May 5, 1998
In general, H.R. 2676 as reported by the Senate Finance Committee reflects
the bipartisan consensus for reforming the Internal Revenue Service (IRS),
and the Administration supports Senate passage of the bill -- but with
certain modifications which are described below. In addition, the
Administration continues to have serious concerns about the significant net
costs of the bill which are not offset. These costs would drain
anticipated budget surpluses prior to fulfilling our commitment to save
Social Security first.
Administration Commitment to Reinventing the IRS. The Administration began a program of reform at the IRS more than three years ago and has supported two major external reform initiatives since that time: the National Commission on Restructuring the Internal Revenue Service, which completed its work almost a year ago, and House passage of H.R. 2676, the "Internal Revenue Service Restructuring and Reform Act of 1997" on November 5, 1997.
The Administration's ongoing program to reform the IRS includes the work of Vice President Gore's Customer Service Task Force, the efforts to establish Citizen's Advocacy Panels, the reviews of IRS criminal investigation and inspection programs by outside experts, the actions taken to increase awareness and improve implementation of current regulations concerning innocent spouse relief, and the improvements to customer service through the creation of National Problem Solving Days and extended office hours and telephone service. The Administration will continue these efforts to improve the agency.
H.R. 2676 -- Senate Version. In general, the bill reflects the bipartisan consensus for reforming the IRS by expanding taxpayer rights, institutionalizing oversight and ensuring the continuity of the new leadership for the agency, granting the agency greater flexibility in exercising personnel authorities, and making better use of private sector expertise in customer service and technology. The Administration worked extensively with Chairman Roth, Senator Moynihan, and other Members of the Senate Finance Committee to include additional taxpayer rights provisions, address issues raised in Finance Committee oversight hearings, and to refine the bill's provisions related to personnel flexibility. The Administration is pleased that the bill includes provisions that guarantee Executive Branch accountability for the IRS. The bill provides for: Presidential appointment, with Senate confirmation, of the IRS Commissioner; the authority of the Secretary of the Treasury to administer and enforce the internal revenue laws; and the inclusion of the Secretary or Deputy Secretary (as well as an employee representative) on the Oversight Board.
Concerns About Unintended Consequences. The Administration unequivocally supports efforts to ensure fairness for the substantial majority of taxpayers who comply voluntarily with the requirements of the tax system. However, some of the new procedural provisions in the reported bill may unintentionally make it easier for noncompliant taxpayers to avoid paying their fair share of taxes. For example, the bill would allow additional appeals and court challenges before the IRS can collect tax from a taxpayer who refuses to pay, even if the taxpayer has voluntarily self-assessed the amount due or a court has held that the taxpayer owes the tax. Other new provisions in the Senate bill that may have unintended effects and raise compliance concerns include suspending interest and penalties when the IRS fails to provide deficiency notices to taxpayers within one year, allowing joint filers to elect out of joint and several liability, shifting the burden of proof in statistics and penalty cases, and requiring the IRS to notify taxpayers before each third party contact. The Administration would like to work with the Senate to focus the taxpayer protection provisions more precisely on compliant taxpayers who are making a good faith effort to comply with their obligations, and eliminate the unwarranted benefits for those who are willfully evading their responsibility to pay tax.
Burden of Proof. The Administration continues to be concerned about the provision that would shift the burden of proof in certain circumstances and wants to ensure that taxpayers are not provided a disincentive to keep records to support their tax returns. The Administration is also concerned that the provision may have unintended and undesirable consequences, such as making audits more intrusive, and would like to work with the Senate to minimize those consequences.
Accountant-Client Privilege. The Administration believes that creating a new evidentiary privilege for communications between accountants and other tax advisors authorized to appear before the IRS and their clients would be unwise and unwarranted. The Department of Justice and the Federal Bureau of Investigation view the creation of this privilege as an impediment to the prosecution and investigation of fraud matters, and the existence of the privilege will inhibit the investigation of the types of civil tax matters that often lead to criminal tax referrals. In addition, this proposal could also dramatically increase the courts' burden with summons-related and fact-intensive litigation over whether the privilege applies in an expanded universe of cases. The Administration strongly urges the Senate to consider the potential impact on law enforcement and strike this provision from the reported version of the bill.
IRS Computer Systems and Year 2000. The Administration has serious concerns with provisions of the bill that require changes to IRS computer systems in 1998 and 1999. Mandating these changes according to the schedule currently in the bill would make it virtually impossible for the IRS to ensure that its computer systems are Year 2000 compliant by January 1, 2000, and would create a genuine risk of a catastrophic failure of the Nation's tax collection system in the year 2000. Both Secretary Rubin and Commissioner Rossotti have written the Senate Finance Committee warning them of this risk and recommending that the effective dates be modified in accordance with the schedule set forth in Commissioner Rossotti's April 23, 1998, letter. The Administration strongly urges the Senate to make the changes recommended by the Commissioner.
Inspector General for Tax Administration. Finally, although the Administration endorses the creation of a separate Treasury Inspector General (IG) for Tax Administration, the provisions creating the new IG may have the unintended effect of weakening the independence and/or effectiveness of that office. For example, the provision requiring the Treasury IG for Tax Administration to conduct all audits or investigations requested by the Commissioner or the IRS Board inappropriately restricts the IG's authority to make judgments as to the best use of audit/investigative resources. No other IG faces a similar requirement. The Administration looks forward to working with the Senate to address this and other issues.
H.R. 2676 would affect receipts; therefore, it is subject to the pay-as-you-go requirements of the Omnibus Budget Reconciliation Act of 1990. The Administration's pay-as-you-go estimate for this bill is currently under development. The Congressional Budget Office estimates that the reported bill would result in net savings of $75 million during FYs 1998-2002 and net costs of $9.8 billion during FYs 2003-2007. The Administration has serious concerns about the significant net costs of the bill which are not offset. These costs would drain anticipated budget surpluses prior to fulfilling our commitment to save Social Security first. The Administration supports Senate passage of this bill with the modifications described above and with further modifications necessary to eliminate the bill's adverse budget effects.