The following is a summary of the IRS Restructuring and Reform Bill of 1998 (hereinafter "the Act") which was enacted on July 22, 1998.  This summary focuses upon tax procedure, tax controversy and tax litigation.  A complete summary is available for download by clicking here.

The Internal Revenue Service ("IRS") is organized into a three-tier geographic structure with a multi-functional National Office, Regional Offices, and District Offices. The Commissioner of Internal Revenue ("Commissioner") is to restructure the IRS by eliminating or substantially modifying the present-law three-tier geographic structure and replacing it with an organizational structure that features operating units serving particular groups of taxpayers with similar needs.

Presently there is a Regional Commissioner, a Regional Counsel and a Regional Director of Appeals for each of the following four regions: (1) the Northeast Region (New York); (2) the Southeast Region (Atlanta); (3) the Midstates Region (Dallas); and (4) the Western Region (San Francisco). There are 33 district offices, 10 service centers, and 3 computing centers.

The Commissioner has announced a plan to reorganize the structure of the IRS. Under the plan the present regional structure would be replaced with a structure based on units that serve particular groups of taxpayers with similar needs. The Commissioner has currently identified four different groups of taxpayers with similar needs: (1) individual taxpayers; (2) small businesses; (3) large businesses; and (4) the tax-exempt sector (including employee plans, exempt organizations and state and local governments). Under this structure, each unit would be charged with end-to-end responsibility for serving a particular group of taxpayers. The proposed structure would eliminate the need for a taxpayer to deal with different offices to solve a problem.

The IRS is to revise its mission statement to provide greater emphasis on serving the public and meeting the needs of taxpayers. The current mission statement is:

The purpose of the Internal Revenue Service is to collect the proper amount of tax revenue at the least cost; serve the public by continually improving the quality of our products and services; and perform in a manner warranting the highest degree of public confidence in our integrity and fairness.

Congress believes taxpayers should be able to receive from the IRS the same level of service expected from the private sector. Taxpayer inquiries should be answered promptly and accurately; taxpayers should be able to obtain timely resolutions of problems and information regarding activity on their accounts; and taxpayers should be treated fairly and courteously at all times.

C. IRS Oversight Board - Act Sec. 1101 and Code Sec. 7802

Under present law, the administration and enforcement of the internal revenue laws are performed by or under the supervision of the Secretary of the Treasury.

Within the Treasury Department will be established an Internal Revenue Service Oversight Board (the "Board"). The general responsibilities of the Board are to oversee the IRS in its administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws. The Board also has the authority to recommend candidates for Commissioner to the President, and to recommend removal of the Commissioner. The Board has no authority to intervene in (1) specific taxpayer cases, including compliance activities involving specific taxpayers such as criminal investigations, examinations, and collection activities; (2) specific individual personnel matters; or (3) specific procurement matters.

The Oversight Board is composed of nine members. Six of the members are so-called "private-life" members who are not otherwise Federal officers or employees. The other members are: (1) the Secretary of the Treasury (or, if the Secretary so designates, the Deputy Secretary); (2) the Commissioner; and (3) an individual who is a full-time Federal employee or a representative of employees ("employee representative"). The private-life members of the Board and the employee representative are appointed by the President, with the advice and consent of the Senate. Under the Act, the private-life members of the Board will be appointed without regard to political affiliation, based solely on their expertise in the following areas: management of large service organizations; customer service; the Federal tax laws, including tax administration and compliance; information technology; organization development; the needs and concerns of taxpayers; and the needs and concerns of small business. The Board is required to meet on a regular basis (as determined necessary by the Chair), but no less frequently than quarterly.

II.

EXAMINATION ACTIVITIES

A. Limitation of Financial Status Audits - Act Sec. 3412 and Code Sec. 7602

The Act prohibits the IRS from using financial status or economic reality examination techniques to determine the existence of unreported income of any taxpayer unless the IRS has a reasonable indication that there is a likelihood of unreported income, effective on the date of enactment.

OBSERVATION: In the past the IRS has asked a number of intrusive questions and requested information from taxpayers concerning the amount of their living expenses. Tax practitioners should be especially sensitive in the future to the IRS seeking this type of information in audits. Code Sec. 7602(e) prohibits the IRS from using the type of examination techniques that was used in the past "unless the IRS has a reasonable indication that there is a likelihood of unreported income." We are unsure what this "reasonable indication" will be. However, when the IRS starts seeking information that would relate to a financial status audit, tax practitioners should challenge the IRS as to why they are seeking this information and whether the IRS believes there is unreported income. If this is the case, then the IRS may begin a criminal investigation.

B. Explanation of Taxpayers’ Rights in Interviews With the IRS - Act Sec. 3502

Prior to or at initial in-person audit interviews, the IRS must explain to taxpayers the audit process and taxpayers’ rights under that process (Code Sec. 7521). In addition, prior to or at initial in-person collection interviews, the IRS must explain the collection process and taxpayers’ rights under that process. If a taxpayer clearly states during an interview with the IRS that the taxpayer wishes to consult with the taxpayers’ representative, the interview must be suspended to afford the taxpayer a reasonable opportunity to consult with the representative.

The Act requires that the IRS rewrite Publication 1 ("Your Rights as a Taxpayer") to inform taxpayers more clearly of their rights (1) to be represented by a representative and (2) if the taxpayer is so represented, that interviews with the IRS may not proceed without the presence of the representative unless the taxpayer consents. The revisions are required no later than 180 days after the date of enactment.

C. Disclosure of Criteria for Examination Selection - Act Sec. 3503

The provision requires that IRS add to Publication 1 ("Your Rights as a Taxpayer") a statement which sets forth in simple and nontechnical terms the criteria and procedures for selecting taxpayers for examination. The statement is required to be included not later than 180 days after the date of enactment.

D. Change in Tax Matters Partner - Act Sec. 3705 and Code Sec. 6231(a)(7)

The Act requires the IRS to notify all partners of any resignation of the tax matters partner that is required by the IRS, and to notify the partners of any successor tax matters partner. This provision is effective for selections of tax matters partners made by the IRS after the date of enactment.

E. Reason for Refund Disallowance - Act Sec. 3505 and Code Sec. 6402(j)

The Examination Division of the IRS examines claims for refund submitted by taxpayers. The Act requires the IRS to notify the taxpayer of the specific reasons for the disallowance (or partial disallowance) of a refund claim. This provision is effective 180 days after the date of enactment.

A. Taxpayer Advocate - Act Sec. 1102 and Code Secs. 7803(c) and 7811(a)

In 1996, the Taxpayer Bill of Rights 2 ("TBOR 2") established the position of Taxpayer Advocate, which replaced the position of Taxpayer Ombudsman created in 1979 by the IRS. The Taxpayer Advocate is appointed by and reports directly to the IRS Commissioner. TBOR 2 also created the Office of the Taxpayer Advocate. The functions of the office are (1) to assist taxpayers in resolving problems with the IRS; (2) to identify areas in which taxpayers have problems in dealings with the IRS; (3) to propose changes (to the extent possible) in the administrative practices of the IRS that will mitigate those problems; and (4) to identify potential legislative changes that may mitigate those problems.

Taxpayers can request that the Taxpayer Advocate issue a taxpayer assistance order ("TAO") if the taxpayer is suffering or about to suffer a significant hardship as a result of the manner in which the internal revenue laws are being administered. A TAO may require the IRS to release property of the taxpayer that has been levied upon, or to cease any action, take any action as permitted by law, or refrain from taking any action with respect to the taxpayer.

Under present law, the direct point of contact for taxpayers seeking TAOs is a problem resolution officer appointed by a District Director or a Regional Director of Appeals. The Taxpayer Advocate has designated the authority to issue TAOs to the local and regional problem resolution officers.

The Act renames the IRS Taxpayer Advocate as the "National Taxpayer Advocate." The National Taxpayer Advocate is appointed by the Secretary of the Treasury after consultation with the Commissioner and the IRS Oversight Board.

The present-law problem resolution system is replaced with a system of local Taxpayer Advocates who report directly to the National Taxpayer Advocate and who are independent from the IRS examination, collection, and appeals functions. The National Taxpayer Advocate has the responsibility to evaluate and take personnel actions (including dismissal) with respect to any local Taxpayer Advocate or any employee in the Office of the National Taxpayer Advocate.

At the initial meeting with any taxpayer seeking the assistance of the Office of the Taxpayer Advocate, the local taxpayer advocate is required to notify the taxpayer that the Office operates independently of any other IRS office and reports directly to Congress through the National Taxpayer Advocate. Each local office of the Taxpayer Advocate is to maintain a separate phone, facsimile, and other electronic communication access, and a separate post office address. The IRS will be required to publish the taxpayer’s right to contact the local Taxpayer Advocate in the statutory notice of deficiency.

The circumstances under which a TAO may be issued have been expanded. The Act provides that a "significant hardship" is deemed to occur if one of the following four factors exists: (1) there is an immediate threat of adverse action; (2) there has been a delay of more than 30 days in resolving the taxpayer’s account problems; (3) the taxpayer will have to pay significant costs (including fees for professional services) if relief is not granted; or (4) the taxpayer will suffer irreparable injury, or a long-term adverse impact, if relief is not granted.

These factors are not an exclusive list of what constitutes a significant hardship; a TAO may also be issued in other circumstances in which it is determined that the taxpayer is suffering or will suffer a significant hardship.

In determining whether to issue a TAO in cases in which the IRS failed to follow applicable published guidance (including procedures set forth in the Internal Revenue Manual), the Taxpayer Advocate is to construe the matter in a manner most favorable to the taxpayer. These provisions generally are effective on the date of enactment

C. Statements to Taxpayers With Installment Agreements - Act Sec. 3506

Effective July 1, 2000, the Act requires the IRS to send every taxpayer who has an installment agreement an annual statement of the initial balance owed, the payments made during the year, and the remaining balance.

D. Approval Process for Liens, Levies, and Seizures - Act Sec. 3421

The Act requires the IRS to implement an approval process under which any lien, levy or seizure would, when appropriate, be approved by a supervisor who would review the taxpayer's information, verify that a balance is due, and affirm that a lien, levy or seizure is appropriate under the circumstances. Circumstances to be considered include the amount due and the value of the asset. The provision is effective for collection actions commenced after the date of enactment. In the case of any action under the automated collection system, the provision applies to actions initiated after December 31, 2000.

OBSERVATION: Tax practitioners need to know what type of supervisory action has been taken and what was considered when a tax lien is filed or when a levy is issued. When exercising appeal rights under Code Secs. 6320 and 6330, the tax practitioner should request this information from the Appeals Officer.

E. Due Process with Respect to Liens and Levies in IRS Collection Actions - Act Sec. 3401 and Code Secs. 6320 and 6330

Levy is the IRS’s administrative authority to seize a taxpayer’s property to pay the taxpayer’s tax liability. The IRS is entitled to seize a taxpayer’s property by levy if the Federal tax lien has attached to such property. The Federal tax lien arises automatically where (1) a tax assessment has been made; (2) the taxpayer has been given notice of the assessment stating the amount and demanding payment; and (3) the taxpayer has failed to pay the amount assessed within ten days after the notice and demand.

The IRS may collect taxes by levy upon a taxpayer’s property or rights to property (including accrued salary and wages). The Act establishes formal procedures designed to insure due process where the IRS seeks to collect taxes by levy (including by seizure). The due process procedures also apply after notice of a Federal tax lien has been filed.

1. Tax Lien

Under Code Sec. 6320, the IRS must notify the taxpayer in writing of the filing of a notice of federal tax lien. The notice must be given in person, left at the home or place of business of the taxpayer, or sent by certified or registered mail to the taxpayer’s last known address not more than five business days after the filing of the notice of tax lien. The notice must include the following:

a. The amount of unpaid tax;

b. the right of the taxpayer to request a hearing during the thirty days beginning on the day after the five day period for mailing the notice. Thus, the taxpayer should have thirty-five days after the filing of the notice of tax lien to appeal;.

c. the appeal rights available to the taxpayer; and

d. the procedures for the release of tax liens on the property.

2. Levy

As under present law, notice of the intent to levy must be given at least 30 days (90 days in the case of a life insurance contract) before property can be seized or salary and wages garnished. During the 30-day (90-day) notice period, the taxpayer may demand a hearing to take place before an Appeals Officer who has had no prior involvement in the taxpayer’s case. If the taxpayer demands a hearing within that period, the proposed collection action may not proceed until the hearing has concluded and the appeals officer has issued his or her determination.

Notice must be given in the same manner as the notice that relates to tax liens. The notice under Code Sec. 6330 must include the following in simple and non-technical terms:

a. the amount of unpaid tax;

b. the right of the taxpayer to request a hearing during the 30-day period before the levy;

c. the action proposed by the IRS and the rights of the taxpayer with respect to such action;

d. the provisions of the Internal Revenue Code relating to the levy and the sale of the property;

e. the procedure applicable to the levy and the sale of the property;

f. the administrative appeals available to the taxpayer with respect to the levy and sale of the property;

g. the alternatives (such as an installment agreement) available to the taxpayer which could prevent levy on the property; and

h. the Internal Revenue Code provisions and procedures relating to the redemption of the property and release of tax liens on the property.

3. Hearing

With respect to any hearing involving a tax lien or notice of intent to levy, the hearing will be held by the IRS Appeals Office. The Appeals Officer who is assigned the case shall be impartial and have had no prior involvement with the taxpayer on the issues being considered.

During the hearing, the IRS is required to verify that all statutory, regulatory, and administrative requirements for the proposed collection action have been met. IRS verifications are expected to include (but not be limited to) showings that:

a. the Revenue Officer recommending the collection action has verified the taxpayer’s liability;

b. the estimated expenses of levy and sale will not exceed the value of the property to be seized;

c. the Revenue Officer has determined that there is sufficient equity in the property to be seized to yield net proceeds from sale to apply to the unpaid tax liabilities; and

d. with respect to the seizure of the assets of a going business, the Revenue Officer recommending the collection action has thoroughly considered the facts of the case, including the availability of alternative collection methods, before recommending the collection action.

The taxpayer (or affected third party) is allowed to raise any relevant issue at the hearing. Issues eligible to be raised include but are not limited to (see Code Sec. 6330(c)(2)):

a. appropriate spousal defenses;

b. challenges to the appropriateness of collection actions;

c. collection alternatives, which could include the posting of a bond, substitution of other assets, an installment agreement or an offer-in-compromise; and

d. challenges to the underlying liability as to existence or amount, if the taxpayer did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.

The Appeals Officer is to address whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary. A proposed collection action should not be approved solely because the IRS shows that it has followed appropriate procedures.

4. Judicial Review

The Appeals Officer is expected to prepare a written determination addressing the issues presented by the taxpayer and considered at the hearing. The determination of the Appeals Officer may be appealed to Tax Court or, where appropriate, the Federal district court. Where the validity of the tax liability was properly at issue in the hearing, and where the determination with regard to the tax liability is a part of the appeal, no levy may take place during the pendency of the appeal. The amount of the tax liability will in such cases be reviewed by the appropriate court on a de novo basis. Where the validity of the tax liability is not properly part of the appeal, the taxpayer may challenge the determination of the Appeals Officer for abuse of discretion. In such cases, the Appeals Officer’s determination as to the appropriateness of collection activity will be reviewed using an abuse of discretion standard of review. Levies will not be suspended during the appeal if the IRS shows good cause why the levy should be allowed to proceed.

No further hearings are provided under this provision as a matter of right. It is the responsibility of the taxpayer to raise all relevant issues at the time of the pre-levy hearing. A taxpayer could apply for consideration of new information, make an offer-in-compromise, request an installment agreement, or raise other considerations at any time before, during, or after the hearing. However, after the 30-day period has expired, the IRS is not required to provide a hearing or delay any levy or sale of levied property. Nothing in this provision is intended to limit any remedy that is otherwise available under present law.

IRS Appeals would retain jurisdiction over its determinations. IRS Appeals could enter an order requiring the IRS collection division to adhere to the original determination. In addition, the taxpayer would be allowed to return to IRS Appeals to seek a modification of the original determination based on any change of circumstances.

In the case of a continuous levy, the due process procedures would apply to the original imposition of the levy. Except in jeopardy and termination cases, continuous levy would not be allowed to begin without notice and an opportunity for a hearing. A determination entered at the conclusion of a hearing allowing the continuous levy to proceed would be subject to post-determination adjustment on application by the taxpayer. Thus, taxpayers would have the right to have IRS Appeals review any continuous levy and take any changes in circumstances into account.

The provision is effective for collection actions initiated more than 180 days after the date of enactment.

OBSERVATION: Prior to the passage of Code Secs. 6320 and 6330, the IRS provided for the Appeals Office to review certain collection action. However, such review was not nearly as broad as what is now available. Under the prior procedure the IRS was not required to notify the taxpayer of appeals procedures, nor was the taxpayer allowed to go to court if the taxpayer disagreed with the Appeals Officer.

It remains to be seen exactly how taxpayers will benefit from these new sections. From the tax practitioner’s perspective, there is much more that will have to be done in advising and making sure taxpayers understand the rights they have under these new sections. Failure to exercise the appeal procedure within the time allowed forecloses the taxpayer from appealing the tax lien and proposed levies--thus another deadline that all tax practitioners must meet.

There will obviously be more litigation that arises out of collection action. It is unknown what standard the courts will apply in these types of cases. In addition, tax attorneys will have to be concerned about bringing frivolous lawsuits.

F. Levy Exemption Amounts - Act Sec. 3431 and Code Sec. 6334

The Act increases the value of personal effects exempt from levy to $6,250, and the value of books and tools exempt from levy to $3,125.

G. Release of Levy on Uncollectible Taxes - Act Sec. 3432 and Code Sec. 6343

The Act requires the IRS to immediately release a wage levy upon agreement with the taxpayer that the tax is not collectible. This provision is effective for levies imposed after December 31, 1999.

H. Levy Prohibited During Refund Action - Act Sec. 3433 and Code Sec. 6331

The Act requires the IRS to withhold collection by levy of liabilities that are the subject of a refund suit during the pendency of the litigation. This provision is effective for refund suits brought with respect to tax years beginning after December 31, 1998. Proceedings related to a proceeding under this provision include, but are not limited to, civil actions or third-party complaints initiated by the United States or another person with respect to the same kinds of tax (or related taxes or penalties) for the same (or overlapping) tax periods.

OBSERVATION: This provision will relate primarily to suits involving the trust fund recovery penalty. In the past, in some cases the IRS has begun or continued collection action while the taxpayer was contesting the assessment. Taxpayers can sue without the fear that the IRS will attempt to collect during the pendency of the lawsuit.

I. Increase in Amount of Certain Property on Which Lien not Valid - Act Sec. 3435 and Code Sec. 6323

The Federal tax lien attaches to all property and rights to property of the taxpayer, if the taxpayer fails to pay the assessed tax liability after notice and demand (Code Sec. 6321). However, the Federal tax lien is not valid as to certain "superpriority" interests as defined in Code Sec. 6323(b).

Two of these interests are limited by a specific dollar amount. Under Code Sec. 6323(b)(4), purchasers of personal property at a casual sale are presently protected against a Federal tax lien attached to such property to the extent the sale is for less than $250. Code Sec. 6323(b)(7) provides protection to mechanic’s lienor with respect to the repairs or improvements made to owner-occupied personal residences, but only to the extent that the contract for repair or improvement is for not more than $1,000.

In addition, a superpriority is granted under Code Sec. 6323(b)(10) to banks and building and loan associations which make passbook loans to their customers, provided that those institutions retain the passbooks in their possession until the loan is completely paid off.

The Act increases the dollar limit for purchasers at a casual sale from $250 to $1,000, and further increases the dollar limit from $1,000 to $5,000 for mechanic’s lienor providing home improvement work for owner-occupied personal residences and indexes these dollar amounts for inflation. The provision is effective on the date of enactment.

J. Waiver of Early Withdrawal Tax for IRS Levies on Employer-Sponsored Retirement Plans or IRAs - Act Sec. 3436 and Code Sec. 72(t)(2)(A)

The Act provides an exception from the 10-percent early withdrawal tax for amounts withdrawn from an employer-sponsored retirement plan or an IRA that are subject to a levy by the IRS. The exception applies only if the plan or IRA is levied; it does not apply, for example, if the taxpayer withdraws funds to pay taxes in the absence of a levy, in order to release a levy on other interests. The provision is effective for withdrawals after the date of enactment.

K. Prohibition of Sales of Seized Property at Less Than Minimum Bid - Act Sec. 3441 and Code Sec. 6335(e)

The Act prohibits the IRS from selling seized property for less than the minimum bid price. The Act provides that the sale of property for less than the minimum bid price would constitute an unauthorized collection action, which would permit an affected person to sue for civil damages pursuant to Code Sec. 7433. This provision is effective for sales occurring after the date of enactment.

L. Accounting of Sales of Seized Property - Act Sec. 3442 and Code Sec. 6340(c)

The IRS is authorized to seize and sell a taxpayer’s property to satisfy an unpaid tax liability (Code Sec. 6331(b)). The IRS is required to give written notice to the taxpayer before seizure of the property (Code Sec. 6331(d)). The IRS must also give written notice to the taxpayer at least 10 days before the sale of the seized property.

The Act requires the IRS to provide a written accounting of all sales of seized property, whether real or personal, to the taxpayer. The accounting must include a receipt for the amount credited to the taxpayer's account. The provision is effective for seizures occurring after the date of enactment.

M. Codification of IRS Administrative Procedures for Seizure of Taxpayer’s Property - Act Sec. 3444 and Code Sec. 6331

The IRS provides guidelines for Revenue Officers engaged in the collection of unpaid tax liabilities. The Internal Revenue Manual (IRM 56(12)5.1) provides general guidelines for seizure actions:

1. the Revenue Officer must first verify the taxpayer’s liability;

2. no levy may be made if the estimated expenses of levy and sale will exceed the fair market value of the property to be sized (Code Sec. 6331(f));

3. no levy may be made on the date of an appearance in response to an administrative summons, unless jeopardy exists (Code Sec. 6331(g));

4. the taxpayer should have an opportunity to read the levy form;

5. the Revenue Officer must attach a sufficient number of warning notices on the property to clearly identify the property to be seized;

6. the Revenue Officer must inventory the property to be seized; and

7. a Revenue Officer may not use force in the seizure of property.

Prior to the levy action, the Revenue Officer must determine that there is sufficient equity in the property to be seized to yield net proceeds from the sale to apply to unpaid tax liabilities. If it is determined after seizure that the taxpayer’s equity is insufficient to yield net proceeds from sale to apply to the unpaid tax, the Revenue Officer will immediately release the seized property. See IRM 56(12)2.1.

IRS Policy Statement P-5-34 states that the facts of a case and alternative collection methods must be thoroughly considered before deciding to seize the assets of a going business. IRS Policy Statement P-5-16 advises reasonable forbearance on collection activity when the taxpayer’s business has been affected by a major disaster such as flood, hurricane, drought, fire, etc., and whose ability to pay has been impaired by such disaster.

The Act codifies the IRS administrative procedures which require the IRS to investigate the status of certain property prior to levy, effective on the date of enactment. The Act provides that the investigation shall include:

1. a verification of the taxpayer’s liability;

2. a determination whether expenses of levy and sale will exceed the fair market value of the property;

3. a determination that the equity in the property is sufficient to yield net proceeds from the sale of the property to apply to the tax liability; and

4. a thorough consideration of alternative collection methods.

N. Seizure of Residences and Businesses - Act Sec. 3445 and Code Sec. 6334(a)(13)

Subject to certain procedural rules and limitations, the IRS may seize the property of the taxpayer who neglects or refuses to pay any tax within 10 days after notice and demand. The IRS may not levy on the personal residence of the taxpayer unless the District Director (or the assistant District Director) personally approves in writing or in cases of jeopardy. There are no special rules for property that is used as a residence by parties other than the taxpayer. IRS Policy Statement P-5-34 states that the facts of a case and alternative collection methods must be thoroughly considered before deciding to seize the assets of a going business.

The Act prohibits the IRS from seizing any real property used as a residence by the taxpayer or any nonrental real property of the taxpayer used by any other individual as a residence to satisfy an unpaid liability of $5,000 or less, including penalties and interest.

The Act requires the IRS to exhaust all other payment options before seizing the taxpayer’s business assets or principal residence. A levy is permitted on a principal residence only if a judge or magistrate of a United States District Court approves (in writing) of the levy. The provision is effective on the date of enactment.

OBSERVATION: Section 6334 does not state whether the IRS has to file a legal action against the taxpayer in order to seize the residence, or if the IRS can just go before a judge and have an order signed. The taxpayer should exercise all rights available at every stage of the collection process including contesting the liens and levies under Sections 6320 and 6330.

O. Fair Debt Collection Practices - Act Sec. 3466 and Code Sec. 6304

The Fair Debt Collection Practices Act provides a number of rules relating to debt collection practices. Among these are restrictions on communication with the consumer, such as a general prohibition on telephone calls outside the hours of 8:00 a.m. to 9:00 p.m. local time, and prohibitions on harassing or abusing the consumer. In general, these provisions do not apply to the Federal Government.

The Act applies to the IRS certain restrictions relating to communication with taxpayer/debtors and the prohibitions on harassing or abusing a debtor. The restrictions relating to communication with the taxpayer/debtor are not intended to hinder the ability of the IRS to respond to taxpayer inquiries (such as answering telephone calls from taxpayers). The provision is effective on the date of enactment.

P. Guaranteed Installment Agreements - Act Sec. 3467 and Code Sec. 6159

Code Sec. 6159 authorizes the IRS to enter into written agreements with any taxpayer under which the taxpayer is allowed to pay taxes owed, as well as interest and penalties, in installment payments if the IRS determines that doing so will facilitate collection of the amounts owed. Many taxpayers can request an installment agreement by filing Form 9465. The IRS in most instances readily approves these requests if the amounts involved are not large (in general, below $10,000) and if the taxpayer has filed tax returns on time in the past.

The Act requires the IRS to enter into an installment agreement, at the taxpayer's option, if:

1. the liability is $10,000, or less (excluding penalties and interest);

2. within the previous five years, the taxpayer has not failed to file or to pay, nor entered into an installment agreement under this provision;

3. if requested by the IRS, the taxpayer submits financial statements, and the IRS determines that the taxpayer is unable to pay the tax due in full;

4. the installment agreement provides for full payment of the liability within three years; and

5. the taxpayer agrees to continue to comply with the tax laws and the terms of the agreement for the period (up to three years) that the agreement is in place.

The provision is effective on the date of enactment.

OBSERVATION: Even though the threshold level is $10,000, the taxpayer should always ask for what terms he wants, as the IRS may grant a higher level.

IV.

ACCOUNTANT-CLIENT PRIVILEGE

A. Confidentiality Privilege Between Taxpayer and Federally Authorized Practitioners - Act Sec. 3411 and Code Sec. 7525

A common law privilege of confidentiality exists for communications between an attorney and a client with respect to the legal advice the attorney gives the client. Communications protected by the attorney-client privilege must be based on facts of which the attorney is informed by the taxpayer, without the presence of strangers, for the purpose of securing the advice of the attorney. The privilege may not be claimed where the purpose of the communication is the commission of a crime or tort. The taxpayer must either be a client of the attorney or be seeking to become a client of the attorney.

The privilege of confidentiality applies only where the attorney is advising the client on legal matters. It does not apply in situations where the attorney is acting in other capacities. Thus, a taxpayer may not claim the benefits of the attorney-client privilege simply by hiring an attorney to perform some other function. For example, if an attorney is retained to prepare a tax return, the attorney-client privilege will not automatically apply to communications and documents generated in the course of preparing the return.

The privilege of confidentiality also does not apply where an attorney that is licensed to practice another profession is performing such other profession. For example, if a taxpayer retains an attorney who is also licensed as a certified public accountant (CPA), the taxpayer may not assert the attorney-client privilege with regard to communications made and documents prepared by the attorney in his role as a CPA.

The attorney-client privilege is limited to communications between taxpayers and attorneys. No equivalent privilege is provided for communications between taxpayers and other professionals authorized to practice before the IRS, such as accountants or enrolled agents.

Code Sec. 7525 extends the present law attorney-client privilege of confidentiality to communications between taxpayers and individuals who are authorized under federal law to practice before the IRS.

With respect to tax advice, under Code Sec. 7525(a)(1), the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.

B. Conditions for Asserting Privilege

This new section provides that the privilege may only be asserted in:

1. any noncriminal tax matter before the IRS, and

2. any noncriminal tax proceeding in federal court brought by or against the United States.

The term "federally authorized tax practitioner" means any individual who is authorized under federal law to practice before the IRS if such practice is subject to federal regulation under Section 330 of Title 31, United States Code.

The term "tax advice" means advice given by an individual with respect to a matter which is within the scope of the individual’s authority to practice before the IRS.

The privilege does not apply to any written communication between a federally authorized tax practitioner and a director, shareholder, officer, employee, agent, or representative of a corporation in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter (as defined in Code Sec. 6662(d)(2)(C)(iii)).

The provision is effective with regard to communications made on or after the date of enactment.

OBSERVATION: There will probably be much litigation over this provision before we know exactly what it means. While it would seem to extend to certified public accountants and enrolled agents the same privileges that attorneys have, there is much left out of the statute and legislative history.

There are more requirements of the attorney-client privilege than are discussed in the legislative history and set forth in Code Sec. 7525. The advice sought from an attorney must have been sought for the purpose of seeking legal advice. It must have been the expectation of the client that what was told the attorney and what advice the attorney gave was to be confidential. The privilege can be waived in several different ways and in some cases very easily. Giving advice to a representative of a corporation may not be protected depending on to whom it is given and who has access to the information. Even attorneys have had problems with protecting their privilege in these types of situations. Over the years the attorney-client privilege has been narrowed by the courts.

Other governmental agencies can apparently obtain information given to an accountant for IRS purposes. Advice with respect to state taxes is not covered.

There are many unanswered questions. Does this privilege apply to work product? How is the privilege handled when tax and nontax advice are given? When does the noncriminal tax proceeding become criminal?

What we do know is that even to attorneys the privilege does not apply to tax return preparation. Under the new provision, tax advice is advice given by individuals who have the authority to practice before the IRS. Circular 230 authorizes certified accountants and enrolled agents to practice before the IRS. Under the term "tax advice" the person giving the advice is authorized to do so under Circular 230. Circular 230 also defines or attempts to define practice before the IRS. Does that mean that advice is only protected if it covers what is allowed to be done under Circular 230? We do not know at this time.

Tax practitioners who are not attorneys must act with caution in giving advice that they expect to be privileged. Such advice may or may not be privileged in the future depending on how the courts interpret this new privilege provision.

V.

INNOCENT SPOUSE

A. Relief for Innocent Spouses - Act Sec. 3201 and Code Sec. 6015

1. Under present law, relief from liability for tax, interest, and penalties is available for "innocent spouses" in certain circumstances. To qualify for such relief, the innocent spouse must establish:

a. that a joint return was made;

b. that an understatement of tax, which exceeds the greater of $500 or a specified percentage of the innocent spouse's adjusted gross income for the preadjustment (most recent) year, is attributable to a grossly erroneous item of the other spouse;

c. that in signing the return, the innocent spouse did not know, and had no reason to know, that there was an understatement of tax; and

d. that taking into account all the facts and circumstances, it is inequitable to hold the innocent spouse liable for the deficiency in tax. The specified percentage of adjusted gross income is 10 percent if adjusted gross income is $20,000 or less. Otherwise, the specified percentage is 25 percent.

2. Presently the proper forum for contesting the IRS’ denial of innocent spouse relief is determined by whether an underpayment is asserted or the taxpayer is seeking a refund of overpaid taxes. Accordingly, the Tax Court may not have jurisdiction to review all denials of innocent spouse relief.

3. The new law generally makes innocent spouse relief easier to obtain. The revision eliminates all of the understatement thresholds and requires only that the understatement of tax be attributable to an erroneous (and not just a grossly erroneous) item of the other spouse.

B. Two Procedures for Relief From Liability

1. Code Sec. 6015(b) provides:

a. A joint return has been filed for a taxable year.

b. On such return there is an understatement of tax attributable to erroneous items of one individual filing the joint return.

c. The other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement.

d. Taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement.

e. The innocent spouse makes a separate liability election not later than the date which is two years after the date the IRS has begun collection activities with respect to the individual making the election.

f. Upon making this election, the innocent spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such understatement. There are certain limitations on this provision.

g. The above innocent spouse provision permits a spouse to elect to limit his or her liability for unpaid taxes on a joint return to the spouse's separate liability amount. In the case of a deficiency arising from a joint return, a spouse could elect to be liable only to the extent that items giving rise to the deficiency are allocable to the spouse. The separate liability election also applies in situations where the tax shown on a joint return is not paid with the return. In this case, the amount determined under the separate liability election equals the amount that would have been reported by the electing spouse on a separate return. However, if any item of credit or deduction would be disallowed solely because a separate return is filed, the item of credit or deduction will be computed without regard to such prohibition. Special rules apply to prevent the inappropriate use of the election. The separate liability election may not be used to create a refund, or to direct a refund to a particular spouse.

2. Code Sec. 6015(c) provides as follows with regard to the limitation of liability for taxpayers no longer married or taxpayers legally separated or not living together:

a. If an individual who has filed a joint return for any taxable year elects, the individual’s liability for any deficiency which is assessed with respect to the return shall not exceed the portion of such deficiency properly allocable to the individual under Code Sec. 6015(d).

b. Each individual who makes this election shall have the burden of proof with respect to establishing the portion of any deficiency allocable to such individual.

c. Individuals eligible to make the election are as follows:

(1) An individual shall only be eligible to make this election if:

(a) at the time such election is filed, such individual is no longer married to, or is legally separated from, the individual with whom such individual filed the joint return to which the election relates, or

(b) such individual was not a member of the same household as the individual with whom such joint return was filed at any time during the 12-month period ending on the date such election is filed.

(2) Certain taxpayers are ineligible to make this election if the IRS demonstrates that assets were transferred between individuals filing a joint return as part of a fraudulent scheme by such individuals.

d. This election for any taxable year shall be made not later than two years after the date on which the IRS has begun collection activities with respect to the individual making the election.

e. This election is not valid with respect to certain taxpayers if the IRS demonstrates that an individual making an election had actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual under Code Sec. 6015(d). This section shall not apply where the individual with actual knowledge establishes that such individual signed the return under duress.

f. The above provision provides a separate liability election for a taxpayer who, at the time of the election, is no longer married to, is legally separated from, or has been living apart for at least 12 months from the person with whom the taxpayer originally filed a joint return. Such taxpayers may elect to have the liability for any deficiency limited to the portion of the deficiency that is attributable to items allocable to the taxpayer.

C. Other Considerations

1. Items are generally allocated between spouses in the same manner as they would have been allocated had the spouses filed separate returns. The IRS may prescribe other methods of allocation by regulation. The allocation of items is to be accomplished without regard to community property laws.

2. The election applies to all unpaid income taxes and the self-employment tax. The election may be made at any time not later than two years after collection activities begin with respect to the electing spouse.

3. The Tax Court has jurisdiction of disputes arising from the separate liability election. The IRS is required to develop a separate form with instructions for taxpayers to use in electing to limit liability.

4. Code Sec. 6015 further authorizes the IRS to relieve an individual of liability if relief is not available under the expanded innocent spouse rule or the separate liability election, but it would be inequitable to hold the individual liable for any unpaid tax or any deficiency.

5. The period in which an election may be made under the provision will not expire before the later of the date that is two years after the date of enactment or two years after the date of the first collection action that has the effect of giving the spouse notice of the IRS' intention to collect the joint liability from the spouse. This rule does not extend the statute of limitations.

6. An individual may elect under the provision without regard to whether such individual has previously been denied innocent spouse relief under present law.

7. The IRS is required to notify all taxpayers who have filed joint returns of their rights to elect to limit their joint and several liability under this provision. It is expected that such notice will appear in appropriate IRS publications, including IRS Publication 1, and in collection-related notices sent to taxpayers. In addition, the IRS should, whenever practicable, send appropriate notifications separately to each spouse.

OBSERVATION: This provision applies to tax liability arising after the date of enactment, and for any tax liability for tax arising on or before the date of enactment that remains unpaid on the date of enactment. Since there is presently no form available to request such relief, it is suggested that Form 8857, Request for Innocent Spouse Relief, be used until such time as the IRS gives instructions to use some other form. Attach a statement to Form 8857 and explain that Form 8857 is being used to request innocent spouse relief under Code Sec. 6015.

For all cases that tax practitioners have worked on in the past where innocent spouse relief was requested and tax is still owed, the taxpayers involved in those cases should be contacted and made aware of Code Sec. 6015. These taxpayers can still request innocent spouse relief even though it was previously denied.

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