Restructuring and reforming the Internal Revenue Service

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

Passed overwhelmingly 402-8 in the House of Representatives and 96-2 in the Senate--the Internal Revenue Service Restructuring and Reform Act of 1998 creates "a new day for the American taxpayer," according to Senate Finance Chairman William Roth (R.-Del.). The law clears the way for the most comprehensive internal reorganization of the IRS in more than 40 years.

The act provides for the dismantling of the IRS's traditional geographic divisions and replaces them with operational divisions structured around four groups of taxpayers: Wage and Income, for those with wages and investment income; Small Business/Supplemental, for those who file Schedule C (self-employed), F (farm), E (rental, partnership, trust, estate, and S corporation--those that elect to be taxed like a partnership--income), 2106 (employee business expenses), partnerships, S corporations, and other corporations with income less than $5,000,000; Large Corporate and Middle Market, for corporations with incomes of $5,000,000 or greater; and Tax Exempt, for employee plans, exempt organizations, and state and local governmental entities. It is anticipated that the Chief Counsel's Office will retain a separate, independent structure that would address issues in each of the new divisions.

Along with the structural changes, the act seeks to alter the character and group mind-set of the IRS by creating a nine-member, largely private-sector oversight board, strengthening the national taxpayer advocate, and relocating most of the Inspection Service to the Treasury Department, to be headed by a newly created Inspector General of Tax Administration. The Commissioner of Internal Revenue would have a five-year term, including the current commissioner. The act also calls for annual joint hearings of the Congressional committees with IRS jurisdiction.

These proposals are intended to provide greater oversight and accountability for the agency. However, as Rep. Ben Cardin (D.-Md.) pointed out, "The success of IRS reform will not be the passage of this bill, but the implementation of the bill." The objective is to provide fair and equitable treatment of taxpayers.

The law grants additional taxpayer protections and creates new procedural rules for the agency. What really is going on is a change in attitude from the top more than anything else. Commissioner Charles O. Rossotti has mandated a climate of customer service for the IRS, reflected not only in the Reform Act, but, even more importantly, in how agents are treating taxpayers.

The act extends the attorney-client privilege to tax advice given in non-criminal proceedings by professionals authorized to practice before the IRS (CPAs and enrolled agents). However, this new privilege would not apply to written communications between a practitioner and any representative of a corporation in connection with the promotion of a tax shelter, defined as any investment strategy that comes with the significant purpose of avoiding taxes. Because of the vagueness of the word "significant," it has been argued that the IRS could apply this to any corporate planning advice given by accountants. One of an accountant's functions is to help his client avoid taxes, when legal. A clarification on this issue should be imminent.

Concerning individuals and businesses with a net worth of $7,000,000 or less, the IRS now has the burden of proof in any court proceeding with respect to a factual issue relevant to determining tax liability. The taxpayer must comply with the requirements of the Internal Revenue Code and the regulations issued thereunder; maintain records required by the Code and regulations; cooperate with reasonable requests by the IRS for meetings, interviews, witnesses, information, and documents; and meet the net worth limitations that apply for awarding attorneys' fees.

The act contains a host of taxpayer rights provisions, including penalty and interest reforms, innocent spouse relief, protection against abusive liens and levies, restrictions on IRS use of "financial reality" audit techniques, and expansion of the offer-in-compromise program. These provisions are intended to protect taxpayers from IRS abuses, smooth the process of working out tax problems, and ease dealings with the agency.

The act permits up to $100,000 in civil damages caused by an officer or employee of the IRS who negligently disregards provisions of the Code or Treasury regulations in connection with the collection of Federal taxes. It permits up to $1,000,000 in civil damages caused by an officer or employee of the IRS who willfully violates provisions of the bankruptcy code relating to automatic stays or discharge.

In addition, it prohibits the IRS from seizing any real property used as a residence and any other non-rental property owned by the taxpayer used by someone else as a residence to satisfy an unpaid liability of $5,000 or less, including penalties and interest. Moreover, the act prohibits the IRS from collecting a tax liability by levy during any period a taxpayer has an offer in compromise being processed, during the 30 days following a rejection of an offer in compromise, during any period in which an appeal of the rejection of an offer is being considered, and while an installment agreement is pending.