Clinton Signs Bill That Aims to Reform IRS

WASHINGTON —  President Clinton signed into law the most far-reaching reform of the Internal Revenue Service in four decades on Wednesday, aiming to shatter the walls of a bureaucracy that had become so entrenched that it operated largely outside the control of the nation’s political system.

The new law, which grew out of a reform movement fueled by widespread public discontent with the agency’s abuse of power, would subject the IRS to greater outside oversight and impose new limits on its sweeping powers over individual Americans.

“The bill will give the American people an IRS they deserve,” said Clinton, who originally was skeptical about the proposals but became a convert following sensational Senate hearings on IRS misdeeds.

For all the hoopla and high expectations surrounding the reforms, the goal of reining in the powerful agency faces an uphill battle, as even administration officials conceded Wednesday. The tax code remains hopelessly complex, IRS technology is obsolete and the agency has been battered by disclosures of internal misconduct and corruption.

Even if the law can remedy some of these defects--and there are doubters--the process of reform is likely to take many years, said former IRS Commissioner Fred Goldberg. In the meantime, Goldberg added in an interview, millions of taxpayers will be afforded better protection. And thousands of IRS agents will be on notice that their methods have to change.

“It alerts the IRS to just how they are perceived by the public and the Congress,” said Robert Schreibman, a Rolling Hills Estates tax expert. “You are looking at legislation that hasn’t been so overwhelmingly supported since the declaration of war against Japan. It is telling the IRS that it has to get its house in order.”

The law, which is expected to cost $12.9 billion over about 10 years, contains 74 new rights for taxpayers, including the right to a hearing before the agency can seize a home, bank account or other assets. In addition, the law will reduce to 12 months from 18 months the time period in which investments must be held to qualify for the minimum rate on capital gains taxes (20% in some cases, 10% in others).

But the bill’s most far-reaching impact may arise from its attempt to alter the very culture within an agency that has come to symbolize the excesses of the federal bureaucracy. Among its varied provisions, the Internal Revenue Service Restructuring and Reform Act of 1998 will:

* Establish a nine-member board, including six private citizens, that will be authorized to recommend to the White House the hiring and firing of IRS commissioners, as well as overseeing general administration of the far-flung agency.

* Shift the legal burden of proof in civil cases from taxpayers to the IRS; the IRS already has to satisfy such a burden of proof in criminal matters.

* Make it easier for “innocent” divorced and separated spouses to avoid legal responsibility for the tax evasions of their former partners.

* Impose new disclosure requirements forcing the IRS to explain why it would deny a refund and to provide the phone number of the IRS employee handling a case.

* Allow only 18 months of interest and penalties to build up on tax assessments after a return is filed. Previously, the IRS could take up to three years to audit a return and slap interest and penalties on the entire period.

Yet for all the new provisions, at least some tax specialists remain skeptical that the law is sufficient for its ambitious goals.

“It is primarily going to benefit a relatively small number of people who are involved in an audit or some compliance activity,” explained Phil Brand, a former IRS compliance chief who is now at the KPMG Peat Marwick LLP accounting firm. “As a symbol, it could be conceived to be relatively powerful. In reality, not many people will be affected by it.”

The new law is just the latest chapter in a history of efforts to impose control over an agency whose very name can strike fear in the hearts of Americans.

Congress has repeatedly attempted to reform the IRS during this century, but its successes have proved fleeting at best. The last watershed overhaul of the IRS was in 1952, after allegations surfaced that the agency was corrupted by widespread political patronage jobs.

The answer was a sweeping purge of the political appointees. But the housecleaning had unanticipated consequences, spawning a new, inbred culture dominated by career employees. More recently, reports of taxpayer abuse--including overzealous enforcement and punitive collection tactics--have echoed on Capitol Hill. Congress passed two taxpayers’ rights bills over the last decade that helped the problem but ultimately were judged as weak medicine.

Earlier this year, the House actually voted to dump the tax code, and the Senate followed suit, albeit with nonbinding language.

“The IRS had become so far removed from the expectations of the people that you needed to do something to right that balance--and that’s what this bill does,” said Goldberg. “It creates the possibility of success that hasn’t existed in decades.”

For his part, Clinton was initially cautious about joining the bandwagon to transform the IRS, part of his Treasury Department. But as the Republican-led push gained popular support, the president joined in.

In his remarks Wednesday, the president said the IRS has made progress in improving its service, including expanded office hours, telephone accessibility and programs for filing taxes via telephone and computer.

“All this meant quicker refunds, less paperwork and fewer hassles for American taxpayers,” Clinton said. “But clearly there is more to do to build an IRS for the 21st century.”

Agreed Treasury Secretary Robert E. Rubin: “We have devoted a great deal of time and resources to moving forward on these problems. Since then, we have made real progress in using technology more effectively, which was the first matter we addressed; fair treatment of taxpayers; and improving customer service.

“But without question, there is an enormous amount of work that lies ahead. These problems developed over years, in some cases even decades, and it will take a long time to get this thing to where it needs to be.”

At the bill-signing ceremony, Clinton also maintained that it would be the “wrong course for America” to have a major tax cut, as sought by Republican leaders, before resolving the long-term financing issues of Social Security.

House Republicans have stepped up pressure to force an election year confrontation with Clinton over cutting taxes.

Times staff writer Janet Hook contributed to this story.