The Internal Revenue Service Restructuring and Reform Act of 1998.
Tax Executives Institute, Inc. is pleased to submit the following comments for consideration by the House-Senate conferees on H.R. 2676, The Internal Revenue Service Restructuring and Reform Act of 1998. The Institute is the professional association of corporate tax executives. Our 5,000 members are accountants, attorneys, and other business professionals who work for the largest 2,800 companies in North America; they are responsible for conducting the tax affairs of their companies and for ensuring their compliance with the tax laws. TEI members deal with the tax laws and with the Internal Revenue Service on almost a daily basis, and the Institute believes that the professional training and experience of our members enable the Institute to bring an important, and balanced, perspective to the issues involved in efforts to restructure and reform the IRS and to enhance taxpayer rights.
H.R. 2676 holds great promise for improving the management and oversight of the IRS and for significantly enhancing taxpayer rights while giving the agency the tools necessary to fulfill its congressionally approved mandate. The Institute commends the members of the House Committee on Ways and Means and the Senate Committee on Finance -- especially those members who served on the National Commission on Restructuring the IRS whose work laid the foundation for the legislation -- for their leadership and for their efforts to achieve an appropriate balance between the needs of the IRS (which is charged by Congress with collecting the revenues necessary to fund government programs) and taxpayers (who are clearly entitled to be treated with respect and professionalism by an adequately trained and properly motivated workforce).
The task confronting the IRS is a daunting one -- enforcing the tax laws, processing 200 million tax returns annually, and collecting the $1.5 trillion necessary to run the federal government, all in an efficient, fair, and evenhanded manner. Most people pay their fair share of taxes voluntarily, without problems and, indeed, without even coming into contact with an IRS employee. Other taxpayers, however, for a variety of reasons (including purposeful noncompliance) do not. Congressional hearings, both last fall and this spring, demonstrated that the IRS has not always succeeded in its dealings with taxpayers. Although TEI and its members have experienced the same frustration that has prompted calls to "abolish the IRS" or "tear the tax system out by the roots," the Institute recognizes that the facile, "easy" solution to what ails the IRS -- dismantling the agency -- is the wrong one. Some type of organization is necessary to collect the taxes Congress imposes, and it would be unwise to assume that a new agency could avoid all the shortcomings of the IRS simply because it is a new agency. The key is to focus on particular problems, to attack and resolve them, and to move forward. The key is to move away from rhetoric and toward practical, responsible solutions.
Stated simply, there is no magic cure for what troubles the IRS, no panacea. To be sure, the IRS and its employees must be held accountable, as must those taxpayers who fail to fulfill their legal obligations. For IRS reform to be successful, the agency must address training, operations, technology, culture, and taxpayer education -- and the public's confidence in the IRS must be restored. These issues are interrelated. TEI agrees that the culture of the IRS must be changed. Granting the Commissioner greater discretion in recruiting, rewarding, and retaining the agency's top managers is critical to fulfilling one of the objectives of IRS restructuring and reform -- ensuring that taxpayers deal only with IRS employees who are trained adequately and possess the skills and tools necessary to do their jobs well.
In the comments that follow, TEI sets forth its recommendations on significant provisions of the House and Senate versions of H.R. 2676 that differ materially from each other.
IRS Oversight Board
Both the House and Senate versions of H.R. 2676 would create an Internal Revenue Service Oversight Board to provide continuing oversight of the IRS. Under section 101 of the House bill, the Board would consist of 11 members (including 8 "private-life" appointees), whereas section 1101 of the Senate bill would create a Board consisting of only 9 individuals (with 6 "private-life" members). Under each bill, the Secretary of the Treasury, the Commissioner of Internal Revenue, and a representative of an organization representing a substantial number of IRS employees would be appointed to the Board. Believing that a smaller Oversight Board would operate more efficiently (and be less likely to be dominated by "constituency politics"), TEI urges the conferees to adopt the Senate bill's provision on the size of the Board.
In respect of who should serve on the Board, the Institute generally believes that members should be selected on the basis of their expertise in areas such as general management, finance, technology, and personnel. Hence, although TEI appreciates the reasoning underlying the decision to include a union representative on the Board (specifically, the need to secure the support of IRS employees in order to enable the agency to meet the challenges of the 21st century), the Institute strongly believes that no particular group should be guaranteed a position on the Oversight Board. We do, however, support the delineation in the statute of the various "skill sets" -- management of large service organizations, customer service, federal tax law (including tax administration and compliance), information technology, organization development, and the needs and concerns of taxpayers -- that should characterize the private-sector representatives on the Board. Because of the desirability of preventing fractionalization among Board members (and because all constituency groups are included within the phrase "the needs and concerns of taxpayers"), the Institute does not support the Senate bill's singling out a particular group (small business) for special treatment.
Under the Senate bill, the Oversight Board would terminate on September 30, 2008. Although TEI does not strongly object to the sunsetting provision, we regret that it may signal that the commitment to enhanced oversight of the IRS (by the Executive Branch as well as by Congress) is little more than a passing fad. To be effective, oversight must be ongoing and consistent. The Board, however, should not be retained if, after a period of years, it becomes an empty vessel. Hence, if Congress determines that the appropriate cultural and management changes have been effected at the IRS and further determines that Congress itself is providing consistent, credible oversight of the agency, it should consider abolishing the Board. TEI does not anticipate that occurring for some time and, accordingly, we do not support the sunsetting provision in the Senate bill. Finally, although it may well be necessary for the Board to meet more than quarterly (especially at the outset), the Institute supports the Senate provision not to require more frequent meetings.
Improving Congressional Oversight and Accountability
Section 401 of the House bill contains extensive provisions to improve congressional accountability of the IRS, including the coordination of requests for investigations by the General Accounting Office as well as the scheduling of joint congressional hearings to facilitate more orderly and principled oversight of the tax agency. The Senate bill does not contain these provisions.
TEI strongly believes that responsible, focused legislative oversight is essential for effective government and, further, that enhanced congressional oversight and accountability is especially critical to improving the management and operation of the IRS. Because the Institute supports steps to streamline congressional oversight activities (including those of the U.S. General Accounting Office) and to make it at once less reactive, more constructive, and more integrated, TEI endorses the provision in section 401 of the House bill to streamline congressional oversight. We also strongly support the provisions in section 422 of the House bill and section 4002 of the Senate bill to address the problem of tax law complexity by meaningfully involving the IRS in the legislative process and requiring the Joint Committee on Taxation to prepare "tax law complexity" analyses in respect of legislative proposals.
Enhancing Taxpayer Rights
1. Overview. TEI commends the House and the Senate for passing bills that will significantly enhance taxpayer rights, thereby serving to restore taxpayer confidence in the integrity and fairness of the tax system. At the same time, it should be recognized that for most taxpayers the biggest abuses come not from excessive actions by IRS personnel but from the highly complicated laws and onerous administrative procedures that Congress enacts and the President signs into law. Accordingly, we urge Congress to redouble its efforts to simplify the tax laws (aided by the enactment of the provisions in the House and Senate bills requiring tax lax complexity analyses).
TEI also wishes to express its concern that, unless care is taken, certain of the provisions in the House and Senate bills may create unrealistic expectations among taxpayers, unintentionally increasing noncompliance. For example, although the provision on shifting the burden of proof is narrowly drawn (to ensure that taxpayers cannot evade their responsibility by refusing to maintain adequate records), the "fine print" of the provision may be lost on taxpayers who hear only that they will no longer be "guilty until proven innocent." Similarly, taxpayers who scan the headlines may not appreciate the limitations on the bills' provision extending the privilege of confidentiality to non-attorneys. TEI does not dispute the various limitations contained in the bills; indeed, given our ongoing concerns about the burden-of-proof provision (discussed below), we believe they are absolutely necessary. We are concerned, however, that the end result of "overselling" the taxpayer rights provisions may be, once taxpayers confront the limitations face to face, to undermine efforts to restore confidence in the fairness of the tax system. Accordingly, we urge Congress to exercise restraint in how the provisions are presented to the public.
2. Taxpayer Advocate. Sections 102 and 343 of the House bill and sections 1102(a), (c), and (d) of the Senate bill would each effect significant changes in respect of the appointment of the Taxpayer Advocate and in the operation and management of the IRS's problem resolution program. The House bill would continue the current practice of the Taxpayer Advocate's being appointed by the Commissioner, whereas the Senate bill would vest authority to appoint the National Taxpayer Advocate in the Secretary of the Treasury (taking into account three candidates recommended to the Secretary by the Oversight Board).
TEI believes that the Problem Resolution Program represents one of the IRS's success stories and that Problem Resolution Officers (PROs) are some of the unsung heroes in the tax system. We acknowledge that our members (as tax professionals) are more tax-savvy than most taxpayers, but nevertheless believe their generally satisfactory experiences with PROs are reflective of those of the taxpaying public as a whole. This is not to say that the Office of Taxpayer Advocate or the Problem Resolution Program cannot or should not be improved. As Commissioner Rossotti has acknowledged, all IRS employees should become taxpayer advocates. We question, however, whether the Taxpayer Advocate and PROs should be wholly independent of the IRS. Indeed, the Taxpayer Advocate and PROs need to be intimately familiar with the IRS and its functions. Yes, they need to exercise independent judgment, but they also need to know how to cut through the procedures and protocols that might otherwise hinder their ability to resolve particular problems. We believe the necessary knowledge and experience will only come if the Taxpayer Advocate and PROs are part of the agency. If the Taxpayer Advocate were estranged from the IRS, his or her ability to do the job could well be imperiled.
TEI believes that the Taxpayer Advocate should be appointed by, and report to, the Commissioner, since the Commissioner retains ultimate responsibility for the operation of the tax agency. Hence, although we believe it would be proper for the Oversight Board to play a role in the Taxpayer Advocate's selection, TEI does not support the provision in the Senate bill pursuant to which the Board would recommend three candidates to the Secretary of the Treasury.
3. Burden of Proof Section 301 of the House bill and section 3001 of the Senate bill would shift the burden of proof from the taxpayer to the Internal Revenue Service in certain situations. In all candor, TEI continues to have serious reservations about the prudence of shifting the burden of proof away from the party having access to the relevant facts in tax disputes -- the taxpayer. Although the notion of shifting the burden of proof undeniably resonates with the public, we fear that the sound-bite dominated debate has obscured the risk the provision poses to a self-assessment tax system. Specifically, we believe the provision may induce taxpayers to be less than forthcoming in meeting their obligations or prompt the IRS to be more intrusive as it seeks to satisfy its higher burden. TEI's first preference remains excluding the provision from the final bill.
If some form of burden-shifting provision is included in final legislation, however, the Institute recommends that care be taken to ensure that the provision cannot be utilized as a sword by noncompliant taxpayers to evade their responsibilities. Indeed, properly viewed, the burden-of-proof provision will operate only as a shield against unfounded assertions by the IRS -- in essence, the difficulty of proving a negative. For this reason, we believe the provision in the Senate bill shifting the burden of proof in respect of penalty assertions would further taxpayer rights without imperiling tax administration.
Because the Senate provision explicitly provides that the burden of proof will not shift unless taxpayers satisfy their recordkeeping requirement and produce credible evidence establishing their entitlement to the burden shift, TEI prefers the Senate provision to that in the House bill. Because of our ongoing concerns about the unintended consequences of the burden-shifting provision, however, we recommend that the provision's scope be limited to income taxes. We also question the need for a separate provision dealing with the burden of proof where the IRS uses statistical information to reconstruct an individual taxpayer's income.
4. Interest and Penalties. The House and the Senate bills contain a number of provisions affecting the operation of the Internal Revenue Code's interest and penalty provisions. TEI agrees that significant changes in the interest and penalty provisions should be considered, and we applaud the decision of the House and the Senate to include ameliorating provisions in the Restructuring Bill. As explained below, however, we have concerns with certain of the provisions.
a. Interest-Rate Differential During Overlapping Periods of Interest on Overpayments and Underpayments. TEI strongly supports the proposal in section 331 of the House and section 3301 of the Senate bill to eliminate the so-called interest-rate differential pursuant to which a higher interest rate is imposed on tax deficiencies than is paid on tax refunds, though we are disappointed that the proposal will only apply to individuals; in our view, the provision should properly apply to all taxpayers because it is unseemly for the government to charge any taxpayer a higher rate of interest than it pays. We also strongly endorse the provision in both the House and the Senate bills to establish a net interest rate of zero on equivalent amounts of overpayment and underpayment of income tax. Moreover, we support the Senate provision to apply the interest-netting provision to any taxes imposed by Title 26 and not only income taxes.
Finally, TEI supports the provision in the Senate bill to apply the interest-netting provision to interest for periods before the date of enactment if (1) the statute of limitations has not expired with respect to either the underpayment or overpayment, (2) the taxpayer identifies the periods of overpayment and underpayment for which the zero rate applies, and (3) the taxpayer applies to the Secretary before December 31, 1999, for the application of the zero rate.
b. Suspension of Interest and Certain Penalties if Secretary Fails to Contact Individual Taxpayers. Under section 3305 of the Senate bill, the accrual of penalties and interest will be suspended if the IRS has not sent the taxpayer a notice of deficiency within one year following the later of the original due date of the return or the date on which the individual taxpayer timely filed the return. (The House bill contains no comparable provision.) TEI has serious concerns about the long-term consequences of the provision in the Senate bill. Since interest is properly viewed as a charge for the use or forbearance of money, we do not believe interest should be suspended merely because the taxpayer has not received a formal notice of deficiency after a specified period of time. Indeed, given the IRS's administrative procedures (pursuant to which a notice of deficiency may not be issued until months or even years after the taxpayer becomes aware of a potential tax liability and has been accorded an opportunity to pay or dispute it), we question the factual premise upon which the suspension provision is based. Moreover, we are concerned that the suspension-of-interest provision may provide noncompliant taxpayers with an incentive to delay the resolution of their cases. (The provision may even reflect a misapprehension of how long it takes the IRS to identify returns for audit, to conduct an examination, and then issue a notice of deficiency.)
Hence, although the provision may seem like a relief provision for taxpayers who find themselves inadvertently (and unknowingly) caught up in a dispute with the IRS, the provision may in reality reward noncompliant taxpayers. Finally, although a stronger case may exist for suspending the accrual of penalties if the taxpayer is unaware of a tax dispute, we believe it would be ill-advised to enact the Senate provision. Accordingly, TEI recommends that the conferees reject the Senate provision on suspending the accrual of interest and penalties and instead instruct the Joint Committee on Taxation and Treasury Department (as part of the study mandated under section 381 of the House bill and section 3801 of the Senate bill) to consider specifically the efficacy of the proposal.
c. Interest and Penalty Study. TEI supports the requirement of section 381 of the House bill and section 3801 of the Senate bill that the Joint Committee on Taxation (and, in respect of the Senate bill, the Department of the Treasury as well) conduct a comprehensive study of the Code's interest and penalty provisions. As the process moves forward, we recommend that Congress keep in mind the following general principles:
* The Code's interest provisions should operate solely to compensate for the use or forbearance of money.
* Penalties generally should not be imposed for "foot faults" or for violations that involve nonpurposeful behavior. Given the horrendous complexity of the Internal Revenue Code, taxpayers who strive in good faith to comply should not be penalized. Specifically, TEI recommends that Congress reassess the amendments to section 6662 of the Code enacted in 1997 (which changed the standard to be applied in determining whether a particular transaction or arrangement constitutes a "tax shelter" -- without defining what that new "significant purpose" standard demands); at a minimum, the enforcement of the new standard should be suspended pending the issuance of detailed guidance on the provision's scope.
* Taxpayers who do not strive in good faith to comply should not be given a "pass" in respect of interest charges or penalties. To be sure, the Code's current interest and penalty provisions can sometimes operate to create inequitable (or at least highly sympathetic) situations. In seeking to enhance the rights of taxpayers in lien and levy situations, Congress should take care not to unduly benefit noncompliant taxpayers or send the wrong signal to the overwhelming majority of taxpayers who fully comply with the law.
* Congress should abjure the enactment of new (and onerous) interest and penalty provisions to raise revenue. Indeed, just as Congress has rightly urged the IRS not to use penalty assessments in evaluating the success of its compliance programs, it is unseemly for Congress or the Administration to attempt to "pay for" other provisions by imposing higher penalties or excessive interest rates.
5. Due Process in IRS Collection Actions. Under section 3401 of the Senate bill, taxpayers would have the right to demand that an appeals hearing be held before a collection action may proceed. (The House bill contains no comparable provision.) Although the provision is intended to ensure that taxpayers are afforded due process, TEI is concerned that the procedures set forth in the Senate bill may unreasonably delay the collection of properly due and owing taxes, thereby adversely affecting the IRS's ability to collect those amounts. To be sure, the rights of all taxpayers should be safeguarded, even where they fail to fulfill their obligation to pay their fair share of taxes. If the procedures prevent the IRS from collecting taxes from delinquent taxpayers, however, the harm will not be to the tax agency -- it will be to those millions of taxpayers who voluntarily comply with the law. Accordingly, TEI urges Congress to move cautiously in erecting obstacles to the IRS's duty to collect taxes.
6. Software Trade Secrets Protection. Both section 344 of the House bill and section 3413 of the Senate bill would restrict the IRS's ability to issue a summons for third-party tax-related computer source code, but the restrictions in the Senate bill are more extensive. While recognizing the IRS's need in limited cases to secure access to computer software (and source code), TEI urges the conferees to include a provision in the legislation to ensure that a summons for computer source code will not be issued unless it is expressly determined that the need for such source code outweighs the risk of disclosure of the code.
7. IRS Procedures Relating to Appeals of Examinations and Collections. Section 3465 of the Senate bill would codify certain existing IRS procedures with respect to early referrals to Appeals and the Collections Appeals Process as well as existing alternative dispute resolution procedures, while requiring the IRS to establish a pilot program of binding arbitration for disputes of all sizes. (The House bill contains no comparable provision.) Because TEI regards the IRS's Appeals program as very effective in enabling taxpayers to resolve disputes short of litigation, the Institute has no objection to the provision in the Senate bill that would codify existing practices and procedures. We urge the conferees to make it clear, however, that the provision will not preclude the IRS from developing new procedures to further Appeals' mission.
8. IRS Employee Contacts. Section 3705 of the Senate bill requires that all IRS notices and correspondence contain a name and telephone number of an IRS employee whom the taxpayer may call. In addition, the Senate bill requires that, to the extent practicable and advantageous to the taxpayer, the IRS should assign one employee to handle a matter until it is resolved. (The House bill contains no comparable provisions.) TEI agrees that the IRS must be more taxpayer friendly, and we applaud efforts by Commissioner Rossotti and others to move the agency in that direction. We also agree that IRS correspondence should generally contain the name and telephone number of a person who can be contacted about the taxpayer's situation. It should be recognized, however, that given the broad range of topics that IRS correspondence might address, the high volume of correspondence, varying work hours, and myriad other issues, it may not always be possible for each notice (especially computer-generated notices) to contain the name of a specific individual to be contacted. The key is to ensure that whomever the taxpayer contacts is able to access the pertinent information and either handle the taxpayer's case or immediately refer the taxpayer to someone who can.
1. Moratorium on Regulations Under Notice 98-11. Under section 3713(a) of the Senate bill, the IRS would be precluded for six months from issuing temporary or final regulations with respect to Notice 98-11, which concerns the application of the Subpart F rules of the Code to so-called hybrid entities (i.e., an entity that is treated as a controlled foreign corporation for U.S. purposes and as separate from the controlled foreign corporation for foreign tax purposes). (The House bill contains no comparable provision.) Because of the significant questions that exist concerning the IRS's authority to issue regulations in accord with Notice 98-11 and because of the potentially adverse effect that any such regulations might have on the ability of U.S. corporations to compete globally, TEI supports the enactment of the six-month moratorium contained in the Senate bill.
2. Transfer-Pricing Enforcement. Section 3803 of the Senate bill would direct the IRS Oversight Board to undertake a study on whether the IRS has the resources to prevent tax avoidance by companies using unlawful transfer-pricing methods. (The House bill contains no comparable provision.) TEI opposes the provision in the Senate bill. Although Congress clearly has a responsibility to ensure compliance with the tax law (including those provisions governing the treatment of transactions between related corporations), TEI believes that it is wholly inappropriate to assign the task of conducting a transfer-pricing study to the Oversight Board -- especially in the bill creating the Board. The Board's mission will be to provide strategic oversight to the agency, not to become involved in day-to-day operations of one or more of the IRS's functions, no matter how important. Indeed, both the House and Senate bills would prohibit the Board (whose members will be management not tax experts) from becoming involved in tax policy and law enforcement. Hence, to the extent the conferees conclude that a transfer-pricing study should be conducted, the task should be assigned not to the Board but to either the Joint Committee on Taxation or the Department of the Treasury.
Tax Executives Institute appreciates this opportunity to provide its comments on H.R. 2676. Any questions about the Institute's views should be directed to either Michael J. Murphy, TEI's Executive Director, or Timothy J. McCormally, the Institute's General Counsel and Director of Tax Affairs. Both individuals may be contacted at (202) 638-5601.
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|Date:||Jul 1, 1998|
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