Last June, the U.S. 5th Circuit Court of Appeals struck a blow for taxpayer rights when it ruled that in disputed cases, the Internal Revenue Service must prove a person is guilty of understating reported income instead of presuming guilt and making the taxpayer prove his innocence.
That seems reasonable and logical, but now, after listening to arguments from the IRS, the U.S. House of Representatives has moved to invalidate much of what the appeals court decided.The provision undoing the court's work was one of many amendments tacked onto a tax bill behind closed doors before the House passed the tax measure last week.
The IRS had claimed that failure to act would jeopardize a system that finds $20 billion a year in unreported income. However, the IRS position seems to overstate the problem.
Each year, the IRS uses computers to compare income tax returns with other documents listing wages, interest and dividends paid to that person. Those documents are known as "information returns." When a difference shows up, the IRS issues an assessment of additional taxes owed.
Under long-standing IRS policy, information returns have always been assumed to be correct. For example, if a bank reported to the IRS that it paid interest to a person, that person had the burden of proving the information was inaccurate. There's nothing necessarily wrong with that approach. Bank documents normally are viewed as proof unless a person can demonstrate they are wrong.
The appeals court decision was based on another situation entirely. In that case, a house painter argued that information from a client overstated the amount the painter was paid for a job. Neither party had any records to substantiate their claims.
Despite the lack of documentary evidence, the IRS issued a notice of additional taxes. The painter sued. In its ruling, the appeals court reasonably held that the IRS cannot simply assume information is valid "without any foundation whatsoever." That seems a far cry from undermining the whole computer matching process, as the IRS has complained.
In the just-passed tax bill, the House said the IRS must take reasonable steps to insure the accuracy of information returns. But then the House took it all away by adding that failure by the IRS to comply "shall not invalidate any notice of deficiency or assessment of a deficiency."
In other words, the IRS can go ahead and assess extra taxes even if it can't verify the facts in the case. That's exactly what the court said the IRS couldn't do.
The Senate should show better judgment and remove the amendment from the tax bill.