Taxpayer Bill of Rights 2.

On July 11, 1996, Congress approved by unanimous consent H.R. 2337, the Taxpayer Bill of Rights 2, a package of provisions aimed at helping taxpayers in their dealings with the IRS. The bill was signed by President Clinton on July 30, 1996.

The new law will raise $196 million: $33 million to offset the revenue loss by allowing the Service to impose sanctions short of complete revocation of tax-exempt status on Sec. 501(c)(3) and 501(c)(4) organizations for certain violations, and $163 million by applying the failure-to-pay penalty to substitute returns filed by the IRS in the same manner as the penalty is applied to delinquent returns filed by taxpayers.

Specific provisions

[] Establishment of a taxpayer advocate within the Service: The bill establishes a new position of Taxpayer Advocate equal to that of the IRS Chief Counsel. The Advocate will make independent reports to Congress on problems encountered by taxpayers and recommendations for improvement of the tax system.

[] Expansion of authority to issue Taxpayer Assistance Orders (TAOs): The bill provides the new taxpayer advocate with broader authority to intervene and take affirmative action on behalf of taxpayers who would otherwise suffer significant hardship.

[] Modifications to installment agreement provisions: The IRS must provide taxpayers with notice before altering, modifying or terminating an installment agreement. The bill also requires the IRS to establish procedures for an independent administrative review of termination of an installment agreement for taxpayers who request such a review.

[] Expansion of authority to abate interest: The bill expands the interest abatement provisions by permitting the Service to abate interest from any unreasonable error or delay resulting from managerial acts as well as ministerial acts. This would include extensive delays resulting from the loss of records by the Service, IRS personnel transfers, extended illnesses, extended personnel training or extended leave. The bill also gives the Tax Court jurisdiction to determine whether the Service's failure to abate interest was an abuse of discretion.

[] Extension of interest-free period for payment of tax: The bill extends the interest-free period provided to taxpayers for the payment of the tax liability reflected in a deficiency notice from 10 days to 21 days, provided that the total tax liability shown on the notice is less than $100,000.

[] Abatement of penalty for failure to make required deposits of payroll taxes: The bill enumerates additional circumstances under which the penalty assessed against a taxpayer that inadvertently fails to make the required deposits may be waived or abated by the IRS.

[] Permit joint return to be made after separate returns without full payment of tax: The bill repeals the requirement of full payment of tax liability as a precondition to switching from married filing separately status to married filing jointly status.

[] Studies of joint and several liability for married persons' joint tax returns: The bill directs the Treasury Department and the General Accounting Office to examine the tax policy implications, equity implications and operational changes that would confront the IRS if the joint and several liability standard were changed.

[] Disclosure of collection activities with respect to joint returns: The bill requires, on written request, the Service to inform either spouse if the IRS is making any attempt to collect the tax liability from the other spouse, the general nature of the collection effort and the amount collected.

[] Authority to withdraw public notice of IRS liens: The bill allows the Service to withdraw a public notice of tax lien prior to payment in full by the indebted taxpayer under certain circumstances and would require that, in the case of an erroneous lien, and on taxpayer request, the IRS make reasonable efforts to notify major credit agencies and financial institutions of the lien's erroneous filing. 171 Authority to return levied property: The Service has authority to return levied property under certain conditions.

[] Modifications to certain levy exemption amounts: The bill increases the exemption amount to $2,500 for personal property and to $1,250 for books and tools, and indexes these amounts for inflation.

[] Offers-in-compromise: The bill provides that offers-in-compromise that reduce tax liabilities by less than $50,000 do not require a written opinion from the Office of Chief Counsel.

[] Civil damages for fraudulent filing of information returns: The bill creates a Federal cause of action for a person who has been victimized by a willfully filed fraudulent information return. Recoverable damages would be the greater of $5,000 or the actual damages and, in the court's discretion, reasonable attorney's fees.

[] Requirement to conduct reasonable investigation of information returns: The IRS must now produce reasonable and probative information to corroborate an information return in any court proceeding, if a taxpayer asserts a reasonable dispute as to the accuracy of the information return.

[] Awarding of costs and attorney's fees: The bill provides that, once a taxpayer substantially prevails over the Service in a tax dispute, the IRS has the burden of proof tO establish that it was substantially justified in maintaining its position against the taxpayer. The bill also establishes a rebuttable presumption that the Service's position was not substantially justified if it did not follow in the administrative proceeding its own published guidance or guidance issued to the taxpayer. The bill raises the statutory rate for attorney's fees to $110 per hour (indexed for inflation beginning after 1996). The bill clarifies that the taxpayer's failure to extend the statute of limitations shall not be considered to be a failure to exhaust administrative remedies. The bill eliminates the present-law restrictions on awarding attorney's fees in all declaratory judgment proceedings. O Increase in limit on recovery of civil damages for unauthorized collection actions: The bill increases the limit on civil damages for unauthorized collection actions from $100,000 to $1 million, and gives the courts discretion to reduce a damage award if the taxpayer has not exhausted administrative remedies, rather than deny eligibility for the award.

[] Modifications to penalty to collect and remit payroll taxes: The IRS must now issue a preliminary notice 60 days in advance of any demand for payment of the 100% penalty, except in jeopardy cases. The Service is required to share with a responsible person the names of any other person the IRS has determined to be a responsible person, the nature of the collection activities and the amount collected from such persons The bill creates a Federal cause of action for a person liable for the 100% penalty to seek contribution from other persons who have a similar liability for the collection of tax, but who have not contributed their proportionate share. Also, the 100% penalty is not to be imposed On unpaid, volunteer trustees or directors who do not participate in the day-to-day financial operations of organizations and do not have actual knowledge: of the failure to remit taxes to the IRS.

[] Enrolled agents included as third-party recordkeepers: The bill includes enrolled agents as third-party recordkeepers to whom Sec. 7609 applies.

[] Safeguards related to designated summons: The bill requires that issuance of any designated summons with respect to a corporation's tax return must be preceded by review of the Regional Counsel for the region in which the examination of the corporation's return is being conducted. The bill limits the use of a designated summons to the 1,600 corporations being examined as part of the Coordinated Examination Program. The bill also requires the Service to report annually on the number of designated summonses issued in the preceding 12 months.

[] Relief from retroactive application of IRS regulations: The bill provides that the effective date of any temporary, proposed or final regulation shall not be before the earliest of the date the regulation is filed in the Federal Register; for a final regulation, the date of the temporary or proposed regulation to which it relates was filed with the Federal Register; and the date on which any notice substantially describing the expected contents of any temporary, proposed or final regulation is issued to the public. This limitation would not apply if (1) the regulations are issued within 18 months of the enactment of the statutory provision to which the regulation relates; (2) the Treasury determines that the regulation should be retroactive in order to prevent abuse; (3) the regulation is directed at correcting procedural defects in an earlier regulation; (4) the regulation relates to the internal policies, practices and procedures of Treasury, when Treasury provides that taxpayers may elect to have the entire regulation apply retroactively; or (5) Congress grants authority to the Treasury to prescribe the effective date of a regulation.

[] Phone numbers on Form 1099: The bill requires the providers of information returns to list the name, address and phone number of the payor's information contact on the Form 1099. (See News Notes, page 592, this issue.)

[] Notification to taxpayers of overpayments: The bill requires the Service to make reasonable efforts to notify within 60 days those taxpayers who have made payments that the IRS cannot associate with a balance due on the taxpayer's account.

[] Unauthorized enticement of information disclosure: The bill creates a Federal cause of action, allowing a taxpayer to sue the government for the lesser of $500,000 or actual damages (plus costs of the action), if the Service intentionally compromises the collection of any tax due from an attorney, accountant or enrolled agent representing a taxpayer in exchange for information supplied by the taxpayer to such a professional for the purpose of obtaining tax advice.

[] Annual reminders to taxpayers with outstanding delinquent accounts: The bill requires the IRS to send out annual reminders to taxpayers with outstanding tax liabilities who are not in active collection status.

[] Extension of authority for IRS undercover operations: The bill provides a five-year extension of the Service's authority to"churn" the income earned by an undercover operation to pay the additional expenses incurred in the undercover operation.

[] Disclosure of Form 8300 information on cash transactions: The bill allows Form 8300 information on cash transactions to be disclosed for either civil or criminal enforcement or regulatory purposes in the same manner as Currency Transaction Reports filed by financial institutions under the Bank Secrecy Act.

[] Disclosure of returns and return information to designee of taxpayer: The bill deletes the word "written" from the Sec. 6103(c) requirement that "written consent" from the taxpayer is necessary for the disclosure of taxpayer information to a designated third party.

[] Study on interest netting: The bill requires the Treasury to conduct a study of the manner in which the IRS has implemented Congress's directions as to the netting of interest on overpayments and underpayments and the policy and administrative implications of global interest netting. Before submitting the report to the tax-writing committees, Treasury would be required to hold a public hearing to receive comments.

[] Expenses of detection of underpayments and fraud: The bill clarifies that rewards for information leading to the detection and punishment of violations of the Internal Revenue laws are to be paid out of the proceeds collected by reason of the information provided.

[] Use of private delivery service for timely-mailing-as-timely-filing rule: The bill gives the Treasury authority to expand the "timely-mailing-as-timely filing" rule to include a designated delivery service.

[] Report on misconduct of IRS employees: The bill requires the Service to make an annual report to the taxwriting committees, beginning June 1, 1997, on all categories of instances involving allegations of misconduct by IRS employees.

FROM PATRICK HECK, ERNST & YOUNG LLP, WASHINGTON, D. C.