Senate OKs Bill to Revamp IRS, Add Taxpayer Rights

WASHINGTON — Responding to a groundswell of public fury at one of the government’s most-maligned agencies, the Senate unanimously approved legislation Thursday that would restructure the Internal Revenue Service for the first time in decades and give taxpayers an arsenal of new rights when they have disputes with the agency.

The 97-0 vote was a rare display of bipartisanship at a time when most issues before Congress--especially tax matters--have split lawmakers along party lines. The political momentum behind demands for change at the agency is so strong in this election year that no one, not even President Clinton or his IRS commissioner, is defending the status quo.

The bill for the first time would subject the IRS to oversight by a management board dominated by private citizens. It would shift the burden of proof from taxpayers to the IRS in civil court cases and suspend penalties and interest charges in drawn-out tax disputes.

A similar bill already has been approved by the House. Minor differences will be worked out in a conference committee and Clinton is expected to sign the final legislation.

“No agency touches the lives of Americans more than the IRS,” said Sen. Pete V. Domenici (R-N.M.). “Yet one out of every two Americans said they would rather be mugged than be audited by the IRS. This bill should reverse that prevailing view.”

“It will make the IRS more accountable to and respectful of taxpayers,” said Senate Minority Leader Tom Daschle (D-S.D.). “It will help transform the culture of the IRS to make customer service a top priority.”

Although the bill makes significant changes in the IRS, it falls short of the more extreme demands being made by some Republicans to “end the IRS as we know it” and completely revamp the tax code.

Indeed, some senators raised questions about whether the citizen oversight board would really change the way the IRS does business or whether it would go the way of many other well-intentioned, but ultimately irrelevant, government advisory panels.

“It’s business as usual,” said Sen. Frank H. Murkowski (R-Alaska).

And while few lawmakers openly questioned the idea of strengthening taxpayers’ rights, the Clinton administration and nongovernmental analysts are worried that several of the bill’s provisions, such as the suspension of some penalties and the shifted burden of proof, will discourage voluntary compliance and make it harder for the IRS to nail tax evaders.

But such reservations have been largely washed away by the political tidal wave of support for the bill in this election year, when no lawmaker wants to be seen as a friend of the IRS.

The usually somnolent subject of IRS restructuring got a big shot of political adrenaline last fall when the Senate Finance Committee conducted a dramatic, high-profile series of hearings spotlighting allegations of mismanagement and abuse of power in the agency.

Among the problems exposed: a $4-billion computer foul-up, harassment of innocent taxpayers and agents being pressed to meet arbitrary tax collection quotas.

The public response to those hearings was so great that the IRS reform bill was pulled out of the legislative backwaters of Capitol Hill and transformed into the cornerstone of the Republicans’ anti-tax agenda. As support snowballed, Clinton abruptly dropped his initial opposition to the House version of the bill and Democrats criticized Republicans for not bringing it to the Senate floor quickly enough.

Sponsors are hoping that, by restructuring the agency and giving taxpayers new rights, they can begin to turn the IRS from a fearsome tax-collection behemoth into a more consumer-oriented, taxpayer-friendly institution.

The bill instructs the IRS commissioner to reorganize the agency around the needs of different kinds of taxpayers, such as small businesses, big businesses and individuals. That will replace the current structure, which is based on regional units that address the needs of all taxpayers within a given geographic area.

The bill aims to improve management of the IRS by establishing an oversight board consisting of nine members: six private citizens, the Treasury secretary, the IRS commissioner and an IRS labor union representative. The board would set policy and strategy and approve any plans to reorganize the agency.

One aim is to modernize the agency by including on the panel private citizens with expertise in management, customer service and other relevant administrative experience.

The bill includes many provisions designed to increase the leverage of taxpayers who get into disputes with the IRS. While that is a relatively small slice of the populace, it includes many in the politically powerful small business sector.

Of the 120 million tax returns filed every year, about 2 million are audited. Only about 25,000 of the cases end up in tax court. Most are settled before going to trial.

One of the biggest changes would suspend penalties and interest charged to taxpayers if the IRS does not inform them of problems in their returns within one year. Penalties also would be suspended in cases where the taxpayers agree to pay back taxes in installments.

Another major change would require the IRS, not the taxpayer, to bear the burden of proof in civil tax court. Under current law, an IRS ruling against a taxpayer stands unless the taxpayer can prove it is wrong. The bill shifts the burden of proof to the IRS, so long as the taxpayer cooperates and provides requested information.

Critics are worried that the shift will make it easier for tax cheats to elude the IRS and would force the agency to make even more intrusive demands to get the evidence it needs to prove a case.

Another provision would make it easier for divorced people to disavow tax mistakes made by their ex-spouses in tax forms filed jointly while they were married. The aim is to keep “innocent spouses” from being punished for mistakes for which they were not responsible.

The Senate action was hailed by the chief author of the House version, Ways and Means Chairman Bill Archer (R-Texas). “It is about time that Washington focused more on protecting taxpayers and less on increasing the powers of the IRS,” Archer said.

* OVERSIGHT PANEL: Six private citizens would be part of IRS review board. A14

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Siding With Taxpayers

The Senate legislation reforming the Internal Revenue Service contains several significant new protections for taxpayers:

Burden of Proof

* The IRS must prove taxpayer error in civil tax court cases instead of requiring taxpayers to prove their innocence.

Cost Recovery

* Taxpayers who prevail in court cases have the right to recover attorney expenses from the IRS.

* Taxpayers can recover up to $100,000 in civil damages if an IRS employee acts with negligence in the collection process.

Innocent Ex-Spouses

* A divorced spouse who proves he or she was ignorant of tax misdeeds committed by the other spouse when they were married may be relieved of financial liability.

* The IRS must inform each spouse of the amount of money being paid by the other spouse to satisfy unpaid taxes.

Interest and Penalties

* If the IRS fails to notify a taxpayer within one year that a penalty will be charged, interest and penalties are suspended.

* The IRS cannot levy “failure to pay” penalties if a taxpayer is participating in an installment payment plan.

Due Process

* The IRS must notify a taxpayer 30 days before filing a lien or seizing a taxpayer’s property.

* Taxpayers have 30 days to request an appeal of an adverse ruling, and no collection activity is allowed until after the appeals hearing.

Privacy Rights

* Attorney-client privilege is extended to cover accountants and other tax practitioners.

* The IRS must have reason to believe that taxpayers have failed to report income before launching investigative procedures.

* The IRS must notify taxpayers before contacting third parties such as neighbors, customers and vendors.

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1996 1997 Investigations 2,857 2,698 Prosecutions recommended 1,708 1,627 Indictments 1,461 1,492 Avg. months served 17 17

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Researched by TRICIA FORD / Los Angeles Times