September 15, 1997 | Testimony on Taxes
Chairman Roth and Distinguished Members of the Committee: With
me today are Lee Monks, the Taxpayer Advocate, and Ron Rhodes, the
Assistant Commissioner for Collection. We appreciate the
opportunity to appear today and discuss important aspects of the
way the Internal Revenue Service performs the mission which the
Congress has assigned it. Given its jurisdiction and role in the
establishment the nation's tax policy, it is crucial that this
Committee be provided as complete a picture as possible of the way
today's tax administration processes work.
The IRS has worked hard during the past months to be responsive to the requests of the Committee's investigative staff. Early in their deliberations the investigators identified several cases for which the IRS has provided extensive case information, as well as access to the pertinent field and national office IRS employees. In the past few weeks, four of those cases were identified as probable subjects for this hearing. As we have reviewed those four cases, we identified mistakes in the way that two of the four cases were handled, and in a third case, we didn't provide the kind of assistance we should have in helping the taxpayer rectify an error they made when they filed their return. I am sorry we made those mistakes. The taxpayers involved certainly deserved better treatment than they received. In one instance we have had a chance to formally apologize and in the other two we have either solved the original problems or offered to help resolve a remaining taxpayer concern. Beyond wishing that we had not made the original mistake, I am also concerned that it took too long to identify and correct the errors. I intend to share these concerns and others identified in our preparation for this hearing when I meet with our key senior executives next month.
As unacceptable as any mistake is, I hope this Committee will consider them in the context of IRS's performance of its overall responsibilities. During the days that have immediately preceded these hearings, a variety of allegations have found their way into the media. Unfortunately it is far too easy for an allegation of wrong doing or even an actual error to be mis-characterized in a way that impugns an entire organization and all its employees. As a career IRS employee, I know my IRS colleagues not only understand, but take very seriously the significant responsibilities with which we have been vested. Most chose careers in public service because they believed they could make an important contribution to the success of their country.
This Committee is in a unique position to understand the complexity and sensitivity of the mission that has been assigned to the IRS. Each year the Service receives nearly 200 million tax returns, collects and accounts for well in excess of a trillion dollars, generates nearly 90 million refunds and receives millions of calls, letters and visits from taxpayers in need of help. In addition, a normal year will find the IRS involved in approximately 10 million "compliance contacts" ranging from tax audits to collection of delinquent accounts and reconciliation of discrepancies between information supplied by third parties (i.e., employers, banks, mortgage companies, etc.) and the information reported on tax returns. Each of these millions of transactions is sensitive, whether it is the processing of a routine refund return or a compliance contact. The impact of these interactions on taxpayers is clearly influenced by the way in which the IRS performs its responsibilities. There are also a variety of issues outside the IRS control which influence the difficulty or ease with which these interactions occur. The economy, for example, often bears directly on the ease with which some taxpayers are able to pay the tax they owe. Likewise the introduction of significant tax law changes frequently challenges some taxpayers' abilities to correctly meet their tax obligations. Few organizations, public or private, perform their responsibilities in as sensitive an environment as that confronted daily by the employees of the Internal Revenue Service.
One of the true strengths of the United States "self assessment" system is that the vast majority of U.S. taxpayers file their returns on time and pay the tax they owe. These taxpayers account for the 83-85 percent compliance rate that exists today. For the most pad, the contacts between these taxpayers and the IRS involve receiving the forms, assistance and education required to maintain their compliance. Because these taxpayers represent the backbone of our system, IRS has increasingly sought to offer them simpler ways of filing, paying and obtaining assistance. Likewise in the case of taxpayers who may owe tax but strive to resolve their non- compliance, the Service has significantly expanded its ability to solve problems over the telephone, improved the tone and clarity of correspondence it sends and increased the alternatives available to resolve tax delinquencies. In addition to these improvements, there is currently underway a major effort to further improve the customer service effectiveness of the IRS. A group of front-line employees and managers from the IRS, Treasury and the Vice President's National Performance Review staff have spent the last three months reviewing virtually every aspect of customer service and will next month present a comprehensive set of improvement options.
In contrast to the majority of compliant taxpayers, however, are those people who do not meet their tax obligations. Out of fairness to those taxpayers who do, the IRS seeks to collect overdue taxes from those who have not voluntarily filed and paid. We do not treat all who have not complied the same. The type of IRS contact and the enforcement actions we use depends upon the willingness and ability of taxpayers to correct their noncompliance.
Nonpayment of Taxes Owed
While a minority overall, a significant number of taxpayers do not pay the full amount of taxes owed. At the end of FY 1996, the cumulative unpaid taxes owed which we record as accounts receivable exceeded $216 billion. Payment delinquency can occur for a variety of reasons. A taxpayer may file a return on time but not pay the full liability. A taxpayer may make a math error on the return that increases the tax liability. In addition, examinations and matching of information returns to tax returns frequently identify a liability which is not fully paid.
The first contact with a taxpayer who owes back taxes is a notice or a "tax bill" which is sent to all taxpayers who owe. Currently, individual taxpayers who owe can receive up to 4 notices issued over a 16 week period before the IRS attempts to contact the taxpayer by telephone or in person. Business taxpayers who owe can receive up to 2 notices issued over 6 weeks. Recently, these notices were re-written in clearer language so that taxpayers would be able to easily understand what they have and have not paid. With any notice of a balance due, taxpayers also automatically receive a publication entitled "Your Rights As a Taxpayer" (Publication 1). A publication entitled "Understanding the Collection Process" is sent with the final notice (Publication 594).
Nonfiling of Tax Returns
Another group of taxpayers fail to file tax returns for which they are liable.
Some do not file because they are not aware that they need to file. Others fail to file because of a traumatic event in their life, such as a divorce or loss of a job. Still others do not file because they cannot pay the entire amount they owe. We estimate that over $13 billion is owed annually by taxpayers who do not voluntarily and timely file required tax returns; this is known as the nonfiling gap.
The IRS identifies potential individual nonfilers primarily from information documents showing payments made by third parties, such as Forms W-2 and 1099. Potential business nonfilers are identified based on information the business provided when it applied for an employer identification number and its prior return filing history. When information documents reflect that an individual taxpayer had income sufficient to require a return but did not file a return or when our information indicates a business has not filed a required return, we send a notice requesting that the taxpayer either file the required return or explain why they are not required to file. Those we believe should have filed but did not receive either 2 notices over an 8 week period or 1 notice depending on the amount of tax likely due.
Those Who Will Correct Noncompliance
Many taxpayers respond when they receive one or more notices from the IRS regarding their nonpayment of taxes owed or their nonfiling of required tax returns. For example, in FY 1996, taxpayers paid $14.7 billion after receiving a notice; $11.7 billion was similarly paid in FY 1995. In FY 1995 and in FY 1996, over 1.1 million delinquent returns were filed each year by taxpayers receiving a nonfiler notice.
Other taxpayers will call us after receiving a notice because they do not have the money to pay the tax due. If the taxpayer cannot fully pay, telephone assistors will work with the taxpayer to help resolve the problem. Taxpayers may be asked to provide financial information so that the correct course of action can be determined. Our telephone tax assistors have the authority to recommend adjustments to the tax bill, to allow the taxpayer additional time to secure funds from a bank or third party, to temporarily suspend collection action, or to establish a payment agreement; known as an installment agreement.
Installment agreements offer the IRS a unique opportunity to keep taxpayers in the tax system who would otherwise not be able to meet their full tax obligations while assisting taxpayers in correcting the cause of the delinquency. In FY 1992, 1.52 million taxpayers entered into installment agreements. As a result of IRS efforts to expand the use of installment agreements, the number entering into installment agreements increased to 2.67 million taxpayers in FY 1996.
When the tax debt cannot be resolved through an installment agreement, an Offer in Compromise may sometimes be an appropriate way to satisfy the debt. By law, taxpayers can submit an application for an Offer in Compromise when there is "doubt as to liability for the amount owed" or "doubt as to ability to pay the full amount owed". In FY 1992, we modified the Offer in Compromise policy and streamlined procedures to make it easier for a taxpayer to submit an offer and have it accepted. Reflective of this change is the comparison between FY 1991 when the IRS accepted 1,995 offers from taxpayers to compromise their tax debt, and FY 1996, when this increased to over 27,600 accepted offers. Our rate of accepting offers submitted has also steadily increased from 25 percent in FY 1991 to 48 percent in FY 1996. An offer is a reasonable alternative to declaring a case currently not collectible or to proposing a lengthy installment agreement. Our ultimate goal is to collect what is collectible as early and inexpensively as possible -- reaching agreements that are in the best interest of both taxpayers and the government. Accepting reasonable offers not only resolves past delinquencies; it gives taxpayers a "fresh start" from which to manage their future filing and payment requirements. As a condition for accepting an offer, taxpayers who have an offer accepted agree to comply with all filing and payment requirements for five years -- thus, enhancing voluntary compliance.
Some Taxpayers Make No Arrangement To Comply
There are, unfortunately, some taxpayers who choose not to take advantage of these arrangements, and who continue to refuse to pay their taxes. In their unwillingness to pay their fair share of taxes, these taxpayers impose extra -- and unfair -- loss on those who do comply with the law.
When a taxpayer does not respond to our notices by filing a delinquent return, paying the full amount owed, establishing a payment agreement or filing an offer in compromise, the IRS attempts to make further contact with the taxpayer either through telephone or face-to-face contact. Upon contact with the taxpayer, we will try to work with the taxpayer to resolve the nonfiling and/or the delinquent tax debt.
In addition to the various ways in which arrangements can be made to pay delinquent tax, collection personnel can determine, at any step in the process, that the tax debt is not currently collectible because such collection would result in a significant hardship. A significant hardship may occur if the taxpayer cannot maintain necessities, such as food, clothing, shelter, and medical treatment. At the end of FY 1996, collection personnel determined that taxpayers could not currently pay $29.2 billion of the $216 billion in accounts receivable due to hardship.
If we cannot contact the taxpayer, or the taxpayer is unwilling to make arrangements to pay or unwilling to file a delinquent return, we utilize enforcement tools that the Congress has authorized. In the case of nonpayment, we may place a lien or levy on the taxpayer's assets. We may levy against wages, funds on deposit at a bank. rental income, dividends, demand notes or securities. Before the IRS takes levy action, however, we must send the taxpayer a final notice of intent to levy at least 30 days in advance of the levy. We may give this notice in person, leave it at the taxpayer's dwelling or usual place of business, or send it by certified or registered mail. We must release a levy if: the amount owed is paid in full; documentation is provided to us to determine that releasing the levy will help collect the tax; the taxpayer enters into an approved, current installment agreement and the IRS and the taxpayer have agreed to release the levy; or the levy is creating an economic hardship.
In appropriate situations and usually after other collection actions have been exhausted, the seizure and sale of property may be used to collect delinquent tax debt.
Among other rights, a taxpayer has the right to an administrative review of our seizure action. Before selling the property, public notice usually appears in a newspaper in the county where the sale will be held. The original notice of sale is personally delivered to the taxpayer or sent by certified mail. We must wait at least 10 days after giving notice before conducting the sale. Before the sale, the property can be released if the taxpayer: pays the amount of the government's interest in the property; enters into an escrow arrangement; provides an acceptable bond; or makes an acceptable agreement for payment of the tax. Taxpayers can "buy back" personal property at any time before the sale by paying the tax due, including penalties and interest, and paying the expenses of seizure, Taxpayers can also request that we sell the seized property within 60 days. Seizure of a personal residence requires the approval of the District Director and taxpayers have 180 days to redeem their personal residence after the sale. In FY 1996. $164,7 million was collected from approximately 10,000 seizures. Notably, in only about 2500 of these seizures, were the taxpayers' assets required to be sold. Over the past 5 years, the number of seizures has remained fairly constant-about 10,000 seizures per year. Seizures were used in less than 0.2 percent of the 6.6 million delinquent cases closed in FY 1996.
In those cases in which no return has been filed despite the issuance of several requests to the taxpayer, our enforcement efforts may include "substitute for return" assessments. In a "substitute for return" assessment, we determine the taxpayer's liability based on available third party information and write to the taxpayer proposing assessment of this amount unless they respond by filing a correct return; by explaining they are not required to file a return; by explaining that some of the income reported by their parties is not their income; or by appealing our proposed assessment. A taxpayer can appeal the proposed assessment within the IRS through our Appeals Office. Most differences can be settled through the appeals system without expensive and timeconsuming court trials. If the matter cannot be settled to the taxpayer's satisfaction in Appeals, the taxpayer can take the case to court. If the taxpayer fails to respond to our letter, we pursue assessment using deficiency procedures.
Collection Appeals Process
At any step of the collection process, taxpayers who believe that they have been treated unfairly have administrative remedies available to them. Taxpayers can request an administrative review of the employee's actions with the employee's manager. On April 1, 1996, the IRS put into place additional administrative appeal rights by establishing new procedures that give taxpayers the right to appeal liens, levies, and seizures proposed by the IRS. Also, the Taxpayer Bill of Rights 2 required the IRS to provide an independent administrative review of terminations of installment agreements for taxpayers who request such a review. This new appeal right was made effective January 1, 1997.
Taxpayers subject to a lien, levy, seizure or termination of an installment agreement receive Publication 1660, "Collection Appeal Rights for Liens, Levies, and Seizures," which explains their right to make such an appeal and the procedures for requesting an appeal. Publication 1660 and Form 9423 (Collection Appeal Request) are included as appendix to my testimony. The IRS has trained its collection personnel in this new appeals procedure. Since April 1996, approximately 1,800 taxpayers have utilized this administrative appeals process. Our Appeals function has fully sustained the collection action in 75 percent of these cases and fully reversed the collection action in 13 percent of these cases. Taxpayer Advocate Plays Key Problem Resolution Role The Service has had a Taxpayer Advocate (formerly called the Taxpayer Ombudsman) since 1979. As the current advocate for taxpayers within the Service, Mr. Monks' responsibility is to ensure that taxpayers are provided the assistance necessary to resolve their issues or, at least, are provided the information they are seeking on their inquiry. Taxpayers who are experiencing problems that they cannot clear up through normal channels, or that may be experiencing significant hardship as a result of IRS action, or that want to register a complaint about treatment by IRS can contact the local taxpayer advocate in the district in which they reside or at the service center with which they may be corresponding. Taxpayers may also communicate directly with Mr. Monks here in Washington, D.C. In helping resolve difficult individual cases. the Taxpayer Advocate's office compiles and tracks data on the types of problems taxpayers experience with the IRS and then works with appropriate IRS officials to correct any system deficiencies contributing to those problems.
The Advocates' office is also frequently involved in cases in which complying with the law may constitute a hardship for an individual taxpayer. In those instances, taxpayers can apply for hardship relief by filing an application (Form 911) for a Taxpayer Assistance Order. In addition, employees can refer a taxpayer's case to the advocate's office for hardship consideration.
Approximately 35 percent of all Taxpayer Assistance Orders are initiated by employees. A local taxpayer advocate will review the application and, if appropriate, takes steps to relieve a hardship or to stop a collection action until a review determines that the action is appropriate. In addition, our problem resolution program provides an avenue for taxpayers who have been unable to resolve their problem with IRS; when a significant matter or event is not being considered; or if their rights have been violated.
As you are aware, Mr. Chairman, in February 1997, after reading the announcement that this Committee was establishing an investigative team to review IRS' treatment of taxpayers and that a number of taxpayers had come to the Committee with a variety of problems that they had experienced with the IRS, Mr. Monks wrote you offering the assistance of his office in handling any of the taxpayer issues identified by the Committee. The Committee did refer one case to the Taxpayer Advocate and I was pleased that the advocate's office was able to resolve this taxpayer's matter expeditiously.
Specific Taxpayer Cases
In May and June 1997, the Chairman requested that IRS provide to designated Committee staff the tax returns and other relating to disagreements between the IRS and taxpayers associated with the cases that I mentioned earlier in my testimony.
Section 6103 of the Internal Revenue Code, which prohibits disclosure of taxpayer information, prevents my discussing the specific facts of each of these cases in a public hearing without a taxpayer's written consent. It is anticipated, however, that the Committee staff will obtain authorizations which will permit me to respond to questions that Committee members may have about the specific cases which we have reviewed. Before I respond to any specific case, however, I do want to stress that we strive to maintain consistent and fair treatment of all taxpayers. At the same time, given the very specific nature of many of the cases our employees encounter, we consciously vest employees with sufficient discretion to treat each taxpayer's situation on its own merit. There is obviously some tension between wanting absolute guarantees of consistency and empowering front-line employees to use their professional judgment. I would like to be able to tell you today that all 100,000 IRS employees -- myself included -- always exercise our judgement correctly in every one of the millions of taxpayers' cases we work. We do make mistakes just like employees in other government agencies or in any other large business that deals with the public. As I said earlier, three of the cases submitted to the Committee staff include mistakes which we made. I am both disturbed and sorry for how our failure to correct these mistakes timely has disrupted these taxpayers' lives. While I want to apologize for the frustration, inconvenience, and hardship caused by our actions, I also want to commit to doing everything possible to see that other taxpayers do not experience what these taxpayers experienced. The Service does take these situations seriously and we do want instances like these brought to our attention.
Day in and day out, our employees confront a very challenging job. In the vast majority of cases, I believe they exercise their responsibilities with extreme care and concern for the rights of taxpayers. Through their efforts, we ensure that the millions of Americans who willingly meet their tax obligations are required to pay only their fair share. Their efforts also help ensure that the tax revenues contemplated by our tax laws are collected and made available to enable our nation to meet its crucial spending and deficit management objectives. On behalf of my colleagues at the IRS, I commit to you a redoubled effort at ensuring that we exercise our responsibilities with the utmost professionalism and respect for the public we serve.