Taxpayer Bill of Rights 3.

The House approved the Internal Revenue Service Restructuring and Reform Bill of 1997 on Nov. 5, 1997. The bill covers four areas: executive branch governance; electronic filing; the Taxpayer Bill of Rights 3 (TBOR3); and Congressional accountability for the IRS. Because the Clinton Administration now supports this bill, a modified version is likely to be enacted in 1998, once the Senate passes its version and the two versions are reconciled by a conference committee.

The TBOR3 provisions include a number that affect tax liability and procedural rights, a few of which are likely to be subject to much debate before they are finalized. TBOR3 comes slightly more than a year after TBOR2 was enacted into law and reflects the growing view that taxpayers are not being treated fairly under existing tax laws, and in their dealings with the Service. Some of the more important provisions of TBOR3 include:

Burden of proof. It is proposed that the burden of proof will shift to the IRS in any court proceeding involving a factual issue if the taxpayer asserts a reasonable dispute, provided the taxpayer fully cooperates with the Service (including exhausting administrative remedies and meeting net worth requirements). This is the most controversial provision in TBOR3 and could affect the way audits are conducted and how revenue agents deal with taxpayers and/or their representatives. Even though the burden of proof will not shift until cases reach the court system, unresolved cases will have to be more fully developed by revenue agents in order to prepare them for potential trials.

Confidentiality to nonattorneys. The attorney-client privilege of confidentiality would be extended in any noncriminal proceeding to any individual authorized to practice before the IRS. Thus, a client could discuss his tax situation with other qualified tax advisers in the same manner as with licensed attorneys. This represents a substantial change from current law and could alter the way audits are conducted and factual evidence is obtained.

Innocent spouse relief. The rules would be revised to make it easier for a spouse to obtain innocent spouse status by:

1. allowing consideration of such relief when the understatement of income is merely erroneous (not just when "grossly" erroneous);

2. eliminating all of the understatement thresholds; and

3. allowing an apportionment of the tax based on the spouse's knowledge.

Eliminating interest differential. A net interest rate of zero would be established on equivalent amounts of overpayment and underpayment that exist for any period for income and self-employment taxes.

Expansion of taxpayer assistance orders (TAOs). The Taxpayer Advocate will be able to consider five factors when determining whether to issue a TAO:

* immediate threat of adverse action;

* unreasonable delay in resolving an account problem;

* significant costs (including professional representation) that will be incurred if relief is not granted;

* likelihood of the taxpayer suffering irreparable injury or a long-term adverse impact if relief is not granted; and

* whether the IRS employee to whom the order would be issued is not following published administrative guidance (including the Internal Revenue Manual).

Small tax case expanded for Tax Court. Tax disputes up to $25,000 would be eligible for the special small case procedures in the Tax Court. (The current limit is $10,000.)

Suspension of statute of limitations (SOL). Equitable tolling of the SOL would be allowed for refund claims during the time an individual could not manage his financial affairs because of a physical or mental disability expected to last less than 12 months.

Financial status audits. The IRS would be prohibited from using financial status or economic reality examination techniques to probe for the existence of unreported income, unless there is a "reasonable indication that there is a likelihood of such unreported income."

Offers in compromise. The IRS would be required to develop and publish schedules of national and local allowances, to ensure that taxpayers entering into offers in compromise have adequate means to provide for basic living expenses. This provision codifies the standards in the Internal Revenue Manual.

Low-income clinics. The Treasury would be required to make matching grants for the development, expansion or continuation of low-income clinics. The clinics would charge only a nominal fee to represent taxpayers in disputes with IRS, or to provide Federal income tax information to individuals for whom English is not the primary language.