IRS Restructuring and Reform Act of
1998
Senate
Report page2
 
D. Taxpayer Advocate (secs. 1102(a), (c), and (d) of the bill
and sec. 7803(c) of the Code)
Present
Law
Taxpayer
Advocate
In 1996, the Taxpayer Bill of Rights 2 ("TBOR
2") established the position of Taxpayer
Advocate, which replaced the position of Taxpayer
Ombudsman, created in 1979 by the
IRS
. The Taxpayer Advocate is appointed by and reports
directly to the
IRS
Commissioner.
TBOR 2 also created the Office of the Taxpayer
Advocate. The functions of the office are (1) to
assist taxpayers in resolving problems with the
IRS
, (2) to identify areas in which taxpayers have
problems in dealings with the
IRS
, (3) to propose changes (to the extent possible) in
the administrative practices of the
IRS
that will mitigate those problems, and (4) to
identify potential legislative changes that may
mitigate those problems.
Taxpayer
assistance orders
Taxpayers can request that the Taxpayer Advocate
issue a taxpayer assistance order ("TAO")
if the taxpayer is suffering or about to suffer a
significant hardship as a result of the manner in
which the internal revenue laws are being
administered. A TAO may require the
IRS
to release property of the taxpayer that has been
levied upon, or to cease any action, take any action
as permitted by law, or refrain from taking any
action with respect to the taxpayer.
Under present law, the direct point of contact for
taxpayers seeking taxpayer assistance orders is a
problem resolution officer appointed by a District
Director or a Regional Director of Appeals. The
Taxpayer Advocate has designated the authority to
issue taxpayer assistance orders to the local and
regional problem resolution officers.
Reports
of the Taxpayer Advocate
The Taxpayer Advocate is required to report annually
to the House Committee on Ways and Means and the
Senate Finance Committee on the objectives of the
Taxpayer Advocate for the up-coming fiscal year.
This report is required to be provided no later than
June 30 of each calendar year and is to contain full
and substantive analysis, in addition to statistical
information.
The Taxpayer Advocate is also required to report
annually to the House Committee on Ways and Means
and the Senate Finance Committee on the activities
of the Taxpayer Advocate during the most recently
ended fiscal year. This report is required to be
provided no later than December 31 of each calendar
year, and is to contain full and substantive
analysis, in addition to statistical information.
This report is also required to: (1) identify the
initiatives the Taxpayer Advocate has taken on
improving taxpayer services and
IRS
responsiveness; (2) contain recommendations received
from individuals with the authority to issue TAOs;
(3) contain a summary of at least 20 of the most
serious problems encountered by taxpayers, including
a description of the nature of such problems; (4)
contain an inventory of the items described in (1),
(2), and (3) for which action has been taken and the
result of such action; (5) contain an inventory of
the items described in (1), (2), and (3) for which
action remains to be completed and the period during
which each item has remained on such inventory; (6)
contain an inventory of the items described in (1),
(2) and (3) for which no action has been taken, the
period during which the item has remained on the
inventory, the reasons for the inaction, and
identify any
IRS
official who is responsible for the inaction; (7)
identify any TAO that was not honored by the
IRS
in a timely manner; (8) contain recommendations for
such administrative and legislative action as may be
appropriate to resolve problems encountered by
taxpayers; (9) describe the extent to which regional
problem resolution officers participate in the
selection and evaluation of local problem resolution
officers, and (10) include such other information as
the Taxpayer Advocate deems advisable.
The reports of the Taxpayer Advocate are to be
submitted directly to the Congressional Committees
without prior review or comment from the
Commissioner, Secretary, any other officer or
employee of the Treasury, or the Office of
Management and Budget.
Reasons
for Change
The Committee believes that the Taxpayer Advocate
serves an important role within the
IRS
in terms of preserving taxpayer rights and solving
problems that taxpayers encounter in their dealings
with the
IRS
. To that end, it is appropriate that the
IRS
Oversight Board have input in the selection of the
Taxpayer Advocate. Due to the enhanced powers of the
Taxpayer Advocate in TBOR2 and this bill, the
Committee has been advised that the Taxpayer
Advocate should be appointed by the Secretary to
avoid constitutional problems. In addition, the
Committee believes that the Taxpayer Advocate should
have experience appropriate to the position and that
the Taxpayer Advocate's objectivity would be best
preserved by limiting prior and future employment
with the
IRS
. The Committee also believes that the reporting
requirements of the Taxpayer Advocate should be
targeted not only towards solving problems with the
IRS
but also towards preventing problems before they
arise.
The Committee believes that the Taxpayer Advocate
must have broad discretion to provide relief to
taxpayers. In determining whether a taxpayer
assistance order should be issued, the Taxpayer
Advocate should consider certain factors as
constituting a "significant hardship" for
the taxpayer. In addition to providing relief if the
taxpayer is about to suffer a significant hardship,
the Taxpayer Assistance Order should be issued in
other appropriate situations, such as if there is an
immediate threat of adverse action, if there has
been a delay of more than 30 days in resolving the
taxpayer's account problems, the taxpayer will have
to pay significant costs if relief is not granted,
or the taxpayer will suffer irreparable injury, or
long-term adverse impact, if relief is not granted.
The Committee believes that the Taxpayer Advocate
should have flexibility to issue a TAO under any
appropriate circumstances, not only when one of the
listed factors exists.
Explanation
of Provision
National
Taxpayer Advocate
The bill renames the Taxpayer Advocate the
"National Taxpayer Advocate." The bill
provides that the
IRS
Oversight Board is to recommend to the Secretary 3
candidates for National Taxpayer Advocate from among
individuals with a background in customer service as
well as tax law and with experience representing
individual taxpayers. The Secretary is required to
choose a National Taxpayer Advocate from among the
individuals recommended by the Oversight Board. An
individual may be appointed as the National Taxpayer
Advocate only if the individual was not an officer
or employee of the
IRS
during the 2-year period ending with such
appointment and the individual agrees not to accept
employment with the
IRS
for at least 5 years after ceasing to be the
National Taxpayer Advocate.
The bill replaces the present-law problem resolution
system with a system of local Taxpayer Advocates who
report directly to the National Taxpayer Advocate
and who will be employees of the Taxpayer Advocate's
Office, independent from the
IRS
examination, collection, and appeals functions. The
National Taxpayer Advocate has the responsibility to
evaluate and take personnel actions (including
dismissal) with respect to any local Taxpayer
Advocate or any employee in the Office of the
National Taxpayer Advocate. In conjunction with the
Commissioner, the National Taxpayer Advocate is
required to develop career paths for local Taxpayer
Advocates.
The National Taxpayer Advocate is required to
monitor the coverage and geographical allocation of
the local Taxpayer Advocates, develop guidance to be
distributed to all
IRS
officers and employees outlining the criteria for
referral of taxpayer inquires to local taxpayer
advocates, ensure that the local telephone number
for the local taxpayer advocate is published and
available to taxpayers.
Each local Taxpayer Advocate may consult with the
appropriate supervisory personnel of the
IRS
regarding the daily operation of the office of the
Taxpayer Advocate. At the initial meeting with any
taxpayer seeking the assistance of the Office of the
Taxpayer Advocate, the local taxpayer advocate is
required to notify the taxpayer that the Office
operated independently of any other
IRS
office and reports directly to Congress through the
National Taxpayer Advocate. At the discretion of the
local taxpayer advocate, the advocate shall not
disclose to the
IRS
any contact with or information provided by the
taxpayer. Each local office of the Taxpayer Advocate
is to maintain a separate phone, facsimile, and
other electronic communication access, and a
separate post office address.
The
IRS
would be required to publish the taxpayer's right to
contact the local Taxpayer Advocate on the statutory
notice of deficiency.
Taxpayer
assistance orders
The provision expands the circumstances under which
a TAO may be issued. The bill provides that a
"significant hardship" is deemed to occur
if one of the following four factors exists: (1)
there is an immediate threat of adverse action; (2)
there has been a delay of more than 30 days in
resolving the taxpayer's account problems; (3) the
taxpayer will have to pay significant costs
(including fees for professional services) if relief
is not granted; or (4) the taxpayer will suffer
irreparable injury, or a long-term adverse impact,
if relief is not granted. These factors are not an
exclusive list of what constitutes a significant
hardship; a TAO may also be issued in other
circumstances in which it is determined that the
taxpayer is or will suffer a significant hardship.
The Taxpayer Advocate is also authorized to issue a
TAO in any circumstances that the Taxpayer Advocate
considers appropriate for the issuance of a TAO.
In determining whether to issue a TAO in cases in
which the
IRS
failed to follow applicable published guidance
(including procedures set forth in the Internal
Revenue Manual), the Taxpayer Advocate is to
construe the matter in a manner most favorable to
the taxpayer.
Reports
of the National Taxpayer Advocate
The provision requires the annual report regarding
the activities of the National Taxpayer Advocate for
the most recently ended fiscal year to (in addition
to the information required under present law): (1)
identify areas of the tax law that impose
significant compliance burdens on taxpayers or the
IRS
, including specific recommendations for remedying
such problems; and (2) identify the 10 most
litigated issues for each category of taxpayers,
including recommendations for mitigating such
disputes.
Effective
Date
The provision is generally effective on the date of
enactment. During the period before the appointment
of the
IRS
Oversight Board, the National Taxpayer Advocate
shall be appointed by the Secretary (taking into
consideration individuals nominated by the
Commissioner) from among individuals who have a
background in customer service as well as tax law
and experience in representing individual taxpayers.
The provision providing that the Taxpayer Advocate
reports directly to the Commissioner, the provision
providing that the Taxpayer Advocate is appointed by
the Secretary, and the restrictions on previous and
subsequent employment of the Taxpayer Advocate do
not apply to the individual serving as the Taxpayer
Advocate on the date of enactment.
E.
Treasury Office of Inspector General;
IRS
Office of the Chief Inspector
(secs.
1102 and 1103 of the bill, sec. 7803(d) of the Code,
and secs. 2, 8D, and 9 of the Inspector General Act
of 1978)
Present
Law
Treasury
Inspector General
The Treasury Office of Inspector General
("Treasury IG") was established in 1988
and charged with conducting independent audits,
investigations and review to help the Department of
Treasury accomplish its mission, improve its
programs and operations, promote economy, efficiency
and effectiveness, and prevent and detect fraud and
abuse. The Treasury IG derives its statutory
authority under the Inspector General Act of 1978,
as amended ("IG Act of 1978").
Appointment
and qualifications
The IG Act of 1978 provides that the Treasury IG is
selected by the President, with the advice and
consent of the Senate, without regard to political
affiliation and solely on the basis of integrity and
demonstrated ability in accounting, auditing,
financial analysis, law, management analysis, public
administration, or investigations. The Treasury IG
can be removed from office by the President. The
President must communicate the reasons for such
removal to both Houses of Congress.
Duties
and responsibilities
The Treasury IG generally is authorized to conduct,
supervise and coordinate internal audits and
investigations relating to the programs and
operations of the Treasury, including all of its
bureaus and offices.16
Special rules apply, however, with respect to the
Treasury IG's jurisdiction over ATF, Customs, the
Secret Service and the
IRS
--the four so-called "law enforcement
bureaus." Upon its establishment, the Treasury
IG assumed the internal audit functions previously
performed by the offices of internal affairs of ATF,
Customs and the Secret Service. Although the
Treasury IG was granted oversight responsibility for
the internal investigations performed by the Office
of Internal Affairs of ATF, the Office of Internal
Affairs of Customs, and the Office of Inspections of
the Secret Service, the internal investigation or
inspection functions of these offices remained with
the respective bureaus. The Treasury IG did not
assume responsibility for either the internal audit
or inspection functions of the
IRS
Office of the Chief Inspector. However, it was
directed to oversee the internal audits and internal
investigations performed by the
IRS
Office of the Chief Inspector.
The Commissioner and the Treasury IG have entered
into two Memorandums of Understanding ("MOUs")17
to clarify the respective roles of the
IRS
Office of the Chief Inspector and the Treasury IG in
two primary areas: (1) the investigation of
allegations of wrongdoing by
IRS
executives and employees in situations where the
independence of the Office of the Chief Inspector
could be questioned, and (2) oversight by the
Treasury IG of the
IRS
Office of the Chief Inspector.18
Pursuant to the 1990 MOU, the Commissioner agreed to
transfer 21 FTEs and $1.9 million from the
IRS
appropriation to the Treasury IG appropriation to be
used for the following purposes: (1) oversight of
the operations of the Office of the Chief Inspector;
(2) conduct of special reviews of
IRS
operations; (3) investigation of allegations of
misconduct concerning the Commissioner, the Senior
Deputy Commissioner, and employees of the
IRS
Office of the Chief Inspector; and (4) investigation
of allegations of misconduct where the independence
of the
IRS
Office of the Chief Inspector might be questioned.
With respect to item (4), the Commissioner and
Treasury IG agreed that all allegations of
misconduct involving
IRS
executives and managers (Grade 15 and above), as
well as any other allegation involving
"significant or notorious" matters were to
be referred to the Treasury IG, and that
investigations arising out of such referrals
generally would be conducted by the Treasury IG.
In general, under the IG Act of 1978, Inspectors
General are instructed to report expeditiously to
the Attorney General whenever the Inspector General
has reasonable grounds to believe there has been a
violation of Federal criminal law. However, in
matters involving criminal violations of the
Internal Revenue Code, the Treasury IG may report to
the Attorney General only those offenses under
section 7214 of the Code (unlawful acts of revenue
officers or agents, including extortion, bribery and
fraud) without the consent of the Commissioner.
Authority
The Treasury IG reports to and is under the general
supervision of the Secretary of Treasury, acting
through the Deputy Secretary. In general, the
Secretary cannot prevent or prohibit the Treasury IG
from initiating, carrying out, or completing any
audit or investigation or from issuing any subpoena
during the course of any audit or investigation.
However, section 8D of the IG Act of 1978 grants the
Secretary authority to prohibit audits or
investigations by the Treasury IG under certain
circumstances. In particular, the Treasury IG is
under the authority, direction, and control of the
Secretary with respect to audits or investigations,
or the issuance of subpoenas, which require access
to sensitive information concerning: (1) ongoing
criminal investigations or proceedings; (2)
undercover operations; (3) the identity of
confidential sources, including protected witnesses;
(4) deliberations and decisions on policy matters,
including documented information used as a basis for
making policy decisions, the disclosure of which
could reasonably be expected to have a significant
influence on the economy or market behavior; (5)
intelligence or counterintelligence matters; (6)
other matters the disclosure of which would
constitute a serious threat to national security or
to the protection of certain persons. With respect
to audits, investigations or subpoenas that require
access to the above-listed information, the
Secretary may prohibit the Treasury IG from carrying
out such audit, investigation or subpoena if the
Secretary determines that such prohibition is
necessary to prevent the disclosure of such
information or to prevent significant impairment to
the national interests of the
United States
. The Secretary must provide written notice of such
a prohibition to the Treasury IG, who must, in turn,
transmit a copy of such notice to the Committees on
Government Reform and Oversight and Ways and Means
of the House and the Committees on Governmental
Affairs and Finance of the Senate.
Access
to taxpayer returns and return information
The Treasury IG has access to taxpayer returns and
return information under section 6103(h)(1) of the
Code. However, such access is subject to certain
special requirements, including the requirement that
the Treasury IG notify the
IRS
Office of the Chief Inspector (or the Deputy
Commissioner in certain circumstances) of its intent
to access returns and return information.
Reporting
requirements
Under the IG Act of 1978, the Treasury IG reports to
the Congress semiannually on its activities. Reports
from the Treasury IG are transmitted to the
Committees on Government Reform and Oversight and
Ways and Means of the House and the Committees on
Governmental Affairs and Finance of the Senate.
Resources
For fiscal year 1997, the Treasury IG had 296 FTEs
and total funding of $29.7 million. 174 FTEs were
assigned to the Treasury IG's audit function and 61
were assigned to the investigative function. The
remaining FTEs were divided among the following
functions: evaluations, legal, program, technology
and administrative support. Of the total Treasury IG
FTEs, approximately 23 were used for
IRS
oversight activities in fiscal year 1997.
IRS
Office of Chief Inspector
The
IRS
Office of the Chief Inspector (also known as the
"Inspection Service") was established on
October 1, 19
51, in response to publicity revealing widespread
corruption in the
IRS
. At the time of its creation, President Harry S.
Truman stated, "A strong, vigorous inspection
service will be established and will be made
completely independent of the rest of the Internal
Revenue Service."
Appointment
of the Chief Inspector
In 1952, the Office of the Assistant Commissioner
(Inspection) was established. The office was
redesignated as the Office of the Chief Inspector on
March 25, 1990
. The Chief Inspector is appointed by the
Commissioner. In this regard, pursuant to Treasury
Director 40-01, the Commissioner must consult with
the Treasury IG before selecting candidates for the
position of Chief Inspector (and all other senior
executive service ("
SES
") positions in the Office of the Chief
Inspector). The Commissioner must also consult with
the Treasury IG regarding annual performance
appraisals for the Chief Inspector and other
SES
officials.
The Office of the Chief Inspector consists of a
National Office and the offices of the Regional
Inspectors. The offices of the Regional Inspectors
are located in the same cities and have the same
geographic boundaries as the offices of the four
IRS
Regional Commissioners. The Regional Inspectors
report directly to the Chief Inspector.
Duties
and responsibilities
The Office of the Chief Inspector generally is
responsible for carrying out internal audits and
investigations that: (1) promote the economic,
efficient, and effective administration of the
nation's tax laws; (2) detect and deter fraud and
abuse in
IRS
programs and operations; and (3) protect the
IRS
against external attempts to corrupt or threaten its
employees. The Chief Inspector reports directly to
the Commissioner and Deputy Commissioner of the
IRS
.
The
IRS
Inspection Service is divided into three functions:
Internal Security, Internal Audit, and Integrity
Investigations and Activities. Internal Security's
responsibilities include criminal investigations
(employee conduct, bribery, assault and threat and
investigations of non-
IRS
employees for acts such as impersonation, theft,
enrolled agent misconduct, disclosure, and
anti-domestic terrorism) investigative support
activities (including forensic lab, computer
investigative support, and maintenance of law
enforcement equipment), protection, and background
investigations.
Internal Audit is responsible for providing
IRS
management with independent reviews and appraisals
of all
IRS
activities and operations. In addition, Internal
Audit makes recommendations to improve the
efficiency and effectiveness of programs and to
assist
IRS
officials in carrying out their program and
operational responsibilities. In this regard,
Internal Audit generally conducts performance
reviews (program audits, system development audits,
internal control audits) and financial reviews
(financial statement audits and financial related
reviews).
Integrity Investigations and Activities are joint
internal audit and internal security operations
undertaken as a proactive effort to detect and deter
fraud and abuse within the
IRS
. Integrity Investigations and Activities also
includes the UNAX
Central
Case
Development
Center
. The Center was developed in October, 1997, in
response to the Taxpayer Browsing Protection Act of
1997. Its purpose is to detect unauthorized accesses
to
IRS
computer systems by
IRS
employees and to refer such instances to Internal
Security investigators for further investigation.
Authority
The Chief Inspector derives specific and general
authority from delegation by the Commissioner and
Deputy Commissioner. In addition, under section
7608(b) of the Code, the Chief Inspector is
authorized to perform certain functions in
connection with the duty of enforcing any of the
criminal provisions of the Code, including executing
and serving search and arrest warrants, serving
subpoenas and summonses, making arrests without
warrant, carrying firearms, and seizing property
subject to forfeiture under the Code.
Access
to taxpayer returns and return information The Office of the Chief Inspector has full access to taxpayer returns
and return information.
Reporting
requirements
The Office of the Chief Inspector reports facts
developed through its internal audit and internal
security activities to
IRS
management officials, who are charged with the
responsibility of reviewing
IRS
activities. The results of the Chief Inspector's
internal audit and internal security activities also
are reported to the Treasury IG and are included in
the Treasury IG's semiannual reports to Congress.
Internal audit reports prepared by the Office of the
Chief Inspector are provided monthly to the
Government Accounting Office, as well as to the
House and Senate Appropriations Committees. In
addition, a monthly list of Internal Audit reports
is provided to Treasury and the Office of Management
and Budget. Reports of Investigation regarding
criminal conduct are referred to the Department of
Justice for prosecution.
Resources
The
IRS
Office of the Chief Inspector had 1,202 FTEs for
1997 and total funding of $100.1 million. Of these
FTEs, approximately 442 performed Internal Audit
functions, 511 performed Internal Security
functions, and 94 performed Integrity Investigations
and Activities. Of the remaining FTEs, approximately
95 were dedicated to information technology
functions and 60 staffed the offices of the Chief
Inspector and the Regional Inspectors.
Reasons
for Change
The Committee believes that the current
IRS
Office of the Chief Inspector lacks sufficient
structural and actual autonomy from the agency it is
charged with monitoring and overseeing. Further, the
current relationship between the Treasury IG and the
IRS
Office of the Chief Inspector does not foster
appropriate oversight over the
IRS
. The Committee believes that the establishment of
an independent Inspector General within the
Department of Treasury whose primary focus and
responsibility will be to audit, investigate, and
evaluate
IRS
programs will improve the quality as well as the
credibility of
IRS
oversight.
Explanation
of Provision
In
general
The bill establishes a new, independent, Treasury
Inspector General for Tax Administration
("Treasury IG for Tax Administration")
within the Department of Treasury. The
IRS
Office of the Chief Inspector is eliminated, and all
of its powers and responsibilities are transferred
to the Treasury IG for Tax Administration. The
Treasury IG for Tax Administration has the powers
and responsibilities generally granted to Inspectors
General under the IG Act of 1978, without the
limitations that currently apply to the Treasury IG
under section D of the Act. The role of the existing
Treasury IG is redefined to exclude responsibility
for the
IRS
. The Treasury IG for Tax Administration is under
the supervision of the Secretary of Treasury, with
certain additional reporting to the Board and the
Congress.
Appointment
and qualifications of Treasury IG for Tax
Administration
The Treasury IG for Tax Administration is selected
by the President, with the advice and consent of the
Senate. The Treasury IG for Tax Administration can
be removed from office by the President. The
President must communicate the reasons for such
removal to both Houses of Congress.
The Treasury IG for Tax Administration must be
selected without regard to political affiliation and
solely on the basis of integrity and demonstrated
ability in accounting, auditing, financial analysis,
law, management analysis, public administration, or
investigations. In addition, however, the Treasury
IG for Tax Administration should have experience in
tax administration and demonstrated ability to lead
a large and complex organization. The Treasury IG
for Tax Administration may not be employed by the
IRS
within the two years preceding and the five years
following his or her appointment.
The Treasury IG for Tax Administration is required
to appoint an Assistant Inspector General for
Auditing and an Assistant Inspector for Inspections.
Under the bill, such appointees, as well as any
Deputy Inspector General(s) appointed by the
Treasury IG for Tax Administration, may not be
employed by the
IRS
within the two years preceding and the five years
following their appointments.
Duties
and responsibilities of Treasury IG for Tax
Administration
The Treasury IG for Tax Administration has the
present-law duties and responsibilities currently
delegated to the Treasury IG with respect to the
IRS
. In addition, the Treasury IG for Tax
Administration assumes all of the duties and
responsibilities currently delegated to the
IRS
Office of the Chief Inspector. The Treasury IG for
Tax Administration has jurisdiction over
IRS
matters, as well as matters involving the Board.
Accordingly, the Treasury IG for Tax Administration
is charged with conducting audits, investigations,
and evaluations of
IRS
programs and operations (including the Board) to
promote the economic, efficient and effective
administration of the nation's tax laws and to
detect and deter fraud and abuse in
IRS
programs and operations. In this regard, the
Treasury IG for Tax Administration specifically is
directed to evaluate the adequacy and security of
IRS
technology on an ongoing basis. In addition, the
Treasury IG for Tax Administration is responsible
for protecting the
IRS
against external attempts to corrupt or threaten its
employees. The Treasury IG for Tax Administration is
charged with investigating allegations of criminal
misconduct (e.g., Code sections 7212 , 7213, 7214,
7216 and new section 7217), as well as
administrative misconduct (e.g., violations of the
Taxpayer Bill of Rights and the Taxpayer Bill of
Rights 2, the Office of Government Ethics Standards
of Ethical Conduct and the
IRS
Supplemental Standards of Ethical Conduct).
In addition, the bill directs the Treasury IG for
Tax Administration to implement a program
periodically to audit at least one percent of all
determinations (identified through a random
selection process) where the
IRS
has asserted either section 6103 (directly or in
connection with the Freedom of Information Act or
the Privacy Act) or law enforcement considerations
(i.e., executive privilege) as a rationale for
refusing to disclose requested information. The
program must be implemented within 6 months after
establishment of the Treasury IG for Tax
Administration. The Treasury IG for Tax
Administration is directed to report any findings of
improper assertion of section 6103 or law
enforcement considerations to the Board.
Further, the Treasury IG for Tax Administration is
directed to establish a toll-free confidential
telephone number for taxpayers to register
complaints of misconduct by
IRS
employees and to publish the telephone number in
IRS
Publication 1.
There are no restrictions on the Treasury IG for Tax
Administration's ability to refer matters to the
Department of Justice. Thus, the Treasury IG for Tax
Administration is required to report to the Attorney
General whenever the Treasury IG for Tax
Administration has reasonable grounds to believe
that there has been a violation of Federal criminal
law.
Authority
of Treasury IG for Tax Administration
The Treasury IG for Tax Administration reports to
and is under the general supervision of the
Secretary of Treasury. Under the bill, the Secretary
cannot prevent or prohibit the Treasury IG for Tax
Administration from initiating, carrying out, or
completing any audit or investigation or from
issuing any subpoena during the course of any audit
or investigation.
Under the bill, the Treasury IG for Tax
Administration must provide to the Board all reports
regarding
IRS
matters on a timely basis and conduct audits or
investigations requested by the Board. The Treasury
IG for Tax Administration also must, in a timely
manner, conduct such audits or investigations and
provide such reports as may be requested by the
Commissioner.
In carrying out the duties and responsibilities
described above, the Treasury IG for Tax
Administration has the present-law authority
generally granted to Inspectors General under the IG
Act of 1978. The limitations on the authority of the
Treasury IG under such Act do not apply to the
Treasury IG for Tax Administration. In addition, the
Treasury IG for Tax Administration has the authority
granted to the
IRS
Office of the Chief Inspector under present-law Code
section 7608, including the right to execute and
serve search and arrest warrants, to serve subpoenas
and summonses, to make arrests without warrant, to
carry firearms, and to seize property subject to
forfeiture under the Code.
Resources
To ensure that the Treasury IG for Tax
Administration has sufficient resources to carry out
his or her duties and responsibilities under the
bill, all but 300 FTEs from the
IRS
Office of the Chief Inspector are transferred to the
Treasury IG for Tax Administration. Such FTEs
include all of the FTEs performing investigative
functions in the Office of the Chief Inspector
Internal Security and Integrity Investigations and
Activities. In addition, the 21 FTEs previously
transferred from Inspection to Treasury IG pursuant
to the 1990 MOU to perform oversight of the
IRS
are transferred to the Treasury IG for Tax
Administration.
The Commissioner will retain approximately 300 FTEs
from the
IRS
Office of the Chief Inspector to staff an audit
function (including support staff) for internal
IRS
management purposes. Like other
IRS
functions, however, this audit function is subject
to oversight and review by the Treasury IG for Tax
Administration.
Access
to taxpayer returns and return information
Taxpayer returns and return information are
available for inspection by the Treasury IG for Tax
Administration pursuant to section 6103(h)(1). Thus,
the Treasury IG for Tax Administration has the same
access to taxpayer returns and return information as
does the Chief Inspector under present law.
Reporting
requirements
The Treasury IG for Tax Administration is subject to
the semiannual reporting requirements set forth in
section 5 of the IG Act of 1978. As under present
law, reports are made to the Committees on
Government Reform and Oversight and Ways and Means
of the House and the Committees on Governmental
Affairs and Finance of the Senate. The reports must
contain the information that is required to be
reported by the Treasury IG with respect to the
IRS
under present law, as well as information regarding
the source, nature and status of taxpayer complaints
and allegations of serious misconduct by
IRS
employees received by the
IRS
or by the Treasury IG for Tax Administration. In
addition, the Treasury IG for Tax Administration is
required to report annually on certain additional
information (e.g., regarding the use of enforcement
statistics in evaluating
IRS
employees, the implementation of various taxpayer
rights protections, and
IRS
employee terminations and mitigations) required by
the bill.
Treasury
IG
The Treasury IG generally continues to have its
present-law responsibilities and authority with
respect to all Treasury functions other than the
IRS
and the Board. However, the Treasury IG generally
does not have access to taxpayer returns and return
information under section 6103 (unless the Secretary
specifically authorizes such access).
The Treasury IG for Tax Administration operates
independently of the Treasury IG. The Secretary of
Treasury is directed to establish procedures
pursuant to which the Treasury IG for Tax
Administration and the Treasury IG shall coordinate
audits and investigations in cases involving
overlapping jurisdiction.
The Treasury IG continues to have responsibility for
providing an opinion on the Department of Treasury's
consolidated financial statement as required under
the Chief Financial Officer Act. The Treasury IG for
Tax Administration is responsible for rendering an
opinion on the
IRS
custodial and administrative accounts (to the extent
the Government Accounting Office does not exercise
its option to preempt under the CFO Act).
Effective
Date
The provision is effective 180 days after the date
of enactment.
E.
Prohibition on Executive Branch Influence Over
Taxpayer Audits
(sec. 1105 of the bill and new sec. 7217 of the
Code)
Present
Law
There is no explicit prohibition in the Code on
high-level Executive Branch influence over taxpayer
audits and collection activity.
The Internal Revenue Code prohibits disclosure of
tax returns and return information, except to the
extent specifically authorized by the Internal
Revenue Code (sec. 6103). Unauthorized disclosure is
a felony punishable by a fine not exceeding $5,000
or imprisonment of not more than five years, or both
(sec. 7213). An action for civil damages also may be
brought for unauthorized disclosure (sec. 7431).
Reasons
for Change
The Committee believes that the perception that it
is possible that high-level Executive Branch
influence over taxpayer audits and collection
activity could occur has a negative influence on
taxpayers' views of the tax system. Accordingly, the
Committee believes that it is appropriate to
prohibit such influence.
Explanation
of Provision
The bill makes it unlawful for a specified person to
request that any officer or employee of the
IRS
conduct or terminate an audit or otherwise
investigate or terminate the investigation of any
particular taxpayer with respect to the tax
liability of that taxpayer. The prohibition applies
to the President, the Vice President, and employees
of the executive offices of either the President or
Vice President, as well as any individual (except
the Attorney General) serving in a position
specified in section 5312 of Title 5 of the United
States Code (these are generally Cabinet-level
positions). The prohibition applies to both direct
requests and requests made through an intermediary.
In the case of a law enforcement action authorized
by the Attorney General, discussions involving
specified persons with respect to that law
enforcement action shall not be considered to be
requests made through an intermediary.
Any request made in violation of this rule must be
reported by the
IRS
employee to whom the request was made to the Chief
Inspector of the
IRS
. The Chief Inspector has the authority to
investigate such violations and to refer any
violations to the Department of Justice for possible
prosecution, as appropriate. Anyone convicted of
violating this provision will be punished by
imprisonment of not more than 5 years or a fine not
exceeding $5,000 (or both).
Three exceptions to the general prohibition apply.
First, the prohibition does not apply to a request
made to a specified person by or on behalf of a
taxpayer that is forwarded by the specified person
to the
IRS
. This exception is intended to cover two types of
situations. The first situation is where a taxpayer
(or a taxpayer's representative) writes to a
specified person seeking assistance in resolving a
difficulty with the
IRS
. This exception permits the specified person who
receives such a request to forward it to the
IRS
for resolution without violating the general
prohibition. The second situation that this first
exception is intended to cover is an audit or
investigation by the
IRS
of a Presidential nominee. Under present law (sec.
6103(c)), nominees for Presidentially appointed
positions consent to disclosure of their tax returns
and return information so that background checks may
be conducted. Sometimes an audit or other
investigation is initiated as part of that
background check. The Committee anticipates that any
such audit or investigation that is part of such a
background check will be encompassed within this
first exception.
The second exception to the general prohibition
applies to requests for disclosure of returns or
return information under section 6103 if the request
is made in accordance with the requirements of
section 6103.
The third exception to the general prohibition
applies to requests made by the Secretary of the
Treasury as a consequence of the implementation of a
change in tax policy.
Effective
Date The
provision applies to violations occurring after the
date of enactment.
G.
IRS
Personnel Flexibilities
(Secs. 1201-1205 of the bill and new chapter 95 of
Title 5, U.S.C.)
Present
Law
The
IRS
is subject to the personnel rules and procedures set
forth in title 5, United States Code. Under these
rules,
IRS
employees generally are classified under the General
Schedule or the Senior Executive Service.
Reasons
for Change
The Committee believes that as part of restructuring
the
IRS
, the Commissioner should have the ability to bring
in experts and the flexibility to revitalize the
current
IRS
workforce. The current hiring practices often
inhibit the ability of the Commissioner to change
the
IRS
' institutional culture. Commissioner Rossotti has
indicated that in order to maximize efforts to
transform the
IRS
into an efficient, modern and responsive agency, the
ability to recruit and retain a top-notch leadership
and technical team is critical.
The Committee believes the
IRS
needs the flexibility to recruit employees from the
private sector, to redesign its salary and incentive
structures to reward employees who meet their
objectives, and to hold non-performers accountable.
Personnel and pay flexibilities are necessary
prerequisites for larger fundamental changes in the
IRS
.
The Committee wants to support the Commissioner's
initiatives to reposition the current
IRS
workforce as part of implementing a new organization
designed around the needs of taxpayers.
Explanation
of Provision
In general
The bill amends title 5 of the United States Code to
provide certain personnel flexibilities to the
IRS
. In general, the bill provides that the
IRS
exercise the personnel flexibilities consistently
with existing rules relating to merit system
principles, prohibited personnel practices, and
preference eligibles. In those cases where the
exercise of personnel flexibilities would affect
members of the employees' union, such employees'
will not be subject to the exercise of any
flexibility unless there is a written agreement
between the
IRS
and the employees' union. Negotiation impasses
between the
IRS
and the employees' union may be appealed to the
Federal Services Impasse Panel.
Senior
management and technical positions
Streamlined critical pay authority
The bill provides a streamlined process for the
Secretary of the Treasury, or his delegate, to fix
the compensation of, and appoint up to 40
individuals to, designated critical technical and
professional positions, provided that: (1) the
positions require expertise of an extremely high
level in a technical, administrative or professional
field and are critical to the
IRS
; (2) exercise of the authority is necessary to
recruit or retain an individual exceptionally well
qualified for the position; (3) designation of such
positions is approved by the Secretary; (4) the
terms of such appointments are limited to no more
than four years; (5) appointees to such positions
are not
IRS
employees immediately prior to such appointment; and
(6) the total annual compensation for any position
(including performance bonuses) does not exceed the
rate of pay of the Vice President (currently
$175,400).
These appointments are not subject to the otherwise
applicable requirements under title 5. All such
appointments will be excluded from the collective
bargaining unit and the appointments will not be
subject to approval of the Office of Management and
Budget ("OMB") or the Office of Personnel
Management ("OPM").
The streamlined authority will be limited to a
period of 10 years.
Critical
pay authority
The bill provides OMB with authority to set the pay
for certain critical pay positions requested by the
Secretary under section 5377 of title 5 of the
United States Code at levels higher than authorized
under current law. These critical pay positions
would be critical, technical, administrative and
professional positions other than those designated
under the streamlined authority. Under the bill, OMB
is authorized to approve requests for critical
position pay up to the rate of pay of the Vice
President (currently $175,400).
Recruitment,
retention and relocation incentives
The bill authorizes the Secretary to vary from the
existing provisions governing recruitment, retention
and relocation incentives. The authority will be for
a period of 10 years and will be subject to OPM
approval.
Career-reserve
Senior Executive Service ("
SES
") positions
The bill broadens the definition of a "career
reserved position" in the
SES
to include a limited emergency appointee or a
limited term appointee who, immediately upon
entering the career-reserved position, was serving
under a career or a career-conditional appointment
outside the
SES
or whose limited emergency or limited term
appointment is approved in advance by OPM. The
number of appointments to these
SES
positions will be limited to up to 10 percent of the
total number of
SES
positions available to the
IRS
. These positions will be limited to a 3 year term,
with the option of extending the term for 2 more
3-year terms.
Variable
compensation
The bill provides the Secretary with the authority
to provide performance bonus awards to
IRS
senior executives of up to one-third of the
individual's annual compensation. The bonus award
would be based on meeting preset performance goals
established by the
IRS
. An individual's total annual compensation,
including the bonus, can not exceed the rate of pay
of the Vice President. The authority will not be
subject to OPM approval.
It is anticipated that the bonuses will not be
available to more than 25
IRS
senior executives annually.
General
workforce
Performance management system
The bill permits the Secretary to establish a new
performance management system which will maintain
individual accountability by: (1) establishing one
or more retention standards for each employee
related to the work of the employee and expressed in
terms of performance; (2) providing for periodic
performance evaluations to determine whether
employees are meeting the applicable retention
standard; and (3) taking appropriate action, in
accordance with applicable laws, with respect to any
employee whose performance does not meet established
retention standards.
The bill requires that the performance management
system provide for: (1) establishing goals or
objectives for individual, group or organizational
performance and taxpayer service surveys; (2)
communicating such goals or objectives to employees;
and (3) using such goals or objectives to make
performance distinctions among employees or groups
of employees.
It is intended that in no event will performance
measures be used which rank employees or groups of
employees based on enforcement results, establish
dollar goals for assessments or collections, or
otherwise undermine fair treatment of taxpayers.
Awards
The bill provides the Secretary the authority to
establish an awards program for
IRS
employees. The program will be designed to provide
incentives for and recognition of individual, group
and organizational achievements. The Secretary will
have the authority to provide awards between $10,000
and $25,000 without OPM approval.
These awards will be based on performance under the
new performance management system, and in no case
will awards be made (or performance measured) based
on tax enforcement results.
Workforce
classification and pay banding
The bill provides the Secretary with authority to
establish one or more broad band pay systems
covering all or any portion of the
IRS
workforce, subject to OPM criteria. At a minimum,
the OPM criteria will have to: (1) ensure that the
pay band system maintain the concept of equal pay
for substantially equal work; (2) establish the
minimum and maximum number of grades that may be
combined into pay bands; (3) establish requirements
for setting minimum and maximum rates of pay in a
pay band; (4) establish requirements for adjusting
the pay of an employee within a pay band; (5)
establish requirements for setting the pay of a
supervisory employee in a pay band; and (6)
establish requirements and methodologies for setting
the pay of an employee upon conversion to a
broad-banded system, initial appointment, change of
position or type of appointment and movement between
a broad-banded system and another pay system.
Workforce
staffing
The bill provides the
IRS
with flexibility in filling certain permanent
appointments with qualified temporary employees. A
qualified temporary employee is defined as a
temporary employee of the
IRS
with at least two years of continuous service, who
has met all applicable retention standards and who
meets the minimum qualifications for the vacant
position.
The bill authorizes the
IRS
to establish category rating systems for evaluating
job applicants, under which qualified candidates are
divided into two or more quality categories on the
basis of relative degrees of merit, rather than
assigned individual numerical ratings. Managers will
be authorized to select any candidate from the
highest quality category, and will not be limited to
the three highest ranked candidates. In
administering these category rating systems, the
IRS
generally will be required to list preference
eligibles ahead of other individuals within each
quality category. The appointing authority, however,
could select any candidate from the highest quality
category, as long as existing requirements relating
to passing over preference eligibles are satisfied.
The bill authorizes the
IRS
to establish probation periods for
IRS
employees of up to 3 years, when it is determined
that a shorter period will not be sufficient for an
employee to demonstrate proficiency in a position.
Voluntary
separation incentives
The bill provides authority to the
IRS
to use Voluntary Separation Incentive Pay
("buyouts") through
December 31, 2002
. The use of voluntary separation incentive is not
intended to necessarily reduce the total number of
Full Time Equivalents ("
FTE
") positions in the
IRS
.
Demonstration
projects
The bill provides the
IRS
with authority to conduct one or more demonstration
projects through a streamlined process. The
authority will enable the
IRS
to test new approaches to Human Resource Management.
The bill provides authority to the Secretary and OPM
to waive the termination of a demonstration project,
thereby making it permanent. At least 90 days prior
to waiving the termination date OPM will be required
to publish a notice of such intent in the Federal
Register and inform the appropriate Committees
(including the House Ways and Means Committee, the
House Government Reform and Oversight Committee, the
Senate Finance Committee and the Senate Governmental
Affairs Committee) of both Houses of Congress in
writing.
Performance
measures
The
IRS
is directed to develop employee performance measures
that favor taxpayer service and prohibit awarding
merit pay or bonuses that are based on enforcement
quotas, goals, or statistics.
Violations
for which
IRS
employees may be terminated
The bill requires the
IRS
to terminate an employee for certain proven
violations committed by the employee in connection
with the performance of official duties. The
violations include: (1) failure to obtain the
required approval signatures on documents
authorizing the seizure of a taxpayer's home,
personal belongings, or business assets; (2)
providing a false statement under oath material to a
matter involving a taxpayer; (3) falsifying or
destroying documents to avoid uncovering mistakes
made by the employee with respect to a matter
involving a taxpayer; (4) assault or battery on a
taxpayer or other
IRS
employee; (5) violation of the civil rights of a
taxpayer or other
IRS
employee; (6) violations of the Internal Revenue
Code, Treasury Regulations, or policies of the
IRS
(including the Internal Revenue Manual) for the
purpose of retaliating or harassing a taxpayer or
other
IRS
employee; and (7) wilful misuse of section 6103 for
the purpose of concealing data from a Congressional
inquiry.
The bill provides non-delegable authority to the
Commissioner to determine that mitigating factors
exist, that, in the Commissioner's sole discretion,
mitigate against terminating the employee. The bill
also provides that the Commissioner, in his sole
discretion, may establish a procedure which will be
used to determine whether an individual should be
referred for such a determination by the
Commissioner. The Treasury IG is required to track
employee terminations and terminations that would
have occurred had the Commissioner not determined
that there were mitigation factors and include such
information in the IG's annual report.
IRS
employee training program
The bill requires the
IRS
to place a high priority on employee training and to
adequately fund employee training programs. The bill
also requires the
IRS
to provide to the Congressional tax writing
committees a comprehensive multi-year plan to: (1)
ensure adequate customer service training; (2)
review the organizational design of customer
service; (3) implement a performance development
system; and (4) provide, in fiscal year 1999,
sixteen to twenty-four hours of conflict management
training for collection employees.
Effective
Date
The provision , other than the
IRS
employee training program provision, is effective on
the date of enactment. The provision relating to the
IRS
employee training program is effective 90 days after
the date of enactment.
TITLE
II. ELECTRONIC FILING
A.
Electronic Filing of Tax and Information Returns
(sec. 2001 of the bill)
Present
Law
Treasury Regulations section 1.6012-5 provides that
the Commissioner may authorize a taxpayer to elect
to file a composite return in lieu of a paper
return. An electronically filed return is a
composite return consisting of electronically
transmitted data and certain paper documents that
cannot be electronically transmitted.
The
IRS
periodically publishes a list of the forms and
schedules that may be electronically transmitted, as
well as a list of forms, schedules, and other
information that cannot be electronically filed.
During the 1997 tax filing season, the
IRS
received approximately 20 million individual income
tax returns electronically.
Reasons
for Change
The Committee believes that the implementation of a
comprehensive strategy to encourage electronic
filing of tax and information returns holds
significant potential to benefit taxpayers and make
the
IRS
returns processing function more efficient. For
example, the error rate associated with processing
paper tax returns is approximately 20 percent, half
of which is attributable to the
IRS
and half to error in taxpayer data. Because
electronically-filed returns usually are prepared
using computer software programs with built-in
accuracy checks, undergo pre-screening by the
IRS
, and experience no key punch errors, electronic
returns have an error rate of less than one percent.
Thus, the Committee believes that an expansion of
electronic filing will significantly reduce errors
(and the resulting notices that are triggered by
such errors). In addition, taxpayers who file their
returns electronically receive confirmation from the
IRS
that their return was received.
Explanation
of Provision
The provision states that the policy of Congress is
to promote paperless filing, with a long-range goal
of providing for the filing of at least 80 percent
of all tax returns in electronic form by the year
2007. The provision requires the Secretary of the
Treasury to establish a strategic plan to eliminate
barriers, provide incentives, and use competitive
market forces to increase taxpayer use of electronic
filing. The provision requires all returns prepared
in electronic form but filed in paper form to be
filed electronically, to the extent feasible, by the
year 2002.
The provision requires the Secretary to create an
electronic commerce advisory group and to report
annually to the tax-writing committees on the
IRS
's progress in implementing its plan to meet the
goal of 80 percent electronic filing by 2007.
Effective
Date
The provision is effective on the date of enactment.
B.
Due Date for Certain Information Returns (sec. 2002
of the bill and sec. 6071 of the Code)
Present
Law
Information such as the amount of dividends,
partnership distributions, and interest paid during
the calendar year must be supplied to taxpayers by
the payors by January 31 of the following calendar
year. The payors must file an information return
with the
IRS
with the information by February 28 of the year
following the calendar year for which the return
must be filed. Under present law, the due date for
filing information returns with the
IRS
is the same whether such returns are filed on paper,
on magnetic media, or electronically. Most
information returns are filed on magnetic media
(such as computer tapes), which are physically
shipped to the
IRS
.
Reasons
for Change
The Committee believes that encouraging information
return filers to file electronically will
substantially increase the efficiency of the tax
system by avoiding the need to convert the
information from magnetic media or paper to
electronic form before return matching.
Explanation
of Provision
The provision provides an incentive to filers of
information returns to use electronic filing by
extending the due date for filing such returns from
February 28 (under present law) to March 31 of the
year following the calendar year to which the return
relates.
The provision also requires the Treasury to issue a
study evaluating the merits and disadvantages, if
any, of extending the deadline for providing
taxpayers with copies of information returns from
January 31 to February 15 (Forms W-2 would still be
required to be furnished by January 31).
Effective
Date
The extension of the due date for filing returns
applies to information returns required to be filed
after
December 31, 1999
. The Treasury study is due by
December 31, 1998
.
C.
Paperless Electronic Filing (sec. 2003 of the bill
and sec. 6061 of the Code)
Present
Law
Code section 6061 requires that tax forms be signed
as required by the Secretary. The
IRS
will not accept an electronically filed return
unless it has also received a Form 8453, which is a
paper form that contains signature information of
the filer.
A return generally is considered timely filed when
it is received by the
IRS
on or before the due date of the return. If the
requirements of Code section 7502 are met, timely
mailing is treated as timely filing. If the return
is mailed by registered mail, the dated registration
statement is prima facie evidence of delivery. As an
electronically filed return is not mailed, section
7502 does not apply.
The
IRS
periodically publishes a list of the forms and
schedules that may be electronically transmitted, as
well as a list of forms, schedules, and other
information that cannot be electronically filed.
Reasons
for Change
Electronically filed returns cannot provide the
maximum efficiency for taxpayers and the
IRS
under current rules that require signature
information to be filed on paper. Also, taxpayers
need to know how the
IRS
will determine the filing date of a return filed
electronically. The Committee believes that more
types of returns could be filed electronically if
proper procedures were in place. Also, as the
IRS
shifts to a paperless tax return system, the
Committee intends for the
IRS
to assist taxpayers in shifting to paperless record
retention.
Explanation
of Provision
The provision requires the Secretary to develop
procedures that would eliminate the need to file a
paper form relating to signature information. Until
the procedures are in place, the provision
authorizes the Secretary to provide for alternative
methods of signing all returns, declarations,
statements, or other documents. An alternative
method of signature would be treated identically,
for both civil and criminal purposes, as a signature
on a paper form.
The provision also provides rules for determining
when electronic returns are deemed filed and to make
it possible for taxpayers to authorize, on
electronically filed returns, persons (such as
return preparers) to whom information may be
disclosed pursuant to section 6103.
The provision requires the Secretary to establish
procedures, to the extent practicable, to receive
all forms electronically for taxable periods
beginning after
December 31, 1998
.
Effective
Date
The provision is effective on the date of enactment.
D.
Return-Free Tax System (sec. 2004 of the bill)
Present
Law
Under present law, taxpayers generally are required
to calculate their own tax liabilities and submit
returns showing their calculations.
Reasons
for Change
The Committee believes that it would benefit
taxpayers to be relieved, to the extent feasible,
from the burden of determining tax liability and
filing returns.
Explanation
of Provision
The provision requires the Secretary or his delegate
to study the feasibility of, and develop procedures
for, the implementation of a return-free tax system
for appropriate individuals for taxable years
beginning after 2007. The Secretary is required
annually to report to the tax-writing committees on
the progress of the development of such system. The
Secretary is required to make the first report on
the development of the return-free tax system to the
tax-writing committees by
June 30, 2000
.
Effective
Date
The provision is effective on the date of enactment.
E.
Access to Account Information (sec. 2005 of the
bill)
Present
Law
Taxpayers who file their returns electronically
cannot review their accounts electronically.
Reasons
for Change
The Committee believes that it would be desirable
for a taxpayer (or the taxpayer's designee) to be
able to review that taxpayer's account
electronically, but only if all necessary privacy
safeguards are in place.
Explanation
of Provision
The provision requires the Secretary to develop
procedures not later than
December 31, 2006
, under which a taxpayer filing returns
electronically (or the taxpayer's designee under
section 6103(c)) could review the taxpayer's own
account electronically, but only if all necessary
privacy safeguards are in place by that date. The
Secretary is required to issue an interim progress
report to the tax-writing committees by
December 31, 2003
.
Effective
Date
The provision is effective on the date of enactment.
TITLE
III
. TAXPAYER PROTECTION
AND
RIGHTS
A.
Burden of Proof (sec. 3001 of the bill and new sec.
7491 of the Code)
Present
Law
Under present law, a rebuttable presumption exists
that the Commissioner's determination of tax
liability is correct.19
"This presumption in favor of the Commissioner
is a procedural device that requires the plaintiff
to go forward with prima facie evidence to support a
finding contrary to the Commissioner's
determination. Once this procedural burden is
satisfied, the taxpayer must still carry the
ultimate burden of proof or persuasion on the
merits. Thus, the plaintiff not only has the burden
of proof of establishing that the Commissioner's
determination was incorrect, but also of
establishing the merit of its claims by a
preponderance of the evidence".20
The general rebuttable presumption that the
Commissioner's determination of tax liability is
correct is a fundamental element of the structure of
the Internal Revenue Code. Although this presumption
is judicially based, rather than legislatively
based, there is considerable evidence that the
presumption has been repeatedly considered and
approved by the Congress. This is the case because
the Internal Revenue Code contains a number of civil
provisions that explicitly place the burden of proof
on the Commissioner in specifically designated
circumstances. The Congress would have enacted these
provisions only if it recognized and approved of the
general rule of presumptive correctness of the
Commissioner's determination. A list of these civil
provisions follows.
(1) Fraud. --Any proceeding involving the
issue of whether the taxpayer has been guilty of
fraud with intent to evade tax (secs. 7454(a) and
7422(e)).
(2) Required reasonable verification of
information returns. --In any court proceeding,
if a taxpayer asserts a reasonable dispute with
respect to any item of income reported on an
information returned filed with the Secretary by a
third party and the taxpayer has fully cooperated
with the Secretary (including providing, within a
reasonable period of time, access to and inspection
of all witnesses, information, and documents within
the control of the taxpayer as reasonably requested
by the Secretary), the Secretary has the burden of
producing reasonable and probative information
concerning such deficiency in addition to such
information return (sec. 6201(d)).
(3) Foundation managers. --Any proceeding
involving the issue of whether a foundation manager
has knowingly participated in prohibited
transactions (sec. 7454(b)).
(4) Transferee liability. --Any proceeding in
the Tax Court to show that a petitioner is liable as
a transferee of property of a taxpayer (sec.
6902(a)).
(5) Review of jeopardy levy or assessment
procedures. --Any proceeding to review the
reasonableness of a jeopardy levy or jeopardy
assessment (sec. 7429(g)(1)).
(6) Property transferred in connection with
performance of services. --In the case of
property subject to a restriction that by its terms
will never lapse and that allows the transferee to
sell only at a price determined under a formula, the
price is deemed to be fair market value unless
established to the contrary by the Secretary (sec.
83(d)(1)).
(7) Illegal bribes, kickbacks, and other
payments. --As to whether a payment constitutes
an illegal bribe, illegal kickback, or other illegal
payment (sec. 162(c)(1) and (2)).
(8) Golden parachute payments. --As to
whether a payment is a parachute payment on account
of a violation of any generally enforced securities
laws or regulations (sec. 280G(b)(2)(B)).
(9) Unreasonable accumulation of earnings and
profits. --In any Tax Court proceeding as to
whether earnings and profits have been permitted to
accumulate beyond the reasonable needs of the
business, provided that the Commissioner has not
fulfilled specified procedural requirements (sec.
534).
(10) Expatriation. --As to whether it is
reasonable to believe that an individual's loss of
citizenship would result in a substantial reduction
in the individual's income taxes or transfer taxes (secs.
877(e), 2107(e), 2501(a)(4)).
(11) Public inspection of written determinations.
--In any proceeding seeking additional disclosure of
information (sec. 6110(f)(4)(A)).
(12) Penalties for promoting abusive tax
shelters, aiding and abetting the understatement of
tax liability, and filing a frivolous income return.
--As to whether the person is liable for the penalty
(sec. 6703(a)).
(13) Income tax return preparers' penalty.
--As to whether a preparer has willfully attempted
to understate tax liability (sec. 7427).
(14) Status as employees. --As to whether
individuals are employees for purposes of employment
taxes (pursuant to the safe harbor provisions of
section 530 of the Revenue Act of 1978).21
Reasons
for Change
The Committee is concerned that individual and small
business taxpayers frequently are at a disadvantage
when forced to litigate with the Internal Revenue
Service. The Committee believes that the present
burden of proof rules contribute to that
disadvantage. The Committee believes that, all other
things being equal, facts asserted by individual and
small business taxpayers who cooperate with the
IRS
and satisfy relevant recordkeeping and
substantiation requirements should be accepted. The
Committee believes that shifting the burden of proof
to the Secretary in such circumstances will create a
better balance between the
IRS
and such taxpayers, without encouraging tax
avoidance.
The Committee believes that it is inappropriate for
the
IRS
to rely solely on statistical information on
unrelated taxpayers to reconstruct unreported income
of an individual taxpayer. The Committee also
believes that, in a court proceeding, the
IRS
should not be able to rest on its presumption of
correctness if it does not provide any evidence
whatsoever relating to penalties.
Explanation
of Provision
The provision provides that the Secretary shall have
the burden of proof in any court proceeding with
respect to a factual issue if the taxpayer
introduces credible evidence with respect to the
factual issue relevant to ascertaining the
taxpayer's income tax liability. Four conditions
apply. First, the taxpayer must comply with the
requirements of the Internal Revenue Code and the
regulations issued thereunder to substantiate any
item (as under present law). Second, the taxpayer
must maintain records required by the Code and
regulations (as under present law). Third, the
taxpayer must cooperate with reasonable requests by
the Secretary for meetings, interviews, witnesses,
information, and documents (including providing,
within a reasonable period of time, access to and
inspection of witnesses, information, and documents
within the control of the taxpayer, as reasonably
requested by the Secretary). Cooperation also
includes providing reasonable assistance to the
Secretary in obtaining access to and inspection of
witnesses, information, or documents not within the
control of the taxpayer (including any witnesses,
information, or documents located in foreign
countries22
). A necessary element of cooperating with the
Secretary is that the taxpayer must exhaust his or
her administrative remedies (including any appeal
rights provided by the
IRS
). The taxpayer is not required to agree to extend
the statute of limitations to be considered to have
cooperated with the Secretary. Cooperating also
means that the taxpayer must establish the
applicability of any privilege. Fourth, taxpayers
other than individuals must meet the net worth
limitations that apply for awarding attorney's fees
(accordingly, no net worth limitation would be
applicable to individuals). Corporations, trusts,
and partnerships whose net worth exceeds $7 million
are not eligible for the benefits of the provision.
The taxpayer has the burden of proving that it meets
each of these conditions, because they are necessary
prerequisites to establishing that the burden of
proof is on the Secretary.
The burden will shift to the Secretary under this
provision only if the taxpayer first introduces
credible evidence with respect to a factual issue
relevant to ascertaining the taxpayer's income tax
liability. Credible evidence is the quality of
evidence which, after critical analysis, the court
would find sufficient upon which to base a decision
on the issue if no contrary evidence were submitted
(without regard to the judicial presumption of
IRS
correctness). A taxpayer has not produced credible
evidence for these purposes if the taxpayer merely
makes implausible factual assertions, frivolous
claims, or tax protestor-type arguments. The
introduction of evidence will not meet this standard
if the court is not convinced that it is worthy of
belief. If after evidence from both sides, the court
believes that the evidence is equally balanced, the
court shall find that the Secretary has not
sustained his burden of proof.
Nothing in the provision shall be construed to
override any requirement under the Code or
regulations to substantiate any item. Accordingly,
taxpayers must meet applicable substantiation
requirements, whether generally imposed23
or imposed with respect to specific items, such as
charitable contributions24
or meals, entertainment, travel, and certain other
expenses.25
Substantiation requirements include any requirement
of the Code or regulations that the taxpayer
establish an item to the satisfaction of the
Secretary.26
Taxpayers who fail to substantiate any item in
accordance with the legal requirement of
substantiation will not have satisfied the legal
conditions that are prerequisite to claiming the
item on the taxpayer's tax return and will
accordingly be unable to avail themselves of this
provision regarding the burden of proof. Thus, if a
taxpayer required to substantiate an item fails to
do so in the manner required (or destroys the
substantiation), this burden of proof provision is
inapplicable.27
The provision also provides that in any instance in
which the Secretary uses statistical information
from unrelated taxpayers solely to reconstruct an
individual taxpayer's income (such as average income
for taxpayers in the area in which the taxpayer
lives), the burden of proof is on the Secretary with
respect to the item of income that was reconstructed
by the Secretary.
Further, the provision provides that, in any court
proceeding, the Secretary must initially come
forward with evidence that it is appropriate to
apply a particular penalty to the taxpayer before
the court can impose the penalty. This provision is
not intended to require the Secretary to introduce
evidence of elements such as reasonable cause or
substantial authority. Rather, the Secretary must
come forward initially with evidence regarding the
appropriateness of applying a particular penalty to
the taxpayer; if the taxpayer believes that, because
of reasonable cause, substantial authority, or a
similar provision, it is inappropriate to impose the
penalty, it is the taxpayer's responsibility (and
not the Secretary's obligation) to raise those
issues.
Effective
Date
The provision applies to court proceedings arising
in connection with examinations commencing after the
date of enactment.
B.
Proceedings by Taxpayers
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