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A KINDER, IRS In the wake of reports of taxpayer abuse by the IRS,2 Congress established the National Commission on Restructuring the Internal Revenue Service to review the structure and practices of the IRS and to recommend changes for improvement and modernization. Its goal was to restore public trust in the tax system. During 12 days of public hearings, the commission elicited comment from taxpayers, tax professionals, scholars, and citizen's groups on improving the IRS. The commission also reviewed thousands of reports and documents and conducted research and surveys to better understand IRS operations. On June 25, 1997,3 the commission issued its final report, which contained several key recommendations: · The creation of an oversight board. · The establishment of a fixed term for the Commissioner of Internal Revenue. · An upgrade for IRS technological systems. · The development of an overall strategic plan. · Tax law simplification. The IRS had been operating under a mission statement that in part, described its purpose as the collection of the proper amount of revenue at the least cost-an orientation that, according to many participants in the review process, may have led to taxpayer abuse and taxpayer frustration with the IRS. The new IRS mission statement, unveiled by the Commissioner of Internal Revenue on September 24, 1998, declares that the purpose of the IRS is to "provide America’s taxpayers [with] top quality service by helping them understand and meet their tax responsibilities and by applying the tax laws with integrity and fairness to all.” 4 To further the goal of customer service, the present geographic structure of the IRS (comprising 4 regions and 33 districts) will be replaced with functional units designed to address particular taxpayer needs.5 Four such organizational units have been identified and will serve: · Individual taxpayers who have only wage and investment income. · Small business taxpayers, including sole proprietors and small business corporations with assets under $5 million. · Middle-market and large corporate taxpayers. · The tax-exempt sector, including employee plans, exempt organizations, and state and local governments. The IRS Oversight Board, which the act establishes under the auspices of the Department of the Treasury, will oversee the IRS as it administers and executes the mandates of the Internal Revenue Code.6 The specific responsibilities of the board involve reviewing IRS operations and approving strategic plans for modernizing the tax system.7 The nine board members will consist of the treasury secretary, the IRS commissioner, an individual who is a full-time federal employee or a representative of federal employees, and six persons who are not federal officers or employees.8 The IRS commissioner will now be appointed for a five-year term and, with limited exceptions, will consult with the Oversight Board.9 The creation of the Oversight Board should result in the consistent strategic oversight and guidance that the Treasury Department was alleged to be unable to provide. Moreover, the private sector board members will bring a perspective that should result in a more taxpayer-oriented IRS. In 1996, the Taxpayer Bill of Rights 2 created the Taxpayer Advocate,10an office within the IRS that assists taxpayers in resolving problems with the agency, proposes changes in IRS administrative practices, and identifies potential legislative responses.11 The commission questioned the independence of the Taxpayer Advocate not only because the office was within the IRS but because it was staffed by career IRS employees. It is contemplated that this perception will change with the passage of the 1998 act, in which the newly renamed National Taxpayer Advocate will be appointed by the treasury secretary after consulting with the IRS commissioner (who previously had sole authority to appoint the Taxpayer Advocate) and the Oversight Board. Candidates for the post of National Taxpayer Advocate must have a background in customer service as well as experience in tax law and representing individual taxpayers. Officers or employees of the IRS during the two-year period prior to the appointment will not be eligible, and the successful candidate may not accept employment with the IRS for five years after the conclusion of the appointment. 12 Nonlawyer Privilege In addition to structural changes in the IRS, the 1998 act contains the Taxpayer Bill of Rights 3, which sets forth a variety of significant provisions affecting tax law administration. The commission believed that taxpayers and their advisers should have the right to protect their communications with a claim of privilege in noncriminal proceedings before the IRS and in federal courts when the IRS is a party, as long as the adviser is authorized to practice before the IRS. During congressional debate the argument was raised that the privilege should apply to nonattorneys authorized to practice before the IRS.13 The extension of confidentiality to nonattorneys was characterized as an issue of taxpayer rights by accountants who contended that a taxpayer's choice of a tax adviser should not be affected by whether the communications between them would be privileged. Based
largely upon strenuous efforts by accounting profession lobbyists, the act contains a
provision, now IRC Section 7525, that extends the present common law attorneyclient
privilege of confidentiality to tax advice that is furnished by any individual who is
authorized to practice before the IRS,14
including attorneys, CPAS, enrolled agents, and actuaries.15 "Tax advice" is defined as advice
given by an individual on a matter that is within the scope of the individual's authority
to practice before the IRS." The privilege may be asserted in any nonciimidal tax
proceeding before the IRS, as well as noncriminal tax proceedings in federal court when
the IRS is a party to the proceeding. The
privilege may not be asserted to prevent disclosure of information to any regulatory body
other than the IRS, such as the Securities and Exchange Comniission. Moreover, the privilege does not apply to any
written communication between a federally authorized tax practitioner and any director,
shareholder, officer, employee, agent, or representative of a corporation in connection
with the promotion of direct or indirect corporate participation in a tax shelter.17 The extent and nature of this extension of the privilege to nonattorneys is uncertain. Does the privilege extend to the work product of a federally authorized practitioner, to an accountant's opinion on a taxpayer's financial statements, and to audit papers? Also, what constitutes the scope of a nonlawyer's tax advice, and when does a noncriminal tax proceeding become criminal? Further, does the privilege apply when both tax and nontax advice are given by a nonlawyer? What happens if the privilege is waived?18 Courts are certain to address these issues in the future. Equally significant is the fact that no comparable privilege exists in California, a dichotomy that could result in the IRS obtaining information indirectly that it could not otherwise obtain directly.19 The fact that these issues, among others, are unresolved has led to concern that use of the confidentiality privilege by nonlawyers will create confusion and uncertainty. However, the traditional exceptions to the attorney-client privilege will still apply to the new statutory privilege. For example, information communicated for the preparation of tax returns is not privileged, even for attorneys.20 Similarly, the privilege would not extend to communications from the taxpayer-client to the federally authorized tax practitioner under the crime-fraud exception. Moreover, there still remains the requirement, as set forth in United States v. Kovel,21 of employing the accountant by the attorney for assistance in the rendition of legal services, thereby cloaking the accountant with the attorney-client privilege in criminal matters.22 Innocent Spouse The Taxpayer Bill of Rights 3 also includes a section devoted to simplifying the innocent spouse rules. Under the act, new IRC Secfion 6015 permits the innocent spouse to limit his or her liability for unpaid taxes on a joint return to the amount of that spouse's separate liability. Significantly, community property laws will be set aside for the purposes of innocent spouse relief. Thus the income earned by a spouse will be imputed solely to that spouse together with the attending tax inability.23 The innocent spouse is required to file an election during a period that does not expire before a date that is two years after the date the first collection activity begins after July 22, 1998.24 The act also provides spouses who are denied elections for general relief and separate liability with the right to file a petition with the U.S. Tax Court to redress their grievances.25 Finally, but by no means least important, the act provides that a spouse may be relieved of joint liability when it would be inequitable to hold the spouse liable for an unpaid tax or deficiency (or any portion of either) if relief is not available to the innocent spouse under the general relief or separate liability elections. This provision applies not only to deficiencies but to underpayments of tax-i.e., liability due under a joint return.26 Burden of Proof Perhaps
one of the most fundamental changes in the 1998 act, at least in theory, is the shift of
the burden of proof away from the taxpayer. Under
prior law, when the IRS made a determination that a position on a tax return was
incorrect, there existed a rebuttable presumption that its determination was correct.27
This procedural device required taxpayers to present prima facie evidence to support a
finding contrary to the IRS determination. Once
the taxpayer's burden was satisfied, the taxpayer still had to carry the ultimate burden
of persuasion on the merits.28 Although the presumption was never codified,
there were a number of provisions in the amended 1986 IRC29 that indirectly
revealed congressional approval of it.30 Individual taxpayers and small businesses were frequently at a disadvantage when forced to litigate with the IRS, and lawmakers decided that placing the burden of proof on the taxpayer Contributed to that disadvantage.31 Consequently, the law has now been modified. Under new IRC Section 7491, the IRS has the burden of proof in any court proceeding for a factual issue that is relevant to determining a taxpayer's tax liability if the taxpayer introduces credible evidence32 with respect to that factual issue. "Credible evidence" is defiiied qualitatively as evidence that, after critical analysis, a court would find sufficient enough to form a basis for a decision if no contrary evidence were submitted.33 Taxpayer evidence that is not considered credible includes implausible factual allegations, frivolous claims, or tax-protester arguments.34 Once the credible evidence standard is met, the taxpayer is then required to meet several conditions before the burden of proof shifts to the IRS: · The taxpayer must comply with the requirements of the IRC and the Treasury Regulations promulgated thereunder to substantiate a questionable item and to maintain records.35 The substantiation requirement must be met whether it is generally or specifically imposed, and thus a taxpayer must substantiate items in dispute to the satisfaction of the IRS.36 · The taxpayer must cooperate with reasonable requests by the IRS for meetings, interviews, witnesses, information, and documents.37 As a corollary to this cooperation with the IRS, the taxpayer must have exhausted his or her administrative remedies, including any appeal rights provided by the IRS.38 · Taxpayers other than individuals must meet the net worth limitations that apply for awarding attorney's fees.39 The new burden-of-proof rules apply to income, estate, gift, and generation-skipping transfer taxes, they do not apply to employment or other taxes. ·
Tax practitioners have expressed
concern that shifting the burden of proof will result in more intrusive IRS audit
procedures since the IRS must now find the records to carry its burden.40 They
further argue that shifting the burden is likely to give rise to more disputes and
interpretive questions and will increase the workload of the Tax Court.41
Another alleged pitfall involving the burden-of-proof standard is the requirement that the
taxpayer exhaust IRS administrative appeal procedures-a costly, time-consuming, and
burdensome task for both the taxpayer and the IRS. Practitioners
may have to spend more time on cases to ensure that the cooperation requirement has been
satisfied, and taxpayers may be faced with higher litigation costs due to a second
minitrial on whether the burden of proof has been shifted to the IRS.42 Some commentators have indicated that no matter
what impact arises from shifting the burden of proof, the new standard will be used in
only a few cases when the evidence presented by both the IRS and the taxpayer is so
equally balanced that it would require the application of the burden-of-proof rules.43 It is noteworthy that the burden of proof still rests with the taxpayer at the examination stage as well as during administrative appeals. Indeed, the IRS currently is implementing monitoring procedures for documenting taxpayer compliance during an examinations.44 Not much imagination is required to conclude that the scope of audits is sure to expand. On the other hand, the IRS Appeals Division faces enhanced litigation risks during settlement efforts by raising the issue of whether the burden-of-proof criteria have been met by the taxpayer. Examination Provisions Prior to the 1998 act, the IRS was required to give the
taxpayer a notice of any summons served for testimony or production of records on
third-party recordkeepers-for example, banks, consumer reporting agencies, brokers,
attorneys, accountants, barter exchanges, and the like.
The new act requires the taxpayer to be given written notice for a summons
served on all third parties-not just third-party recordkeepers.45 However,
notification of a summons served on third parties is not required 1) for a summons served
on a taxpayer or agents of the taxpayer (such as a corporation, partnership, or other
entity),46 2) if the summons is issued to determine whether records of a
business transaction or an individual's affairs have been made or kept,47 3) for a summons issued solely to determine the
identity of a person with a numbered bank account,48 and 4) for a summons
issued in furtherance of collection efforts49 or a criminal investigation.50
While service of a summons to third-party recordkeepers now can be made by mail, personal
or substituted service is still required for all other persons.51 The
act requires the IRS to provide reasonable advance notice to the taxpayer of potential
third-party contacts that may occur in the course of an examination or collection of a tax
matter.52 Indeed, the taxpayer now has the right to request a record of all
thirdparty contacts made by the IRS.53 This
rule does not apply 1) when the taxpayer has authotized the contact, 2) upon a showing of
good cause that the notice would jeopardize collection of the tax or may involve a
reprisal against any person, and 3) for pending climinal investigations.54 These notice requirements are important because the taxpayer whose return is being examined will no longer be kept in the dark involving IRS third-party contacts and thus will have the opportunity not only to discuss the situation with the third party but also to be better equipped to respond to proposed adjustments. Moreover, the notice might prevent damage to the taxpayer's reputation or business. Until passage of the act, the IRS had the right to audit any return for any legitimate reason.55 The IRS often classified returns that on their face indicated the potential of unreported income (such as returns showing negative adjusted gross income or negative taxable income, or both). In response to the IRS's alleged intrusiveness in the course of these so-called financial status or economic lifestyle audits, the act restricts the IRS from using examination techniques to determine the existence of unreported income unless there is reasonable indication that there is a likelihood of unreported income.56 This provision appears to require the IRS to look outside the four corners of the tax return for evidence that would give rise to the likelihood of unreported income. The
statutory period for filing a claim for an income tax refund is three years from the date
the tax return was filed or two years from the date the tax was paid, whichever is later.57
The act suspends the statute of limitations during any period of "financial
disability,"58 which is defined as when the taxpayer is unable to manage
his or her financial affairs by reason of a medically determinable physical or mental
impairment that can be expected to result in death or a period of not less than 12 months.59
This statute effectively overrules the holding by the Supreme Court in United States v. Brockamp.60 The IRS statute of limitations for making an assessment generally expires three years after the tax return is filed, unless a notice of deficiency is issued or the taxpayer and the IRS previously entered into a consent to extend the statute.61 The act provides that after December 31, 1999, the IRS is required to advise the taxpayer of the taxpayer's right to refuse to extend the statute of limitations. The taxpayer also must be advised that the statute can be limited, in the manner of a "restricted consent," to particular items on the return or to a particular period of time.62 Restricted consents were the norm during the era when tax shelter partnerships were under examination, but currently the IRS normally avoids restricted consents because of inevitable questions concerning their scope. These statute of limitations provisions will no doubt place added pressure on the IRS to expedite the examination process in order to avoid triggering them. The act requires the IRS commissioner to develop and implement a plan that in part will ensure an independent appeals process. Such a plan must include the prohibition of ex parte communications between appeals officers and other IRS employees if the communications may appear to compromise the independence of the appeals officers.63 This new requirement may lead to the resumption of the Notices Section issuing 30-day letters - a practice that was in place until two years ago-as opposed to the current procedure in which the 30-day letter is issued by the revenue agent proposing the adjustments to be contested. Issuance by the Notices Section would obviate the submission of the protest letter to the revenue agent and the sometimes ex parte rebuttal. This procedure would not only further the purpose contemplated by the act but would do more to ensure the independence of the appeals officer in evaluating proposed adjustments. . Judicial Proceedings There are several new rules under the 1998 act dealing with judicial proceedings. First the act increases the minimum jurisdiction for the small-case procedure from $10,000 to $50,000,64 and it is estimated that this increased jurisdictional minimum will amount to more than 60 percent of the Tax Court's inventory.65 The Tax Court's discretion to deny the small-case procedure for cases in which the issue in dispute is novel or similar to other cases before the Tax Court still remains.66 The increased jurisdictional threshold will likely involve cases that will not lend themselves to the informality contemplated under the small-case procedure, and thus there may be more cases subject to removal than in the past. The act expands the authority to award fees and costs by moving the time period after which reasonable administrative costs can be awarded to the earliest of 1) the date the taxpayer receives the notice of the decision of the IRS Appeals Office, 2) the date of the issuance of the notice of deficiency, or 3) the date of the 30-day letter.67 The act raises hourly rate caps on awards of reasonable attorney's fees to $125 per hour-and the caps will be indexed for inflation.68 Fees paid to attorneys and accountants are recoverable under the act if they are incurred at the administrative appeals level, and fees paid to accountants eligible to practice before the Tax Court are also recoverable.69 Furthermore, the taxpayer is regarded as the prevailing party and thus is entitled to recover costs if the liability under the judgment (without interest) is equal to or less than the liability that would have resulted had the taxpayer's offer been accepted.70 This rule places the recovery of costs in Tax Court on an equal footing with federal district courts and the Court of Federal Claims.71 Prior to the act estates that could not fully pay their estate tax liability and qualified for an IRC Section 6166 election to defer payment of tax over a maximum period of 15 years faced a dilemma. The rule for income, estate, and gift taxes was that the full amount of tax must be paid before a claim for a refund could be filed and a refund action brought thereafter in district court or the Court of Federal Claims.72 Thus, the estate that would want to invoke the refund procedure could not do so until all of the estate tax was paid, which generally resulted in only a small part of the tax being eligible for refund under the claim for refund three-year (tax return) /two-year (tax payment) statute of limitations rule.73 The act remedies this dilemma by vesting jurisdiction in the district courts and Court of Federal Claims notwithstanding the lack of a full payment of the estate tax by an estate that made an IRC Section 616674 election. Interest and Penalties Under
prior law an individual taxpayer who underpaid taxes was required to pay interest on the
underpayment at a rate equal to the federal short-term interest rate plus three percentage
points (which for the three-month period beginning July 1, 1998, was 8 percent compounded
daily).75 An individual taxpayer who overpaid taxes received interest at a rate
of the federal short-term rate plus two percentage points.76 In an underpayment
and an overpayment from different years were outstanding at the same time, they were
offset against each other, with the difference bearing interest at the underpayment or
overpayment rate.77 However, if
either the underpayment or overpayment was satisfied in full, one was not offset against
the other and interest was paid on the whole amount.
The individual taxpayer thus was required to report the interest income but
could not deduct the interest payment.78 The
commission believed that taxpayers should be charged interest only on the amount they
actually owed to the IRS, taking into account overpayments and underpayments from all open
years.79 The act therefore
establishes a net interest rate of zero on all equivalent amounts of overpayment and
underpayment that exist for any period. This technique, known as global interest
netting, is available for any type of tax-for example, interest on income tax may be
netted against interest on self-employment tax.80 The act also establishes the underpayment rate as
equal to the overpayment rate, and thus the previous disparity in which the overpayment
rate was one percentage point less than the underpayment rate has now been appropriately
eliminated. The IRS can no longer operate as
a bank in this circumstance.81 Under prior law, interest and penalties generally accrued during the periods when taxes were outstanding regardless of whether the taxpayer was aware that a tax was due.82 Congressional heaings clarified the fact that interest and penalties can quickly increase a tax debt to the point that it becomes virtually impossible for a middle-class taxpayer to repay it.83 Indeed, an individual taxpayer owing income tax for 1979 (presumably for a lingering tax shelter) would have accrued tax-motivated interest as of December 31, 1998, of 770 percent of the tax involved. Under the act , the accrual of interest and penalties will be suspended for tax years ending after July 22, 1998, if the IRS has not issued the taxpayer a 30-day letler or notice of deficiency within 18 months following a date that is the later of 1) the original due date of the return (without regard to extensions), or 2) the date on which the individual taxpayer timely filed the return. For tax years beginning after December 31, 2003, the 18-month period is shortened to one year. The suspension only applies to individuals, and penalties and interest resume 21 days after the tax notice is issued.84
The average length of time for a tax return to be selected for examination generally is 6 to 18 months after it is filed. To avoid the suspension of interest, the IRS must not only accelerate the selection of returns for examination but also expedite completion of the examination. On the other hand, taxpayers now have an incentive to prolong the examination in order to trigger the 18-month anniversary and stop the potential interest accrual in the event of adjustments. This conflict may result in a higher level of IRS tenacity, which could lead to the same intrusiveness feared by many practitioners regarding the new burden-of-proof rules. Collection Reform The hearings before the Senate
Finance Committee disclosed that the most severe IRS abuses occurred as a result of its
collection practices, and the 1998 act contains provisions that respond to the need for
reforms in this area. Under the act the IRS
must notify persons of the existence of any liens against them within five days after a
lien has been filed.85 The notice
of the lien must be delivered in person,86 left at the taxpayer's home or
business,87 or sent by certified or registered mail to the taxpayer's
last-known address.88 The notice must explain in simple terms the amount of
unpaid tax, the taxpayer's right to request a hearing date during the 30-day period
beginning on the sixth day after the lien is filed, the available administrative appeals
and procedures, and then the procedures for releasing the lien.89 However, by giving the IRS the right to first file a notice of lien before the taxpayer is given the opportunity for a hearing, Congress may have diminshed it’s intended remedy. Once the tax lien is filed, public notice will surely attract all the deleterious economic effects attending it, such as the fact that business competitors, family, friends, and credit reporting agencies, among others, will be aware of the lien. Moreover, the release of an erroneously filed lien does not altogether remove the taint created by the lien. In short, while the taxpayer is afforded due process in contesting the lien, a major purpose for doing so – namely, avoiding publication of the notice – is not cured. In another of the act's fundamental changes, at least 30 days prior to levying on a taxpayer's property, the IRS must notify the taxpayer in writing about the right to a hearing.90 As with the hearing involving a notice of lien, the levy hearing will be held by the IRS Office of Appeals and conducted by an appeals officer with no prior involvement with the case.91 If the lien or levy issue is not resolved with the Office of Appeals, the taxpayer can proceed to a judicial review either in the Tax Court or the district court if the Tax Court lacks jurisdiction.92 When a hearing or judicial review is requested, the statute of limitations on collection is tolled and collection of the tax is suspended absent a determination of jeopardy.93 The offer in compromise, a procedure based upon the doubtful collectibility of a tax, has been in existence for a long time.94 The act makes the process easier in several ways. First, the act codifies the national and local expense standards for living, housing, and transportation employed by the IRS for several years.95 Second, the IRS is prohibited from serving a levy while the offer in compromise is pending. This prohibition also applies to the period during which an installment agreement is being negotiated or is in effect.96 Although the effective dates for these collection freezes do not begin until after December 31, 1999, they are currently being observed by the IRS in most cases. Finally, the longstanding procedure for appealing a rejected offer in compromise also has been codified.97 The intent behind the codification of procedures for offers in compromise that the IRS has already been following is to provide uniformity to the process and fairness to the taxpayer. Mandatory suspension of collection activities should hasten achievement of this goal. The IRS generally has 10 years following an assessment of tax to begin collection of the tax by levy or a court proceedings.98 Under prior law, the 10-year limitations period for collecting assessed tax may have also been extended by written agreement within the original 10-year limitations period or any extension thereof. The 10-year collections period may have been extended even after it expired if there had been a levy on any part of the taxpayers’ property prior to the expiration and a written extension had been agreede to before the levy was released.99 Under
the act, effective after December 31, 1999, the 10-year limitations period for tax
collection will no longer be extended if there has been no levy on the taxpayer’s
property. If the taxpayer entered into an
installment agreement with the IRS, however, the 10-year limitations period may be
extended under the original terms of the installment agreement plus 90 days.100 The ramifications of eliminating the
right to extend the collection statute of limitations will now involve more artful
negotiations of installment agreements. If an installment agreement has not been entered
into between the IRS and the taxpayer, and an extension of
the statute of limitations is made on or before December 31, 1999, the
extension will expire on the latest of 1) the last day of the 10-year period, or 2)
December 31, 2002.101 As a corollary, the act now provides for a suspension of
the statute of limitations for the period during which there existed a wrongful seizure or
notice of lien erroneously filed on property of a third party.102 Under the act there is a blanket
prohibition on the seizure of a personal residence when the levy does not exceed $5,000.1O3
If a levy does exceed $5,000, the IRS must obtain a court order prior to the seizure.104
The revenue officer is now required to obtain prior approval of the district director
before seizing business assets, unless the revenue officer can demonstrate that collection
of the tax is in jeopardy. To obtain
approval, the IRS must show that seizure is its only viable remaining recourse to obtain
satisfaction of the tax liability.105 In addition
to providing taxpayers with a remedy for damages incurred for certain reckless or
intentional unauthorized actionsa remedy available under prior law-the act now provides
damages for negligent actions106 equal to the lesser of $1 million ($100,000 involving
negligence) or the sum of actual economic damages suffered by the taxpayer as a result of
the reckless, intentional, or negligent IRS actions, and costs of the action.107
The act even goes so far as to provide a remedy for violations of certain bankruptcy
procedures, specifically the willful violation of automatic stay and discharge provisions
of the Bankruptcy Code. Administrative and
litigation costs are expressly recoverable under act by a petition in Bankruptcy Court. 108 The act mandates IRS compliance with the Fair Debt Collection Practices Act(FDCPA) rules governing communications with persons who have outstanding obligations.109 The IRS may not attempt to communicate with taxpayers at unusual times or places that the IRS knew (or should have known) were inconvient to the taxpayer.110 A convient time for communication with the taxpayer generally is between 8 A.M. and 9 P.M. Moreover, if the IRS knows the taxpayer is represented by a person acting under a power of attorney, the IRS is prohibited from contacting the taxpayer unless the person with power of attorney fails to respond within a reasonable period of time to IRS communications.111 Finally, the IRS cannot attempt to communicate with the taxpayer at the taxpayer’s place of employment if the IRS knows or has reason to know that the taxpayer’s employer prohibits the taxpayer from receiving the communication.112 All other rules of the FDCPA are inpplicable to the IRS. The act puts teeth in these prohibitions by providing that a breach of any of the foregoing rules will subject an IRS representative to civil damages.113 Thus, for the first time, taxpayers potentially can recover damages for even the negligent bypass of the taxpayer's representative under a power of attorney. The import of the act's remedy for this and other FDCPA violations, especially harassment, will not go unnoticed, especially by tax protesters. For taxable periods beginning after December 31, 1998, the IRS is barred from serving a levy on the property of a taxpayer during the pendency of a refund action of a divisible tax such as an employment tax or trust fund recovery penalty (the 100 percent penalty).114 Equally significant is the rule that the IRS is barred from filing a collection action while such a refund action is pending, exact for a counterclaim for the balance of any employment tax or trust and recovery penalty for which the taxpayer may still be liable. 115 In addition, the statute of kiitations for the expiration of the assessment is tolled during the pendency of a refund action.116 Codification of the stay of collection rules in refund actions in large part memorializes the longstanding practice of the Department of Justice. The act now provides criteria for the issuance of a Taxpayer Assistance Order (TAO), which generally is intended to provide the taxpayer with relief from the harshness of a particular IRS collection activity. TAO applications are filed with the Office of the National Taxpayer Advocate, which can issue a TAO if the taxpayer is suffering or about to suffer a significant hardship. The definition of "significant hardship" includes: · An immediate threat of adverse action. · A delay of more than 30 days in resolving the taxpayer's account problems. · Significant costs incurred by the taxpayer which includes Professional fees for legal and other representation · Irreparable injury to, or long-term adverse impact on, the taxpayer if the relief is not granted.117 The codification of what qualifies as significant hardship should greatly assist taxpayers in solving their problems and expediting their relief. The 1998 act requires the IRS to make fundamental changes in its structure and procedures. However, as with any new legislation, procedural goblins lie in wait that will give taxpayers nightmares, tax practitioners the opportunity to carve their own interpretations, and the IRS the power (or excuse) to take its own sometimes more restrictive path until the legislation dust settles. Implementation of the acts vast array of taxpayer protection will depend in part on the attitude of the IRS – and change does not come easily. However, the clear legislative mandates of the act will go a long way in changing the culture of the IRS and improving the fairness of the U.S. tax system. In short, the bouquet of roses delivered by Congress under the act, while smelling sweet, nonetheless contains thorns, about which both the taxpayer and the IRS must be made wary. 1. Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L No. 105-206 [hereinafter 1998 Act] . 2. See, e.g., Baker Says He Was Targeted Falsely,- IRS Employees Allege Wrongdoing, 84 DTR G-8 (BNA) (May 1, 1998); Taxpayers Tell Finance Committee ofabuse by Criminal Investigation Division, 83 DTR G-7 (BNA) (Apr. 30,1998). 3. REPORT OF THE NATIONAL COMMISSION ON REsTRUcTURING THE INTERNAL REVENUE SERVICE, A VISION FOR A NEW IRS, June 25,1997. 4 IRS Announcement IR-98-59, DTR G-1 (BNA) (Sept 25,1998). 5. 1998 Act, supra. note 1, §1001 (a) (2); SENATE FINANCE Comm., Report On Restructuring the IRS, S. Rep. No. 174, 105th Cong., 2d Sess. 2 (1998) [hereinafter SENATE REPORT]. 6. I.R.C. §7802 (c) (1) (A). 7. I.R.C. §7802 (d). 8. I.R.C. §7802 (b). 9. I.R.C. §§7803 (a) (1), 7803 (a) (3). 10. Taxpayer Bill of Rights 2, Pub. L No. 104-168 (formerly I.RC. §7802(d) (1)). 11. Former I.R.C. §7802(d)(2) (now I.R.C. §7803 (c) (2) (A)). 12. I.RC. §7803(c) (1) (B). W. Val Oveson, chairman of the Utah State Tax Commission since 1993, was appointed as the National Taxpayer Advocate on Aug. 11, 1998. Commissioner Rosatti Names New Top Management Teamfor Service, 155 DTR G4 (BNA) (Aug. 12, 1998). 13. See SENATE REPORT, supra note 5, at 36. 14 Treasury Department Views on Major Issues in IRS Rstructuhng Bill (Hk 2676), 112 DTR 1-5 (BNA) (June 11, 1998). 15. I.R.C. §7525 (3) (A). 16. I.R.C. §7525(a) (3) (B). 17. I.R.C. §7525 (b). 18. 1998 Tax Legislation, IRS Restructuring and Reform, LAW, EXPLANATION AND ANALYSIS (CCH),1141, at 285-86 (1998). 19. Conformity legislation AB 1469 (Ortiz) is presently pending before the California Assembly. The bill adopts only a few of the Provisions of the act and does not include the new confidentiality privilege. 20. United States v. Bornstein, 977 F. 2d 112 (4th Cir. 1992); Colton V. United States, 306 F. 2d 633 (2d Cir. 1962). 21. United States v. Kovel, 296 F. 2d 918 (2d Cir. 1961). 22. United States v. Judson, 322 F. 3d 460 (9th Cir. 1963). 23. This provision follows Wiksell v. Commissioner, 90 F. 3d 1459 (9th Cir. 1997). 24. 1998 Act, supra note 1, §3201 (g) (2). 25. I.R.C. §6015 (e). 26. I.R.C. §6015 (f). 27. Welch v. Helvering, 290 U.S. 111, 115 (1933). Also, the taxpayer generally bears the burden of proof under Tax Court Rule 142. 28. Danville Plywood Corp. v. United States, 16 Cl. Ct 584 (1989). 29. I.R.C. of of 1986, as amended (26 U.S.C.). 30. See, eg., I.R.C. §7454 (a) (fraud), I.RC. §6201 (d) (verification regarding information returns), I.RC. §6902 (a) (transferee liability), I.R.C. §534 (accumulated earnings). 31. HOUSE WAYS AND MEANS Comm., INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM BILL OF 1997 (Oct. 31, 1997), reprinted in 48 Stand. Fed. Tax Rep. 56 (CCH) (Nov. 13,1997). 32. The fact that the taxpayer has to bring forth credible evidence is likely to cut down on the amount of litigation, because the taxpayer must go first. See Treasury Focused onMaking Burden Shift Workable As IRS Reform Goes To Conference, 98 DTR G-4 (BNA) May 21, 1998). 33. SENATE REPORT, supra note 5, at 24. 34. Id. 35. I.R.C. §§7491 (a) (2) (A), 7491 (a) (2) (B). 36. See CONFERENCE REPORT ON THE IRS RESTRUCTURING AND REFORM BILL OF 1998 (CCH), at 57 (June 24, 1998). 37. I.R.C. §7491 (a) (2) (B) 38. See SENATE REPORT, supra note 5, at 24. 39. I.R.C. §7491 (a) (2) (C). In general, corporation, trusts, and partnerships whose net worth exceeds $7 million are not eligible for the benefits of the provision. 40. See H.REP.No.364, 105th Cong., 2d Sess. 161 (1998); New York Tax Bar Section Strongly Opposes Inclusionof Burden of Proof Shift in IRS Reform Bill, 51 DTR G-6 (BNA) (Mar.17, 1998); Burden Shift Worries Former Commissioners; Rossotti Reorganization Plan Wins Praise, 20 DTR GG-1 (BNA) (Jan.30,1998). 41. Burden Shift under Restructuring Bill Could Give Rise to Disputes, Questions, Cohen Says, 9 DTR G-3 (BNA) (Jan. 14,1998). 42. See supra note 18, 1331, at 349-50. 43. Tax Court Judge Sees Few Cases Where Burden of Proof Shift Would Apply, 85 DTR G-8 (BNA) (May 4, 1998). 44.Burden Shift Likely to Result In Increased Audits; IRS to Eye Cooperation, Butler Says, 152 DTR G-1 (BNA) (Aug. 7,1998). 45. I.R.C. §7609(a) (1). 46 I.RC. §7609(c) (2) (A). 47 I.RC. §7609(c)(2)(B). 48 I.R.C. §7609 (c) (2) (C). 49 I.R.C. §7609 (C) (2) (D). 50. I.RC. §7609(c) (2) (E). 51 I.RC. §7603(b). 52 I.R.C. §7602(c) (1). 53. I.R.C. §7602(c)(2). 54. I.R. C. §7602(c)(3). 55 I.R.C. §7601 (a). 56. I.RC. §7602(e). 57 I.R.C. §6511(a). 58. I.RC. §6511 (h) (1). 59 I.F-C. §6511 (h) (2). 60. United States v. Brockarnp, 117 S. Ct 849 (1997), reversing 67 F. 3d 260 (9di Cir. 1996) (statute of limitations for filing a claim for refund could not be equitably tolled because the taxpayer was too ill at the time the claim was required to be filed). 61 I.R.C. §6501 (a). 62 I.R.C. §6501 (c) (4) (B). 63 1998 Act, supra note 1, § 1001 (a) (4). 64. I.PC. §7463(a). 65. See supra note 41, at G-2. 66. Tax Court Rule 172 (c). 67 I.RC. §7430 (c) (2). 68. I.R.C. §7430(c) (1) (B). 69 I.R.C. §7430 (c) (4) (E). 70. I.RC. §7430(c) (3) (A). 71 FED. P, Civ. P. 68. 72 Flora v. United States, 362 U.S. 145 (1960). 73 I.RC. §6511 (b) (2). 74. I.PC. §7422 0) (1). 75. See SENATE REPOPT, supra note 5, at 31. 76 Id. 77 Id. 78 Temp. Treas. Regs. §1. 163-gr(b) (2) (i) (A); Redlark v. Commissioner, 81 AFIR 2d 98-1483 (9th Cir. 1998). 79. Congress wanted to implement a mandatory offset of all open years, which would have taken away the incentive to delay the payment of underpayments to apply to future overpayments. See SENATE REPORT, supra note 5, at 31. 80 I.PC. §6621(d). 81 I.P-C. §6621 (a) (1) (B). 82 See SENATE REPORT, supra note 5, at 33. 83.See supra note 18, 'ffl4Ol, at 356. 84.I.R.C. §6404(g) (1) (A). 85 I.R.C. §6320 (a) (2). 86 I.R.C. §6320 (a) (2) (A). 87 I.p 87. I.R.C. §6320 (a) (2) (B). 88.I.RC. §6320 (a) (2) (C). 89 I.R.C. §6320 (a) (3). 90. I.R.C. §6330(a). 91 I.RC. §6330(b). 92 I.R.C. §§6330(d) (1), 6320(c). 93 I.RC. §6330(e). 94. I.R.C. §7122(a). 95 I.R.C. §7122 (c) (2). 96 I.R.C. §6331(k). 97. I.RC. §7122(d). 98. I.R.C. §6502(a) (1). 99. Former I.RC. §6502(a) (2). 100. 1998 Act, supra note 1, §3461 © (2). 101.Id. 102. I.R.C. §6503(@. 103 I.R.C. §6334 (a) (13). 104
I.RC. §6334(e) (1). 105 I.R.C. §6334 (e) (2). 106 I.R.C. §7433 (a). 107. I.R.C. §7433(b). 108 I.R.C. §7433(e). 109 I.R.C. §6304(a). 110. I.R.C. §6304 (a) (1). 111. I.R.C. §6304(a) (2). 112 I.RC. §6304(a) (3). 113 I.RC. §6304(c). 114 I.p C. §§6331(i) (1), 6631(i) (2). 115 I.F-C. §6331 (i) (4). 116 I.F C. §6331 (i) (5). 117 I.RC. §§7811 (a) (1), 7811 (a) (2). |