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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.
Pay-As-You-Go Scoring
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.
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