Taxpayer Bill of Rights III (1998)

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Taxpayer Bill of Rights III (1998)

Richard Gershon

The IRS Restructuring and Reform Act of 1998 (P.L. 105-206), which Congress signed into law on July 22, 1998, contains the Taxpayer Bill of Rights 3 (T3). By enacting the T3 Congress sought to address criticisms of the Internal Revenue Service and its dealings with taxpayers. In creating this legislation, it was important for Congress to balance taxpayers' rights with the Internal Revenue Service's obligation to administer the tax laws efficiently. The Taxpayer Bill of Rights 3 modifies the Taxpayer Bill of Rights 2 by expanding taxpayer rights in several areas. Specifically, the T3 expanded or created the following rights for taxpayers:

Attorney-Client Confidentiality Expanded to Certain Non-Attorneys Prior to the enactment of T3, confidentiality protection was only provided between taxpayers and their attorney representatives. Accordingly, the IRS could question non-attorney representatives about their thoughts, impressions, opinions, or analysis. T3 expands the traditional attorney-client privilege to taxpayer representatives authorized to practice before the IRS (enrolled agents and Certified Public Accountants) with respect to their thoughts, impressions, opinions, or analysis during a noncriminal administrative proceeding. This newly created privilege does not apply to civil or criminal court trials.

Shifting the Burden of Proof to the IRS Under the prior law, the taxpayer had the burden of proof in an action by the IRS against that taxpayer. T3 provides that the burden of proof will shift to the government in some cases. To shift the burden, taxpayers must have "fully cooperated" with IRS at the administrative level by providing all witnesses, information, and documentation reasonably requested, possibly including confidential communications between taxpayers and their representatives.

PROVISIONS RELATING TO SPOUSES

Joint Returns When spouses file a joint tax return, they are treated as a single unit; therefore, each is individually responsible for all tax liabilities, penalties and interest, even if the liability was caused by the other spouse. While filing a joint return usually provides a small tax benefit, each spouse becomes personally liable for all additional taxes the other spouse may have accrued. Many taxpayers hoped that T3 would relieve taxpayers of joint return liability. Instead, Congress opted to require the IRS to explain this potential unlimited liability in its publications.

Innocent Spouse Relief Even though Congress retained joint liability in T3, the legislation provides relief for innocent spouses who sign a joint return. An innocent spouse is one who establishes that when the return was signed, he or she did not know, and had no reason to know, there was an understatement of taxes by the other spouse. Further, the innocent spouse must prove that under the circumstances, it would be inequitable to hold the innocent spouse liable for any liability arising from the other spouse's conduct in failing to report income in an accurate manner. T3 also provides for apportionment of relief if the spouse was innocent as to some items, but not others.

Offers in Compromise T3 changes the law regarding Offers in Compromise involving spouses. Under the prior law, if one spouse's actions caused the termination of the offer, the offer was terminated for both spouses. Under T3, if the offer is terminated due to the actions of one spouse, the offer will continue for the spouse (or former spouse) who remains in compliance.

SMALL TAX CASE LIMITATIONS

T3 raised the maximum amount in controversy for a small tax case (an informal proceeding similar to small claims court) from $10,000 to $25,000.

STATUTORY REFUND PERIOD TOLLED

The prior law barred a taxpayer's claim for a refund if the claim was not filed within two years. T3 allows for the period to be extended if the taxpayer proves a medical disability during this period that prevented filing for the refund.

DAMAGES FOR NEGLIGENT COLLECTION ACTION

T3 provides that a taxpayer may recover a maximum of $100,000 for negligent collection actions by the IRS.

RESTRICTIONS ON ECONOMIC REALITY AUDITS

T3 restricts the use of "economic reality" audits to those situations where the IRS believes there is a reasonable likelihood of unreported income. Economic reality audits focus on a taxpayer's assets and lifestyle, rather than the income and expenses claimed on the tax return.

See also: Federal Income Tax Act of 1913; Internal Revenue Act of 1954; Tax Reform Act of 1986.