Section 7—Taxpayer Rights


A significant part of improving taxpayer service and changing the culture of the IRS involves ensuring that taxpayers are treated fairly and impartially by the IRS, are able to seek redress or review of IRS actions by the courts, and are able to resolve conflicts creatively and expeditiously with IRS cooperation.

In order to ensure that fewer taxpayers are subject to improper treatment or excessively burdened by the IRS, Congress and the IRS need to focus more attention on preventing problems before they occur. The Commission found that the passage of the Omnibus Taxpayer Bill of Rights and Taxpayer Bill of Rights 2 have had an important effect on changing the culture of the IRS. The agency spends significant resources educating personnel to treat taxpayers fairly, and the Commission found very few examples of IRS personnel abusing power. Nevertheless, with the complexity of the tax law and an agency of its size with powers to audit and collect from taxpayers, there likely will continue to be the few unfortunate examples of abuse. Many of the additional safeguards against abusive actions enacted over the last few years are helping people deal with these systemic problems, however.


1. Taxpayer Advocates

Taxpayer Advocates must be accessible to taxpayers and have the authority and accountability necessary to speak for and take actions on behalf of taxpayers.

Taxpayer Advocates play an important role and are essential for the protection of taxpayer rights and to promote taxpayer confidence in the integrity and accountability of the IRS. To succeed, the Advocate must be viewed, both in perception and reality, as an independent voice for the taxpayer within the IRS. Currently, the national Taxpayer Advocate is not viewed as independent by many in Congress. This view is based in part on the placement of the Advocate within the IRS and the fact that only career employees have been chosen to fill the position. Because a candidate for the job is likely to have additional career ambitions at the IRS after performing the Advocate position, it is difficult to perceive the Advocate as independent when the position is regarded as just another assignment for an IRS executive, with the Commissioner viewing his or her performance as determining the next position. Additionally, while the Advocate has provided recommendations for improvements at the IRS, these recommendations merely tend to highlight ongoing IRS corrective efforts with little in the way of recommendations that focus attention on issues that the IRS either is doing nothing or its efforts are inadequate. Finally, what recommendations the Advocate has provided have limited value because they do not prescribe specific legislative or administrative corrections.

In a similar vein, the independence of the local Advocates is brought into question when their work is reviewed and graded by District and Service Center Directors. These managers have performance goals that in some cases are directly opposite to the goals of the Advocates. The Advocates seek to ensure that a case is handled properly and correctly, which often is a time consuming process. Conversely, District and Service Center Directors have goals of production and dollars. The changes recommended by this Report, which emphasize customer satisfaction, should minimize friction between the performance goals of local Advocates and the district directors to whom they report.


National Taxpayer Advocate

To ensure the independence of the national Taxpayer Advocate, candidates for this position should have substantial experience representing taxpayers before the IRS or with taxpayer rights issues. If the Advocate is selected from the ranks of career IRS employees, the selection also should be a person with substantial experience assisting taxpayers or with taxpayer rights issues, and the job description should stipulate that it will be the employee’s final position within the agency.

The Taxpayer Advocate, as the voice of the taxpayer, will have a special relationship with the Board of Directors. The Board should be involved in the selection of the Advocate, and have final authority over the hiring decision. In addition to the Advocate’s report to Congress, the Advocate should report to the Board and work closely with the Commissioner to resolve taxpayer issues internally. In addition, the Advocate should comment on any IRS policy action that the Advocate believes will cause or remedy taxpayers’ problems. When the Advocate believes that the Commissioner has not responded satisfactorily to these comments, the Advocate will report to the Board and the Congress. Finally, the Advocate should report annually to Congress on the significant compliance burdens for taxpayers or the IRS, including specific recommendations for remedying these problems, and, in conjunction with the National Director of Appeals, the Advocate should report annually to Congress on the ten most litigated issues (for each category of taxpayer) and provide potential solutions for mitigating disputes in those areas.


Local Taxpayer Advocates

The Commissioner should ensure sufficient staffing of local Taxpayer Advocates (LTAs) and, at a minimum, that their number and geographic coverage is not reduced. The Commission is concerned that the current number of LTAs and their allocated time for taxpayer problem resolution is inadequate. The national Advocate should report annually to the Board and Congress as to whether LTA coverage levels and allocated time are adequate to resolve taxpayer problems and what the optimal staffing level should be.

The Taxpayer Advocate should develop guidance on how many times a taxpayer has to contact the IRS regarding the same situation before they are automatically entitled to be referred to the LTA. This guidance should be disseminated to all IRS employees and should be provided to the public. The Board should adopt as a performance measurement whether the standard for referral to the LTA is being met.

Finally, the Commission found that the LTAs often were buried in the organization, unknown to the average taxpayer. While taxpayers who contact their congressional representative often are funneled to an LTA, the program is not visible enough for most taxpayers to know to find an LTA when they encounter problems with the IRS. To ensure that taxpayers know how to reach an LTA, Congress should require the IRS to publish the local telephone numbers (for print and electronic mediums) for reaching the LTA in each Internal Revenue District. Finally, the Commission recommends that the IRS develop career paths for LTAs, so that individuals can progress through the General Schedule in the same manner as examination employees, without having to leave the LTA program.


Taxpayer Assistance Orders

One of the important powers of the Advocates is the authority to issue Taxpayer Assistance Orders (TAO). Advocates rarely have used this authority, in part because problems are resolved voluntarily and because the Advocates attempt to balance their need to resolve a particular case with their need to maintain good relationships with the various IRS functions to which they regularly take cases. Practitioners state that another reason for the low number of TAOs has been the high legal barrier required to receive a TAO. A TAO may be issued if the Advocate determines that it is necessary to avoid a significant hardship to the taxpayer. The regulations explain that a "significant hardship" means a "serious privation ..... mere economic or personal inconvenience to the taxpayer does not constitute significant hardship." Because the agency has interpreted the statutory term so narrowly, very few cases are eligible for relief. During fiscal year 1996, 32,150 taxpayers requested a TAO but only 5 TAO’s were granted. However, the IRS provided some assistance in 24,623 cases. To ensure that Advocates are able to provide relief for taxpayers who need it, Congress also should authorize the use of a TAO when an IRS employee is not following applicable published administrative guidance, including the Internal Revenue Manual. Finally, when determining whether to issue a TAO, Advocates should consider the immediate threat of adverse action, delay of more than thirty days in resolving taxpayer account problems, or the prospect that the taxpayer will have to pay significant professional fees for representation.


2. Taxpayers’ Redress

Congress must provide taxpayers with adequate and reasonable compensation for actual damages incurred for wrongful actions by the IRS.

While the Taxpayer Bill of Rights legislation made great strides to allow taxpayers to recover damages for IRS malfeasance, current provisions do not provide adequate relief. In addition, there are many cases in which taxpayers are not able to obtain review of IRS actions.

The primary vehicle for taxpayers’ redress, section 7430 of the Internal Revenue Code, allows recovery of administrative and litigation costs when the IRS position is not substantially justified. In practice it is nearly impossible to recover administrative costs because the law does not allow recovery of costs incurred prior to the time of the final administrative notice from the IRS. Because most administrative costs are incurred between the time of the preliminary notice of deficiency (i.e., the 30 day letter) and the time of the final notice of deficiency (i.e., the 90 day letter), the present construction of section 7430 is self-defeating. Moreover, because relief is not available to individuals and corporations above certain net worth ceilings, section 7430 denies redress for many taxpayers who incur attorneys’ fees.

To ensure that taxpayers are able to seek true relief, Congress should raise the net worth ceilings to $5 million for individuals and $35 million for businesses and allow the award of costs incurred after receipt of the preliminary letter of proposed deficiency. The reasonableness of attorney’s fees should be determined by the court, which should take into account special factors, including the difficulty of the issues presented in the case and the local availability of tax expertise. In addition, Congress should clarify that taxpayers must be notified by the IRS of their right to appeal administrative denial of administrative and litigation costs by filing a petition with the United States Tax Court within 90 days of receiving a notice denying the application for costs, and that orders denying such relief are appealable in the same manner as other decisions of the Tax Court. Congress also should clarify that nonprofit clinics that represent low income taxpayers, and other pro bono representatives, are eligible to receive awards under section 7430, based upon the number of hours worked and costs expended. Finally, Congress should specify that if the IRS has lost a position in at least three United States Courts of Appeal, subsequent taxpayers will be entitled to recover under section 7430 because the subsequent loss would serve to indicate that the position of the IRS was not substantially justified.

Other provisions of the Internal Revenue Code allow recovery of damages against the IRS for unauthorized disclosures of tax return information, failure to release liens, and certain unauthorized collection actions. The latter action is available only for reckless or intentional violations of the law. For example, relief is not available when the IRS takes collection actions against the wrong party, as in the case of a mistaken identity. Moreover, relief is not available when the IRS is negligent or reckless in the use of its summary examination and assessment powers. Congress should provide relief in these areas. For example, Congress could amend section 7433 to allow recovery of damages for unauthorized, improper, or erroneous collection actions when the IRS is negligent, up to $100,000.


3. Quality Taxpayer Service and Treatment

IRS employee performance measures and quality reviews should ensure that taxpayers receive fair, impartial, timely, and courteous treatment.

Because of weak performance measurements, insufficient training, and a lack of proper managerial review and control, examinations and collection actions can be intrusive, burdensome, and lengthy. Taxpayer assistance can be similarly frustrating and unnecessarily time consuming. Like employees anywhere, IRS personnel generally strive to do a good job as measured by their managers. They are very much aware of what it takes to make the grade within their organization. For this reason, it is imperative that personnel measurements take into consideration the courteous and fair treatment of taxpayers and that personnel are rewarded for emphasizing the collection of the proper amount of taxes. Although individuals are not graded on actual amounts assessed, larger organizational groups within the IRS are graded by recommended dollars assessed, as well as interest and penalties. The Commission did not find performance measures to indicate whether taxpayers are treated with the utmost respect.


Quality Service Measures

The IRS mission is "to collect the proper amount of taxes." As explained in Revenue Procedure 64-22, the IRS has a duty to apply the laws enacted by Congress in a fair and impartial manner, with neither a government nor a taxpayer point of view, and issues should be raised by examiners only when meritorious. The Commission found that some practitioners and IRS employees do not believe that employees actually are measured in a manner that promotes these standards.

To ensure that taxpayers receive quality service, performance measures for all IRS employees should be developed that incorporate the requirements of Revenue Procedure 64-22. Thus, employees should be evaluated on the basis of criteria that measure whether they apply the law in a fair and impartial manner, whether they seek to ascertain and apply the correct meaning of the law in light of congressional purpose, whether they raise only meritorious issues, whether they take positions that are consistent with established IRS positions, whether they administer the law without delay in a courteous manner, and whether they act vigorously to educate taxpayers and ensure compliance with the law.

The IRS should include as a measure for senior management the sustension rate of adjustments that are reviewed by the IRS Appeals function. While Appeals is able to consider additional factors when it reviews cases, including the hazards of litigation, low sustension rates nonetheless can be indicative of below par performance. For example, currently IRS Appeals sustains approximately 30 cents on the dollar for adjustments involving large corporations. This low rate reflects not only poor allocation of IRS resources but also represents a major burden to the taxpayer. A similar concern exists with the low sustension rates for cases settled or cases decided by the Tax Court. The taxpayer must spend significant sums to fight the IRS on cases of limited merit. Senior management must take steps to ensure that employees receive proper training, supervision, and support, so that these sustension rates can be improved. Also, the Appeals staff should provide feedback on areas that are subject to settlement so that examiners would be aware of which legal positions are not being sustained.


Quality Reviews

The Commission heard from many former and current IRS employees that increasing the number of reviews of examination by quality review staff and institutionalizing the importance of quality for all examination employees would be a good step in ensuring that these performance measures are met. In addition, the Commission believes that IRS managers must be held responsible for the training and evaluation of new examination and collection employees during their probationary period in order to determine their fitness for permanent duty.


Taxpayer Service Surveys

To measure taxpayer satisfaction and ensure taxpayers receive fair and courteous treatment, the Commissioner, in consultation with the Taxpayer Advocate, should conduct continual surveys of taxpayers who have interactions with the IRS. The findings of these surveys, gathered at the group or unit level, should be used for the purpose of continuously improving the work done by IRS employees with the public.

Several state tax administrations conduct surveys of taxpayers that have proved beneficial for management. In addition, the private sector has found such surveys useful in identifying and rewarding exceptional employees. Surveys should be conducted for all IRS locations that deal directly with taxpayers, and posts of duty with substantial staffing.

At a minimum, surveys should be constructed to allow for review of management performance. In addition, surveys should provide sufficient data for management to measure aggregate employee performance, as well as taxpayer satisfaction with services provided by the IRS. The Taxpayer Advocate should publish the results of these surveys in the annual report to the Board of Directors by district and regional offices.


4. Accountability to Taxpayers

The independence of the IRS from political pressures and accountability to taxpayers are integral to maintaining confidence in our voluntary compliance system.


Criteria for examination selection

In recent years concerns have been raised that certain taxpayers have been selected for examination for political purposes. At the same time, the paucity of information available to the public as to the criteria and procedures for selecting taxpayers for examination leaves room for taxpayers to speculate, particularly when certain examinations are brought to light through the media. For example, IRS Publication 556 merely explains that several computer methods are used to select returns, but does not indicate whether returns are selected for examination on the basis of information available in the media or on the basis of information provided to the IRS by informants. To provide taxpayers with a better understanding of the independence of the IRS from improper influence, the Commission urges the IRS to better educate the public about its procedures to the greatest extent possible within the bounds imposed by genuine law enforcement concerns. Further, the Congress should consider changes to the law based on the findings of ongoing review by the Joint Committee on Taxation of audits of nonprofit organizations.


Records archived

Because taxpayers and the IRS can learn from the past, the IRS must develop a comprehensive record keeping program to maintain and preserve the integrity of internal records. All federal agencies are required to deposit significant and historical records with the National Archives and Records Administration (NARA). Because section 6103 of the Internal Revenue Code prohibits the disclosure of tax return information, the IRS does not allow NARA personnel to review its internal records for archival purposes. The inability to resolve this problem is detrimental to developing an accurate history of the IRS through which taxpayers can hold the agency accountable for its actions. Moreover, to the extent that IRS decision makers do not have ready access to prior reports and studies, they are not able to make fully informed decisions. Congress should provide NARA access to all IRS records for archival purposes, and to assist the IRS in establishing and maintaining a comprehensive record keeping program.


Access to tax return information

The Commission heard concerns regarding the scope and use of the provisions regarding taxpayer confidentiality. In light of the complexity of the issue and the need to balance a host of conflicting interests, including taxpayer privacy, the need for third parties to use tax return information, and the ability to achieve greater levels of voluntary compliance by allowing the public to know who does not file tax returns, Congress should study these rules.


Freedom of information

Congress enacted the Freedom of Information Act (FOIA) to encourage openness in government and to provide a tool for the media to have access to information to do its investigatory job, and established specific deadlines for agency action on information requests. For requests to the IRS, the average FOIA request takes six months to process and appeals can take nearly a year, which is far in excess of the 10 business day statutory period for requests and 20 business days for appeals.

Because the media is able to perform an oversight function through its work, and disseminate the information to a larger audience, the Commission recommends that requests by the media be given priority for processing and appeals purposes. This priority should mirror the process established by the Department of Justice, which provides expedited processing for certain FOIA requests that promote public accountability, particularly when the information sought involves possible questions about the government’s integrity which affect public confidence.


5. Other Taxpayer Rights Proposals

Restoration of public confidence in the IRS must begin with Congress through legislation promoting fair and impartial tax administration which focuses on preventing problems before they occur.

The Commission’s task force on Taxpayer Rights developed a number of additional proposals for action by Congress which are included in Appendix I.