Can the IRS truly be reformed?

USA Today (Society for the Advancement of Education), Jan, 1998 by Jeff A. Schnepper

It has been said that the only difference between death and taxes is that death doesn't become more complicated -- and more painful -- every time Congress meets. Well, they're at it again! As this column was being written, Congress was debating several new tax proposals that seek to change your relationship with the Internal Revenue Service and the very structure of the tax system itself.

Congressional testimony of IRS mismanagement and uncontrolled strong-arm activities forced a "sincere apology ... for mistakes we have made and for any anguish we have caused" from Acting Internal Revenue Service Commissioner Michael P. Dolan. It also resulted in legislation proposing the creation of a new IRS Oversight Board within the Treasury Department with review powers over various budget items, personnel decisions, operational functions, and the approval and establishment of the mission and goals of the IRS itself. Composed of 11 members, it would contain eight who could not be Federal employees. These "private life" members would be selected based on their expertise in management, service, law, technology, and organization. It is hoped that they will give a non-bureaucratic perspective to taxpayer service.

While the IRS's proclaimed goals rejected quotas as a criteria in compensation and promotion, the internal culture of the agency mandated the opposite. Although the IRS generally tries to do a good job, as a former IRS employee put it, "the organizational culture tends to be driven by the need to produce good collection figures, which can lead to sloppy and even overbearing collection methods at the field office level." While I don't expect the Board to have any real impact on the IRS, collection abuses should decrease thanks to the publicity they have received.

With the IRS, taxpayers always have the burden of proving their deductions. With respect to alleged unreported income, the IRS has the burden of proof. Except for unreported income, individuals always are guilty until proven innocent. Is this an appropriate reflection of the American spirit? Is it potentially poisonous politically?

The Internal Revenue Service Restructuring and Reform Act of 1997 contains within it a Taxpayer Bill of Rights 3, with one of the provisions turning the traditional taxpayer burden of proof on its head. The proposal provides that the IRS shall have the burden of proof in any court proceeding with respect to an issue of fact (not law) if you assert a "reasonable dispute" and "fully cooperate" with the IRS.

This proposal looks great in the headlines, but fails to produce any real value when examined in detail. First, you still have the burden of proof with respect to any issues of law. That's where the really big dollars are. Second, you still have the burden of proof where the Code requires specific taxpayer substantiation. That translates into all deductions for meals, entertainment, and certain travel. Moreover, and most importantly, "fully cooperate" is defined to require you to provide, in a reasonable period of time, access to and inspection of all of your witnesses, information, and documents. In addition, before you can qualify, you have to exhaust all of your administrative remedies, where the burden of proof still is with you.

Those who have argued against this provision fear that it would create havoc within the tax examination system. They point out, correctly, that all documents to prove expenses, etc., are in the control of the taxpayer and therefore he or she should have the burden of proof in producing them. What goes unreported is that this shall continue to be the rule during all administrative proceedings. Only at the judicial level will the burden shift. and then only after full cooperation. That means the burden doesn't shift until all of the taxpayer's relevant documents are in the hands of the IRS. Thus, the basis for the objection falls away.

Is the burden shift a good idea? Absolutely! Any time I can take the upper hand -- or at least get an equal chance -- in dealings with the government, I'm a happy man. However, I suspect the real winners here are the attorneys who will generate huge bills litigating whether or not "full cooperation" has been achieved.

Talking about lawyers, currently, if you "substantially prevail" in a dispute with the IRS, you can be awarded reasonable litigation costs, including legal fees up to $110 per hour (indexed for inflation) if the position of the government was not substantially justified. The new proposals provide for fees in excess of $110 per hour when justified; move the point earlier where you could qualify for reasonable administrative costs; permit appropriate fees to be awarded, even when actual fees were nominal; and modify the substantial justification requirement of the government by taking into account all rulings against it, including other circuits. Moreover, the proposed Restructuring and Reform Act increases the Tax Court small case cap to $25,000. Under current law, if you want to use the special small case procedures, which are much more informal, your dispute must not involve more than $10,000. I support all of the above procedural changes, but recognize that, while they are steps in the right direction, they are very small steps.