Testimony provided to Oversight Subcommittee

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Statement of Alvin S. Brown

Chairman Lewis, Ranking Member Boustany, and Members of the Subcommittee on Oversight, I appreciate the opportunity to address Internal Revenue Service (IRS) operations now subject to its annual review. Mr. Chairman, I agree with your concern about IRS levies on Social Security income. The IRS often levies Social Security income without taking into account whether the taxpayer is left with money for food, housing, transportation and other necessary expenses. Under section 6343(a)(2)(D) of the IRS Code, the IRS is prohibited from any levy that creates an “economic hardship.[1]” My testimony deals with the larger topic of counterproductive IRS tax lien and tax levy practices. In many cases, these liens and levies not only cause economic hardship to individual and business taxpayers, they even have the perverse effect of decreasing tax revenue and, correspondingly, increasing the Tax Gap.

I am a tax attorney with the law firm of Alvin Brown & Associates[2] and the founder of The IRS Forum, www.IRSForum.org,[3] a 501(c)(3) educational organization. I had a 27 year career in the Office of the IRS Chief Counsel. I have been representing taxpayers throughout the U.S. and abroad specializing in IRS controversies for more than a decade. With this experience within and outside of the IRS, I have valuable insight on current IRS practices that negatively impact both the collection of revenue and economic growth. My testimony reflects my personal experiences with the IRS representing taxpayers before the IRS. I will support the following statements:

In many instances, IRS tax levies of salaries of taxpayers and gross income of businesses reduce the collection of tax revenue, destroy small businesses, cause the loss of jobs, and reduce tax compliance;
In many instances, IRS tax liens also reduce tax revenue, destroy small businesses, cause the loss of jobs and reduce tax compliance.
The Subcommittee’s annual review of the IRS fiscal year budget proposal, with testimony from the IRS Commissioner, while important, does not assure effective IRS oversight because the Subcommittee does not have access to sufficient data to independently evaluate the operations and activities of the IRS. Greater transparency of IRS operations and activities is necessary for effective oversight of the IRS. There is ample available data that could provide transparency of IRS practices in its administration of the tax law, but it has not yet been compiled in an accessible database.
The Subcommittee would be assisted in providing more effective IRS oversight if it could reference a data base of taxpayer complaints about IRS abuses of power, abuses of discretion, misapplication of law, and even misconduct. If the individual taxpayer complaints to Members of Congress were saved and combined, organized by issue, and uploaded into a permanent data base, the Subcommittee would have important data to provide needed IRS transparency and result in more effective IRS oversight. Such organized data are necessary to identify IRS positions and practices that have a negative impact on the economy and on the collection of tax revenue.
The National Taxpayer Advocate does not effectively use its authority to issue Taxpayer Assistance Offers under section 7811(a) to impede IRS abuses of power and abuses of discretion.
Counterproductive Tax Liens

Section 6321 of the Internal Revenue Code creates an unperfected (statutory) tax lien on taxpayers in cases where there is an unpaid tax debt. The IRS thereafter has the plenary discretion to file the Notice of Filing of Tax Lien (NFTL) in the public records. The NFTL is immediately picked up by the credit agencies in their credit reports. The tax lien will not be released until the tax debt is paid or otherwise discharged. The credit agencies keep a record of the tax lien on the taxpayer’s credit report during the period that the tax debt remains unpaid and for seven years after the tax debt is released or discharged. The NFTL has severe negative economic consequences on individual and business taxpayers often initially and long after any tax obligation is resolved.

The IRS criteria for filing tax liens is found in the Internal Revenue Manual (IRM) 5.12.2.4.1 (05-20-2005). The IRM requires a filing of a NFTL if the unpaid balance of assessment (UBA) is $5,000 or more. Even where a taxpayer has offered to pay in full the UBA in an Installment Agreement (including interest and penalties), the IRS mandates the filing of an NFTL.

A mandatory NFTL, in effect, is in conflict with the intent of Congress to make the NFTL discretionary. IRM 5.12.2.4.1 requires the NFTL without taking into account whether or not the tax lien will cause an economic hardship or reduce taxable revenue. My personal experience with IRS Revenue Officers is that they will file an NFTL even when they know it will cause irreparable economic harm to an individual or business taxpayer because they believe they are mandated to file the NFTL by the IRM despite the Congressional statute to the contrary.

The underlying tax policy for IRS tax liens is to protect the standing of the IRS as a creditor over other future creditors. That tax policy is not served where an individual taxpayer has limited assets, owns no real estate and has limited income that is only sufficient for reasonable and necessary living expenses. That tax policy is not served if the result of an NFTL is a large loss of current and future income for individual and business taxpayers.

An NFTL filed in the public records is devastating to individual taxpayers. We live at a time where there is immediate access to credit reports. Landlords will often not rent an apartment to a taxpayer with an NFTL. Increasingly, employers will not hire a taxpayer with an NFTL, and some employers will dismiss an existing employee with an NFTL. The reduction of taxable income caused by an unnecessary NFTL undercuts the ability of a taxpayer to pay his or her outstanding tax liability. For that reason, this IRS practice actually reduces revenue and expands the Tax Gap.

When an NFTL is filed on a business, current lenders often withdraw financing (e.g., account receivable factors), and the business will not be able to get credit for inventory and supplies. Business customers often terminate their business relationship immediately when they have notice that their supplier or service provider has an NFTL. The bad credit caused by an NFTL means that the business will lose the ability to borrow money to purchase inventory or borrow to invest in further business growth. An NFTL is one of the largest factors contributing to the demise of small businesses. When the business closes, there is a loss of business income, a loss of tax revenue and a loss of jobs.

In small-asset situations and in the case of pure service providers (e.g., consultants and other professionals), an NFTL has no effect or purpose other than to ruin the credit of the service business taxpayers. Insurance companies will not accept contracts from an insurance broker with an NFTL. Stock brokers will lose licenses as the result of an NFTL. The Department of Defense will not do business with an individual or a business with an NFTL and will also refuse to renew an existing contract. Without real estate or other large assets, the purpose for an NFTL, to give the IRS a security interest in assets, is not met. In these cases the NFTL causes a loss of employment, a loss of business income, creates economic hardship, and discourages tax compliance with a resulting negative impact on the Tax Gap. Taxpayers incurring economic hardship as the result of an NFTL may join the underground economy and not be tax compliant.

It is counterproductive to file tax liens on taxpayers who are willing to pay their tax debt in full, including interest and penalties in an Installment Agreement. In Installment Agreement cases, individuals and businesses are penalized with a mandatory NFTL even though they want to pay their outstanding tax debt in full because of the NFTL. A loss of business due to the NFTL diminishes the ability of a taxpayer to make the Installment Agreement payments.

If an NFTL is filed when an Offer in Compromise (OIC) for a business is under active consideration, the resulting loss of business income will correspondingly reduce the amount needed to pay the IRS to settle the outstanding business tax debt because business income is considered in the settlement calculations.

The economic damage caused by an unnecessary and economically counterproductive tax lien is inconsistent with the Mission Statement of the IRS to apply the tax law with “fairness” and with “integrity.” It is senseless for the IRM to mandate an NFTL without measuring whether the economic damage or hardship caused by the NFTL outweighs the benefit of the NFTL. There is no current legislative threshold or “safe harbor” to prevent an economically counterproductive NFTL. My comment in this matter only applies to situations where the NFTL is not justified. Obviously, there are situations where the NFTL is needed to protect the creditor status of the U.S.

An NFTL can be appealed under section 6320 and section 6630 for a collection due process or equivalency hearing. The problem is that these statutes do not offer NFTL relief; they merely provide collection alternatives such as the filing of an OIC or an Installment Agreement. There is an anomaly that section 6320 and section 6330 provide an opportunity to appeal an NFTL but no opportunity to ask for a tax lien withdrawal even if the tax lien is causing an economic hardship and a loss of income. Collection due process appeals under section 6330 provide no relief even when an NFTL is causing an economic hardship. The discretion of the IRS to withdraw a tax lien under section 6323(j) is rare and unusual. Although the National Taxpayer Advocate (NTA) has been granted the authority to stop a “significant hardship” under section 7811, that authority is underused, rare, unusual and difficult to achieve on any tax lien issue.

Section 7811(a)[4] of the Code permits the NTA to stop a “hardship” with a Taxpayer Assistance Order (TAO) as the result of the manner in which the internal revenue laws are being administered by the IRS. Notwithstanding, a TAO is not used on tax lien issues under the authority of the “hardship” language of section 7811. Instead the NTA involvement with tax lien issues is considered, if at all, for tax lien withdrawal requests under section 6323(j)(1)(D) with the consent of personnel at the centralized IRS lien office. The NTA defers to the IRS centralized lien offices to resolve tax lien withdrawal matters. The IRS consent to a tax lien withdrawal is rare and unusual (e.g., situations where there has been an error or mistake in filing the NFTL). The NTA does not use its authority under section 7811 to consider tax lien “hardships” and make determinations independent of the IRS centralized lien office in requests for lien withdrawals. The function of the NTA as an ombudsman on tax lien matters is inert and inconsistent with Congressional intent under section 7811 to use a TAO when there is a “significant hardship” and irreparable injury to taxpayers. I cannot think of greater irreparable harm than the loss of businesses, jobs and taxable revenue resulting from an NFTL when the interest of the U.S. as a creditor is economically insubstantial in contrast to the economic damage caused to individual and business taxpayers as is the case, for example, in pure service businesses.

Counterproductive tax levies

The tax policy of section 6343(a)(2)(D) to prevent or stop a levy in the case of an “economic hardship” is explicit and unqualified. Congress prohibits[5] a tax levy if the levy denies a family, food, housing transportation, medicine, health insurance, child care, court ordered payments, and other reasonable and necessary living expenses. Families in an “economic hardship” situation cannot be tax compliant. If there is a choice between food and taxes, the election will always be to feed the family. On the other hand, if taxpayers have sufficient assets and income for their necessary expenses, they are able to seek gainful employment and contribute to the tax revenue base. Taxpayers frequently quit their job when a levy on wages causes an economic hardship. My testimony today is that in almost every IRS levy of income, the IRS Revenue Officer levy invariably creates a taxpayer “economic hardship” within the meaning of section 6343(a)(2)(D) for two reasons: 1) levies on income from employment and levies on accounts receivable are continuous; and 2) the IRS sends the employer Publication 1494[6] which lists the amount exempt from income under section 6634[7]. The amounts exempt from levy under section 6664 are minimal amounts unrelated to the amounts that cannot be levied under section 6343(a)(2)(D). When employers receive Publication 1494 from the IRS, the employers erroneously believe that the levy is for all amounts that exceed the section 6634 limitations because the IRS does not also give employers instructions that will create a prohibited “economic hardship” precluded by section 6343(a)(2)(D). For this reason IRS continuous levies of wages will generally create a taxpayer “economic hardship” in conflict with the intent of Congress under section 6343(a)(2)(D). In these circumstances taxpayers often elect to work in the underground economy and avoid future tax compliance. These dire consequences result when the IRS refuses to follow the unqualified legislative mandate of section 6343(a)(2)(D). The willful failure to comply with the “economic prohibition” of 6343(a)(2)(D) is an “unlawful” act[8]. That unlawful act is not prohibited by either IRS management or the NTA.

Almost all businesses will fail if the IRS files a continuous levy on accounts receivable. Gross income is needed for taxes, payroll, and other administrative and operating expenses. A levy on gross income will usually force a business to discharge all employees and cease operations leaving an unpaid tax debt. A levy can be appealed but the business will normally be irreparably damaged before the three to six months it takes to schedule a levy appeal.

Levies on bank accounts can also be economically counterproductive. Although the bank account levies are one-time only levies and capture only the amount in the account at the time of the levy, levies can be made on the same account repeatedly at the discretion of the IRS Revenue Officer. In the case of a business bank account, the levy often takes money deposited for payroll, taxes and other necessary business administrative and operational expenses. A bank account levy on a business bank account can put it out of business resulting in a loss of jobs and taxable income.

The NTA and the IRS have taken the position that a business cannot have an “economic hardship” within the meaning of section 6343(a)(2)(D). This position apparently came from TD 9007 that published the final OIC regulations on July 23, 2002. TD 9997 states that the economic hardship standard of section 301.6343-1 on the regulations “specifically applies only to individuals.” The IRS position in TD 9007 is wrong because section 6343(a)(2)(D) does not distinguish between individual and business “economic hardship” and further because §301.6343-1(a) is expressly limited by the term in general. The “in general” preface does not exclude a business hardship. It is patently absurd for the IRS and the NTA to take a position that a business cannot have an economic hardship.

Levies can be appealed under section 6330 and that appeal, if made timely, will stop collection action. In the appeal, the Taxpayer can submit an OIC or an Installment Agreement as an alternative to the collection action. However, under section 6330(c)(2)(B), the underlying tax liability may not be raised as a basis for appeal unless the taxpayer did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute the tax liability. The limitation to challenge the underlying liability in section 6330(c)(2)(B) is inconsistent with the fact that a taxpayer is always able to challenge the underlying tax liability in an OIC under the plain language of section 7122(a). Further, the IRS will permit “audit reconsideration.” The advantage of raising a liability issue under section 6330 is that the discretion of the IRS is subject to judicial review for “abuse of discretion” whereas there is no judicial review for an OIC.

Taxpayers are often not represented or underrepresented when tax assessments are made. I have frequently found tax issues that should have been raised had there been competent representation. In the best interest of helping individual and business taxpayers who may have an erroneous tax assessment that results in an inappropriate tax levy, taxpayers should be allowed to raise substantive issues in a section 6330 appeal even if there has been prior consideration of the substantive issues. Although section 6330(c)(2)(A)(iii) allows an OIC to be submitted, the IRS will not permit an OIC based on “doubt as to liability.” That limitation on IRS appeals of a tax levy is incorrect because the statute does not distinguish between the different types of OICs. Further, the language of section 6330(c)(2)(A)(iii) is not modified by the limitations of section 6330(c)(2)(B).

The NTA does not use its authority to issue a TAO in levy and tax lien hardship cases[9]. My office has literally filed hundreds of Forms 911, a request for a TAO, and no TAO has ever been issued in any of those cases even when the economic hardship caused by a levy is irreparable and clear “misconduct” within the meaning of 7214(a)(3). Instead the NTA attempts to orally persuade IRS Revenue Officers to stop levies that create an economic hardship. That advocacy style intervention does not always work when Revenue Officers and their managers refuse to release a levy even when they know the levy will close a business or cause an economic hardship to an individual. The refusal of the NTA to issue a TAO in “significant hardship” cases is in conflict with the legislative intent of Congress to use a TAO as a tool to intercede in those circumstances. The underutilized TAO has the obvious effect of reducing taxable revenue caused by closed businesses and lost jobs. In these instances the NTA does not stop clear IRS “misconduct.”

The problems described above in tax lien and tax levy hardship cases, and the resulting loss of tax revenue, can be ameliorated in large part if the NTA consents to use a TAO as intended by Congress under section 7811. Every Form 911 should result in an expeditious TAO if a TAO is justified at the discretion of the NTA to conform with the intent of Congress to have the NTA use its power as ombudsman for taxpayers. The NTA condones IRS misconduct if it does nothing to stop IRS misconduct on “economic hardship” issues precluded by 6343(a)(2)(D).

The Need for IRS “Transparency” to Facilitate IRS Oversight

My testimony today highlights the need for improved IRS transparency and oversight on a daily basis rather than at the time of the annual oversight review by the Subcommittee of the IRS fiscal year budget. The economically counterproductive activities of the IRS that I have identified in this testimony would likely not occur if visible to Congress, the media and the public.

The Internal Revenue Code quite properly limits disclosure of its interaction with a taxpayer[10]. The privacy of a taxpayer is protected by law. For this reason nobody knows what actions the IRS takes except the IRS, the taxpayer, the taxpayer’s representative, and in some cases the NTA. However, taxpayers can voluntarily reveal their IRS experiences with or without disclosing their identity.

“Transparency” - National Data Base - Voluntary Taxpayer Submissions

It is fair to say that every Member of Congress gets complaints about the IRS regularly. Constituents complain about IRS abuses of power, IRS misconduct, erroneous applications of law, and hardship. However, these data are not saved; becoming wasted data. The complaint traffic to the NTA is also wasted data. There is no national data base for IRS complaints. Obviously, the IRS will be hesitant to be overly aggressive on a tax matter or to engage in the counterproductive practices I have described if IRS actions were more transparent to the public, to the media, and to Congress.

The Subcommittee on Oversight will be able to execute its oversight function over the IRS more effectively if it has access to a national data base reflecting IRS interactions with taxpayers. Taxpayers throughout the U.S. voluntarily voice their IRS experiences constantly to all Members of Congress as well as to the members of this Subcommittee. That empirical data is available but it is neither organized nor saved. There is also no platform to upload that data to a combined data base. Such a national data base of taxpayer and constituent experiences, if collected, organized by issue and analyzed would give this Subcommittee and Congress the IRS transparency that is presently lacking.

The IRS Forum as a Vehicle to Provide IRS Transparency and Oversight

The IRS Forum has been approved by the IRS as a 501(c)(3) educational organization. The IRS Forum has a presence on the internet at www.irsforum.org to encourage the uploading of the experiences of taxpayers with the IRS. The sole purpose of this is to provide IRS transparency to facilitate oversight of the IRS.

The IRS Forum provides an internet portal for taxpayers to record and discuss their IRS experiences with other taxpayers who have suffered with the same or similar abusive experiences. Individual taxpayers will be able to facilitate positive changes in the IRS by joining with hundreds and thousands of other taxpayers with similar experiences and similar issues into a unified national voice of sufficient magnitude to get the attention of the media, top management of the IRS, and the Congress for constructive changes in the law and the administration of the tax law. Taxpayers are thereby empowered.

At the IRS Forum, with a platform to upload experiences, taxpayers can fully discuss their IRS experiences along with the factual and legal issues considered by the IRS. This transparency will put the spotlight on IRS practices and encourage the IRS to treat taxpayers with integrity and fairness.

In particular, the IRS Forum data base has important potential benefits for Members of Congress:

The IRS Forum will accumulate constituent data that would otherwise not be saved.
To the extent that constituents vent their IRS complaints directly to the IRS Forum, that action will free up more Member and staff time for their legislative responsibilities.
Actual case histories of IRS administrative and operational problems create “talking points” for tax simplification or tax reform.
Constituent problems and complaints about the IRS have far greater impact when they join with a larger group with similar issues at the IRS Forum.
Transparency of IRS operations enhances the ability of the Subcommittee on Oversight to identify IRS abuses of power, abuses of discretion, and misapplication of the law. For example, the tax lien and tax levy abuses discussed above would be identified from voluntary submissions of cases of these abuses by taxpayers to the national data base.
When the data hits critical mass, it will get the attention of the media, the public and Congress for possible corrective legislation.
When tax legislation is being considered, that data base in the IRS Forum could be searched for information and guidance.
· In addition, the transparency of the accumulative data will be educational for all taxpayers and constituents.

The non-partisan IRS Forum is not a commercial venture. There are no membership fees, and the IRS Forum does not accept advertising. The IRS Forum functions only as a non-profit educational organization on IRS positions and administrative practices.

The Immediate Goal of the IRS Forum: to provide assistance to the Congress in conducting oversight of the IRS by accumulating and making publicly available data regarding IRS practices. To facilitate the accumulation of that data, the members of the Subcommittee on Oversight, other Members of the House Committee on Ways and Means, and other members of the House and Senate are encouraged to refer constituent IRS complaint traffic to the IRS Forum. That cooperation would help in building a permanent institutional data base of taxpayer experiences with the IRS to facilitate IRS transparency and oversight.

Summary

I thank the Chairman and this Committee for receiving this testimony. From my personal experiences in dealing with the IRS on behalf of clients, I have identified IRS administrative practices dealing with tax liens and tax levies that reduce the collection of tax revenue, increase the Tax Gap, create economic hardship for taxpayers, contribute to a loss of jobs, result in business failures, and conflict with sound tax policy. Correction of these counterproductive practices by the IRS will operate as a “revenue raiser” that will assist in reducing the Tax Gap and have a positive impact on the economy.

I believe it is important for the NTA to change its procedures to use a TAO for every significant economic hardship. I have also made some suggestions to improve the rights of taxpayers in collection due process appeals and also broaden the issues that can be petitioned to the Tax Court.

IRS oversight by the Subcommittee will be significantly enhanced with improved IRS transparency from a permanent national data base with information voluntarily uploaded by taxpayers to the IRS Forum. With guidance from the Subcommittee, I am willing to modify the IRS Forum in any way that would help serve the non-partisan oversight objectives of the Subcommittee and the constituents of all Members of Congress. It is also helpful to the U.S. public to have a platform to learn about tax issues. The simple idea of a permanent data base on the internet managed by the IRS Forum is an elegant way to improve IRS transparency and oversight and serve its educational purposes. The IRS Forum can meet all of its educational objectives if Members of Congress elect to inform constituents, complaining about the IRS, that they can upload those experiences to the IRS Forum and gain the benefit of interacting with other taxpayers with similar issues and at the same time, help make the IRS transparent and also help make their experiences part of an important data base.

Given my long history of dealing with the IRS as a manager in the Office of the IRS Chief Counsel and also in representing taxpayers before the IRS, I would be pleased to make myself available to the Subcommittee and its staff on any of the issues discussed in this testimony, the IRS Forum, and on any other IRS matter including some suggestions for revenue raisers that can improve tax compliance.

Respectfully submitted,


Alvin S. Brown, Esq.

(703) 425-1400 ex 106

ab@irstaxattorney.com


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[1] Section 301.6342-1(b)(4)(i) of the Income Tax Regulations states the general rule that a levy creates an “economic hardship” if the levy, “in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses.”

[2] 9667B Main Street, Fairfax, VA 22031 (703) 425-1400 ab@irstaxattorney.com.

[3] The IRS Forum offers an internet platform for taxpayers to voluntarily upload their IRS experiences by issue. The objective of the IRS Forum is to provide IRS “transparency” with a national data base of actual taxpayer interactions with the IRS. A perpetual data base of taxpayer experiences with the IRS will provide educational insight on IRS operational and administrative practices.

[4] Under section 7811(a)(1)(A) the NTA has the authority to issue a Taxpayer Assistance Order if “the National Taxpayer Advocate determines the taxpayer is suffering or about to suffer a significant hardship as a result of the manner in which the internal revenue laws are being administered by the Secretary * * *.” Section 7811(a)(3)(D) a “significant hardship” includes “irreparable injury to, or a long-term adverse impact on, the taxpayer if relief is not granted.”

[5] Through section 301.6343-1(b)(4) of legislative regulations under 6343(a)(2)(D)

[6] Last published in 2007

[7] Section 6634 of the Code identifies property exempt from levy. The exclusion includes clothing, tools and other items including the minimum exclusion from income under section 6634(d). The small section 6634 exclusions from levy are unrelated to the “economic hardship” prohibition under 6343(a)(2)(D)

[8] Section 7214(a)(3) makes it an “unlawful act” when an IRS willfully fails to comply with a tax statute. Any unlawful act requires mandatory dismissal from the IRS and subject that employee to a fine of up to $10,000

[9] IRM 13.1.2.D (12-15-2007), requires a TAO in stalemate situations involving a “significant hardship.”

[10] Section 6103