Pre-budget tax proposals - IV: Need for taxpayers' bill of rights

E. Protections for taxpayers subject to audit or collection activities
1. Due process in IRS collection actions
The bill 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.
The IRS would be required to notify the taxpayer that a notice of lien had been filed. During the 30-day period beginning with the mailing or delivery of such notification, the taxpayer may demand a hearing before an appeals officer who has had no prior involvement with the taxpayer's case.
Before the IRS can levy against a taxpayer's property, it would be required to provide the taxpayer with a "Notice of Intent to Levy," similar to that currently required under section 6331(d). The notice would not be required to itemise the property the Secretary seeks to levy on. Service by registered or certified mail, return receipt requested, would be required.
Subject to the exceptions noted below, no levy could occur within the 30-day period beginning with the mailing of the "Notice of Intent to Levy." During that 30-day period, the taxpayer may demand a pre-levy hearing before an appeals officer who generally has had no prior involvement with the taxpayer's case.
If a return receipt is not returned, the Secretary may proceed to levy against the taxpayer 30 days after the Notice of Intent to Levy was mailed. The Secretary must provide a hearing equivalent to the pre-levy hearing if later requested by the taxpayer. However, the Secretary is not required to suspend the levy process pending the completion of a hearing that is not requested within 30 days of the mailing of the Notice.
An exception to the general rule prohibiting levies during the 30-day period would apply in the case of State tax offset procedures, and in the case of jeopardy or termination assessments.
No seizure of a dwelling that is the principal residence of the taxpayer or the taxpayer's spouse, former spouse, or minor child would be allowed without prior judicial approval. Notice of the judicial hearing must be provided to the taxpayer and relevant family member. At the judicial hearing, the Secretary would be required to demonstrate (1) that the requirements of any applicable law or administrative procedure relevant to the levy have been met, (2) that the liability is owed, and (3) that no reasonable alternative for the collection of the taxpayer's debt exists.
The provision is effective for collection actions initiated more than 180 days after the date of enactment.
2. Examination activities
a. Uniform application of confidentiality privilege to taxpayer communications with federally authorised practitioners
The bill extends the present law attorney-client privilege of confidentiality to communications between taxpayers and individuals who are authorised under Federal law to practice before the IRS. The privilege of confidentiality created by this provision does not apply to a written communication between federally authorised tax practitioner and any director, shareholder, officer, employee, agent, or representative of a corporation in connection with the promotion of any tax shelter (as defined in section 6662(d)(2)(C)(iii)) with respect to which such corporation is a direct or indirect participant.
The provision is effective with regard to communications made on or after the date of enactment.
b. Limitation on financial status audit techniques
The bill 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.
c. Software trade secrets protection
The bill prohibits the Secretary from issuing (or beginning an action to enforce) a summons in a civil action for any portion of any third-party tax-related computer source code unless certain requirements are satisfied. The bill also establishes a number of protections against the disclosure and improper use of software and source code obtained by the IRS in the course of an examination. The bill specifically provides that computer software or source code that is obtained by the IRS in the course of the examination of a taxpayer's return is included in the definition of return information under section 6103.
The provision does not change or eliminate any other requirement of the Code. A summons for third-party tax-related computer source code that meets the standards established by the provision will not be enforced if it would not be enforced under present law.
The provision is effective with respect to summons issued and software acquired after the date of enactment. In addition, 90 days after the date of enactment, the protections against the disclosure and improper use of trade secrets and confidential information added by the provision (except for the requirement that the Secretary provide a written agreement from non-U.S. government officers and employees) apply to software and source code acquired on or before the date of enactment.
d. Threat of audit prohibited to coerce tip reporting alternative commitment agreements
The bill requires the IRS to instruct its employees that they may not threaten to audit any taxpayer in an attempt to coerce the taxpayer to enter into a tip reporting alternative commitment ("TRAC") agreement, effective on the date of enactment.
e. Taxpayers allowed motion to quash all third-party summonses
The bill generally expands the current "third-party record-keeper" procedures to apply to summonses issued to persons other than the taxpayer. Thus, the taxpayer whose liability is being investigated receives notice of the summons and is entitled to bring an action in the appropriate U.S. District Court to quash the summons. The provision is effective for summonses served after the date of enactment.
f. Service of summonses to third-party record-keepers permitted by mail
The bill allows the IRS the option of serving any summons either in person or by certified or registered mail, effective for summonses served after the date of enactment.
g. Notice of IRS contact of third parties
The bill provides that the IRS may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of the taxpayer without providing reasonable notice to the taxpayer that contacts with persons other than the taxpayer may be made. The provision is effective with respect to contacts made after 180 days after the date of enactment.
3. Collection activities
a. Approval process for liens, levies, and seizures
The bill 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 date of enactment, except in the case of any action under the automated collection system, the provision applies to actions initiated after December 31, 2000.
b. Modifications to certain levy exemption amounts
The bill 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. These amounts are indexed for inflation, effective for levies issued after the date of enactment.
c. Release of levy upon agreement that amount is uncollectible
The bill requires the IRS to immediately release a wage levy upon agreement with the taxpayer that the tax is not collectible, effective for levies imposed after December 31, 1999.
d. Levy prohibited during pendency of refund proceedings
The bill requires the IRS to withhold collection by levy of liabilities that are the subject of a refund suit during the pendency of the litigation, 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.
e. Approval required for jeopardy and termination assessments and jeopardy levies
The bill requires IRS Chief Counsel review and approval before the IRS can make a jeopardy assessment, a termination assessment, or a jeopardy levy. If the Chief Counsel's approval is not obtained, the taxpayer is entitled to obtain abatement of the assessment or release of the levy, and, if the IRS fails to offer such relief, to appeal first to IRS Appeals under the new due process procedure for IRS collections and then to court. The provision is effective for taxes assessed and levies made after the date of enactment.
f. Increase in amount of certain property on which lien not valid
The bill 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 mechanics lienors 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.
g. Waiver of early withdrawal tax for IRS levies on employer-sponsored retirement plans or IRAs
The bill 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.
h. Prohibition of sales of seized property at less than minimum bid
The bill prohibits the IRS from selling seized property for less than the minimum bid price, effective for sales occurring after the date of enactment.
i. Accounting of sales of seized property
The bill 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.
j. Uniform asset disposal mechanism
The bill requires the IRS to implement a uniform asset disposal mechanism for sales of seized property within two years from the date of enactment.
k. Codification of IRS administrative procedures for seizure of taxpayer's property
The bill 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.
l. Procedures for seizure of residences and businesses
The bill prohibits the IRS from seizing any real property used as a residence by the taxpayer or any non-rental 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 bill requires the IRS to exhaust all other payment options before seizing the taxpayer's business assets or principal residence. For this purpose, future income that may be derived by a taxpayer from the commercial sale of fish or wildlife under a specified State permit must be considered in evaluating other payment options before seizing the taxpayer's business assets. 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.
4. Provisions relating to examination and collection activities
a. Procedures relating to extensions of statute of limitations by agreement
The bill eliminates the provision of present law that allows the statute of limitations on collections to be extended by agreement between the taxpayer and the IRS. Extensions of the statute of limitations on collection may be made as part of an instalment agreement; the extension is only for the period for which the instalment agreement by its terms extends beyond the end of the otherwise applicable 10-year period, plus 90 days.
The bill also requires that, on each occasion on which the taxpayer is requested by the IRS to extend the statute of limitations on assessment, the IRS must notify the taxpayer of the taxpayer's right to refuse to extend the statute of limitations or to limit the extension to particular issues.
The provision is effective for requests to extend the statute of limitations made after December 31, 1999. If, in any request to extend the period of limitations made on or before December 31, 1999, a taxpayer agreed to extend that period beyond the 10-year statute of limitations on collection, that extension shall expire on the latest of: the last day of such 10-year period, December 31, 2002, or the 90th day after the end of the term of the instalment agreement related to such request.
b. Offers-in-compromise
The bill expands the authority for the IRS to accept offers-in-compromise.
The bill requires the IRS to develop and publish schedules of national and local allowances that will provide taxpayers entering into an offer-in-compromise with adequate means to provide for basic living expenses. The IRS is required to consider the facts and circumstances of a particular taxpayer's case in determining whether the national and local schedules are adequate for that particular taxpayer. The bill prohibits the IRS from rejecting an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer.
The bill prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer's offer-in-compromise for that liability is being processed, (2) during the 30 days following rejection of an offer, (3) during any period in which an appeal of the rejection of an offer is being considered, and (4) while an instalment agreement is pending.
The bill requires that the IRS implement procedures to review all proposed IRS rejections of taxpayer offers-in-compromise and requests for instalment agreements prior to the rejection being communicated to the taxpayer.
The bill provides that the IRS will adopt a liberal acceptance policy for offers-in-compromise to provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes.
The provisions are generally effective for offers-in-compromise submitted after the date of enactment. The provision, suspending levy is effective with respect to offers-in-compromise pending on or made after December 31, 1999.
c. Notice of deficiency to specify deadlines for filing tax court petition
The provision requires the IRS to include on each deficiency notice the date determined by the IRS as the last day on which the taxpayer may file a petition with the Tax Court. The provision provides that a petition filed with the tax court by this date is treated as timely filed. The provision is effective for notices mailed after December 31, 1998.
d. Refund or credit of overpayments before final determination
The provision provides that a proper court (including the tax court) may order a refund of any amount that was collected within the period during which the Secretary is prohibited from collecting the deficiency by levy or other proceeding. The provision allows the refund of any overpayment determined by the tax court to the extent the overpayment is not contested on appeal. The provision is effective on the date of enactment.
e. IRS procedures relating to appeal of examinations and collections
The bill codifies existing IRS procedures with respect to early referrals to Appeals and the Collections Appeals Process. The bill also codifies the existing Alternative Dispute Resolution ("ADR") procedures, as modified by eliminating the dollar threshold. The provision is effective on the date of enactment.
f. Application of certain fair debt collection practices
The bill 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.
g. Guaranteed availability of instalment agreements
The bill requires the Secretary to enter an instalment agreement, at the taxpayer's option, if: (1) the liability is $10,000, or less (excluding penalties and interest); (2) within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an instalment agreement under this provision; (3) if requested by the Secretary, the taxpayer submits financial statements, and the Secretary determines that the taxpayer is unable to pay the tax due in full; (4) the instalment agreement provides for full payment of the liability within 3 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 3 years) that the agreement is in place. The provision is effective on the date of enactment.
h. Prohibition on requests to taxpayers to waive rights to bring actions
The bill provides that the Government may not request a taxpayer to waive the taxpayer's right to sue the United States or one of its employees for any action taken in connection with the tax laws, unless (1) the taxpayer knowingly and voluntarily waives that right, or (2) the request is made to the taxpayer's attorney or other representative, effective on the date of enactment.
F. Disclosures to taxpayers
1. Explanation of joint and several liability
The bill requires that the IRS establish procedures to clearly alert married taxpayers of their joint and several liability, the availability of electing separate liability, and an individual's right to relief under section 6015 of the Code on all appropriate tax publications and instructions. The IRS will make an appropriate cross-reference to these statements near the signature line on appropriate tax forms. The bill requires that the procedures be established as soon as practicable, but no later than 180 days after the date of enactment.
2. Explanation of taxpayers' rights in interviews with the IRS
The bill 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.
3. Disclosure of criteria for examination selection
The provision requires that IRS add to Publication 1 ("Your Rights as a Taxpayer") a statement which sets forth in simple and non-technical 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.
4. Explanation of the appeals and collection process
The bill requires that, no later than 180 days after the date of enactment, a description of the entire process from examination through collections, including the assistance available to taxpayers from the Taxpayer Advocate at various points in the process, be provided with the first letter of proposed deficiency that allows the taxpayer an opportunity for administrative review in the IRS Office of Appeals.
5. Explanation of reason for refund disallowance
The bill requires the IRS to notify the taxpayer of the specific reasons for the disallowance (or partial disallowance) of a refund claim, effective for 180 days after the date of enactment.
6. Statements to taxpayers with instalment agreements
The bill requires the IRS to send every taxpayer in an instalment agreement an annual statement of the initial balance owed, the payments made during the year, and the remaining balance, effective July 1, 2000.
7. Notification of change in tax matters partner
The bill 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, effective for selections of tax matters partners made by the Secretary after the date of enactment.
8. Conditions under which taxpayers' returns may be disclosed
The bill requires that general tax forms instruction booklets include a description of conditions under which tax return information may be disclosed outside the IRS (including to States), effective on the date of enactment.
9. Disclosure of Chief Counsel Advice
The provision amends section 6110 of the Code, establishing a structured process by which the IRS will make certain work products, designated as "Chief Counsel Advice," open to public inspection on an ongoing basis. It is designed to protect taxpayer privacy while allowing the public inspection of these documents in a manner generally consistent with the mechanism of section 6110 for the public inspection of written determinations. In general, the provision operates by establishing that Chief Counsel Advice are written determinations subject to the public inspection provisions of section 6110. The provision applies to Chief Counsel Advice issued more than 90 days after enactment.
G. Low-income taxpayer clinics
The bill provides that the Secretary is authorised to provide up to $6,000,000 per year in matching grants to certain low-income taxpayer clinics. No clinic could receive more than $100,000 per year. Eligible clinics would be those that charge no more than a nominal fee to either represent low-income taxpayers in controversies with the IRS or provide tax information to individuals for whom English is a second language. The provision is effective on the date of enactment.
H. Other provisions
1. Cataloging complaints
The bill requires that, in collecting data for the annual report to the Congress on allegations of IRS employee misconduct, records of taxpayer complaints of misconduct by IRS employees must be maintained on an individual employee basis, effective January 1, 2000.
2. Archive of records of Internal Revenue Service
The bill provides an exception to the disclosure rules to require IRS to disclose IRS records to officers or employees of National Archives and Records Administration ("NARA"), upon written request from the U.S. Archivist, for purposes of the appraisal of such records for destruction or retention. The present-law prohibitions on and penalties for disclosure of tax information would generally apply to NARA. The provision is effective for requests made by the Archivist after the date of enactment.
3. Payment of taxes
The bill requires the Secretary or his delegate to establish such rules, regulations, and procedures as are necessary to allow payment of taxes by check or money order to be made payable to the United States Treasury, rather than to the IRS, effective on the date of enactment.
4. Clarification of authority of Secretary relating to the making of elections
The bill clarifies that, except as otherwise provided, the Secretary may prescribe the manner of making any election under the Code by any reasonable means, effective on the date of enactment.
5. IRS employee contacts
The bill requires any manually generated correspondence received by a taxpayer from the IRS to include in a prominent manner the name, telephone number, and unique identifying number of an IRS employee the taxpayer may contact with respect to the correspondence. Any other correspondence or notice received by a taxpayer from the IRS must include in a prominent manner a telephone number that the taxpayer may contact. An IRS employee must give a taxpayer during a telephone or personal contact the employee's telephone number and unique identifying number. The requirements for a unique identifying number are effective six months after the date of enactment.
6. Use of pseudonyms by IRS employees
The bill provides that an IRS employee may use a pseudonym only if (1) adequate justification, such as protecting personal safety, for using the pseudonym was provided by the employee as part of the employee's request to use a pseudonym, and (2) IRS management has approved the request to use the pseudonym prior to its use. This provision is effective for requests made after the date of enactment.
7. Illegal tax protester designations
The bill prohibits the use by the IRS of the "illegal tax protester" designation. Any extant designation in the individual master file (the main computer file) must be removed and any other extant designation (such as on paper records that have been archived) must be disregarded. The IRS is, however, permitted to designate appropriate taxpayers as non-filers. The IRS must remove the non-filer designation once the taxpayer has filed valid tax returns for two consecutive years and paid all taxes shown on those returns. The provision is effective on the date of enactment, except that the removal of any designation from the master file, is not required to begin before January 1, 1999.
8. Provision of confidential information to Congress by whistleblowers
The bill provides that any person (ie, a whistleblower) who otherwise has or had access to any return or return information under section 6103 may disclose such return or return information to the House Ways and Means Committee, the Senate Finance Committee, or the Joint Committee on Taxation or to any individual authorised by one of those committees to receive or inspect any return or return information if such person (the whistleblower) believes such return or return information relates to evidence of possible misconduct, maladministration, or taxpayer abuse. The provision is effective on the date of enactment.
9. Listing of local IRS telephone numbers and addresses
The bill requires the IRS, as soon as is practicable, to publish addresses and local telephone numbers of local IRS offices in appropriate local telephone directories.
10. Identification of return preparers
The bill authorises the IRS to approve alternatives to Social Security numbers to identify tax return preparers, effective on the date of enactment.
11. Offset of past-due, legally enforceable State income tax obligations against overpayments
The bill permits States to participate in the IRS refund offset program for specified past-due, legally enforceable State income tax debts, providing the person making the Federal tax overpayment has shown on the Federal return for the taxable year of the overpayment an address that is within the State seeking the tax offset. The provision is effective for Federal income tax refunds payable after December 31, 1999.
12. Reporting requirements in connection with education tax credits
The bill modifies the information reporting requirements applicable to certain educational institutions in connection with the HOPE Scholarship and Lifetime Learning credits. In addition to reporting the aggregate amount of payments for qualified tuition and related expenses received by the educational institution with respect to a student, the institution must report any grant amount received by the student and processed through the institution during the applicable calendar year. An educational institution also must report only the aggregate amount of reimbursements or refunds paid to a student by the institution (and not by any other party). The bill further clarifies that the definition of term "qualified tuition and related expenses" shall be as set forth in section 25A, determined without regard to section 25A(g)(2) (which requires adjustments for certain scholarships). The provision applies to returns required to be filed with respect to taxable years beginning after December 31, 1998.
(To be continued)