Senate passes overhaul of IRS Lopsided vote sends measure to Clinton who vowed to sign it; Kinder agency is sought


WASHINGTON -- The Senate yesterday overwhelmingly approved the first overhaul of the Internal Revenue Service in 46 years, sending to President Clinton a bill that grants taxpayers a slew of new weapons to battle a tax agency Americans love to hate.

Clinton is expected to sign the bill with all the fanfare he can muster, a remarkable turnaround from last year, when he opposed the legislation, saying it would expose tax policy to undue influence from big business while creating an even more intrusive IRS.

But two rounds of jaw-dropping Senate hearings into alleged IRS abuses aroused enough public outrage to overwhelm even the fiercest critics of the IRS reform bill. Two weeks ago, the House passed the bill's final version, 402-8. The Senate voted yesterday 98-2, with senators from Maryland joining the majority.

"This is one of the few times I've been here that I can actually say we've made a difference in the lives of people," said Republican Sen. Charles E. Grassley of Iowa, who ranked the measure's importance alongside last year's balanced budget agreement.

The White House chimed in with its own praise. "This bill will help give Americans an IRS that is not only off people's backs but is, more importantly, on their side," said Vice President Al Gore.

The bill would grant taxpayers new rights to battle the IRS, bolster the power of the Treasury Department's taxpayer advocate, curb penalties and interest charges for citizens who try to follow the law in good faith, and allow taxpayers to sue the government if overzealous IRS agents disregard tax law.

The legislation also would grant new powers to the IRS commissioner to hire from the outside and to fire career employees. It also would discourage Congress from further complicating the tax code and it would create an independent oversight board dominated by the private sector.

"This is really about an attempt to influence the culture of the IRS in the broadest sense," said Phil Brand, a veteran of the agency who directs IRS policies and procedures at KPMG Peat Marwick, the accounting and consulting firm. "The IRS has always viewed itself as a law enforcement agency. Now they're being asked to view themselves as a financial services agency with a tilt to customer service."

The bill also contains a $2 billion tax cut of sorts, a capital gains provision inserted during House-Senate negotiations last month that affects those who sell stocks. It reduces to 12 months from 18 months the period that investors must hold stocks or other assets to qualify for the lowest capital gains tax rate of 20 percent.

IRS reform was once seen by Republicans as a cornerstone of their bid to keep control of Congress this fall. The bill emerged from a report by a bipartisan commission on IRS restructuring. But Clinton initially opposed any legislation that granted so much power to an oversight board dominated by political appointees from the private sector.

That opposition crumbled after testimony in September from ordinary taxpayers such as:

The priest who described how the IRS harassed him for 18 months over an alleged $18,000 debt but refused to show him a tax return.

The woman who wept while laying out a 17-year battle over a tax bill owed by someone with a name similar to her husband's.

The IRS agent, Jennifer Long, who testified that the agency used "egregious tactics" aimed at extracting "unfairly assessed taxes, literally ruining families, lives and businesses."

The IRS was not allowed to tell its side of the story on any of these allegations, and federal investigators later called many of Long's charges groundless. But every lawmaker seemed to have a constituent tale of IRS harassment.

Democratic Sen. Barbara A. Mikulski of Maryland told of Veterans of Foreign Wars and American Legion posts in Maryland that "have been systematically audited" over the past half-dozen years for selling food and drinks to members' guests.

"Citizens deserve a dollar's worth of services for a dollar's worth of taxes," Mikulski said.

As horror stories poured into Washington, Clinton reversed his position last fall and endorsed the legislation.

Since then, Democrats and Republicans have crawled over each other to take credit for the bill, much to the irritation of many House Republicans who had hoped to portray Democrats as foes of IRS reform.

White House opposition might well have been futile, said Don Kettl, director of the LaFollette Institute of Public Affairs at the University of Wisconsin and one of the bill's earliest critics.

"This is an administration that just came back from Tiananmen Square," he said. "There, one individual could stand in front of a column of tanks. Here, it was clear that standing in front of this tank would just mean a flattened administration official."

A quartet of lawmakers -- Grassley, Democratic Rep. Benjamin L. Cardin of Baltimore, Republican Rep. Rob Portman of Ohio and Democratic Sen. Bob Kerrey of Nebraska -- headed off efforts to add provisions that one party or another would not stand.

And many of the early objections were answered, said Michael E. Mares, chief of the tax committee for the American Institute of Certified Public Accountants.

For example, early versions of the bill would have shifted the burden of proof for tax evasion from the taxpayer to the IRS.

That raised fears that IRS agents would actually become more intrusive, demanding more records from taxpayers in case they would have to prove a case. And tax cheats might simply destroy their financial records, then challenge the IRS to prove that they had underpaid.

The final version shifts the burden of proof only in Tax Court, where few tax cases actually end up. And it insists that taxpayers must be able to produce all relevant financial records.

Another provision -- giving protection to estranged spouses saddled with the tax burdens of their tax-cheating mates -- has been narrowed to avoid abuse.

Still, the bill will make it harder and more costly for the IRS to collect taxes. Most of the bill's 10-year, $13 billion price tag stems from taxes that won't be collected. But supporters say most of that money would have been extracted unfairly by the IRS.

Main features

Cost estimates are by Congress' Joint Committee on Taxation and are for 10 years:

Interest and many penalties waived if IRS failed to contact a taxpayer about a dispute within 18 months of filing return. After 2004, period is shortened to one year. Other penalties also reduced, such as halving the failure-to-pay penalty for people who agree to pay back taxes through installments. Increases interest rate paid on tax refunds. Cost: $5.2 billion.

Burden of proof in many Tax Court cases shifts from taxpayer to IRS. To qualify, a taxpayer would have to maintain required tax records, cooperate with IRS and have a net worth below $7 million. Cost: $2.7 billion.

Expands ability of taxpayers to avoid paying for tax mistakes caused without their knowledge by former spouses. Cost: $1.4 billion.

Creates a nine-member oversight board of private sector representatives, the Treasury secretary and an employee representative to develop long-range plans and craft a budget.

Gives IRS commissioner flexibility to hire 40 new executives at salaries of $175,400. Lets IRS chief align the agency to the needs of individual taxpayers, small businesses and others, replacing its current geographic structure.

Reduces the waiting period from 18 months to 12 months before investors qualify for the reduced 20 percent capital gains tax rate, for sales of assets after Jan. 1, 1998. Cost: $2.1 billion.

The bill would cost $13 billion. It is financed partly by allowing wealthy people over age 70 1/2 to convert their existing IRA accounts into Roth IRAs, which require taxable contributions but offer future tax-free withdrawals.

Pub Date: 7/10/98

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