Source: https://www.scribd.com/doc/24465195/The-Internal-Revenue-Service-Restructuring-and-Reform-Act-of-1998
Timestamp: 2017-09-22 08:59:59
Document Index: 729144215

Matched Legal Cases: ['§1002', '§1101', '§7802', '§7802', '§1102', '§7803', '§7803', '§1102', '§6212', '§1102', '§7811', '§7811', '§7803', '§1103', '§7803', '§1105', '§7217', '§1201', '§6103', '§1203', '§2001', '§2002', '§6071', '§6041', '§2003', '§2004', '§3001', '§7491', '§7491', '§7491', '§7491', '§3101', '§7430', '§7430', '§7430', '§3101', '§3102', '§7426', '§7433', '§7426', '§7426', '§7426', '§7426', '§7426', '§7433', '§3102', '§7426', '§3103', '§7463', '§7436', '§7443', '§3104', '§7422', '§3105', '§3106', '§6325', '§7426', '§6015', '§6015', '§6015', '§6015', '§6015', '§3201', '§6015', '§6015', '§6662', '§3202', '§6511', '§3301', '§6621', '§3302', '§6601', '§3303', '§6651', '§3304', '§6656', '§3305', '§6404', '§3306', '§6751', '§3307', '§6672', '§3308', '§6631', '§3309', '§6404', '§6662', '§3411', '§7525', '§3401', '§6320', '§6320', '§6331', '§3401', '§6330', '§6330', '§6159', '§6330', '§6330', '§6330', '§6320', '§6330', '§6672', '§6330', '§6330', '§6330', '§6330', '§3412', '§7602', '§6103', '§3413', '§7612', '§3414', '§3414', '§3416', '§7609', '§3415', '§3416', '§7603', '§3417', '§7602', '§3421', '§3421', '§6330', '§6334', '§3431', '§6334', '§3432', '§6342', '§3433', '§6331', '§6672', '§7421', '§3433', '§6502', '§3434', '§7429', '§3435', '§6323', '§6323', '§3435', '§3436', '§72', '§3441', '§6335', '§6335', '§3442', '§6340', '§6340', '§3442', '§3443', '§6335', '§3443', '§6331', '§3444', '§6331', '§3445', '§6334', '§3445', '§6334', '§3455', '§3445', '§6374', '§3445', '§6330', '§3445', '§6330', '§6330', '§6320', '§6330', '§3445', '§3461', '§6502', '§3462', '§7122', '§2462', '§6331', '§3462', '§6462', '§3462', '§6159', '§3462', '§3462', '§3462', '§3463', '§6213', '§6212', '§3464', '§6213', '§3464', '§3465', '§7123', '§3465', '§3466', '§6304', '§7433', '§7433', '§3467', '§6154', '§3467', '§3468', '§6015', '§3501', '§3502', '§3503', '§3503', '§3504', '§3504', '§3505', '§6302', '§3506', '§6159', '§3506', '§3507', '§6231', '§3508', '§6103', '§3508', '§3502', '§6110', '§6110', '§6110', '§3509', '§6110', '§3601', '§7526', '§3701', '§3702', '§6103', '§3703', '§3705', '§3706', '§3707', '§3708', '§6103', '§3709', '§3709', '§3710', '§6109', '§3711', '§6109', '§25', '§25', '§3712', '§60505', '§3801', '§3802', '§3803', '§3804', '§4001', '§4002', '§4011', '§4021']

The Internal Revenue Service Restructuring and Reform Act of 1998© | Internal Revenue Service | Internal Revenue Code
The Internal Revenue Service Restructuring and Reform Act of 1998©
THE INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998© By: Robert E. McKenzie S-1 INTRODUCTION S-1.
10 In July, 1998, Congress completed the most extensive revision of the IRS structure in history. In reaction to many IRS abuses, Congress created an Oversight Board to the IRS and severely limited the powers of its Examination and Collection Division. Specific due process rights were granted for the first time with respect to collection matters. Congress limited the use of many aggressive examination techniques and granted taxpayers specific rights to sue the IRS when it abused its discretion. S-2 REORGANIZATION OF STRUCTURE AND MANAGEMENT OF THE IRS
IRS Mission and Restructuring
S-2.10 The Act directs the Internal Revenue Service ("IRS") to revise its mission statement to provide greater emphasis on serving the public and meeting the needs of taxpayers. The Act directs the Commissioner of Internal Revenue ("Commissioner") to restructure the IRS by eliminating or substantially modifying the present-law three-tier geographic structure and replacing it with an organizational structure that features operating units serving particular groups of taxpayers with similar needs. [§1002]
Establishment and Duties of IRS Oversight Board
S-2.20 The Act provides for the establishment within the Treasury Department of the Internal Revenue Service Oversight Board (the "Board"). The general responsibilities of the Board are to oversee the IRS in its administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws. The Board also has the authority to recommend candidates for Commissioner to the President, and to recommend removal of the Commissioner. The Board has no authority to intervene in (1) specific taxpayer cases, including compliance activities involving specific taxpayers such as criminal investigations, examinations, and collection activities, (2) specific individual personnel matters, or (3) specific procurement matters. The Board has authority to oversee general law enforcement matters, and it has the responsibility to ensure that the organization and operation of the IRS allows the IRS to carry out its mission. [§1101] [IRC§7802]
S-2.30 The Oversight Board is composed of 9 members. Six of the members are so-called "private-life" members who are not otherwise Federal officers or employees. The other members are: (1) the Secretary of the Treasury (or, if the Secretary so designates, the Deputy Secretary); (2) the Commissioner; and (3) an individual who is a full-time Federal employee or a representative of employees ("employee representative"). The private-life members of the Board and the employee representative are appointed by the President, with the advice and consent of the Senate. Under the Act, the private-life members of the Board will be appointed without regard to political affiliation, based solely on their expertise in the following areas: management of large service organizations; customer service; the Federal tax laws, including tax administration and compliance; information technology; organization development; the needs and concerns of taxpayers; and the needs and concerns of small business. Under the Act, Board members would have limited access to confidential tax return and return information under section 6103. This limited access would permit the Board to receive section 6103 information from the newly established Treasury Inspector General for Tax Administration or the Commissioner in connection with reports to the Board. This access to section 6103 information does not include the taxpayer's name, address, or taxpayer or employer identification number. Board members are subject to the anti-browsing rules applicable to IRS employees under present law. In addition, the private-life members and the employee representative will be subject to a number of ethics rules pertaining to representational activities and compensation matters, post-employment restrictions, and financial disclosure requirements. The President is granted the authority to waive the ethics rules for the employee representative under certain circumstances. [IRC§7802(6)]
S-2.40 The six private-life Board members will be appointed for five-year terms. The private-life members (including the employee representative) may serve no more than two five-year terms. Board member terms will be staggered, as a result of a special rule providing that some private-life members first appointed to the Board
would serve initial terms of less than five years. Under this rule, the staggered term of the initial Board shall be as follows: two members first appointed will have a term of three years; two members shall have a term of four years; and two members shall have a term of five years. The terms of the initial Board members will run from the date of appointment. Subsequent terms will run from expiration of the previous term. A Board member appointed to fill a vacancy before the expiration of a term will be appointed to the remainder of the term. Such a member could be appointed to a subsequent five-year term.
S-2.50 The members of the Board are to elect a Chair from the private-life members for a two-year term. Except as otherwise provided by a majority of the Board, the authority of the Chair includes the authority to hire appropriate staff, call meetings, establish committees, establish the agenda for meetings, and develop rules for the conduct of business.
S-2.60 The Board is required to meet on a regular basis (as determined necessary by the Chair), but no less frequently than quarterly. The Board can meet privately, and is not subject to public disclosure laws. A quorum of five members is required in order for the Board to conduct business. Actions of the Board can be taken by a majority vote of those members present and voting.
S-2.70 The provisions relating to the Board are effective on the date of enactment. The President is directed to submit nominations for Board members to the Senate within six months of the date of enactment. The Act provides that the provisions relating to the Board are not to be construed to invalidate the actions and authority of the IRS prior to the appointment of members of the Board. S-3 APPOINTMENT AND DUTIES OF IRS COMMISSIONER CHIEF COUNSEL AND OTHER PERSONNEL
IRS Commissioner and Other Personnel
S-3.10 As under present law, the Act provides that the Commissioner is appointed by the President, with the advice and consent of the Senate, and may be removed at will by the President. Under the Act, one of the qualifications of the Commissioner is demonstrated ability in management. The Commissioner is appointed to a five-year term, beginning with the date of appointment. The Commissioner may be reappointed for more than one five-year term. The Board recommends candidates to the President for the position of Commissioner; however, the President is not required to nominate for Commissioner a candidate recommended by the Board. The Board has the authority to recommend the removal of the Commissioner. [§1102(a)] [IRC§7803]
S-3.20 Under the Act, the IRS Chief Counsel would no longer be an Assistant General Counsel of the Treasury and would generally report to the IRS Commissioner, with two exceptions. First, the Chief Counsel would report to both the Commissioner and the Treasury General Counsel with respect to (1) legal advice or interpretation of the tax law not relating solely to tax policy and (2) tax litigation. Second, the Chief Counsel would report only to the Treasury General Counsel with respect to legal advice or interpretation of the tax law relating solely to tax policy. [IRC§7803] S-4 STRUCTURE AND FUNDING OF THE EMPLOYEE PLANS AND EXEMPT ORGANIZATIONS DIVISION ("EP/EO") S-4.10 To facilitate the reorganization of the IRS into operational units, the Act eliminates the present-law statutory requirement contained in section 7802(b) of the Code that there be an "Office of Employee Plans and Exempt Organizations" under the supervision and direction of an Assistant Commissioner. In addition, the Act repeals the funding mechanism for EP/EO set forth in section 7802(b). These provisions are effective on the date of enactment of the Act. S-5 TAXPAYER ADVOCATE AND TAXPAYER ASSISTANCE ORDERS S-5.10 The Act renames the IRS Taxpayer Advocate as the "National Taxpayer Advocate." The National Taxpayer Advocate is appointed by the Secretary of the Treasury after consultation with the Commissioner and the IRS Oversight Board. The individual appointed to be the National Taxpayer Advocate cannot have been an officer or employee of the IRS (other than in the Office of the Taxpayer Advocate) during the two-year period ending with such individual's appointment, and must agree not to accept employment with the IRS (other than in the Office of the Taxpayer Advocate) for at least five years after ceasing to be the National Taxpayer Advocate. The present-law problem resolution system is replaced with a system of local Taxpayer Advocates who report directly to the National Taxpayer Advocate and who are independent from the IRS examination, collection, and appeals functions. The Act expands the circumstances under which a Taxpayer Assistance Order may be issued if a taxpayer is suffering from or about to suffer from a significant hardship. These provisions generally are effective on the date of enactment. [§1102(a)] [IRC§6212(a)]
S-5.20 The Act expands the definition of "significant hardship" by including the following the circumstances: (1) The existence of an immediate threat of adverse action. (2) A delay of more than thirty (30) days in resolving the taxpayers account problems. (3) The payment by the taxpayer of significant cost (including fees for professional services) if relief is not granted or; (4) Irreparable injury or a long standing adverse impact, if relief is not granted. [§1102] [IRC§7811]
S-5.30 The list is not intended to be exclusive. A TAO may also be issued in any case which the taxpayer meets other requirements that will be spelled out in regulations. [IRC§7811(a)(1)(B)] The ranks are to be based in consideration of equity. If the Internal Revenue Service has failed to follow published guidance, including the Internal Revenue Manual, the Taxpayer Advocate is required to construe the facts taken into account in a manner most favorable to the taxpayer. [IRC§7803(c)(2)(B)(ii)] The TAO requirements became effective upon signing of the Act by the President. S-6 TREASURY OFFICE OF INSPECTOR GENERAL; IRS OFFICE OF THE CHIEF INSPECTOR S-6.10 Under the Act, a new, independent Treasury Inspector General for Tax Administration ("Treasury IG for Tax Administration") is established within the Department of Treasury. The IRS Office of the Chief Inspector is eliminated, and all of its powers and responsibilities are transferred to the Treasury IG for Tax Administration, except for employee background checks and protection of employees against physical threats. The Treasury IG for Tax Administration has the powers and responsibilities generally granted to Inspectors General under the IG Act of 1978, without the limitations that currently apply to the Treasury IG under section D of that Act. The role of the existing Treasury IG is redefined to exclude responsibility for the IRS. The Treasury IG for Tax Administration is under the supervision of the Secretary of Treasury, with certain additional reporting to the IRS Oversight Board and the Congress. The provision is effective 180 days after the date of enactment. [§1103]
[IRC§7803(d)]
S-6.20 Congress apparently felt that the Chief Inspector was not sufficiently independent from the Internal Revenue Service. Over the years there have been several scandals involving top executive of the IRS who are not fully investigated by the Chief Inspector. By creating a separate structure outside the IRS, Congress has given the new inspector greater autonomy and greater authority to investigate IRS officials. Congress apparently hopes that an independent inspector general within the Treasury Department with primary responsibility to audit, investigate and evaluate IRS problems will improve quality and creditability. S-7 PROHIBITION ON EXECUTIVE BRANCH INFLUENCE OVER TAXPAYER AUDITS S-7.10 The Act makes it unlawful for the President, the Vice President, employees of the executive offices of the President or Vice President, as well as any individual (other than the Attorney General) serving in a Cabinet-level position to request that any officer or employee of the IRS conduct or terminate an audit or otherwise investigate or terminate the investigation of any particular taxpayer with respect to the tax liability of that taxpayer. This prohibition applies to both direct and indirect requests. Anyone convicted of violating this provision will be punished by imprisonment of not more than 5 years or a fine not exceeding $5,000 (or both). This provision is effective for violations after the date of enactment. [§1105] [IRC§7217] S-8 IRS PERSONNEL FLEXIBILITIES S-8.10 The Act requires the IRS to exercise the personnel flexibilities consistently with existing rules relating to merit system principles, prohibited personnel practices, and performance incentives. In those cases where the exercise of personnel flexibilities would affect members of the employees' union, such employees would not be subject to the exercise of any flexibility unless there is a written agreement between the IRS and the employees' union. The Act addresses issues relating to senior management and technical positions, the establishment of a performance management system, the granting of awards to IRS employees, staffing Flexibilities, and mandatory terminations of employees for certain proven violations. [§1201]
Mandatory Terminations S.8.20 The act requires the IRS to terminate employees for certain violations including: 1. Willful failure to obtain approval signature on documents authorizing the seizure on a taxpayers home personal belongings or business assets.
2. Provided false statements under oath with respect to material matter following a taxpayer or taxpayer representative. 3. Falsifying or destroying documents to avoid uncovering mistakes made by any employee with respect to a taxpayer or a taxpayer representative. 4. Assault or battery on a taxpayer or a taxpayer representative, but only if there is a criminal conviction or a final judgment in a civil case. 5. Violation of a taxpayer's or a taxpayer representative's civil rights or the civil rights of another IRS employee. 6. Violations of the Internal Revenue Code, regulations, or IRS policies for purposes of retaliating against or harassing a taxpayer or a taxpayer representative. 7. Willful misuse of IRC§6103 (confidentiality of returns and return information) for the purpose of concealing data from a congressional inquire. 8. Willful failure to file a federal tax return. 9. Willful understatement of a federal tax liability. 10. Threatening to audit a taxpayer to extract personal gain. [§1203] S-9 ELECTRONIC FILING
Electronic Filing of Tax and Information Returns <![endif]> S-9.10 Under the Act, the policy of the Congress is to promote paperless filing, with a long-range goal of providing for the filing of at least 80 percent of all tax returns in electronic form by the year 2007. [§2001]
Due Date for Certain Information Returns S-9. 20 The Act provides an incentive to filers of information returns to use electronic filing by extending the due date for filing such returns with the IRS from February 28 (under present law) to March 31 of the year following the calendar year to which the return relates. This provision still requires payees to receive the information returning by January 31. The Act also requires the Treasury to issue a study evaluating the merits and disadvantages, if any, of extending the deadline for providing taxpayers with copies of information returns (other than Forms W-2) from January 31 to February 15. The report is due by June 30, 1999. [§2002], [IRC§6071], [IRC§§6041-6050S]
Paper less Electronic Filing S-9.30 To facilitate the filing of electronic returns, the Secretary is required to develop procedures that would eliminate the need to file a paper form relating to signature information. In addition, the Secretary is to establish procedures, to the extent practicable, to receive all forms electronically for taxable periods beginning after December 31, 1999. The Act also provides rules for determining when electronic returns are deemed filed and for authorization for return preparers to communicate with the IRS on matters included on electronically filed returns. [§2003]
Return-Free Tax System S-9.40 The Act requires the Secretary or his delegate to study the feasibility of, and develop procedures for, the implementation of a return-free tax system for appropriate individuals for taxable years beginning after 2007. [§2004]
Access to Account Information S-9.50 Under the Act, the Secretary is required to develop procedures not later than December 31, 2006, under which a taxpayer filing returns electronically could review the taxpayer's own account electronically, but only if all necessary privacy safeguards are in place by that date. S-10 TAXPAYER PROTECTION AND RIGHTS
Burden of Proof <![endif]> S-10.10 The Act provides that the Secretary shall have the burden of proof in any court proceeding with respect to a factual issue if the taxpayer introduces credible evidence with respect to the factual issue relevant to ascertaining the taxpayer's tax liability. [§3001] [IRC§7491]
Four Conditions S-10.20 Four conditions apply. First, the taxpayer must comply with the requirements of the Internal Revenue Code and the regulations issued thereunder to substantiate any item (as under present law). Second, the taxpayer must maintain records required by the Code and regulations (as under present law). Third, the taxpayer must cooperate with reasonable requests by the Secretary for meetings, interviews, witnesses, information, and documents. Fourth, taxpayers other than individuals must meet the net worth limitations that apply for awarding attorney's fees. The taxpayer has the burden of proving the second, third and fourth conditions. The provision applies to income, estate, gift, and generation-skipping transfer taxes. [IRC§7491(a)]
Statistical Information S-10.30 The IRS has the burden of proof in any court proceeding with respect to income items of individual taxpayers that were reconstructed solely based on statistics of unrelated taxpayers. The IRS has consistently utilized Bureau of Labor Statistics to determine taxpayer expenses and income. The Internal Revenue Service might calculate an individuals income based on the average income for taxpayers in the area where the taxpayer lived. [IRC§7491(b)] The Internal Revenue Service also has the burden of proof in any tax proceeding to present credible evidence before it may impose a penalty. In other words the IRS must come forth initially with evidence that it is appropriate to apply a particular penalty to the taxpayer. [IRC§7491(c)]
S-10.40 The provision applies to court proceedings arising in connection with examinations commencing (or taxable periods or events beginning or occurring) after the date of enactment. S-11 EXPANSION OF AUTHORITY TO AWARD COSTS AND CERTAIN FEES S-11.10 The Act increases the hourly fee cap on attorneys, CPA's and Enrolled Agents fees and expands the circumstances under which attorneys fees and administrative costs may be awarded to taxpayers, effective for costs incurred and services performed more than 180 days after the date of enactment. [§3101] [IRC§7430(c) (1)(B)5]
Substantially Justified S-11.20 Current law requires that a party is not awarded administrative and/or litigation costs against the U.S. if the United States establishes its position is justified. The new law adds that in determining whether the U.S. position was substantially justified, a court must take into account whether the U.S. has lost on substantially similar cases in courts of appeals for other circuits. [IRC§7430(c)(4)(B)(iii)] Congress made the change because the IRS has in the past continued to litigate issues that have been previously decided in favor of the taxpayer in other circuits. Congress believes that such conduct by the IRS places a burden on taxpayers required to litigate the issues once again.
Fee Rate S-11.30 Under current law the prevailing party will be awarded one-hundred ten ($110.00) dollars per hour. The Act increases that amount to one-hundred twenty-five ($125.00) dollars per hour. The courts may consider the difficulty of the issues and the local availability of tax expertise in determining whether a higher rate is justified. The court may award more fees than actually paid by the individual if the court finds that taking into account all of the facts and circumstances the services are worth more than a nominal fee charged by the representative. This provision reflects Congresses believe that pro bono tax clinics should be encouraged and rewarded for efforts on behalf of taxpayers.
Earlier Award of Fees Permitted S-11.40 Under prior law administrative cost and fees were awardable to a taxpayer for services after she
received a notice of a decision from an IRS appeals office or a deficiency notice. The new act provides for the award of reasonable administrative costs as of the earliest of when the IRS sends a first letter of proposed deficiency which allows the taxpayer an opportunity to go to the appeals office or the taxpayers receipt of a notice of deficiency. Therefore, many taxpayers will now be able to recover fees after receipt of a thirty (30) day letter, not a ninety (90) day letter. As before, the act specifically includes the cost for Enrolled Agents and CPA's within its definition of attorneys fees. [IRC§7430(c)(2)] [§3101(b)] S-12 CIVIL DAMAGES FOR COLLECTION ACTIONS S-12.10 The act permits up to $100,000 in civil damages caused by an officer or employee of the IRS who negligently disregards provisions of the Code or Treasury regulations in connection with the collection of Federal tax with respect to the taxpayer. The damages are $1,000,000 if the disregard was willful or reckless. Each award is further enhanced by the costs of the action. The taxpayer must exhaust administrative remedies. The Act also permits up to $1 million in civil damages caused by an officer or employee of the IRS who willfully violates provisions of the Bankruptcy Code relating to automatic stays or discharges. These provisions are effective for actions of officers or employees of the IRS occurring after the date of enactment. [§3102]
Third-Parties May Recover Damages for Wrongful Seizures S-12.20 Under prior law a party other than taxpayer could only bring a wrongful levy action pursuant to IRC§7426(b) which did not provide the same statutory damages and relief as §7433. Therefore, the third-party who had his property wrongfully seized by the Internal Revenue Service had fewer remedies available than the taxpayer who was subject to reckless or intentional disregard of the Internal Revenue Code by an IRS employee. Under the new Act if in any third-party action against the IRS for wrongful levy there is a finding that any officer or employee of the IRS recklessly or intentionally or by reason of negligence disregarded any provision of the Internal Revenue Code, the IRS can be held liable for an amount equal to the lesser of one million dollars (one hundred thousand dollars in the case of negligence) less the sum of money due under IRC§7426(a)(1). A third party may receive actual, direct economic damages sustained as a proximate result of reckless, or intentional or negligent disregard of any provision of the IRC by an IRS officer, reduced by any amount of damages which would be awarded by IRC§7426(b), IRC§7426(h)(1)(A) and the cost of the action. The new action must be brought within two years of the occurrence as opposed to the nine months required by the IRC§7426. Therefore, a third-party who has failed to bring a third-party action pursuant to IRC§7426 may still have a cause of action pursuant to IRC§7433. The third-party must also have exhausted administrative remedies to qualify for damages. [§3102(b)] [IRC§7426(h)IRC7433(d)]
S-13 INCREASE IN SIZE OF CASES PERMITTED ON SMALL CASE CALENDAR S-13.10 The Act increases the cap for small case treatment in the Tax Court from $10,000 to $50,000, effective for proceedings commenced after the date of enactment. [§3103] [IRC§7463, IRC§7436(c)(i), IRC§7443A(b)(3)] S-14 ACTIONS FOR REFUND WITH RESPECT TO CERTAIN ESTATES WHICH HAVE ELECTED THE INSTALLMENT METHOD OF PAYMENT
S-14.10 The Act grants the U.S. Court of Federal Claims and the U.S. district courts jurisdiction to determine the correct amount of estate tax liability (or refund) in actions brought by taxpayers deferring estate tax payments under section 6166, as long as certain conditions are met. The Act further provides that once a final judgment has been entered by a district court or the U.S. Court of Federal Claims, the IRS is not permitted to collect any amount disallowed by the court, and any amounts paid by the taxpayer in excess of the amount the court finds to be currently due and payable are refunded to the taxpayer, with interest. The provision is effective for claims for refunds filed after the date of enactment. [§3104] [IRC§7422(j)] S-15 REVIEW OF AN ADVERSE IRS DETERMINATION OF A BOND ISSUE'S TAX-EXEMPT STATUS S-15.10 The Act directs the Internal Revenue Service to modify its administrative procedures to allow tax-exempt bond issuers examined by the IRS to appeal adverse examination determinations to the Appeals Division of the IRS as a matter of right. Such an appeal is to be considered by senior personnel with experience in tax-exempt bonds issues. The direction to the IRS is effective on the date of enactment. [§3105] S-16 CIVIL ACTION FOR RELEASE OF ERRONEOUS LIEN S-16.10 The Act establishes an administrative procedure permitting 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 if such record owner is not the person whose unsatisfied liability gave rise to the lien. The record owner is required to apply to the Secretary of the Treasury for such a certificate and either to deposit cash or to furnish a bond sufficient to protect the lien interest of the United States. The provision is effective on the date of enactment. [§3106] [IRC§6325(b)(4)] [IRC§7426(a)] S-17 RELIEF FOR INNOCENT SPOUSES S-17.10 The Act generally makes innocent spouse relief easier to obtain. The Act eliminates all of the understatement thresholds and requires only that the understatement of tax be attributable to an erroneous (and not just a grossly erroneous) item of the other spouse. An individual will be relieved of liability for tax (including interest, penalties and other amounts) for a tax year to the extent the liability is attributable to an understatement described below: 1. A joint return was filed for the tax year [IRC §6015(b)(1)(A)]; 2. There is an understatement of tax on the return that is attributable to an erroneous item by the other spouse [IRC §6015(b)(1)(B)]; 3. A taxpayer establishes that in signing the return he/she did not know and had no reason to know of the understatement; [IRC §6015(b)(1)(C);
4. Taking into account all of the facts and circumstances, it would be inequitable to hold the taxpayer liable for the deficiency attributable to the understatement; [IRC §6015(b)(1)(D)]; and 5. A taxpayer elects the benefits of this provision, on the form that the IRS prescribes (the IRS must issue a form for spousal relief), no later than the date that is two years after the date the IRS has begun collection activities with respect to the taxpayer. [IRC §6015(b)(1)(E)]
Election to Allocate S-17.20 The Act also provides a separate liability election for a taxpayer who, at the time of the election, is no longer married to, is legally separated from, or has been living apart for at least 12 months from the person with whom the taxpayer originally filed a joint return. [§3201] [IRC §6015(a)] Such taxpayers may elect to have the liability for any deficiency limited to the portion of the deficiency that is attributable to items allocable to the taxpayer. The election is not available if the Secretary demonstrates that assets were transferred between individuals filing a joint return as part of a fraudulent scheme of the individuals or if both individuals had actual knowledge of the understatement of tax.
Knowledge 17.30 If an individual who otherwise qualifies for innocent spouse relief fails to establish that he/she did not know or had reason to know the understatement, but does establish that he/she did not know or have reason to know the extent of the understatement, that individual may be relieved of liability for tax, penalties and interest to the extent that liability is attributable to the portion of the understatement that he/she did not know or have reason to know. Example: If the husband and wife file a joint return and the IRS determines the deficiency for the year based on $15,000 of unreported income attributable to the husband. Wife shows she did not know or have reason to know of $5,000 of the under-reported income. If the wife otherwise qualifies for any spouse relief, she will be of relieved of joint liability for the portion of the understatement attributable to the $5,000 of omitted income. She will still remain liable for the taxes due on the $10,000 of omitted income.
Divorced, Separated or Living Apart S-17.40 An individual is eligible to make the separate liability election only if at the time the election is filed he/she is no longer married to, or is legally separated from, the spouse from whom the joint return to which the election relates was filed; or he/she was not a member of the same household as the spouse with whom the joint return was filed at any time during the twelve month period ending at the date the election is filed [IRC §6015(c) (3)(A)(i)]. This provision allows additional relief when the IRS proposes a deficiency against a taxpayer who is no longer married or living with the person with whom he/she filed the joint return. The proponent may have had indication of a potential understatement but is without actual knowledge. If the understatement was not attributable to him/her, he/she may elect proportional liability. The provision does not apply to returns which were jointly filed showing a liability at the time of filing. It only applies to deficiencies as described in IRC §6662(d)(2)(a).
Time Deadline S-17.50 Expanded innocent spouse relief and the separate liability election must be elected no later than two years after the date on which the Secretary has begun collection activities with respect to the individual seeking the relief. The Act provides that the Tax Court has jurisdiction with respect to disputes about innocent spouse relief.
Equitable Relief S-17.60 The Act further authorizes the Secretary to relieve an individual of liability if relief is not available under the expanded innocent spouse rule or the separate liability election, if it would be inequitable to hold the individual liable for any unpaid tax or any deficiency. The expanded innocent spouse relief, separate liability election, and authority to provide equitable relief apply to liabilities for tax arising after the date of enactment, as well as any liability for tax arising on or before the date of enactment that remains unpaid on the date of enactment. S-18 SUSPENSION OF STATUTE OF LIMITATIONS ON FILING REFUND CLAIMS DURING PERIODS OF DISABILITY S-18.10 The Act permits equitable tolling of the statute of limitations for refund claims of an individual taxpayer during any period of the individual's life in which he or she 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 to last for a continuous period of not less than 12 months. Tolling does not apply during periods in which the taxpayer's spouse or another person is authorized to act on the taxpayer's behalf in financial matters. The provision applies to periods of disability before, on, or after the date of enactment but does not apply to any claim for refund or credit which (without regard to the provision) is barred by the statute of limitations as of the date of enactment. [§3202] [IRC §6511(h)] S-19 INTEREST AND PENALTY CHANGES
Elimination of Interest Differential S-19.10 The Act establishes a net interest rate of zero when interest is payable and allowable on equivalent amounts of overpayment and underpayment of any taxes imposed by Title 26 (the Internal Revenue Code) that exist for any period. Each overpayment and underpayment is considered only once in determining whether equivalent amounts of overpayment and underpayment exist. The special rules that increase the interest rate paid on large corporate underpayments and decrease the interest rate received on corporate underpayments in excess of $10,000 do not prevent the application of the net zero rate. The provision applies to income taxes and self-employment taxes. The provision applies to interest for periods beginning before the date of enactment if: (1) the statute of limitations has not expired with respect to either the underpayment or overpayment; (2) the taxpayer identifies the periods of underpayment and overpayment for which the zero rate applies; and (3) on or before December 31, 1999, the taxpayer asks the Secretary to apply the zero rate. [§3301] [IRC §6621(d)]
Increase in Overpayment Rate Payable to Taxpayers Other Than Corporations
S-19.20 The Act provides that the overpayment interest rate will be AFR plus three percentage points, except that for corporations, the rate remains at AFR plus two percentage points. The provision is effective for interest for the second and succeeding calendar quarters beginning after the date of enactment. {§3302) [IRC §6601(f)]
Mitigation of Penalty for Individual's Failure to Pay During Period of Installment Agreement S-19.30 The Act provides that the penalty for failure to pay taxes is one half of the usual rate (.25 percent instead of .50 percent) imposed with respect to the tax liability of an individual for any month in which an installment payment agreement with the IRS is in effect, provided that the individual filed the tax return in a timely manner (including extensions). The provision is effective for installment agreement payments made after December 31, 1999. [§3303] [IRC §6651(h)]
Designation of Tax Deposits S-19.40 The Act allows the taxpayer to designate the period to which each deposit is applied. The designation must be made no later than 90 days of the related IRS penalty notice. The provision extends the authorization to waive the failure to deposit penalty to the first deposit a taxpayer is required to make after the taxpayer is required to change the frequency of the taxpayer's deposits. The provision is effective for deposits required to be made more than 180 days after the date of enactment. The Act also provides that, for deposits required to be made after December 31, 2001, any deposit is to be applied to the most recent period to which the deposit relates, unless the taxpayer explicitly designates otherwise. [§3304] [IRC §6656(e)]
Suspension of Interest and Certain Penalties if Secretary Fails to Contact Individual Taxpayer S-19.50 The Act suspends the accrual of certain penalties and interest after eighteen (18) months if the IRS has not sent the taxpayer a notice specifically stating the taxpayer's liability for additional taxes (and the basis for the liability) within eighteen (18) months following the date which is the later of (1) the original due date of the return or (2) the date on which the individual taxpayer timely filed the return. The suspension only applies to individuals who file a timely tax return and does not apply to the failure to pay penalty, in the case of fraud, or with respect to criminal penalties. The provision is effective for taxable years ending after the date of enactment. With respect to taxable years beginning before January 1, 2004, the eighteen (18) month period is decreased to twelve (12) months. Interest and penalties resume 21 days after the IRS sends a notice to the taxpayer specifically stating the taxpayer's liability and the basis for the liability. The provision is applied separately with respect to each item or adjustment. [§3305] [IRC §6404(g)]
Procedural Requirements for Imposition of Penalties and Additions to Tax S-19.60 The Act requires that each notice imposing a penalty include the name of the penalty, the Code section imposing the penalty, and a computation of the penalty. The Act also requires the specific approval of IRS management to assess all non-computer generated penalties unless excepted. This provision does not apply to failure to file penalties, failure to pay penalties, or to penalties for failure to pay estimated tax. The provision is effective with respect to notices issued, and penalties assessed, after December 31, 2000. [§3306] [IRC §6751]
Personal Delivery of Notice of Penalty Under Section 6672 S-19.70 The Act permits in-person delivery, as an alternative to delivery by mail, of a preliminary notice that the IRS intends to assess a 100-percent penalty, effective on the date of enactment. [§3307] [IRC §6672(b)]
Notice of Interest Charges S-19.80 The Act requires every IRS notice that includes an amount of interest required to be paid by the taxpayer that is sent to an individual taxpayer to include a detailed computation of the interest charged and a citation to the Code section under which such interest is imposed, effective for notices issued after December 31, 2000. [§3308] [IRC §6631]
S-19.90 The Act provides that taxpayers located in a Presidentially declared disaster area do not have to pay interest on taxes due for the length of any extension for filing their tax returns granted by the Secretary of the Treasury, effective for disasters declared after December 31, 1997, with respect to taxable years beginning after December 31, 1997. The provision is designated as emergency legislation under Section 252(e) of the Balanced Budget and Emergency Deficit Control Act. [§3309] [IRC §6404(h)] S-20 UNIFORM APPLICATION OF CONFIDENTIALITY PRIVILEGE TO TAXPAYER COMMUNICATIONS WITH FEDERALLY AUTHORIZED PRACTITIONERS S-20.10 The Act extends the present law attorney-client privilege of confidentiality to communications between taxpayers and individuals who are authorized under Federal law to practice before the IRS. The privilege of confidentiality created by this provision does not apply to a written communication between any federally authorized tax practitioner and any director, shareholder, officer, employee, agent, or representative of a corporation in connection with the promotion of any tax shelter (as defined in §6662(d)(2)(C)(iii)) with respect to which such corporation is a direct or indirect participant. The privilege has never applied to attorneys during the preparation of a tax return and hence it does not now apply to Enrolled Agents and CPAs. Therefore, any disclosure made by the taxpayer while you are preparing the tax return must be assumed not to be privileged. On the other hand, disclosures made for the purposes of tax planning or during the course of representation will be privileged. The provision is effective with regard to communications made on or after the date of enactment. [§3411] [IRC §7525] S-21 DUE PROCESS IN IRS COLLECTION ACTIONS S-21.10 The Act establishes formal procedures designed to insure due process where the IRS seeks to collect taxes by levy (including by seizure). The due process procedures also apply after notice of a Federal tax lien has been filed. The IRS would be required to notify the taxpayer prior to filing a Notice of Lien. During the 30-day
period beginning with the mailing or delivery of this notification, the taxpayer may demand a hearing before an appeals officer who has had no prior involvement with the taxpayer's case. These provisions become effective 180 days after enactment. [§3401] [IRC §6320] Prior Rights to Appeal S-21.20 Since February 12, 1996 the Internal Revenue Service has had a collection appeals program which allows taxpayers to appeal the filing of a lien. This protection however was not statutory. If the IRS chose not to follow its own procedures, there was no remedy available to the taxpayer.
Impartial Hearing S-21.30 §6320 provides statutory appeal rights to taxpayers who are subject to federal tax liens. The provision specifically provides for an impartial hearing officer (which may not have been the case in the past). In the past the Internal Revenue Service collection division engaged in substantial ex parte discussion with the Appeals Officer. Now there are specific statutory protections available to the taxpayer and specific guarantees of independence by the Appeals Officer. Because taxpayers will also have the right to seek judicial review of any determination of the appeals officer, the taxpayer is guaranteed to have better consideration at the appeals level. In the past, if an Appeals Officer ruled against you the matter was referred back to the collection division and it proceeded to file the lien without further rights to the taxpayer. As case law develops in this area, Appeals Officers will also have guidelines from the courts as to appropriate reasons for foregoing liens and releasing liens. S-22 LEVY APPEAL RIGHTS S-22.10 Before the IRS can levy against a taxpayer's property, it would be required to provide the taxpayer with a "Notice of Intent to Levy," similar to that currently required under §6331(d). The notice would not be required to itemize the property the Secretary seeks to levy on. Service by registered or certified mail, return receipt requested, would be required. [§3401(B)] [IRC §6330]
Notice of Intent to Levy S-22.20 Subject to the exceptions noted below, no levy could occur within the 30-day period beginning with the mailing of the "Notice of Intent to Levy." During that 30-day period, the taxpayer may demand a pre-levy hearing before an appeals officer who generally has had no prior involvement with the taxpayer's case. Post Notice Hearing S-22.30 If a return receipt is not returned, the Secretary may proceed to levy against the taxpayer 30 days after the Notice of Intent to Levy was mailed. The Secretary must provide a hearing equivalent to the pre-levy hearing if later requested by the taxpayer. However, the Secretary is not required to suspend the levy process pending the completion of a hearing that is not requested within 30 days of the mailing of the Notice. Exceptions S-22.40 An exception to the general rule prohibiting levies during the 30-day period would apply in the case of state tax offset procedures, and in the case of jeopardy or termination assessments.
Prior Rights S-22.50 Since February 12, 1996 the Internal Revenue Service has had an appeals program which allowed taxpayers to appeal proposed or actual levies by the Internal Revenue Service. The unfortunate part of the program was that the taxpayers were not necessarily apprised of their rights to the appeals program. Revenue Officers were not prone to tell taxpayers of appeal rights since that might encourage taxpayers to seek those rights. In addition, there was no statutory protection of appeal rights. IRC §6330 now provides that the Internal Revenue Service must specifically inform taxpayers of their rights to appeal within 30 days of any proposed action by the IRS to levy upon the taxpayer's property. The taxpayer is specifically allowed to appeal the proposed levy and request that the Internal Revenue Service consider IRC §6159 Installment Agreements. Under prior law a taxpayer who requested a payment plan could be legally denied their payment plan and would have no further remedies. IRC §6330 (C)(2) specifically requires that the hearing officer consider spousal challenges to appropriateness of the collection actions and other collection alternatives which could include a bond, substitution of other assets, installment agreements or an offer in compromise. The prior administrative appeals procedure did not grant such broad authority to the Appeals Officer. The Appeals Officer was only allowed to look at the appropriateness of the Internal Revenue Service action even if another alternative would have been appropriate. The Appeals Division was not given the authority to find best remedy for the taxpayer. Amount of Liability S-22.60 The Act also authorizes the taxpayer to challenge the existence or the amount of the underlying tax liability for any tax period that the taxpayer did not receive statutory notice of deficiency for tax or did not otherwise have an opportunity to dispute such tax liability. The Appeals Officer is specifically directed to consider the following factors when considering a collection appeal: the verification presented, the issues raised by the taxpayer and whether any proposed collection action balances the needs for collection of taxes with the legitimate concerns of the person that any collection action be no more intrusive than necessary. [IRC §6330(C) (2)(B)] S-23 JUDICIAL REVIEW OF LIENS AND LEVIES S-23.10 The rights of taxpayers with respect to liens and levies are greatly extended by the waiver of sovereign immunity contained in IRC §6330 (d). A taxpayer who has exercised her rights to appeal under IRC §6320 and/or IRC §6330 with respect to liens and levies now has specific authority to seek judicial review of an adverse IRS decision. This provision represents a huge expansion of taxpayer rights. A basic presumption of all prior collection proceedings was the right of the IRS to take summary levy and lien actions without judicial intervention. The Tax Court has now been granted specific jurisdiction to hear matters concerning taxes under its jurisdiction. Generally those taxes would include income taxes, gift taxes, excise taxes and with the advent of Taxpayer Act of Rights 3 IRC §6672 Penalties. Other taxes including employment tax liabilities would be subject to judicial review by a U.S. District Court. If the taxpayer chose the wrong jurisdiction then the taxpayer will be allowed 30 days to seek review of an appeal before the proper court. During the pendency of a judicial appeal the appeals officer will retain jurisdiction of the matter. IRC §6330 (d)(2).
Delays in Collection S-23.20 The addition of judicial rights to review IRS collection action could result in a substantial delays in collection of taxes by the Internal Revenue Service. It might also encourage some recalcitrant taxpayers to
prolong collection of taxes. Congress has chosen to balance protections of well-meaning taxpayers by providing the judicial remedies. One result however may be to encourage non-compliance by less dedicated taxpayers. The addition of judicial review provisions is a reaction to prior IRS abuses in collection matters. Many taxpayers who have legitimately sought payment arrangements and/or offers in compromise from the Internal Revenue Service have been confronted by inflexible collection employees. IRS policies including its allowable expense program have imposed severe constraints on taxpayers who wish to repay their taxes. The Internal Revenue Service over the past several years has become increasingly inflexible in granting installment agreements. In fact for a period of time from 1994 to 1997 the Internal Revenue Service adopted severe restrictions on granting installment agreements with respect to employment tax liabilities. The new collection appeals program will prevent the Service from imposing unreasonable restrictions on installment agreements. Taxpayers now have the right to seek independent review of a Collection Division decision. If the taxpayer is dissatisfied with that review, §6330(c) grants specific authority to seek judicial review of IRS determinations.
Caution S-23.30 A note of caution is merited here because even though IRC §6330(c) grants the authority for judicial review there is no precedent as to the standards which the courts may apply. Although §6330(b) sets forth the standards for appeals review, there can be no certainty as to how those standards may be applied by courts. One would hope that the courts will develop their own bright line tests so that practioners may judge the appropriateness of judicial relief from IRS collection actions.
Suspension of Collection in Statute Limitations S-23.40 If a taxpayer exercises rights pursuant to the Collection Appeals process the Internal Revenue Service is precluded from taking levy or lien action during the pendency of the proceeding except in the event of a jeopardy or a levy upon a state tax refund. S-24 AUDIT PROTECTIONS
Limitation on Financial Status Audit Techniques S-24.10 The Act prohibits the IRS from using "financial status" or "economic reality" examination techniques to determine the existence of unreported income of any taxpayer unless the IRS has a reasonable indication that there is a likelihood of unreported income, effective on the date of enactment. [§3412] [IRC §7602(d)]
Software Trade Secrets Protection S-24.20 The Act prohibits the Secretary from issuing (or beginning an action to enforce) a summons in a civil action for any portion of any third-party tax-related computer source code unless certain requirements are satisfied. The Act also establishes a number of protections against the disclosure and improper use of software and source code obtained by the IRS in the course of an examination. The Act specifically provides that computer software or source code that is obtained by the IRS in the course of the examination of a taxpayer's return is included in the definition of return information under §6103. [§3413] [IRC §7612]
Prior Standards S-24.30 The provision does not change or eliminate any other requirement of the Code. A summons for third-party tax-related computer source code that meets the standards established by the provision will not be enforced if it would not be enforced under present law.
Effective Date S-24.40 The provision is effective with respect to summons issued and software acquired after the date of enactment. In addition, 90 days after the date of enactment, the protections against the disclosure and improper use of trade secrets and confidential information added by the provision (except for the requirement that the Secretary provide a written agreement from non-U.S. government officers and employees) apply to software and source code acquired on or before the date of enactment. S-25 Threat of Audit Prohibited to Coerce Tip Reporting Alternative Commitment Agreements S-25.10 The Act requires the IRS to instruct its employees that they may not threaten to audit any taxpayer in an attempt to coerce the taxpayer to enter into a tip reporting alternative commitment ("TRAC") agreement, effective on the date of enactment. [§3414]
The Prior TRAC Program S-25.20 During the past several years the Internal Revenue Service has engaged in a program of attempting to seek greater tips compliance in the hotel, restaurant and entertainment industry by approaching employers to seek tip reporting commitment agreements. Unfortunately the approach the IRS has taken has been to threaten the employer with audit if it did not force its employees to begin paying taxes on an agreed percentage of tips. The employer was confronted with the risk of an IRS audit or with the alternative of forcing each of its employees to agree to a certain percentage presumed tips. Act §3414 specifically prohibits the IRS from engaging in its current arm twisting of employers. The provision appears to have been a clear concession to the entertainment, restaurant and casino industry. S-26 SUMMONS RIGHTS
Taxpayers Allowed Motion to Quash all Third-party Summonses S-26.10 The Act generally expands the current "third-party record keeper" procedures to apply to summonses issued to persons other than the taxpayer. Thus, the taxpayer whose liability is being investigated receives notice of the summons and is entitled to bring an action in the appropriate U.S. District Court to quash the summons. The provision is effective for summonses served after the date of enactment. [§3416] [IRC §7609(i)(3)]
IRS Right to Summons S-26.20 Taxpayers are granted statutory authority to seek to quash third party summons. Although a right is granted by this provision, the courts probably will liberally construe the Internal Revenue's right to gather information from third parties and is unlikely that this provision will impede the Services ability to secure information from third parties. §3415 specifically excludes summons issued to aid in the collection of an assessment or judgment entered against the person with respect to whose liability the summons was issued and the liability at law or an equity of the person for transfer or fiduciary liability. It also specifically excludes summons issued by a criminal investigator in the Internal Revenue Service.
Summons by Mail S-26.30 The Internal Revenue Service is now given specific authority to serve a third party summons by mail. In the past the Internal Revenue Service was required to personally serve a summons. [§3416(a)] [IRC §7603(b)]
Notice of IRS Contact of Third Parties S-26.40 The Act provides that the IRS may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of the taxpayer without providing reasonable notice to the taxpayer that contacts with persons other than the taxpayer may be made. The provision is effective with respect to contacts made after 180 days after the date of enactment. [§3417] [IRC §7602(E)]
Enhanced Privacy Rights S-26.50 This Section represents a substantial enhancement of taxpayer privacy rights. The Internal Revenue Service is now required to notify the taxpayer in advance of its intent to seek information from third parties. This provision will allow taxpayers several protections. First the taxpayer will be able to better control the nature of the contact by informing third record keepers of the potential contact by the Internal Revenue Service and secondly, the taxpayer may be able to convince the IRS investigator that a better means to secure the information is available. The taxpayer might volunteer additional information in an effort to prevent the decision to seek third party information. The IRS retains the right to determine that for good cause shown, not to inform the taxpayer would jeopardize collection of any tax or it would involve reprisal against any person. The Internal Revenue Service also has the right to forego the notice in the event of a pending criminal investigation. Even with the rights to foreclose such notice granted to the IRS, the taxpayer's bargaining position is greatly enhanced by the new notice provisions. Practitioners and taxpayers should be alert to opportunities to provide alternative information to the IRS to avoid contacts with third parties. Contacts to third parties by the IRS generally hurt a taxpayer's reputation and may severely damage business relationships. Therefore the advance notice provisions should be used as an opportunity to prevent such contacts. S-27 COLLECTION APPROVAL PROCESS
Approval Process for Liens, Levies, and Seizures S-27.10 The Act requires the IRS to implement an approval process under which any lien, levy or seizure would,
when appropriate, be approved by a supervisor, who would review the taxpayer's information, verify that a balance is due, and affirm that a lien, levy or seizure is appropriate under the circumstances. Circumstances to be considered include the amount due and the value of the asset. The provision is effective for collection actions commenced after date of enactment, except in the case of any action under the automated collection system, the provision applies to actions initiated after December 31, 2000. [§3421]
Prior Law S-27.20 Under current law the Internal Revenue collection employees routinely filed notices of lien and Notice of Levy without discussion of the matter with supervisors. Revenue Officers were routinely delegated the authority to levy upon bank accounts, wages and assets held by third parties without supervisory approval. Federal Tax Liens were routinely filed by Revenue Officers without their supervisor's approval. §3421 imposes a duty upon IRS supervisory personnel to engage in specific reviews prior to the initiation of liens and levies. The supervisor must review the taxpayers information and verify the balances due and confirm that an action proposed to be taken is appropriate considering the taxpayers circumstances, the amount due and the value of the property. With respect to non-automated collection actions, this provision takes effect immediately.
Automated Collection S-27.30 With respect to automated collection actions, the provision will not take effect until December 31, 2000. The exclusion of Automated Collection System actions from the immediate impact of this provision is unfortunate. Most Notices of Levy and Liens are served by the Automated Collection System. Only a small percentage of levies and liens are issued by Revenue Officers. Over the years more hardships have been visited on taxpayers by the Automated Collection System than Revenue Officers. Liens and levies are issued in a rote fashion by a computer without human intervention via the Automatic Collection System. The system is ripe for errors and unintended harms to taxpayers. Given the current method of serving levies and liens by Automated Collection System, the Service will face a substantial challenge to place an human element into the process. One must be alert to exercise the rights under §6330 to protect clients from potential abuses by the Automated Collection System during the period from enactment of this provision until December 31, 2000. S-28 LEVY EXEMPTIONS S-28.10 The Act substantially increases the exemptions from levy available to taxpayers under §6334 of the Internal Revenue Code. The Exemption for personal effects rises from $2500 to $6,250 and books and tools of trade goes from $1350 to $3125. The increases will have the practical effect of preventing seizure of books and tools in trade and personal effects from many lower income taxpayers. The prior exemptions were diminished and allowed an opportunity for the IRS to take cars and other personal belongings from individuals with limited means. New exemptions will allow taxpayers to at least retain modest vehicles, personal items, books and tools of trade with reasonable value. {§3431] [IRC §6334(a)] S-29 RELEASE OF LEVY UPON AGREEMENT THAT AMOUNT IS UNCOLLECTIBLE S-29.10 The Act requires the IRS to immediately release a wage levy upon agreement with the taxpayer that the tax is not collectible, effective for levies imposed after December 31, 1999. [§3432] [IRC §6342(e)]
Currently Not Collectible <![endif]> S-29.20 IRM 5375 allows the IRS to declare an account currently not collectible. The IRS takes this step if after reviewing the taxpayer's financial statement it determines that he or she is unable to pay any tax liability at this time. Over the years the Internal Revenue Service has occasionally declared accounts uncollectible while continuing to levy upon a taxpayer's wages. This provision will prevent such action. If the IRS determines the account is uncollectible it may not continue to take a taxpayer's wages. The provision imposes a statutory mandate upon the IRS. In the past it was inconsistent for the Internal Revenue Service to determine the taxpayer could not pay a tax liability while at the same time continuing to seize that taxpayer's salary. S-30 LEVY PROHIBITED DURING PENDENCY OF REFUND PROCEEDINGS S-30.10 The Act requires the IRS to withhold collection by levy of liabilities that are the subject of a refund suit during the pendency of the litigation, effective for refund suits brought with respect to tax years beginning after December 31, 1998. Proceedings related to a proceeding under this provision include, but are not limited to, civil actions or third-party complaints initiated by the United States or another person with respect to the same kinds of tax (or related taxes or penalties) for the same (or overlapping) tax periods. [§3433] [IRC §6331(i)]
Prior Policy S-30.20 This provision adopts a policy of the Internal Revenue Service as a statutory protection. P-5-16 has provided since 3-1-84 that the Internal Revenue Service would forebear collection during the pendency of a refund suit regarding a devisable liability. Unfortunately, the Service has occasionally violated its own policies and the taxpayer was left without remedy. Most often this provision applies to a trust fund liability pursuant to IRC §6672. Taxpayer are not required to pay the entire liability in order to file a refund claim. Taxpayers generally pay the amount of tax due for one employee for one period and then file a refund claim with a request for abatement of the remaining liability. If the Internal Revenue Service denies that claim or six months expires then the taxpayer is authorized to initiate a refund in U.S. District Court pursuant to IRC §7421. Unfortunately, the Internal Revenue Service occasionally continued to pursue collection measures even though the taxpayer had sought a refund in U.S. District Court. U.S. District Courts were specifically prohibited from enjoining IRS collection efforts during the pendency of refund litigation concerning a devisable liability. §3433 grants specific authority to United State's Court's to enjoin IRS collection actions during the pendency of devisable liability disputes. This provision will prevent the abusive situation where a taxpayer disputes a liability but faces draconian IRS collection actions while at the same time pursuing legal rights before a federal court. The provision specifically provides for the suspension of the collection Statute of Limitations pursuant to IRC §6502 during the pendency of a proceeding. S-31 APPROVAL REQUIRED FOR JEOPARDY AND TERMINATION ASSESSMENTS AND JEOPARDY LEVIES S-31.10 The Act requires IRS Chief Counsel review and approval before the IRS can make a jeopardy assessment, a termination assessment, or a jeopardy levy. If the Chief Counsel's approval is not obtained, the taxpayer is entitled to obtain abatement of the assessment or release of the levy, and, if the IRS fails to offer such relief, to appeal first to IRS Appeals under the new due process procedure for IRS collections and then to court. The provision is effective for taxes assessed and levies made after the date of enactment.
Greater Taxpayer Protections S-31.20 This provision enhances taxpayer protections when the IRS chooses to initiate a jeopardy assessment. A review by Chief Counsel and/or his delegate is now required prior to the assertion of a jeopardy assessment. Such assessments have always been rare but the case law is ripe with IRS abuse of this provision. The intent of the statute is to impose a legal review of any jeopardy assessment prior to adverse actions by revenue agents and revenue officers. It should reduce but not necessarily eliminate improper use of the jeopardy assessment process by the Internal Revenue Service (not all IRS attorneys have common sense). [§3434] [IRC §7429(a)(1)] S-32 INCREASE IN AMOUNT OF CERTAIN PROPERTY ON WHICH LIEN NOT VALID S-32.10 The Act increases the dollar limit for purchasers at a casual sale from $250 to $1,000, and further increases the dollar limit from $1,000 to $5,000 for mechanics lienors providing home improvement work for owner-occupied personal residences and indexes these dollar amounts for inflation. The provision is effective on the date of enactment. [§3435] [IRC §6323(b)]
Super Priorities S-32.20 Since the enactment of the Federal Tax Lien Act in 1966, IRC Section 6323 has contained certain super priority protections for competing lien claimants. Certain claimants are given priority over the Internal Revenue Lien even if those claims arose subsequent to the filing of a Federal Tax Lien. Unfortunately, the dollar protections contained an IRC Section 6323 has remained constant since the enactment of the Federal Tax Lien Act of 1966. IRC §6323(B) has now been specifically amended to increase the protections for assets purchased at casual sales from $250 to $1000. It has also been increased from $1000 to $5000 protection for claimants who file mechanics liens for repairs performed on residential property. The provision also provides for cost of living adjustments in the future. To avoid confusion, §3435 also expands the definition of passbook loans and provides for a definition of "deposit secured loans". This provision allows banks and other financial institutions to specifically take security interest in taxpayer deposits and retain priority even if the security agreement is signed subsequent to the Federal Tax Lien. S-33 WAIVER OF EARLY WITHDRAWAL TAX FOR IRS LEVIES ON EMPLOYER-SPONSORED RETIREMENT PLANS OR IRAS S-33.10 The Act provides an exception from the 10-percent early withdrawal tax for amounts withdrawn from an employer-sponsored retirement plan or an IRA that are subject to a levy by the IRS. The exception applies only if the plan or IRA is levied; it does not apply, for example, if the taxpayer withdraws funds to pay taxes in the absence of a levy, in order to release a levy on other interests. The provision is effective for withdrawals after the date of enactment. [§3436] [IRC §72(t)(2)(A)(vii)]
May Levy IRA's and 401K Plans S-33.20 The Internal Revenue Service retains the right to levy upon IRA's, Keoghes, and 401K plans but now when it takes such action it may not assert an excise penalty on the involuntarily converted funds. Taxpayers will still have to pay the income taxes due as a result of the involuntary conversion.
S-34 PROHIBITION OF SALES OF SEIZED PROPERTY AT LESS THAN MINIMUM BID S-34.10 The Act prohibits the IRS from selling seized property for less than the minimum bid price, effective for sales occurring after the date of enactment. [§3441] [IRC §6335(e)]
Prior Law S-34.20 IRC §6335 (E)(1)(a)(i) has provided that the Internal Revenue Service must determine a minimum bid price for property to be sold at auction by the Internal Revenue Service. Unfortunately, the IRS Collection Division has occasionally chosen to accept bids below that minimum bid during the course of a sale. This provision specifically prohibits such conduct from the IRS. The provision appears to be a proper response to prior IRS abuses. For example, a taxpayer might be told in the past the IRS would sell his interest in a home for $50,000. At the auction the IRS would decide immediately to accept a bid for much less than that amount. Section 3441 will now prohibit the IRS from engaging in an immediate reduction of the sale price and therefore would preclude a sale of the property without a redetermination of the minimum bid price and proper notice to the taxpayer. S-35 ACCOUNTING OF SALES OF SEIZED PROPERTY S-35.10 The Act requires the IRS to provide a written accounting of all sales of seized property, whether real or personal, to the taxpayer. The accounting must include a receipt for the amount credited to the taxpayer's account. The provision is effective for seizures occurring after the date of enactment. [§3442] [IRC §6340(a)]
Prior Records S-35.20 IRC §6340 has required the IRS to keep public records regarding sale of real property at its district offices. This task was accomplished by maintaining a Record 21 for each sale of property. Unfortunately, the Internal Revenue Service was not required to keep a record of sales of personal property. §3442 now requires the Internal Revenue Service to maintain records regarding all property which it sells at auction. S-36 UNIFORM ASSET DISPOSAL MECHANISM S-36.10 The Act requires the IRS to implement a uniform asset disposal mechanism for sales of seized property within two years from the date of enactment. [§3443] [IRC §6335] The Act codifies the IRS administrative procedures which require the IRS to investigate the status of certain property prior to levy.
Revised Sale Methods S-36.20 The Congress has expressed its dissatisfaction with the current methods used to sell property by the Internal Revenue Service. Under the current procedures Internal Revenue Service sales are normally conducted
by Revenue Officers. Some of the Revenue Officers are skilled and able to secure the maximum price for property while others have not exhibited skills for properly selling property. §3443 requires the Service to establish a uniform system for disposing a property within two years of the date of enactment. It also expresses the desire that the IRS out source auction sales. This provision will allow the involvement of professional auctioneers in the sale process with the IRS and should enhance the value recovered from the property. Unfortunately, the downside will be that the cost of the sale will be substantially increased for the taxpayer. Under the current system, the taxpayer is only charged for the cost of advertising and other necessary expenses of sale. Therefore, the cost of the labor performed by the Revenue Officer as an Auctioneer is not included within the cost of sale. It would appear under the amendments that the taxpayer now will be imposed with the additional cost of securing the services of an outside auctioneer. The provision could in fact reduce the net proceeds of sale available to pay the taxpayer's tax obligation. Such a result would be unfortunate. S-37 NO EQUITY SEIZURES S-37.10 IRC §6331(f) currently prohibits the Internal Revenue Service from levying upon property if the expense of sale would exceed the fair market value of the property. IRM56(12)(2.1)(4) requires that the Internal Revenue Service determine if the taxpayer's equity is insufficient to pay costs of sale it should release the property. Section 3444 enacts as statutory authority specific rules for determination of taxpayer equity in property. It also imposes a prior constraint upon a seizure where there is no equity. The Internal Revenue Service is now required to perform an analysis of the property's value and its equity prior to taking levy action. [§3444] [IRC §6331(J)] S-38 PROCEDURES FOR SEIZURE OF RESIDENCES AND BUSINESSES S-38.10 The Act prohibits the IRS from seizing any real property used as a residence by the taxpayer or any nonrental real property of the taxpayer used by any other individual as a residence to satisfy an unpaid liability of $5,000 or less, including penalties and interest. The Act requires the IRS to exhaust all other payment options before seizing the taxpayer's business assets or principal residence. For this purpose, future income that may be derived by a taxpayer from the commercial sale of fish or wildlife under a specified State permit must be considered in evaluating other payment options before seizing the taxpayer's business assets. A levy is permitted on a principal residence only if a judge or magistrate of a United States district court approves (in writing) of the levy. The provision is effective on the date of enactment. [§3445] [IRC §6334(a)(13)]
Residential Seizure S-38.20 No seizure of a dwelling that is the principal residence of the taxpayer or the taxpayer's spouse, former spouse, or minor child would be allowed without prior judicial approval. Notice of the judicial hearing must be provided to the taxpayer and relevant family member. At the judicial hearing, the Secretary would be required to demonstrate (1) that the requirements of any applicable law or administrative procedure relevant to the levy have been met, (2) that the liability is owed, and (3) that no reasonable alternative for the collection of the taxpayer's debt exists. The provision is effective for collection actions initiated more than 180 days after the date of enactment. [§3445(b)] [IRC §6334(e)]
Residences and Tangible Business Assets S-38.30 This provision imposes substantial constraints upon the seizure of residences and business assets. The
Internal Revenue Service is specifically prohibited from seizing the taxpayer's residence when there is a tax liability of less than $5,000. The provision also enhances taxpayer protections for seizure of personal residences and business assets. Under current law the Internal Revenue Service can seize a personal residence from the taxpayer with approval of the District Director or Assistant Director. The requirement for approval by the District Director or Assistant Director was enacted with the Taxpayer Act of Rights of 1988. §3455 provides additional protections from seizure of personal residences by providing the Internal Revenue Service may only take a personal residence with approval of a judge or magistrate. The provision provides for protection of tangible personal property or real property used in trade or sale of business from levy by the Internal Revenue Service. The Internal Revenue Service is required to get judicial approval prior to seizing tangible business related assets. It must exhaust all other payment options before seizing the taxpayer's business assets or principle residence. The provisions should substantially reduce the number of Internal Revenue seizures of residences and business assets. [§3445(b)] [IRC §6374(e)]
ExParte Action S-38.40 Since 1977, the Internal Revenue Service has been required to secure the taxpayer's consent or writ of entry prior to entering into areas where the taxpayer had an expectation of privacy for the purposes of seizing assets (See G.M. Leasing Corp. v 429 U.S. 338, 97 Supreme Court 619(1977). The IRS secures these writs by filing an ex parte action in U.S. District Court. §3445 does not prohibit ex parte actions by the IRS to secure judicial authority for seizure of tangible business assets or a personal residence. Therefore, the Internal Revenue Service probably will go before a judge to seek permission to seize tangible business assets and homes. The taxpayer may be forced to litigate the appropriateness of those actions after the seizure. The IRS may later conclude that they should notify the taxpayer.
Rights in Context with §6330 of the Act S-38.50 The protections provided by §3445 should also be viewed in context of the new protections regarding levy provided in §6330. The taxpayer now has the right to seek judicial review prior to any type of levy action by the Internal Revenue Service. But if we assume the taxpayer neglected to protest pursuant to §6330 when first given notice, the Internal Revenue Service would then be allowed to seek ex parte authority to seize the personal residence or business assets of a taxpayer. The practitioner must be alert to take all steps to protect the taxpayer's rights pursuant to §6320 and §6330 at the first instance to avoid the potential that the IRS might later seek to exercise its authorities under §3445. S-39 PROCEDURES RELATING TO EXTENSIONS OF STATUTE OF LIMITATIONS BY AGREEMENT S-39.10 The Act eliminates the provision of present law that allows the statute of limitations on collections to be extended by agreement between the taxpayer and the IRS. Extensions of the statute of limitations on collection may only be made as part of an installment agreement; the extension is only for the period for which the installment agreement by its terms extends beyond the end of the otherwise applicable 10-year period, plus 90 days. The Act also requires that, on each occasion on which the taxpayer is requested by the IRS to extend the statute of limitations on assessment, the IRS must notify the taxpayer of the taxpayer's right to refuse to extend the statute of limitations or to limit the extension to particular issues. [§3461] {IRC §6502(a)]
S-39.20 The provision is effective for requests to extend the statute of limitations made after December 31, 1999. If, in any request to extend the period of limitations made on or before December 31, 1999, a taxpayer agreed to extend that period beyond the 10-year statute of limitations on collection, that extension shall expire on the latest of: the last day of such 10-year period, December 31, 2002, or the 90th day after the end of the term of the installment agreement related to such request.
Commentary S-39.30 The Internal Revenue Service is now prohibited from seeking extensions for statute of limitations pursuant to 6502 except in the case of granting an installment agreement. The Internal Revenue Service is allowed to solicit such extensions from corporations but not from individuals. The provision does not prohibit the Internal Revenue Service from taking enforcement action prior to the expiration of a statute of limitation. Therefore the taxpayer could be close to the ten year statute of limitations potential that he may no longer be required to pay the tax liability but might also be confronted by the IRS taking enforced collection measures. The Internal Revenue Service also is not prohibited from suing the taxpayer in U.S. District Court. It may sue to reduce the tax claim to judgment which will then allow the Internal Revenue Service more time to collect the tax liability even though the tax payer refused to sign an extension of the Statute of Limitations. Although such suits are rare, one might project that in the future more suits to reduce tax claims to judgment may be initiated by the Internal Revenue Service to protect its rights to collect taxes. This provision does not become effective except with respect to extensions requested after December 31, 1999. Therefore, during the next 18 months the Internal Revenue Service may continue to request extensions of statutes of limitations. S-40 OFFERS IN COMPROMISE S-40.10 The Act expands the authority for the IRS to accept offers in compromise. The Act requires the IRS to develop and publish schedules of national and local allowances that will provide taxpayers entering into an offer in compromise with adequate means to provide for basic living expenses. The IRS is required to consider the facts and circumstances of a particular taxpayer's case in determining whether the national and local schedules are adequate for that particular taxpayer. The Act prohibits the IRS from rejecting an offer in compromise from a low-income taxpayer solely on the basis of the amount of the offer. [§3462] [IRC §7122]
Prohibition of Levy S-40.20 The Act prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer's offer in compromise for that liability is being processed, (2) during the 30 days following rejection of an offer, (3) during any period in which an appeal of the rejection of an offer is being considered, and (4) while an installment agreement is pending. [§2462(b)] [IRC §6331(k)]
Rejections S-40.30 The Act requires that the IRS implement procedures to review all proposed IRS rejections of taxpayer offers in compromise and requests for installment agreements prior to the rejection being communicated to the taxpayer. The Act provides that the IRS will adopt a liberal acceptance policy for offers in compromise to provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes.
Effective Date S-40.40 The provisions are generally effective for offers-in-compromise submitted after the date of enactment. The provision suspending levy is effective with respect to offers-in-compromise pending on or made after December 31, 1999.
More Liberal Policies S-40.50 Since August, 1995 the IRS has imposed specific standards for allowable expenses upon taxpayers who seek offers in compromise. In many cases, those standards are less than the actual expenses faced by the taxpayer. Although the Internal Revenue Manual provides authority for flexibility most Internal Revenue Districts have been rather inflexible in applying the standards. The net result is that middle class individuals were not able to compromise their taxes because of the standards imposed by the Internal Revenue Service. §3462 imposes a duty upon the Internal Revenue Service to exercise much more flexibility in the use of its allowable expense standards. Revenue Officers and employees of the Collection Division are not allowed to use the schedules to the extent that such use would result in the taxpayer not having adequate means to provide for basic living expenses. This provision will be particularly important with respect to housing. Because the IRS uses the average cost of housing in a particular county in determining its current allowable expense standards, any taxpayer who recently purchased a home probably has housing expenses that exceed the IRS standard. It would appear that §6462 will require the IRS to look at the actual expenses of the taxpayer as opposed to its arbitrary determination of appropriate housing standards.
Minimum Offer Standards S-40.60 Some districts have imposed minimum offer standards for taxpayers. Therefore, a low income taxpayer who offered a minimum amount might have the offer rejected even though it represented her maximum ability to pay. The Internal Revenue Service is now required to consider each offer submitted by a taxpayer on its individual merits not based upon some minimal offer amount.
Prior Policy S-40.70 The Internal Revenue Service has had a policy since 1959 of foregoing collection during the pendency of an Offer in Compromise. (P-5-9) §3462 prohibits levy while an offer in compromise is pending or an installment agreement pursuant to §6159 is pending. The provision also provides for suspension of collection while an appeal is pending. Although under the current protections of P-5-97 not many levies have taken place during the pendency of an Offer in Compromise, the taxpayer now has specific statutory protections against enforcement action by the IRS while attempting to settle his or her tax obligations.
Appeal Rights S-40.80 Although the Internal Revenue Service currently provides for administrative review of Offers in
Compromise by the Appeals Division there has been no specific statutory requirement for such review. §3462 (d) now enacts into law specific rights of independent review of Offers in Compromise by the Internal Revenue Service Office of Appeals.
Joint Offer - Default by One Spouse S-40.90 Offers in Compromise contain within their terms the requirement that the taxpayer remain current during the 5 years subsequent to approval of an Offer in Compromise. One problem which has arisen is that married taxpayers who later divorce may face the possibility where one of the spouses fails to meet all of his or her tax obligation. As a result the Internal Revenue Service has occasionally attempted to default the Offer in Compromise with respect to both spouses. §3462 now contains specific protections for an innocent spouse who has complied with all of his or her tax obligations notwithstanding any default by a spouse.
Doubt as to Liability Offers S-40.100 Another protection provided by §3462 is with respect for Offers in Compromise based on doubt as to liability. In the past the Internal Revenue Service has occasionally rejected offers with respect to doubt as to liability solely because it could not find its administrative file. The Internal Revenue Service is now prohibited from taking such action. The Internal Revenue Service has imposed additional duties upon taxpayers seeking compromise liabilities solely on the basis of doubt as to liability by requiring those taxpayers to submit financial statements. Many in the practitioner community believe the taxpayers with substantial means were prejudiced by this requirement because the Internal Revenue Service would consider the taxpayers substantial economic means when reviewing the underlying liability. The Internal Revenue Service is now specifically prohibited from requiring financial statements when offers are submitted based solely on doubt as to liability. S-41 NOTICE OF DEFICIENCY TO SPECIFY DEADLINES FOR FILING TAX COURT PETITION S-41.10 The provision requires the IRS to include on each deficiency notice the date determined by the IRS as the last day on which the taxpayer may file a petition with the Tax Court. The provision provides that a petition filed with the Tax Court by this date is treated as timely filed. The provision is effective for notices mailed after December 31, 1998. [§3463] [IRC§6213(a)]
Statutory Notice of Deficiency S-41.20 IRC §6212 has required that the taxpayer subsequent to an examination receive a Notice of Deficiency allowing him or her to file a Tax Court petition within 90 days of a notice of deficiency. Unfortunately many unsophisticated taxpayers did not recognize the specific language of 90 days or in some manner misinterpreted the 90 day provision. To prevent such misapprehensions by taxpayers the Internal Revenue Code has now been amended to provide for the Internal Revenue Service 90 Day Notice of Deficiency must specifically state the deadline for filing a Tax Court petition. This should reduce errors by unsophisticated taxpayers and representatives. S-42 REFUND OR CREDIT OF OVERPAYMENTS BEFORE FINAL DETERMINATION
S-42.10 The Act provides that a proper court (including the Tax Court) may order a refund of any amount that was collected within the period during which the Secretary is prohibited from collecting the deficiency by levy or other proceeding. The provision allows the refund of any overpayment determined by the Tax Court to the extent the overpayment is not contested on appeal. The provision is effective on the date of enactment. [§3464] [IRC §6213(a)]
Prior Procedure S-42.20 Under its prior procedures the IRS had a policy freezing taxpayer refunds while there was a pending deficiency before the United States Tax Court. §3464 specifically allows the Court to order refund of any other tax credit during the pendency of a Tax Court petition. This will allow tax payers to continue to receive refunds even though they may be in a Tax Court dispute with the Internal Revenue Service. S-43 EARLY REFERRAL TO APPEALS S-43-10 The Internal Revenue Service has had an early referral program for certain employment tax deficiencies for several years. This provision allowed for early referral of disputes regarding independent contractor employee status to the appeals division from the examination division. The provision allowed for a more rapid resolution of a large tax dispute. The Internal Revenue Service has now been directed to implement procedures to allow broader use of early appeals programs. The Internal Revenue Service has also been directed to establish procedures which will allow for alternative dispute resolution including mediation and arbitration. [§3465] [IRC §7123]
Local Offices S-43.20 In an effort to become more efficient, the Internal Revenue Service has reorganized over the past several years and now has reduced its total districts from sixty-three to thirty-three. This reorganization has resulted in some States being left without an individual appeals office. §3465 specifically requires that the Internal Revenue Service maintain at least one appeals office in each State and that it consider the use of video conferences for taxpayers in remote areas of each State.
S-44 APPLICATION OF CERTAIN FAIR DEBT COLLECTION PRACTICES S-44.10 The Act applies to the IRS certain restrictions relating to communication with taxpayer/debtors and the prohibitions on harassing or abusing a debtor. The restrictions relating to communication with the taxpayer/debtor are not intended to hinder the ability of the IRS to respond to taxpayer inquiries (such as answering telephone calls from taxpayers). The provision is effective on the date of enactment. [§3466] [IRC §6304]
Cause of Action Under §7433 S-44.20 The Collection Division has been made subject to some of the protections provided to individuals from private Act collectors. The Internal Revenue Service is not allowed to contact the taxpayers at an unusual time or place which is known to be inconvenient to the taxpayer. The Internal Revenue Service specially is directed
to deal with the taxpayer's authorized representative and not to deal with the taxpayer unless that representative fails to respond within a reasonable period of time. This provision provides additional protections for taxpayer by clearly delineating the right to be represented before the Internal Revenue Service by a CPA, EA or Attorney. The Internal Revenue Service is also prohibited from harassing or abusing the taxpayer and in some instances from calling the taxpayer on the job. If the Internal Revenue Service violates these provisions the taxpayer is authorized to pursue remedies pursuant to §7433 of the Internal Revenue Code regarding negligent, reckless or intentional disregard of the Internal Revenue Code by IRS collection employees. Most employees of the Internal Revenue Service act in a professional manner but these additional protections will allow taxpayers specific rights to seek judicial damages as a result of improper conduct. In the past, the taxpayer had few remedies for abusive IRS conduct by incompetent or arrogant IRS employee's. Now the taxpayer has specific statutory rights. Bad IRS employees must change their collection approach to avoid judicial sanctions. S-45 GUARANTEED AVAILABILITY OF INSTALLMENT AGREEMENTS S-45.10 The Act requires the Secretary to enter an installment agreement, at the taxpayer's option, if: (1) the liability is $10,000, or less (excluding penalties and interest); (2) within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an installment agreement under this provision; (3) if requested by the Secretary, the taxpayer submits financial statements, and the Secretary determines that the taxpayer is unable to pay the tax due in full; (4) the installment agreement provides for full payment of the liability within 3 years; and (5) the taxpayer agrees to continue to comply with the tax laws and the terms of the agreement for the period (up to 3 years) that the agreement is in place. The provision is effective on the date of enactment. [§3467] [IRC §6154]
Prior Administrative Rights S-45.20 IRM 5331.31 (no longer in existence) currently authorizes IRS employees to grant installment payment agreements of up to three (3) years to taxpayers who owe individual income taxes of less than $10,000.00. §3467 imposes a specific statutory requirement that the Internal Revenue Service grant an installment agreement to taxpayers who owe less than $10,000.00 of individual income taxes including penalties and interest. The taxpayer must not have been delinquent in any tax obligations in the prior five (5) taxable years or have defaulted on any prior installment agreement. Any agreement may be defaulted if the taxpayer fails to meet any subsequent tax obligations during the pendency of the installment agreement. The provision creates statutory rights where in the past installment agreements for small liability were merely policy. S-46 PROHIBITION ON REQUESTS TO TAXPAYERS TO WAIVE RIGHTS TO BRING ACTIONS S-46.10 The Act provides that the Government may not request a taxpayer to waive the taxpayer's right to sue the United States or one of its employees for any action taken in connection with the tax laws, unless (1) the taxpayer knowingly and voluntarily waives that right, or (2) the request is made to the taxpayer's attorney or other representative, effective on the date of enactment. [§3468] S-47 EXPLANATION OF RIGHTS
S-47.10 The Act requires that the IRS establish procedures to clearly alert married taxpayers of their joint and several liability, the availability of electing separate liability, and an individual's right to relief under §6015 of the Code on all appropriate tax publications and instructions. The IRS will make an appropriate cross reference to these statements near the signature line on appropriate tax forms. The Act requires that the procedures be established as soon as practicable, but no later than 180 days after the date of enactment. [§3501] Explanation of Taxpayers' Rights in Interviews with the IRS S-47.20 The Act requires that the IRS rewrite Publication 1 ("Your Rights as a Taxpayer") to inform taxpayers more clearly of their rights (1) to be represented by a representative and (2) if the taxpayer is so represented, that interviews with the IRS may not proceed without the presence of the representative unless the taxpayer consents. The revisions are required no later than 180 days after the date of enactment. [§3502]
Disclosure of Criteria for Examination Selection S-47.30 The provision requires that IRS add to Publication 1 ("Your Rights as a Taxpayer") a statement which sets forth in simple and nontechnical terms the criteria and procedures for selecting taxpayers for examination. The statement is required to be included not later than 180 days after the date of enactment. [§3503]
Selection for Audit S-47.40 The IRS uses many methods to select returns for examination. It uses a DIF scoring system which measures the variance from the norm of particular claimed exemptions and deductions. It also utilizes informant, document matches, media, other law enforcement agencies and special programs to select returns for examination. Section 3503 requires that the Internal Revenue Service inform the taxpayer of the method used to select his/her tax return for examination unless such information would be detrimental to law enforcement. The IRS must put these procedures in effect no later than 180 days after an enactment of the provision. Taxpayers will now have greater clues as to the issues that the IRS might raise during an audit because they will be aware of the causes of that audit. Knowledge of the source of an audit should help reduce the fear generated by an audit and allow the taxpayer to better present a defense. [§3503]
Explanation of the Appeals and Collection Process S-47.50 The Act requires that, no later than 180 days after the date of enactment, a description of the entire process from examination through collections, including the assistance available to taxpayers from the Taxpayer Advocate at various points in the process, be provided with the first letter of proposed deficiency that allows the taxpayer an opportunity for administrative review in the IRS Office of Appeals. [§3504] S-46.60 Taxpayers are granted many new rights by this act. Only if they are told of those rights will most taxpayers be aware of those protections. Therefore, Congress has imposed a duty upon the IRS to publish an explanation of taxpayer rights within 180 days of the enactment of this law. One must anticipate that Publication One will grow extensively from its current two-page version. [§3504]
S-47.70 The Act requires the IRS to notify the taxpayer of the specific reasons for the disallowance (or partial disallowance) of a refund claim, effective for 180 days after the date of enactment. [§3505] [IRC §6302(J)]
Statements to Taxpayers with Installment Agreements S-47.80 The Act requires the IRS to send every taxpayer in an installment agreement an annual statement of the initial balance owed, the payments made during the year, and the remaining balance, effective July 1, 2000. [§3506] [IRC §6159]
Annual Statement of Tax, Interest & Penalties S-47.90 Taxpayers who have entered into installment agreements with the Internal Revenue Service pursuant 6159, have not been provided with clear explanations of accrued interest and penalties accruing on their respective tax liabilities. As a result, businesses and individuals who might be allowed to deduct accrued interest and taxes in certain situations have not been able to determine the proper amount without making specific requests for information from the Internal Revenue Service. Effective July 1, 2000, the Internal Revenue Service will be required to provide an annual statement to each taxpayer subject to an installment agreement with the accrued interest and penalties and balance due. This statement will allow individuals to provide information to their respective tax preparers. It will also allow taxpayers to clearly track their remaining outstanding liabilities to the Internal Revenue Service. [§3506]
Notification of Change in Tax Matters Partner S-47.100 The Act requires the IRS to notify all partners of any resignation of the tax matters partner that is required by the IRS, and to notify the partners of any successor tax matters partner, effective for selections of tax matters partners made by the Secretary after the date of enactment. [§3507] [IRC §6231(a)(7)]
Conditions Under Which Taxpayers' Returns May be Disclosed S-47.110 The Act requires that general tax forms instruction booklets include a description of conditions under which tax return information may be disclosed outside the IRS (including to States), effective on the date of enactment. [§3508]
Instructional Book S-47.120 IRS §6103 provides substantial protections to taxpayers with respect to the privacy of return information. §3508 provides that the Internal Revenue Service must disclose those rights in a clear and concise manner in instructional booklets that accompany tax returns
S-47.130 The Internal Revenue Service currently provides each taxpayer subject to an interview a Publication One. Unfortunately, that publication does not clearly delineate all rights to the taxpayer. §3502 requires that the IRS must now clearly set forth the taxpayers rights including the right to be represented in interviews by a person authorized by the IRS and to suspend an interview to allow time to secure representation. S-48 DISCLOSURE OF CHIEF COUNSEL ADVICE S-48.10 The provision amends §6110 of the Code, establishing a structured process by which the IRS will make certain work products, designated as "Chief Counsel Advice," open to public inspection on an ongoing basis. It is designed to protect taxpayer privacy while allowing the public inspection of these documents in a manner generally consistent with the mechanism of §6110 for the public inspection of written determinations. In general, the provision operates by establishing that Chief Counsel Advice are written determinations subject to the public inspection provisions of §6110. The provision applies to Chief Counsel Advice issued more than 90 days after enactment. [§3509] [IRC §6110] S-49 LOW-INCOME TAXPAYER CLINICS S-49.10 The Act provides that the Secretary is authorized to provide up to $6,000,000 per year in matching grants to certain low-income taxpayer clinics. No clinic could receive more than $100,000 per year. Eligible clinics would be those that charge no more than a nominal fee to either represent low-income taxpayers in controversies with the IRS or provide tax information to individuals for whom English is a second language. The provision is effective on the date of enactment. [§3601] [IRC §7526]
S-49.20 Because of the complexity of current tax law many people are only able to exercise their rights before the Internal Revenue Service with the assistance of a tax professional. Unfortunately, low income tax payers are unable to afford professional fees. In order to protect low income taxpayers, Congress has chosen to provide for funding of low income tax clinics. Protection of low income taxpayers and their rights will also enhance protection of rights to all individuals. The more taxpayers assert their rights whether at the low or high income level, the more likely it is that the Internal Revenue Service will comply with proper procedures. S-50 CATALOGING COMPLAINTS S-40.10 The Act requires that, in collecting data for the annual report to the Congress on allegations of IRS employee misconduct, records of taxpayer complaints of misconduct by IRS employees must be maintained on an individual employee basis, effective January 1, 2000. [§3701]
Archive of Records of Internal Revenue Service
S-50.20 The Act provides an exception to the disclosure rules to require IRS to disclose IRS records to officers or employees of National Archives and Records Administration ("NARA"), upon written request from the U.S. Archivist, for purposes of the appraisal of such records for destruction or retention. The present-law prohibitions on and penalties for disclosure of tax information would generally apply to NARA. The provision is effective for requests made by the Archivist after the date of enactment. [§3702] [ira §6103(l)(17)]
S-50.30 In the past the Internal Revenue Service initiated many letters which did not contain an identifying number and telephone number for an IRS employee. Taxpayers were at a loss to properly respond to that correspondence. The problem was particularly difficult with respect to notices issued by Service Centers. Taxpayers who attempted to call a Service Center were confronted with a bureaucracy and could not receive consistent resolution of their tax problems. Section 3705 requires the IRS to place specific phone numbers and identifying numbers on every piece of correspondence generated by the Internal Revenue Service. Once the taxpayer contacts the Internal Revenue the taxpayer is entitled to know the personal name and identifying number of an IRS employee. The provision also provides a requirement that the Service develop a system so that the taxpayer can deal with one person during the process as opposed to being shuffled from one person to another. The Internal Revenue Service is also required to establish help lines for Spanish speaking taxpayers. The IRS is required to provide the unique identifying number for each employee within six months of enactment. S-51 PAYMENT OF TAXES S-51.10 The Act requires the Secretary or his delegate to establish such rules, regulations, and procedures as are necessary to allow payment of taxes by check or money order to be made payable to the United States Treasury, rather than to the IRS, effective on the date of enactment. [§3703] S-52 IRS EMPLOYEE CONTACTS S-52.10 The Act requires any manually generated correspondence received by a taxpayer from the IRS to include in a prominent manner the name, telephone number, and unique identifying number of an IRS employee the taxpayer may contact with respect to the correspondence. Any other correspondence or notice received by a taxpayer from the IRS must include in a prominent manner a telephone number that the taxpayer may contact. An IRS employee must give a taxpayer during a telephone or personal contact the employee's telephone number and unique identifying number. The requirements for a unique identifying number are effective six months after the date of enactment. [§3705] Use of Pseudonyms by IRS Employees
S-52.20 The Act provides that an IRS employee may use a pseudonym only if (1) adequate justification, such as protecting personal safety, for using the pseudonym was provided by the employee as part of the employee's request to use a pseudonym, and (2) IRS management has approved the request to use the pseudonym prior to its use. This provision is effective for requests made after the date of enactment. [§3706] S-53 ILLEGAL TAX PROTESTER DESIGNATIONS S-53.10 The Act prohibits the use by the IRS of the "illegal tax protester" designation. Any extant designation in the individual master file (the main computer file) must be removed and any other extant designation (such as on paper records that have been archived) must be disregarded. The IRS is, however, permitted to designate appropriate taxpayers as nonfilers. The IRS must remove the nonfiler designation once the taxpayer has filed valid tax returns for two consecutive years and paid all taxes shown on those returns. The provision is effective on the date of enactment, except that the removal of any designation from the master file, is not required to begin before January 1, 1999. [§3707]
S-53.20 The IRS has had a policy over the years of identifying individuals presumed to be tax protesters and encoding its computer systems and all the files relative to those taxpayers with special "P" codes for protestor. That practice has resulted in individuals who have been identified as protestors receiving less courtesy and fewer rights then other individuals. The Internal Revenue Services goal in establishing this policy was to discourage illegal tax protestors and to make it difficult for them to present their bogus protestor arguments. Section 3707 prohibits the Internal Revenue Service from identifying individuals as protestors. Those taxpayers, therefore, will now go through the remainder of their tax life with the scarlet letter "P". Taxpayers will be able to rehabilitate themselves without the stigma of having been identified as protestors. Unfortunately, this change of law will also encourage illegal tax protestors to continue making their spurious arguments. There will be less stigma attached to those arguments and IRS employee's will be hard pressed to spot some protestor arguments. It is bad policy to create any system which encourages tax protestors to present their discredited arguments. S-54 PROVISION OF CONFIDENTIAL INFORMATION TO CONGRESS BY WHISTLEBLOWERS S-54.10 The Act provides that any person (i.e., a whistleblower) who otherwise has or had access to any return or return information under section 6103 may disclose such return or return information to the House Ways and Means Committee, the Senate Finance Committee, or the Joint Committee on Taxation or to any individual authorized by one of those committees to receive or inspect any return or return information if such person (the whistleblower) believes such return or return information relates to evidence of possible misconduct, maladministration, or taxpayer abuse. The provision is effective on the date of enactment. [§3708] [IRC §6103(f)(5)] S-55 LISTING OF LOCAL IRS TELEPHONE NUMBERS AND ADDRESSES
S-55.10 The Act requires the IRS, as soon as is practicable, to publish addresses and local telephone numbers of local IRS offices in appropriate local telephone directories. [§3709]
Easier to Contact Local IRS Offices
S-55.20 It is very difficult to secure the phone number for local IRS offices. A review of the local phone directory generally will find a listing of a 800 number which does not go directly to the local IRS office. For example, there is no general telephone listed in the Chicago directory, which allows a call directly to the local Chicago office. §3709 requires that each district provide a local phone number and addresses for the Internal Revenue Services offices in its area in the local phone directories. This will allow taxpayers to locate local offices and to conduct business with local offices. IRS employee's in distant offices do not have the same concerns for individual taxpayers as local employees. Experienced practitioners almost universally agree that the best results for IRS problems come with local contact with IRS officials. Therefore, the IRS will not be able to hide behind a structure which encourages the taxpayer to use an impersonal phone system. The taxpayer will now be able to find a local office and go directly to that office to solve problems. S-56 IDENTIFICATION OF RETURN PREPARERS S-56.10 The Act authorizes the IRS to approve alternatives to Social Security numbers to identify tax return preparers, effective on the date of enactment. [§3710] [IRC §6109(a)] S-57 OFFSET OF PAST-DUE, LEGALLY ENFORCEABLE STATE INCOME TAX OBLIGATIONS AGAINST OVERPAYMENTS S-57.10 The Act permits States to participate in the IRS refund offset program for specified past-due, legally enforceable State income tax debts, providing the person making the Federal tax overpayment has shown on the Federal return for the taxable year of the overpayment an address that is within the State seeking the tax offset. The provision is effective for Federal income tax refunds payable after December 31, 1999. [§3711] [IRC §6109] S-58 REPORTING REQUIREMENTS IN CONNECTION WITH EDUCATION TAX CREDITS S-58.10 The Act modifies the information reporting requirements applicable to certain educational institutions in connection with the HOPE Scholarship and Lifetime Learning credits. In addition to reporting the aggregate amount of payments for qualified tuition and related expenses received by the educational institution with respect to a student, the institution must report any grant amount received by the student and processed through the institution during the applicable calendar year. An educational institution also must report only the aggregate amount of reimbursements or refunds paid to a student by the institution (and not by any other party). The Act further clarifies that the definition of term "qualified tuition and related expenses" shall be as set forth in §25A, determined without regard to §25A(g)(2) (which requires adjustments for certain scholarships). The provision applies to returns required to be filed with respect to taxable years beginning after December 31, 1998. [§3712] [IRC §60505(b)(2)(ii)]
S-59 STUDIES
S-59.10 The Act requires the Joint Committee on Taxation and the Treasury to each conduct a separate study reviewing the interest and penalty provisions of the Code, and make any legislative and administrative recommendations deemed appropriate to simplify penalty administration and reduce taxpayer burden. The reports must be provided not later than one year after the date of enactment. [§3801]
S-59.20 The Act requires the Joint Committee on Taxation and Treasury to each conduct a separate study on provisions regarding taxpayer confidentiality. The studies are to examine: (1) present-law protections of taxpayer privacy; (2) the need, if any, for third parties to use tax return information; (3) whether greater levels of voluntary compliance can be achieved by allowing the public to know who is legally required to file tax returns but does not do so; (4) the interrelationship of the taxpayer confidentiality provisions in the Internal Revenue Code with those elsewhere in the United States Code (such as the Freedom of Information Act); (5) the impact on taxpayer privacy of sharing tax information for the purposes of enforcing State and local tax laws (other than income tax laws) and (6) an examination of whether the public interest would be served by greater disclosure of information relating to tax-exempt organizations (described in section 501 of the Code). The findings of the studies, along with any recommendations, are required to be reported to the Congress no later than 18 months after the date of enactment. [§3802]
Non-compliance with Internal Revenue Laws by Taxpayers
S-59.30 The Act provides that the Secretary of the Treasury and the Commissioner, in consultation with the Joint Committee on Taxation, must conduct a study of noncompliance with the tax law, including tax law complexity and willful noncompliance or other factors. The study must be reported to the Congress within one year of the date of enactment. [§3803]
Payments for Informants
S-59.40 The Act requires a study and report by the Secretary of the Treasury to the Congress of the present-law informant reward program (including results) and any legislative or administrative recommendations regarding the program and its application. The study must be reported to the Congress within one year of the date of enactment. [§3804] S-60 CONGRESSIONAL ACCOUNTABILITY FOR THE IRS
Review of Requests for GAO Investigations of the IRS
S-60.10 Under the Act, the Joint Committee on Taxation is to review all requests (other than requests by the chair or ranking member of a Committee or Subcommittee of the Congress) for investigations of the IRS by the General Accounting Office ("GAO") and approve such requests when appropriate. In reviewing such requests, the Joint Committee on Taxation is to eliminate overlapping investigations, ensure that the GAO has the capacity to handle the investigation, and ensure that investigations focus on areas of primary importance to tax administration. The provision is effective with respect to requests for GAO investigations made after the date of enactment. [§4001]
Joint Congressional Review and Coordinated Oversight Reports
S-60.20 Under the Act, there will be one annual joint review which shall include two majority and one minority members of each of the Senate Committees on Finance, Appropriations, and Government Affairs and the House Committees on Ways and Means, Appropriations, and Government Reform and Oversight. The review is to be held before June 1 on the progress of the IRS in meeting its objectives under the strategic and business plans, the progress of the IRS in improving taxpayer service and compliance, the progress of the IRS on technology modernization, and the annual filing season. The annual review will be called by the Chairman of the Joint Committee on Taxation and will take place in each of calendar years 1999-2003. The Act provides that the Joint Committee on Taxation is to make a report once during each Congress to the Committee on Finance and the Committee on Ways and Means on the overall state of the Federal tax system, together with recommendations with respect to possible simplification proposals and other matters relating to the administration of the Federal tax system as it may deem advisable. This report will be required only if amounts necessary to carry out this requirement are specifically appropriated to the Joint Committee on Taxation. The Joint Committee on Taxation also is to report annually to the Senate Committees on Finance, Appropriations, and Government Affairs and the House Committees on Ways and Means, Appropriations, and Government Reform and Oversight with respect to the matters that are the subject of the annual joint hearings of members of such Committees. This reporting requirement will apply only for calendar years 1999-2003. [§4002]
S-60.30 The Act provides that it is the sense of the Congress that the IRS efforts to resolve the century date change computing problems should be fully funded to provide for certain resolution of such problems, and it is the sense of the Congress that the IRS should place resolving the century date change computing problems as a high priority. [§4011]
Tax Law Complexity Analysis
S-60.40 The Act provides that it is the sense of the Congress that the IRS should provide the Congress with an independent view of tax administration and that the tax-writing committees should hear from front-line technical experts at the IRS during the legislative process with respect to the administrability of pending amendments to the Internal Revenue Code. In addition, the IRS is required to report by March 1 of each year to the House Committee on Ways and Means and the Senate Committee on Finance regarding sources of complexity in the administration of the Federal tax laws. The Act requires the Joint Committee on Taxation (in consultation with the IRS and Treasury) to provide an analysis of complexity or administrability concerns raised by tax legislation provisions of widespread applicability to individuals or small businesses. The analysis is to be included in any Committee Report of the House Committee on Ways and Means or Senate Committee on Finance or Conference Report containing tax provisions, or provided to the Members of the relevant Committee or Committees as soon as practicable after the report is filed. A point of order is established with respect to the floor consideration by the House of Representatives of an Act or conference report that does not contain the required tax complexity analysis. The point of order may be waived by a majority vote. [§4021-4022] 07/15/2009
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