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TAXPAYER BILL OF RIGHTS 2
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On July
30, 1996 President Clinton signed into law the Taxpayer Bill of Rights 2
(TBR2). This legislation had been pending for several years but because members
of Congress continued to attach various non-related legislation both President
Clinton and President Bush had been forced to veto it in the past. Finally the
bill was passed as a clean de Taxpayer Advocate may now "order the IRS to
take any action as permitted by law" as opposed to simply ordering an IRS
employee "to cease any action." A taxpayer assistance order may no
longer be revoked by a District Director. That authority now rests solely with
the Commissioner of Internal Revenue Service or the Deputy Commissioner of Internal
Revenue Service and only if a written explanation listing the reasons for
modification or rescission is provided to the Taxpayer Advocate. [IRC 7802(2)]
MODIFICATIONS TO INSTALLMENT AGREEMENT PROVISIONS 
Prior to
terminating or modifying an installment agreement TBR2 requires the IRS to give
a notice of proposed action not later than thirty (30) days prior to the
proposed date. The IRS is also required to include an explanation as to why the
agreement is being modified or terminated. This provision becomes effective six
months after the date of enactment. The IRS is required to establish procedures
for an independent administrative review of terminations of installment
agreements for taxpayers. [IRC 6159(b)(c)]
ABATEMENT OF INTEREST AND PENALTIES IRC 6404(e) has been
expanded and modified to allow abatement of interest where the IRS had made an
error or there has been an unreasonable delay in assessment as a result of
"performing a ministerial or managerial act." For the first time the
Tax Court has been granted specific jurisdictional authority to determine if
interest should be abated. [New IRC 6404(g)]
Extension of Industry IRC 6601(e)(3) has been modified to provide
that subsequent to an audit the taxpayer has a twenty one (21) calendar day
period to pay the assessed notice without accruing interest and penalties as
opposed to a ten (10) day period.
Abatement of Penalty For Failure to Make Deposits IRC 6656 was
modified to allow abatement of penalty if a person inadvertently fails to make
a deposit. It also provides for abatement of penalty the first time a deposit
is made inadvertently to the IRS instead of the appropriate depository. (This
provision may become very important as the IRS moves to electronic transfer of
funds technology beginning January 1, 1997)
JOINT RETURNS The IRS is required to disclose collection activities
to an individual requesting such information in the case of a joint return,
when that individual is no longer married to and/or resides with in the same
household with the other joint filer. This will allow divorced individuals to
find out if their ex-spouse has been approached by the IRS for collection. It
might also encourage the IRS to attempt collection from both individuals as
opposed to the most convenient spouse. [IRC 6103(e)]
Amending Separate Returns IRC 6013(b) has been amended to
allow taxpayers to amend from separate returns to joint returns without paying
outstanding taxes. In the past, taxpayers could only take this step after full
payment of the tax liabilities due on the separate returns. The Secretary of
Treasury Mandated Study is required to study the effects of changing tax
liabilities for joint returns from being joint and several to being
proportionate to the tax attributable to each spouse. This required study has
been brought about because with the high rates of divorce in this country many
times an individual that earned a very small income becomes liable for a very
large tax liability because of the high earnings of a prior spouse. The current
IRS policy is to collect from whichever taxpayer is the easier target. This
study will look for alternatives to such Draconian measures.
COLLECTION ACTIVITIES TBR2 authorizes the IRS to withdraw a notice
of lien subsequent to filing if: 1. The filing of notice was premature or
otherwise not in accordance with administrative procedures; 2. The taxpayer
enters into an installment agreement; 3. The withdrawal of a notice would
facilitate the collection of tax liability or, 4. With the consent of the
taxpayer or Taxpayer Advocate, the withdrawal of such notice would be in the
best interest of the taxpayer (as determined by the Taxpayer Advocate) and the
United States. The IRS is further directed to take all necessary steps to
assist in removing adverse information from credit reporting agencies upon
withdrawal of the lien. [IRC 6323(j)]
Return of Levied Property The IRS is authorized to return
levied property in certain cases if: 1. The levy was premature or otherwise not
in accordance with administrative procedures; 2. The taxpayer has entered into
an installment agreement; 3. The return of the property would facilitate collection
of tax; or 4. With the consent of the taxpayer or Taxpayer Advocate the return
of the property would be in the best interest of the taxpayer (as determined by
the Taxpayer Advocate) and the United States [IRC 6343(d)]
Levy Exemption Amounts The exemption amounts from levy have been
increased to adjust for inflation. New exemptions are as follows: 1. Household
goods $2,500.00 (up from $1,650.00); 2. Books, tools of the trade - $1,250.00
(up from $1,100.00)[IRC 6334(a)]. TBR2 also provides for an inflation
adjustment beginning in the year 1997 which will increase the exemptions by the
amount of the cost of living each year. [IRC 6334(f)]
Offers in Compromise TBR2 removes the requirement that District
Counsel review each Offer in Compromise in an excess of $500.00 and increases
that amount to $50,000.00. The Act requires however that the IRS continue to
assure quality review of each Offer in Compromise. [IRC 7122(b)]
FRAUDULENT INFORMATION RETURN PENALTIES TBR2 establishes a right
to pursue damages of not less than $5,000.00 from any person who provides a
false 1099, W2 or other information return to the IRS which damages the
putative payee. The taxpayer has up to the later of six years or one year after
the date the fraudulent return would have been discovered by the exercise of
reasonable care to file suit. [IRC 7434] The plaintiff is required to provide
a copy of the complaint with the IRS. [IRC 7434(d)]
Reasonable Investigation of Information Returns If a taxpayer
disputes the validity of an information return in any court proceeding the
Internal Revenue Service now has the burden of producing reasonable and
probative information concerning the deficiency in addition to the information
return. The taxpayer has the duty to fully cooperate with the Secretary. [New
IRC 6201(d)]
ATTORNEYS FEES AND COSTS TBR2 reverses the burden of proof
for attorneys fees. The IRS must now prove that it was substantially justified
in bringing the case. In the past, the taxpayer was required to prove that the
IRS had not taken a substantially justified position. There is also established
a rebuttable presumption that the IRS was not substantially justified if the
IRS did not follow its own guidance in the administrative proceeding. The Act
also increases the attorney's fees rate from $75.00 to $110.00 per hour. [IRC
7430(c)] The act also provides for cost of living adjustments after 1996.
Since most courts have allowed an inflation adjustment, this will have a
minimal effect on most fee awards.
Failure to Agree to Extension The fact that the taxpayer fails
to agree to an extension of time for the assessment of tax should not be taken
into account in determining whether a prevailing party has exhausted
administrative remedies. This will allow taxpayers to ignore a thirty day
letter and await a ninety day letter if it is to their tactical advantage. [IRC
7430(b)(1)]
Declaratory Judgment Taxpayers may now seek litigation costs in
declaratory judgment proceedings. [New IRC 7430(b)(3)]
INCREASED DAMAGES FOR UNAUTHORIZED COLLECTION ACTIONS The limit on
damages pursuant to 7433 has been raised from $100,000.00 to $1,000,000.00
when the Internal Revenue Service recklessly or intentionally disregards the
Internal Revenue Code in the collection of a tax. The court is authorized to
reduce an award for litigation costs for failure to exhaust administrative
remedies. [IRC 7433(d)(1)]
TRUST FUND RECOVERY PENALTY MODIFICATIONS TBR2 creates
specific notice requirements prior to assessment of a trust fund recovery
penalty. The IRS must issue a notice of proposed assessment at least sixty days
prior to any notice and demand for payment. If the taxpayer files a timely
protest the time is expanded to thirty days after the Secretary makes a final
administrative determination with respect to the protest. There is a jeopardy
exception to the provision. [New IRC 6672(b)]
Disclosure of Information TBR2 requires the IRS to disclose
to each person assessed with a trust fund recovery penalty the following
information: 1. The name of any other person who has been held liable for the
penalty; and 2. The efforts which the IRS had made in an attempt to collect
from the taxpayers in a general nature including the general nature of
collection activity. [IRC 6103(e)(9)]
Right of Contribution When more than one person is liable for the
penalty each person who has paid the penalty has the right to recover from any
other persons who are liable for the penalty an amount equal to the excess
amount paid by that respective taxpayer. This suit must be brought as a
separate cause of action and may not be brought in conjunction with a
collection suit by the United States or a refund suit by one of the responsible
persons. [IRC 6672(d)]
Voluntary Board Members of Tax Exempt Organizations TBR2 provides
additional protection for voluntary board members of tax exempt organizations
from the assertion of the penalty. It provides that the IRS shall not exert the
penalty if the member: (1) is solely serving in an honorary capacity; (2) does
not participate in day-to-day or financial operations; and (3) does not have
actual knowledge of the failure to pay such penalty. This provision does not
apply however if it would result in no person being held liable for the
penalty. [IRC 6672(e)]
Public Information Requirements The IRS is now required to print
warnings on deposit coupon books and appropriate tax returns regarding the
penalty. The IRS is also directed to create explanatory materials concerning
the penalty and to give specific instructions to its employees regarding the
application of the penalty to voluntary board trustees and directors. [IRC
6672(b)]
SUMMONS MODIFICATIONS Enrolled agents have now been included
within the definition of third party record keepers which previously included
accountants and attorneys. Now upon service of a summons upon an enrolled agent
the taxpayer is entitled notice of that service within three days. [IRC
7609(a)(3)]
Designated Summons The Code now requires that prior to the
issuance of a designated summons which would extend the statute of limitations
for assessment the IRS must have the proposed summons reviewed by the Regional
Counsel of IRS. TBR2 further limits the use of a designated summons to
coordinated examination programs, (audits of large corporations). The IRS must
now report annually to Congress with respect to the issuance statistics for
designated summons. [IRC 6503]
RETROACTIVE APPLICATIONS OF REGULATIONS The Treasury Department
is prohibited from retroactively applying regulations except in limited
circumstances. This provision does not apply with respect to regulations within
eighteen months of the passage of a statutory provision to which the regulation
relates. The IRS may also issue retroactive regulations under the following
circumstances: 1. Prevention of abuse; 2. Correction of procedural defects; and
3. Internal regulations of the Treasury Department and IRS or Congressional authorization
(if the Congress authorizes retroactive effect). [IRC7805(b)]
MISCELLANEOUS PROVISIONS TBR2 includes several
miscellaneous provisions designed to protect taxpayers and enhance collections.
Payor Telephone Number Providers of information returns
are required to provide a telephone number as well as a name and address of the
payor to each payee. This will allow taxpayers who receive an incorrect
information return to easily call the provider. [6041-6050N]
Lost Payments The IRS must make reasonable efforts to
notify the taxpayer within 60 days when it receives a payment which it is
unable to associate with the taxpayer.
Annual Notice of Delinquent Tax The Internal Revenue Service is
required to send an annual notice to each taxpayer who has a delinquent tax
liability. This is intended to require the IRS to remind taxpayers who have
been reported as "currently not collectible" that the tax liability
still exist and to allow the taxpayer to realize the amount of interest and
penalties which are accruing as a result of the tax liability. The provision
will increase government revenue. [IRC 7524]
Protection of Taxpayer Privacy TBR2 authorizes the taxpayer to
bring a civil damage suit against the United States if any United States
officer employee intentionally compromises a tax due from a CPA, attorney or
enrolled agent representing that taxpayer in exchange for information conveyed
by the taxpayer to the representative for purposes of obtaining advice. The
exception to this provision is that the IRS may provide a compromise if the
taxpayer is perpetrating a fraud or a crime. This provision was intended to
prevent the IRS from using tax professionals as informants against their
clients and then providing financial benefit to that tax professional by
compromising his or her tax liability. Damages are limited to the lesser of
$500,000.00 or the actual direct economic damages plus costs of the action. [IRC
7435]
Private Delivery Services IRC 7502 has been amended to
allow private delivery services in addition to the U.S. Postal Service. The
postmark rule for petition date to Tax Court will include the date receipt of a
private delivery service.
SUBSTITUTE FOR RETURNS When the IRS prepares a substitute
for return under IRC 6020(b) for a taxpayer the documents will be treated as a
return for the failure to pay penalty. [IRC 6651(g)]
COPYRIGHT
1996 ROBERT E. MCKENZIE
MORE INFORMATION FROM MCKENZIE
& MCKENZIE PC
- LEARN ABOUT INDEPENDENT CONTRACTOR EMPLOYEE AUDITS RECENT LAW CHANGES
- MORE INFO ON ROBERT E MCKENZIE'S BOOKS
- LINKS TO OTHER SOURCES OF TAX INFORMATION
- LAW & LEADING ATTORNEYS BIO OF ROBERT E. MCKENZIE
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Page created by: remckenzie@arnstein.com
Changes last made on: 2/12/2007