Related Links • Gingrich Presses for Capital Gains Cut (Washington Post, June 25) • Compromise on IRS Reform Reported Near (Washington Post, June 20) • Senate Passes IRS Overhaul (Washington Post, May 8) • Key Post Stories About the IRS On the Web • Text and Status of H.R. 2676, from THOMAS • Testimony and News Releases from the Senate Finance Committee Hearings

By Albert B. Crenshaw
Washington Post Staff Writer
Thursday, June 25, 1998; Page A01

Congressional tax writers reached final agreement yesterday on the most extensive overhaul of the Internal Revenue Service in nearly half a century.

The costly bill will restructure the IRS and provide taxpayers with broad new rights in dealing with the agency, often portrayed as the most disliked bureaucracy in the federal government.

A nine-member board, which will include six people from outside the government, will oversee the agency and help set its strategic direction. Tax penalties that resulted from the agency's own failings will be slashed or suspended, the burden of proof in many tax disputes will shift from the taxpayer to the IRS, and the agency's ability to seize property will be curtailed.

The measure is the culmination of more than two years of work by Congress, touched off originally by the IRS's repeated failure to modernize its computers. It achieved even greater momentum after Senate Finance Committee hearings last fall that included startling testimony alleging agency abuse of both taxpayers and employees.

"These reforms will help turn the IRS into an agency that has power sufficient to collect the appropriate amount of federal revenues, but whose institutional culture is marked by service . . . and openness," said Finance Committee Chairman William V. Roth Jr. (R-Del.).

President Clinton said yesterday that he would sign the bill, which could pass the House as early as today and the Senate soon after the July recess.

"We need an IRS that reflects American values and respects American taxpayers," Clinton said. "This bill goes a long way toward that goal."

The Finance Committee hearings fueled a nationwide outcry about the IRS, which Republicans have sought to keep alive both as a campaign issue and in hopes of creating a groundswell for a wholesale revision of the nation's tax system. The public reaction caught the Clinton administration off guard, and administration officials moved quickly to embrace many of the congressional proposals.

The hearings featured taxpayers who testified that they had been pursued by the agency for taxes they already had paid or never owed in the first place. IRS employees also testified about IRS efforts to target small taxpayers and to intimidate workers who sought to report abuses.

To correct this "culture of intimidation," as Sen. Charles E. Grassley (R-Iowa) called it, the bill would, among other things:

Shift the burden of proof from the taxpayer to the agency in court proceedings. The government already bears the burden of proof in criminal cases, but most tax disputes are civil and the burden in civil cases falls to the party in possession of the evidence, typically the taxpayer. The measure would shift the burden to the government to prove the taxpayer wrong but would require the taxpayer to keep records and cooperate with the agency.

Ease the treatment of so-called innocent spouses. Under current law, if a married couple files a joint return, both are liable for all the tax. In many cases, a divorced person, usually an ex-wife, is hit with taxes and penalties that were the responsibility of the other spouse. The bill would make it easier for the innocent spouse to qualify for relief and would allow divorced or separated spouses to elect to be taxed only on her own portion of the couple's income.

Suspend or reduce penalties and interest. Currently, the IRS may take up to three years to audit a return, and if it finds a deficiency, it charges penalties and interest dating from the filing of the return. The result is often a greater sum than the original tax.

The bill would require the IRS at least to notify the taxpayer within 18 months of a possible liability, so it could be paid and the interest and penalty clock stopped. The Senate originally had set a 12-month deadline, but the IRS said it could not meet that deadline with its current technology. Lawmakers compromised on 18 months but agreed to impose the 12-month deadline beginning five years from now.

Reforming the IRS The IRS reform bill addresses some of the most widely publicized complaints about the agency: * Shifting the burden of proof from the taxpayer to the agency in court cases. Taxpayers will still have to keep records and cooperate with the IRS, but in questions of fact, the IRS will have to prove the taxpayer wrong, rather than the other way around. * Protecting innocent spouses. Divorced or separated spouses can elect to be liable for taxes only on their portion of the couple's combined income, rather than on all of it as is the case now. * Easing penalties and interest payments. The bill will force the IRS to notify taxpayers within 18 months (within 12 months after 2003) after a return is filed if additional tax is owed. If the agency does not provide this notification, penalties and interest on the unpaid tax are suspended. Currently, the agency is so slow that taxpayers may have big penalty and interest bills before they ever learn that they have underpaid their taxes. * Better service. The bill contains numerous management initiatives, ranging from electronic filing to strengthening the Office of Taxpayer Advocate, that backers say will eventually mean better service for all taxpayers -- faster refunds, easier filing, quicker response to questions and problems.

The bill also would reduce failure-to-pay penalties now imposed on taxpayers when they are paying in installments and would require the IRS to include in each penalty and interest notice a computation of the sum owed.

Impose a number of due-process requirements and other restrictions on tax collections. It would require the agency to give a delinquent taxpayer 30 days to request a hearing before property is seized and would require the agency to seize business property only as a last resort. A personal residence could not be seized without court approval.

Extend the attorney-client privilege in most cases to accountants and others authorized to practice before the IRS.

Within the IRS itself, the bill would set up the board to oversee the management and direction of the agency. The board would include six private-sector members, plus the Treasury secretary, the IRS commissioner and a representative of IRS employees.

A dispute over federal conflict-of-interest rules and the worker representative was resolved by giving the president power to waive the rules. That seems to clear the way for an official of the National Treasury Employees Union to take that seat.

The bill also gives IRS Commissioner Charles O. Rossotti new personnel authority, both to move executives around and to hire a small number of key people at salaries of up to $175,400. Rossotti has said increased flexibility is crucial if he is to hire and retain the technical and management experts he needs.

Besides IRS reforms, the measure grants investors a break on capital gains -- profits from the sale of assets such as stocks and bonds -- by shortening the time such items must be held in order to qualify for special low tax rates. That change, from an 18-month holding period to 12 months, is expected to cost the government about $2 billion over the next 10 years.

And lawmakers decided to not correct a drafting error in last year's tax law that provides a benefit worth several hundred thousand dollars each to estates valued at more than $17 million.

Those benefits, plus taxpayer-protection provisions that will both reduce collections and cut penalty and interest charges, mean that overall the bill will cost the government about $12.8 billion over the next decade.

The House and Senate negotiators agreed to pay for those losses by curbing a gimmick used by businesses to accelerate deductions for employee vacations, by tightening tax treatment of certain real estate investment trusts and some business receivables, and by changing the rules on conversion of traditional individual retirement accounts to the new Roth IRAs, which are tax-free on withdrawal.

This last provision, which would raise $8 billion in three years, had been criticized by Democrats as a expensive revenue drain in the long run. It would allow wealthy older people to use Roth IRAs as an estate-planning device to provide heirs with tax-free income. The change raises revenue at first because the conversions are taxable, but later on it is expected to cost the government about $1 billion a year.

Given the political momentum for some sort of IRS overhaul, however, neither congressional Democrats nor the administration were willing to try to halt the measure over any of the costly provisions.