irs restructuring and reform act

8/14/2019 IRS Restructuring and Reform Act

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THE INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998

By: Robert E. McKenzie

S-1 INTRODUCTION

S-1.10 In July, 1998, Congress completed the most extensive revision of the IRS structure in history. In reactionto many IRS abuses, Congress created an Oversight Board to the IRS and severely limited the powers of itsExamination and Collection Division. Specific due process rights were granted for the first time with respect tocollection matters. Congress limited the use of many aggressive examination techniques and granted taxpayersspecific rights to sue the IRS when it abused its discretion.

S-2 REORGANIZATION OF STRUCTUREAND

MANAGEMENT OF THE IRS

IRS Mission and Restructuring

S-2.10 The Act directs the Internal Revenue Service ("IRS") to revise its mission statement to provide greateremphasis on serving the public and meeting the needs of taxpayers. The Act directs the Commissioner of InternalRevenue ("Commissioner") to restructure the IRS by eliminating or substantially modifying the present-lawthree-tier geographic structure and replacing it with an organizational structure that features operating unitsserving particular groups of taxpayers with similar needs. [1002]

Establishment and Duties of IRS Oversight Board


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S-2.20 The Act provides for the establishment within the Treasury Department of the Internal Revenue ServiceOversight Board (the "Board"). The general responsibilities of the Board are to oversee the IRS in itsadministration, management, conduct, direction, and supervision of the execution and application of the internalrevenue laws. The Board also has the authority to recommend candidates for Commissioner to the President, and

to recommend removal of the Commissioner. The Board has no authority to intervene in (1) specific taxpayercases, including compliance activities involving specific taxpayers such as criminal investigations, examinations,and collection activities, (2) specific individual personnel matters, or (3) specific procurement matters. TheBoard has authority to oversee general law enforcement matters, and it has the responsibility to ensure that theorganization and operation of the IRS allows the IRS to carry out its mission. [1101] [IRC7802]

Nine Members

S-2.30 The Oversight Board is composed of 9 members. Six of the members are so-called "private-life" memberswho are not otherwise Federal officers or employees. The other members are: (1) the Secretary of the Treasury(or, if the Secretary so designates, the Deputy Secretary); (2) the Commissioner; and (3) an individual who is afull-time Federal employee or a representative of employees ("employee representative"). The private-lifemembers of the Board and the employee representative are appointed by the President, with the advice andconsent of the Senate. Under the Act, the private-life members of the Board will be appointed without regard topolitical affiliation, based solely on their expertise in the following areas: management of large serviceorganizations; customer service; the Federal tax laws, including tax administration and compliance; informationtechnology; organization development; the needs and concerns of taxpayers; and the needs and concerns of

small business. Under the Act, Board members would have limited access to confidential tax return and returninformation under section 6103. This limited access would permit the Board to receive section 6103 informationfrom the newly established Treasury Inspector General for Tax Administration or the Commissioner inconnection with reports to the Board. This access to section 6103 information does not include the taxpayer'sname, address, or taxpayer or employer identification number. Board members are subject to the anti-browsingrules applicable to IRS employees under present law. In addition, the private-life members and the employeerepresentative will be subject to a number of ethics rules pertaining to representational activities andcompensation matters, post-employment restrictions, and financial disclosure requirements. The President isgranted the authority to waive the ethics rules for the employee representative under certain circumstances.[IRC7802(6)]

Private-Life Members

S-2.40 The six private-life Board members will be appointed for five-year terms. The private-life members(including the employee representative) may serve no more than two five-year terms. Board member terms willbe staggered, as a result of a special rule providing that some private-life members first appointed to the Board


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would serve initial terms of less than five years. Under this rule, the staggered term of the initial Board shall be asfollows: two members first appointed will have a term of three years; two members shall have a term of fouryears; and two members shall have a term of five years. The terms of the initial Board members will run from thedate of appointment. Subsequent terms will run from expiration of the previous term. A Board memberappointed to fill a vacancy before the expiration of a term will be appointed to the remainder of the term. Such amember could be appointed to a subsequent five-year term.

Chair

S-2.50 The members of the Board are to elect a Chair from the private-life members for a two-year term. Exceptas otherwise provided by a majority of the Board, the authority of the Chair includes the authority to hireappropriate staff, call meetings, establish committees, establish the agenda for meetings, and develop rules forthe conduct of business.

Meetings

S-2.60 The Board is required to meet on a regular basis (as determined necessary by the Chair), but no lessfrequently than quarterly. The Board can meet privately, and is not subject to public disclosure laws. A quorumof five members is required in order for the Board to conduct business. Actions of the Board can be taken by a

majority vote of those members present and voting.

Effective Date

S-2.70 The provisions relating to the Board are effective on the date of enactment. The President is directed tosubmit nominations for Board members to the Senate within six months of the date of enactment. The Act

provides that the provisions relating to the Board are not to be construed to invalidate the actions and authorityof the IRS prior to the appointment of members of the Board.

S-3 APPOINTMENT AND DUTIES OF IRS COMMISSIONER

CHIEF COUNSEL AND OTHER PERSONNEL

IRS Commissioner and Other Personnel


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S-3.10 As under present law, the Act provides that the Commissioner is appointed by the President, with theadvice and consent of the Senate, and may be removed at will by the President. Under the Act, one of thequalifications of the Commissioner is demonstrated ability in management. The Commissioner is appointed to afive-year term, beginning with the date of appointment. The Commissioner may be reappointed for more than

one five-year term. The Board recommends candidates to the President for the position of Commissioner;however, the President is not required to nominate for Commissioner a candidate recommended by the Board.The Board has the authority to recommend the removal of the Commissioner. [1102(a)] [IRC7803]

IRS Chief Counsel

S-3.20 Under the Act, the IRS Chief Counsel would no longer be an Assistant General Counsel of the Treasuryand would generally report to the IRS Commissioner, with two exceptions. First, the Chief Counsel would reportto both the Commissioner and the Treasury General Counsel with respect to (1) legal advice or interpretation ofthe tax law not relating solely to tax policy and (2) tax litigation. Second, the Chief Counsel would report only tothe Treasury General Counsel with respect to legal advice or interpretation of the tax law relating solely to taxpolicy. [IRC7803]

S-4 STRUCTURE AND FUNDING OF THE EMPLOYEE PLANS

AND EXEMPT ORGANIZATIONS DIVISION ("EP/EO")

S-4.10 To facilitate the reorganization of the IRS into operational units, the Act eliminates the present-lawstatutory requirement contained in section 7802(b) of the Code that there be an "Office of Employee Plans andExempt Organizations" under the supervision and direction of an Assistant Commissioner. In addition, the Actrepeals the funding mechanism for EP/EO set forth in section 7802(b). These provisions are effective on the dateof enactment of the Act.

S-5 TAXPAYER ADVOCATE AND TAXPAYER ASSISTANCE ORDERS

S-5.10 The Act renames the IRS Taxpayer Advocate as the "National Taxpayer Advocate." The NationalTaxpayer Advocate is appointed by the Secretary of the Treasury after consultation with the Commissioner andthe IRS Oversight Board. The individual appointed to be the National Taxpayer Advocate cannot have been anofficer or employee of the IRS (other than in the Office of the Taxpayer Advocate) during the two-year periodending with such individual's appointment, and must agree not to accept employment with the IRS (other than inthe Office of the Taxpayer Advocate) for at least five years after ceasing to be the National Taxpayer Advocate.The present-law problem resolution system is replaced with a system of local Taxpayer Advocates who reportdirectly to the National Taxpayer Advocate and who are independent from the IRS examination, collection, andappeals functions. The Act expands the circumstances under which a Taxpayer Assistance Order may be issuedif a taxpayer is suffering from or about to suffer from a significant hardship. These provisions generally areeffective on the date of enactment. [1102(a)] [IRC6212(a)]


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Taxpayer Assistance Orders

S-5.20 The Act expands the definition of "significant hardship" by including the following the circumstances:

(1) The existence of an immediate threat of adverse action.

(2) A delay of more than thirty (30) days in resolving the taxpayers account problems.

(3) The payment by the taxpayer of significant cost (including fees for professional services) if relief is notgranted or;

(4) Irreparable injury or a long standing adverse impact, if relief is not granted. [1102] [IRC7811]

Nonexclusive

S-5.30 The list is not intended to be exclusive. A TAO may also be issued in any case which the taxpayer meetsother requirements that will be spelled out in regulations. [IRC7811(a)(1)(B)] The ranks are to be based inconsideration of equity. If the Internal Revenue Service has failed to follow published guidance, including theInternal Revenue Manual, the Taxpayer Advocate is required to construe the facts taken into account in amanner most favorable to the taxpayer. [IRC7803(c)(2)(B)(ii)] The TAO requirements became effective uponsigning of the Act by the President.

S-6 TREASURY OFFICE OF INSPECTOR GENERAL;

IRS OFFICE OF THE CHIEF INSPECTOR

S-6.10 Under the Act, a new, independent Treasury Inspector General for Tax Administration ("Treasury IG forTax Administration") is established within the Department of Treasury. The IRS Office of the Chief Inspector iseliminated, and all of its powers and responsibilities are transferred to the Treasury IG for Tax Administration,except for employee background checks and protection of employees against physical threats. The Treasury IGfor Tax Administration has the powers and responsibilities generally granted to Inspectors General under the IGAct of 1978, without the limitations that currently apply to the Treasury IG under section D of that Act. The roleof the existing Treasury IG is redefined to exclude responsibility for the IRS. The Treasury IG for TaxAdministration is under the supervision of the Secretary of Treasury, with certain additional reporting to the IRSOversight Board and the Congress. The provision is effective 180 days after the date of enactment. [1103]


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[IRC7803(d)]

Autonomy

S-6.20 Congress apparently felt that the Chief Inspector was not sufficiently independent from the InternalRevenue Service. Over the years there have been several scandals involving top executive of the IRS who arenot fully investigated by the Chief Inspector. By creating a separate structure outside the IRS, Congress hasgiven the new inspector greater autonomy and greater authority to investigate IRS officials. Congress apparentlyhopes that an independent inspector general within the Treasury Department with primary responsibility to audit,investigate and evaluate IRS problems will improve quality and creditability.

S-7 PROHIBITION ON EXECUTIVE BRANCH

INFLUENCE OVER TAXPAYER AUDITS

S-7.10 The Act makes it unlawful for the President, the Vice President, employees of the executive offices of thePresident or Vice President, as well as any individual (other than the Attorney General) serving in aCabinet-level position to request that any officer or employee of the IRS conduct or terminate an audit orotherwise investigate or terminate the investigation of any particular taxpayer with respect to the tax liability ofthat taxpayer. This prohibition applies to both direct and indirect requests. Anyone convicted of violating thisprovision will be punished by imprisonment of not more than 5 years or a fine not exceeding $5,000 (or both).This provision is effective for violations after the date of enactment. [1105] [IRC7217]

S-8 IRS PERSONNEL FLEXIBILITIES

S-8.10 The Act requires the IRS to exercise the personnel flexibilities consistently with existing rules relating tomerit system principles, prohibited personnel practices, and performance incentives. In those cases where theexercise of personnel flexibilities would affect members of the employees' union, such employees would not besubject to the exercise of any flexibility unless there is a written agreement between the IRS and the employees'union. The Act addresses issues relating to senior management and technical positions, the establishment of aperformance management system, the granting of awards to IRS employees, staffing Flexibilities, and mandatoryterminations of employees for certain proven violations. [1201]

Mandatory Terminations

S.8.20 The act requires the IRS to terminate employees for certain violations including:

1. Willful failure to obtain approval signature on documents authorizing the seizure on a taxpayers homepersonal belongings or business assets.


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2. Provided false statements under oath with respect to material matter following a taxpayer or taxpayerrepresentative.

3. Falsifying or destroying documents to avoid uncovering mistakes made by any employee with respect to ataxpayer or a taxpayer representative.

4. Assault or battery on a taxpayer or a taxpayer representative, but only if there is a criminal conviction or afinal judgment in a civil case.

5. Violation of a taxpayer's or a taxpayer representative's civil rights or the civil rights of another IRS employee.

6. Violations of the Internal Revenue Code, regulations, or IRS policies for purposes of retaliating against orharassing a taxpayer or a taxpayer representative.

7. Willful misuse of IRC6103 (confidentiality of returns and return information) for the purpose of concealing

data from a congressional inquire.

8. Willful failure to file a federal tax return.

9. Willful understatement of a federal tax liability.

10. Threatening to audit a taxpayer to extract personal gain. [1203]

S-9 ELECTRONIC FILING

Electronic Filing of Tax and Information Returns

S-9.10 Under the Act, the policy of the Congress is to promote paperless filing, with a long-range goal ofproviding for the filing of at least 80 percent of all tax returns in electronic form by the year 2007. [2001]

Due Date for Certain Information Returns

S-9. 20 The Act provides an incentive to filers of information returns to use electronic filing by extending thedue date for filing such returns with the IRS from February 28 (under present law) to March 31 of the yearfollowing the calendar year to which the return relates. This provision still requires payees to receive theinformation returning by January 31. The Act also requires the Treasury to issue a study evaluating the meritsand disadvantages, if any, of extending the deadline for providing taxpayers with copies of information returns(other than Forms W-2) from January 31 to February 15. The report is due by June 30, 1999. [2002],[IRC6071], [IRC6041-6050S]


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Paper less Electronic Filing

S-9.30 To facilitate the filing of electronic returns, the Secretary is required to develop procedures that wouldeliminate the need to file a paper form relating to signature information. In addition, the Secretary is to establishprocedures, to the extent practicable, to receive all forms electronically for taxable periods beginning afterDecember 31, 1999. The Act also provides rules for determining when electronic returns are deemed filed and

for authorization for return preparers to communicate with the IRS on matters included on electronically filedreturns. [2003]

Return-Free Tax System

S-9.40 The Act requires the Secretary or his delegate to study the feasibility of, and develop procedures for, theimplementation of a return-free tax system for appropriate individuals for taxable years beginning after 2007.[2004]

Access to Account Information

S-9.50 Under the Act, the Secretary is required to develop procedures not later than December 31, 2006, underwhich a taxpayer filing returns electronically could review the taxpayer's own account electronically, but only ifall necessary privacy safeguards are in place by that date.

S-10 TAXPAYER PROTECTION AND RIGHTS

Burden of Proof

S-10.10 The Act provides that the Secretary shall have the burden of proof in any court proceeding with respectto a factual issue if the taxpayer introduces credible evidence with respect to the factual issue relevant toascertaining the taxpayer's tax liability. [3001] [IRC7491]

Four Conditions

S-10.20 Four conditions apply. First, the taxpayer must comply with the requirements of the Internal RevenueCode and the regulations issued thereunder to substantiate any item (as under present law). Second, the taxpayermust maintain records required by the Code and regulations (as under present law). Third, the taxpayer mustcooperate with reasonable requests by the Secretary for meetings, interviews, witnesses, information, anddocuments. Fourth, taxpayers other than individuals must meet the net worth limitations that apply for awardingattorney's fees. The taxpayer has the burden of proving the second, third and fourth conditions. The provisionapplies to income, estate, gift, and generation-skipping transfer taxes. [IRC7491(a)]


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Statistical Information

S-10.30 The IRS has the burden of proof in any court proceeding with respect to income items of individualtaxpayers that were reconstructed solely based on statistics of unrelated taxpayers. The IRS has consistentlyutilized Bureau of Labor Statistics to determine taxpayer expenses and income. The Internal Revenue Servicemight calculate an individuals income based on the average income for taxpayers in the area where the taxpayerlived. [IRC7491(b)] The Internal Revenue Service also has the burden of proof in any tax proceeding to presentcredible evidence before it may impose a penalty. In other words the IRS must come forth initially with evidence

that it is appropriate to apply a particular penalty to the taxpayer. [IRC7491(c)]

S-10.40 The provision applies to court proceedings arising in connection with examinations commencing (ortaxable periods or events beginning or occurring) after the date of enactment.

S-11 EXPANSION OF AUTHORITY TO AWARD

COSTS AND CERTAIN FEES

S-11.10 The Act increases the hourly fee cap on attorneys, CPA's and Enrolled Agents fees and expands thecircumstances under which attorneys fees and administrative costs may be awarded to taxpayers, effective forcosts incurred and services performed more than 180 days after the date of enactment. [3101] [IRC7430(c)(1)(B)5]

Substantially Justified

S-11.20 Current law requires that a party is not awarded administrative and/or litigation costs against the U.S. ifthe United States establishes its position is justified. The new law adds that in determining whether the U.S.position was substantially justified, a court must take into account whether the U.S. has lost on substantiallysimilar cases in courts of appeals for other circuits. [IRC7430(c)(4)(B)(iii)] Congress made the change becausethe IRS has in the past continued to litigate issues that have been previously decided in favor of the taxpayer inother circuits. Congress believes that such conduct by the IRS places a burden on taxpayers required to litigatethe issues once again.

Fee Rate

S-11.30 Under current law the prevailing party will be awarded one-hundred ten ($110.00) dollars per hour. TheAct increases that amount to one-hundred twenty-five ($125.00) dollars per hour. The courts may consider the

difficulty of the issues and the local availability of tax expertise in determining whether a higher rate is justified.The court may award more fees than actually paid by the individual if the court finds that taking into account allof the facts and circumstances the services are worth more than a nominal fee charged by the representative.This provision reflects Congresses believe thatpro bono tax clinics should be encouraged and rewarded forefforts on behalf of taxpayers.

Earlier Award of Fees Permitted

S-11.40 Under prior law administrative cost and fees were awardable to a taxpayer for services after she


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received a notice of a decision from an IRS appeals office or a deficiency notice. The new act provides for theaward of reasonable administrative costs as of the earliest of when the IRS sends a first letter of proposeddeficiency which allows the taxpayer an opportunity to go to the appeals office or the taxpayers receipt of anotice of deficiency. Therefore, many taxpayers will now be able to recover fees after receipt of a thirty (30) dayletter, not a ninety (90) day letter. As before, the act specifically includes the cost for Enrolled Agents and CPA'swithin its definition of attorneys fees. [IRC7430(c)(2)] [3101(b)]

S-12 CIVIL DAMAGES FOR COLLECTION ACTIONS

S-12.10 The act permits up to $100,000 in civil damages caused by an officer or employee of the IRS whonegligently disregards provisions of the Code or Treasury regulations in connection with the collection of Federaltax with respect to the taxpayer. The damages are $1,000,000 if the disregard was willful or reckless. Eachaward is further enhanced by the costs of the action. The taxpayer must exhaust administrative remedies. TheAct also permits up to $1 million in civil damages caused by an officer or employee of the IRS who willfullyviolates provisions of the Bankruptcy Code relating to automatic stays or discharges. These provisions areeffective for actions of officers or employees of the IRS occurring after the date of enactment. [3102]

Third-Parties May Recover Damages for Wrongful Seizures

S-12.20 Under prior law a party other than taxpayer could only bring a wrongful levy action pursuant toIRC7426(b) which did not provide the same statutory damages and relief as 7433. Therefore, the third-partywho had his property wrongfully seized by the Internal Revenue Service had fewer remedies available than thetaxpayer who was subject to reckless or intentional disregard of the Internal Revenue Code by an IRS employee.Under the new Act if in any third-party action against the IRS for wrongful levy there is a finding that any officeror employee of the IRS recklessly or intentionally or by reason of negligence disregarded any provision of theInternal Revenue Code, the IRS can be held liable for an amount equal to the lesser of one million dollars (onehundred thousand dollars in the case of negligence) less the sum of money due under IRC7426(a)(1). A third

party may receive actual, direct economic damages sustained as a proximate result of reckless, or intentional ornegligent disregard of any provision of the IRC by an IRS officer, reduced by any amount of damages whichwould be awarded by IRC7426(b), IRC7426(h)(1)(A) and the cost of the action. The new action must bebrought within two years of the occurrence as opposed to the nine months required by the IRC7426. Therefore,a third-party who has failed to bring a third-party action pursuant to IRC7426 may still have a cause of actionpursuant to IRC7433. The third-party must also have exhausted administrative remedies to qualify for damages.[3102(b)] [IRC7426(h)IRC7433(d)]

S-13 INCREASE IN SIZE OF CASES PERMITTED

ON SMALL CASE CALENDAR

S-13.10 The Act increases the cap for small case treatment in the Tax Court from $10,000 to $50,000, effectivefor proceedings commenced after the date of enactment. [3103] [IRC7463, IRC7436(c)(i),IRC7443A(b)(3)]

S-14 ACTIONS FOR REFUND WITH RESPECT TO CERTAIN ESTATES

WHICH HAVE ELECTED THE INSTALLMENT METHOD OF PAYMENT


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S-14.10 The Act grants the U.S. Court of Federal Claims and the U.S. district courts jurisdiction to determine thecorrect amount of estate tax liability (or refund) in actions brought by taxpayers deferring estate tax paymentsunder section 6166, as long as certain conditions are met. The Act further provides that once a final judgmenthas been entered by a district court or the U.S. Court of Federal Claims, the IRS is not permitted to collect anyamount disallowed by the court, and any amounts paid by the taxpayer in excess of the amount the court finds tobe currently due and payable are refunded to the taxpayer, with interest. The provision is effective for claims for

refunds filed after the date of enactment. [3104] [IRC7422(j)]

S-15 REVIEW OF AN ADVERSE IRS DETERMINATION

OF A BOND ISSUE'S TAX-EXEMPT STATUS

S-15.10 The Act directs the Internal Revenue Service to modify its administrative procedures to allowtax-exempt bond issuers examined by the IRS to appeal adverse examination determinations to the AppealsDivision of the IRS as a matter of right. Such an appeal is to be considered by senior personnel with experiencein tax-exempt bonds issues. The direction to the IRS is effective on the date of enactment.[3105]

S-16 CIVIL ACTION FOR RELEASE OF ERRONEOUS LIEN

S-16.10 The Act establishes an administrative procedure permitting a record owner of property against which aFederal tax lien has been filed to obtain a certificate of discharge of property from the lien as a matter of right ifsuch record owner is not the person whose unsatisfied liability gave rise to the lien. The record owner is requiredto apply to the Secretary of the Treasury for such a certificate and either to deposit cash or to furnish a bondsufficient to protect the lien interest of the United States. The provision is effective on the date of enactment.[3106] [IRC6325(b)(4)] [IRC7426(a)]

S-17 RELIEF FOR INNOCENT SPOUSES

S-17.10 The Act generally makes innocent spouse relief easier to obtain. The Act eliminates all of theunderstatement thresholds and requires only that the understatement of tax be attributable to an erroneous (andnot just a grossly erroneous) item of the other spouse. An individual will be relieved of liability for tax (includinginterest, penalties and other amounts) for a tax year to the extent the liability is attributable to an understatementdescribed below:

1. A joint return was filed for the tax year [IRC 6015(b)(1)(A)];

2. There is an understatement of tax on the return that is attributable to an erroneous item by the other spouse[IRC 6015(b)(1)(B)];

3. A taxpayer establishes that in signing the return he/she did not know and had no reason to know of theunderstatement; [IRC 6015(b)(1)(C);


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4. Taking into account all of the facts and circumstances, it would be inequitable to hold the taxpayer liable forthe deficiency attributable to the understatement; [IRC 6015(b)(1)(D)]; and

5. A taxpayer elects the benefits of this provision, on the form that the IRS prescribes (the IRS must issue a formfor spousal relief), no later than the date that is two years after the date the IRS has begun collection activitieswith respect to the taxpayer. [IRC 6015(b)(1)(E)]

Election to Allocate

S-17.20 The Act also provides a separate liability election for a taxpayer who, at the time of the election, is nolonger married to, is legally separated from, or has been living apart for at least 12 months from the person withwhom the taxpayer originally filed a joint return. [3201] [IRC 6015(a)] Such taxpayers may elect to have theliability for any deficiency limited to the portion of the deficiency that is attributable to items allocable to thetaxpayer. The election is not available if the Secretary demonstrates that assets were transferred betweenindividuals filing a joint return as part of a fraudulent scheme of the individuals or if both individuals had actualknowledge of the understatement of tax.

Knowledge

17.30 If an individual who otherwise qualifies for innocent spouse relief fails to establish that he/she did notknow or had reason to know the understatement, but does establish that he/she did not know or have reason toknow the extent of the understatement, that individual may be relieved of liability for tax, penalties and interestto the extent that liability is attributable to the portion of the understatement that he/she did not know or havereason to know. Example:

If the husband and wife file a joint return and the IRS determines the deficiency for the year based on $15,000 ofunreported income attributable to the husband. Wife shows she did not know or have reason to know of $5,000of the under-reported income. If the wife otherwise qualifies for any spouse relief, she will be of relieved of jointliability for the portion of the understatement attributable to the $5,000 of omitted income. She will still remainliable for the taxes due on the $10,000 of omitted income.

Divorced, Separated or Living Apart

S-17.40 An individual is eligible to make the separate liability election only if at the time the election is filedhe/she is no longer married to, or is legally separated from, the spouse from whom the joint return to which the

election relates was filed; or he/she was not a member of the same household as the spouse with whom the jointreturn was filed at any time during the twelve month period ending at the date the election is filed [IRC 6015(c)(3)(A)(i)]. This provision allows additional relief when the IRS proposes a deficiency against a taxpayer who isno longer married or living with the person with whom he/she filed the joint return. The proponent may have hadindication of a potential understatement but is without actual knowledge. If the understatement was notattributable to him/her, he/she may elect proportional liability. The provision does not apply to returns whichwere jointly filed showing a liability at the time of filing. It only applies to deficiencies as described in IRC6662(d)(2)(a).


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Time Deadline

S-17.50 Expanded innocent spouse relief and the separate liability election must be elected no later than twoyears after the date on which the Secretary has begun collection activities with respect to the individual seekingthe relief. The Act provides that the Tax Court has jurisdiction with respect to disputes about innocent spouserelief.

Equitable Relief

S-17.60 The Act further authorizes the Secretary to relieve an individual of liability if relief is not available underthe expanded innocent spouse rule or the separate liability election, if it would be inequitable to hold theindividual liable for any unpaid tax or any deficiency. The expanded innocent spouse relief, separate liabilityelection, and authority to provide equitable relief apply to liabilities for tax arising after the date of enactment, aswell as any liability for tax arising on or before the date of enactment that remains unpaid on the date ofenactment.

S-18 SUSPENSION OF STATUTE OF LIMITATIONS

ON FILING REFUND CLAIMS DURING PERIODS OF DISABILITY

S-18.10 The Act permits equitable tolling of the statute of limitations for refund claims of an individual taxpayerduring any period of the individual's life in which he or she is unable to manage his or her financial affairs byreason of a medically determinable physical or mental impairment that can be expected to result in death or tolast for a continuous period of not less than 12 months. Tolling does not apply during periods in which thetaxpayer's spouse or another person is authorized to act on the taxpayer's behalf in financial matters. Theprovision applies to periods of disability before, on, or after the date of enactment but does not apply to anyclaim for refund or credit which (without regard to the provision) is barred by the statute of limitations as of thedate of enactment. [3202] [IRC 6511(h)]

S-19 INTEREST AND PENALTY CHANGES

Elimination of Interest Differential

S-19.10 The Act establishes a net interest rate of zero when interest is payable and allowable on equivalentamounts of overpayment and underpayment of any taxes imposed by Title 26 (the Internal Revenue Code) thatexist for any period. Each overpayment and underpayment is considered only once in determining whether

equivalent amounts of overpayment and underpayment exist. The special rules that increase the interest rate paidon large corporate underpayments and decrease the interest rate received on corporate underpayments in excessof $10,000 do not prevent the application of the net zero rate. The provision applies to income taxes andself-employment taxes. The provision applies to interest for periods beginning before the date of enactment if:(1) the statute of limitations has not expired with respect to either the underpayment or overpayment; (2) thetaxpayer identifies the periods of underpayment and overpayment for which the zero rate applies; and (3) on orbefore December 31, 1999, the taxpayer asks the Secretary to apply the zero rate. [3301] [IRC 6621(d)]

Increase in Overpayment Rate Payable to Taxpayers Other Than Corporations


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S-19.20 The Act provides that the overpayment interest rate will be AFR plus three percentage points, exceptthat for corporations, the rate remains at AFR plus two percentage points. The provision is effective for interestfor the second and succeeding calendar quarters beginning after the date of enactment. {3302) [IRC 6601(f)]

Mitigation of Penalty for Individual's Failure to Pay

During Period of Installment Agreement

S-19.30 The Act provides that the penalty for failure to pay taxes is one half of the usual rate (.25 percentinstead of .50 percent) imposed with respect to the tax liability of an individual for any month in which aninstallment payment agreement with the IRS is in effect, provided that the individual filed the tax return in atimely manner (including extensions). The provision is effective for installment agreement payments made afterDecember 31, 1999. [3303] [IRC 6651(h)]

Designation of Tax Deposits

S-19.40 The Act allows the taxpayer to designate the period to which each deposit is applied. The designationmust be made no later than 90 days of the related IRS penalty notice. The provision extends the authorization towaive the failure to deposit penalty to the first deposit a taxpayer is required to make after the taxpayer isrequired to change the frequency of the taxpayer's deposits. The provision is effective for deposits required to bemade more than 180 days after the date of enactment. The Act also provides that, for deposits required to bemade after December 31, 2001, any deposit is to be applied to the most recent period to which the depositrelates, unless the taxpayer explicitly designates otherwise. [3304] [IRC 6656(e)]

Suspension of Interest and Certain Penaltiesif Secretary Fails to Contact Individual Taxpayer

S-19.50 The Act suspends the accrual of certain penalties and interest after eighteen (18) months if the IRS hasnot sent the taxpayer a notice specifically stating the taxpayer's liability for additional taxes (and the basis for theliability) within eighteen (18) months following the date which is the later of (1) the original due date of thereturn or (2) the date on which the individual taxpayer timely filed the return. The suspension only applies toindividuals who file a timely tax return and does not apply to the failure to pay penalty, in the case of fraud, orwith respect to criminal penalties. The provision is effective for taxable years ending after the date of enactment.With respect to taxable years beginning before January 1, 2004, the eighteen (18) month period is decreased totwelve (12) months. Interest and penalties resume 21 days after the IRS sends a notice to the taxpayerspecifically stating the taxpayer's liability and the basis for the liability. The provision is applied separately withrespect to each item or adjustment. [3305] [IRC 6404(g)]

Procedural Requirements for Imposition of Penalties and Additions to Tax

S-19.60 The Act requires that each notice imposing a penalty include the name of the penalty, the Code sectionimposing the penalty, and a computation of the penalty. The Act also requires the specific approval of IRSmanagement to assess all non-computer generated penalties unless excepted. This provision does not apply tofailure to file penalties, failure to pay penalties, or to penalties for failure to pay estimated tax. The provision iseffective with respect to notices issued, and penalties assessed, after December 31, 2000. [3306] [IRC 6751]


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Personal Delivery of Notice of Penalty Under Section 6672

S-19.70 The Act permits in-person delivery, as an alternative to delivery by mail, of a preliminary notice that theIRS intends to assess a 100-percent penalty, effective on the date of enactment. [3307] [IRC 6672(b)]

Notice of Interest Charges

S-19.80 The Act requires every IRS notice that includes an amount of interest required to be paid by thetaxpayer that is sent to an individual taxpayer to include a detailed computation of the interest charged and acitation to the Code section under which such interest is imposed, effective for notices issued after December 31,2000. [3308] [IRC 6631]

Abatement of Interest on Underpayments by Taxpayers in Presidentially Declared Disaster Areas

S-19.90 The Act provides that taxpayers located in a Presidentially declared disaster area do not have to payinterest on taxes due for the length of any extension for filing their tax returns granted by the Secretary of theTreasury, effective for disasters declared after December 31, 1997, with respect to taxable years beginning afterDecember 31, 1997. The provision is designated as emergency legislation under Section 252(e) of the BalancedBudget and Emergency Deficit Control Act. [3309] [IRC 6404(h)]

S-20 UNIFORM APPLICATION OF CONFIDENTIALITY PRIVILEGE TO TAXPAYERCOMMUNICATIONS WITH FEDERALLY AUTHORIZED PRACTITIONERS

S-20.10 The Act extends the present law attorney-client privilege of confidentiality to communications betweentaxpayers and individuals who are authorized under Federal law to practice before the IRS. The privilege ofconfidentiality created by this provision does not apply to a written communication between any federallyauthorized tax practitioner and any director, shareholder, officer, employee, agent, or representative of acorporation in connection with the promotion of any tax shelter (as defined in 6662(d)(2)(C)(iii)) with respectto which such corporation is a direct or indirect participant. The privilege has never applied to attorneys duringthe preparation of a tax return and hence it does not now apply to Enrolled Agents and CPAs. Therefore, anydisclosure made by the taxpayer while you are preparing the tax return must be assumed not to be privileged. On

the other hand, disclosures made for the purposes of tax planning or during the course of representation will beprivileged. The provision is effective with regard to communications made on or after the date of enactment.[3411] [IRC 7525]

S-21 DUE PROCESS IN IRS COLLECTION ACTIONS

S-21.10 The Act establishes formal procedures designed to insure due process where the IRS seeks to collecttaxes by levy (including by seizure). The due process procedures also apply after notice of a Federal tax lien hasbeen filed. The IRS would be required to notify the taxpayer prior to filing a Notice of Lien. During the 30-day


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period beginning with the mailing or delivery of this notification, the taxpayer may demand a hearing before anappeals officer who has had no prior involvement with the taxpayer's case. These provisions become effective180 days after enactment. [3401] [IRC 6320]

Prior Rights to Appeal

S-21.20 Since February 12, 1996 the Internal Revenue Service has had a collection appeals program which

allows taxpayers to appeal the filing of a lien. This protection however was not statutory. If the IRS chose not tofollow its own procedures, there was no remedy available to the taxpayer.

Impartial Hearing

S-21.30 6320 provides statutory appeal rights to taxpayers who are subject to federal tax liens. The provisionspecifically provides for an impartial hearing officer (which may not have been the case in the past). In the pastthe Internal Revenue Service collection division engaged in substantial ex parte discussion with the AppealsOfficer. Now there are specific statutory protections available to the taxpayer and specific guarantees ofindependence by the Appeals Officer. Because taxpayers will also have the right to seek judicial review of any

determination of the appeals officer, the taxpayer is guaranteed to have better consideration at the appeals level.In the past, if an Appeals Officer ruled against you the matter was referred back to the collection division and itproceeded to file the lien without further rights to the taxpayer. As case law develops in this area, AppealsOfficers will also have guidelines from the courts as to appropriate reasons for foregoing liens and releasing liens.

S-22 LEVY APPEAL RIGHTS

S-22.10 Before the IRS can levy against a taxpayer's property, it would be required to provide the taxpayer witha "Notice of Intent to Levy," similar to that currently required under 6331(d). The notice would not be requiredto itemize the property the Secretary seeks to levy on. Service by registered or certified mail, return receiptrequested, would be required. [3401(B)] [IRC 6330]

Notice of Intent to Levy

S-22.20 Subject to the exceptions noted below, no levy could occur within the 30-day period beginning with themailing of the "Notice of Intent to Levy." During that 30-day period, the taxpayer may demand a pre-levyhearing before an appeals officer who generally has had no prior involvement with the taxpayer's case.

Post Notice Hearing

S-22.30 If a return receipt is not returned, the Secretary may proceed to levy against the taxpayer 30 days afterthe Notice of Intent to Levy was mailed. The Secretary must provide a hearing equivalent to the pre-levy hearingif later requested by the taxpayer. However, the Secretary is not required to suspend the levy process pendingthe completion of a hearing that is not requested within 30 days of the mailing of the Notice.

Exceptions

S-22.40 An exception to the general rule prohibiting levies during the 30-day period would apply in the case ofstate tax offset procedures, and in the case of jeopardy or termination assessments.


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Prior Rights

S-22.50 Since February 12, 1996 the Internal Revenue Service has had an appeals program which allowedtaxpayers to appeal proposed or actual levies by the Internal Revenue Service. The unfortunate part of theprogram was that the taxpayers were not necessarily apprised of their rights to the appeals program. Revenue

Officers were not prone to tell taxpayers of appeal rights since that might encourage taxpayers to seek thoserights. In addition, there was no statutory protection of appeal rights. IRC 6330 now provides that the InternalRevenue Service must specifically inform taxpayers of their rights to appeal within 30 days of any proposedaction by the IRS to levy upon the taxpayer's property. The taxpayer is specifically allowed to appeal theproposed levy and request that the Internal Revenue Service consider IRC 6159 Installment Agreements. Underprior law a taxpayer who requested a payment plan could be legally denied their payment plan and would haveno further remedies. IRC 6330 (C)(2) specifically requires that the hearing officer consider spousal challengesto appropriateness of the collection actions and other collection alternatives which could include a bond,substitution of other assets, installment agreements or an offer in compromise. The prior administrative appealsprocedure did not grant such broad authority to the Appeals Officer. The Appeals Officer was only allowed tolook at the appropriateness of the Internal Revenue Service action even if another alternative would have beenappropriate. The Appeals Division was not given the authority to find best remedy for the taxpayer.

Amount of Liability

S-22.60 The Act also authorizes the taxpayer to challenge the existence or the amount of the underlying taxliability for any tax period that the taxpayer did not receive statutory notice of deficiency for tax or did nototherwise have an opportunity to dispute such tax liability. The Appeals Officer is specifically directed toconsider the following factors when considering a collection appeal: the verification presented, the issues raisedby the taxpayer and whether any proposed collection action balances the needs for collection of taxes with thelegitimate concerns of the person that any collection action be no more intrusive than necessary. [IRC 6330(C)(2)(B)]

S-23 JUDICIAL REVIEW OF LIENS AND LEVIES

S-23.10 The rights of taxpayers with respect to liens and levies are greatly extended by the waiver of sovereignimmunity contained in IRC 6330 (d). A taxpayer who has exercised her rights to appeal under IRC 6320and/or IRC 6330 with respect to liens and levies now has specific authority to seek judicial review of anadverse IRS decision. This provision represents a huge expansion of taxpayer rights. A basic presumption of allprior collection proceedings was the right of the IRS to take summary levy and lien actions without judicialintervention. The Tax Court has now been granted specific jurisdiction to hear matters concerning taxes under its

jurisdiction. Generally those taxes would include income taxes, gift taxes, excise taxes and with the advent of

Taxpayer Act of Rights 3 IRC 6672 Penalties. Other taxes including employment tax liabilities would besubject to judicial review by a U.S. District Court. If the taxpayer chose the wrong jurisdiction then the taxpayerwill be allowed 30 days to seek review of an appeal before the proper court. During the pendency of a judicialappeal the appeals officer will retain jurisdiction of the matter. IRC 6330 (d)(2).

Delays in Collection

S-23.20 The addition of judicial rights to review IRS collection action could result in a substantial delays incollection of taxes by the Internal Revenue Service. It might also encourage some recalcitrant taxpayers to


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prolong collection of taxes. Congress has chosen to balance protections of well-meaning taxpayers by providingthe judicial remedies. One result however may be to encourage non-compliance by less dedicated taxpayers. Theaddition of judicial review provisions is a reaction to prior IRS abuses in collection matters. Many taxpayers whohave legitimately sought payment arrangements and/or offers in compromise from the Internal Revenue Servicehave been confronted by inflexible collection employees. IRS policies including its allowable expense programhave imposed severe constraints on taxpayers who wish to repay their taxes. The Internal Revenue Service overthe past several years has become increasingly inflexible in granting installment agreements. In fact for a periodof time from 1994 to 1997 the Internal Revenue Service adopted severe restrictions on granting installment

agreements with respect to employment tax liabilities. The new collection appeals program will prevent theService from imposing unreasonable restrictions on installment agreements. Taxpayers now have the right toseek independent review of a Collection Division decision. If the taxpayer is dissatisfied with that review,6330(c) grants specific authority to seek judicial review of IRS determinations.

Caution

S-23.30 A note of caution is merited here because even though IRC 6330(c) grants the authority for judicialreview there is no precedent as to the standards which the courts may apply. Although 6330(b) sets forth thestandards for appeals review, there can be no certainty as to how those standards may be applied by courts. Onewould hope that the courts will develop their own bright line tests so that practioners may judge theappropriateness of judicial relief from IRS collection actions.

Suspension of Collection in Statute Limitations

S-23.40 If a taxpayer exercises rights pursuant to the Collection Appeals process the Internal Revenue Service isprecluded from taking levy or lien action during the pendency of the proceeding except in the event of a

jeopardy or a levy upon a state tax refund.

S-24 AUDIT PROTECTIONS

Limitation on Financial Status Audit Techniques

S-24.10 The Act prohibits the IRS from using "financial status" or "economic reality" examination techniques todetermine the existence of unreported income of any taxpayer unless the IRS has a reasonable indication thatthere is a likelihood of unreported income, effective on the date of enactment. [3412] [IRC 7602(d)]

Software Trade Secrets Protection

S-24.20 The Act prohibits the Secretary from issuing (or beginning an action to enforce) a summons in a civilaction for any portion of any third-party tax-related computer source code unless certain requirements aresatisfied. The Act also establishes a number of protections against the disclosure and improper use of softwareand source code obtained by the IRS in the course of an examination. The Act specifically provides thatcomputer software or source code that is obtained by the IRS in the course of the examination of a taxpayer'sreturn is included in the definition of return information under 6103. [3413] [IRC 7612]


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Prior Standards

S-24.30 The provision does not change or eliminate any other requirement of the Code. A summons forthird-party tax-related computer source code that meets the standards established by the provision will not beenforced if it would not be enforced under present law.

Effective Date

S-24.40 The provision is effective with respect to summons issued and software acquired after the date ofenactment. In addition, 90 days after the date of enactment, the protections against the disclosure and improperuse of trade secrets and confidential information added by the provision (except for the requirement that theSecretary provide a written agreement from non-U.S. government officers and employees) apply to software andsource code acquired on or before the date of enactment.

S-25 Threat of Audit Prohibited to Coerce Tip

Reporting Alternative Commitment Agreements

S-25.10 The Act requires the IRS to instruct its employees that they may not threaten to audit any taxpayer in anattempt to coerce the taxpayer to enter into a tip reporting alternative commitment ("TRAC") agreement,effective on the date of enactment. [3414]

The Prior TRAC Program

S-25.20 During the past several years the Internal Revenue Service has engaged in a program of attempting toseek greater tips compliance in the hotel, restaurant and entertainment industry by approaching employers toseek tip reporting commitment agreements. Unfortunately the approach the IRS has taken has been to threatenthe employer with audit if it did not force its employees to begin paying taxes on an agreed percentage of tips.The employer was confronted with the risk of an IRS audit or with the alternative of forcing each of itsemployees to agree to a certain percentage presumed tips. Act 3414 specifically prohibits the IRS fromengaging in its current arm twisting of employers. The provision appears to have been a clear concession to theentertainment, restaurant and casino industry.

S-26 SUMMONS RIGHTS

Taxpayers Allowed Motion to Quash all Third-party Summonses

S-26.10 The Act generally expands the current "third-party record keeper" procedures to apply to summonsesissued to persons other than the taxpayer. Thus, the taxpayer whose liability is being investigated receives noticeof the summons and is entitled to bring an action in the appropriate U.S. District Court to quash the summons.The provision is effective for summonses served after the date of enactment. [3416] [IRC 7609(i)(3)]


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IRS Right to Summons

S-26.20 Taxpayers are granted statutory authority to seek to quash third party summons. Although a right isgranted by this provision, the courts probably will liberally construe the Internal Revenue's right to gatherinformation from third parties and is unlikely that this provision will impede the Services ability to secureinformation from third parties. 3415 specifically excludes summons issued to aid in the collection of anassessment or judgment entered against the person with respect to whose liability the summons was issued andthe liability at law or an equity of the person for transfer or fiduciary liability. It also specifically excludes

summons issued by a criminal investigator in the Internal Revenue Service.

Summons by Mail

S-26.30 The Internal Revenue Service is now given specific authority to serve a third party summons by mail. Inthe past the Internal Revenue Service was required to personally serve a summons. [3416(a)] [IRC 7603(b)]

Notice of IRS Contact of Third Parties

S-26.40 The Act provides that the IRS may not contact any person other than the taxpayer with respect to thedetermination or collection of the tax liability of the taxpayer without providing reasonable notice to thetaxpayer that contacts with persons other than the taxpayer may be made. The provision is effective with respectto contacts made after 180 days after the date of enactment. [3417] [IRC 7602(E)]

Enhanced Privacy Rights

S-26.50 This Section represents a substantial enhancement of taxpayer privacy rights. The Internal RevenueService is now required to notify the taxpayer in advance of its intent to seek information from third parties. Thisprovision will allow taxpayers several protections. First the taxpayer will be able to better control the nature ofthe contact by informing third record keepers of the potential contact by the Internal Revenue Service andsecondly, the taxpayer may be able to convince the IRS investigator that a better means to secure theinformation is available. The taxpayer might volunteer additional information in an effort to prevent the decisionto seek third party information. The IRS retains the right to determine that for good cause shown, not to informthe taxpayer would jeopardize collection of any tax or it would involve reprisal against any person. The InternalRevenue Service also has the right to forego the notice in the event of a pending criminal investigation. Evenwith the rights to foreclose such notice granted to the IRS, the taxpayer's bargaining position is greatly enhancedby the new notice provisions. Practitioners and taxpayers should be alert to opportunities to provide alternativeinformation to the IRS to avoid contacts with third parties. Contacts to third parties by the IRS generally hurt a

taxpayer's reputation and may severely damage business relationships. Therefore the advance notice provisionsshould be used as an opportunity to prevent such contacts.

S-27 COLLECTION APPROVAL PROCESS

Approval Process for Liens, Levies, and Seizures

S-27.10 The Act requires the IRS to implement an approval process under which any lien, levy or seizure would,


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when appropriate, be approved by a supervisor, who would review the taxpayer's information, verify that abalance is due, and affirm that a lien, levy or seizure is appropriate under the circumstances. Circumstances to beconsidered include the amount due and the value of the asset. The provision is effective for collection actionscommenced after date of enactment, except in the case of any action under the automated collection system, theprovision applies to actions initiated after December 31, 2000. [3421]

Prior Law

S-27.20 Under current law the Internal Revenue collection employees routinely filed notices of lien and Noticeof Levy without discussion of the matter with supervisors. Revenue Officers were routinely delegated theauthority to levy upon bank accounts, wages and assets held by third parties without supervisory approval.Federal Tax Liens were routinely filed by Revenue Officers without their supervisor's approval. 3421 imposes aduty upon IRS supervisory personnel to engage in specific reviews prior to the initiation of liens and levies. Thesupervisor must review the taxpayers information and verify the balances due and confirm that an actionproposed to be taken is appropriate considering the taxpayers circumstances, the amount due and the value ofthe property. With respect to non-automated collection actions, this provision takes effect immediately.

Automated Collection

S-27.30 With respect to automated collection actions, the provision will not take effect until December 31, 2000.The exclusion of Automated Collection System actions from the immediate impact of this provision isunfortunate. Most Notices of Levy and Liens are served by the Automated Collection System. Only a smallpercentage of levies and liens are issued by Revenue Officers. Over the years more hardships have been visitedon taxpayers by the Automated Collection System than Revenue Officers. Liens and levies are issued in a rotefashion by a computer without human intervention via the Automatic Collection System. The system is ripe forerrors and unintended harms to taxpayers. Given the current method of serving levies and liens by Automated

Collection System, the Service will face a substantial challenge to place an human element into the process. Onemust be alert to exercise the rights under 6330 to protect clients from potential abuses by the AutomatedCollection System during the period from enactment of this provision until December 31, 2000.

S-28 LEVY EXEMPTIONS

S-28.10 The Act substantially increases the exemptions from levy available to taxpayers under 6334 of theInternal Revenue Code. The Exemption for personal effects rises from $2500 to $6,250 and books and tools oftrade goes from $1350 to $3125. The increases will have the practical effect of preventing seizure of books andtools in trade and personal effects from many lower income taxpayers. The prior exemptions were diminished

and allowed an opportunity for the IRS to take cars and other personal belongings from individuals with limitedmeans. New exemptions will allow taxpayers to at least retain modest vehicles, personal items, books and toolsof trade with reasonable value. {3431] [IRC 6334(a)]

S-29 RELEASE OF LEVY UPON AGREEMENT THAT AMOUNT IS UNCOLLECTIBLE

S-29.10 The Act requires the IRS to immediately release a wage levy upon agreement with the taxpayer that thetax is not collectible, effective for levies imposed after December 31, 1999. [3432] [IRC 6342(e)]


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Currently Not Collectible

S-29.20 IRM 5375 allows the IRS to declare an account currently not collectible. The IRS takes this step if afterreviewing the taxpayer's financial statement it determines that he or she is unable to pay any tax liability at thistime. Over the years the Internal Revenue Service has occasionally declared accounts uncollectible whilecontinuing to levy upon a taxpayer's wages. This provision will prevent such action. If the IRS determines theaccount is uncollectible it may not continue to take a taxpayer's wages. The provision imposes a statutorymandate upon the IRS. In the past it was inconsistent for the Internal Revenue Service to determine the taxpayercould not pay a tax liability while at the same time continuing to seize that taxpayer's salary.

S-30 LEVY PROHIBITED DURING PENDENCY OF REFUND PROCEEDINGS

S-30.10 The Act requires the IRS to withhold collection by levy of liabilities that are the subject of a refund suitduring the pendency of the litigation, effective for refund suits brought with respect to tax years beginning after

December 31, 1998. Proceedings related to a proceeding under this provision include, but are not limited to, civilactions or third-party complaints initiated by the United States or another person with respect to the same kindsof tax (or related taxes or penalties) for the same (or overlapping) tax periods. [3433] [IRC 6331(i)]

Prior Policy

S-30.20 This provision adopts a policy of the Internal Revenue Service as a statutory protection. P-5-16 hasprovided since 3-1-84 that the Internal Revenue Service would forebear collection during the pendency of arefund suit regarding a devisable liability. Unfortunately, the Service has occasionally violated its own policiesand the taxpayer was left without remedy. Most often this provision applies to a trust fund liability pursuant toIRC 6672. Taxpayer are not required to pay the entire liability in order to file a refund claim. Taxpayersgenerally pay the amount of tax due for one employee for one period and then file a refund claim with a requestfor abatement of the remaining liability. If the Internal Revenue Service denies that claim or six months expiresthen the taxpayer is authorized to initiate a refund in U.S. District Court pursuant to IRC 7421. Unfortunately,the Internal Revenue Service occasionally continued to pursue collection measures even though the taxpayerhad sought a refund in U.S. District Court. U.S. District Courts were specifically prohibited from enjoining IRScollection efforts during the pendency of refund litigation concerning a devisable liability. 3433 grants specificauthority to United State's Court's to enjoin IRS collection actions during the pendency of devisable liabilitydisputes. This provision will prevent the abusive situation where a taxpayer disputes a liability but facesdraconian IRS collection actions while at the same time pursuing legal rights before a federal court. Theprovision specifically provides for the suspension of the collection Statute of Limitations pursuant to IRC 6502

during the pendency of a proceeding.

S-31 APPROVAL REQUIRED FOR JEOPARDY AND TERMINATION ASSESSMENTS ANDJEOPARDY LEVIES

S-31.10 The Act requires IRS Chief Counsel review and approval before the IRS can make a jeopardyassessment, a termination assessment, or a jeopardy levy. If the Chief Counsel's approval is not obtained, thetaxpayer is entitled to obtain abatement of the assessment or release of the levy, and, if the IRS fails to offersuch relief, to appeal first to IRS Appeals under the new due process procedure for IRS collections and then tocourt. The provision is effective for taxes assessed and levies made after the date of enactment.


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Greater Taxpayer Protections

S-31.20 This provision enhances taxpayer protections when the IRS chooses to initiate a jeopardy assessment. Areview by Chief Counsel and/or his delegate is now required prior to the assertion of a jeopardy assessment.Such assessments have always been rare but the case law is ripe with IRS abuse of this provision. The intent of

the statute is to impose a legal review of any jeopardy assessment prior to adverse actions by revenue agents andrevenue officers. It should reduce but not necessarily eliminate improper use of the jeopardy assessment processby the Internal Revenue Service (not all IRS attorneys have common sense). [3434] [IRC 7429(a)(1)]

S-32 INCREASE IN AMOUNT OF CERTAIN PROPERTY ON WHICH LIEN NOT VALID

S-32.10 The Act increases the dollar limit for purchasers at a casual sale from $250 to $1,000, and furtherincreases the dollar limit from $1,000 to $5,000 for mechanics lienors providing home improvement work forowner-occupied personal residences and indexes these dollar amounts for inflation. The provision is effective onthe date of enactment. [3435] [IRC 6323(b)]

Super Priorities

S-32.20 Since the enactment of the Federal Tax Lien Act in 1966, IRC Section 6323 has contained certain superpriority protections for competing lien claimants. Certain claimants are given priority over the Internal RevenueLien even if those claims arose subsequent to the filing of a Federal Tax Lien. Unfortunately, the dollarprotections contained an IRC Section 6323 has remained constant since the enactment of the Federal Tax LienAct of 1966. IRC 6323(B) has now been specifically amended to increase the protections for assets purchasedat casual sales from $250 to $1000. It has also been increased from $1000 to $5000 protection for claimants whofile mechanics liens for repairs performed on residential property. The provision also provides for cost of livingadjustments in the future. To avoid confusion, 3435 also expands the definition of passbook loans and providesfor a definition of "deposit secured loans". This provision allows banks and other financial institutions tospecifically take security interest in taxpayer deposits and retain priority even if the security agreement is signedsubsequent to the Federal Tax Lien.

S-33 WAIVER OF EARLY WITHDRAWAL TAX FOR IRS LEVIES ON EMPLOYER-SPONSOREDRETIREMENT PLANS OR IRAS

S-33.10 The Act provides an exception from the 10-percent early withdrawal tax for amounts withdrawn froman employer-sponsored retirement plan or an IRA that are subject to a levy by the IRS. The exception applies

only if the plan or IRA is levied; it does not apply, for example, if the taxpayer withdraws funds to pay taxes inthe absence of a levy, in order to release a levy on other interests. The provision is effective for withdrawalsafter the date of enactment. [3436] [IRC 72(t)(2)(A)(vii)]

May Levy IRA's and 401K Plans

S-33.20 The Internal Revenue Service retains the right to levy upon IRA's, Keoghes, and 401K plans but nowwhen it takes such action it may not assert an excise penalty on the involuntarily converted funds. Taxpayerswill still have to pay the income taxes due as a result of the involuntary conversion.


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S-34 PROHIBITION OF SALES OF SEIZED PROPERTY AT LESS THAN MINIMUM BID

S-34.10 The Act prohibits the IRS from selling seized property for less than the minimum bid price, effective forsales occurring after the date of enactment. [3441] [IRC 6335(e)]

Prior Law

S-34.20 IRC 6335 (E)(1)(a)(i) has provided that the Internal Revenue Service must determine a minimum bidprice for property to be sold at auction by the Internal Revenue Service. Unfortunately, the IRS CollectionDivision has occasionally chosen to accept bids below that minimum bid during the course of a sale. Thisprovision specifically prohibits such conduct from the IRS. The provision appears to be a proper response toprior IRS abuses. For example, a taxpayer might be told in the past the IRS would sell his interest in a home for$50,000. At the auction the IRS would decide immediately to accept a bid for much less than that amount.Section 3441 will now prohibit the IRS from engaging in an immediate reduction of the sale price and thereforewould preclude a sale of the property without a redetermination of the minimum bid price and proper notice to

the taxpayer.

S-35 ACCOUNTING OF SALES OF SEIZED PROPERTY

S-35.10 The Act requires the IRS to provide a written accounting of all sales of seized property, whether real orpersonal, to the taxpayer. The accounting must include a receipt for the amount credited to the taxpayer'saccount. The provision is effective for seizures occurring after the date of enactment. [3442] [IRC 6340(a)]

Prior Records

S-35.20 IRC 6340 has required the IRS to keep public records regarding sale of real property at its districtoffices. This task was accomplished by maintaining a Record 21 for each sale of property. Unfortunately, theInternal Revenue Service was not required to keep a record of sales of personal property. 3442 now requiresthe Internal Revenue Service to maintain records regarding all property which it sells at auction.

S-36 UNIFORM ASSET DISPOSAL MECHANISM

S-36.10 The Act requires the IRS to implement a uniform asset disposal mechanism for sales of seized propertywithin two years from the date of enactment. [3443] [IRC 6335] The Act codifies the IRS administrativeprocedures which require the IRS to investigate the status of certain property prior to levy.

Revised Sale Methods

S-36.20 The Congress has expressed its dissatisfaction with the current methods used to sell property by theInternal Revenue Service. Under the current procedures Internal Revenue Service sales are normally conducted


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by Revenue Officers. Some of the Revenue Officers are skilled and able to secure the maximum price forproperty while others have not exhibited skills for properly selling property. 3443 requires the Service toestablish a uniform system for disposing a property within two years of the date of enactment.It also expressesthe desire that the IRS out source auction sales. This provision will allow the involvement of professionalauctioneers in the sale process with the IRS and should enhance the value recovered from the property.Unfortunately, the downside will be that the cost of the sale will be substantially increased for the taxpayer.Under the current system, the taxpayer is only charged for the cost of advertising and other necessary expensesof sale. Therefore, the cost of the labor performed by the Revenue Officer as an Auctioneer is not included

within the cost of sale. It would appear under the amendments that the taxpayer now will be imposed with theadditional cost of securing the services of an outside auctioneer. The provision could in fact reduce the netproceeds of sale available to pay the taxpayer's tax obligation. Such a result would be unfortunate.

S-37 NO EQUITY SEIZURES

S-37.10 IRC 6331(f) currently prohibits the Internal Revenue Service from levying upon property if theexpense of sale would exceed the fair market value of the property. IRM56(12)(2.1)(4) requires that the InternalRevenue Service determine if the taxpayer's equity is insufficient to pay costs of sale it should release theproperty. Section 3444 enacts as statutory authority specific rules for determination of taxpayer equity inproperty. It also imposes a prior constraint upon a seizure where there is no equity. The Internal Revenue Serviceis now required to perform an analysis of the property's value and its equity prior to taking levy action. [3444][IRC 6331(J)]

S-38 PROCEDURES FOR SEIZURE OF RESIDENCES AND BUSINESSES

S-38.10 The Act prohibits the IRS from seizing any real property used as a residence by the taxpayer or anynonrental real property of the taxpayer used by any other individual as a residence to satisfy an unpaid liabilityof $5,000 or less, including penalties and interest. The Act requires the IRS to exhaust all other payment options

before seizing the taxpayer's business assets or principal residence. For this purpose, future income that may bederived by a taxpayer from the commercial sale of fish or wildlife under a specified State permit must beconsidered in evaluating other payment options before seizing the taxpayer's business assets. A levy is permittedon a principal residence only if a judge or magistrate of a United States district court approves (in writing) of thelevy. The provision is effective on the date of enactment. [3445] [IRC 6334(a)(13)]

Residential Seizure

S-38.20 No seizure of a dwelling that is the principal residence of the taxpayer or the taxpayer's spouse, formerspouse, or minor child would be allowed without prior judicial approval. Notice of the judicial hearing must be

provided to the taxpayer and relevant family member. At the judicial hearing, the Secretary would be required todemonstrate (1) that the requirements of any applicable law or administrative procedure relevant to the levyhave been met, (2) that the liability is owed, and (3) that no reasonable alternative for the collection of thetaxpayer's debt exists. The provision is effective for collection actions initiated more than 180 days after the dateof enactment. [3445(b)] [IRC 6334(e)]

Residences and Tangible Business Assets

S-38.30 This provision imposes substantial constraints upon the seizure of residences and business assets. The


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Internal Revenue Service is specifically prohibited from seizing the taxpayer's residence when there is a taxliability of less than $5,000. The provision also enhances taxpayer protections for seizure of personal residencesand business assets. Under current law the Internal Revenue Service can seize a personal residence from thetaxpayer with approval of the District Director or Assistant Director. The requirement for approval by theDistrict Director or Assistant Director was enacted with the Taxpayer Act of Rights of 1988. 3455 providesadditional protections from seizure of personal residences by providing the Internal Revenue Service may onlytake a personal residence with approval of a judge or magistrate. The provision provides for protection oftangible personal property or real property used in trade or sale of business from levy by the Internal Revenue

Service. The Internal Revenue Service is required to get judicial approval prior to seizing tangible businessrelated assets. It must exhaust all other payment options before seizing the taxpayer's business assets or principleresidence. The provisions should substantially reduce the number of Internal Revenue seizures of residences andbusiness assets. [3445(b)] [IRC 6374(e)]

ExParte Action

S-38.40 Since 1977, the Internal Revenue Service has been required to secure the taxpayer's consent or writ ofentry prior to entering into areas where the taxpayer had an expectation of privacy for the purposes of seizingassets (See G.M. Leasing Corp. v 429 U.S. 338, 97 Supreme Court 619(1977). The IRS secures these writs byfiling an ex parte action in U.S. District Court. 3445 does not prohibit ex parte actions by the IRS to secure

judicial authority for seizure of tangible business assets or a personal residence. Therefore, the Internal RevenueService probably will go before a judge to seek permission to seize tangible business assets and homes. Thetaxpayer may be forced to litigate the appropriateness of those actions after the seizure. The IRS may laterconclude that they should notify the taxpayer.

Rights in Context with 6330 of the Act

S-38.50 The protections provided by 3445 should also be viewed in context of the new protections regarding

levy provided in 6330. The taxpayer now has the right to seek judicial review prior to any type of levy actionby the Internal Revenue Service. But if we assume the taxpayer neglected to protest pursuant to 6330 whenfirst given notice, the Internal Revenue Service would then be allowed to seek ex parte authority to seize thepersonal residence or business assets of a taxpayer. The practitioner must be alert to take all steps to protect thetaxpayer's rights pursuant to 6320 and 6330 at the first instance to avoid the potential that the IRS might laterseek to exercise its authorities under 3445.

S-39 PROCEDURES RELATING TO EXTENSIONS OF STATUTE OF LIMITATIONS BYAGREEMENT

S-39.10 The Act eliminates the provision of present law that allows the statute of limitations on collections to beextended by agreement between the taxpayer and the IRS. Extensions of the statute of limitations on collectionmay only be made as part of an installment agreement; the extension is only for the period for which theinstallment agreement by its terms extends beyond the end of the otherwise applicable 10-year period, plus 90days. The Act also requires that, on each occasion on which the taxpayer is requested by the IRS to extend thestatute of limitations on assessment, the IRS must notify the taxpayer of the taxpayer's right to refuse to extendthe statute of limitations or to limit the extension to particular issues. [3461] {IRC 6502(a)]

Effective Date


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S-39.20 The provision is effective for requests to extend the statute of limitations made after December 31,1999. If, in any request to extend the period of limitations made on or before December 31, 1999, a taxpayeragreed to extend that period beyond the 10-year statute of limitations on collection, that extension shall expire

on the latest of: the last day of such 10-year period, December 31, 2002, or the 90th day after the end of the termof the installment agreement related to such request.

Commentary

S-39.30 The Internal Revenue Service is now prohibited from seeking extensions for statute of limitationspursuant to 6502 except in the case of granting an installment agreement. The Internal Revenue Service isallowed to solicit such extensions from corporations but not from individuals. The provision does not prohibit theInternal Revenue Service from taking enforcement action prior to the expiration of a statute of limitation.Therefore the taxpayer could be close to the ten year statute of limitations potential that he may no longer berequired to pay the tax liability but might also be confronted by the IRS taking enforced collection measures. TheInternal Revenue Service also is not prohibited from suing the taxpayer in U.S. District Court. It may sue toreduce the tax claim to judgment which will then allow the Internal Revenue Service more time to collect the tax

liability even though the tax payer refused to sign an extension of the Statute of Limitations. Although such suitsare rare, one might project that in the future more suits to reduce tax claims to judgment may be initiated by theInternal Revenue Service to protect its rights to collect taxes. This provision does not become effective exceptwith respect to extensions requested after December 31, 1999. Therefore, during the next 18 months the InternalRevenue Service may continue to request extensions of statutes of limitations.

S-40 OFFERS IN COMPROMISE

S-40.10 The Act expands the authority for the IRS to accept offers in compromise. The Act requires the IRS todevelop and publish schedules of national and local allowances that will provide taxpayers entering into an offer

in compromise with adequate means to provide for basic living expenses. The IRS is required to consider thefacts and circumstances of a particular taxpayer's case in determining whether the national and local schedulesare adequate for that particular taxpayer. The Act prohibits the IRS from rejecting an offer in compromise from alow-income taxpayer solely on the basis of the amount of the offer. [3462] [IRC 7122]

Prohibition of Levy

S-40.20 The Act prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer'soffer in compromise for that liability is being processed, (2) during the 30 days following rejection of an offer,

(3) during any period in which an appeal of the rejection of an offer is being considered, and (4) while aninstallment agreement is pending. [2462(b)] [IRC 6331(k)]

Rejections

S-40.30 The Act requires that the IRS implement procedures to review all proposed IRS rejections of taxpayeroffers in compromise and requests for installment agreements prior to the rejection being communicated to thetaxpayer. The Act provides that the IRS will adopt a liberal acceptance policy for offers in compromise toprovide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes.


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Effective Date

S-40.40 The provisions are generally effective for offers-in-compromise submitted after the date of enactment.The provision suspending levy is effective with respect to offers-in-compromise pending on or made afterDecember 31, 1999.

More Liberal Policies

S-40.50 Since August, 1995 the IRS has imposed specific standards for allowable expenses upon taxpayers whoseek offers in compromise. In many cases, those standards are less than the actual expenses faced by thetaxpayer. Although the Internal Revenue Manual provides authority for flexibility most Internal RevenueDistricts have been rather inflexible in applying the standards. The net result is that middle class individuals werenot able to compromise their taxes because of the standards imposed by the Internal Revenue Service. 3462imposes a duty upon the Internal Revenue Service to exercise much more flexibility in the use of its allowableexpense standards. Revenue Officers and employees of the Collection Division are not allowed to use the

schedules to the extent that such use would result in the taxpayer not having adequate means to provide for basicliving expenses. This provision will be particularly important with respect to housing. Because the IRS uses theaverage cost of housing in a particular county in determining its current allowable expense standards, anytaxpayer who recently purchased a home probably has housing expenses that exceed the IRS standard. It wouldappear that 6462 will require the IRS to look at the actual expenses of the taxpayer as opposed to its arbitrarydetermination of appropriate housing standards.

Minimum Offer Standards

S-40.60 Some districts have imposed minimum offer standards for taxpayers. Therefore, a low income taxpayerwho offered a minimum amount might have the offer rejected even though it represented her maximum ability topay. The Internal Revenue Service is now required to consider each offer submitted by a taxpayer on itsindividual merits not based upon some minimal offer amount.

Prior Policy

S-40.70 The Internal Revenue Service has had a policy since 1959 of foregoing collection during the pendencyof an Offer in Compromise. (P-5-9) 3462 prohibits levy while an offer in compromise is pending or an

installment agreement pursuant to 6159 is pending. The provision also provides for suspension of collectionwhile an appeal is pending. Although under the current protections of P-5-97 not many levies have taken placeduring the pendency of an Offer in Compromise, the taxpayer now has specific statutory protections againstenforcement action by the IRS while attempting to settle his or her tax obligations.

Appeal Rights

S-40.80 Although the Internal Revenue Service currently provides for administrative review of Offers in


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Compromise by the Appeals Division there has been no specific statutory requirement for such review. 3462(d) now enacts into law specific rights of independent review of Offers in Compromise by the Internal RevenueService Office of Appeals.

Joint Offer - Default by One Spouse

S-40.90 Offers in Compromise contain within their terms the requirement that the taxpayer remain currentduring the 5 years subsequent to approval of an Offer in Compromise. One problem which has arisen is thatmarried taxpayers who later divorce may face the possibility where one of the spouses fails to meet all of his orher tax obligation. As a result the Internal Revenue Service has occasionally attempted to default the Offer inCompromise with respect to both spouses. 3462 now contains specific protections for an innocent spouse whohas complied with all of his or her tax obligations notwithstanding any default by a spouse.

Doubt as to Liability Offers

S-40.100 Another protection provided by 3462 is with respect for Offers in Compromise based on doubt as toliability. In the past the Internal Revenue Service has occasionally rejected offers with respect to doubt as toliability solely because it could not find its administrative file. The Internal Revenue Service is now prohibitedfrom taking such action. The Internal Revenue Service has imposed additional duties upon taxpayers seekingcompromise liabilities solely on the basis of doubt as to liability by requiring those taxpayers to submit financialstatements. Many in the practitioner community believe the taxpayers with substantial means were prejudiced bythis requirement because the Internal Revenue Service would consider the taxpayers substantial economic meanswhen reviewing the underlying liability. The Internal Revenue Service is now specifically prohibited fromrequiring financial statements when offers are submitted based solely on doubt as to liability.

S-41 NOTICE OF DEFICIENCY TO SPECIFY DEADLINES FOR FILING TAX COURT PETITION

S-41.10 The provision requires the IRS to include on each deficiency notice the date determined by the IRS asthe last day on which the taxpayer may file a petition with the Tax Court. The provision provides that a petitionfiled with the Tax Court by this date is treated as timely filed. The provision is effective for notices mailed afterDecember 31, 1998. [3463] [IRC6213(a)]

Statutory Notice of Deficiency

S-41.20 IRC 6212 has required that the taxpayer subsequent to an examination receive a Notice of Deficiencyallowing him or her to file a Tax Court petition within 90 days of a notice of deficiency. Unfortunately manyunsophisticated taxpayers did not recognize the specific language of 90 days or in some manner misinterpretedthe 90 day provision. To prevent such misapprehensions by taxpayers the Internal Revenue Code has now beenamended to provide for the Internal Revenue Service 90 Day Notice of Deficiency must specifically state thedeadline for filing a Tax Court petition. This should reduce errors by unsophisticated taxpayers andrepresentatives.

S-42 REFUND OR CREDIT OF OVERPAYMENTS BEFORE FINAL DETERMINATION


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S-42.10 The Act provides that a proper court (including the Tax Court) may order a refund of any amount thatwas collected within the period during which the Secretary is prohibited from collecting the deficiency by levy orother proceeding. The provision allows the refund of any overpayment determined by the Tax Court to theextent the overpayment is not contested on appeal. The provision is effective on the date of enactment. [3464][IRC 6213(a)]

Prior Procedure

S-42.20 Under its prior procedures the IRS had a policy freezing taxpayer refunds while there was a pendingdeficiency before the United States Tax Court. 3464 specifically allows the Court to order refund of any othertax credit during the pen

irs restructuring and reform act

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