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Taxpayer Bill of Rights 2

A tax law
that helps
the taxpayer

By Mark Stone

In Brief

More Help for David in the Fight Against Goliath

Taxpayer Bill of Rights 2 expands on the original Taxpayer Bill of Rights and is intended to empower taxpayers with statutory mandated protection to assure tax laws are administered fairly and consistently. Its major provisions relate to the following areas:


* Taxpayers now have a longer grace period before interest will be assessed on a deficiency.

* The IRS's ability to alter, modify, or terminate an installment agreement has been revised.

* The IRS is provided with authority to withdraw a public notice of tax lien or return levied property before full payment under certain circumstances.

* The IRS is required to send an annual notice of outstanding tax liabilities to each taxpayer.

Responsible Party

* The IRS is required to disclose its collection activities against a taxpayer's former spouse on written request.

* Additional notification to a responsible party is required in connection with trust fund taxes.

Taxpayer Legal Rights

* Gives the IRS power to abate interest in cases of unreasonable error or delay caused by "managerial acts."

* Gives the taxpayer recourse to the Tax Court to review the IRS's refusal to abate interest.

* In situations where the taxpayer is seeking to recover costs of litigation against the IRS, the IRS now has the burden of proof to establish it was substantially justified in maintaining its position against the taxpayer.

* Information returns are no longer presumed to be correct.

* Damages that can be collected for unauthorized collection activities by the IRS are increased.

Other Procedural Changes

* Establishes the office of Taxpayer Advocate.

* Establishes limits on the issuance of retroactive regulations.

* IRS is allowed to waive the penalty for failure to deposit payroll taxes under certain circumstances.

* IRS has the authority to accept the mailing date for certain private delivery services as the filing date.

iding a wave of bipartisan support in an election year, P.L. 104-168 was signed into law by President Bill Clinton on July 30, 1996, effectively creating the "Taxpayer Bill of Rights 2" (TBOR-2). This legislation contains more than forty separate provisions, most of which are intended to empower taxpayers with statutorily mandated protections to ensure tax laws are administered in a fair and consistent manner. These laws expand on the original Taxpayer Bill of Rights enacted as part of TAMRA in 1988, making the IRS more responsive and more accountable to their clients, the taxpayer!

TBOR-2 contains provisions addressing perceived IRS abuses in its investigatory and collection activities, as well as an expansion of the taxpayer's legal right to pursue claims against the IRS. Although this legislation covers many areas, this discussion will focus on provisions related to changes in collection activities, the rights of responsible persons, changes in the taxpayer's legal rights, and other procedural changes required by TBOR-2. Unless noted otherwise, the provisions of TBOR-2 are effective as of July 30, 1996.


Once the tax has been assessed, the IRS has a 10-year statute for collections. Taxpayers have complained about the manner the IRS uses in fulfilling its Congressional authority to collect taxes. In response to these complaints taxpayers will now have--

* a longer grace period for payments after a deficiency notice has been issued;

* the right to notification and appeal if an installment agreement is to be terminated;

* a chance to have the IRS release any liens or levies prior to payment; and

* a yearly statement of taxes owed.

Grace Period. Taxpayers will now have a longer grace period before interest will be assessed on a deficiency. Under the former law, taxpayers had 10 calendar days to pay the tax. Effective December 31, 1996, TBOR-2 extends this interest-free period to 21 calendar days, if the total deficiency is less than $100,000. Otherwise, the deficiency has to be paid within 10 business days. Even the term "business days" extends the payment period since it excludes weekends and holidays. Overall, this provision will give the taxpayer more time to determine if the deficiency is valid without fear of incurring additional charges.

Installment Agreements. The IRS's authority to alter, modify, or terminate an installment agreement has been altered to provide the taxpayer more protection. Under prior law, with one exception, the IRS could alter, modify, or terminate an agreement without giving the taxpayer notice. If it was determined the taxpayer's financial situation had significantly changed, a written explanation was provided to the taxpayer at least thirty days prior to a change or termination of the agreement. Effective January 30, 1997, TBOR-2 requires 30 days notification to all changes or terminations to installment agreements, unless collection of the tax is in jeopardy. If the collection is in jeopardy, the IRS must be able to justify their concern. Under TBOR-2, the IRS must establish new procedures for taxpayers facing termination of their installment agreement, allowing for an independent administrative review of the termination. These procedures are required to be in place by January 1, 1997.

Liens and Levies. Prior to TBOR-2, the IRS had no authority to release a lien or return levied property unless the notice had been erroneously issued or until the deficiency was paid in full. Under TBOR-2, the IRS can withdraw a public notice of tax lien or return levied property before full payment under the following circumstances:

* The filing was premature or did not follow administrative procedures;

* The taxpayer enters into an installment agreement to satisfy the liability;

* Withdrawal of the lien or levy would facilitate collection of the tax liability; or

* Withdrawal would be in the best interest of the taxpayer and the U.S. Government.

Upon withdrawal of the lien, the IRS must give a copy of the notice of withdrawal to the taxpayer. In addition, at the taxpayer's request, the IRS must make a reasonable effort to notify creditors, credit reporting agencies, and financial institutions specified by the taxpayer, of the lien's withdrawal. The IRS is not subject to any formal administrative or judicial review on this provision.

Yearly Statement of Taxes Due. Effective in 1997, each taxpayer will receive an annual notice of their outstanding tax liabilities. This notice is intended to prevent taxpayers who do not hear from the IRS for many years from assuming the IRS has abandoned its claim to the outstanding tax deficiency. This provision will not create a new defense against the IRS's collection activity, since the taxpayer's failure to receive this annual notice won't affect the tax liability.

Responsible Person

In situations where there is more than one responsible person for a tax, the IRS will pursue the easiest avenue of collection. By going after the taxpayer "with deep pockets," the IRS may not necessarily be going after the most culpable person. With regards to joint returns and trust fund taxes, the person paying the deficiency is now given the tools necessary to pursue claims against the other responsible parties for their proportionate liability.

Joint Returns. TBOR-2 has focused on the unfair treatment associated with collections based on joint returns. The Treasury and the General Accounting Office are each required to conduct separate studies on the effect of changing the liability structure for taxes on a joint return from being joint and several, to being proportionate to the tax attributable to each spouse. The study will focus on the implications of proportionate liability and other related issues for the equity and tax policy implications, as well as the operational changes the IRS would face.

Under present policy, when a couple files jointly and a deficiency is assessed, the IRS needs to proceed only against one of the spouses. This can cause an inequitable situation when the couple is separated or divorced, and one spouse is left "holding the bag." Prior to TBOR-2, the IRS's collection activity against the other spouse was considered privileged and could not be released. In certain situations, TBOR-2 will require the IRS to disclose its collection activities against the taxpayer's former spouse upon a written request from the taxpayer. The IRS must disclose in writing whether it has attempted to collect the deficiency from the other spouse, the general nature of the collection activities against that spouse, and any amounts collected.

Trust Fund Taxes. Similar to joint tax returns, taxpayers held to be responsible persons may be unfairly responsible for paying the IRC section 6672 trust fund 100% penalty tax. This occurs when employment taxes are not withheld and the IRS goes after multiple responsible persons for collection. Before the assessment of this penalty, the IRS must now inform the person by mail that it is deeming that person a responsible person, unless the collection is in jeopardy. The taxpayer will then have a 60-day period after this notice, before notice and demand for payment can be made. Similar to joint returns, any responsible person can request a written statement from the IRS for the names of other persons the IRS considers liable for the tax and the nature of collection activities against those other responsible persons.

In cases of multiple responsible persons, a Federal cause of action will now be available for the taxpayer paying the penalty. This taxpayer can go after the other responsible persons for their "proportionate right of contribution." The statute and legislation are not clear on how to determine proportionate liability. Should the proportionate liability be allocated equally among responsible persons or should officers or directors bear a heavier burden? Although unclear, TBOR-2 allows recovery from the other responsible persons to the extent the taxpayer paid more than a proportionate share.

Taxpayer Legal Rights

Too often an innocent taxpayer is faced with the formidable task of settling a disagreement with the IRS. With TBOR-2, the taxpayer's right to fair treatment is more equitably balanced with the government's need to collect taxes.

Ministerial Acts. Prior to TBOR-2, the only occasion where the IRS could abate interest on a deficiency was when the IRS failed to do a narrowly defined ministerial act. An example of such a case would be when all the decisions related to a dispute have been settled, but the IRS failed to file some piece of paper to make it official. In the case of a ministerial act, the IRS has the sole discretion to grant an abatement of interest. Many taxpayers who tried to litigate the IRS's decision as an abuse of discretion were routinely denied judicial review. This is because the Federal courts generally do not have jurisdiction to review the IRS's failure to abate interest.

Managerial Acts. TBOR-2 gives the taxpayer two forms of relief. The first relief provision gives the IRS the power to abate interest in cases of unreasonable error or delay caused by managerial acts, as well as ministerial acts. Managerial acts contemplated by this provision include loss of records by the IRS, personnel transfers, personnel training, as well as extended illnesses or leaves by IRS personnel. No abatement of interest will be allowed for general administrative decisions (e.g., implementing an improved computer system).

Recourse to Tax Court. The second relief provision gives the taxpayer recourse to the Tax Court to review the IRS's refusal to abate interest. After the IRS considers the abatement request, they must issue a final determination. If the final determination denies the abatement request, the taxpayer has 180 days to petition the Tax Court to get judicial review. The court will determine whether the IRS's failure to abate interest was an abuse of discretion and whether to order abatement action.

Under IRC section 7430, a taxpayer who successfully challenges a deficiency may recover attorney fees and other administrative and litigation costs. Prior to TBOR-2, the taxpayer had to first exhaust all administrative remedies within the IRS, and then had to establish the IRS's position was not substantially justified to receive an award of attorney fees. Under TBOR-2, once the taxpayer substantially prevails over the IRS, the burden of proof shifts to the IRS to establish it was substantially justified in maintaining its position against the taxpayer. The IRS's ability to prove it was substantially justified will be weakened if the administrative proceedings did not follow current regulations and other IRS administrative published sources. To be substantially justified requires a position that has more merit than being frivolous, yet does not require proving substantial authority (a one-in-three chance). This bill also provides that a taxpayer's failure to agree to an extension of the statute of limitation can't be taken into account to determine if the taxpayer has exhausted all administrative remedies. In addition, taxpayers may now qualify for an award of attorney fees in any declaratory judgement proceedings.

The decision whether the IRS was substantially justified is normally made by the judge trying the case. TBOR-2 increases the maximum rate for attorney fees from the current rate of $75 an hour to $110 an hour. A problem with the original $75 an hour rate, which was being indexed for inflation, was a controversy whether the index base date was October 1981 or January 1986. This bill resolved this controversy by setting the rate for attorney fees at $110 an hour for 1996, and indexed for inflation for years thereafter.

Information Returns. The TBOR-2 gives some relief in the area of informational returns. Previously, informational returns were presumed to be correct. As a result, a taxpayer that received an erroneous or fraudulent informational return encountered difficulties with the IRS. This was exacerbated if the issuer refused to correct the information and report the change to the IRS. TBOR-2 shifts the burden to the government to produce reasonable and probative information about the deficiency in addition to the informational return itself. This burden will be shifted only if the taxpayer can assert a reasonable dispute about an item on the information return and the taxpayer has fully cooperated with the IRS.

In the area of informational returns, the taxpayer may recover damages in a civil action for the fraudulent filing of an informational return. A civil action for damages may be brought if the information return was willfully filed with fraudulent information. The plaintiff may recover the greater of $5,000 or actual damages, plus costs and attorney fees. The court awarding the damages must specify what amount should have been reported on the information return. The action must be initiated within six years after the filing of the fraudulent return or within one year after the fraudulent return would have been discovered through the exercise of reasonable care, whichever is later.

Damages for Unauthorized Collection Actions. Among other provisions to strengthen the taxpayer's legal recourse, TBOR-2 increases the damages that can be collected for unauthorized collection action by the IRS. To prevail, an IRS officer or employee must be shown to have recklessly or intentionally disregarded provisions of the code or regulations. The damages that can be collected under this provision are increased to $1,000,000 from $100,000. TBOR-2 also gives the court discretion to reduce an award if the taxpayer has not exhausted all the administrative remedies available.

Under TBOR-2, the taxpayer is given a civil cause of action for damages for the IRS's unauthorized enticement of information. New IRC section 7435 allows damages to be claimed where an IRS employee entices a tax professional to reveal information about a client in exchange for favorable treatment of the professional's own tax liability. Recoverable damages that must be claimed within a two-year period are the lesser of $500,000 or the actual economic damages, including cost of the action. This provision does not apply if the information conveyed relates to a crime or perpetration of fraud.

Other Procedural Changes

Certain provisions of TBOR-2 are expected to dramatically change the structure and authority of the IRS. The most noticeable change is the establishment of the Taxpayer's Advocate, a new office responsible for assisting taxpayers in resolving problems with the IRS. Other changes to the IRS's authority will affect--

* its ability to retroactively issue

* its ability to waive penalties for payroll taxes; and

* the acceptance of private delivery

Taxpayer's Advocate. The creation of the taxpayer advocate ("TA") within the IRS will replace the present taxpayer ombudsman. This position is intended to enable the TA to independently represent the interest of taxpayers with the authority to expeditiously resolve problems with the IRS. Within the IRS, the TA will not have a direct line of authority over the regional and local problem resolution officers (PROs), but the House Committee Report emphasizes that the PROs should take their directions from the TA and "... not become subordinated to the pressure from local revenue officers and district directors." Among the TA's responsibilities will be to make two annual reports to the tax writing committees of Congress on taxpayer problems encountered in their interaction with the IRS and recommendations to resolve these problems. These reports will not be subject to review by anyone at the IRS, Treasury Department, or others, and will require the IRS to formally respond within three months of the report.

The TA is also given expanded authority over the previous taxpayer ombudsman in the issuance of taxpayer assistance orders (TAO). TBOR-2 will give the TA the authority to order release of levied property or require the IRS to refrain from an action that would cause a significant hardship to a taxpayer. In addition to requiring the IRS to take action, the TA can also limit the time period in which this action has to be taken. Once the TAO is issued, the only persons who may modify or rescind the order are limited to the TA or the commissioner or deputy commissioner with a written explanation to the TA.

Retroactive Regulations. The regulations constitute the IRS's, and thereby, the Treasury's official interpretation of the IRC. Prior to TBOR-2, regulations issued were presumed to be retroactively effective. Under this bill, the earliest effective date is the regulation's date of publication in the Federal Register or the date the public is substantially made aware of its contents. There are several exceptions for retroactive application, these include--

* regulations issued within 18 months of the enactment of the statutory provision;

* Congress giving the Treasury the authority to issue retroactive regulations; and

* regulations issued to prevent abuse or to correct a procedural defect.

The IRS may permit taxpayers to apply new regulations retroactively to the date of publication. Although the IRS will still have the ability to issue retroactive regulations, the burden is now shifted to the IRS to show this action fits one of the exceptions.

Waiver of Penalties. Another relief provision under TBOR-2 will allow the IRS to waive the penalty for failure to deposit payroll taxes under certain situations. This penalty can be waived for a person that inadvertently fails to deposit any employment tax if the following three conditions are met:

* The depositor satisfies the net worth requirements under IRC section 7430 to award attorneys' fees.

* The failure to deposit occurs during the first quarter employment tax deposits were required.

* The employment tax return was filed on time.

The IRS may also abate the failure-to-deposit penalty for first-time depositors who inadvertently send the deposit to the wrong government depository.

Private Delivery IRS. The last procedural item being emphasized from TBOR-2 is the "timely-mailing as timely-filing" rule. This relates to a Ninth Circuit U.S. Court of Appeals rule in the 1995 V.L. Correia vs. Commissioner case where a taxpayer using a private delivery service would have the date of actual receipt, not the mailing date, deemed the filing date. IRC section 7502(a) requires delivery by the U.S. Postal Service for the mailing date to be the filing date. The distinction between mailing date and actual receipt date can have expensive repercussions, since assessment of penalties and interest is based on set deadlines. For what might be perceived a simple rule, this created a tax trap for many unwary taxpayers. Under TBOR-2, Congress has given the IRS the authority to accept the mailing date for certain private delivery services as the filing date. Based on certain criteria, the IRS may designate what services can qualify and is given authority to treat these services as the equivalent of U.S. certified or registered mail. In Notice 97-26 the IRS extended this status to the following companies and their services:

* Airborne Express­Overnight Air Express IRS, Next Afternoon IRS, Second Day IRS

* DHL Worldwide Express­DHL Same Day IRS, DHL USA Overnight

* Federal Express (FedEx)­FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2 Day

* United Parcel IRS (UPS)­UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M.

A Slingshot for Taxpayer

The IRS is given the unenviable job of enforcing our nation's tax laws and collecting legally due taxes. The IRS's ability to effectively do this job is important, because the functioning of the Federal government depends on the public's willingness to voluntarily pay the taxes owed. Although crucial, this is also a difficult responsibility because the complicated structure of our current income tax system interjects the IRS into the private lives of U.S. taxpayers.

The powerful Congressional support of TBOR-2 sends a clear message that the IRS has grown too powerful and intrusive in its duties. House Ways and Means Chairman Bill Archer's floor statement supporting the bill advocated that "...taxpayers who are involved in a dispute with the IRS will be armed with additional rights and protections. In the David vs. Goliath fight between the taxpayer and the IRS, this bill is the slingshot the taxpayer can now use to win his or her fight." Whether we can expect to see a Taxpayer Bill of Rights 3 is predicated on whether TBOR-2 accomplishes its goals and whether these goals remain applicable as our tax structure and the IRS evolve into the 21st century. *

Mark Stone, CPA, CFP, is a member of the tax department of Yohalem Gillman & Company, LLP. The author wishes to acknowledge and thank the tax department at Lopez, Edwards, Frank, & Co. for its assistance with this article.

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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