Lawmakers Agree to Terms of IRS Reform

Key Senate and House negotiators reached agreement Friday on the major elements of legislation to restructure the Internal Revenue Service, a measure that also would give taxpayers an array of new rights in disputes with the feared agency.

The compromise bill, which President Clinton is expected to sign, for the first time would subject the IRS to oversight by a management board dominated by private citizens.

The bill also would shift the burden of proof from taxpayers to the IRS in civil court cases and would suspend penalties and interest charges in some drawn-out tax disputes.

“The plan we announce today makes a major change in the way the IRS does its business by putting the taxpayers first for a change,” said House Ways and Means Committee Chairman Bill Archer (R-Texas), one of four tax writers who drafted the compromise to resolve relatively minor differences between versions passed earlier by the House and Senate.

Negotiators have yet to decide how to make up for tax revenue that would be lost because of the legislation. Budget analysts are still calculating how much that will be. A plan to offset those losses is supposed to be included in the measure.

The Senate version of the bill was the most costly--its revamp of tax penalties and other provisions had an estimated 10-year price tag of $18.3 billion. But the compromise bill is expected to cost several billion dollars less.

The revised legislation will be returned to the House and Senate for expected approval. Congressional leaders expect Clinton to receive the finished bill sometime in mid-July.

The bill is the centerpiece of Congress’ response to growing public fury at the IRS, an agency heavily criticized in recent congressional hearings and elsewhere for mismanagement and heavy-handed tactics in dealing with taxpayers.

The Republican congressional leadership has done much to fan the flames of resentment toward the tax system. Earlier this week, the House approved a bill calling for abolition of the tax code in 2002 and replacing it with a simpler but yet-to-be-determined tax system. However, that largely symbolic bill was approved largely along party lines and is unlikely to become law.

By contrast, the legislation to overhaul the IRS has enjoyed broad bipartisan support and is likely to be signed into law in a matter of weeks. It is an unusual piece of legislative accomplishment at a time when Capitol Hill is awash in partisan rancor that has helped kill or stall other initiatives, such as campaign finance reform and antismoking legislation.

Clinton welcomed the compromise as building “on our initiative to give Americans a modern, customer-friendly IRS. I urge Congress to send me this compromise legislation quickly but to make sure that it is fully and properly funded.”

The IRS bill aims to improve the management of the agency by establishing an oversight board to set policy, review its budgets and approve reorganization plans. The panel would include six people from the private sector, to be chosen by the president. Other members would be the secretary of the Treasury, the IRS commissioner and an IRS employee representative.

The inclusion of an employee representative was a compromise designed to assuage GOP critics, who objected to earlier versions that called for this spot to be filled by an official of the labor union to which IRS workers belong.

Other provisions would have a more direct effect on individual taxpayers when they are audited or otherwise find themselves in a dispute with the agency. One of the broadest changes would require the agency to prove that taxpayers are in error when they go to civil tax court. Under current law, taxpayers carry the burden of proof.

Negotiators also accepted a version of a major Senate proposal to suspend penalties and interest charged to taxpayers if the IRS does not inform them of problems in their returns within one year of filing.

Responding to IRS concerns that the agency would have a hard time immediately operating under that new deadline, negotiators set it at 18 months for the next five years, after which the one-year notice requirement would kick in.

The compromise includes provisions that would make it easier for divorced and separated spouses to disavow mistakes made in tax forms filed jointly. But the provision is not as generous as the version the Senate passed, which critics said could have let married people completely off the hook for their spouses’ mistakes.

The bill also contains a provision designed to discourage Congress from enacting overly complicated tax laws. It would require each tax bill that goes to the House and Senate floor to be accompanied by an analysis of its effect on the code’s complexity.

Clinton administration officials who once had raised concerns that initial versions of the bill might make it harder to crack down on tax cheats were among those hailing the compromise.

“This legislation will help the great majority of taxpayers who voluntarily meet their tax obligations each and every year without offering encouragement for noncompliance,” the administration said in a statement from Treasury Secretary Robert E. Rubin and IRS Commissioner Charles O. Rossotti.

“This is the most comprehensive reform [and] restructure of IRS in modern history,” Sen. William V. Roth Jr. (R-Del.), chairman of the Senate Finance Committee, told reporters. He was among the lawmakers who drafted the compromise.

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Impact Points

Burden of proof: In civil court, IRS must prove guilt instead of the taxpayer proving innocence.

Spouses: It will be easier for a taxpayer to escape penalties for the actions of an estranged or former spouse.

Penalties: Buildup of penalties stops if IRS does not promptly notify a taxpayer of problems--within 18 months initially, then one year.

Management: Establishes an oversight board composed of the Treasury secretary, the IRS commissioner, an IRS employee representative and six people appointed by the president.