U.S. GOVERNMENT PRINTING OFFICE

49–746 cc WASHINGTON : 1998

S. HRG. 105–581

INTERNAL REVENUE SERVICE’S METHODS

HEARING

BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON APPROPRIATIONS

UNITED STATES SENATE

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

SPECIAL HEARING

Printed for the use of the Committee on Appropriations

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

For sale by the U.S. Government Printing Office

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ISBN 0–16–057354–8
(II)

COMMITTEE ON APPROPRIATIONS

TED STEVENS, Alaska, Chairman

THAD COCHRAN, Mississippi

ARLEN SPECTER, Pennsylvania

PETE V. DOMENICI, New Mexico

CHRISTOPHER S. BOND, Missouri

SLADE GORTON, Washington

MITCH MCCONNELL, Kentucky

CONRAD BURNS, Montana

RICHARD C. SHELBY, Alabama

JUDD GREGG, New Hampshire

ROBERT F. BENNETT, Utah

BEN NIGHTHORSE CAMPBELL, Colorado

LARRY CRAIG, Idaho

LAUCH FAIRCLOTH, North Carolina

KAY BAILEY HUTCHISON, Texas

ROBERT C. BYRD, West Virginia

DANIEL K. INOUYE, Hawaii

ERNEST F. HOLLINGS, South Carolina

PATRICK J. LEAHY, Vermont

DALE BUMPERS, Arkansas

FRANK R. LAUTENBERG, New Jersey

TOM HARKIN, Iowa

BARBARA A. MIKULSKI, Maryland

HARRY REID, Nevada

HERB KOHL, Wisconsin

PATTY MURRAY, Washington

BYRON DORGAN, North Dakota

BARBARA BOXER, California

STEVEN J. CORTESE, Staff Director

LISA SUTHERLAND, Deputy Staff Director

JAMES H. ENGLISH, Minority Staff Director

SUBCOMMITTEE ON TREASURY AND GENERAL GOVERNMENT

BEN NIGHTHORSE CAMPBELL, Colorado, Chairman

RICHARD C. SHELBY, Alabama

LAUCH FAIRCLOTH, North Carolina

TED STEVENS, Alaska

(ex officio)

HERB KOHL, Wisconsin

BARBARA A. MIKULSKI, Maryland

ROBERT C. BYRD, West Virginia

(ex officio)

Professional Staff

PATRICIA A. RAYMOND

TAMMY PERRIN

LULA EDWARDS

BARBARA A. RETZLAFF (Minority)
(III)

CONTENTS

Page

Opening remarks of Senator Campbell .................................................................. 1

Statement of Linda Sanders, Littleton, CO ........................................................... 4

Prepared statement .......................................................................................... 12

Remedy for abuses ................................................................................................... 13

Statement of Dennis Marty, Grand Junction, CO ................................................ 14

Statement of Amy Powers, Littleton, CO .............................................................. 16

Statement of Katherine Morehead, Aurora, CO ................................................... 20

Prepared statement .......................................................................................... 23

Senator’s examples of other cases .......................................................................... 25

Statement of Alvin Stjernholm, Lakewood, CO .................................................... 25

Prepared statement .......................................................................................... 27

Statement of Robert Lesher, Lakewood, CO ......................................................... 28

Prepared statement .......................................................................................... 31

Need for major changes ........................................................................................... 33

Statement of Doris Martinez, former IRS revenue agent, president, Associated

Tax Centre, Inc ..................................................................................................... 33

Taxpayer Advocate and Problem Resolution Program ......................................... 34

Disparate treatment of minority taxpayers ........................................................... 35

Secret hit lists and actions against taxpayer representatives ............................. 36

Abusive audits and lack of due process ................................................................. 38

Penalty and interest abatements and reform ........................................................ 38

Taxpayer education and the Internal Revenue Code ........................................... 39

Prepared statement of Doris Martinez .................................................................. 41

Antibrowsing bill ..................................................................................................... 45

Statement of Kenneth Tuchman, founder and president, TeleTech .................... 46

Prepared statement .......................................................................................... 50

Possible pilot program ............................................................................................. 52

Statement of Hon. Charles O. Rossotti, Commissioner, Internal Revenue Service .......................................................................................................................... 55

Prepared statement .......................................................................................... 60

Public service announcements ................................................................................ 62

IRS outreach efforts ................................................................................................. 62

Innocent spouses ...................................................................................................... 63

IRS penalties ............................................................................................................ 64

Changing of seizure numbers ................................................................................. 65

Credit card payments .............................................................................................. 66

Use of private contractors ....................................................................................... 66

Automation at IRS ................................................................................................... 67

Educating children on tax issues ........................................................................... 67

Burden of proof ........................................................................................................ 68

Questions submitted by Senator Campbell ........................................................... 70

Statement of Robert M. Tobias, president, National Treasury Employees

Union ..................................................................................................................... 77

Prepared statement .......................................................................................... 78

Accountability for IRS budget ................................................................................. 81

Prepared statement of Charles Pat Smith, State Adjutant, the American

Legion, Department of Colorado ......................................................................... 83
(1)

INTERNAL REVENUE SERVICE’S METHODS

TUESDAY, APRIL 14, 1998

U.S. SENATE,

SUBCOMMITTEE ON TREASURY AND

GENERAL GOVERNMENT,

COMMITTEE ON APPROPRIATIONS,

Denver, CO.

The subcommittee met at 9 a.m., University of Denver, Denver,

CO, Hon. Ben Nighthorse Campbell (chairman) presiding.

Present: Senator Campbell.

PANEL 1

NONDEPARTMENTAL WITNESSES

STATEMENTS OF:

LINDA SANDERS, LITTLETON, CO

DENNIS MARTY, GRAND JUNCTION, CO

AMY POWERS, LITTLETON, CO

KATHERINE MOREHEAD, AURORA, CO

ALVIN STJERNHOLM, LAKEWOOD, CO

ROBERT LESHER, LAKEWOOD, CO

OPENING REMARKS OF SENATOR CAMPBELL

Senator CAMPBELL. Good morning. The Treasury and General

Government Subcommittee will be in session.

First I want to thank the Center for Public Policy here at the

university for offering their assistance in setting up this room and

providing us a space to do this hearing.

As you know, the Senate Appropriations Subcommittee on Treasury and General Government oversees the budget for the Internal

Revenue Service. The IRS has become America’s least loved agency,

to put it mildly.

Today we will be discussing the Internal Revenue Service’s methods.

Every Member of Congress, including me, has received constituent complaints about taxpayer abuse by the IRS. Our own files in

our office are filled with so-called horror stories, and some we may

hear this morning.

A recent hearing by the Senate Finance Committee provided

shocking information from IRS employees themselves about how

taxpayers are mistreated. In the midst of all this debate, Congress

is now trying to rein in some of those abuses and reform how the

IRS is managed.
2

The House of Representatives recently passed a bill to reform the

IRS, and the Senate Finance Committee has just presented their

version to the full Senate for consideration next month. So the testimony we will be taking today will become part of that public

record on this issue.

The IRS has a huge job. It is responsible for collecting over $1.5

trillion in taxes. Tax collection is a necessary function, and most

Americans understand this. But it does not have to be a necessary

evil.

Over 80 percent of American taxpayers voluntarily comply with

tax laws—a fact that many people do not realize. It is past time

for the IRS to decide to work for the taxpayers, as private industry

does.

The IRS can learn a great deal from the private sector. As an example, in the private sector if someone has a problem with a credit

card or other type of billed account, they can usually call, sometimes on a 24-hour-a-day basis, and talk to a human being, actually talk to someone who has the authority to try to fix it rather

than some automated system with a recording.

Taxpayers are also demanding that they can rely upon information provided by the IRS and not be punished with late fees and

penalties if someone else at the IRS disagrees with the advice that

they were first given.

Taxpayers are tired of being notified years after they have filed

that they have an additional tax obligation, which has by then

grown to several times the initial debt because of interest and penalties. Many who would have paid the initial tax had they known

are shocked to learn that they owe an enormous debt over and

above the tax obligation. Sometimes they simply can’t pay it.

In short, taxpayers are demanding that they be treated fairly,

and that is exactly what they have every right to expect.

The IRS has a new Commissioner, Mr. Charles Rossotti, and I

am pleased that Mr. Rossotti has accepted our invitation to be here

with us today. Mr. Rossotti, would you stand just for a moment,

over here on the right? Thank you very much for coming. [Applause.]

Mr. Rossotti needs to hear first hand what some of our citizens

have been facing in dealing with the representatives of his agency.

He has come on board just recently and, in fact, during a very critical period for the IRS, and I certainly compliment you on your willingness to go around the United States and take on this job and

listen to the citizens themselves.

Unlike most previous IRS Commissioners, Mr. Rossotti is not a

so-called policy wonk or a Washington bureaucrat. He was a successful businessman, and his management experience as the founder and chief executive of a computer consulting company gives him

the skills and knowledge to make the necessary culture and technology changes so that the IRS can be effective in its interaction

with taxpayers. He knows how to make a payroll. He knows what

it is like to deal with myriads of Government mandates and paperwork in trying to comply with the taxes that he in turn had to pay

as a private businessman.
3

Today, on our first panel we will hear from Coloradans who have

had problems with the IRS. With us today are individual taxpayers, business taxpayers, and innocent spouses.

On the next panel, the second panel, we’ll have two people with

different perspectives on problems faced by the IRS and specific

recommendations for solving those problems.

Then we will have an opportunity to listen to the Commissioner

himself, and I am sure we will all want to hear his plans to make

the agency more responsive as well as his observations on some of

the stories that he is going to hear.

Our final witness will be Mr. Robert Tobias, the president of the

National Treasury Employees Union, and Mr. Tobias represents

the IRS employees themselves. So it will be interesting to get his

perspective as well.

Some people, of course, just want to eliminate the IRS altogether.

We have heard that a number of times. We have received a lot of

mail in our office saying that. I think we all recognize that there

has to be some way of collecting taxes if you want good highways,

if you want schools, if you want a national defense. We have to

have a form of collecting taxes.

Today I hope we can discuss the ways to make the IRS a more

responsive agency to all of us. We will be hearing some very disheartening stories this morning, but I think if we give Mr. Rossotti

the opportunity to try to fix the problems—although he is responsible for the agency now, I would hate to, as they say, shoot the

messenger since he just recently came on board in the last half

year.

Our first panel this morning will consist of Ms. Linda Sanders

of Littleton, Dennis Marty of Grand Junction, Amy Powers of

Littleton, Katherine Morehead of Aurora, Dr. Alvin Stjernholm—I

hope I have pronounced that right, Doctor—of Lakewood, and Mr.

Robert Lesher, also of Lakewood. Thank you all for agreeing to

share your concerns.

When we first decided to do this hearing, we contacted a number

of people, and, very frankly, some were very reluctant to testify.

We had several say they would only testify if they could be behind

a screen because they were very clearly worried about some retribution. But I want to give anybody here testifying today an absolute assurance of this committee—and I know I can speak for Mr.

Rossotti, too—that that simply will not happen, and we will continue to monitor your activities.

Also, we obviously have a little bit of a time constraint. We have

3 hours. We have tried to divide it up among the people testifying

in time for some questions and some dialog, and so we will try and

limit, I think, the first panel to about 10 minutes each. So if you

have a very long, involved testimony, be assured that all of it will

be included in the record. You may wish to abbreviate your comments to about 10 minutes.

With that, we will start in the order that I read your names, if

Ms. Linda Sanders would go ahead. Why don’t you pull the microphone over pretty close to you, so the people in the back of the

room can hear. And thank you for agreeing to be here, Linda.
4

STATEMENT OF LINDA SANDERS

Ms. SANDERS. Thank you. I hope my voice isn’t too squeaky. I am

not enjoying being here.

Senator CAMPBELL. Closer.

Ms. SANDERS. My name is Linda Sanders. I have had an experience with the IRS which has demonstrated to me their brutal

power. And I wish to ask the Commissioner if his agents should be

able to commit perjury and falsify documents in order to collect tax.

So far, the IRS has only justified what they did to me by saying,

‘‘it is our mission to collect the proper amount of tax * * *.’’

Now, all of us understand that the IRS must collect tax, but the

objection that I have and many Americans have is that the IRS

breaks the law in meeting that goal. In my case, breaking the law

resulted in my losing over $150,000 more than the tax that was

owed, as well as my home, which took 20 years to save up for, as

well as destroying my relationships with my family. It simply

wasn’t necessary, so why did they do it? And are there any circumstances under which they should be allowed to go unpunished

and continue with these practices?

My ex-husband and I owed the IRS $26,000 because of a capital

gain tax imposed upon us because we sold our expensive home and

we bought down to pay bills rather than declare bankruptcy. And

I am so grateful that this horrible capital gain tax has since been

changed.

We couldn’t pay the tax, and the IRS put a lien on the house to

protect their interest in the property. After about 1 year they began

collection procedures and they seized the house with the intent to

sell it to access the equity to pay the tax. However, I protested—

and I hope I can use that word without being labeled an anti-Government terrorist. I protested to my Congressman and said that if

IRS sold this house and forced us to buy down again, we would

incur another capital gain tax and then we would have to lose the

next house. And it seemed insane to me that I had to be homeless

just because I made the choice first to be financially responsible

and I lowered my standard of living by buying down instead of

going bankrupt. So my protests to my Congressman resulted in the

IRS releasing that seizure in 1993.

I would like to show that because it is significant to the rest of

what I have to say. If we could just cut the lights right in front

of the screen?

Senator CAMPBELL. Maybe just right in front of the screen we

can turn this down a little bit?

[The information follows:]
5

Ms. SANDERS. If you can see this, it is a 1993 seizure on my property, but what happened is when I asked my Congressman to help

me because of the catch-22 I found myself in, they released it, and

here is the evidence: Disposition of Property. It was released prior

to sale for an administrative decision. And it is important that you

notice that this is the seizure that was released.

A year later, the IRS began levying my ex-husband’s paycheck

because they had to collect the tax. Here is the levy on wages. It

was for the year of the tax we are talking about, and it was against

my husband, and the date was in February 1994. So in 1994, they

did begin collecting the tax.

[The information follows:]
6

Ms. SANDERS. Then, without any warning whatsoever, about 1

month after the wage levy, the IRS put a for sale sign on my front

door, and they advertised my house for sale with the date set for

2 weeks hence. Because I had worked with a tax attorney who specialized in taxpayer rights on levy and seizure, I knew the IRS was

violating the law because they weren’t giving me the warning notices I knew I was allowed before sale. The law provides, first, for

a 10-day warning under section 6331, and then a second warning

under section 6331(d). Section (a) is 10 days, section (d) is 30 days,

so altogether the taxpayer has 40 days to get a loan or sell the

house at a profit and pay the tax.
7

Because they sold my house without complying with the law and

because I knew it from working with a tax attorney, I refused to

redeem from that sale. I refused because it would ratify what they

had done and it would waive my right to object later. I wanted the

sale voided, and I wanted the IRS to back up and follow the law.

That way I wouldn’t have to pay all the extra charges and penalties that they add on when they sell a tax lien, and in my case

that came to an extra $6,000.

So I waited for the inevitable court hearing which would come

after the 6-month redemption period. And during those 6 months,

I prepared. I intended to show the court that the sale was void because the IRS hadn’t given me time to get a loan, pursuant to the

law that gives me the warning notices. My evidence here shows

that the IRS released the 1993 seizure, and I rightfully expected

that any subsequent seizure would have to be preceded with the

40-day noticing requirements again because the law states that

subsequent seizures have to follow the same procedures—that is

section 6331(c)—especially since my ex-husband’s wages were being

levied for the tax. But instead, depriving me of time to get a loan

deprived me of the chance to pay just the lien. And, instead, they

got 20 years of my life savings, and they left me homeless, and I

am still homeless today.

So during the 6-month period after the sale, I acquired some of

the sale records which the IRS is required to make under section

6340, and these records prove that the house was sold under a second seizure for which no seizure notice had been given. And while

documents had been done under the new number, the IRS never

gave me the 40-day notices. Instead, the IRS altered the old seizure

documents, which were released, to make it appear as though all

the steps had been followed for the second seizure.

And let me show you that.

[The information follows:]
8
9

Ms. SANDERS. Here you can see the new 1994 number written

over the 1993 number. And here let me show you—here is the 1993

seizure that was released, and it lines up just perfectly to show you

what is written underneath the 1994 number.

The IRS still does not deny that no notice was given for the new

1994 seizure. They simply say that no notice was needed because

the second time it was just a very, very long seizure from the first

1993 one, and that they have to change numbers because IRS

changes everyone’s seizure numbers every October to match the fiscal year. And I would like to show you the sworn testimony of the

agent explaining that they have to change seizure numbers every

fiscal October on everybody.

[The information follows:]
10

TESTIMONY OF IRS AGENT

* * * at the time this was the number assigned to this seizure, for control purposes,

for accounting.

Question. So, why did the number change?

Answer. After we went into 1994—I have explained that—its accounting purpose

is so then we no longer can pay out seizure expenses out of 1993 budgets. So, we

had to reissue a 1994 number for it, because of a fiscal tax year.

Question. When did the seizure happen that occurred?

Answer. 1993.

Question. All right. So, we have the date of this document as April 7, 1993?

* * * number. A seizure number is nothing other than a way that we internally

track seizure expense so we can make sure that any advertisement, any expense

that we have, if we have to change locks, if we do whatever we have to do in some

certain situations we have to, if it’s real property, we have to have grass mowed,

whatever we have to do has to be paid out by our accounting department under that

seizure number.

So, the fact that there’s a seizure number here, and then later there’s another seizure number, this occurred because it went beyond our fiscal year, and this is a

1993 seizure expense number, when it went into 1994, fiscal year 1994, we had to

renumber that.

Ms. SANDERS. Here the agent says, ‘‘Let me explain a seizure

number. A seizure number is nothing other than a way that we internally track seizure expense so we can make sure that any advertisement’’—I am sorry. I am reading the—she did several pages,

and I have brought * * * she is asked how come the number

changed. She says, ‘‘At the time this [was the] number assigned to

this seizure, for control purposes [and it was] for accounting.’’

‘‘After we went into 1994—I have explained that—its accounting

purpose so then we no longer can pay out seizure expenses out of

1993 budgets. So, we had to reissue a 1994 number for it, because

of a fiscal tax year.’’ She is saying that right here.

At the bottom, she says, ‘‘So, the fact that there’s a second seizure number here * * * because it went beyond the fiscal year,

and [it] is a 1993 seizure expense number, when it went into 1994,

fiscal year 1994, we had to renumber that.’’

Well, I called IRS data headquarters in Maryland to find out if

this is true, if all the seizure numbers have to be changed every

fiscal October. And I have a tape recording of that conversation if

anyone would like to hear it. And, of course, the clerk laughed and

said that would be a recordkeeping nightmare, there is no way they

can change fiscal numbers to match the fiscal year. She said that

once a seizure number is assigned, it stays there.

But, additionally, I decided to find out from the Government Accounting Office whether or not the seizure budget for 1993 went

dry and that perhaps they might have had to change the numbers,

and the Government Accounting Office first told me that, no, the

1993 budget was to last all the way until 1997, it did not run dry,

and he said seizure budgets are not used for residential seizures.

And as evidence of that, I went to the title company that prepared

the title for my seizure, and it was paid by Visa.

[The information follows:]
11

Ms. SANDERS. So these lies caused the State court to uphold the

sale as proper, and I was evicted from my home. The court determined that I must have gotten all the notices and that I must be

the one lying. But all I got was the notice of sale the day that it

went into the paper, and I couldn’t possibly secure financing that

quickly. It was a malicious act to punish me for daring to demand

that the IRS follow the law.
12

Unless and until the IRS Commissioner himself admits that the

agency broke the law here and committed perjury, no court will

contradict the IRS. Perhaps judges can’t even survive audits. The

IRS is a self-monitoring agency, like the police, and if their internal

affairs department does not admit the problem, the taxpayer has

no remedy. The IRS is so powerful that even the courts are intimidated by them and refuse to question their integrity.

So if the Commissioner doesn’t accept the integrity and admit

this was perjury and document falsification, there is no remedy for

American taxpayers like me.

So, please, Mr. Commissioner, would you please give me the only

remedy that will make me whole again and admit that the IRS

does not change seizure numbers every October? And please be an

example of the honesty and integrity that is necessary in our Government. Because even the President is now allowed to authorize

perjury, so I don’t see how any district director could do so.

I hope that these hearings are not just a ‘‘warm fuzzy’’ for the

public, and I hope something will be done about this.

Thank you, Senator Campbell. [Applause.]

PREPARED STATEMENT

Senator CAMPBELL. Thank you, Ms. Sanders. We have your complete statement and it will be made part of the record.

[The statement follows:]

PREPARED STATEMENT OF LINDA SANDERS

My name is now Linda Sanders—I have had an ‘‘experience with the IRS’’ which

has demonstrated to me their brutal power. I wish to ask the Commissioner if his

agents should commit perjury and falsify documents in order to collect tax from me.

So far, they have justified what they did to me by saying, ‘‘it is our mission to collect

the proper amount of tax * * *’’.

Now, we all understand that the IRS must collect tax—but the objection that

many Americans have—is that the IRS breaks the law in meeting that goal. In MY

case—breaking the law resulted in my losing over $150,000 MORE than the tax

owed—as well as my home which took 20 years of life to save up for—as well as

destroying my relationships with my family. IT SIMPLY WASN’T NECESSARY—

SO WHY DID THEY DO IT? AND ARE THERE ANY CIRCUMSTANCES UNDER

WHICH THEY SHOULD BE ALLOWED TO GO UNPUNISHED AND CONTINUE

THESE PRACTICES?

My ex-husband and I owed the IRS $26,000 because of a capital gain tax imposed

upon us because we sold our expensive home and ‘‘bought down’’. (I am so grateful

that this horrible capital gain tax has since been changed). We couldn’t pay the

tax—and the IRS put a lien on the property. After about a year they began collection procedures and seized the house with the intent to sell it to access the equity

in it to pay the tax. However—I protested to my Congressman and said that if the

IRS sold the house—and forced us to ‘‘buy down’’ again—we would incur ANOTHER

capital gain tax and then lose the NEXT house. It seemed insane to me that I had

to be homeless just because I made the choice to be financially responsible—and

lower my standard of living by buying down instead of going bankrupt. My protests

to my Congressman resulted in the IRS releasing the seizure in 1993.

Then, a year later, the IRS began levying my ex-husband’s paycheck for the outstanding tax.

Then, WITHOUT ANY WARNING WHATSOEVER—a month later, the IRS put

a ‘‘for sale’’ sign on my door and advertised my house for sale with the date set for

2 weeks hence. Because I’d worked for a tax attorney who specialized in taxpayer

rights on levy and seizure, I KNEW the IRS was violating the law that gives the

taxpayer NOTICE that they are about to lost their home. The law provides for:

(first) a 10 day warning under 26 USC 6331(a) and then a second warning for 30

days under 26 USC 6331(d). Altogether the taxpayer has 40 days to get a loan or

sell the house and pay the tax—they only gave me 14 days—not enough time to se-
13

cure financing. They wanted me homeless to punish me for the work I had done

with the tax attorney—protecting taxpayer rights.

Because they had sold my house without complying with the law—AND I KNEW

IT BECAUSE OF WORKING WITH THE ATTORNEY—I refused to redeem from

the sale—I refused because it would ratify what they had done—and waive my right

to object. I wanted the sale voided and I wanted the IRS to back up and follow the

law. That way I wouldn’t have to pay all the extra charges and penalties they add

on when they sell tax liens, which, in my case came to about $6,000.

I waited for the inevitable court hearing which would come after the 6 month redemption period. During those 6 months, I prepared. I intended to show the court

that the sale was void because the IRS hadn’t given me time to get a loan to pay

the tax. My evidence here shows that the IRS released the 1993 seizure of the house

and so I rightfully expected that any subsequent seizure would have to be preceded

with the 40 day noticing requirements again under 26 USC 6331(c). Especially since

my ex-husband’s wages were levied for the tax already. Depriving me of the time

to get a loan deprived me of the chance to pay just the lien. Instead, they ALSO

got 20 years of life savings and left me homeless.

During the 6 month period after the sale, I acquired some of the sale records

which the IRS made as required by 26 USC 6340. The record showed that the house

was sold under a SECOND seizure for which no SECOND notice had been given.

The new seizure had been done under 94–0088D but I did not get any 40-day seizure notices. Instead, the IRS altered the old seizure document which were released

to make it appear as if all the steps had been followed for the second seizure.

The IRS still does not deny that no notice was given for the new 1994 seizure

number. They simply explain away the two seizure numbers (for which no notice

was given for the second) by saying that IRS changes EVERYONE’S SEIZURE

NUMBERS each October—to MATCH THE FISCAL YEAR. I spoke with data Headquarters and the clerk said this isn’t true.

Additionally, another IRS agent said that the IRS HAS to change all the numbers

every fiscal October because the seizure ‘‘budget’’ runs dry and they have to pay

bills out of a new budget.

However, the bill for the Title Company work says it was paid by VISA, not a

check from a budget.

These lies caused the state court that evicted me from the home, to uphold the

sale as ‘‘proper.’’ UNLESS and UNTIL the IRS Commissioner, himself, admits that

the agency broke the law, no court will NOT contradict the IRS’s word. The IRS

is a self monitoring agency—like the police—and if their internal affairs department

does not rectify the problem—the taxpayer has NO REMEDY.

Mr. Commissioner—DO YOU CONDONE THESE LIES? Will you please give me

the only remedy that can ‘‘make me whole’’ again, by admitting that the IRS does

NOT change seizure numbers every fiscal October? Or please tell us under what circumstances you permit the IRS to lie and falsify documents in order to take property from American taxpayers?

Thank you.

REMEDY FOR ABUSES

Senator CAMPBELL. Linda, there is a remedy, and you are part

of it. That is why you are here. These abuses, some have gone on

for years and years and years, and it is not the kind of thing that

can get turned around overnight, but there are many people that

are very concerned about you.

I might also mention, too, that this isn’t the U.S. Senate, but it

is a Senate hearing, and in that respect, I would ask the audience

if they would respect the decorum of the Senate. I don’t mind, you

know, a few light comments and so on, but we have done a few

hearings in the last few weeks where we have had protesting in the

committee room and, you know, screaming and singing of the national anthem and all these other things, and we want to avoid

that. You have a first amendment right, obviously, as anybody

does, but it could really be disruptive if it gets out of hand.

With that, I would like Dennis Marty to go ahead, please. You

might want to pull that microphone closer.
14

STATEMENT OF DENNIS MARTY

Mr. MARTY. Good morning. My name is Dennis Marty. My wife

and I live in Grand Junction, CO, which is about 250 miles west

of here. I am currently under a disability retirement from the U.S.

Postal Service. I have worked as a teacher and coach, as a Colorado

State highway patrolman, as a data analyst, and chemical sampling coordinator, and as a mail carrier. The chemical sampling coordinator position required that I have a Q level, or top secret, security clearance. My wife has taught elementary school in Grand

Junction for the past 20 years. I have a bachelor’s degree in physics

and math, a master’s degree in secondary education, and a Ph.D.

in environmental engineering.

I could spend all of my time talking about being disabled and my

tax audit where the auditor extended my audit into multiple years.

Instead, I will spend the majority of the time talking about two

specific items involved in this audit.

The sequence of events leading to our current predicament with

the IRS started in February 1997. We received a letter from the

Colorado Department of Revenue dated February 5, stating that

based on information they received from the IRS, we had understated my unemployment benefits for 1994 and we owed additional

tax, interest, and penalties. We paid the amount requested on

March 17 because at that time we could not find the documents to

prove that the claim was wrong. We returned the letter with the

payment and apparently did not keep a copy of that letter.

We received an audit notice from the IRS dated March 21. The

audit was set for May 8. The documents requested were our tax returns for 1993, 1994, and 1995, income documentation, farm expenses, and my wife’s miscellaneous employment expenses.

During the audit meeting on May 8, one of the initial claims

made by the auditor was that I had understated my 1994 unemployment benefits from the State of Colorado in the amount of

$522. Due to an injury suffered in a fall at work, I was unable to

remain seated for the length of time required to complete the audit

that day. This is how the auditor found out that I had become disabled and that I had been on leave without pay for the previous

8 months. The auditor said that he would complete the audit and

contact us.

Early on Saturday morning, May 10, the auditor contacted me by

phone. During this phone call, he repeatedly accused me of understating unemployment benefits from 1994 and overstating mortgage interest in 1995 by $4,448. He informed me that because of

these changes, he was expanding the audit to include the years

1990 through 1996. The auditor was belligerent during the phone

call. It seemed to me that by making these accusations the auditor

was implying that we were attempting to defraud the Government.

The phone call was followed by a written information document

request form detailing the additional material that the auditor

wanted. On May 17, we supplied some of the additional documents

he requested. We did not supply the tax returns for the years of

1990, 1991, and 1992. Later we found out that he could only go

back 3 years, making those years off limits, anyway.
15

The auditor’s preliminary report had us owing in excess of $28,000 in additional taxes, interest, and penalties. This included

the two errors that we were accused of making. The auditor also

had disallowed every penny of our medical claims, as well as the

majority of the rest of our itemized deductions.

This appears to be an abuse of the burden-of-proof concept. The final report calls for $24,397.20, and both errors were excluded. But

he still disallowed the majority of the itemized deductions. The facts of our case are as follows: The $522 understated unemployment benefits was actually a State tax refund. This amount

was correctly claimed on line 10 of the 1994 tax return. The auditor did not include the 1099 miscellaneous that he claimed that he

used to make his accusations when he supplied his notes to me

under my Freedom of Information Act request. I sent a second request for these specific notes, and I have not received any additional documents.

I have not shown the auditor this documentation that I had relating to this particular problem, but it was still removed from the

final report. I was able to document the $4,448 overstated mortgage interest with a form the auditor said he had not received. In

1995, we refinanced our property and received two 1098 forms reporting mortgage interest. The auditor did not have one of these

two documents when he accused us of this error.

The auditor claimed that the IRS does not give information to

State revenue departments until after an audit is closed. This was

in response to my request that he send a letter to the Colorado Department of Revenue stating that the information supplied to them

was in error.

Despite several requests under the Freedom of Information Act,

the Colorado Department of Revenue has been unable to provide

me with a copy of their letter dated February 5, 1997.

In conclusion, I have several questions that I feel apply to our

audit.

No. 1, after watching the testimony given during the Senate Finance Committee’s hearing on the IRS, I have to wonder if my disability and leave without pay status contributed to the vigor with

which the auditor pursued this case.

No. 2, why didn’t the auditor have the second 1098 mortgage interest form? Was it the bank’s error or an internal IRS error? Since

the financial institution was not penalized, I can only assume that

it was an IRS error.

Where is the 1099 miscellaneous that the auditor claimed was

for an additional $522 unemployment benefit? I contacted the Colorado Department of Labor and Employment and had them check

their archives, and they sent me documentation that I had claimed

the correct amount on my 1994 return. So there would be no 1099

miscellaneous anywhere.

Why can’t I get a copy of the February 1997 letter from the Colorado Department of Revenue which clearly stated their information

came from the IRS?

I have testified in court as an expert witness. If I were testifying

as an expert witness and made mistakes similar to the two that

this auditor made, the jury would probably be instructed to disregard my testimony.
16

Why are the rules of evidence different for the IRS than for other

law enforcement agencies? And why can the IRS expand an audit

when that expansion has been initiated because of erroneous data?

Finally, due to my disability, lengthy leave without pay status

from the Postal Service, and my low rate of income from the Federal Employees Disability Retirement, we are not able to pay the

$24,000 that the IRS says we still owe unless we sell our property.

Even that might not be enough money to pay the IRS. Our audit

is currently in the appeals process and is ongoing.

I would like to thank you for the opportunity to present this testimony.

Senator CAMPBELL. Thank you.

Before we go on to Ms. Powers, while it is fresh in my mind, just

let me ask you a couple of questions. When you had your conversation with the auditor, was that taped by the auditor?

Mr. MARTY. He did not tell me that it was.

Senator CAMPBELL. Well, it would have been illegal if he hadn’t,

if he hadn’t shown the tape recorder. But when you said he was

abusive in nature, was that done in writing or just over the phone?

Mr. MARTY. This was over the phone on that Saturday morning.

Senator CAMPBELL. And under the Freedom of Information Act,

you didn’t ask for any documentation that he might have taped you

or put something in writing that you didn’t receive?

Mr. MARTY. What I requested was specifically his notes relating

to how he made that claim of understating the unemployment benefit.

Senator CAMPBELL. And you never got that?

Mr. MARTY. He never sent it.

Senator CAMPBELL. Did you contact our office or Senator Allard’s

office to try to get it?

Mr. MARTY. I have not as of this time.

Senator CAMPBELL. Would you do that?

Mr. MARTY. OK.

Senator CAMPBELL. If you would talk to Ricardo afterward, or

sometime when you can, we will try and expedite that if we can

get it. Sometimes we can’t, but hopefully we can.

Mr. MARTY. Right.

Senator CAMPBELL. With that we will go on to Ms. Powers,

please?

STATEMENT OF AMY POWERS

Ms. POWERS. Good morning. Thank you, Senator Campbell, for

the opportunity to testify today as an innocent spouse, and thank

you, Mr. Commissioner, for coming to Denver for this hearing. Also,

I would like your personal assurance, Mr. Commissioner, that my

participation today will in no way adversely affect my current negotiating situation with the Internal Revenue Service.

Before I begin, Mr. Rossotti, I would like you to put aside your

title of IRS Commissioner and, Senator, I would like you to put

aside your title as well, and listen to this story simply as a taxpayer.

Let’s assume you, Mr. Rossotti, were married 12 years ago. You

met your wife while still in college, and she had a highly successful

job. You were just starting out in the business world. Unfortu-
17

nately, you were divorced a year later and went your separate

ways, but not before signing a joint tax return. The majority of income reported on that return was earned by your wife prior to your

marriage. You worked part-time for minimum wage and had the

necessary taxes deducted from your paycheck.

You were only married for 5 months that year, and by August

of the next year, your wife no longer wanted the responsibility of

being married and asked to be separated. You relocated to Georgia

in 1987. Five years ago, you were remarried, but 2 weeks prior to

your wedding day, you received a letter from the IRS stating that

you owed in excess of $30,000 for that joint return signed in 1986.

Mr. Rossotti, Senator Campbell, the only difference in this story

and my own personal experience is I have turned the tables on you.

This is my story, and as one taxpayer to another, there is something very wrong here.

I am currently at the stage of an offer in compromise with the IRS. I have offered to pay the original assessed amount of $9,000,

but that was flatly rejected. This process of offer in compromise has

taken nearly 2 years to negotiate.

At almost every turn, I have hit a wall in terms of requesting

information or filing information. It appears to me that the right

hand doesn’t know what the left hand is doing. I have noticed that

in requesting certain information, letters are signed by one person,

but questions should be directed to another. This slows the process.

An agent in Idaho returned my original offer in compromise because it was submitted on a photocopied form rather than a carbon-copy original. This slows the process.

Agents have cited internal rules to be applied externally. Again,

with respect to my offer in compromise, an agent recently stated,

and I quote, ‘‘Colorado statutes work to inhibit acceptance of offers

from one party to a joint liability.’’ In essence, the Colorado statute

should not be binding on the IRS. However, the IRS district counsel’s office has established an internal rule which requires collection officers to treat the statute as binding regardless of the State

of residency of the spouse.

Since when does a State law override a Federal law? And if that

is the case, wouldn’t Georgia law prevail and uphold my divorce decree, which is a legal and binding document stating that my exhusband would be responsible for any and all debt, be it taxes or

otherwise?

Mr. Rossotti, the rules have been made up along the way, and

the game continues to be played out at my expense. Meanwhile, interest and penalties continue to rise. Even today, as I testify before

you, interest and penalties creep upward. Is this right, as one taxpayer to another? It would seem to me that since I have been

forced into this situation by your agency, the least you could do is

freeze interest and penalties while your agency takes its time—2

years—to evaluate my offer.

I have received letters from your agency stating to pay up or we

will garnish wages, take your 401(k) and profit sharing. Additionally, you believe my husband should be held liable and his income

used to help satisfy the debt. As a lieutenant commander in the

U.S. Naval Reserves, a Federal Government employee, this angers

him more than anything.
18

Recently in the news there have been countless stories shared by

innocent spouses all over the country. Their stories are not much

different than mine. And as I watched ‘‘Dateline’’ last night, I was

sickened by the inefficiencies and lack of compassion displayed by

your agency.

There are two things that bother me about my situation and the

other innocent spouses, and they should bother you, too: First, it

is our right as citizens of this country to work, pursue education,

and raise a family. Second, it is our right as citizens of this country

to succeed in these things and pursue the American dream if we

so choose. Excuse me.

These are my rights, and I am being punished for succeeding.

Your agency today demands $45,000 and believes that I should

be able to pay it because I am young, have a college degree, and

have a very successful career. I am proud of these things and never

in a million years would have dreamed that they would be used

against me. Furthermore, this situation has brought on numerous

tax liens filed against me, while my ex-husband deliberately moved

from location to location. My employer was notified to garnish my

wages. My credit is, as you can imagine, not good. This has prohibited me and my spouse from purchasing a home and forces my

spouse to carry the burden of most of our debt.

Additionally, as with many other spouses, I am sure, this situation has caused undue stress on my relationship with my husband

and my family.

As your agency pursues innocent spouses, you are simultaneously crippling families and family structures by forcing spouses

to seek multiple jobs to pay off debt. You are affecting the care and

education of our children by forcing us to seek other, less expensive

day-care options or schools. And you are affecting our minds.

We cannot simply shake off the IRS and just walk away. This is

not the American dream. Doesn’t this bother you, as one taxpayer

to another?

I have been specifically targeted, harassed, and threatened simply because I am an easy target. Since my divorce in 1988, I have

dutifully filed returns in the States of Georgia and Colorado. Here

is a question for you: If I am to be held jointly liable for the tax

debt, why then had I never received a notice regarding the debt

until nearly 6 years later? That letter, dated November 3, 1992,

stated, and I quote, ‘‘Our records show that we have previously

sent you notices, but we have not yet received full payment. This

is final notice.’’

Please, Mr. Commissioner, with all due respect, your agency

owes me the common courtesy of sending me the same correspondence allegedly sent to my ex-husband. I have yet to receive anything.

Instead, your agency waited almost until the statute of limitations was to expire, nearly 6 years, to contact me and inform me

that I owed $34,869.35. The original assessed tax was only $9,000.

Had I been informed of this delinquent debt, I would have made

sure that it was taken care of at that time. There are two reasons

why I never paid anything. First, I was unaware that the amount

was outstanding. And, second, I was under the impression that my
19

court-filed divorce decree was a legal and binding document created

to protect me from this exact situation.

Furthermore, my attorneys contacted my ex-husband directly in

February 1993, and he agreed that it was his liability and not

mine.

Over the past 10 years, interest and penalties have soared to over $37,000. These moneys are inflated assessments of time wasted by your agency—time with which there was plenty of time to inform me and the thousands of other innocent spouses of these socalled debts. Instead, it appears your agency has allowed these

debts to increase to such amounts that it makes it ridiculous and

impossible for anyone to pay.

Furthermore, we are presumed guilty immediately. It seems to

me the burden of proof should lie with the Internal Revenue Service. We at least give that common courtesy of innocent until proven

guilty to other taxpayers.

In closing, I would like to add that your agency has contacted me

on several occasions asking for my assistance in locating my exhusband. I provided phone numbers and addresses of family, including his parents. This effort has been to no avail. Ironically,

sometime in 1990 or 1991, my ex-husband was employed by the

Government, having joined the U.S. Navy Seals. He was right in

the palm of your hand and was apparently given special permission

by the Government to waive payment of the tax debt until he was

out of the service. According to his mother, the Navy was very interested in keeping him. He was bright and the perfect specimen

for the Navy Seals. Subsequently, he left the Navy early. He quit.

Furthermore, in a letter dated February 1993, an IRS agent stated that Mr. Hammond, my ex-husband, had contacted IRS Agent

Mr. Gonzales to arrange a payment agreement and was advised by

Mr. Gonzales that he lived in an area serviced by south Los Angeles office and that he would have to wait to be contacted by the

south Los Angeles office before making payment arrangements.

This is simply outrageous. Again, right within your grasp, but he

was told to hold off making payment arrangements until another

district agent contacted him.

If the tables were turned, as in the story I mentioned earlier, Mr.

Rossotti, you would be testifying today, struggling to protect your

basic rights. So, instead, I testify before you and ask that you call

off your agency. I would like my case dismissed. I would like to be

absolved of any tax debt related to 1986, which is the year in question.

Again, as I think back on the ‘‘Dateline’’ story last night, it is disgusting what is happening to innocent spouses across the country.

The fact that your agency has the power to treat one person the

way they did and are continuing to do is unforgivable and criminal.

It is estimated that over 50,000 individuals have been forced into

similar situations, and this is wrong. How many more people must

testify before this problem is resolved? Isn’t it already painfully obvious that the rules must be changed now?

Mr. Rossotti, I respectfully ask your assistance in making some

long overdue changes in your agency and ask for your support for

the innocent spouses around the country, as well as the other taxpayers.
20

Thank you.

Senator CAMPBELL. Ms. Powers, first, it is not his agency. It is

our agency. That is why we are here, and that is why we are going

to make some changes.

Let me just ask, you are a schoolteacher, as I understand it?

Ms. POWERS. No; I am sorry. I am a recruiter for a consulting

company.

Senator CAMPBELL. Your taxes went, because of the 7 percent compounded daily, from roughly $9,000 to four times that much

now.

Ms. POWERS. To $45,000.

Senator CAMPBELL. And at your present salary, do you think you

could ever get it paid off? Is it compounding faster than your ability to even pay it?

Ms. Powers. Yes, sir.

Senator CAMPBELL. Well, I want you to know, you mentioned

that if we Senators or he, the Commissioner, ever had experiences

like that as private citizens, we would understand better. Believe

me, I have. I wasn’t born in the Senate. Let me tell you, I have.

Years ago, about 11⁄2 or 2 years after we were married in—oh, it

must have been about 1966 or so, we had our taxes filled out by

a professional tax person, and he made a terrible mistake. And

about 1 year later, I got a bill from them for, as I remember,

around $24,000, and I was broke, had no money, just trying to

start a business, didn’t have any money. And I was angry and disgusted. I just went down and told them, Put me in jail, I’m not

going to pay a damn thing. And we negotiated some. He sputtered

around, said, well, I don’t want to put you in jail. So we ended up

where I paid 20 cents on the dollar, or something to that effect.

But, believe me, some of us have been in that position where we

didn’t know where to turn and we just kind of threw up our hands

and gave up. Don’t give up.

Ms. POWERS. Thank you.

Senator CAMPBELL. Thank you. We will now hear from Ms. Morehead.

Oh, and, by the way, let me ask you, too. Have you been at all

into work with our office on your problem or Senator Allard’s or

any of the Congress people?

Ms. POWERS. Yes; I have. I have written letters to Senator Allard

and to you, and I have actually spoken with Ricardo on several occasions.

Senator CAMPBELL. All right. Thank you.

Ms. Morehead.

Ms. MOREHEAD. Thank you. I hope——

Senator CAMPBELL. Oh, and I also want to remind you, we are

told that our time is already going to cut into the people that want

to testify a little later, so if we could try to keep it to about 10 minutes, we would certainly appreciate it.

STATEMENT OF KATHERINE MOREHEAD

Ms. MOREHEAD. My hope is my testimony today will help those

listening to better assess what works and what doesn’t work from

both the viewpoint of the taxpayer and the people working at the

IRS. My experience has shown me our present U.S. tax laws do
21

very little to empower taxpayers or IRS employees and even less

to create expedient, synergistic, creative solutions to tax problems,

especially tax problems resulting from divorce.

The following timeline will demonstrate the frustration and

sense of powerlessness I felt during the past 8 years of dealing

with the IRS regarding my 1989 joint tax return filed following my

divorce on April 9, 1990. In April 1987, while living in southern

California, my husband and I separated after 17 years of marriage.

With two young children, 3 and 5, I moved to Denver in November

of 1987. Although not legally separated, Gary Morehead, my exhusband, and I lived as though we were divorced for the next 21⁄2

years. My husband sent me money for living expenses which the

judge in the 1990 divorce decree rules as alimony and child support.

As a part of my divorce decree in April 1990, my husband agreed

to pay the 1989 taxes, something which he had done for the previous 18 years of our marriage. Following the divorce, I discovered

he had not filed a tax return and called our accountant in Las

Vegas to find out what I needed to do. I was told by the certified

public accountant that I could do nothing and would have to wait

until he filed.

Taking the accountant’s advice, I waited and asked Gary to file

the tax return, never dreaming by simply filing a return for 1989

married separately I could have avoided this entire situation.

Gary did tell me he was filing, and although late, he would be

paying the 1989 taxes. Thinking this had been resolved, I went

about the job of being a single parent, raising two young children

and putting my life back together.

In the fall of 1993, I received a phone call from the IRS informing me the 1989 taxes had not been paid, and because I had signed

the joint return, I was liable for the $24,000 debt my ex-husband

had not paid. An IRS agent was sent to my work to evaluate

whether I had extra money to begin payments on this debt. After

looking at my financial picture, she told me she found I was not

able to make payments. She had chosen to not freeze my checking

account or garnish my wages and said she would never force the

sale of my home where as a parent I was raising two dependent

children.

She reassured me the IRS in Las Vegas, where my ex-husband

was living, had assessed him $654 a month payments toward this

debt. However, I was told the IRS would put a lien on my house

to secure the debt as my ex-husband showed no assets and I had

an amount equivalent to the debt as equity in my home. Disturbed

about the course of events, but assured by the IRS that his payments would pay off the lien and it would be removed, I moved on

with my life.

During the following years, I discovered that my ex-husband only

made payments for a few months. He was out of work for a few

months, and when he did return to work as a developer and consultant, the IRS apparently did not follow through to return him

to his payment plan. I called the IRS and asked repeatedly for information, for help, and for solutions which would allow my children and me to remain in our home and not become homeless. I
22

was told either I pay the now $40,000 debt with penalties and interest or hire an attorney to sue my ex-husband. Making $20,000 per year teaching, I did not have the luxury of

extra money for attorney’s fees. Finally, in the summer of 1996, I

was told about a free tax clinic at Denver University, where law

students would help me for free if they decided to take my case.

The clinic reviewed my case and decided to help me. As they spoke

to the IRS and pressed the IRS in Las Vegas and Phoenix for information regarding this case, we were told the IRS could not even

find a file on Gary Morehead and that he had not been pursued

because their workload was so heavy and they did not have the

staff to work on a small case like mine.

In August 1997, the DU tax clinic was discontinued. I continued

to ask the IRS for information, talking with people in Seattle, Salt

Lake City, Phoenix, Las Vegas, and Denver. In September 1997, I

was informed by my ex-husband he had applied in that spring for

bankruptcy and because the IRS had not pursued him in 3 years,

according to the law, he would not be liable for the IRS debt, which

was now almost $50,000 and that I would be totally liable.

Communicating with the IRS and bankruptcy court in Las Vegas

and Denver, I discovered what he told me was true. According to

the IRS in Las Vegas, Phoenix, and Denver, my State divorce decree was not recognized by the IRS, and I was left accountable for

an original debt of $24,000, which had now grown to over $47,000.

Because the IRS had a lien on my home and had chosen not to pursue my ex-husband, who now was making over $165,000 a year,

and because of the IRS and Federal bankruptcy laws, I was responsible for this debt and was expected to pay it when making less

than $20,000 plus child support. Through the bankruptcy records,

I also discovered my ex-husband had not paid taxes for several

years following our divorce, while I had filed each year and all my

refunds had gone toward the payment of this debt.

In January, feeling powerless but hopeful I could refile as an innocent spouse, I hired an attorney and we went to the IRS with

the attached compromise. I would pay taxes on the amount of

money I received in 1989, based on the court decision for alimony

and child support in April 1990 when my divorce decree was finalized. When we went to the IRS office, we were told the current IRS

laws do not allow for this type of agreement. According to the local

IRS office, my only options remain paying the $47,000 debt by selling my home, offer a compromise which could not be less than the

equity in my house, which is about $45,000, file bankruptcy, or

wait out the statute of limitations, which is another 5 years. None

of these seemed to me to be fair or just.

Through this experience, several things were obvious. First, the

unfair expectation of a single mother to pay off debt which was

greater than her income was unrealistic. Second, it became apparent the IRS, for whatever reason, was unwilling to pursue my exhusband for the taxes owed. Because I had decided to invest my

money in a home for myself and my children, the IRS used the lien

on my home as an easy out rather than serving equitable justice.

The IRS never attached wages on an individual—my ex-husband—

who had a much higher income and who had access to the money

which was originally taxed.
23

Most importantly, the difficulty of obtaining timely information

from the IRS was frustrating. When asking for IRS information

which was pertinent to my case, I was told to call another office

or flatout refused information as to whether the IRS was getting

money from my ex-husband.

A greatly simplified tax code could create a greater understanding for taxpayers and eliminate the need for a large, unwieldy, inflexible bureaucracy unable to negotiate fair and just settlements.

Instead of relying on the advice of expensive accountants and attorneys, which the average taxpayer can ill afford, a simpler tax code

could empower rather than defeat individuals like myself who are

willing to pay our fair share of taxes. Hopefully, the new law severing joint liability will go a long way to helping individual taxpayers

and IRS employees administer justice with our tax system, particularly in cases of divorce.

I am grateful to the IRS Commissioner, to Senator Campbell,

and all lawmakers who are courageous in their willingness to look

at problems and listen to stories like mine in order to create crucial

and needed changes in our tax code and the administering of it.

PREPARED STATEMENT

Senator CAMPBELL. Thank you, Ms. Morehead. We have your

complete statement and it will be made part of the record.

[The statement follows:]

PREPARED STATEMENT OF KATHERINE MOREHEAD

My hope is, my testimony today will help those listening to better assess what

works and what doesn’t work from both the viewpoint of the taxpayer and the people working at the IRS. My experience has shown me, our present U.S. tax laws,

do very little to empower taxpayers or IRS employees and even less to create expedient, synergistic creative solutions to tax problems, especially tax problems resulting

from divorce.

The following time line will demonstrate the frustration and sense of powerlessness I felt during the past eight years of dealing with the IRS regarding my 1989

joint tax return filed following my divorce on April 9, 1990. In April of 1987 while

living in southern California my husband and I separated after seventeen years of

marriage. With two young children three and five, I moved to Denver in November

of 1987. Although not legally separated, Gary Morehead, my ex-husband, and I lived

as though we were divorced for the next two and half years. My husband sent me

money for living expenses which the judge in the 1990 divorce decree ruled as alimony and child support.

As a part of my divorce decree in April 1990, my husband agreed to pay the 1989

taxes, something which he had done for the previous 18 years of our marriage. Following the divorce, I discovered he had not filed a tax return and called our accountant in Las Vegas to find out what I needed to do. I was told by the CPA that I

could do nothing and would have to wait until he filed.

Taking the accountant’s advice I waited and asked Gary to file the tax return,

never dreaming by simply filing a return for 1989 married separately, I could have

avoided this entire situation.

Gary did tell me he was filing and although late he would be paying the 1989

taxes. Thinking this had been resolved, I went about the job of being a single parent, raising two young children, and putting my life back together.

In the fall of 1993, I received a phone call from the IRS informing me the 1989

taxes had not been paid, and because I had signed the joint return, I was liable for

the $24,000 debt my ex-husband had NOT paid. An IRS agent was sent to my work

to evaluate whether I had extra money to begin payments on this debt. After looking at my financial picture she told me she found I was not able to make payments.

She had chosen to not freeze my checking account, or garnish my wages and would

never force the sale of my home where as a parent I was raising two dependent children.
24

She reassured me the IRS in Las Vegas, where my ex-husband was living, had assessed him $654.00 a month payment toward this debt. However, I was told the

IRS would put a lien on my house to secure the debt as Gary showed no assets and

I had an amount equivalent to the debt as equity in my home. Disturbed about the

course of events, but assured by the IRS that his payments would pay off the lien

and it would be removed, I moved on with my life.

During the following years, I discovered Gary only made payments for a few

months. He was out of work for a few months and when he returned to work as

a developer and consultant, the IRS apparently did not follow through to return him

to his payment plan. I called the IRS and asked repeatedly for information, for help

and for solutions which would allow my children and me to remain in our home and

not become homeless. I was told either I pay the now $40,000 debt with penalties

and interest or hire an attorney to sue my ex-husband. Making $20,000 per year, I did not have the luxury of extra money for attorney

fees. Finally, in the summer of 1996, I was told about a free tax clinic at Denver

University where law students would help me for free if they decided to take my

case. The clinic reviewed my case and decided to help me. As they spoke to the IRS

and pressed the IRS in Las Vegas and Phoenix for information regarding this case,

we were told the IRS could not even find a file on Gary and he had not been pursued because their work load was so heavy and they did not have the staff to work

on a small case like mine.

In August of 1997, the DU tax clinic was discontinued. I continued to ask the IRS

for information, talking with people in Seattle, Salt Lake City, Phoenix, Las Vegas

and Denver. In September of 1997, I was informed by my ex-husband, he had applied in the spring of 1997 for bankruptcy and because the IRS had not pursued

him in three years, he would not be liable for the IRS debt which was not almost

$50,000 and I would be totally liable.

Communicating with the IRS and bankruptcy court in Las Vegas and Denver, I

discovered what he told me was true. According to the IRS in Las Vegas, Phoenix

and Denver, my state divorce decree was not recognized by the IRS and I was left

accountable for an original debt of $24,000, which had now grown to over $47,000.

Because the IRS had a lien on my home and had chosen not to pursue my ex-husband who now was making over $165,000 per year, and because of the IRS and Federal bankruptcy laws, I was responsible for this debt and was expected to pay it,

when making less than $20,000 plus child support. Through the bankruptcy records

I also discovered my ex-husband had not paid taxes for several years following our

divorce, while I had filed each year and all my refunds had gone towards the payment of this debt.

In January, feeling powerless but hopeful I could refile as an innocent spouse, I

hired an attorney and we went to the IRS with the attached compromise. I would

pay taxes on the amount of money I had received in 1989, based on the court decision for alimony and child support in April 1990 when my divorce decree was finalized. When we went to the IRS office we were told the current IRS laws do not allow

for this type of agreement. According to the local IRS office my only options remain

paying the $47,000 debt by selling my home, offer a compromise which could not

be less than the equity in my house (about $45,000), file bankruptcy or wait out

the statute of limitations (another 5 years). None of these seemed to me to be fair

or just.

Through this experience several things were obvious. First, the unfair expectation

of a single mother to pay off a debt which was much greater than her income was

unrealistic. Secondly, it became apparent the IRS, for whatever reason was unwilling to pursue my ex-husband for the taxes owed. Because I had decided to invest

my money in a home for myself and my children the IRS used the lien on my home

as an easy out rather than serving equitable justice. The IRS never attached wages

on an individual who had a much higher income and who had access to the money

which was originally taxed.

Most importantly, the difficulty of obtaining timely information from the IRS was

frustrating. When asking for IRS information which was pertinent to my case I was

told to call another office or flat out refused information as to whether the IRS was

getting money from my ex-husband.

A greatly simplified tax code could create a greater understanding for taxpayers

and eliminate the need for a large unwieldy, inflexible bureaucracy unable to negotiate fair and just settlements. Instead of relying on the advice of expensive accountants and attorneys, which the average taxpayer can ill afford, a simpler tax code

could empower rather than defeat individuals like myself who are willing to pay our

fair share of taxes. Hopefully, the new law severing joint liability will go a long way

to helping individual taxpayers and IRS employees administer justice with our tax

system, particularly in cases of divorce.
25

[CLERK’S NOTE.—The compromise mentioned in Ms. Morehead’s statement does

not appear in the hearing record, but is available for review in the subcommittee’s

files.]

SENATOR’S EXAMPLES OF OTHER CASES

Senator CAMPBELL. About 11⁄2 years ago, I got a call from a lady

in Montana, whom I had known just slightly, had met, who had a

story almost identical to yours—a single mom, several children—

in fact, her oldest son just recently died in a rodeo accident—living

in an 8-foot camper out in the woods, and went to a local store to

make the call. That is how broke she was and how scared she was,

too. She had a story almost identical to yours, and the next thing

that really worried me is she just flat told me on the phone that

she was going to kill herself, that she had no options, totally hopeless, didn’t know who to turn to.

I called the Billings agency of the IRS, and to their credit, they

did go to work on it right away and helped straighten it out and

it was all kind of taken care of. But I think that in some extreme

cases that is not out of the realm of thinking, when people feel that

they are set upon by the Government and they have nobody to turn

to and nobody to talk to. That has entered the minds of a number

of people when they have seen everything lost because of what they

consider to be punitive actions by their own Government. There is

something wrong in our Government when people do that.

I had a guy in Steamboat Springs a few years ago, hiding behind

bushes when I was doing a town meeting, who whispered at me

when I came out of the town meeting and asked me if he could talk

to me. And I said sure, and I went over and talked to him. He said

he had been warned by IRS agents not to talk to his—I was in the

Congress on the House side—not to talk to his Congressman. Boy,

there is something wrong with Government when we have that

kind of intimidation and fear. So thank you for testifying.

Ms. MOREHEAD. In all credit to the person who evaluated me initially, I mean, she did have that compassion to allow me to stay

in my home, and I am grateful.

Senator CAMPBELL. Well, it does go to show there are some IRS

people that really are trying, and I know in the case of this Montana woman, somebody up there really went to work and did fix

it, fortunately for that lady and for the IRS, too, because I was certainly going to hold them responsible.

Dr. Stjernholm.

STATEMENT OF ALVIN STJERNHOLM

Mr. STJERNHOLM. Thank you. I want to thank you, Senator

Campbell, for the opportunity and the privilege to testify here this

morning relative to the abuse by the IRS. I want to point out that

the passage of the House of Representatives bill relating to the IRS

is a nice gesture, but does nothing to compensate the hard-working

citizens financially raped by the IRS.

A letter dated October 15, 1997, from Donald M. Squires, Chief,

Branch Disclosure Litigation, well documents the fact my attempt

to get my records through the Freedom of Information Act from the

IRS was stalled for 4 years as Mr. Squires’ letter relates to my appeal dated December 10, 1993. As of this date, the documents re-
26

quested in 1993 have not been furnished, and the reason that letter

appeared was because of the Senate hearings before—the IRS before the Senate.

My attorney stated to me personally that he does not know of

other individuals financially raped by the IRS as bad as my wife

and I. My wife and I donated a Mobile Educational Unit to the Colorado Chiropractic State Association, and I was allowed a writeoff

approximately $58,000 over a 3-year period. Approximately 12

years later, IRS officials ignored the statute of limitations and the

IRS code and denied my gift given 12 years earlier and properly

audited by the IRS examiners for 16 consecutive years. The IRS officials then decided 3 of the 16 years they had audited were wrong,

and the IRS then demanded $230,000 in back taxes, liened our

home, and destroyed our credit.

I had made a deposit on a ranch in Wyoming and had approximately $216,000 in equipment and personal property in Wyoming.

The IRS seized all of the equipment and personal property in Wyoming and held an auction. A Freightliner tractor, a La Crosse 24-

ton low boy equipment trailer, and an International Track (250)

caterpillar loader were all auctioned off miles from the auction site.

Receipts for major repairs to document market value were ignored.

Following the auction, the Stjernholms were allowed $25,000 instead of $216,000 toward the $230,000 assessed by the IRS.

For over 1 year, my attorney has attempted a cash settlement

and an additional $226,000 was paid to the IRS in May 1997. During the past year of negotiations, additional amounts of $3,000 and

$25,000 were demanded or all negotiations would be terminated

and additional property would be seized and auctioned. In January

1998, an additional $73,000 was paid and liens were finally released.

I am currently paying twice the interest rate of the going interest

rate because no one will touch you because of your lien by the IRS.

And my banker was threatened for helping me along the way before these liens were released.

The IRS officials ignored the statutes, the statute of limitations,

and the laws as they relate to the IRS codes and the audits they

previously approved for 16 consecutive years.

Senator, will you please introduce legislation or amend the current IRS bill in order to compensate a hard-working Korean vet

and his wife in addition to other numerous people who have been

financially raped by the IRS.

At age 65, I am several hundred thousand dollars in debt because of the IRS financial rape job.

Senator, the Tax Code is a real problem, but the arrogant IRS

officials out of control, ignoring the codes and the statutes, is a

more serious problem.

I should bring to your attention the fact I have spent several

hundreds of thousands of dollars on tax attorneys, but these tax attorneys are intimidated by the demands of the IRS officials. Even

the tax judge reversed his position 1 year later, as well documented

by a $1,000 transcript of a 1-day trial. And at the conclusion of

that trial, I should add, the judge was so impressed with our testimony that he came down and literally shook hands with my wife
27

and I and wished us well. But 1 year later, he handed down a decision, and it was negative to our trial.

In closing, I should report the fact I was again audited in 1991,

as my herd of buffalo as a separate business was in question. The

IRS examiner was pleasant and efficient and approved my return

as 100 percent OK.

Based on the testimony of the former employees and my personal

experience with approximately 17 examiners, all but one of these

examiners were pleasant, competent, and good, hard-working IRS

employees. The real problem is with the IRS officials, starting with

the past Commissioners of the IRS. I have a great deal of correspondence with those officials to document their abuse and financial rape.

Again, Senator Campbell, I want to thank you for allowing me

to present this testimony of financial abuse, and thank you, Mr.

Rossotti, for your attendance and your interest here today.

Thank you.

PREPARED STATEMENT

Senator CAMPBELL. Thank you, Dr. Stjernholm. We will insert

your prepared statement in the record.

[The statement follows:]

PREPARED STATEMENT OF DR. ALVIN STJERNHOLM

The passage of the House of Representatives bill relating to the IRS is a nice gesture, but does nothing to compensate the hard working citizens FINANCIALLY

RAPED BY THE IRS.

A letter dated October 15, 1997, from Donald M. Squires (Chief, Branch Disclosure Litigation) well documents the fact my attempt to get my records through the

Freedom of Information Act from the IRS was stalled for four years as Mr. Squires’

letter relates to my appeal dated December 10, 1993. As of this date, the documents

requested in 1993 have not been furnished.

My attorney stated to me personally that he does not know of other individuals

financially raped by the IRS as bad as my wife and I. My wife and I donated a Mobile Educational Unit to the Colorado Chiropractic State Association and I was allowed a write-off of approximately $58,000 over a three year period. Approximately

12 years later, IRS officials ignored the Statute of Limitations and the IRS codes

and denied my gift given 12 years earlier and properly audited by the IRS examiners for 16 consecutive years, the IRS officials then decided three of the sixteen years

they had audited were wrong and the IRS then demanded $230,000 in back taxes,

liened our home and destroyed our credit.

I had made a deposit on a ranch in Wyoming and had approximately $216,000

in equipment and personal property in Wyoming. The IRS seized all of the equipment and personal property in Wyoming and held an auction. A Freightliner tractor,

a La Crosse 24-ton low boy equipment trailer and an International Track (250) caterpillar loader were ALL AUCTIONED OFF MILES FROM THE AUCTION SITE.

RECEIPTS FOR MAJOR REPAIRS TO DOCUMENT MARKET VALUE WERE IGNORED.

Following the auction, the Stjernholms were allowed $25,000 instead of $216,000

toward the $230,000 assessed by the IRS.

For over a year our attorney has attempted a cash settlement and an ADDITIONAL $226,000 WAS PAID TO THE IRS IN MAY 1997. During the past year

of negotiations additional amounts of $3,000 and $25,000 were demanded or all negotiations would be terminated and additional property would be seized and auctioned. In January, 1998, an additional $73,000 was paid and liens were finally released.

THE IRS OFFICIALS IGNORED THE STATUTES, THE STATUTE OF LIMITATIONS, AND THE LAWS AS THEY RELATED TO THE IRS CODES AND THE

AUDITS THEY PREVIOUSLY APPROVED FOR 16 CONSECUTIVE YEARS.
28

Senator, will you please introduce legislation or amend the current IRS House Bill

in order to compensate a hard working Korean Veteran and his wife in addition to

other numerous good people who have been financially raped by the IRS.

At age 65, I am several hundred thousand dollars in debt because of the IRS financial rape job.

Senator, the tax code is a real problem, but the arrogant IRS officials out of control, ignoring the codes and the statutes, is a more serious problem.

I should bring to your attention the fact I have spent hundreds of thousands of

dollars on tax attorneys, but these tax attorneys are intimidated by the demands

of the IRS officials. Even the tax judge reversed his position a year later, as well

documented by a $1,000 transcript of a one-day trial.

In closing, I should report the fact I was again audited in 1991, as my herd of

buffalo as a separate business was in question. The IRS examiner was pleasant, efficient and approved my return as 100 percent okay.

Based on the testimony of the former IRS employees and my personal experience

with approximately 17 examiners, all but one of these examiners were pleasant,

competent and good hard-working IRS employees. The real problem is with the IRS

officials, starting with the past Commissioners of the IRS. I have a great deal of

correspondence with those IRS officials to document their abuse and financial rape.

Thank you for allowing me to present this testimony of financial abuse by the

IRS.

STATEMENT OF ROBERT LESHER

Senator CAMPBELL. Mr. Lesher, if you would go ahead.

Mr. LESHER. Thank you, Senator. I am Robert Lesher, a Denver

resident for 40 years. Microphone coming through? OK. Former Air

Force fighter pilot, and I have been a commercial real estate broker

and investor for a long time here, or was until all this broke loose.

By 1990, when this starts, my estate was composed mainly of

general partnerships with other local investors in real estate, and

it was a pretty good estate. By the end of 1991, I had no estate

after the IRS did its initial——

Senator CAMPBELL. Mr. Lesher, I think you are beginning to fade

out a little bit. You need to get closer to the microphone.

Mr. LESHER. By 1991, the estate has ceased to exist after the IRS

audit. I am going to speed this up because I know you are running

late.

In January 1990, an IRS auditor contacted me and wanted to go

over the 1988 returns. He explained he as working for a special

project out of the TEFRA office in Ogden, UT, the IRS Service Center. No partnership of mine had ever been a so-called TEFRA partnership, tax shelter partnership. However, he had stumbled on a

partnership we had put together in 1989 to buy a care home here

in Denver up in the Highlands area caring for about 120 mentally

handicapped people, people who could not function—they were not

dangerous, but they couldn’t function well in society on their own.

The Federal funds earmarked for that population, however, were

sidetracked by the Governor of Colorado into a new State bureaucracy, and the home failed. We lost our shirts, and the 120 residents

ended up on the street. More than a few of them died.

After the auditor began working on our records, my wife suffered

a stroke—not connected to the audit, I don’t believe—and this was

a bad one, and I asked for a little time to help care for her. The

auditor was under a lot of pressure. He couldn’t do much. He

stayed on us. I asked for help from a problem resolution officer

here in Denver by the name of Mr. Blighton. He was a very nice

fellow, told me to file a form 911 and he would try to help, but

that, unfortunately, the Denver District was all out of form 911’s,
29

but he would be glad to send me one when they got some more in.

Until then, he really couldn’t do anything.

Three months later, he did send me one. I filled it out the same

day and returned it, and he wrote a letter saying, you took too long

filling this out, I can’t help you. End of that chapter.

Mr. Virkler, the auditor, in continuing his work, stated he had

audited the partnership returns before coming to me, which is required by IRS procedure—and common sense. It turned out he had

not because he was under a lot of pressure to push through as

many audits as he could. The project needed as many scalps as

soon as possible to show the public that, in theory, they were beating up on the rich, and we were supposed to be one of the rich. We

were out of business, but we were the rich.

The auditor revised the K–1’s in the partnership to show that we

had a profit instead of having lost, and in violation—and he told

me this—of a tax code paragraph, 108(d)(7)(A), he flowed the socalled income that he created through our S Corp. partners to our

personal returns and charged us with all sorts of unpaid taxes,

penalties, interest, high crimes, and misdemeanors, like everybody

else I have been listening to this morning.

He was quite open about the whole thing, what he was doing

that was right and what he was doing that was wrong. He even

helped me write an appeal and pointed out all he had to do was

file an amended return for the form 8082 that nobody had ever

heard of—I finally found out what it was—and the whole matter

would go away.

As the months went by, the appeal went in, the months went by,

nothing happened. I started looking for an appeals officer and I

couldn’t locate where the appeal was. And the next thing that actually did happen was an assessment signed by a local fellow. I don’t

know titles. Some of the IRS titles I found, I can’t equate them to

the private sector, so they don’t make much sense to me. This was

a fellow named Santambrogio who signed an assessment against us

and another fellow signed a lean against us, the usual lien that you

heard about this morning. There went the credit; there went being

able to be a real estate broker; there went my estate, because, in

general, in partnership organizations where you get together with

a few people to invest in something, normally you have a clause in

there that if you incur a tax lien, Federal, State, something like

that, your partnership vanishes—for good reason. Nobody wants to

wake up in the morning and find the IRS in bed with you as a

partner, or the State revenue people. That is the protection. My

partnership interests vanished at the stroke of a pen.

An appeals officer finally did surface, a very nice lady—most of

these people were very nice—with the position that since we were

already assessed, there was no point in considering our appeal. Appeal dismissed. She made one noteworthy statement: ‘‘We have a

‘gotcha’ for everything.’’ I remember that one.

The lien stopped my business. It didn’t produce any income to

the Government.

I went to tax court to try to do something there and spent what

little money I had left. We got ready to go to court, and one of the

local IRS attorneys said, Oh, well, this case is not going to court

because TEFRA cases don’t have a right to go to tax court. They
30

are streamlined into collection. I said, well, Bill, this is not a

TEFRA case, as you well know. He said, No, but we are treating

it as one. It started off as one, so we are treating it as one.

I later learned that what he told me was not true. TEFRA is an

acronym for the 1986 Tax Code which was designed to catch tax

loopholes. That is where that term comes from.

However, this same fellow, one of the attorneys, along with the

auditor and another pro had suggested filing an amended return.

We did. It vanished. We never found a sign of it. I did file a FOIA,

Freedom of Information request. I had a little better luck than you

did, I believe. I got partial things out. A lot of names were removed

from memos, and I would get page 2 of a five-page memo and

things like that. I got a little information, and there was some reference to the amended tax return and a reference to finding ways

to just not process it. And it was just not processed. I don’t know

where it is today. It probably just isn’t.

The next step, Denver District Counsel Neal Roberts, a very excellent fellow, suggested I contact a Dave Christiansen in the

TEFRA office in Ogden, where this whole thing started. Mr.

Christiansen pulled my file over there, looked at it, said this is ‘‘off

the wall,’’ sent it back over here to Denver District and requested

that they reaudit, do this over again. Denver District said no, we

don’t have time for that sort of thing. Mr. Christiansen did that

round trip again with the file and back to Denver District, coming

into a different person. Denver doesn’t report to Ogden, so he can’t

order it. He can only suggest it. They both report, I think, to Dallas.

Again, Denver District said no, we are not going to reaudit this.

That avenue closed, I filed an offer in compromise, taxpayer not

liable, using the exact code—well, the exact code I quoted from the

original auditor. He said this is not valid because you cannot flow

through because of—and I quoted the code book and page—you

cannot flow—even if the partnership, which didn’t have a profit,

did have a profit, you can’t flow the taxes through from an S corporation to the owners of the corporation.

A pretty good argument. It was never answered. The letter that

came back was from the same person who had signed the assessment a couple of years beforehand, and his denial was a one-page

letter in which he stated the IRS had determined that our workers

were, in fact, employees and, therefore, we owed the taxes.

Hello? Workers? We never had any workers. That wasn’t the subject. What is going on here? I assumed that he was mixing this up

with another case. I wrote him back politely and said I think, you

know, you have titled your letter to our case, but you are answering somebody else’s offer in compromise. Mr. Santambrogio’s letter

came—a second letter came back, said no, we find your workers are

employees, therefore, you have got to pay the tax.

Senator CAMPBELL. Mr. Lesher, I hate to hurry you, but we are

going to have trouble fitting all of our panels in if we run on.

Let me ask you, the letters you are talking about, did you submit

copies of those letters to the committee, too?

Mr. LESHER. No; but I can.

Senator CAMPBELL. Would you please do that?
31

Mr. LESHER. Yes; everything I am saying here is—almost everything is in letter form.

Senator CAMPBELL. Anything you have a documentation of, we

would like to have.

Mr. LESHER. How about three large volumes?

Senator CAMPBELL. That is good. Everything.

Mr. LESHER. That is pretty much the end of it. There are lots of

other colorful things. It still sits in that position. I am doing other

business now because I can’t do what I was very good at, one of

the leading brokers here in town. An ex-IRS attorney summed it

up pretty well and made me feel actually a little better about the

whole thing, saying that there is really nobody in the IRS whose

job it is to fix messes, clean up messes. And ours was obviously a

mess. And anybody who stood up and said, hey, look, we really

screwed up on this Lesher’s return and audit and so on, let’s get

it fixed, would be a marked man, really, kind of like a whistleblower. There is just nobody that would dare do that. That makes

sense.

One of the comments from—coming out of the offer in compromise was that—and this was not given to me. This was a private note that I got from a FOIA, Freedom of Information, was that

he thought that we had unreported income. A very bad thing. So

a new audit this past year with the lady going around town to the

Board of Realtors and places saying we are investigating Mr.

Lesher for unreported income and tax fraud.

Senator CAMPBELL. Mr. Lesher, I have to remind you, we are

going to have to move on. We have to take set-up time for the next

panel.

Mr. LESHER. I am through. That ended finding nothing, and that

is where we stand at the moment. I tried to get them to say we

found nothing, but they wouldn’t do it.

PREPARED STATEMENT

Senator CAMPBELL. Mr. Lesher, we will insert your complete

statement in the record.

[The statement follows:]

PREPARED STATEMENT OF ROBERT LESHER

I am Robert Lesher, 65, Denver resident 40 years, former Air Force fighter pilot,

long a real estate broker, investor in real estate partnerships. By 1990 my ‘‘estate,’’

as it were, was made up of interests in several investment property general partnerships with other local investors, and I continued as a Realtor and commercial

broker.

January 1990, IRS auditor Eric Virkler contacted me, wanting to audit my 1988

returns. He explained he was working an audit project for the TEFRA office of the

IRS’s service center in Ogden, Utah. TEFRA is an acronym referring generally to

tax shelter partnerships, the so-called tax-loopholes that Congress so loves to use

to whip the public’s emotions. No partnership of mine had ever been a TEFRA partnership. However, Mr. Virkler had blundered into a failed enterprise where we had

bought and tried to operate a home for the mentally handicapped, here in Denver.

The federal funds earmarked for that population were sidetracked by Colorado Governor Romer into a new State bureaucracy, the home failed, we lost out shirts, and

the 119 mentally retarded residents ended up on the street. We had to return the

property to the mortgage holder.

When Auditor Virkler arrived on the scene, my wife Peggy suffered a severe

stroke. However, Mr. Virkler was under some pressure to deliver scalps and, while

I was trying to get help care for my wife, he made continuous demands, threats,
32

phone calls, and such to get my immediate attention to his cause. My wife has since

died.

To get breathing room, I sought help from Problem Resolution Officer Phil

Blighton. He seemed sympathetic, told me to file a form 911 and he would try to

help. Unfortunately, he said, the district was all out of form 911’s, so until they got

some in, there was nothing he could do—except mail me one when they arrived.

Several months later one came in the mail, I completed it and returned it to Mr.

Blighton the same day. He wrote that I had taken too much time completing the

Form 911, and that my request for help was therefore denied.

Mr. Virkler stated he had audited the partnership returns before coming to me,

as required by law. It turned out he had not, though to speed things up he issued

the partnership a no-action letter. The TEFRA audit project needed as many scalps

as soon as possible to show the public that in theory they were beating up on the

rich. We were supposed to be the rich.

Mr. Virkler had revised partnership K–1’s to show that my S corporation, the

partner in the care home, had a profit as a result of the business failure, a not unusual IRS interpretation. In open violation of tax code paragraph 108d7A he flowed

the so-called debt-relief income through the S Corp to our personal returns, and

charged us with all sorts of unpaid taxes, penalties, interest, high crimes and misdemeanors.

In all this, Mr. Virkler was quite open about what he was doing in accordance

with, and in violation of code and regulations, and provided me documentation on

the side to support an appeal and wipe out this new tax debt. He even helped me

write an appeal that made sense. Also, he pointed out, all we had to do was file

an amended return employing a form 8082, and the whole matter would go away.

As months went by, I heard nothing back from the appeal, and could not even

learn who had it, or where the appeals office might be. Then I received notice that

one Michael Santambrogio has filed an assessment against us, followed by a general

lien against all our property real and personal. I tried to contact both these gentlemen by letter and phone. Neither would answer nor return calls.

An appeals officer finally did surface, with the position that since we were already

assessed, there was no point in considering our appeal. Appeal dismissed. She made

one noteworthy statement regarding the whole process: ‘‘We have a gotcha for everything—whatever we want to do, we can find a rule to support it.’’

The lien stopped my real estate brokerage business and wiped out my estate, as

it were, though in so doing produced no income to the government. A standard condition of private partnerships is that if any partner incurs a tax lien, his interest

in the partnership vanishes as though it never existed. No one wants to wake up

in morning to find the IRS in his bed as a new business partner. The estate I had

been building for 20 years in the profession was wiped out forever by the pen of

one Phil Voss, who signed the lien.

We went to tax court, and spent what little money we had left putting together

our case for that in-house judiciary. Just before our court date, the IRS’ attorney,

Bill Davis, advised us that TEFRA matters had no right to go to tax court. But this

is not a TEFRA case. That’s all right, we’re treating it as one. Later I learned that

what Mr. Davis had told me was untrue, that in fact we could have proceeded with

tax court.

Mr. Davis, along with the auditor and another PRO had all suggested filing an

amended return, which we did at the same time, well within the 3-year time limit.

It vanished, and was never acted upon one way or another. I found mention of it

in unsigned memoranda acquired through a Freedom of Information action, advocating finding some rule to disallow it.

Denver District Counsel Neal Roberts suggested I contact one Dave Christiansen,

in the TEFRA office in Ogden, where this whole thing had started. I did so. He

called in the files, allowed that our case was, ‘‘off the wall,’’ and sent the files back

to Denver District with a request to reaudit. Denver District refused. Mr.

Christiansen made the same round trip a second time, and a second time was told

to forget it.

That avenue closed, I filed an offer in compromise (taxpayer not liable), an appeal

of sorts generally unknown to the public. Though I could have made a number of

arguments, I made only one, what I considered the simplest and more irrefutable,

that the flow-through of the bogus K–1 income was in violation of the tax code as

sited. One paragraph, with documentation.

The answer came back from, lo and behold, the same Michael Santambrogio who

had filed the premature assessment. His denial was a one-page letter in which he

stated that the IRS had determined our workers were in fact employees therefore

we owed the taxes.
33

Hello? Workers? What workers? I assumed the letter was mixed up with another

case, returned it to him with a polite note to that effect. Not so. His second reply

was the same as the first. Mr. Santambrogio could find no way to refute my claim,

so he faked a different claim and ‘‘answered’’ that instead.

I wrote him again. He wrote back that he has talked to the person I worked with

in Ogden (Dave Christiansen), and their attorney in Denver (Bill Davis) and that

both agreed we owed the money, period. That of course, did not answer the OIC,

but was supposed to shut me up.

I called Dave Christiansen, who denied in writing expressing any such opinion to

any one, and denied ever talking with Mr. Santambrogio. I called Bill Davis several

times. He would not return my calls.

Dave Christiansen has since been reassigned by the IRS. I am unable to learn

of his whereabouts.

An admittedly fraudulent audit, an appeal and an amended return ignored, the

right to court denied, and the OIC process brushed aside with lies.

Many friends have helped me survive after being put out of business by the IRS

process and my assets, my partnership interest, made worthless. Yet in no way was

my loss the government’s gain. They simply destroyed a productive, tax-paying businessman as a matter of their normal course of business, not with any particular

malice.

To close, an observation by an ex-IRS attorney summed it up pretty well, and

made me feel that this on-going nightmare was not my own insanity. Sure our case

is a mess, it is illegal, improper, and the IRS has done almost everything wrong.

However, no one at any level in the IRS is going to stand up and say so unless he’s

ready to commit career suicide. It’s the same as being a whistle blower. No one in

the IRS would dare come out and say, ‘‘Hey, we really screwed up on the Leshers,

and we need to correct that mess and let them live their lives again.’’ No one in

the IRS would have the courage or the integrity to do a thing like that.

With that reality check, nothing got fixed but I felt a lot better.

NEED FOR MAJOR CHANGES

Senator CAMPBELL. Well, I appreciate your testimony. I have to

tell all of you that when I see grown men who have served in the

military, in the Korean War, as I have, by the way, Doctor, and

people who have seen their families come apart or lost their homes,

when I see, very frankly—I have been taking notes, and I am sure

the Commissioner has, too. But he is not looking in your faces. He

is beside you. But when I see tears coming up in your eyes, I can

understand the hopelessness that some of you feel in dealing with

the IRS, and there is no question in my mind we have to make

some major changes if we are ever going to have the American

public’s confidence restored in Government. It has to start with the

agency that takes their money.

I do appreciate you all being here, and with that, if you have any

additional comments you would like to turn in over the next week

or so, we will make sure they are included in the record, too.

PANEL 2

STATEMENTS OF:

DORIS MARTINEZ, FORMER IRS REVENUE AGENT, PRESIDENT, ASSOCIATED TAX CENTRE, INC.

KENNETH TUCHMAN, FOUNDER AND PRESIDENT, TELETECH

INTRODUCTION OF WITNESSES

Senator CAMPBELL. We will now go to panel 2, and that will take

about 5 minutes to set up: Dr. Doris Martinez and Mr. Ken

Tuchman, I believe it is pronounced. If you would come up and get

your equipment set up, we will just take about a 5-minute break

while we are doing that.

[A brief recess was taken.]
34

Senator CAMPBELL. On this panel, there are only two people testifying on this panel, so we will be able to go a few minutes longer

than the former panel. So we will start with Ms. Martinez, if you

would like to go ahead, and then we will proceed with Ken

Tuchman after Ms. Martinez.

Bring that microphone over directly from you.

STATEMENT OF DORIS MARTINEZ

Ms. MARTINEZ. Senator, I would like to remind you that I am

hearing impaired, I am profoundly deaf, that and the fact that I

can’t hear the words now. So today I have asked for some help

today with notetaking.

Senator CAMPBELL. Sure. For the audience, Ms. Martinez said

she is hearing impaired, and she will need a little help, and that

is why other people are here with her. But you still need to speak

directly into that thing.

Ms. MARTINEZ. OK. This is Frankie Bowie and Gary Gurhle and

Darla Espinosa will be joining us to help us with the notetaking

in just a few minutes. Here she is. OK.

With that, on behalf of Denver District taxpayers, I would like

to commend you, Senator Campbell, and the Treasury and General

Government Subcommittee for holding this most important IRS

field hearing, the purpose of which is to discuss——

Senator CAMPBELL. Doris, you are still too far away from the

microphone.

Ms. MARTINEZ [continuing]. The purpose of which is to discuss

ongoing restructuring issues and potential remedies. With congressional action pending on H.R. 2676, we believe the input offered

today may be vital in considering certain provisions. For those

issues not yet on the table, perhaps future legislation and changes

to IRS procedure and policies can provide much needed taxpayer

protection and relief.

My name is Doris Martinez, and I am a former IRS agent, Denver District, from 1977 to 1984. I have been in private practice

since 1987, and I am president of Associated Tax Centre, a firm

which specializes in handling IRS problem situations. I have been

profiled in articles by the Denver Post, the Denver Business Journal, Accounting Today, and, along with my partners, cohosted a

radio talk show during the filing season in 1996. Our topics focused

on IRS tactics, abuses, taxpayer rights, and responsibilities. I am

an enrolled agent and a member of the National Society of Accountants and National Society of Enrolled Agents.

The testimony offered today is based on my experience and

knowledge gained as an IRS employee, taxpayer representative,

and humble taxpayer.

The issues brought to your attention are wide and varying, but

with a common theme: the need for equitable tax procedures and

laws, and equitable treatment of all taxpayers by an IRS held accountable for its actions.

TAXPAYER ADVOCATE AND PROBLEM RESOLUTION PROGRAM

Commissioner Rossotti has requested a $10 million increase for

the Taxpayer Advocate’s Office and Problem Resolution Program.

Until the Office of the Taxpayer Advocate becomes independent in
35

all aspects, I believe Congress should reconsider the request, deny

it, or consider reduction or elimination of the program altogether.

The basis for taking position is my experience in dealing repeatedly

with the Denver District Problem Resolution Office with consistently unproductive results and information secured from the Tax

Analyst, a nonprofit watchdog organization.

According to documentation provided by the taxpayer advocate

and subsequently reported by the Tax Analyst, during a recent 3-

year period district problem resolution offices handled over 121,000

requests for assistance. Only 82 taxpayers received orders for relief. This is inefficiency at its worse. At the district level, problem

resolution officers have no authority to compel action or provide relief. Their purpose is to gather information and submit reports.

When a taxpayer submits a request for assistance, the problem resolution office refers the case to the appropriate division and PRP

caseworkers work the case. In reality, these are IRS collection and

examination division personnel assigned to the PRP program.

These employees have the same attitudes and objectives as their

nonproblem resolution counterparts. The perspective that each district has a taxpayer advocate field office is nothing more than an

illusion, a $34 million illusion.

Solution: H.R. 2676 does not go far enough in providing taxpayers with an independent program with which to resolve hardship cases or previously unresolved issues. An objective problem

resolution program is critical to effective taxpayer relief. There is

only one taxpayer advocate, and that position is not autonomous.

That is not enough.

Utilization of outside contractors using existing budgets at the

district level, specifically enrolled agents, CPA’s, or tax attorneys

experienced in IRS matters, is a possible solution. If we accept the

premise that both IRS employees and enrolled practitioners outside

of the Service are following the same Internal Revenue Code and

operational directives contained in the Internal Revenue Manual,

then the issue of adversarial relationships between an independent

problem resolution office and the IRS is nonexistent. Ultimately,

we all answer to the Secretary, Department of the Treasury.

DISPARATE TREATMENT OF MINORITY TAXPAYERS

Our observation is that all taxpayers are not being treated equally. African-American taxpayers are treated the worst, with Hispanics running a close second. Examples of abuses are:

Insisting minority taxpayers liquidate their retirement funds or

sell their homes in predominately white, upscale neighborhoods,

when their nonminority counterparts are granted generous installment agreements, leaving their assets intact.

Two, refusing to accept that Hispanic males are responsible

enough to secure custody of their children and support them, thereby denying the earned income credit when it is rightfully due.

Statements made by Service Center employees include, ‘‘We know

how you people cover up for each other.’’ ‘‘You people.’’ In this situation, documents were requested from a single Hispanic father and

timely submitted. The affidavit was provided by another Hispanic

surnamed individual, the baby-sitter. It was not good enough for
36

the line employee. It took a complaint to the manager to get the

information accepted and the earned income credit released.

In yet another instance, a revenue officer demanded a family of

five children, living at below poverty level, be paraded in front of

her and taken back to her work area so she could question them

without their father present. They were 5 to 15 years old. The revenue officer asked them who took care of them, who cooked for

them, where was their mother. Their mother had left them, and

the littlest one, the 5-year-old, sleepy-eyed and somewhat disheveled, answered: ‘‘My mommy doesn’t live with us anymore. She

doesn’t love us. My daddy and my brother take care of me.’’ I was

there with them. These children were forced to relive a traumatic

and heart-breaking event in their life in front of two strangers, the

revenue officer and me. All this, to put a taxpayer in currently not

collectible status. I don’t see these types of demands put upon nonminority taxpayers.

In May 1996, I received a call from a retired IRS tax auditor

from Fresno, CA. He wanted to know if I had noticed that minority

taxpayers were audited more frequently and treated more harshly.

This was his experience. He was concerned and he was angry.

Based on that call, my own experiences, and recent findings by the

GAO regarding earned income credit issues and higher audits rates

in States which have high minority populations, it appears this is

a national issue.

Solution: When a representative from the IRS discriminates

against a taxpayer, he or she not only insults the taxpayer, but insults, me, you, the district director, the Commissioner, and all

Americans. The Service has EEO programs and rules which are

supposed to be enforced internally. Yet these very issues still exist

when dealing with the taxpayers, and they have no place to go. I

know of few alternatives when dealing with racism. Zero tolerance

for disparate treatment of taxpayers under threat of discipline or

loss of position should be a Servicewide mandate. Other than that,

there is only one way to deal with racism and that is to confront

it, confront it one employee, one situation at a time. Responsive

IRS management which takes swift action to correct the taxpayer’s

problem and discipline or fire the offending employee will result in

a more effective IRS. The solution does not come so much in the

form of a request, but it is rather a demand.

SECRET HIT LISTS AND ACTIONS AGAINST TAXPAYER REPRESENTATIVES

While a representative in the Denver District, I saw ‘‘Hit Lists

of Problem Preparers.’’ In October 1996, my partner and I were advised by current and former IRS personnel that my firm and I were

on that list. In September 1997, a Denver District branch chief, examination, denied I was on the list, but verbally confirmed that the

district passes a list around, and during tax season solicits information from revenue agents to find out who’s giving them a bad

time so they can put them on the list and conduct surprise field

compliance visits. This is a document and a practice that, if an outsider asks, IRS management will summarily deny exists. It is one

of their dirty little secrets. Use of this tactic is used to harass taxpayer representatives and discourage representation.
37

I know of another taxpayer representative, also on this dubious

list, who has been pursued to the point of total disruption of her

business and family life. She is a meticulous practitioner, but

wound up on somebody’s bad side at the IRS while representing an

audit or collection issue. Both she and her clients have been put

through grueling audits, most of which have been largely unproductive.

I have mentioned my partner several times. His name was Rudy

Maestas. He is not here today because he died 18 months ago. The

Denver District had been pursuing us for several years in a relentless and obsessive effort to disbar me or otherwise put us out of

business. There were times when we felt like the wrath of 800 IRS

employees was upon us and it was frightening to the point where

we feared for our lives. The reason for pursuit? ‘‘She has influence

over taxpayers, she has influence over further compliance, she is

high profile and former IRS. She doesn’t meet the criteria for these

actions, but pursue her, anyway. Treat her like a tax protester.’’

These statements, made by IRS officials, were found in documents secured via the Freedom of Information Act. The FOIA provided evidence of illegal snooping, forgery, falsified and fabricated

documents, and repeated districtwide disclosure violations, among

other things. The Denver District has expended at least $500,000

and 4 years pursuing us, a pursuit which is not yet over.

In the middle of all this, my partner Rudy became so upset, so

distraught, that he told me, his family, and friends that if anything

happened to him to look to the Denver District IRS as the cause

of his death, no matter what the circumstances. And so today,

Commissioner Rossotti and District Director Hutton, I hold this

district responsible for whatever you took off my partner’s life. Because I am profoundly deaf, I know what real silence is like. And

there is no sound which screams as loudly in my ears as the silence

of my partner no longer here. Rudy was my partner and my best

friend. In contributing to Rudy’s death, this district may have silenced his laughter, but you have not silenced his voice, for today

I speak for us both. His death has broken my heart, but not my

spirit.

Nevertheless, the question still remains: Despite repeated complaints up to the regional level, why hasn’t IRS management asked

to see my full documentation and pursued the issues? I have offered the documentation more than once. Why haven’t you taken

action against the guilty Service employees within this district?

Solution: There are already laws, including the new illegal snooping law, existing disclosure laws which hold IRS employees accountable, the Privacy Act of 1974, and the Freedom of Information

Act, all meant to protect the taxpayer, not the perpetuators at the

IRS. Yet these laws remain largely ineffective without an independent outside board with full authority to investigate and take

action. It is clear that the IRS on its own is not capable of conducting full and objective investigations, nor are they taking appropriate corrective action.

Hit lists on problem preparers/practitioners are unconstitutional,

un-American, and in violation of the Privacy Act. IRS employees

who engage in this practice, encourage it, perpetuate it, or stand
38

by and do nothing should all be held accountable and disciplined

or fired.

The practitioners on these lists are entitled to know that their

rights have been violated, be given an opportunity to file formal

complaints, and provisions made for damages or compensation to

be paid without litigation. Use of mediators would expedite the

process and keep expenditures for all parties to a minimum.

I am mindful of the concerns by Service employees that they may

be disciplined or fired without due process. While that is not the

suggestion, the current concerns of 58,000 IRS employees should

not supersede the concerns and welfare of 200 million American

taxpayers and their representatives.

ABUSIVE AUDITS AND LACK OF DUE PROCESS

There seems to be a growing pattern in which tax auditors and

revenue agents conduct audits which are malicious, intrusive, and

largely unproductive. Most of these audits could be handled via correspondence using the computer matching program. Many times

audits shouldn’t take place at all or are concluded with grossly erroneous results. Examples:

A recent office audit was conducted on a Form 1040EZ with a po- tentially omitted W–2 in the amount of $200. The tax auditor attempted to do a lifestyle audit and demanded the taxpayer provide

copies of his parents’ tax returns and Social Security numbers. The

audit was ultimately a no-change.

A 500-hour field audit, which included a national search for assets, when, in fact, the audit could have been accomplished via correspondence using the computer matching program. Cost of the

field audit exceeded $25,000. A correspondence audit would have

taken $2.50, postage included.

The continued practice of denying taxpayers the right to protest

unagreed issues, even when a taxpayer has specifically stated he

or she wants to protest, remains a problem. Every time Service

personnel deny someone the right to protest or appeal, they contribute to the ever increasing problem of taxpayer noncompliance.

The hardest thing to do as a representative is to convince a

wronged taxpayer that the system will work next time.

Solution: We should eliminate the majority of tax auditor and

revenue agent positions. These people clearly do not have enough

to do. Office and field audit procedures remain largely archaic and

are increasingly intrusive. The purpose of an audit is to ensure

that a return is substantially correct as filed, nothing else. With

computerization and the expansion of information returns, most office and field audits are unnecessary. Lifestyle audits must be limited to those circumstances which are clearly developed after the

initial interview and basic audit procedures have been concluded.

An outside citizens oversight board should be responsible for handling complaints, monitoring abusive practices, and holding management and line employees accountable.

PENALTY AND INTEREST ABATEMENTS AND REFORM

All penalties contain provisions for abatement or refund if there

is reasonable cause. In short, the Internal Revenue Code provides

for our humanity. In reality, there is no parity as to who receives
39

abatements. It is easier to get a $100,000 penalty abated for a corporation than it is to get a $200 penalty removed for an individual.

The smaller the taxpayer, the more personal it gets, all the way

down to whether or not that taxpayer has ever sinned before.

Today we live in a more complex society in which divorce, frequent moves, violent deaths, and all manners of bizarre circumstances descend upon a person’s life. Abatement procedures

and reasonable cause must be updated and expanded to reflect our

society. Frequently, taxpayers are erroneously told they cannot request abatements until the full tax has been paid. The current

move to make notices more readable is to be commended. We must

go one step further and include with every written notice of assessment and demand for payment a simple instruction which allows

the taxpayer to request abatement of refunded penalties. The assessment or demand letter should include space for the taxpayer’s

explanation of circumstances and instructions to attach any relevant documentation they would like considered.

H.R. 2676 contains a provision to suspend failure-to-pay penalties so long as the taxpayer is making payments, but there is no

provision to suspend interest. Ongoing discussions regarding the

cost of abating penalties along with expanded innocent-spouse provisions estimate the cost to be at more than $5 billion. The cost of

tax-related bankruptcies, which account for up to one-third of all

bankruptcies, and repeated noncompliance could be avoided and

would greatly reduce the $5 billion loss of revenue. Most taxpayers

want to pay their taxes. It is the penalties and interest which frustrate and discourage them the most.

Solution: More realistic policy and abatement guidelines which

rely less on the whim of Service employees and are more consistently applied are badly needed. Regardless as to whether it is applied to tax or penalty, taxpayers can only pay so much. Legislation

providing for suspension of interest so long as payments are being

made should be considered.

Today the overall rate of noncompliance is 20 percent, up from

5 percent in 1960. If we can reverse that trend by 1 percent by

avoiding bankruptcies and encouraging taxpayer compliance, at the

current rate of payments processed by the Internal Revenue Service in the amount of $1.7 trillion per year, an additional $17 billion

per year will be collected, voluntarily. This will more than offset

any losses due to penalty, interest, or innocent-spouse reform.

TAXPAYER EDUCATION AND THE INTERNAL REVENUE CODE

The original Internal Revenue Code was 16 pages long. Today’s

code contained over 500,000 words and is still growing. The Taxpayer Relief Act of 1997 alone contains 800 amendments and 300

new provisions. Was America sleeping when we let this get by? To

Congress, I say, What happened? And I would like to show you the

Internal Revenue Code, two volumes. The 1997 Taxpayer Relief

Act, this is it by itself.

Senator CAMPBELL. Do you have that memorized yet? [Laughter.]

Ms. MARTINEZ. I had to buy bifocals just to read this. To Congress, I say, What happened? What happened?

Americans are obsessed with taxes, yet they don’t understand

them. If you ask a junior-high student what the term ‘‘under the
40

table’’ means, they can tell you. If you ask a senior in high school

what the term ‘‘voluntary compliance’’ means, they don’t know. Tax

education of the American public stops with the Boston Tea Party.

Yet every year we have new taxpayers joining the system via the

millions of teenagers who enter the job market. I challenge the IRS

to appropriate a portion of their budget to truly educate the public

and provide a badly needed sense of history which is currently

lacking in the American taxpayer.

To Congress, I ask for a national taxpayer education initiative.

A child in the sixth grade is old enough to earn an allowance. Start

there. Send representatives, perhaps tax auditors and revenue

agents, to speak in our schools, from elementary school up through

high school. As a Nation, we must start teaching taxation in history, math, and business courses. But we must teach it. We are

currently failing to educate our young people about their rights and

responsibilities.

Most Americans don’t even know which President gave us the

prototype for the current IRS organization and our system of taxation, nor do they know that the entire system was completely dismantled not once but twice due to corruption. By the way, the

President who gave us the IRS was Abraham Lincoln when he created the Bureau of Internal Revenue in 1862, which was completely dismantled in 1872 and later resurrected in 1913. Prior to

that, in 1801, Thomas Jefferson dismantled a widely corrupt Federalist system of Internal Revenue, which had been in place less

than 10 years, and our country was funded exclusively by the collection of customs duties until the Civil War.

We send police officers, firemen, and other professionals into our

schools to give talks in classes and schoolwide assemblies. Why not

representatives from the Internal Revenue Service? It is the one

thing I would like to see in my lifetime. This is how you avoid the

necessity for audits and installment agreements. You start at the

beginning.

In summary, IRS, you are the trustees, the guardians of the Internal Revenue Code. It is incumbent upon both management and

line employees at the IRS to treat all taxpayers with dignity and

parity, for you are the trustees, the guardians of the Internal Revenue Code.

IRS. You must put integrity back into the ‘‘I,’’ for corruption has

many faces: lying, racism, retaliation, illegal snooping, unnecessary

intrusiveness, excessive collection actions, hit lists, behaving like a

secret society. Taxpayers view all of these acts as corrupt.

I often hear people say with great hostility, ‘‘How can you work

with the IRS? They are a bunch of lying crooks.’’

As a former revenue agent, it hurts to hear that. Yet sad to say,

I have no quick rebuttal. Integrity throughout the agency must be

restored without delay.

IRS. The IRS must put respect back into the ‘‘R,’’ respect for the

taxpayer, respect for their rights and the system as it was meant

to be. Our taxation system contains a steady balance between taxpayer rights and the authority granted to Service employees. It is

lack of respect for the taxpayers which is giving rise to additional

legislation as we speak. Respect is one of those things which if you

give it, it will be returned to you as well.
41

IRS. The ‘‘S’’ must stand for solutions. Solutions for the taxpayer

which educate, encourage cooperation, and promote an atmosphere

which fosters voluntary compliance mean solutions for everyone.

To Congress, we look forward to a continued commitment to restructure the IRS and enact whatever legislation is necessary to

protect and further the interests of the taxpayer. To the Internal

Revenue Service, we welcome a newly invigorated management

which will hopefully inspire and guide the employees who have

been entrusted as stewards of the Internal Revenue Code. And we

look to the American people who, as taxpayers, must continue their

efforts with honesty, responsibility, and, as always, in the spirit of

voluntary compliance.

PREPARED STATEMENT

Senator CAMPBELL. Thank you, Ms. Martinez. We have your complete statement and it will be made part of the record.

[The statement follows:]

PREPARED STATEMENT OF DORIS MARTINEZ

On behalf of Denver District Taxpayers, I would like to commend Senator

Nighthorse Campbell and the Postal/Treasury Subcommittee for holding this most

important IRS Field Hearing, the purpose of which is to discuss on-going restructuring issues and potential remedies. With Congressional action still pending on H.R.

2676 we believe the input offered today may be vital in considering certain provisions. For those issues not yet on the table, perhaps future legislation and changes

to IRS procedure and policies can provide taxpayer protection and relief.

My name is Doris Martinez and I’m a former IRS revenue agent, Denver District,

from 1977 to 1984. I’ve been in private practice since 1987 and am president of Associated Tax Centre, Inc., specializing in handling IRS problem situations. I have

been profiled in articles by the Denver Post, The Denver Business Journal, Accounting Today and also co-hosted a radio talk show during the filing season us 1996.

Our topics focused on IRS tactics, abuses, taxpayer rights and responsibilities. I’m

an enrolled agent and a member of the National Society of Accountants and National Society of Enrolled Agents.

The testimony offered today is based on my experience and knowledge gained as

an IRS employee, taxpayer representative and humble taxpayer.

The issues brought to your attention are wide and varying, but with a common

theme—the need for equitable tax procedures and laws; and equitable treatment of

all taxpayers by an IRS held accountable for its actions.

I. Taxpayer Advocate and Problem Resolution Program.—Commissioner Rossotti

has requested $10 million to the PRO budget. Until the Office of the Taxpayer Advocate becomes independent in all aspects I believe Congress should deny the request

and consider reduction or elimination of the program altogether. The basis for taking this position is my experience in dealing repeatedly with the Denver District

Problem Resolution Office with consistently unproductive results and information

secured from the Tax Analyst, a non-profit watch dog organization. According to

documentation provided by the Taxpayer Advocate and subsequently reported by

the Tax Analyst, during a recent three year period, District Problem Resolution Offices handled over 121,000 requests for assistance. Only 82 taxpayers received orders for relief. This is inefficiency at its worse. At the District level, Problem Resolution Officers have no authority to compel action or provide relief. Their purpose is

to gather information and submit reports. When a taxpayer submits a request for

assistance, the Problem Resolution office refers the case to the appropriate Division

and Problem Resolution Program ‘‘caseworkers’’ work the case. In reality these are

IRS collection or examination division personnel, assigned to the Problem Resolution

Program. These employees have the same attitudes and objectives as their nonProblem Resolution counterparts. Thus, the perspective that each District has a

Taxpayer Advocate field office is nothing more than an illusion, a $40,000,000 illusion.

Solution: H.R. 2676 does not go far enough in providing taxpayers with an independent program with which to resolve hardship cases or previously unresolved

issues. An objective Problem Resolution Program is critical to effective taxpayer relief. There is only one Taxpayer Advocate and that position is not autonomous. That
42

is not enough. Utilization of outside contractors using existing budgets at the District level, specifically enrolled agents, CPA’s or tax attorneys experienced in IRS

matters is a possible solution. If we accept the premise that both IRS employees and

enrolled practitioners outside of the Service are following the same Internal Revenue Code and operational directives contained in the Internal Revenue Manual,

then the issue of adversarial relationships between an independent Problem Resolution Office and the IRS is non-existent. Ultimately we all answer to the Secretary,

Department of Treasury.

II. Disparate Treatment of Minority Taxpayers.—Our observation is that all taxpayers are not being treated equally. African-American taxpayers are treated the

worst with Hispanics running a close second. Examples of abuses are:

(1) Insisting minority taxpayers liquidate their retirement funds or sell their

homes in predominately white, upscale neighborhoods when their non-minority

counter-parts are granted generous installment agreements, leaving their assets intact.

(2) Refusing to accept that Hispanic males are responsible enough to secure custody of their children and support them, thereby denying the Earned Income Credit

when it is rightfully due. Statements made by Service Center employees include ‘‘we

know how you people cover up for each other.’’ In this situation documentation was

requested from a single Hispanic father and timely submitted. The affidavit was

provided by another Hispanic surnamed individual, the baby sitter. It was not good

enough for the line employee. It took a complaint to the manager to get the information accepted and the Earned Income Credit released.

(3) In yet another instance a revenue officer demanded a family of five children,

living at below poverty level, be paraded in front of her and taken back to her work

area so she could question them without their father present. They were five to fifteen years old. The revenue officer asked them who took care of them, who cooked

for them, where was their mother? Their mother had left them and the littlest one,

the five year old, sleepy eyed and somewhat disheveled answered ‘‘my mommy

doesn’t live with us anymore, she doesn’t love us. My daddy and my brother take

care of me.’’ I was there with them. These children were forced to relive a traumatic

and heart breaking event in their life in front of two strangers, the revenue officer

and me. All this, to put a taxpayer in currently not collectible status. I don’t see

these types of demands put upon non-minority taxpayers.

In May 1996 I received a call from a retired IRS tax auditor from Fresno, California. He wanted to know if I had noticed that minority taxpayers were audited more

frequently and treated more harshly. This was his experience. He was concerned

and angry. Based on that call, my own experiences and recent findings by the GAO

regarding Earned Income Credit Issues it appears this is a national issue.

Solution: When a representative from the IRS discriminates against a taxpayer

he/she not only insults the taxpayer, but insults me, you, the District Director, the

Commissioner and all Americans. The Service has EEO programs and rules which

are supposed to be enforced internally. Yet these very issues still exist when dealing

with taxpayers, and they have no place to go. I know of few alternatives when dealing with racism. Zero tolerance for disparate treatment of taxpayers under threat

of discipline or loss of position should be a Service wide mandate. Other than that

there is only one way to deal with racism and that is one employee, one situation

at a time. Responsive IRS management which takes swift action to correct the taxpayer’s problem and counsel, discipline or fire the offending employee will result in

a more effective IRS. This solution does not come so much in the form of a request

but rather a demand.

III. Secret Hit Lists and Actions Against Taxpayer Representatives.—While a representative in the Denver District, I saw ‘‘Hit Lists of Problem Preparers.’’ In October 1996 my partner and I were advised by current and former IRS personnel that

my firm and I were on that list. In September 1997 a Denver District Branch Chief,

Examination, verbally confirmed that the District ‘‘passes lists around, and during

tax season solicits information from revenue agents to find out who’s giving them

problems so they can put them on the list and conduct surprise field compliance visits.’’ This list is a document and practice that if an outsider asks IRS management

will summarily deny exists. It is one of their dirty little secrets. Use of this tactic

is used to harass taxpayer representatives and discourage representation.

I know of another taxpayer representative, also on this dubious list, who has been

pursued to the point of total disruption of her business and family life. She is a meticulous practitioner, but wound up on someone’s bad side at the IRS while representing an audit or collection issue. Both she and her clients have been put

through grueling lifestyle audits, all of which have been largely unproductive.

I’ve mentioned my partner several times. His name was Rudy Maestas. He’s not

here today because he died in October 1996. The Denver District had been pursuing
43

us for several years in a relentless and obsessive effort to disbar me or otherwise

put us out of business. There were times when we felt like the wrath of 800 IRS

employees was upon us and it was frightening to the point where my family feared

for my life. The reason for pursuit? ‘‘She has influence over taxpayers, she’s high

profile and former IRS.’’ These statements made by IRS officials, were found in documents secured via the Freedom of Information Act. The FOIA (Freedom of Information Act) documents provided evidence of illegal snooping, forgery, falsified and

fabricated documents and repeated District wide disclosure violations, among other

things. The Denver District has expended at least $500,000 and four years pursuing

us, a pursuit which is not yet over.

In the middle of all of this, Rudy became so upset, so distraught that he told me,

his family and friends, that if anything happened to him to look to the Denver District IRS as the cause of his death. He dropped dead from a heart attack a month

later. He was 47 years old. And so, today Commissioner Rossotti and District Director Hutton, I hold this District responsible for whatever you took off my partner’s

life. Because I’m profoundly deaf, I know what real silence is like. And there is no

sound which roars as loudly as the silence of my partner no longer here. Rudy was

my partner and best friend. In contributing to Rudy’s death this District may have

silenced his laughter, but you have not silenced his voice, for today I speak for us

both. His death has broken my heart, but not my spirit.

The question still remains though, despite repeated complaints up to the Regional

level, why hasn’t IRS management asked to see my full documentation? It has been

offered more than once. Why haven’t you taken action against the guilty parties?

Solution: There are already laws, including the new illegal snooping law, existing

disclosure laws which hold IRS employees accountable, the Privacy Act of 1974 and

the Freedom of Information Act, all meant to protect the taxpayer, not the perpetuators at the IRS. Yet these laws remain largely ineffective without an independent

outside board with full authority to investigate and take action. It is clear the IRS

on its own, is not capable of conducting full and objective investigations nor are they

taking appropriate corrective action.

‘‘Hit lists’’ on problem preparers/practitioners are unconstitutional and in violation

of the Privacy Act. IRS employees who engage in this practice, encourage it, perpetuate it or stand by and do nothing should all be held accountable and be disciplined

or fired.

The practitioners on these lists are entitled to know that their rights have been

violated, be given an opportunity to file formal complaints and provisions made for

damages or compensation to be paid without litigation. Use of mediators would expedite the process and keep expenditures for all parties at a minimum.

I am mindful of the concerns by Service employees that they may be disciplined

or fired without due process. While that is not the suggestion, it does not seem reasonable that the concerns of 58,000 IRS employees should not supersede the concerns and welfare of 200,000 million American taxpayers and their representatives.

IV. Abusive Audits and Lack of Due Process.—There seems to be a growing pattern in which tax auditors and revenue agents conduct audits which are malicious,

intrusive and largely unproductive. Most of these audits could be handled via correspondence utilizing the computer matching program. Many times audits shouldn’t

take place at all or are concluded with grossly erroneous results. Examples:

(1) A recent office audit was conducted on a Form 1040EZ with a potentially omitted W–2 in the amount of $200. The tax auditor attempted to do a lifestyle audit

and demanded the taxpayer provide copies of his parents tax returns and social security numbers. The case was a no change.

(2) A 500 hour field audit which included a national search for assets when in

fact the audit could have been accomplished via correspondence using the computer

matching program. Cost of the field audit exceeded $25,000. A correspondence audit

would have taken $2.50, postage included.

(3) The continued practice of denying taxpayers the right to protest unagreed

issues, even when a taxpayer has specifically stated he/she wants to protest, remains a problem. Every time Service personnel deny someone the right to protest

or appeal, they contribute to the ever increasing problem of taxpayer non-compliance. The hardest thing to do as a representative is to convince a wronged taxpayer

that the system will work the next time.

Solution: We should eliminate the majority of tax auditor and revenue agent positions. These folks clearly do not have enough to do. Office and Field audit procedures remain largely archaic and are increasingly intrusive. The purpose of an audit

is to ensure that a return is substantially correct as filed. With computerization and

the expansion of information returns, most office and field audits are unnecessary.

Lifestyle audits must be limited to those circumstances which clearly develop after

the initial interview and basic audit procedures have been concluded. An outside
44

citizens oversight board should be responsible for handling complaints, monitoring

abusive practices and holding management and line employees accountable.

V. Penalty and Interest Abatements/Reform.—All penalties contain provisions for

abatement or refund if there is reasonable cause. In short, the Internal Revenue

Code provides for our humanity. In reality there is no parity as to who receives

abatements. It’s easier to get a $100,000 penalty abated for a corporation than it

is to get a $200 penalty removed for an individual. The smaller the taxpayer the

more personal it gets, down to whether or not that taxpayer has ever sinned before.

Today we live in a more complex society in which divorce, frequent moves, violent

deaths and all manners of bizarre circumstance descend upon a person’s life. Abatement procedures and reasonable cause must be updated and expanded to reflect our

society. Frequently taxpayers are erroneously told they cannot request abatements

until after the full tax has been paid. The current move to make notices more readable is to be commended. We must go one step further and include with every written notice of assessment and demand for payment a simple instruction for requesting abatements of penalties with space for the taxpayer’s explanation of circumstances and instructions to attach any relevant documentation they would like

considered.

H.R. 2676 contains a provision to suspend failure to pay penalties so long as the

taxpayer is making payments, but there is no provision to suspend interest. On

going discussions regarding the cost of abating penalties along with expanded innocent spouse provisions, estimate the cost to be at more than $5 billion. The cost of

tax related bankruptcies, which account for up to a third of all bankruptcies, and

repeated non-compliance could be avoided and would greatly reduce the $5 billion

loss of revenues. Most taxpayers want to pay their taxes. It is the penalties and interest which frustrate and discourage them the most.

Solution: More realistic policy and abatement guidelines which rely less on the

whim of Service employees and are applied consistently, in addition to reform of innocent spouse laws are badly needed. Regardless as to whether it’s applied to tax

or penalty, taxpayers can pay only so much. Legislation providing for suspension of

interest so long as payments are being made should also be considered.

VI. Taxpayer Education and the Internal Revenue Code.—The original Internal

Revenue Code was 16 pages long. Today’s Code contains over 500,000 words and

is still growing. The Taxpayer Relief Act of 1997 alone contains 800 amendments

and 300 new provisions. Was America sleeping when we let this get by? To Congress

I say what happened?

Americans are obsessed with taxes, yet they don’t understand them. If you ask

a junior high student what the term ‘‘under the table’’ means, they can tell you. If

you ask a senior in high school what the term ‘‘voluntary compliance’’ means, they

don’t know. Tax education of the American public stops with the Boston Tea Party.

Yet every year we have new taxpayers joining the system via the millions of teenagers who enter the job market. I challenge the IRS to appropriate a portion of their

budget to truly educate the public and provide a badly needed sense of history

which is currently lacking in the American taxpayer. To Congress I ask for a National Taxpayer Education Initiative. A child in the 6th grade is old enough to earn

an allowance. Start there. Send representatives, perhaps tax auditors and revenue

agents, to speak in our schools, from elementary school up through high school. As

a nation we must start teaching taxation in history, in math or business courses—

but we must teach it. We are currently failing to educate our young people about

their rights and responsibilities.

Most Americans don’t know which President gave us the prototype for the current

IRS organization, and our system of taxation, nor do they know that the entire system was completely dismantled not once but twice due to corruption. By the way,

the President who gave us the IRS was Abraham Lincoln when he created the Bureau of Internal Revenue in 1862, which was completely dismantled in 1872 and

later resurrected in 1913. Prior to that, in 1801 Thomas Jefferson dismantled a

widely corrupt Federalist system of Internal Revenue, which had been in place less

than 10 years, and our country was funded exclusively by the collection of Customs

Duties until the Civil War.

We send police officers, firemen and other professionals into our schools to give

talks in classes and in school wide assemblies. Why not representatives from the

IRS? It is the one thing I would like to see in my lifetime. This is how you avoid

the necessity for audits and installment agreements. You start at the beginning.

VII. Summary—IRS, you are the trustees, the guardians of the Internal Revenue

Code.—It is incumbent upon both management and line employees at the IRS to

treat all taxpayers with dignity and parity, for you are the trustees, the guardians

of the Internal Revenue Code. IRS. You must put integrity back Into the ‘‘I,’’ for

Corruption has many faces; lying, racism retaliation, illegal snooping, unnecessary
45

intrusiveness, excessive collection actions, hit lists, behaving like a secret society.

Taxpayers view all of these acts as corrupt. I often hear people say with great hostility, ‘‘How can you work with the IRS, they are a bunch of lying crooks.’’ As a

former revenue agent, it hurts to hear that, yet sad to say I here no quick rebuttal.

Integrity throughout the agency must be restored without delay. IRS. The IRS must

put respect back into the ‘‘R’’, respect for the taxpayer, respect for their rights and

the system as it was meant to be. Our taxation system contains a steady balance

between taxpayer rights and the authority granted to Service employees. It is lack

of respect for the taxpayers which is giving rise to additional legislation as we

speak. Respect is one of those things which if you give, it will returned to you as

well. IRS. The ‘‘S’’ must stand for Solutions. Solutions for the taxpayer which educate, encourage cooperation and promote an atmosphere which fosters voluntary

compliance mean solutions for everyone.

To Congress, we look forward to a continued commitment to enact whatever legislation is necessary to protect and further the interests of the taxpayer. To the IRS

we welcome a newly invigorated management which will hopefully inspire and guide

the employees who have been entrusted as stewards of the Internal Revenue Code.

And we look to the American people who as taxpayers must continue our efforts

with honesty, responsibility and as always in the spirit of voluntary compliance.

ANTIBROWSING BILL

Senator CAMPBELL. That was a very detailed and well-spoken

testimony. Bashing the IRS has become almost a national pastime,

as you probably know, and I was particularly interested in your

testimony because you offered a number of suggestions and solutions.

Let me get a couple of things first, though. You mentioned one

audit, and as I did some quick arithmetic up here—Ricardo did it

for me—you were saying basically that one audit cost 500 hours in

time and $25,000 to collect $200. Is that correct?

Ms. MARTINEZ. The audit is currently under progress. I computed

that 500 hours—does anybody have a calculator here? I believe I

used a $50-per-hour rate on that.

Senator CAMPBELL. I see. OK.

Ms. MARTINEZ. Man-hours. So that is 500 hours. Totally unnecessary. They could have done it via the computer matching program.

I guess my question is: What are we doing with the computerization program? What is the purpose of all these 1099’s?

Senator CAMPBELL. Well, we ask the Commissioner.

Ms. MARTINEZ. They are designed to save money. We are not

doing it.

Senator CAMPBELL. You also alluded to what you called the

snooping bill. We call it the browsing bill, the antibrowsing bill. In

fact, it was my bill that was passed last year when a number of

IRS people were caught browsing with no probable cause through

the tax returns of sometimes family, sometimes famous movie stars

or athletes, sometimes just their enemies.

Before we passed that bill, it was already illegal to use that information, but it wasn’t illegal just to do the snooping. That is now.

Unfortunately, it is only a misdemeanor, but at least it is illegal.

You also spoke about a number of documents. If you have those

on file—I noticed your testimony was very complete. If you would

give the committee a copy of all that documentation that you accumulated, I would like to include that in the record, too.

And I was particularly interested in your comments about educating people about taxes, how it came about, that we have to accept this responsibility. That is all great. But you spoke mostly
46

about the schools and youngsters, but they are not the ones who

pay their taxes. It is their parents.

How would you suggest we educate the adults, the ones that are

actually paying the taxes?

Ms. MARTINEZ. I believe the media can be a big help in that regard. We see all kinds of television spots and commercials on don’t

do drugs, antiviolence. Television, radios, and newspaper public

service announcements can help the rest of us get caught up and

help us to become better taxpayers and make compliance just a little easier.

Senator CAMPBELL. OK. I thank you very much for your testimony.

Now we will go to Kenneth Tuchman, and I apologize not recognizing you at first, but I remember now meeting you several

times in Washington. Thank you for appearing today. If you would

like to go ahead and proceed?

STATEMENT OF KENNETH TUCHMAN

Mr. TUCHMAN. Good morning, Mr. Chairman. My name is Kenneth Tuchman. I am the founder and president of TeleTech Holdings, the Nation’s leading provider of outsourced customer care

management services. I would like to thank you and the committee

for providing me with the opportunity to testify here today.

While I can’t offer solutions to all of the serious problems so well

expressed by the last panel, I hope that I can shed some light on

some exciting opportunities the IRS might pursue to enhance your

customer care capabilities.

To do so, I would like to outline TeleTech’s partnership with the

U.S. Postal Service and describe the benefits that we believe our

public-private partnership has brought to this public institution. In

addition, I would like to explain why private sector companies such

as TeleTech can bring new technology and innovative solutions to

other Government entities, including the Internal Revenue Service.

Americans, regardless of their perspective on the scope of Government, expect public agencies to serve the citizens of our country

as effectively as possible. Without a doubt, this is the goal of our

Nation’s dedicated public work force as well. We believe that the

experience and core competencies of TeleTech and other similar

firms in servicing customers in the private sector is applicable to

servicing public sector customers as well.

First, I would like to provide some background on TeleTech to

give our partnership with the Postal Service some perspective. I

founded TeleTech in 1982 with one goal: To provide outsourced customer care solutions to corporations and corporation-like entities.

What is driving the need for business today? Well, to begin with,

customers are less loyal, more demanding, than ever before. They

measure service excellence in ways dramatically different than

they did just a few years ago. They point and click to find information, shop freely at 4 a.m., and expect instantaneous responses to

even the most complex questions. Today, the information age is affecting every aspect of a company’s ability to acquire, keep, and

manage customers.

TeleTech serves the customer care management needs of large

global companies such as GTE, Microscoft, AT&T, United Parcel
47

Service, to name a few. All of our clients have one thing in common: They have a strategic and competitive need for customer service excellence. Yet because creating a best-in-class customer care

operation requires vast capital resources, ever-changing technology,

and a whole new infrastructure, they choose to outsource the function to companies like TeleTech.

Clients create and implement customized strategies that combine

the best of our abilities with theirs. While strategies for each client

differ significantly, one goal is always the same: Customer satisfaction that translates into long-term customer relationships. Our clients know that over the long run, satisfied customers mean greater

competitive strength, increased efficiency, and certainly reduced

overall costs.

It is our view that this approach translates well into the public

sector. Ideally, public sector institutions would focus on long-term

relationships with their citizen-customers based on satisfaction and

responsiveness, which can only come from single interaction resolutions to even complex inquiries. Over the long run, this would not

only improve their cost structure and revenue collection capabilities

due to efficiencies gained, it would also enhance their image. Perhaps most importantly, it would enable them to deliver what citizens are entitled to expect: Expeditious, responsive, and effective

interactions with Government entities that serve them.

As you will see, this approach is enhancing the Postal Service’s

ability to deliver just that to its customers.

The most relevant example of benefits of a partnership between

the public and private sectors can be found in our Denver National

Service Center where 600 TeleTech employees manage 65,000 customer inquiries for the U.S. Postal Service every day.

In 1996, TeleTech responded to a Postal Service request for proposal. After a rigorous competitive bidding process, we were awarded the contract in September of that year to establish the first of

six national service centers. Prior to the establishment of this network of national service centers, whenever the American public

called the U.S. Postal Service, calls were directed to their local post

office. Often this meant that calls were simply unanswered as local

staff were busy at the counter or simply did not have the tools or

information to be able to answer specific inquiries. This reflected

poorly on the Postal Service’s commitment to universal service for

all.

TeleTech began handling calls for the USPS Pacific and Colorado

region on November 28, 1996. We have managed this program during regular seasons and throughout the peak-season volumes experienced during Christmas as well as during tax seasons. We have

established a separate subsidiary with dedicated management and

staff whose only duty and responsibility is serving the U.S. Postal

Service and its customers.

This has been a successful partnership which has married the

best of the private and public sectors. Together, we have established what is in my opinion one of the world’s finest examples of

best-in-class customer care. TeleTech could not have achieved this

result on its own, and neither, I would suggest, could the U.S. Postal Service. This level of performance, in such a short timeframe, is

achieved only through an open, honest partnership.
48

Upon this bedrock, TeleTech and the Postal Service have built

solutions to deliver across-the-board service level improvements,

ensuring that the American public’s calls are answered accurately

every day of the week, 24 hours a day. We work together to constantly improve the quality of our work, meeting frequently not

only with our corporate counterparts at the USPS but also with

local post office staff, to ensure that our definition of quality is one

and the same. This attention to detail will lead to overall improvement in customer service ratings for the entire organization.

Because TeleTech provides the people, processes, management,

and undiluted focus on delivering world-class customer care, while

the Postal Service provides the infrastructure and capital, our partnership allows the Postal Service to focus on doing what it does

best: Delivering the mail. Simultaneously, the Postal Service is

able to greatly improve both the service levels and accessibility

Americans experience in interacting with this Government institution. In many ways, our partnership is helping to break down the

invisible barriers that many Americans perceive stand between

themselves and the public organizations that serve them.

I believe that there are many areas of emulation in our successful public-private partnership with USPS that might be applicable

to new approaches for the IRS.

We all recognize the challenges faced by the IRS and applaud the

commitment of its dedicated employees to deliver quality service.

Sometimes, however, it is simply not enough to strive for excellence

when the tools provided obstruct your ability to deliver accurate information to average taxpayers. It has been well documented that

the current IRS computer and information delivery systems are the

source of many service failures. In short, although IRS employees

work long hours and are both dedicated and professional, structural and technological deficiencies hinder their efforts, resulting in

inconsistent service quality and frustration for millions of taxpayers across our Nation.

I know that the IRS is taking steps to address this technology

deficiency with their current tender for a prime contract and the

announced short list of Lockheed Martin and Computer Sciences

Corp., both excellent companies. The enormity of this project is

mind-boggling. I wish Mr. Rossotti and his team the very best and

welcome the agency’s renewed commitment to providing employees

with the tools they need to deliver the kind of service we taxpayers

demand.

However, when reviewing large-scale technology projects of this

nature, I immediately think of the individuals who answer the

phone—the people who are providing the human face of the agency.

Technology is never a magic bullet. The human interface is clearly

a crucial element in reinventing the IRS.

In the headlong rush to provide innovative technology, the customer service agent is often the last to be considered, and in many

cases, this results in alienation and distrust on the front lines. And

despite all technology improvements and money, the implementation fails to meet its objectives.

But it need not be so.

The typical customer service agent answers up to 25 calls per

hour 8 hours a day. This is a tough job. To enact change in this
49

environment without impacting morale is not easy, and waiting 3

to 4 years for the technology fix to arrive is clearly not an option.

The impact of technology in a customer service environment can

be dramatic, but it is also possible to make dramatic changes to

current processes—to apply short-term fixes, if you will, which can

provide immediate service improvements. We would propose such

a solution for the IRS, one that incorporates the people side of the

equation.

My suggestion is to blend the best of the private and public sector, establishing a private sector test-bed communication center,

which would serve as a laboratory for innovative process change.

Let new ideas and processes be first tested in an environment

which embraces change. Once these innovations have been demonstrated to work and are successful, export them to every IRS

communication center and quickly improve the effectiveness of the

entire enterprise. Because the changes tested here will affect them

the most, it may make sense that current IRS employees actually

staff this center.

In one sense, the establishment of such a center is business consulting in its purest form. Because your private sector partner

would be in the trenches with your staff, suggestions for improvement can immediately be tested, proven, and implemented. Let the

private sector see and feel some of the burden carried out by the

frontline staff of the IRS.

The goals of this type of outsourcing partnership are similar to

those you are undertaking now: Rapid improvement without losing

the knowledge and commitment of current staff.

Finally, I submit that this private sector communication center

could also serve as the test bed for the new technology systems

that are to be delivered under the current IRS prime contract for

technology. It would be important to separate this initiative from

the larger technology development effort, using it exclusively as an

independent testing center.

Although the private sector is different from the public sector,

one basic principle remains the same: Our client’s core competency

is not customer service. When a large institution’s core competency

is not customer service but desires for such competency exists, such

as with the IRS, it only makes sense that that institution seek the

assistance of a company whose only focus is customer service. In

such instances, public-private partnerships are ideal.

Customer service companies such as TeleTech have succeeded

with such arrangements for a wide range of companies. For example, TeleTech provides Microscoft with technical support, product

support, and registration of all of its products. We also provide the

United Parcel Service with tracing and tracking of virtually all of

their packages. We also provide GTE with service on local, long-distance, Internet, and wireless service, just to name a few examples.

In addition to the IRS, we believe that similar services can be provided to other Government bureaucracies as well. Solutions are inherent in partnerships.

TeleTech is proud of its partnership with the Postal Service and

is excited about innovation at the IRS. We hope our fully customercentric approach, technology- and people-based solutions can be of
50

help to this committee as you explore changes at the IRS. Together,

we believe there is a real reinvention potential.

I want to reiterate my personal commitment to make myself or

my employees available to help your efforts in any way. Thank you,

Mr. Chairman, for inviting me to be a part of this important process.

PREPARED STATEMENT

Senator CAMPBELL. Thank you, Mr. Tuchman. We have your

complete statement and it will be made part of the record.

[The statement follows:]

PREPARED STATEMENT OF KENNETH TUCHMAN

INTRODUCTION

Mr. Chairman, I am Kenneth Tuchman, founder and President of TeleTech Holdings Incorporated, the nation’s leading provider of outsourced customer care management services. I would like to thank you and the Committee for providing me

the opportunity to testify here today.

I hope I can shed some light on some exciting solutions and opportunities the IRS

might pursue to enhance your customer care capabilities. To do so, I’d like to outline

TeleTech’s partnership with the United States Postal Service and describe the benefits that we believe our public-private partnership has brought to this venerable

public institution. In addition, I would like to explain why a private sector company

such as TeleTech can bring new technology and innovative solutions to other wellestablished government entities, including the Internal Revenue Service.

Americans, regardless of their perspective on the scope of government, expect public agencies to serve the citizens of our country as effectively as possible. Without

a doubt this is the goal of our nation’s dedicated public work force as well. We believe that the experience and core competencies of TeleTech and other similar firms

serving customers in the private sector is applicable to servicing public sector customers as well.

TELETECH’S BACKGROUND

First, I’d like to provide some background on TeleTech to give our partnership

with the Postal Service some perspective. I founded TeleTech in 1982 with one goal:

to provide outsourced customer care solutions to corporations and corporate-like entities. Today, TeleTech serves the customer care management needs of large global

companies such as GTE, Microsoft, AT&T, and UPS. All of our clients have one

thing in common; they have a strategic and competitive need for customer service

excellence. Yet because creating a best-in-class customer care operation requires

vast capital resources, ever-changing technology and whole new infrastructures,

they choose to outsource the function to companies like TeleTech.

In essence, we help our clients acquire, serve and retain their customers by managing inbound telephone, Internet and PC-based video inquiries on their behalf.

More specifically, TeleTech has 18 customer communication centers located

throughout the United States, United Kingdom, Australia, New Zealand, Mexico

and Canada. These centers have over 7,100 state-of-the-art computer workstations,

which are used by greater than 9,000 highly trained customer care professionals in

managing millions of customer inquiries even week.

We invest a great deal in our front line employees, who represent a wide range

of experience and talents, from entry level customer service personnel to senior technical support specialists and registered nurses. We empower our employees with

cutting-edge training and the latest desktop tools for delivering world-class customer care.

Every industry is different, and therefore, customer service firms like TeleTech

perform unique services for every company we serve. In each instance, we help our

clients create and implement customized strategies that combine the best of our

abilities with theirs. While strategies for each client differ significantly, one goal is

always the same: customer satisfaction that translates into long-term customer relationships. Our clients know that over the long run, satisfied customers mean greater

competitive strength, increased efficiency and certainly reduced costs.

It is our view that this approach translates well into the public sector. Ideally,

public sector institutions would focus on long-term relationships with their citizen-
51

customers based on satisfaction and responsiveness. Over the long run, this would

not only improve their cost structure because they become more efficient, it would

also enhance their image. Perhaps most importantly, it would enable them to deliver what citizens are entitled to expect: expeditious, responsive and effective interactions with the government entities that serve them.

As you’ll see, this approach is enhancing the Postal Service’s ability to deliver just

that to its customers.

TELETECH’S PARTNERSHIP WITH THE UNITED POSTAL SERVICE

The most relevant example of the benefits of a partnership between the public

and private sector can be found in out Denver East facility, where 600 TeleTech employees manage customer inquiries for the United States Postal Service every day.

In 1996, TeleTech responded to a Postal Service Request for Proposal. After a rigorous competitive bidding process, we were awarded the contract in September of

that year to establish the first of six National Service Centers. Prior to the establishment of this network of National Service Centers, whenever the American Public

called the USPS their calls were directed to their local post office. Often this meant

that calls were simply unanswered as the local staff were busy at the counter, or

simply did not have the tools or information to be able to answer specific inquiries.

This reflected poorly on the USPS’s commitment to universal service for all.

TeleTech began handling calls for the USPS Pacific and Colorado region on November 28, 1996, including the peak volumes experienced at Christmas and during

tax season. We have established a separate subsidiary with dedicated management

and staff whose only duty and responsibility is serving the USPS and its customers.

This has been a successful partnership which has married the best of the private

and public sectors. Together, we have established what is in my opinion one of the

finest examples of a best-in-class customer communication center in the world.

TeleTech could not have achieved this result on its own and neither, I would suggest, could the U.S. Postal Service. This level of performance, in such a short time

frame, is achieved only through an open, honest partnership.

Upon this bedrock, TeleTech and the USPS have built solutions to deliver acrossthe-board service level improvements, ensuring that the American public’s calls are

answered accurately every day of the week, 24 hours a day. We work together constantly to improve the quality of our work, meeting frequently not only with our corporate counterparts at the USPS but also with local post office staff, to ensure that

our definition of quality is one and the same. This attention to detail will lead to

an overall improvement in customer service rates for the whole organization.

Because TeleTech provides the people, processes, infrastructure, technology management and undiluted focus on delivering world class customer care, our partnership allows the Postal Service to focus on doing what it does best: delivery the mail.

Simultaneously, the Postal Service is able to greatly improve both the service levels

and accessibility Americans experience in interacting with this government institution. In many ways, our partnership is helping to break down the invisible barriers

that many Americans perceive stand between themselves and the public organizations that serve them.

I believe there are many areas of emulation in our successful public-private partnership with the USPS that might be applicable to a new approach for the IRS.

IRS CHALLENGES

We all recognize the challenges faced by the IRS and applaud the commitment

of its dedicated employees to deliver quality service. Sometimes, however, it is simply not enough to strive for excellence when the tools provided obstruct your ability

to deliver accurate information to the average taxpayer. It has been well documented that the current IRS computer and information delivery systems are the

source of many service failures. In short, although IRS employees work long hours

and are both dedicated and professional, structural and technological deficiencies

hinder their efforts, resulting in inconsistent service quality and frustration for millions of taxpayers across our nation.

I know that the IRS is taking steps to address this technology deficiency with

their current tender for a Prime Contract, and the announced short-list of Lockheed

Martin and Computer Sciences Corporation, both excellent companies. The enormity

of this project is mind boggling. I wish Mr. Rossotti and his team the very best, and

welcome the agency’s renewed commitment to providing employees with the tools

they need to deliver the kind of service we taxpayers demand.

However, when reviewing large scale technology projects of this nature, I immediately think of the individuals who answer the phone—the people providing the
52

human face of the agency. Technology is never a magic bullet. The human interface

is clearly a crucial element reinventing the IRS.

In the headlong rush to provide innovative technology, the Customer Service

Agent is often the last to be considered. In many cases this results in alienation

and distrust on the front-lines, and despite all technology improvements and money,

the implementation fails to meet its objectives.

But it need not be so.

The typical customer service agents answer up to 25 calls per hour eight hours

a day—this is a tough job. To enact change in this environment without impacting

morale is not easy and waiting three to four years for the technology fix to arrive

is not an option.

The impact of technology in a customer service environment can be dramatic, but

it is also possible to make dramatic changes to current processes—to apply shortterm fixes if you will—which can provide immediate service improvements. We

would propose such a solution for the IRS, one that incorporates the people side of

the equation.

My suggestion is to blend the best of the private and public sector establishing

a private sector test-bed taxpayer communication center, which would serve as the

laboratory for innovative process changes. Let new ideas and processes be first tested in an environment which embraces change. Once these innovations have been

demonstrated to work and are successful, export them to every IRS call center and

quickly improve the effectiveness of the entire enterprise. Because the changes tested here will affect them the most, it may make sense that current IRS employees

staff this center.

In one sense, the establishment of such a center is business consulting in its

purest form. Because your private sector partner would be in the trenches with your

staff, suggestions for improvement can be immediately tested, proven and implemented. Let the private sector see and feel some of the burden carried by the frontline staff of the IRS.

The goals of this type of outsourcing partnership are similar to those you are undertaking now: rapid improvement without losing the knowledge and commitment

of current staff.

Finally, I submit that this private sector call center could also serve as the test

bed for the new technology systems that are to be delivered under the current IRS

Prime Contract for technology. It would be important to separate this initiative from

the larger technology development effort, using it exclusively as an independent

testing center.

CONCLUSION

Although the private sector is different from the public sector, one basic principle

remains the same: our client’s core competency is not customer service. When a

large institution’s core competency is not customer service but the desire for such

competency exists, such as with the IRS, it only makes sense for that institution

to seek the assistance of a company whose only focus is customer service. In such

instances, public-private partnerships are ideal.

Customer service companies such as TeleTech have succeeded with such arrangements for a wide range of companies. For example, TeleTech helps Microsoft register services for software seminars. For UPS, we track and trace parcel packages.

For GTE we provide a massive customer service effort that combines the selling and

servicing of a variety of their products under one customer service umbrella. In addition to the IRS, we believe that similar services can be provided to other government bureaucracies as well. Solutions are inherent in partnership.

TeleTech is proud of its partnership with the Postal Service and is excited about

innovation at the IRS. We hope our fully customer-centric approach, technology and

people-based solutions can be of help to this committee as you explore change at

the IRS. Together, we believe there is real re-invention potential.

POSSIBLE PILOT PROGRAM

Senator CAMPBELL. Ms. Martinez, I might tell you that I am

going to ask staff to look into the possibility of doing a pilot program that you suggest that would be administered by the IRS. Last

year—as you might know, this committee deals with the budgets

of a number of agencies, and one of them happens to be the Bureau

of Alcohol, Tobacco and Firearms [ATF], and the drug czar’s budget, too. And last year we put quite a bit of money into a national
53

program to try to educate youngsters about the dangers of drugs

that seems to be going very well. We also, obviously, try to do this

with a revenue-neutral budget so that we don’t have to raise taxes

to do it, and sometimes that is difficult because we have to try to

find other money in the discretionary part of our whole budget. But

I think it is worth exploring.

I just want you to know that we are going to at least look into

the possibility of doing that.

Ms. MARTINEZ. I appreciate that. Thank you.

Senator CAMPBELL. Ken, let me ask you just a couple of questions. Basically, what you are suggesting is that the IRS enter into

a public-private partnership, as the Postal Service has. Is that

right?

Mr. TUCHMAN. That is correct.

Senator CAMPBELL. I would guess that, considering we are really

dealing with a problem now of up-to-date IRS technology, we do not

have that in the private industry because they would go broke if

they don’t keep up to date. They can’t compete. And if they can’t

compete, they lose market share and all the rest of it happens, unlike the Federal Government that doesn’t have to compete. So it

might be a good idea.

Has it been mutually beneficial for both the Postal Service and

for you as a company?

Mr. TUCHMAN. It has been extremely beneficial.

Senator CAMPBELL. We haven’t heard anything from the Postal

Service one way or the other, frankly.

Mr. TUCHMAN. From the Postal Service’s perspective, they have

dramatically increased service that was not previously available.

People were forced to wait in line 25, 30 minutes to have simple

questions answered. Now, simply through the telephone or through

the Internet, they are getting their answers, which are being responded to within seconds. And the program is now being rolled

out all across the Nation.

Senator CAMPBELL. Well, I notice in your written testimony, you

have 18 customer communication around—everywhere, the United

States, United Kingdom. It lists a number of computer

workstations and so on.

What areas in the United States are your company?

Mr. TUCHMAN. Today, TeleTech has 13 facilities in the United

States, and then 5——

Senator CAMPBELL. In 13 cities you have these things set up?

Mr. TUCHMAN. Right. We are in locations like South Carolina,

West Virginia, New York, Pennsylvania. We are right here in Colorado—we are one of the larger employers in Colorado—California,

et cetera. We are also in five countries outside the United States.

Senator CAMPBELL. Have you made any proposals to the IRS or

any other agency besides the Postal Service?

Mr. TUCHMAN. No; we have not. We have had some preliminary

meetings with the IRS just to let them know that our services, in

fact, exist.

Senator CAMPBELL. As I understand it, the IRS—I might be corrected on this, but as I understand it, they have, you know, waves.

They are very busy in the spring and less busy in the fall.

Mr. TUCHMAN. Correct.
54

Senator CAMPBELL. Do you think private industry can deal with

that easier?

Mr. TUCHMAN. Well, I think when you look at—if you just take

the United Parcel Service or the Postal Service as an example, they

have identical waves.

Senator CAMPBELL. That is right. Christmas and——

Mr. TUCHMAN. Christmastime and tax season are their two busiest times.

I think it is also important to note that these organizations that

have chosen this public-private—that have chosen to do

outsourcing, in many cases the savings are in the hundreds of millions on an annualized basis.

The other thing is that we are finding that the employee turnover is dramatically reduced because the employees are less frustrated because they actually have proper systems to do their job

and do their job properly.

So what we are proposing here is really a test bed, a laboratory

that the IRS would be able to actually sample a relationship between public and private sectors.

Senator CAMPBELL. I suppose there are some problems when you

talk about replacing some of the people in the Federal work force.

You can’t just fire them. Unfortunately, sometimes you can’t. You

have to move them around and find other places for them under

Federal law.

Mr. TUCHMAN. Well, our goal actually would not be to replace the

existing workers. We believe that they actually have a lot of value

that they can provide. Our goal would actually be a partner in

managing and providing technology and facilities, et cetera, to be

able to off-load these existing employees, and then potentially create new position opportunities available where there is more of the

repetitive-type transactions that people are having to sometimes

wait quite a bit of time just to get answers on some of the simpler

questions that they ask.

Senator CAMPBELL. OK. I thank you both for your testimony and

appreciate you being here.

Mr. TUCHMAN. Thank you.
(55)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

STATEMENT BY HON. CHARLES O. ROSSOTTI, COMMISSIONER

INTRODUCTION OF WITNESS

Senator CAMPBELL. And now we will go to the gentleman that I

am sure many of us have been waiting to hear, the Commissioner

himself, Mr. Charles Rossotti.

Well, Commissioner, you have heard some interesting suggestions, bordering on go jump in the lake to some very positive ones,

too. I noticed your staff person was over there taking notes. I hope

it has given you some ideas, as well as the ideas you have gained

from the other hearings you have done around the country or you

have been at around the country. And I certainly want to thank

you for being here.

Why don’t you go ahead with your testimony? I would like to ask

you a few questions on behalf of some of the people who have testified.

COMMISSIONER ROSSOTTI’S STATEMENT

Mr. ROSSOTTI. I will try to be brief and just hit the high points,

Mr. Chairman, and provide time for questions. But, first, I just

want to thank you for inviting me to be here and allowing me to

participate and listen to the problems that many of your constituents here in Colorado obviously have. As you know, I have only

been Commissioner for a relatively few months, and one of the reasons I took the job, having come from the private sector myself, is

that I certainly was aware from personal experience, as well as the

experience of many colleagues and friends, of some of the problems

that people have in dealing with the IRS. And so I felt that since

we do need, as you observed, some form of an agency to collect

taxes, if we were going to have such an agency, we ought to do a

better job than we were doing in serving the taxpayers who are

paying the taxes. So that is the reason I took the job.

As I think you know from some of my previous testimony, the

basic thing that I said right at the beginning that I thought we

needed to do was to simply change the whole focus of the agency.

I think the agency has done a good job of operating an enormous

operation and processing an enormous amount of data, certainly

collecting 95 percent of the Government’s revenues. But it has not

always done that in a way that has been responsive to the needs

of the taxpayers. And if we are going to do that, we have to turn

the whole thing around and try to look at things through the eyes

of the taxpayers. That is why I have been traveling around for the

last several months to talk to people who are having problems as

well as making suggestions for the agency. And this is, as we cer-
56

tainly heard today, not always a pleasant picture, and some of the

things that we hear certainly are very difficult problems that will

not be solved easily. But we have to listen to these kinds of problems if we are going to effect real change at the IRS, which is actually what I hope we will do.

Let me just make a couple of comments about some of the things

that came out in your panels, and then I would like to just talk

a little bit more broadly about some of the ways that we are going

to try over time to deal with some of these issues.

First of all, I just want to reiterate what you said, Mr. Chairman,

that any witness who came here today or, in fact, to any congressional committee need not fear retaliation. As long as I am Commissioner, I will personally provide that assurance that anybody

who wants to give us this kind of input, regardless of how critical

it might be, is certainly welcome to do it and will not suffer anything as a result of that.

Second, just with respect to the cases and some of the issues, the

specific issues that were raised today, I have certainly listened

carefully to these, and as you have noted, we did have some IRS

people here taking notes so we can follow up. And I think there are

three things that we will specifically do. One is that the District

Director, Mr. Hutton, is here and I am going to ask him to give

me a special report on all the matters that came up today that are

within this district. I think most of them are within this district.

More particularly, though, those taxpayers that have open cases

and issues that are still unresolved, we are going to ask a person

from the Taxpayer Advocate’s Office to take a special interest in

each of those cases and follow them through to the point where

they can be resolved, or at least explained as clearly as possible to

the people involved. And, third, there were a couple of matters that

were quite serious allegations, if I heard them correctly, and we

will, independently of the district, have some investigations done of

those matters to see what we can learn, because we do want to follow up on any of these things that may have been really improper.

So we will take those particular actions on the specific things that

were discussed today in the hearing.

I also want to make a special comment about the innocent-spouse

problem. I only began to learn about this a few months ago, and

I have to say that I think that this innocent-spouse problem is one

of the more disturbing things that I have learned about since I

have gotten here. It really is quite unfair. There is just no doubt

about that. And I wish that we had it within our power within the

IRS to provide a complete solution to this. As I have learned, we

do have the ability to take some action to do better than we have

done so far, but we don’t have full authority; and that is why in

the law that is currently being considered there are additional provisions in there that I think will correct the problem. We will certainly work with the committees to make that happen.

In the meantime, some of the things that we are doing on this

innocent-spouse problem are first of all, basically to simply make

sure that the authority that we do have to provide relief to innocent spouses is actually made available to those people who qualify.

Frankly, it had not been a good process and sometimes people who

had the right to receive certain relief were not getting it. So we are
57

at least taking action on that score. We have set out a new specific

form that just went out on our website. It is being printed right

now on paper. So that will be out there, and we have set up a special group in Cincinnati to process these forms to make sure that

the particular kinds of things that have to be considered in these

cases will be taken care of.

We are also trying to do some broad training of our employees

to recognize these kinds of innocent-spouse cases, even if the taxpayers themselves are not aware of it. So we are doing some special training in that regard, and we hope that very soon some of

the operators on our 800 number will be aware of this.

We are also working with some local organizations in different

parts of the country that work with spouses that may be abused

to make sure that their network is aware of some of these procedures. So this is what we are doing, and I don’t believe that it is

in any way sufficient, but it is certainly better than what we had

before. And I think with the help of the new legislation, Mr. Chairman, that you alluded to, we can solve this problem really once and

for all.

Let me also now mention a couple of things, and I won’t go

through a long laundry list because I know you want to have time

for questions and some other comments, but there are some things

that we are attempting to do in the very near term to provide better service to taxpayers and to deal with some of these more difficult kinds of situations that come up.

One of the most basic ones, as the gentleman who just testified

mentioned, is phone service. It is important that people be able to

get through on the phone. In many of our cases, people are not just

getting through on the phone to ask a simple question. They are

getting through because they may have gotten a notice or a deficiency statement that they have a question about or where they are

being asked to pay money and they have a question about that. It

is certainly vital that people be able to get through to somebody

when they have that kind of situation, as well as to just ask normal questions about the tax law.

When I looked at the data, Mr. Chairman, 2 years ago the situation was such that people were getting notices saying you may owe

money or they may have had a question, and the chances of getting

through on the phone to the IRS were very, very minimal. They

were really very, very low. This, of course, is an extraordinarily

frustrating and unacceptable situation.

In this filing season that we are just completing, there was a considerable effort that was underway partially before I got there, to

at least improve it, not to the level that the private sector delivers

but certainly dramatically improve it. And so far this season, if you

look at it the way the private sector measures it, we are answering

about 75 percent of the calls, which is still not good enough, but

it is a whole lot better than way down there where it was. That

means there are about 14 million fewer busy signals that people

are getting this season.

Second, on the more difficult kinds of cases that some of your

constituents describe today where they have gone on for a long period of time and haven’t been resolved, we have had a number of

open houses that we call problem-solving days around the country.
58

We are having them in various cities. The first one here in Denver,

I think, was on the 15th of November, and then there have been

ones in other cities around the country and in Colorado as well. I

think there is another coming up in May. And these have actually

been reasonably successful, I would say quite successful, in fact, for

those taxpayers who have come in with a particular problem. They

have been able to meet face to face with a person. We have had

everybody there, and I think we have gotten about 90 percent of

these cases cleared away and have gotten very good ratings from

our customers that have come in.

That is another thing that we have started new. We have started

actually asking customers, taxpayers, what they actually think of

the service. We started it with these problem-solving days, and we

are now launching a process to eventually ask every taxpayer who

interacts with us, even in an examination or a collection action, to

actually rate the service that they got. Eventually we will use this

as part of our way of measuring performance in the agency. This

is, again, going to take some time, but we are started on it.

On the matter of these collection situations, and particularly

when very sensitive situations arise, such as seizing someone’s

home, which is probably the most sensitive thing that you could

possibly do, one of the first things that I did when I started to hear

about these things is to at least put in place some more rigorous

procedures to ensure that there is management review of things

like seizures of homes and personal property. We have also given

some additional authority to the taxpayer advocate to deal with

these kinds of situations.

Finally, let me just mention something that has been covered in

the press. It wasn’t mentioned here very much today, but certainly

an important issue is how the performance of individual employees

and managers in the IRS had been measured, particularly those in

the compliance functions. We have taken steps to eliminate the use

of certain kinds of statistics, such as how much money was collected per person. We want to completely eliminate that from the

way that performance is measured in the IRS. That has been done,

and it is, I hope, a thing of the past.

We are working on some new ways to measure performance that

we think will balance the interest of taxpayers as well as the need

to collect taxes. Again, this is not something that we were able to

do very quickly—eliminate the unfortunate kinds of statistics. Putting in place the right kind of measures that really measure what

we need will take a little longer.

Now, those are just some near-term things, and we will continue

to work on those. Let me just finish up by saying that even if we

do all those things and we do more of them, I don’t think we are

still going to produce the IRS that the public expects and deserves.

I think if we were to define what it is that the public expects, as

I would understand it, we have to meet two standards:

One is that for each and every taxpayer that we interact with in

any way, shape, or form, whether it is the simplest thing like providing a form or something as difficult as collecting money when

there’s a real problem, every single one of those cases should be

measured and should be done in such a way that it provides the
59

taxpayer the most helpful possible service that they can get from

us during each one of those interactions.

The second thing I think we need to accomplish is an overall fairness in the way compliance is done so that anybody who is willingly complying, which, of course, as many of your panelists mentioned, is the majority of people, each of those people will not feel

that somehow there is someone else over there who is a neighbor

or a business competitor who is not complying and putting an unfair burden on them. So we have to look at this whole thing as a

fair form of compliance.

Those are really the standards that I think we need to measure

ourselves against, and we need to go a long way and make a lot

of changes to reach them at the level that we hope. But as you

know, in some of my testimony before your committee earlier, Mr.

Chairman, just to briefly summarize, I think in the long run there

are five big things that we have to do.

One is we have to turn the whole thing around to be much more

focused on preventing problems early in the cycle, solving problems

with taxpayers early rather than later on getting into as many enforcement actions as we do. And I think the suggestion about more

taxpayer education is certainly a good one in that regard.

The second thing is that we need to really organize the IRS in

a way that it is focused externally more on helping taxpayers, and

there is a large number of diverse taxpayers in this country, from

college students who just have a very simple form to file through

a phone call, to more complex businesses. I have proposed reorganizing the entire IRS to be focused on different operating units

where each would be responsible for each one of these groups. The

small business people, for example, would have a group that would

just work to help them and work with them throughout the whole

cycle of complying with the tax law.

I think the third one, which is very much related to that, is that

we do need to streamline internally the way that management

roles are defined so that we have a clearer set of responsibility and

accountability. Right now the IRS is quite fragmented, as some of

your panelists have noted, and that is because it has really evolved

over 45 years in a certain way, and I think it is time to rethink

that.

I think the fourth one I have mentioned. We need to measure the

performance of our employees the right way so that it encourages

the right kind of behavior.

And, finally, of course, the big one is we do have to replace the

really old technology that we have, and you know, Mr. Chairman,

we have come before your committee to ask your help in that. It

is a big job, but we will never reach the goal of having the right

kind of service or the right kind of fairness with taxpayers with the

30-year-old computer systems that we have in the IRS.

So those are some of the things that I think we need to do long

term, and they are not going to be easy to do and they are not

going to be quick to do, but I think with your help and the help

of others in Congress and, in particular, the bills that are currently

going through, I do think we can make progress in this direction.

Thank you for giving me the opportunity to testify, Mr. Chairman.
60

PREPARED STATEMENT

Senator CAMPBELL. Thank you. And I also thank you for assuring the people that were here on the panel that there would be

nothing in the way of retaliation in any way, shape, or form from

the IRS and giving that same kind of commitment. We have your

prepared statement and it will be made part of the record.

[The statement follows:]

PREPARED STATEMENT OF CHARLES O. ROSSOTTI

Mr. Chairman, I want to thank you for the opportunity to appear at this field

hearing. I am also very pleased that so many of our customers—the taxpayers in

the Denver region—will be expressing their views too, as well as NTEU President

Robert Tobias.

As you know, I became IRS Commissioner in November, and one of the first

things I set out to accomplish was to change the focus of the IRS. If we are to provide top-quality service to our customers, we must see the agency through the eyes

of taxpayers. Sometimes, it may be different, but if we are to effect real change at

the IRS—as I am attempting to do—it is a critical first step. So once again, thank

you for allowing me to testify today and for the chance to hear what’s on our customers’ minds.

This morning, I would like to discuss what I am trying to do in both the shortand the long-term to modernize the IRS and provide first-quality service to our customers. But before I begin that discussion, I want to speak to the innocent spouse

issues that have been raised today.

We are trying to do all we can to help innocent spouses. This is a very troubling

situation, and I wish I could provide a complete and immediate solution. The law

limits what I and our employees can do in this area, but we are doing much more

to solve this problem.

The Treasury Department announced on February 9 a set of administrative

changes to expand innocent spouse relief. We are already beginning to implement

these actions. Less than two weeks ago, we put up on our website a new application

for an individual seeking innocent spouse relief. New Form 8857 can be found at

www.irs.ustreas.gov. We have also expedited printing of the paper version of the

form, and it should be available to taxpayers in a matter of days. These forms requesting innocent spouse relief will be sent to Cincinnati, Ohio and processed at

that central location by examiners with expertise in innocent spouse cases.

We are also training our employees to better recognize a potential innocent spouse

situation, even if the taxpayer is unaware of the potential relief. Special training

courses will be developed for our collection and examination personnel. And telephone operators with special training in innocent spouse provisions will be available

on our toll-free number: 1–800–TAX–1040.

In addition, we want to reach out to national and local organizations, like those

here in Denver, that help abused and battered spouses. They are excellent partners

in helping to get out the word about innocent spouse relief. They are also in an excellent position to alert individuals who might qualify for relief to consider the innocent spouse provisions.

I recognize that these measures go only so far, and are far short of what I would

like to see. With the help of the new legislation now going through Congress, we

will be able to do much more.

One of the IRS’ most important responsibilities is to manage a successful filing

season, and we are doing so again this year, both nationwide and in Colorado. This

season, while total return receipts are about even, our e-file and TeleFile alternative

means of filing are up 25 and 26 percent respectively over the same time period last

year. Colorado closely tracks these national usage figures. E-file is up 23 percent

and TeleFile is up 29 percent in the State; paper returns are down five percent.

Colorado’s refunds are up six percent and the average refund is $1,369, up from

$1,274 last year.

As of April 3, 1998, over five million individuals have filed by phone. This spring,

small businesses nationwide were also able to file Form 941, Employer’s Quarterly

Federal Tax Return, over the telephone. This year, we expect over 1.2 million returns to be filed using this option.

Beginning in January 1998, the IRS also expanded telephone service to 16 hoursa-day (7:00 am to 11:00 pm), Monday through Saturday. And starting today, we will

be on the phones 24-hours-a-day until midnight the 15th. Next year, during the

busiest time of the tax season, there will be phone service 24-hours-a-day, seven
61

days-a-week. And for those procrastinators who have not even started the process,

we will have IRS personnel at the main Post Office tomorrow to help prepare returns. Next year, I would hope they would consider the ease of e-file and TeleFile.

So far this filing season, we have answered nearly 30 million phone calls; including more than 700 thousand in the Rocky Mountain District. Our nationwide overall

phone access, as defined by GAO, to telephone assistance has increased from 30 percent in fiscal year 1996 to about 91 percent this season. The Rocky Mountain District, which includes Colorado, also came in at 91 percent. Nationwide that means

there have been 14.4 million fewer busy signals experienced by taxpayers.

The IRS also expanded walk-in service hours. During the last six Saturdays of

the filing season, over 150 selected IRS walk-in offices were open from 9:00 am to

3:00 pm. On Saturday, March 28 we held EITC Awareness Day across the country,

and the last two Saturdays of the filing season were Problem Prevention Days. In

the Rocky Mountain District, Problem Prevention Days were held in Denver, Colorado Springs, Cheyenne, Casper, Boise, Billings, Missoula and Salt Lake City.

We also had a number of Problem Solving Days in the Rocky Mountain District

that met with great success. On November 15th, we conducted a Problem Solving

Day in Denver. Of the 370 total cases presented by taxpayers, 352 have been closed.

That’s a 95 percent closure rate and we are still working to finish the remaining

18. Our customers were also extremely satisfied with the service they received. In

an on-site survey of customers receiving service, we received an average 6.8 rating

out of a possible seven. The next Problem Solving Day will be held on May 16 in

Denver.

A growing number of taxpayers are also getting the tax information they need

from our Internet site, IRS CD–ROM’s and our fax system. So far this fiscal year,

our Internet site had over 300 million hits. That is about triple over the same period

last year. Our fax system traffic is about 70 percent higher than last year. Over

625,000 successful transmissions of tax forms and information have been made by

fax.

The IRS, in conjunction with its private sector partners, has also made significant

progress toward enhancing electronic payment methods. I was very pleased that our

Electronic Federal Tax Payment System made such substantial progress with existing business users that it will not be necessary to impose a penalty on July 1, 1998,

as was previously planned. The penalty waiver from July 1, 1998 through December

31, 1998, will extend to those employers first required to use EFTPS on or after July

1, 1997, and that make timely deposits by paper coupons. We think that’s good news

to many of your small business constituents.

In fiscal year 1997, more than $655 billion in tax payments was deposited electronically through EFTP, a significant increase over the $416 billion deposited in

fiscal year 1996. As of April 4, 1998, deposits in fiscal year 1998 are already over

$620 billion. Enrollment continues to grow with over 1.8 million taxpayers currently

enrolled in the system, of which over 500,000 are volunteers who are not required

to use the system. This success is the reason that we have been able to defer the

penalty.

For the coming fiscal year, we will pursue a highly-focused initiative to improve

taxpayer service through improved clarity of notices, forms and publications, better

telephone service, more walk-in service, expanded electronic filing, improved training of customer service representatives, strengthened support for small businesses,

increased staffing for the Taxpayer Advocate’s office, and the creation of Citizen Advocacy Panels.

As the Chairman is aware, I have also proposed a sweeping modernization of the

Internal Revenue Service. Despite the short-term progress we are making, we will

only reach our goal of first-quality service to each and every taxpayer through

changes in five key areas, each complementing the other.

First, we must implement revamped IRS business practices that will focus on understanding, solving and preventing taxpayer problems. Instead of the historic onesize-fits all agency, we should tailor efforts to taxpayer groups with common needs.

College students and retired seniors are but two examples.

Second, we need an organizational structure that serves a segment of taxpayers

with similar needs. One potential way to organize the IRS is to divide it into four

units, each charged with top-to-bottom responsibility for serving a segment of customers, such as small businesses.

Third, the IRS needs fewer layers of management and the creation of management roles with clear responsibility and accountability.

Fourth, we must measure organizational performance by balancing customer satisfaction, business results, employee satisfaction and productivity. It is important to

create a system that positively influences employee behavior.
62

Fifth, we must take advantage of new technology. IRS’ current computer systems

cannot support the agency’s mission and goals. We desperately need to upgrade our

1960’s technology. But building new computer systems to support old business practices and a complex organizational structure will not work. The recently-issued technology modernization blueprint and the new Chief Information Officer organization

provide an excellent basis for managing our new technology.

The consulting firm of Booz, Allen & Hamilton will validate the concept for modernization in terms of risk, cost and impact on customers, both external and internal.

In conclusion, I believe we can transform the IRS into an agency dedicated to customer service and working for the taxpayer. We can make it an organization that

helps taxpayers meet the obligations imposed by the tax laws while ensuring that

compliance is fair. We can do all of this while increasing productivity and shrinking

the size of the IRS in relation to the economy. This will take time and investments

to modernize technology, business practices and organization. But, with the support

of the Congress, I am optimistic that we will succeed.

PUBLIC SERVICE ANNOUNCEMENTS

Senator CAMPBELL. Let me ask you a few questions. I was really

interested in Ms. Martinez’s idea about public service announcements, if we could find the money. I think our authority is about

$25 billion, and about one-half of that is discretionary. And under,

you know, the theory that we are going to have revenue-neutral expenses, we have to find some money somewhere else. But does the

IRS do anything along that line now of public service announcements? Not to extol the virtues of the IRS, but to try to tell people

the solutions or how they——

Mr. ROSSOTTI. It is very limited, very limited. I think we did a

limited amount of that with respect to encouraging people to use

electronic filing, which is something that solves everybody’s problem because you get more accurate stuff in and that was successful.

But I don’t think that we have done as much as we could with the

whole opportunity to focus earlier in the cycle to educate people. I

actually agree with I think it was Ms. Martinez who said that ultimately moving everything up and getting the problems prevented

in the first place is the right way to do it. But, no, I don’t think

we have done much with public service announcements.

Senator CAMPBELL. But if we could do something along that line,

you would support that?

Mr. ROSSOTTI. I would support anything that we can do to educate people about how to get their returns filed right in the first

place, absolutely.

IRS OUTREACH EFFORTS

Senator CAMPBELL. I also want to apologize that we couldn’t get

some of the written testimony to you before. The fact is we didn’t

have some of it until the last minute. But I appreciate you trying

to kind of ad-lib some of the answers and deal with them as well

as you can.

The IRS has been conducting problem resolution days which provide taxpayers an opportunity to meet the IRS. We have heard of

that. You have spoken of that a little bit. But what steps is the IRS

taking to reach the people that may not or cannot make it to the

problem resolution sites?

Mr. ROSSOTTI. Well, actually, of course, what we really want—

it is almost a slogan—is that every day be a problem-solving day.

I think that the improved phone service and the increased walk-
63

in service during filing season are the two most specific things that

give you an answer. We have increased the phone service to 16

hours a day, 6 days a week, and the accessibility is up, and the last

2 days of the season, we are actually open 24 hours. Plus the last

6 Saturdays of the filing season, we have had open houses or problem-solving days where people could come in on Saturday mornings, for example, in shopping malls and other places and get service.

So we are trying to reach out where people need the service and

give it to them. I think there has been a lot of progress this season,

although I would certainly not claim we are anywhere close to

where we should be, ultimately.

Senator CAMPBELL. You heard both Ms. Powers and Ms. Morehead. They are classic examples that are faced by the innocent

spouse. It is just unbelievable to me that a woman could lose her

home because of something her husband did not do or did do. What

protections are there currently available?

INNOCENT SPOUSES

Mr. ROSSOTTI. Mr. Chairman, I have to say that when I first

learned about this problem, I looked into it and I was rather

shocked myself, not having come from the tax law business, to find

out that there are really only very, very limited protections. I will

say the IRS has not done as good a job even of extending those to

people, which is what we are trying to fix. But basically it is only

in the case of where there is an assessment that has been made

after the return is filed and where it can be shown that the innocent spouse did not really have responsibility for that and there are

some other restrictions on it. So it is really quite limited in terms

of what the law permits today.

In other words, when the tax return goes in, under the current

law, and both spouses sign it, they have that joint and several liability, and that is in the law. And I think we all understand that

in some cases that is not right, and that is why we need to change

that.

Senator CAMPBELL. Well, under Senator Roth’s bill in the Senate

Finance Committee, he is trying to fix that, as you probably know.

Mr. ROSSOTTI. I am confident that it will be fixed. There are various nuances of different provisions as to how it would be fixed, but

it will certainly give substantially more protection to innocent

spouses.

Senator CAMPBELL. It will give spouses relief and allow them to

only pay their own taxes. The problem is they are not retroactive.

So that means those people who are already caught in this bind,

we need to try and work with the people that have already been

caught in this spousal problem.

Mr. ROSSOTTI. Yes; we will. As I told you in the testimony, we

are doing a lot more to at least reach out and use the authority

that we do have. And there are other things that are tangentially

related. I think one of the taxpayers mentioned offers in compromise. We do have authority under offers in compromise. We are

trying to look at ways of making that more available or at least

more—not so much more available, but to have the timeframe that
64

it takes to do these things be shorter and make it a more practical

option for more taxpayers.

Senator CAMPBELL. Well, that section of Senator Roth’s bill actually is a good section. I think it is going to be very popular and

widely supported. But it won’t come online until the 1999 filing

deadline, I guess. So I would just hope that you would try to implement that as fast as you can, should it become law, which I assume

it will be.

Mr. ROSSOTTI. Yes, sir.

IRS PENALTIES

Senator CAMPBELL. One of the biggest frustrations certainly that

taxpayers pay are the penalties. We have heard about that. The

penalties go up. Even if they pay off what they owe, the penalties

are so much more sometimes they can’t even catch up with it. And

the documentation to show that they are doing what the IRS has

told them to do is sometimes very conflicting. Could you maybe

elaborate on that a little bit about the penalties, how you are going

to address that?

Mr. ROSSOTTI. Well, again, interestingly enough, Mr. Chairman,

one of the things I did before my confirmation hearings was consult

with several of the former Commissioners, because they have interesting things to tell you. And to a person, every one of them said

that the place you ought to really work on is those penalties; those

are not right.

Unfortunately, they have also been studying them for years and

have not completely solved the problem because it gets to be complicated. But I think that in the bill, again, that will be before the

Senate soon, there are some particular things that I think are

going to ameliorate that. One in particular has to do with the failure-to-pay penalty, which occurs when someone has an installment

agreement. It would reduce the amount of penalties that would be

related to that situation, which is one of the most common ones

that causes this buildup of problems that occurs. And right now

that is a penalty in a statute, so it is not really up to the IRS to

handle that in most cases.

But I think with the new bill, it would deal with that one particular case that is probably for individual taxpayers one of the

most onerous and probably the most unfair.

Senator CAMPBELL. One of the most famous cases was that of

former boxing champion Joe Louis in the 1950’s. He got so far behind in his tax—perhaps you remember that—that he couldn’t

begin to even pay the penalties, and finally, in fact, Congress

passed a special relief bill because he was just getting further and

further in debt. But it is unlikely that Congress would pass a relief

bill for every single person where the penalties have kind of overburdened them. So we need to do that somewhere in the agency;

we need to help that.

Also, according to the information provided by Ms. Powers, she

received notification of a tax obligation 5 years after she filed that

showed a $13,000 tax balance owed, and in that 5 years it became

$35,000. She didn’t even know the original amount was owed. How

could something like that happen?
65

Mr. ROSSOTTI. Mr. Chairman, I just don’t know. I really

don’t——

Senator CAMPBELL. I know you weren’t there, and I am certainly

not blaming you for it, because——

Mr. ROSSOTTI. I know. There are these situations. I really don’t

know. I mean, we will look into that situation.

Senator CAMPBELL. Well, I would hope you would take some

steps that people are notified before the interest starts accumulating, because that is just almost unimaginable how it could be 5

years later and get this terrific bill that they had no idea was coming.

Mr. ROSSOTTI. As a matter of fact, in general, that is one of the

biggest systematic problems, not necessarily 5 years, but as a general rule, one of the things I have learned that is a very systematic

problem at the IRS—and this has much to do with the computer

systems as well as other things—is that we are much too slow,

much too late, in getting to things such as——

Senator CAMPBELL. Well, one of the sections of Senator Roth’s

bill, in fact, requires the IRS to notify within 1 year, and I would

think that you would support that. But I obviously know, too, that

part of this, when you are dealing with 200 million taxpayers, you

have got to have the kind of technology that allows you to get

ahead of the curve.

Mr. ROSSOTTI. Eventually, we should be much faster in all these

things, but in this area, I think the technology is a major constraint, unfortunately, right now.

Senator CAMPBELL. Ms. Sanders, as I understand it, lost her

home in this tug of war with the IRS. From her testimony, it appears that the IRS took steps to seize her home even though her

ex-husband’s wages had been levied to pay the capital gains tax.

If his wages had already been levied to pay the tax, what would

the need be to seize her home?

Mr. ROSSOTTI. Mr. Chairman, I don’t—I can’t——

Senator CAMPBELL. I don’t mean to put you on the spot.

Mr. ROSSOTTI. We are going to look into it. As I told you, we are

going to look into all those cases and try to find out more about

what happened.

CHANGING OF SEIZURE NUMBERS

Senator CAMPBELL. Well, then, let me ask you because I know

you have only been on board one-half of a year or so, and I know

these may be a little bit unfair to ask you. But you might know

this: Does the IRS change everybody’s seizure number every October?

Mr. ROSSOTTI. Mr. Chairman, I don’t know, but we will find out.

Senator CAMPBELL. OK. You are not sure. Could you find that

out and submit it to the committee for the record, too?

Mr. ROSSOTTI. Yes.

Senator CAMPBELL. It might be something we want to offer as an

amendment to Senator Roth’s bill.

Mr. ROSSOTTI. Yes; we will find that out.

[The information follows:]

The serial numbers initially assigned to a seizure do not change with each new

fiscal year.
66

Senator CAMPBELL. What is the policy with regard to changing

seizure numbers? Is there any kind of a policy at all in place?

Mr. ROSSOTTI. I honestly don’t know, Mr. Chairman. We will find

that out and get back to you.

[The information follows:]

After a seizure is made, the revenue officer obtains a serial number and annotates

that number onto the seizure documents. The serial number is assigned by an automated system for the purpose of establishing an accounting control of seized property, tracking the age of the seizure, totaling expenses of the seizure, identifying the

disposition of the assets, and closing out the seizure file. Seizure serial numbers initially assigned to the case file continue to be the same number until there is a final

disposition of that seizure.

CREDIT CARD PAYMENTS

Senator CAMPBELL. Does the IRS make payments by credit card?

I heard that, too.

Mr. ROSSOTTI. That is another one that I don’t know. I mean, I

suppose it is possible because I think there are some minor purchases that can be made by credit card, but I don’t know. We will

find that out for you.

[The information follows:]

The IRS purchases goods and services with the government credit card. The credit

card is used by the IRS as a streamlined purchasing method for making micro-purchases ($2,500 or less) and for ordering from existing government contracts, such

as those on General Services Administration (GSA) schedules and indefinite delivery/indefinite quantity contracts negotiated and administered by the IRS. In these

cases, the credit card serves as the vehicle for both procuring and paying for the

goods or services. We anticipate that, in the future, the government credit card will

be used by the IRS to make payments for deliveries, even in cases where a standard

contract document is the required purchasing method.

USE OF PRIVATE CONTRACTORS

Senator CAMPBELL. We heard from Mr. Tuchman and also Ms.

Martinez that they suggested basically that we use some outside

contractors to do some of the work of the IRS. What would you

think of that idea? Coming from the private industry yourself, I am

sure you know, as I do, that they are much more efficient than

Government agencies.

Mr. ROSSOTTI. There are certainly some things. Most important

is the new technology, which, of course, we are planning to do almost entirely with prime contractors. I think as you get into things

like specific taxpayers’ tax accounts, it gets to be a little bit more

difficult to manage.

Senator CAMPBELL. Dealing with Ms. Martinez’s comments, too,

have you ever heard of a hit list that she suggested or alluded to?

Mr. ROSSOTTI. I have not.

Senator CAMPBELL. But I am sure, being a Federal agency, there

is zero tolerance for any racial discrimination, I would guess.

Mr. ROSSOTTI. Yes, sir; there certainly is, in both the official policies and, I have to tell you, from my own personal commitment. I

have a very, very strong personal belief in the need to be inclusive

and to be nondiscriminatory and to take advantage of everybody’s

talents in the appropriate way. And I certainly would not tolerate

in any way that I would have any influence, any form of discrimination either internally or with taxpayers.
67

AUTOMATION AT IRS

Senator CAMPBELL. Ms. Martinez also believed that a majority of

tax auditor and revenue agent positions could be eliminated because, in her words, most audits could be conducted by correspondence using computer technology. And I know we are moving into

the time when computers talk to computers an awful lot, but——

Mr. ROSSOTTI. Well, actually, a rather large fraction of the audits

on individual taxpayers are already done through service centers

and correspondence and so forth, and the percentage of audits

being done by face-to-face auditors in the office is actually declining

and is relatively small compared to what it used to be. But I think

that there are always going to be some cases where there is just

a need to bring documentation in and sit down face to face.

Senator CAMPBELL. In fact, that does fly in the face a little bit

of some of the comments we have got, that, my gosh, they make

a telephone call, and they get a recording.

Mr. ROSSOTTI. Right.

Senator CAMPBELL. They don’t want a machine, talking to a machine. They want to talk to a live human being, as you can understand.

Mr. ROSSOTTI. I think that that is exactly what I was going to

say, that what we really need to do, really what the private sector

does, is to provide the appropriate form of service to each customer

based on what their particular needs are. So some people just as

a matter of personal preference like to deal in person, and others—

you know, I always like to talk about when my kids were in college.

I don’t think they knew what a stamp is. They just used the phone.

And so you have to accommodate different needs of different kinds

of people.

EDUCATING CHILDREN ON TAX ISSUES

Senator CAMPBELL. I might comment for your reading, if you

haven’t already, this recent Washington Post article, ‘‘A Tax-Time

Bonus for Your Children.’’ It was a little bit along the lines of what

Ms. Martinez said. It talked about how to educate youngsters in

dealing with tax problems, and if you haven’t read that, it might

be interesting reading for you.

Mr. ROSSOTTI. Thank you.

[The information follows:]

A TAX-TIME BONUS FOR YOUR CHILDREN

(By Suzanne Sutton, Special to the Washington Post, April 10, 1998)

‘‘Mom, I think it’s better if I itemize,’’ 10-year-old Jason says as he looks up from

his stack of tax forms.

‘‘Go for it,’’ says his mother, without looking up from hers.

‘‘But don’t forget, you can only take medical expenses over 7.5 percent of your adjusted gross,’’ his 12-year-old sister, Kim, calls from the kitchen. ‘‘Unless you have

a high mortgage deduction, it won’t make sense. By the way, can I use one of your

Schedule E’s? I forgot about the roof repair on one of my apartment houses.’’

Some strange sort of upscale family bonding? Or gruesome child labor? A CPA

head-start program? None of the above. It’s April!

Think about it. The hard part about tax-time isn’t the tax forms themselves. It’s

that the tax forms count, the numbers have to be true, our records precise, and at

the end, we have to part with our money. Remove all that and what do you have?

A devil of a good math problem for kids, tailor-made for almost any age. And free

at any post office or public library.
68

True, there are lots of big words, and lots of fine print, much of which we don’t

even understand. True, the rules are rigorous, the penalties ominous, and the tax

code oppressively complex, but no matter. We’re not filing these forms.

When you get down to it, tax forms use math no more complicated than simple

arithmetic: lots of addition, a bit of subtraction (never quite enough), and occasionally a little multiplication or division to offer some spice. If you choose your forms

well, you might even get a chance to do some percent problems, but that’s pretty

much it. So you see, even your little ones can have a go at this.

And they will want to. Children want to be grown up and there is nothing juvenile

about the 1040 or this year’s Schedule D. Bring home their very own tax forms, and

you’re likely to be greeted with a big smile and a ‘‘for me?!’’

After you get the forms home your next step is to set the framework to get him

started. This is a project that can suit a wide range of ages and abilities, so try to

remove any anxiety that you, as a wise and reflective adult, associate with the

forms. No one will care if your child’s advertising expenses exceed his gross profits,

if he takes depletion allowance when you don’t even know what it is, or if he chooses

to take the ‘‘audit-risky’’ home office deduction. Adjust suggestions to suit those of

your child. The steps are simple.

Explain the basics.—What may seem obvious to us, does not seem obvious to

them. Explain to your child the idea of income tax, that it’s a way for the country

to get the funds it needs for all it does, that the forms are filled out by anyone who

earns income and are used to figure out how much each person must pay.

Give him a persona.—Why be a struggling student, when can be a wealthy landlord? Why be a government executive, when he can be a staging artist? Three exwives could be interesting, with all that alimony, and farming might be fun. Get

extra forms.

Or, adopt a persona.—Calculate the tax forms for someone famous. Imagine a rock

star’s Schedule C: Travel, Meals and Entertainment. How about Ebenezer Scrooge’s

Itemized Deductions? Michael Jordan’s 1040, line 7. A Congressman from your home

state?

Guide him through the forms he’ll use.—To the uninitiated, the forms look like

a bunch of rows and columns and fine print. (Of course they also look that way to

the initiated.) You may want to highlight the lines that make sense to use. Or not.

It’s perfectly okay to have nonsensical entries. For young children, just filling in columns, adding, and subtracting will be enough. Older children may enjoy coming up

with complex scenarios.

Let him follow some steps.—Believe it or not, the tax forms really do tell us what

to do. They tell us which columns to add, what to subtract, and what percentages

to take. They refer us to other lines on other forms and then back again. This may

be tedious when me do it, but it is excellent practice for kids, not to mention potentially quite fun—much like a maze.

Calculators?—As someone who works every day with high school students who

are unable to do arithmetic without one, I encourage kids to try it without, until

I’m sure their skips are solid. For young students, or students struggling to learn

the basics, this can be a great ‘‘by hand’’ exercise. But calculators can be useful for

complex situations, ‘‘what if?’’ questions, and certainly for speed. You can do it both

ways. This is fun, remember?

Show the connections.—All roads lead back to the 1040. Help them see how all

the supporting forms lead back here, and how to compute the final tally using the

table in the IRS booklet.

Don’t forget to sign.—You’d be surprised how exciting that can be for kids, to sign

their own tax form. They even can write a fictitious check if tax is owed. They’ll

derive far more pleasure from the act than we do, to be sure.

Ignore the deadline!—If you’re too frantic filing your own forms before the 15th,

don’t worry. Save your extra forms or collect some of the surplus and give them to

your children after April 15. No penalties here.

BURDEN OF PROOF

Senator CAMPBELL. You know, most people, I think most constituents—and me, too, to a certain degree—believe that the IRS

assumes you are guilty right from the get-go and it is up to you

to prove you are not. In other words, the burden of proof is on the

taxpayer, which, you know, in most other areas of our society you

are innocent until proven guilty. And we hear this all the time, and

this is the law, this is our basic fundamental right as Americans,
69

we are innocent until proven guilty. But with the IRS, you are

guilty until proven innocent.

I understand that because, believe me, as an elected official here,

guilty until proven innocent, too, of darn near everything, so I understand the process.

But would you comment on that? I know you have been trying

to make some fundamental change in that attitude.

Mr. ROSSOTTI. Yes; well, I think when people say that, my interpretation is there are sort of two levels of meaning there. One level

is sort of in the technical legal sense of, you know, what is the burden of proof and so forth, and there are some changes that will be

in the bill coming up that will adjust that for taxpayers that go to

court. And I think certainly my view is that it is appropriate that,

if everything is equal, the taxpayer ought to get the benefit of the

doubt.

But I think actually, in my discussions, that many taxpayers, not

so much the tax lawyers but the broader group of taxpayers, sort

of look at it in—they are not so much focusing on the technical

legal interpretation of what happens when you go to tax court and

how did the judge make a decision. I think they are really looking

at it more as an attitude and what is the point of view of the IRS.

I mean, is the IRS basically taking the point of view that you are

wrong until you can prove me right as opposed to the technical

side. And I think on that, you know, that is a broader kind of—

that is really the shift I said. That is really the shift that we need

to make, a basic shift. We need to look at ourselves more as problem solvers with taxpayers and take the point of view, OK, this

taxpayer has a problem; even if they do owe more tax, let’s try to

figure out through offers in compromise or installment agreements

or some way to get this taxpayer current, in compliance, and then

move on from there so that they can get on with their life and we

can get on to the next thing.

I think that is a different point of view perhaps than—not perhaps, it is a different point of view than has been the focus in the

past.

You know, I really want to say that I don’t think that we can

really criticize the IRS employees for that at all, because I think

that really my perception is that everybody that was involved—and

probably this would have to include the Congress as well as the

various administrations on both sides—took the point of view that,

you know, as long as the money was flowing in and things were

running right, you know, that was the most important thing. And

I have certainly heard it from many people that are former IRS

employees and former executives who are not even there anymore,

who said, look, the way that you would get in trouble in the IRS—

and it was from the management at the top—is if you, quote, gave

away the Government’s money and didn’t collect every cent in

every circumstance. You know, that was the way you would get in

trouble. You would never get any benefit for trying to really solve

a problem for a taxpayer, particularly.

That is really an obsolete point of view, and I think it needs to

be changed, and I think it is going to certainly require the continued support of the Congress to make that happen.

Senator CAMPBELL. Well, the public momentum is there now.
70

Mr. ROSSOTTI. Yes.

Senator CAMPBELL. I have cosponsored I think every Taxpayer

Bill of Rights since I have been there 10 years, including the first

one 10 years ago that put restrictions on IRS employees getting bonuses for money collected. It put the burden of proof on the IRS

so they would have to prove you wrong rather than you prove yourself innocent. I still remember that bill 10 years ago. It would have

required the IRS to pay interest if it was their mistake, just like

the individual has to pay interest if it is their mistake. We never

could get that passed, but just at that time the support for it in

the administration, the support for it among some of our colleagues, and the support for it by the public just did not have the

momentum it does now, and I think that the hearings they have

done on the House side recently, hearings that you are aware of,

and the support from this administration to make some changes,

and certainly the momentum has developed at the grassroots level

is going to put some of those things in place, or at least peripherally, that we have been talking about for years.

Mr. ROSSOTTI. Yes, sir.

Senator CAMPBELL. Let’s see. I think that perhaps—I had a number of other questions, but in the interest of time, I think I will go

ahead and ask you to submit the answers to those in writing, if you

would.

Mr. ROSSOTTI. Sure.

SUBMITTED QUESTIONS

Senator CAMPBELL. I certainly appreciate you being here. I know

you have a busy schedule. You are going to a lot of places, but

thank you very much. I have about five or six more questions that

I think are important for this committee to know, and that will

give you more lead time than you had today, by the way. I would

hope that you would stay here at least for our last panelist, who

is Mr. Robert Tobias, with the National Treasury Employees

Union, if you have the time.

Mr. ROSSOTTI. I will.

Senator CAMPBELL. And thank you again for being here, Mr.

Commissioner.

[The following questions were not asked at the hearing, but were

submitted to the agency for response subsequent to the hearing:]

QUESTIONS SUBMITTED BY SENATOR CAMPBELL

DENVER, COLORADO FIELD HEARING

Question. There appears to be some conflicting information about seizure numbers. Does the IRS change seizure numbers each October at the beginning of a new

fiscal year?

Answer. No, the serial numbers initially assigned to a seizure do not change with

each new fiscal year.

Question. Exactly what is the IRS policy with regard to changing seizure numbers

during such proceedings?

Answer. After a seizure is made, the revenue officer obtains a serial number and

annotates that number onto the seizure documents. The serial number is assigned

by an automated system for the purpose of establishing an accounting control of

seized property, tracking the age of the seizure, totaling expenses of the seizure,

identifying the disposition of the assets, and closing out the seizure file. Seizure serial numbers initially assigned to the case file continue to be the same number until

there is a final disposition of that seizure.
71

Question. Just a curiosity question—Does the IRS make payments by credit card?

Answer. The IRS purchases goods and services with the government credit card.

The credit card is used by the IRS as a streamlined purchasing method for making

micro-purchases ($2,500 or less) and for ordering from existing government contracts, such as those on General Services Administration (GSA) schedules and indefinite delivery/indefinite quantity contracts negotiated and administered by the

IRS. In these cases, the credit card serves as the vehicle for both procuring and paying for the goods or services. We anticipate that, in the future, the government credit card will be used by the IRS to make payments for deliveries, even in cases where

a standard contract document is the required purchasing method.

Question. Dennis Marty outlined some of the problems he had with confusion over

unemployment benefits and mortgage interest payments. Generally speaking, if a

bank made a mistake on a 1098 mortgage interest form, who is held responsible—

the bank or the taxpayer?

Answer. The filer of an information return is subject to penalties under I.R.C. Sections 6721–6722 for providing incorrect information on an information return filed

with the Service and for any incorrect information on the payee statement provided

to the taxpayer. The penalty is $50 per information return up to a limit of $250,000,

and $50 per payee statement up to a limit of $100,000. If the filer of the incorrect

information return and payee statement catches the error and files a corrected information return and sends a corrected payee statement, the taxpayer is responsible

for filing an amended tax return and paying any additional tax owed. In normal circumstances, the taxpayer would not be liable for penalties in such cases.

Question. Are the rules of evidence that are applicable to the IRS different from

those that apply to other federal agencies?

Answer. Rules of evidence are set by formal rules of the various courts and do

not differ between parties (whether the government or not) or between agencies including the Internal Revenue Service. In federal courts, the ‘‘Federal Rules of Evidence’’ are used. By statute, I.R.C. section 7453, the Tax Court also uses the same

rules of evidence. An exception exists for cases where the taxpayer elects to use the

small case procedures of the Tax Court. I.R.C. section 7463. In such cases, which

are informal proceedings, any evidence deemed to have value can be considered

without regard to the formal rules of evidence. Tax Court Rule 177(b). This rule permits taxpayers to present their own cases, usually unassisted by representatives

who would be versed in the evidentiary rules.

[ADDITIONAL NOTE.—Although this question was framed in terms of rules of evidence, it is possible that it meant to refer to burden of proof. A burden of proof is

not strictly a rule of evidence but rather determines how issues are to be decided

based upon the evidence produced. Burdens of proof are set by issue specific or generic statutes, formal rules of court, and discretionary judgments of courts based

upon common law principles. When made by statute, they are usually made with

reference to the legal issues involved and the social and legal policies inherent in

those issues, so no real comparison can be made between agencies which deal with

different laws and issues.]

Question. What are the IRS guidelines for expanding an audit? Can it be done

simply because the auditor wants to do so?

Answer. In office examination, group manager approval is required to expand the

examination beyond the issues that were pre-classified. In field examination, expanding the issues is primarily a revenue agent decision that would require group

manager approval in limited situations.

In all cases where an examiner requests another return (prior year, subsequent

year or related), group manager approval is necessary.

The examiner (revenue agent or tax auditor) is required to use professional judgment in determining scope and depth of the examination. Some preliminary issues

may be pre-identified on the return; however, it is the responsibility of the examiner

to expand or limit the examination based on further review and analysis of the return, taxpayer records and statements and any other available related information.

An examiner may decide to expand the examination to include additional issues,

prior and/or subsequent year returns or related returns. Related returns are any

other return that have a direct relationship to the return under examination, such

as financial transactions that directly affect both returns.

Question. Both Amy Powers and Katherine Morehead are classic examples of

problems faced by an innocent spouse. What protections are currently available for

innocent spouses in these types of situations? What more can be done?

Answer. Under existing law, when a married couple files a joint tax return, each

spouse is liable for the full amount of income tax for that year. Under certain circumstances which are enumerated in Internal Revenue Code section 6013, one

spouse may qualify as an ‘‘innocent spouse’’ and be relieved of joint liability. In Feb-
72

ruary 1998, the IRS announced a number of administrative actions to ensure that

spouses who may qualify for such relief can apply for it. These actions were:

1. Issuance of special form—Form 8857, Request for Innocent Spouse Relief—

which was available on the Internet on March 31 whereby spouses can file a claim

for innocent spouse relief;

2. Centralization of innocent spouse claims (Forms 8857) in one service center;

3. Training to ensure the proper recognition and routing procedures for the mail

opening operation in all ten service centers to review and recognize cases for appropriate routing;

4. Establishment of procedures to ensure that taxpayers calling the toll-free telephone service with questions about innocent spouse will be directed to a specialist

trained in the innocent spouse provisions of the tax law;

5. Initiation of a program of focused outreach on both the national and local levels

to community organizations that serve abused or battered spouses to identify those

who might qualify for relief under the innocent spouse provisions;

6. Mandatory discussions with taxpayers of innocent spouse provisions at the conclusion of the audit, where such provisions could be applicable.

The current House Bill and Senate Bill on Restructuring the IRS contain provisions on innocent spouse relief which will result in more spouses qualifying for such

relief than under the existing law.

Question. As you know, the Senate Finance Committee recently approved an IRS

reform package which will soon be considered by the Senate. One of the provisions

of Senator Roth’s bill would change the innocent spouse relief requirements to allow

them to pay taxes on their own incomes only. That provision would become effective

in time for the 1999 filing season. That seems a long time to wait for relief. Can’t

this change be implemented any faster?

Answer. As passed by the Senate, this provision currently is effective for tax liabilities arising after the date of enactment and any liability arising on or before

such date, but remaining unpaid as of such date. I took a careful look at the provisions in the Senate Restructuring bill in light of our century date change and 1999

filing season efforts and requested later effective dates for some provisions. The innocent spouse provision is very complex and cannot effectively be administered on

a manual basis; an automated system must be developed and implemented to reduce the likelihood of error. In the near term, the IRS must manage a large number

of complex tasks, each of which must be completed on time to avoid failure of the

tax administration system. Thus, even if these provisions are feasible individually,

the cumulative impact of a group of proposals can seriously imperil our ability to

successfully conduct the 1999 filing season as well as implement our century date

change program.

Question. According to the information provided by Ms. Powers, she received noti- fication of a tax obligation five years after she filed which showed that a $13,000

tax balance owed had miraculously become almost $35,000. And, she didn’t even

know that the original amount was owed. How does this happen? What steps, if any,

do you plan to take to make sure that taxpayers are notified of a tax obligation BEFORE any interest and/or penalties begin to accrue?

Answer. The IRS sends notices, including notice and demand for payment, to the

last known address of the taxpayer. In the case of divorced or separated spouses,

one spouse may receive these notices and may not inform the other spouse. Under

existing law, many penalties and interest begin to accrue on the tax obligation from

the due date of the tax return. Penalties and interest can only be abated under certain circumstances provided by law and failure to receive notification of a tax obligation is not one of these circumstances. The Senate Restructuring Bill expands relief

for innocent spouses and will provide additional relief for divorced or separated taxpayers.

Question. Dr. Alvin Stjernholm was on the receiving end of tax audits for 16 consecutive years. Is that some sort of a record, or is that common? What is the statute

of limitations on tax liability?

Answer. Records are not maintained on the frequency of audits of an individual

taxpayer. However, 16 consecutive audits would not be common.

There is no limitation on the frequency with which a taxpayer may be selected

for examination. However, if the examination results in a no change or minimal

changes to the tax liability, the taxpayer is entitled to relief from any examination

involving the same issues for the two years following the year of the no change or

minimal change.

IRC 6501(a) and 6501(b)(1) provide that the statute of limitations for assessment

is generally three years after the return is filed or due (without regard to extensions), whichever is later. The IRC provides for several exceptions to the general

rule—fraud and substantial understatement of income are two examples. A tax-
73

payer may be asked to extend the statute of limitations when a taxpayer is under

examination and the statute of limitations may expire before the examination can

be completed.

Question. What is the process for auctioning a taxpayer’s assets to settle a tax

debt? How often are items auctioned off for significantly less than what they are

worth? Is the debt actually settled after the auction?

Answer. The process of auctioning a taxpayer’s assets begins with seizing the

asset and establishing a fair market value for the property. Some methods used to

establish the fair market value are comparable sales, and in the case of specialized

property, appraisal of the asset, which the Service may provide. A minimum bid

price, as required the Internal Revenue Code Section 6335, is established. The purpose of the minimum bid is to conserve the taxpayer’s equity by setting a price that

is generally above eighty percent (80 percent) of the forced sale value of the taxpayer’s interest in the asset, less encumbrances having priority over the Federal

Tax Lien. Internal Revenue Service Policy Statement P–5–35 limits establishing the

minimum bid above the amount of tax, additions to the tax, and the expenses of

the sale; however, it does not limit the amount prospective buyers can bid. The taxpayer is provided with documentation that informs him or her of the minimum bid

amount, an explanation of how the bid was determined, and instructions for the taxpayer on how to appeal the Service’s determination of value and computation of the

minimum bid.

The property may be offered for sale at a public auction sale or under sealed bid.

A public auction may be conducted by a revenue officer or by a professional auctioneer. The objective of the sale process is to maximize the amount realized at the

sale that can be applied to the taxpayer’s account. Marketing and advertising the

assets, or using an auctioneer are strategies used to maximize bids. The assets are

sold as-is, where-is, and without recourse to the government.

We have no data at the National level to show how often assets were sold for significantly less than their value or to identify if the tax debt was settled after the

auction. However, many taxpayers do not have sufficient equity in assets to settle

their entire tax debt. For example, in fiscal year 1997, 27.5 percent of the seized

cases were sold netting $159,960,760. The average balance due per seized case was

$179,546 and the average net yield per seizure was $16,429. Indeed, the seizure enforcement action also had impact on the 18.9 percent of the seizures that were redeemed and the 49.1 percent of the seizures that were released for various reasons

(the taxpayer entered into an installment agreement or the government received

their interest in the property). Interestingly, of the seizures released, only 3 percent

did not meet the minimum bid and therefore were also released. The remaining 4.5

percent of the seizures were cash seizures, not requiring an auction.

Question. The new IRS you envision is supposed to be more customer friendly. As

you heard, Robert Lesher tried to get help from a Problem Resolution Officer and

instead found himself in a bureaucratic maze of unavailable forms and unknown

time frames. What changes do you envision to the PRO system to address these

types of problems?

Answer. While I am not able to comment on the specific circumstances surrounding Mr. Lesher’s case. I can tell you that the local Taxpayer Advocate took action

to discover why there was a breakdown in securing a Form 911. He learned that

the forms distribution centers had been instructed to destroy all existing copies of

Form 911, due to a change in the form. As a result, several taxpayers and practitioners were left with no source of Form 911. This should not have happened; however, due to the efforts of the Taxpayer Advocate, procedures were developed to ensure that Forms 911 are not destroyed until replacement copies are available.

Action was also taken to instruct toll free and walk-in employees that they have

a responsibility to obtain information from taxpayers when they ask for Form 911

and that they (IRS employees) are to take action to relieve the hardship or write

up Form 911 and route it directly to the Taxpayer Advocate’s office. In addition, our

employees are trained to tell taxpayers that they can submit an Application for Taxpayer Assistance Order without the Form 911 if necessary.

This issue raised an important point. We will never eliminate all problems, but

the point is to identify weaknesses in our way of doing business with taxpayers, and

take corrective actions so that taxpayers are not disadvantaged.

Question. What are the IRS rules or guidelines for dealing with a taxpayer whose

family is experiencing severe health problems?

Answer. While there are no written rules or guidelines for dealing with a taxpayer

whose family is experiencing severe health problems, the IRS does make every effort

to provide taxpayers, to the extent the law allows, flexibility in interacting with the

IRS.
74

Question. Mr. Rossotti, you may have read an April 7 article in the Boston Globe

entitled ‘‘IRS won’t take Acton man’s canceled check for answer’’. In a nutshell, the

taxpayer paid his 1996 income tax by check, which was deposited by the IRS, and

the canceled check was returned to the taxpayer by his bank. Well, somehow the

money got lost and now the IRS is demanding that the taxpayer pay again. This

seems pretty unfair to me. Are you familiar with this article? Can you justify the

IRS actions?

Answer. Yes, I am aware of this story reported in the media. While I cannot address the specific facts of this individual situation because of privacy restrictions,

I can give you specifics on the procedures the IRS has in place for handling cases

when a taxpayer has not been credited for a payment. When a taxpayer must be

contacted to resolve the problem, the IRS asks for a front and back copy of the canceled check. The back of the check provides coding information that allows for the

funds to be traced from bank to bank. The canceled check is proof of payment and

is honored by the IRS. If the taxpayer in this instance was told otherwise, that was

incorrect and we have apologized to him for this.

Question. Commissioner Rossotti, you have stated that the IRS has begun addressing problem areas that surfaced during the Senate hearings last fall about IRS

abuse of taxpayers. When will taxpayers, on the outside looking in, be able to see

a difference in the way they are treated by the IRS?

Answer. As I have previously stated, I believe that the IRS, over time, can greatly

improve its service to the public. In the near term, we are taking action to move

forward toward these goals. Since the September hearings before the Senate Finance Committee, the IRS created a number of initiatives to improve taxpayer service and help taxpayers comply with the law. Last November we began hosting

monthly Problem Solving Days across the country. Taxpayers have consistently

given IRS high marks for the service they received at Problem Solving Day. We extended the hours of telephone service this filing season to 16 hours a day 6 days

a week. As part of our Saturday Service Days, we also hosted Problem Prevention

Days and sponsored an Earned Income Tax Credit Awareness Day to help taxpayers

determine if they are eligible for the credit and then show them the correct way to

fill out the tax return. Even though these are small first steps, the feedback that

we are receiving is that taxpayers are seeing a difference in the service that they

receive from the IRS. Testimony provided by practitioner representatives before the

House Ways and Means Oversight Subcommittee praised IRS’ efforts to improve

customer service performance during this year’s filing season. One practitioner, in

his testimony, stated that others in the field have reported that the IRS personnel

they have been dealing with have mostly been cooperative in their efforts to iron

out taxpayer problems and assist citizens in putting together installment agreements or offers in compromise in order to resolve their cases.

Question. Is the IRS conducting a thorough review of IRS employees who have

had any direct interaction with taxpayers of their treatment of taxpayers?

Answer. After the IRS oversight hearings conducted by the Senate Finance Committee in September 1997, the IRS Inspection Service initiated internal audits on

the use of enforcement statistics, collection enforcement actions, and controls in the

examination process. Inspection also initiated some investigations of alleged misconduct by IRS employees. Completed investigations have been referred to a Treasury review board for administrative action. Internal audits and investigations are

continuing. In addition, the Treasury Inspector General has conducted investigations on this subject.

In more general terms, in an effort to make sure we have the proper mechanism

in place to review complaints about employees, IRS will be convening a Disciplinary

Action Review Task Force to review our complaint intake systems (e.g., Automated

Labor and Employee Relations Tracking System (ALERTS), the Equal Employment

Opportunity office, the Chief Inspector, and correspondence to the Commissioner

(Executive Control Management System—ECMS). With the assistance of an outside

expert, the task force will assess the number and type of complaints/disciplinary actions; determine if we should integrate the intake systems (the same complaint

might come in through several channels); and determine the appropriate level of

agency oversight.

Question. What type of training are employees with direct interaction with taxpayers currently receiving? Are you planning any changes to that training?

Answer. There is a wide range of training in development and currently being delivered. For example, front-line employees in Compliance (Examination and Collection) are receiving training on interviewing techniques, alternative dispute resolution, conflict management, and customer service as well as technical training on the

Taxpayer Relief Act of 1997. In addition, we are developing training to move the

organization to deliver World Class Customer Service. This training will be deliv-
75

ered to all employees to direct our organizational focus to the delivery of quality customer service which meets the needs of the American taxpayer. We are in the process of asking members of the Commissioner’s Advisory Group to assist in the review

of training materials, offer comments and recommend changes in the way the material is presented.

Question. I believe many would agree that IRS employees’ attitudes must change.

Will training help to make that change? The point I’m making is that given the reputation of the IRS with the taxpayers, I think the front line is the first place for

you to start making changes.

Answer. Clearly, training is key to improving the attitudes and performance of

IRS employees. The front line employees who meet and deal with taxpayers must

be the immediate recipients of training if we are to influence our reputation with

the American taxpayer. To this end, we have developed competency assessment instruments to measure customer service attitudes and technical proficiency. These

instruments have provided information upon which we have developed and piloted

training. This training has resulted in greater customer service and technical performance on the part of those employees who have participated in the training. We

will extend this training to all employees through the World Class Customer Service

initiatives.

Question. Mr. Rossotti, you heard the testimony of Ken Tuckman and what he believes his company can do to assist the IRS. His ideas appear to dovetail nicely with

your own ideas of providing better customer service. Do you think there is a place

for such a contract support organization within the IRS?

Answer. To further our goal to provide world class customer service, it is my intention to tap into corporate expertise when appropriate. Currently, we do have several initiatives underway that are customer focused and conceptually similar to Mr.

Tuckman’s proposals. These initiatives are designed to foster improvement without

relying on new technology. Some of the current initiatives are: improvement of

training strategies; enhancement of reference materials and other tools available to

Customer Service Representatives; reassessment of work processes, work flow, required skills, etc.; and, improved hiring and recruiting practices.

Question. The most obvious use for such a first-line customer service operation is

to answer routine non-tax questions—such as where to get forms or what form goes

with what kind of income. Do you happen to know what percentage of calls to the

IRS during peak filing season fall into that category?

Answer. During the period of January 1, 1998, to April 18, 1998, approximately

6 percent of the calls handled by assistors (on the tax law and tax account lines)

were requests for information regarding forms i.e., forms ordering and forms help.

An additional five million calls requesting forms were placed to the 1–800–TAX–

FORM line during this period.

(77)

NONDEPARTMENTAL WITNESS

STATEMENT OF ROBERT M. TOBIAS, PRESIDENT, NATIONAL TREASURY EMPLOYEES UNION

INTRODUCTION OF WITNESS

Senator CAMPBELL. With that, we will just go right into Mr.

Tobias’ testimony, and thank you also for being here.

You can just go ahead and proceed, Mr. Tobias.

Mr. TOBIAS. Good morning, Mr. Chairman. Thank you very much

for providing NTEU with an opportunity to testify today.

I want to start by saying that the vast majority of Internal Revenue Service employees are dedicated, committed, and extremely

competent employees. I say this because I believe it and I say it

because the data that has recently been collected supports that

conclusion.

Over the past 4 fiscal years, fiscal years 1995 to 1998, the IRS

collected 24 percent more revenue, handled 8 percent more returns,

with 13 percent fewer resources, or $1 billion less in constant dollars. In fiscal year 1995, IRS processed 193 million returns, and in

fiscal year 1998, we will process 208.4 million returns.

In addition, the number of calls answered has increased from

101.2 million in——

Senator CAMPBELL. Could I interrupt you just a moment? I noticed when Mr. Rossotti sat down, we suddenly had an influx of

people running up to sit right beside him and behind him. I would

tell folks in the audience that he can’t solve your problems here in

10 minutes that you may have with the IRS, and I would hope that

you would let him hear the testimony, because he is going to have

to respond to a lot of this testimony, and not encumber him with

your personal problems. We have a process by which we deal with

that, and we will certainly help you through our Senate office, too.

But he needs to listen to this testimony.

Go ahead, Mr. Tobias.

Mr. TOBIAS. In addition, the number of calls answered has increased from 101.2 million in 1995 to 120.6 million in 1998. And

the level of access or the opportunity to actually reach the IRS has

increased from 30 percent, an abysmally low level, in 1996 to, as

Commissioner Rossotti testified, we expect 75 percent in 1998. And

the accuracy rate for those calls is 96 percent.

More work has been done at considerably less cost. In 1995, it

cost 59 cents to collect $100 of revenue, and in 1998, it will be 47

cents. No other tax collection agency in the world is even close.

Most democracies spend between $1.25 and $1.70.

More work, less cost, and 11,000 fewer employees since 1995—

IRS employees have performed well.
78

The good performance is reflected in the evaluations taxpayers

who have an actual transaction with the IRS provide. The results,

I believe, are very good.

Commissioner Rossotti testified about the problem-solving days

that the IRS recently initiated, starting on November 15. The taxpayers have evaluated employees overall at a 6.45 level on a 7-

point scale.

The Examination Division has now begun customer satisfaction

surveys. The initial results show that 5.9 percent rate audits as unfair and 76.3 percent rate the IRS as fair—the highest rating; and

3.6 percent rate the employees disrespectful, and 81.5 percent respectful—the highest rating. And there was a Harris poll that was

released today which showed that 6 percent of the public believe

they have been treated unfairly by IRS personnel, whereas 76 percent say they were treated fairly by the IRS. Five percent of the

public say the IRS has been discourteous and, in contrast, 83 percent say the IRS has been courteous.

We certainly need more customer satisfaction data, but what we

have collected is very favorable.

The solutions, I believe, to the problems you heard today lay in

a reorganized IRS consistent with what Commissioner Rossotti recently testified, an IRS reorganized along business lines.

As a member of the committee to restructure the IRS, I supported this concept, and I have supported the Commissioner’s approach. It will focus accountability and allow the IRS to fulfill its

responsibilities to those taxpayers who are compliant and those

who seek to be compliant. The solution to the problem also, I believe, is to appropriate the full amount requested by the President.

The IRS needs the requested funds to implement the vast

changes in the tax law enacted in 1997. It needs the funds to implement the Y2K effort. It needs the funds to improve business

technologies, laptops for revenue agents, computers for revenue officers. It needs the money to improve the level of access from the

75 percent this year to the planned 86 percent in 1999. And it

needs the money to provide for needed training.

Cutting the IRS budget, as some have proposed, won’t solve the

IRS problems. It will make the IRS worse. I certainly urge you and

the committee to appropriate the full requested amount. I think the

IRS is on the right track, and I am hopeful that with this appropriation it won’t be derailed.

Thank you very much, Mr. Chairman.

PREPARED STATEMENT

Senator CAMPBELL. Thank you, Mr. Tobias. We have your complete statement and it will be made part of the record.

[The statement follows:]

PREPARED STATEMENT OF ROBERT M. TOBIAS

Chairman Campbell, I am very pleased to be here today to discuss the views of

the National Treasury Employees Union (NTEU) on the needs and operations of the

Internal Revenue Service. I have served as President of the NTEU since 1983 and

have been associated with NTEU since 1968. NTEU represents approximately

150,000 federal employees, roughly 95,000 of whom work for the IRS.

The IRS has had many problems in recent years, including serious difficulties in

acquiring and utilizing technology needed to allow employees to perform their jobs
79

at levels that taxpayers rightly expect. Funding and training cutbacks have also created problems. Between 1992 and 1998 the agency has cut nearly 15,000 employees,

leaving many functions, such as customer service, understaffed and woefully undertrained.

The IRS Restructuring Commission on which I served looked carefully into the

many problems facing the IRS and the taxpayers who must interact with it. The

Commission’s thoughtful analysis of the problems and solutions provide a solid

guide to getting the IRS back on track. But, the Commission’s recommendations

might have languished on a shelf without the impetus for action created by hearings

held by the Senate Finance Committee last September. Those hearings were very

painful for the IRS employees I represent.

They were painful because the vast majority of IRS employees try very hard, despite antiquated computers, sometimes misguided managers and public disdain to

do the best job possible for the taxpayers, yet the message of the hearings that filtered through the media all across the country was that most IRS employees were

incompetent at best and evil at worst. Senator Roth repeatedly stated that most IRS

employees do a good job and that Congress’ interest is in correcting systemic problems and in protecting employees from management abuses.

The hearings were painful for IRS employees for other reasons as well. They were

painful because many of the problems that were highlighted were problems that IRS

employees knew could have been avoided. The most glaring of these problems, that

of overly aggressive tax collection efforts, could have been avoided if the Field Office

Performance Index, which has been suspended since the hearings, had never been

adopted. NTEU had strenuously opposed the use of this system that measured and

rated each IRS Field Office by the amount of collection revenue brought in. We

knew that even though individual employee quotas had been outlawed, this system

would have the same result by pushing district managers to push employees to emphasize collection statistics rather than fair treatment. And, in fact, those hearings

and subsequent IRS internal investigations have found a number of managers who

have done just that.

I believe that lack of training, outdated technology, low pay and the ‘‘stovepipe,’’

compartmentalized structure of the IRS contributed to the inability of taxpayers to

get their problems solved. I believe that Commissioner Rossotti’s proposals to

change the IRS structure to make it more responsive to taxpayers will make it easier for IRS employees to provide better customer service. I also believe that the institution of ‘‘problem solving days’’ has been helpful in providing IRS employees with

an additional means to help solve taxpayers’ problems and should serve as a model

for how all of the IRS’s departments should work together to solve taxpayers’ problems all the time. But much more needs to be done and the most important step

to addressing the problems raised in last September’s hearings is enactment of H.R.

2676, which passed the House by a vote of 426 to 4 in November of 1997.

One issue critical to success for IRS reform that is not directly addressed in H.R.

2676 is adequate funding. Employees cannot provide quality service to taxpayers

without adequate pay, training, technology and facilities. The federal employees who

serve at the Internal Revenue Service want to provide world-class service. But as

we have heard time and again, just like their private sector counterparts, federal

employees must have the tools to get the job done right. Budgetary driven personnel

restrictions often prevent the agency from hiring the employees they require to adequately handle the workload. Restrictions and promotions and limited advancement

opportunities lead to morale problems. The lack of funding for training creates situations where employees are thrust into situations they are unable to handle to the

level taxpayers expect and deserve. Congress has the ability to correct these problems and put the agency on a solid, long-term course with success. Not only success

from the standpoint of collecting taxes owed, but success from the view of taxpayers

who must deal with the agency. No one will ever enjoy paying their taxes, but, at

a minimum, they should come away from their dealings with the agency believing

they have been treated with respect and dignity. The IRS can and will be a worldclass organization with the proper tools and funding.

Right now, customer service representatives at the IRS earn on average around

$28,000 a year, with an absolute maximum salary in the highest cost city of the

country (San Francisco) of $36,027. The customer service representative is the person who is charged with answering every question that any taxpayer across the

country may have when they call the IRS for help. This is the person charged with

having intricate knowledge of the entire U.S. Tax Code, including the 9,000 pages

just added last year. A law school graduate working as a first year associate at a

tax law firm would laugh at that salary. Even customer service representatives at

other federal agencies, like the Social Security Administration, earn more money.
80

That must change. IRS must be able to attract, retain and promote individuals who

will provide world class customer service.

I would note that Senator Gramm of Texas stated at the Finance Committee hearing on January 28th that IRS employees needed to be paid more. I would like to

second that sentiment and emphasize that not only the top technology people need

to be paid more, but to ensure quality service to taxpayers, front line employees

need to be paid more as well.

Despite the monumental amount of knowledge required to perform the customer

service jobs well, little, and in some cases, no training is provided. I have heard of

many cases in which IRS employees who ordinarily perform other functions have

been told to answer taxpayer calls and man walk in sites with no training at all.

One IRS employee temporarily assigned to cover a taxpayer service window with no

training recently told me that she felt terrible having to tell a taxpayer that all she

could do was to take her information and ask someone else to get back to her. She

said she understood and sympathized with the taxpayer’s anger over not being able

to get an answer to her question, but that she was more afraid of giving the taxpayer the wrong answer. This also must change and I believe ensuring the availability of appropriate training can be addressed in the context of a new performance

management system as required by section 9302 of the H.R. 2676.

Mr. Chairman, the plain fact is that no one, not even the Congress, can have it

both ways. We cannot expect the IRS to eliminate its problems if we cut its budget.

That makes no sense. I hope this Congress will provide the funding necessary to

achieve the level of service taxpayers expect and deserve.

NTEU believes that the President’s budget proposal is the absolute minimum required to begin a reinvention of the IRS ‘‘around taxpayers needs.’’ However, there

are some in the Congress who are seeking to gut the IRS budget instead of providing the resources indispensable to that necessary restructuring. The Senate Budget

Committee’s recent action to cut the President’s request for the IRS by 6 percent—

some $500 million—makes no sense. It is the wrong cut, in the wrong place, and

at the wrong time.

Both the recently announced Gore-Rubin ‘‘Reinventing Service at the IRS’’ report

and the President’s budget are solid first steps in response to taxpayers’ concerns.

The Congress must not ignore them. As the new IRS Commissioner, Mr. Rossotti,

advised both the Senate and House Appropriations Subcommittees in early March:

‘‘The fiscal year 1999 budget we are requesting is absolutely essential to begin this

long-term transformation.’’ The total budget request for fiscal year 1999 is $8.196 billion and 100,829 FTE. The total budget request includes a net increase of $529 million and 1,232 FTE over

the fiscal year 1998 level. Of this increase, $176 million represents part of the cost

that would be needed to maintain the current level of operations, taking into account inflation and mandatory pay increases. The remaining increases represent

funding dedicated to improved near-term customer service ($103 million), near-term

and long-term technology investments ($227 million) and organizational modernization ($25 million).

I have spent a good amount of time with Commissioner Rossotti. I support his

reorganization proposals and have joined with him to urge all IRS employees to do

the same. Foremost among the funding initiatives proposed for fiscal year 1999,

NTEU believes that the Congress should consider the $103 million for near-term improvements in customer service as one of its highest priorities. In my role on the

IRS Commission, I advocated the position that the IRS needed to make customer

service its number one priority. I believe Commissioner Rossotti agrees with that

view.

Mr. Chairman, even though we agree that the IRS needs to do much more to improve its operations, IRS employees are performing exceedingly well in comparison

to any similar organization in the world. Over the past four fiscal years, fiscal year

1995 to fiscal year 1998, the IRS collected 24 percent more revenue, handled 8 percent more returns with 13 percent fewer resources, or more than $1 billion less, in

constant dollars. In fiscal year 1995, the IRS processed 193.3 million returns. In fiscal year 1998, it is expected to process 208.4 million returns. In the past year, the

total tax revenue collected rose by more than $70 billion while the agency processed

an additional 5.8 million returns. Revenues were $1.36 trillion in fiscal year 1996;

$1.5 trillion in fiscal year 1997; $1.58 trillion in fiscal year 1998, and projected revenues for fiscal year 1999 are $1.64 trillion. In addition, the accuracy rates for tax

law inquiries, accounts information and refunds have dramatically improved.

In fiscal year 1995, the cost to collect $100 of revenue was 59 cents. In fiscal year

1996, the cost was 53 cents and in fiscal year 1997, 48 cents. In fiscal year 1998,

the cost to collect $100 should drop to 47 cents. No tax collection agency anywhere

comes close, much less matches the IRS cost per dollar of revenue raised. Most de-
81

mocracies spend nearly three to four times that much, $1.25 to $1.70, to collect $100

in income tax revenue.

In 1997, the 102,000 IRS employees collected more than $1.5 billion, processed

215 million tax returns, issued almost 88 million refunds, assisted more than 110

million taxpayers, distributed more than one billion forms and publications, sent 70

million notices and letters to taxpayers, processed more than one billion information

documents, completed more than 1.5 million audits and assessed $10.4 billion on delinquent returns. In fiscal year 1998, the IRS will answer more than 120 million

telephone calls, provide walk-in service to nearly nine million taxpayers, and will

examine nearly 1.3 million individual returns.

Mr. Chairman I believe this data shows without a doubt that IRS employees have

been performing remarkably well. Despite inadequate resources and a host of poor

management practices that failed to prevent the well-publicized failings of some,

IRS employees are the best in the world at what they do and are consistently getting better. But you can only squeeze people so hard for so long. There’s a limit.

We cannot expect the IRS to continue to improve, especially in the area of customer

service, without investing the resources that Commissioner Rossotti, the Rubin-Gore

Task Force and the Restructuring Commission have recommended. NTEU strongly

urges that the Congress to provide these resources.

Mr. Chairman, thank you for this opportunity to present the views of the National

Treasury Employees Union at today’s hearing. I applaud you and other members

of the Subcommittee for taking a closer look at the operations and the needs of the

Internal Revenue Service. I would be pleased to answer any questions you may

have.

ACCOUNTABILITY FOR IRS BUDGET

Senator CAMPBELL. Our committee will be dealing with their

budget, as you know, and we have the last couple years been trying

to provide the additional revenue to bring them up to speed, particularly for the needed equipment for particularly the year 2000.

But in addition to that, you know, we have to have accountability.

And as you probably know, in the past there has been money appropriated that it has been very questionable about what it was

used for. I have heard a lot of different numbers, and I don’t want

to try and dig through my hearing notebook, but there was literally

millions and millions of dollars that apparently was misspent on

the wrong kinds of equipment, the wrong kinds of computers and

so on. So, you know, I am supportive of bringing it up to speed so

it can do a better job, but by the same token, I have to be accountable to my constituents about where we are spending their money.

And I think the agencies have to be equally accountable about how

they are using it.

I might say from your particular position, you are, I guess, a little like me in that you, in fact, become sort of an ambassador. You

are a representative of that agency, working for it, just as I am of

the U.S. Senate. And even though the statistics say most people in

any given area, let’s say policemen, for instance, do a terrific job,

you only have to have one really bad experience with a policeman—

or a Senator or perhaps an IRS official or an IRS agent—to really

sour you on the whole thing. And I think when people tell us about

how they lost their home, my gosh, literally had their family destroyed, boy, those are crucial, terrible things to hear.

So from that perspective, I think a lot of us kind of try and use

the zero tolerance theory. If there is one bad apple in the Senate,

it taints all of us. If there is one bad employee, even though you

have tens of thousands, it certainly taints the whole agency. And

one bad policeman taints a police department.

So I would hope that the NTEU is also aware of that and is continually trying to strive to, you know, upgrade their performance,
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do a better job with their customers or, as we call them, constituents.

Mr. TOBIAS. Well, I believe, Mr. Chairman, that every transaction that an IRS employee has is like opening night of a Broadway play; that is, that employee is indeed the face of the IRS, and

the IRS is judged ill or well based on that transaction. And I think

it is important that employees not only understand that intellectually, but that they be provided the technology, that they be provided the training, and they be provided the time—the time—in

order to provide the kind of service that I think employees want

to provide.

I believe the employees in the Internal Revenue Service want to

provide that service, and if they are provided the time, the technology, and the training, I think you will see many, many fewer of

the kind of taxpayer transactions that we have been hearing about

over the last year.

Senator CAMPBELL. Well, those of us in the Senate are dealing

with it. I think we are determined to make change, and I really

think that the Commissioner is also determined to make change.

And I would hope that the NTEU is also willing to participate in

that and to help effect changes that are going to make it better for

everyone, not only employees of the IRS and the Federal Government but the constituents and the average American taxpayer that

has to pay the bill.

Mr. TOBIAS. There is no question that NTEU is interested in participating in making the IRS more efficient, more effective, and,

most importantly, more responsive to the complaints of the taxpaying public.

Senator CAMPBELL. OK. I thank you.

I thank you for your appearance, and that is the last person who

will testify. And, Mr. Tobias, we may have some additional questions to send in, if you would submit your answers in writing.

CONCLUSION OF HEARING

And if there is anybody in the audience who would like to comment on this hearing, if you would submit in writing what you

would like us to study and to be included, if you think there are

some changes—these bills are working their way through Congress

now—we would appreciate you submitting those in about the next

7 days before our hearings are completed.

With that, thank you for your attendance, and that concludes the

hearing.

[Whereupon, at 11:58 a.m., Tuesday, April 14, the hearing was

concluded and the subcommittee was recessed, to reconvene subject

to the call of the Chair.]
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MATERIAL SUBMITTED SUBSEQUENT TO

CONCLUSION OF HEARING

[CLERK’S NOTE.—The following material was not presented at the

hearing, but was submitted to the subcommittee for inclusion in

the record subsequent to the hearing:]

PREPARED STATEMENT OF CHARLES PAT SMITH, STATE ADJUTANT, THE AMERICAN

LEGION, DEPARTMENT OF COLORADO

Thank you for the opportunity to appear before this committee to discuss the IRS

and The American Legion.

My name is Charles Pat Smith and I am the Executive Director for The American

Legion Department of Colorado. The American Legion is a veteran’s organization

founded in 1919 to assist those returning WWI veterans with their physical and

mental problems that they encountered while serving their country. We were founded also to assist the widows and orphans of those who did not return, to promote

Americanism and Patriotism in our country, to speak out on issues affecting the security of our country and to enhance the lives of the children of this country. After

almost 80 years our mission remains the same today. The American Legion has always enjoyed the status of a non-profit organization under IRS guidelines and we

have been provided a group exemption number. The beginning of our preamble to

our constitution states, and I quote, ‘‘We associate ourselves together for the following purposes: To uphold and defend the Constitution of the United States of America; to maintain law and order * * *.’’ The American Legion truly believes in these

precepts. A study of our history will show that we are law-abiding citizens. As an

organization we pay our taxes that we are required to pay. We follow the laws of

the country as set forth by the Congress of the United States. Where we disagree

with the laws we seek to change those laws in a peaceful orderly manner. We use

the system of government that we, as veterans, fought to preserve to make meaningful changes for all of our citizens. And that brings us to the subject before us

today, abuses by the IRS as they relate to the American Legion, and other non-profit organizations.

Early in the 1930’s the Congress of the United States passed a law that required

those individuals in our society who sought to enrich themselves through illegal

gambling activities to register with the IRS as a professional gambler and to pay

one-quarter of one percent (1⁄4 of 1 percent) of their gross ‘‘wagers.’’ Those professional gamblers were also required to pay an ‘‘occupational tax’’ of $50.00. The law

was designed to provide a method of prosecuting those ‘‘gangsters’’ of the time who

were preying on society since prosecutions and convictions of other types of crimes

were hard to come by at that time. The American Legion does not believe the intent

of Congress back then was to penalize non-profit organizations for conducting legal

charitable gaming activities in their communities. The American Legion does not believe that subsequent changes in the law by Congress and regulations and revenue

rulings issued by the IRS apply to our charitable bingo and pull tab operations.

I would like to quote the government’s position taken from a recent audit of an

American Legion post. Quote, ‘‘The fact that an organization is exempt from Federal

income tax under section 501 (a) of the Code does not determine whether the taxes

imposed by sections 4401 and 4411 are applicable. No provision in the Code exempts

a nonprofit organization, as such, from the wagering tax.’’ We would submit to you

that no exemption is present in the code because, again, the intent of Congress was

to ‘‘catch’’ illegal gambling activities. If, in fact, non-profit organizations are engaging in illegal activities where individuals in the organizations are preying on society

then apply the law to those individuals and prosecute them, not the organization.

The IRS has launched a selective attack on American Legion Posts in Colorado.

We currently have 88 American Legion Posts and Auxiliary Units conducting legal

charitable gambling activities under the state bingo and raffles law. The IRS agents

have initiated audits of 13 of those American Legion Post and/or units. The selection
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of the posts that they are auditing apparently was random and they are apparently

using these posts as their ‘‘test bed.’’ It appears that the audits are selective enforcement of the law and they are not conducting their audits consistently across this

state. The agents know they are dealing with volunteers and that intimidation is

easy. Several of our American Legion Posts have paid the occupational tax and are

paying the gross wager fee on a monthly basis. They did so because it was easier

to pay than to question whether the law applied to them.

Of the 13 posts currently under audit the finding of tax liability for those 13

amounts to under $40,000. The American Legion intends to challenge the IRS’s determination of liability through the internal IRS appeal process and to tax court,

if that becomes necessary. It is our understanding that for the IRS to litigate a case

before tax court it will cost the government about $50,000 per individual case. For

the 13 cases pending that would amount to $650,000 to collect just under $40,000.

How ridiculous. In addition to the cost to the government it will cost the American

Legion in legal fees, money better spent in the community.

The IRS believes we are liable for the tax because sometimes proceeds from our

charitable gaming activities are used to pay operational expenses for our post

homes. Their rational is that this is illegal because the payment of those expenses

constitutes ‘‘inurement to the benefit of private shareholders and individuals.’’

Again, how ridiculous. We require our members to pay dues to give them the opportunity to volunteer their time and support the organization with their additional donations. Our post homes are community centers and they do require upkeep and

maintenance. Our post homes are used for many activities that benefit the community, including boys and girls scouts, community blood drives, and meeting places

for other community based organizations that don’t have their own meeting place.

For the IRS to say that we can’t use those legal gaming proceeds to pay operational

expenses is really stretching the law.

The other issue that indicates to us that The American Legion is being singled

out for these audits is that they have determined that 501c(4) social welfare organizations are not liable for the tax. The American Legion is a 501c(19) organization;

a classification designed for veterans organizations. We meet all the requirements

as set forth in the c(4) status, and in fact we were originally a c(4) organization.

The difference is that Congress granted The American Legion the c(19) status for

two reasons. First to permit us to sell life insurance products to our membership

and, second to permit us to spend money in pursuit of issues before Congress affecting veterans and their families, or lobbying if you will. In every other aspect we are

a c(4) organization. So the question arises why are we being treated differently, just

because we are permitted to lobby Congress? At what point does the liberal interpretation of the law in this case by the IRS cease to be enforcement and become

harassment?

So what is the solution? In our view we are not liable for the tax and we will

not be intimidated any further by the IRS. We believe they are wrong and we will

exercise our rights that we fought for as veterans. Unfortunately that will cost everyone, both money and time. We would ask this committee to ask the IRS Commissioner to look at this situation with The American Legion here in Colorado and to

rule on the arbitrary and selective enforcement of the law. We would ask that this

committee consider writing into the law a specific exemption for non-profit organizations that will settle the issue and again express the intent of Congress as it existed

when the original law was passed. Let’s punish the crooks, not the care-giving members of the American Legion and their Auxiliary. Thank you for your time.

Æ