August 1996

The Taxpayer Bill of Rights

President Clinton July 30 signed into law the Taxpayer Bill of Rights II (Public Law 104-168) to give taxpayers increased leverage in dealings with the Internal Revenue Service. Some of the more significant items include:

• Establishment of the Office of the Taxpayer Advocate.
• A requirement that the IRS notify taxpayers before terminating any installment agreement.
• The abatement of interest and penalties attributable to unreasonable errors or delays from IRS managerial acts.

To pay for the new provisions, the Act imposes intermediate sanctions on tax-exempt organizations and their members that engage in transactions resulting in private inurement.

Main Provisions

The Taxpayer Advocate

The IRS now has an Office of Taxpayer Ombudsman that serves as the primary advocate, within the IRS, for taxpayers. The Act establishes a new position of Taxpayer Advocate and creates the Office of the Taxpayer Advocate. The objectives of the Taxpayer Advocate are to:

• Assist taxpayers in resolving problems with the IRS.
• Identify areas in which taxpayers have problems in dealings with the IRS.
• Propose changes (to the extent possible) in the administrative practices of the IRS that will mitigate those problems.
• Identify potential legislative changes that may mitigate those problems.

The Act requires that, in order to ensure independence, the Taxpayer Advocate report directly to Congress twice a year. These reports are not subject to review by the Commissioner, the Treasury Department, or the Office of Management and Budget.

The Taxpayer Advocate is also given broader authority to issue Taxpayer Assistance Orders. These orders can release property, require the IRS to cease any action, or refrain from taking any action that will cause significant hardship as a result of the administration of internal revenue laws. Only the Taxpayer Advocate, Commissioner, or Deputy Commissioner is able to modify or rescind Taxpayer Assistance Orders.

Effective date: The provision is effective on the date of enactment.

Modification of Installment Agreements

The Act requires that the IRS give 30 days notice before altering, modifying, or terminating a previously agreed upon installment agreement, unless the change is caused by a determination that the collection of tax is in jeopardy. The Act provides that the Treasury Secretary must establish a procedure for independent administrative review of termination of an installment agreement upon request by the taxpayer.

Effective date: The provision is effective beginning six months after the date of enactment.

Abatement of Interest and Penalties

The Act expands IRS authority to abate interest for managerial acts of the IRS in addition to ministerial acts (non-discretionary procedural acts). The IRS may abate interest for delays caused by managerial acts such as loss of records by the IRS, IRS personnel transfers, extended illnesses, extended personnel training, or extended leave. The Tax Court is given jurisdiction to review an IRS failure to abate interest. Additionally, the Act authorizes the IRS to waive penalties for inadvertent failure to deposit employment taxes, under certain circumstances, for the first quarter the taxpayer was required to make such deposit and to abate penalties for first time that deposits were sent to the Secretary rather than to the required government depository.

Effective date: The provision is effective for tax years beginning after the date of enactment.

Studies of Joint and Several Liability for Married Persons Filing Joint Returns

The Act directs the Treasury Department and the General Accounting Office to perform independent studies of the effects of:

• Changing the "joint and several" liability for taxpayers filing joint returns to "proportionate" liability.
• Requiring the IRS to be bound by the terms of divorce decrees that address tax liability responsibilities.
• Adding "innocent spouse" provisions to provide meaningful relief to former spouses.
• Overturning Poe v. Seaborn to eliminate a new spouse’s assets required to satisfy the spouse’s previous joint and several liability with a former spouse.

Effective date: The reports are due six months after enactment.

Joint Return May Be Made After Separate Returns Without Full Payment of Tax

The Act repeals the requirement that taxpayers must fully pay their tax liability in order to amend a previously filed married filing separate return to a married filing joint return.

Effective date: The provision is effective for tax years beginning after the date of enactment.

Disclosure of Collection Activities With Respect to Joint Returns

The Act requires the IRS to communicate with a taxpayer the collection activities it has pursued to collect tax liabilities associated with a joint return filed when the taxpayer was married. The taxpayer must request this information in writing. The IRS may omit the current home and business address to protect taxpayers against hostile former spouses.

Effective date: The provision is effective on the date of enactment.

Withdrawal of Public Notice of Lien and Return of Levied Property

The Act authorizes the IRS to withdraw a public notice of a tax lien prior to the taxpayer’s full payment of all tax liabilities and allows the IRS to return levied property if the IRS determines that:

• The filing of notice or levy was premature or not otherwise in accordance with the IRS administrative procedures, or
• The taxpayer has entered into an installment agreement with the IRS to satisfy the tax liability, or
• The withdrawal of the lien or return of the property would facilitate tax collection; or
• The withdrawal of the lien or return of the property would be in the best interest of both the taxpayer and the government as determined by the Taxpayer Advocate.

Effective date: The provision is effective on the date of enactment.

Modification of Certain Levy Exemption Amounts

The Act raises the value amount of property that is exempt from levy (confiscation). The personal property exemption amount is raised from $1,650 to $2,500, and the books and tools of trade exemption amount is raised from $1,100 to $1,250. Both amounts will be indexed for inflation occurring after January 1, 1997.

Effective date: The provision is effective for levies issued after 1996.

Offers in Compromise

The Act raises the amount of tax liabilities that may be compromised, without a written report from the IRS Chief Counsel, under the offer in compromise program from $500 to $50,000.

Effective date: The provision is effective on the date of enactment.

Civil Damages for Fraudulent Filing of Information Returns

The Act provides that taxpayers may bring a recognized civil action for damages against persons who willfully file a fraudulent information return that reports payments purportedly made to the taxpayer. The taxpayer damaged by these fraudulent returns may seek the greater of $5,000 or actual damages, including reasonable attorney fees.

Effective date: The provision is effective for fraudulent returns filed after the date of enactment.

Requirement to Conduct Reasonable Investigations of Information Returns

The Act shifts the burden of producing reasonable and probative information regarding a deficiency during a court proceeding from the taxpayer to the IRS for any income reported on an information return. The taxpayer must assert a reasonable dispute with respect to an item of income reported on an information return filed by a third party and must cooperate fully with the IRS.

Effective date: The provision is effective on the date of enactment.

Awarding of Costs and Certain Fees

After a taxpayer substantially prevails over the IRS in a tax dispute, the Act shifts the burden of proof from the taxpayer to the IRS for purposes of proving that the IRS was substantially justified in maintaining its position. If the IRS does not prove it was substantially justified, then the court may award attorney fees to the taxpayer. Additionally, there is a rebuttable presumption that the IRS was not substantially justified in maintaining its position if the IRS does not follow, in its administrative proceeding, its published regulations, revenue rulings and procedures, information releases, notices, announcements, or private letter rulings, determination letters, or technical advice issued to the taxpayer.

Effective date: The provision is effective for all proceedings commenced after the date of enactment.

Attorneys’ Fees

The Act raises the amount of attorney fees that may be awarded to the prevailing party from $75 per hour to $110 per hour, indexed for inflation beginning after 1996. Additionally, the Act provides that the taxpayer’s failure to execute an extension of the statute of limitations may not be considered for purposes of determining whether the taxpayer has exhausted all administrative remedies necessary to be awarded attorney fees. Finally, the Act eliminates the present law restrictions on awarding attorney fees in all declaratory judgment proceedings.

Effective date: The provision is effective for all proceedings commenced after the date of enactment.

Modification of Recovery of Civil Damages for Unauthorized Collection Actions

The Act raises the amount a taxpayer may recover in damages caused by the actions of an IRS employee who recklessly or intentionally disregards the provisions in the Internal Revenue Code or Treasury Regulations in connection with the collection of federal taxes from $100,000 to $1 million.

Effective date: The provision is effective for unauthorized collection actions occurring after the date of enactment.

Court Discretion to Reduce Award for Litigation Costs

The Act permits, but does not require, a court to reduce an award of litigation costs if the taxpayer does not exhaust all administrative remedies.

Effective date: The provision is effective for proceedings commenced after the date of enactment.

Modification to Penalty for Failure to Collect and Pay Tax Notice to Responsible Person

The Act requires that the IRS issue a notice to an individual whom the IRS has determined to be a responsible person for unpaid employment tax purposes. The initial notice must be issued at least 60 days prior to issuing any notice or demands for penalties, unless collection is believed to be in jeopardy.

Effective date: The provision is effective for assessments made after June 30, 1996.

Disclosure of All Responsible Parties

The Act requires the IRS, if requested in writing by a person considered a responsible person, to disclose the names of all other persons believed to be responsible persons by the IRS, whether the IRS has pursued collection activities against those persons, and to disclose the amounts, if any, that have been collected from those persons.

Effective date: The provision is effective on the date of enactment.

Right of Contribution

The Act creates a federal cause of action allowing a responsible person who paid a disproportionate share of the penalty to have a "right of contribution" from the other responsible persons for their proportionate share of the penalty.

Effective date: The provision is effective for penalties assessed after the date of enactment.

Board Members of Tax-Exempt Organizations

The Act exempts an individual who serves on a tax-exempt organization’s board of directors in an honorary or voluntary capacity and is not involved in the day-to-day operations from being a responsible person for penalty purposes. This provision may not operate to eliminate all responsible persons.

Effective date: The provision is effective on the date of enactment.

Modification of Rules Relating to Summonses Enrolled Agents Included as Third-Party Recordkeepers

The Act includes enrolled agents in the definition of third-party record keepers. Taxpayers must be given notice and an opportunity to challenge a third-party summons when served on a third-party record keeper. Attorneys and accountants are already included in the definition of third-party record keepers.

The Act requires that the Regional Counsel, from the Office of the Chief Counsel to the IRS, for the region in which the examination is being conducted, review all designated summonses before they are issued. Additionally, the Act restricts designated summonses to Coordinated Examination Program (CEP) examinations only. These safeguards are implemented because the statute of limitations is suspended when designated summonses are issued. The Act also requires the Treasury Department to annually report to Congress the number of designated summons issued throughout the year.

Effective date: The provision applies to summonses issued after the date of enactment.

Relief from Retroactive Application of Treasury Regulations

The Act provides that temporary or proposed regulations must have an effective date no earlier than the date of publication in the Federal Register or the date on which any notice substantially describing the expected contents of such regulation is issued to the public. The following exceptions apply:

• Any regulation issued within 18 months of a statutory enactment may be applied retroactively.
• The prohibition against retroactive effect may be superseded by a legislative grant.
• Temporary or proposed regulations may be issued to prevent abuse or correct a procedural defect in the issuance of a regulation.
• Treasury may provide for the taxpayer to elect retroactive treatment.
• Final regulations may be retroactively issued to the date of publication of the temporary or proposed regulation.
• For regulations relating to internal Treasury Department policies, practices, or procedures would not be affected by the provision.

Effective date: The provision is effective for regulations that relate to statutory provisions enacted on or after the date of the Act’s enactment.

Miscellaneous Provisions

Phone Number of Persons Providing Payee Statements

The Act requires payors to list the contact person’s phone numbers in addition to their name and address on all information returns.

Effective date: The provision is effective for all information returns required to be furnished after December 31, 1996 (without regard to extensions).

Required Notice of Certain Payments

The Act requires that the IRS make reasonable efforts to notify, within 60 days, those taxpayers who have made payments that the IRS cannot associate with the taxpayer.

Effective date: The provision is effective on the date of enactment.

Unauthorized Enticement of Information Disclosure

The Act creates a cause of action by the taxpayer against the United States when an officer or employee compromises the determination or collection of tax due from an attorney, accountant, or enrolled agent, in exchange for information concerning the taxpayer’s tax liability. The taxpayer may collect the lesser of $500,000 or actual damages plus attorney fees.

Effective date: The provision is effective on the date of enactment.

Annual Reminder Notices

The Act requires the IRS to send annual reminder notices of deficiencies regardless of their amount.

Effective date: The provision is effective on the date of enactment.

Extension of "Churning" Authority

The Act reinstates the ability of the IRS to "churn" the income earned by an undercover operation to pay additional expenses incurred in the undercover operation. This offset authority is from the date of the bill’s enactment until January 1, 2001. The IRS will be required to report to Congress annually.

Effective date: The provision is effective on the date of enactment.

Disclosure of Returns on Cash Transactions

The Act permanently extends the special rules that allow the IRS to disclose to other federal agencies information contained in Form 8300 "Report of Cash Payments Over $10,000 Received in a Trade or Business," for the purpose of administering federal criminal statutes. In addition, the bill also allows disclosure to states, local, and foreign agencies for civil, criminal, and regulatory purposes. Disclosures for tax administration are not permissible. The dissemination prohibitions and related sanctions for disseminating this information apply to those agencies who have access to the Form 8300 information.

Effective date: The provision is effective on the date of enactment.

Disclosure of Returns to Taxpayer Designee

Presently, the IRS is authorized to disclose the return of any taxpayer, or return information pertaining to a taxpayer, to such person(s) that the taxpayer designated in a "written" request. The Act deletes the word "written" and thus allows the IRS to adopt alternatives to the written request requirement.

Effective date: The provision is effective on the date of enactment.

Report on Netting of Interest on Overpayments and Liabilities

The Act requires the Secretary of the Treasury to study how the IRS has implemented the netting of interest on overpayments and underpayments. Netting of underpayments and overpayments will be beneficial to the taxpayer since the interest rate charged on underpayments is higher than the interest rate paid on overpayments. Additionally, the study should focus on the policy and administrative implications of global netting. The study must be completed within 6 months of this bill’s enactment.

Effective date: The provision is effective on the date of enactment.

Expenses for Detection of Underpayments and Fraud

The Act clarifies that payments of rewards for information leading to the detection and punishment of violations of the Internal Revenue Laws apply to both civil and criminal violations and these rewards are to be paid out of the proceeds obtained from this information.

Effective date: The provision is effective six months after the date of enactment.

Use of Private Delivery Services

The Act authorizes the IRS to allow the use of private delivery companies to qualify for the "timely mailed is timely filed" rule. Private delivery companies will be required to be designated by the IRS prior to the IRS’ acceptance of their receipts for proof of the returns being timely filed.

Effective date: The provision is effective on the date of enactment.

Reports on Misconduct by IRS Employees

The Act requires the IRS to make annual reports to the tax-writing committees of all instances involving allegations of misconduct by IRS employees, arising either from internally identified cases or from taxpayer or third-party initiated complaints. The first report is due June 1, 1997.

Effective date: The provision is effective on the date of enactment.

Revenue Offsets

Failure-to-Pay Penalty Applicable To Substitute Returns

The Act applies the failure-to-pay tax penalty to substitute returns prepared by the IRS. This penalty now will be applied from the due date of

the return until the tax is paid for both delinquent returns and substitute returns.

Effective date: The provision is effective for all returns whose due date, without regard to extensions, is due after the date of enactment.

Intermediate Sanctions On Private Excess Benefit Amounts

Under current law, the tax-exempt status of charitable organizations is conditioned on the requirement that no part of the net earnings of the organization benefits any private shareholder or individual (the so-called "private inurement test"). There is no specific statutory private inurement test for tax-exempt social welfare organizations.

The Act extends the private inurement test to tax-exempt social welfare organizations. The Act also imposes penalty excise taxes as intermediate sanctions (short of revocation of tax-exempt status) when nonprofit charitable organizations and social welfare organizations engage in transactions with

certain insiders that result in private inurement. The Act requires additional reporting of information by nonprofit organizations to the IRS and increases public access to documents filed by those organizations with the IRS. The Act also increases the penalty provisions for organizations which fail to timely file their

information return and fail to allow public inspections or to provide copies of their information returns.

Effective date: The provisions generally are effective Sept. 14, 1995, unless the transaction is subject to a contract that was binding on Sept.13, 1995, in which case these provisions are effective Jan. 1, 1997.