Taxpayer's Bill of Rights III

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, November 30, 1997

Copyright 1995-7 Robert L. Sommers, all rights reserved.

Taxpayer’s Bill of Rights III

In an effort to appease angry taxpayers, the House passed the Internal Revenue Service Restructuring and Reform Act of 1997 ("Act") which includes a revised Taxpayers Bill of Rights III.

Attorney-client Confidentiality Expanded to Certain Non-attorneys

Under current law, there is not confidentiality protection between a taxpayers and their non-attorney representatives. IRS could question representatives about their thoughts, impressions, opinions or analysis. The Act expands the traditional attorney-client privilege to taxpayer representatives authorized to practice before the IRS (enrolled agents and CPAs) with respect to their thoughts, impressions, opinions or analysis during a non-criminal administrative proceeding. This newly created privilege does not apply to civil or criminal court trials.

Shifting the Burden of Proof to IRS

If ever a provision had a political ring to it, it is this shift of the burden of proof to IRS in case cases. There’s a big catch: To shift the burden, taxpayers must have "fully cooperated" with IRS at the administrative level by providing all witnesses, information and documentation reasonably requested, which could include confidential communications between taxpayers and their representatives.

Joint Returns

Unfortunately, instead of overhauling the joint-return liability provisions, Congress chose to notify taxpayers about their "joint and several liabilities." When a husband and wife file a joint return, they are treated as a single unit; therefore, each is individually responsible for all tax liabilities, penalties and interest, even if the liability was caused by the other spouse. While filing a joint return usually provides a small tax benefit, each spouse becomes personally liable for all additional taxes the other spouse may have accrued.

Congress decided to have IRS explain this potential unlimited liability in its publications, rather than address the mismatch of benefits verses risk. Often one spouse signs a joint return because of the tax savings, while unaware that the other spouse has misreported income or expenses or has adopted a questionable position under the tax law. Nevertheless, each spouse becomes responsible for all additional taxes.

Innocent Spouse Relief

The Act provides relief if an innocent spouse establishes that when the return was signed, he or she did not know, and had no reason to know, that there was such understatement and that under the circumstances, it would be inequitable to hold the other spouse liable for the deficiency. There is also an apportionment of relief if the spouse was innocent as to some items, but not others.

Miscellaneous Provisions

Small Tax Case Limitations: The upper limit for a small tax case (an informal proceeding similar to small claims court) has been raised from $10,000 to $25,000.

Refund: The claim period for a refund is two years, but will be extended if the taxpayer proves a medical disability during this period which prevents him or her from requesting the refund.

Damages for Negligent Collection Action: For the first time, a taxpayer may recover a maximum of $100,000 for negligent IRS collection actions.

Offers in Compromise: When an Offer in Compromise is terminated due to the actions of one spouse, the Offer will continue for the spouse (or former spouse) who remains in compliance.

Restrictions on Economic Reality Audits: IRS is limited to using "economic reality" audits to those situations where the IRS believes there is a reasonable likelihood of unreported income. Economic reality audits focus on a taxpayer’s assets and lifestyle, rather than the income and expenses claimed on the tax return.


While these changes are modest and positive, the final legislation could be improved if (1) Congress makes it clear that IRS cannot compel a taxpayer’s representative to testify or provide confidential information in any court proceeding; (2) the burden of proof must shift to IRS if the taxpayer reasonably complies will all requests for relevant financial documentation (such as original books and records); and (3) the liability for filing a joint return is proportional to the tax benefit received.

The most significant pro-taxpayer change is the new damage claim for negligent IRS collection activities.


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