I posted in a recent blogthat I was not a fan of Collection Due Process (CDP) and that it was part of the misguided legislation in the 1998 Revenue Reform Act (RRA98). I overstated my dislike for CDP to make a point, and while not all of the 1998 reforms are negative, I do have a problem with several of the changes. Today, I will examine the off-Code provision that contains the worst, most mean-spirited aspect of those changes, Section 1203.
Section 1203 of RRA98 provides a list of 10 actions by IRS employees that result in termination from employment, and has thus been referred to as the Ten Deadly sins. The only exception exists through the Commissioner of the IRS who must personally commute the automatic termination provision. While employees of the IRS may deserve termination from employment if they commit one of these acts, by targeting only IRS employees the law sends a terrible message and misses an opportunity to make a statement about the acts giving rise to termination. Instead, Section 1203 conveys that Congress sought to offer symbolic legislation rather than pass a law seeking to meaningful influence behavior in way that would positively influence compliance. Political Scientist Murray Edelman described the practice of symbolic legislation in his writings. Having lived with the misguided symbolism of 1203 for 15 years, the time has come to move the discussion to legislation that can create a more effective compliance atmosphere.
Leading up to the passage of RRA 98, Senator Roth of Delaware, the Chairman of the Senate Finance Committee, held sensational hearings on IRS collectionpractices and criminal investigations seeking to demonstrate an agency run amok. While bad case handling no doubt existed, and continues to exist as we enter the sixth month of the current IRS scandal implicating abuses in the handling of applications for tax-exempt status, many of the alleged abuses brought out through the Senate Finance hearings in 1997 and 1998 were later debunked. During the period immediately after the passage of RRA98, Section 1203 received a fair amount of attention. In more recent years it has received much less attention but it continues to haunt tax administration and the implementation of certain tax procedures.
The Treasury Inspector General for Tax Administration (TIGTA) recently reported on the millions of federal taxes owed by contractors working for the IRS. The National Treasury Employees Union (NTEU) responded by pointing out the disparity in treatment between IRS employees and the contractors working side by side with them. The disparity does not exist only between IRS employees and IRS contractors. Section 1203 does not apply to Treasury Department employees, including attorneys at IRS Chief Counsel, or the Department of Justice Tax Division who represent the IRS in court, to Congressional or White House Staffers, or employees of any other federal agency or department.
The impact of Section 1203 on tax procedure and administration makes it a relevant topic for this blog. Before getting to its impact on tax procedure, it is important to lay some ground work and discuss the real impact of the provision.
The GAO Report of 2003
In February 2003 the General Accounting Office (now called the Government Accountability Office and commonly referred to as GAO) did a study entitled Tax Administration – IRS and TIGTA Should Evaluate Their Processing of Employee Misconduct under Section 1203. This study tracks four years of 1203 and does a good job of providing figures on the impact of Section 1203 on IRS employees based on each of the 10 provisions of the statute. The study points out that the 10 provisions really fall into two broad categories – employee tax return related misconduct and taxpayer and employee rights provisions. During the four year period from the end of July 1998 when RRA98 passed until September, 2002, the IRS or TIGTA investigated 3,512 allegations of misconduct implicating Section 1203 and found 419 violations that resulted in 71 employees being fired.
The 10 acts under Section 1203 that will cause the firing of an IRS employee are:
(1) Willful failure to obtain the required approval signatures on documents authorizing a seizure of a taxpayer’s home, person belongings, or business assets [the chilling effect of this one has a significant impact on tax procedure and administration but almost no impact on employee termination]
(2) Providing a false statement under oath with respect to a material matter involving a taxpayer or taxpayer representative;
(3) Violating the rights protected under the Constitution or the civil rights established under six specifically identified laws with respect to a taxpayer, taxpayer representative or other employee of the IRS;
(4) Falsifying or destroying documents to conceal mistakes made by any employee with respect to a matter involving a taxpayer or taxpayer representative;
(5) Assault or battery of a taxpayer, taxpayer representative, or employee of the IRS, but only if there is a criminal conviction, or a final judgment by a court in a civil case, with respect to the assault or battery;
(6) Violating the Internal Revenue Code, Department of Treasury regulations, or policies of the IRS (including the Internal Revenue Manual) for the purpose of retaliating against, or harassing, a taxpayer, taxpayer representative, or other employee of the IRS [guess which provision results in the most allegations of misconduct];
(7) Willful misuse of the provisions of section 6103 of the Internal Revenue Code for the purpose of concealing information from a congressional inquiry;
(8) Willful failure to file any return of tax required under the Internal Revenue Code on or before the date prescribed therefor (including any extensions), unless such failure is due to reasonable cause and not to willful neglect;
(9) Willful understatement of federal tax liability, unless such understatement is due to reasonable cause and not to willful neglect; and
(10)Threatening to audit a taxpayer for the purpose of extracting personal gain or benefit.
Three of these provisions dominate the alleged violations – #6 “Harassment”; #8 “Late Returns”; and #9 “Willful Understatement.” Of these three, Late Returns dominates the actual terminations with 55 of the total of 71 terminations coming from this one provision. See page 9 of the Report.
I was not surprised at all by the three provisions that drew the most allegations or the one provision that resulted in the most terminations. The report dug deeper into the 55 terminations for Late Returns and validated a result I also expected. Table 5 of the report at page 33 displays the grade of each terminated employee. Almost all of the employees fired for Late Returns were low-wage employees. Thirty-seven of the 55 employees fired for Late Returns were grade 7 or below, and grade 4 had the highest number of employees filed. These numbers show that Congress has created a mechanism for firing low-level clerical employees at the IRS who have little to do with the direct enforcement of the tax laws.
The justification for Section 1203’s requirement that all IRS employees timely file their returns or be fired was that public perception demanded that level of tax compliance among IRS employees. The impact of the law falls squarely on low-level employees not engaged in direct enforcement of the tax laws and not in a position to provide much influence with their behavior compared to the other types of high profile federal employees mentioned. I do not condone the late filing by any IRS employee but if the Congressional concern were public perception, it chose an odd group to punish as a means of promoting compliance with the tax laws. Knowing what we now know about this law, we can craft a more meaningful law that actually does promote compliance and is not just symbolic legislation that happens to fall most harshly on employees having little to do with compliance.
The two provisions of Section 1203 focused on employee tax return issues resulted in almost 90% of the 71 firings during the first four years of the existence of the statute (62 out of 71 firings.) I could not find a report similar to the 2004 GAO report laying out the statistics on 1203 actions in significant detail. I did find that in each semi-annual TIGTA report a page providing some detail on the number of 1203 violations. If you look at each semi-annual TIGTA report and turn to the page reporting on 1203, you quickly see that well over 90% of the violations relate to the two provisions dealing with untimely filing tax returns or willfully understating tax.
A Focus on Seizure and Harassment
Rather than focus further on those provisions that primarily target IRS employees who do not interface with the public and have little impact on tax administration and procedure, I want to focus on “Seizure signatures” and “Harassment” which directly impact tax administration and procedure. There were 16 complaints concerning Seizure signatures resulting in 13 completed investigations, zero cases of substantiated violations, and zero firings during the first four years covered by the GAO report. During the entire life of 1203, I see only one reported incident of an employee willfully executing a seizure without appropriate signatures and being terminated.
These numbers should be read in conjunction with the number of seizures occurring after RRA98. Prior to RRA98 the IRS conducted about 10,000 seizures per year. After stopping seizure activity almost completely immediately after RRA98, the number of seizuresslowly grew after its enactment and in the past several years has leveled off at the 600-700 per year range.
If Congress wanted to stop the IRS from conducting seizures, it could hardly have found a more effective mechanism short of simply removing the authority from the Code. If Congress believes that seizing property as a means of collecting taxes serves a viable function, it should consider the chilling effect of Section 1203 on this activity. This chilling effect runs in tandem with the impact of IRC 7803which requires TIGTA to do an annual report on every seizure. The combination of these provisions makes seizure a very rare activity. As a result, revenue officers are even more uncomfortable using it since the prospect of making a mistake on something you rarely do increases the likelihood of unfavorable scrutiny. Maybe the near extinction of seizure from the panoply of remedies available to the IRS serves an overall beneficial purpose to the system of tax administration, but no one seems to look for whether the impact the multi-billion dollar uncollected federal tax debt. Knowing how rare this remedy has become may embolden some delinquent taxpayers who have little to fear from administrative collection action if they do not have wages or bank accounts. This forces administrative collection action on the more difficult cases into a narrower band of collection remedies.
By a large margin, the 1203 provision most frequently used by taxpayers, at least during the first four years of its life, was the Harassment provision. This provision resulted in 1729 allegations with 1,680 completed investigations, six of which were substantiated with one person fired. That is a lot of smoke with very little fire. One could say that all of these allegations and investigations were good for the system because they kept the enforcement employees honest. One might conclude that so few violations were found because government employees were investigating other government employees placing a very high burden on proving harassment or retaliation. The method in which TIGTA reports on 1203 in its semi-annual report does not provide information on the number of alleged violations. It is not possible to tell if harassment violations continue to dominate the number of allegations. The reports do make clear that instances of harassment during the last ten years that result in an actual determination of a violation are rare and almost non-existent.
At least initially, the number of complaints stemming from this provision demonstrated it had more value to many taxpayers and representatives as a sword to thwart investigations rather than a shield to protect against bad behavior. Once a complaint of this type occurs, the actual tax investigation, if it is still open, slows while the Harassment investigation takes place. A complaint of Harassment or the threat of a complaint of Harassment could alter the behavior of the IRS employee and perhaps stop or slow an investigation. Other tools exist for dealing with employees who harass a taxpayer that could result in but do not require termination. These remedies, which predate 1998, could combat bad behavior without adversely impacting compliance activities.
Some Broader Observations and Recommendations
I feel that, in general, Section 1203 brings more harm to the system than good by creating a burdensome drag on tax administration without sufficient benefits. Section 1203 has allowed the collection of data for 15 years on identified employee behaviors within one branch of the federal government. Rather than have TIGTA simply report on the number of terminations or other employee discipline each year, some real research should take place examining the value of this and other 1203 provisions.
IRS employees who behave badly on certain core conduct functions certainly exist. The mechanism for firing federal employees for performance, and even non-Section 1203 conduct violations, may need strengthening in order to eliminate employees whose conduct deserves dismissal. Current federal rules protecting employees may not strike the appropriate balance between protections of the individual rights versus protection of the public. Still, the targeted nature of Section 1203 on the IRS ignores the problems that can exist in any federal agency and appears aimed at currying votes rather than promoting appropriate behavior. Instead of keeping 1203 on the books in its current form as a monument to political symbolism, Congress should conduct a careful study of factors that would protect the public while allowing IRS compliance officers to do their job unimpeded by poorly designed laws. The impact of that targeting after 15 years deserves attention to see if this was just a bad law passed at a time when Congress was flexing its muscle or is an effective tool for controlling the behavior of federal employees that should be extended to other parts of the federal government and to federal contractors.
Based on observation and not empirical data or thoughtful study, I would eliminate the taxpayer and employee rights provisions, except for the provision involving the threat of audit for personal gain. Fifteen years of history suggest that these provisions rarely result in dismissal. I do not condone the other targeted behaviors but believe that IRS employees deserve no different treatment than other federal employees. Most of the other behaviors involve actions not unique to IRS employees. Singling out IRS employees serves no benefit and may result in making them less effective in appropriate compliance activities. To the extent that IRS employees engage in inappropriate behavior, the same tools should exist for all federal employees to discipline that behavior. If those tools need adjustment, do not do it on a targeted basis. Interestingly, the current scandal has triggered Congressional attention to Section 1203, but not the attention I suggest above. The House has passed a bill that will add to the bases for terminating IRS employees.
My perspective is that 1203 works with respect to the two provisions related to return filing and willful understatement of tax. Even though the 2004 GAO report demonstrated that the impact of these two provisions falls hardest on low-level employees, the provisions still provide a base level of appropriate conduct. The requirement to timely file does not adversely impact IRS employee performance on compliance functions. It also acts to promote compliance in the same way the use of licenses can serve as a cost effective method for promoting compliance (a topic I blogged on). The same is true of requiring dismissal for a willful understatement of tax. These two provisions result in well over 90% of the dismissals under 1203. They are measurable, generally inexcusable and do not have a negative impact on IRS employees trying to properly enforce the tax laws.
Legislation has been proposed to extend tax compliance provisions across the federal government. This proposed legislation focuses on payment compliance which 1203 does not address. The IRS has payment compliance provisions that apply to its employees but do not have the force of immediate termination that 1203 contains. Any new federal legislation should include filing compliance for both timeliness and accuracy and should cover not only all federal employees but also federal contractors. Congress should seek to extend these requirements to state employees and local employees based on the benefits provided to those governments by the federal government through the offset provisions of IRC 6402. This is a cost effective mechanism for increasing compliance from a group of individuals who should model compliance with the tax laws. Government employees, at any level, should lose the privilege of government employment if they cannot comply with this most basic function of citizenship which funds their positions. This fruit is low hanging and the failure of any government employee or contractor to timely file and pay the proper amount of taxes reflects poorly on the government as a whole. Any provisions of the type described here should provide for mitigation of sanctions in appropriate circumstances.
I have made brief mention here of IRC 7803 and the annual reporting that TIGTA does on several IRS actions. I will follow up with future posts examining some of the IRC 7803 provisions that I feel provide little benefit but may foster the chilling effect of certain actions by IRS employees in the enforcement functions. It has now been 15 years since these provisions were put into the Code in RRA 98. That legislation contained provisions of wide benefit that resulted from careful study as well as provisions driven more by a mob mentality. After 15 years some attention should be paid to their success or failure in producing the intended results on enforcement.