A little-noticed provision in the tax revision bill passed by the House last year would leave Internal Revenue Service auditors and lawyers personally liable for attorney fees and court costs of taxpayers who win their cases.

The awards would be at the discretion of the judge in the tax case, and could be imposed on the employe only if he or she were found to be acting in an "arbitrary and capricious" manner.

But IRS officials and tax experts are afraid that the provision -- which was added by the Ways and Means Committee during its final hours of tax-writing in the early morning of Nov. 23 -- could turn auditors into milquetoasts if it becomes law. That could result in fewer audits, fewer court cases and less federal revenue.

"On a marginal case, even where they have a chance of winning, they won't bring it," said former IRS commissioner Sheldon S. Cohen. "Not because the judge will find them liable, but because he might. These guys make $30,000 or $40,000 a year. Why should they take the chance?"

It is almost unprecedented for IRS employes to be vulnerable to lawsuits because of their actions on the job. In the only other instance experts could recall, IRS employes could be sued before 1982 for disclosing tax information. Congress changed that law because it was found to be hampering the service's ability to hire new people.

As written, the legislation appears to apply to a substantial portion of the IRS's 95,000 employes. It apparently covers revenue agents, the accountants who determine that a taxpayer owes money; revenue officers, who try to collect it; special agents, who initiate criminal actions, and lawyers, who try the cases -- roughly 32,400 people altogether.

The money involved is significant as well: The average award of fees and costs in tax cases over the last few years was $6,300, although taxpayers rarely are eligible for those awards even if they win their cases. Taxpayers win against the IRS in only 6.7 percent of the cases.

The provision was proposed by Rep. Andrew Jacobs Jr. (D-Ind.), who said it will protect taxpayers from unreasonable harassment by the IRS, only covers costs incurred, and can only be awarded by the judge presiding in the tax case. It is not applicable in separate legal suits. But Jacobs agreed in a telephone interview with contentions that the change could have a "chilling effect" on IRS activities if it is enacted.

"Maybe what we need is a slight chilling effect on unelected people in the bureaucracy when they're dealing with people who have no recourse," Jacobs said. He added that the exacting standards of the legislation -- after the taxpayer wins the case, the judge will have to find the IRS was arbitrary and capricious -- mean relatively few IRS employes will be penalized.

"I'd be surprised if in 10 years they had two rulings that [found that IRS agents] were arbitrary and capricious," Jacobs said.

By that time, however, IRS officials are afraid there won't be any agents left.

The IRS would not comment on the record about the implications of the provision, although a spokesman for the Treasury Department, which includes the IRS, said the administration opposes the provision. Sources at Treasury and IRS said they fear it would be much more difficult to recruit and retain agents and attorneys if the personal-liability proposal became law.

Officials also point out that it takes imagination and aggressiveness to enforce the tax laws vigorously. Because taxpayers constantly are thinking up new ways to skirt the edges of improper deductions, IRS agents have to be willing to challenge them even if the law is not crystal clear on the issue. The result: The IRS occasionally loses in court.

"The tax law is so fluid, there is not always a right or wrong," said former assistant Treasury secretary Ronald A. Pearlman, who raised objections to the provision when Jacobs proposed it during the Ways and Means Committee's closed-door tax-writing session. [It passed on a voice vote.]

"I'm very disturbed when we try to put a harness on the creativity of Revenue Service employes. They shouldn't be abusive or heavy-handed, but one of the things you want from revenue agents is that they be able to think creatively," Pearlman said.

IRS officials said there is no clear definiton of "arbitrary and capricious" in the proposed law, so that agents will have no way of knowing if they are going too far. If the problem is IRS agents abusing taxpayers, it should be dealt with by a harsher system of penalties or dismissal from the service, one IRS source said.

Officials also suggested that Congress could liberalize the system under which taxpayers, in extreme cases, can collect their court costs and fees from the IRS itself. Only 33 such awards have been made since the program was begun in 1982.

The position of the Senate, which is considering the tax bill, is not clear on the personal-liability provision. Last year, the Finance Committee approved legislation making it easier for taxpayers to recover their costs and fees when they win tax cases, but the money would come from the government, not the agents.