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by Bryan T. Camp

The Evil That Men Do Lives After Them . . .1

Bryan T. Camp is an associate professor of law, Texas Tech University School of Law. This is the second of a new column in Tax Notes. The column will generally explore the laws and policies of tax administration. Its goals are to help readers navigate the laws of tax administration by (1) guiding them through the thickets of particular procedural problems and (2) giving them a sense of the larger tax administration forest. Copyright 2004 Bryan T. Camp. All rights reserved. Friends, readers, colleagues, I come not to praise RRA 98 but to bury it.2 In 1997 the noble senators on the Senate Finance Committee told us that the IRS was abusive. If so, it was a grievous fault and grievously has the IRS and the worthy cause of efficient and just tax administration paid for it. Last month I suggested that the doctrines that create the forest of tax administration laws have historically favored inquisitorial methods of determining and collecting tax liabilities over adversarial methods.3 In the next few columns, I hope to build a case that RRA 98 did not merely trim back unruly branches of that law, but instead basically clear-cut the old growth and attempted to supplant it with procedures grounded in adversarial process paradigms. I do not believe the lawmakers fully understood what they were doing, with the result that RRA 98 is pretty much a hack job. While tax procedure law has never been a walk in the park, it is now more like a federal disaster area and neither the IRS or the courts can really clean up the mess created by Congress. It is up to the legislature to either weed out the most noxious of the new provisions or else just spray the whole mess with a virtual jug of RoundUp and plant anew. The lawmakers essential goof was to change the inquisitorial nature of the IRS tax determination and collection process by inserting statutes based on an adversarial model of tax administration. Recall that last

month I defined a system as inquisitorial if it has either or both of two interrelated characteristics: (a) it combines the power to decide a legal issue with the power to decide what evidence is necessary or enough to make the substantive determination; and (b) it prefers discovery of truth over restrictions on government intrusions into personal privacy (what I called autonomy in the prior column). So to the extent that RRA 98 moves the tax determination and collection system away from these two characteristics, the system becomes less inquisitorial and more adversarial. Doing so may or may not be a good idea; one could certainly make a rational decision to move tax administration towards an adversarial process. And we should have that debate (perhaps in a different column or forum). But whether one believes RRA 98 went too far or did not go far enough, the point of this column in the next few months is that it mucked up tax practice and procedure and needs fixing.4 This column will look at the basis for the lawmakers actions in 1998 to see just what they thought were the problems with tax administration, as evidenced by their rhetoric and the Senate Finance Committees investigations of IRS abuse. I hope you will agree with me that the

1 The quote is the fourth line of Marc Antonys funeral oration in William Shakespeares Julius Caesar. 2 RRA 98 is the common acronym for the Internal Revenue Service Restructuring and Reform Act of 1998, P.L. 105-206, 112 Stat. 685 (1998). 3 Bryan T. Camp, The Inquisitorial Process of Tax Administration, Tax Notes, June 21, 2004, p. 1549.

As Prof. Michael Asimow from UCLA put it in an e-mail to me earlier this year: It is absurd to turn the IRS investigation stage, or its collection stage, into an adversarial process. Prof. Asimow suggests that the tax administration system is ultimately adversarial in the sense that if the taxpayer does not like the IRS action, the taxpayer can always dispute it in an adversarial forum the Tax Court, or district court, or Court of Federal Claims. The ultimate decisions, he suggests, are thus still made in an adversarial forum and the IRS is no different from any prosecutor (or any law enforcement administrative agency like the FTC or SEC). While I agree that taxpayers in theory have recourse to courts, I suggest that in practice (a) access to courts is significantly reduced by various barriers to review, including the full payment rule, and (b) review by courts is generally perfunctory thanks to strong legal presumptions that favor the IRSs liability and collection decisions. I think the IRS really is different. For example, when a grand jury indicts, the government must then prove its case before a petit jury. So while the grand jury has broad subpoena powers, its decision to indict is interstitial, subject to the rules of evidence and the governments ultimate burden to prove its case in another forum. In contrast, the IRSs decision on tax liability is not preliminary to the government proving its case in another forum. Even today, it can use that decision, as reflected in the assessment, to take significant unilateral administrative collection actions, such as offset and the levying of state income tax refunds. As I explain further below, the deficiency procedures are simply not implicated for the majority of accounts receivable. It is true that the IRS cannot put people in prison, but it can take their property or rights to property, which is still a pretty significant intrusion into the private sphere.

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lawmakers rhetoric was pretty incoherent, and the Senate investigation poorly done by almost any objective standard. Starting next month, I will look at how the rhetorical excesses found unfortunate expression in some of the key provisions in RRA 98 and will show how these provisions stem from the essential goof of mixing adversarial with inquisitorial process.5 This month I should like to make observations about: (1) the overall thrust of rhetorical gamesmanship during 1997-1998; (2) the sloppiness of the actual investigation into IRS abuse; (3) how the specific rhetoric used to critique the IRS processes linked abuse with inquisitorial modes of procedure, thus setting the stage for adversarial reform; and finally (4) how even at the technical level, the drafters struggled with concepts of tax administration.

enforcement is never easy. It is always subject to abuse.9 [W]e also need to keep in mind we need a revenue agency in the United States to do the very difficult work of colleting those revenues that we as a Congress said people are responsible to pay.10

(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

So Are They All, All Honorable Men

So it was the Republicans who said the IRS was abusive. Specifically, the most significant RRA 98 reforms regarding tax determination and collection came from the efforts of the Senate Finance Committee, led by the Honorable William Roth and Honorable Charles Grassley, R-Iowa.11 Sens. Roth and Grassley concluded that the IRS was abusive. Sen. Roths staff worked hard for some eight months to find cases of abuse to present to the American public.12 It is true that before their efforts, evidence of abuse was scattered and insignificant. The bipartisan National Commission on Restructuring the Internal Revenue Service specifically found very few examples of IRS personnel abusing power after its year of intensive study of the agency.13 But maybe the Commission did not look hard enough. The senators certainly said the IRS was abusive. And the senators were honorable men. It is also true that after the Senate Finance Committee presented its public parade of horribles, follow-up investigations revealed that the drama was more fiction than fact, and the tales of woe were woefully unsupported.14 But the senators said the IRS was abusive. And surely the senators were honorable men. Finally, it is true that, unlike the sensational Senate investigations of the IRS in the early 1950s which resulted in the removal, resignation, and criminal convictions of an extraordinarily high number of high-ranking IRS officials the 1998 Senate investigation resulted in no removals,

Abuse Versus Law and Order

What has always struck me as odd about the 1997 and 1998 Senate Finance Committee hearings on the IRS abuse of taxpayers was the strange rhetoric coming from the mouths of the Republicans and Democrats.6 Test yourself: From which party would you expect to hear complaints about erosion of individual civil rights from a government law enforcement agencys attempt to enforce the law? Which party would you expect to vigorously promote the need for resources and power necessary to catch lawbreakers? If you are like me, you would expect the thrust of Democratic critiques to be about protecting individuals from law enforcement abuses, parried by the Republican rhetorical riposte of law and order. The rhetoric about alleged IRS abuse was all backwards in the fall of 1997 and spring of 1998. Republicans sounded like Democrats. They complained incessantly and everywhere (including, notably, their campaign materials) that the IRS had the biggest network of potential intrusion into the privacy of every American, that it uses tactics that we would view . . . as inappropriate to assess and collect taxes.7 They expressed a deep concern and a fundamental belief that such a violation of . . . civil rights should not . . . take place, not in America.8 On the other hand, the voice of law and order came from the Democrat side: This objective [preventing abuse] is particularly important when such actions are done in the name of law enforcement. At the same time, we must do so in a way that does not undermine those who are performing crucial law enforcement missions. . . . Law

Remarks of Rep. Steny Hoyer, D-Md., in S.Hrg. 105-190 at Remarks of Sen. Kent Conrad, D-N.D., in S.Hrg. 105-190 at

11. 15.

10

5 Thus, I will devote the next few columns to the provisions relating to collection due process, third-party contacts, burdenof-proof shifts, the tax advice privilege, and the expanded powers of IRS Appeals and the National Taxpayer Advocate. 6 The hearings held in September 1997 are printed as S.Hrg. 105-190; those from January 1998 are S.Hrg. 105-529; and those from April 1998 are at S.Hrg. 105-598. 7 The first quote is from Rep. Bill Archer, R-Texas, in a news conference on Sept. 30, 1997 (you can see the transcript in the LEXIS FDCH Political Transcripts database). The second quote is from Sen. Phil Gramms, R-Texas, opening remarks in S.Hrg. 105-190 at 16. 8 Sen. William Roth, R-Del., opening remarks in S.Hrg. 105190 at 2.

11 See Statement of Rep. Rob Portman, R-Ohio, S.Hrg. 105-529 at 52-53 (Jan. 29, 1998) (noting that while the House had passed legislation based on the restructuring commissions recommendations, it was this committee, the Finance Committees work and particularly your hearings this September that really focused all of America on the need to fundamentally reform this troubled agency.); Statement of Sen. Don Nickles, R-Okla., S. Hrg. 105-598 at 10 (April 28, 1998) (I have got about a dozen things that we added that was not [sic] in the House bill, [but] is in the Senate bill.). 12 See Testimony of Mike Dolan, IRS Acting Commissioner, S. Hrg. 105-190 at 200 (referring to the opening announcement of the investigation); See generally Opening Statement of Sen. Roth, id. at 323-324 (describing the course and methods of the committee investigation). 13 Report of National Commission on Restructuring the Internal Revenue Service, A Vision for a New IRS, June 27, 1997, at 48. 14 See Bryan T. Camp, Tax Administration As Inquisitorial Process and the Partial Paradigm Shift in the IRS Restructuring and Reform Act of 1998, 56 Fla. L. Rev. at 81 (2004), citing GAO and The New York Times investigations, particularly the fine efforts of David Cay Johnston to sort out the fact from the fantasy.

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no forced resignations, and no indictments (much less any convictions).15 Yet Sens. Roth and Grassley said the IRS was abusive, and on that basis proposed the farreaching reforms of RRA 98. So why did the honorable Republicans propose such profound changes in the law based on such poor data? One answer is as old as the income tax itself. Prof. Harold Dubroff recounts that in the early days of the income tax administration some commentators were concerned that opponents of an income tax were deliberately sabotaging the administrative process to subvert the tax structure.16 And some of the rhetoric by some of the Republican politicians in 1997 has the faint odor of subversion, particularly to the noses of those inclined to sniff out conspiracies.17 One does not have to be a conspiracy theorist, however, to account for either the impetus for or the resultant reforms of RRA 98. One can salute Sens. Roth, Grassley, and their hardworking staff for their dedication to good government even while concluding that their efforts were unwise, undesirable, and poorly executed. For however honorable the motives may have been, the twin evils of ignorance and carelessness explain the reforms quite well. One sees it in the rhetoric. One sees it in the drafting. Lets look at some of both.

Rhetoric
The critique of the IRS was grounded in adversarial logic. Consider this exchange between Sen. Roth and former IRS Commissioner Margaret M. Richardson in the September 1997 hearings. Commissioner Richardson was testifying about a proposal to shift the burden of proving the correct tax liabilities from the Service to taxpayers. She was against the proposal, as were all the other witnesses who were attorneys. But politicians on both sides of the aisle had found good press in comparing the

15 Id. at 87-91 (comparing and contrasting 1950s investigation results with 1990s investigation results). 16 See Harold Dubroff, The United States Tax Court: An Historical Analysis, 40 Albany L. Rev. 7, 23-24 (1975). Prof. Dubroff quotes one 1923 contemporary urging that All those familiar with the situation at Washington are agreed that if the income tax is to be preserved its friends will have to make a vigorous fight for better administration. 17 For example, Sen. Conrad pointed out that some colleagues were making political hay of the alleged problems with the IRS by sending out mailers to constituents saying We want to end the IRSs reign of terror. S.Hrg. 105-190 at 15. Rep. Archer also made explicit links between the administration of the tax laws and income tax in a news conference on September 30, 1997. As reported by FDCH Political Transcripts, after attacking IRS abuse, Archer said that the abuse was inherent in the administration of an income tax: But clearly, part of our problem today is the way the IRS had been managed; but a potentially bigger part of the problem is the complexity of the code itself. Which I believe is an inherent flaw in any tax system that is based on income. The logic implicit in those comments is that if tax liabilities are indeterminate then there is no true liability for the IRS to find. If so, then there is no point in giving any special deference to the agencys determinations, undercutting one of the justifications for an inquisitorial system. Archer did not put it that way, but that is what his comments imply.

civil tax administration system with the criminal justice system and declaring that it was wrong to give criminals a presumption of innocence while making taxpayers bear the burden of proving their innocence from additional tax liabilities.18 When Commissioner Richardson tried to explain her opposition to the proposal, Sen. Roth interrupted her: Ms. Richardson: . . . What concerns me, and I think many people who have worked in the tax area, is that the taxpayer really is in possession of the facts and does have the knowledge about The Chairman: Isnt a person accused of a crime, a murder, also the one, peculiarly, with the knowledge and information? Ms. Richardson: Well, we are talking about civil proceedings here, not criminal proceedings. . . . As I discussed last month, a central justification for the inquisitorial nature of tax administration has been that the information necessary to exercise the governmental taxing power is initially entirely in the hands of the taxpayers. That is a key reason why the IRS has historically been given the twin powers of investigation and determination, both for the determination tax liability and collecting it. Sen. Roth rejected that justification by reference to the highly adversarial process of criminal prosecution. In criminal prosecutions, the presumption of innocence is one of the ways in which adversarial process prefers individual autonomy over truth as seen by the adage better 10 guilty persons be set free than 1 innocent person be deprived of liberty. In contrast, the historic preference in tax administration has been to presume the agency has got it right and leave it up to the taxpayer to prove the agency wrong. On the autonomy scale, a citizens freedom to avoid paying the taxes necessary to support the Democracy is nowhere near as important as freedom from physical captivity and penal sanction. Many of the complaints about IRS abuse expressed a concern that the IRS had too much power. The objections were (a) that the taxpayer was presumed guilty of owing the taxes as determined by the IRS (as in the example I give above), and (b) the decisionmaker was also the evidence gatherer. The IRS can take a taxpayers home by just the signature of the district director alone.19 Liens and levies may be filed against those whom the IRS knows have no liability for a particular tax. Parents, relatives, a company employee may have liens filed against their property or have a paycheck levied in order to get the real taxpayer to comply.20 The rhetorical response to the complaints was to advocate adversarial process as a check on the power of the IRSs power to be

(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

18 Criminals have more rights in this country than taxpayers do. It shouldnt be that way. Thats wrong and were going to fix it, proclaimed Rep. Archer on October 21, 1997. (Transcript available on LEXIS in the FDCH Political Transcripts database). Rep. Richard Gephardt, D-Mo., made a similar pronouncement on the same day. 19 Testimony of Robert Schriebman, September 1997 Hearings, S.Hrg. 105-190 at 40. 20 Roth, Opening Statement, September 1997 Hearings, at 4 (describing forthcoming witness testimony).

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both the decisionmaker and evidence gatherer. See, the problem that you have is that you have got an internal conflict of interest within the IRS. They are their own judge and jury over peoples lives. Let us remove that. This will cure the Ivory Soaps worth of taxpayer abuse.21 Sen. Phil Gramm put it this way: I am still totally convinced that the problem is this agency has too much unchecked power. An agency in a free society should never have the ability to investigate, evaluate, and basically prosecute, all wrapped up into one. There clearly is an absence of checks and balances within this agency, and I think it needs to be changed. *** With the Internal Revenue Service, you have no external checks, and I think, basically, that is the problem.22 Another prominent critique of the period expressed the idea that the Service should not be entrusted with determining taxes because the Tax Code was so complicated that there was no true liability. That was part of Rep. Archers shtick. Income, he declared, is a subjective term.23 Likewise, the Hon. Sen. Roth said the code was too complex to be efficiently and consistently administered by the Internal Revenue Service. And Sen. Ben Nighthorse Campbell complained that taxpayers were 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.24 Implicit in this complaint is that the IRS is not simply discovering the taxpayers true tax liability by correcting taxpayer error, but is actually changing the tax liability by finding an additional tax obligation that was not there until the IRS said so. In sum, and as I describe in much more detail elsewhere, the rhetoric used by Sens. Roth, Grassley, and others of their ilk expressed two key concerns: (a) the IRS had too much power to determine and collect taxes without the approval of an independent reviewer and (b) the need to discover or collect the true or correct income tax liability of a taxpayer should take a back seat to the need to keep the IRS from disrupting the most

sensitive aspects of our citizens private lives. The first concern, of course, matches the first distinction I posit between inquisitorial and adversarial systems. The RRA 98 reformers wanted to separate the decisionmaking powers from the information-gathering powers by making the IRS accountable to independent bodies, either external or internal to the IRS. Likewise, note that the second key concern reflects the second distinction I make between inquisitorial and adversarial process; here the RRA 98 reformers sought to promote individual autonomy over the discovery of truth, which in the tax arena means the true and correct tax liability. Starting next month, I will explore how specific reforms did this. Now, however, I would like to end this months column with an example of careless drafting.

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Drafting
As to the drafting, check out the Senate Finance Committees proposal for section 6404(g), which would have required that interest on underpayments be suspended anytime the IRS does not provide a Notice of Deficiency to the taxpayer within one year of the return being filed (or the due date, whichever was later).25 Echoing the comments of Sen. Campell (see above) and many others, the Senate Finance Committees April 22, 1998, report expresses the committees concern that the IRS should promptly inform taxpayers of their obligations with respect to tax deficiencies and amounts due. In addition, the committee is concerned that accrual of interest and penalties absent prompt resolution of tax deficiencies may lead to the perception that the IRS is more concerned about collecting revenue than in resolving taxpayers problems.26 The proposed provision reflected a fundamental misunderstanding of tax administration: It assumed (1) that unpaid tax liabilities are the result of tax deficiencies and (2) that taxpayer problems come about because of disagreements with the Service about the amount of taxes owed. Both assumptions are bogus. Well over half of the Services accounts receivables are taxpayers whose liability was determined by the IRS by accepting their returns as filed.27 As I explained last month, for very practical reasons, the IRS decides to accept most returns as filed, but it is still the IRSs determination that leads to the assessment. It is just that in almost all cases, the IRS agrees with the taxpayer, except for some of the unlucky 0.5 percent of taxpayers whose returns are audited. Thus, most unpaid tax liabilities do not involve amounts that were ever subject to the deficiency procedure but are simply the result of taxpayers who self-report the tax

Testimony of Robert Schriebman, September 1997 Hearings, S.Hrg. 105-190 at 40. 22 Opening Statement of Sen. Phil Gramm, R-Texas, April 1998 Hearings, S.Hrg. 105-598 at 211. Note again the use of the word prosecute, implicitly labeling tax determination as a criminal process. Note also the incoherency of these remarks. Sen. Gramm apparently did not believe that the FBI, SEC, local police, grand juries, or any other of our government institutions have a place in a free society because, on a daily basis they each investigate, evaluate, and basically prosecute. Such strong anti-law and order rhetoric is, once again, very surprising to hear from Sen. Gramm. If one substitutes decide the liability for evaluate in Sen. Gramms statement, one gets closer to a coherent criticism of the system. 23 News conference of September 30, 1997, reported in FDCH Political Transcripts, available on LEXIS. 24 Sen. Ben Nighthorse Campbell, R-Colo., Internal Revenue Service Methods, Hearings Before a Subcommittee of the Senate Committee on Appropriations, S.Hrg. 105-581 at 2 (January 1998).

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25 Section 3305 of H.R. 2676, as passed by the Senate on May 7, 1998 (emphasis added). RRA 98 wound its way through the legislative process mostly in the form of H.R. 2676. The House version passed the House on November 5, 1997. The Senate Finance Committee kept the number but struck the text and substituted its own bill. As thus modified, the Senate passed H.R. 2676 on May 7, 1998. The conference committee met on May 10, 1998, and produced its report on May 24, 1998. See generally http://thomas.loc.gov for the bills history. 26 S.Rep. 105-174 (April 22, 1998) at 64. 27 See Camp, 56 Fl. L. Rev. at 115, note 589.

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liability but for whatever reason do not fully pay it. Most taxpayer problems with the IRS come about for one very simple reason: The taxpayer is a debtor who cannot or will not pay the creditor. That surely does create a problem, but not one addressed by the Senates proposed interest forgiveness provision. Even when the taxpayer and the IRS disagree about the proper amount of taxes, the IRS follows the deficiency procedures only for income, gift, and estate tax liabilities. For assessable penalties, excise taxes, and employment taxes, the IRS does not issue a notice of deficiency, even when it disagrees with the taxpayer on the amount owed. So the Senate proposal would have given federal interest-free loans to taxpayers who misreported excise and employment taxes. Worse, the bulk of accounts receivable where there would never be a deficiency and hence, never a notice of deficiency would run forever interest-free after the first year. Even though Treasury and the IRS pointed all this out, the Senate still went ahead with the proposal and it was passed by the full Senate. Fortunately, the Conference Committee fixed the problem by changing Notice of Deficiency to a notice to the taxpayer specifically stating the taxpayers liability. The enacted language is thus broad enough to cover the demand for payment notices that are routinely sent out per section 6303. And, for whatever reason, the drafters put in a redundancy,

providing that interest is not suspended with respect to any tax liability shown on the return.28 The story of section 6404(g) is basically a story of a very bad draft that got fixed in conference. The part fixed, however, was the technical goof caused by failure to understand the deficiency process. The larger problem with section 6404(g) is how it undermines inquisitorial process. Compare the new section 6404(g) with section 6404(e). The latter section gives the IRS discretion to abate any interest attributable to any unreasonable error or delay made by an IRS employee. The reformers, however, did not trust the IRS to be both the judge and jury to decide when to abate. So section 6404(g) essentially provides the congressional judgment of what is an unreasonable delay. Although this particular reform does not directly shift the prior process of interest abatement to adversarial mode, it does remove decisionmaking power from the IRS by creation of a bright-line rule.29 It is not the prime example of how RRA 98 shifted tax administration into a new paradigm, but it still reflects some of the adversarial thinking that went into RRA 98. For this columns purposes, however, I offer it to you as evidence of the taxwriters lack of basic technical knowledge of tax administration. One should not be surprised to see some confusion at the conceptual level of adversarial and inquisitorial process as well. I submit that one does see that in the CDP provisions and other provisions that I shall discuss in the next few columns.

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28 I confess that I am clueless on that extra languages purpose. The only time I can think it might apply is when the taxpayer self-reports a liability, does not pay it, and the IRS takes more than one year to issue the section 6303 Notice and Demand for Payment. That does not make any sense, however, since (a) as a legal matter, section 6303 requires the IRS to issue the notice and demand for payment within 60 days of the assessment, and courts have held that the failure to do so results in the nonattachment of the tax lien and the inability of the Service to use its levy powers. See Behren v. United States, 764 F. Supp. 180 (S.D. Fla. 1991), and (b) as a practical matter, the IRS submissions processing is pretty darned efficient at sending out that first notice (the CP 501 for IMF accounts). Of more interest is the effect of this little tidbit of legislative history on the situation in Montgomery v. Commissioner, 122 T.C. No. 1, Doc 2004-1409, 2004 TNT 15-9 (January 2004). On one hand, the section 6404(g) history supports the concurring opinions, who point out how Congress failed to respond to criticisms of CDP made by Treasury. See concuring opinions of Judges Laro and Gale. On the other hand, the section 6404(g) history supports Judge Halperns dissent, too. Because Congress went to so much trouble (using redundant language, even) to explicitly deny interest abatement for the liability that taxpayers self-reported even if the IRS fails to give any notice within one year, it makes little sense to infer that Congress would allow those same taxpayers to dispute their self-reported liability in a CDP hearing. 29 Even as fixed in conference, section 6404(g) is still subject to a number of other criticisms, notably that it cuts directly against the idea expressed in section 6501 that the IRS should have three years to identify and examine returns. See Camp, 56 Fla. L. Rev. at 115-116.

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