Statement of Nina E. Olson, Executive Director,
The Community Tax Law Project, Richmond, Virginia
Testimony Before Subcommittee on Oversight
of the House Committee on Ways and Means
Hearing on the Recommendations of the National Committee on
the IRS on Taxpayer Protections and Rights
September 26, 1997
Madame Chairwoman and Members of the Committee:
Thank you for providing me the opportunity to testify on the issue of taxpayer rights. I comment in my capacity as the Executive Director and staff attorney of The Community Tax Law Project. CTLP is a 501(c)(3) organization founded in 1992 for the purposes of (1) providing low income Virginia residents with pro bono legal representation in federal, state and local tax disputes; (2) educating low income individuals about their rights and responsibilities as U.S. taxpayers; and (3) increasing public awareness of and encouraging informed debate about policy and practice issues impacting on low income taxpayers.
CTLP accomplishes its goals in a variety of ways, including in-house legal representation and a pro bono referral panel of volunteer attorneys, accountants and enrolled agents. The Project provides back-up training and technical support for its volunteers and maintains a research library. Student interns from local law schools receive course credit for working at the clinic. It sponsors continuing legal education programs, including one in June, 1995, on the representation of low income newcomers. I frequently address groups of low income parents and workers about tax issues impacting on their families and their businesses. CTLP also publishes The Community Tax Law Report, a national newsletter about low income tax policy and practice.
My remarks today are tinted from my perspective as a taxpayer advocate, one who has daily contacts with all levels of the Internal Revenue Service on behalf of low income taxpayers. Perhaps even more important, I am the attorney who answers taxpayers' calls for assistance and screens cases for acceptance by the Project. I hear directly from low income taxpayers about their own efforts in resolving tax disputes and their treatment by IRS employees.
Let me unequivocally state that in my twenty-two years of tax practice I have found IRS employees to be as a rule considerate, helpful and genuinely interested in resolving disputes. Even in the most adversarial of situations some measure of decorum and mutual respect is present. However, and this is a big "however," the same cannot be said about unrepresented taxpayers' treatment, particularly at the collections level, and, specifically, with the automated collection sites.
It is my experience that unrepresented taxpayers, in particular low income taxpayers, receive inadequate assistance from IRS employees. This is so despite the well-intentioned efforts of many Service employees. The reasons for this discrepancy in treatment are legion, but foremost among them must simply be the fact that taxpayers feel frightened and threatened by the IRS' power as a creditor. In large part these feelings are encouraged by the Service's own notices, which state that they may seize your vehicle, levy on accounts, etc. While this fear may ultimately lead to taxpayer compliance, my point here is that it also creates in many taxpayers a "flight" response. Taxpayers already expect the worst and act in a manner that may bring "the worst" about. Nervous and anxious, the taxpayer is often unable to convey vital information that may enable the IRS to resolve the dispute.
Even when a taxpayer attempts to inform the Service about his or her position, the taxpayer may not know the right questions to ask, the right person to address them to, or the appropriate procedure for relief. Some IRS employees do not reach out to the taxpayer and attempt to elicit the necessary information. In dealings with the Collections division, taxpayers feel like quasi-criminals, rather than individuals who are attempting to arrange payment of their taxes.
Taxpayers receive incomprehensible notices from the Service. At the Project, we try to target our own publicity at a fifth-grade reading level. Imagine what a taxpayer may think who receives a five page letter from the IRS listing schedules of interest calculations and only on page 2 or 3 discovers the reason for a proposed adjustment to account. Even if the taxpayer does not ignore the notice, he often cannot understand the options open to him for protesting the notice. The taxpayer's failure to communicate generates a 90-day letter; his failure to file a Tax Court petition results in assessment; and an issue which should have been resolved through correspondence ends up in collection, where a taxpayer's protests that "I don't owe this tax" fall on deaf ears.
District Counsel attorneys can only do so much for a pro se petitioner in the United States Tax Court. A taxpayer may be in Tax Court not because she has a winning side but because she can't afford to pay the tax. The petitioner may not provide enough facts for the district counsel attorney to determine the appropriate tax treatment of an item. Settlement attempts may be rebuffed by the taxpayer as a move to outsmart her. The IRS is perceived as an enemy and that perception precludes communication and cooperation.
TAXPAYER REPRESENTATION ISSUES
Section 313. LOW INCOME TAXPAYER CLINICS.
The Need for Clinics:
The problems described above make the case for passage of Section 313, which addresses seed money funding for low income taxpayer clinics. Taxpayers without access to representation will receive vastly different and less favorable results in the tax system than those who are represented by a tax professional. The tax professional acts as an advocate but also as a reality check. In fact, it may be that the most important service representatives provide is educating taxpayers about the tax system and their rights and responsibilities within that system.
Student tax clinics have been operating since the late 1970's. Today, there are approximately 14 law school clinics and 2 accounting school clinics. Student clinics are conducted under the guidance of a faculty member; representation is generally limited to taxpayers with $10,000 in tax liability or deficiency per year. Most, if not all, impose some sort of financial eligibility requirements for case acceptance. Some of the clinics maintain active relationships with the members of the private tax profession, arranging student mentor programs and even case referrals.
My own program, The Community Tax Law Project, limits its case acceptance to taxpayers whose income is at or below 250% of the federal poverty level. Representation is free of charge for taxpayers meeting Legal Services Corporation eligibility (i.e., 125% of federal poverty level). We charge a $25 one time administrative fee to taxpayers with income between 125% and 250% federal poverty level. Needless to say, no attorney accepting a pro bono referral may accept a fee from the client, even if the client's financial circumstances change for the better. We are careful to protect the integrity of our referrals and to ensure that our program cannot be used for the private inurement of individuals.
Our clients come from all over Virginia, including Chesapeake watermen, members of the Asian community in northern Virginia, workers and elderly individuals from Richmond, Roanoke, the Tidewater, and Harrisonburg. We have rural and urban clients. Our pro bono panel of over 135 tax professionals also covers the state. Thus, I am able to make client referrals to tax professionals in the general geographic area closest to the client.
Over the past year, The Community Tax Law Project handled in-house or through pro bono referral approximately 30 to 40 cases each month -- almost 400 cases on an annual basis. Of the three Tax Court dockets held in Richmond and Roanoke, Virginia, each year, we formally or informally participate in nine to fifteen cases. These figures do not include the many phone calls I field each week that are strictly informational.
Perhaps the most common misperception is that low income taxpayers don't pay taxes so they can't have any tax problems. Our clients have cases involving complex issues, such as investment tax credits and depreciation deductions claimed by rural farmers; the taxable nature of severance pay received by a Navy pilot in combat status at the time of his retirement from service; and the taxable nature of a payment received in the settlement of a complicated suit alleging anti-trust violations as well as personal and reputation injuries. Other cases involve the responsible person penalty (IRC 6672) and employee classification issues. All of the taxpayers involved meet our income eligibility guidelines; their cases involve serious issues of law and fact.
The Earned Income Credit, administered through our tax system, may be the single most successful anti-poverty initiative today. Yet the EIC and related dependency exemptions and filing status determinations involve some of the most intricate and complicated sections of the Code. Many of our cases raise these very issues. We also see a fair number of "innocent spouse" cases, including one in which the ex-wife failed to report nonemployee compensation from an astrological 900-number helpline, a job her ex-husband, our client, never knew she held.
All of our clients in the above cases are struggling hard to make ends meet. In many cases, their returns were prepared by tax preparation services or by VITA programs. But who is there to help with the problems that arise after the return is filed?
The Need for Funding:
It would seem that low income tax clinics are an obvious solution to the problems described above. Yet universities are struggling to find funding for an enterprise that not only provides its students with valuable practical experience and instills in them a professional commitment to community involvement but also offers substantial assistance to taxpayers and the tax system. In its first year of operation, CTLP sent out over thirty grant applications to national, state and local foundations. All applauded our mission; all stated that tax representation did not fall within their funding priorities. CTLP currently operates on a $28,000 annual grant from the Virginia Law Foundation.
Seed money support would go a long way toward encouraging the charitable sector to recognize the need for tax representation and the relationship of tax to a whole slew of problems affecting low income individuals. As the tax system becomes an agent of social policy and the source of initiatives directed at encouraging taxpayers to work, attend higher education, or to save for retirement, those individuals who cannot afford professional advice will be increasingly left in the dust. This is a social policy matter and is rightfully the focus of private philanthropy.
But the federal government also has a stake in seeing that low income taxpayers have access to representation. Our tax system is a voluntary system, whereby taxpayers report their own tax obligations. Taxes truly are the "lifeblood" of our government and noncompliance with the tax system drains the public coffers and alienates compliant taxpayers. However, where a system is perceived as stacked against the taxpayer and where their legitimate complaints, questions and requests are handled brusquely, impolitely or incorrectly, taxpayer compliance will suffer. Representation ameliorates this situation by keeping the taxpayer within the tax system. Representatives not only protect the taxpayer's rights but also explain to him his responsibilities.
In short, it is in the government's interest to ensure that taxpayers are adequately represented, regardless of their income level. Despite initial misgivings about students and private sector attorneys engaging in protracted disputes and wasting government resources, IRS employees at all levels now recognize the contribution clinics make to the smooth administration of the tax law. Clinic representation speeds up the dispute process, clarifies the issues, and facilitates settlement where appropriate. Finally, clinic representation saves expense because it often leads to case resolution at the earliest, most appropriate level.
Outreach and Education:
I applaud the sponsors of this bill for emphasizing the need for outreach and education efforts in those communities where English is a second language. Newcomers to the United States from other countries often are completely unfamiliar with the concept of an income tax and have never had to file a tax return before. Members of such communities are highly entrepreneurial and may be unaware of self-employment tax rules. They may work as household employees and are not aware that their employers are not withholding social security tax on their behalf. They may fall into the hands of unscrupulous preparers who claim erroneous dependents or qualifying children for purposes of the Earned Income Credit.
I recommend to your Committee, however, that clinic outreach not be limited to those communities specifically but be expanded to include "traditionally low income populations." For example, CTLP is working on a program to train welfare-to-work program participants and their case workers throughout Virginia about basic tax issues, including dependency exemptions, the advanced earned income credit, self-employment issues, and dependent care credit. Many members of this population have never had a bank account before much less filed an income tax return. As a taxpayer advocate, I look at the number of people entering the workforce and see the problems three years down the line when the Service begins to issue notices about improperly filed (or nonfiled) returns. An ounce of prevention goes a long way.
Further, I encourage you to add a provision requiring the Secretary of the Treasury, or his delegate, to develop methods for publicizing the clinics, including, but not limited to, posters and brochures displayed in taxpayer service offices and examination, appeals and district counsel office waiting rooms, and notices inserted in pre- and post-examination correspondence. Currently, Internal Revenue Manual 6570 Chapter (17)48 provides for such publicity on behalf of student tax clinics. (See also IRM Exhibits (17)00-1 through -7 for examples of "stuffer" notices.) There are no such provisions applicable to independent nonprofit clinics such as CTLP. To date the Service has not agreed to supply such publicity on CTLP's behalf, despite numerous requests over the last four years.
It is interesting to note that CTLP is handling 30-40 cases each month without any publicity from the Internal Revenue Service. The Community Tax Law Project originally requested such publicity in February, 1993, and we are still without any formal assistance from the Service. Most recently a pilot proposal to the National Appeals Office was met with opposition from Appeals on the ground that Appeals has a satisfactory case closing rate. I am advised that Appeals is in favor of pro bono representation but that they believe it should occur earlier in the dispute process. I concur with the idea of reaching taxpayers at the earliest level, but I do not view any of these methods as mutually exclusive. As the Service well knows, sometimes it takes several attempts to get a person's attention.
My concern here is for those taxpayers who drop out and never take their cases to Appeals because they do not have representatives. I am also concerned about the quality of case closings where taxpayers are unrepresented. We should try to reach these individuals along with taxpayers in exam or in collections.
There are many employees at all levels of the Service, from the Commissioner and Chief Counsel to Collections employees, who support the concept of pro bono representation. Student tax clinics and CTLP would not be as successful as they are today without the support of IRS employees. I view the clinic publicity boondoggle as another classic example of "not in my backyard" concerns. Thus, an unequivocal direction from Congress about the development of publicity measures for tax clinics, along with the imposition of a deadline for reporting back with such a plan, should overcome any footdragging on the Service's part.
Section 314. TAX COURT JURISDICTION.
As of June 1997, over 50% of the Tax Court's docket consisted of "small tax cases," i.e., cases in which the deficiency (including penalties) at issue is greater than $10,000 per year. The S-case docket affords taxpayers an opportunity to have their day in court without prepayment of the deficiency.
According to Chief Counsel's office, as of September 30, 1996, the Tax Court docket consisted of 30.2% of cases in the range of $10,000 to $100,000. It is difficult to project how many of those will elect the S-case docket. One significant drawback to S-case litigation is the lack of an appeal. $25,000 is a large enough sum to suggest to me that many taxpayers would not elect the S calendar thereby forgoing an avenue for appeal.
Because of this appellate path restraint I do not think there will be a flood of S-case petitions in this deficiency range. However, it is possible that more pro se taxpayers in this deficiency range will be inclined to bring S-case petitions where the cost of litigating a regular Tax Court case led them not to file under the existing rules. This observation only serves to emphasize the importance of providing funding for more clinical programs to assist in such representation.
Section 302. ATTORNEY FEES.
To date, I have not personally encountered a case in which I would request attorney fees. However, I feel that the system is fundamentally flawed if the Service can be punished for its "not substantially justified" positions in cases involving taxpayers with the ability to pay for representation, but the exact same behavior will go unpunished if the taxpayer is represented on a pro bono basis.
Section 7430 is modelled after the Equal Access to Justice Act, 28 U.S.C. 2412. Under the EAJA, attorney fees are awarded to pro bono representatives. (See, e.g., Cornella v. Schweiker, 728 F.2d 978 (8th Cir. 1984).) There is a slight difference in wording between 7430 and the EAJA, namely, the former statute defines "reasonable litigation costs" as "reasonable fees paid or incurred for the services of attorneys in connection with the court proceeding." IRC 7430(c)(1)(B)(iii) (Italics added.) This language has been cited as grounds for denial of pro bono attorney fees in tax litigation. (See Gaskins v. Commissioner, 71 T.C.M. (CCH) 3165 (1996).)
It is interesting to note, however, that the Joint Committee's General Explanation of TEFRA 82 clearly states Congress' intentions in enacting 7430 to cover the award of attorney fees to pro bono organizations: "[I]f an attorney is employed on behalf of the taxpayer by a third party such as a section 501(c)(3) organization, those attorney's fees may be recovered by the taxpayer even though the organization initially incurred the expense of retaining the counsel."
To me, then, this amendment to section 7430 reflects Congress' willingness to provide all taxpayers with access to justice, as well as a desire to penalize the Internal Revenue Service when it takes positions not substantially justified in cases, regardless of the income level of the litigants.
EMPLOYEE ACCOUNTABILITY ISSUES
302(b). AWARD OF ADMINISTRATIVE COSTS INCURRED AFTER 30-DAY LETTER.
Most Appeals Officers are willing to reverse unreasonable positions advanced in the examination stage. However, I support the proposal for including administrative costs incurred after the issuance of the 30-day letter in attorney fees awards under Section 7430. Appeals officers serve as the dividing line between settlement and litigation. The Appeals officer is the first IRS employee in any tax dispute who can consider hazards and risks of litigation. For this reason I believe they should be held to the standard of taking positions that are supportable; if they do not, they do violence to the system, forcing the taxpayer and the government to further expense, either through litigation or the collections process. Appeals officers must be held accountable for meeting the high standards they profess. They have nothing to fear if they live up to such standards.
Section 303. CIVIL DAMAGES FOR NEGLIGENCE IN COLLECTION ACTIONS
Although the vast majority of CTLP's calls involve collection actions, I cannot support the imposition of civil damages for negligence in collection actions. I am concerned that the undertrained, understaffed, and beleaguered employees in the IRS Collections Division will become even more demoralized. I fear that this provision may result in some truly outrageous actions being punished but that the overall level of service will decline even further as employees feel subject to allegations of negligence. It is much more effective to provide better training and support for first-level customer service employees so that they can feel some professionalism about their jobs than it is to make all employees the possible targets of irate taxpayer allegations.
Section 315. CATALOGING COMPLAINTS
I support H.R. 2292's provisions requiring procedures for cataloging and reviewing taxpayer complaints about IRS employee misconduct and the establishment of a toll-free hotline for taxpayers to register such complaints. Such a system would lead to employee accountability without subjecting the employee to the demoralizing provisions described in Section 303, as outlined above.
Precisely because the tax system is the one federal agency with which Americans have the longest and most frequent contact, its employees must conduct themselves in a highly professional manner. To this end, they should be held accountable for their actions. A workable grievance system should provide taxpayers with the ability to report what they perceive as employee misconduct while respecting the rights of IRS employees and taking into consideration the negative public perception all tax collectors must face.
Even where complaints are not sustained, the information gleaned from the cataloging effort will provide tax administrators with concrete data of what taxpayers themselves perceive as abuses. This, in turn, can provide direction for publicity campaigns to inform the public about certain procedures or can lead to systemic change that can avoid the perceived problem.
Section 308. OFFERS-IN-COMPROMISE.
As a general proposition, low income individuals rarely qualify for offers-in-compromise. I have clients who, under the Service's own guidelines, have no net equity in assets nor any present value of their five-year income stream. Yet because they can offer only $500 to $1,000, often using funds loaned from family members, the Service will not accept the offer. It is in the Service's interest to sit back and wait for collection from possible future tax refund offsets rather than to accept an offer which will not even cover the cost of employee time expended in processing the offer.
While this may make economic sense, it has the unfortunate effect of saying to low income taxpayers that they cannot receive finality on an outstanding tax liability, despite years of continuing compliance, whereas someone with greater means can. This unintended consequence smacks a little bit too much like "buying" justice, and, I believe, reinforces the feeling among low income taxpayers that they are being abandoned by their government.
I recommend to this Committee that the Service be directed to accept valid, workable offers despite the quantitative cost to the system. An improved perception of equal treatment of all taxpayers will redound to the benefit of the Treasury.
Section 308 of this bill addresses the use of national and local allowances only within the offers-in-compromise program. I encourage this Committee to extend its coverage to the use of such allowances in installment payment arrangements. While the motivation behind the use of allowances -- the avoidance of wild fluctuations between districts and the resulting forum shopping -- is laudable in theory, in practice the results are impractical and ignore the reality of many people's lives.
For example, the national standard for food allowances increases depending on one's income level. It is well documented that citizens of the inner city often have the highest food prices -- they do not have large supersaver grocery stores in their areas, and often shop at convenience stores with high mark-ups. This fact defies the "logic" of the national standards. Yet in one installment arrangement negotiation, the revenue officer refused to allow my client an extra bus trip fare in order to go shopping at a supersaver store. In short, she condemned him to spending less money on food than he was actually spending and denied him a valid expense that would have enabled him to keep his actual food costs within the national allowance. This posture is impossible to justify and again makes the tax agency appear to ignore the real needs of the rank-and-file taxpayer.
Section 310. ELIMINATION OF APPLICATION OF FAILURE TO PAY PENALTY DURING PERIOD OF INSTALLMENT AGREEMENT.
This provision will go a long way toward bringing people back into the system. I receive at least one call each week from someone complaining that despite the payments they are making under an installment plan, the balance never declines. They invariably state that they don't know how much longer they will keep up the payments, since they aren't getting ahead.
In the commercial sector, applying a failure to pay penalty while receiving payments and charging interest on a past debt would be called "usurious." The rationale for the failure to pay penalty is to punish the defaulted debtor for not paying the debt. If the taxpayer is making installment payments and, more importantly, is fulfilling the compliance conditions of the installment agreement, then that taxpayer should be encouraged to remain within the agreement and within the tax system. He or she should not continue to be financially penalized. The Treasury's interests could be protected by reinstatement of the penalty upon taxpayer default.
Section 311. SAFE HARBOR FOR QUALIFICATION FOR INSTALLMENT AGREEMENTS.
I view this provision as helpful and of very limited application. Many delinquent taxpayers are tardy for several years running. In such cases, it is my opinion that they should undergo close financial scrutiny prior to entering into or modifying installment plans. (As noted above, the standards used to evaluate one's financial needs should be revised for greater flexibility.) However, for the taxpayer who has remained compliant except for an isolated instance, usually attributable to some catastrophic event in the taxpayer's personal or professional life, this provision will encourage him to remedy his delinquency and will give him a sense that his government has his interests at heart.
TAXPAYER INFORMATION AND EDUCATION
The Service simply must do a better job of advising the taxpaying public about tax procedures and about potential traps for the unwary. At the same time, the public must be made aware that the tax laws are not created by the Service, nor does the IRS itself receive the tax monies. Attempts to better educate and inform the taxpayer about such matters will go a long way toward reducing (not eliminating) animosity toward the IRS.
Section 316. PROCEDURES INVOLVING TAXPAYER INTERVIEWS.
Taxpayers need to understand the procedures relating to examination and collection of tax before the commencement of any interviews. It is not enough to simply insert a notice in an otherwise incomprehensible mailing. The IRS employee should also explain the process in understandable terms to the taxpayer. This description will not only help the taxpayer understand the process and his rights, but it will also serve to remind the IRS employee of the entire process and his own role within it.
This section should also state that an unrepresented taxpayer shall be advised of the availability of any organizations providing pro bono representation prior to the commencement of an interview. If the individual expresses a desire to contact such an organization, the interview should be rescheduled for a later time, unless the taxpayer consents to the continuation of the interview.
Section 304. DISCLOSURE OF CRITERIA FOR EXAMINATION SELECTION.
A large part of the current disaffection with the IRS is simply attributable to the lack of information about its activities, most notably the audit examination. Providing greater information about the criteria for audit, in a manner that will not disclose any items "detrimental to law enforcement," will help erode the aura of secrecy surrounding the Service. It will dispel myths about how returns are selected. Greater information will lighten the task of those of us in the private sector who defend the integrity of the IRS.
This information must be graphically as well as grammatically legible. It should be available in numerous languages, and it must be accompanied by an education outreach campaign involving IRS employees and private sector professionals. It is not enough for the criteria to be buried in a densely worded publication; the Service must make a good faith effort to publicize the information. Again, professional groups and tax clinics can be of assistance here; creative thinking and efforts are called for.
Section 317. EXPLANATION OF JOINT AND SEVERAL LIABILITY.
No problem bedevils the tax practitioner more than the consequences of joint and several liability for taxes on a joint return. Innocent spouse cases are some of the most frustrating and tragic I have personally encountered. It is my experience that many taxpayers look back with hindsight and say that had they but known they were signing on to a joint debt, they would not have filed a joint return.
Although I do not think that a well-publicized explanation of the consequences of joint and several liability will eradicate the innocent spouse problem in the most tragic of cases, for a large number of filers it will make them stop and think twice before signing joint returns. Furthermore, if such an explanation were included in notices from the examination or even the collections division, the taxpayer will be alerted to the need for attending the meeting himself or to the need for possible separate representation. Thus innocent spouse issues will be raised earlier in the dispute process.
Unfortunately, this proposal would be rendered meaningless in practice if a spouse does not receive notice of the IRS exam, appeals or collection action. It can only be fully effective if the Service has accurate and updated taxpayer addresses, which would be facilitated by granting the Service access to the postal service's address files. IRS employees must also be instructed to require consent from an absent spouse to representation by the present spouse prior to conducting an examination or other interview. This consent can be supplied on the existing Form 2848, Power of Attorney and Declaration of Representative. Alternatively, the Service could develop a separate form for consent which includes the joint and several liability explanation and on which the absent spouse acknowledges having received and reviewed said explanation prior to consenting to representation by the present spouse. This notification, along with information about the availabilty of pro bono representation, will protect many spouses.
In concluding my remarks, I wish to emphasize again the importance of providing taxpayers with information, assistance, and access to representation. Without these elements our voluntary tax system will fail. Further, the Internal Revenue Service must be adequately funded in all its operations in order meet its tax administration and enforcement responsibilities. New customer service initiatives, including low income taxpayer clinics, should not be excuses for underfunding other IRS functions.
H.R. 2292 goes a long way toward crafting a tax system that fulfills its revenue raising mission in a manner that respects the average citizen's person and property. The bill is posited on the assumption that taxpayers wish to comply with their tax obligations and enables them to do so with dignity. The low income individuals I represent ask no more than that.