A practitioners' roundtable on the Taxpayer Bill of Rights 2.
Don Herskovitz, J.D., LL.M Senior Technical Advisor Washington National Tax Group Deloitte & Touche LLP Washington, D.C.
Director Washington National Tax Group Deloitte & Touche LLP Washington, D.C.
Bruce K. Gribens, J.D., CPA
Manager Washington National Tax Group Deloitte & Touche LLP Washington, D.C.
This article is an adaptation of an interview on the Taxpayer Bill of Rights 2. The interview is part of an audiotape series produced by the Deloitte & Touche LLP Washington National Tax Group on various tax topics.
DON: Jim, what does the Taxpayer Bill of Rights 2 (TBR2) mean for taxpayers?
JIM: It's an important piece of legislation. Many of the items in the TBR2 are an expansion of rights contained in the original Taxpayer Bill of Rights (TBR). One important TBR2 provision is the title change from the Taxpayer Ombudsman to the Taxpayer Advocate (TA). This sends a clear signal throughout the IRS, and to all taxpayers, that this person is an advocate for the taxpayer. The TBR2 also imposes an important new requirement on installment agreements. Generally, the IRS must now give taxpayers 30 days' prior notification of revocation of an installment agreement. Before the TBR2, in certain circumstances, the ORS could revoke an installment agreement without notification. There is also an expansion of many of the rights that taxpayers were initially granted in the TBR; finally, the TBR2 codified a number of administrative changes that were made on Jan. 1, 1996 by the IRS Commissioner.
DON: Bruce, what's your opinion of the TBR2;
BRUCE: The TBR2 assists taxpayers in three broad categories:
First, it reduces the financial burden on taxpayers who are already complying with the tax laws. For example, there are provisions that (1) expand the IRS's ability to abate interest, (2) extend the interest-free period within which a taxpayer can pay a deficiency after notice and demand without accruing additional interest and (3) allow the IRS to abate penalties for a first-time depositor's inadvertent failure to deposit payroll taxes.
Second, it eases some of the IRS's collection procedures. For example, it (1) allows the IRS to return levied property in certain circumstances, (2) allows the IRS to withdraw a public notice of lien, (3) increases the levy exemption amount and (4) increases the amount the IRS may accept as an offer-incompromise without having to obtain the IRS Chief Counsel's consent.
Third, it increases the IRS's communication with taxpayers. Specifically, it requires a preliminary notice be sent to persons subject to the trust fund provisions; employers who withhold employment taxes must receive a preliminary notice at least 60 days before the IRS can issue a notice and demand and impose a penalty. The TBR2 also requires that an annual notice be sent to taxpayers with outstanding Federal tax liabilities. Under prior law, the IRS was not required to send annual notices to such taxpayers; because the IRS had 10 years to collect the tax, a number of years would go by, and a taxpayer would forget the debt. Now a taxpayer will be sent an annual reminder that the IRS is still actively seeking payment.
DON: Jim, could you comment on the TBR2's procedural provisions?
JIM: There has been an expansion of the TA's authority to affirmatively take any lawful action (via issuance of a Taxpayer Assistance Order (TAO)) as to taxpayers who would otherwise suffer hardship from the IRS's administration of the tax laws. The filing of Form 911, Application for Taxpayer Assistance Order to Relieve Hardship, with the TA or a Problem Resolution Officer, puts a stay on any matter before the IRS for a 24-hour period.
DON: Do you think the TBR2 will give tax practitioners more flexibility and options in dealing with the IRS? Will tax professionals be able to deal with more experienced personnel at the IRS, who have a more reasonable approach to the taxpayer's problem?
JIM: The TBR2 provides for better communication between taxpayers and the IRS. Sometimes, practitioners have to deal with inexperienced personnel at the lower levels of the IRS. Some of the TBR2's provisions, such as expansion of the use of TAOs, will move a matter to a higher level, ensuring more experienced personnel will review the matter before a potentially harmful action is taken against the taxpayer.
DON: Bruce, what are the more important TBR2 provisions, in your view?
BRUCE: One of the TBR2's revenue offsets is the creation of intermediate sanctions, an excise tax that can be imposed on certain activities of tax-exempt organizations. In general, prior to the TBR2, the IRS could penalize a tax-exempt organization only by revoking its exempt status (or threatening to).
However, the IRS would not want to revoke the exemption of, for example, a hospital, which might hurt a community. Further, there are practical reasons why the IRS may not be able to penalize a tax-exempt organization that is violating the Code's restrictions. With intermediate sanctions, the IRS can assess an excise tax penalty on those organizations participating in an "excess benefit transaction" -- a transaction not at arm's-length or not at fair market value between the organization and a disqualified person (i.e., a person who has influence over the organization, such as an officer or director).
JIM: The IRS has always been reluctant to revoke an exemption. The availability of intermediate sanctions should generate a lot of IRS activity in this area.
DON: Jim, what's your opinion of the TBR2 provisions allowing designated private delivery services (PDSs) to deliver tax returns and other filings to the IRS? This is quite a departure from prior procedure, isn't it?
JIM: It certainly is. Under the TBR2, the IRS can designate qualified PDSs that will meet Sec. 7502(f)s "timely mailing as timely filing" rule.
DON: Could a local delivery service qualify?
JIM: Absolutely. The TBR2 provides that the IRS can designate a delivery service if the service is available to the general public, is at least as timely on a regular basis as the US. mail, has satisfactory recordkeeping criteria and meets additional requirements. A service does have to apply before it can be designated, however. Recently, in Rev. Proc. 97-19, the IRS set out the criteria for designating a PDS and in Notice 97-26, approved the following services as PDSs: United Parcel Service, Federal Express, DHL Worldwide Express and Airborne Express.
JIM: If a taxpayer doesn't use one of the currently designated PDSs, then, unless it uses the US. Postal Service (U.S.P.S.), the filing will not be protected. If the taxpayer needs a postmark, the postmark is only going to be valid for filling purposes if it's from the US.P.S.
DON: So at present, taxpayers should use the US.P.S. if they aren't going to use a designated PDS.
BRUCE: Right -- a courier should not be used until it has become a designated PDS.
DON: Are there any other major TBR2 provisions, Jim?
JIM: There is a lot of activity today in the installment agreement area. The IRS has realized that collection is more successful if a taxpayer agrees to a payment schedule, rather than letting the debt remain inactive for a long period of time. In addition, there's increased acceptance of installment agreements, and the IRS must now give the taxpayer 30 days' notice before revoking such an agreement, unless the tax is in jeopardy. Once the 30-day notice is received, the taxpayer has a right of review, but that procedure needs to be clarified (and probably will be, shortly). The review will likely be via Appeals. The only certainty is that taxpayers who receive a notice of termination should avail themselves of the review procedure. Hopefully, the review will be conducted within the 30-day period; after 30 days, the IRS will impose the lien or levy.
Another new provision allows the Tax Court to determine whether the IRS's failure to abate interest for an eligible taxpayer was an abuse of discretion. The TBR2 requires the taxpayer to petition for such review within 180 days of receipt of the IRS notification; this review is available to taxpayers who meet the net worth standards for an award of attorneys' fees under Regs. Sec. 301.7430-5(f) (individuals with $2 million or less in assets and businesses with $7 million or less in assets).
DON: Bruce, what kind of practice problems will the TBR2 help alleviate?
BRUCE: We get a lot of calls regarding liens and levies. In a typical scenario, a taxpayer receives a deficiency notice and does not call the tax adviser until after the IRS has actually placed a lien or levy on the property. In the right circumstances, the TBR2 allows the notice of public lien to be withdrawn or levied property to be returned.
Taxpayer Advocate (TBR2 Section 101;
Code See. 7802)
DON: Jim, what is the new TA position all about?
JIM: The TA is established in place of the Taxpayer Ombudsman and is appointed by (and reports directly to) the IRS Commissioner. The TA is compensated at the same level as the highest person reporting to the IRS Deputy Commissioner. The position is intended to enable the TA to independently represent the interests of taxpayers. Its functions include assisting taxpayers and resolving problems with the IRS. A practitioner should not be reluctant to use the TA; the TA is there to identify areas in which taxpayers have problems in dealing with the IRS. The TA is charged to look through the IRS, to review the calls received, to note the problems the IRS has in dealing with taxpayers and to propose changes in the IRS's administrative practices to correct those problems. In turn, the TA has to submit two annual reports to Congress on proposed solutions to these problems. Practitioners are encouraged to identify problems and propose legislative solutions for the TA's report to Congress. The first report (due Dec. 31 each year) describes the TA's activities during the prior fiscal year, the problems noted and a plan to correct them. This report is to summarize the 20 most serious problems that taxpayers have in dealing with the IRS.
The other annual report (due June 30 each year) contains the TA's objectives for the next calendar year. The creation of a TA should serve to quell some of the frustration practitioners feel in dealing with the IRS.
Taxpayer Assistance Orders (TBR2 Section 102;
Code Sec. 7811)
DON: Bruce, how could a taxpayer use the TA's office to solve a problem?
BRUCE: A Form 911 can be filed to obtain emergency assistance. When something has gone wrong, the filling of that form allow. for communication with high-level, more experienced IRS personnel, who will have a sense of reasonableness, review the situation and step in to protect the taxpayer's rights. Prior to the TBR2, such aid was somewhat limited; the TBR2 expands the use of TAOs. A taxpayer may apply for a TAO; the IRS may also use it to take any lawful action to relieve a taxpayer's significant hardship.
DON: Does it seem that the TA's Office is going to take more of an advocate's role than the Taxpayer Ombudsman did in the past?
BRUCE: Yes, and the TBR2 expands the TA's ability to offer emergency assistance. Therefore, the TA will be involved in more areas in which it didn't have the ability to act before.
JIM: Also, Don, a practitioner shouldn't be reluctant to use Form 911. As Bruce pointed out, it freezes an imminent IRS action for 24 hours, until the situation can be reviewed. While 24 hours seems short, I've seen a lot of things get corrected in that time frame.
DON: The 24-hour period, although short, is an opportunity for the Service to step back and examine the problem more closely. It gives the practitioner an opportunity to present arguments to the IRS, and possibly for the IRS to take a more reasonable position than before.
BRUCE: Right. A higher-level IRS employee is now placing a 24-hour hold, reviewing the situation and examining the request for relief
DON: The bottom line is this: the practitioner should use the 24-hour hold imaginatively to increase the client's leverage.
JIM: Exactly. If a TAO is issued, only the Commissioner, the Deputy Commissioner or the TA can rescind it; prior to the TBR2, a District Director could rescind it. If an imminent IRS action will produce a hardship, file Form 911 with the TA immediately.
In a recent situation, one of our clients had stopped making payments under an installment agreement. The revenue officer was about to impose a lien or levy. We advised the officer we were going to file Form 911, and magically, reasonableness returned to the process -- supervisor became available who was formerly unavailable, and the revenue officer became more understanding of our problem. I believe we resolved the problem in the correct way for both the government and the taxpayer.
DON: Bruce, didn't you also have a recent, successful Form 911 situation?
BRUCE: We had a client facing potential employee layoffs md a plant closing, and awaiting a significant refund from the IRS. We used Form 911 to expedite the refund, enabling the client to meet its payroll. Thus, the Form 911 can be used proactively, not just defensively.
Installment Agreements (TBR2 Sections 201
and 202; Code See. 6159)
DON: Jim, what advice can you give practitioners about installment agreements?
JIM: The IRS enters into an installment agreement when taxpayers do not have the money to pay a tax bill immediately. In some instances, when the debt is below a certain amount, the taxpayer can enter into an installment agreement even if he has the funds to pay the bill immediately. The IRS, in recent years, has acted more like a business in collecting debts, realizing that it's better to get someone to pay something today, on a schedule, than to wait for the entire amount. Prior to the TBR2, if a taxpayer fell behind with even one payment, the IRS would revoke the installment agreement. Now, the IRS must give the taxpayer 30 days' notice of its intent to alter, modify or terminate the agreement, unless connection of the tax is in jeopardy; in such rare cases, the IRS can proceed directly to a lien or levy. A taxpayer who receives 30-day notice that the installment agreement will be terminated has the right to an independent administrative review. The IRS is trying to establish a procedure under which such review will occur within the 30-day period. This is important because, if the 30-day period expires and the agreement is terminated, the resulting liens or levies will have to be removed.
DON: Will this be limited to individuals? I would imagine that small and medium-sized businesses also get into situations that require installment agreements.
JIM: Don, the TBR2 doesn't address that question; it only deals with notification of termination, and the right to have such notice reviewed. Until recently, the IRS entered into installment agreements at the complete discretion of the Revenue Officer and the District. Recently, Ron Rhodes, the IRS Assistant Commissioner of Collections, more or less stated at an AICPA meeting that he would encourage his staff to consider installment agreements, because he realizes this is a business decision for the IRS. I think we are going to see a lot more of them. I would encourage every practitioner whose client has a payment problem to talk to the Revenue Officer about an installment agreement.
Interest Abatement (TBR2 Sections 301
and 302; Code Sec. 6404)
DON: Bruce, how do the new interest abatement provisions work?
BRUCE: Don, prior to the TBR2, the IRS had very limited ability to abate interest, because it compensates the government for the loss of the use of finds. Thus, interest could only be abated for unreasonable errors or delays in IRS ministerial acts. Under the TBR2, the IRS can abate interest for ministerial acts and managerial acts (or delays) caused by IRS personnel (e.g., loss of records, personnel transfer, extended leave for illness or training). In such cases, the IRS can abate the accrued interest caused by the delay.
JIM: Let me add that, prior to the TBR2, if an IRS employee took a one-year leave for training, that was a managerial act for which interest could not be abated. Now it could be.
DON: Also, the Tax Court now can review the IRS's failure to abate interest. We're talking about the potential for abatement of a large amount of interest, not just when a one-week or 30-day problem is created by the Service.
JIM: Yes, it could be a sizable amount of interest. The TBR2 allows the taxpayer to petition the Tax Court to review (within 180 days after the mailing of the IRS's decision not to abate interest) whether the IRS's refusal was an abuse of discretion; such review was not available under prior law. To be eligible for such review, the taxpayer must meet the Regs. Sec. 301.7430-5(f) net worth provisions.
DON: Jim, when a client is in Appeals and has this opportunity to go to Tax Court, it sort of tips the scale a bit in his favor.
JIM: Absolutely. Now, the IRS must consider the hazards of litigation. Prior to the TBR2, if the IRS refused to abate interest, the only recourse was to pay it and sue for a refund. Now, the taxpayer has access to the Tax Court without paying the interest.
DON: The potential for Tax Court review is going to be very helpful in representing a client.
JIM: Yes, because now Appeals Officers have to consider the hazards of litigation.
Extension of Interest-Free Period
(TBR2 Section 303; Code Sec. 6601)
DON: There's a provision in the TBR2 extending the interest-free period for taxpayers.
BRUCE: Yes. Prior to the TBR2, a taxpayer had 10 calendar days from the date of a deficiency notice to pay the amount due without accruing interest; basically, it gave the taxpayer additional time to make the payment, so that when the payment was made, the full deficiency was satisfied. For instance, if a deficiency notice stated that $100,000 in tax was due, if it was paid within the 10-day period, the taxpayer did not get a later bill for the accrued interest during the 10-day period. Well, Congress extended the 10-day period, because it wasn't long enough. Now, for deficiencies under $100,000, the interest-free period is 21 calendar days; for deficiencies of $100,000 or more, the interest-free period is now 10 business days. These time periods may still be insufficient to determine whether the deficiency is correct (e.g., by obtaining the IRS records) and/or to raise the funds to pay it.
Required Deposits of Payroll Taxes
(TBR2 Section 304; Code Sec. 6656)
DON: There is a provision in the TBR2 that is somewhat unique -- the abatement of penalties on payroll taxes. Jim, would you please explain that?
JIM: Yes. The IRS now may waive the penalty for an inadvertent failure to deposit any employment tax if (1) the taxpayer meets the net worth requirements, (2) the failure to deposit occurred in the first quarter that the depositing entity was required to make deposits and (3) the employment tax return was timely filed. The IRS also may abate the failure to deposit penalty for first-time depositors who inadvertendy send the deposit to the IRS instead of the required government depository. That's an easy mistake to make for novice depositors.
DON: Also, if a new corporation or other entity is created with taxpayers who are experienced in making deposits, a mistake in transmitting deposits may still come under the first-time depositor provision.
JIM: Good point.
Joint Returns (TBR2 Section 403; Code Sec. 6103)
DON: Another problem arises when parties who filed jointly are separated or divorced. There are many situations in which one spouse doesn't know that collection activities have started against the former spouse until it's too late. What does the TBR2 do about that, Bruce?
BRUCE: If a deficiency is assessed on a joint return, and the taxpayers are no longer married or no longer reside in the same household, the TBR2 requires the IRS to disclose in writing to an ex-spouse (in response to a written request) whether it has pursued collection activities against the former spouse. Under prior law, the IRS could withhold this information from the other party to the joint return. Not only does the IRS now have to tell the ex-spouse whether it has pursued collection activities, it also has to disclose the activities undertaken, whether wages or other property were levied, and the amount collected, if any. This can be very helpful information, especially when the parties aren't communicating. To prevent abuse, the IRS can limit the number of times an ex-spouse can request this information to one written request per quarter, unless the taxpayer has good cause to seek more frequent information. Additionally, for safety reasons, the IRS disclosure may omit the current home address and business location of the person from whom it's collected, in case there's a hostile relationship between the ex-spouses.
Lien Withdrawal (TBR2 Section 501(a);
Code Sec. 6323)
DON: Collection activities are always an area of dispute. One of the taxpayer problems is that when liens are filed against them, it creates credit problems. Does the TBR,2 offer relief.
JIM: There is a provision, Don, for the withdrawal of public notice of the lien. Under prior law, the IRS could withdraw a notice of lien only if it was erroneously filed or the tax was paid in full. Now, the IRS can withdraw a lien prior to full payment of the tax. For example, if the filing of the lien is premature, it can be withdrawn. I think the Service may be reluctant to withdraw a lien if there's an installment agreement, but I would still ask. The lien can also be withdrawn if it will facilitate the collection of the tax liability or if the TA determines that it would be in the best interests of the taxpayer and the government.
Return of Levied Property (TBR2 Section 501(b);
Code Sec. 6343)
DON: Often, situations arise in which the Service levies on property. The TBR2 authorizes the Service to return levied property. Tell us about that, Bruce.
BRUCE: Under prior law, the IRS could return levied property only if the tax, interest and penalty were paid in full. Now, the IRS can return levied property in four situations: 1. If the levy was premature or not in accordance with administrative procedures. If the IRS did not use the notice and demand procedures and levied the property prematurely, it can return it. 2. If the taxpayer has entered into an installment agreement. 3. If the return of the property will facilitate the collection of tax. Generally, this occurs when the IRS takes business assets; the property will be returned if the IRS believes that return will enable the taxpayer to generate the income to pay the tax. 4. If the TA determines that its return of the property is in the best interests of the taxpayer and the government.
These situations have to be distinguished from a wrongful levy; when the IRS levies property wrongfully, then ultimately returns it, it pays interest on the value of such property. In the situations enumerated above, the levy is correct; the taxpayer will not receive interest.
Offers-in-Compromise (TBR2 Section 503;
Code Sec. 7122)
DON: Continuing in the collection area, there has been great discussion recently of the problems and issues relating to offers-in-compromise. The Service, at times, has been reluctant to accept an offer; now, it is taking a more active role in encouraging taxpayers to use them. Jim, based on your experience with the Service [former IRS National Director of Appeals] versus the current atmosphere, what's the IRS's practice on offers-in-compromise? Also, what does the TBR2 do to make that program more available to taxpayers?
JIM: The offer-in-compromise area is very hot right now. In the last two or three years, the IRS has recognized that this is an important tool for taxpayers and the government to use to get taxpayers back on the right path. In the past, some district directors never accepted an offer-in-compromise; in recent years, there's been a tremendous increase-in the number of offers made and accepted. However, there was always another step that the Chief Counsel's office had - -to review any offer over $500. The TBR2 raised this amount to $50,000. This increase will greatly facilitate the processing of offers. The offer-in-compromise program is a tool that should always be considered if a client cannot pay a tax bill.
Information Returns (TBR2 Section 602;
Code Sec. 6201)
DON: In the past, the taxpayer generally had the burden of proof. There has been a pro-taxpayer shift under the TBR2, in terms of the burden of proof in certain areas, such as disputed information returns. What have you found in this area, Bruce?
BRUCE: You're correct, Don; in general, the burden of proof is on the taxpayer. In the past, there was a presumption of correctness whenever the IRS assessed a deficiency. Under the TBR2, however, when someone (unintentionally or intentionally) files a Form W-2 or 1099 that shows the taxpayer was paid an amount, when in fact that amount was not paid, the burden of proof is now shifted to the IRS. Once the taxpayer has fully cooperated with the IRS and asserted in a court proceeding that (1) there is a mistake in the Form W-2 or 1099 that hasn't been corrected or (2) the form was intentionally filed incorrectly, showing more income than the taxpayer earned, the burden shifts to the IRS to prove that the form and the deficiency are correct. For this purpose,"full cooperation" means that the taxpayer has notified the IRS within a reasonable period after discovering the mistake and has allowed the IRS access to all witnesses or documents that would be helpful in proving or disproving,the taxpayer's claim.
Trust Fund Taxes (TBR2 Section 901;
Code Sec. 6672)
DON: Bruce, I understand that the TBR2 provides some latitude as to the penalty for failure to file trust fund taxes.
BRUCE: The IRS now has to provide a preliminary notice to taxpayers who are subject to the trust fund penalties, 60 days prior to issuing a notice and demand for the penalty for failure to pay over trust fund taxes. In addition, the statute of limitations cannot expire within 90 days after the date such notice is mailed. Thus, if the IRS does not notify the taxpayer that he is subject to the penalty until the last day of the statute of limitations, it will be extended for 90 days.
DON: Bruce, how would you sum up the provisions of the TBR2?
BRUCE: I think it's a step in the right direction. It's a continuation and an expansion of the rights granted by the TBR. It gives taxpayers some additional tools when dealing with the IRS and eliminates some of the draconian procedures that were in place, especially in the collection area. The TBR2 is a step down the path that will eventually lead to the Taxpayer Bill of Rights 3.
DON: Jim, from your perspective as former IRS National Director of Appeals, and now as co-director of D&T's Tax Controversy Services Team, how would you sum up the TBR2's provisions?
JIM: As Bruce said, it's an important act. It gives taxpayers additional rights, because it expands provisions of the TBR. It's a major move forward. Over the years, the collection process has been very burdensome to some, maybe even harsh. The TBR2 removes some of the harshness and allows some relief. Most important is the recognition that the IRS and the tax system need a TA; there has to be someone to contact to obtain relief. The Form 911, and the fact that only the Commissioner, the Deputy Commissioner or the TA can overturn a TAO is extremely important. It delivers the message that taxpayers are to be listened to and treated with respect.