IRS Restructuring and Reform Act of 1998 (part two)

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, August 23, 1998

Copyright 1998 Robert L. Sommers, all rights reserved.

This is the second of two parts on the 1998 tax legislation.

Innocent Spouse Relief

The most significant changes enacted by this new legislation involve innocent spouse relief on a joint tax return. For a spouse who is married when the audit occurs, relief now covers all "erroneous" income, credit or deduction items on the joint return, regardless of the dollar amount (prior law required "grossly" erroneous items). If a spouse did not know or had no reason to know about an erroneous item of income, credit or deduction, innocent spouse relief can be claimed.

But the major beneficiaries of these new rules are spouses living apart for at least 12 months or who are divorced or legally separated. These spouses may make a "separate liability election" to be taxed only on their share of the income. In essence, they can now file as married filing separately, and pay tax on their share of income only.

The innocent spouse must make the separate liability election within two years from the time collection activity begins. Notice to the former spouse is not considered notice to the innocent spouse. The election does not apply unless the full amount of the tax shown on the joint return was paid.

Also, the new innocent spouse provisions apply to all outstanding liabilities arising after the date of enactment, as well as unpaid liabilities on the date of enactment. The bottom line: Spouses who may have had a possible innocent spouse claim under old law could benefit greatly from the new law.


Offers in Compromise

Congress has told IRS to accept more offers-in-compromise, by lowering the standard for acceptance. IRS cannot reject an offer from a low-income taxpayer because the amount offered does not meet a certain threshold (such as $500).

Offers-in-compromise are based on two premises: doubt as to liability (taxpayer does not owe the tax) or doubt as to collectibility (taxpayer owes the money but cannot pay it). For cases involving doubt as to liability, IRS cannot reject an offer because it fails to locate the tax return or the administrative file. Also, taxpayers are not required to provide financial information when the offer is based on doubt as to liability.

IRS is prohibited from levying personal property or collecting on a tax liability while an offer-in-compromise is pending or its rejection has been appealed. Once an offer has been submitted, all collection activities must stop (except in egregious situations). Taxpayers have 30 days to appeal a rejected offer.

IRS must now consider "hardship" and "equity" as part of the offer process which could include a waiver of penalties and interest in appropriate cases.

A joint offer no longer can be terminated because one of the parties fails to meet the requirements (i.e. one spouse does not timely file tax returns after the couple is separated or divorced).


Installment Agreements

In general, IRS is required to provide installment agreements for tax liabilities under $10,000, effective immediately. IRS must provide an annual statement, by July 1, 2000, regarding the balance at the beginning of the year, all payments made and the year-end balance due.

After 1999, while an installment agreement is in effect and provided the taxpayer timely filed the return, the failure-to-pay penalty is reduced .5% to .25% and interest will stop accruing.


Expanded "Due Process" Rights

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. At the hearing, IRS must verify that all applicable laws and administrative procedures have been met. Taxpayers may raise issues regarding the appropriateness of the collection activity.

There is another 30-day period to file a Tax Court petition if IRS Appeals rules against the taxpayer. IRS is now treated like any other creditor seeking payment: It must give the debtor the right to be heard.

IRS is prohibited from placing liens on property or levying (foreclosing on a lien) on a taxpayer's property while the appeals process is in effect.

IRS is Partially Bound by Fair Debt Collection Practices Act

IRS must now comply with certain provisions of the Fair Debt Collection Practices Act. In general, IRS cannot harass, oppress or abuse any person in connection with the collection of taxes. This means IRS cannot use: (1) threats of violence or criminal action to harm a taxpayer; (2) profanity or abusive language, either verbally or in writing; (3) the telephone with an intent to harass or annoy any person at any number or without meaningful disclosure of the caller's identity.

Collectors may not contact taxpayers at an inconvenient time; and if a taxpayer appoints a representative, the tax collector must direct future communications to the representative. Taxpayers can stop IRS contact at work if such communications are prohibited by the employer.


Levies on Residences and Retirement Plans

A court order is needed before IRS can levy on a principal residence. IRS cannot levy on a principal residence when the tax liability (including penalties and interest) is less than $5,000.

If a retirement plan or IRA is levied, the 10% early withdrawal penalty is waived. This rule does not apply if a taxpayer voluntarily withdraws money from a retirement plan to pay the taxes.




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