Recent congressional hearings focusing on the abuses taxpayers have suffered under the strong arm of the IRS are leading to changes that, sponsors say, will finally bring about meaningful reform to the agency. The proposals will be especially welcome to individual taxpayers and small-business owners, who often find it difficult to deal with the nation's tax collector.
While most observers agree change is long overdue, they say there is a good deal more behind the Senate hearings and the IRS overhaul legislation than just the need to make the agency more taxpayer-responsive. "Party politics have started to overtake the issues," says Greg Jenner, national director of federal tax policy in the Washington, DC, office of Coopers & Lybrand LLP.
Former IRS commissioner Don Alexander agrees: "The Republicans need an issue, and they have a very popular one--`We hate the IRS, so we are going to run against the service.' "
Joan Szabo is a writer in McLean, Virginia, who has reported on tax issues for more than 12 years.
Hear Ye, Hear Ye
Party politics or no, the September Senate hearings painted a grim picture of the agency. A retired New York priest who testified at the hearings described how he had been harassed by IRS agents for eight months over an alleged $18,000 tax debt, and all the while the service refused to show him his tax return. And a Bakersfield, California, woman wept as she described her 17-year ordeal with the agency over a tax bill owed by someone who had a name similar to her husband's. Senators also heard from an IRS agent who said "egregious tactics" were used by the agency "to extract unfairly assessed taxes, literally ruining families, lives and businesses, all unnecessarily and sometimes illegally."
On the last day of the hearings, acting IRS commissioner Michael Dolan apologized for the IRS' mistakes and promised to take immediate action to correct them. "The service takes these situations seriously, and we do want instances like these brought to our attention," he told the senators.
Not wanting to appear unreceptive to growing lawmaker and taxpayer demands for change, the White House recently said it had changed its position and would not oppose a House bill to overhaul the IRS. The measure, sponsored by Rep. Bill Archer (R-TX), passed in the House in November; the Senate is expected to consider its version of the bill in the spring.
Despite its apparent support, the White House says it will continue to work to improve the Archer bill. The legislation was made more palatable to President Clinton when Archer agreed to delete a provision that would have stripped the president of his power to hire and fire the IRS commissioner.
The Road Ahead
Under Rep. Archer's bill, individuals would receive 28 new taxpayer rights. The basic groundwork for the legislation was laid by a congressional commission that spent a year studying the IRS and its problems. (For details on the commission's recommendations, see "Tax Talk," October 1997.)
"While most people at the IRS follow the rules and collect the nation's revenues the way they're supposed to, there are too many instances in which taxpayers are denied their fundamental rights, money is coerced from people who do not owe, and the defenseless become targets for IRS audits," Archer declared during a national radio address in October.
To combat these problems, the legislation would shift the burden of proof in tax lawsuits away from taxpayers and onto the IRS. This provision aims to address the perception that current law considers taxpayers guilty until proved innocent when involved in an IRS dispute.
Taxpayers would still be required to produce documents upon demand, provide access to witnesses and cooperate with the IRS--crucial provisions, says Alexander. "The problem of shifting the burden of proof without those requirements is that it would encourage taxpayers to deliberately avoid keeping records," says Alexander. "They could claim they made larger deductible expenditures than they did, and there would be no way for the IRS to disprove them."
The measure would also create an 11-member IRS oversight board that would hold the IRS accountable for change at the agency. The president would select eight private citizens for the board; the remaining board members would be the treasury secretary, the IRS commissioner and a union representative for IRS employees.
As envisioned by Archer, the new board would review and approve the IRS' annual strategic plans; review the agency's operations, including plans for modernization, agent training and education; review the IRS commissioner's selection, evaluation and compensation of senior managers; and review and approve major IRS reorganization plans. While the board would not have a role in establishing tax policy, it would approve the agency's annual budget request. The president could still submit a different request if he wished to do so. In addition, the board would not have the authority to receive confidential taxpayer return information.
The Clinton Administration opposes the creation of an independent board because it would take power away from the Treasury, and it will probably try to water down some of the board's proposed powers when the Senate considers the measure.
The legislation would also allow taxpayers to sue the agency for damages caused by IRS negligence and make it easier to recover legal costs when the IRS wrongly accuses a taxpayer. In addition, it would make more cases eligible for resolution in a tax version of small claims court and provide financing for low-income tax clinics to help needy Americans who are in a dispute with the IRS. The measure would also expand the ability of "innocent spouses," often divorced women, to be relieved from liability for additional taxes the IRS determines are owed on a joint return filed during the couple's marriage.
Even if the measure is signed into law, Republican lawmakers are expected to keep the heat on by moving the debate from the IRS' internal problems to simplifying the tax code. The focus is likely to be on whether a flat tax or a national sales tax should replace our current federal tax system.
While Congress moves to overhaul the IRS, the agency itself is taking steps to address concerns expressed during the Senate hearings. To dispel the widely held belief among IRS employees that they are graded on revenue collections, acting commissioner Dolan instructed IRS officials to stop comparatively ranking the 33 district offices on their tax collection results. He also suspended the distribution of any goals relating to revenue production in the field offices.
After the Senate hearings on taxpayer abuses, the White House also announced a number of administrative changes that are being instituted, including:
- establishing 33 citizen review boards around the country where taxpayers can take complaints about the IRS. The panels will not resolve disputes but will help taxpayers work with the IRS Taxpayer Advocate's Office.
- providing IRS operator service 24 hours a day, seven days a week, by 1999. As a first step, operators will be available 16 hours a day, six days a week, starting this month.
- keeping IRS offices open on Saturdays during tax season.
- reducing by 30 percent the tax notices mailed to citizens.
- selecting the IRS' taxpayer advocate from outside the agency instead of from within, as was past procedure.
In the meantime, the Senate Finance Committee finally confirmed Charles Rossotti as the new IRS commissioner. Rossotti, chairman of American Management Systems Inc., an information systems consulting company in Fairfax, Virginia, is seen by the Clinton Administration as someone who can alleviate the IRS' technology difficulties and help improve its customer service. Critics have claimed, however, that he lacks the tax experience needed for the job.
Accountant Jenner says individual taxpayers and small-business owners should ultimately benefit from all these changes, and that will be especially true if the Archer bill passes.
Another plus, he says, is that the IRS will get a chance to put its house in order. "The agency will have a structure imposed by lawmakers who have a political stake in the success of that structure," Jenner says. When all the political rhetoric dies down, he adds, "lawmakers will have to give the new system a chance to work and prove its effectiveness."
Don Alexander, c/o Akin, Gump, Strauss, Hauer & Feld LLP, (202) 887-4064
Greg Jenner, c/o Coopers & Lybrand LLP, (202) 822-4000, e-mail: email@example.com