Taxation – We should learn from US mistakes

On 22 July, President Clinton signed into law the IRS Restructuring and Reform Act of 1998. As we move into the second year of self-assessment, the Act is something that politicians on this side of the Atlantic should ponder over. There is much in it that ought to be copied in the UK.

The Act follows the June 1997 National Commission report on restructuring the Internal Revenue Service, ordered by Congress in 1996 in response to growing public dissatisfaction with the IRS’ wide-ranging power and the draconian, authoritarian and autocratic way it had come to use it.

The introduction to the report recites: ‘The goal of this report is to recommend changes to the IRS that will help restore the public’s faith in the US tax system … No single recommendation will fix the IRS, but taken as a whole, this package sets the stage for an IRS that is fair, efficient and friendly … As a guiding principle, the commission believes that taxpayer satisfaction must become paramount at the new IRS …’

Drawing parallels

It is ironic that public dissatisfaction with the IRS should have come to a head just as the Inland Revenue has been busy introducing self-assessment, a longstanding US system, and, as a result, introducing many of the things that have gone wrong in the US. The fact that the US has felt it important to reform the IRS to restore the public’s faith in it suggests we should learn now from their mistakes and build at least some of their reforms into the UK tax system.

The Commissioner of the IRS has been directed to develop an independent plan to reorganise the IRS, inter alia, simplify the chain of command and ensure an independent appeal function within the IRS itself. His plan must not impair any existing rights or remedies.

He has also been told to restate the IRS mission statement, which begins ‘to collect the proper amount of tax revenue at the lowest cost’, to place greater emphasis on servicing the public and meeting taxpayers needs.

Congress has also established a nine-person IRS Oversight Board, six members of which must not be Federal employees, to review the IRS strategic and operational plans, scrutinise its budget and ensure the proper treatment of taxpayers by IRS employees.

It has been instructed to introduce a comprehensive staff training plan, including at least 16 hours of conflict management training.

Power to the people

In the event of a dispute, once the taxpayer introduces credible evidence, the burden of proof shifts from the taxpayer to the IRS, provided the taxpayer has given reasonable co-operation and has complied with any statutory requirements.

If the IRS reconstructs a taxpayer’s income through statistical information on unrelated taxpayers, the burden is, again, on the IRS. If a taxpayer makes a settlement offer which is rejected by the IRS and the tax court does not order a higher amount, the IRS must pay the taxpayer’s legal costs. An aggrieved taxpayer will be able to sue for damages of up to $100,000.

Legal professional privilege is extended to accountants and others authorised to practice before the IRS (although such a privilege will not apply in criminal tax matters).

Taxpayers are also given various new rights regarding distraint and other levies. They must be given notice of proposed action, are entitled to an administrative hearing before an impartial officer, and to a judicial review of the collection activity.

The IRS cannot seek information from a third party without first notifying the taxpayer, and periodically letting him know who they have contacted.

A decision to seize any property must be reviewed by a superior. No levy can be made at a time when the taxpayer has a claim against the IRS. The list of new protections for taxpayers goes on and on.

If taxpayers believe they are being fairly and reasonably treated, they are less likely to seek to evade their responsibilities. Enhanced taxpayer rights therefore benefit everyone.

Robert Maas is a partner with Blackstone Franks

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