Real estate tax lien certificate

INTRODUCTION

The Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 (the Act) was signed into law by President Clinton on July 22, 1998. The law is far-reaching and multi-functional and is surprisingly complex; it affects a broad cross-section of taxpayers in a variety of significant ways. The 1998 Act is actually six acts rolled into one piece of legislation. The law represents a major attempt to rein in the IRS through a ground-up reorganization. The Act also lowers the holding period for the most favorable capital gains rate; makes several technical corrections to the Taxpayer Relief Act of 1997 (TRA 1997); enacts the "Taxpayer Bill of Rights 3;" carves out a separate Electronic Filing section; and adds a list of "revenue raisers" that affect both individuals and corporations.

The purpose of this manuscript is to summarize some of the provisions to the Internal Revenue Code that are now effective as law or that will soon become effective as law. Individuals and business owners are urged to look closely at this sweeping legislation to seek ways in which they can significantly diminish their future income taxes and to examine the new protections and rights that taxpayers enjoy under the new law. The following discussions focus on some of the major provisions of the new tax bill which, directly or indirectly, affect real estate investors. Some suggestions for tax planning are also included. To determine the particular effect, if any, each of these provisions will have on a particular taxpayer, each taxpayer should consult with his or her CPA, tax attorney, or other tax professional.

ELECTRONIC FILING

One important component of the IRS Restructuring and Reform Act of 1998 is the electronic filing rules and incentives. The Act has provisions residence for one year and then moves because of a job transfer may exclude up to $125,000 (one-half the regular amount of $250,000 exclusion under the Tax Act of 1997). If he or she has a gain of $75,000 on the sale of the residence, it is all excluded rather than only one-half of the $75,000, in accordance to the clarification provided in the Tax Act of 1998.

MISCELLANEOUS ITEMS

A miscellaneous, but significant item, in the Tax Act of 1998 affects all taxpayers who have a tax liability starting in 1999 (effective on 1998 tax returns) as they are to make checks and money orders payable to the "U.S. Treasury," not to the "Internal Revenue Service." Another miscellaneous item that is not part of the 1998 Act but is a change in IRS procedures involves private letter rulings. On January 20, 1999, the IRS announced that businesses with less than $1 million in gross income now qualify for a special $500 user fee when they request a private letter ruling. The fee for most other private letter ruling requests is $5,000. A private letter ruling is a written statement issued by the IRS to a taxpayer that interprets and applies the tax laws to the taxpayer's specific set of facts. This change makes private letter rulings available to small businesses.

CONCLUSION

The IRS Restructuring and Reform Act of 1998 is a complicated piece of legislation that contains numerous amendments and new provisions. Many of these provisions can help businesses of all sizes in many industries reduce their tax burden if properly applied. A law as complicated as this needs a great deal of study if one is to maximize the tax breaks that are potentially available in such a sweeping piece of legislation. Those managers and owners who are responsible for maximizing shareholder wealth and maintaining appropriate capital structures should look very closely at this law. In addition, many of the new tax provisions have a significant impact on individuals. Individuals, business owners, and business managers should consult with appropriate tax professionals to assure proper application and maximum benefit from the new law. to encourage electronic filing of tax returns and information returns (i.e.,1099s and W-2s). The Act sets a goal that 80 percent of all tax and information returns will be filed electronically by the year 2007. The Act also aims for a return-free tax system for individuals whose tax return information is limited to items already reported to the IRS on information returns. The Act has a goal for this return-free system to begin in the year 2008. In addition, the Act directs the Treasury Department to develop a plan that would require all computer-generated tax returns to be filed electronically by the calendar year 2002.

There are several incentives for filing electronic tax returns. First, electronically filed returns are generally prepared using computer tax preparation software. Returns prepared on the computer have an error rate of less than one percent. This means the taxpayer is less likely to encounter such problems as delayed refunds or certain IRS audits. Another advantage of filing an electronic tax return is the speed with which the taxpayer can potentially receive a tax refund. Whereas a paper tax return generates a refund check in approximately six to eight weeks, an electronically prepared and filed tax return can result in the refund amount being deposited in the taxpayer's bank account in nine to 15 days (when coupled with the electronic funds transfer system). Still another advantage of electronic filing is the almost immediate acknowledgment (usually within a day) from the IRS that the return has been received and accepted. A final advantage of electronic filing is the ability to file the tax return separately from the payment when taxes are due. Under the new rules, a taxpayer can file his or her electronic tax return at any point during the tax season (January through April 15), and the taxpayer can wait and pay the taxes that are due on or before April 15.

To encourage the filing of electronic information returns by employers, the Act has delayed the due date for filing information returns. Whereas employers who file information returns on paper must do so by February 28 of each year, employers who file electronic information returns may wait until March 31 to file. This includes, among other things, reporting wages, interest, dividends, and non-employee compensation. The due date for providing copies of information returns to payees, however, currently remains as January 31 of each year (the Treasury is studying the possibility of changing this date to February 15). The effective date of this change is January 1, 2000.

Burden of Proof

A somewhat controversial provision of the Act is that the burden of proof shifts to the IRS in certain situations. Historically, an IRS determined tax deficiency has been presumed to be correct. This former rule required the taxpayer to persuade the courts that the IRS determination was incorrect and/or that the IRS position was without merit. The IRS has always had the burden of proof in certain cases such as those involving illegal transactions and fraud. The new law, however, places the burden of proof on the IRS in tax litigation with respect to a factual issue.

Specifically, four conditions must be met for the burden of proof to shift to the IRS. First, the taxpayer must comply with the requirements of the Internal Revenue Code (hereafter the Code) and the regulations issued thereunder to substantiate any item that relates to the litigation. Second, the taxpayer must maintain records required by the Code and its regulations. Third, the taxpayer must cooperate with reasonable IRS requests for meetings, interviews, witnesses, information, and documents. Finally, the taxpayer must either be an individual or must be a corporation, trust, or partnership with a net worth of no more than $7 million and no more than 500 employees. In other words, the burden of proof shifts to the IRS for individuals and small businesses with respect to a factual issue.

This change does not apply to present court proceedings; only those arising in connection with audits that started after the President signed the Act (July 22,1998). The burden of proof also shifts to the IRS in two other situations. First, the burden of proof is on the IRS if they use statistics to reconstruct an individual's income. Second, the IRS bears the burden when the court case involves proceedings against an individual taxpayer regarding a penalty or addition to tax. This change became effective with the enactment of the Act (July 22,1998).

Proceedings by Taxpayers