You are on page 1of 5

ROBERT E. MCKENZIE, ESQ.

ARNSTEIN & LEHR LLP


120 SOUTH RIVERSIDE PLAZA, SUITE 1200
CHICAGO, IL 60606
312-876-6927
312-876-7318 fax

VISIT OUR HOME PAGE

TAXPAYER BILL OF RIGHTS 2

: On July 30, 1996 President Clinton signed into law the Taxpayer Bill of Rights 2 (TBR2). This
legislation had been pending for several years but because members of Congress continued to attach various
non-related legislation both President Clinton and President Bush had been forced to veto it in the past.
Finally the bill was passed as a clean de Taxpayer Advocate may now "order the IRS to take any action as
permitted by law" as opposed to simply ordering an IRS employee "to cease any action." A taxpayer
assistance order may no longer be revoked by a District Director. That authority now rests solely with the
Commissioner of Internal Revenue Service or the Deputy Commissioner of Internal Revenue Service and
only if a written explanation listing the reasons for modification or rescission is provided to the Taxpayer
Advocate. [IRC 7802(2)]

MODIFICATIONS TO INSTALLMENT AGREEMENT PROVISIONS Prior to terminating or modifying


an installment agreement TBR2 requires the IRS to give a notice of proposed action not later than thirty (30)
days prior to the proposed date. The IRS is also required to include an explanation as to why the agreement is
being modified or terminated. This provision becomes effective six months after the date of enactment. The
IRS is required to establish procedures for an independent administrative review of terminations of
installment agreements for taxpayers. [IRC 6159(b)(c)]

ABATEMENT OF INTEREST AND PENALTIES IRC 6404(e) has been expanded and modified to
allow abatement of interest where the IRS had made an error or there has been an unreasonable delay in
assessment as a result of "performing a ministerial or managerial act." For the first time the Tax Court has
been granted specific jurisdictional authority to determine if interest should be abated. [New IRC 6404(g)]

Extension of Industry IRC 6601(e)(3) has been modified to provide that subsequent to an audit the
taxpayer has a twenty one (21) calendar day period to pay the assessed notice without accruing interest and
penalties as opposed to a ten (10) day period.

Abatement of Penalty For Failure to Make Deposits IRC 6656 was modified to allow abatement of
penalty if a person inadvertently fails to make a deposit. It also provides for abatement of penalty the first
time a deposit is made inadvertently to the IRS instead of the appropriate depository. (This provision may
become very important as the IRS moves to electronic transfer of funds technology beginning January 1,
1997)

JOINT RETURNS The IRS is required to disclose collection activities to an individual requesting such
information in the case of a joint return, when that individual is no longer married to and/or resides with in the
same household with the other joint filer. This will allow divorced individuals to find out if their ex-spouse has
been approached by the IRS for collection. It might also encourage the IRS to attempt collection from both
individuals as opposed to the most convenient spouse. [IRC 6103(e)]

Amending Separate Returns IRC 6013(b) has been amended to allow taxpayers to amend from separate
returns to joint returns without paying outstanding taxes. In the past, taxpayers could only take this step after
full payment of the tax liabilities due on the separate returns. The Secretary of Treasury Mandated Study is
required to study the effects of changing tax liabilities for joint returns from being joint and several to being
proportionate to the tax attributable to each spouse. This required study has been brought about because with
the high rates of divorce in this country many times an individual that earned a very small income becomes
liable for a very large tax liability because of the high earnings of a prior spouse. The current IRS policy is to
collect from whichever taxpayer is the easier target. This study will look for alternatives to such Draconian
measures.

COLLECTION ACTIVITIES TBR2 authorizes the IRS to withdraw a notice of lien subsequent to filing if:
1. The filing of notice was premature or otherwise not in accordance with administrative procedures; 2. The
taxpayer enters into an installment agreement; 3. The withdrawal of a notice would facilitate the collection of
tax liability or, 4. With the consent of the taxpayer or Taxpayer Advocate, the withdrawal of such notice
would be in the best interest of the taxpayer (as determined by the Taxpayer Advocate) and the United States.
The IRS is further directed to take all necessary steps to assist in removing adverse information from credit
reporting agencies upon withdrawal of the lien. [IRC 6323(j)]

Return of Levied Property The IRS is authorized to return levied property in certain cases if: 1. The levy
was premature or otherwise not in accordance with administrative procedures; 2. The taxpayer has entered
into an installment agreement; 3. The return of the property would facilitate collection of tax; or 4. With the
consent of the taxpayer or Taxpayer Advocate the return of the property would be in the best interest of the
taxpayer (as determined by the Taxpayer Advocate) and the United States [IRC 6343(d)]

Levy Exemption Amounts The exemption amounts from levy have been increased to adjust for inflation.
New exemptions are as follows: 1. Household goods $2,500.00 (up from $1,650.00); 2. Books, tools of the
trade - $1,250.00 (up from $1,100.00)[IRC 6334(a)]. TBR2 also provides for an inflation adjustment
beginning in the year 1997 which will increase the exemptions by the amount of the cost of living each year.
[IRC 6334(f)]

Offers in Compromise TBR2 removes the requirement that District Counsel review each Offer in
Compromise in an excess of $500.00 and increases that amount to $50,000.00. The Act requires however that
the IRS continue to assure quality review of each Offer in Compromise. [IRC 7122(b)]

FRAUDULENT INFORMATION RETURN PENALTIES TBR2 establishes a right to pursue damages of


not less than $5,000.00 from any person who provides a false 1099, W2 or other information return to the IRS
which damages the putative payee. The taxpayer has up to the later of six years or one year after the date the
fraudulent return would have been discovered by the exercise of reasonable care to file suit. [IRC 7434] The
plaintiff is required to provide a copy of the complaint with the IRS. [IRC 7434(d)]
Reasonable Investigation of Information Returns If a taxpayer disputes the validity of an information
return in any court proceeding the Internal Revenue Service now has the burden of producing reasonable and
probative information concerning the deficiency in addition to the information return. The taxpayer has the
duty to fully cooperate with the Secretary. [New IRC 6201(d)]

ATTORNEYS FEES AND COSTS TBR2 reverses the burden of proof for attorneys fees. The IRS must
now prove that it was substantially justified in bringing the case. In the past, the taxpayer was required to
prove that the IRS had not taken a substantially justified position. There is also established a rebuttable
presumption that the IRS was not substantially justified if the IRS did not follow its own guidance in the
administrative proceeding. The Act also increases the attorney's fees rate from $75.00 to $110.00 per hour.
[IRC 7430(c)] The act also provides for cost of living adjustments after 1996. Since most courts have
allowed an inflation adjustment, this will have a minimal effect on most fee awards.

Failure to Agree to Extension The fact that the taxpayer fails to agree to an extension of time for the
assessment of tax should not be taken into account in determining whether a prevailing party has exhausted
administrative remedies. This will allow taxpayers to ignore a thirty day letter and await a ninety day letter if
it is to their tactical advantage. [IRC 7430(b)(1)]

Declaratory Judgment Taxpayers may now seek litigation costs in declaratory judgment proceedings.
[New IRC 7430(b)(3)]

INCREASED DAMAGES FOR UNAUTHORIZED COLLECTION ACTIONS The limit on damages


pursuant to 7433 has been raised from $100,000.00 to $1,000,000.00 when the Internal Revenue Service
recklessly or intentionally disregards the Internal Revenue Code in the collection of a tax. The court is
authorized to reduce an award for litigation costs for failure to exhaust administrative remedies. [IRC
7433(d)(1)]

TRUST FUND RECOVERY PENALTY MODIFICATIONS TBR2 creates specific notice requirements
prior to assessment of a trust fund recovery penalty. The IRS must issue a notice of proposed assessment at
least sixty days prior to any notice and demand for payment. If the taxpayer files a timely protest the time is
expanded to thirty days after the Secretary makes a final administrative determination with respect to the
protest. There is a jeopardy exception to the provision. [New IRC 6672(b)]

Disclosure of Information TBR2 requires the IRS to disclose to each person assessed with a trust fund
recovery penalty the following information: 1. The name of any other person who has been held liable for the
penalty; and 2. The efforts which the IRS had made in an attempt to collect from the taxpayers in a general
nature including the general nature of collection activity. [IRC 6103(e)(9)]

Right of Contribution When more than one person is liable for the penalty each person who has paid the
penalty has the right to recover from any other persons who are liable for the penalty an amount equal to the
excess amount paid by that respective taxpayer. This suit must be brought as a separate cause of action and
may not be brought in conjunction with a collection suit by the United States or a refund suit by one of the
responsible persons. [IRC 6672(d)]

Voluntary Board Members of Tax Exempt Organizations TBR2 provides additional protection for
voluntary board members of tax exempt organizations from the assertion of the penalty. It provides that the
IRS shall not exert the penalty if the member: (1) is solely serving in an honorary capacity; (2) does not
participate in day-to-day or financial operations; and (3) does not have actual knowledge of the failure to pay
such penalty. This provision does not apply however if it would result in no person being held liable for the
penalty. [IRC 6672(e)]

Public Information Requirements The IRS is now required to print warnings on deposit coupon books and
appropriate tax returns regarding the penalty. The IRS is also directed to create explanatory materials
concerning the penalty and to give specific instructions to its employees regarding the application of the
penalty to voluntary board trustees and directors. [IRC 6672(b)]

SUMMONS MODIFICATIONS Enrolled agents have now been included within the definition of third
party record keepers which previously included accountants and attorneys. Now upon service of a summons
upon an enrolled agent the taxpayer is entitled notice of that service within three days. [IRC 7609(a)(3)]

Designated Summons The Code now requires that prior to the issuance of a designated summons which
would extend the statute of limitations for assessment the IRS must have the proposed summons reviewed by
the Regional Counsel of IRS. TBR2 further limits the use of a designated summons to coordinated
examination programs, (audits of large corporations). The IRS must now report annually to Congress with
respect to the issuance statistics for designated summons. [IRC 6503]

RETROACTIVE APPLICATIONS OF REGULATIONS The Treasury Department is prohibited from


retroactively applying regulations except in limited circumstances. This provision does not apply with respect
to regulations within eighteen months of the passage of a statutory provision to which the regulation relates.
The IRS may also issue retroactive regulations under the following circumstances: 1. Prevention of abuse; 2.
Correction of procedural defects; and 3. Internal regulations of the Treasury Department and IRS or
Congressional authorization (if the Congress authorizes retroactive effect). [IRC 7805(b)]

MISCELLANEOUS PROVISIONS TBR2 includes several miscellaneous provisions designed to protect


taxpayers and enhance collections.

Payor Telephone Number Providers of information returns are required to provide a telephone number as
well as a name and address of the payor to each payee. This will allow taxpayers who receive an incorrect
information return to easily call the provider. [ 6041-6050N]

Lost Payments The IRS must make reasonable efforts to notify the taxpayer within 60 days when it
receives a payment which it is unable to associate with the taxpayer.

Annual Notice of Delinquent Tax The Internal Revenue Service is required to send an annual notice to
each taxpayer who has a delinquent tax liability. This is intended to require the IRS to remind taxpayers who
have been reported as "currently not collectible" that the tax liability still exist and to allow the taxpayer to
realize the amount of interest and penalties which are accruing as a result of the tax liability. The provision
will increase government revenue. [IRC 7524]

Protection of Taxpayer Privacy TBR2 authorizes the taxpayer to bring a civil damage suit against the
United States if any United States officer employee intentionally compromises a tax due from a CPA, attorney
or enrolled agent representing that taxpayer in exchange for information conveyed by the taxpayer to the
representative for purposes of obtaining advice. The exception to this provision is that the IRS may provide a
compromise if the taxpayer is perpetrating a fraud or a crime. This provision was intended to prevent the IRS
from using tax professionals as informants against their clients and then providing financial benefit to that tax
professional by compromising his or her tax liability. Damages are limited to the lesser of $500,000.00 or the
actual direct economic damages plus costs of the action. [IRC 7435]

Private Delivery Services IRC 7502 has been amended to allow private delivery services in addition to
the U.S. Postal Service. The postmark rule for petition date to Tax Court will include the date receipt of a
private delivery service.

SUBSTITUTE FOR RETURNS When the IRS prepares a substitute for return under IRC 6020(b) for a
taxpayer the documents will be treated as a return for the failure to pay penalty. [IRC 6651(g)]

COPYRIGHT 1996 ROBERT E. MCKENZIE

VISIT OUR HOME PAGE

MORE INFORMATION FROM MCKENZIE & MCKENZIE PC

1. LEARN ABOUT INDEPENDENT CONTRACTOR EMPLOYEE AUDITS RECENT LAW


CHANGES
2. MORE INFO ON ROBERT E MCKENZIE'S BOOKS
3. LINKS TO OTHER SOURCES OF TAX INFORMATION
4. LAW & LEADING ATTORNEYS BIO OF ROBERT E. MCKENZIE
OTHER COLLECTION
ARTICLES
ABA COMMENTS ON NEW
IRS COLLECTION PROCEDURES OFFER IN COMPROMISE RULES

APPLICATION FOR
THE TAXPAYER BILL OF
THE TRUST FUND RECOVERY PENALTY TAXPAYER ASSISTANCE
RIGHTS 2
ORDER

IRS COLLECTION OF
OFFERS IN COMPROMISE EMPLOYMENT TAX REDUCE IRS PENALTIES
DELINQUENCIES

DISCHARGING TAXES IN
APPEAL LIENS AND LEVIES
BANKRUPTCY

IRS COLLECTION STANDARDS FOR LIVING EXPENSES,


TRANSPORTATION AND FOR LOCAL HOUSING AND
UTILITIES

5.

Page created by: remckenzie@arnstein.com


Changes last made on: 2/12/2007