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IRS Restructuring and Reform Act of
1998
House
ways & Means Committee Report page3

Subtitle
B --Budget
SEC
. 411. FUNDING FOR CENTURY DATE CHANGE.
It is the sense of Congress that the Internal
Revenue Service efforts to resolve the century date
change computing problems should be funded fully to
provide for certain resolution of such problems.
SEC
. 412. FINANCIAL MANAGEMENT ADVISORY GROUP.
The Commissioner shall convene a financial
management advisory group consisting of individuals
with expertise in governmental accounting and
auditing from both the private sector and the
Government to advise the Commissioner on financial
management issues, including --
(1) the continued partnership between the Internal
Revenue Service and the General Accounting Office;
(2) the financial accounting aspects of the Internal
Revenue Service's system modernization;
(3) the necessity and utility of year-round
auditing; and
(4) the Commissioner's plans for improving its
financial management system.
Subtitle
C --Tax Law Complexity
SEC
. 421. ROLE OF THE INTERNAL REVENUE SERVICE.
It is the sense of Congress that the Internal
Revenue Service should provide the Congress with an
independent view of tax administration, and that
during the legislative process, the tax writing
committees of the Congress should hear from
frontline technical experts at the Internal Revenue
Service with respect to the administrability of
pending amendments to the Internal Revenue Code of
1986.
SEC
. 422. TAX COMPLEXITY ANALYSIS.
(a) IN GENERAL. --Chapter 92 (relating to powers and
duties of the Joint Committee on Taxation) is
amended by adding at the end the following new
section:
"
SEC
. 8024. TAX COMPLEXITY ANALYSIS.
"(a) IN GENERAL. --If --
"(1) legislation is reported by the Committee
on Finance of the Senate, the Committee on Ways and
Means of the House of Representatives, or any
committee of conference, and
"(2) such legislation includes any provision
amending the Internal Revenue Code of 1986, the
report or statement accompanying such legislation
shall contain a Tax Complexity Analysis prepared by
the staff of the Joint Committee on Taxation.
"(b) CONTENT OF COMPLEXITY ANALYSIS. --Each Tax
Complexity Analysis shall identify the provisions,
if any, adding significant complexity or providing
significant simplification, as determined by the
staff of the Joint Committee on Taxation, and shall
include the basis for such determination.
"(c) LEGISLATION SUBJECT TO POINT OF ORDER.
--It shall not be in order in the Senate or the
House of Representatives to consider any legislation
described in subsection (a) required to be
accompanied by a Tax Complexity Analysis that does
not contain a Tax Complexity Analysis.
"(d) RESPONSIBILITIES OF THE COMMISSIONER.
--The Commissioner shall provide the Joint Committee
on Taxation with such information as is necessary to
prepare Tax Complexity Analyses."
(b) CLERICAL AMENDMENT --The table of sections for
chapter 92 is amended by adding at the end the
following new item:
"Sec. 8024. Tax complexity analysis."
(c) EFFECTIVE DATE. --The amendments made by this
section shall apply to legislation considered on or
after
January 1, 1998
.
TITLE
V --CLARIFICATION OF DEDUCTION FOR DEFERRED
COMPENSATION
SEC
. 501. CLARIFICATION OF DEDUCTION FOR DEFERRED
COMPENSATION.
(a) IN GENERAL. --Subsection (a) of section 404 is
amended by adding at the end the following new
paragraph:
"(11) DETERMINATIONS RELATING TO DEFERRED
COMPENSATION. --
"(A) IN GENERAL. --For purposes of determining
under this section --
"(i) whether compensation of an employee is
deferred compensation, and
"(ii) when deferred compensation is paid, no
amount shall be treated as received by the employee,
or paid, until it is actually received by the
employee.
"(B) EXCEPTION. --Subparagraph (A) shall not
apply to severance pay."
(b) SICK LEAVE PAY TREATED LIKE VACATION PAY.
--Paragraph (5) of section 404(a) is amended by
inserting "or sick leave pay" after
"vacation pay".
(c) EFFECTIVE DATE. --
(1) IN GENERAL. --The amendments made by this
section shall apply to taxable years ending after
October 8, 1997
.
(2) CHANGE IN METHOD OF ACCOUNTING. --In the case of
any taxpayer required by this section to change its
method of accounting for its first taxable year
ending after
October 8, 1997
--
(A) such change shall be treated as initiated by the
taxpayer,
(B) such change shall be treated as made with the
consent of the Secretary of the Treasury, and
(C) the net amount of the adjustments required to be
taken into account by the taxpayer under section 481
of the Internal Revenue Code of 1986 shall be taken
into account in such first taxable year.
I.
SUMMARY
AND
BACKGROUND
A. PURPOSE
AND
SUMMARY
H.R. 2676, as amended, modifies the structure and
procedures of the Internal Revenue Service ("
IRS
"), provides
IRS
personnel flexibilities, encourages electronic
filing, provides additional taxpayer rights and
protections, modifies Congressional oversight of the
IRS
, and provides a revenue offset relating to the
treatment of the employer deduction for vacation
pay.
Title I --Executive branch governance.
The bill establishes within the Treasury Department
the Internal Revenue Service Oversight Board (the
"Board"). The general responsibility of
the Board is to oversee the
IRS
in the administration, management, conduct,
direction, and supervision of the execution and
application of the internal revenue laws. The Board
is to have the following specific responsibilities:
to review and approve strategic plans of the
IRS
; to review the operational functions of the
IRS
; to provide for the review of the Commissioner's
selection, evaluation and compensation of senior
managers; to review and approve plans for major
reorganizations; and to review and approve the
budget of the
IRS
prepared by the Commissioner. The Board is to be
composed of 8 private-life members appointed by the
President with the advice and consent of the Senate,
plus the Secretary of the Treasury (or the Deputy
Secretary), the
IRS
Commissioner, and a representative of a union
representing a significant number of
IRS
employees (who would be appointed by the President,
with the advice and consent of the Senate).
The bill provides that the
IRS
Commissioner is appointed as under present law by
the President, with the advice and consent of the
Senate. However, the Board has the authority to
recommend candidates for Commissioner to the
President, and to recommend removal of the
Commissioner. The Commissioner has such duties and
powers as prescribed by the Secretary. Unless
otherwise prescribed by the Secretary, such duties
include certain statutorily enumerated duties. The
Secretary must notify the Congress of any changes in
the duties delegated to the Commissioner.
The bill deletes the present-law funding mechanism
for the employee plans and exempt organizations
division of the
IRS
in Code section 7802(b)(2). Such funding mechanism
has never been utilized under present law.
The bill makes changes relating to the Taxpayer
Advocate designed to strengthen the office, and
prohibits Executive Branch influence over taxpayer
audits and collection activity.
The bill also makes certain changes to facilitate
IRS
personnel flexibilities.
Title II. Electronic filing
The bill provides rules designed to facilitate and
encourage electronic filing of tax returns, whenever
feasible. Under the bill, electronic filing is
encouraged by the use of advertising, development of
incentives, and setting a goal of 80 percent of
returns to be electronically filed by the year 2007.
With respect to information returns, submitters are
encouraged to use electronic filing by extending the
due date for filing from February 28 to March 31.
The bill requires development of procedures to
facilitate electronic filing, including those that
would permit the Secretary to accept returns without
a manual signature. The bill also requires the
IRS
to study and develop procedures to implement a
return free system. The
IRS
also must develop procedures that would permit, to
the extent feasible, taxpayers who use electronic
filing to review their account information
electronically.
Title
III
. Taxpayer bill of rights 3
The bill contains a number of provisions designed to
strengthen the rights of taxpayers in their dealings
with the Internal Revenue Service. Among the more
significant of these provisions are modifying the
burden of proof, providing more generous innocent
spouse relief, protecting the confidentiality of tax
advice, expanding the conditions under which
taxpayers can receive awards of attorney's fees in
disputes with the
IRS
, permitting taxpayers to receive civil damages for
negligence by the
IRS
in collection actions, and suspending the statute of
limitations on filing refund claims during periods
of disability.
Title IV. Congressional accountability for the
Internal Revenue Service
The bill provides that all requests for studies of
the
IRS
by the General Accounting Office (other than
requests by the Chair or ranking member of a
committee or subcommittee) must be approved by the
Joint Committee on Taxation. The bill provides for
two joint hearings a year of the 6 Congressional
Committees with oversight jurisdiction over the
IRS
. The Joint Committee on Taxation is required to
report annually to the tax-writing committees on the
state of the Federal tax system, and at the joint
hearings.
The bill provides that a committee report or
conference report on tax legislation is to include a
Tax Complexity Analysis prepared by the staff of the
Joint Committee on Taxation.
Title V. Clarification of deduction for vacation
pay
The bill overrules a Tax Court decision by providing
that vacation pay that is actually received by
employees more than 2 1/2 months after the end of
the year is not deductible until paid by the
employer. Under the bill, amounts are not considered
received by employees or paid unless they are
actually received. Letters of credit, trusts, and
similar mechanisms will not constitute payment or
receipt. B. BACKGROUND
AND
NEED FOR LEGISLATION
The National Commission on Restructuring the
Internal Revenue Service (the
"Commission") was established to review
the present practices of the Internal Revenue
Service ("
IRS
") and to make recommendations for modernizing
and improving its efficiency and taxpayer services.
The Commission's report, issued June 25, 19971
contains recommendations relating to executive
branch governance and management of the
IRS
, Congressional oversight of the
IRS
, personnel flexibilities, customer service and
compliance, technology modernization, electronic
filing, tax law simplification, taxpayer rights, and
financial accountability. H.R. 2292, introduced on
July 30, 1997, by Mr. Portman and Mr. Cardin,
generally mirrors the recommendations of the
Commission.
H.R. 2676 builds on the Commission's report and
recommendations and the provisions of H.R. 2292 to
provide for a more effective
IRS
in its administration of the tax laws and in
improving the
IRS
's service and responsiveness to taxpayers.
C. LEGISLATIVE HISTORY
Committee bill
H.R. 26762
was introduced by Chairman Archer and Messrs.
Portman and Cardin on October 21, 1997, and was
amended by the Committee in a markup on October 22,
1997. An amendment in the nature of a substitute
(offered by Chairman Archer) was adopted by a voice
vote, with a quorum present. The bill, as amended,
was ordered favorably reported by a roll call of 33
yeas and 4 nays on October 22, 1997, with a quorum
present.
Committee hearings
Full Committee. --The Committee held public bearings
on September 16-17, 1997, on the recommendations of
the National Commission on Restructuring the
Internal Revenue Service.
Subcommittee on Oversight. --The Subcommittee
on Oversight held public hearings on
IRS
-related topics in 1997 as follows:
Annual Report of the Internal Revenue Service
Taxpayer Advocate (February 25, 1997).
"High-Risk" Programs Within the
Jurisdiction of the Committee on Ways and Means
(March 4, 1997).
IRS
Budget for Fiscal Year 1998 and the 1997 Tax Return
Filing Season (March 18, 1997).
Electronic Federal Tax Payment System (April 16,
1997).
Report of the National Commission on Restructuring
the Internal Revenue Service (July 24, 1997).
Recommendations of the National Commission on
Restructuring the Internal Revenue Service to Expand
Electronic Filing of Tax Returns (September 9,
1997).
Recommendations of the National Commission on
Restructuring the Internal Revenue Service on
Taxpayer Protections and Rights (September 26,
1997).
In addition, the Subcommittee on Oversight submitted
recommendations on October 20, 1997, to the Full
Committee relating to (1) electronic filing and (2)
taxpayer rights and protections. These Subcommittee
recommendations are the basis for the provisions in
Title II and Title
III
, respectively, of the Committee bill. Chairman
Archer had directed the Subcommittee on Oversight to
review these two areas of the Commission's report
and to make recommendations to the Full Committee.
II.
EXPLANATION OF THE
BILL
TITLE I. EXECUTIVE BRANCH GOVERNANCE
A. CREATION OF
IRS
OVERSIGHT BOARD (sec. 101 of the bill and sec. 7802
of the Code)
PRESENT LAW
Under present law, the administration and
enforcement of the internal revenue laws are
performed by or under the supervision of the
Secretary of the Treasury.3
Present law imposes standards of ethical conduct on
Federal employees in order to avoid conflicts of
interest. Criminal penalties are imposed on
violations of these standards. In some cases, less
strict standards apply to special government
employees than to regular, full-time Federal
government employees. In general, a special
government employee is an individual who is expected
to serve no more than 130 days during any 365-day
period.
In general, the ethical conduct rules (1) prohibit a
Federal employee from accepting compensation for
representing clients before the agency in which the
employee serves or against the United States;4
(2) prohibit a Federal employee from acting as agent
or attorney for anyone in a claim against the United
States;5
(3) impose post-employment restrictions on senior
employees in order to prohibit the unfair use of
prior Government employment;6
and (4) prohibit a Federal employee from
participating personally and substantially in
matters that affect his or her own financial
interest or that of persons with certain
relationships to the employee.7
In the case of a special government employee who
serves less than 60 days in the preceding 365 days,
the restrictions in (1) and (2) above only apply
with respect to matters in which the special
government employee personally and substantially
participated in his or her official capacity.
One of the post-employment restrictions prohibits
senior government employees from representing
parties other than the
United States
before their former department or agency for one
year after employment. This restriction does not
apply to special government employees who serve less
than 60 days in the final 1-year period of service.
Federal government employees compensated at certain
pay grades are subject to public financial
disclosure requirements. Special government
employees who serve less than 60 days in a year are
not subject to the public financial disclosure
requirements, but are subject to confidential
financial disclosure requirements.
REASONS FOR CHANGE
The Committee believes that a well-run
IRS
is critical to the operation of our tax system.
Public confidence in the
IRS
must be restored so that our system of voluntary
compliance will not be compromised. The Committee
believes that most Americans are willing to pay
their fair share of taxes, and that public faith in
the
IRS
is key to maintaining that willingness.
The National Commission on Restructuring the
IRS
(the "Restructuring Commission"), which
conducted a year-long study of the
IRS
, found that a number of factors contribute to
current
IRS
management problems, including the following. While
the Treasury is responsible for
IRS
oversight, it has generally provided little
consistent strategic oversight or guidance to the
IRS
. The Secretary and Deputy Secretary have many other
broad responsibilities, and generally leave the
IRS
largely independent. The average tenure of an
IRS
Commissioner is under 3 years, as is the average
tenure of senior Treasury officials responsible for
IRS
oversight. Many of the issues that need to be
addressed by the
IRS
will require expertise in various areas,
particularly management and technology.
The Restructuring Commission concluded that
"problems throughout the
IRS
cannot be solved without focus, consistency and
direction from the top. The current structure, which
includes Congress, the President, the Department of
the Treasury, and the
IRS
itself, does not allow the
IRS
to set and maintain consistent long-term strategy
and priorities, nor to develop and execute focused
plans for improvement. Additionally, the structure
does not ensure that the
IRS
budget, staffing and technology are targeted toward
achieving organizational success."
The Committee shares the concerns of the Commission,
and agrees that fundamental change in
IRS
management and oversight is essential. The Committee
believes that a new management structure that will
bring greater expertise in more areas, focus, and
continuity will help the
IRS
on the path toward becoming an efficient,
responsive, and respected agency that always acts
appropriately in carrying out its functions.
The Committee believes that private sector input is
a necessary part of any new management structure.
The Committee believes that the ethics rules
applicable to special government employees (without
regard to exceptions for length of service or pay
grade) should be applied to the private sector
members of the new
IRS
management. These rules will enhance the ability of
such members to demonstrate impartiality in the
performance of their duties, while not unduly
restricting the available pool of potential
candidates.
The Committee is aware that the taxpaying public may
never relish contacts with the agency responsible
for collecting taxes. Nevertheless, by establishing
a new management structure that will better enable
the
IRS
to develop and fulfill long-term goals, the
Committee believes that the
IRS
will be able to gain public support, and will make
contacts with the
IRS
as infrequent and as pleasant as possible. The
Committee is also aware that changes being made to
IRS
management structure are not the final step, and
that continued oversight of the
IRS
, by Congress as well as the Administration, is
necessary in order to ensure long-term progress.
EXPLANATION OF PROVISION
Duties, responsibilities, and powers of the
IRS
Oversight Board
The bill provides for the establishment within the
Treasury Department of the Internal Revenue Service
Oversight Board (referred to as the
"Board"). The general responsibilities of
the Board are to oversee the Internal Revenue
Service (the "
IRS
") in its administration, management, conduct,
direction, and supervision of the execution and
application of the internal revenue laws. The Board
has no responsibilities or authority with respect to
(1) the development and formulation of Federal tax
policy relating to existing or proposed internal
revenue laws, (2) law enforcement activities of the
IRS
, including compliance activities such as criminal
investigations, examinations, and collection
activities,8
and (3) specific procurement activities of the
IRS
(e.g., selecting vendors or awarding contracts). As
discussed more fully in Part B., below, the Board
also has the authority to recommend candidates for
IRS
Commissioner to the President, and to recommend
removal of the Commissioner. The members of the
Board do not have authority to receive confidential
taxpayer return information.9
The Board has the following specific
responsibilities: (1) to review and approve
strategic plans of the
IRS
, including the establishment of mission and
objectives and standards of performance) and annual
and long-range strategic plans; (2) to review the
operational functions of the
IRS
, including plans for modernization of the tax
system, out sourcing or managed competition, and
training and education; (3) to provide for the
review of the Commissioner's selection, evaluation
and compensation of senior managers; and (4) to
review and approve the Commissioner's plans for
major reorganization of the
IRS
. It is intended that major reorganizations subject
to the Board's review and approval are limited to
major changes in organizational structure, such as
the 1995
IRS
reorganization that combined 7 regions into 4 and 63
districts into 33. In addition, the Board will
review and approve the budget request of the
IRS
prepared by the Commissioner, submit such budget
request to the Secretary, and ensure that the budget
request supports the annual and long-range strategic
plans of the
IRS
. The Secretary is required to submit the budget
request approved by the Board to the President, who
is required to submit such request, without
revision, to the Congress together with the
President's annual budget request for the
IRS
. The bill does not affect the ability of the
President to include, in addition, his own budget
request relating to the
IRS
.
It is intended that the Board will reach a formal
decision on all matters subject to its review. With
respect to those matters over which the Board has
approval authority, the Board's decisions are
determinative. It is fully expected that, with
respect to those matters over which the Board has
approval authority (other than as relates to the
development of the budget), the Secretary will exert
his or her oversight responsibility over the
IRS
by working through and with the Board.10
The Board is required to report each year to the
President and the Congress regarding the conduct of
its responsibilities.
It is expected that the Treasury Department will no
longer utilize the
IRS
Management Board once the new Board created by the
bill is in place, as the functions of the
IRS
Management Board would be taken over by the new
Board.
Composition of the Board
The Board is composed of 11 members. Eight of the
members are so-called "private-life"
members who are not Federal officers or employees.
These private-life members will be appointed by the
President, with the advice and consent of the
Senate. The remaining members are (1) the Secretary
of the Treasury (or, if the Secretary so designates,
the Deputy Secretary of the Treasury), (2) a
representative from a union representing a
substantial number of
IRS
employees, who will be appointed by the President
with the advice and consent of the Senate, and11
(3) the Commissioner of the
IRS
.
The private-life members of the Board are to be
appointed based on their expertise in the following
areas: management of large service organizations;
customer service; the Federal tax laws, including
administration and compliance; information
technology; organization development; and the needs
and concerns of taxpayers. In the aggregate, the
members of the Board should collectively bring to
bear expertise in all these enumerated areas.
The private-life members are considered special
government employees during the entire period of
their appointment. That is, they will be considered
to be performing services as a special government
employee on each day during their appointment, not
just on those days on which they actually perform
services. Thus, they will be subject to the ethical
conduct rules applicable to special government
employees who serve more than 60 days during any
365-day period. Thus, for example, private-life
Board members would not be able to represent clients
before the
IRS
on matters during their term as a Board member.
Private-life Board members would also be subject to
the 1-year post-employment restriction applicable to
senior-level employees. Finally, private-life
members would be subject to the public financial
disclosure rules generally applicable to special
government employees above certain pay grades.
Compensation of Board members
The private-life members of the Board will be
compensated at a rate of $30,000 per year, except
that the Chair will be compensated at a rate of
$50,000 a year. Other members of the Board will
receive no compensation for their services as Board
members. The members of the Board will be entitled
to travel expenses for purposes of attending
meetings of the Board.
Administrative matters
The 8 private-life Board members and the union
representative generally will be appointed for
5-year terms. The private-life members may serve no
more than two 5-year terms. Each 5-year term begins
upon appointment. Board member terms are staggered,
as a result of a special rule providing that some
private-life members first appointed to the Board
will serve initial terms of less than 5 years. The
members of the Board are to elect a chairperson from
among the private-life Board members for a 2-year
term. Any member of the Board can be removed at the
will of the President. In addition, the Secretary of
the Treasury (or, if so delegated, the Deputy
Secretary) and the
IRS
Commissioner are removed from the Board upon
termination of employment in such positions and the
representative of
IRS
employees is removed from the Board upon termination
of their employment, membership, or other
affiliation with the organization representing
IRS
employees.
The Board is required to meet at least once a month,
and can meet at such other times as the Board
determines appropriate.
A quorum of 6 members is required in order for the
Board to conduct business. Actions of the Board are
taken by a majority vote of those members present
and voting.
The Board will not have its own permanent staff, but
will have such staff as detailed by the Commissioner
at the request of the Chair of the Board. The Chair
can procure temporary and intermittent services
under section 3109(b) of title 5 of the U.S. Code.
Claims against Board members
The private-life members of the Board and the union
representative have no personal liability under
Federal law with respect to any claim arising out of
or resulting from an act or omission by such Board
member within the scope of service as a Board
member. The bill does not limit personal liability
for criminal acts or omissions, wilful or malicious
conduct, acts or omissions for private gain, or any
other act or omission outside the scope of service
of the Board member.
The bill does not affect any other immunities and
protections that may be available under applicable
law or any other right or remedy against the
United States
under applicable law, or limit or alter the
immunities that are available under applicable law
for Federal officers and employees.
EFFECTIVE DATE
The provision s of the bill relating to the Board
are effective on the date of enactment. The
President is directed to submit nominations for
Board members to the Senate within 6 months of the
date of enactment.
B. APPOINTMENT
AND
DUTIES OF
IRS
COMMISSIONER (secs. 102 and 103 of the bill and secs.
7803 and 7804 of the Code)
PRESENT LAW
Within the Department of the Treasury is a
Commissioner of Internal Revenue, who is appointed
by the President, with the advice and consent of the
Senate. The Commissioner has such duties and powers
as may be prescribed by the Secretary.12
The Secretary has delegated to the Commissioner the
administration and enforcement of the internal
revenue laws.13
The Commissioner generally does not have authority
with respect to policy matters.14
The Secretary is authorized to employ such persons
as the Secretary deems appropriate for the
administration and enforcement of the internal
revenue laws and to assign posts of duty.
REASONS FOR CHANGE
The Committee believes that the duties and
responsibilities of the Commissioner are of such
significance that the Commissioner should continue
to be appointed by the President.15
However, the frequency with which the Commissioner
changes --the average tenure in office is under 3
years --is one of the factors contributing to lack
of
IRS
management continuity. The Committee believes (as
did the National Commission on Restructuring the
IRS
) that providing a statutory term for the
Commissioner to serve would help ensure greater
continuity of
IRS
management.
The Committee believes that it is appropriate to
preserve the present-law structure under which the
duties of the Commissioner are delegated by the
Secretary of the Treasury. Modifying this structure
may unnecessarily interfere with the operations of
the
IRS
and other agencies within the Treasury. In order to
enable the Congress to properly fulfill its
oversight responsibilities with respect to the
IRS
, the Committee believes that the Congress should be
notified of changes in the delegation of authority
to the Commissioner.
EXPLANATION OF PROVISION
As under present law, the Commissioner will be
appointed by the President, with the advice and
consent of the Senate, and can be removed at will by
the President. The Commissioner will be appointed to
a 5-year term, beginning with the date of
appointment. The Board has the power to recommend
candidates to the President for Commissioner. The
Board has the authority to recommend the removal of
the Commissioner. Although the President is not
required to nominate for Commissioner a candidate
recommended by the Board (or to remove a
Commissioner when the Board so recommends), it is
expected that the President will generally give
deference to the Board's expertise and familiarity
with the needs and functions of the
IRS
and will act in accordance with the Board's
recommendations.
The Commissioner has such duties and powers as
prescribed by the Secretary. Unless otherwise
specified by the Secretary, such duties and powers
include the power to administer, manage, conduct,
direct, and supervise the execution and application
of the internal revenue laws or related statutes and
tax conventions to which the United States is a
party and to recommend to the President a candidate
for Chief Counsel (and recommend the removal of the
Chief Counsel). It is intended that the listed
duties codify present delegations. However, if the
Secretary changes such orders, they may be subject
to the notice requirement of the bill, described
below.
If the Secretary determines not to delegate the
specified duties to the Commissioner, such
determination will not take effect until 30 days
after the Secretary notifies the House Committees on
Ways and Means, Government Reform and Oversight, and
Appropriations, the Senate Committees on Finance,
Government Operations, and Appropriations, and the
Joint Committee on Taxation.
This provision is not intended to alter the
Secretary's existing authority to delegate to
agencies other than the
IRS
the authority to administer and enforce certain
portions of the internal revenue laws. For example,
the Secretary currently has delegated to the Bureau
of Alcohol, Tobacco and Firearms the authority to
administer and enforce the taxes under section 4181
and chapters 51, 52, and 53 of the Internal Revenue
Code (regarding excise and other taxes on alcohol,
tobacco, firearms, and destructive devices).
The Commissioner is to consult with the Board on all
matters within the Board's authority (other than the
recommendation of candidates for Commissioner and
the recommendation to remove the Commissioner). With
respect to those matters within the Board's approval
authority (other than with respect to the
development of the budget), it is fully expected
that the Secretary will exert his or her oversight
responsibility over the
IRS
by working through and with the Board.16
Unless otherwise specified by the Secretary, the
Commissioner is authorized to employ such persons as
the Commissioner deems proper for the administration
and enforcement of the internal revenue laws and
would be required to issue all necessary directions,
instructions, orders, and rules applicable to such
persons. Unless otherwise provided by the Secretary,
the Commissioner will determine and designate the
posts of duty.
The Commissioner is compensated as under present
law. EFFECTIVE DATE
The provision s of the bill relating to the
Commissioner generally are effective on the date of
enactment. The provision relating to the 5-year term
of office applies to the Commissioner in office on
the date of enactment. This 5-year term runs from
the date of appointment.
C. STRUCTURE
AND
FUNDING OF THE EMPLOYEE PLANS
AND
EXEMPT ORGANIZATIONS ("EP/EO") DIVISION
(sec. 102 of the bill and sec. 7802(b) of the Code)
PRESENT LAW
Prior to 1974, no one specific office in the
IRS
had primary responsibility for employee plans and
tax-exempt organizations. As part of the reforms
contained in the Employee Retirement Income Security
Act of 1974 ("ERISA"), Congress
statutorily created the Office of Employee Plans and
Exempt Organizations ("EP/EO") under the
direction of an Assistant Commissioner.17
EP/EO was created to oversee deferred compensation
plans governed by sections 401-414 of the Code and
organizations exempt from tax under Code section
501(a).
In general, EP/EO was established in response to
concern about the level of
IRS
resources devoted to oversight of employee plans and
exempt organizations. The legislative history of
Code section 7802(b) states that, with respect to
administration of laws relating to employee plans
and exempt organizations, "the natural tendency
is for the Service to emphasize those areas that
produce revenue rather than those areas primarily
concerned with maintaining the integrity and
carrying out the purposes of exemption
provisions."18
To provide funding for the new EP/EO office, ERISA
authorized the appropriation of an amount equal to
the sum of the section 4940 excise tax on investment
income of private foundations (assuming a rate of 2
percent) as would have been collected during the
second preceding year plus the greater of the same
amount or $30 million.19
However, amounts raised by the section 4940 excise
tax have never been dedicated to the administration
of EP/EO, but are transferred instead to general
revenues. Thus, the level of EP/EO funding, like
that of the rest of the
IRS
, is dependent on annual Congressional
appropriations to the Treasury Department.
REASONS FOR CHANGE
The Committee believes that it is important to
retain the Office of Employee Plans and Exempt
Organizations under the supervision and direction of
an Assistant Commissioner of the Internal Revenue.
Because of EP/EO's expertise in the area of
retirement benefits, the Committee believes that its
responsibilities should be expanded to include
nonqualified deferred compensation arrangements. In
addition, the inclusion of an annual reporting
mechanism in the bill is designed to ensure that the
Commissioner is adequately informed regarding the
activities of EP/EO.
The funding formula for EP/EO set forth in section
7802(b)(2) would, if utilized, result in an unstable
level of funding that may bear little or no relation
to the amount of financial resources actually
required by the EP/EO division. In repealing the
funding mechanism, however, the Committee notes
that, given the magnitude of the sectors EP/EO is
charged with regulating, as well as the unique
nature of its mandate, an adequately funded EP/EO is
extremely important to the efficient and fair
administration of the Federal tax system.
Accordingly, financial resources for EP/EO should
not be constrained on the basis that EP/EO is a
"non-core"
IRS
function; rather, EP/EO, like all functions of the
IRS
, should be funded so as to promote the efficient
and fair administration of the Federal tax system.
EXPLANATION OF PROVISION
The bill retains the Office of Employee Plans and
Exempt Organizations under the supervision and
direction of an Assistant Commissioner of the
Internal Revenue. As under present law, EP/EO is
responsible for carrying out functions and duties
associated with organizations designed to be exempt
from tax under section 501(a) of the Code and with
respect to plans designed to be qualified under
section 401(a). In addition, however, EP/EO's
responsibilities are expanded to include
nonqualified deferred compensation arrangements. The
bill also provides that the Assistant Commissioner
shall report annually to the Commissioner on EP/EO
operations.
In addition, the bill repeals the funding mechanism
for EP/EO set forth in section 7802(b). Thus, the
appropriate level of funding for EP/EO is,
consistent with current practice, subject to annual
Congressional appropriations, as are other functions
within the
IRS
.
EFFECTIVE DATE
The provision is effective on the date of enactment.
D. TAXPAYER ADVOCATE (sec. 102 of the bill and sec.
7803 of the Code)
PRESENT LAW
In 1996, the Taxpayer Bill of Rights 2 ("TBOR
2")20
established the position of Taxpayer Advocate, which
replaced the position of Taxpayer Ombudsman, created
in 1979 by the
IRS
. Before the creation of the Taxpayer Advocate, the
Taxpayer Ombudsman was a career civil servant
selected by and serving at the pleasure of the
IRS
Commissioner. The Taxpayer Advocate is appointed by
and reports directly to the
IRS
Commissioner.
TBOR 2 also created the office of the Taxpayer
Advocate. The functions of the office are (1) to
assist taxpayers in resolving problems with the
IRS
, (2) to identify areas in which taxpayers have
problems in dealings with the
IRS
, (3) to propose changes (to the extent possible) in
the administrative practices of the
IRS
that will mitigate those problems, and (4) to
identify potential legislative changes that may
mitigate those problems.
The Taxpayer Advocate is required to submit two
annual reports to the tax-writing committees, one,
due by June 30, that describes the objectives of the
Taxpayer Advocate for the next fiscal year and
another, due by December 31, that describes the
activities of the Taxpayer Advocate for the previous
fiscal year. The December 31 report must identify
what the Taxpayer Advocate has done to improve
taxpayer services and
IRS
responsiveness, contain recommendations received
from individuals who have the authority to issue a
Taxpayer Assistance Order, describe in detail the
progress made in implementing those recommendations,
contain a summary of at least 20 of the most serious
problems encountered by taxpayers in dealing with
the
IRS
, include recommendations for such administrative
and legislative action as may be appropriate to
resolve such problems, describe the extent to which
regional problem resolution officers participate in
the selection and evaluation of local problem
resolution officers, and include other such
information as the Taxpayer Advocate may deem
advisable. The reports are submitted without review
by the Commissioner, the Secretary of the Treasury,
or any other officer or employee of the Department
of Treasury or the Office of Management and Budget.
REASONS FOR CHANGE
The Committee believes that the Taxpayer Advocate
serves an important role within the
IRS
in terms of preserving taxpayer rights and solving
problems that taxpayers encounter in their dealings
with the
IRS
. To that end, it is appropriate that the
IRS
Oversight Board have input in the selection of the
Taxpayer Advocate. In addition, the Committee
believes that the Taxpayer Advocate should have
experience appropriate to the position and that the
Taxpayer Advocate's objectivity would be best
preserved by limiting future employment with the
IRS
. The Committee also believes that the reporting
requirements of the Taxpayer Advocate should be
targeted not only towards solving problems with the
IRS
but also towards preventing problems before they
arise.
EXPLANATION OF PROVISION
The bill requires the Commissioner to obtain the
approval of the
IRS
Oversight Board on the selection of the Taxpayer
Advocate. A candidate for the Taxpayer Advocate must
have either substantial experience representing
taxpayers before the
IRS
or have substantial experience within the
IRS
. If the prospective Taxpayer Advocate was an
officer or an employee of the
IRS
before being appointed as the Taxpayer Advocate, the
individual is required to agree not to accept any
employment with the
IRS
for at least 5 years after ceasing to be the
Taxpayer Advocate.
The bill modifies the information to be included in
the December 31 report to the tax-writing
committees. The report no longer needs to include
information about the extent to which regional
problem resolution officers participate in the
selection and evaluation of local problem resolution
officers. The report identifies areas of the tax law
that impose significant compliance burdens on
taxpayers or the
IRS
, including specific recommendations for solving
these problems. The Taxpayer Advocate also is
required to work in conjunction with the National
Director of Appeals to identify the 10 most
litigated issues for each category of taxpayers, and
include the list of issues and recommendations for
mitigating such disputes in the report. Categories
of taxpayers include, for example, individuals,
self-employed individuals, small businesses, etc.
As under present law, the reports are submitted
directly to the tax-writing committees, without
review by the
IRS
Oversight Board, the Secretary of the Treasury, or
any other officer or employee of the Department of
the Treasury or the Office of Management and Budget.
In addition, the bill imposes new responsibilities
on the Taxpayer Advocate. The Taxpayer Advocate is
requested to monitor the coverage and geographical
allocation of problem resolution officers and
develop guidance that outlines criteria to be used
by
IRS
employees in referring taxpayer inquiries to problem
resolution officers. In connection with these
responsibilities, it is anticipated that the
Taxpayer Advocate will work with the
IRS
District Offices to ensure convenient taxpayer
access to the local problem resolution officer. For
example, the local telephone number for the problem
resolution officer in each district should be
published and available to taxpayers.
It is intended that the Taxpayer Advocate will work
with the Commissioner in developing career paths for
local problem resolution officers, so that
individuals can progress through the General
Schedule in the same manner as examination
employees, without having to leave the problem
resolution system. In that regard, it is
contemplated that the compensation levels of local
and regional problem resolution officers should be
the same as those of
IRS
personnel operating in other functional units. Under
the current system, local problem resolution
officers generally must return to an audit or
collection function to achieve promotion. This lack
of a career path within the problem resolution
system reduces the independence of the system. It is
contemplated that, to the extent feasible, regional
problem resolution officers should be selected from
the available pool of local problem resolution
officers.
EFFECTIVE DATE
This provision is effective on the date of
enactment, except that the post-employment
restrictions on the Taxpayer Advocate do not apply
to an individual holding that position on the date
of enactment.
E. PROHIBITION ON EXECUTIVE BRANCH INFLUENCE OVER
TAXPAYER AUDITS
(sec. 104 of the bill and new sec. 7217 of the Code)
PRESENT LAW
There is no explicit prohibition in the Code on
high-level Executive Branch influence over taxpayer
audits and collection activity.
The Internal Revenue Code prohibits disclosure of
tax returns and return information, except to the
extent specifically authorized by the Internal
Revenue Code (sec. 6103). Unauthorized disclosure is
a felony punishable by a fine not exceeding $5,000
or imprisonment of not more than five years, or both
(sec. 7213). An action for civil damages also may be
brought for unauthorized disclosure (sec. 7431).
REASONS FOR CHANGE
The Committee believes that the perception that it
is possible that high-level Executive Branch
influence over taxpayer audits and collection
activity could occur has a negative influence on
taxpayers' views of the tax system. Accordingly, the
Committee believes that it is appropriate to
prohibit such influence.
EXPLANATION OF PROVISION
The bill makes it unlawful for a specified person to
request that any officer or employee of the
IRS
conduct or terminate an audit or otherwise
investigate or terminate the investigation of any
particular taxpayer with respect to the tax
liability of that taxpayer. The prohibition applies
to the President, the Vice President, and employees
of the executive offices of either the President or
Vice President, as well as any individual (except
the Attorney General) serving in a position
specified in section 5312 of Title 5 of the United
States Code (these are generally Cabinet-level
positions). The prohibition applies to both direct
requests and requests made through an intermediary.
Any request made in violation of this rule must be
reported by the
IRS
employee to whom the request was made to the Chief
Inspector of the
IRS
. The Chief Inspector has the authority to
investigate such violations and to refer any
violations to the Department of Justice for possible
prosecution, as appropriate. Anyone convicted of
violating this provision will be punished by
imprisonment of not more than 5 years or a fine not
exceeding $5,000 (or both).
Three exceptions to the general prohibition apply.
First, the prohibition does not apply to a request
made to a specified person by a taxpayer or a
taxpayer's representative that is forwarded by the
specified person to the
IRS
. This exception is intended to cover two types of
situations. The first situation is where a taxpayer
(or a taxpayer's representative) writes to a
specified person seeking assistance in resolving a
difficulty with the
IRS
. This exception permits the specified person who
receives such a request to forward it to the
IRS
for resolution without violating the general
prohibition. The second situation that this first
exception is intended to cover is an audit or
investigation by the
IRS
of a Presidential nominee. Under present law (sec.
6103(c)), nominees for Presidentially appointed
positions consent to disclosure of their tax returns
and return information so that background checks may
be conducted. Sometimes an audit or other
investigation is initiated as part of that
background check. The Committee anticipates that any
such audit or investigation that is part of such a
background check will be encompassed within this
first exception.
The second exception to the general prohibition
applies to requests for disclosure of returns or
return information under section 6103 if the request
is made in accordance with the requirements of
section 6103.
The third exception to the general prohibition
applies to requests made by the Secretary of the
Treasury as a consequence of the implementation of a
change in tax policy.
EFFECTIVE DATE
The provision applies to violations occurring after
the date of enactment.
F.
IRS
PERSONNEL FLEXIBILITIES (sec. 111 of the bill and
new secs. 9301-9304 of title 5, U.S.C.)
PRESENT LAW
The Internal Revenue Service, like almost all other
federal agencies, is subject to the personnel rules
and procedures set forth in title 5, United States
Code. As such, its employees generally are
classified under the General Schedule or the Senior
Executive Service.
REASONS FOR CHANGE
Under the existing personnel rules and procedures
set forth in title 5, hiring, evaluating, promoting,
and firing employees is subject to extensive
regulation. Given the role of the
IRS
in the federal government, its unique needs in terms
of skilled tax, technology, and service personnel,
and its present needs to motivate its managers and
employees to embrace continuous improvements and
cost savings while maintaining adequate levels of
service for taxpayers, the Committee finds that
certain flexibilities are appropriate and will
facilitate the efforts of the
IRS
to better manage its workforce.
The Committee finds that the vast majority of
IRS
employees are competent professionals who perform
their jobs as well as can be expected under existing
organizational constraints. However, over the past
decade, the quality of
IRS
interaction with taxpayers and the public has
deteriorated, in part due to lower personnel
qualifications, pay levels, and training quality. In
addition, the stovepipe nature of
IRS
operations, in which functional units such as
taxpayer services, exam, collection, and appeals set
and implement their own priorities and objectives,
which often are disconnected from the other
functions and the organization as a whole, adds to
the problem of decreased taxpayer service. Moreover,
the risk averse nature of the
IRS
, which provides minimal incentive for managers or
front-line employees for achieving mission, stifles
creativity, innovation, and quick problem
resolution.
Consistent with the rest of this bill, the Committee
intends section 111 to lead to increased
accountability on the part of
IRS
managers and employees and increased focus on the
IRS
mission, goals, and objectives. At the core of this
accountability and focus lies increased attention on
providing adequate levels of service to taxpayers.
The Committee believes that taxpayers should deal
only with
IRS
employees who are trained adequately and possess the
skills and tools necessary to do their jobs well. To
provide such service to taxpayers, the Committee
expects the
IRS
to use the flexibilities provided by this section to
hire and promote qualified professionals, to provide
incentives for employees to treat taxpayers with the
service and respect that they deserve, and to
discipline employees who cannot or will not treat
taxpayers fairly. In short, the Committee expects
the
IRS
to hold all workers --from senior managers to
front-line employees --accountable for carrying out
the
IRS
mission.
EXPLANATION OF PROVISION
In general
Section 111 of the bill would amend title 5, United
States Code, by inserting a new chapter 93 providing
certain personnel flexibilities to the
IRS
. By providing these flexibilities in this manner,
the Committee intends for the
IRS
to remain subject to all of the rules and procedures
of title 5, except to the extent that the exercise
of flexibilities provided under this new chapter 93
is inconsistent with prior law.
The bill clarifies that the personnel flexibilities
for the
IRS
are intended to be exercised consistently with
existing rules relating to merit system principles,
prohibited personnel practices, and preference
eligibles. Moreover, the Committee believes that the
employees of the
IRS
should be involved in the reinvention of the
bureaucracies in which they work. Accordingly, the
bill provides that the flexibilities provided to the
IRS
must be negotiated between the
IRS
and the employees' union. Such negotiations need not
address all of the flexibilities provided under this
provision. The written agreement should be a
consensus document, but is not a contract that can
be appealed to the federal services impasse panel,
or otherwise create additional appeal rights. To the
extent that the exercise of any flexibility, such as
that provided by new section 9303(c), would not
affect members of the employees' union, then no
written agreement is required.
Performance management
The bill would require the
IRS
to establish a new performance management system
within one year from the date of enactment. The
Committee expects that this system will refocus the
IRS
's personnel system on the overall mission of the
IRS
and how each employee's performance relates to that
mission. The new performance standards are premised
on the notion of retention --performance at the
retention standard indicates that an employee has
performed fully successfully, no better or worse.
Failure to meet this standard indicates that the
employee has not performed adequately, and managers
should use the tools available to encourage the
employee to improve performance, or if such efforts
do not lead to improved performance, to remove the
employee. The performance standard above the
retention standard is intended to encourage
employees to perform at a higher level, and to allow
managers to make performance distinctions among
employees.
The Committee encourages the
IRS
to redesign its performance measures to more
appropriately align employee behavior with
organizational goals. One of the most significant
efforts that the
IRS
must undertake in this regard is to design internal
measures that will encourage behavior which makes it
easier for taxpayers to interact with the
IRS
. While this will involve significant effort, the
Committee expects that these measures will bring the
organizational goals and objectives, including those
established under the Government Performance and
Results Act of 1993 and Revenue Procedure 64-22,
down to the individual employee level. In addition,
the Committee expects the
IRS
to develop taxpayer service surveys that will gauge
the level of service that taxpayers actually
receive, for use in evaluating organizational and
group performance. In no case should measures be
used which rank employees or groups of employees
based solely on enforcement results, establish
dollar goals for assessments or collections, or
otherwise undermine fair treatment of taxpayers.
While any system of measures must reflect the
efficiency and productivity of employees, the
Committee expects that the
IRS
will establish a balanced system of measures that
will ensure that taxpayer satisfaction is paramount
throughout all
IRS
functions.
Awards
There are three types of awards specifically
referenced in the bill. First, certain awards for
superior accomplishments will continue to require
certification to the Office of Personnel Management
(OPM), but absent objection from OPM within 60 days,
the Commissioner's recommendations for such awards
will take effect. As with all awards, these awards
should be made based on performance under the new
performance management system, and in no case should
awards be made (or performance measured) based
solely or principally on tax enforcement results.
The second category of awards relates to the most
senior managers in the
IRS
. The Commissioner will have discretion, upon
consultation with the
IRS
Oversight Board established under section 101 of
this bill, to make awards of up to 50 percent of
salary to such managers, so long as the total
compensation for an employee as a result of such an
award does not equal or exceed the annual rate of
compensation for the Vice President for such
calendar year. As with awards for superior
accomplishments, OPM will have 60 days to object.
The Commissioner will be required to prescribe
regulations defining how determinations will be made
as to whether an employee is eligible for such
awards. In no case, however, will more than 8
employees be eligible to receive such awards in any
calendar year. Moreover, it is not expected that all
of the eligible pool will receive such awards each
year, or that the full 50 percent would be
appropriate, except in cases of extraordinary
performance.
Finally, the third category of awards --based on
savings --is intended to encourage the practice of
rewarding employees for developing more efficient
methods of administration. The Committee encourages
the
IRS
to establish programs that encourage employee input
into reorganizing business processes leading to
efficiency gains, and sharing resultant savings with
employees. Provided that taxpayers receive adequate
levels of service, the Committee expects that such
gainsharing awards will help to improve the
efficiency of the
IRS
.
Streamlined procedures
The bill provides two tools to streamline the
process of taking certain adverse actions for poor
performance. First, the notice period for taking
adverse actions is reduced from 30 days to 15 days.
At the discretion of the
IRS
, and in accordance with regulations issued by OPM,
this period can be extended.
Second, the bill prohibits appeals of the denial of
a step increase to the Merit Systems Protections
Board. Aggrieved employees nonetheless can appeal
such actions pursuant to internal agency procedures,
including any procedures agreed to pursuant to
collective bargaining agreements or pursuant to the
written agreement under section 9301(b) authorizing
the use of this flexibility.
Staffing flexibilities
The bill provides the
IRS
with flexibility in filling certain permanent
appointments in the competitive service by
authorizing the
IRS
to fill such vacancies with either qualified
veterans or qualified temporary employees. For
purposes of this provision, a qualified veteran is
an individual who is either a preference eligible or
has been separated from the armed forces under
honorable conditions after at least three years of
active service, and who meets the minimum
qualifications for the vacant position. A qualified
temporary employee is defined under the bill as a
temporary employee of the
IRS
with at least two years of continuous service, who
has met all applicable retention standards and who
meets the minimum qualifications for the vacant
position.
The bill also authorizes the
IRS
to establish category rating systems for evaluating
job applicants, under which qualified candidates are
divided into two or more quality categories on the
basis of relative degrees of merit, rather than
assigned individual numerical ratings. Managers
would be authorized to select any candidate from the
highest quality category, and would not be limited
to the three highest ranked candidates, as is the
case under existing law. In administering these
category rating systems, the
IRS
generally will be required to list preference
eligibles ahead of other individuals within each
quality category. Nonetheless, the appointing
authority can select any candidate from the highest
quality category, as long as existing requirements
relating to passing over preference eligibles are
satisfied.
The bill authorizes the Commissioner to reassign or
remove career appointees in the Senior Executive
Service immediately upon taking office. While the
Committee does not intend for any Commissioner to
make wholesale management changes without thorough
evaluations, the Committee believes that if the
Commissioner is to be held accountable, then the
Commissioner must have the flexibility to recruit
his own management team.
The bill authorizes the Commissioner to establish
probation periods for
IRS
employees of up to 3 years, when the Commissioner
determines that a shorter period is not sufficient
for an employee to demonstrate proficiency in a
position.
Demonstration projects
The bill makes it easier for the
IRS
to establish demonstration projects under title 5.
The Committee expects that the
IRS
will use this flexibility to establish demonstration
projects to improve personnel management,
particularly to the extent that such projects lead
to increased individual accountability. For example,
the
IRS
might use this flexibility to establish
demonstration projects involving broad-banded pay
systems or alternative classification systems, to
provide for variations in the existing rules
regarding grade and pay retention, or to provide for
variations from existing provisions relating to
payment of recruitment, relocation, and retention
bonuses. In addition, the Committee expects that the
IRS
will use this flexibility to develop more efficient
means of handling employee appeals of personnel
actions. No flexibility can be exercised under this
provision that does not preserve due process for
employees, however.
To allow the
IRS
the flexibility to establish these and other
demonstration projects, as appropriate, the bill
authorizes any number of projects, and exempts the
IRS
from many of the requirements applicable to
demonstration projects under section 4703 of title
5, United States Code. Specifically, the bill
eliminates the requirement that the
IRS
submit plans to establish demonstration projects to
a public hearing, and streamlines the advance notice
requirements of section 4703. In addition, the bill
allows the
IRS
to establish demonstration projects for any number
of its employees, and gives the Commissioner greater
latitude in working with OPM to develop and
implement demonstration projects. The bill maintains
a number of the existing prohibitions on
demonstration projects, including the prohibition on
using demonstration projects to waive any
requirement of title 5 relating to family and
medical leave. As with the other personnel
flexibilities provided under this section, the bill
requires the
IRS
to negotiate a written agreement with the employees'
union to the extent that the implementation of a
demonstration project affects such employees.
The bill establishes a general time limitation of 5
years on the duration of any demonstration project
established under this section. However, if the
Commissioner and the Director of OPM concur, a
demonstration project may be extended for an
additional 2 years if necessary to validate the
results of the project. Not later than 6 months
prior to the termination of a project, the bill
requires the Commissioner to submit a legislative
proposal to the Congress if the Commissioner
determines that such project should be made
permanent.
EFFECTIVE DATE
The provision s shall take effect on the date of the
enactment of this Act.
TITLE II. ELECTRONIC FILING
A. ELECTRONIC FILING OF TAX
AND
INFORMATION RETURNS (sec. 201 of the bill and sec.
6011 of the Code)
PRESENT LAW
Treas. Reg. section 1.6012-5 provides that the
Commissioner may authorize, at the option of a
person required to make a return, the use of a
composite return in lieu of a paper return. An
electronically filed return is a composite return
consisting of electronically transmitted data and
certain paper documents that cannot be
electronically transmitted. Form 8453 is a paper
form that must be received by the
IRS
before any electronically filed return is complete.
Form 8453 provides signature information to the
IRS
.
The
IRS
conducted the first test of electronic filing in
1986, for a limited number of tax year 1985 returns.21
In 1990, the
IRS
permitted nationwide electronic filing of returns
that had refunds owing.22
In 1991, the
IRS
accepted electronically filed returns that had
balances due.23
In 1993, the
IRS
established an electronic filing goal of 80 million
tax returns by 2001. During the 1997 tax filing
season, the
IRS
received approximately 20 million individual tax
returns electronically.
REASONS FOR CHANGE
The Committee believes that the implementation of a
comprehensive strategy to encourage electronic
filing of tax and information returns holds
significant potential to benefit taxpayers and make
the
IRS
returns processing function more efficient. For
example, the error rate associated with processing
paper tax returns is approximately 20 percent, half
of which is attributable to the
IRS
and half to error in taxpayer data. Because
electronically-filed returns usually are prepared
using computer software programs with built-in
accuracy checks, undergo pre-screening by the
IRS
, and experience no key punch errors, electronic
returns have an error rate of less than one percent.
Thus, the Committee believes that an expansion of
electronic filing will significantly reduce errors
(and the resulting notices that are triggered by
such errors). In addition, taxpayers who file their
returns electronically receive confirmation from the
IRS
that their return was received.
EXPLANATION OF PROVISION
The bill states that the policy of Congress is to
promote paperless filing, with a long-range goal of
providing for the filing of at least 80 percent of
all tax returns in electronic form by the year 2007.
The bill requires the Secretary of the Treasury to
establish a strategic plan to eliminate barriers,
provide incentives, and use competitive market
forces to increase taxpayer use of electronic
filing. The strategic plan initially targets returns
prepared in electronic form but filed in paper form,
such as a return prepared by the taxpayer using
return preparation software, which the taxpayer then
printed and filed in paper form. The bill requires
all such returns to be filed electronically, to the
extent feasible, by the year 2002.
The bill requires the Secretary to create an
electronic commerce advisory group comprised of
representatives from the small business, tax
practitioner, preparer, and computerized tax
processor communities and other representatives from
the electronic filing industry. Under the bill, the
Chair of the
IRS
Oversight Board, together with the Secretary and the
Chair of the electronic commerce advisory group, are
required to report annually to the tax-writing
committees on the
IRS
's progress in implementing its plan to meet the
goal of 80 percent electronic filing by 2007.
To promote electronic filing, the bill authorizes
the Secretary to publicize the benefits of
electronic filing by using mass communications and
other means. In addition, the bill authorizes the
Secretary to implement procedures for paying
appropriate incentives for electronically filed
returns. This provision is not intended to override
section 1205 of the Taxpayer Relief Act of 1997,24
which prohibits the
IRS
from paying fees to credit card companies in
connection with receiving tax payments by credit
card.
EFFECTIVE DATE
The provision is effective on the date of enactment.
B. TIME FOR FILING CERTAIN INFORMATION RETURNS WITH
THE
IRS
(sec. 202 of the bill and sec. 6071 of the Code)
PRESENT LAW
Information such as the amount of dividends,
partnership distributions, and interest paid during
the tax year must be supplied to taxpayers by the
payors by January 31 of the year following the
calendar year for which the return must be filed.
The payors must file an information return with the
IRS
with the information by February 28 of the year
following the calendar year for which the return
must be filed. Under present law, the due date for
information returns is the same whether such returns
are filed on paper, on magnetic media, or
electronically. Most information returns are filed
on magnetic media (such as computer tapes) which
must be physically shipped to the
IRS
.
REASONS FOR CHANGE
The Committee believes that encouraging information
return filers to file electronically will
substantially increase the efficiency of the tax
system by avoiding the need to convert the
information from magnetic media or paper to
electronic form before return matching.
EXPLANATION OF PROVISION
The bill provides an incentive to filers of
information returns to use electronic filing by
extending the due date for filing such returns from
February 28 (under present law) to March 31 of the
year following the calendar year to which the return
relates. The bill does not change the requirement
that payors must supply taxpayers with the
applicable information by January 31. The Committee
anticipates that the
IRS
will cooperate with interested private sector filers
of information returns in facilitating to the
maximum extent feasible the utilization of
electronic filing for such forms.
EFFECTIVE DATE
The provision applies to information returns
required to be filed after December 31, 1999.
C. PAPERLESS ELECTRONIC FILING (sec. 203 of the bill
and sec. 6061 of the Code)
PRESENT LAW
Code section 6061 requires that tax forms be signed
as required by the Secretary. The
IRS
will not accept an electronically filed return
unless it has received a Form 8453 providing
signature information on the filer.
Generally, a return is considered timely filed when
it is received by the
IRS
on or before the due date of the return. If the
requirements of Code section 7502 are met, timely
mailing is treated as timely filing. If the return
if mailed by registered mail, the dated registration
statement is prima facie evidence of delivery. As an
electronically filed return is not mailed, section
7502 does not apply.
The
IRS
periodically publishes a list of the forms and
schedules that may be electronically transmitted, as
well as a list of forms, schedules, and other
information that cannot be electronically filed.
REASONS FOR CHANGE
Electronically filed returns cannot provide the
maximum efficiency for taxpayers and the
IRS
under current rules that require signature
information to be filed on paper. Also, taxpayers
need to know how the
IRS
will determine the filing date of a return filed
electronically. The Committee believes that more
types of returns could be filed electronically if
proper procedures were in place.
EXPLANATION OF PROVISION
The bill requires the Secretary to develop
procedures that would eliminate the need to file a
paper form relating to signature information. The
Secretary is required to develop procedures for the
acceptance of signatures in digital or other
electronic form. Until the procedures are in place,
the bill authorizes the Secretary to waive the
requirement of a signature or to provide for
alternative methods of subscribing all returns,
declarations, statements, or other documents. The
bill treats documents subscribed under such
alternative methods as signed for all purposes, both
civil and criminal, and provides a rebuttable
presumption that any such return, declaration,
statement or other document was actually submitted
and subscribed by the person on whose behalf it was
submitted. It is contemplated that the
IRS
will establish procedures for rebuttal of the
presumption.
The bill also provides rules for determining when
electronic returns are deemed filed, and for
authorization for return preparers to communicate
with the
IRS
on matters included on electronically filed returns.
The bill also requires that the Secretary establish
procedures, to the extent practicable, to receive
all tax forms electronically by December 31, 1998.
EFFECTIVE DATE
The provision is effective on the date of enactment.
D. RETURN-
FREE
TAX SYSTEM (sec. 204 of the bill)
PRESENT LAW
Under present law, taxpayers are required to
calculate their own tax liabilities and submit
returns showing their calculations.
REASONS FOR CHANGE
The Committee believes that it would benefit
taxpayers to be relieved, to the extent feasible,
from the burden of determining tax liability and
filing returns.
EXPLANATION OF PROVISION
The bill requires the Secretary or his delegate to
study the feasibility of and develop procedures for
the implementation of a return-free tax system for
taxable years beginning after 2007. The Secretary is
required annually to report to the tax-writing
committees on the progress of the development of
such system, including what additional resources the
IRS
would need to implement the system, the changes to
the Internal Revenue Code that would facilitate the
system, the procedures developed to date, and the
number and classes of taxpayers who would be
permitted to use such a system. The Secretary is
required to make the first report on the development
of the return-free filing system to the tax-writing
committees on June 30, 1999. It is contemplated that
the return-free filing system would initially be
targeted at taxpayers who had taxable income from
wages, interest, dividends, pensions, and
unemployment compensation; did not itemize
deductions; and did not take any tax credits other
than the earned income tax credit.25
EFFECTIVE DATE
The provision is effective on the date of enactment.
E. ACCESS TO ACCOUNT INFORMATION (sec. 205 of the
bill)
PRESENT LAW
Taxpayers who file their returns electronically
cannot review their accounts electronically.
REASONS FOR CHANGE
The Committee believes, to the extent feasible, that
taxpayers should have access to their account
information held by the
IRS
. If taxpayers file electronically, they should be
able to review the information electronically, to
the extent feasible.
EXPLANATION OF PROVISION
The bill requires the Secretary to develop
procedures under which a taxpayer filing returns
electronically could review the taxpayer's account
electronically not later than December 31, 2006, but
only if all necessary privacy safeguards are in
place by that date.
EFFECTIVE DATE
The provision is effective on the date of enactment.
TITLE
III
. TAXPAYER
BILL
OF RIGHTS 3
A. BURDEN OF PROOF (sec. 301 of the bill and new
sec. 7491 of the Code)
PRESENT LAW
Under present law, a rebuttable presumption exists
that the Commissioner's determination of tax
liability is correct.26
"This presumption in favor of the Commissioner
is a procedural device that requires the plaintiff
to go forward with prima facie evidence to support a
finding contrary to the Commissioner's
determination. Once this procedural burden is
satisfied, the taxpayer must still carry the
ultimate burden of proof or persuasion on the
merits. Thus, the plaintiff not only has the burden
of proof of establishing that the Commissioner's
determination was incorrect, but also of
establishing the merit of its claims by a
preponderance of the evidence".27
The general rebuttable presumption that the
Commissioner's determination of tax liability is
correct is a fundamental element of the structure of
the Internal Revenue Code. Although this presumption
is judicially based, rather than legislatively
based, there is considerable evidence that the
presumption has been repeatedly considered and
approved by the Congress. This is the case because
the Internal Revenue Code contains a number of civil
provisions that explicitly place the burden of proof
on the Commissioner in specifically designated
circumstances. The Congress would have enacted these
provisions only if it recognized and approved of the
general rule of presumptive correctness of the
Commissioner's determination. A list of these civil
provisions follows.
(1) Fraud. --Any proceeding involving the
issue of whether the taxpayer has been guilty of
fraud with intent to evade tax (secs. 7454(a) and
7422(e)).
(2) Required reasonable verification of
information returns. --In any court proceeding,
if a taxpayer asserts a reasonable dispute with
respect to any item of income reported on an
information returned filed with the Secretary by a
third party and the taxpayer has fully cooperated
with the Secretary (including providing, within a
reasonable period of time, access to and inspection
of all witnesses, information, and documents within
the control of the taxpayer as reasonably requested
by the Secretary), the Secretary has the burden of
producing reasonable and probative information
concerning such deficiency in addition to such
information return (sec. 6201(d)).
(3) Foundation managers. --Any proceeding
involving the issue of whether a foundation manager
has knowingly participated in prohibited
transactions (sec. 7454(b)).
(4) Transferee liability. --Any proceeding in
the Tax Court to show that a petitioner is liable as
a transferee of property of a taxpayer (sec.
6902(a)).
(5) Review of jeopardy levy or assessment
procedures. --Any proceeding to review the
reasonableness of a jeopardy levy or jeopardy
assessment (sec. 7429(g)(1)).
(6) Property transferred in connection with
performance of services. --In the case of
property subject to a restriction that by its terms
will never lapse and that allows the transferee to
sell only at a price determined under a formula, the
price is deemed to be fair market value unless
established to the contrary by the Secretary (sec.
83(d)(1)).
(7) Illegal bribes, kickbacks, and other
payments. --As to whether a payment constitutes
an illegal bribe, illegal kickback, or other illegal
payment (sec. 162(c)(1) and (2)).
(8) Golden parachute payments. --As to
whether a payment is a parachute payment on account
of a violation of any generally enforced securities
laws or regulations (sec. 280G(b)(2)(B)).
(9) Unreasonable accumulation of earnings and
profits. --In any Tax Court proceeding as to
whether earnings and profits have been permitted to
accumulate beyond the reasonable needs of the
business, provided that the Commissioner has not
fulfilled specified procedural requirements (sec.
534).
(10) Expatriation. --As to whether it is
reasonable to believe that an individual's loss of
citizenship would result in a substantial reduction
in the individual's income taxes or transfer taxes
(secs. 877(e), 2107(e), 2501(a)(4)).
(11) Public inspection of written determinations.
--In any proceeding seeking additional
disclosure of information (sec. 6110(f)(4)(A)).
(12) Penalties for promoting abusive tax
shelters, aiding and abetting the understatement of
tax liability, and filing a frivolous income return.
--As to whether the person is liable for the
penalty (sec. 6703(a)).
(13) Income tax return preparers' penalty. --As
to whether a preparer has willfully attempted to
understate tax liability (sec. 7427).
(14) Status as employees. --As to whether
individuals are employees for purposes of employment
taxes (pursuant to the safe harbor provisions of
section 530 of the Revenue Act of 1978).28
REASONS FOR CHANGE
The Committee is concerned that individual and small
business taxpayers frequently are at a disadvantage
when forced to litigate with the Internal Revenue
Service. The Committee believes that the present
burden of proof rules contribute to that
disadvantage. The Committee believes that, all other
things being equal, facts asserted by individual and
small business taxpayers who fully cooperate with
the
IRS
and satisfy all relevant substantiation requirements
should be accepted. The Committee believes that
shifting the burden of proof to the Secretary in
such circumstances will create a better balance
between the
IRS
and such taxpayers, without encouraging tax
avoidance.
EXPLANATION OF PROVISION
The bill provides that the Secretary shall have the
burden of proof in any court proceeding with respect
to a factual issue if the taxpayer asserts a
reasonable dispute with respect to any such issue
relevant to ascertaining the taxpayer's income tax
liability. Two conditions apply. First, the taxpayer
must fully cooperate at all times with the Secretary
(including providing, within a reasonable period of
time, access to and inspection of all witnesses,
information, and documents within the control of the
taxpayer, as reasonably requested by the Secretary).29
Full cooperation also includes providing reasonable
assistance to the Secretary in obtaining access to
and inspection of witnesses, information, or
documents not within the control of the taxpayer
(including any witnesses, information, or documents
located in foreign countries30
). A necessary element of fully cooperating with the
Secretary is that the taxpayer must exhaust his or
her administrative remedies (including any appeal
rights provided by the
IRS
). The taxpayer is not required to agree to extend
the statute of limitations to be considered to have
fully cooperated with the Secretary. Second, certain
taxpayers must meet the net worth limitations that
apply for awarding attorney's fees. In general,
corporations, trusts, and partnerships whose net
worth exceeds $7 million are not eligible for the
benefits of the provision. The taxpayer has the
burden of proving that it meets each of these
conditions, because they are necessary prerequisites
to establishing that the burden of proof is on the
Secretary.
The provision explicitly states that nothing in the
provision shall be construed to override any
requirement under the Code or regulations to
substantiate any item. Accordingly, taxpayers must
meet all applicable substantiation requirements,
whether generally imposed31
or imposed with respect to specific items, such as
charitable contributions32
or meals, entertainment, travel, and certain other
expenses.33
Substantiation requirements include any requirement
of the Code or regulations that the taxpayer
establish an item to the satisfaction of the
Secretary.34
Taxpayers who fail to substantiate any item in
accordance with the legal requirement of
substantiation will not have satisfied all of the
legal conditions that are prerequisite to claiming
the item on the taxpayer's tax return and will
accordingly be unable to avail themselves of this
provision regarding the burden of proof. Thus, if a
taxpayer required to substantiate an item fails to
do so in the manner required (or destroys the
substantiation), this burden of proof provision is
inapplicable.35
EFFECTIVE DATE
The provision applies to court proceedings arising
in connection with examinations commencing after the
date of enactment.
B. PROCEEDINGS BY TAXPAYERS
1. Expansion of Authority to Award Costs and Certain
Fees (sec. 311 of the bill and sec. 7430 of the
Code)
PRESENT LAW
Any person who substantially prevails in any action
by or against the United States in connection with
the determination, collection, or refund of any tax,
interest, or penalty may be awarded reasonable
administrative costs incurred before the
IRS
and reasonable litigation costs incurred in
connection with any court proceeding. In general,
only an individual whose net worth does not exceed
$2 million is eligible for an award, and only a
corporation or partnership whose net worth does not
exceed $7 million is eligible for an award.
Reasonable litigation costs include reasonable fees
paid or incurred for the services of attorneys,
except that the attorney's fees will not be
reimbursed at a rate in excess of $110 per hour
(indexed for inflation) unless the court determines
that a special factor, such as the limited
availability of qualified attorneys for the
proceeding, justifies a higher rate. Awards of
reasonable litigation costs and reasonable
administrative costs cannot exceed amounts paid or
incurred.
Once a taxpayer has substantially prevailed over the
IRS
in a tax dispute, the
IRS
has the burden of proof to establish that it was
substantially justified in maintaining its position
against the taxpayer. A rebuttable presumption
exists that provides that the position of the United
States is not considered to be substantially
justified if the
IRS
did not follow in the administrative proceeding (1)
its published regulations, revenue rulings, revenue
procedures, information releases, notices, or
announcements, or (2) a private letter ruling,
determination letter, or technical advice memorandum
issued to the taxpayer.
REASONS FOR CHANGE
The Committee believes that taxpayers should be
allowed to recover the reasonable administrative
costs they incur where the
IRS
takes a position against the taxpayer that is not
substantially justified, beginning at the time that
the
IRS
establishes its initial position by issuing a letter
of proposed deficiency which allows the taxpayer an
opportunity for administrative review in the
IRS
Office of Appeals. In determining what constitutes
reasonable costs, the Committee believes that either
the difficulty of issues or the limited local
availability of tax expertise may justify the
payment of higher hourly rates.
The Committee believes that the pro bono publicum
representation of taxpayers should be encouraged and
the value of the legal services rendered in these
situations should be recognized. Where the
IRS
takes positions that are not substantially
justified, it should not be relieved of its
obligation to bear reasonable administrative and
litigation costs because representation was provided
the taxpayer on a pro bono basis.
The Committee is concerned that the
IRS
may continue to litigate issues that have previously
been decided in favor of taxpayers in other
circuits. The Committee believes that this places an
undue burden on taxpayers that are required to
litigate such issues. Accordingly, the Committee
believes it is important that the court take into
account whether the
IRS
has lost in the courts of appeals of other circuits
on similar issues in determining whether the
IRS
has taken a position that is not substantially
justified and thus liable for reasonable
administrative and litigation costs.
EXPLANATION OF PROVISION
The bill: (1) provides that the difficulty of the
issues presented or the unavailability of local tax
expertise can be used to justify an award of
attorney's fees of more than the statutory limit of
$110 per hour; (2) moves the point in time after
which reasonable administrative costs can be awarded
to the date on which the first letter of proposed
deficiency which allows the taxpayer an opportunity
for administrative review in the
IRS
Office of Appeals is sent; (3) permits the award of
attorney's fees (in amounts up to the statutory
limit determined to be appropriate) to specified
persons who represent for no more than a nominal fee
a taxpayer who is a prevailing party; and (4)
provides that in determining whether the position of
the United States was substantially justified, the
court shall take into account whether the United
States has lost in courts of appeal for other
circuits on substantially similar issues. The court
may also take into account whether the
United States
has won in courts of appeal for other circuits on
substantially similar issues.
EFFECTIVE DATE
The provision applies to costs incurred and services
performed more than 180 days after the date of
enactment.
2. Civil Damages for Negligence in Collection
Actions (sec. 312 of the bill and sec. 7433 of the
Code)
PRESENT LAW
A taxpayer may sue the United States for up to $1
million of civil damages caused by an officer or
employee of the
IRS
who recklessly or intentionally disregards
provisions of the Internal Revenue Code or Treasury
regulations in connection with the collection of
Federal tax with respect to the taxpayer.
REASONS FOR CHANGE
The Committee believes that taxpayers should also be
able to recover economic damages they incur as a
result of the negligent disregard of the Code or
regulations by an officer or employee of the
IRS
in connection with a collection matter.
EXPLANATION OF PROVISION
The bill provides for up to $100,000 in civil
damages caused by an officer or employee of the
IRS
who negligently disregards provisions of the
Internal Revenue Code or Treasury regulations in
connection with the collection of Federal tax with
respect to the taxpayer. Inadvertent errors in
IRS
functions, such as in computer programming, do not
trigger the application of this provision. No person
is entitled to seek civil damages for negligent,
reckless, or intentional disregard of the Code or
regulations in a court of law unless he first
exhausts his administrative remedies.
EFFECTIVE
DATE
The provision is effective with respect to actions
of officers or employees of the IRS occurring after
the date of enactment.
3. Increase in Size of Cases Permitted on Small Case
Calendar (sec. 313 of the bill and sec. 7463 of the
Code)
PRESENT LAW
Taxpayers may choose to contest many tax disputes in
the Tax Court. Special small case procedures apply
to disputes involving $10,000 or less, if the
taxpayer chooses to utilize these procedures (and
the Tax Court concurs).
REASONS FOR CHANGE
The Committee believes that use of the small case
procedures should be expanded.
EXPLANATION OF PROVISION
The bill increases the cap for small case treatment
from $10,000 to $25,000.
EFFECTIVE DATE
The provision applies to proceedings commenced after
the date of enactment.
C. RELIEF FOR INNOCENT SPOUSES AND PERSONS WITH
DISABILITIES
1. Innocent Spouse Relief (sec. 321 of the bill and
new sec. 6015 of the Code)
PRESENT LAW
Spouses who file a joint tax return are each fully
responsible for the accuracy of the return and for
the full tax liability. This is true even though
only one spouse may have earned the wages or income
which is shown on the return. This is "joint
and several" liability. A spouse who wishes to
avoid joint liability may file as a "married
person filing separately."
Relief from liability for tax, interest and
penalties is available for "innocent
spouses" in certain limited circumstances. To
qualify for such relief, the innocent spouse must
establish: (1) that a joint return was made; (2)
that an understatement of tax, which exceeds the
greater of $500 or a specified percentage of the
innocent spouse's adjusted gross income for the
preadjustment (most recent) year, is attributable to
a grossly erroneous item36
of the other spouse; (3) that in signing the return,
the innocent spouse did not know, and had no reason
to know, that there was an understatement of tax;
and (4) that taking into account all the facts and
circumstances, it is inequitable to hold the
innocent spouse liable for the deficiency in tax.
The specified percentage of adjusted gross income is
10 percent if adjusted gross income is $20,000 or
less. Otherwise, the specified percentage is 25
percent.
It is unclear under present law whether a court may
grant partial innocent spouse relief. The Ninth
Circuit Court of Appeals in Wiksell v.
Commissioner's 37
has allowed partial innocent spouse relief where the
spouse did not know, and had no reason to know, the
magnitude of the understatement of tax, even though
the spouse knew that the return may have included
some understatement.
The proper forum for contesting a denial by the
Secretary of innocent spouse relief is determined by
whether an underpayment is asserted or the taxpayer
is seeking a refund of overpaid taxes. Accordingly,
the Tax Court may not have jurisdiction to review
all denials of innocent spouse relief.
No form is currently provided to assist taxpayers in
applying for innocent spouse relief.
REASONS FOR CHANGE
The Committee is concerned that the innocent spouse
provisions of present law are inadequate. The
Committee believes it is inappropriate to limit
innocent spouse relief only to the most egregious
cases where the understatement is large and the tax
position taken is grossly erroneous. The Committee
also believes that partial innocent spouse relief
should be considered in appropriate circumstances,
and that all taxpayers should have access to the Tax
Court in resolving disputes concerning their status
as an innocent spouse. Finally, the Committee
believes that taxpayers need to be better informed
of their right to apply for innocent spouse relief
in appropriate cases and that the IRS is the best
source of that information.
EXPLANATION OF PROVISION
The bill generally makes innocent spouse status
easier to obtain. The bill eliminates all of the
understatement thresholds and requires only that the
understatement of tax be attributable to an
erroneous (and not just a grossly erroneous) item of
the other spouse.
The bill provides that innocent spouse relief may be
provided on an apportioned basis. That is, the
spouse may be relieved of liability as an innocent
spouse to the extent the liability is attributable
to the portion of an understatement of tax which
such spouse did not know of and had no reason to
know of.
The bill specifically provides that the Tax Court
has jurisdiction to review any denial (or failure to
rule) by the Secretary regarding an application for
innocent spouse relief. The Tax Court may order
refunds as appropriate where it determines the
spouse qualifies for relief and an overpayment
exists as a result of the innocent spouse qualifying
for such relief. The taxpayer must file his or her
petition for review with the Tax Court during the
90-day period that begins on the earlier of (1) 6
months after the date the taxpayer filed his or her
claim for innocent spouse relief with the Secretary
or (2) the date a notice denying innocent spouse
relief was mailed by the Secretary. Except for
termination and jeopardy assessments (secs. 6851,
6861), the Secretary may not levy or proceed in
court to collect any tax from a taxpayer claiming
innocent spouse status with regard to such tax until
the expiration of the 90-day period in which such
taxpayer may petition the Tax Court or, if the Tax
Court considers such petition, before the decision
of the Tax Court has become final. The running of
the statute of limitations is suspended in such
situations with respect to the spouse claiming
innocent spouse status.
The bill also requires the Secretary of the Treasury
to develop a separate form with instructions for
taxpayers to use in applying for innocent spouse
relief within 180 days from the date of enactment.
An innocent spouse seeking relief under this
provision must claim innocent spouse status with
regard to any assessment not later than two years
after the date of such assessment.
EFFECTIVE DATE
The provision is effective for understatements with
respect to taxable years beginning after the date of
enactment.
2. Suspension of Statute of Limitations on Filing
Refund Claims During Periods of Disability (sec. 322
of the bill and sec. 6511 of the Code)
PRESENT LAW
In general, a taxpayer must file a refund claim
within three years of the filing of the return or
within two years of the payment of the tax,
whichever period expires later (if no return is
filed, the two-year limit applies) (sec. 6511(a)). A
refund claim that is not filed within these time
periods is rejected as untimely.
There is no explicit statutory rule providing for
equitable tolling of the statute of limitations.
Several courts have considered whether equitable
tolling implicitly exists. The First, Third, Fourth,
and Eleventh Circuits have rejected equitable
tolling with respect to tax refund claims. The Ninth
Circuit has permitted equitable tolling. However,
the U.S. Supreme Court has reversed the Ninth
Circuit in U.S. v. Brockamp, 38
holding that Congress did not intend the equitable
tolling doctrine to apply to the statutory
limitations of section 6511 on the filing of tax
refund claims.
REASONS FOR CHANGE
The Committee believes that, in cases of severe
disability, equitable tolling should be considered
in the application of the statutory limitations on
the filing of tax refund claims.
EXPLANATION OF PROVISION
The bill permits equitable tolling of the statute of
limitations for refund claims of an individual
taxpayer during any period of the individual's life
in which he or she is unable to manage his or her
financial affairs by reason of a medically
determinable physical or mental impairment that can
be expected to result in death or to last for a
continuous period of not less than 12 months. Proof
of the existence of the impairment must be furnished
in the form and manner required by the Secretary. It
is anticipated that, in applying the medically
determinable test, the Secretary will evaluate
whether a medical opinion that a physical or mental
impairment exists has been offered by a person
qualified to do so with respect to that particular
type of impairment. Tolling does not apply during
periods in which the taxpayer's spouse or another
person is authorized to act on the taxpayer's behalf
in financial matters.
EFFECTIVE DATE
The provision applies to periods of disability
before, on, or after the date of enactment but would
not apply to any claim for refund or credit which
(without regard to the provision) is barred by the
statute of limitations as of January 1, 1998.
D. PROVISIONS RELATING TO INTEREST
1. Elimination of Interest Differential on
Overlapping Periods of Interest on Income Tax
Overpayments and Underpayments (sec. 331 of the bill
and sec. 6621 of the Code)
PRESENT LAW
A taxpayer that underpays its taxes is required to
pay interest on the underpayment at a rate equal to
the Federal short term interest rate plus three
percentage points. A special "hot
interest" rate equal to the Federal short term
interest rate plus five percentage points applies in
the case of certain large corporate underpayments.
A taxpayer that overpays its taxes receives interest
on the overpayment at a rate equal to the Federal
short term interest rate plus two percentage points.
In the case of corporate overpayments in excess of
$10,000, this is reduced to the Federal short term
interest rate plus one-half of a percentage point.
If a taxpayer has an underpayment of tax from one
year and an overpayment of tax from a different year
that are outstanding at the same time, the IRS will
typically offset the overpayment against the
underpayment and apply the appropriate interest to
the resulting net underpayment or overpayment.
However, if either the underpayment or overpayment
have been satisfied, the IRS will not typically
offset the two amounts, but rather will assess or
credit interest on the full underpayment or
overpayment at the underpayment or overpayment rate.
This has the effect of assessing the underpayment at
the higher underpayment rate and crediting the
overpayment at the lower overpayment rate. This
results in the taxpayer being assessed a net
interest charge, even if the amounts of the
overpayment and underpayment are the same.
The Secretary has the authority to credit the amount
of any overpayment against any liability under the
Code.39
Congress has previously directed the Internal
Revenue Service to consider procedures for
"netting" overpayments and underpayments
and, to the extent a portion of tax due is satisfied
by a credit of an overpayment, not impose interest.40
REASONS FOR CHANGE
The Committee believes that taxpayers should be
charged interest only on the amount they actually
owe, taking into account overpayments and
underpayments from all open years. The Committee
does not believe that the different interest rates
provided for overpayments and underpayments were
ever intended to result in the charging of the
differential on periods of mutual indebtedness.
The Committee is also concerned that current
practices provide an incentive to taxpayers to delay
the payment of underpayments they do not contest, so
that the underpayments will be available to offset
any overpayments that are later determined. The
Committee believes that this is contrary to sound
tax administrative practice and that taxpayers
should not be disadvantaged solely because they
promptly pay their tax bills.
EXPLANATION OF PROVISION
The bill establishes a net interest rate of zero on
equivalent amounts of overpayment and underpayment
that exist for any period. Each overpayment and
underpayment is to be considered only once in
determining whether equivalent amounts of
overpayment and underpayment exist. The special
rules that increase the interest rate paid on large
corporate underpayments and decrease the interest
rate received on corporate underpayments in excess
of $10,000 do not prevent the application of the net
zero rate. The bill applies to income taxes and
self-employment taxes.
For example, following an examination of his 1998
return, a corporate taxpayer is determined to have
overpaid its 1998 taxes by $5,000. Previously, the
taxpayer established by an amended return that it
had underpaid its 1999 taxes by $7,000. The taxpayer
has paid the 1999 underpayment, plus interest
determined at the underpayment rate. The statute of
limitations has not run with respect to either 1998
or 1999. In determining the amount of the refund
owed the taxpayer with regard to the 1998
overpayment, the period for which the 1999
underpayment was outstanding must be taken into
account. For all periods in which the underpayment
and overpayment run concurrently (i.e., from the due
date of the 1999 return until the underpayment was
paid), the interest rate on the $5,000 overpayment
and $5,000 of the underpayment must be the same so
that the net interest rate of zero applies.41
The interest rate on the remaining $2,000 of the
underpayment that was originally calculated at the
short term Federal rate plus three percent would not
be affected.
EFFECTIVE DATE
The provision applies to interest for calendar
quarters beginning after the date of enactment.
Until such time as procedures are implemented that
allow for the automatic application of this
provision by the IRS, the Committee expects that the
Secretary will promptly and carefully consider any
taxpayer's request to have interest charges
recalculated in accordance with this provision. It
is expected that the Secretary will extend the
statute of limitations where necessary to allow for
the consideration of such requests.
In light of past Congressional statements urging the
Secretary to eliminate interest rate differentials
in these circumstances, and taking into
consideration Congress' belief that the Secretary
may do so, the Committee continues to expect that
the Secretary will implement the most comprehensive
crediting procedures that are consistent with sound
administrative practice, and not only those affected
by this provision.
2. Increase in Overpayment Rate Payable to Taxpayers
Other than Corporations (sec. 332 of the bill and
sec. 6621 of the Code)
PRESENT LAW
A taxpayer that underpays its taxes is required to
pay interest on the underpayment at a rate equal to
the Federal short-term interest rate (AFR) plus
three percentage points. A taxpayer that overpays
its taxes receives interest on the overpayment at a
rate equal to the Federal short-term interest rate
(AFR) plus two percentage points.
REASONS FOR CHANGE
The Committee believes that the interest
differential for noncorporate taxpayers should be
eliminated.
EXPLANATION OF PROVISION
The bill provides that the overpayment interest rate
will be AFR plus three percentage points, except
that for corporations, the rate will remain at AFR
plus two percentage points.
EFFECTIVE DATE
The provision applies to interest for calendar
quarters beginning after the date of enactment.
E. PROTECTIONS FOR TAXPAYERS SUBJECT TO AUDIT OR
COLLECTION
1. Privilege of Confidentiality Extended to
Taxpayer's Dealings with Non-attorneys Authorized to
Practice Before IRS (sec. 341 of the bill and sec.
7602 of the Code)
PRESENT LAW
A common law privilege of confidentiality exists for
communications between an attorney and client with
respect to the legal advice the attorney gives the
client. Communications protected by the
attorney-client privilege must be based on facts of
which the attorney is informed by the taxpayer,
without the presence of strangers, for the purpose
of securing the advice of the attorney. The
privilege may not be claimed where the purpose of
the communication is the commission of a crime or
tort. The taxpayer must be, or be seeking to become,
a client of the attorney.
The privilege of confidentiality applies only where
the attorney is advising the client on legal
matters. It does not apply in situations where the
attorney is acting in other capacities. Thus, a
taxpayer may not claim the benefits of the
attorney-client privilege simply by hiring an
attorney to perform some other function. For
example, if an attorney is retained to prepare a tax
return, the attorney-client privilege will not
automatically apply to communications and documents
generated in the course of preparing the return. The
privilege of confidentiality also does not apply
where an attorney that is licensed to practice
another profession is performing such other
profession. For example, if a taxpayer retains an
attorney who is also licensed as a certified public
accountant (CPA), the taxpayer may not assert the
attorney-client privilege with regard to
communications made and documents prepared by the
attorney in his role as a CPA.
The attorney-client privilege is limited to
communications between taxpayers and attorneys. No
equivalent privilege is provided for communications
between taxpayers and other professionals authorized
to practice before the Internal Revenue Service,
such as accountants or enrolled agents.
REASONS FOR CHANGE
The Committee believes that a right to privileged
communications between a taxpayer and his or her
advisor should be available in noncriminal
proceedings before the Internal Revenue Service, so
long as the advisor is authorized to practice before
the Internal Revenue Service. A right to privileged
communications in such situations should not depend
upon whether the advisor is also licensed to
practice law. The Committee believes that it is
appropriate to provide for this right within the
Committee's jurisdiction, by applying it to
noncriminal proceedings before the IRS.
EXPLANATION OF PROVISION
The bill extends the present law attorney-client
privilege of confidentiality to tax advice that is
furnished by any individual who is authorized to
practice before the Internal Revenue Service, acting
in a manner consistent with State law for such
individual's profession, to a client-taxpayer (or
potential client-taxpayer) in any noncriminal
proceeding before the Internal Revenue Service.
The provision will allow taxpayers to consult with
other qualified tax advisors in the same manner they
currently may consult with tax advisors that are
licensed to practice law. The provision does not
modify the attorney-client privilege. Accordingly,
except for criminal proceedings, the privilege of
confidentiality under this provision applies in the
same manner and with the same limitations as the
attorney-client privilege of present law. The
provision does not extend the privilege of
confidentiality to communications that would not be
eligible for the privilege if prepared by an
attorney.
The provision applies to individuals authorized to
practice before the Internal Revenue Service,
regardless of the method pursuant to which they are
so authorized. Some, such as accountants, are
authorized to practice by fulfilling State licensing
requirements. Others, such as enrolled agents and
enrolled actuaries, are authorized to practice by
passing a Treasury Department examination.
EFFECTIVE DATE
The provision is effective on the date of enactment.
2. Expansion of Authority to Issue Taxpayer
Assistance Orders (sec. 342 of the bill and sec.
7811 of the Code)
PRESENT LAW
Taxpayers can request that the Taxpayer Advocate in
the Internal Revenue Service ("IRS") issue
a taxpayer assistance order ("TAO") if
they are suffering or about to suffer a significant
hardship as a result of the manner in which the
internal revenue laws are being administered (sec.
7811). A TAO may require the IRS to release property
of the taxpayer that has been levied upon, or to
cease any action, take any action as permitted by
law, or refrain from taking any action with respect
to the taxpayer.
REASONS FOR CHANGE
The Committee believes that certain factors should
generally be considered by the Taxpayer Advocate in
determining whether a taxpayer assistance order
should be issued.
EXPLANATION OF PROVISION
The bill provides that in determining whether to
issue a TAO, the Taxpayer Advocate shall consider,
among others, the following four factors: (1)
whether there is an immediate threat of adverse
action; (2) whether there has been an unreasonable
delay in resolving the taxpayer's account problems;
(3) whether the taxpayer will have to pay
significant costs (including fees for professional
representation) if relief is not granted; and (4)
whether the taxpayer will suffer irreparable injury,
or a long-term adverse impact, if relief is not
granted. In addition, in cases where an IRS employee
to whom the order would be issued is not following
applicable published administrative guidance,
including the Internal Revenue Manual
("IRM"), the Taxpayer Advocate shall
construe the factors taken into account in
determining whether to issue a TAO in the manner
most favorable to the taxpayer.
EFFECTIVE DATE
The provision is effective on the date of enactment.
3. Limitation on Financial Status Audit Techniques
(sec. 343 of the bill and sec. 7602 of the Code)
PRESENT LAW
The IRS examines Federal tax returns to determine
the correct liability of taxpayers. The IRS selects
returns to be audited in a number of ways, such as
through a computerized classification system (the
discriminant function ("DIF") system).
REASONS FOR CHANGE
The Committee believes that financial status audit
techniques are intrusive, and that their use should
be limited to situations where the IRS already has
indications of unreported income.
EXPLANATION OF PROVISION
The bill prohibits IRS from using financial status
or economic reality examination techniques to
determine the existence of unreported income of any
taxpayer unless the IRS has a reasonable indication
that there is a likelihood of unreported income.
EFFECTIVE DATE
The provision is effective on the date of enactment.
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