The Taxpayer Rights and Reforms of RRA 98

The Internal Revenue Service Restructuring and Reform Act of 1998, known as RRA 98, was enacted in response to public concern about the practices of the Internal Revenue Service (IRS). The legislation’s primary objective was to overhaul the agency, mandating a change from a culture focused on enforcement to one that prioritized customer service and the protection of taxpayer rights. This was the most substantial reorganization of the IRS since the 1950s, driven by a bipartisan effort to make the agency more accountable. The act introduced new protections and procedures designed to create a fairer balance between taxpayers and the nation’s tax collector.

Shifting the Burden of Proof in Tax Court

A change introduced by RRA 98 was the modification of the “burden of proof” standard in certain judicial proceedings. Historically, the IRS’s determination of a tax liability was presumed correct, and the taxpayer carried the full burden of proving it was wrong. The act created Internal Revenue Code Section 7491, which allows the burden of proof to shift from the taxpayer to the IRS on a factual issue. This shift is not automatic and applies only in a court proceeding, not during an initial audit or administrative appeal.

For the burden to transfer to the government, the taxpayer must satisfy several requirements. These include:

• Introducing credible evidence regarding the factual issue in dispute.
• Complying with all legal requirements to substantiate any item, such as the specific record-keeping rules under IRC Section 274 for certain expenses.
• Maintaining all records as required by the Internal Revenue Code.
• Cooperating with reasonable requests from the IRS for information, documents, meetings, and interviews.
• Meeting certain net worth limitations, which applies to entities like corporations, partnerships, or trusts.

If all these conditions are met, the responsibility then falls on the IRS to prove that its position is correct.

New Taxpayer Rights in IRS Collections

RRA 98 established new rights for taxpayers facing collection actions by creating Collection Due Process (CDP) hearings under IRC Sections 6320 and 6330. These provisions give taxpayers a formal opportunity to be heard by an independent party before the IRS can seize property. The right to a CDP hearing is triggered when the IRS files a Notice of Federal Tax Lien, which requires a hearing notice within five business days, or provides a Final Notice of Intent to Levy, which requires a 30-day notice period.

During a CDP hearing, conducted by the IRS’s independent Office of Appeals, a taxpayer can propose collection alternatives like an Offer in Compromise or an installment agreement. A taxpayer can also raise spousal defenses or argue that the collection action is inappropriate. The underlying tax liability can be challenged only if the taxpayer did not have a prior opportunity to do so.

The law also requires a court order before the IRS can seize a taxpayer’s principal residence. After the Appeals office’s decision, the taxpayer can seek judicial review in the U.S. Tax Court. The IRS is generally prohibited from levying a taxpayer’s property while the CDP hearing and any court appeal are pending, providing a pause in collection activity.

Significant Expansion of Innocent Spouse Relief

RRA 98 reformed the rules for “innocent spouse relief,” making it more accessible for individuals to be relieved of tax liability from a joint tax return. When a couple files jointly, they are each “jointly and severally liable” for the entire tax debt. The law, codified in IRC Section 6015, created three distinct avenues for relief.

The first path is an updated version of traditional innocent spouse relief. To qualify, a taxpayer must show that an understatement of tax on the joint return is due to an erroneous item of the other spouse. They must also prove that at the time of signing the return, they did not know and had no reason to know about the understatement, and that it is inequitable to hold them liable.

A second option is the “separation of liability,” available to taxpayers who are divorced, legally separated, or have lived apart for at least 12 months. A qualifying taxpayer can elect to allocate the tax deficiency between themselves and their former spouse as if they had filed separate returns. This makes the requesting spouse responsible only for the tax attributable to their own income and deductions.

The third option is “equitable relief,” which acts as a safety net. This provision grants the IRS authority to provide relief when it would be unfair to hold a spouse liable and they do not qualify for the other two types of relief. This is often used in cases involving an underpayment of tax or in situations involving abuse or financial coercion.

Creation of the Tax Practitioner-Client Privilege

RRA 98 created a new tax practitioner-client privilege, codified in IRC Section 7525. This provision extended the common-law confidentiality protections that exist between an attorney and client to federally authorized tax practitioners. This category includes Certified Public Accountants (CPAs) and Enrolled Agents (EAs).

The privilege applies to confidential communications involving “tax advice” between the taxpayer and their practitioner. This was intended to allow taxpayers to have open conversations with their tax advisors without fear that those discussions could be used against them by the IRS in a civil tax matter.

However, the scope of this privilege is subject to limitations. It can only be asserted in non-criminal tax matters before the IRS or in federal court. The privilege offers no protection in criminal tax investigations or any state tax matter.

The privilege also does not cover information shared for the purpose of tax return preparation, as this information is expected to be disclosed. It also does not apply to general business advice or to any written communications related to the promotion of corporate tax shelters.