On April 11, the House passed a new taxpayer rights bill (H.R. 4163) that would provide taxpayers with additional protections when having to deal with the IRS. The measure is a follow-up to the Internal Revenue Service Restructuring and Reform Act of 1998.
Under this most recent measure, penalties on unpaid taxes would be reduced and penalties or interest charged would be eliminated when the IRS causes a mistake or an unreasonable delay during a tax investigation. It also aims to clarify rules about the disclosure of tax return information. For example, the measure would provide for judicial review of an IRS decision to withhold the release of information on a return. The IRS would also be required to let taxpayers know whenever their returns have been inspected or when tax information has been disclosed illegally.
While this bill promises some improvements when dealing with the IRS, its disclosure provisions may not be especially beneficial for business owners, says Mark Luscombe, principal federal tax analyst with CCH Inc., a Riverwoods, Illinois-based provider of tax and business law information. As now drafted, the bill raises concerns that "too much confidential tax information would be disclosed in an administrative tax proceeding," he explains. For example, tax return information might be disclosed during situations where the IRS is scrutinizing cash payments to partners in a partnership.
The White House responded to the legislation by saying the admin-istration is committed to strengthening taxpayer rights and will continue to work with Congress and the IRS to ensure that taxpayers receive the best service possible. Nevertheless, the Clinton administration's Office of Management and Budget (OMB) did register some objections. It's specifically concerned about a provision that would allow an exclusion from income for interest received on overpayments of tax. OMB claims that dishonest taxpayers would have an incentive to "invest" with the IRS by "intentionally overpaying their taxes in order to receive this tax-free interest."
OMB says it's possible that Congress can address these concerns by modifying the bill. If the changes meet OMB's satisfaction, analysts predict this new taxpayer rights bill could be one of a number of provisions in a tax measure that Congress is likely to clear this session.
While the House usually passes smaller tax measures, "the Senate tends to gather all the little tax bills the House has passed and put them together in one big bill for consideration," says Luscombe. But there are, of course, still no assurances that even if a bill passes, it will actually see the light of day. "There could be another situation like last year," he explains, "where Congress came up with a big tax bill, but the president vetoed it."
- Employers Council on Flexible Compensation, www.ecfc.org