A Kinder Gentler Irs?
The forms haven't gotten any shorter. The instructions are as murky as ever. And you'll still get a knot in the pit of your stomach when you receive a fat envelope with "Internal Revenue Service" in the return address.
But take heart: Congress' big push last summer to overhaul the IRS is showing results. True, the IRS Restructuring & Reform Act's drive to turn tax collectors into efficient, customer-friendly servants of the people will take years. But the voices on the telephone help lines already sound cheerier, and pros who deal every day with the IRS report that auditors and agents are showing a distinct change of attitude. "They're still firm, but `firm but kind' is winning out over `firm and mean,"' says David Lifson, who chairs the American Institute of Certified Public Accountants' tax committee.
One example: An IRS auditor agreed to honor an underling's deal to postpone collection of a $100,000-plus tax bill until Lifson's client received a scheduled bonus, even though the lower-level office had exceeded its authority in accepting the delay. "They're acting like reasonable people," Lifson says.
Of course, the IRS's new kindness could disappear as quickly as it came. But taxpayers are gaining lasting legal protections in audits and collections. Most of these new shields took effect in January. So taxpayers whose returns are kicked back for errors or pulled for audit from now on should receive clearer notices, gain easier deadlines, and have more recourse to appeals, including quicker access to Tax Court. In some cases, the changes will apply to those already under examination.
If you're in the lucky majority whose dealings with the IRS are limited to the once-a-year agony of filing, most of this won't matter to you. "The average taxpayer doesn't wind up in court or even get many notices," says Mark Watson, a partner in KPMG's personal financial planning practice in Washington. But the new law's 40-plus taxpayer-rights provisions--expected to cut penalties and interest by $13 billion over the next five years--should prevent IRS abuses and provide relief for hundreds of thousands of taxpayers who get called on the table for errors or omissions in their returns.
EQUAL TREATMENT. One change that could matter to more people than most: Effective last Oct. 1, the IRS must pay the same interest rate on taxes you've overpaid as on money you owe because of underpayments. The rate is now 7%. In the past, taxpayers paid one percentage point more. The law also requires the IRS to charge no interest on an underpayment when a taxpayer has offsetting overpayments--if, say, you misreported some 1995 income in 1996 and thus paid too little tax for 1995 and too much for '96. During 1999, taxpayers can apply to zero-out interest on such offsetting balances retroactively, back to taxes paid for 1995. The IRS plans to issue instructions soon.
Taxpayers will also end up paying less interest unless the IRS starts meeting deadlines imposed by the new law. Effective with 1998 returns, the IRS must suspend penalties and interest on a tax violation if it doesn't notify the taxpayer of the error within 18 months after the return is filed. So if you make a math mistake on your Form 1040 this April, and the IRS doesn't catch it and tell you within 18 months, you won't owe interest or penalties for the period between Oct. 15, 2000, and three weeks after the notice is finally issued. Since it now takes the IRS 18 months just to match up returns with W-2 income statements, thousands of taxpayers may enjoy these pauses in penalties during the next couple years.
Some of the new law's most heralded reforms won't have nearly as much impact. Take "burden of proof." This provision specifies, for certain cases in Tax Court, that the IRS has to prove what you owe, rather than forcing you to disprove what the auditor claims. The biggest beneficiaries, says KPMG's Watson, will be heirs and charitable donors who must put a value on property such as artwork, real estate, or closely held businesses that they inherited or gave away. Now, if a taxpayer gets a valuation from a qualified appraiser, the IRS must prove the value is wrong. In the past, the IRS could dismiss appraisals until the taxpayer produced a price the agency liked. But most taxpayers who wind up in court won't find much changed. The law only shifts the burden of proof if the taxpayer keeps all required records and fully cooperates with the IRS. The case must also go through all levels of IRS appeals before it can go to court.
Indeed, accountants say the new provision could make life worse. Some clients may be emboldened to quit keeping--or even destroy--necessary tax records. "Audits will probably become more intrusive, because examiners will want to gather more evidence so they can make their case if they end up in court," says Stuart Kessler, partner at the New York accounting firm of Goldstein Golub & Kessler. And most taxpayers will pass up the burden of proof advantage, Watson says, so they can go straight to Tax Court--which stops interest from accruing--rather than wend their way through IRS appeals.
By contrast, tax pros are pleased with the new law's breaks for "innocent spouses"--usually women who unknowingly sign an incorrect or fraudulent joint tax return. Under old rules, the IRS had little choice but to pursue these spouses, often long after their marriages had broken up, because they were jointly liable for their exes' taxes and penalties. Now, spouses will have an easier time proving they didn't know about partners' shenanigans. And divorced or separated taxpayers will be allowed to break out of a joint return--and escape liability for a spouse's taxes--up to two years after the IRS starts trying to collect the taxes. "Under the old rules, the IRS was powerless to provide fairness and equity" to spouses, says accountant Lifson. "Now, they can use judgment."
The IRS also will have far less latitude in auditing and collecting from taxpayers. "Lifestyle" audits, where the IRS suspects taxpayers are living beyond their reported means, can't be launched without some hard evidence of underreported income. The IRS must notify targets of noncriminal audits before it seeks information from their bankers, employers, neighbors, or other third parties. And the new law gives a taxpayer more notice and chances to appeal when the IRS places a lien or levy on wages or bank accounts--or tries to seize property.
Reformers hope all these changes will create an IRS that collects what Uncle Sam is owed in a fair--perhaps even polite--manner. It'll take years to tell whether the IRS becomes as warm and friendly as Congress intends. But for taxpayers, the law's protections should ease the chill they feel by at least a few degrees.
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