FAQ: Taxpayer's Bill of Rights II

Frequently Asked Tax Questions -- August 18, 1996

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, Sunday August 18, 1996

Taxpayer's Bill of Rights II

Incensed with what it perceived as IRS arrogance, incompetence and heavy-hand tactics with taxpayers, Congress enacted a second Taxpayer's Bill of Right on July 30, 1996.

The good news is that this new law curbs some of the more outlandish IRS abuses in the administration of our tax laws and collection of taxes. The bad news is that it does not go far enough and, in too many instances, allows the IRS to determine whether it is acting unreasonably. Highlights of the new law, called "Rights II," include:

New limits for attorneys' fees and damage awards in collection cases

Rule: When a taxpayer beats the IRS in a tax collection case, he can receive statutory attorneys' fees, unless the IRS can prove it did not act recklessly in pursuing the case.

The maximum rate of recovery has been raised from $75 an hour to $110 an hour. Also, a taxpayer may now recover $1 million in actual and direct economic damages caused by IRS wrongful collective activities. Previously, the limit was $100,000.

Comment: This rule shifts the burden to the IRS, but is only beneficial in cases when the IRS acted recklessly. The IRS can counter this "reckless" charge by claiming it was merely incompetent, negligent or even careless in its collection efforts. Therefore, taxpayers will need to document any reckless conduct by the IRS early in the proceeding, in writing, stating the reasons why the taxpayer does not owe the taxes under question. The increase for attorneys' fees is helpful, but in reality the hourly rates charged by experienced tax attorneys usually range between two to three times the 110 allowance. Still, taxpayers can recover a larger portion of their attorneys' fees with this $35/hour increase.

Fraudulent information returns

Rule: Rights II addresses false information returns (often Form 1099) filed by third parties which adversely affect the taxpayer. A taxpayer may bring a civil case for damages against a person who files a fraudulent information return and may collect the greater of $5,000 or the amount of actual damages suffered, plus court costs, and, in the trial court's discretion, reasonable attorneys' fees. The statute of limitations for bringing suit is six years from the date the fraudulent information return was filed or one year after the date the document would have been discovered through the exercise of reasonable care, whichever comes later.

Comment: This change is long overdue. Taxpayers have been burdened with false Form 1099s by unscrupulous employers and others, with little legal recourse. Now, those who submit fraudulent information returns can be sued for a minimum of $5,000. This rule should serve as a deterrent.

IRS must conduct a reasonable investigation of information returns

Rule: If there is a dispute between the IRS and a taxpayer regarding the information provided by a third party on an information return (often a Form 1099), and if the taxpayer has reasonably cooperated with the IRS to provide the information and witnesses supporting the taxpayer's contention, the burden of proof shifts to the IRS with respect to the accuracy of the information return. Once this occurs, the information return will be considered inaccurate, unless the IRS can prove otherwise.

Comment: This shift in the presumption of the accuracy of information returns will favor taxpayers. Currently, the taxpayer must prove the inaccuracy of an information return. Even when the information is false, there might be little evidence (outside the taxpayer's word) to prove it.

Interest abatement

Rule: Interest may be abated (reduced) if the tax payment is delayed by unreasonable mistakes or delays by IRS employees. Interest abatement includes both "ministerial" (non-discretionary, bookkeeping types of mistakes) and now "managerial" acts by the IRS. These managerial acts can include delays resulting from a loss of tax records by the IRS and IRS personnel actions such as transfers, training, illness or leave.

Comment: These interest abatement provisions are potentially significant. Generally, the IRS has not been permitted to abate interest on taxes, even though the agency was causing the interest to accrue through its negligence or inattentiveness.

Unfortunately, the IRS could thwart Congress's intent by making an unduly restrictive interpretation of what constitutes an "unreasonable" mistake.

If the reference to reasonableness is made with respect to private industry, the IRS would be held to a much higher standard. Currently, what passes for reasonableness for this agency would be considered unacceptable by almost any outside standard.

Retroactive regulations

Rule: Rights II prohibits any temporary, proposed or final regulations from being implemented earlier than the date that the regulation is first printed in the Federal Register.

Comment: Good! Is there a more egregious abuse of power than to promulgate regulations that apply retroactively. That such a law must be passed to prevent this type of behavior illustrates the abusive conduct of this agency and highlights why it is under attack from both the public and Congress.

Private delivery services

Rule: This provision allows taxpayers to rely on the postmark of a private delivery service to prove the timeliness of mailing tax documents. Prior to Rights II, taxpayers could rely on postmarks only from the U.S. Postal Service as evidence that tax documents had been mailed.

There is a "timely-mailed, timely-filed" rule which states a document is filed when it is deposited in the mails.

Comment: This was a trap for the unwary that has been fixed. The IRS claimed that the delivery of a document (such as a Tax Court petition) by Federal Express (or other private courier) did not meet the requirement of mailing.

For example, a document delivered to Federal Express before a deadline, but received by the IRS or a court after the deadline was untimely. If, however, the taxpayer used the U.S. mail and could prove the document was mailed prior to the deadline, the document would have been timely filed. Filing documents by certified mail, return receipt requested, remains the most effective for filing, but Federal Express and the other private delivery services are now officially accepted.

A taxpayer advocate

Rule: The largely ineffective taxpayer "ombudsman" has been replaced by a "taxpayer's advocate" with expanded powers. The advocate will assist taxpayers in their dealings with the IRS, identify problems within the tax system and work with the Congressional tax writers to solve problems identified by the taxpayer's advocate.

Comment: The previous taxpayer's advocate was an IRS official, often uncomfortable challenging the system; consequently, taxpayers became frustrated. Let's hope an independent taxpayer advocate will zealously represent taxpayers who encounter egregious situations or conduct when dealing with the IRS.

Rights II is a clear warning to the IRS to act more professionally in its dealings with taxpayers. Whether the IRS will heed this admonition and actually change its ways is anyone's guess.


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