RRA 1998 House Ways Report p4

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
Levy - continued
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
Fraud Statutes
Bankruptcy
Tax Reform Legislation
Tax Shelters
Tax Court
Trust Fund Penalty
Legislation
Innocent Spouse Relief
Important Links

IRS Restructuring and Reform Act of 1998

House ways & Means Committee Report page4

4. Limitation on Authority to Require Production of Computer Source Code (sec. 344 of the bill and sec. 7602 of the Code)

PRESENT LAW

The Secretary of the Treasury is authorized to examine any books, papers, records, or other data that may be relevant or material to an inquiry into the correctness of any Federal tax return. The Secretary may issue and serve summonses necessary to obtain such data, including summonses on certain third-party record keepers. There are no specific statutory restrictions on the ability of the Secretary to demand the production of computer records, programs, code or similar materials.

REASONS FOR CHANGE

The Committee believes that the intellectual property rights of the developers and owners of computer programs should be respected and is concerned that the examination of third-party tax-related computer source code by the IRS could lead to the diminution of those rights through the inadvertent disclosure of trade secrets. The Committee also believes that the indiscriminate examination of computer source code by the IRS to identify issues on a taxpayer's return would be inappropriate. Accordingly, the Committee believes that a summons for the production of third-party tax-related computer source code should only be issued where the IRS has not otherwise been able to ascertain through reasonable efforts the manner in which a taxpayer has arrived at the entry on a return and has identified with specificity the portion of the computer source code it seeks to examine.

EXPLANATION OF PROVISION

The Secretary is generally prohibited from issuing (or beginning an action to enforce) a summons in a civil action for any portion of any third-party tax-related computer source code unless (1) the Secretary is unable to otherwise reasonably ascertain the correctness of an item on a return from the taxpayer's other books, papers, records, other data, or the computer software program and associated data itself and (2) the Secretary first identifies with reasonable specificity the portion of the computer source code to be used to verify the correctness of the item.

The Secretary would be considered to have satisfied these requirements with regard to the identified portion of the source code if the Secretary makes a formal request for such materials to both the taxpayer and the owner or developer of the software that is not satisfied within 90 days. Such formal request must clearly state that one of the consequences of failure to respond to the request will be the waiver of any prohibition on the summons of tax-related computer source code that might otherwise apply.

The Secretary's determination that the identified portion of the third-party tax-related computer source code may be summoned may be contested in any proceeding to enforce the summons, by any person to whom the summons is addressed. For this purpose, the special procedures for third-party summonses ⁴² will apply. In any such proceeding, the court may issue any order that is necessary to prevent the disclosure of trade secrets or other confidential information.

For these purposes, tax-related computer source code includes the human readable instructions for any computer software program that is used for accounting, tax return preparation, tax compliance or tax planning, along with the design and development materials related to such software program, including any relevant program notes and memoranda.

The prohibition on issuing summons for tax-related computer source code does not apply in connection with any inquiry into any offense connected with the administration or enforcement of the internal revenue laws. A computer software program will not be treated as tax advice for the purpose of the professional-client privilege contained in section 341 of this bill.

The prohibition applies only in the case of tax-related computer software that is intended for commercial distribution. Source code related to computer software that was developed by, or primarily for the benefit of, the taxpayer or a related person (within the meaning of section 267 or 707(b)) for the internal use of the taxpayer or such related person may continue to be summonsed by the Secretary to the extent allowed under present law.

EFFECTIVE DATE

The provision is effective for summonses issued more than 90 days after the date of enactment. It is expected that the Secretary will not use the 90 day period between the date of enactment and the effective date in a manner that would circumvent the intent of the provision.

5. Procedures Relating to Extensions of Statute of Limitations by Agreement (sec. 345 of the bill and sec. 6501 of the Code)

PRESENT LAW

The statute of limitations within which the IRS may assess additional taxes is generally three years from the date a return is filed (sec. 6501).⁴³ Prior to the expiration of the statute of limitations, both the taxpayer and the IRS may agree in writing to extend the statute, using Form 872 or 872-A. An extension may be for either a specified period or an indefinite period. The statute of limitations within which a tax may be collected after assessment is 10 years after assessment (sec. 6502). Prior to the expiration of the statute of limitations, both the taxpayer and the IRS may agree in writing to extend the statute, using Form 900.

REASONS FOR CHANGE

The Committee believes that taxpayers should be fully informed of their rights with respect to the statute of limitations.

EXPLANATION OF PROVISION

The bill requires that, on each occasion on which the taxpayer is requested by the IRS to extend the statute of limitations, the IRS must notify the taxpayer of the taxpayer's right to refuse to extend the statute of limitations or to limit the extension to particular issues.

EFFECTIVE DATE

The provision applies to requests to extend the statute of limitations made after the date of enactment.

6. Offers-in-Compromise (sec. 346 of the bill and sec. 7122 of the Code)

PRESENT LAW

Section 7122 of the Code permits the IRS to compromise a taxpayer's tax liability. In general, this occurs when a taxpayer submits an offer-in-compromise to the IRS. An offer-in-compromise is a proposal to settle unpaid tax accounts for less than the full amount of the assessed balance due. An offer-in-compromise may be submitted for all types of taxes, as well as interest and penalties, arising under the Internal Revenue Code.

Taxpayers submit an offer-in-compromise on Form 656. There are two bases on which an offer can be made. The first is doubt as to the liability for the amount owed. The second is doubt as to the taxpayer's ability fully to pay the amount owed. An application can be made on either or both of these grounds. Taxpayers are required to submit background information to the IRS substantiating their application. If they are applying on the basis of doubt as to the taxpayer's ability fully to pay the amount owed, the taxpayer must complete a financial disclosure form enumerating assets and liabilities.

As part of an offer-in-compromise made on the basis of doubt as to ability fully to pay, taxpayers must agree to comply with all provisions of the Internal Revenue Code relating to filing returns and paying taxes for five years from the date the IRS accepts the offer. Failure to observe this requirement permits the IRS to begin immediate collection actions for the original amount of the liability.

REASONS FOR CHANGE

The Committee believes that taxpayers should be fully informed of the offer-in-compromise procedures, including the responsibilities created by those procedures. In determining whether there is doubt as to the taxpayer's ability fully to pay the amount owed, the Committee believes that the Secretary should take into consideration a taxpayer's need to provide for the basic living expenses of his or her family, based on the cost of living in the taxpayer's locality.

EXPLANATION OF PROVISION

The bill requires the IRS to develop and publish schedules of national and local allowances designed to provide taxpayers entering into an offer-in-compromise with adequate means to provide for basic living expenses. The bill also provides that, in the case of a compromise agreement that is terminated due to the actions of one spouse or former spouse, the spouse or former spouse remaining in compliance with the agreement may obtain reinstatement of such agreement on application. All payments required under the offer-in-compromise must be current for either spouse or former spouse to be in compliance with the agreement. Finally, the bill requires the IRS to prepare a publication or statement providing guidance to taxpayers on the rights and obligations of taxpayers and the IRS relating to offers in compromise. This statement will include materials explaining to married taxpayers their responsibilities should their marital status change and instructions for applying to have an offer-in-compromise reinstated under the circumstances discussed above. It is expected that this publication or statement will be provided to taxpayers considering an offer in compromise at appropriate times.

EFFECTIVE DATE

The provision is effective on the date of enactment. It is expected that the materials required by this provision will be published as soon as practicable, but no later than 180 days after the date of enactment. It is expected that offers-in-compromise based on this provision will be available as of the date of enactment.

7. Notice of Deficiency to Specify Deadlines for Filing Tax Court Petition (sec. 347 of the bill and sec. 6213 of the Code)

PRESENT LAW

Taxpayers must file a petition with the Tax Court within 90 days after the deficiency notice is mailed (150 days if the person is outside the United States) (sec. 6213). If the petition is not filed within that time period, the Tax Court does not have jurisdiction to consider the petition.

REASONS FOR CHANGE

The Committee believes that taxpayers should receive assistance in determining the time period within which they must file a petition in the Tax Court and that taxpayers should be able to rely on the computation of that period by the IRS.

EXPLANATION OF PROVISION

The bill requires that the IRS include on each deficiency notice the date determined by the IRS as the last day on which the taxpayer may file a petition with the Tax Court. It is expected that the last day on which a taxpayer who is outside the United States may file a petition with the Tax Court will be shown as an alternative. The bill provides that a petition filed with the Tax Court by this date shall be treated as timely filed.

EFFECTIVE DATE

The provision would apply to notices mailed after December 31, 1998.

8. Refund or Credit of Overpayments Before Final Determination (sec. 348 of the bill and sec. 6213 of the Code)

PRESENT LAW

A taxpayer may petition the Tax Court for a redetermination of a deficiency within 90 days (150 days if the notice is addressed to a person outside the United States) from the date the notice of deficiency is mailed by the IRS. Generally, the Secretary may not make any assessment or commence any levy or other proceeding to collect the deficiency during such period or, if the taxpayer petitions the Tax Court, until the decision of the Tax Court has become final. The making of any such assessment, or the commencing of any proceeding or levy, during the prohibited period may be enjoined by a proceeding in the proper court (including the Tax Court). However, no authority is provided for ordering the refund of any amount collected within the prohibited period.

If a taxpayer contests a deficiency in the Tax Court, no credit or refund of income tax for the contested taxable year generally may be made, except in accordance with a decision of the Tax Court that has become final. Where the Tax Court determines that an overpayment has been made and a refund is due the taxpayer, and a party appeals a portion of the decision of the Tax Court, no provision exists for the refund of any portion of any overpayment that is not contested in the appeal.

REASONS FOR CHANGE

The Committee believes that the Secretary should be allowed to refund the uncontested portion of an overpayment of taxes, without regard to whether other portions of the overpayment are contested.

EXPLANATION OF PROVISION

The bill provides that where a timely petition in respect of a deficiency is filed in the Tax Court, the proper court (including the Tax Court) may order a refund of any amount that was collected within the period during which the Secretary is prohibited from collecting the deficiency by levy or other proceeding.

The bill also allows the refund of that portion of any overpayment determined by the Tax Court to the extent the overpayment is not contested on appeal.

EFFECTIVE DATE

The provision applies on the date of enactment.

9. Threat of Audit Prohibited to Coerce Tip Reporting Alternative Commitment Agreements (sec. 349 of the bill)

PRESENT LAW

Restaurants may enter into Tip Reporting Alternative Commitment (TRAC) agreements. A restaurant entering into a TRAC agreement is obligated to educate its employees on their tip reporting obligations, to institute formal tip reporting procedures, to fulfill all filing and record keeping requirements, and to pay and deposit taxes. In return, the IRS agrees to base the restaurant's liability for employment taxes solely on reported tips and any unreported tips discovered during an IRS audit of an employee.

REASONS FOR CHANGE

The Committee believes that it is inappropriate for the Secretary to use the threat of an Internal Revenue Service audit to induce participation in voluntary programs.

EXPLANATION OF PROVISION

The bill requires the IRS to instruct its employees that they may not threaten to audit any taxpayer in an attempt to coerce the taxpayer to enter into a TRAC agreement.

EFFECTIVE DATE

The provision is effective on the date of enactment.

F. DISCLOSURES TO TAXPAYERS

1. Explanation of Joint and Several Liability (sec. 351 of the bill)

PRESENT LAW

In general, spouses who file a joint tax return are each fully responsible for the accuracy of the tax return and for the full 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. Spouses who wish to avoid joint and several liability may file as a married person filing separately. Special rules apply in the case of innocent spouses pursuant to section 6013(e).

REASONS FOR CHANGE

The Committee believes that married taxpayers need to clearly understand the legal implications of signing a joint return and that it is appropriate for the IRS to provide the information necessary for that understanding.

EXPLANATION OF PROVISION

The bill requires that, no later than 180 days after the date of enactment, the IRS must establish procedures clearly to alert married taxpayers of their joint and several liability on all appropriate tax publications and instructions. It is anticipated that the IRS will make an appropriate cross-reference to these statements near the signature line on appropriate tax forms.

EFFECTIVE DATE

The bill requires that the procedures be established as soon as practicable, but no later than 180 days after the date of enactment.

2. Explanation of Taxpayers' Rights in Interviews With the IRS (sec. 352 of the bill)

PRESENT LAW

Prior to or at initial in-person audit interviews, the IRS must explain to taxpayers the audit process and taxpayers' rights under that process (sec. 7521). In addition, prior to or at initial in-person collection interviews, the IRS must explain the collection process and taxpayers' rights under that process. If a taxpayer clearly states during an interview with the IRS that the taxpayer wishes to consult with the taxpayers' representative, the interview must be suspended to afford the taxpayer a reasonable opportunity to consult with the representative.

REASONS FOR CHANGE

The Committee believes that taxpayers should be more fully informed of their rights to representation in dealings with the IRS and that those rights should be respected.

EXPLANATION OF PROVISION

The bill requires that the IRS rewrite Publication 1 ("Your Rights as a Taxpayer") to more clearly inform taxpayers of their rights (1) to be represented by a representative and (2) if the taxpayer is so represented, that the interview may not proceed without the presence of the representative unless the taxpayer consents.

EFFECTIVE DATE

The addition to Publication 1 must be made not later than 180 days after the date of enactment.

3. Disclosure of Criteria for Examination Selection (sec. 353 of the bill)

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 it is important that taxpayers understand the reasons they may be selected for examination.

EXPLANATION OF PROVISION

The bill requires that IRS add to Publication 1 ("Your Rights as a Taxpayer") a statement which sets forth in simple and nontechnical terms the criteria and procedures for selecting taxpayers for examination. The statement must not include any information the disclosure of which would be detrimental to law enforcement. The statement must specify the general procedures used by the IRS, including whether taxpayers are selected for examination on the basis of information in the media or from informants. Drafts of the statement or proposed revisions to the statement are required to be submitted to the House Committee on Ways and Means, the Senate Committee on Finance, and the Joint Committee on Taxation.

EFFECTIVE DATE

The addition to Publication 1 must be made not later than 180 days after the date of enactment.

4. Explanations of Appeals and Collection Process (sec. 354 of the bill)

PRESENT LAW

There is no statutory requirement that specific notices be given to taxpayers along with the first letter of proposed deficiency that allows the taxpayer an opportunity for administrative review in the IRS Office of Appeals.

REASONS FOR CHANGE

The Committee believes it is important that taxpayers understand they have a right to have any assessment reviewed by the IRS Office of Appeals, as well as be informed of the steps they must take to obtain that review.

EXPLANATION OF PROVISION

The bill requires that, no later than 180 days after the date of enactment, an explanation of the appeals process and the collection process be provided with the first letter of proposed deficiency that allows the taxpayer an opportunity for administrative review in the IRS Office of Appeals.

EFFECTIVE DATE

The bill requires that the explanation be included as soon as practicable, but no later than 180 days after the date of enactment.

G. LOW-INCOME TAXPAYER CLINICS (sec. 361 of the bill and new sec. 7525 of the Code)

PRESENT LAW

There are no provisions in present law providing for assistance to clinics that assist low-income taxpayers.

REASONS FOR CHANGE

The Committee believes that the provision of tax services by accredited nominal fee clinics to low-income individuals and those for whom English is a second language will improve compliance with the Federal tax laws and should be encouraged.

EXPLANATION OF PROVISION

The Secretary shall make matching grants for the development, expansion, or continuation of certain low-income taxpayer clinics. Eligible clinics are those that charge no more than a nominal fee to either represent low-income taxpayers in controversies with the IRS or provide tax information to individuals for whom English is a second language. The term "clinic" includes (1) a clinical program at an accredited law school in which students represent low-income taxpayers, and (2) an organization exempt from tax under Code section 501(c) which either represents low-income taxpayers or provides referral to qualified representatives.

A clinic is treated as representing low-income taxpayers if at least 90 percent of the taxpayers represented by the clinic have incomes which do not exceed 250 percent of the poverty level and amounts in controversy of $25,000 or less.

The aggregate amount of grants to be awarded each year is limited to $3,000,000. No taxpayer clinic could receive more than $100,000 per year. The clinic must provide matching funds on a dollar-for-dollar basis. Matching funds may include the allocable portion of both the salary (including fringe benefits) of individuals performing services for the clinic and clinic equipment costs, but not general institutional overhead.

The following criteria are to be considered in making awards: (1) number of taxpayers served by the clinic, including the number of taxpayers in the geographical area for whom English is a second language; (2) the existence of other taxpayer clinics serving the same population; (3) the quality of the program; and (4) alternative funding sources available to the clinic.

EFFECTIVE DATE

The provision is effective on the date of enactment.

H. OTHER TAXPAYER RIGHTS PROVISIONS

1. Actions for Refund with respect to Certain Estates which have Elected the Installment Method of Payment (sec. 371 of the bill and sec. 7422 of the Code)

PRESENT LAW

In general, the U.S. Court of Federal Claims and the U.S. district courts have jurisdiction over suits for the refund of taxes, as long as full payment of the assessed tax liability has been made. Flora v. United States, 357 U.S. 63 (1958), affd on reh'g, 362 U.S. 145 (1960). Under Code section 6166, if certain conditions are met, the executor of a decedent's estate may elect to pay the estate tax attributable to certain closely-held businesses over a 14-year period. Courts have held that U.S. district courts and the U.S. Court of Federal Claims do not have jurisdiction over claims for refunds by taxpayers deferring estate tax payments pursuant to section 6166 unless the entire estate tax liability has been paid (i.e., timely payment of the installments due prior to the bringing of an action is not sufficient to invoke jurisdiction). See, e.g., Rocovich v. United States, 933 F.2d 991 (Fed. Cir. 1991), Abruzzo v. United States , 24 Ct. Cl. 668 (1991).

REASONS FOR CHANGE

The Committee believes that the refund jurisdiction of the U.S. Court of Federal Claims and the U.S. district courts should apply without regard to whether the taxpayer has elected, and the Secretary accepted, the payment of that tax in installments.

EXPLANATION OF PROVISION

The bill grants the U.S. Court of Federal Claims and the U.S. district courts jurisdiction to determine the correct amount of estate tax liability (or for any refund) in actions brought by taxpayers deferring estate tax payments under section 6166, as long as certain conditions are met. In order to qualify for the provision, the estate must have made an election pursuant to section 6166, fully paid each installment of principal and/or interest due before the date the suit is filed (as long as one or more installments are not yet due), and no portion of the payments due may have been accelerated. The bill further provides that once a final judgment has been entered by a district court or the U.S. Court of Federal Claims, the IRS would not be permitted to collect any amount disallowed by the court, and any amounts paid by the taxpayer in excess of the amount the court finds to be currently due and payable would be refunded to the taxpayer. Lastly, the bill provides that the 2-year statute of limitations for filing a refund action would be suspended during the pendency of any action brought by a taxpayer pursuant to section 7479 for a declaratory judgment as to an estate's eligibility for section 6166.

EFFECTIVE DATE

The provision is effective for claims for refunds filed after the date of enactment.

2. Cataloging Complaints (sec. 372 of the bill)

PRESENT LAW

The IRS is required to make an annual report to the Congress, beginning in 1997, on all categories of instances involving allegations of misconduct by IRS employees, arising either from internally identified cases or from taxpayer or third-party initiated complaints.⁴⁴ The report must identify the nature of the misconduct or complaint, the number of instances received by category, and the disposition of the complaints.

REASONS FOR CHANGE

The Committee believes that all allegations of misconduct by IRS employees must be carefully investigated. The Committee also believes that the annual report to Congress will help develop a public perception that the IRS takes such allegations of misconduct seriously. The Committee is concerned that, in the absence of records detailing taxpayer complaints of misconduct on an individual employee basis, the IRS will not be able to adequately investigate such allegations or properly prepare the required report.

EXPLANATION OF PROVISION

The bill requires that, in collecting data for this report, records of taxpayer complaints of misconduct by IRS employees shall be maintained on an individual employee basis. These individual records are not to be listed in the report, but they will be useful in preparing the report. The Committee intends that these records be used in evaluating individual employees.

EFFECTIVE DATE

The requirement is effective on the date of enactment.

3. Archive of Records of the IRS (sec. 373 of the bill and sec. 6103 of the Code)

PRESENT LAW

The IRS is obligated to transfer agency records to the National Archives and Records Administration (" NARA ") for retention or disposal. The IRS is also obligated to protect confidential taxpayer records from disclosure. These two obligations have created conflict between NARA and the IRS. Under present law, the IRS determines whether records contain taxpayer information. Once the IRS has made that determination, NARA is not permitted to examine those records. NARA has expressed concern that the IRS may be using the disclosure prohibition to improperly conceal agency records with historical significance.

IRS obligation to archive records

The IRS, like all other Federal agencies, must create, maintain, and preserve agency records in accordance with section 3101 of title 44 of the United States Code. NARA is the Government agency responsible for overseeing the management of the records of the Federal government.⁴⁵ Federal agencies are required to deposit significant and historical records with NARA.⁴⁶ The head of each Federal agency must also establish safeguards against the removal or loss of records.⁴⁷

Authority of NARA

NARA is authorized, under the Federal Records Act, to establish standards for the selective retention of records of continuing value.⁴⁸ NARA has the statutory authority to inspect records management practices of Federal agencies and to make recommendations for improvement.⁴⁹ The head of each Federal agency must submit to NARA a list of records to be destroyed and a schedule for such destruction.⁵⁰ NARA examines the list to determine if any of the records on the list have sufficient administrative, legal research, or other value to warrant their continued preservation. In many cases, the description of the record on the list is sufficient for NARA to make the determination. For example, NARA does not need to inspect Presidential tax returns to determine that they have historical value and should be retained. In some cases, NARA may find it helpful to examine a particular record. NARA has general authority to inspect records solely for the purpose of making recommendations for the improvement of records management practices.⁵¹ However, tax returns and return information can only be disclosed under the authority provided in section 6103 of the Internal Revenue Code. There is no exception to the disclosure prohibition for records management inspection by NARA.⁵²

In connection with its evaluation of the records management system of the IRS, NARA noted several instances where the disclosure prohibitions of Code section 6103 complicated their review of many IRS records.

NARA is also responsible for the custody, use and withdrawal of records transferred to it.⁵³ Statutory provisions that restrict public access to the records in the hands of the agency from which the records were transferred also apply to NARA . Thus, if a confidential record, such as a Presidential tax return, is transferred to NARA for archival storage, NARA is not permitted to disclose it. In general, the application of such restrictions to records in the hands of NARA expire after the records have been in existence for 30 years.⁵⁴ The issue of whether the specific disclosure prohibition of section 6103 takes precedence over the general 30-year expiration of restrictions generally applicable to records in the hands of NARA has not been addressed by a court, but an informal advisory opinion from the Office of Legal Counsel of the Attorney General concluded that the 30-year expiration provision would not reach records subject to section 6103.⁵⁵

Confidentiality requirements

The IRS must preserve the confidentiality of taxpayer information contained in Federal income tax returns. Such information may not be disclosed except as authorized under Code section 6103. Section 6103 was substantially revised in 1976 to address Congress' concern that tax information was being used by Federal agencies in pursuit of objectives unrelated to administration and enforcement of the tax laws. Congress believed that the widespread use of tax information by agencies other than the IRS could adversely affect the willingness of taxpayers to comply voluntarily with the tax laws and could undermine the country's self-assessment tax system.⁵⁶ Section 6103 does not authorize the disclosure of confidential return information to NARA .

Section 6103 restricts the disclosure of returns and return information only. Return means any tax or information return, declaration of estimated tax, or claim for refund, including schedules and attachments thereto, filed with the IRS. Return information includes the taxpayer's name; nature and source or amount of income; and whether the taxpayer's return is under investigation. Section 6103(b)(2) provides that "nothing in any other provision of law shall be construed to require the disclosure of standards used or to be used for the selection of returns for examination, or data used or to be used for determining such standards, if the Secretary determines that such disclosure will seriously impair assessment, collection, or enforcement under the internal revenue laws." Section 6103 does not restrict the disclosure of other records required to be maintained by the IRS, such as records documenting agency policy, programs and activities, and agency histories. Such records are required to be made available to the public under the Freedom of Information Act ("FOIA").⁵⁷

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 it is appropriate to permit disclosure to NARA for purposes of scheduling records for destruction or retention, while at the same time preserving the confidentiality of taxpayer information in those documents.

EXPLANATION OF PROVISION

The bill provides an exception to the disclosure rules to require IRS to disclose IRS records to officers or employees of NARA , upon written request from the Archivist, for purposes of the appraisal of such records for destruction or retention in the National Archives. The present-law prohibitions on and penalties for disclosure of tax information will generally apply to NARA .

EFFECTIVE DATE

The provision is effective for requests made by the Archivist after the date of enactment.

4. Payment of Taxes (sec. 374 of the bill)

PRESENT LAW

The Code provides that it is lawful for the Secretary to accept checks or money orders as payment for taxes, to the extent and under the conditions provided in regulations prescribed by the Secretary (sec. 6311). Those regulations ⁵⁸ state that checks or money orders should be made payable to the Internal Revenue Service.

REASONS FOR CHANGE

The Committee believes that it more appropriate that checks be made payable to the United States Treasury.

EXPLANATION OF PROVISION

The bill requires the Secretary or his delegate to establish such rules, regulations, and procedures as are necessary to allow payment of taxes by check or money order to be made payable to the United States Treasury

EFFECTIVE DATE

The provision is effective on the date of enactment.

5. Clarification of Authority of Secretary Relating to the Making of Elections (sec. 375 of. the bill and sec. 7805 of the Code)

PRESENT LAW

Except as otherwise provided, elections provided by the Code are to be made in such manner as the Secretary shall by regulations or forms prescribe.

REASONS FOR CHANGE

The Committee wishes to eliminate any confusion over the type of guidance in which the Secretary may prescribe the manner of making any election.

EXPLANATION OF PROVISION

The provision clarifies that, except as otherwise provided, the Secretary may prescribe the manner of making of any election by any reasonable means.

EFFECTIVE DATE The provision is effective as of the date of enactment.

6. Limitation on Penalty on Individual's Failure to Pay for Months During Period of Installment Agreement (sec. 376 of the bill and sec. 6651 of the Code)

PRESENT LAW

Taxpayers who fail to pay their taxes are subject to a penalty of one-half percent per month on the unpaid amount, up to a maximum of 25 percent (sec. 6651(a)). Taxpayers who make installment payments pursuant to an agreement with the IRS (under sec. 6159) are also subject to this penalty.

REASONS FOR CHANGE

The Committee believes that it is inappropriate to apply the full penalty for failure to pay taxes to taxpayers who are in fact paying their taxes through an installment agreement.

EXPLANATION OF PROVISION

The bill provides that the penalty for failure to pay taxes is not imposed with respect to the tax liability of an individual with respect to any month in which an installment payment agreement with the IRS (under sec 6159) is in effect to the extent that doing so would result in the cumulative penalty percentage exceeding 9.5 percent (instead of 25 percent).

EFFECTIVE DATE

The provision is effective for installment agreement payments made after the date of enactment.

I. STUDIES

1. Study of Penalty Administration (sec. 381 of the bill)

PRESENT LAW

The last major revision of the overall penalty structure in the Internal Revenue Code was the Improved Penalty Administration and Compliance Tax Act, part of the Omnibus Budget Reconciliation Act of 1989.⁵⁹

REASONS FOR CHANGE

The Committee believes that it is appropriate to undertake a study of penalty administration, which will permit the Committee whether the current penalty structure could be improved.

EXPLANATION OF PROVISION

The bill requires the Joint Committee on Taxation to conduct a study reviewing the administration and implementation of the penalty reform provisions of the Omnibus Budget Reconciliation Act of 1989, and making any legislative and administrative recommendations it deems appropriate to simplify penalty administration and reduce taxpayer burden.

EFFECTIVE DATE

The report must be provided not later than nine months after the date of enactment.

2. Study of Confidentiality of Tax Return Information (sec. 382 of the bill)

PRESENT LAW

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). No tax information may be furnished by the IRS to another agency unless the other agency establishes procedures satisfactory to the IRS for safeguarding the tax information it receives (sec. 6103(p)).

REASONS FOR CHANGE

The Committee believes that a study of the confidentiality provisions will be useful in assisting the Committee in determining whether improvements can be made to these provisions.

EXPLANATION OF PROVISION

The bill requires the Joint Committee on Taxation to conduct a study on provisions regarding taxpayer confidentiality. The study is to examine present-law protections of taxpayer privacy, the need for third parties to use tax return information, and the ability to achieve greater levels of voluntary compliance by allowing the public to know who is legally required to file tax returns but does not do so.

EFFECTIVE DATE

The findings of the study, along with any recommendations, are required to be reported to the Congress no later than one year after the date of enactment.

TITLE IV. CONGRESSIONAL ACCOUNTABILITY FOR THE IRS

A. REVIEW OF REQUESTS FOR GAO INVESTIGATIONS OF THE IRS (sec. 401 of the bill and sec. 8021(e) of the Code)

There is presently no specific statutory requirement that requests for investigations by the General Accounting Office ("GAO") relating to the IRS be reviewed by the Joint Committee on Taxation (the "Joint Committee"). However, some of the studies that GAO conducts relating to taxation and oversight of the IRS require access under section 6103 of the Code to confidential tax returns and return information. Under section 6103, the GAO may inform the Joint Committee of its initiation of an audit of the IRS and obtain access to confidential taxpayer information unless, within 30 days, three-fifths of the Members of the Joint Committee disapprove of the audit. This provision has not been utilized; the GAO generally seeks advance access to confidential taxpayer return information from the Joint Committee.

REASONS FOR CHANGE

The Restructuring Commission recommended changes to the approval process for GAO reports based on its findings that the GAO conducts myriad audits of the IRS, many of which relate to lesser matters and which are not integrated into a constructive, focused package. The Committee believes that GAO audits and reports can be helpful as an oversight tool, but that they should be coordinated so as to ensure appropriate allocation of resources, both of the IRS and the GAO.

EXPLANATION OF PROVISION

Under the bill, the Joint Committee on Taxation reviews all requests (other than requests by the chair or ranking member of a Committee or Subcommittee of the Congress) for investigations of the IRS by the GAO and approves such requests when appropriate. In reviewing such requests, the Joint Committee is to eliminate overlapping investigations, ensure that the GAO has the capacity to handle the investigation, and ensure that investigations focus on areas of primary importance to tax administration.

The provision does not change the present-law rules under section 6103.

EFFECTIVE DATE

The provision is effective with respect to requests for GAO investigations made after the date of enactment.

B. JOINT CONGRESSIONAL HEARINGS AND COORDINATED OVERSIGHT REPORTS (secs. 401 and 402 of the bill and secs. 8021(f) and 8022 of the Code)

PRESENT LAW

Under the present Congressional committee structure, a number of committees have jurisdiction with respect to IRS oversight. The committees most responsible for IRS oversight are the House Committees on Ways and Means, Appropriations, Government Reform and Oversight, the corresponding Senate Committees on Finance, Appropriations, and Governmental Affairs, and the Joint Committee on Taxation. While these Committees have a shared interest in IRS matters, they typically act independently, and have separate hearings and make separate investigations into IRS matters. Each committee also has jurisdiction over certain issues. For example, the House Ways and Means Committee and the Senate Finance Committee have exclusive jurisdiction over changes to the tax laws. Similarly, the House and Senate Appropriations Committees have exclusive jurisdiction over IRS annual appropriations. The Joint Committee does not have legislative jurisdiction, but has significant responsibilities with respect to tax matters and IRS oversight.

REASONS FOR CHANGE

The Restructuring Commission found that the Congressional committees responsible for IRS oversight "focus on different issues that change from year to year. While these issues are important, there is a lack of coordinated focus on high level and strategic matters. Because the IRS tries to satisfy requests from Congress, this nonintegrated approach to oversight further blurs the ability to set strategic direction and focus on priorities."

The committee believes that Congressional oversight of the IRS should be more coordinated, and should include long-term objectives.

EXPLANATION OF PROVISION

Under the bill, there will be two annual joint hearings of two majority and one minority members of each of the Senate Committees on Finance, Appropriations, and Governmental Affairs and the House Committees on Ways and Means, Appropriations, and Government Reform and Oversight. The first annual hearing is to take place before April 1 of each calendar year and is to review the strategic plans and budget for the IRS (including whether the budget supports IRS objectives). The second annual hearing is to be held after the conclusion of the annual tax filing season, and is to review the progress of the IRS in meeting its objectives under the strategic and business plans, the progress of the IRS in improving taxpayer service and compliance, progress of the IRS on technology modernization, and the annual filing season. The bill does not modify the existing jurisdiction of the Committees involved in the joint hearings.

The bill provides that the Joint Committee is to make annual reports to the Committee on Finance and the Committee on Ways and Means on the overall state of the Federal tax system, together with recommendations with respect to possible simplification proposals and other matters relating to the administration of the Federal tax system as it may deem advisable. The Joint Committee also is to report annually to the Senate Committees on Finance, Appropriations, and Governmental Affairs and the House Committees on Ways and Means, Appropriations, and Government Reform and Oversight with respect to the matters that are the subject of the annual joint hearings of members of such Committees.

EFFECTIVE DATE

The provision is effective on the date of enactment.

C. BUDGET MATTERS

1. Funding for century date change (sec. 411 of the bill)

PRESENT LAW

No specific provision.

REASONS FOR CHANGE

The Committee believes that adequate funding of efforts to resolve this problem is essential.

EXPLANATION OF PROVISION

The bill provides that it is the sense of the Congress that the IRS efforts to resolve the century date change computing problems should be fully funded to provide for certain resolution of such problems.

EFFECTIVE DATE

The provision is effective on the date of enactment.

2. Financial management advisory group (sec. 412 of the bill)

PRESENT LAW

No provision.

REASONS FOR CHANGE

The Committee believes that the IRS Commissioner could benefit from input from experts in governmental accounting and auditing.

EXPLANATION OF PROVISION

The bill directs the Commissioner to 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.

EFFECTIVE DATE

The provision is effective on the date of enactment.

D. TAX LAW COMPLEXITY ANALYSIS (sec. 421 and 422 of the bill and sec. 8024 of the Code)

PRESENT LAW

Present law does not require a formal complexity analysis with respect to changes to the tax laws.

REASONS FOR CHANGE

The Restructuring Commission found a clear connection between the complexity of the Internal Revenue Code and the difficulty of tax law administration and taxpayer frustration. The Committee shares the concern that complexity is a serious problem with the Federal tax system. Complexity and frequent changes in the tax laws create burdens for both the IRS and taxpayers. Failure to address complexity may ultimately reduce voluntary compliance.

The Committee is aware that it may not be possible or desirable to eliminate all complexity in the tax system. There are many objectives of a tax system and particular tax provisions, and simplicity is only one. In some cases other policies, such as fairness, may outweigh concerns about complexity.

Nevertheless, the Committee believes it essential to try to reduce the complexity of the tax system whenever possible. Accordingly, the Committee believes it appropriate to introduce new procedural rules that will help to focus attention on complexity as an issue. Such rules are an important step, but do not take the place of the most effective way to address complexity --that is for the Congress and the Administration to make reducing complexity a priority when drafting tax legislation.

The Committee also believes that encouraging the participation of IRS personnel in drafting legislation will help to highlight administrative and complexity issues while legislation is being developed.

EXPLANATION OF PROVISION

IRS participation in drafting legislation

The bill provides that it is the sense of the Congress that the IRS should provide the Congress with an independent view of tax administration and that the tax-writing committees should hear from front-line technical experts at the IRS during the legislative process with respect to the administrability of pending amendments to the Internal Revenue Code.

Complexity analysis

The bill requires the staff of the Joint Committee on Taxation to provide a "Tax Complexity Analysis" for legislation reported by the Senate Committee on Finance and the House Committee on Ways and Means and conference reports amending the tax laws. The Tax Complexity Analysis is to identify those provisions in the bill or conference report that, as determined by the staff of the Joint Committee, add significant complexity to the tax laws, or provide significant simplification. The Complexity Analysis is required to include a discussion of the basis for the determination by the staff of the Joint Committee. It is expected that, in general, the Complexity Analysis will be limited to no more than 20 provisions. If the staff of the Joint Committee determines that a bill or conference report does not contain any provisions that add significant complexity or simplification to the tax laws, then the Complexity Analysis is to contain a statement to that effect.

Factors that may be taken into account by the staff of the Joint Committee in preparing the Complexity Analysis include the following: (1) whether the provision is new, modifies or replaces existing law, and whether hearings were held to discuss the proposal and whether the IRS provided input as to its administrability; (2) when the provision becomes effective and corresponding compliance requirements on taxpayers; (3) whether new IRS forms or worksheets are needed, whether existing forms or worksheets must be modified, and whether the effective date allows sufficient time for the IRS to prepare such forms and educate taxpayers; (4) necessity of additional interpretive guidance (e.g., regulations, rulings, notices); (5) the extent to which the proposal relies on concepts contained in existing law, including definitions; (6) effect on existing record keeping requirements and the activities of taxpayers, complexity of calculations and likely behavioral response, and standard business practices and resource requirements; (7) number, type, and sophistication of affected taxpayers; and (8) whether the proposal requires the IRS to assume responsibilities not directly related to raising revenue which could be handled through another Federal agency.

The bill requires the Commissioner to provide the Joint Committee with such information as is necessary to prepare each required Tax Complexity Analysis.

A point of order arises with respect to the floor consideration of a bill or conference report that does not contain the required Complexity Analysis. The point of order may be waived by a majority vote.

It is hoped that the Administration will include a similar complexity analysis when submitting proposed legislation.

EFFECTIVE DATE

The requirement for a Tax Complexity Analysis is effective with respect to legislation considered on or after January 1, 1998.

TITLE V. REVENUE OFFSET: EMPLOYER DEDUCTION FOR VACATION PAY

(sec. 501 of the bill and sec. 404 of the Code)

PRESENT LAW

For deduction purposes, any method or arrangement that has the effect of a plan deferring the receipt of compensation or other benefits for employees is treated as a deferred compensation plan (sec. 404(b)). In general, contributions under a deferred compensation plan (other than certain pension, profit-sharing and similar plans) are deductible in the taxable year in which an amount attributable to the contribution is includible in income. However, vacation pay which is treated as deferred compensation is deductible for the taxable year of the employer in which the vacation pay is paid to the employee (sec. 404(a)(5)).

Temporary Treasury regulations provide that a plan, method, or arrangement defers the receipt of compensation or benefits to the extent it is one under which an employee receives compensation or benefits more than a brief period of time after the end of the employer's taxable year in which the services creating the right to such compensation or benefits are performed. A plan, method or arrangement is presumed to defer the receipt of compensation for more than a brief period of time after the end of an employer's taxable year to the extent that compensation is received after the 15th day of the 3rd calendar month after the end of the employer's taxable year in which the related services are rendered (the "2 1/2 month" period). A plan, method or arrangement is not considered to defer the receipt of compensation or benefits for more than a brief period of time after the end of the employer's taxable year to the extent that compensation or benefits are received by the employee on or before the end of the applicable 2 1/2 month period. (Temp. Treas. Reg. Sec. 1.404(b)-1T A-2.)

The Tax Court recently addressed the issue of when vacation pay and severance pay are considered deferred compensation in Schmidt Baking Co., Inc., 107 T.C. 271 (1996). In Schmidt Baking, the taxpayer was an accrual basis taxpayer with a fiscal year that ended December 28, 1991. The taxpayer funded its accrued vacation and severance pay liabilities for 1991 by purchasing an irrevocable letter of credit on March 13, 1992. The parties stipulated that the letter of credit represented a transfer of substantially vested interest in property to employees for purposes of section 83, and that the fair market value of such interest was includible in the employees' gross incomes for 1992 as a result of the transfer.⁶⁰ The Tax Court held that the purchase of the letter of credit, and the resulting income inclusion, constituted payment of the vacation and severance pay within the 2 1/2 month period. Thus, the vacation and severance pay were treated as received by the employees within the 2 1/2 month period and were not treated as deferred compensation. The vacation pay and severance pay were deductible by the taxpayer for its 1991 fiscal year pursuant to its normal accrual method of accounting.

REASONS FOR CHANGE

Prior to the Tax Reform Act of 1986, an employer could make an election to deduct an amount representing a reasonable addition to a reserve account for vacation pay earned by employees before the close of the current year and expected to be paid by the close of that year or within 12 months thereafter. As a result of concerns that this rule provided more favorable tax treatment for vacation pay than other types of compensation or deductible items, the Tax Reform Act of 1986 limited this special rule to vacation pay that is paid during the current taxable year or within 8 1/2 months after the close of the taxable year of the employer with respect to which the vacation pay was earned by employees.

The tax treatment of vacation pay was again changed in the Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987"). At that time, the Congress was concerned that then-present law provided more favorable tax treatment for vacation pay that was deferred by employees beyond the end of the year than was provided for other deferred benefits. The House and Senate bills would have repealed the reserve for accrued vacation pay and would have provided that deductions for vacation pay generally would be allowed in any taxable year for amounts paid during the year, plus vested vacation amounts paid or funded within 2 1/2 months after the end of the year. The conference agreement followed a different approach, and provided that "vacation pay earned during any taxable year, but not paid to employees on or before the date that is 2 1/2 months after the end of the taxable year, is deductible for the taxable year of the employer in which it is paid to employees."⁶¹ The key difference between the House and Senate provisions and the conference agreement to OBRA 1987 is that the conference agreement does not allow a deduction for amounts merely because they are vested and funded (i.e., are includible in income) within 2 1/2 months after the end of the employer's taxable year.

The Committee believes that the decision in Schmidt Baking reaches an inappropriate result and represents an incorrect interpretation of the intent of the Congress in adopting the vacation pay provision in OBRA 1987. The Committee believes that the intent of that provision was clearly to provide that a deduction for vacation pay is not available for the current taxable year unless the vacation pay is actually paid to employees within 2 1/2 months after the end of the year. Moreover, OBRA 1987 reflects Congressional intent and understanding that compensation actually paid beyond the 2 1/2 month peri