Taxpayer Protections Key Focus of IRS Bill

Taxpayers with Alzheimer’s disease. Divorced wives of tax cheats. Families that can’t afford fancy tax attorneys. People who--oops!--overpaid.

Those are some of the folks whose dealings with the Internal Revenue Service will be made easier under legislation now sailing through Congress to overhaul the much-reviled, often-feared collection agency.

The central thrust of the bill--and the principal source of controversy--is its plan to reorganize the IRS and place it under an independent oversight board. But the measure also includes provisions that would hit many taxpayers closer to home.

The bill could make it easier for taxpayers to file electronically. It would strengthen the position of taxpayers embroiled in disputes with the IRS. And critics fear that a provision shifting the burden of proof from the taxpayer to the IRS in civil tax court will make it easier for tax cheats to get away with it.

Indeed, the bill would have its greatest direct impact on the relatively small number of people who get in trouble with the IRS. But even the millions of Americans who quietly file their tax forms and hear no complaints might derive some benefit.

Support for the legislation snowballed this week when President Clinton dropped his opposition, Democrats stampeded to support it and the House Ways and Means Committee overwhelmingly approved it. The House is expected to pass the measure before Congress adjourns in early November, but the Senate is not expected to act until early next year.

The grandest ambition of the bill’s sponsors is to transform the IRS from a fearsome tax-collecting behemoth into a taxpayer-friendly, consumer-oriented agency.

“It is designed to produce a new IRS that more closely resembles a modern financial services organization than an enforcement-minded, bureaucratic dinosaur,” said Rep. Rob Portman (R-Ohio), leading architect of the legislation.

That’s a tall order. But short of that, the bill includes provisions that could have a more immediate effect on certain lucky groups of taxpayers.

For divorced spouses, the bill would make it easier to disavow mistakes made by ex-spouses in tax forms filed jointly while they were married. Rep. Nancy L. Johnson (R-Conn.) helped push the “innocent spouse” proposal after the IRS pursued her daughter for errors made by her former husband.

For people with mental disabilities like Alzheimer’s, the bill would suspend the three-year statute of limitations for requesting refunds because of mistakes on their tax returns. That provision was added in response to a case in which the IRS refused to refund $7,000 mistakenly paid by a senile 93-year-old man from Granada Hills, Calif. His daughter did not discover the mistake until after his death. The IRS rejected her request for a refund because it came after the statutory deadline. The Supreme Court upheld the IRS decision earlier this year.

For people who overpay their taxes, the bill could mean more generous refunds. Under current law, the IRS charges a higher interest rate when people underpay their taxes than it pays when people send it too much money. The bill would eliminate that differential--in effect, increasing the interest paid to those who overpay their taxes by 1 percentage point.

In an effort to bring tax filing into the 21st century and limit errors along the way, the bill calls for making it easier for people to file their returns electronically. The measure would order the Treasury secretary to come up with a plan to have 80% of all returns filed electronically by 2007.

For people who cannot afford a tax attorney, the bill would extend the attorney-client privilege of confidentiality to conversations with accountants and other nonlawyers.

For people who cannot even afford an accountant, the bill has other benefits. It would set up a new grant program to aid agencies that represent low-income people in tax disputes. But the total spent each year on such grants would be no more than $3 million.

Most of the new taxpayer protections would affect the relatively small number of people involved in disputes with the IRS. Of the 120 million income tax returns filed each year, only about 2 million are audited. Only about 25,000 of those end up in tax court and all but about 1,500 are settled before they go to trial.

For that handful of cases that end up in court, one of the most controversial proposals in the bill would shift the burden of proof from the taxpayer to the IRS in civil tax court proceedings. Now, an IRS ruling against a taxpayer stands unless the taxpayer can prove that it is wrong. The bill would shift the burden of proof to the IRS, so long as the taxpayer cooperates and provides requested information.

Critics, including the Clinton administration, warn that the proposed change could make it harder for the IRS to nail tax evaders and force the agency to be even more intrusive to get the evidence it needs to prove a case. An example cited by a recent Treasury Department memo: If a taxpayer claims a child as a dependent and the government suspects it is a fiction, IRS agents might have to resort to interviewing neighbors.

Changing the burden of proof is the most costly provision of the bill, with a projected revenue loss of $795 million over five years. Most of that reflects the expectation that, with the burden of proof shifted, taxpayers would settle their cases on somewhat better terms, according to Kenneth J. Kies, chief of staff of Congress’ Joint Committee on Taxation. But about 15% of the revenue loss is expected to come from a drop in tax compliance among people who cut corners because they think it will be harder for the IRS to catch them.

In other areas, the bill makes it easier for people to sue the IRS for damages. Right now, taxpayers can collect damages only if they can prove that the IRS was reckless or intentionally wronged them. The bill would allow aggrieved taxpayers to sue for as much as $100,000 in damages in cases of negligence.

And for all the taxpayers who wonder, “Why me?” when they are audited, the bill promises an answer. It would require the IRS to publish an explanation of the criteria it applies in deciding whom to audit.