By Albert B. Crenshaw
You've heard the politics; you've heard the hype. But what will the revamping of the Internal Revenue Service really mean to you as a taxpayer?
That question has multiple answers. There will be long-term effects and short-term effects; there will be an impact on your day-to-day dealings with the IRS, and there will be an impact on your legal rights if you get into a dispute with the agency.
If you are among the millions of taxpayers whose sole contact with the IRS is the annual rite of sending in your return and getting your refund check, things probably won't change very much. In a few years it may be easier to do these transactions electronically, but the substance is likely to remain much the same.
But if you are among the growing number of taxpayers who want or need something more from the agency or are in a fight with it, you could see some important improvements.
More than a year of study by the congressionally appointed National Commission on Restructuring the Internal Revenue Service, plus a sensational series of hearings last month by the Senate Finance Committee, demonstrated two principal problem areas.
First, the IRS has fallen far behind the times technologically, so that it is often unable to respond to taxpayer inquiries, and workers dealing with taxpayers cannot be sure they have all the relevant facts concerning the taxpayer's case.
Second, internal and external pressure to maximize collections has led at least some IRS workers to ignore taxpayer assertions that they have paid what they owe, and others to bludgeon taxpayers into paying money they never owed in the first place.
Obviously, these two problems interact. Even well-meaning IRS workers have trouble distinguishing honest mix-ups from efforts at cheating because they can't always get rudimentary information, such as whether a bill has in fact been paid. And poor data collection makes it tough for managers, assuming they try, to spot rogue agents or others in the agency who are abusing taxpayers.
The legislation approved last week by the House Ways and Means Committee aims to deal with both of these areas, and Charles O. Rossotti, President Clinton's nominee to head the agency, vowed to do the same. But Rossotti, chairman and co-founder of American Management Systems Inc., a big Fairfax-based information technology company, said last week that from what he has seen, it's going to take years to get there.
For one thing, the agency's computers aren't ready for the year 2000. For another, there's that huge tax bill enacted last summer. Indeed, Rossotti is plainly worried that the agency may not make it through three filing seasons without a major breakdown.
So in the short run, based on the House bill and Rossotti's promises, taxpayers can expect only modest technical improvements. Look for:
Increased advertising for the IRS's Telefile program. Telefile allows taxpayers with simple returns to skip filling out a paper return and instead file over a push-button telephone. About 26 million taxpayers could be eligible for this program but only about 5 million used it last year. Rossotti promised to push it harder.
Eased electronic filing. Today about 70 million tax returns are, at some point during preparation, in electronic form, either in somebody's home computer or in an accountant's or tax preparer's. The vast majority of those get printed out and mailed to the IRS. A big barrier to simply filing these electronically is the requirement of a signature. The House bill directs the IRS's parent agency, the Treasury Department, to figure out a way around this and to get these returns filed electronically by 2002.
The bill also calls for creation of a system under which taxpayers could review their own IRS files electronically by 2006, but given the privacy safeguards required, that may be a tough deadline to meet.
On the legal side, the House bill includes some 28 provisions designed to widen taxpayer rights in dealing with the agency. Most of these would be meaningful only to people involved in disputes with the IRS and the majority of taxpayers are not. But if you do get into a squabble these provisions could help. Among them:
Innocent-spouse relief. Each year the IRS nails thousands of people, mostly divorced women, for taxes incurred by their spouse or ex-spouse. Current law allows the IRS or the U.S. Tax Court to grant relief, but the requirements are stringent. For one thing, the underpayment has to be large; for another, it has to be "grossly erroneous." The bill would eliminate the threshold and it would allow relief for items that are simply erroneous though not grossly so. And it would allow partial relief, eliminating the all-or-nothing standard most courts have been applying.
Damages. Current law allows most taxpayers who prevail against the IRS to recover administrative or attorney's fees if the IRS's position was not substantially justified. The bill would raise the current $110-an-hour ceiling on attorney's fees, provide that the court take into account whether the IRS has lost on the same issue in other courts, and otherwise make it easier to collect. Current law also allows a taxpayer to sue for up to $1 million in damages if the IRS or its workers recklessly or intentionally disregard law or regulation. The bill would allow taxpayers to collect up to $100,000 in civil damages if the agency negligently disregards law or regulation, an easier standard to meet than recklessly or intentionally.
Disability. taxpayer now must file for a refund within three years of filing a return or two years of paying the tax, whichever is later. In several recent cases, elderly people have overpaid and by the time their relatives discovered the error it was too late to obtain a refund. The bill would suspend the time limit for any period during which a taxpayer is disabled and unable to manage his or her affairs.
Interest. IRS now charges a higher rate of interest on late tax payments than it pays when it is late with a refund. The bill would equalize the rates for individuals, though not corporations.
Other items. The bill would sharply limit the penalty that could be imposed on an individual who falls behind on an installment payment plan. It would extend attorney-client confidentiality privilege to accountants and some other non-attorneys. It would require clearer notices to taxpayers of various rights and deadlines, such as that for filing an appeal to the Tax Court. And it would bar IRS use of "economic reality" audit techniques such as your living in a house you couldn't afford on the income you're reporting unless there is reasonable indication of unreported income.
In addition, the House bill would shift the burden of proof in court cases from the taxpayer to the IRS. At present, the taxpayer bears that burden.
How much effect this last change would have is a matter of debate. But it worries the Treasury Department. Tax law will continue to require taxpayers to keep books and records, get receipts for donations and the like. And the bill would require production of those records and cooperation on the part of the taxpayer.
Treasury officials believe they have statutory authority to require all the necessary records, and fear that if the IRS tightens regulations to make sure records are retained and available, members of Congress will begin bashing the agency publicly.
The department doesn't object to taxpayers' winning when the evidence on both sides is equal, but "we don't want to create an incentive for taxpayers not to keep records," one Treasury official said.
It's not clear if the tax writers understand how the provision would work, either. They cite as an example a situation in which a taxpayer makes a donation of, say, an old car to charity and takes a deduction of $2,000. The IRS says it's worth $1,000. Both present valuation experts to back up their positions but because of the burden of proof, under current law, the IRS would win. The bill would reverse that, the authors say.
In fact, in cases like this, the change probably would have no effect at all. The Tax Court and U.S. District Courts almost always split the difference unless one side's case lacks credibility.
One potential peril from shifting the burden of proof, according to former IRS commissioner Lawrence Gibbs, might be to give taxpayers the impression that by not keeping records they might automatically win in court against the agency. "That could be a trap for the unwary," he said.
© Copyright 1997 The Washington Post Company