On July 22 President Clinton signed into law the Internal Revenue Service Restructuring and Reform Act of 1998, the most significant reform of the IRS to be passed in more than four decades.
The new law gives the IRS, the government's second largest bureaucracy, a not-so-gentle shove toward modernity. The act's major provisions, approximately 40% of which were based on proposals presented by AICPA representatives during seven congressional and tax commission hearings, include expansion of taxpayer protections, IRS organizational reforms and a number of technical corrections to the 1997 tax act.
"We've put into effect a new structure that is fairly radical and that should result in far better service and a better culture at the IRS over time," said Congressman Rob Portman (R-Ohio). "This is pretty big stuff. It's risky in a way, but, given the poor results at the IRS on a number of levels, extraordinary measures were called for."
The most extraordinary measure is the creation of the IRS Oversight Board, whose nine members will oversee the IRS in all aspects of tax policy administration.
Six board members will come from the private sector with expertise in areas such as management, taxation and information technology. The three remaining positions will be filled by the IRS commissioner, a representative of the Treasury and a federal employee representative. All board members will be appointed by the president for five-year terms on a staggered basis.
"The board will give the IRS outside expertise, continuity and accountability," Portman said.
Pamela J. Pecarich, who is a tax consultant from Bakersfield, California, and a member of the tax executive committee, said, "A lot of changes were necessary at the IRS. With these reforms, Congress is giving the IRS the time and the tools it needs to improve. The act buys the IRS a new lease on life."
Under the 1998 act the national taxpayer advocate and the inspector general for tax administration will gain greater autonomy from the IRS. The IRS will devise a new mission statement focused on meeting taxpayer needs. And the IRS will change from an organizational structure based on geographical units to one segmented by taxpayer characteristics.
Michael E. Mares, chairman of the Institute's tax executive committee, said, "When you combine the board's oversight duty with the enhanced national taxpayer advocate position and the improved position of treasury inspector general for tax administration, you've got a lot of oversight that will be brought to bear on the IRS."
In addition to the reforms at the IRS, the 1998 act also mandates many taxpayer protections.
It extends to taxpayers confidentiality protection for tax advice given by CPAs and federally authorized tax practitioners (enrolled agents and enrolled actuaries) in matters before the IRS or in cases before the federal court in which a federal tax authority is involved. The privilege extension, however, does not apply to criminal proceedings.
"The extension of privilege is a good idea for the taxpayer," said Don Summa, a tax consultant in Red Bank, New Jersey, and former national senior tax partner for Arthur Young & Co. "Taxpayers should be able to choose advisers they think can best represent them."
Nancy K. Hyde, a partner of Onstott, Craddick & Hyde in Oklahoma City, agreed that the new privilege would benefit taxpayers. "The accountant-client privilege gives taxpayers the same level of protection they have now with their attorneys with respect to tax advice."
Hyde, who is chairwoman of the Institute's tax forms committee, also said in the past attorneys had used privilege as a selling point in marketing their tax services. The extension of privilege to confidential communications with CPAs will level the playing field between CPAs and attorneys, she said.
Like many other CPAs, Hyde has adopted a wait-and-see attitude on the provision in the 1998 act that shifts the burden of proof from taxpayers to the IRS. "That provision is like a beautifully wrapped present," she said. "When you open it up, it's not quite as neat as you thought it would be."
The shift would require better recordkeeping and supporting documentation for taxpayer filings being examined by the IRS. The shift might also prompt agents to be more aggressive in preparing their cases, she said.
According to Mares the tax committee opposed the burden of proof "because we believed it would lead to more intrusiveness into taxpayer affairs. The IRS would be forced to ask a lot of questions at the audit level in order to present their case."
Ray A. Knight, a senior manager at KPMG Peat Marwick, said he thought the provision was so narrowly written that it would have little effect on the average taxpayer.
"The major obstacle preventing the shift in the burden of proof from the taxpayer to the IRS is substantiation," Knight said. "Taxpayers who think the shift is automatic may be disappointed if their recordkeeping is inadequate."
Knight added that, if taxpayers lose tax cases because their filings had poor supporting documentation, they may blame their tax advisers and look to them to cover any losses.
Less controversial and more taxpayer-friendly provisions of the 1998 act include the following:
- The IRS will be required to notify taxpayers when it intends to contact third parties in audit proceedings.
- Taxpayers will no longer be charged a higher interest rate on underpayments than the IRS pays on overpayments.
- The netting of interest in overlapping periods of overpayment and underpayment will be permitted.
- The IRS will be required to give taxpayers an explanation of refund denials.
- The statute of limitations on refund claims will be suspended for taxpayers unable to handle their affairs because of a medical disability or mental impairment.
- Relief for innocent spouses will be easier to obtain.
"The new law is a big win for taxpayers," said Gerald Padwe, vice-president of the AICPA federal taxation division. The Institute was very active at every step of the process of bringing this legislation to fruition. Throughout, the Institute advocated an improved management structure for the IRS, better service to taxpayers, stability and simplification of the tax law and strengthened taxpayer rights.
"By and large the AICPA is very pleased with the act. We're optimistic about how the IRS is going to look in the future," Mares said.