H.R. 4735

3/17/2010

House Committee on Oversight and Government Reform Subcommittee on Federal Workforce, Postal Service and the District of Columbia

Chairman Lynch, Ranking Member Chaffetz, and distinguished members of the Subcommittee, on behalf of the National Treasury Employees Union (NTEU), I would like to thank you for allowing me to provide comments on H.R. 4735 which would require the federal government to fire workers who fail to pay their taxes and prohibit job applicants with serious tax issues from being hired.

Mr. Chairman, NTEU firmly believes that each and every federal employee should pay their taxes in a timely manner. There are currently rules in place that allow employees to be disciplined and even terminated for serious tax delinquency, but we believe this legislation would deprive them of the right of due process afforded to other taxpayers. Furthermore, we believe that terminating their employment or preventing them from obtaining gainful employment would only serve to worsen their financial situation and lessen their ability to repay any taxes owed or be compliant in the future.

DUE PROCESS

NTEU believes that under H.R.4735, the dismissal of federal employees could occur before they had an opportunity to challenge an IRS determination of delinquency. As with any matter dealing with taxes, it is likely more complicated than it appears. There are, after all, a variety of extenuating circumstances -- divorce and its aftermath, serious illness, loss of a job and significant financial difficulties -- that can play into the existence of a tax debt. There is also the question of what qualifies as a serious delinquency, both in dollar amount and time.

Unfortunately, under H.R.4735, there are no real flexibilities provided for taxpayers that are actively seeking to reach an agreement with the IRS on how to settle their outstanding tax liability or that are facing serious financial hardships. Thus, current or prospective federal employees that are delinquent in their taxes may not be afforded the same rights afforded to other taxpayers in similar circumstances.

Currently, under IRS collection procedures, if a taxpayer does not pay all taxes owed in full when they file their tax return, they will receive a bill. This bill begins the collection process, which continues until the account is satisfied or until the IRS may no longer legally collect the tax, for example if the collection period has expired.

The first notice a taxpayer will receive will be a letter that explains the balance due and requires payment in full. It will include the tax plus penalties and interest added to the unpaid balance from the date the tax was due.

If a taxpayer is unable to pay the balance in full, the IRS may be able to offer them a monthly installment agreement. If a taxpayer is experiencing a financial hardship and is unable to pay anything, the IRS may temporarily suspend collection action.

If a taxpayer does not qualify for an installment agreement under any of the payment options, they may choose to propose an Offer in Compromise (OIC). An OIC is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax liability by payment of a reduced amount.

If arrangements are not made to pay the tax due voluntarily, the IRS may take action to secure payment through several means including: Filing a Notice of Federal Tax Lien, Serving a Notice of Levy, or Offsetting a refund to which a taxpayer is entitled.

During the collection process, even if a taxpayer works out a payment solution with the IRS, the IRS may have to file a Notice of Federal Tax Lien to secure the government’s interest as a creditor in competition with other creditors in certain situations, such as bankruptcy proceedings or sales of real estate. The federal tax lien is a claim against a taxpayers’ property, including property that they acquire after the lien arises. The lien arises automatically when they fail to pay the taxes owed within ten days after IRS sends out their first notice. Once a lien arises, the IRS generally cannot issue a "Certificate of Release of Federal Tax Lien" until the taxes, penalties, interest, and recording fees are paid in full or until the IRS may no longer legally collect the tax.

If a taxpayer wants to exercise their right to appeal the notice of lien, they have 30 days to submit a written request to the IRS requesting a collection due process (CDP) hearing. The purpose of a CDP hearing is to provide taxpayers an opportunity for an independent review to ensure that the lien action is warranted and appropriate

Under H.R. 4735, if a prospective or current federal employee does not pay the assessed tax liability within ten days of receiving a Notice of Federal Tax Lein from the IRS, they will be prohibited from federal employment. They would not be provided the full 30 days to appeal the notice of lein provided to them under the Internal Revenue Code. This is a clear violation of their due process.

In addition, terminating a workers’ employment will only serve to exacerbate any financial distress they may be experiencing, thereby lessening their ability to pay their taxes. I would note that just last week, the IRS announced several additional steps it is taking this tax season to help people having difficulties meeting their tax obligations because of unemployment or other financial problems. The steps include additional flexibility on offers in compromise for struggling taxpayers and a series of Saturday “open houses” offering taxpayers extra opportunities to work out tax problems face to face with the IRS.

This announcement by the IRS is an acknowledgement that in the current economic climate, it is more important than ever that taxpayers be provided with additional flexibilities to help them work through any financial difficulties they may be experiencing and become compliant. Many federal employees have been affected by the economic downturn through the loss of jobs of family members and the loss of value of their homes.

As Nina Olson, the National Taxpayer Advocate, has said, when dealing with non-compliant taxpayers, the focus should not just be on getting them compliant for a single year, but on keeping them compliant in the future as well.

In addition to concerns that H.R. 4735 does not adequately ensure that the rights of federal workers are protected, we are also concerned that the bill does not include any minimum tax delinquency threshold that would trigger the mandatory termination provisions. I would note that H.R. 572, the contractor tax delinquency legislation that is also under consideration by the subcommittee, would only prohibit the awarding of contracts or grants to delinquent contractors that are in excess of $100,000, while H.R. 4735 contains no similar minimum threshold.

We also believe it is unfair that under H.R. 4735 only executive branch federal employees are subject to termination for failing to pay their taxes while Members of Congress remain exempt. Certainly, fairness would require that Members of Congress and federal employees be subject to the same standards.

Furthermore, we have a number of concerns about how the process for determining the eligibility an applicant for federal employment with a tax debt work would. In particular, who would be responsible for investigating an applicant’s tax situation and making the determination of whether or not they are eligible for federal employment? How would such investigations and determinations work and who would be responsible for carrying them out? And would an applicant have the right to respond to any problems that are found? If it is determined that they are not eligible for employment, do they have the right to appeal that decision? And who would be responsible for hearing and deciding such an appeal?

5 C.F.R. 2635

As stated previously, NTEU firmly believes each and every federal employee should pay their taxes in a timely manner and believes that the federal government already has enhanced processes to ensure compliance by federal employees.

Under 5 U.S.C. 2635.809, agencies can take disciplinary action against employees for failure to satisfy their “just financial obligations,” including their obligation to pay Federal, state, and local taxes. These disciplinary actions can range from counseling to removal.

This Office of Government Ethics regulation, part of the government-wide standards of ethical conduct, provides: Employees shall satisfy in good faith their obligations as citizens, including all just financial obligations, especially those such as Federal, State, or local taxes that are imposed by law. For purposes of this section, a just financial obligation includes any financial obligation acknowledged by the employee or reduced to judgment by a court. In good faith means an honest intention to fulfill any just financial obligation in a timely manner.

Federal Employee/Retiree Delinquency Initiative (FERDI)

In 1993, IRS initiated the Federal Employee/Retiree Delinquency Initiative (FERDI), to promote federal tax compliance among current and retired federal employees. According to the Internal Revenue Manual, the program incorporates the purpose and intent of Office of Government Ethics regulations 5 CFR 2635.809, discussed previously.

The broad objectives of FERDI are to enhance the federal government’s tax administration process by improving the compliance of federal employees and annuitants with their responsibility for filing tax returns and paying taxes, thereby helping to ensure the public’s confidence in the tax system. The program combines reaching out to federal agencies to raise their awareness of this issue and prioritizing IRS’ efforts to reduce its unpaid tax cases.

Beginning in 1993, the IRS began periodically matching its records of outstanding taxes and non-filed tax returns against federal personnel records to identify federal workers and annuitants who either had outstanding taxes or had not filed their tax returns. IRS entered into agreements with the Defense Manpower Data Center, which receives personnel data files on many of the government’s active and retired civilian and military workers, and the U.S. Postal Service, which maintains and processes similar data for postal workers, to match these personnel records against a data file of outstanding taxes and unfiled tax returns. Most agencies, accounting for over 95 percent of the federal workforce, participate in this matching process.

Agencies that participate in the matching process and agencies where IRS is able to perform a match using W-2 information annually receive a letter from IRS informing them of the number of employees with outstanding taxes or unfiled tax returns. These letters also contain IRS’ assessment of the agency’s rate of compliance. Because of restrictions imposed by confidentiality laws, these agencies do not receive information on the specific names of individual employees whom IRS has identified as not complying with the nations’ tax laws.

The program has been successful in reducing tax delinquency among federal employees and retirees. In 2008, the overall FERDI non-compliance rate was 2.86 percent, down from 3.47 percent in 2002.

Federal Payment Levy Program

To help IRS collect delinquent taxes more effectively, Congress included a provision in the Taxpayer Relief Act of 1997 (P.L. 105-34), which became Section 6331 (h) of the Internal Revenue Code, authorizing the establishment of the Federal Payment Levy Program (FPLP), which allows IRS to continuously levy up to 15 percent of certain federal payments made to delinquent taxpayers.

Under FPLP, the IRS sends an electronic file containing tax debt information to the Department of Treasury’s Financial Management Service (FMS). The FMS then searches for matches between the names and taxpayer identification numbers (TINs) in its database on pending federal payments and the names and TINs in its database on delinquent tax accounts. If a match is found, the FMS notifies the IRS, which in turn notifies the taxpayer in question of its intent to levy certain federal payments to that individual until the tax debt is paid in full. If 30 days pass with no reply from the taxpayer, the IRS authorizes FMS to levy all eligible federal payments to that individual. The levy remains in effect until the debt is paid in full, or until the taxpayer makes other arrangements with the IRS to pay off the debt.

The list of federal payments that can be levied through the FPLP include; federal employee retirement annuities, federal payments made to a contractor/vendor doing business with the government; federal employee travel advances or reimbursements, certain Social Security benefits, and federal salaries.

According to the Department of Treasury’s FY 2008 Report to Congress, the total amount of levy collections in FY 2008 under FPLP was $400 million, an increase of $311 million over the FY 2003 level.

Section 1203 of the IRS Restructuring and Reform Act of 1998 (RRA 98)

NTEU has experience with mandatory terminations for tax infractions. Commonly known as the “Ten Deadly Sins,” Section 1203 of RRA ’98 outlines ten infractions for which IRS employees must be fired. One of the ten infractions is the untimely filing of federal income taxes, even when a refund is due.

Let me be clear, NTEU does not condone any violation of law or rules of conduct by its members at the IRS or in any other government agency. Violations of some rules clearly warrant termination of employment. But even the previous Administration recognized the adverse impact Section 1203 was having on IRS employees and the ability of the IRS to carry out its mission, and recommended several modifications to Section 1203 to enhance the fundamental fairness of the statute, including allowing appropriate discipline rather than mandatory termination. NTEU believes mandatory termination for even minor tax infractions is unduly harsh and should not be the only disciplinary action available. The system in place at the IRS takes away discretion from managers and requires large amounts of resources to administer. In addition, it is patently unfair to hold those who are charged with enforcing the tax laws to a higher standard than those who write them.

NTEU strongly believes we should be changing the system at the IRS, not subjecting the rest of the federal workforce to it.

IRS Employee Tax Compliance Program

Mr. Chairman, while we believe the mandatory terminations provisions under Section 1203 are patently unfair, we do believe it is the duty of each and every IRS employee to pay their taxes and support IRS efforts to ensure their compliance.

We also believe that currently IRS already has sufficient ability to identify and punish employees who may have failed to meet their obligations as taxpayers. Under the Employee Tax Compliance (ETC) Program, the IRS can identify employees who have filed or paid their taxes late, are delinquent in paying any balance due, or for whom IRS has no record of a tax return having been filed. The program periodically matches IRS’ automated personnel records against its master files—its detailed database of taxpayer accounts—and downloads any matches into a separate Employee Tax Compliance database. Program personnel review these data to identify the potential compliance issue, and if they determine an infraction has occurred, refer the issue to the employee’s labor relations office for review. Depending on the nature of the issue identified, certain disciplinary action may be warranted.

I would note that in 2004, as part of a continuing effort to ensure tax compliance by IRS employees, IRS instituted a number of steps to ensure employees strictly met and followed their tax filing and payment requirements. The multi-step initiative included a new review of tax behavior of IRS employees, a deeper IRS compliance and auditing effort for employees and an expanded education and outreach effort inside the agency.

NTEU strongly believes that the IRS Employee Tax Compliance Program will ensure that IRS employees fulfill their responsibility to meet their tax obligations and allow them continue effectively serving their mission of providing taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.