The 1988 tax bill: ignorance is not bliss

Business Horizons, March-April, 1990 by Tim C. McKee

The 1988 Tax Bill: Ignorance Is Not Bliss

Nearly everyone is aware of the sweeping changes to individual income taxes created by the Tax Reform Act of 1986 (TRA). However, three additional tax acts have been signed into law since the TRA of 1986, and yet another tax act will most likely be passed in 1990.

A basic premise of U.S. law is that everyone is presumed to know the law. It has been established that the IRS does not fully comprehend nor correctly interpret tax law, but that does not change the fact that every taxpayer is presumed to know it. Ignorance is not bliss.

The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) was signed into law by President Reagan on November 10, 1988. The following article will take a brief look at the provisions of TAMRA, including the important Taxpayer Bill of Rights, as they affect the individual taxpayer.

TAXPAYER BILL OF RIGHTS

Near the end of the nineteenth century, Karl Louis Dobermann was engaged as a local tax collector in the German province of Thuringia. Dobermann set out to breed an aggressive dog to assist him in his tax collection duties. The result was the Doberman pinscher. His action put real teeth into the tax collection process.

The Internal Revenue Service has had the same overwhelming advantage as Dobermann. Fear is what most individuals experience when they see as unleashed Doberman pinscher approaching, or when they receive a personal letter from the Internal Revenue Service. The IRS strives to correctly uphold the tax laws, but often - far too often - the IRS has incorrectly assessed taxpayers. Whether right or wrong, the IRS has been able to intimidate, threaten, and economically injure taxpayers with the same force as a Doberman pinscher. The Taxpayer Bill of Rights, a section of TAMRA, has reduced some of the unrestrained power formerly enjoyed by the IRS.

The Taxpayer Bill of Rights was a result of numerous horror stories by individual taxpayers. The three representative accounts you are about to read are true. Only the names have been changed to protect the innocent.

* In 1981, Mr. Sweeny found that he could not pay the taxes he owed. When he received an overdue notice, with the help of an IRS agent he set up a three-year payment plan. Mr. Sweeny made payments on time throughout the next two years. In 1983, Mr. Sweeny received a letter from the IRS stating, "Final Notice: Payment of $4,510 due ten days from the date of this letter." It was August 14, and the letter was dated August 4. Mr. Sweeny contacted the IRS by phone that day and was assured that nothing would happen until he could meet with the IRS. The very next day, the IRS confiscated all the money in his checking account. Checks he had written to his mortgage company and his automobile insurance company on August 8 and August 9 were returned due to insufficient funds. Mr. Sweeny later discovered that a reorganization had taken place and a different agent had been assigned his account. This agent mistakenly determined that the account was due in full immediately. No apology was issued by the IRS.

* On October 31, 1986, Mr. Lohmann received a final notice from the IRS stating that he owed in excess of $7,700. Mr. Lohmann knew that he did not owe anything, but numerous phone calls and letters to the IRS could not solve the problem. In November, the IRS slapped a lien on his property that remained there for two months. The IRS then determined that it had made a mistake in social security numbers and removed the lien. The problem appeared to be solved. Despite this, Mr. Lohmann received a final notice for the $7,700 in March 1987, requiring further phone calls to the IRS to prevent collection.

* Mr. and Mrs. Bach jointly requested and were granted an extension to file their taxes on October 15, 1988. October 15, 1988 was a Saturday, therefore the tax return was due on Monday, October 17. Mr. and Mrs. Bach determined that they could save $356 by filing separate returns and both did so on October 17, 1988. Three months later, the IRS sent Mrs. Bach a letter stating that she owed a penalty of $198 for failure to file her tax return by April 15.

Mrs. Bach called the IRS and explained that she had filed separately but a joint extension had been granted allowing her to file in October. The IRS representative on the telephone agreed that the extension was valid in her case, but that she still owed the penalty because she filed after October 15. Mrs. Bach then pointed out that October 15 was a Saturday. The representative replied that "filing on October 17 was acceptable if she had mailed the return in the morning of October 17, not in the afternoon, as she had done." Therefore the penalty could not be abated.

Not satisfied with the telephone response, Mrs. Bach wrote a letter to the IRS. The penalty was abated. Had she followed the IRS representative's telephone advice, she would have paid the penalty and the case would have been closed.

Similar complaints by numerous taxpayers led to the introduction and passage of the Taxpayer Bill of Rights, a section of TAMRA.