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The prospects for a 1998 tax bill.

Congress is expected to pass the final version of the IRS Restructuring and Reform Act by early Spring 1998. This bill provides for enactment of a broad range of positive reforms involving the management structure of the IRS, electronic filing, and beneficial taxpayer rights measures. The National Society has vigorously lobbied in support of passage of the IRS reform bill.

IRS reform is not likely to be the only tax bill passed by Congress in 1998. By summer or early fall, Congress is expected to consider a budget reconciliation bill for fiscal year 1998, legislation which is likely to include a tax component. The odds of a tax bill as part of budget reconciliation are high, especially in light of the fact President Clinton's 1999 budget proposal includes a number of tax measures. Congressional Republicans seem to be coalescing around a modest tax cut in the range of $30 billion over 5 years. However, any tax cut is not likely to become larger than $30 billion, particularly because Senate Democrats are pushing a resolution to "safeguard" Social Security before any "spending" of the budget surpluses by Congress on tax cuts or new spending programs.

This Capitol Corridors column discusses some of the tax proposals being considered as part of budget reconciliation, measures which are likely to prove important to independent accountants and their clients.

Innocent Spouse Relief

The U.S. Treasury Department recently released a report on Joint Liability and Innocent Spouse Issues. The report analyzes the treatment of married taxpayers who may under current law elect to file their annual income tax returns either jointly or separately. Many commentators suggest that innocent spouse relief, especially in light of the Treasury's release of the report, is on a fast track for passage in 1998. They speculate innocent spouse relief will become law this year even if such relief is not ultimately included in any final IRS reform bill. In the absence of its inclusion in the IRS bill this spring, such relief is very likely to become part the 1998 budget reconciliation legislation.

As practicing accountants are well aware, the filing status of each spouse ultimately determines the tax liability owed by each spouse. To the extent a married taxpayer files separately under present law, he or she is generally only liable for the amount of the tax reported (or due) on his or her individual return. And this same married spouse, by virtue of filing separately, is generally not liable for the tax due on the separate return filed by the other spouse.

Married couples who file a joint return are held by the IRS to be jointly and severally liable under current law for the full amount of tax due by virtue of the filing of that joint return.

Congress recognized that this joint and several liability rule for joint returns could cause unfair results for a spouse, particularly for an "innocent spouse," who did not benefit from or did not know about the unpaid tax liability. For this reason Congress made innocent spouse relief part of the Internal Revenue Code in 1971.

The House of Representatives included further innocent spouse relief as part of its version of the IRS reform bill. The House version repeals various statutory dollar thresholds designed to limit innocent spouse relief under current law; it provides for relief for simply erroneous items; and it allows innocent spouse relief on a pro-rata basis, instead of the all or nothing basis of current law.

In the Senate, Senators Alphonse D'Amato (R-NY) and Bob Graham (D-FL) have called for repeal of the current law relating to a spouse's liability for the tax due on a joint return. These senators are pushing legislation which would make a spouse liable only for the amount of the income he or she earned in a given year.

The 18-Month Holding Period for Capital Gains

With the completion of the 1998 tax filing season, accountants know of the current complexity involved with the reporting of capital gains on Schedule D, Form 1040. In fact, the National Society testified before the House Ways and Means Committee on this very topic on February 12, 1998. Dr. William Stevenson, NSA's witness at the hearing, stated that the Society supports elimination of the 18-month holding period required for the new maximum 20% capital gains rate. The change was enacted as part of the Taxpayer Relief Act of 1997.

Representative Bill Archer (R-TX), Chairman of the Ways and Means Committee, has recommended making the top 20% capital gains rate effective for capital assets held for one year or more. Archer has stated that he will include a one year holding period as part of the Ways and Means Committee's 1998 tax bill.

NSA recognizes that elimination of the current 18-month holding period is probably the best way to deal with the complexity in the law on capital gains. The Society believes Archer's proposal will reduce the difficulties associated with capital gains recordkeeping and reporting.

Relief for Third Parties who Claim the IRS Has Filed an Erroneous Lien

President Clinton has proposed a pro-taxpayer measure which provides relief to third parties who may claim the IRS has filed an erroneous lien. Under this proposal, an administrative procedure is created which is similar to the wrongful levy remedy made available to third parties by Section 7426 of the Internal Revenue Code. This proposal permits a record owner of property against which a Federal tax lien has been filed to obtain a certificate of discharge of property from the lien as a matter of right. However, in order to protect the lien interest of the Federal government, the third party would be required to deposit cash or to furnish a bond.

Clinton is proposing this measure to protect third parties who pay another person's tax under protest for the purpose of removing a lien on the third party's property. The U.S. Supreme Court ruled in the 1995 Williams v. United States case that a third party under similar circumstances could bring a refund suit against the government because the third party had no other adequate administrative or judicial remedy.
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Author:Goldstein, Benson
Publication:The National Public Accountant
Date:May 1, 1998
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