The National Commission on Restructuring the Internal Revenue Service (Restructuring Commission) was not primarily intended to focus on taxpayer rights. There was a simple reason for this. In the preceding decade, Congress had passed two substantial bills, the Taxpayer Bill of Rights in 1989 (TBOR I),1 and the Taxpayer Bill of Rights II in 1995 (TBOR II),2 and in 1997, additional procedural changes to the Internal Revenue Code, many of which could be characterized as taxpayer rights provisions, were already pending in tax legislation even as the Restructuring Commission completed its work.3 Therefore, the Restructuring Commission concentrated its efforts on structural reforms of the IRS—the general reorganization into four customer-based divisions, personnel improvements, changes in the IRS leadership rules, etc.4 Taxpayer rights provisions were relegated to an appendix, without even the same strong recommendations as the structural changes.5

The House version of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98)6 included a series of taxpayer rights provisions, which largely consisted of "consensus" items, such as provisions carefully drafted to correct or improve previous enactments, follow-up ideas that had been studied pursuant to TBOR I and TBOR II, and also some of the Restructuring Commission's ideas.7 But, after hearings on the bill and on perceived abuses by the IRS, a number of additional taxpayer rights provisions were introduced.8 To tax procedure experts, some of the newly proposed changes (such as the Collection Due Process provisions,9 which created an entirely new avenue for judicial review of tax disputes) could be considered truly revolutionary. Good ideas often lay at the core of many of these new proposals, but Treasury and the IRS raised both policy concerns and technical objections to them. Some provisions were not completely thought through and were still being hurriedly drafted as late as (literally) the evening before the House voted on the Conference Report.10

Many taxpayer rights provisions from RRA 98 have been tremendous successes; others, unfortunately, have not lived up to their promise, often for various technical reasons; still others have been a "mixed bag." This Article will examine a number of these provisions, how they came about and were revised during the legislative process, and how they have been implemented over the past twenty-five years. One of the authors has the perspective of being both one of the principal negotiators of these provisions for the Treasury Department in 1998 and subsequently a practitioner representing numerous individual and business taxpayers dealing with the new rules. After reviewing and evaluating the efficacy of the reviewed provisions, the Article will conclude with observations regarding reform or improvement of these provisions.

I. SUCCESS STORIES

A. "Innocent Spouse" and "Separation of Liability" Relief Under Section 6015

Section 6013 had long provided that spouses who file a joint return are jointly and severally liable for the resulting tax.11 This often led to disputes regarding collection of the joint liability from the assets of one spouse or the other, especially in situations involving separation or divorce, or where one spouse had substantial non-jointly-held assets.12 Before RRA 98, relief from joint and several liability in such situations was statutorily available but somewhat limited in scope. An "innocent spouse" had to establish that she did not know, and had no reason to know, that there was an understatement of tax on her joint return and that it would be inequitable to hold her liable for the deficiency.13 But, in addition, the amount at stake (that is, the understatement) had to exceed a certain portion of the innocent spouse's adjusted gross income in the pre-adjustment year in order to obtain relief.14 Moreover, the understatement had to be "substantial" and attributable to a "grossly erroneous" item of the other spouse.15 If the Secretary denied innocent spouse relief, then the Tax Court could review the joint status of the liability only if a notice of deficiency had been issued.16

The limited availability of innocent spouse relief especially affected vulnerable demographics. In practice, numerous divorced single mothers were paying their ex-husband's tax liability single-handedly.17 One member of Congress later went as far as to conclude that the IRS was taking advantage of joint liability to make women the target of collection activity.18

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Footnotes

1. Technical and Miscellaneous Revenue Act, Pub. L. No. 100-67, Title VI, § 6235, 100 Stat. 3342, 3737 (1988).

2. Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 401, 110 Stat. 1452 (1996).

3. Taxpayer Bill of Rights 3, Pub. L. No. 104-168, § 401, 110 Stat. 1452 (1996) (amended 1997).

4. NAT'L COMM'N ON RESTRUCTURING THE INTERNAL REVENUE SERV., A NEW VISION FOR A NEW IRS passim (1997) [hereinafter NAT'L COMM'N ON RESTRUCTURING].

5. Id.

6. Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 685.

7. H.R. 2292, 105th Cong. 1st Sess. (1997), Title III.

8. H.R. 2676, 105th Cong. 1st Sess. (1997), Title III.

9. § 3401, 112 Stat. at 750 (enacting I.R.C. §§ 6320, 6330, providing notice and opportunity for hearing upon notice of lien and before levy).

10. See, e.g., § 3411, 112 Stat. at 750 (enacting I.R.C. § 7525, including a carve out for tax shelters in I.R.C. § 7525(b)).

11. Joint and several liability arising from a joint tax return was first codified by the Revenue Act of 1938 and is currently set forth in I.R.C. § 6013(d)(3): "if a joint return is made . . . the liability with respect to the tax shall be joint and several."

12. Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 401, 110 Stat. 1452, 1459 (1996) (TBOR II) (requiring a study of joint liability including issues related to divorce, innocent spouse status, and community income or property); U.S. DEP'T OF THE TREAS., REPORT TO THE CONGRESS ON JOINT LIABILITY AND INNOCENT SPOUSE ISSUES (1998) [hereinafter INNOCENT SPOUSE ISSUES].

13. I.R.C. § 6013(e)(1) (1996).

14. I.R.C. § 6013(e)(4) (1996).

15. I.R.C. § 6013(e)(2), (3) (1996); e.g., Douglas v. Comm'r, 86 T.C. 758, 762 (1986) ("Grossly erroneous items include any item of income that is omitted from gross income, regardless of the basis for omission. A claim for deduction or credit will be treated as a grossly erroneous item only if the claim had no basis in law or fact.").

16. I.R.C. § 6213(a) (1996).

17. 144 CONG. REC. 1418 (1998); INNOCENT SPOUSE ISSUES, supra note 12.

18. 144 CONG. REC. 1418 (1998) (statement of Sen. Jon Kyl: "singling out women for abusive collection is just plain wrong.").

Originally Published by Pittsburg Tax Review

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.