RRA 1998 House Ways Report p3

Articles by Alvin Brown
Tax Preparation
Offer In Compromise
State Offers in Compromise
Levy
IRS Tax Liens
IRS Tax Liens - continued
IRS Tax Liens - continued 2
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Audit Techniques Guide
Congressional Contacts
Criminal Investigation
D.O.J Criminal Tax Manual
Tax Litigation
Penalty
Installment Agreements
Statute of Limitations
Frivolous Tax Argument
Interest Abatement
IRS Misconduct
IRS Abuses
Tax Fraud
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Bankruptcy
Tax Reform Legislation
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Legislation
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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, 1997 ¹ 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. 2676 ² 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, and ¹¹ (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.