Taxpayer protections and rights - 1998.

One of the most important sections of the Internal Revenue Service Restructuring and Reform Act of 1998 (hereinafter referred to as the Act), is that dealing with taxpayer protection and rights, which contains numerous provisions affecting how the IRS deals with taxpayers and their representatives. These changes affect the examination as well as the collection process. There are also changes in judicial proceedings that will have a bearing on how revenue agents conduct examinations. The changes are far-reaching and, in most cases, will be beneficial to taxpayers.

Examination/Judicial

One of most significant changes is in the area of burden of proof. Normally, taxpayers have the burden of proof in court proceedings. The courts have held that a deficiency notice is presumed correct and the taxpayer must prove it wrong. However, under the Act, the burden of proof relative to a factual issue is shifted to the IRS in a court proceeding if the taxpayer presents credible evidence on that issue, complies with the statutory recordkeeping requirements, cooperates with reasonable requests for information and documents, meetings and interviews, and does not have a net worth of more than $7 million if a taxpayer other than an individual. The Service also has the burden of proof if statistical information is used to reconstruct income and in sustaining penalties. However, the burden of proof is not usually the deciding factor in tax cases. It is only when the evidence is equally balanced that the burden of proof becomes the important issue in the case. Taxpayers will have to wait and see how the IRS reacts to this provision, to determine whether it will lead to more intrusive audits and more document requests by revenue agents.

Another significant change is the extension of the confidentiality privilege in certain instances to all persons authorized under federal law to practice before the Service; this includes attorneys CPAs, EAs and actuaries. The privilege only extends to matters covered by the existing attorney-client privilege (such as analyzing the tax ramifications of a proposed transaction). Communications relative to the preparation of income tax returns generally will not be considered a privileged communication. The privilege can only be asserted in noncriminal tax proceeding in Federal courts in which the IRS is a party.

Additional provisions include: (1) the Service's inability to conduct financial status audits except when there is a likelihood of unreported income; (2) prohibition of certain persons within the executive branch (including the President and Vice-President) to request any IRS officer or employee to conduct, terminate or otherwise influence the outcome of an audit; and (3) the requirement that the Service notify the taxpayer before issuing third-party summonses.

Collection

The changes to IRS procedures in the collection of delinquent accounts will have a significant effect on the collection process and in the way revenue officers deal with taxpayers and their representatives. Supervisory approval will be required in most cases before a lien or levy is issued or before property is seized. This provision is effective on July 22, 1998 for nonautomated collection actions; for all liens and levies serviced by the Automated Collection System, the effective date will not be until after 2000. The Service will not be able to seize a principal residence to satisfy a liability of $5,000 or less (currently, procedures are in place to prevent the seizure of a principal residence unless approved by the district director). Further, business assets will not be subject to seizure unless the taxpayer's other assets are insufficient to pay the outstanding liability.

The Act also provides for due process in collection activities. The provisions include notification of the existence of a lien within five days of its being filed, the right to a hearing within 30 days (before an appeals officer with no prior involvement with the matter), the right to appeal the hearing determination to the Tax Court, and prohibitions on harassment and abuse (by subjecting the IRS to certain provisions of the Fair Debt Collection Practices Act).

The Act makes changes to and codifies existing practices relative to offers in compromise and installment agreements. While the offer program is currently undergoing review by an IRS task force to streamline the process and make it more accessible to more taxpayers, the Act requires the Service to develop national and local standards for allowable expenses, and also to determine when, based on facts and circumstances, the standards are not appropriate. While an offer is pending and for 30 days after rejection, levies are prohibited.

The Act guarantees an installment agreement to a taxpayer owing $10,000 or less who, over the preceding five years, has not failed to file a tax return, failed to pay any income tax or entered into an installment agreement. The IRS also will provide an annual statement setting forth the beginning balance, payments made during the year and the ending balance. The failure-to-pay penalty will be reduced from .5% to .25% per month while an installment agreement is in effect if the tax return was timely filed. The penalty provision does not take effect until 2000.

The Act changes the rules relative to the extension of the 10-year statute of limitations (SOL) period for collecting taxes. The 10-year period may not be extended if there has been no levy on any of the taxpayer's property, effective after 1999. The 10-year period may be extended if any installment agreement is in place. Also, if a request for extension of the SOL was made before Dec. 31, 1999, the extension will expire on the latest of.' (1) the last day of the original 10-year limitations period; (2) Dec. 31, 2002; or (3) in the case of an extension in connection with an installment agreement, the 90th day after the extension. The Service has recently instituted a policy under which it will not extend the SOL period even though it has the statutory authority to do so. Procedures have not been developed yet in relation to installment agreements.

Comment: The Act imposes a great number of changes to the way the IRS will collect taxes in the future. Because revenue agents as well as revenue officers must consider taxpayers' rights, it will be interesting to see how the Service implements the provisions of the Act in protecting taxpayers' rights, as well as the impact (if any) on the amount of delinquent taxes collected by the IRS.