RRA 1998 Senate Report p1

RRA 1998 Senate Report Page 1

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IRS Restructuring and Reform Act of 1998

Senate Report page1

Senate Finance Committee Explanation of the Internal Revenue Service Restructuring and Reform Act (HR 2676), as Adopted by the Senate Finance Committee

April 22, 1998

105th Congress

[SRepNo 105-174, 98ARD 077-2] Explanation of the Internal Revenue Service Restructuring and Reform Act (HR 2676), as Adopted by the Senate Finance Committee.

105th Congress

2d Session

INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998

April --, 1998. --Ordered to be printed

Mr. Roth, from the Committee on Finance submitted the

following

R E P O R T

[To accompany H.R. 2676]

The Committee on Finance, to which was referred the bill (H.R. 2676) to amend the Internal Revenue Code of 1986 to restructure and reform the Internal Revenue Service, and for other purposes, having considered the same, reports favorably thereon with an amendment and recommends that the bill as amended do pass.

CONTENTS

I. LEGISLATIVE BACKGROUND

II. EXPLANATION OF THE BILL

TITLE I. EXECUTIVE BRANCH GOVERNANCE AND MANAGEMENT OF

THE IRS

A. IRS Restructuring and Creation of IRS Oversight Board

1. IRS restructuring and mission (secs. 1001-1002)

2. Establishment and duties of IRS Oversight Board (sec. 1101)

B. Appointment and Duties of IRS Commissioner and Chief Counsel and Other Personnel

1. IRS Commissioner and other personnel (secs. 1102(a) and 1104)

2. IRS Chief Counsel (sec. 1102(a))

C. Structure and Funding of the Employee Plans and Exempt Organizations Division ("EP/EO") (sec. 1101)

D. Taxpayer Advocate (secs. 1102(a), (c), and (d))

E. Treasury Office of Inspector General; IRS Office of the Chief Inspector (secs. 1102(a) and 1103)

F. Prohibition on Executive Branch Influence Over Taxpayer Audits (sec. 1105)

G. IRS Personnel Flexibilities (secs. 1201-1205)

TITLE II. ELECTRONIC FILING

A. Electronic Filing of Tax and Information Returns (sec. 2001)

B. Due Date for Certain Information Returns (sec. 2002)

C. Paperless Electronic Filing (sec. 2003)

D. Return-Free Tax System (sec. 2004)

E. Access to Account Information (sec. 2005)

TITLE III . TAXPAYER PROTECTION AND RIGHTS

A. Burden of Proof (sec. 3001)

B. Proceedings by Taxpayers

1. Expansion of authority to award costs and certain fees (sec. 3101)

2. Civil damages for collection actions (sec. 3102)

3. Increase in size of cases permitted on small case calendar (sec. 3103)

4. Expansion of Tax Court jurisdiction to responsible person penalties (sec. 3104)

5. Actions for refund with respect to certain estates which have elected the installment method of payment (sec. 3105)

6. Tax Court jurisdiction to review an adverse IRS determination of a bond issue's tax-exempt status (sec. 3106)

7. Civil action for release of erroneous lien (sec. 3107)

C. Relief for Innocent Spouses and for Taxpayers Unable to Manage Their Financial Affairs Due to Disabilities

1. Spousal election to limit joint and several liability on joint return (sec. 3201)

2. Suspension of statute of limitations on filing refund claims during periods of disability (sec. 3202)

D. Provisions Relating to Interest and Penalties

1. Elimination of interest differential on overlapping periods of interest on income tax overpayments and underpayments (sec. 3301)

2. Increase in overpayment rate payable to taxpayers other than corporations (sec. 3302)

3. Elimination of penalty on individual's failure to pay during period of installment agreement (sec. 3303)

4. Mitigation of failure to deposit penalty (sec. 3304)

5. Suspension of interest and penalties where Secretary fails to contact individual taxpayer (sec. 3305)

6. Procedural requirements for imposition of penalties and additions to tax (sec. 3306)

7. Personal delivery of notice of penalty under section 6672 (sec. 3307)

8. Notice of interest charges (sec. 3308)

E. Protections for Taxpayers Subject to Audit or Collection Activities

a. Due Process

i. Due process in IRS collection actions (sec. 3401)

b. Examination Activities

i. Uniform application of confidentiality to taxpayer communications with federally authorized practitioners (sec. 3411)

ii. Limitation on financial status audit techniques (sec. 3412)

iii. Software trade secrets protection (sec. 3413)

iv. Threat of audit prohibited to coerce tip report alternative commitment agreements (sec. 3414)

v. Taxpayers allowed motion to quash all third-party summones (sec. 3415)

vi. Service of summones to third-party recordkeepers permitted by mail (sec. 3416)

vii. Prohibition on IRS contact of third parties without taxpayer pre-notification (sec. 3417)

c. Collection Activities

i. Approval process for liens, levies, or seizures (sec. 3421)

ii. Modification to certain levy exemption amounts (sec. 3431)

iii. Release of levy upon agreement that amount is uncollectible (sec. 3432)

iv. Levy prohibited during pendency of refund proceedings (sec. 3433)

v. Approval required for jeopardy and termination assessments and jeopardy levies (sec. 3434)

vi. Increase in amount of certain property on which lien not valid (sec. 3435)

vii. Waiver of early withdrawal tax for IRS levies on employersponsored retirement plans or IRAs (sec. 3436)

viii. Prohibition of sales of seized property at less than minimum bid (sec. 3441)

ix. Accounting of sales of seized property (sec. 3442)

x. Uniform asset disposal mechanism (sec. 3443)

xi. Codification of IRS administrative procedures for seizure of taxpayer's property (sec. 3444)

xii. Procedures for seizure of residences and businesses (sec. 3445)

d . Provisions Relating to Examination and Collection Activities

i. Procedures relating to extensions of statute of limitations by agreement (sec. 3461)

ii. Offers-in-compromise (sec. 3462)

iii. Notice of deficiency to specify deadlines for filing Tax Court petition (sec. 3463)

iv. Refund or credit of overpayments before final determination (sec. 3464)

v. IRS procedures relating to appeal of examinations and collections (sec. 3465)

vi. Application of certain fair debt collection practices (sec. 3466)

vii. Guaranteed availability of installment agreements (sec. 3467)

F. Disclosures to Taxpayers

1. Explanation of joint and several liability (sec. 3501)

2. Explanation of taxpayers' rights in interviews with the IRS (sec. 3502)

3. Disclosure of criteria for examination selection (sec. 3503)

4. Explanation of appeals and collection process (sec. 3504)

5. Explanation of reason for refund denial (sec. 3505)

6. Statements to taxpayers with installment agreements (sec. 3506)

7. Notification of change in tax matters partner (sec. 3507)

G. Low-Income Taxpayer Clinics (sec. 3601)

H. Other Provisions

1. Cataloging complaints (sec. 3701)

2. Archive of records of Internal Revenue Service (sec. 3702)

3. Payment of taxes (sec. 3703)

4. Clarification of authority of Secretary relating to the making of elections (sec. 3704)

5. IRS employee contacts (sec. 3705)

6. Use of pseudonyms by IRS employees (sec. 3706)

7. Conference of right in the National Office of IRS (sec. 3707)

8. Illegal tax protestor designations (sec. 3708)

9. Provision of confidential information to Congress by whistleblowers (sec. 3709)

10. Listing of local IRS telephone numbers and addresses (sec. 3710)

11. Identification of return preparers (sec. 3711)

12. Offset of past-due, legally enforceable State income tax obligations against overpayments (sec. 3712) Moratorium regarding regulations under Notice 98-11 (sec. 3713(a)(1))

14. Sense of the Senate regarding Notices 98-5 and 9811 (sec. 371(a)(2) and (b))

I. Studies

1. Administration of penalties and interest (sec. 3801)

2. Confidentiality of tax return information (sec. 3802)

TITLE IV. CONGRESSIONAL ACCOUNTABILITY FOR THE IRS

A. Century Date Change (sec. 4001)

B. Tax Law Complexity Analysis (sec. 4002)

TITLE V. REVENUE OFFSETS

A. Employer Deduction for Vacation and Severance Pay (sec. 5001)

B. Modify Foreign Tax Credit Carryover Rules (sec. 5002)

C. Clarification and Expansion of Mathematical Error Procedures (sec. 5003)

D. Freeze Grandfathered Status of Stapled REITs (sec. 5004)

E. Make Certain Trade Receivables Ineligible for Markto-Market Treatment (sec. 5005)

F. Add Vaccines Against Rotavirus Gastroenteritis to List of Taxable Vaccines (sec. 5006)

TITLE VI. TAX TECHNICAL CORRECTIONS

TECHNICAL CORRECTIONS TO THE TAXPAYER RELIEF ACT OF 1997

A. Amendments to Title I of the 1997 Act Relating to the Child Credit

1. Stacking rules for the child credit under the limitations based on tax liability (sec. 6003(a))

2. Treatment of a portion of the child credit as a supplemental child credit (sec. 6003(b))

B. Amendments to Title II of the 1997 Act Relating to Education Incentives

1. Clarifications to HOPE and Lifetime Learning tax credits (sec. 6004(a))

2. Educations IRAs (sec. 6004(d))

3. Treatment of cancellation of certain student loans (sec. 6004(f))

4. Deduction on student loan interest (sec. 6004(b))

5. Enhanced deduction for corporate contributions of computer technology and equipment (sec. 6004(e))

6. Qualified State tuition programs (sec. 6004(e))

7. Qualified zone academy bonds (sec. 6004(g))

C. Amendments to Title III of the 1997 Act Relating to Savings Incentives

1. Conversions of IRAs into Roth IRAs (sec. 6005(b))

2. Penalty-free distributions from IRAs for education expenses and purchase of first homes (sec. 6005(c))

3. Limits based on modified adjusted gross income (sec. 6005(b))

4. Contribution limit to Roth IRAs (sec. 6005(b))

5. Contribution limitations for active participation in an IRA (sec. 6005(a))

D. Amendments to Title III of the 1997 Act Relating to Capital Gains

1. Individual capital gain rate reductions (sec. 6005(d))

2. Rollover of gain from sale of qualified stock (sec. 6005(f))

3. Exclusion of gain on the sale of a principal residence owned and used less than two years (sec. 6005(e)(1) and (2))

4. Effective date of the exclusion of gain on the sale of a principal residence (sec. 6005(e)(3))

E. Amendments to Title IV of the 1997 Act Relating to Alternative Minimum Tax

1. Election to use AMT depreciation for regular tax purposes (sec. 6006(b))

2. Clarification of small business exemption (sec. 6006(a))

F. Amendments to Title V of the 1997 Act Relating to Estate and Gift Taxes

1. Clarification of phaseout range for 5-percent surtax to phase out benefits of the unified credit and graduated rates (sec. 6007(a)(1))

2. Clarification of effective date for indexing of generation-skipping exemption (sec. 6007(a)(2))

3. Conversion of qualified family-owned business exclusion into a deduction (sec. 6007(b)(1)(A)

4. Coordination between unified credit and family-owned business provision (sec. 6007(b)(1)(B) and 6007(b)(4))

5. Clarification of businesses eligible for familyowned business provision (sec. 6007(b)(2))

6. Clarification of "trade or business" requirement for family-owned business provision (sec. 6007(b)(5))

7. Clarification that interests eligible for familyowned business provision must be passed to a qualified heir (sec. 6007(b)(1)(B))

8. Other modifications to the qualified family-owned business provision (secs. 6007(b)(3), 6007(b)(6), and 6007(b)(7))

9. Clarification of interest on installment payment of estate tax on holding companies (sec. 6007(c))

10. Clarification on declaratory judgment jurisdiction of U.S. Tax Court regarding installment payment of estate tax (sec. 6007(d))

11. Clarification of rules governing revaluation of gifts (sec. 6007(e))

12. Clarification with respect to post-mortem conservation easements (sec. 6007(g))

G. Amendments to Title VII of the 1997 Act Relating to Incentives for the District of Columbia (sec. 6008)

H. Amendments to Title IX of the 1997 Act Relating to Miscellaneous Provisions

1. Clarification of effect on certain transfers to Highway Trust Fund (sec. 6009(a))

2. Clarification of Mass Transit Account portions of highway motor fuels taxes (sec. 6009(b))

3. Clarification of qualification for reduced rate of tax on certain hard ciders (sec. 6009(c))

4. Combined employment tax reporting demonstration project (sec. 6009(f))

5. Election for 1987 partnerships to continue exception from treatment of publicly traded partnerships as corporations (sec. 6009(d))

6. Depreciation limitations for electric vehicles (sec. 6009(e))

7. Modification of operation of elective carryback of existing net operating losses of the National Railroad Passenger Corporation ("Amtrak") (sec. 6009(g))

I. Amendments to Title X of the 1997 Act Relating to Revenue-Raising Provisions

1. Exemption from constructive sales rules for certain debt positions (sec. 6010(a)(1))

2. Definition of forward contract under constructive sales rules (sec. 6010(a)(2))

3. Treatment of mark-to-market gains of electing traders (sec. 6010(a)(3))

4. Special effective date for constructive sale rules (sec. 6010(a)(4))

5. Gain recognition for certain extraordinary dividends (sec. 6010(b))

6. Treatment of certain corporate distributions (sec. 6010(c))

7. Certain preferred stock treated as "boot" --statute of limitations (sec. 6010(e)(2))

8. Certain preferred stock treated as "boot" --treatment of transferor (sec. 6010(e)(1))

9. Application of section 304 to certain international transactions (sec. 6010(d))

10. Establish IRS continuous levy and improve debt collection (sec. 6010(f))

11. Clarification regarding aviation gasoline excise tax (sec. 6010(g))

12. Clarification of requirement that registered fuel terminals offer dyed fuel (sec. 6010(h))

13. Clarification of treatment of prepaid telephone cards (sec. 6010(i))

14. Modify UBIT rules applicable to second-tier subsidiaries (sec. 6010(j))

15. Application of foreign tax credit holding period rule to RICs (sec. 6010(k))

16. Clarification of provision expanding the limitations on deductibility of premiums and interest with respect to life insurance, endowment and annuity contracts (sec. 6010(o))

17. Clarification of allocation of basis of properties distributed by a partnership (sec. 6010(m))

18. Clarification to the definition of modified adjusted gross income for purposes of the earned income credit phaseout (sec. 6010(p))

J. Amendments to Title XI of the 1997 Act Relating to

Foreign Provisions

1. Application of attribution rules under PFIC provisions (sec. 6011(b)(2)

2. Treatment of PFIC option holders (sec. 6011(b)(1))

3. Application of PFIC mark-to-market rules to RICs (sec. 6011(c)(3))

4. Interaction between the PFIC provisions and other mark-to-market rules (sec. 6011(c)(2))

K. Amendments to Title XII of the 1997 Act Relating to Simplification Provisions

1. Travel expenses of Federal employees participating in a Federal criminal investigation (sec. 6012(a))

2. Effective date for provisions relating to electing large partnerships, partnership returns required on magnetic media, and treatment of partnership items of individual retirement arrangements (sec. 6012(d))

3. Modification of distribution rule for REITS (sec. 6012(f))

L. Amendments to Title XIII of the 1997 Act Relating to Estate, Gift and Trust Simplification

1. Clarification of treatment of revocable trusts for purposes of the generation-skipping transfer tax (sec. 6013(a))

2. Provision of regulatory authority for simplified reporting of funeral trusts terminated during taxable year (sec. 6013(b))

M. Amendment to Title XIV of the 1997 Act Relating to Excise Tax Simplification

1. Clarification of provision allowing wine imported in bulk to be transferred to a U.S. winery without payment of tax (sec. 6014)

N. Amendments to Title XV of the 1997 Act Relating to Pensions and Employee Benefits

1. Treatment of certain disability payments to public safety employees (sec. 6015(c))

O. Amendments to Title XVI of the 1997 Act Relating to Technical Corrections

1. Application of requirements for SIMPLE IRAs in the case of mergers and acquisitions (sec. 6016(a))

2. Treatment of Indian tribal governments under section 403(b) (sec. 6016(a))

TECHNICAL CORRECTIONS TO OTHER TAX LEGISLATION

A. Treatment of Adoption Tax Credit Carryovers (sec. 6017)

B. Disclosure Requirements for Apostolic Organizations (sec. 6018)

C. Allow Deduction for Unused Employer Social Security Credit (sec. 6019)

D. Earned Income Credit Qualification Rules (sec. 6020)

III . BUDGET EFFECTS OF THE BILL

A. Committee Estimates

B. Budget Authority and Tax Expenditures

C. Consultation with Congressional Budget Office

IV. VOTES OF THE COMMITTEE

V. REGULATORY IMPACT AND OTHER MATTERS

A. Regulatory Impact

B. Unfunded Mandates Statement

VI. CHANGES IN EXISTING LAW MADE BY THE BILL , AS REPORTED

I. LEGISLATIVE BACKGROUND

A. Committee Action

Committee consideration

The Committee on Finance marked up H.R. 2676 (the "Internal Revenue Service Restructuring and Reform Act of 1998") on March 31, 1998. The Committee adopted Chairman Roth's amendment in the nature of a substitute, as amended, and ordered the bill, as amended, favorably reported by a roll call vote of 12-0 (20-0 including proxy votes). The bill also includes tax technical corrections provisions.

Committee and Subcommittee hearings

The Committee held several public hearings during the 105th Congress as part of its investigation of the operations and structure of the Internal Revenue Service (" IRS "). A series of investigative hearings were held by the full committee on September 23-25, 1997, which examined both the internal and public conduct of the IRS . The Finance Committee's Subcommittee on Taxation and IRS Oversight held a field hearing in Oklahoma City, Oklahoma on December 3, 1997 , regarding IRS management and operations in the Oklahoma-Arkansas District.

The Finance Committee continued public hearings on IRS administration, including taxpayer rights, on January 28 and 29 and on February 5, 11 , and 25, 1998. The hearing on February 11, 1998 , focused on the tax treatment of "innocent spouses."

B. Commission Report

The National Commission on Restructuring the Internal Revenue Service (the "Commission") was established to review the practices of the IRS and to make recommendations for modernizing and improving its efficiency and taxpayer services. The Commission report was issued on June 25, 1997 ,¹ and contained 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.

S.1096 (the "Internal Revenue Service Restructuring and Reform Act of 1997"), introduced on July 30, 1997 , by Senators Kerrey and Grassley, generally followed the Commission's recommendations. A similar bill, H.R. 2676, was passed by the House on November 5, 1997 .²

II. EXPLANATION OF THE BILL TITLE I. EXECUTIVE BRANCH GOVERNANCE AND MANAGEMENT OF THE IRS

A. IRS Restructuring and Creation of IRS Oversight Board

1. IRS mission and restructuring (secs. 1001 and 1002 of the bill)

Present Law

IRS mission statement

The IRS mission statement provides that:

The purpose of the Internal Revenue Service is to collect the proper amount of tax revenue at the least cost; serve the public by continually improving the quality of our products and services; and perform in a manner warranting the highest degree of public confidence in our integrity and fairness.

IRS organizational plan

Under Reorganization Plan No. 1 of 1952, the Internal Revenue Service (" IRS ") is organized into a 3-tier geographic structure with a multi-functional National Office, Regional Offices, and District Offices. A number of IRS reorganizations have occurred since then, but no major changes have been made to the basic 3-tier structure. Presently, as a result of a 1995 reorganization, there is a Regional Commissioner, a Regional Counsel and a Regional Director of Appeals for each of the following 4 regions: (1) the Northeast Region (headquartered in New York); (2) the Southeast Region (Atlanta); (3) the Midstates Region (Dallas); and (4) the Western Region (San Francisco). There are 33 District Offices, 10 service centers, and 3 computing centers.

Reasons for Change

The Committee believes that a key reason for taxpayer frustration with the IRS is the lack of appropriate attention to taxpayer needs. At a minimum, taxpayers should be able to receive from the IRS the same level of service expected from the private sector. For example, taxpayer inquiries should be answered promptly and accurately; taxpayers should be able to obtain timely resolutions of problems and information regarding activity on their accounts; and taxpayers should be treated fairly and courteously at all times. The Commissioner of Internal Revenue has indicated his interest in improving customer service. The Committee believes that taxpayer service is of such importance that the Committee should not only support the Commissioner's efforts, but also mandate that a key part of the IRS mission must be taxpayer service.

The Commissioner has announced a broad outline of a plan to reorganize the structure of the IRS in order to help make the IRS more oriented toward assisting taxpayers and providing better taxpayer service. Under this plan, the present regional structure would be replaced with a structure based on units that serve particular groups of taxpayers with similar needs. The Commissioner has currently identified four different groups of taxpayers with similar needs: individual taxpayers, small businesses, large businesses, and the tax-exempt sector (including employee plans, exempt organizations and State and local governments). Under this structure, each unit would be charged with end-to-end responsibility for serving a particular group of taxpayers. The Commissioner believes that this type of structure will solve many of the problems taxpayers encounter now with the IRS . For example, each of the 33 district offices and 10 service centers are now required to deal with every kind of taxpayer and every type of issue. The proposed plan would enable IRS personnel to understand the needs and problems affecting particular groups of taxpayers, and better address those issues. The present-law structure also impedes continuity and accountability. For example, if a taxpayer moves, the responsibility for the taxpayer's account moves to another geographical area. Further, every taxpayer is serviced by both a service center and at least one district. Thus, many taxpayers have to deal with different IRS offices on the same issues. The proposed structure would eliminate many of these problems.

The Committee believes that the current IRS organizational structure is one of the factors contributing to the inability of the IRS to properly serve taxpayers and the proposed structure would help enable the IRS to better serve taxpayers and provide the necessary level of services and accountability to taxpayers. The Committee supports the Commissioner in his efforts to modernize and update the IRS and believes it appropriate to provide statutory direction for the reorganization of the IRS .

Explanation of Provision

The IRS is directed to revise its mission statement to provide greater emphasis on serving the public and meeting the needs of taxpayers.

The IRS Commissioner is directed to restructure the IRS by eliminating or substantially modifying the present-law three-tier geographic structure and replacing it with an organizational structure that features operating units serving particular groups of taxpayers with similar needs. The plan is also required to ensure an independent appeals function within the IRS . As part of ensuring an independent appeals function, the reorganization plan is to prohibit ex parte communications between appeals officers and other IRS employees to the extent such communications appear to compromise the independence of the appeals officers. The legality of IRS actions will not be affected pending further appropriate statutory changes relating to such a reorganization (e.g., eliminating statutory references to obsolete positions).

Effective Date

The provision is effective on the date of enactment.

2. Establishment and duties of IRS Oversight Board (sec. 1101 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 The Secretary has delegated the responsibility to administer and enforce the Internal Revenue laws to the Commissioner. The Commissioner has the final authority of the IRS concerning the substantive interpretation of the tax laws as reflected in legislative and regulatory proposals, revenue rulings, letter rulings, and technical advice memoranda. Under present law, the duties of the Chief Counsel of the IRS are prescribed by the Secretary. The Secretary has delegated authority over the Chief Counsel to General Counsel of the Treasury. The General Counsel has delegated authority to serve as the legal adviser to the Commissioner to the Chief Counsel.

Federal employees are subject to rules designed to prevent conflicts of interest or the appearance of conflicts of interest. The rules applicable to any particular employee depend in part on whether the employee is a regular, full-time Federal Government employee or a special government employee, the length of service of the employee and the pay grade of the employee. A "special government employee" is, in general, an officer or employee of the executive or legislative branch of the U.S. government who is appointed or employed to perform (with or without compensation) for not to exceed 130 days during any period of 365 days, temporary duties either on a full-time or intermittent basis. Violations of the ethical conduct rules are generally punishable by imprisonment for up to 1 year (5 years in the case of wilful conduct), a civil fine, or both. The amount of the fine with respect to each violation cannot exceed the greater of $50,000 or the compensation received by the employee in connection with the prohibited conduct.

Under the ethical conduct rules, all Federal Government employees (including special government employees) are precluded from participating in a matter in which the employee (or a related party) has a financial interest. In addition, special government employees cannot represent a party (whether or not for compensation) or receive compensation for representation of a party ⁴ in relation to a matter (1) in which the employee has at any time participated personally and substantially, or (2) which is pending in the department or agency of the Government in which the special government employee is serving. In the case of a special government employee who has served in a department no more than 60 days during the immediately preceding 365 days, item (2) does not apply. Thus, for example, such an individual can receive compensation for representational services with respect to matters pending in the department in which the employee serves, as long as it is not a matter involving parties in which the employee personally and substantially participated.⁵

The conflict of interest rules also impose restrictions on what a Federal Government employee can do after leaving the Government. Under these rules, senior level officers and employees (including special government employees) who served at least 60 days cannot represent anyone other than the United States before the individual's former department or agency for 1 year after terminating employment. Whether an employee is a senior level officer or employee is determined by pay grade. The one-year post employment restriction does not apply to special government employees who serve less than 60 days during the 365-day period before termination of employment.⁶

Federal employees with pay grades above certain levels (and who have at least 60 days of service) are required to file annually public financial disclosures.

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 confidence in the IRS is key to maintaining that willingness.

The National Commission on Restructuring the IRS (the "Restructuring Commission") conducted a year-long study of the IRS and found that a number of factors contribute to current IRS management problems. The Restructuring Commission found that, 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 require expertise in various areas, particularly management and technology.

The Restructuring Commission concluded the following:

"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 believes that fundamental change in IRS management and oversight is essential. The Committee believes that a new management structure that will bring greater expertise in needed areas, and more focus and continuity will help the IRS to become an efficient, responsive, and respected agency that 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 appropriate ethics rules should be applied to the private sector members of the new IRS management in order to 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 does not 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 the IRS will provide better service and reduce IRS contact with taxpayers. 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 IRS in the administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws. As part of its oversight responsibilities, the Board has the responsibility to ensure that the organization and operation of the IRS allows it to carry out its mission. The Board will sunset September 30, 2008.

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 administration system, outsourcing or managed competition, and training and education; (3) to review and approve the Commissioner's plans for major reorganization of the IRS (except that the approval authority does not apply to the reorganization provided for under the bill); and (4) to review operations of the IRS in order to ensure the proper treatment of taxpayers. The Board also has the following specific responsibilities relating to management: (1) to recommend to the President candidates for Commissioner (and to recommend the removal of the Commissioner); (2) taking into account the recommendations, if any, of the Commissioner, to recommend to the Secretary 3 candidates for appointment as the National Taxpayer Advocate from individuals who have a background in customer service and tax law, and experience representing individual taxpayers (and to recommend the removal of the National Taxpayer Advocate); (3) to review the Commissioner's selection, evaluation, and compensation of IRS senior executives who have program management responsibility over significant functions of the IRS ; (4) and to review procedures of the IRS relating to financial audits.

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 will be determinative.

The Board has no responsibilities or authority with respect to the development and formulation of Federal tax policy relating to existing or proposed internal revenue laws. In addition, the Board has no authority (1) to intervene in specific taxpayer cases, including compliance activities involving specific taxpayers such as criminal investigations, examinations, and collection activities, (2) to engage in specific procurement activities of the IRS (e.g., selecting vendors or awarding contracts), or (3) to intervene in specific individual personnel matters.

Board members would have limited access to confidential tax return and return information under section 6103. This limited access would permit the Board to receive such information (i.e., information that has not been redacted to remove confidential tax return and return information) from the Treasury IG for Tax Administration or the Commissioner in connection with reports made to the Board. This access to section 6103 information does not include the taxpayer's name, address, or taxpayer or employer identification number. The Board members are subject to the anti-browsing rules applicable to IRS employees under present law.⁷

In exercising its duties, it is expected that the members of the Board shall maintain appropriate confidentiality (e.g., regarding enforcement matters).

The Board is required to report each year regarding the conduct of its responsibilities. The annual report shall be provided to the President and the House Committees on Ways and Means, Government Reform and Oversight, and Appropriations and the Senate Committees on Finance, Governmental Affairs, and Appropriations. In addition, the Board is required to report to the Ways and Means and Finance Committees if the IRS does not address problems identified by the Board.

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 9 members. Six of the members are so-called "private-life" members who are not otherwise Federal officers or employees. These private-life members are appointed by the President, with the advice and consent of the Senate. The other members are: (1) the Secretary (or, if the Secretary so designates, the Deputy Secretary); (2) the Commissioner; and (3) a representative from an employee organization that represents a substantial number of IRS employees and who is appointed by the President, with the advice and consent of the Senate. In appointing the representative of an employee organization, the President is not required to choose an individual recommended by the employee organization, but may choose whoever the President determines to be an appropriate representative of the employee organization.

The private-life members of the Board will be appointed without regard to political affiliation and based solely on their expertise in the following areas: (1) management of large service organizations; (2) customer service; (3) the Federal tax laws, including administration and compliance; (4) information technology; (5) organization development; and (6) the needs and concerns of taxpayers. In the aggregate, the private-life members of the Board should collectively bring to bear expertise in these enumerated areas.

A private-life Board member and the employee representative Board member may be removed at the will of the President. In addition, the Secretary (or Deputy Secretary) and the IRS Commissioner are automatically removed from the Board upon his or her termination of employment as such.

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 would be compensated at a rate of $50,000 a year. The other Board members will receive no compensation for their services as a Board member. All members of the Board are entitled to travel expenses for purposes of attending Board meetings or visiting IRS offices in connection with Board functions.

Ethical conduct rules

Private-life members

Under the bill, the private-life Board members are subject to the public financial disclosure rules applicable to Federal government employees above certain pay grades and who have at least 60 days of service. Thus, the private-life Board members are required to file a public financial disclosure report for purposes of confirmation, annually during their tenure on the Board, and upon termination of appointment.

The ethical conduct rules applicable to private-life Board members depend on whether or not such members are determined to be "special government employees" under the present-law rules. It is expected that they generally will be. In that case, they will be subject, at a minimum, to the ethical conduct rules applicable to special government employees. In addition, during their term as a Board member, a private-life Board member cannot represent any party (whether or not for compensation) with respect to (1) any matter before the Board or the IRS , (2) any tax-related matter before the Treasury Department or (3) any court proceeding with respect to a matter described in (1) or (2). Thus, for example, the day after appointment to the Board, a private-life Board member could not meet with representatives of the IRS or Treasury on behalf of a client or the Board member's corporate employer with respect to proposed tax regulations. On the other hand, the Board member could, for example, represent clients before the U.S. Customs Service. The special rules applicable to private-life Board members generally do not preclude the Board member from sharing in compensation from representation of clients by another person (e.g., a partner of the Board member) before the IRS or Treasury.⁸

In addition, private-life Board members are subject to the 1-year post employment restriction applicable to individuals above certain pay grades and who have served at least 60 days (whether or not the members are special government employees under the present-law rules).

If the Board members are determined not to be special government employees under the present-law rules, then they will be subject to the ethical conduct rules relating to regular Federal Government employees.

Representative of employee organization

In general, the bill provides that the employee representative or Board member is subject to the same ethical conduct rules as the private-life Board members. However, the bill modifies the otherwise applicable ethical conduct rules so that they do not preclude the employee representative from carrying out his or her duties as a Board member and his or her duties with respect to the employee organization. In particular, the employee representative is not prohibited from (1) representing the interests of the employee organization before the Federal Government on any matter, or (2) acting on a Board matter because the employee organization has a financial interest in the matter. In addition, the employee representative can continue to receive his or her compensation from the employee organization.⁹

The employee representative is subject to the same public financial disclosure rules as the private-life Board members. In addition, the employee organization is required to provide an annual financial report with the House Ways and Means Committee and the Senate Finance Committee. Such report is required to include the compensation paid to the individual serving on the Board, the compensation of individuals employed by the employee organization, and membership dues collected by the organization.

The employee representative is subject to the same 1-year post employment restriction applicable to the private-life Board members, except to the extent the representative is acting in his capacity as a representative of the employee organization.

Administrative matters

Term of appointments

The 6 private-life Board members will be appointed for 5-year terms. The private-life members may serve no more than two 5-year terms. Board member terms will be staggered, as a result of a special rule providing that some private-life members first appointed to the Board would serve terms of less than 5 years. Under this rule, 2 members first appointed will have a term of 2 years, 2 for a term of 4 years, and 2 for a term of 5 years. The terms of the initial Board members will run from the date of employment. Subsequent terms will run from expiration of the previous term. A Board member appointed to fill a vacancy before the expiration of a term will be appointed to the remainder of the term. Of course, such a member could be appointed to subsequent 5-year term.

Chair of the Board

The members of the Board are to elect a Chair from the private-life members for a 2-year term. Except as otherwise provided by a majority of the Board, the authority of the Chair includes the authority to hire appropriate staff, call meetings, establish committees, establish the agenda for meetings, and develop rules for the conduct of business.

Meetings

The Board is required to meet on a regular basis (as determined necessary by the Chair), but no less frequently than quarterly. The Board can meet privately, and is not subject to public disclosure laws.

A quorum of 5 members is required in order for the Board to conduct business. Actions of the Board can be taken by a majority vote of those members present and voting.

Staffing

The Chair is authorized to hire (and terminate) such personnel as the Chair finds necessary to enable the Board to carry out its duties. In addition, the Board will have such staff as detailed by the Commissioner or from another Federal agency 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 have no personal liability under Federal law with respect to any claim arising out of or resulting form an act or omission by the 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 as a 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 relating to the Board is 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. The legality of the actions of the IRS are not affected pending appointment of the Board.

B. Appointment and Duties of IRS Commissioner and Chief Counsel and Other Personnel 1. IRS Commissioner and other personnel (secs. 1102(a) and 1104 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.¹⁰ The Secretary has delegated to the Commissioner the administration and enforcement of the internal revenue laws.¹¹ The Commissioner generally does not have authority with respect to tax policy matters.¹²

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.

Explanation of Provision

As under present law, the Commissioner is appointed by the President, with the advice and consent of the Senate, and may be removed at will by the President. Under the bill, one of the qualifications of the Commissioner is demonstrated ability in management. The Commissioner is appointed to a 5-year term, beginning with the date of appointment. The Commissioner may be reappointed for more than one 5-year term. The Board recommends candidates to the President for the position of Commissioner; however, the President is not required to nominate for Commissioner a candidate recommended by the Board. The Board has the authority to recommend the removal of the Commissioner.

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, to exercise the IRS ' final authority concerning the substantive interpretation of the tax laws, to recommend to the President a candidate for Chief Counsel (and recommend the removal of the Chief Counsel), and to recommend candidates for the position of National Taxpayer Advocate to the IRS Board. If the Secretary determines not to delegate such 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, and the Senate Committees on Finance, Governmental Affairs, and Appropriations. 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).

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 is 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.

Effective Date

The provision s relating to the Commissioner 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. The 5-year term runs from the date of appointment.

2. IRS Chief Counsel (sec. 1102(a) and sec. 7803 of the Code)

Present Law

The President is authorized to appoint, by and with the consent of the Senate, an Assistant General Counsel of the Treasury, who is the Chief Counsel of the IRS . The Chief Counsel is the chief law officer for the IRS and has such duties as may be prescribed by the Secretary. The Secretary has delegated authority over the Chief Counsel to the Treasury General Counsel. The Chief Counsel does not report to the Commissioner, but to the Treasury General Counsel. As delegated by the Treasury General Counsel, the duties of the Chief Counsel include: (1) to be the legal advisor to the Commissioner and his or her officers and employees; (2) to furnish such legal opinions as may be required in the preparation and review of rulings and memoranda of technical advice and the performance of other duties delegated to the Chief Counsel; (3) to prepare, review, or assist in the preparation of proposed legislation, treaties, regulations and Executive Orders relating to laws affecting the IRS ; (4) to represent the Commissioner in cases before the Tax Court; (5) to determine what civil actions should be brought in the courts under the laws affecting the IRS and to prepare recommendations to the Department of Justice for the commencement of such actions and to authorize or sanction commencement of such actions.

Explanation of Provision

As under present law, the Chief Counsel is appointed by the President, with the advice and consent of the Senate. Under the bill, the Chief Counsel is not an Assistant General Counsel of the Treasury and reports directly to the Commissioner.

The Chief Counsel has such duties and powers as prescribed by the Secretary. Unless otherwise specified by the Secretary, these duties include the duties currently delegated to the Chief Counsel as described above. If the Secretary determined not to delegate such specified duties to the Chief Counsel, such determination is subject to the same notice requirement applicable to changes in the delegation of authority with respect to the Commissioner.

Effective Date

The provision is generally effective on the date of enactment. The provision providing that the Chief Counsel reports directly to the Commissioner is effective 90 days after the date of enactment.

C. Structure and Funding of the Employee Plans and Exempt Organizations Division ("EP/EO") (sec. 1102 of the bill and sec. 7803 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.¹³ 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."¹⁴

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.¹⁵ 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

To facilitate the reorganization of the IRS along functional lines, the Committee believes that the statutory provision requiring the establishment of the Office of Employee Plans and Exempt Organizations under the direction of an Assistant Commissioner should be eliminated. In addition, because 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, the Committee believes that it is appropriate to repeal the funding mechanism.

Explanation of Provision

The bill eliminates the statutory requirement contained in section 7802(b) that there be an "Office of Employee Plans and Exempt Organizations" under the supervision and direction of an Assistant Commissioner. The Committee intends that a comparable structure be created administratively to ensure that adequate resources within the IRS are devoted to oversight of the tax-exempt sector.

In addition, because 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, the bill repeals the funding mechanism. 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 . In this regard, however, the Committee believes 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.

For example, it is important to allocate sufficient funds for EP/EO staffing adequately to monitor and assist businesses in establishing and maintaining retirement plans. Recently, in Revenue Procedure 98-22, the IRS announced the expansion of the self-correction programs it offers employers to encourage companies to identify and correct errors without incurring significant penalties. These changes are welcomed, and it is not intended that the elimination of the statutory requirement contained in section 7802(b)(1) or the self-funding mechanism described in section 7802(b)(2) impede the implementation of these and EP/EO's other programs and activities. Rather, it is intended that there be adequate funding for EP/EO, including these self-correction programs that will encourage the establishment and continuation of retirement plans to increase coverage of American workers while protecting the rights of employees to benefits under these plans and maintaining the integrity and purposes of the exemption provisions.

Effective Date

The provision is effective on the date of enactment.