IRS Restructuring and Reform Act of 1998 (part one)

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, August 9, 1998

Copyright 1998 Robert L. Sommers, all rights reserved.

The recent IRS Restructuring and Reform Act of 1998 is aimed at "reorganizing" the IRS -- an oxymoron to many. Spurred by the media parade of IRS horror stories, Congress has enacted significant reforms for those ensnared by the IRS bureaucracy at the audit and collection levels. Taxpayers have new procedural rights, and many of the more egregious abuses have been eliminated. The following are some of the highlights:

Burden of Proof: In some situations, the burden of proof on factual issues now shifts to IRS to win. IRS must be 50.1% correct in cases where there is no evidence, or equal evidence for and against the taxpayer. This shift does not apply to corporations, trusts or partnerships with net worth exceeding $7 million.

To shift the burden, taxpayers must have reasonably cooperated with IRS, complied with all reasonable requests for information, and must have maintained records and substantiated items as required under present law.

Note: IRS may thus become more aggressive in seeking information to meet its new burden, which could make audits more complex and expensive for taxpayers.

Tax Representative Confidentiality: Under some conditions, the existing attorney-client confidentiality privilege will apply to non-attorneys authorized to practice before IRS in non-criminal tax administrative or court proceedings.

Attorney Fees: Attorney fees and costs may be awarded when IRS is not substantially justified in its position. Now, they may be recovered from the date IRS first issues a proposed deficiency. There is no longer an hourly limit on attorney fees (additional fees may be awarded in difficult cases).

If IRS has lost on similar issues in another U.S. Court of Appeals, attorneys fees will more likely be awarded. In addition, if a taxpayer offers to settle and IRS refuses, and then does not win in court more than what was offered, the taxpayer may recover attorney's fees, even having lost in court. This is similar to the rule in U.S. District Courts.

Suits Against IRS: Negligence will occur if IRS does not follow its rules and regulations. If IRS negligently disregards the law in connection with collecting taxes, taxpayers may sue for civil damages up to $100,000. This amount is increased to $1,000,000 if an IRS employee willfully violates the law governing collections.

Interest and Penalties: Interest rates on taxpayer overpayments (refunds) and amounts owed to IRS are now identical. Interest and certain penalties are suspended if IRS does not provide notice of a tax liability within 18 months after the due date, provided the return was timely filed.

Statute of Limitations on Assessment or Collection: IRS is not permitted to request an extension on tax assessments beyond the 3-year limitation without specifically notifying you of your right to refuse to extend the statute or your right to limit the extension to certain outstanding issues. Also, IRS cannot extend the 10-year limitation on collection, unless there is a levy already in place on your property. or in cases where the period was extended under an installment agreement.

Financial Status Audits: The so-called "life-style" audits where IRS asks intrusive and personal questions regarding a taxpayer's personal spending habits have been curtailed, unless IRS already has a reasonable indication that there is a likelihood of unreported income.

Additional income tax reforms:

Capital Gains: In 1997, the federal capital gains rate for certain long-term investments (held 18 months or longer) was reduced from 28% to 20%. For taxpayers in the 15% bracket, the rate was reduced to 10%. The new law lowers the holding period from 18 to 12 months for sales occurring after December 31, 1997.

Roth IRA: Those converting to a Roth may elect to recognize all the income during 1998, rather than in equal installments over 4 years. This is an advantage if your income is low this year. A surviving-spouse beneficiary may continue to defer income over the 4-year period. Unfortunately, if a taxpayer names someone other than a spouse and the taxpayer dies within the 4-year period, the remaining income is claimed on the decedent's final tax return.

Those finally deemed ineligible for a Roth conversion have until the due date of their return, plus extensions, to convert a Roth back to an IRA.

Next Column: The new innocent spouse rules and tax collection safeguards.


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