The Taxpayer Bill of Rights
First published in the
Los Angeles Lawyer
© 1989 Dennis N. Brager, Esq.*
On November 10, 1988, President Reagan signed the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), which includes the Omnibus Taxpayer Bill of Rights (the Bill). While it does not change substantive tax law, the Bill focuses on leveling the playing field in those situations where the Internal Revenue Service (IRS) has acted incorrectly or overzealously. In its original form, the Bill would have created substantial additional rights for taxpayers in their battles with the IRS. However, the Bill was altered substantially at various stages in the legislative process. The end result provides some assis-tance for embattled taxpayers, though many of the major reforms were gutted.
SANCTIONS FOR IRS MISCONDUCT
The Bill creates a cause of action for civil damages against the IRS in the case of unauthorized collection actions.1 A taxpayer is entitled to bring an action in United States District Court whenever an IRS employee intentionally or recklessly dis-regards any provision of the Internal Revenue Code (IRC), or the Treasury Regulations promulgated pursuant to the IRC, in connection with the collection of a tax. No damages may be awarded for actions that are merely negligent or careless. Damages are limited to the lesser of $100,000 or the actual, direct economic damages sustained as a proximate result of the reckless or intentional actions of the IRS employee, plus the costs of the action. The statute of limitations within which a taxpayer must bring suit is two years from the date on which he had a reasonable opportunity to discover all the elements of a potential cause of action.
The discretion of an IRS revenue officer in connection with the col-lection of an assessed tax liability virtually is unlimited.2 He has authority to seize and sell virtually all of the taxpayer's assets subject to very limited exemptions.3 Even though the IRS now has statutory authority to enter into installment payment agree-ments, the revenue officer has no duty to do so.4 Thus, any alleged "unreasonableness" by the revenue officer would not give rise to a cause of action. A non-exclusive list of actions that might be justiciable, under appropriate circumstances include:
A levy by the IRS on a person who has no liability to the IRS, e.g., a child or other relative of the taxpayer;
A collection action taken against a taxpayer who has filed a timely petition with the U.S. Tax Court;
Seizure of exempt property; or
Failure to abide by an installment agreement entered into by the IRS, under cir-cumstances other than provided by Section 6159.
A taxpayer may also sue for damages where the IRS in-tentionally, recklessly or negligently fails to release a lien when it is statutorily required to do so.5 Such circumstances include instances where the taxpayer has fully paid the liability in question, or where the liability has become unenforceable.6 Unlike actions for damages under the general provisions noted above, the amount of the damages are not limited to a dollar amount.
The Bill revises the procedures under which the IRS may levy upon property. The law now requires that a taxpayer be given notice not less than 30 days prior to the issuance of a levy.7 Under prior law only a 10-day notice was required. If a levy is served upon a bank or other financial institution, the bank is required to hold onto any deposits of the taxpayer for 21 days before remitting the amount to the IRS.8 The purpose is to allow the taxpayer time to notify the IRS of errors with respect to the garnished accounts. This pro-vision, however, merely codifies existing IRS procedure.9 The type and amounts of property exempt from levy are expanded by the Bill.10 Thus, if the tax-payer is the head of a family, $1,550 of "fuel, provisions, furniture, and personal effects in his household, and of arms for personal use, livestock and poultry of the taxpayer" is exempt from levy. This is a munificent increase of $50 from prior law! In 1990 the ex-emption skyrockets to $1,650. Books and tools of the tax-payer's trade are exempt up to $1,050. This is increased from $1,000 under prior law. In 1990 the exempt amount is $1,100. Even these miserly changes are effective only for levies issued on or after July 1, 1989.11
Under the Bill a taxpayer's wages are partially exempt from levy.12 The exempt amount of a taxpayer who is paid on a weekly basis equals the sum of the standard deduction and the amount of the deduction for personal exemptions, divided by 52. Thus, in 1989 the exempt amount for a married couple with two children would be approximately $250 per week. For a single taxpayer the exempt amount would be approximately $96 per week.13 The amount under prior law for the same couple was $150 per week, and $75 in the case of the single taxpayer.14
The Bill exempts the taxpayer's primary residence from levy, unless the district director or the assistant district director personally approves the levy in writing, or the collection of tax is determined to be in jeopardy.15 It remains to be seen whether requiring approval at a higher level within the IRS will result in a greater degree of leniency. The Bill provides that the IRS must release a levy if it determines that the levy is creating an "economic hardship due to the financial condition of the taxpayer."16 This provision, and its relation to the new right of action for intentional vio-lations of the IRC, raises several extremely interesting, and as yet unanswered, questions. For example, does the provision impose an implicit requirement that the IRS make a deter-mination as to whether or not economic hardship exists? If so, must that determination be reasonable? Unless the taxpayer has substantial assets, won't a levy on the taxpayer's wages almost always impose an economic hardship? If the answer to these questions is yes, will a cause of action for damages exist against the IRS if it fails to release a levy on a taxpayer's wages after he makes a showing of economic hardship? What if the IRS makes a good faith determination of no economic hardship, but a court later determines this judgment was incorrect? Does a cause of action exist?
It would not be surprising if either the courts or Congress answers some or all of these questions in the negative. Affirmative answers could crimp severely the effort to painlessly balance the budget by increasing collections. However, Congress, at least, may find it politically difficult to reverse direction.
ADMINISTRATIVE REVIEW OF LIENS
Under present law, a taxpayer can obtain an administrative review of an initial determination of tax deficiency before collection is initiated. There are, however, no statutory procedures for administrative review of lien filings by the IRS.17 The Bill requires the IRS to publish regulations by May 9 that would provide taxpayers with a pro-cedure for obtaining ad-ministrative review of the filing of the notice of lien and an opportunity to petition for the release of the lien.18
The scope of the review is extremely limited. It does not include a review of the propriety of the underlying deficiency.19 Instead, it is limited to deter-mining whether the lien filing was erroneous because the tax liability giving rise to the lien had been paid or the tax had been assessed in violation of the restrictions on assessment cont-ained in the IRC or the Bankruptcy Code. By its terms, it also has no application to the erroneous issuance of a levy. Upon a determination that a lien was filed erroneously, the IRS is required to expeditiously, and within 14 days if practicable, issue a certificate of release of lien, including a statement that the lien filing was erroneous.20
TAXPAYER ASSISTANCE ORDERS
The Bill provides that the taxpayer ombudsman has the authority to issue "taxpayer assistance orders" if, in the opinion of the ombudsman, the taxpayer is suffering, or is about to suffer, a significant hardship as a result of the manner in which the internal revenue laws are being administered.21
The taxpayer assistance order may require the IRS to release a levy, or to cease any action or refrain from taking any action with respect to collection or any other provision of law. The filing of an application for a taxpayer assistance order will suspend the running of applicable statutes of limitations, beginning on the date of the filing of the application and ending on the date of the ombudsman's deci-sion, plus any period specified in the taxpayer assistance order issued pursuant to the application.
Naturally, the usefulness of this provision will depend upon how it is administered by the ombudsman. However, even if the ombudsman does issue a taxpayer assistance order, it may be rescinded or modified by any district director, compliance center director, service center director, regional director of appeals or any superior of such person.
The Bill contains a variety of provisions regarding taxpayer interviews with the IRS. At or before the initial interview, the Bill requires that the IRS provide the taxpayer with an explanation of the audit or collection process and the taxpayer's rights under the process.22
The Bill provides that the IRS cannot require a taxpayer who is represented by an attorney, or other individual authorized to practice before the IRS, to appear at an interview without issuing an administrative summons.
The taxpayer may make an audio recording of any inperson interview with the IRS, provided an advance request for per-mission is made and the recording is at the taxpayer's expense and with his equipment. The Bill also allows the IRS to make an audio recording of the interview if the IRS informs the taxpayer prior to the interview. The IRS must give the taxpayer a transcript or copy of the recording, but only if the taxpayer reimburses the IRS for both the cost of the transcription and the cost of reproducing the transcript or copy.
The Bill provides for "mini Miranda" rights. If in the course of an interview, the taxpayer clearly states that he wishes to consult with his attorney, or an- other individual authorized to practice before the IRS, then the IRS must suspend the interview. Unfortunately, this provision, along with the other provisions relating to taxpayer interviews, are inapplicable where most needed, i.e., in the course of a criminal investigation.
The IRS must issue regulations by November 10 setting forth standards determining whether the selection of a time and place for interviewing the taxpayer is reasonable.23 These regulations are expected to provide that it is not reasonable for the IRS to require that the taxpayer attend an examination at an IRS office other than the one located closest to his home.24 They also are expected to provide that it is not reasonable to conduct the interview at the taxpayer's place of business if the business is so small that doing so essentially would require the taxpayer to close the business.
The Bill requires that certain notices sent to the taxpayer describe the basis for, and identify the amount, of the tax, interest and penalties included in the notice.25 However, an inadequate description does not invalidate the notice. The rule applies only to 90-day letters, 30-day letters, notices generated out of information return matching programs and certain collection notices. This provision does not change IRS practice as it relates to 90- or 30-day letters. How-ever, it should improve tre-mendously the clarity of collection notices.
As originally passed by Senate, the Bill contained a major liberalization of the provisions of the IRC governing the award of attorneys' fees and other litigation costs.26 Subsequently, these provisions were scaled back considerably. As enacted, the Bill provides for payment by the IRS of reasonable litigation and administrative costs, including attorneys' fees, to a prevailing taxpayer where the "position of the United States" is not "substantially justified."27 Unfortunately for taxpayers, administrative costs include only costs incurred on or after the earlier of the date of receipt of the "notice of the decision of the Internal Revenue Service Office of Appeals" or the date of the notice of deficiency.28 The quoted language adds little to the definition of administrative costs since in income tax cases the IRS Appeals Office generally does not issue "notices of decision."
A taxpayer who is audited and does not agree with the determination made by the IRS Examination Division is entitled to an administrative hearing Office.29 Upon the conclus before the IRS Appeals ion of the hearing either there is an agree-ment as to the tax due, in which case the parties sign a written agreement, or no agreement can be reached, in which case a notice of deficiency is issued by the IRS.30 There are no notices of decision.31
Once the IRS has issued its notice of deficiency, the taxpayer's next step is to file a petition for redetermination of the tax with the U.S. Tax Court.32 Thus, in most instances, any recoverable costs incurred will be in connection with the court proceedings, not in connection with the administrative proceeding.33 One advantage of the new provision, however, is it allows a taxpayer to recover costs involved in filing a petition with the Tax Court, even though the IRS concedes the case once the petition is filed. Under prior law, costs were not necessarily available in that situation.34
In one respect the new attorneys' fees provisions are a step backward. Under previous law, in determining whether the position of the U.S. was substantially justified, one looked to the position taken by the U.S. in the civil proceeding, any administrative action or inaction taken by the IRS district counsel, and all subsequent administrative action or inaction.35 Since it is not unusual for the Office of District Counsel, the legal arm of the IRS, to become involved in a case prior to the institution of a lawsuit, it was possible to obtain attorneys' fees and other costs in connection with a suit that arose out of the unreasonable actions of administrative personnel. Under the Bill these opportunities may be more limited.
ADDING LITTLE OR NOTHING
The Bill provides a number of provisions that purport to benefit taxpayers but, on closer inspection, add virtually nothing to existing law or IRS practice.
The Bill prohibits the IRS from using tax enforcement re-cords to evaluate employees directly involved in collection activities or their immediate superiors.36 It also prohibits the IRS from imposing or suggesting production quotas or goals with respect to these individuals. Existing IRS policy, however, already prohibits such use of enforcement statistics,37 and the Bill specifically provides that as long as the IRS acts in conformance with its existing policy statements, it will be deemed to be in compliance with the law.38 In fact current IRS policy is broader than the Bill since it applies to all enforcement officers, reviewers and appeals officers, while the Bill is limited to collection department employees and their immediate supervisors.
The IRS is authorized under the Bill to enter into written agreements with taxpayers, pursuant to which a taxpayer may satisfy his liability for any tax due by making installment payments.39 This provision adds nothing to existing law since IRS practice has always been to enter into installment agreements whenever a taxpayer has in-sufficient assets to make payment in full.40 The problem has always been convincing the IRS employee assigned to the case that the taxpayer should be allowed to pay in installments rather than forcing him to sell his home and all his other assets in order to pay the liability in full. Nothing in this new provision requires the IRS to enter into an installment agreement, or does anything else to alleviate the problem.
By May 9 the IRS must prepare a written statement, in non-technical terms, delineating the rights of taxpayers and the obligations of the IRS in con-nection with the determination and collection of taxes.41 This statement is to be distributed to all taxpayers whom the IRS contacts with respect to the determination of collection or a tax. The statement also must be submitted to Congress.
The IRS currently provides taxpayers with explanations of their rights at various stages during the audit and collection process.42 The statement comtemplated by Congress apparently would amalgamate all the information into one booklet, which would be distributed to taxpayers only once,43 at the first contact with the IRS. The current practice of distributing information only at the stage it is relevant (e.g., a statement concerning a taxpayer's appeal rights is distributed to the taxpayer at the conclusion of an audit), is more appropriate than handing the taxpayer a thick booklet (which he will probably misplace) at the beginning of an audit that may stretch out over a period of a year or longer.
The Bill requires that the IRS waive any penalty attributable to erroneous written advice furnished to a taxpayer by the IRS in response to a specific written request of the taxpayer, as long as the penalty did not result from a failure by the taxpayer to provide adequate or accurate information.44 The IRS is required to issue regulations implementing this rule by May 9. This pro-vision is useless to most taxpayers. Written advice generally is furnished only to requests by taxpayers for private letter rulings, and the IRS issues these rulings only in certain defined areas.45 In addition, un-der existing law, a taxpayer is entitled to rely, except in certain very limited circumstances, on the ruling not merely with respect to the avoidance of penalties but as to the treatment of an item on his tax return.46
The U.S. Tax Court's jurisdiction is expanded by the Bill in several respects. The Tax Court was granted jurisdiction (concurrent with the federal district courts, which already had jurisdiction)47 to restrain the assessment and collection of any tax by the IRS, if the tax is the subject of a timely filed petition pending before the Tax Court.48 This provision gives the taxpayer a more convenient forum but does not otherwise change existing law. In addition, as a practical matter, once taxpayer's counsel informs the IRS attorney assigned to answering the taxpayer's petition that collection activity is continuing, the IRS attorney will notify the Collection Division to abate the tax and cease collection.
The Bill grants the Tax Court jurisdiction to order the IRS to refund an overpayment of tax, plus interest, if the IRS fails to refund an overpayment de-termined by the Tax Court withing 120 days after a Tax Court decision has become final.49 This provision has no effect on the failure of the IRS to refund NOL carrybacks or in other instances where no case is already pending before the court.
The Tax Court now is authorized to determine the amount of interest due in connection with any tax it determines to be due.50 Thus, if there is any dispute between the IRS and the taxpayer as to the amount of interest due in a decided Tax Court case, the court can now determine the amount of interest due. A Tax Court action to determine the amount of interest due must be brought within one year of the date the underlying Tax Court action otherwise becomes final, and only after the taxpayer has paid the entire amount of the tax, plus interest the IRS claims to be due. The Bill also extends the Tax Court's jurisdiction to allow it to modify its decision in certain estate tax cases.51
REAL REFORMS NEEDED
The Bill, although a step in the right direction, is not a dramatic change in the law. Most of the provisions are either cosmetic, merely codify existing practice or are without mechansisms for enforcement. With the exception of the provisions authorizing suits against the IRS for damages and authorizing the release of levies in the case of economic hardship, the Taxpayer Bill of Rights will do very little to alter the balance of power between the IRS and the taxpayer. Even these pro-visioins will be dependent upon the willingness of the courts to interpret them in a liberal manner.
The true significance of the Taxpayer Bill of Rights is that Congress has begun to recognize the necessity for curtailing some part of the IRS's enormous power. If taxpayers and their attorneys let Congress know their views, the Bill may be expanded in the future to include real reforms.
1 §7433; H.R. Rep. No. 100-1104, 100th Cong., 2d Sess. 229 (Conf. Rep.). Effective for actions occuring after Nov. 10, 1988. TAMRA §6241. Unless otherwise specified, all § references are to the Int. Rev. Code of 1986, as amended.
2 See M. Saltzman, IRS Practice and Procedure, ¶ 14.15 (1981).
3 §§6331 et seq.
5 §7432. Effective for taxpayer notices provided and damages arising after Dec. 31, 1988. TAMRA §6240.
7 §6331(d)(2). Effective for levies issued on or after July 1, 1989. TAMRA §6236.
8 §6332(c). Effective as to levies issued on or after July 1, 1989. TAMRA §6236.
9 See Internal Revenue News Release IR 87-87 (Aug. 4, 1987).
11 TAMRA §6236.
12 §6334(d). Effective for levies issued on or after July 1, 1989. TAMRA §6236.
13 The amounts are calculated as follows: The standard deduction is $5,000 for a married couple filing a joint return and $3,000 for a single individual, indexed for inflation beginning in 1989.§63(c). Each exemption is equal to $2,000. §151(d).
14 $75 per week for the taxpayer, and $25 for the spouse and each dependent. §6334(d) (prior to amendment).
15 §6334(e)(1). Effective as to levies issued on or after July 1, 1989. TAMRA §6236(c). The subject of jeopardy levies and assessments is beyond the scope of this article, but normally these provisions only come into play in the case of suspected drug dealers or individuals who may flee the country.
16 §6343. Effective as to levies issued on or after July 1, 1989. TAMRA §6236(f).
17 Conf. Rep., supra n. 1, at 224.
18 §6326. The regulations are to be effective 60 days after they are issued. TAMRA §6238(b).
19 See Conf. Rep., supra n. 1, 224.
21 §7811. Effective as of Jan. 1, 1989. TAMRA §6230(d). The IRS was required to issue regulations prescribing the form and manner in which a taxpayer may apply for a taxpayer assistance order by Feb. 8, 1989. TAMRA §6230(c).
22 §7520[A]. Effective for interviews conducted on or after Feb. 8, 1989. TAMRA §6228.
23 TAMRA §6228(b).
24 Conf. Rep., supra n. 1, at 212.
25 §7521. Effective for notices sent on or after Jan. 1, 1990. TAMRA §6228.
26 See Conf. Rep., supra n. 1, at 225, 226.
27 §7430. Effective for proceedings commenced after Nov. 10, 1988. TAMRA §6239.
29 See 26 C.F.R. §601.106(b).
30 26 C.F.R. §601.106(d)(2).
31 In fact the phrase is not defined in the Int. Rev. Code, nor is it a term of art. However, in limited situations, the IRS Appeals Office issues letters that could be construed as "notices of decision." For example, if a taxpayer files an appeal of a denial of a claim for refund, the Appeals Office's communication of its denial or approval of the appeal could constitute a notice of deficiency.
33 One exception is, if after the notice of deficiency was issued, the taxpayer decided that instead of filing a petition with the Tax Court he would pay the tax and sue for a refund in the district court. He would be required to file a claim for refund as a prerequisite to the district court's jurisdiction. In this instance, the cost of filing the refund claim should qualify as a cost incurred in connection with the administrative proceeding.
34 See Feuer v. Commissioner, T.C.M 1988-55.
35 §7430(c)(4) (prior to amendment).
36 TAMRA §6231(a).
37 IRS Policy Statement P-1-20.
38 TAMRA §6231(b).
39 §6159(a). Effective for agreements entered into after Nov. 10, 1988.
40 See Conf. Rep., supra n. 1, at 219.
41 TAMRA §6227.
42 See Conf. Rep., supra n. 1, at 211.
43 TAMRA §6227(c).
44 §6404(f). Effective for advice requested on or after Jan. 1, 1989. TAMRA §6229(b).
45 26 C.F.R. §601.201.
46 See M. Saltzman, IRS Practice and Procedure, ¶ 3.03(1981).
47 See Conf. Rep., supra n.1, at 230.
48 § 6213(a). Effective for orders entered after Nov. 10, 1988.
49 § 6512(b)(2). Effective for overpayments that have not been refunded by Feb. 8, 1989. TAMRA §6244.
50 §7481. Effective for assessments made after Nov. 10, 1988. TAMRA §6246.
51 §7481(d).*Dennis Brager, Esq., is a State Bar Certified Tax Specialist in Los Angeles. A former IRS senior trial attorney, Mr. Brager now devotes his efforts exclusively to helping clients resolve their tax problems with the IRS and California State tax agencies. Services include negotiating Tax Debts, Tax Fraud Representation, Tax Litigation, Tax Audit and Appeals Representation, Tax Preparer Penalty Mitigation, Payroll Tax Audits, and California Sales Tax Problems. He may be reached at 800.380.TAX LITIGATOR.