Now that Congress has approved the IRS Restructuring and Reform Act and President Clinton is eager to sign it, taxpayers should be aware of how the legislation will affect them.
The Senate approved the legislation by a 96-2 vote on July 9, which followed the House's endorsement of the bill two weeks ago by a 408-8 margin. The 800-page bill is aimed at "reorganizing" the IRS bureaucracy -- an "oxymoron" to many. Spurred on by the media parade of IRS horror stories, Congress has enacted significant reforms in IRS collection methods. Also, taxpayers have gained additional rights at the audit level. But this legislation, outside of an important change in the capital gains holding period, does not significantly change your existing tax burden. The highlights include:
Under current law, married couples who file a joint tax return are jointly and separately liable for all the taxes owed by husband or wife, opening both parties to IRS collection efforts. The new law extends innocent spouse relief to all "erroneous" income items (prior law required "grossly" erroneous income items).
Also, spouses living apart for at least 12 months or who are divorced or legally separated may elect to be taxed only on their share of the income (in essence, as married filing separately). The spouse may make the election within 2 years after collection activity begins against the accused spouse. This provision applies to all outstanding liabilities arising after the date of enactment, as well as unpaid liabilities on the date of enactment.
IRS brings about 50,000 "innocent spouse" cases a year. They typically arise in divorce proceedings in which a wife discovers a husband has been hiding assets, says New York University law Professor Richard Beck.
However, legal experts caution the law doesn't let an innocent spouse off simply by saying she was a homemaker and relied on her husband to handle the family finances. Experts warn spouses whether they're married, separated or divorced to check all tax papers carefully before signing.
There are expanded "due process" protections in tax collection matters: Taxpayers have a right to appeal (via an independent appeals process) within 30 days after receiving a Notice of Lien and Intent to Levy. There is another 30-day period to file a Tax Court petition if IRS Appeals rules against the taxpayer.
IRS has been told to accept more offers-in-compromise. It is prohibited from collecting on a tax liability while an offer-in-compromise is pending or its rejection has been appealed. In general, IRS is required to provide installment agreements for tax liabilities under $10,000 and the failure-to-pay penalty is eliminated during installment agreements.
A court order is needed before IRS can levy on a principal residence, and IRS must follow fair debt-collection practices, much like any other debt collector (i.e. no harassing phone calls). IRS cannot levy on a principal residence when the tax liability (including penalties and interest) is less than $5,000. Also, if a retirement plan or IRA is levied, the 10% early withdrawal penalty is waived.
The holding period for long-term capital gains (taxed at 20% -- 10% for those in the 15% bracket) is reduced to 12 months, retroactive to January 1, 1998. Previously, investments held between 12 and 18 months were taxed at 28%. This will reduce some complexity in computing the tax, but there remains multiple capital gains rates for various assets and holding periods.
Those converting to a Roth may elect to recognize all the income during 1998, rather than in equal installments over 4 years. Also, those ineligible for a Roth conversion have until the due date of their return, plus extensions, to reconvert a Roth back to an IRA. A surviving-spouse beneficiary of a 1998 Roth conversion may still defer income over the 4-year period.
In some situations, the burden of proof in tax cases shifts to IRS, which has the burden on factual issues, provided the taxpayer has reasonably cooperated, maintained records and substantiates items as required under present law. This shift does not apply to corporations, trusts or partnerships with net worth exceeding $7 million.
The existing attorney-client confidentiality privilege will apply to non-attorneys authorized to practice before IRS in non-criminal tax administrative or court proceedings. The privilege does not apply to the preparation of tax returns.
Scripts Howard News Service and Reuters contributed to this report.
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