FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, Ranking Member Turner, and distinguished Members of the Committee:

I appreciate the opportunity to discuss with you today the provisions of H.R. 4181, the "Debt Payment Incentive Act of 2000."

Section 3720B of Title 31 of the United States Code (enacted as part of the Debt Collection Improvement Act of 1996) currently bars a person from obtaining loans, loan insurance, or loan guarantees administered by a Federal agency if the person has an outstanding debt, other than a debt under the Internal Revenue Code of 1986, with any Federal agency that is in delinquent status. This provision can be waived by the head of the Federal agency administering the loan program.

Section 6103(l)(3) of Title 26 of the United States Code (the Internal Revenue Code of 1986) provides that upon written request by the head of a Federal agency administering a Federal loan program, the Secretary of the Treasury may disclose whether or not a loan applicant has a tax delinquent account. Disclosures under this section may be made only for purposes of, and to the extent necessary in, determining the creditworthiness of the applicant.

H.R. 4181 would amend section 3720B in two key respects. First, it would extend the provision to persons applying for Federal contracts. Second, it would extend the provision to tax debts as well as nontax debts. For the latter purpose, the bill provides that each loan applicant or prospective Federal contractor would be required to sign a form authorizing the Secretary of the Treasury to disclose to the head of the Federal agency information describing whether the loan applicant or prospective contractor had an outstanding tax debt in delinquent status.

Treasury generally supports efforts to reduce delinquent debt, both tax and nontax. To effectively achieve this result, however, a number of policy and technical issues must be addressed.

The most general tax policy issue raised by the bill that must be considered is its effect on voluntary tax compliance. Ours is a system of voluntary tax compliance dependent upon self-assessment. Anytime a person's tax status becomes relevant for nontax purposes, an incentive is created to misreport - or not report at all -- tax liability in order to obtain another benefit or to avoid another obligation. Indeed, because it takes longer for a taxpayer who does not file a return to be reflected as delinquent in IRS records, this provision could have the effect of encouraging people not to file returns. Similarly, taxpayers might be encouraged to file frivolous lawsuits in order to avoid delinquent status. On the other hand, the provision could have the effect of enhancing tax compliance be encouraging taxpayers to avoid tax delinquent status by either paying their tax debts or pursuing other appropriate procedural avenues.

The issue of how to define tax delinquent status takes on greater significance under the bill than currently exists for purposes of section 6103(l)(3) because the determination of tax delinquent status under the bill would result in an automatic denial of loans or contracts, a potentially harsher result than merely factoring such status into a determination of creditworthiness as is currently the case under section 6103(l)(3). The bill currently defines tax delinquent status to be any Federal tax debt that has not been paid within 90 days of assessment. Treasury recommends that this provision be deleted. This language is unnecessary in light of section 3720B(a), which grants Treasury the authority to define delinquent status. Alternatively, Treasury believes that the bill should make it explicit that a debt will not be considered to be in tax delinquent status if the taxpayer has either already administratively or judicially appealed or is in the process of administratively or judicially appealing a determination by the Internal Revenue Service (IRS). This is consistent with the approach taken with respect to nontax debts in the existing regulations under section 3720B (31 C.F.R. �5.13). It should be noted, however, that it can take a significant amount of time for a taxpayer to exhaust all administrative and judicial remedies with respect to a Federal tax debt. In either case, Treasury should have the authority and flexibility to determine additional standards for considering a tax debt to be in delinquent status. For example, it may be appropriate to exclude delinquencies of nominal amounts.

In addition, in certain circumstances, taxpayers may be provided opportunities to contest the underlying tax liabilities after assessment. For example, the IRS Restructuring and Reform Act of 1998 provides additional due process safeguards for innocent spouses and taxpayers subject to collection procedures. To ensure that taxpayers in these and other situations are not considered delinquent, Treasury believes the bill and/or implementing regulations also should clarify that a tax debt would not be considered to be in delinquent status if the taxpayer has not been provided the opportunity to contest the underlying liability before the IRS Office of Appeals.

Regardless of precisely how a tax delinquent account is defined, significant procedural and systems changes would be necessary for the IRS to be able to track, analyze, and communicate the information necessary to implement the provisions of the bill. At least initially, the process would involve labor-intensive analysis of each relevant taxpayer's account. IRS estimates that procedural changes could take at least eighteen months to implement. Automation of this process, if possible, would require significant systems changes on top of IRS's planned modernization efforts and would be years off.

Under the bill, a person would be defined, in the case of a corporation, as any corporation with a shareholder owning at least 25 percent of the shares of stock in that corporation and who has been assessed a penalty under section 6672. This is intended to prevent avoidance of this provision by reincorporating a business that had been subject to the penalty. However, in the case of a partnership, a section 6672 penalty of any partner would subject the partnership to this provision. We recommend that this provision similarly be limited to partners with at least a 25 percent interest in the partnership. Otherwise the provision potentially will be unfair to large partnerships and difficult to administer. We note that in both cases, IRS does not currently collect information necessary for determining 25 percent ownership. We suggest that partnerships and corporations applying for Federal loans or contracts should be required to provide a list of such partners or shareholders under penalties of perjury.

Under the bill, in connection with loan applications or contract proposals, taxpayers would be required to authorize the Secretary of the Treasury to disclose whether they had a debt under the Internal Revenue Code of 1986 in delinquent status. Treasury would be required to develop a form for such purpose. The authority for such a disclosure would be section 6103(c) of the Internal Revenue Code, which permits the disclosure of returns or return information to persons designated by the taxpayer.

Treasury recommends that the disclosures contemplated by the bill should instead be made via an amendment to section 6103(l)(3), which currently provides explicit statutory authority for similar types of disclosures without the taxpayer's consent. This is consistent with the statutory scheme of section 6103 generally, under which large-scale disclosures typically are achieved through an explicit statutory exception to section 6103 that grants an agency automatic access to returns or return information for specific purposes. In addition, different rules and procedures apply to disclosures pursuant to section 6103(c) than apply to disclosures pursuant to explicit statutory exceptions. Explicit statutory exceptions typically specify exactly which information can be disclosed, to whom, and for what purposes. In addition, many of these disclosures are subject to special record-keeping requirements under section 6103(p)(3) and safeguarding requirements under section 6103(p)(4). Disclosures pursuant to section 6103(c), by contrast, are subject to none of those limitations. Moreover, while statutory disclosures are typically at least partly automated, section 6103(c) waivers typically involve a paper process and are subject to a review for compliance with certain regulatory requirements by the IRS. Roughly 2 million third-party designee consents are processed by the IRS each year. The disclosures required by this bill would add substantially to that number, would be difficult to administer, and would create delay in granting loans and contracts.

Another important consideration relevant to the disclosure of return information under this provision is that many Federal agencies use contractors to administer their loan programs. Contractors may also be involved in the contract approval process. Disclosures under section 6103 may only be made to officers and employees of the recipient agency unless otherwise expressly provided. The Congress traditionally has restricted access to returns and return information by contractors, even when disclosure otherwise has been authorized, due to concerns about taxpayer privacy. In order to protect taxpayer privacy, the amendment to section 6103(l)(3) should make explicit that disclosures to contractors of the agencies administering the loans or entering into contracts will be permitted for purposes only of this provision, subject to the contractors' agreement to otherwise maintain the confidentiality of the information, and subject to the agency's demonstrated oversight of its contractors' compliance with the safeguard requirements of section 6103(p)(4) to the Secretary's satisfaction.

As currently drafted, this provision appears to limit the information to be disclosed to verification of whether or not the taxpayer has a tax debt in delinquent status. Treasury agrees with the decision to so limit the disclosure particularly if disclosures are to be made to contractors. However, we would also point out that the head of a Federal agency is authorized to waive the provisions of section 3720B. Regulations under this section provide examples of the factors that should be balanced in making a decision as to whether to grant a waiver. These factors include the age, amount, and cause(s) of the delinquency and the likelihood that the person will resolve the delinquent debt. 31 C.F.R. �5.13(g)(3)(i). Treasury believes that in some cases, Federal agencies may wish to provide taxpayers with an opportunity to explain a tax delinquency indicator. This is important because, as noted above, significant procedural and systems changes will be necessary to capture this information, and there are likely to be cases where a delinquent status indicator is erroneous. In order to provide such an explanation, however, additional disclosures will be necessary. In such circumstances it will be appropriate to obtain the taxpayer's consent, using existing IRS forms and procedures to disclose that information.

Treasury recognizes the value of the notice provided by requiring taxpayers to authorize the necessary disclosures. Treasury suggests that such notice should be incorporated into the loan application or contract proposal process without such notice having the legal effect of authorizing the disclosures. Partnerships and corporations would be responsible for notifying their 25 percent partners or shareholders that their return information might be disclosed.

In light of Treasury's policy and technical concerns with the bill, we suggest that if the bill were enacted, it would be appropriate to initiate this program in pilot form. This would permit an overall evaluation of the effectiveness of this program (including its effect on tax compliance) and would provide the IRS with an opportunity to develop procedures or systems necessary to implement this program.

This concludes my prepared remarks. We look forward to working with the Congress in addressing these concerns as the legislation develops. I would be pleased to respond to your questions.