IRS Information
IRS Restructuring & Reform Act of 1998

For the IRS explanation of your rights as a taxpayer, visit their web site at 

Link on the section for IRS publications and select 

* Publication 1 - Your Rights As A Taxpayer
* Publication 556 - Examination of Returns, Appeal Rights and Refund Claims

On July 22, 1998, President Clinton signed “The Internal Revenue Service Restructuring and Reform Act of 1998”, which includes many tax changes that have nothing to do with reforming the IRS. In addition, on June 19, 1998, Clinton signed the “Surface Transportation Revenue Act of 1998”, which includes some changes in the tax rules applicable to employer provided transportation benefits and reimbursements. 

New Taxpayer Rights

The name of the 1998 tax bill is “The IRS Restructuring and Reform Act of 1998” and the provisions dealing with the IRS and with taxpayer’s rights make up the bulk of this law. 

In the past few years, we’ve had two “Taxpayer Rights” laws that were ostensibly intended to provide greater taxpayer “rights” and to safeguard taxpayers from over zealous tax collectors. Since the first one wasn’t enough and the second one obviously didn’t do the job, I wasn’t very optimistic about this one until after I had studied it in some detail. While many of the changes made by this law are more cosmetic than real, some of the changes should have a major and beneficial change for most taxpayers. 

This new law does make significant changes in the “rules of engagement” between taxpayers and tax  collectors by ......

 * Shifting the burden of proof in certain civil cases
 * Creating a confidentiality privilege for some non-lawyers
 * Giving a spouse greater protection from joint liability
 * More Flexibility in the offer-in-compromise program
 * Partial relief from tax liens and levies
 * Restricting the use of “lifestyle audits” by the IRS
 * Disclosure of IRS audit selection procedures
 * Re-organizing the IRS by type of taxpayer
 * Creating a new Taxpayer Advocate position in the IRS
 * Creating an independent IRS Oversight Board

Shifting the burden of proof in certain civil cases
 

With the IRS, we are all guilty unless we can prove we are innocent - except when they accuse us of a felony. In any criminal case, the burden of proof has always been on the IRS to prove that we are guilty of a crime.

But in non-criminal (civil) disputes with the IRS, we are required to prove that the information on our tax returns is correct. This burden has included disputes carried to any court  regarding the amount of tax we owe. The new law puts the burden of proof on the IRS in any proceedings before any civil Court. However, there are *substantial* qualifications and potential problems with this apparent  tax break. Your tax lawyer will know the details, but you need to know that this new rule may actually end up costing you more money in order to satisfy the tough qualifications to shift the burden of proof. For example, the law requires taxpayers to first exhaust all available administrative remedies within  the IRS. However, in many tax disputes, it’s been less expensive and faster to simply petition the tax court or one of the other tax venues. The new law will eliminate that option if you want to shift the burden of proof to the IRS. However, if you are willing to carry the burden of proof as is the present requirement, you should still be able to bypass the administrative appeals and go directly to court. Thus, this change may be an advantage in the sense that it gives you and your advisor another option to utilize.
 

  Creating a confidentiality privilege for accountants

Here’s another change that appears to be beneficial, but which in fact may backfire on a lot of taxpayers and their tax accountants. Communications with lawyers are generally protected from being disclosed to the government or to a plaintiff, subject to some exceptions. Thus, if you were seeking confidential legal advice about a tax matter, you previously had to do so with an attorney because anything you said to an accountant would be unprotected information -- with respect to the IRS. And, in many cases, you would have to hire an attorney who in turn would hire an accountant to help you with the dispute. Now, any “federally authorized tax practitioner” will have the same standing as a lawyer with respect to certain tax advice information. The confidentiality privilege is not extended to tax preparation services. This basically effects CPAs and Enrolled Agents. But, the limits on this confidentiality privilege are complicated and accountants will now have to learn the nuances of what is privileged and what isn’t. So, don’t assume that everything you tell  your tax accountant is hereafter protected from disclosure to the IRS. 

Speaking for myself, if any client wants to discuss any tax matters that might expose them to a felony charge, I’m still going to insist they discuss the matter with a lawyer. And, I’ll be spending some time attending seminars on the nuances of what this change really means in my work as a tax  accountant and tax advisor.
 

  Giving a spouse greater protection from joint liability

This change appears to be a major benefit for spouses who have been held liable for tax penalties in cases where they simply signed the tax return without having any real knowledge of its contents. The new law permits married taxpayers to elect separate tax liability even though they have filed joint returns. In addition, the IRS is now required to send separate notices of joint tax liability to each spouse. The new rules also provide relief from many of the prior rules that made it very difficult for a spouse to avoid joint liability for taxes.
 

  More Flexibility in the offer-in-compromise program
 

An offer-in-compromise or an installment payment arrangement for back taxes is generally available to taxpayers who do not have the assets or income necessary to pay the taxes due. In general, the IRS has been somewhat inflexible in applying it’s rules with regard to such arrangements. The new law requires the IRS to be more flexible in the application of certain rules. In addition, some prior IRS procedures are no longer permitted as a matter of law. While the changes in this area are not dramatic, they should result in fewer hardships for more taxpayers.
 

  Partial relief from tax liens and levies
 

Some of the worst abuses of taxpayers arise from the power of the IRS collection employees to apply liens and levies on the income and property of a taxpayer without court approval. The new law introduces some modest improvements in a variety of the rules that apply to the use of liens and levies by the IRS. Even so, the changes are not so great as to prohibit the IRS from “getting the money” from reluctant taxpayers. For example, the law now requires supervisory approval before a revenue officer can commence collection efforts by lien or levy, starting on the date of enactment of the new law. However, the automated lien and levy system produces most of the problems and isn’t subject to any review or approval process until after 2001. But, the enhanced role of the new National Taxpayer Advocate will give taxpayers a source of redress if a lien or levy would result in a hardship on them. 
 

  Restricting the use of “lifestyle audits” by the IRS
 

One of the most intrusive, time consuming and abusive audit methods used by the IRS is the “lifestyle audit” - formerly known as an “economic reality audit”. When an IRS auditor suspects that a taxpayer has significant unreported income, the auditor resorts to a detailed analysis of the taxpayer’s lifestyle (spending habits) in order to compute how much income would be required to support the lifestyle. If the computed income is more than the reported income, the IRS presumes that the taxpayer has failed to report all of his or her income. 

To counter that kind of allegation, the taxpayer is required to use a detailed cash receipts and disbursements and balance sheet from year to year to establish that any excess “income” can be accounted for via gifts, inheritances, the consumption of assets or the assumption of added debt. 

Taxpayer representatives have complained that many agents are using this audit technique at the beginning of an audit and without any basis for suspecting any unreported income. Further, many agents have taken the position that this type of audit requires them to deal directly with the taxpayer, and to visually inspect the taxpayer’s home and style of living. That has precluded the taxpayer from using a representative in dealing with the IRS. The new law prohibits the IRS from using this audit technique to determine the existence of any unreported income unless they can establish a reasonable indication of such unreported income by other methods. 

By the way. If any IRS agent attempts to gather information about your lifestyle, I would encourage you to get help from a lawyer who  specializes in taxpayer defense work. Either the IRS agents will be ignoring the new law or will have established a “reasonable indication” that you have failed to report all of your income. If they pursue that course, that means they are probably looking for criminal sanctions. 
 

 Disclosure of IRS audit selection procedures
 

It should be no surprise for any U.S. taxpayer to learn that the IRS regards their role as part of an adversary proceeding like a football game, a game of chess or even the “game” of war. It’s their perceived duty to extract as much money as possible during the audit process. To do that, they are extremely selective in who is picked for an audit. Roughly, about 1% of the tax returns are selected for some kind of audit by the IRS. Some commentator’s have referred to this selective audit system as a “reverse lottery”. If your “ticket” (tax return) is selected, you lose. The other 99% of the taxpayers are winners. 

 As with any “game”, it’s to the advantage of one side to keep their strategy a secret. While the public and the tax professionals have a general knowledge of how returns are selected for an audit, the specifics are a carefully guarded secret by the IRS. In particular, the methods used for computer selected returns based on the “Discriminate Information Function” (DIF) is very carefully guarded. The new law requires the IRS to disclose the criteria and procedures used by the IRS to select taxpayers for audits. The disclosure is to be made in IRS publication # 1 - “Your Rights As A Taxpayer”. A draft of the proposed statement is to be submitted to the House and Senate tax writing committees for approval before it’s published. 

Frankly, I would be amazed if this disclosure gave taxpayers or their advisors any meaningful information we don’t already have. For example, The Privacy Act of 1974 and The Paperwork Reduction Act of 1980 require government agencies to explain their justification for requiring information from the public. The IRS simply says in each of their tax forms that “We ask for tax return information to carry out the tax laws of the U.S.” When the Congress required the IRS to provide an estimate of the time required to prepare various forms, they complied, but their estimates are a well known joke among tax preparers. I believe it will be exceedingly easy for the IRS to “disclose” how they select tax returns for audits without disclosing any useful details. 
 

 Re-organizing the IRS by type of taxpayer or return
 

The IRS is presently organized by four geographic regions, under which there are a total of 33 district offices, 10 service centers and 2 computing centers. A major purpose of the IRS Restructuring Act is to change the organization of the IRS from a geographic structure into one based on serving different groups of taxpayers. The law requires the IRS to restructure into four primary segments serving

(1) individual taxpayers,
(2) small businesses and the self employed,
(3) larger corporations and
(4) tax exempt entities.

It’s not clear yet where the estate and gift tax group will be, but I presume it will be part of the individual group. The international group will most likely be split between the four new segments. Each of the four new groups is to have its own “independent appeals” operation. Presumably, the 10 service centers and the two computing centers will be assigned to one of the four new sections. I presume each of the four groups will have its own collection division that will be separate from the audit division. 

A major benefit and drawback of the re-structuring will be that IRS employees will be better able to specialize in various parts of the tax law. Presently, taxpayers are confronted with auditors who may have very little understanding of various complex aspects of their returns. The potential drawback is that tax advisors who specialize won’t have as much of an edge in dealing with the IRS agent. 

 Creating a new Taxpayer Advocate position in the IRS
 

The Congress has made numerous attempts to create some kind of agency that will serve as impartial arbiters between taxpayers and the IRS. However, until now, the IRS has successfully argued that putting such a function outside the IRS would diminish their ability to collect the taxes that are due. This time, an independent National Committee on Restructuring the IRS was appointed to study the issue in relation to the ongoing incidents of taxpayer abuse by IRS agents. The committee persuaded the Congress to remove the Taxpayer Advocate from appointment by the IRS Commissioner. A number of other significant changes have been set forth in the new law to provide that the National Taxpayer Advocate (NTA) be appointed by the Treasury Secretary with consultation by the IRS Commissioner and the new IRS Oversight Board (discussed next.) In addition, the new law provides for an independent career path for employees of the NTA and for removing the local taxpayer advocates from control by the local District Directors. This restructuring bill offers the most sweeping and meaningful change of the taxpayer advocate position since the introduction of the Taxpayer Ombudsman in 1979. In conjunction with the new oversight board, aggrieved taxpayers should now have some meaningful recourse from overzealous agents or mindless IRS computer systems.
 

 An Independent IRS Oversight Board
 

Over the years, the Congress has created numerous independent boards to study the IRS organization or other aspects of IRS operations in order to make the agency more “user friendly”. However, none of these committees or boards have had any permanent role nor any real authority over the IRS. Now, the 1998 law creates an IRS Oversight Board with nine members, six of whom must be from the private sector. One of the members will be the IRS Commissioner, another will be appointed by the Secretary of the Treasury and the third public employee to serve on the board will be a representative of the IRS employees. The six members of the board from the private sector are not permitted to have been IRS employees within the two years prior to being appointed and must agree not to accept employment with the IRS for five years after serving on the board. Each member of the board will serve five year staggered terms and no member can serve more than two terms. The private members are appointed by the President, subject to the “advise and consent” of the Senate. 

This board has budget and executive authority over the IRS, but it is not permitted to get involved in individual taxpayer matters. And, the Oversight Board is required to consult with the Secretary of the Treasury for appointments to the new National Taxpayer Advocate position. Even though the IRS Commissioner is a member of this board, the board has authority to recommend to the President that an IRS Commissioner be removed from office if that is deemed necessary by the other members of the board. 
 

 An Assessment of the IRS Restructuring and Reform Bill
 

There are a great many more provisions in the new law that offer varying degrees of relief to taxpayers in their ongoing disputes with the IRS, but the most significant change seems to be the one that creates an oversight board that is independent of the IRS. Another is the establishment of a five year term for the IRS Commissioner so that a new  commissioner can’t be appointed following every election, as often occurs. 

The Congress has a long history of dealing with problems caused by the IRS in a cosmetic fashion. They pass laws that appear to deal with problems but which have no real substance because they impose no independent checks on the IRS. Perhaps I’m an incurable optimist, but it seems to me that this change is fundamentally different. It may take a few years before the full impact of these changes are felt, but taxpayers should now have meaningful recourse for relief outside the inflexible IRS bureaucracy.

Another Taxpayer Bill of Rights

On July 30, 1996, President Clinton signed the Taxpayer Bill of Rights 2. 

The most publicized part of the bill is the provision that permits taxpayers to sue the U.S. government for up to $1 million in damages. Previously, the limit was $100,000. According to the Commerce Clearing House explanation of this provision, taxpayers still have a lot of obstacles to overcome in order to win a judgment from the IRS. First, the taxpayer must show that an IRS officer or employee recklessly or intentionally disregarded some provision of the Internal Revenue Code in connection with the collection of taxes. “Mere negligence or carelessness on the part of the IRS does not create a cause of action under this provision.” Second, this rule does not apply to the agents who conduct the audits. It only applies to the ones who are trying to collect the taxes the auditors say you owe. Third, the amounts that can be awarded are for actual damages only. There is no provision for punitive damages. A related provision allows taxpayers to sue the IRS if any IRS employee attempts to entice tax advisors into disclosing information about the taxpayer. 

Another provision of the bill may provide even greater relief to more taxpayers. This provision limits the authority of the IRS to issue regulations that have a retroactive impact. However, this new rule can be superseded by legislative authority. (Clearly, the lawmakers realize they are implementing retroactive laws and apparently have no intention of stopping the practice.) 

For many years, the government has been trying to create a position in the IRS that will provide a safe haven for abused taxpayers. Currently, that position is known as the Taxpayer Ombudsman. However, that position is subordinate to many other IRS positions and has often been thwarted by those higher ranking IRS employees. The new law creates a new position called the “Taxpayer Advocate” and gives that person a little more clout than the Taxpayer Ombudsman had. Let’s hope it works. The succession of past efforts to give taxpayers a source of relief in the IRS has been far less successful than was expected by each previous enabling law. 

Meanwhile, this bill gives the IRS explicit authority to disclose information on cash transaction returns for reporting cash transfers of more than $10,000. The disclosure can be to other government agencies (city, county, state, etc.) for purposes of any civil, criminal or regulatory purpose. The new law also allows the IRS to offer rewards for information regarding civil as well as criminal violations of the law. Another provision extends the IRS’s authority to use the income they secure from undercover operations to pay the expenses of those operations.

NOTICE: This Information is intended only for educational purposes and may be regarded as controversial by some tax experts. Readers should consult with a qualified tax professional who is familiar with their specific financial and tax circumstances before adopting any ideas that are discussed in this article.