Restructuring and Reforming the Internal Revenue Service

Article excerpt

Passed overwhelmingly 402-8 in the House of Representatives and 96-2 in the Senate--the Internal Revenue Service Restructuring and Reform Act of 1998 creates "a new day for the American taxpayer," according to Senate Finance Chairman William Roth (R.-Del.). The law clears the way for the most comprehensive internal reorganization of the IRS in more than 40 years.

The act provides for the dismantling of the IRS's traditional geographic divisions and replaces them with operational divisions structured around four groups of taxpayers: Wage and Income, for those with wages and investment income; Small Business/Supplemental, for those who file Schedule C (self-employed), F (farm), E (rental, partnership, trust, estate, and S corporation--those that elect to be taxed like a partnership--income), 2106 (employee business expenses), partnerships, S corporations, and other corporations with income less than $5,000,000; Large Corporate and Middle Market, for corporations with incomes of $5,000,000 or greater; and Tax Exempt, for employee plans, exempt organizations, and state and local governmental entities. It is anticipated that the Chief Counsel's Office will retain a separate, independent structure that would address issues in each of the new divisions.

Along with the structural changes, the act seeks to alter the character and group mind-set of the IRS by creating a nine-member, largely private-sector oversight board, strengthening the national taxpayer advocate, and relocating most of the Inspection Service to the Treasury Department, to be headed by a newly created Inspector General of Tax Administration. The Commissioner of Internal Revenue would have a five-year term, including the current commissioner. The act also calls for annual joint hearings of the Congressional committees with IRS jurisdiction.

These proposals are intended to provide greater oversight and accountability for the agency. However, as Rep. Ben Cardin (D.-Md.) pointed out, "The success of IRS reform will not be the passage of this bill, but the implementation of the bill." The objective is to provide fair and equitable treatment of taxpayers.

The law grants additional taxpayer protections and creates new procedural rules for the agency. What really is going on is a change in attitude from the top more than anything else. Commissioner Charles O. Rossotti has mandated a climate of customer service for the IRS, reflected not only in the Reform Act, but, even more importantly, in how agents are treating taxpayers.

The act extends the attorney-client privilege to tax advice given in non-criminal proceedings by professionals authorized to practice before the IRS (CPAs and enrolled agents). However, this new privilege would not apply to written communications between a practitioner and any representative of a corporation in connection with the promotion of a tax shelter, defined as any investment strategy that comes with the significant purpose of avoiding taxes. Because of the vagueness of the word "significant," it has been argued that the IRS could apply this to any corporate planning advice given by accountants. …