Paseornek & Stimola, CPA's, PA

RESTRUCTURING
AND REFORM
ACT OF 1998

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PASEORNEK & STIMOLA
CERTIFIED PUBLIC ACCOUNTANTS
A PROFESSIONAL CORPORATION

Congress has passed the IRS Restructuring and Reform Act of 1998 on July 22, 1998. This Act makes many important changes to the Internal Revenue Code. Below are the changes directly affecting most taxpayers:

   -Capital Gains Holding Period
   -Technical Corrections to the Taxpayer
      Relief Act of 1997
   -New Law Changes
   -New Taxpayer Rights

Capital Gains Holding Period

The Tax Relief Act of 1997 (TRA 97) reduced the maximum capital gain rate from 28 percent to 20 percent and a 10-percent rate for capital gains otherwise taxed at a 15-percent rate provided the property was held for 18 months. Congress has reduced the holding period to one year retroactive to January 1, 1998.

Technical Corrections to TRA 97

Over 40 corrections were made to the TRA 97. Many simply corrected 1997 tax problems such as the proper manner in which to net capital gains against capital losses. Based on promises from Congress that unclear or contradictory parts of the act would be corrected, the IRS proceeded with preparing its tax forms. In short, many provisions of the Act simply bring established intent into line. In other cases, retroactive clarification of effective dates were addressed.

The Act also clarified the mystery surrounding the exclusion for homeowners selling their principle residence held for a period less than the required two years. TRA 97 permitted the exclusion ($500,00 for married-filing jointly and $250,000 for single taxpayers) on a pro-rata basis. For example, married taxpayers, living in their principle residence for one year would be entitled to one-half or a $250,000 exclusion. However, the IRS contended that the gain was prorated, and not the exclusion. The technical correction clarifies that the homeowner is allowed to use his prorated exclusion against the gain. Using the example above, providing the taxpayers' gain is less than $250,000, the full amount of the gain would be excluded.

New Law Changes

The Act contains new legislation intended to add over thirteen billion dollars in new revenues:

Roth IRA's:
       1) Taxpayers will have until the due date of their 1998 return (including extensions) to revoke Roth IRA conversions made in 1997.
       2) Closing of a loophole in TRA 97 whereby certain taxpayers could convert regular IRA's to Roth IRA's, spread the tax effect over a 4 year period, and then immediately withdraw the funds without penalty. The Act accelerates the income recognized in the case of premature withdrawals from a Roth IRA after 1997 and the 10% penalty on any income recognized.
       3) Taxpayers may elect to include the income from a 1998 coversion in 1998 or ratably over 4 years.
       4) Contributions are not reduced by SEP or SIMPLE contributions.
       5) The Act broadened eligibility starting in 2005 to permit wealthier taxpayers to convert their traditional IRAs to Roth IRAs by eliminating the inclusion of required distributions in the $100,000 limit.

IRA's (Non Roth IRA's): Total contributions to all IRA's are limited to $2,000. The AGI limitation of $150,000 applies only to nonactive participant spouses.

Deductibility of vacation and severance pay will only be permitted to employers when the amounts are actually received and taxed to the employees.

Change in the mark-to-market treatment for some trade receivables.

Tax benefits for certain real estate investment trusts known as 'stapled' or paired-share REITs have been limited.

New Taxpayer Rights

This area of the Act reflects the recommendations of the Commission to Restructure the IRS in answer to the growing concerns over IRS abuses. It authorized a major restructuring of the IRS at its managment levels, and seeks to encourage taxpayer education and awareness. The Act mandates the IRS to improve its internet and Telefile programs. To promote electronic filing, certain due dates will be extended and procedures (such as paperless signatures, privacy safeguards, and electronic forms) will be developed.

Other provisions are:

To hold IRS employees accountable for their actions and to reward those who treat taxpayers fairly.

Authority to terminate an employee for willfully failing to obtain authorization to seize a taxpayer's property, perjury material to a taxpayer issue, falsified or destroyed documents to conceal the employee's mistakes, or engaged in abuses or egregious misconduct.

Termination may occur for violating a taxpayer's civil rights or breaking IRS policies for the purpose of harassing or retaliating against either a taxpayer or an employee.

Independent oversight of the IRS

The Commissioner's term will be limited to will now serve a five-year term. Future candidates for IRS Commissioner will be required to demonstrate an ability in management.

An independent Office of Appeals will be established.

The newly named National Taxpayer Advocate will no longer be under the IRS Commissioner's control. The Advocate will be appointed by the Treasury Secretary and local advocates will be appointed in each state. This will replace the current Problem Resolution System.

There will be a new, and independent, Inspector Generalfor Tax Administration. This will be a Treasury position, and is a Presidential appointment.

Protecting taxpayers by providing for due process during collections activities.

IRS is prohibited from using financial status or economic reality exam techniques to determine the existence of unreported income (lifestyle audits) unless the IRS has a reasonable indication that there is a likelihood ofunreported income.

The IRS will be responsible if agency delays cause additional expense to the taxpayer.

The present law attorney-client privilege is, in many cases, extended to non-attorney tax advisers provided the advisors are authorized under Federal law to practice before the IRS.

Small cases up to $50,000 (increased from $10,000) will be eligible for appeal to the Tax Court.

Rules are established outlining when a business must allow the Service to examine its computer source code. Previously, there were no statutory restrictions.

Expanded Innocent spouses relief. the new law will permit divorced or separated spouses to limit their individual liabilities to the amount of the tax attributable to each spouse's income.

New rules are instituted for liens, levies and seizures making it easier for the taxpayer to appeal.

Jeopardy assessments must be approved by the Chief Counsel.Supervisors must approve liens, levies and seizures. Levies and other collection actions are prohibited while refund issues are being appealed.

Requires IRS to obtain court approval before levying or seizing a taxpayer's home, or the home of a spouse, former spouse or a minor child.

Penalties and interest will be suspended if taxpayers do not receive timely notice

Improved communications with taxpayers including better instructions, contact phone numbers, and notification of specific rights.

The IRS may not designate a taxpayer as an "illegal tax protester" but rather as a "nonfiler." This designation must be removed after the taxpayer files and pays for two consecutive years.

Further studies on penalty, interest assessment and confidentiality will be conducted by the Treasury and the Congressional Joint Committee on Taxation.

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