Practice Issues Raised by IRS Restructuring

By Danielle D'Angelo

The legislation restructuring the IRS signed into law by President Clinton in July is not only the biggest overhaul of the IRS in almost 50 years but also raises a number of practice issues for CPAs. The biggest change is the extension of taxpayer confidentiality protection to accountants. Other provisions of interest include:

* Burden of Proof--Despite opposition from the tax practice community, the new law permits a shift in the burden of proof to the IRS in court proceedings. Many tax practitioners believe that this change could result in more intrusive IRS audits with overly broad requests so the IRS can bolster its case with as much information as possible.

* Limitation on Financial Status Audits--Culminating several years of effort by the CPA profession, the law prohibits the IRS' use of financial status audit techniques unless there is a reasonable indication of unreported income.

* Interest and Penalty Relief--The IRS will be required to show the computation of any penalty or interest included in a notice sent to taxpayers. Noncorporate taxpayers will no longer be charged interest on an underpayment at a higher rate than the IRS will pay such taxpayer on an overpayment. In addition, netting of interest on overlapping periods of overpayment and underpayment will be permitted.

Other provisions create an oversight board for the IRS with the majority of its representatives from the private sector, require Congress to give more consideration to the complexity of pending tax legislation, and grant new taxpayer rights in addition to the extension of the confidentiality privilege. The final bill also included an amendment that reduces the holding period on capital gains from 18 months to 12 months.

The accounting profession played an active role in helping lawmakers understand the issues and develop the legislation. The NYSSCPA testified before the Senate Finance Committee last year, the only state accounting organization asked to appear, and the AICPA testified at this and other hearings, and provided additional technical assistance.