On July 22, 1998, President Clinton signed into law the "Internal Revenue Service Restructuring and Reform Act" ("the Act"). In addition to imposing the most comprehensive reorganization of the IRS and its oversight since 1952, the Act provides numerous procedural reforms intended to enhance taxpayer protections. These address interest and penalties, audit and collection activities, and required IRS disclosures to the taxpayer. The Act provides for the creation of nine-member oversight board, the position of National Taxpayer Advocate, and a five-year term for the IRS Commissioner. Notably, the Act also addresses burden of proof requirements and expands somewhat the tax advisor-client privilege of confidentiality in noncriminal tax matters.
A fundamental element of U.S. tax law has been the general rebuttable presumption that the IRS's determination of a taxpayer's tax liability is correct. The burden of proof to support a contrary finding in any court proceeding is imposed on the taxpayer. The Act changes the rules in certain cases.
Under the Act, for all individuals and for corporations, trusts, and partnerships with a net worth below $7 million, the burden of proof has now been shifted to the government provided the taxpayer meets specified conditions. Specifically, the taxpayer must be in compliance with the substantiation requirements and the record-keeping requirements imposed by current law and regulations. During the audit process, the taxpayer also must cooperate with "reasonable requests" by the IRS for meetings and interviews, and for witnesses, information, and documents of, or in the control of, the taxpayer. Further, requisite cooperation extends to providing "reasonable assistance" to the IRS to access evidentiary sources not within the control of the taxpayer, including those located in foreign countries. Finally, "cooperation" requires that the taxpayer exhaust all available administrative remedies.
If the taxpayer establishes that these conditions have been satisfied, and the taxpayer introduces "credible evidence" supporting the absence of tax liability, then the burden of proof will shift to the government. This provision applies to court proceedings arising in connection with examinations commencing after July 22, 1998. Absent an examination, it applies to taxable periods or events beginning after that date.
On the privilege issue, it is well-established that communications between an attorney and client with respect to legal advice affecting tax liability (as distinguished from "tax return preparation" communications) enjoy a privilege of confidentiality. As of July 22, 1998, the Act extends the confidentiality privilege, as circumscribed, to tax advice furnished by any individual authorized under Federal law to practice before the IRS. This would include certified public accountants, enrolled agents, and enrolled actuaries. The privilege may be asserted in noncriminal tax proceedings before the IRS, and in noncriminal tax proceedings in the Federal courts where the United States is a party.
The privilege does not apply, however, to any written communication between a non-lawyer and a corporation in connection with the promotion of any "tax shelter" as to which the corporation is a direct or indirect participant. The Code defines "tax shelter" quite broadly, as any partnership, entity, plan or arrangement, "a significant purpose" of which "is the avoidance or evasion of Federal income tax."
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