TESTIMONY OF SUSAN D. ANDERSON, EXECUTIVE DIRECTOR, LOWER YUKON ECONOMIC DEVELOPMENT COUNCIL, ANCHORAGE, ALASKA

MS. ANDERSON. My name is Susan Anderson, Executive Director of the Lower Yukon Economic Development Council. Our 15-member council serves the 10 villages of the Lower Yukon region which lie within the boundaries of the Wade-Hampton Census area, encompassing 10,000 square miles. The mission of the council is to help residents achieve economic independence by bringing State, Federal and private resources to the region.

In addition to providing business and community development services, one of our mandates is to assist area residents, including commercial fishermen, to resolve tax issues including historical non-compliance, tax obligations and current filings. We have been working with individuals to resolve these issues since 1993 when the chum salmon run disaster made it difficult for area fishermen to pay their taxes. Some of our work is helping those who do not read and write English to communicate with the IRS.

When the State established its Commercial Fishing Tax Obligation loan program in 1994, I traveled through the Lower Yukon with representatives of the State loan program to offer assistance in paying past-due taxes. During that trip, we discovered that nonfiling was as large a problem as the inability to pay tax obligations. We also found that the reasons for non-filing were largely a lack of education and a lack of understanding of the IRS.

In February of 1994, we arranged with the IRS to have agents travel to the region to help people file their tax returns for past years. During that trip, 150 returns were filed. LYEDC and the IRS were very encouraged by this result and continued to work together to resolve tax issues in the Lower Yukon region. By October of 1995, limited entry permit holders from the Lower Yukon had received over $250,000 in tax obligation loans which were used to pay their back taxes.

In late 1995, I was approached by the IRS Problem Resolution Office to help devise a tax education program which would deliver education to rural Alaska's villages. We developed a partnership between the IRS, LYEDC and the school districts of the Lower Yukon. Using software purchased by LYEDC and a lesson plan developed by the IRS, the school districts are teaching tax preparation to senior high students. As an offshoot of this program, the Small Business Development Center has joined us to offer some of the same courses to adults in the community using the schools' computers.

The Lower Yukon program was designed to be a pilot project which could be used as a delivery system state-wide in coming years. The beauty of this program is that it uses minimal resources to provide the maximum opportunity for developing local capacity for tax preparation, thereby avoiding many of the tax problems facing residents of rural Alaska. This is an effort on the part of the IRS to effectively address the educational needs of all taxpayers. Although this tax season is not yet completed, we are all optimistic about the prospects for success of this program.

Unfortunately, because of changes within the IRS, we may never know if educating rural Alaskans will improve compliance. The IRS

is currently implementing its reorganization plan which will consolidate taxpayer education and services under a Seattle District which will include Alaska and Hawaii. The reorganization is intended to make the IRS more efficient and to save money. The reorganization will reduce the number of employees in Portland and Seattle and remove responsibility for taxpayer education from Alaska and Hawaii altogether.

The total savings in personnel costs achieved by removing taxpayer education from these two States is less than $100,000, as the program has operated with one professional staff person in each State for many years. Given the amount of money spent by the IRS on administration and printing, $100,000 hardly seems like a significant savings.

Overall, this reorganization will eliminate the current Alaska District and several Alaska services will be transferred to a new district based in Seattle. The Seattle District office, more than 2,000 miles from Anchorage, will be the IRS' primary location for Alaskan and Hawaiian taxpayers on education, assistance, or compliance matters. Residents of the States of Alaska and Hawaii will no longer have the ability to work with the IRS to resolve tax issues or to prevent them from arising in the future. This will be a serious setback for the collection efforts of the IRS.

The efforts of the Alaska Business Development Center and the State of Alaska have opened doors within the IRS to rural Alaskans. The cooperative efforts of our council with the IRS have created an atmosphere in our region which has fostered a desire on the part of regional residents to come into compliance and to remain in compliance with IRS codes. This is a new way of thinking in rural Alaska. The way in which IRS operated in the past, including seizing property and garnishing wages without personal contact, caused great fear among many rural Alaskans.

If the Alaska District of the IRS is eliminated in favor of the Seattle District, it is almost certain that the typically aggressive way of collecting taxes will return, and as a result the IRS will see a return of the previously high levels of non-filing and non-payment in rural Alaska. To help ensure that the days of non-filing and noncompliance do not return, taxpayer education and control of the Alaska District must remain in Alaska. It is so difficult in Alaska, and indeed in the rest of the Nation, to create programs which actually solve problems. It would be almost criminal to remove our potential for success at this juncture.

[The prepared statement of Ms. Anderson follows:]

PREPARED STATEMENT OF SUSAN D. ANDERSON

My name is Susan Anderson, Executive Director of the Lower Yukon Economic Development Council. Our 15-member council serves the ten villages of the Lower Yukon region which lie within the boundaries of the Wade-Hampton Census area encompassing 10,000 square miles. The mission of the council is to help residents to achieve economic independence by bringing State, Federal and private resources to the region.

In addition to providing business and community development services, one of our mandates is to assist area residents, including commercial fishermen, to resolve tax issues including historical non-compliance, tax obligations and current tax filing. We have been working with individuals to resolve these issues since 1993 when the chum salmon run disaster made it difficult for many fishermen to pay their taxes. Some of our work is helping those who do not read and write English to communicate with the IRS.

When the State established its Commercial Fishing Tax Obligation loan program in 1994, I traveled through the Lower Yukon with representatives of the State loan program to offer assistance in paying past due taxes. During that trip we discovered that non-filing was as large a problem as the inability to pay tax obligations. We also found that the reasons for non-filing were largely a lack of education and understanding of the IRS.

In February of 1994 we arranged with the IRS to have agents travel to the region to help people file their tax returns for past years. During that trip 150 returns were filed, LYEDC and the IRS were very encouraged by this result and continued to work together to resolve tax issues in the Lower Yukon region. By October of 1995 limited entry permit holders from the Lower Yukon had received over $250,000 in tax obligation loans which were used to pay their back taxes.

In late 1995 I was approached by the IRS Problem Resolution Office to help devise a tax education program which would deliver education to rural Alaska's villages. We developed a partnership between the IRS, LYEDC, and the School Districts of the Lower Yukon. Using software purchased by LYEDC and a lesson plan developed by the IRS, the school districts are teaching tax preparation to the senior high students. As an offshoot of this program, the Small Business Development Center has joined us to offer the same course to the adults of the community using the schools' computers.

The Lower Yukon program was designed to be a pilot project which could be used as a delivery system statewide in coming years. The beauty of this program is that it uses minimal resources to provide the maximum opportunity for developing local capacity for tax preparation, thereby avoiding many of the tax problems facing residents of rural Alaska. This is an effort on the part of the IRS to effectively address the educational needs of all taxpayers. Although this tax season is not yet completed, we are all optimistic about the prospects for success of this program.

Unfortunately, because of changes within the IRS we may never know if educating rural Alaskans will improve compliance. The IRS is currently implementing its reorganization plan which will consolidate taxpayer education and services under a Seattle district which will include Alaska and Hawaii. The reorganization is intended to make the IRS more efficient and to save money.

The new organization will reduce the number of employees in Portland and Seattle, and remove responsibility for taxpayer education from Alaska and Hawaii altogether. The total savings in personnel costs achieved by removing Taxpayer Education from these two States is less than $100,000 as the program has operated with one professional staff person in each State for many years. Given the amount of money spent by the IRS on administration and printing, $100,000 hardly seems like a significant savings.

Overall this reorganization will eliminate the current Alaska district and several Alaska services will be transferred to a new district based in Seattle. The Seattle District office, more than 2,000 miles from Anchorage, will be the IRS's primary location for Alaskan and Hawaiian taxpayers on education, assistance or compliance matters. Residents of the States of Alaska and Hawaii will no longer have the ability to work with the IRS to resolve tax issues or to prevent them from arising in the future. This will be a serious setback for the collection efforts of the IRS.

The efforts of the Alaska Business Development Center and the State of Alaska have opened doors within the IRS to rural Alaskans. The cooperative efforts of our council with the IRS have created an atmosphere in our region which has fostered a desire on the part of regional residents to come into compliance and to remain in compliance with IRS codes. This is a new way of thinking in rural Alaska. The way in which the IRS operated in the past, including seizing property and garnishing wages without personal contact, caused great fear among many rural Alaskans. If the Alaska District of the IRS is eliminated in favor of the Seattle District, it is almost certain that the typically aggressive way of collecting taxes will return, and, as a result, the IRS will see a return of the previously high levels of non-filing and non-payment in rural Alaska. To help ensure that the days of non-filing and non-compliance do not return, taxpayer education and control of the Alaska District must remain in Alaska. It is so difficult in Alaska, and indeed in the rest of the nation, to create programs which actually solve problems, it would be almost criminal to remove our potential for success at this juncture.

Chairman STEVENS. Thank you. Let me just ask you a few questions. Mr. Street, as I understand it, what the IRS did was it got from the State the reports of the fish tickets that the permit holders had filed showing the gross amount of fish that had been landed by, for instance, the gentleman you mentioned, Mr. Carle, and,

based on that, put a value on the fish and charged him with a total gross as far as the income he had not filed a tax return for. Is that right?

Mr. STREET. That is correct, Senator.

Chairman STEVENS. And then when he didn't respond to it, they proceeded to then put a garnishment not only on whatever he had, but also to attach the permit that was issued by the State, which is a limited entry permit that allows people in specific areas the right to fish to a limited amount every year, correct?

Mr. STREET. That is correct. What they did is they force-filed. They filed taxes on his behalf based on the gross income that was discovered from the sale of his fish. That is right.

Chairman STEVENS. And your organization went back through and documented the expenses that he had in generating that income and found that for the periods involved he owed $28,000 rather than several hundred thousand dollars, is that correct?

Mr. STREET. That is correct, Senator. Once the expenses had been taken into consideration, including the standard deduction that all taxpayers are entitled to, the tax obligation was $28,000, as I described.

Chairman STEVENS. As I understand it, there also is a situation that our State does not allow permits to be seized. They are rights, but they don't have value as far as the State is concerned, isn't that correct?

Mr. STREET. The Entry Commission in the State is opposed to the seizing and selling of the permits. That is correct, sir. It would be inaccurate to say that they didn't have value.

Chairman STEVENS. No. They have value, but this forces the State to transfer the permit to an ineligible, or a person that may not be eligible to purchase it, right?

Mr. STREET. That is correct. They are opposed to having a third party such as the IRS dictate who a permit would be sold to. It is a privilege that they want to control.

Chairman STEVENS. The permits were issued basically to the people who resided in the area, right?

Mr. STREET. That is correct, sir, who have had a history of fishing in that area.

Chairman STEVENS. Now, Ms. Anderson, you found that as a result of the reorganization-and I might add that it is not alone in IRS; the administration seems to be intent on closing offices in Alaska mainly because they are paid a 25-percent cost of living allowance, the government employees. I don't know if you realize that, but on the basis of productivity and efficiency per dollar paid, Alaska and Hawaii are automatically at the bottom of the list because our people get paid an offshore cost of living allowance because of the high cost of living, and both Alaska and Hawaii offices are being closed very rapidly in almost every agency of the government. But in this case, they are going to move the IRS people to Seattle, correct?

Ms. ANDERSON. They will be increasing the staff in Seattle to make up for the shortfall when they close down the offices in Hawaii and Alaska, but my understanding is that the employees who are currently in Hawaii and Alaska will just be transferred to a different job within the State and won't lose their jobs at all.

Chairman STEVENS. I understand they won't lose their jobs, but the reason for closing the offices is based upon an economic decision rather than a perceived lack of need for the offices, right?

Ms. ANDERSON. Absolutely, but it is curious that they are just transferring the position from one place to another within the State organization of the IRS office in order to save money, but they are still spending the money. The service will no longer be provided, but the people who used to provide the service will still be employed.

Chairman STEVENS. It is very difficult to understand. The modernization program comes into effect because that is what they did; they obtained the gross records from the States and fed them into the computer and cross-checked that against the returns that had been filed and proceeded to assess taxes on the basis of the value of the fish that had been landed without regard in any way to the economics of the enterprise, to the costs of the business.

I don't think people understand the crew shares. Can you just for the last second explain that? That is the payment made to the crew by the boat owner or captain for their share of the fish that is landed. They are joint venture operations, right?

Mr. STREET. That is correct, sir. You have to have a limited entry permit holder who oversees and basically is the head of the fishing business, and depending on the type of gear used, he has to hire crew members to assist him in this and they all receive a percentage based on the gross income from the sale of the fish.

Chairman STEVENS. Thank you. Senator Glenn?

Senator GLENN. Thank you, Mr. Chairman. I never met Mr. Carle, obviously, but I would like to inquire, is this situation where Mr. Carle apparently relied on the fact that he didn't know that there were income tax laws or he was supposed to be paying income tax-is this a common occurrence or is this a real rarity among fishermen up there?

Mr. STREET. I would say it is not that unusual. In rural Alaska, somebody who was born and raised in rural Alaska has limited formal education. His interaction with something like the IRS is practically nil. His parents before him probably had very little, if any, interaction with something like the IRS, so it doesn't become a part of their operation.

Senator GLENN. Well, does this mean there is no withholding, no Social Security, and none of the other government forms are filed? How about Alaska requirements on business? Certainly, there are some requirements there that he has to file?

Mr. STREET. Well, these are independent business people and there is no need for withholding of estimated income tax from their gross revenues from fishing.

Senator GLENN. We have had a couple of cases from southern Ohio, which isn't as populated as the rest of the State. People back in some of the hill country there have gotten caught in the same thing. They just didn't file, period, and then claimed, oh, I didn't know I was supposed to file, and so on. I tell you, it didn't stand up for them and I don't think it should.

I don't know Mr. Carle or anything about him. Maybe it is a different situation up there, but I would think, if this is a commonplace thing, maybe the Alaska Business Development Center ought