Taxpayer Bill of Rights  

Taxpayer Bill of Rights 2 (T2 )

1. Taxpayer Rights Review. T2 will create an independent administrative appeal, outside the IRS, but within the Treasury Department. Once a taxpayer has exhausted administrative remedies, he/she may elect to go to Review for a binding determination on certain issues unrelated to the determination of tax liability.

Review Officers will, for example, have specific authority to review taxpayer disputes in the following matters:

a. Recovery of out of pocket costs.

b. Release of erroneous, premature or incorrectly filed liens.

c. Recovery of civil damages for certain unauthorized collection actions.

d. Abatement of interest for unreasonable IRS delay.

e. Recovery of damages due to failure to release liens.

f. Review of installment agreement disputes.

g. Taxpayer Assistance Orders (with expanded authority to cause the IRS to act).

2. The Ombudsman. The Ombudsman presently reports to the IRS Commissioner. T2 will provide that the Ombudsman be appointed by the President and confirmed by the Senate, but left within the IRS. Included in the Ombudsman's scope of power will be the authority to

(1) abate assessments,

(2) grant refund requests, and

(3) stay collection activity.

The Ombudsman will have the power to grant authority to his/her designees (i.e., the Problems Resolution officers). Action taken by the Ombudsman will be reported to the Senate Finance Subcommittee on Private Retirement Plans and Oversight of the Internal Revenue Service and the House Ways and Means Committee on Oversight.

The Problems Resolution Office (PRO) presently reports to the local District Director. T2 will provide that the PRO report directly to the Ombudsman. The PRO will be hired, supervised, reviewed, and promoted or demoted by the Ombudsman.

The visibility of the PRO must be improved. This may be achieved by requiring the IRS to provide PRO officers names and telephone numbers in IRS tax instructions.

In addition, T2 will require the Ombudsman to provide Congress the following quarterly reports:

a. Initiatives the Ombudsman's office has taken on improving taxpayer services and IRS responsiveness.

b. PRO recommendations flowing from the field.

c. A summary of problems encountered (nature of problems) and their resolution.

d. The inventory of open items (initiatives, recommendations, and problems above) on which no action has been taken along with an aging report.

e. Items on which changes have been made and whether or not those changes resolved the underlying problem.

f. Recommended changes that have not been implemented with an aging report and the reasons for not implementing the changes, and the IRS official who made the final decision on each recommended change.

g. If there is a perceived need for legislation to correct a problem or inequity, the reports should contain such recommendations.

In addition, the Ombudsman should furnish to Congress it's objectives on an annual basis. These objectives should be furnished well in advance of the beginning of the calendar year.

All reports should contain full and substantive analysis, in addition to statistical information.

3. Elimination of Interest Differential. T2 will eliminate the current interest differential (See IRC section 6621) between interest the taxpayer pays the IRS on underpayments and interest the IRS pays the taxpayer on overpayments.

4. Recovery of Administrative Costs. IRC section 7430 presently provides for the recovery of administrative costs incurred on or after the earlier of the receipt of the final decision of Appeals or the statutory notice of deficiency. Because, generally, no administrative costs are incurred after this period (except where the taxpayer pays the full amount of tax and files a claim for refund), the statutory provision is ineffective. In addition, the burden is on the taxpayer to show that the position of the IRS was not "substantially justified'.

T2 will amend section 7430 to provide that any person who substantially prevails in an administrative proceeding can recover reasonable administrative costs, but only if such costs were incurred after the earlier of: (1) the date of the first notice of proposed deficiency that allows the taxpayer an opportunity for administrative review in the IRS Office of Appeals, or (2) the date of the statutory notice of deficiency. In addition, if the notices above are not applicable (i.e., a non-deficiency proceeding-trust fund taxes, etc.), then costs run from the first notice that notified the taxpayer of the assessment or the proposed assessment. No such costs will be recoverable if the Government can show that it's position was substantially justified.

T2 will also amend section 7430 to provide that reasonable fees incurred for the services of qualified taxpayer representatives shall not be in excess of $150 (currently $75) and the amount shall be indexed to inflation.

5. Expansion of Secretary's Authority to Issue Certificate of Release Liens. IRC section 6326(b) requires the Secretary to issue a Certificate of Release for "erroneous" liens only. This extremely narrow language prevents the IRS from issuing the Release on premature or incorrectly filed liens. T2 will grant the Secretary the authority to issue a certificate of release for premature or incorrectly filed liens.

6. Removal of Limits on Recovers of Civil Damages. IRC section 7433 (Civil damages for certain unauthorized collection actions) caps damage awards against the IRS at $100,000. Section 7433 also limits recovery to "reckless and intentional" actions of the IRS. T2 will remove the $100,000 cap and include recovery for "negligent" action by the IRS.

7. Content of Notices. IRC section 7522 (Content of tax due, deficiency, and other notices.) requires the IRS to clarify certain notices by January 1, 1990, by identifying and describing the basis for any tax due, as well as any interest and penalties assessed. A year later many IRS notices have not been improved. T2 will provide that notices with inadequate descriptions will be invalid.

8. Abatement of Interest for Unreasonable IRS Delays. IRC section 6404(e)(1) (Assessment of interest attributable to errors and delays by the IRS) provides "the Secretary may abate" interest on "any deficiency in whole or in part to any error or delay by an officer or employee of the IRS (acting in his official capacity) in performing a ministerial act".

The ministerial act requirement too narrowly limits the possibility of relief to the taxpayer. Also, IRS rejection of a taxpayer request to abate interest cannot be reviewed because section 6404(e)(1) provides no guidance for courts as to the appropriate judicial review standard.

T2 will provide that the Secretary must abate interest for unreasonable IRS errors and delays. The ministerial act limitation will be deleted from the statute, and courts will use "unreasonable" as the appropriate standard of review.

9. Secretary's Power to Suspend Rules. T2 will grant the Secretary broad powers to suspend rules which, because of changed circumstances since the enactment of a provision, would cause a hardship on a group of taxpayers.

10. Taxpayer Assistance Orders (TAOs). T2 will expand TAOs to force action by the IRS (e.g. force the IRS to issue a refund), and T2 will provide a judicial remedy for failure to honor TAOs.

11. Damages for Wrongful Liens. Section 7432 provides for a cause of action against the IRS for damages sustained due to failure to release liens. T2 will provide a similar cause of action for wrongful liens, including liens issued after a petition is filed in U.S. Tax Court.

12. Attorney-Client Privilege. T2 will amend the Federal Rules of Evidence to provide that disclosure of information to outside independent auditors will not destroy the attorney-client privilege.

13. Notice of Deficiency. IRC section 6212(a) authorizes the IRS to determine tax deficiencies. The term "determine" is not defined in the Code, and until recently, courts have declined to inquire whether or not, and how the IRS made it's determination. The courts are now beginning review the IRS process of making a determination and chip away at the long-standing presumption of correctness afforded deficiency notices.

T2 will provide that, in order for an IRS notice of deficiency to be entitled to the presumption of correctness, the IRS will be required to have physically examined the underlying tax return, where such return has been filed. Additionally, T2 will amend section 6212(a) to provide that a "determination" must be "a thoughtful and considered determination that the United States is entitled to an amount not yet paid." Portillo vs. Commissioner, 832 F.2d 1128 (5th Circuit 1991). If the IRS fails to make a thoughtful and considered determination, then the notice of deficiency will be invalid.

14. Procedural Safeguard Where IRS Determines a Tax Deficiency Based on Information Return Reporting. T2 will provide that where the taxpayer asserts a non-frivolous dispute with respect to any item of income reported to the IRS on an information return, the IRS, not the taxpayer, will bear the burden of proof in any deficiency or refund proceeding absent a showing that the IRS conducted a reasonable investigation of the facts and physically examined the taxpayer's return.

15. Tax Preparation Fees. T2 will provide that fees incurred with respect to the preparation of "Schedule C" (Unincorporated Trade or Business), or "Schedule F" (Farm Income and Expenses) will be allowed as an ordinary and necessary business expense. Thus, such fees will not be subject to the two-percent floor of applicable to miscellaneous itemized deductions. As a result, unincorporated taxpayers or farmers will not be at a disadvantage compared to incorporated businesses that incur tax preparation fees. The IRS has taken the position that such expenses are subject to the two-percent floor.

16. Designated Summons. IRC section 6503(k) permits the IRS to issue a "designated summons" directing the production of documents or other information in connection with the audit of a corporate taxpayer. There is no requirement that the IRS notify the taxpayer that a designated summons is about to be issued. Under present law, the IRS may issue a designated summons with just 60 days remaining on the statute of limitations, and if the taxpayer does not comply fully with the summons in a relatively short period of time, then the IRS can suspend the statute of limitations by seeking judicial enforcement of that summons. While there may be situations where the use of a designated summons late in the audit process may be appropriate, nonetheless the IRS should not be allowed to surprise taxpayers who reasonably and in good faith believed that the statute of limitations was soon going to expire.

T2 will require the IRS to first seek the requested documents or other information informally. Additionally, IRS will be required to provide written notice that a designated summons is going to be issued and provide an explanation as to why the response, if any, to the prior informal request was not sufficient. Finally, the taxpayer would have the right to a conference with IRS within 15 business days of such written notice. Section 6503(k) provides the IRS with an extraordinary compliance tool, and taxpayers should fairly be warned when IRS intends to utilize it.

17. Increase Levy Exemption Amount. T2 will raise the levy exemption amounts of $1500 for personal property and of $1100 for equipment and property for a trade, business, or profession to the present indexed amounts.

18. Taxpayer's Right to an Installment Agreement. T2 will provide that an individual taxpayer has an automatic right to an installment agreement if the taxpayer has not been delinquent in the previous 3 years and the liability was under $10,000. This provision will be limited to individual Form 1040 taxes.

19. Prospective Effective Dates for Treasury Regulations. T2 will generally require that all regulations issued by the Treasury Department to implement broad legislative guidelines be effective prospectively from the date of issuance in final, temporary, or proposed form. To keep such a presumption from providing shelter for abusive transactions, and to provide for administration of tax laws in the interim between the effective date of a statute and the effective date of the associated regulations, taxpayers would be deemed to have satisfied the necessary requirements if they made a good-faith effort to utilize a reasonable interpretation of the statute that resulted in substantial compliance. This general rule requiring that regulations be prospective could be superseded by a specific legislative grant authorizing the Treasury Department to prescribe the effective date of regulations with respect to statutory provision.

20. Trust Fund Taxes. Section 6672 imposes personal liability on those persons who are required to collect employment taxes and who willfully fail to pay over these taxes to the IRS. Currently, taxpayers who may be responsible persons are assessed the taxes owed without the right to an administrative review. T2 would require the IRS to issue a preliminary notice which will give the taxpayer the right to an administrative appeals hearing. In addition, T2 would provide taxpayers the right to go to Tax Court prior to assessment (via a declaratory judgment procedure similar to section 7476). Steps will also be taken to prevent the IRS from collecting more than 100% of the taxes owed (which can happen since each responsible person is jointly and severally liable.)

21. Safeguard for Divorced or Separated Spouses. In the case of divorced or separated spouses, procedures will be instituted to require the absent spouse's signature to acknowledge whether the other spouse, may or may not, represent the absent spouse in an audit situation.

22. Notice of Examination by Written Notice. T2 will require that the initial notice of an examination must be made by written notice, not by telephone.

23. Hardship. In the Code, regulations, and other administrative guidance, there exists a standard of "hardship". In many areas the standard has been modified to require that the basis for seeking relief is "undue" hardship or "significant" hardship. For example, IRC section 7811 provides that the Ombudsman may issue a TAO if a determination has been made that the taxpayer is suffering or about to suffer a "significant" hardship.

Such standards presuppose that a taxpayer must bear some degree of hardship before any relief can be afforded. Relief must be available before the hardship occurs.

T2 will eliminate qualifiers such as "undue", "significant", etc. from the Code, regulations, or in any other administrative pronouncement as they relate to the standard of hardship.

24. Notice of Proposed Deficiency. T2 will require that the IRS issue a notice of proposed deficiency (30-day letter), thereby permitting administrative appeal rights. If there are less than six months left on the statute of limitations, then the taxpayer shall have the option to extend the statute of limitations so that the IRS can issue a notice of proposed deficiency. The notice requirement will not apply in jeopardy assessment situations.

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