Appendix I

Taxpayer Rights Supplementary Information

 

Taxpayer Rights Proposals

 

Offers in compromise

The proposal would require the Commissioner to ensure that national and local expense allowances give taxpayers adequate means to provide for basic living expenses when considering an offer in compromise.

 

Eliminate interest differential.

The proposal would amend section 6621 of the Internal Revenue Code to eliminate the differential between interest rates applicable to overpayments and underpayments of tax. By eliminating the necessity for and complexity of interest netting, the proposal furthers the goal of fundamental fairness for taxpayers and generally simplifies tax administration.

 

Eliminate application of failure to pay penalty during period of installment agreement

The proposal would amend section 6651 of the Internal Revenue Code to eliminate the application of the failure to pay penalty during periods when a taxpayer is in compliance with an installment agreement entered into pursuant to section 6159 of the Internal Revenue Code. Taxpayers who have entered into an agreement to pay their tax liabilities, including interest, should not continue to be penalized.

 

Taxpayers’ right to installment agreement

The proposal would amend section 6159 of the Internal Revenue Code to require the IRS to enter into an installment agreement for amounts that do not exceed $10,000, upon request by the taxpayer, if the taxpayer has not been delinquent in filing returns or paying tax shown due thereon at any time during the prior five years, and has not qualified under this safe harbor previously.

 

Payment of taxes

The proposal would require tax payments to be made to the order of the Treasurer, United States of America. Because the IRS receives much of the backlash for policies and activities that are not within or completely within its control and this backlash is encouraged by writing checks payable to the order of the IRS. This change properly reflects the true recipient of tax dollars and promotes payment as our social responsibility for the funding of federal government operations and programs.

 

Seed money for clinics representing low-income taxpayers

The proposal would authorize the IRS to establish a program to support the creation of clinics representing low-income taxpayers. By establishing a program for awarding grants to endow such clinics, this proposal would help to ensure that low-income taxpayers involved in controversies with the IRS could obtain representation. This program also will conduct outreach and education to populations that do not speak English as a first language.

 

Clarify and expand the jurisdiction of Tax Court

The proposal would clarify that a Tax Court order of refund is appealable, but the Tax Court does not have jurisdiction to review refund offsets. The proposal also would expand the jurisdiction of the Tax Court to issue declaratory judgments regarding an estate’s initial or continuing eligibility for an extension of time for payment of estate tax pursuant to section 6166 of the Internal Revenue Code. Finally, the proposal would increase the jurisdictional limit of section 7463 to $25,000, and index that amount prospectively, to provide streamlined procedures for taxpayers to appeal IRS determinations in informal proceedings.

 

Centralize cataloging and review of complaints and Board oversight

The proposal would require the IRS to centralize the cataloging and review of taxpayer complaints of IRS misconduct on an individual employee basis. The proposal also would require the Commissioner and Taxpayer Advocate to establish guidelines for internal review and discipline of IRS employees, and the Board of Directors to ensure independent oversight of IRS internal review. This function would be similar to that performed by citizen’s police boards that monitor internal police reviews. The proposal also would require the IRS to establish a toll-free number for taxpayers to register complaints, to be included in Publication 1.

 

Require IRS employees to explain taxpayers their rights

The proposal would amend section 7521 of the Internal Revenue Code to require IRS employees to notify taxpayers of their rights prior to commencing any interview or examination, to inquire whether the taxpayer understands these rights, and to inquire whether the taxpayer is represented by an attorney, accountant, or enrolled agent, in which case the interview or examination should be terminated until such time as the taxpayer’s representative is present. Taxpayer should be informed of their right to have the examination take place in a reasonable place and that the place does not have to be the taxpayers’ home. In addition, taxpayers should be required to be notified of the reasons for selection of their return for examination upon notification of the examination. Finally, the proposal would require the IRS to provide taxpayers with a written explanation of the applicable burdens of proof on taxpayers and the IRS.

 

Joint and several liability

The proposal would require the IRS to clearly alert taxpayers of their joint and several liabilities on tax forms. A discussion of the possible consequences of joint and several liability should be included in the instructions to the various tax forms and publications.

 

Procedures relating to extensions of statute of limitations

The proposal would amend section 6501(c)(4) of the Internal Revenue Code to require IRS employees to notify taxpayers of their right to refuse to extend the applicable statute of limitations, or to limit such extension to particular issues.

 

Penalty administration

The proposal would require the Taxpayer Advocate to prepare a study and provide an independent report to Congress by July 30, 1998 reviewing IRS penalty administration and the implementation of penalty reform recommendations made by Congress in the Omnibus Budget Reconciliation Act of 1989, including legislative and administrative recommendations to simplify penalty administration and reduce taxpayer burden.

 

Individual/joint tax treatment

The proposal would require the Secretary to prepare a study on the feasibility of treating each individual separately for tax purposes, including recommendations for eliminating the marriage penalty, addressing community property issues, and reducing burden for divorced and separated taxpayers.

 

Burden of proof

The proposal would require the General Accounting Office to prepare a report on the burdens of proof for the taxpayer and the IRS in a dispute. This report should highlight the current differences between criminal (IRS and non-IRS) and civil burdens of proof. In addition, the report should examine the differences between the burdens of proof for individuals in civil IRS disputes versus other civil disputes with the federal government, and should comment on the impact of changing these burdens on tax administration and taxpayer rights.

 

Protection of taxpayer information

The proposal would require the Joint Committee on Taxation to evaluate whether the Congress should encourage the IRS to accept the recommendation of the American Institute of Certified Public Accountants to provide administrative forbearance of requests by the IRS to obtain tax advice or planning memoranda from the files of taxpayers’ advisors, except in cases referred for criminal investigation.

 

Additional Discussion of Taxpayer Rights Proposals

 

Taxpayers’ redress

The Commission recommends a significant expansion in providing taxpayers’ redress for IRS malfeasance. The purpose of this expansion is twofold: first, to compensate the taxpayer for the damages he has suffered from IRS misconduct; and, second, to reinforce for IRS management the importance of improving the performance of IRS personnel.

There historically has been a concern that expanding taxpayer rights to redress would be disruptive to collection efforts. Setting aside the issue of whether it is appropriate that taxpayers should be provided rights only to the extent that it does not disrupt collection efforts, the Commission found no evidence that the rights to redress and collection of representation fees provided to the taxpayer under the Omnibus Taxpayer Bill of Rights and Taxpayer Bill of Rights 2 have caused disruption to IRS collection efforts. In addition, the costs of expanding taxpayers’ redress have been vastly overestimated. For example, the costs of reimbursing representation fees was originally estimated to be over $100 million per year. The actual cost has been approximately $5 million per year.

 

Penalties, interest payments and installment agreements.

The Commission heard from a number of sources that because of high interest payments and penalties it is very difficult for many taxpayers to resolve their tax disputes with the IRS. These high penalties and interest payments are created to raise revenue, not to act as a deterrence to taxpayers. The penalties and interest payments are often at a level where they actually are a significant disincentive for many taxpayers to reach an agreement with the IRS. In addition, the penalties and interest payments (coupled at times with unreasonably low living allowances) are so heavy a burden that taxpayers will enter an agreement only to find later that they cannot meet the terms.

In addition to high penalties and interest payments, the Commission also heard from many sources that it is sometimes difficult for taxpayers to obtain installment agreements or offers in compromise. The Commission heard testimony that there is wide geographic variance in taxpayers getting installment agreements or offers in compromise. The Commission believes that installment agreements and offers in compromise can be useful in resolving tax disputes and should not be discouraged.

The Commission believes that the recommendations on penalties, interest payments and installment agreements will help relieve the unnecessary burdens placed on taxpayers to come into compliance and pay their taxes. The recommendations will benefit taxpayers, should increase revenues in the long term, and improve voluntary compliance.

 

Tax clinics

The purpose of the tax clinics is twofold: to provide representation for low-income taxpayers and perform outreach to certain populations. The IRS does not aggressively conduct outreach to taxpayers who that do not speak English as a first language.

The Commission believes the work of the clinics will benefit the IRS. By providing representation and counseling, the clinics will eliminate many frivolous cases. The clinics will also help ensure that actions brought are only for meritorious issues and are done in a professional manner—thereby minimizing the burden for the courts and the IRS.

The tax clinics will be required as part of their work to perform outreach and education to populations that do not speak English as a first language. This effort will encourage greater voluntary compliance. The Commission intends that the funds only provide seed money and that the tax clinics should be self-supporting within five years.

 

Use of surveys to obtain taxpayer feedback

The Commission found that several states, foreign countries and some parts of the IRS use surveys to get customer feedback. Surveys give taxpayers an opportunity to share their opinion on the services provided and also assist management in improving services.

Examples of surveys are included below. The first is a survey provided by the State of Florida to taxpayers who have been audited by independent contractors hired by the state to perform audits of businesses. The second is a "Customer Satisfaction Survey" developed by the IRS Office of Appeals, which will be distributed to taxpayers starting in July 1997.

 

State of Florida Survey:

1. Did your Notification of Audit advise you of the taxes to be audited, audit period and records the auditor would need?

2. Did the auditor make an appointment with the appropriate person at your office?

3. Was the auditor usually on time for appointments?

4. During the pre-audit interview, or shortly thereafter, did the auditor:

a. Explain the areas of your business to be examined?

b. Explain the general audit process and the approach?

c. Explain the applicable tax issues for your type of business?

d. explain your taxpayers rights?

5. Did the auditor usually try to minimize the disruption to your business operations?

6. Did the auditor conduct the audit in a professional, courteous manner?

7. Did the auditor offer assistance that would help you comply with Florida’s tax statutes?

8. Before or during the exit interview, did the auditor:

a. Provide the audit workpapers and adjustments?

b. Explain the audit issues and results?

c. Explain your hearing and appeal rights?

9. Did the auditor educate you and your staff in the correct method of tax application for any errors?

10. Have you undergone an audit by any other governmental agency?

a. If yes by whom?

b. Based on the questions above, how did this audit compare?

 

Office of Appeals Survey:

Taxpayer Name:

Field Exam____ Office Exam____ Service Center____ Collection____

 

How did you learn about the IRS Office of Appeals?

IRS employee____ IRS publication____ Previous knowledge____

Taxpayers representative____ Other______________________

 

At the IRS Appeals conference were you the:

Taxpayer____ Taxpayer’s representative____

 

At the conclusion of the Appeals process, did you reach:

Agreement on all of the issues____ Agreement on only some of the issues____

No agreement on any of the issues____

 

Please rate your level of satisfaction with each of the following items:

1. The time it took to hear from Appeals after you notified the IRS that you wanted an Appeals conference:

Completely satisfied____

Somewhat satisfied ____

Neither satisfied nor dissatisfied____

Somewhat dissatisfied ____

Completely dissatisfied ____

Unable to answer ____

 

2. The time it took for the Office of Appeals to schedule your initial conference after they first contacted you:

Completely satisfied____

Somewhat satisfied ____

Neither satisfied nor dissatisfied____

Somewhat dissatisfied ____

Completely dissatisfied ____

Unable to answer ____

 

3. The time it took to get you case through the Office of Appeals process:

Completely satisfied____

Somewhat satisfied ____

Neither satisfied nor dissatisfied____

Somewhat dissatisfied ____

Completely dissatisfied ____

Unable to answer ____

 

4. The IRS explanation of the Appeals process before you went to Appeals:

Completely satisfied____

Somewhat satisfied ____

Neither satisfied nor dissatisfied____

Somewhat dissatisfied ____

Completely dissatisfied ____

Unable to answer ____

 

5. The Appeals officer’s explanation of the appeals process:

Completely satisfied____

Somewhat satisfied ____

Neither satisfied nor dissatisfied____

Somewhat dissatisfied ____

Completely dissatisfied ____

Unable to answer ____

 

6. Appeals correctly applied the law to the facts in your case:

Completely satisfied____

Somewhat satisfied ____

Neither satisfied nor dissatisfied____

Somewhat dissatisfied ____

Completely dissatisfied ____

Unable to answer ____

 

7. Appeals was fair in resolving your case:

Completely satisfied____

Somewhat satisfied ____

Neither satisfied nor dissatisfied____

Somewhat dissatisfied ____

Completely dissatisfied ____

Unable to answer ____

 

8. Appeals was impartial in resolving your case:

Completely satisfied____

Somewhat satisfied ____

Neither satisfied nor dissatisfied____

Somewhat dissatisfied ____

Completely dissatisfied ____

Unable to answer ____

 

9. Your overall experience with the Appeals process:

Completely satisfied____

Somewhat satisfied ____

Neither satisfied nor dissatisfied____

Somewhat dissatisfied ____

Completely dissatisfied ____

Unable to answer ____

 

Did the Appeals officer inform you of the following:

a. How much you owed? Yes____ No____

b. How the amount you owed was computed? (if you asked) Yes_____ No_____ Not applicable______

c. About your payment options.

Yes____ No____ Not applicable____

 

Would you use Appeals again?

Yes ____ No____ Not Sure ____

 

Is there anything the IRS could do to improve the Appeals process?

Don’t Know ____ No ____

Yes (please explain) _________________________________________________ ____________________________________________________________________________________________________________________________________________________________

 

Quality review

The improvement in quality of examination will mean that many taxpayers no longer will be subject to groundless assessments by the IRS. However, it also means that many taxpayers may face additional assessments. Reviews by the GAO and Internal Audit have found that poor quality of audit has often translated into the IRS not making proper assessments against a taxpayer.

 

The tables below provide an historical review of the sustension and recovery rates for the IRS in Appeals and the Tax Court. Table I-1 shows the recovery rates in appeals since fiscal year 1992. Table I-2 provides details by case size for the recovery rates for "S" cases (under $10,000, no appeal allowed and informal rules of evidence) and regular docketed cases in Tax Court. Table I-3 shows the closures and recovery rates for "S" and regular docketed tax cases closed between fiscal year 1992 and fiscal year 1996.

 

Table I-1. Recovery Rates in Appeals

FY 1996

FY 1995

FY 1994

FY 1993

FY 1992

FIVE YEAR TOTAL

Nondocketed

Number of Work Units Closed

43,731

42,281

41,576

43,281

44,347

215,216

Additional Tax and Penalties:

Proposed ($1,000)

11,623,092

9,893,945

8,629,987

8,507,266

8,891,067

47,545,357

Revised ($1,000)

3,880,121

2,877,568

2,384,268

2,519,875

2,588,071

14,249,903

Percent Recovered

33.38%

29.08%

27.63%

29.62%

29.11%

29.97%

Docketed

Number of Work Units Closed

20,136

19,059

22,148

23,378

25,140

109,861

Additional Tax and Penalties:

Proposed ($1,000)

2,043,079

2,341,895

2,939,049

2,492,774

3,194,118

13,010,915

Revised ($1,000)

435,602

615,915

768,859

447,616

832,348

3,100,340

Percent Recovered

21.32%

26.30%

26.16%

17.96%

26.06%

23.83%

Total

Number of Work Units Closed

63,867

61,340

63,724

66,659

69,487

325,077

Additional Tax and Penalties:

Proposed ($1,000)

13,666,171

12,235,840

11,569,036

11,000,040

12,085,185

60,556,272

Revised ($1,000)

4,315,723

3,493,483

3,153,127

2,967,491

3,420,419

17,350,243

Percent Recovered

31.58%

28.55%

27.25%

26.98%

28.30%

28.65%

TERMS: 

Work units - Historically Appeals has tracked its inventory in "works units". A work unit generally involves one or more related taxpayers for one or more periods, for which the protests contain substantially the same primary issue. A work unit can , and often does, involve more than one tax return.

 

Additional Tax and Penalties - All of the docketed amounts and the bulk of the nondocketed amounts represent District proposed deficiencies (as defined in IRC Sec. 6211). However, the nondocketed figures also contain adjustments which are not subject to Tax Court jurisdiction. This includes cases referred to Appeals by Collection such as Trust Fund Recovery cases and Offer in Compromise cases.

 

SOURCE: Office of the National Director of Appeals, IRS

 

Table I-2. Recovery Rates by Case Size Cumulative through September 1996
Consolidated (except TERRA)

 

Table I-3. Closures and Recovery Rates for "S" and Regular Docketed Tax Cases Closed FY 1992 - FY 1996

Terminology and Definitions - Office of Chief Counsel

Recovery Rate: the percentages of taxes recovered in a settlement or litigated case to the amount of tax in dispute (Tax Owed on Decision / Tax in Dispute). Tax in Dispute is the amount of tax in the statutory notice and petition. Tax Owed on Decision is the amount of tax as found in the decision and stipulation and reflects the redetermined deficiency after application of carrybacks and other allowances from years not in dispute. Accordingly, the recovery rate reflects the result of litigation reduced by these carrybacks and other allowances.

Sustension Rate: Sustension rate is the percentage of taxes sustained in a settled or litigated case to the amount of tax in dispute (Deficiency Sustained / Tax in Dispute). Tax in Dispute is the amount of tax in the statutory notice and petition. The Deficiency Sustained is the deficiency in dispute as redetermined in the decision and stipulation before application of carrybacks and other allowances from years not in dispute.

Sustension rate data is available only for docketed cases closed in fiscal years 1994 and 1995 involving corporate cases with over $10 million dollars in dispute and CEP cases. This data historically had not been collected within Chief Counsel’s information systems. However, Counsel has begun to collect sustension rate data on large corporate cases in order to evaluate litigation results more accurately (i.e. prior to the application of carrybacks from other nonlitigation tax years).

 

SOURCE: Office of Chief Counsel, IRS