TAXPAYER RIGHTS ISSUES
Senator Kerrey, Congressman Portman, Commissioners, my name is Joseph F. Lane and I am an Enrolled Agent engaged in private practice in Menlo Park, California. I am submitting this written testimony today on behalf of the National Association of Enrolled Agents. The more than 9,000 members of the NAEA are all small business owners and tax professionals who work with the employees of the Internal Revenue Service's Examination and Collection Divisions on a daily basis. Since we represent individuals and business owners before the IRS, Enrolled Agents are uniquely positioned to provide substantive input to the Service on the effect its policies have on the average taxpayer and to provide feedback to Congress on the practical feasibility and administrability of the tax provisions it enacts into law.
We applaud the work of the Commission in the daunting task of studying the restructuring of the IRS and appreciate the opportunity to share with you today some of our views on the current direction of the Service's Examination and Collection programs.
Before we address specific programs of concern to us today, we would like to discuss the current state of employee morale in the IRS. We have noted over the past several years an increasingly deteriorating espirit d' corps among Service employees.
In our testimony before the House Ways and Means Oversight Subcommittee last year, we urged that Congress request GAO to study this issue. The reason we are concerned about this problem is that our voluntary compliance system depends on both sides of the table being staffed by competent, motivated individuals who share a responsibility to insure that the laws are administered consistently and fairly.
This means that individual taxpayers are entitled to the best representation possible before the Service when their individual tax returns are being audited or their individual taxes collected.
It also means that all taxpayers, as a group, are entitled to the best possible people representing the public interest to insure correct returns are filed and the correct amount of taxes are assessed and paid.
The perception of all taxpayers about the fairness and impartiality of the tax administration system is dependent on confidence that their interests are adequately represented by the officers and agents of the Service. We believe that the current state of employee morale is so low that it jeopardizes this perception of adequate representation of the public interest.
Our Members continually provide us with information about dispirited employees and how their attitudes have detrimental effects on taxpayers. Government agents who feel put upon and victimized by continual criticism and harping in the media and political arenas easily develop a callousness when dealing with taxpayer cases assigned to them. This is a human reaction and is very understandable, but it is as serious a threat to our voluntary system as anything else confronting it today.
By the very nature of its function, the IRS is not a popular place to work and will always encounter problems in recruiting the best talent available. It is further hampered in its effort to bring in new talent when the espirit d' corps falls to the level where employees cannot recommend employment with the Service. This leaves the Service with the unenviable task of revising job criteria to fill jobs with the people available rather than recruiting choice personnel. Often those who are selected have limited promotion potential within the organization. We believe the Commission should study the whole issue of employee morale and task the GAO to address what incentives could be pursued to bolster the IRS recruitment of competent, well educated, promotable individuals for government service. One suggestion might be to explore the possibility of paid internships for tax and accounting students to work within the Service for several years prior to commencing private practice. This would provide excellent on the job training and development experience of future practitioners; insure a steady supply of well educated government employees; regularly give the Service an infusion of new viewpoints with the end product being increased taxpayer confidence and satisfaction.
There are several Collection program policy areas we feel need to be reviewed by the Commission.
A) Local Standard Expense Allowances Cause Increased Bankruptcy Filings
There has been a dramatic increase in the number of personal bankruptcies since January, 1996. The increase last year was in excess of 25%, despite a very strong national economy.
In our opinion, many of these increased bankruptcies were the direct result of the IRS imposition, in October, 1995, of national and local standard expense allowances for use in reaching Collection case determination decisions. In many instances, the imposition of these limits on what a taxpayer may claim as a necessary and reasonable monthly expense has benefited the Service to the detriment of other unsecured creditors and, in some cases, secured creditors who enjoyed lien priority to the IRS liens.
We do not believe this effect was ever intended by Congress when enacting the federal tax lien statutes. These standards have a pervasive effect as they impact any case resolution decision relating to the ability of the taxpayer to secure an offer in compromise, an installment agreement, or a determination that the tax is currently not collectible.
In many geographical areas, the standard expense allowances for housing, utilities, property taxes, homeowners or renters insurance, association fees and property maintenance and repairs are absurdly low. As a consequence, many practitioners have been forced to recommend that their clients seek the protection of the bankruptcy court as there simply is no way to resolve the matter administratively within the IRS.
When we raised this issue with IRS National Office Collection officials last summer, we were advised that their new policy had no impact they could discern on bankruptcies. We believe there is ample indication that there is a direct cause and effect and urge the Commission to examine the problem.
B) Collection Appeals Process Isn't An Appeals Process
The Service introduced an "appeals" process for Collection cases last winter and made much to do about how it afforded taxpayers the opportunity to seek an appellate review of such matters as the filing of the notice of federal tax lien, withdrawal or denial of a request for an installment agreement and seizures of taxpayer assets.
The scope of this program is so circumscribed by the procedural limitations imposed that it really does not constitute a true appellate process. The appeals function is limited to reviewing if the decision by the Collection officer adhered to the procedural requirements of the Internal Revenue Manual only. It does not permit any appellate review of the judgment or conduct of the Collection officer.
The one beneficial aspect of this process from our viewpoint is that it requires the involvement of the Collection group manager prior to the case going up to Appeals. This is a welcome sign that the National Office wants group managers to become more involved in the taxpayer case management and negotiation process, something which has been sorely neglected in the past decade.
We believe the lack of taxpayer and practitioner use of this "appeals" process is ample evidence that this program is not perceived as a fair and independent appellate procedure and believe the Commission ought to examine its intent and practice.
C) Inconsistent Enforcement Policies Across the Nation
The Service explained that the purpose for imposing the use of the reasonable and necessary expense allowances was to eliminate inconsistencies in application of enforcement criteria. We have long complained about these regional inconsistencies and we agreed with the Service that some effort at uniformity was needed at the national level.
We now find, however, that new inconsistencies keep cropping up in the way the local districts are choosing to interpret the "standards", as if the term standard was open to debate. For example, some districts now hold out a policy that they will not permit an installment agreement to pay off back payroll tax obligations, even if the debtor business is now current and complying. This causes unnecessary business failures and bankruptcies, not to mention grievous equity losses to the small business owners involved.
The Service made a point of restricting the allowable expense criteria to individual taxpayers, rightfully deciding that business entities had too diverse a group of necessary expenses to ever arrive at a fair allowance number. Despite this wise National Office policy, it has not prevented local districts from proceeding to limit expenses on business taxpayers who are self-employed.
We have had complaints that Revenue Officers have not allowed legitimate business travel expenses where the taxpayer failed to secure a sale on the trip in question. This is a prime example of why decisions of field revenue officers need to be subjected to a real appellate review process.
We have also heard of revenue officers allowing only the amount authorized by the local housing and utility standard to taxpayers who ran substantial businesses out of their homes and should have been permitted a higher amount of expense allowance to reflect the true cost of the business activity.
We have also had complaints about revenue officers not allowing business expenses for automobile and truck costs incurred in the course of the taxpayer's business - but rather limiting the taxpayer to the local transportation standard expense allowance developed for individuals.
All of these examples indicate we have a "standard" that is not a standard in the eyes of many local revenue officers.
A) Use of Enforcement Statistics for Evaluative Purposes Jeopardizes Taxpayer Rights
We are very concerned about some provisions of the most recent Examination Program Letter issued by the Service for the coming year. The program letter spells out for the field organization the goals and objectives established by the National Office for examination divisions nationwide. In the latest version (at Appendix F), there is a discussion of new performance measures to be used in evaluating local district directors by using the amount of additional tax, penalty and interest proposed by their examination division, regardless of the validity of the assessments!
We must point out the danger of this approach. Whenever an enforcement agency resorts to using production statistics for evaluative purposes, be they audit yields or traffic tickets, the first casualty is citizen rights. This is especially critical given our perception of the current state of employee morale in the Service.
The Commission should hold hearings about the impact this emphasis will cause and, we believe, should recommend to Congress that the Service be barred from using this data in the way suggested.
B) Inappropriate Use of Financial Status Auditing Techniques
We are still hearing complaints from Members and taxpayers about the insistence of local Examination Division personnel using "economic reality" auditing procedures when there is no information provided to the taxpayer or representative as to why the Service believes there is evidence to indicate unreported income. We are aware that the National Office issued instructions to the field organization last spring to use the financial status audit procedures only when appropriate but feel that this is being observed on a sporadic basis by the districts across the nation. We urge the Commission to delve into this problem in the field hearings you will be conducting around the country later this spring.
C) Market Segment Specialization Program Audits
We believe the Service should be recognized for the efforts it has made in the development of the Market Segment Specialization Program. In our opinion, it is one of the best approaches to identifying the root causes of taxpayer non-compliance introduced into tax administration in the past twenty-five years.
The best example of the effectiveness of the MSSP approach is the important compliance program the Central California District has underway in the Central Valley of California. This program, which focuses on a major source of non-compliance with tax, labor and immigration laws, the farm labor contractors, has yielded dramatic results in a relatively short time. The best thing about this program is that it has aided the legitimate businesses in the Central Valley who for years have been at a competitive disadvantage when faced with competitors who, by not paying taxes and offering benefits, were able to underbid them. This is exactly the type of program the Service should be focusing on to restore their reputation as a premier government agency and to reestablish their credibility with the legitimate business community. They should be applauded for this effort. We urge the Commission to hold one of your field hearings in the Fresno, California area to permit a first hand look at this success story.
The traditional assumptions the Service made about its impact on taxpayer compliance behavior patterns have always been questionable in the minds of many tax professionals and academics. For the first time, through the use of the MSSP examination process, patterns of compliance and non-compliance can be tracked by industry and enforcement efforts targeted in appropriate directions.
We think this is good news for taxpayers who are complying and paying their fair share as well as presenting the Service in the favorable light of channeling its enforcement dollars into those areas most in need of its attention.
D) Examination Quality Review
One of the consequences of the morale problem we discussed earlier in our statement is evident in the assessment of the outcome quality of entry level examinations. When the Service has to fill jobs with the bodies available rather than the best candidates the quality of the work product declines.
We are consistently being told by Members and by taxpayers via our Web site and America On Line Tax Channel that they cannot resolve basic issues with the entry level examination staff; that group managers will not meet with them or, if they do, they always back the position taken by the subordinate; that the only way to resolve anything in favor of the taxpayer is to by-pass the examination staff and proceed to appeals on every case.
These are disturbing complaints because there will never be enough staffing available for every case to proceed to appeals. We would like to see the Service make a renewed effort to involve Examination group managers in an informal conference process prior to a case going unagreed. We feel it would be in the best interests of the Service to resolve these cases at the lowest possible level and we know it would save taxpayers millions of dollars annually in representation fees.
TAXPAYER RIGHTS ISSUES
A) Extension of Client Privilege to Enrolled Agents and CPAs
We would like to see the Commission examine the possibility of extending the concept of client-attorney privilege to Enrolled Agents and Certified Public Accountants. It is a basic right of taxpayers not to have their own advisors used as witnesses against them. We believe there are adequate safeguards available to the Service in regulating the practice of taxpayer representatives covered by Circular 230. The extension of the privilege to all taxpayer advocates is long overdue.
B) Register All Commercial Tax Return Preparers
We would like to see the recommendations of the IRS Commissioner's Advisory Group regarding the registration of all commercial tax return preparers enacted into law. The Commission has already heard compelling testimony from the Australian Tax Commissioner on the status of commercial tax preparers in that country. We believe that a fundamental taxpayer right is to be able to rely on the expertise of the individuals who assist in helping citizens meet their tax obligations. We have, for too long, had an uneven playing field where those tax professionals who have made the most significant commitment to their profession - Enrolled Agents, attorneys and Certified Public Accountants are the most regulated. Only those professions require continuing professional education. Only those professions have developed standards of professional practice and published standards of professional ethics. The tax laws of this country are too complex to permit commercial firms to offer services to taxpayers without requiring that they maintain a minimum level of technical proficiency and stand by their product in the event of error. Taxpayers deserve no less.
C) Abolish the Failure to Pay Penalty for Installment Agreements
One of the proposed changes in the initial Taxpayer Bill of Rights II legislation would have amended IRC § 6651 to prevent the assessment of late payment penalties during the period of installment agreements. We believe this should be put back on the table.
We understand there are very real economic considerations in dealing with matters relating to the Federal budget process - but we firmly believe that the government should not be using penalties for revenue purposes. Once a taxpayer has voluntarily come to the IRS and arranged to satisfy his liability what is the purpose of "piling on" additional penalties? The combined Federal interest and penalty rate on the average taxpayer installment agreement debt today would be illegal under most state usury laws, save for the fact that the Federal government is not subject to those statutes.
We thank the Commission for the opportunity to again offer our comments for your consideration. As we have stated before, we stand ready to assist you in your work in the future. Thank you.