IRS Restructuring and Reform Act of 1998: Monopoly of Force, Administrative Accountability, and Due Process

By Seth Kaufman

This article examines section 7433 of the Internal Revenue Code (IRC), discusses the recommendations of the tax judiciary’s Federal Court Study Committee, details the structural changes of the IRS stemming from the 1998 Act, and examines the Act’s creation of the National Taxpayer Advocate in the context of the separation of function doctrine.

Section 7433 and the Limits of Accountability. State agents are generally entitled to sovereign immunity. In Bivens v. Six Unknown Named Agents of Federal Bureau of Narcotics, the Supreme Court recognized the right to bring civil actions against federal employees who, while acting under the color of law, violate an individual’s constitutional rights. Several years later, the Court’s ruling in Schweiker v. Chilicky narrowed the availability of Bivens actions to instances where Congress failed to create an administrative scheme to address administrative wrongs.

The 1988 Taxpayer Bill of Rights (TBOR 1) provided taxpayers with many important substantive and procedural rights. Throughout the 1987 hearings that led to the passage of TBOR 1, several senators lambasted the IRS for improperly using the tax collection process to pressure taxpayers into paying disputed tax liabilities. As a compromise, Congress added section 7433 to the Internal Revenue Code.

Section 7433 raises two important issues. First, the creation of a specific statutory cause of action against the United States government eliminates the availability of Bivens actions against IRS personnel. Second, section 7433 permits the IRS to create an administrative remedies scheme, which plaintiffs must exhaust before taking the government to federal court.

Congress declared section 7433 to be the "exclusive remedy for recovering damages resulting from" tax collection activities. In this context, the phrase "exclusive remedy" eliminates the availability of Bivens actions. District courts and courts of appeal, following the Supreme Court’s ruling in Schweiker, have granted summary judgment in favor of IRS agents in Bivens actions against IRS employees, noting that Congress established section 7433 to remedy tax collection illegalities.

Section 7433 also removes tax collection controversies between taxpayers and the IRS from the jurisdiction of federal courts and places them in the IRS administrative bureaucracy. Section 7433(d) requires taxpayers to exhaust their administrative remedies before filing section 7433 actions in district court. In 1996, the Taxpayer Bill of Rights 2 (TBOR 2) eliminated the exhaustion requirement, permitting district courts to hear section 7433 claims provided that damage awards are reduced when the claimant does not exhaust administrative remedies. However, Congress reinstated the exhaustion requirement in the 1998 Act.

Several policy reasons support the exhaustion requirement, including the assumption that agencies act in good faith and will eventually solve problems within their jurisdiction in a fair manner. Although this requirement is relaxed when "‘the administrative process [could not] vindicate the right asserted,’" courts may not bypass the administrative remedies system when the statute requires exhaustion, except in extraordinary circumstances. Treasury Regulation section 301.7433-1 controls the administrative remedies process for section 7433 claims, but the case law indicates that few plaintiffs, particularly pro se litigants, actually apply for relief under the IRS’s administrative scheme.

Congress should not have re-imposed the exhaustion provision. Many plaintiffs bring their actions to federal court under section 7433 because they do not trust the IRS to seriously consider their claims. Furthermore, most pro se plaintiffs do not understand the meaning of exhaustion of administrative remedies. These plaintiffs should not be penalized by their good-faith ignorance; instead, federal courts should hear their claims if valid. In addition, few pro se plaintiffs have actual notice of the process established by Treasury Regulation section 301.7433-1. Congress should understand many people’s distrust of the ability of the IRS to proceed with their claims. TBOR 2 reached the correct balance between taxpayer suspicion and administrative and judicial convenience.

The 1998 Act lowered the mens rea requirement of section 7433 from a recklessness, or intentional, standard to negligence. However, the negligence standard poses new policy and legal questions that the Act and legislative history do not resolve. The Act lacks an adequate definition of negligence and courts may struggle to apply an objective negligence test. Some courts may attempt to create a "reasonable IRS agent" standard, which would be problematic due to the insularity of the tax collection community and the divergent standards used by the IRS throughout the country. Violations of the Internal Revenue Manual’s collections procedures and other national policy statements are not actionable under section 7433 since these guidelines and procedures are not part of the IRC or Treasury regulations.

The use of a negligence standard may also have a significant "chilling effect" on legitimate tax collection, especially from wealthy and litigious taxpayers who are inclined to sue the IRS and federal government. Litigious taxpayers would, however, initiate lawsuits against the IRS on groundless claims of negligence. In turn, IRS employees may become more cautious than appropriate when their actions possibly subject the IRS to civil suit. However, most suits will be dismissed for failure to exhaust administrative remedies or for failure to state a claim.

Under the 1998 Act’s provision that allows civil actions for negligent collection activities, improper collections caused by the IRS’s antiquated computer system are excluded.

"History Rather Than Logic:" Structural Barriers to IRS Accountability. The complexity of the tax code has caused doctrinal confusion in tax jurisprudence. The absence of a clear tax jurisprudence may promote dissimilar tax administration as well as the potential for agency mismanagement. The IRS Restructuring and Reform Act took a step to ensure IRS accountability by implementing the recommendations of the Federal Courts Study Committee (FCSC).

Congress established the FCSC to study the federal judicial system and to devise a long-term plan for its future. The FCSC proposed to vest subject-matter jurisdiction over all civil income, estate, and gift tax cases within a two-tiered tax court. The first tier would contain a trial division with Article III court status, and the second tier would contain an appellate division with exclusive appellate jurisdiction over the trial tier. The Supreme Court would still maintain ultimate appellate authority. Congress did not implement the FCSC’s recommendation.

Independent Oversight of the IRS: The New Oversight Board and the Office of National Taxpayer Advocate. The administration of federal collection requires an impartial office that does not share a common interest with IRS agents. The 1998 Act created an IRS Oversight Board to monitor the progress of IRS reform. To counter arguments that the members of the Oversight Board will have the power to favor lenient tax treatment for themselves or their corporate interests, the board cannot intervene in specific cases or act as an ombudsman. The board does not have the power to institute IRS reforms; the board’s power lies in approval and review authority. The board reports to the president and to congress.

The 1998 Act creates a blueprint for an independent taxpayer advocate system by increasing the taxpayer advocates’ independence and by expanding their authority to issue "taxpayer assistance orders." The new system requires a separate promotion track for Taxpayer Advocates as a means to promote taxpayer advocate self-identification. Furthermore, local taxpayer advocates report to the NTA, not to IRS managers.

Seth Kaufman has his B.A. from Wesleyan University, 1995, and is a 1999 J.D. candidate at Washington College of Law, American University.

-This article is an abridged and edited version of one that originally appeared on page 819 in Administrative Law Review, Fall 1998 (50:4).