House passes taxpayer rights legislation, but many provisions are already in practice.

In April, the House passed a bill (HR 2337) designed to provide taxpayers administrative relief when dealing with the Internal Revenue Service. Last year, Congress added similar legislation to the Revenue Reconciliation Act of 1995, which ultimately was vetoed by President Clinton. The provisions of the new House bill, Taxpayer Bill of Rights 2, were included in substantially the same form in the balanced budget bill passed by the House last year, and are supported by the administration.

But many of the provisions in HR 2337 already are in practice. The IRS announced in January a series of new taxpayer rights initiatives after the Revenue Reconciliation Act was vetoed. According to the Treasury, the administration wanted to ensure the bipartisan momentum that led to the taxpayer bill of rights would not be lost. The IRS also added new regulatory and guidance projects that are not part of the House bill.

So why does Congress want to pass legislation that is already in practice? Not all the provisions in the HR 2337 are included in recent IRS initiatives. Also, the House bill would ensure the provisions could not be repealed by an IRS administrative action. "There is nothing to prevent the IRS from narrowing its application or rescinding its initiatives," said Patrick G. Heck, senior manager of Ernst & Young in Washington, D.C. "If these provisions are passed by Congress and put into the Internal Revenue Code, taxpayers will know the IRS cannot simply choose to ignore them."

Following are some examples of provisions in the House bill already addressed by IRS administrative action:

* The Taxpayer Bill of Rights would replace the title of taxpayer ombudsman with a taxpayer advocate, who would be able to issue taxpayer assistance orders and would be required to report annually to Congress on problems encountered by taxpayers in their dealings with the IRS. The provision gives the taxpayer advocate more stature within the agency.

The IRS has given the taxpayer ombudsman the authority to issue taxpayer assistance orders to relieve taxpayer hardship, such as directing immediate payment of a refund to an eligible taxpayer or postponing an IRS collection action to allow the IRS to review its appropriateness.

* The House bill would allow the IRS to withdraw a public notice of tax lien or return property that has been levied in certain circumstances; when, for example, the taxpayer has entered into an installment agreement to satisfy the tax liability.

The IRS currently allows taxpayers to appeal liens, levies and seizures. Before this provision, the IRS could return money seized from personal savings accounts only if the taxpayer overpaid the liability or withdrew lien notices that were filed erroneously. "There have been circumstances in which the IRS has taken money from taxpayers that unnecessarily put them out of business or created a severe hardship," said Heck. "In some cases, if the IRS had not placed a levy on a property, the taxpayer eventually would have been able to pay off the entire tax debt."

* A provision in the House proposal would direct the Treasury Department and the General Accounting Office to analyze several joint return-related issues. Another provision would allow taxpayers who file separate returns and subsequently determine that their tax liability would have been less if they had filed a joint return to switch filing status without paying in full their initial tax liability. "This gives taxpayers who filed incorrectly a chance to file a joint return without making full payment on their separate returns," said Heck.

The IRS now notifies a taxpayer of actions taken against his or her spouse to collect joint taxes. Previously, a divorced or separated spouse might not have known of an IRS collection action against the other spouse on a joint tax liability.

Other key provisions that appear in the House bill include

* Modifications to IRS policies when installment agreements are terminated. The IRS would be required to notify taxpayers 30 days before altering, modifying or terminating any installment agreement, explaining why it intends to take this action and giving taxpayers the opportunity to have the decisions reviewed.

* Expansion of IRS authority to lower interest rates for any unreasonable error or delay that the service causes. The bill gives the Tax Court jurisdiction to determine whether IRS failure to abate interest was an abuse of discretion.

* Allowing taxpayers who have been victims of fraudulent Form 1099 and Form W-2 information returns to bring civi1 actions for damages against the person filing that false return. This provision also would require the IRS to investigate the information return when the taxpayer disputes the accuracy of its information. "This bill should alleviate many of the difficulties taxpayers have encountered with the IRS when addressing disputed erroneous or fraudulent information returns," said Heck.

The House bill would raise $33 million to offset the revenue losses caused by the taxpayer rights provision by imposing intermediate sanctions on tax-exempt organizations for certain violations. A bill similar to HR 2337 was introduced in the Senate by David Pryor (D-Ark.) last year, but it is unclear what action the Senate will take.

The High Cost of Compliance

Compliance cost..........$724
Taxes paid...............$100

    Average costs of tax compliance for small business
relative to taxes paid.

    Source: Tax Foundation

IRS Wants to Reconcile Accounting Methods for Loans

The Internal Revenue Service is requesting comments regarding the proper accounting for loans subject to both the principle-reduction method of accounting and the mark-to-market rules. The IRS is concerned that taxpayers are using the principal-reduction method for the de minimis original issue discount (OID) on loans to claim inappropriate tax treatment under mark-to-market rules of Internal Revenue Code section 475.

The IRS is considering a number of alternatives for accounting for loan. For example, the entire principal on a loan subject to section 475 could be treated as recovered on the first date the loan is marked to market, after which the loan would not be treated as outstanding for purposes of the principal-reduction method under revenue procedure 94-29.

Written comments should be sent in duplicate no later than July 15 to CC:DOM:FI&P, Room 4300, IRS, 111 Constitution Avenue, N.W., Washington, D.C. 20224.