Chapter 7 - Policies Underlying the Federal Income Tax Law

• IRS Restructuring and Reform Act of 1998: This Act, enacted in July 1998, made a variety of changes. Some of these are covered in the updates to Chapter 2 and Chapter 5. Changes relevant to topics discussed in Chapter 7 include the following.
  • Burden of Proof (page 216) - the burden of proof is changed to provide that in a court proceeding involving a factual issues, the burden of proof will be on the IRS, rather than the IRS, if the following requirements have been met:
    • the taxpayer has complied with the requirements to substantiate any item;
    • the taxpayer has maintained all records required under the tax law and has cooperated with reasonable requests by the IRS for witnesses, information, documents, meetings, and interviews,

    This shift applies to all individuals, but only to corporations and partnership with a net worth of $7 million or less. This provision is effective for court cases that arise with respect to audits that begin after July 22, 1998 (IRC Section 7491).

    Many practitioners expect issues to arise under this new provision. For example, what if a revenue agent seems to be asking for more documents that appears necessary to the taxpayer. Would the taxpayer be viewed as not having cooperated with all reasonable requests of the IRS and thus, not benefit from the shift in the burden of proof if the audit ends up in court? What does "reasonable requests" mean?

  • Tax Law Complexity Analysis (page 218) - As described by the Joint Committee on Taxation:

    "The [Act] provides that it is the sense of the Congress that the IRS should provide the Congress with an independent view of tax administration and that the tax-writing committees should hear from front-line technical experts at the IRS during the legislative process with respect to the administrabiity of pending amendments to the Internal Revenue Code. In addition, the IRS is required to report by March 1 of each year to the House Committee on Ways and Means and the Senate Committee on Finance regarding sources of complexity in the administration of the Federal tax laws."

    "The [Act] requires the Joint Committee on Taxation (in consultation with the IRS and Treasury) to provide an analysis of complexity or administrability concerns raised by tax legislation provisions of widespread applicability to individuals or small businesses. The analysis is to be included in any Committee Report of the House Committee on Ways and Means or Senate Committee on Finance or Conference Report containing tax provisions, or provided to the Members of the relevant Committee or Committees as soon as practicable after the report is filed. A point of order is established with respect to the floor consideration by the House of Representatives of a bill or conference report that does not contain the required tax complexity analysis. This point of order may be waived by a majority vote." [JCX-50-98R]

    Update to Figure 7-1 (page 218): The Act provides that a Tax Complexity Analysis "(A) includes -

    • (i) an estimate of the number of taxpayers affected by the provision, and
    • (ii) if applicable, the income level of taxpayers affected by the provision, and

    (B) should include (if determinable) -

    • (i) the extent to which tax forms supplied by the Internal Revenue Service would require revision and whether any new forms would be required,
    • (ii) the extent to which taxpayers would be required to keep additional records,
    • (iii) the estimated cost to taxpayers to comply with the provision,
    • (iv) the extent to which enactment of the provision would require the Internal Revenue Service to develop or modify regulatory guidance,
    • (v) the extent to which the provision may result in disagreements between taxpayers and the Internal Revenue Service, and
    • (vi) any expected impact on the Internal Revenue Service from the provision (including the impact on internal training, revision of the Internal Revenue Manual, reprogramming of computers, and the extent to which the Internal Revenue Service would be required to divert or redirect resources in response to the provision)."

• Tax Law Complexity: Testimony from witnesses at a June 23, 1998 House Ways and Means Subcommittee hearing on the impact of tax law complexity on individual taxpayers and small businesses (including testimony of the AICPA)

Links for Chapter Exercise and Other Links of Interest

• MSSP Papers (Exercises 41 and 42)

• IRS Forms

• Legislative proposals from Congress (Exercise 44)

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Last updated on September 1, 1998.
Tax Aspects of Business Transactions: A First Course, by Annette Nellen