Copyright 1996 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536
Getting legislation through Congress and signed by the President has been tough this year. This is one bill that's had a much easier time of it. While there aren't any giveaways here, there are a number of provisions that should make it easier to deal with the IRS. Some of the provisions will also make the Service think twice before unduly hassling a taxpayer or going to court.
Here's a synopsis of the provisions of most importance to individuals and smaller businesses.
Taxpayer advocate. The law establishes a new position, Taxpayer Advocate, within the IRS, replacing the Taxpayer Ombudsman. The functions are (1) to assist taxpayers in resolving problems with the IRS, (2) to identify areas in which taxpayers have problems with the IRS, (3) to propose changes in the administrative practices of the IRS, and (4) to identify potential legislative changes that may mitigate those problems.
The law also provides that only the Taxpayer Advocate, or the Commissioner or Deputy Commissioner of the IRS may modify or rescind a Taxpayer Assistance Order (TAO).
Installment agreements. The law requires the IRS to notify taxpayers 30 days before altering, modifying, or terminating any installment agreement for any reason other than that the collection of tax is determined to be in jeopardy.
Abatement of interest and penalties. The bill permits the IRS to abate interest and penalties with respect to any unreasonable error or delay resulting from managerial as well as ministerial acts. Thus, for instance, if your file gets lost for 6 months because an IRS is employee is transferred, you may be able to have any resulting interest and penalties abated.
Interest free period. Under the old rules you had 10 calendar days from the date of a notice to pay the IRS. If the check was late, you'd have additional interest. For notices given after December 31, 1996 you'll have 21 calendar days to respond if the total tax liability is less than $100,000. If it's $100,000 or more, you'll have 10 business days.
First-time payroll penalty. The IRS can now waive certain payroll tax penalties for first-time filers.
Disclosure of collection activity to spouse. If a tax deficiency is assessed on a joint return and the individuals are no longer married or not residing in the same household, the new law requires the IRS to disclose in writing (in response to a written request) whether the IRS has attempted to collect the deficiency from the other individual, the nature of the collection activities, and the amount collected.
Withdrawal of public notice of levy. The law allows the IRS to withdraw a public notice of tax lien prior to payment in full by the indebted taxpayer under certain circumstances.
Offers in compromise. The law increases from $500 to $50,000 the amount requiring a written opinion from the Office of Chief Counsel. Compromises below the $50,000 threshold must be subject to continuing quality review by the IRS.
This change should make it easier for taxpayers to get an offer in compromise through the IRS red tape.
Civil damages for fraudulent information return. Under this provision a person who receives a fraudulent information return (e.g., 1099-DIV, 1099-INT, etc.) can bring a civil action for damages against the person filing that return. Recoverable damages are the greater of $5,000 or the amount of actual damages. In some cases, suit can be brought as long as 6 years after the filing of the information return.
IRS must establish its position is substantially justified. The law provides that, once a taxpayer substantially prevails over the IRS in a tax dispute, the IRS has the burden of proof to establish that it was substantially justified in maintaining its position against the taxpayer. This switches the burden of proof from the taxpayer (where it had been) to the IRS. Thus, the successful taxpayer will receive an award of attorney's fees unless the IRS satisfied its burden of proof.
Moreover, the law also provides a rebuttable presumption that the position of the IRS was not substantially justified if the IRS did not follow in the administrative proceeding its published regulations, revenue rulings, revenue procedures, etc.
This could be the most important provision. It will make the IRS much more cautious about going to court, because a loss could prove costly. While the number of cases may be only slightly lower, the Service will have to expend more resources in checking the law.
Attorney awards. Now, if a taxpayer wins a case and is entitled to attorney fees, the statutory rate is $110 per hour, up from $75. This amount will be indexed for inflation after 1996.
Increase in limit of civil damages for unauthorized collection actions. The law increases the cap on damages from $100,000 to $1 million if the IRS intentionally disregards the Code or regulations when collecting tax.
Preliminary notice requirement. The IRS must now issue a notice to an individual determined to be a responsible person with respect to unpaid trust fund taxes (e.g., withheld income and FICA tax) at least 60 days prior to issuing a notice and demand for the penalty.
Disclosure where more than one person subject to penalty. The law requires the IRS, if requested in writing, to disclose the name of any other person the IRS has determined to be a responsible person with respect to the tax liability. The IRS has to disclose whether it has attempted to collect this penalty. This rule applies to trust fund taxes (e.g., withheld income taxes, FICA, etc.).
Right of contribution from multiple responsible persons. If more than one person is liable for a trust fund penalty, each person who paid the penalty is entitled to recover from other persons who are liable for the penalty an amount equal to the excess of the amount paid by such person over his proportionate share of the penalty.
This change, and the two above, may make the trust fund penalty somewhat less onerous, if you get caught in that trap.
Board members of tax-exempt organizations. The trust fund penalty will not be imposed on any volunteer, unpaid members of any board of trustees or directors of a tax-exempt organization if the members were serving solely in an honorary position and not involved in day-to-day activities.
Treasury department regulations. Temporary and proposed regulations must now have an effective date no earlier than the date of publication in the Federal Register, or on the date on which any notice substantially describing the contents is issued to to the public.
This provision prohibits the issuance of retroactive regulations, something that's been done more frequently in recent years.
Additional data on information returns. The law requires that information returns (e.g., 1099-DIV, 1099-MISC, etc.) contain the name, address, and phone number of the information contact of the person required to make the information return. The telephone number is intended to provide direct access to individuals who can resolve taxpayer problems (i.e., any mistakes on the 1099). This provision is effective for information returns to be filed after December 31, 1996.
Required notice of certain payments. The IRS is required to make reasonable efforts to notify, within 60 days, those taxpayers who have made payments which the IRS cannot associate with the taxpayer. For example, you make a payment to the IRS and don't identify the purpose of the payment.
Rewards. The new law clarifies that the IRS can pay rewards for information relating to civil violations as well as criminal ones and provides that rewards are to be paid out of the proceeds collection by reason of the information provided.
Extension of authority for undercover operations. The law allows the IRS to continue using income from undercover operations to fund additional undercover activities, but it must now file new reports on its activities. While this 5-year extension is a plus for the IRS, the additional reporting requirements are partially offsetting.
Private delivery services. The IRS can now revise its regulations to expand the 'timely-mailing as timely filing' rule to include a designated delivery service. Thus, you will be able to mail a tax return or similar document by a private service and have it considered timely filed on the date 'postmarked'. Don't FedEx that return just yet. The IRS must designate which services will qualify.
Revenue raising provisions. Some of the provisions mentioned above will cost the government revenue. As a partial offset, the law contains a number provisions aimed at tax-exempt organizations. One would impose a penalty excise tax on organizations where certain persons receive excess benefits from the organization. For example, where an officer receives an excessive salary.
Another rule provides that a social welfare organization or other organization described in that section, would be eligible for tax-exempt status only if no part if its net earnings inures to the benefit of any private shareholder or individual.
Tax-exempt organizations will have to report additional information with respect to certain disqualified persons, and the new law extends the public's ability to inspect the organization's forms filed with the IRS. The penalty for failure to allow public inspections or provide copies is increased from $1,000 to $5,000. Finally, small organizations will also be subject to a higher penalty for failure to file or include all required information on a Form 990, $20 per day instead of $10 per day (with a maximum penalty of the lesser of $10,000 or 5% of the organizations gross receipts). (Organizations with gross receipts of more than $1 million are subject to a penalty of $100 per day with a maximum of $50,000.)