The Taxpayer Bill of Rights is viewed by some as a step in the right direction. Others see it as smoke and mirrors. But the wordy — yet historic — Taxpayer Relief Act of 1997 remains the largest tax-cut legislation in 16 years.
Sifting through the technical and legal language, what does the Taxpayer Bill of Rights mean to the average business owner?
“The bill has some good aspects to it, but it is a lot of smoke and mirrors,” said Walt Dallas, tax attorney and partner with Barnes Broom Dallas & McLeod PLLC. “It’s less substantive than reports indicate.”
The act covers improvements in capital gains, Roth IRAs, child credits, estate tax reductions, education tax incentives and other provisions, totaling more than 40 rule changes.
“A lot of areas were particularly beneficial, especially from an accounting viewpoint,” said Woody York, tax partner at Arthur Andersen LLP in Jackson. “The act allows taxpayers to talk about transactions with their accountants without being concerned, for the most part, about confidentiality.”
There are benefits
Who benefits? Innocent spouses, for starters.
“Allowances have been made for innocent spouses, where one spouse is not penalized for debt of another spouse,” York said. “This particularly helps with cases of estrangement or divorce.”
Worried about a home being seized? The IRS cannot seize the personal residence of a taxpayer to satisfy a tax liability of $5,000 or less. That’s double what it was.
“It has typically not been the policy of the IRS to seize personal residences anyway,” said Dallas, “It’s a very rare occurrence when it happens.”
If tax liability does not exceed $10,000, the IRS must enter into an installment agreement with an individual who requests it, if their tax returns have been filed promptly and accurately within the last five years. “The IRS has to provide that opportunity,” York said.
In the past, the IRS did not have to give an explanation if they deemed it necessary to keep your refund. Under this act, the IRS has to provide a reason. “That happens quite often when a refund is requested and the IRS does not refund it because they disagree,” York said.
“There are many provisions that the small business owner will find very beneficial,” he said.
For example, the taxpayer can collect attorney’s fees if the taxpayer wins a case against the IRS.
“The IRS has always had this provision but the act provides a little more flexibility,” Dallas said. “If, for example, the IRS is being stubborn on an issue and does not compromise, and if the taxpayer wins, the taxpayer can collect attorney’s fees.”
The act allowed a statute of limitations in the estate and gift area, Dallas said.
“You used to file a gift tax return and the IRS could come back 20 to 30 years later,” he said. “Now, once you file a gift tax return and make proper disclosure, that gift tax statute of limitation runs.”
The interest rate is now the same for over and under payments — about 5% to 6%, he said.
The small case calendar has been increased from $10,000 to $50,000, which will be “a nice help to smaller taxpayers if the court system can hold it,” Dallas said.
What about ‘burden of proof?’
Shifting the burden of proof to the IRS has been met with cynicism, said Dallas.
“The law says if the taxpayer makes certain disclosures, the technical burden of proof shifts to the IRS,” he said. “The IRS has to prove the taxpayer violated the tax law. Once the IRS makes that proof, the burden shifts back to the taxpayer. I’ve heard comments that said nothing has really changed.”
What about the possibility of the IRS rewarding its employees based on tax quotas collected?
“This bill specifically bars the IRS from using records of tax enforcement results to evaluate its employees,” said York. “It does not require, but suggests, that production quotas or goals, with respect to employees, should not be based on their results of examinations. That’s a benefit to the taxpayers.”
Dallas said it has not been the policy of the IRS to reward employees based on a quota system.
“Minor abusive situations that tend to make it in front of Congress have made it seem so,” he said. “Regardless, it’s classified as a positive change.”
Here are some other changes that will affect business people:
• Property held for more than a year — no longer 18 months minimum — will be eligible for lower capital gains rates.
• Taxpayers planning for retirement, and those who have already retired, will have more options with the Roth Conversion IRAs. The new law imposes penalties on some, but not all, early withdrawals.
• Education tax breaks funded in an education IRA applies to taxpayers under the age of 30. Benefits can be shifted to other family members to avoid the penalty.
• The person primarily liable on the student loan can deduct student loan interest.
“Nothing has really changed from a practical sense,” said Dallas. “You’re still going to have to substantiate your deductions. You’re going to have to prove your positions are correct.”