The
New Taxpayers Bill of Rights:
More Bang with Your Tax Bucks
The Internal Revenue Service
(IRS) Restructuring and Reform Act of 1998 makes sweeping changes to the way the
IRS interacts with taxpayers.
In fact, a major section of
the new Act, The Taxpayers Bill of Rights 3, includes more than 40 new taxpayer
rights and protections. Here are some of the more significant ways in which the
new law protects taxpayers.
Burden of Proof Shifts
Historically, the IRS’s
determination of tax liability has been presumed to be correct. Perhaps the most
important provision in the Act shifts the burden of proof from individual
taxpayers to the IRS in court proceedings on income, gift, estate, or
generation-skipping tax liability. To benefit from the new provision, you must
introduce credible evidence, cooperate with reasonable IRS requests, and meet
certain record keeping and substantiation requirements. There is one potential
downside. This change could result in more intrusive IRS practices during the
examination phase, with the IRS making overly broad requests to obtain as much
information as possible prior to the time the burden shifts.
The shift of burden does not
apply to corporations, trusts, and partnerships having net worth above $7
million.
Relief for Innocent Spouses Gets Easier
As a rule, married individuals
filing joint returns are jointly and severally liable for the tax due on a joint
return. That means one spouse may be held liable for paying the entire tax bill,
even though the other spouse is responsible for an understatement of income. The
new law makes it easier for “innocent spouses” — those who did not know
and had no reason to know of certain understatements — to qualify for innocent
spouse protection. In doing so, the 1998 Act eliminates the understatement
dollar thresholds and adjusted gross income requirements and expands relief to
include “erroneous” and not just “grossly erroneous” income items of the
other spouse.
Furthermore, joint filers who
are divorced or legally separated, or who have been living apart for at least 12
months may make a separate liability election with respect to an understatement.
The election must be made within two years from the date the IRS initiates
collection efforts.
Interest and Penalty Rules Change
The new Act also provides
interest and penalty relief for taxpayers. In the past, the IRS could subject
you to years of interest and penalty charges if it delayed telling you that
there was a mistake on your return. Now, if the IRS doesn’t tell you within 18
months after you file your return or the return’s due date (whichever is
later), in most cases, the charges stop accruing.
Another provision in the Act
affects the rates of interest on underpayments and overpayments. In the past,
the IRS charged one percent more in interest on overdue charges than it paid out
on overdue refunds. Under the new Act, the rates of interest on both
under-payments and overpayments are the same — 3 percentage points above the
federal short-term rates.
Court, Audit, and Collection Procedures Revised
The Act also makes Tax Court
more accessible by increasing the small tax case threshold to $50,000 from
$10,000. Taxpayers who win in Tax Court now can claim higher attorney fees. And
if an IRS officer or employee negligently disregards Tax Code regulations, you
may collect up to $100,000.
Another key section of the new
law includes a long list of safeguards that limit IRS authority and protect
taxpayers from IRS audit and collection abuses. Among them are provisions that
make offers-in-compromise and installment agreements more flexible and
accessible to taxpayers.
Client Privileges Expanded
Prior to the 1998 Act, there was no federal law
that allowed accountants the equivalent of the attorney-client privilege of
confidentiality. Only lawyers could avoid testifying against their clients. The
Act extends the attorney-client privilege of confidentiality to tax advice
furnished to a client-taxpayer by CPAs and other individuals authorized to
practice before the IRS. The privilege may be asserted in any non-criminal
proceeding before the IRS.