IRS Restructuring and Reform Act of 1998

By a vote of 402 to 8, the House has overwhelmingly approved the IRS Restructuring and Reform Act of 1998. The proposed legislation follows months of Congressional testimony alleging IRS abuses. The new law would establish an “IRS Oversight Board” within the Treasury Department whose mission would include reviewing operations to ensure the proper treatment of taxpayers. The Board would also review plans for a modernization of operational functions, and approve the Commissioner’s plans for a “major reorganization” of the IRS. A late rider added to the bill would shorten the holding period for long term capital gains property from 18 months to 12 months.

A new Taxpayer Advocate system would replace the present-law problem resolution system with a “system of local Taxpayer Advocates who report directly to the National Taxpayer Advocate.” Unlike under the current system, the Advocate would be “independent from IRS examination, collection, and appeals functions.”

The bill also effects a profound transformation in the procedural rights of taxpayers: Provided the taxpayer complies with the Code and Regulations, maintains records, and cooperates with “reasonable” IRS requests interviews and information, the bill shifts the burden of proof to the IRS in any court proceeding with respect to any factual issue with which the taxpayer provides credible evidence.

The legislation would also:

¶  Expand the authority of courts to award litigation costs to taxpayers prevailing against the IRS. In addition, reasonable attorneys’ fees would no longer contain hourly rate caps; and in determining whether an IRS position was “substantially justified,” courts would be required to take into account whether the IRS had lost in other courts of appeal on substantially similar issues;

¶   Permit taxpayers to recover up to $1 million in civil damages caused by IRS officers or employees who willfully violate provisions of the Bankruptcy Code relating to automatic stays or discharges;

¶ Increase the Tax Court jurisdictional limit for hearing informal “small cases procedures” to $50,000, from $10,000;

¶  Expand the jurisdiction of the Tax Court to hear responsible personal penalty assessments before payment;

¶  Modify the innocent spouse rules by permitting a spouse to elect to limit his or her liability for unpaid taxes on a joint return to that spouse’s separate liability amount. Allocation of items between spouses would follow the rules determining which spouse would report an item if separate returns had been filed;

¶  Equitably toll the statute of limitations for refunds if the taxpayer is unable to manage his or her financial affairs due to severe disability;

¶  Establish a net interest rate of zero on equivalent amounts of overpayment and underpayment existing for the same period;

¶  Bar the IRS from imposing a one-half percent per month failure to pay penalty on taxpayers who have entered into an installment agreement;

¶  Suspend the accrual of interest and penalties after one year (provided the taxpayer timely filed a return) if the IRS has not sent a notice of deficiency within one year from the date of filing, or the due date of the return, if later;

¶  Require each notice containing a penalty to include the name of the penalty, the code section, and a computation of the penalty;

¶  Establish formal procedures to insure that the taxpayer is afforded due process when the IRS seeks to collect taxes by levy or seizure; and

¶ Extend the confidentiality privilege to accountants and enrolled agents furnishing tax advice. The privilege is now applicable only to attorneys.

The IRS has released audit statistics for the 1995 tax year. The overall percentage of individual returns examined was 1.67. More than 4 percent of returns containing a schedule C were examined (primarily due to the number of businesses reporting a net loss). Nonschedule C filers with  incomes up to $100,000 had a 1.16 percent audit rate, while nonschedule C taxpayers with incomes over $100,000 had a 2.85 percent audit rate.

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Information Desk

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