May 05, 2019

The Taxpayer Bill of Rights

Posted by Bishop L. Toups | In Taxes & IRS Audits

In 1988, Congress passed the first of three Taxpayer Bills of Rights. Senator Pryor announced that:

[This law will] stem the abuse of taxpayers by the IRS and provide redress when abuse does occur. It marks a victory for the little taxpayer. It levels the playing field.

Well, you know how politicians get carried away with the sound of their own voices. TBOR I, as it is known, was a step in the right direction. TBOR II added a few more taxpayer protections, and TBOR III, passed in 1998, finally made real progress in giving taxpayers rights.

The IRS now must let taxpayers know that they have certain rights when facing the agency. Congress required the IRS to publish a plain-English pamphlet summarizing these rights, which is Publication 1, Your Rights as a Taxpayer. Take time to read this pamphlet if you are being audited or dealing with an IRS collector. It is reprinted at the end of this chapter.

Taxpayer Bill of Rights I

The following summarizes some of the key features of TBOR I.

The Good

  • The IRS created the position of ombudsman, now called taxpayer advocate. This IRS official is empowered to issue Taxpayer Assistance Orders (TAOs) stopping the IRS from taking certain actions against taxpayers. For instance, the taxpayer advocate can stop a seizure of your property if you can show it will cause a significant hardship. This advocate works through the Taxpayer Advocate Service (see Chapter 8).
  • The IRS developed Publication 1, Your Rights as a Taxpayer. The IRS must enclose it with your first notice concerning delinquent taxes. Oddly, it doesn’t have to be sent with an audit notice. This pamphlet summarizes your rights during any IRS noncriminal interview, such as an audit, appeal, or collections matter.
  • You can propose an installment plan to the IRS if you can’t pay a bill in full. This doesn’t mean you can force the IRS to accept your deal, but the IRS must fairly consider your request.
  • You generally don’t have to meet with the IRS personally if you send a qualified representative—a lawyer, CPA, or an enrolled agent. (See Chapter 13.)
  • You can stop an audit or other IRS meeting to contact a tax professional for advice. (See Chapter 3.) This is the IRS equivalent of your right to an attorney before talking to the police. The IRS won’t furnish you a free tax professional, however.
  • You generally can’t be forced to meet with an IRS auditor at an inconvenient time or place. Congress was concerned about small businesses being forced to close during an audit. In this situation, the IRS must hold the audit at its office or elsewhere. The IRS can, however, visit your business to verify items on your tax return, such as inventory or equipment. (See Chapter 3.)

The So-So

  • Dollar amounts of property and wages exempt from IRS seizure were increased a bit. (See Chapter 7.)
  • The district director—your IRS local chief—or his assistant must personally approve seizures of your principal residence. Revenue officer Rambo cannot decide on her own to take the roof over your head.
  • You must be sent a Notice of Intent to Levy before the IRS seizes your property. You have 30 days to contest the seizure. In practice, if you owe the IRS, you’ll have no legal grounds to contest. This freeze period, however, gives you time to negotiate further with the IRS.

The Window Dressing

  • Penalties can be removed from your tax bill if they resulted from your relying on incorrect IRS written advice. The IRS rarely provides written advice.
  • You can audio record most meetings with the IRS. Taping a meeting would probably make the IRS agent apprehensive and hard to deal with. You can’t legally videotape or record telephone conversations with the IRS.
  • You can sue any IRS employee who intentionally disregards the law, up to $100,000, plus legal costs. In the decade this has been law, 20 taxpayers (at most) have won such cases. And, if you sue and lose, the IRS can get its costs awarded against you.

Taxpayer Bill of Rights II

TBOR II is a supplement to TBOR I, not a replacement. Here is a summary of some of TBOR II’s provisions, which I have also put into the categories of the Good, the So-So, and the Window Dressing.

The Good

  • Taxpayers can formally appeal liens, levies, and seizures to the IRS Appeals Office, which is totally independent of the collection division. The appeals office can stop a lien, levy, or seizure if collectors did not follow correct procedures or it can consider less drastic actions. Collectors are now more respectful of taxpayers, knowing there is another department looking over their shoulders.
  • The IRS can withdraw a Notice of Tax Lien or return seized property if:
    • the IRS action was premature
    • the IRS action was not in accord with established procedures
    • the taxpayer enters into an installment agreement
    • it would facilitate collection of the tax debt, or
    • it is in the best interests of the taxpayer.
  • The IRS can forgive penalties for failing to timely deposit payroll taxes for first-time offenders. Also, the IRS can abate penalties for sending the payment to the IRS instead of depositing it with a proper financial institution. These should ease the burden somewhat for the small business person just starting off.
  • If you personally owe payroll taxes under the Trust Fund Recovery Penalty, the IRS must now inform you of the efforts it makes to collect taxes from any other people who may be liable for the same taxes. (See Chapter 11.) Before, the IRS often made little effort to collect from all but the easiest target. Now, collectors must conscientiously pursue others as well and tell you of the efforts being made. TBOR II also establishes a federal basis for a lawsuit by one codebtor against the others.
  • For married or divorced couples with joint tax bills, the IRS must tell both spouses what collection efforts have been made to get payment from the other spouse. The IRS typically pursues whichever divorced spouse is easier to find, usually the ex-wife with the kids, while the ex-husband with no children skips town. The IRS may now more seriously pursue the ex than in the past.

The So-So

  • Interest or penalties on tax bills won’t begin for 21 days after an assessment. If the added tax is $100,000 or more, the interest-free period is dropped to ten business days. This is an incentive to encourage payment by audit victims as soon as the audit ends. It could save you a few bucks, but not many.
  • Courts can more easily award attorneys’ fees and legal costs to taxpayers who run up against the IRS. The IRS must prove it was substantially justified in bringing a case. While this sounds good, it is still within the discretion of the judge, not a jury, to allow recovery of your legal costs in fighting the IRS. In the past, few people have ever been awarded fees against the IRS, even when they won their case.
  • If you dispute the validity of income attributed to you on a Form 1099 or W-2—for example, a business incorrectly reports money paid to you as an independent contractor—now the IRS, not you, must hash it out with the third party.
  • The IRS must notify a taxpayer within 60 days if it has a credit it can’t match up with a tax bill. The IRS sometimes misapplies payments to accounts. At least now the agency must try to straighten it out in a reasonable period of time. We’ll see.
  • Married taxpayers who previously filed separately and owe taxes can amend their returns to file jointly, without paying the taxes due. Paying first was required to file this type of amendment.

The Window Dressing

  • The term ombudsman from TBOR I was replaced with taxpayer advocate. The problems resolution office is now also known as the Taxpayer Advocate Service. Proponents failed, however, in making this job independent of the IRS.
  • Taxpayers can sue anyone who files a false Form 1099 or W-2 Form with fraudulent intent—that is, someone who falsely and deliberately reports to the IRS that you were paid money. Some militia groups have filed reports on IRS officials and other perceived enemies; this provision is the IRS’s version of revenge.
  • The amount you can sue an IRS collector for illegal acts is $1 million. This sounds good, but just try to get it.
  • The tax court can decide whether or not the IRS’s failure to abate interest was in error. I can’t imagine an ordinary taxpayer taking this issue to court, but for multimillion-dollar cases, this could be significant.
  • You can file your tax return by certain private delivery services, such as UPS, FedEx, or Airborne, as well as by the U.S. mail.
  • Annual notices must be sent to anyone owing the IRS, showing a current balance due. I’m not sure most people are especially eager to get this information, if they need it. More trees sacrificed on the IRS altar.

Taxpayer Bill of Rights III

In 1998, the most significant IRS reform ever became law. While the outcome for the taxpayer was not perfect, it was far better than I expected. I supplied data to Congress and sat through the hearings in Washington.

The Good

  • Innocent spouse help became easier to get for joint return filers. And, a “separate liability election” is now possible for an ex or legally separated spouse or one living apart for at least 12 months. The election limits the tax just to items relating to the innocent spouse (typically a wife). But there’s no help if assets were transferred fraudulently or if the hubby and wife both knew of the tax cheating. This is one of the real highlights of the reform act.
  • The tax court can now hear disputes about innocent spouse relief.
  • The monthly penalty for paying a tax bill under an installment agreement was cut from 0.50% to 0.25%. Anything helps.
  • The IRS can’t charge interest or certain penalties unless it contacts the tax debtor at least once a year. Usually this just means a computer generated notice. This rule doesn’t apply to the failure to pay a penalty or tax fraud.
  • A tax notice showing a penalty must indicate its source (the tax law section) and how it was computed. But, this doesn’t apply to failure to file, failure to pay, or a few other types of penalties.
  • Every IRS notice that includes interest must show how it was computed. This cut down the famous IRS “mystery” bills of the past.
  • The IRS must notify individuals when a Notice of Federal Lien is filed. And, more importantly, for the 30-day period after the mailing of the notice, the taxpayer can go before an appeals officer. Could be of significance in a few cases.
  • All Notices of Intent to Levy must be sent by registered or certified mail, return receipt requested. No levy can take place within 30-days of the mailing. The taxpayer can contest it before an appeals officer. Great added taxpayer protection.
  • There can be no seizure of a principal residence without a court order and prior notice of the hearing. At the hearing, the IRS must show that there is no reasonable alternative for the collection of the tax. This provision has virtually eliminated residence seizures by the IRS. Hooray!
  • The attorney-client confidentiality of communications privilege is extended to anyone authorized under federal law to practice before the IRS. Theoretically, this puts CPAs and enrolled agents on the same footing as attorneys. Sounds good, but not really very important in practice.
  • IRS auditors can’t use financial status or economic reality probes to find unreported income without a reasonable indication that there is a likelihood of it. What the heck is a “reasonable indication”?
  • The IRS may not contact anyone other than the taxpayer during an audit or collection investigation without providing reasonable notice to the taxpayer those contacts are being made. Not much change in IRS procedures, just extra paperwork.
  • IRS supervisory approval is required for any lien, levy, or seizure to affirm that the collector’s action is appropriate under the circumstances. Circumstances include the amount due and the value of the asset. Restricts gunslinger collectors from acting on their own. Since levies and seizures decreased dramatically after the IRS reform act, this provision may deserve part of the credit.
  • Levy exemption amounts for property are indexed for inflation and adjusted annually. These amounts are still pretty minimal.
  • The IRS must provide a written accounting of sales of seized property, whether real or personal, to the tax debtor. The IRS has always done this anyway as a matter of policy, and now it’s law.
  • The IRS can’t seize a residence for a tax debt of $5,000 or less. No big deal as the IRS isn’t seizing residences anymore anyway.
  • The IRS must exhaust all other payment options before seizing the taxpayer’s business assets. May slow down a few rogue IRS collectors.
  • The IRS can’t force a debtor to agree to extend the ten year statute of limitations on collections. However, extensions may be required as part of an installment agreement. So, the doubletalk here is that IRS really can force you to extend the collection period after all.
  • For folks undergoing an audit, the IRS may request an extension of the normal (three-year) audit period. If it does so, the IRS must also tell the audited person they have the right to refuse to sign or to limit the extension to particular audit issues. Well, if you don’t sign, it usually means the IRS will disallow deductions or find you didn’t report all your income and hit you with a bill.
  • The IRS must allow folks making Offers in Compromise enough money for basic living expenses. The IRS can’t reject an offer just because it is low. This is so vague, it’s a source of amusement at IRS offices.
  • IRS levies are prohibited during Offer in Compromise, 30 days following rejection of an offer, during an appeal, or while an installment agreement is in force.
  • IRS must have internal review procedures when rejecting requests for installment agreements. Good protection in theory as it requires supervisors to approve actions of their underlings.

The So-So

  • The IRS now has the burden of proof in any court proceeding on a factual issue once a taxpayer presents credible evidence to the contrary. Four conditions must be met. The taxpayer must (1) substantiate the item, (2) maintain records, (3) cooperate with reasonable IRS requests for meetings, information, and documents, and (4) for entities (not individuals) meet certain net worth limitations. Congress considered, but unfortunately rejected, the original part of this law which placed the burden of proof on the IRS in audits.
  • A federal court can award up to $100,000 to a taxpayer if an IRS employee negligently breaks the law in collecting a tax bill and up to $1 million if the employee willfully violates the bankruptcy code automatic stays or discharge provisions. In reality, I’ve seen very few cases where taxpayers got a dime. However, IRS collectors seem to have become more timid since the law passed.

The Window Dressing

  • IRS will adopt a liberal acceptance policy for Offers in Compromise. From what I’ve seen the IRS has completely ignored this “suggestion” from Congress.
  • Tax audit losers must be told of the deadline date for taking their bill to tax court. This date wasn’t always easy to figure out for someone not in the tax world, and is more important than it might appear to be.
  • Certain fair debt collection practices were made applicable to the IRS (for example, prohibition against harassing or abusive communications).
  • An installment agreement must be granted if: (1) the tax bill is under $10,000, (excluding penalties and interest), (2) in the previous five years, the debtor has had another installment agreement and didn’t default on it, (3) the debtor submits financial statements, if requested, showing she can’t pay in full; and (4) the installment agreement provides for full payment within 3 years.
  • Joint and several liability rules must be explained to married tax debtors. The spouses must be told about electing separate liability and how to get out of the debt altogether.
  • Taxpayers’ rights must be set forth in Publication 1 clearly, including the right to be represented.
  • Explanations to taxpayers of the audit, appeals, and collection processes are required. And folks must be informed about the taxpayer advocate whenever the IRS proposes a new tax bill.
  • Annual statements must be sent to debtors on IRS installment agreements showing the past year’s payments and the remaining balance.
  • IRS correspondence (other than routine notices) must include name, telephone number, and ID number of an IRS employee the taxpayer may contact. IRS employees calling on the phone must give their telephone number and IRS badge number.
  • IRS employees may use pseudonyms only if there is adequate justification, such as protecting personal safety, and IRS management has approved. This stops over-zealous employees from abusing taxpayers while hiding behind a phony name.
  • Illegal tax protester designations are prohibited. These permanent character stains can’t be listed anywhere in the IRS files or in its computer. The IRS only can designate folks as “nonfilers,” but must remove this designation after the taxpayer has filed tax returns and paid all taxes.
  • Any person (whistleblower) providing confidential information to Congress can’t be punished if he believes such information relates to misconduct or taxpayer abuse.
  • Listing of local IRS telephone numbers and local IRS offices in directories. Believe it or not, the IRS did not do this before Congress ordered them in the law.

Chapter Highlights

  • A federal law known as the Taxpayer Bill of Rights establishes certain rights for individuals and entities in dealing with the IRS.
  • Your primary rights are to be treated fairly and in a prompt manner and to have a representative deal with the IRS for you.
  • Read the two-page IRS Publication 1, Your Rights as a Taxpayer, whenever you have a problem with the IRS.

Bishop L. Toups

Bishop L. Toups is an estate planning, elder law, and tax attorney in Southwest Florida.

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