New Taxpayer Rights Initiatives

The Internal Revenue Service today announced a series of new taxpayer rights initiatives as part of its ongoing efforts to reduce the burden on taxpayers when conducting business with the IRS and to make it easier for taxpayers to understand and exercise their rights. Highlights of the new initiatives include the following:

ENHANCED POWERS FOR THE OMBUDSMAN

Background:
The Taxpayer Ombudsman has served since 1979 as the advocate for taxpayers within the IRS and has responsibility for administering the nationwide Problem Resolution Program. When a taxpayer faces a problem dealing with the IRS, the taxpayer may ask the Ombudsman, or one of the Ombudsman's Problem Resolution Officers based in local IRS offices, to intervene on the taxpayer's behalf to resolve the problem. If the taxpayer's complaint has merit, the Ombudsman will either negotiate a solution to the problem with IRS personnel or issue a Taxpayer Assistance Order (TAO) to order the IRS either to take or cease action, as the case may be, with respect to the taxpayer.

Details of new initiatives:
Several new initiatives, effective immediately, are designed to increase the Ombudsman's authority.

• A TAO issued by the Ombudsman currently can be overruled by a number of local IRS officials, including district directors, service center directors, compliance center directors, regional directors of appeals, or their superiors. The initiative increases the Ombudsman's authority by limiting those with authority to overrule, modify or withdraw a TAO to the Commissioner, Deputy Commissioner, or Ombudsman.

• To clarify the proper scope of a TAO, the Commissioner explicitly delegates to the Ombudsman the authority to direct the IRS through a TAO to issue a refund to relieve a severe financial hardship faced by a taxpayer. Likewise, the Ombudsman explicitly may issue a TAO to stop a collection action to ensure review of whether the action is appropriate.

• The Ombudsman will be required to prepare annual reports on the most serious taxpayer problems and suggest administrative and legislative solutions to them. The Ombudsman will establish a formal process to track the response of IRS officials to the administrative solutions identified in these annual reports.

• The Ombudsman's authority is being increased in local IRS offices by giving the Ombudsman greater power in selecting and evaluating local Problem Resolution Officers in IRS regions, districts and service centers.

DIVORCED AND SEPARATED SPOUSES

Background:
Many taxpayers have expressed concern that the federal income tax system does not adequately address the unique problems faced by spouses who filed joint returns and later divorce or separate. For example, a divorced or separated spouse may not know of an IRS collection action against the other spouse on a joint tax liability.

Details of new initiatives:

• The IRS will adopt a new procedure by March 1996 to notify one spouse of actions taken against the other spouse to collect their joint taxes. The new procedure will have privacy safeguards to ensure that the procedure is used exclusively for tax purposes.

• The IRS has begun a study of the tax problems facing divorced and separated spouses. For example, the IRS will examine whether the tax liability of divorced or separated spouses should continue to be determined under a joint and several liability standard (that is, each spouse is potentially liable for all of the couple's taxes), or changed to a proportionate liability standard (that is, each spouse is liable for only the taxes attributable to a particular spouse's income) or even determined according to the couple's divorce decree. As another example, the innocent spouse provisions will be analyzed to determine if they provide any real relief to divorced and separated taxpayers. The goal of the study is to recommend legislative and administrative solutions to these problems where possible. The IRS will soon be requesting public comments for the study.

COMPUTERIZED RECORD STORAGE AND NEW ELECTRONIC FILING OPTIONS

Background:
Many businesses, both large and small, have asked the IRS to adopt procedures to lessen the paper they must store to comply with the tax laws and the paper they must send to the IRS.

• The IRS intends to issue a Revenue Procedure to permit taxpayers -- primarily businesses -- to use computer imaging systems, rather than paper copies, to store the records necessary to properly support the information reported on their tax returns.

• The IRS recently issued Revenue Procedure 96-19 to permit employers to use electronic methods to file Form 941, "Employer's Quarterly Federal Tax Return," which reports the income tax withheld and the Federal Insurance Contributions Act (FICA) tax paid by the employer.

EXPEDITED APPEALS PROCEDURE FOR EMPLOYMENT TAX ISSUES

Background:
Many businesses, particularly small businesses, have asked the IRS to consider developing procedures to shorten the time necessary to resolve their employment tax disputes with the IRS, such as the classification of a worker as an employee or independent contractor.

Details of new initiative:
The IRS will soon issue a new procedure to allow employers to appeal employment tax issues to Appeals even while an examination is in progress. This early referral procedure, modeled on the CEP early referral procedure in Rev. Proc. 96-9, should significantly reduce the time and expense necessary to resolve employment tax issues.

NEW MEDIATION PROCEDURE

Background:
The IRS recognizes that litigation is expensive and time consuming for both taxpayers and the IRS. The IRS is thus exploring various alternative dispute resolution techniques.

Details of new initiative:
In October 1995, the IRS began a one-year test of a procedure that allows certain taxpayers in the Appeals process to request mediation of one or more issues. Mediation has already been used successfully to resolve one large valuation dispute. The IRS encourages taxpayers to consider the mediation procedure if applicable.

NEW RULES FOR IRS INVESTIGATIONS

Background:
The IRS takes seriously its responsibility to protect taxpayers' rights in the course of carrying out its legal obligation to investigate tax cases. The IRS is adopting several new rules to better ensure that taxpayers' rights will be respected during investigations.

Details of new initiatives:

• The IRS strongly believes that it is inappropriate for an agent to compromise the tax liability of an informant in exchange for information about another taxpayer and is formalizing its longstanding practice, effective immediately, to explicitly prohibit this kind of behavior.

• The IRS will require its agents, effective by January 31, 1996, to make more extensive examinations of disputed information returns. This issue arises when a taxpayer claims that wage income reported on a Form W-2 or interest or dividend income reported on a Form 1099 is incorrect. The IRS will increase its efforts to verify that the payor reported the correct amount of income to the IRS. In addition, to reduce the number of such disputes, the IRS will ask the payors who file Form 1099 information returns to include their telephone numbers on the taxpayer's copy of the returns, so that taxpayers can contact the payors directly with questions.

• Federal law permits the IRS or IRS agents to use a "designated summons" to obtain documents from taxpayers. These summonses can, in some circumstances, disadvantage taxpayers by extending the time for assessing taxes. Under the new initiative, effective immediately, IRS agents generally will not be permitted to use such a designated summons except for large corporate taxpayers, and only after review by high level IRS officials.

INTEREST NETTING

Background:
Taxpayers ideally would like to offset the interest they owe on overdue taxes with the interest they can receive on tax refunds -- a procedure known as "interest netting." While the IRS has already introduced some interest netting procedures in simpler situations, such computations can be difficult and expensive for taxpayers with more complicated taxes.

Details of new initiative:
The IRS will conduct a study examining its current interest netting practices and investigate the feasibility of expanding such practices to cover new situations. Public comments soon will be requested.

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