Bill Adds Muscle To 'Weakling' Taxpayer
This week's surprise agreement between Congress and the White House on reorganizing the Internal Revenue Service will give taxpayers more muscle if they get into scraps with the agency.
The bipartisan bill approved Wednesday by the House's tax-writing Ways and Means Committee would bolster taxpayers' rights and put the burden of proof on the IRS - not on the citizen - when tax disputes go to court.
Most important, observers say, it will change how the IRS relates to its "customers." IRS critics say the agency sees itself primarily as a law-enforcement force. But "the IRS is primarily a customer-service organization with a law-enforcement function, not the reverse," says Robert Goldstein, head of IRS relations for the New York State Society of Certified Public Accountants. Several provisions of the bill should bolster the customer-service approach, he says.
The shift in burden of proof would be a significant change in taxpayers' favor. Currently, citizens are guilty in tax disputes until they prove themselves innocent. For example: A taxpayer donates an old car to a charity and claims it is worth $2,000. IRS disputes that, claiming the car is worth only $1,000 and challenging the amount claimed as a deduction. As the law now stands, if both the taxpayer and the IRS produce experts to back up their claims, IRS automatically wins, because its position is presumed to be correct. Under the new law, the taxpayer's deduction would be upheld in tax court unless the IRS proves the taxpayer wrong.
THE change would apply only in tax court after a taxpayer has exhausted administrative remedies with the IRS. Taxpayers must still cooperate with the IRS in producing documents and witnesses the agency "reasonably" requests. Corporations and partnerships worth more than $7 million are not eligible for the proposal's benefits.
Mr. Goldstein says the new provision's main effect may be to encourage the IRS to settle cases before they go to court. But he's also concerned it could lead to more-intrusive IRS audits. "When the IRS says that it needs more documents, and the taxpayer says he's provided sufficient documentation, that becomes a fact for the courts to deal with, and they have to determine what is 'sufficient.' "
Among the new rights the proposal would grant:
* Taxpayers could sue the IRS for as much as $100,000 in damages for negligence. It will also be easier to recover legal fees and costs in disputes with the IRS.
* "Innocent spouses" - usually divorced women - would gain more protection from tax problems created without their knowledge during a marriage to a former spouse.
* Attorney-client privilege would apply not only to lawyers, but also to qualified accountants and tax advisers.
* IRS would provide grants to taxpayer clinics to help low-income Americans who have disputes with the agency.
* Taxpayers would have easier access to the tax court's Small Case Calendar - the equivalent of an inexpensive small-claims court for tax disputes.
* The bill also creates an 11-member IRS Oversight Board, including eight private-sector experts. It would review and approve management plans, modernization efforts, and the IRS budget request. The president would keep his power to hire and fire the IRS commissioner, who would get strengthened management powers and a five-year term.
"All of these are making the IRS more accountable," says Mark Ely, partner in the Washington national tax practice for KPMG Peat Marwick LLP. He calls the proposal "extremely positive."
The bill looks likely to pass the House before adjournment in November. But Senate majority leader Trent Lott of Mississippi says it probably won't reach the Senate floor until next year.