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# Legislative Bulletin........................................................April 15, 2008

**Contents:**

**H.R. 5719**---Taxpayer Assistance and Simplification Act

H.R. 5719---Taxpayer Assistance and Simplification Act (*Rangel, D-NY*)

**[Order of Business]{.underline}**: The bill is scheduled to be
considered on Tuesday, April 15^th^, subject to a closed rule (H.Res.
1102), which neither makes nor allows any amendments.

**[Summary]{.underline}**: In addition to provisions that would impose
additional restrictions on Health Savings Accounts (HSAs) and prohibit
the Internal Revenue Service (IRS) from using the private sector to help
collect tax debts, H.R. 5719 contains an assortment of miscellaneous
tax-code provisions regarding tax compliance, as summarized below. Some
of these provisions have already passed the House in 2007 as part of
H.R. 1677 and H.R. 3056.

To see the RSC Legislative Bulletin on H.R. 1677, go here:
<http://www.house.gov/hensarling/rsc/doc/LB_041707_suspensions.doc>.

To see the RSC Legislative Bulletin on H.R. 3056, go here:
<http://www.house.gov/hensarling/rsc/doc/lb_101007_taxcollectors.doc>.

Highlights of H.R. 5719 are as follows:

-   [Tax Preparer Liability]{.underline}. This provision would modify
    the penalty on the understatement of a taxpayer's liability by a
    paid tax return preparer (increased recently by Public Law 110-28)
    so that return preparers could more easily avoid penalty through
    proper explanation and justifications of their actions on behalf of
    the taxpayer. ***Saves taxpayers \$22 million over ten years.***

-   [Removal of Cell Phone Substantiation]{.underline}. This provision
    would eliminate the special requirements for individuals to keep
    detailed records of calls made on employer-provided cell phones to
    substantiate the business use (and thus the tax deductibility) of
    such devices. ***Saves taxpayers \$237 million over ten years.***

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-   [Withholding Delay]{.underline}. Delays by one year (from December
    31, 2010 to December 31, 2011) the date after which a three-percent
    withholding requirement would become effective on certain government
    payments to persons providing qualifying property or services to
    such government (any level of government, including federal, state,
    and local). Payments subject to the three-percent withholding
    include any payment made in connection with a government voucher or
    certificate program that functions as a payment for property or
    services (such as many agriculture programs). ***Saves taxpayers
    \$316 million over ten years.***

-   [Elderly and Disabled Programs Tax Liability]{.underline}. This
    provision would make the fiscal administrators of state and local
    government programs liable for paying the employment taxes on
    amounts paid by government programs to in-home care workers
    providing care to elderly and disabled persons. ***Negligible
    revenue effect.***

-   [Low-Income Taxpayer Clinics]{.underline}. This provision would
    allow IRS employees to refer taxpayers needing assistance with tax
    cases to qualified low-income taxpayer clinics and would increased
    the ceiling for authorized marching-fund grants to such clinics from
    \$6 million a year to \$10 million a year. ***Negligible revenue
    effect and a \$40 million authorization increase over ten years.***

-   [Volunteer Income Tax Assistance Program]{.underline}. Creates a new
    \$10-million-a-year matching-funds program for the development,
    expansion, or continuation of volunteer income tax assistance
    programs. ***No revenue effect and a \$100 million authorization
    over ten years (though CBO only scores this new program at \$3
    million in the first year and \$2 million a year thereafter).***

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-   [Earned Income Tax Credit Notification]{.underline}. This provision
    would direct the IRS to expand its annual notice requirements
    relating to potential eligibility for the Earned Income Tax Credit
    (EITC)---and its possible refundability---to all potentially
    eligible taxpayers ("to the extent possible"), regardless of whether
    they have filed a tax return for the applicable tax year, and as
    long as the time limitation for claiming the credit has not expired
    (three years from the time the relevant tax return was filed, two
    years from the time the related tax was paid, or, if no tax return
    was filed by the taxpayer, then two years after the tax was paid).
    Such notices would have to be in writing and mailed to the
    taxpayer's last known address. ***No revenue effect*.**

> In current law, low-income taxpayers can be eligible for the
> refundable EITC, based primarily on the number of children in the
> taxpayer's family, adjusted gross income, and earned income. The EITC
> generally equals a specified percentage of earned income up to a
> maximum dollar amount (over a certain income range and diminishing to
> zero over a specified phase-out range). For more on the EITC, go to
> this webpage:
> <http://www.irs.gov/individuals/article/0,,id=96456,00.html>.

-   [IRS Debt Indicators for Predatory Loans]{.underline}. This
    provision would prohibit the Secretary of the Treasury from
    providing a debt indicator to any person with respect to any refund
    anticipation loan when the Secretary determines that the business
    practices of such person involve refund anticipation loans and
    related charges and fees that are "predatory" (not defined in the
    bill). In other words, this provision would seek to make it harder
    for so-called predatory lenders to reduce their risk in making
    refund anticipation loans. A "debt indicator" is defined in the bill
    as a notification provided to a tax practitioner or financial
    institution that a taxpayer's refund will be offset to repay debts
    for delinquent federal or state taxes, student loans, child support,
    or other federal agency debt. A "refund anticipation loan" is
    defined in the bill as a "loan of money or any other thing of value
    to a taxpayer secured by the taxpayer's anticipated receipt of a
    federal tax refund." ***No revenue effect.***

[]{.mark}

-   [Study on Electronic Delivery of Tax Refunds]{.underline}. This
    provision would direct the Secretary of the Treasury, in
    consultation with the National Taxpayer Advocate, to study and
    report to Congress on the feasibility of delivering tax refunds on
    debit cards, prepaid cards, and other electronic means. ***No
    revenue effect.***

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-   [Return of Wrongly Seized Property]{.underline}. This provision
    would extend, from nine months to two years, the period for:

> \--The IRS to return money and the proceeds from the sale of property
> that has been wrongfully levied; and
>
> \--The wronged taxpayer to bring a civil action for wrongful levy.

***Negligible revenue effect.***

-   [Wrongful Levy on Individual Retirement Accounts]{.underline}. This
    provision would allow an individual to recontribute to an Individual
    Retirement Account (IRA) the amounts withdrawn pursuant to a
    wrongful or premature IRS levy and returned by the IRS (plus
    interest) within 60 days of receipt by the individual, regardless of
    the current-law limits on IRA contributions and rollovers. Interest
    paid under this provision would be excludable from gross income for
    tax purposes, once deposited in an IRA, and the returned amounts
    would not yield any new income tax (if deposited in an IRA).
    ***Negligible revenue effect.***

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-   [Notification of Suspected Identity Theft]{.underline}. This
    provision would direct the Secretary of the Treasury, if (in the
    course of an investigation relating to tax fraud, false statements,
    fraudulent tax returns, or other fraudulent tax-related documents)
    he believes that there may have been unauthorized use of the
    identity of a taxpayer or his dependents, to notify the taxpayer
    ("as soon as practicable and without jeopardizing such
    investigation"). The Secretary would also have to notify the
    taxpayer of any criminal charge that was the result of the
    investigation. In current law, information gathered by the IRS in
    connection with a tax-fraud investigation is subject to
    confidentiality restrictions. ***No revenue effect.***

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-   [Prohibition on Private-Sector Debt Collectors for the
    IRS]{.underline}. This provision would strike the authority for the
    IRS to enter into, extend, or renew contracts for tax collection
    with private entities, retroactive to contracts signed on or after
    March 1, 2008. Contracts in effect before this date would remain in
    force, as long as they have not been altered since March 1, 2008.
    Under current law, the IRS may use private debt collection companies
    to contact taxpayers who owe any tax and to arrange payment of such
    tax liabilities. The IRS is currently authorized to pay these
    collection companies (up to 25% of the amount collected) and to
    reserve another 25% of the collections for collection enforcement
    activities at the IRS.

> This provision would also affirmatively deem as void any such tax
> collection contract entered into on or after March 1, 2008. ***Reduces
> revenues by \$552 million over ten years and reduces mandatory
> spending by \$261 million over those same ten years.***
>
> [NOTE]{.underline}: According to the Republican staff of the Ways &
> Means Committee, the IRS has contracted with private debt collectors
> only to collect smaller tax-debts when the amount owed is not in
> question (i.e. when the taxpayer has filed a correct tax return). The
> IRS does not use private tax collectors to collect larger tax-debts or
> when the amount of tax liability is in question.

-   [IRS Unclaimed Refunds]{.underline}. This provision would allow the
    IRS to use any means of "mass communication" to notify taxpayers of
    undelivered refunds. In current law, when the IRS is unable to find
    a taxpayer due a tax refund, the IRS can use "the press or other
    media" to notify the taxpayer of the refund. The IRS has interpreted
    this definition to exclude the Internet. ***No revenue effect.***

-   [Misuse of Treasury Names and Symbols]{.underline}. This provision
    would clarify that any electronic mass communication (including
    "phishing," misleading domain names, etc.) that could reasonably be
    interpreted as falsely conveying a connection to, or approval by,
    the Treasury Department (or any of its parts), are subject to the
    current-law civil penalty of \$25,000 per violation and criminal
    penalty of \$50,000 per violation, presently applicable to
    broadcasts and telecasts. The provision would also clarify that the
    use of the words, abbreviations, titles, letters, symbols, or
    emblems associated with the Department of the Treasury (or any of
    its parts) [in an Internet domain name]{.underline} is covered by
    the current-law prohibition against such misuse in general.
    (Disclaimers that the private entity is not affiliated with the IRS
    do **[not]{.underline}** relieve such entities from liability under
    this provision.) ***No revenue effect*.**

-   [HSA Substantiation]{.underline}. This provision would require the
    "substantiation" of all Health Savings Accounts (HSA) transactions
    from an independent third party, to ensure that money withdrawn from
    an HSA pays for qualified medical expenses. Specifically, the
    section would make the income tax deduction associated with HSA
    contributions contingent on substantiation of all withdrawals,
    beginning in 2011. This oversight of every single account
    transaction would make HSAs similar to Flexible Spending
    Arrangements (FSAs), an earlier consumer-driven health care model.
    The provision also would require HSA trustees to annually report
    expenses not substantiated. **[See the "Conservative Concerns"
    section below]{.underline}.** ***Costs taxpayers \$308 million over
    eight years.***

-   [Tax Treatment of Employees of Foreign Subsidiaries of U.S.
    Companies]{.underline}. This provision would impose employment taxes
    on employers for wages paid for services performed by employees of
    foreign subsidiaries of U.S. parent companies under U.S. government
    contracts. In other words, this provision would treat certain
    non-American employers as if they were American employers. ***Costs
    taxpayers \$860 million over eleven years and increases mandatory
    spending by \$14 million over those same eleven years.***

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-   [Corporate Estimated Tax Timing Gimmick]{.underline}. This provision
    would increase the estimated tax payments that certain corporations
    must remit to the federal government. Under current law,
    corporations with assets of at least \$1 billion must make equally
    divided estimated tax payments for each quarter. This legislation
    would increase the payment due for the third quarter of 2013 by 0.25
    percentage points. The payment due for the fourth quarter of 2013
    would be reduced accordingly so that the corporations pay no net
    increase in estimated payments in 2013. This provision is merely a
    revenue timing shift, a gimmick used to comply with the House's
    PAYGO rules, yet could have real-world implications, as it forces
    certain companies to pay more of their tax payments earlier. ***No
    [net]{.underline} revenue effect beyond fiscal year 2014, but would
    force corporations to pay \$147 million in additional tax payments
    in FY2013 instead of FY2014 .***

**[RSC Bonus Fact]{.underline}:** Treasury Benefits Tax Counsel Tom
Reeder testified before the House Ways & Means Committee last week that
8.4% of HSA account holders self-declare at least some portion of their
distributions as *taxable* income.

**[Committee Action]{.underline}**: On April 8, 2008, H.R. 5719 was
introduced and referred to the Ways & Means Committee, which, on the
subsequent day, marked up the bill and ordered it reported to the full
House by a party-line vote of 23-17.

**[Possible Conservative Concerns]{.underline}**: Some conservatives
have expressed concerns about the HSA substantiation provision. In
addition to increased inconvenience for account holders, introducing a
new step of independent "substantiation" may well increase costs for
banks and account administrators, who are likely to either pass these
costs onto employers and/or consumers, or to exit the HSA space
altogether.

The Joint Committee on Taxation would not reveal whether its estimate of
increased revenues from this provision comes from reducing fraud or from
a reduced number of HSAs in the marketplace---or both. Additionally,
some conservatives have noted the lack of consistent data quantifying
the problem of HSAs being used for non-qualified expenditures.

Some conservatives may also be concerned at the application of FSA
procedures to HSAs. The Internal Revenue Code makes clear that FSA
accounts are held by ***employers***, while HSA funds remain exclusively
the property of the ***employee***. This distinction explains why unused
FSA funds in an employee's account at the time of departure revert back
to the employer, while HSA funds always remain with the employee, and
remain portable from job to job and into retirement. Some conservatives
may be concerned about the potential implications of transferring a
"substantiation" system designed for employer-owned FSAs to
individually-owned HSAs---both in terms of the legal liabilities placed
on employers and administrators to verify transactions, and the
restrictions placed on individuals to control their HSA account dollars.

Some conservatives may also be concerned that H.R. 5719 would eliminate
a successful program that the IRS has used to collect smaller tax-debts,
debts that the IRS has said it would not otherwise be cost-effective to
try to collect. Additionally, some conservatives may be concerned at the
motivation behind this provision---limiting the ability for the federal
government to use private contractors and increasing the use of
government-union-only services.

**The scores for the HSA substantiation provision and the IRS debt
collection provision almost perfectly offset each other, thus one could
argue that this bill** **would** **require individual
HSA-account-holders to use third parties to get their promised tax
benefits** **in order to pay for** **preventing the IRS from using third
parties for debt collection.**

Some conservatives may be concerned at the bill's expansion of the IRS'
outreach effort on the Earned Income Tax Credit. In the past,
conservatives have expressed concerns about the notion of the IRS as tax
advisor and about the EITC itself (because of its refundability and its
ability to turn taxpayers into welfare benefit recipients).
Additionally, some conservatives may be concerned about the
private-sector mandate on Internet domain names.

Some conservatives may also be concerned at the provision imposing
employment taxes on employers for wages paid for services performed by
employees of foreign subsidiaries of U.S. parent companies under U.S.
government contracts---thus treating certain non-American employers as
if they were American employers.

[]{.mark}

Lastly, some conservatives may be concerned at the ongoing use of a
corporate tax-timing shift, which some Members would regard as a budget
gimmick to meet PAYGO rules.

**[Administration Position]{.underline}**: The Administration has issued
a Statement of Administration Policy (SAP), indicating that the
President's senior advisers would recommend that he veto the bill, based
on the HSA and IRS private debt-collection provisions. To read the SAP,
visit this webpage:
<http://www.whitehouse.gov/omb/legislative/sap/110-2/saphr5719-r.pdf>.

**[Cost to Taxpayers]{.underline}**: The Joint Committee on Taxation and
CBO estimate that H.R. 5719 would increase revenues by \$75 million over
six years and by \$41 million over eleven years. The bill would decrease
mandatory spending by \$119 million and \$247 million, respectively,
over the same timeframes. Lastly, the bill would increase authorizations
by \$61 million over ten years.

**[Does the Bill Expand the Size and Scope of the Federal
Government?]{.underline}**: Yes, among other things, the bill would
treat certain non-American employers as American employers for
employment tax purposes and would require that the government directly
do more of its own tax-debt collection, rather than contract it out to
the private-sector.

**[Does the Bill Contain Any New State-Government, Local-Government, or
Private-Sector Mandates?]{.underline}**: Yes, there is one
private-sector mandate: the prohibition from anyone using words,
abbreviations, titles, or letters associated with the Treasury
Department (or its components) as a part of an Internet domain address
in a manner which could be "reasonably" interpreted as conveying the
false impression that the domain address is connected to, or authorized
by, the Department (regardless of whether it features a disclaimer that
the private entity is not affiliated with the IRS).

CBO notes that "the costs of the mandate would be the expenditures
incurred to bring the Internet domain address into compliance added to
any loss of net income associated with those changes."

**[Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax
Benefits/Limited Tariff Benefits?]{.underline}**: House Report 110-584,
which presumably contains an earmark/limited tax benefit/limited tariff
benefit statement, was not available at press time.

**[Constitutional Authority]{.underline}**: House Report 110-584, which
presumably contains a constitutional authority statement, was not
available at press time.

**[Outside Organizations]{.underline}**: A partial list of organizations
[opposing]{.underline} the HSA substantiation provision includes:

-   America's Health Insurance Plans;

-   Business Roundtable;

-   Credit Union National Association;

-   Financial Services Roundtable;

-   HSA Council (part of the American Bankers Association);

-   International Franchise Association;

-   National Association of Health Underwriters;

-   National Association of Manufacturers;

-   National Federation of Independent Business;

-   National Restaurant Association;

-   National Retail Federation;

-   National Taxpayers Union; and

-   U.S. Chamber of Commerce.

**[RSC Staff Contacts]{.underline}**:

-   (All provisions except HSA substantiation) Paul S. Teller,
    <paul.teller@mail.house.gov>, (202) 226-9718

-   (HSA substantiation) Chris Jacobs,
    <christopher.jacobs@mail.house.gov>, (202) 226-8585