Leveling The Playing Field

New Taxpayer Tools

Indeed, if the Taxpayer Bill of Rights 2 had been in place, Ward may never have had to suffer at the hands of the IRS. She would have had a much easier time recovering her property, and her options for suing the IRS for their outrageous conduct would be more plentiful.

The new law provides important tools for helping small-business owners to successfully fight the IRS, including:

Taxpayer Advocate. The law establishes a new high-level position of Taxpayer Advocate within the IRS. The Taxpayer Advocate is appointed by and reports directly to the IRS Commissioner. The Advocate's primary function is to assist taxpayers in resolving problems with the IRS. The law also gives the Taxpayer Advocate broad authority to act on behalf of taxpayers who would otherwise suffer significant hardship due to IRS enforcement. The Advocate may issue a Taxpayer Assistance Order, which requires the IRS to cease any action, or refrain from taking any action, if, in the determination of the Advocate, the taxpayer has been the victim of inappropriate or illegal enforcement activity.

Small-business start-up relief. Often, new businesses fail to use the correct procedure for depositing employment taxes (the most common mistake is sending the taxes directly to the IRS rather than depositing them into a government depository), and the IRS would assess a severe financial penalty, even though the mistake was inadvertent and the employment tax return was filed. Until the passage of the Taxpayer Bill of Rights 2, the tax code didn't allow the IRS to waive the penalty for such mistakes. The new law now allows the IRS to waive these penalties for an inadvertent failure to deposit employment taxes into a government depository.

IRS liens and levies. Before the Taxpayer Bill of Rights 2 was passed, the IRS would withdraw a federal tax lien or a levy (IRS terms for authorizing the government to take your assets without a hearing to satisfy your tax bill) against your business assets only if the lien or levy was filed "in error." The new law provides that the IRS can withdraw the lien if: 1) the lien was not in accordance with the tax code or regulations; 2) you agree to pay your back taxes in installments; and 3) if the Taxpayer Advocate orders the lien released. Also, the IRS must now give a copy of the notice of withdrawal to you and make reasonable efforts to notify creditors and financial institutions of the withdrawal.

Outrageous IRS conduct. If your business has been the victim of outrageous IRS conduct in connection with collecting alleged back taxes, the Taxpayer Bill of Rights 2 allows you to recover up to $1 million in damages. This amount is 10 times the previous $100,000 cap on such suits. In addition to costing the government damage awards, incidents of IRS officers or employees who intentionally or recklessly disregard the tax code or regulations governing collections must be documented in an annual report made to Congress.

Legal fees. The new law makes it easier for taxpayers who win lawsuits against the IRS to obtain reimbursement of legal fees, and raises the cap on reimbursements from $75 to $110 per hour.

Employment taxes. As an employer, you should be aware that, if the amounts deducted from employee paychecks for federal taxes are not deposited, the IRS can assess the employment tax amount against you personally and recover the money and penalties from your personal assets through collection. This is true even if you were not the person responsible for depositing the taxes. When a business which owes employment taxes is unable to pay the tax assessed, IRS agents routinely look for the "deepest pockets" among the principals of the business and then simply (and lawfully) assess that individual the full amount owed. The Taxpayer Bill of Rights 2 now requires the IRS to notify a "responsible party" at least 60 days before demanding the employment tax due. Additionally, the IRS must now disclose the name of any other person it has determined to be a responsible party, and must also report on their attempt to collect from other responsible parties. The new law also gives a taxpayer who is assessed a responsible party employment tax the right to sue other principals in the business for "contribution" to the taxes owed.

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