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IRS Overhaul Gives Taxpayers Rights

October 27, 1997

WASHINGTON (AP) _ A provision in the legislation to overhaul the IRS could save taxpayers more than $1 billion by placing new limits on penalties for repayment of back taxes.

It’s among a host of taxpayer-rights initiatives, some benefiting divorced spouses, the mentally impaired and low-income workers, that have gotten little notice in the political maneuvering surrounding agency restructuring.

``There are some immediate benefits from this legislation,″ says Rep. Rob Portman, R-Ohio, an architect of the legislation.

Most of the discussion and dispute on the bill has concerned such broader issues as the proposed creation of an 11-member oversight board to draft the IRS’ budget and improve management of the agency.

The Clinton administration reversed course last week and backed the bill when sponsors agreed to retain the president’s authority to hire and fire the IRS commissioner.

The administration says it still wants further revisions to an item that would shift the burden of proof from taxpayers to the IRS when disputed cases reach court. Treasury Department officials say the bill, as currently written, could strengthen the hand of tax evasion artists, an assertion disputed by the bill’s sponsors.

The most significant piece of the taxpayer-rights section involves a change in installment agreements for repayment of back taxes. It could save taxpayers $1.03 billion over five years, according to the Joint Committee on Taxation.

Currently, taxpayers who fail to pay their taxes are subject to a penalty of one-half percent per month of the unpaid amount, up to a maximum 25 percent penalty, plus interest. The legislation would drop the maximum penalty to 9.5 percent for taxpayers who reach an installment agreement to repay back taxes.

For example, a taxpayer who owes $100 and has failed to pay the bill after two years would owe $125 plus interest under the current formula. The legislation would reduce the total to $109.50 plus interest if the taxpayer reached an installment agreement.

The bill’s sponsor, House Ways and Means Committee Chairman Bill Archer, R-Texas, said the provision seeks to reverse a trend in the 1980s in which several tax bills boosted IRS penalties and allowed the government to collect more revenue without raising taxes.

``Finally, we’re moving in the other direction,″ Archer said.

Many of the other provisions were tailored for more narrow situations, said Gregory Jenner, a partner in the Coopers & Lybrand accounting firm in Washington.

``To be honest with you, the types of cases these will apply in are exceptions rather than the rule,″ he said.

One item concerns ``innocent spouse relief,″ which would typically apply to divorced spouses who face additional taxes due to mistakes caused by former spouses who prepared the returns.

In a report earlier this year, the General Accounting Office estimated that as many as 587,000 taxpayers could be eligible for such relief.

Another provision of the legislation deals with the formula on interest penalties for underpayment and overpayment of taxes _ a change that could save taxpayers $269 million over five years.

Currently, the IRS charges taxpayers a short-term interest rate plus three percentage points as a penalty for underpayment of taxes. A different formula applies for money the IRS owes taxpayers for overpayments: the short-term interest rate and two percentage points.

To Archer, this formula described a classic problem in the tax code: ``Heads, the government wins, and tails, you lose.″

The bill makes the overpayment rate the same as the underpayment rate.

Generally, the IRS has to pay interest on refunds if it fails to process a return within 45 days after the April 15 deadline.

Another item would benefit primarily the elderly or others suffering mental disabilities who fail to file for refunds within three years if they made a mistake on their returns. The bill suspends the statute of limitations for refunds if the taxpayer suffers a mental disability, such as Alzheimer’s disease.

The bill is based on a 1996 Supreme Court case in which a woman was denied a $7,000 refund for a tax mistake made by her 93-year-old father.

Another proposal would let the Treasury Department make $3 million in annual grants to low-income tax clinics, an amount that would be matched by the clinics. Tax experts say the need for such advice to the poor is growing with the increasing complexity of the tax laws.

These grants would go to tax clinics run by law schools, a small program that helped only 1,145 low-income taxpayers last year.

The House Ways and Means Committee approved the overall measure last week and it is expected to come to the House floor by early November. Senate action isn’t expected until next year.

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