**DESCRIPTION OF SENATE FINANCE COMMITTEE**

**CHAIRMAN'S MARK RELATING TO**

**REFORM AND RESTRUCTURING OF THE**

**INTERNAL REVENUE SERVICE**

Scheduled for Markup

By the

SENATE COMMITTEE ON FINANCE

on March 31, 1998

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

March 26, 1998

JCX-17-98

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CONTENTS

INTRODUCTION		

	I.	EXECUTIVE BRANCH GOVERNANCE		

		A.	IRS Restructuring and Creation of IRS Oversight Board		

			1.  IRS restructuring and mission	

			2.  Establishment and duties of IRS Oversight Board		

		B.	Appointment and Duties of IRS Commissioner and Chief Counsel		

			1.  IRS Commissioner		

			2.  IRS Chief Counsel		

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

		D.	Taxpayer Advocate		

		E.	Prohibition on Executive Branch Influence Over Taxpayer Audits 		

		F.	Treasury Office of Inspector General; IRS Office of the Chief		Inspector		

		G.	IRS Personnel Flexibilities		

II.	ELECTRONIC FILING		

		A.	Electronic Filing of Tax and Information Returns		

		B.	Time for Filing Certain Information Returns With the IRS		

		C.	Paperless Electronic Filing		

		D.	Return-Free Tax System		

		E.	Access to Account Information		

III.	TAXPAYER BILL OF RIGHTS 3		

		A.	Burden of Proof		

		B.	Proceedings by Taxpayers		

			1.	Expansion of authority to award costs and certain fees		

			2.	Civil damages with respect to unauthorized collection actions	

			3.	Increase in size of cases permitted on small case calendar

			4.	Expand Tax Court jurisdiction to include determination of penalties 		under section 6672 of the Code		

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

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

		C.	Relief for Innocent Spouses and Persons With Disabilities		

			1.	Innocent spouse relief		

			2.	Reports on collection activity against spouses		

			3.	Suspension of statute of limitations on filing refund claims during periods			of disability	

		D.	Provisions Relating to Interest and Penalties	

			1.	Elimination of interest differential on overlapping periods of	interest on income tax overpayments and underpayments
		2.	Increase in overpayment rate payable to taxpayers other than				corporations		
			3.	Elimination of penalty on individual's failure to pay during		installment agreement		

			4.	Mitigation of failure to deposit penalty		

			5.	Suspend accrual of interest and penalties if IRS fails to contact		taxpayer within 1 year		

			6.	Notices of penalties must show computation		

			7.	Management approval required for certain penalties		

		E.	Protections for Taxpayers Subject to Audit or Collection		

			1.	Due process in IRS collection actions		

			2.	Privilege of confidentiality extended to taxpayer's dealings with	non-attorneys authorized to practice before IRS		

			3.	Expansion of authority to issue taxpayer assistance orders		

			4.	Limitation on financial status audit techniques		

			5.	Limitation on authority to require production of computer source		code		

		6.	Extensions of statute of limitations by agreement		

		7.	Notice of deficiency to specify deadlines for filing Tax Court		petition		

		8.	Refund or credit of overpayments before final determination		

		9.	Threat of audit prohibited to coerce Tip Report Alternative			Commitment Agreements		

		10.	Codify existing IRS procedures relating to appeal of examinations and collections and increase independence of appeals function		

		11.	Appeals videoconferencing alternative for rural areas		

		12.	Require IRS to notify taxpayer before contacting third parties regarding	IRS examination or collection activities with respect to the taxpayer		

		F.	Disclosures to Taxpayers		

			1.	Explanation of joint and several liability		

			2.	Explanation of taxpayers' rights in interviews with the IRS		

			3.	Disclosure of criteria for examination selection		

			4.	Explanation of appeals and collection process		

			5.	Require IRS to explain reason for denial for refund		

		G.	Low-Income Taxpayer Clinics		

		H.	Other Taxpayer Rights Provisions		

			1.	Cataloging complaints		

			2.	Archive of records of the IRS		

			3.	Payment of taxes		

			4. 	Clarification of authority of Secretary relating to the making of			elections		

		I.	Studies		

			1.	Study of penalty administration		

			2.	Study of confidentiality of tax return information		

		J.	Limits on Seizure Authority		

			1.	IRS to implement approval process for liens, levies, or seizures		

			2.	Prohibit sales of seized property at less than minimum bid		

			3.	IRS to provide accounting and receipt to taxpayer for property			seized and sold		
			4.	Uniform asset disposal mechanism		
			5.	Increase exempt amounts for personal effects and tools		

			6.	Require IRS to immediately release levy upon agreement that			amount is not collectible		

			7.	Codify IRS administrative procedures for seizure of taxpayer's			property		

			8.	Suspend collection by levy during refund suit		

			9.	Require district counsel review of jeopardy and termination			assessments and jeopardy levies		

			10.	Codify certain fair debt collection practices		

			11.	Ensure availability of installment agreements		

			12.	Increase superpriority dollar limits		

			13.	Permit personal delivery of section 6672(b) notices		

			14.	Allow taxpayers to quash all third-party summonses		

			15.	Permit service of summonses by mail		

			16.	Provide new remedy for third parties who claim that the IRS has			filed an erroneous lien		

			17.	Waiver of early withdrawal tax for IRS levies on employer-sponsored retirement plans or IRAs
			18.	Prohibit seizure of residences in small deficiency cases		
		K.	Offers-in-Compromise		

			1.	Rights of taxpayers entering into offers-in-compromise		

			2.	Prohibit IRS rejection of low income taxpayer's offer-in-compromise			based on amount of offer		

			3.	Prohibit IRS rejection an offer-in-compromise solely based on a dispute 		as to liability because the taxpayer's file cannot be located by IRS 		

			4.	Prohibit the IRS from requiring a financial statement for offer-in-compromise based solely on doubt as to liability		

			5.	Suspend collection by levy while offer-in-compromise is pending		

			6.	Rejected offers-in-compromise and requests for installment agreements	to be reviewed		

			7.	Liberal acceptance policy for offers-in-compromise		

		L.	Additional Items		

			1.	Basis for evaluation of IRS employees		

			2.	IRS employee contacts		

			3.	Use of pseudonyms by IRS employees		

			4.	Conference of right in the National Office of IRS		

			5.	Illegal tax protestor designations		

			6.	Allow tax writing committees to obtain data from IRS employees		

IV.	CONGRESSIONAL ACCOUNTABILITY FOR THE IRS		

		A.	Funding for Century Date Change		

		B.	Tax Law Complexity Analysis		

V.	REVENUE OFFSETS		

		A.	Employer Deduction for Vacation and Severance Pay		

		B.	Modify Foreign Tax Credit Carryover Rules		

		C.	Clarify and Expand Mathematical Error Procedures		

		D.	Freeze Grandfathered Status of Stapled REITs	

**INTRODUCTION**

	On November 5, 1997, the House passed H.R. 2676, the "Internal Revenue ServiceRestructuring and Reform Act of 1997."  Titles I-V of H.R. 2676, as passed by the House, wereas reported by the House Committee on Ways and Means on October 31, 1997 (H. Rept. 105-364, Part I) and contain provisions relating to executive branch governance of the IRS, electronicfiling, Taxpayer Bill of Rights 3, Congressional oversight, and a revenue offset.  Title VI of H.R.2676, as passed by the House, contains the "Tax Technical Corrections Act of 1997,"(1) which wasadded as a House amendment to H.R. 2676.  

	The Senate Finance Committee has scheduled a markup relating to Internal RevenueService ("IRS") reform and restructuring proposals, including taxpayer protections, on March 31, 1998.

	This document(2) prepared by the staff of the Joint Committee on Taxation, contains adescription of the Finance Committee Chairman's mark relating to Executive Branch Governanceof the IRS (Part I), Electronic Filing (Part II), Taxpayer Bill of Rights 3 (Part III), CongressionalAccountability for the IRS (Part IV), and Revenue Offsets (Part V).(3)

**I.  EXECUTIVE BRANCH GOVERNANCE**

**A.  IRS Restructuring and Creation of IRS Oversight Board**

**1.  IRS restructuring and mission**

**Present Law
**IRS organizational plan**

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

**IRS mission statement**

	The IRS mission statement provides that:

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

**Description of Proposal**

	The IRS Commissioner would be directed to restructure the IRS by eliminating thepresent-law 3-tier structure and replace it with an organizational structure that features operatingunits serving particular groups of taxpayers with similar needs.  The legality of IRS actions wouldnot be affected pending further appropriate statutory changes relating to such a reorganization(e.g., eliminating statutory references to obsolete positions).

	The IRS would be directed to revise its mission statement to provide greater emphasis onserving the needs of taxpayers.

**Effective Date**

	The proposal would be effective on the date of enactment.

**2.  Establishment and duties of IRS Oversight Board**

**Present Law**

	Under present law, the administration and enforcement of the internal revenue laws areperformed by or under the supervision of the Secretary of the Treasury.(4)

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

	Under the ethical conduct rules, all Federal Government employees (including specialgovernment employees) are precluded from participating in a matter in which the employee (or arelated party) has a financial interest.  In addition, special government employees cannot representa party (whether or not for compensation) or receive compensation for representation of a party(5)in relation to a matter (1) in which the employee has at any time participated personally andsubstantially, or (2) which is pending in the department or agency of the Government in which thespecial government employee is serving.  In the case of a special government employee who hasserved in a department no more than 60 days during the immediately preceding 365 days, item (2)does not apply.  Thus, for example, such an individual can receive compensation forrepresentational services with respect to matters pending in the department in which the employeeserves, as long as it is not a matter involving parties in which the employee personally andsubstantially participated.(6)

	The conflict of interest rules also impose restrictions on what a Federal Governmentemployee can do after leaving the Government. Under these rules, senior level officers andemployees (including special government employees) cannot represent anyone other than theUnited States before the individual's former department or agency for 1 year after terminatingemployment.  Whether an employee is a senior level officer or employee is determined by paygrade.  The one-year post employment restriction does not apply to special governmentemployees who serve less than 60 days during the 365-day period before termination ofemployment.(7)

	Federal employees with pay grades above certain levels are required to file annually publicfinancial disclosures.

**Description of Proposal
**Duties, responsibilities, and powers of the IRS Oversight Board**

	The proposal would provide for the establishment within the Treasury Department of theInternal Revenue Service Oversight Board (referred to as the "Board").  The generalresponsibilities of the Board would be to oversee the IRS in the administration, management,conduct, direction, and supervision of the execution and application of the internal revenue laws. As part of its oversight responsibilities, the Board would have the responsibility to ensure that theorganization and operation of the IRS allows it to carry out its mission.  The Board would sunsetSeptember 30, 2008.

	The Board would have the following specific responsibilities: (1) to review and approvestrategic plans of the IRS, including the establishment of mission and objectives (and standards ofperformance) and annual and long-range strategic plans; (2) to review the operational functions ofthe IRS, including plans for modernization of the tax administration system, outsourcing ormanaged competition, and training and education; (3) to provide for the review of theCommissioner's selection, evaluation and compensation of senior managers and executives; (4) toreview and approve the Commissioner's plans for major reorganization of the IRS (other than thereorganization provided for under the proposal); and (5) to review operations of the IRS in orderto ensure the proper treatment of taxpayers.  In addition, the Board would review and approvethe budget request of the IRS prepared by the Commissioner, submit such budget request to theSecretary, and ensure that the budget request supports the annual and long-range strategic plansof the IRS.  The Secretary would be required to submit the budget request approved by the Boardto the President, who would be required to submit such request, without revision, to the Congresstogether with the President's annual budget request for the IRS.  The proposal would not affectthe ability of the President to include, in addition, his own budget request relating to the IRS.  Asdiscussed below, the Board would also recommend candidates for the positions of IRSCommissioner and Taxpayer Advocate, and could recommend removal of either.

	It is intended that the Board would reach a formal decision on all matters subject to itsreview.  With respect to those matters over which the Board would have approval authority, theBoard's decisions would be determinative.  The Board shall consult with representatives oforganizations that represent a substantial number of IRS employees on matters that impact IRSemployees before it concludes its review and/or approval process. 

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

	Board members would have limited access to confidential tax return and returninformation under section 6103.  This limited access would permit the Board to receive suchinformation (i.e., information that has not been redacted to remove confidential tax return andreturn information) from the Treasury Inspector General in connection with reports made to theBoard or as provided by the Commissioner. The Board members would be subject to the anti-browsing rules applicable to IRS employees under present law.(8)

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

	The Board would be required to report each year to the President and the Congressregarding the conduct of its responsibilities.  In addition, the Board would be required to report tothe Ways and Means and Finance Committees upon a determination that problems identified bythe Board are not being adequately addressed by the IRS.

**Composition of the Board**

	The Board would be composed of 7 members.  Six of the members would be so-called"private-life" members who are not otherwise Federal officers or employees.  These private-lifemembers would be appointed by the President, with the advice and consent of the Senate.  Theother member would be the Commissioner of the IRS.

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

	The private-life members could be removed at the will of the President.  The IRSCommissioner would be removed from the Board upon his or her termination of employment asthe Commissioner.  

**Compensation of Board members**

	The private-life members of the Board would be compensated at a rate of $30,000 peryear, except that the Chair would be compensated at a rate of $50,000 a year.  The IRSCommissioner would receive no compensation for his or her services as a Board member.   Themembers of the Board would be entitled to travel expenses in connection with attending Boardmeetings.

**Ethical conduct rules**

	Under the proposal, the private-life Board members would be subject to the publicfinancial disclosure rules applicable to Federal government employees above certain pay grades.

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

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

**Administrative matters**

	Term of appointments

	The 6 private-life Board members would be appointed for 5-year terms.  The private-lifemembers could serve no more than two 5-year terms.  Each 5-year term would begin uponappointment.  Board member terms would be staggered, as a result of a special rule providing thatsome private-life members first appointed to the Board would serve terms of less than 5 years. Under this rule, 2 members first appointed would serve for 2 years, 2 for 4 years, and 2 for 5years.

Chair of the Board

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

Meetings

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

	 A quorum of 4 members would be required in order for the Board to conduct business. Actions of the Board could be taken by a majority vote of those members present and voting.

Staffing

	The Board would be authorized to have its own permanent staff.  In addition, the Boardwould have such staff as detailed by the Commissioner or from another Federal agency at therequest of the Chair of the Board.  The Chair could procure temporary and intermittent servicesunder section 3109(b) of title 5 of the U.S. Code.

Claims against Board members

	The private-life members of the Board would have no personal liability under Federal lawwith respect to any claim arising out of or resulting form an act or omission by the Board memberwithin the scope of service as a Board member.  The proposal would not limit personal liabilityfor criminal acts or omissions, wilful or malicious conduct, acts or omissions fro private gain, orany other act or omission outside the scope of service as a Board member.  The proposal wouldnot affect any other immunities and protections that may be available under applicable law or anyother right or remedy against the United States under applicable law, or limit or alter theimmunities that are available under applicable law for Federal officers and employees.  

**Effective Date**

	The provisions of the proposal relating to the Board would be effective on the date ofenactment.  The President would be directed to submit nominations for Board members to theSenate within 6 months of the date of enactment.  The legality of the actions of the IRS would notbe affected pending appointment of the Board.

**B.  Appointment and Duties of IRS Commissioner and Chief Counsel**
**1.  IRS Commissioner**

**Present Law**

	Within the Department of the Treasury is a Commissioner of Internal Revenue, who isappointed by the President, with the advice and consent of the Senate.  The Commissioner hassuch duties and powers as may be prescribed by the Secretary.(9)  The Secretary has delegated tothe Commissioner the administration and enforcement of the internal revenue laws.(10)  TheCommissioner generally does not have authority with respect to tax policy matters.(11)

	The Secretary is authorized to employ such persons as the Secretary deems appropriatefor the administration and enforcement of the internal revenue laws and to assign posts of duty.

**Description of Proposal**

	 As under present law, the Commissioner would be appointed by the President, with theadvice and consent of the Senate, and could be removed at will by the President.  TheCommissioner would be appointed to a 5-year term, beginning with the date of appointment.  The Board would recommend candidates to the President for the position of Commissioner;however, the President would not be required to nominate for Commissioner a candidaterecommended by the Board.  The Board would have the authority to recommend the removal ofthe Commissioner. 

	The Commissioner would have such duties and powers as prescribed by the Secretary. Unless otherwise specified by the Secretary, such duties and powers would include the power toadminister, manage, conduct, direct, and supervise the execution and application of the internalrevenue laws or related statutes and tax conventions to which the United States is a party and torecommend to the President a candidate for Chief Counsel (and recommend the removal of theChief Counsel).  The Commissioner would exercise the IRS' final authority concerning thesubstantive interpretation of the tax laws.  If the Secretary determines not to delegate suchspecified duties to the Commissioner, such determination would not take effect until 30 days afterthe Secretary notifies the House Committees on Ways and Means, Government Reform andOversight, and Appropriations, the Senate Committees on Finance, Government Affairs, andAppropriations, and the Joint Committee on Taxation.  The Commissioner would consult with theBoard on all matters within the Board's authority (other than the recommendation of candidatesfor Commissioner and the recommendation to remove the Commissioner).

	Unless otherwise specified by the Secretary, the Commissioner would be authorized toemploy such persons as the Commissioner deems proper for the administration and enforcementof the internal revenue laws and would be required to issue all necessary directions, instructions,orders, and rules applicable to such persons.  Unless otherwise provided by the Secretary, theCommissioner would determine and designate the posts of duty.

	The Commissioner would be compensated as under present law.

**Effective Date**

	The provisions of the proposal relating to the Commissioner would be effective on thedate of enactment.  The provision relating to the 5-year term of office would apply to theCommissioner in office on the date of enactment.  The 5-year term would run from the date ofappointment. 

**2.  IRS Chief Counsel**

**Present Law**

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

**Description of Proposal**

	As under present law, the Chief Counsel would be appointed by the President, with theadvice and consent of the Senate.  The Chief Counsel would not be an Assistant General Counselof the Treasury and would report directly to the Commissioner.

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

**Effective Date**

	The proposal would be effective 90 days after the date of enactment.

**C.  Structure and Funding of the Employee Plans and Exempt Organizations Division ("EP/EO")
**Present Law**

	Prior to 1974, no one specific office in the IRS had primary responsibility for employeeplans and tax-exempt organizations.  As part of the reforms contained in the EmployeeRetirement Income Security Act of 1974 ("ERISA"), Congress statutorily created the Office ofEmployee Plans and Exempt Organizations ("EP/EO") under the direction of an AssistantCommissioner.(12)  EP/EO was created to oversee deferred compensation plans governed bysections 401-414 of the Code and organizations exempt from tax under Code section 501(a). 

	In general, EP/EO was established in response to concern about the level of IRS resourcesdevoted to oversight of employee plans and exempt organizations.  The legislative history of Codesection 7802(b) states that, with respect to administration of laws relating to employee plans andexempt organizations, "the natural tendency is for the Service to emphasize those areas thatproduce revenue rather than those areas primarily concerned with maintaining the integrity andcarrying out the purposes of exemption provisions."(13)

	To provide funding for the new EP/EO office, ERISA authorized the appropriation of anamount equal to the sum of the section 4940 excise tax on investment income of privatefoundations (assuming a rate of 2 percent) as would have been collected during the secondpreceding year plus the greater of the same amount or $30 million.(14)   However, amounts raisedby the section 4940 excise tax have never been dedicated to the administration of EP/EO, but aretransferred instead to general revenues.  Thus, the level of EP/EO funding, like that of the rest ofthe IRS, is dependent on annual Congressional appropriations to the Treasury Department.

**Description of Proposal**

	Because the funding formula for EP/EO set forth in section 7802(b)(2) would, if utilized,result in an unstable level of funding that may bear little or no relation to the amount of financialresources actually required by the EP/EO division, the proposal would repeal the fundingmechanism.  Thus, the appropriate level of funding for EP/EO would, consistent with currentpractice, be subject to annual Congressional appropriations, as are other functions within the IRS. In this regard, however, given the magnitude of the sectors EP/EO is charged with regulating, aswell as the unique nature of its mandate, an adequately funded EP/EO is extremely important tothe efficient and fair administration of the Federal tax system.(15)  Accordingly, financial resourcesfor EP/EO should not be constrained on the basis that EP/EO is a "non-core" IRS function;rather, EP/EO, like all functions of the IRS, should be funded so as to promote the efficient andfair administration of the Federal tax system.

**Effective Date**

	The proposal would be effective on the date of enactment.

**D.  Taxpayer Advocate**

**Present Law**

	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. 

	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.

**Description of Proposal**

	The proposal would provide for the selection of a National Taxpayer Advocate by theSecretary of the Treasury Department from one of three candidates recommended by the IRSOversight Board. The candidates should be individuals with a background in customer service aswell as tax law. 

	As under present law, the National Taxpayer Advocate would be required to annuallyreport to the tax-writing committees of Congress on various matters.  In addition to the mattersrequired to be addressed under current law, the National Taxpayer Advocate would be requiredto identify areas of the tax law that impose significant compliance burdens on taxpayers andidentify the 10 most litigated issues for each category of taxpayer, and any other information thatthe National Taxpayer Advocate may deem advisable. 

	The National Taxpayer Advocate would be required to appoint local Taxpayer Advocates,at least one for each State, who would report directly to the National Taxpayer Advocate.  Incontrast to the present law problem resolution system, the local Taxpayer Advocates would beemployees of the Taxpayer Advocate's Office, independent from the IRS examination, collection,and appeals functions.  The National Taxpayer Advocate would monitor the coverage andgeographical allocation of the local Taxpayer Advocates and would have 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 would be required to develop career pathsfor local Taxpayer Advocates.  In addition, the National Taxpayer Advocate would be required todevelop guidance on the criteria for referral of taxpayer inquiries to local Taxpayer Advocates andensure that access to local Taxpayer Advocates would be readily available to the public. 

	Each local Taxpayer Advocate would report directly to the National Taxpayer Advocateand would operate separately from the local IRS office (including having its own telephone andfax lines and a separate listing in the telephone book) and would so inform the taxpayer at theinitial meeting.  The local Taxpayer Advocate would not be required to disclose to the IRS anycontact with or information provided by the taxpayer. 

	The IRS would be required to publish the taxpayer's right to contact the local TaxpayerAdvocate on the statutory notice of deficiency.  

	The National Taxpayer Advocate cannot have been employed by the IRS during the twoyears preceding the appointment and would be required to agree not to accept any employmentwith the IRS for at least 5 years after ceasing to be the National Taxpayer Advocate.  

**Effective Date**

	The proposal would be effective on the date of enactment.

**E.  Prohibition on Executive Branch Influence Over Taxpayer Audits 
**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).

**Description of Proposal**

	The proposal would make 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 would apply 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(generally Cabinet-level positions).  The prohibition would apply to both direct requests andrequests made through an intermediary.

	Any request made in violation of this rule must be reported by the IRS employee to whomthe request was made to the Treasury Inspector General.  The Inspector would have the authorityto investigate such violations and to refer any violations to the Department of Justice for possibleprosecution, as appropriate.  Anyone convicted of violating this provision will be punished byimprisonment of not more than 5 years or a fine not exceeding $5,000 (or both).

	Three exceptions to the general prohibition apply.  First, the prohibition does not apply toa request made to a specified person by a taxpayer or a taxpayer's representative that is forwardedby the specified person to the IRS.  This exception is intended to cover two types of situations. The first situation is where a taxpayer (or a taxpayer's representative) writes to a specified personseeking assistance in resolving a difficulty with the IRS.  This exception permits the specifiedperson who receives such a request to forward it to the IRS for resolution without violating thegeneral prohibition.  

	The second situation that this first exception is intended to cover is an audit orinvestigation by the IRS of a Presidential nominee.  Under present law (sec. 6103(c)), nomineesfor Presidentially appointed positions consent to disclosure of their tax returns and returninformation so that background checks may be conducted.  Sometimes an audit or otherinvestigation is initiated as part of that background check.  The Committee anticipates that anysuch audit or investigation that is part of such a background check will be encompassed withinthis first exception.

	The second exception to the general prohibition applies to requests for disclosure ofreturns or return information under section 6103 if the request is made in accordance with therequirements of section 6103.

	The third exception to the general prohibition applies to requests made by the Secretary ofthe Treasury as a consequence of the implementation of a change in tax policy.

	Any audit or investigation covered by an exception to this rule would have to be justifiedin writing.

**Effective Date**
	The proposal would apply to violations occurring after the date of enactment.

**F.  Treasury Office of Inspector General; IRS Office of the Chief Inspector**

**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Governmental Affairs and Finance of the Senate and the Committees on Government Reform andOversight and Ways and Means of the House.

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, 1951, 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.

**Description of Proposal**

**In general**

	Under the proposal, the IRS Office of the Chief Inspector would be eliminated, and all ofits powers and responsibilities would be transferred to the Treasury IG. The Treasury IG wouldhave its existing powers and responsibilities under the IG Act of 1978, as well as certainadditional powers and responsibilities.  The Treasury IG would be under the supervision of theSecretary of Treasury, with certain additional reporting to the Board and the Congress.  

**Appointment and qualifications of Treasury IG**

	As under present law, the Treasury IG would be selected by the President, with the adviceand consent of the Senate.  The Treasury IG could be removed from office by the President.  ThePresident would communicate the reasons for such removal to both Houses of Congress.

	As under present law, the Treasury IG would 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 should have experience in tax administration and demonstrated abilityto lead a large and complex organization.  The Treasury IG could not be employed by the IRSwithin the two years preceding and five following his or her appointment.

	As under present law, the Treasury IG would be required to appoint an AssistantInspector General for Auditing and an Assistant Inspector for Inspections.  Under the proposal,such appointees, as well as any Deputy Inspector General(s) appointed by the Treasury IG, couldnot be employed by the IRS within the two years preceding and five years following theirappointments.

**Duties and responsibilities of Treasury IG**

	The Treasury IG would have all of its present law duties and responsibilities.  In addition,the Treasury IG would assume all of the duties and responsibilities currently delegated to the IRSOffice of the Chief Inspector.   

	Accordingly, with respect to the IRS, the Treasury IG would be charged with conductingaudits, investigations, and evaluations of IRS programs and operations 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 specifically would bedirected to evaluate the adequacy and security of IRS technology on an ongoing basis.  Inaddition, the Treasury IG would be responsible for protecting the IRS against external attempts tocorrupt or threaten its employees.  The Treasury IG would be charged with investigatingallegations of criminal misconduct (e.g., Code sections 7212 , 7213, 7214 and 7216), 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).  

	The present law restrictions on the Treasury IG's ability to refer matters to theDepartment of Justice would be removed.  Thus, the Treasury IG would be required to report tothe Attorney General whenever the Treasury IG has reasonable grounds to believe that there hasbeen a violation of Federal criminal law. 

**Authority of Treasury IG**

	As under present law, the Treasury IG would report to and be under the generalsupervision of the Secretary of Treasury.  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.  The present-law authority of theSecretary to prohibit audits, investigations or the issuance of subpoenas by the Treasury IG undercertain circumstances (described above) would not extend to audits, investigations or subpoenasrelating to the IRS.

	Under the proposal, the Treasury IG would provide to the Board all reports regarding IRSmatters on a timely basis and would conduct audits or investigations requested by the Board.  TheTreasury IG also would, 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 wouldhave its present-law authority.  In addition, the Treasury IG would have 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 has sufficient resources to carry out his or her duties andresponsibilities under the proposal, approximately 900 FTEs currently assigned to IRS Office ofthe Chief Inspector would be transferred to the Treasury IG.  Such FTEs would include all of the FTEs performing investigative functions in the Office of the Chief Inspector Internal Security andIntegrity Investigations and Activities.  The proposal would require that at least 900 of TreasuryIG FTEs (but not necessarily the same employees who are transferred to the Treasury IG) shouldbe dedicated to IRS matters on an ongoing basis. 

	The Commissioner would be permitted to retain approximately 300 FTEs from the Officeof Inspection to staff an audit function (including support staff) for internal IRS managementpurposes.  Like other IRS functions, however, this audit function would be subject to oversightand review by the Treasury IG.

**Access to taxpayer returns and return information**

	Taxpayer returns and return information would be available for inspection by the TreasuryIG pursuant to section 6103(h)(1).  Thus, the present law written notice requirements containedin section 8D(e) of the IG Act of 1978 would be repealed, and the Treasury IG would have thesame access to taxpayer returns and return information as does the Chief Inspector under presentlaw.

**Reporting requirements**

	The Treasury IG would continue to be subject to the semiannual reporting requirementsset forth in section 5 of the IG Act of 1978.  As under present law, reports would be 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.  In addition, reports would bemade to the Joint Committee on Taxation.  The reports would be required to contain theinformation that is required to be reported by the Treasury IG under present law, as well certainadditional information (e.g., regarding the source, nature and status of allegations received by theTreasury IG, the implementation of various taxpayer rights protections, and IRS employeeterminations and mitigations) required by this legislation.

**Effective Date**

The proposal would be effective 180 days after the date of enactment.

**G.  IRS Personnel Flexibilities**

**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. 

**Description of Proposal**
**In general**

	The proposal would amend title 5 of the United States Code to provide certain personnelflexibilities to the IRS. In general, the proposal would provide 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' would 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 could be appealed to theFederal Services Impasse Panel.

**Senior management and technical positions**

		Streamlined critical pay authority

	The proposal would provide 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 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 would not be subject to the otherwise applicable requirements undertitle 5. All such appointments would be excluded from the collective bargaining unit and theappointments would not be subject to approval of the Office of Management and Budget("OMB") or the Office of Personnel Management ("OPM").

	The streamlined authority would be limited to a period of 10 years. 

Critical pay authority

	The proposal would provide OMB with approval authority to increase the pay level forcertain critical pay positions requested by the Secretary. These critical pay positions would becritical, technical and professional positions other than those designated under the streamlinedauthority described above. Under the proposal, OMB would be authorized to approve requestsfor critical position pay up to the highest total compensation that does not exceed the rate of payof the Vice President (currently $175,400).

	Recruitment, retention and relocation incentives

	The proposal would provide the Secretary with authority to provide recruitment, retentionand relocation incentives for certain executive and hard-to-fill positions. The authority would befor a period of 10 years and would be subject to OPM approval.

Career-reserve Senior Executive Service ("SES") positions

	The proposal would broaden 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 would belimited to up to 10 percent of the total number of SES positions available to the IRS.  Thesepositions would be limited to a 3 year term, with the option of extending the term for 2 more 3-year terms.

	Variable compensation

	The proposal would provide 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, could not exceed the rate of pay ofthe Vice President. The authority would not be subject to OPM approval. 

	It is anticipated that the bonuses would not be available to more than 25 IRS seniorexecutives annually.

**General workforce**

	Performance management system

	The proposal would require the Secretary to establish a performance management systemwhich would 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 proposal would require 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 would 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 proposal would provide the Secretary the authority to establish an awards programfor IRS employees. The program would be designed to provide incentives for and recognition ofindividual, group and organizational achievements. The Secretary would have the authority toprovide awards of up to $25,000 without OPM approval. 

These awards would be based on performance under the new performance managementsystem, and in no case would awards be made (or performance measured) based on taxenforcement results.

Workforce classification and pay banding

	The proposal would provide 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 would 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 proposal would provide the IRS with flexibility in filling certain permanentappointments with qualified temporary employees. A qualified temporary employee would be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 proposal would authorize 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 would be authorized to select any candidate from the highest quality category, andwould not be limited to the three highest ranked candidates. In administering these category ratingsystems, the IRS generally would 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 were satisfied.

	The proposal would authorize the IRS to establish probation periods for IRS employees ofup to 3 years, when it is determined that a shorter period would not be sufficient for an employeeto demonstrate proficiency in a position.

**Voluntary separation incentives**

	The proposal would provide authority to the IRS to use Voluntary Separation IncentivePay ("buyouts") through December 31, 2002, without regard to the requirement regardingreductions in full-time equivalents.

**Demonstration projects**

	The proposal would provide the IRS with authority to conduct one or more demonstrationprojects through a streamlined process. The authority would enable the IRS to test newapproaches to human resource management. The proposal would provide 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 would 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 would be directed to develop employee performance measures that favortaxpayer service and prohibit awarding merit pay or bonuses that are based on quotas, goals, orstatistics.

**Violations for which IRS employees may be terminated**

The proposal would require 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) perjury (e.g., falsetestimony in a taxpayer's case, failure to provide truthful information in the course of a criminalinvestigation, or false information in a deposition or affidavit); (3) falsifying or destroyingdocuments concerning a particular taxpayer to cover-up employee mistakes; (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 proposal would provide non-delegable authority to the Commissioner to notterminate an employee for one of the enumerated violations if the Commissioner determines thatthere are factors that mitigate against terminating the employee. Whether a proposed terminationshould be reviewed for mitigation factors or whether such factors exist would be in the solediscretion of the Commissioner.  The Treasury IG would be required to track employeeterminations and terminations that would have occurred had the Commissioner not determinedthat there were mitigating factors and include such information in the IG's annual report.

**IRS employee training program**

The proposal would require the IRS to place a high priority on employee training and toadequately fund employee training programs.  The proposal would also require 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 proposal, other than the IRS employee training program proposal, would be effectiveon the date of enactment. The proposal relating to the IRS employee training program would beeffective 90 days after the date of enactment.

**II.  ELECTRONIC FILING**

**A.   Electronic Filing of Tax and Information Returns**

**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.

**Description of Proposal**

	The proposal would state 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 proposal would require the Secretary of the Treasury to establish astrategic plan to increase taxpayer use of electronic filing.  The proposal would require all returnsprepared in electronic form but filed in paper form to be filed electronically, to the extent feasible,by the year 2002.  

	The proposal would require 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 proposal would be effective on the date of enactment.

**B.  Time for Filing Certain Information Returns**

**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.

**Description of Proposal**

	The proposal would provide 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 proposal would also require 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 would apply to information returnsrequired to be filed after December 31, 1999.  The Treasury study would be due on December 31,1998.

**C.  Paperless Electronic Filing**

**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 received a Form 8453 providingsignature information on the filer.  Form 8453 is a paper form that must be received by the IRSbefore any electronically filed return is complete.   Form 8453 provides signature information tothe IRS. 

	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.

**Description of Proposal**

	The proposal would require 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proposal would authorize the Secretary to provide for alternative methods of signing all returns,declarations, statements, or other documents.  A document filed using an alternative method ofsignature would be treated identically, for both civil and criminal purposes, as a signature on apaper form.

	The proposal also would provide rules for determining when electronic returns are deemedfiled, and for authorization for return preparers to communicate with the IRS on matters includedon electronically filed returns.  

	The proposal would require 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 proposal would be effective on the date of enactment.  

**D.  Return-Free Tax System**

**Present Law**

	Under present law, taxpayers generally are required to calculate their own tax liabilitiesand submit returns showing their calculations.

**Description of Proposal**

	The proposal would require 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 would be required annually to report to thetax-writing committees on the progress of the development of such system. The Secretary wouldbe required to make the first report on the development of the return-free filing system to the tax-writing committees on June 30, 1999.

**Effective Date**

	The proposal would be effective on the date of enactment.

**E.  Access to Account Information**

**Present Law**

	Taxpayers who file their returns electronically cannot review their accounts electronically.

**Description of Proposal**

	The proposal would require the Secretary to develop procedures not later than December31, 2006, under which a taxpayer filing returns electronically could review the taxpayer's ownaccount electronically, but only if all necessary privacy safeguards are in place by that date.  TheSecretary would be required to issue an interim progress report to the tax-writing committees byDecember 31, 2003.

**Effective Date**

	The proposal would be effective on the date of enactment. 

**III.  TAXPAYER BILL OF RIGHTS 3**

**A.  Burden of Proof**

**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)

**Description of Proposal**

	The proposal would provide 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 (as under present law).  Third, the taxpayer must cooperate withreasonable requests by the Secretary for meetings, interviews, witnesses, information, anddocuments.  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).

	The proposal would also provide that in any instance in which the Secretary uses arbitrarystatistics to determine the taxpayer's income (such as average income for the area in which thetaxpayer lives), the burden of proof would be on the Secretary with respect to that issue.

	Finally, the proposal would provide 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.

**Effective Date**

	The proposal would apply to court proceedings arising in connection with examinationscommencing after the date of enactment.

**B.  Proceedings by Taxpayers**

**1.  Expansion of authority to award costs and certain fees**

**Present Law**

	Any person who substantially prevails in any action by or against the United States inconnection with the determination, collection, or refund of any tax, interest, or penalty may beawarded reasonable administrative costs incurred before the IRS and reasonable litigation costsincurred in connection with any court proceeding.  Reasonable administrative costs are defined as(1) any administrative fees or similar charges imposed by the IRS and (2) expenses, costs and feesrelated to attorneys, expert witnesses, and studies or analyses necessary for preparation of thecase, to the extent that such costs are incurred before earlier of the date of the notice of decisionby IRS Appeals or the notice of deficiency (sec. 7430(c)(2)).  Net worth limitations apply.

	Reasonable litigation costs include reasonable fees paid or incurred for the services ofattorneys, except that the attorney's fees will not be reimbursed at a rate in excess of $110 perhour (indexed for inflation) unless the court determines that a special factor, such as the limitedavailability of qualified attorneys for the proceeding, justifies a higher rate. 

	Rule 68 of the Federal Rules of Civil Procedure (FRCP) provides a procedure underwhich a party may recover costs if the party's offer for judgment was rejected and the subsequentcourt judgment was less favorable to the opposing party than the offer.   The offering party'scosts are limited to the costs (excluding attorney's fees) incurred after the offer was made.  TheFRCP generally apply to tax litigation in the district courts and the United States Court of FederalClaims.  

**Description of Proposal
	The proposal would:

	 (1) move the point in time after which reasonable administrative costs can be awarded tothe date on which the first letter of proposed deficiency which allows the taxpayer anopportunity for administrative review in the IRS Office of Appeals is sent; 

	(2) permit awards of reasonable attorney's fees at the prevailing rate for the locality;

	 (3) permit the award of attorney's fees to specified persons who represent for no morethan a nominal fee a taxpayer who is a prevailing party;  

	(4) provide that in determining whether the position of the United States was substantiallyjustified, the court shall take into account whether the United States has lost in othercourts of appeal on substantially similar issues; and 

	(5) provide that if a taxpayer makes an offer after the taxpayer has a right to administrativereview in the IRS Office of Appeals, the IRS rejects the offer, and later the IRS obtains ajudgment against the taxpayer in an amount that is equal to or less than the taxpayer'soffer for the amount of the tax liability (excluding interest), reasonable costs andattorney's fees from the date of the offer would be awarded.

The above awards would apply subject to the same net worth limitations as under present law. 

**Effective Date**

	The proposal would apply to eligible costs and services incurred more than 180 days afterthe date of enactment.

**2.  Civil damages with respect to unauthorized collection actions**

**Present Law**

	A taxpayer may sue the United States for up to $1 million of civil damages caused by anofficer or employee of the IRS who recklessly or intentionally disregards provisions of the InternalRevenue Code or Treasury regulations in connection with the collection of Federal tax withrespect to the taxpayer.

**Description of Proposal**

	The proposal would permit (1) up to $100,000 in civil damages caused by an officer oremployee of the IRS who negligently disregards provisions of the Internal Revenue Code orTreasury regulations in connection with the collection of Federal tax with respect to the taxpayer,and (2) up to $1 million in civil damages caused by an officer or employee of the IRS whowillfully disregards provisions of the Bankruptcy Code relating to automatic stays or discharges.  The proposal would also provide that persons other than the taxpayer may sue for civil damagesfor unauthorized collection actions. No person would be entitled to seek civil damages in a courtof law without first exhausting administrative remedies.

**Effective Date**

	The proposal would be effective with respect to actions of officers or employees of theIRS occurring after the date of enactment.

**3.  Increase in size of cases permitted on small case calendar**

**Present Law**

	Taxpayers may choose to contest many tax disputes in the Tax Court.  Special small caseprocedures apply to disputes involving $10,000 or less, if the taxpayer chooses to utilize theseprocedures (and the Tax Court concurs) (sec. 7463).  The IRS cannot require the taxpayer to usethe small case procedures.  The Tax Court generally concurs with the taxpayer's request to usethe small case procedures, unless it decides that the case involves a tax policy issue that should beheard under the normal procedures.  After the case has commenced, the Tax Court may order thatthe small case procedures should be discontinued only if (1) there is reason to believe that theamount in controversy will exceed $10,000 or (2) justice would require the change in procedure.  

	Small tax cases are conducted as informally as possible.  Neither briefs nor oral argumentsare required and strict rules of evidence are not applied.  Most taxpayers represent themselves insmall tax cases, although they may be represented by anyone admitted to practice before the TaxCourt.  Decisions in a case conducted under small case procedures are neither precedent forfuture cases nor reviewable upon appeal by either the government or the taxpayer.  

**Description of Proposal**

	The proposal would increase the cap for small case treatment from $10,000 to $50,000.

**Effective Date**

	The proposal would apply to proceedings commenced after the date of enactment.

**4.  Expand Tax Court jurisdiction to include determination of penalties under section 6672 of the Code**

**Present Law**

	In general, employers are required to withhold income taxes (sec. 3402) and socialsecurity taxes (sec. 3102) from their employee's wages.  These withheld taxes constitute a trust infavor of the United States from the time that the employer deducts them from the employee'swages, and the employer is liable to the government for the payment of such taxes (sec. 7501(a)).Section 6672 subjects all persons considered responsible for the withholding and payment of taxesto a penalty equal to the amount of taxes due where the employer fails to turn over such funds tothe government (the "responsible person" penalty, also known as the "100 percent" penalty). Generally, the determination of whether a person is a "responsible person" is a question of theperson's status, duty, and authority in the context of the business which has failed to collect andpay over taxes required to be withheld.  A responsible person penalty may also be imposed on apayroll lender (sec. 3505).  

	The Tax Court has no jurisdiction over the determination of the correctness of theassessment of the responsible person penalty.  Accordingly, as the Tax Court is the only pre-payment forum for the determination of tax liability, the imposition of the responsible personpenalty can only be challenged in a refund suit in the appropriate district court or the U.S. Courtof Federal Claims after payment of such penalty.  The responsible person penalty is a divisible tax. Thus, unlike a refund suit for income taxes, a responsible person need not pay the full amount ofthe assessment to invoke the jurisdiction of the district court or the U.S. Court of Federal Claims. Instead, the alleged responsible person may commence a refund suit after payment of the portionof the penalty attributable to one employee for one quarter.  

**Description of Proposal**

	The proposal would provide Tax Court jurisdiction over the "responsible person" penalty. Accordingly, the responsible person would not have to make a payment before challenging theimposition of the penalty.  

**Effective Date**

	The proposal would apply to penalties imposed after the date of enactment.

**5.  Actions for refund with respect to certain estates which have elected the installmentmethod of payment**

**Present Law
	In general, the U.S. Court of Federal Claims and the U.S. district courts have jurisdictionover suits for the refund of taxes, as long as full payment of the assessed tax liability has beenmade.  Flora v. United States, 357 U.S. 63 (1958), aff'd on reh'g, 362 U.S. 145 (1960).  UnderCode section 6166, if certain conditions are met, the executor of a decedent's estate may elect topay the estate tax attributable to certain closely-held businesses over a 14-year period.  Courtshave held that U.S. district courts and the U.S. Court of Federal Claims do not have jurisdictionover claims for refunds by taxpayers deferring estate tax payments pursuant to section 6166unless the entire estate tax liability has been paid (i.e., timely payment of the installments due priorto the bringing of an action is not sufficient to invoke jurisdiction).  See, e.g., Rocovich v. UnitedStates, 933 F.2d 991 (Fed. Cir. 1991), Abruzzo v. United States, 24 Ct. Cl. 668 (1991).  Undersection 7479, the U.S. Tax Court has limited authority to provide declaratory judgmentsregarding initial or continuing eligibility for deferral under section 6166.

**Description of Proposal**

	The proposal would grant the U.S. Court of Federal Claims and the U.S. district courtsjurisdiction to determine the correct amount of estate tax liability (or refund) in actions brought bytaxpayers deferring estate tax payments under section 6166, as long certain conditions are met.  Inorder to qualify for the proposal, (1) the estate must have made an election pursuant to section6166, (2) the estate must have fully paid each installment of principal and/or interest due (and allnon-6166-related estate taxes due) before the date the suit is filed, (3) no portion of the paymentsdue may have been accelerated, (4) there must be no suits for declaratory judgment pursuant tosection 7479 pending, and (5) there must be no outstanding deficiency notices against the estate.  In general, to the extent that a taxpayer has previously litigated its estate tax liability, the taxpayerwould not be able to take advantage of this procedure under principles of res judicata.  Taxpayerswould not be relieved of the liability to make any installment payments that become due duringthe pendency of the suit (i.e., failure to make such payments would subject the taxpayer to theexisting provisions of section 6166(g)(3)).

	The proposal further would provide that once a final judgment has been entered by adistrict court or the U.S. Court of Federal Claims, the IRS would not be permitted to collect anyamount disallowed by the court, and any amounts paid by the taxpayer in excess of the amountthe court finds to be currently due and payable would be refunded to the taxpayer, with interest. Lastly, the proposal would provide that the two-year statute of limitations for filing a refundaction would be suspended during the pendency of any action brought by a taxpayer pursuant tosection 7479 for a declaratory judgment as to an estate's eligibility for section 6166. 

**Effective Date**

	The proposal would be effective with respect to claims for refunds filed after the date ofenactment.

**6.  Provide Tax Court jurisdiction to review an adverse IRS determination of a bond issue'stax-exempt status**

**Present Law
	Interest earned on bonds or other debt obligations issued by States or politicalsubdivisions of States generally is excluded from gross income (sec. 103(a)).  However, intereston bonds issued by state and local governments may be taxed when the proceeds of the bond arenot used for traditional governmental purposes (sec. 103(b)).  Bonds used for nontraditionalgovernmental purposes include private activity bonds, arbitrage bonds, and bonds that are notissued in registered form.  

	A prospective issuer of bonds, the interest on which is intended to be excludable fromgross income under Code section 103(a), can request a ruling from the IRS that is subject to thedeclaratory judgment procedures of Code section 7478.  Code section 7478 permits theprospective issuer to obtain a declaratory judgment with respect to the tax-exempt status of thebonds.  The governmental issuer has no opportunity to litigate the tax-exempt status of the bondsonce they are issued. 

**Description of Proposal
	The proposal would extend the declaratory judgment procedures currently applicable toprospective bond issuers to issuers of outstanding bonds. 

**Effective Date**

	The proposal would apply to petitions filed after the date of enactment. 

**C.  Relief for Innocent Spouses and Persons With Disabilities
**1.  Innocent spouse relief**

**Present Law**

	Relief from liability for tax, interest and penalties is available for "innocent spouses" incertain circumstances.  To qualify for such relief, the innocent spouse must establish: (1) that ajoint return was made; (2) that an understatement of tax, which exceeds the greater of $500 or aspecified percentage of the innocent spouse's adjusted gross income for the preadjustment (mostrecent) year, is attributable to a grossly erroneous item of the other spouse; (3) that in signing thereturn, the innocent spouse did not know, and had no reason to know, that there was anunderstatement of tax; and (4) that taking into account all the facts and circumstances, it isinequitable to hold the innocent spouse liable for the deficiency in tax.  The specified percentageof adjusted gross income is 10 percent if adjusted gross income is $20,000 or less.  Otherwise, thespecified percentage is 25 percent.

	The proper forum for contesting the Secretary's denial of innocent spouse relief isdetermined by whether an underpayment is asserted or the taxpayer is seeking a refund ofoverpaid taxes.  Accordingly, the Tax Court may not have jurisdiction to review all denials ofinnocent spouse relief.  

**Description of Proposal**

**In general**

	The proposal would modify the innocent spouse provisions to permit a spouse to elect tolimit his or her liability for unpaid taxes on a joint return to the spouse's separate liability amount. In the case of a deficiency arising from a joint return, a spouse would be liable only to the extentitems giving rise to the deficiency are allocable to the spouse. 

	The allocation of items would be accomplished without regard to community propertylaws.  The election by a spouse to limit the spouse's liability to the separate liability amount couldbe made without regard to whether the spouse knew, or had a reason to know, that an itemallocable to the other spouse was erroneous. 

	The separate liability election would apply to all unpaid taxes under subtitle A of theInternal Revenue Code, including the income tax and the self-employment tax.  The election couldbe made at any time not later than 2 years after collection activities begin with respect to theelecting spouse.

	The Tax Court would have jurisdiction of disputes arising from the separate liabilityelection.  For example, a spouse who makes the separate liability election could petition the TaxCourt to determine the limits on liability applicable under this proposal.  The Tax Court would beauthorized to establish rules that would allow the Secretary of the Treasury and the electingspouse to require, with adequate notice, the other spouse to become a party to any proceedingbefore the Tax Court.  The Secretary of the Treasury would be required to develop a separateform with instructions for taxpayers to use in electing to limit liability.

	Special rules would apply to prevent the inappropriate use of the proposal.  First, reliefunder the proposal would not be available to the extent of the value of any property that wastransferred to the electing spouse by the other spouse if the principal purpose of the transfer wasavoidance of tax (including the avoidance of payment of tax).  A rebuttable presumption wouldexist that a transfer is made for tax avoidance purposes if the transfer was made less than one yearbefore the earlier of the date of assessment or notice of deficiency.  The rebuttable presumptionwould not apply to transfers incident to a decree of divorce or separate maintenance.  Thepresumption may be rebutted by a showing that the principal purpose of the transfer was not theavoidance of tax.  Second, if the IRS demonstrates that assets were transferred between thespouses in a fraudulent scheme joined in by both spouses to reduce total liability, neither spousewould be eligible to make the election under the proposal (and consequently joint and severalliability would apply to both spouses).

**Allocations of items**

	Under the proposal, allocation of items of income and deduction would follow thepresent-law rules determining which spouse is responsible for reporting an item when the spousesuse the married, filing separate filing status.  The Secretary of the Treasury would be grantedauthority to prescribe regulations providing simplified methods of allocating items.

	In general, apportionment of items of income would follow the source of the income. Wage income would be allocated to the spouse performing the job and receiving the Form W-2. Business and investment income (including any capital gains) would be allocated in the sameproportion as the ownership of the business or investment that produces the income.  Whereownership of the business or investment is held by both spouses as joint tenants, it is expected thatany income would be allocated equally to each spouse, in the absence of clear and convincingevidence supporting a different allocation.

	The allocation of business deductions would follow the ownership of the business. Personal deduction items are expected to be allocated equally between spouses, unless theevidence shows that a different allocation is appropriate.  For example, a charitable contributionwould normally be expected to be allocated equally to both spouses.  However, if the wife wereto provide evidence that the deduction relates to the contribution of an asset that was the soleproperty of the husband, any deficiency assessed because it is later determined that the value ofthe property was overstated would be allocated to the husband.

	Items of loss or deduction would be allocated to a spouse only to the extent that incomeattributable to the spouse was offset by the deduction or loss.  Any remainder would be allocatedto the other spouse.

	 Income tax withholding would be allocated to the spouse from whose paycheck the taxwas withheld.  Estimated tax payments would be allocated to the spouse who made the payments;if the payments were made jointly, the payments would be allocated equally to each spouse, in theabsence of evidence supporting a different allocation.

	The allocation of items would be accomplished without regard to the community propertylaws of any jurisdiction. 

	If, considering all the facts and circumstances, it would be inequitable to hold a spouseresponsible for any unpaid tax or deficiency attributable to an item, such item may be equitablyreallocated to the other spouse.  In cases where the IRS proves fraud, the IRS would have thepower to distribute, apportion, or allocate any item between spouses.

**Tax deficiencies**

	If a spouse elects separate liability, the liability for deficiencies determined after a jointreturn is filed would be allocated to the spouse whose item gives rise to the deficiency.  Forexample, if a deficiency is assessed after an IRS audit that relates to the husband's income that hefailed to report on the return, the entire deficiency would be allocated to the husband.  If the wifeelects separate liability, she would owe none of the deficiency.  It would be the sole responsibilityof the husband who failed to report the income.

	If the deficiency relates to the items of both spouses, the separate liability for thedeficiency will be allocated between the spouses in the same proportion as the items giving rise tothe deficiency are allocated.  If the deficiency arises as a result of an item of deduction or credit,the amount of the deficiency allocated to the spouse to whom the item of deduction or credit isallocated would be limited to the amount of income or tax allocated to such spouse that wasoffset by the deduction or credit.  The remainder of the liability would be allocated to the otherspouse to reflect the fact that income or tax allocated to that spouse was originally offset by aportion of the disallowed deduction or credit.

	For example, a married couple files a joint return with wage income of $100,000 allocableto the wife and  $30,000 of self employment income allocable to the husband. On examination, a$20,000 deduction allocated to the husband is disallowed, resulting in a deficiency of $5,600. Under the proposal, the liability is allocated in proportion to the items giving rise to thedeficiency.  Since the only item giving rise to the deficiency is allocable to the husband, andbecause he reported sufficient income to offset the item of deduction, the entire deficiency isallocated to the husband and the wife has no liability with regard to the deficiency, regardless ofthe ability of the IRS to collect the deficiency from the husband.

	If the joint return had shown only $15,000 (instead of $30,000) of self employmentincome for the husband, the income offset limitation rule discussed above would apply.  In thiscase, the disallowed $20,000 deduction entirely offsets the $15,000 of income of the husband, and$5,000 remains.  This remaining $5,000 of the disallowed deduction offsets income of the wife. The liability for the deficiency is therefore divided in proportion to the amount of income offsetfor each spouse.  In this example, the husband would be liable for 3/4 of the deficiency ($4,200),and the wife would be liable for the remaining 1/4 ($1,400).

**Tax shown on a return, but not paid**

	The separate liability election would also be applicable in situations where the tax shownon a joint return is not paid with the return.  In this case, the amount determined under theseparate liability election would equal the electing spouse's liability on a separate return.

	The separate liability election could not be used to create a refund, or to direct a refund toa particular spouse.   

**Effective Date**

	The proposal would apply to any liability for tax arising after the date of enactment andany liability for tax arising on or before such date, but remaining unpaid as of such date.

**2.  Reports on collection activity against spouses**

**Present Law**

	If a tax deficiency with respect to a joint return is assessed, and the individuals filing thejoint return are no longer married or no longer reside in the same household, the IRS mustdisclose in writing (in response to the written request of one of the individuals) whether the IRShas attempted to collect the deficiency from the other individual, the general nature of thecollection activities, and the amount collected, if any.

**Description of Proposal**

	The Treasury Inspector General would be required to certify annually that the IRS hasimplemented and is following procedures insuring that properly requested disclosures regardingamounts collected from former or estranged spouses are being provided.

**Effective Date**

	The certification would be made annually, beginning in 1999.

**3.  Suspension of statute of limitations on filing refund claims during periods of disability**

**Present Law**

	In general, a taxpayer must file a refund claim within three years of the filing of the returnor within two years of the payment of the tax, whichever period expires later (if no return is filed,the two-year limit applies) (sec. 6511(a)).  A refund claim that is not filed within these timeperiods is rejected as untimely.

	There is no explicit statutory rule providing for equitable tolling of the statute oflimitations.  The U.S. Supreme Court has held that Congress did not intend the equitable tollingdoctrine to apply to the statutory limitations of section 6511 on the filing of tax refund claims.

**Description of Proposal**

	The proposal would permit equitable tolling of the statute of limitations for refund claimsof an individual taxpayer during any period of the individual's life in which he or she is unable tomanage his or her financial affairs by reason of a medically determinable physical or mentalimpairment that can be expected to result in death or to last for a continuous period of not lessthan 12 months.   Tolling would not apply during periods in which the taxpayer's spouse oranother person is authorized to act on the taxpayer's behalf in financial matters.

**Effective Date**

	The proposal would apply to periods of disability before, on, or after the date ofenactment but would not apply to any claim for refund or credit which (without regard to theproposed provision) is barred by the statute of limitations as of January 1, 1998.

**D.  Provisions Relating to Interest and Penalties**

**1.  Elimination of interest differential on overlapping periods of interest on income taxoverpayments and underpayments**

**Present Law**

	A taxpayer that underpays its taxes is required to pay interest on the underpayment at arate equal to the Federal short term interest rate plus three percentage points.  A special "hotinterest" rate equal to the Federal short term interest rate plus five percentage points applies in thecase of certain large corporate underpayments.

	A taxpayer that overpays its taxes receives interest on the overpayment at a rate equal tothe Federal short term interest rate plus two percentage points.  In the case of corporateoverpayments in excess of $10,000, this is reduced to the Federal short term interest rate plusone-half of a percentage point.

	If a taxpayer has an underpayment of tax from one year and an overpayment of tax from adifferent year that are outstanding at the same time, the IRS will typically offset the overpaymentagainst the underpayment and apply the appropriate interest to the resulting net underpayment oroverpayment.  However, if either the underpayment or overpayment have been satisfied, the IRSwill not typically offset the two amounts, but rather will assess or credit interest on the fullunderpayment or overpayment at the underpayment or overpayment rate.  This has the effect ofassessing the underpayment at the higher underpayment rate and crediting the overpayment at thelower overpayment rate.  This results in the taxpayer being assessed a net interest charge, even ifthe amounts of the overpayment and underpayment are the same. 

**Description of Proposal**

	The proposal would establish a net interest rate of zero on equivalent amounts ofoverpayment and underpayment that exist for any period.  Each overpayment and underpaymentwould be considered only once in determining whether equivalent amounts of overpayment andunderpayment exist. The special rules that increase the interest rate paid on large corporateunderpayments and decrease the interest rate received on corporate underpayments in excess of$10,000 would not prevent the application of the net zero rate.  The proposal would apply toincome taxes and self-employment taxes.

**Effective Date**

	The proposal would apply to interest for calendar quarters beginning after the date ofenactment.

**2.  Increase in overpayment rate payable to taxpayers other than corporations**

**Present Law**

	A taxpayer that underpays its taxes is required to pay interest on the underpayment at arate equal to the Federal short-term interest rate (AFR) plus three percentage points. A taxpayerthat overpays its taxes receives interest on the overpayment at a rate equal to the Federal short-term interest rate (AFR) plus two percentage points.

**Description of Proposal**

	The proposal would provide that the overpayment interest rate will be AFR plus threepercentage points, except that for corporations, the rate would remain at AFR plus twopercentage points.

**Effective Date**

	The proposal would apply to interest for calendar quarters beginning after the date ofenactment.

**3.  Elimination of penalty on failure to pay during installment agreement**

**Present Law**

	Taxpayers who fail to pay their taxes are subject to a penalty of one-half percent permonth on the unpaid amount, up to a maximum of 25 percent (sec. 6651(a)). ) If the liability isshown on the return, the penalty begins to accrue on the date prescribed for payment of the tax(with regard to extensions (sec. 6651(a)(2)).  If the liability should have been shown on the returnbut was not, the penalty generally begins to accrue after the date that is 21 days from the date ofthe IRS notice and demand for payment with respect to such liability (sec. 6651(a)(3)). Taxpayers who make installment payments pursuant to an agreement with the IRS (under sec.6159) are also subject to this penalty (Treas. reg. sec. 301.6159-1(f) and sec. 6601(b)). 

**Description of Proposal**

	The proposal would provide that the penalty for failure to pay taxes is not imposed withrespect to the tax liability of an individual for any month in which an installment paymentagreement with the IRS (under sec. 6159) is in effect, provided that the individual filed the taxreturn in a timely manner (including extensions).

**Effective Date**

	The proposal would be effective for installment agreement payments made after the dateof enactment.

**4.  Mitigation of failure to deposit penalty**

**Present Law**

	Deposits of payroll taxes are allocated to the earliest period for which such a deposit isdue.  If a taxpayer misses or makes an insufficient deposit, later deposits will first be applied tosatisfy the shortfall for the earlier period; the remainder is then applied to satisfy the obligation forthe current period.  If the depositor is not aware this is taking place, cascading penalties mayresult as payments that would otherwise be sufficient to satisfy current liabilities are applied tosatisfy earlier shortfalls.

	Code section 6656(c) authorizes the Secretary to waive the failure to make depositpenalty for inadvertent failures by first-time depositors of employment taxes.  

**Description of Proposal**

	The proposal would address the cascading penalty issue by allowing the taxpayer todesignate the period to which each deposit is applied.  The proposal would also extend theauthorization to waive the failure to deposit penalty to the first deposit a taxpayer is required tomake after the taxpayer is required to change the frequency of the taxpayer's deposits.  

**Effective Date**

	The proposal would apply to deposits made more than 180 days after the date ofenactment.

******5.  Suspend accrual of interest and penalties if IRS fails to contact taxpayer within 1 year**

**Present Law**

	In general, interest and penalties accrue during periods for which taxes are unpaid withoutregard to whether the taxpayer is aware that there is tax due.

**Description of Proposal**

	The proposal would suspend the accrual of penalties and interest after 1 year if the IRShas not sent the taxpayer a notice of deficiency within the year following the date which is thelater of (1) the original due date of the return or (2) the date on which the individual taxpayertimely filed the return.  The suspension only applies to taxpayers who file a timely tax return.   The proposal would apply only to individuals and would not apply in the case of fraud or withrespect to criminal penalties.  Interest and penalties would resume 21 days after the IRS sends anotice and demand for payment to the taxpayer.

**Effective Date
	The proposal would be effective for taxable years ending after the date of enactment.

**6.  Notices of penalties must show computation**

**Present Law**

	Present law does not require the IRS to show how penalties are computed on the notice ofpenalty.  

**Description of Proposal**

	Each notice imposing a penalty would be required to include the name of the penalty, thecode section requiring the penalty, and a computation of the penalty.

**Effective Date**

	The proposal would apply to notices issued more than 180 days after the date ofenactment.

**7.  Management approval required for certain penalties**

**Present Law**

	Under present law, penalties may be imposed on a taxpayer without management approvalof the specific penalty imposed. 

**Description of Proposal**

	The proposal would require the specific approval of IRS management to assess all non-computer generated penalties unless excepted.  The proposal would not apply to failure to filepenalties, failure to pay penalties, or to penalties for failure to pay estimated tax. 

**Effective Date**

	The proposal would be effective for penalties assessed more than 180 days after date ofenactment.

**E.  Protections for Taxpayers Subject to Audit or Collection**

**1.  Due process in IRS collection actions**

**Present Law**

	Levy is the IRS's administrative authority to seize a taxpayer's property to pay thetaxpayer's tax liability. The IRS is entitled to seize a taxpayer's property by levy if the Federal taxlien has attached to such property. The Federal tax lien arises automatically where (1) a taxassessment has been made; (2) the taxpayer has been given notice of the assessment stating theamount and demanding payment; and (3) the taxpayer has failed to pay the amount assessedwithin ten days after the notice and demand. 

	The IRS may collect taxes by levy upon a taxpayer's property or rights to property(including accrued salary and wages) if the taxpayer neglects or refuses to pay the tax within 10days after notice and demand that the tax be paid.  Notice of the IRS's intent to collect taxes bylevy must be given no less than 30 days (90 days in the case of a life insurance contract) beforethe day of the levy.  The notice of levy must describe the property that will be the subject of thelevy, the procedures that will be used, the administrative appeals available to the taxpayer and theprocedures relating to such appeals,  the alternatives available to the taxpayer that could preventlevy, and the procedures for redemption of property and release of liens.

	The effect of a levy on salary or wages payable to or received by a taxpayer is continuousfrom the date the levy is first made until it is released.

	If the IRS district director finds that the collection of any tax is in jeopardy, collection bylevy may be made without regard to either notice period.  A similar rule applies in the case oftermination assessments.

**Description of Proposal**

	The proposal would establish formal procedures designed to insure due process where theIRS seeks to collect taxes by levy (including by seizure).  The due process procedures apply afterthe Federal tax lien attaches and notice of the Federal tax lien or the notice of the intent to levyhas been given to the taxpayer.

	As under present law, notice of the intent to levy must be given at least 30 days (90 daysin the case of a life insurance contract) before property can be seized or salary and wagesgarnished.  During the 30-day (90-day) notice period, the taxpayer may demand a hearing to takeplace before an appeals officer who has had no prior involvement in the taxpayer's case.   If thetaxpayer demands a hearing, the proposed collection action may not proceed until the hearing hasconcluded and the appeals officer has issued his or her determination.

	 During the hearing, the IRS would be required to verify that all statutory, regulatory, andadministrative requirements for the proposed collection action have been met.  IRS verificationswould be expected to include (but not be limited to) showings that:

		(1)	the revenue officer recommending the collection action has verified thetaxpayer's liability;

		(2)	the estimated expenses of levy and sale will not exceed the value of theproperty to be seized;

		(3)	a consent or writ of entry has been obtained if the property to be seized is onprivate property;

		(4)	the revenue officer has determined that there is sufficient equity in the propertyto be seized to yield net proceeds from sale to apply to the unpaid taxliabilities; and

		(5)	with respect to the seizure of the assets of a going business, the revenue officerrecommending the collection action has thoroughly considered the facts of thecase, including the availability of alternative collection methods, beforerecommending the collection action.

	The taxpayer (or affected third party) would be allowed to raise any relevant issue at thehearing.  Issues eligible to be raised are expected to include (but not be limited to):

		(1)	challenges to the underlying liability as to existence or amount;

		(2)	appropriate spousal defenses;

		(3)	challenges to the appropriateness of collection actions; and

		(4)	collection alternatives, which could include the posting of a bond, substitutionof other assets, an installment agreement or an offer-in-compromise.

	The determination of the appeals officer is expected to address whether the proposedcollection action balances the need for the efficient collection of taxes with the legitimate concernof the taxpayer that the collection action be no more intrusive than necessary.  It is expected thata proposed collection action will not be approved solely because the IRS shows that it hasfollowed appropriate procedures.

	The taxpayer may contest the determination of the appellate officer in Tax Court by filinga petition within 30 days of the date of the determination.  The taxpayer's contest may be basedon IRS abuse of discretion and also may  raise procedural issues, as under present law.  The IRSmay not take any collection action pursuant to the determination during such 30 day period orwhile the taxpayer's contest is pending in Tax Court.

	IRS Appeals would retain jurisdiction over its determinations.  An order could be enteredrequiring the IRS collection division to adhere to the original determination.  In addition, the taxpayer would be allowed to return to IRS Appeals to seek a  modification of the originaldetermination based on any change of circumstances.

	In the case of a continuous levy, the due process procedures would apply to the originalimposition of the levy.  Except in jeopardy and termination cases, continuous levy would not beallowed to begin without notice and an opportunity for a hearing.  A determination allowing thecontinuous levy to proceed entered at the conclusion of a hearing would be subject to  post-determination adjustment on application by the taxpayer.  Thus, taxpayers would have the right tohave IRS Appeals review any continuous levy and take any changes in circumstances intoaccount.

	This proposal does not apply in the case of jeopardy and termination assessments. Jeopardy and termination assessments would subject to post-seizure review as part of the Appealsdetermination hearing as well as through any existing judicial procedure.  A jeopardy ortermination assessments must be approved by the IRS District Counsel responsible for the case.Failure to obtain District Counsel approval would render the jeopardy or termination assessmentvoid.

**Effective Date**

	The proposed due process procedures would apply to collection actions initiated morethan six months after the date of enactment.

**2.  Privilege of confidentiality extended to taxpayer's dealings with non-attorneysauthorized to practice before IRS**

**Present Law**

	A common law privilege of confidentiality exists for communications between an attorneyand client with respect to the legal advice the attorney gives the client.  

	The privilege of confidentiality applies only where the attorney is advising the client onlegal matters.  It does not apply in situations where the attorney is acting in other capacities.  Theprivilege of confidentiality also does not apply where an attorney that is licensed to practiceanother profession is performing such other profession.  Further, the privilege of confidentialitydoes not apply where an attorney is engaged in a non-legal matter, such as the preparation of anincome tax return.

	The attorney-client privilege is limited to communications between taxpayers andattorneys.  No equivalent privilege is provided for communications between taxpayers and otherprofessionals authorized to practice before the Internal Revenue Service, such as accountants orenrolled agents.

**Description of Proposal**

	The proposal would extend the present law attorney-client privilege of confidentiality totax advice that is furnished to a client-taxpayer (or potential client-taxpayer) by any individualwho is authorized under Federal law to practice before the Internal Revenue Service if suchpractice is subject to regulation under section 330 of title 31, United States Code.  Tax advicemeans advice that is within the scope of authority for such individual's practice in respect tomatters under Title 26 (The Internal Revenue Code). 

	The privilege of confidentiality extended by the proposal could be asserted in anynoncriminal tax proceeding before the Internal Revenue Service and in noncriminal taxproceedings in the Federal Courts with regard to noncriminal tax matters.

	The proposal would allow taxpayers to consult with other qualified tax advisors in thesame manner they currently may consult with tax advisors that are licensed to practice law.  Theproposal would not modify the attorney-client privilege of confidentiality, other than to extend itto other authorized practitioners.

**Effective Date**

	The proposal would be effective on the date of enactment.

**3.  Expansion of authority to issue taxpayer assistance orders**

**Present Law**

	Taxpayers can request that the Taxpayer Advocate in the Internal Revenue Service("IRS") issue a taxpayer assistance order ("TAO") if they are suffering or about to suffer asignificant hardship as a result of the manner in which the internal revenue laws are beingadministered (sec. 7811).  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.

**Description of Proposal**

	The proposal would provide that, in addition to current law requirements, the TaxpayerAdvocate would issue a TAO for "significant hardship" 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 ifrelief is not granted; or (4) the taxpayer will suffer irreparable injury, or a long-term adverseimpact, if relief is not granted. 

	In addition, the proposal would provide that, in cases in which the IRS failed to followapplicable published guidance (including procedures set forth in the Internal Revenue Manual),the Taxpayer Advocate would construe the matter in a manner most favorable to the taxpayer.  

**Effective Date
	The proposal would be effective on the date of enactment.

**4.  Limitation on financial status audit techniques**

**Present Law**

	The Secretary is authorized and required to make the inquiries and determinationsnecessary to insure the assessment of Federal income taxes.  For this purpose, any reasonablemethod may be used to determine the amount of Federal income tax owed.  The courts haveupheld the use of financial status and economic reality examination techniques to determine theexistence of unreported income in appropriate circumstances.

**Description of Proposal**

	The proposal would prohibit the IRS from using financial status or economic realityexamination techniques to determine the existence of unreported income of any taxpayer unlessthe IRS has a reasonable indication that there is a likelihood of unreported income.

**Effective Date**

	The proposal would be effective on the date of enactment.

**5.  Limitation on authority to require production of computer source code**

**Present Law**

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

**Description of Proposal**

	The proposal would generally prohibit the Secretary from issuing a summons in a Federaltax matter for any portion of computer source code.  Exceptions to the general rule would beprovided for inquiries into any criminal offense connected with the administration or enforcementof the internal revenue laws and for  computer software source code that was developed by thetaxpayer or a related person for internal use by the taxpayer or related person.  In addition, theSecretary would be allowed to summons computer source code if the Secretary (1) is unable tootherwise reasonably ascertain the correctness of an item on a return from the taxpayer's booksand records, or the computer software program and associated data; (2) identifies with reasonablespecificity the portion of the computer source code to be used to verify the correctness of theitem; and (3) determines that the need for the source code outweighs the risks of disclosure of thecomputer source code.  It is expected that the Secretary will make a good faith, bona fide effortto ascertain the correctness of an item prior to seeking computer source code.  The portion of thecomputer source code to be used would be considered identified with reasonable specificitywhere, for example, the Secretary requests the portion of the code that is used to determine aparticular item on the return, that otherwise relates to an item on the return, that implements anaccounting or other method. 

	The requirements that the Secretary be unable to otherwise reasonably ascertain thecorrectness of an item on a return from the taxpayer's books and records, or the computersoftware program and associated data and that the Secretary have identified with reasonablespecificity the portion of the computer source code requested would be deemed to be satisfiedwhere (1) the Secretary makes a good faith determination that it is not feasible to determine thecorrectness of the return item in question without access to the computer software program andassociated data, (2) the Secretary makes a formal request for such program and data of both thetaxpayer and the owner of the program after reaching such determination, and (3) the Secretaryhas not received such program and data within 180 days of making the formal request. 

	The proposal also establishes a number of protections against the disclosure and improperuse of trade secrets and confidential information incident to the examination by the Secretary ofany summoned computer software program or source code.  Summoned software or source codecould be examined only in connection with the examination of the taxpayer's return with regard towhich it was summoned.  Summoned software or source code must be maintained in a securearea.  Summoned source code may not be removed from the owner's place of business withoutthe owner's consent unless such removal is pursuant to a court order.  If the owner does notconsent to the removal of source code from its place of business, the owner must make availablethe necessary equipment to review the source code.  Summoned software or source code couldnot be decompiled or disassembled, and it may only be copied as necessary to perform the specificexamination.  The owner of the software must be informed of any copies that are made, suchcopies must be numbered, and at the conclusion of the examination and any related courtproceedings, all such copies must be accounted for and returned to the owner, permanentlydeleted, or destroyed.  The Secretary must provide the owner of summoned software or sourcecode with the names of any individuals who will have access to such software or source code and,in the case of individuals that are not employees of the U.S. Government, a written agreement thatsuch individual will not participate in the development of software that is intended for a similarpurpose as the summoned software for a period of two years.

	The Secretary's determination may be contested in any proceeding to enforce thesummons, by any person to whom the summons is addressed.  In any such proceeding, the courtmay issue any order that is necessary to prevent the disclosure of  confidential information,including the enforcement of the protections established by this proposal.

**Effective Date**

	The proposal would be effective for summons issued after the date of enactment.  Inaddition, 90 days after the date of enactment, the protections against the disclosure and improperuse of trade secrets and confidential information added by the proposal (except for therequirement that the Secretary provide a written agreement from non-U.S. governmentemployees) would apply to summons of software and source code issued before the date ofenactment.  

**6.  Extensions of statute of limitations by agreement**

**Present Law**

	The statute of limitations within which the IRS may assess additional taxes is generallythree years from the date a return is filed (sec. 6501). The statute of limitations within which a taxmay be collected is 10 years after assessment (sec. 6502).  Prior to the expiration of the statute oflimitations, both the taxpayer and the IRS may agree in writing to extend the statute.

**Description of Proposal**

	The proposal would eliminate the provision of present law that allows the statute oflimitations on collections to be extended by agreement between the taxpayer and the IRS. 

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

	The Treasury Inspector General would be required to collect information on extensions ofthe statute of limitations and annually report to the tax writing committees. 

**Effective Date**

	The proposal would apply to requests to extend the statute of limitations made after thedate of enactment and to all extensions of the statute of limitations on collection that are open 180days after the date of enactment.

**7.  Notice of deficiency to specify deadlines for filing Tax Court petition**

**Present Law**

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

**Description of Proposal**

	The proposal would require the IRS to include on each deficiency notice the datedetermined by the IRS as the last day on which the taxpayer may file a petition with the TaxCourt.  The proposal would provide that a petition filed with the Tax Court by this date would betreated as timely filed.

**Effective Date**

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

**8.  Refund or credit of overpayments before final determination**

**Present Law**

	Generally, the IRS may not take action to collect a deficiency during the period a taxpayermay petition the Tax Court, or if the taxpayer petitions the Tax Court, until the decision of theTax Court becomes final.  Actions to collect a deficiency attempted during this period may beenjoined, but there is no authority for ordering the refund of any amount collected by the IRSduring the prohibited period.

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

**Description of Proposal**

	The proposal would provide that a proper court (including the Tax Court) may order arefund of any amount that was collected within the period during which the Secretary isprohibited from collecting the deficiency by levy or other proceeding. 

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

**Effective Date**

	The proposal would be effective on the date of enactment.

**9.  Threat of audit prohibited to coerce Tip Reporting Alternative CommitmentAgreements**

**Present Law**

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

**Description of Proposal**

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

**Effective Date**

	The proposal would be effective on the date of enactment.

**10.  Codify existing IRS procedures relating to appeal of examinations and collections andincrease independence of appeals function**

**Present Law**

	IRS Appeals operates through regional Appeals offices which are independent of the localDistrict Director and Regional Commissioner's offices.  The regional Directors of Appeals reportto the National Director of Appeals of the IRS, who reports directly to the Commissioner andDeputy Commissioner.  In general, IRS Appeals offices have jurisdiction over both pre-assessment and post-assessment cases.  The taxpayer generally has an opportunity to seekAppeals jurisdiction after failing to reach agreement with the Examination function and beforefiling a petition in Tax Court, after filing a petition in Tax Court (but before litigation), afterassessment of certain penalties, after a claim for refund has been rejected by the District Director'soffice, and after a proposed rejection of an offer-in-compromise in a collection case (Treas. Reg.sec. 601.106(a)(1)).

	In certain cases under Coordinated Examination Program procedures, the taxpayer has anopportunity to seek early Appeals jurisdiction over some issues while an examination is stillpending on other issues (Rev. Proc. 96-9, 1996-1 C.B. 575).  The early referral procedures alsoapply to employment tax issues on a limited basis (Announcement 97-52).

	A mediation or alternative dispute resolution (ADR) process is also available in certaincases.  ADR is used at the end of the administrative process as a final attempt to resolve a disputebefore litigation.  ADR is currently only available for cases with more than $10 million in dispute. ADR processes are also available in bankruptcy cases and cases involving a competent authoritydetermination.

	In April 1996, the IRS implemented a Collections Appeals Program within the Appealsfunction, which allows taxpayers to appeal lien, levy, or seizure actions proposed by the IRS.  InJanuary 1997, appeals for installment agreements proposed for termination were added to theprogram.

**Description of Proposal**

	The proposal would codify existing IRS procedures with respect to early referrals toAppeals and the Collections Appeals Process.  The proposal would also codify the ADRprocedures and eliminate the dollar threshold.  The proposal would direct the IRS to establish anindependent Appeals function and to prohibit ex parte communications between IRS employeesand Appeals officers with respect to any particular taxpayer's case that is pending in Appeals.

**Effective Date**

	The proposal would be effective as of the date of enactment.

**11.  Appeals videoconferencing alternative for rural areas**

**Present Law
	The IRS has the capability to do videoconferencing.  The IRS does not have any programto provide for Appeals conferences by videoconferencing techniques. 

**Description of Proposal**

	The IRS would be advised to consider videoconferencing of Appeals conferences fortaxpayers seeking appeals in rural or remote areas.  

**Effective Date
	The proposal would be effective on the date of enactment.  

**12.  Require IRS to notify taxpayer before contacting third parties regarding IRSexamination or collection activities with respect to the taxpayer**

**Present Law
	Third parties may be contacted by the IRS in connection with the examination of ataxpayer or the collection of the tax liability of the taxpayer.  The IRS has the right to summonthird-party recordkeepers under Code section 7609.  In general, the taxpayer must be notified ofthe service of summons on a third party within three days of the date of service (sec. 7609(a)). The IRS also has the right to seize property of the taxpayer that is held in the hands of thirdparties (sec. 6331(a).  Except in jeopardy situations, the Internal Revenue Manual provides thatIRS will personally contact the taxpayer and inform the taxpayer that seizure of the asset isplanned.  

**Description of Proposal**

	The proposal would require the IRS to notify the taxpayer before contacting third partiesregarding examination or collection activities with respect to the taxpayer. 

**Effective Date**

	The proposal would be effective 180 days after the date of enactment.  

**F.  Disclosures to Taxpayers**

**1.  Explanation of joint and several liability**

**Present Law**

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

**Description of Proposal**

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

**Effective Date**

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

**2.  Explanation of taxpayers' rights in interviews with the IRS**

**Present Law**

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

**Description of Proposal**

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

	In addition, the proposal would require the Treasury Inspector General to report annuallyas to whether IRS employees are directly contacting taxpayers who have indicated that they prefertheir representatives be contacted.

**Effective Date
	The addition to Publication 1 must be made not later than 180 days after the date ofenactment.  The annual reports would begin in 1999.

**3.  Disclosure of criteria for examination selection**

**Present Law**

	The IRS examines Federal tax returns to determine the correct liability of taxpayers.  TheIRS selects returns to be audited in a number of ways, such as through a computerizedclassification system (the discriminant function ("DIF") system).

**Description of Proposal**

	The proposal would require that IRS add to Publication 1 ("Your Rights as a Taxpayer")a statement which sets forth in simple and nontechnical terms the criteria and procedures forselecting taxpayers for examination.  The statement must not include any information thedisclosure of which would be detrimental to law enforcement.  The statement must specify thegeneral procedures used by the IRS, including whether taxpayers are selected for examination onthe basis of information in the media or from informants.

**Effective Date**

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

**4.  Explanations of appeals and collection process**

**Present Law**

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

**Description of Proposal**

	The proposal would require that, no later than 180 days after the date of enactment, adescription of the entire process from examination through collections, including the assistanceavailable to taxpayers from the Taxpayer Advocate at various points in the process, be providedwith the first letter of proposed deficiency that allows the taxpayer an opportunity foradministrative review in the IRS Office of Appeals.

**Effective Date**

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

**5.  Require IRS to explain reason for denial for refund**

**Present Law**

	The Examination Division of the IRS examines claims for refund submitted by taxpayers. The Internal Revenue Manual requires examination or other audit action on refund claims within30 days after receipt of the claims.  The refund claim is preliminarily examined to determine if itshould be disallowed because it (1) was untimely filed; (2) was based solely on allegedunconstitutionality of the Revenue Acts; (3) was already waived by the taxpayer as considerationfor a settlement; (4) covers a taxable year and issues which were the subject of a final closingagreement or an offer in compromise; or (5) relates to a return closed on the basis of a final orderof the Tax Court.  In those cases, the taxpayer will receive a form from the IRS stating that theclaim for refund cannot be considered.  Other cases will be examined as quickly as possible andthe disposition of the case, including the reasons for the disallowance or partial disallowance ofthe refund claim, must be stated in the portion of the revenue agent's report that is sent to thetaxpayer. 

**Description of Proposal**

	The proposal would require the IRS to send the taxpayer an explanation of the reason forthe disallowance of the refund claim.  

**Effective Date
	The proposal would be effective 180 days after the date of enactment.  

**G.  Low-Income Taxpayer Clinics
**Present Law**

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

**Description of Proposal**

	The Secretary would be authorized to provide up to  $3,000,000 per year in matchinggrants to certain low-income taxpayer clinics. No clinic could receive more than $100,000 peryear.

	Eligible clinics would be those that charge no more than a nominal fee to either representlow-income taxpayers in controversies with the IRS or provide tax information to individuals forwhom English is a second language.

	A "clinic" would include (1) a clinical program at an accredited law school, an accreditedbusiness school, or an accredited accounting school, in which students represent low-incometaxpayers, or (2) an organization exempt from tax under Code section 501(c) which eitherrepresents low-income taxpayers or provides referral to qualified representatives.

**Effective Date**
	The proposal would be effective on the date of enactment.

**H.  Other Taxpayer Rights Provisions**

**1.  Cataloging complaints**

**Present Law**

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

**Description of Proposal**

	The proposal would require that, in collecting data for this report, records of taxpayercomplaints of misconduct by IRS employees shall be maintained on an individual employee basis. These individual records are not to be listed in the report.

**Effective Date**

	The requirement would be effective on the date of enactment.

**2.  Archive of records of the IRS**

**Present Law**

	The IRS is obligated to transfer agency records to the National Archives and RecordsAdministration ("NARA") for retention or disposal.  The IRS is also obligated to protectconfidential taxpayer records from disclosure.  These two obligations have created conflictbetween NARA and the IRS.

**Description of Proposal**

	The proposal would provide an exception to the disclosure rules to require IRS to discloseIRS records to officers or employees of NARA, upon written request from the U.S. Archivist, forpurposes of the appraisal of such records for destruction or retention.  The present-lawprohibitions on and penalties for disclosure of tax information would generally apply to NARA.

**Effective Date**

	The proposal would be effective for requests made by the Archivist after the date ofenactment.

**3.  Payment of taxes**

**Present Law**

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

**Description of Proposal**

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

**Effective Date**

	The proposal would be effective on the date of enactment.

**4.  Clarification of authority of Secretary relating to the making of elections**

**Present Law**

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

**Description of Proposal**

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

**Effective Date**

	The proposal would be effective as of the date of enactment.

**I.   Studies**

**1.  Study of penalty administration**

**Present Law**

	The last major revision of the overall penalty structure in the Internal Revenue Code wasthe "Improved Penalty Administration and Compliance Tax Act," enacted as part of the OmnibusBudget Reconciliation Act of 1989.

**Description of Proposal**

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

**Effective Date**

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

**2.  Study of confidentiality of tax return information**

**Present Law**

	The Internal Revenue Code prohibits disclosure of tax returns and return information,except to the extent specifically authorized by the Internal Revenue Code (sec. 6103). Unauthorized disclosure is a felony punishable by a fine not exceeding $5,000 or imprisonment  ofnot more than five years, or both (sec. 7213).  An action for civil damages also may be broughtfor unauthorized disclosure (sec. 7431).  No tax information may be furnished by the IRS toanother agency unless the other agency establishes procedures satisfactory to the IRS forsafeguarding the tax information it receives (sec. 6103(p)).

**Description of Proposal**

	The proposal would require the Joint Committee on Taxation and Treasury to eachconduct a separate study on provisions regarding taxpayer confidentiality.  The studies are toexamine present-law protections of taxpayer privacy, the need for third parties to use tax returninformation, the ability to achieve greater levels of voluntary compliance by allowing the public toknow who is legally required to file tax returns but does not do so, and the interrelationship of thetaxpayer confidentiality provisions in the Internal Revenue Code with those elsewhere in theUnited States Code (such as the Freedom of Information Act). 

**Effective Date**

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

**J.  Limits on Seizure Authority**

**1.  IRS to implement approval process for liens, levies, or seizures**

**Present Law**

	Supervisory approval of liens, levies or seizures is only required under certaincircumstances.  For example, a levy on a taxpayer's principal residence is only permitted upon thewritten approval of the District Director or Assistant District Director. 

**Description of Proposal**

	The proposal would require the IRS to develop and implement a review process underwhich, where appropriate, any lien, levy, or seizure would be reviewed by a supervisor beforeissuance.  The review process could, if appropriate,  encompass certification that the revenueofficer has reviewed the taxpayer's information, verified that a balance is due, and affirmed that alien, levy or seizure is appropriate given the taxpayer's circumstances, considering the amount dueand the value of the asset.  Failure to follow such procedures could result in disciplinary actionagainst the supervisor and revenue officer.  

	In addition, the Treasury Inspector General would be required to collect information onthe review process and annually report to the tax writing committees.

**Effective Date**

	The proposal would be effective for collection actions commenced after date ofenactment.

**2.  Prohibit sales of seized property at less than minimum bid**

**Present Law**

	Section 6335(e) requires that a minimum bid price be established for seized propertyoffered for sale.  To conserve the taxpayer's equity, the minimum bid price should normally becomputed at 80 percent or more of the forced sale value of the property less encumbrances havingpriority over the Federal tax lien.  If the group manager concurs, the minimum sales price may beset at less than 80 percent.  The taxpayer is to receive notice of the minimum bid price within 10days of the sale.  The taxpayer has the opportunity to challenge the minimum bid price.  Theminimum bid price cannot be more than the tax liability plus the expenses of sale.  Accordingly, ifthe minimum bid price is set at the tax liability plus the expenses of sale, the taxpayer'sconcurrence is not required.  IRM 56(13)5.1(4).  Section 6335 does not contemplate a sale of theseized property at less than the minimum bid price.  Rather, if no person offers the minimum bidprice, the IRS may buy the property at the minimum bid price or the property may be released tothe owner.  Code section 7433 provides civil damages for certain unauthorized collection actions.

**Description of Proposal**

	The proposal would prohibit the IRS from selling seized property for less than theminimum bid price.  The proposal would provide that the sale of property for less than theminimum bid price would constitute an unauthorized collection action, which would permit anaffected person to sue for civil damages for certain unauthorized collection actions pursuant tosection 7433.

**Effective Date**

	The proposal would be effective for sales occurring after the date of enactment.

**3.  IRS to provide accounting and receipt to taxpayer for property seized and sold**

**Present Law**

	The IRS is authorized to seize and sell a taxpayer's property to satisfy an unpaid taxliability (sec. 6331(b)).  The IRS is required to give written notice to the taxpayer before seizureof the property (sec. 6331(d)).   The IRS must also give written notice to the taxpayer at least 10days before the sale of the seized property.

	The IRS is required to keep records of all sales of real property (sec. 6340).  The recordsmust set forth all proceeds and expenses of the sale.  The IRS is required to apply the proceedsfirst against the expenses of the sale, then against a specific tax liability on the seized property, ifany, and finally against any unpaid tax liability of the taxpayer (sec. 6342(a)).  Any surplusproceeds are credited to the taxpayer or persons legally entitled to the proceeds.  

**Description of Proposal**

	The proposal would require the IRS to provide a written accounting of all sales of seizedproperty, whether real or personal, to the taxpayer.  The accounting must include a receipt for theamount credited to the taxpayer's account.

**Effective Date
	The proposal would be effective for seizures occurring after the date of enactment.

**4.  Uniform asset disposal mechanism**

**Present Law**

	The IRS must sell property seized by levy either by public auction or by public sale undersealed bids (sec. 6335(e)(2)(A)).  These are often conducted by the revenue officer charged withcollecting the tax liability.

**Description of Proposal**

	The proposal would require the IRS to implement a uniform asset disposal mechanism forsales of seized property.  The disposal mechanism should be designed to remove any participationin the sale of seized assets by revenue officers. The proposal would authorize the consideration ofoutsourcing of the disposal mechanism.

**Effective Date**

	The proposal would require a uniform asset disposal system to be implemented within twoyears from the date of enactment.

**5.  Increase exempt amounts for personal effects and tools**

**Present Law**

	The Code authorizes the IRS to levy on all non-exempt property of the taxpayer. Property exempt from levy is described in section 6334.  Section 6334(a)(2) exempts from levyup to $2,500 in value of fuel, provisions, furniture, and personal effects in the taxpayer'shousehold.  Section 6334(a)(3) exempts from levy up to $1,250 in value of books and toolsnecessary for the trade, business or profession of the taxpayer.

**Description of Proposal**

	The proposal would increase the value of personal effects exempt from levy to $10,000and the value of books and tools exempt from levy to $5,000.  These amounts would be indexedfor inflation.

**Effective Date**

	The proposal would be effective for collection actions taken after the date of enactment.

**6.  Require IRS to immediately release levy upon agreement that amount is not collectible**

**Present Law**

	Some have contended that the IRS does not release a wage levy immediately upon receiptof proof that the taxpayer is unable to pay the tax, but instead, the IRS levies on one period'swage payment before releasing the levy.

**Description of Proposal**

	The IRS would be required to immediately release a wage levy upon agreement with thetaxpayer that the tax is not collectible.

**Effective Date**

	The proposal would be effective for levies imposed after date of enactment.

**7.  Codify IRS administrative procedures for seizure of taxpayer's property**

**Present Law**

	The IRS provides guidelines for revenue officers engaged in the collection of unpaid taxliabilities.  The Internal Revenue Manual (IRM) 56(12)5.1 provides general guidelines for seizureactions: (1) the revenue officer must first verify the taxpayer's liability; (2) no levy may be made ifthe estimated expenses of levy and sale will exceed the fair market value of the property to besized (sec. 6331(f)); (3) no levy may be made on the date of an appearance in response to anadministrative summons, unless jeopardy exists (sec. 6331(g)); (4) if the property to be seized islocated on private premises, consent or a writ of entry is required (G.M. Leasing Corp. v. UnitedStates, 429 U.S. 338 (1977); IRS Policy Statement P-5-38); (5) the taxpayer should have anopportunity to read the levy form; (6) the revenue officer must attach a sufficient number ofwarning notices on the property to clearly identify the property to be seized; (7) the revenueofficer must inventory the property to be seized; and (8) a revenue officer may not use force in theseizure of property.

	Prior to the levy action, the revenue officer must determine that there is sufficient equity inthe property to be seized to yield net proceeds from the sale to apply to unpaid tax liabilities.  If itis determined after seizure that the taxpayer's equity is insufficient to yield net proceeds from saleto apply to the unpaid tax, the revenue officer will immediately release the seized property.  SeeIRM 56(12)2.1.

	IRS Policy Statement P-5-34 states that the facts of a case and alternative collectionmethods must be thoroughly considered before deciding to seize the assets of a going business. IRS Policy Statement P-5-16 advises reasonable forbearance on collection activity when thetaxpayer's business has been affected by a major disaster such as flood, hurricane, drought, fire,etc., and whose ability to pay has been impaired by such disaster.

**Description of Proposal**

	The proposal would codify the IRS administrative procedures which require the IRS toinvestigate the status of property prior to levy.  The Treasury Inspector General would berequired to review IRS compliance with seizure procedures and report annually to Congress.  

**Effective Date**

	The provision would be effective as of date of enactment.

**8.  Suspend collection by levy during refund suit**

**Present Law**

	The IRS is prohibited from making a tax assessment (and thus prohibited from collectingpayment) with respect to a tax liability while it is being contested in Tax Court. However, underpresent law, the IRS is permitted to assess and collect tax liabilities during the pendency of arefund suit relating to such tax liabilities, under the circumstances described below.

	Generally, full payment of the tax at issue is a prerequisite to a refund suit.  However, ifthe tax is divisible (such as employment taxes or the trust fund penalty under Code section 6672),the taxpayer need only pay the tax for the applicable period before filing a refund claim.  Mostdivisible taxes are not within the Tax Court's jurisdiction; accordingly, the taxpayer has nopre-payment forum for contesting such taxes. In the case of divisible taxes, it is possible that thetaxpayer could be properly under the refund jurisdiction of the District Court or the U.S. Court ofFederal Claims and still be subject to collection by levy with respect to the entire amount of thetax at issue. The IRS's policy is generally to exercise forbearance with respect to collection whilethe refund suit is pending, so long as the interests of the Government are adequately protected(e.g., by the filing of a notice of Federal tax lien) and collection is not in jeopardy. Any refundsdue the taxpayer may be credited to the unpaid portion of the liability pending the outcome of thesuit.

**Description of Proposal**

	The proposal would require the IRS to withhold collection by levy of liabilities that are thesubject of a refund suit during the pendency of the litigation. This would only apply when refundsuits can be brought without the full payment of the tax, i.e., in the case of divisible taxes.Collection by levy would be withheld unless jeopardy exists or the taxpayer waives the suspensionof collection in writing (because collection will stop the running of interest and penalties on thetax liability). This proposal would not affect the IRS's ability to collect other assessments that arenot the subject of the refund suit, to offset refunds, or to file a notice of Federal tax lien. Thestatute of limitations on collection would be stayed for the period during which the IRS isprohibited from collecting by levy.

**Effective Date**

	The proposal would be effective for refund suits brought with respect to tax yearsbeginning after December 31, 1998.

**9.  Require district counsel review of jeopardy and termination assessments and jeopardylevies**

**Present Law**

	In general, a 30 day waiting period is imposed after assessment of all types of taxes.  Incertain circumstances, the waiting period puts the collection of taxes at risk. The Code providesspecial procedures that allow the IRS to make jeopardy assessments or termination assessments incertain extraordinary circumstances, such as if the taxpayer is leaving or removing property fromthe United States (sec. 6851), or if assessment or collection would be jeopardized by delay (secs.6861 and 6862).   In jeopardy or termination situations, a levy may be made without the 30 days'notice of intent to levy that is ordinarily required by section 6331(d)(2).  Jeopardy assessmentsapply when the tax year is over.  Termination assessments apply to the current taxable year or theimmediately preceding taxable year if the filing date has not yet passed.  A termination assessmentserves to terminate the taxable year for the purpose of computing the tax to be assessed andcollected under the termination assessment procedure.  Under both the jeopardy and terminationassessment procedures, the IRS can assess the tax and immediately begin collection if any one ofthe following situations exists: (1) the taxpayer is or appears to be planning to depart the UnitedStates or to go into hiding; (2) the taxpayer is or appears to be planning to place property beyondthe reach of the IRS by removing it from the country, hiding it, dissipating it, or by transferring itto other persons; or (3) the taxpayer's financial solvency is or appears to be imperiled.  Becausethe same criteria apply to jeopardy and termination assessments, jeopardy and terminationassessments are often entered at the same time against the same taxpayer.   

	The Code and regulations do not presently require District Counsel to review jeopardyassessments, termination assessments, or jeopardy levies, although the Internal Revenue Manualdoes require District Counsel review before such actions and it is current practice to make such areview.  The IRS bears the burden of proof with respect to the reasonableness of a jeopardy ortermination assessment or a jeopardy levy (sec. 7429(g)).

**Description of Proposal**

	The proposal would require IRS District Counsel review and approval before the IRScould make a jeopardy assessment, a termination assessment, or a jeopardy levy. If DistrictCounsel's approval was not obtained, the taxpayer would be entitled to obtain abatement of theassessment or release of the levy, and, if the IRS failed to offer such relief, to appeal first to IRSAppeals under the new due process procedure for IRS collections (described in E. 1 above) andthen to the U.S. District Court.

**Effective Date**

	The proposal would be effective with respect to taxes assessed after the date ofenactment.

**10.  Codify certain fair debt collection practices**

**Present Law**

	The Fair Debt Collection Practices Act provides a number of rules relating to debtcollection practices. Among these are restrictions on communication with the consumer, such as ageneral prohibition on telephone calls outside the hours of 8:00 a.m. to 9:00 p.m. local time, andprohibitions on harassing or abusing the consumer. In general, these provisions do not apply tothe Federal Government. These provisions relating to communication with the consumer andprohibiting harassing or abusing the consumer have been applied to the IRS through theappropriations process.

**Description of Proposal**

	The proposal would make the restrictions relating to communication with thetaxpayer/debtor and the prohibitions on harassing or abusing the debtor applicable to the IRS byincorporating these provisions into the Internal Revenue Code.

**Effective Date**

	The proposal would be effective on the date of enactment.

**11.  Ensure availability of installment agreements**

**Present Law**

	Section 6159 of the Code authorizes the IRS to enter into written agreements with anytaxpayer under which the taxpayer is allowed to pay taxes owed, as well as interest and penalties,in installment payments if the IRS determines that doing so will facilitate collection of the amountsowed. An installment agreement does not reduce the amount of taxes, interest, or penalties owed. However, it does provide for a longer period during which payments may be made during whichother IRS enforcement actions (such as levies or seizures) are held in abeyance. Many taxpayerscan request an installment agreement by filing form 9465. This form is relatively simple and doesnot require the submission of detailed financial statements. The IRS in most instances readilyapproves these requests if the amounts involved are not large (in general, below $10,000) and ifthe taxpayer has filed tax returns on time in the past. Some taxpayers are required to submitbackground information to the IRS substantiating their application. If the request for aninstallment agreement is approved by the IRS, a user fee of $43 is charged. This user fee is inaddition to the tax, interest, and penalties that are owed.

**Description of Proposal**

	The proposal would require the Secretary to enter an installment agreement, at thetaxpayer's option, if:

	(1) the liability is $10,000, or less;

	(2) within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered aninstallment agreement under this provision;

	(3) if requested by the Secretary, the taxpayer submits financial statements thatdemonstrate an inability to pay the tax due in full;

	(4) the installment agreement provides for full payment of the liability within 3 years; and

	(5) the taxpayer agrees to continue to comply with the tax laws and the terms of theagreement for the period (up to 3 years) that the agreement is in place.

**Effective Date
	The proposal would be effective on the date of enactment.

**12.  Increase superpriority dollar limits**

**Present Law**

	The Federal tax lien attaches to all property and rights in property of the taxpayer, if thetaxpayer fails to pay the assessed tax liability after notice and demand (sec. 6321). However, theFederal tax lien is not valid as to certain "superpriority" interests as defined in section 6323(b).

	Two of these interests are limited by a specific dollar amount. Under section 6323(b)(4),purchasers of personal property at a casual sale are presently protected against a Federal tax lienattached to such property to the extent the sale is for less than $250. Section 6323(b)(7) providesprotection to mechanic's lienors with respect to the repairs or improvements made to owner-occupied personal residences, but only to the extent that the contract for repair or improvement isfor not more than $1,000.

	In addition, a superpriority is granted under section 6323(b)(10) to banks and building andloan associations which make passbook loans to their customers, provided that those institutionsretain the passbooks in their possession until the loan is completely paid off.

**Description of Proposal**

	The proposal would increase the dollar limit in section 6323(b)(4) for purchasers at acasual sale from $250 to $1,000, and it would increase the dollar limit in section 6323(b)(7) from$1,000 to $5,000 for mechanics lienors providing home improvement work for owner-occupiedpersonal residences. The proposal would index these amounts for inflation. The proposal alsowould clarify section 6323(b)(10) to reflect present banking practices, where a passbook-typeloan may be made even though an actual passbook is not used.

**Effective Date**

	The proposal would be effective on the date of enactment.

**13.  Permit personal delivery of section 6672(b) notices**

**Present Law**

	Any person who is required to collect, truthfully account for, and pay over any taximposed by the Internal Revenue Code who willfully fails to do so is liable for a penalty equal tothe amount of the tax (Code sec. 6672(a)).  Before the IRS may assess any such "100 percentpenalty," it must mail a written preliminary notice informing the person of the proposed penalty tothat person's last known address. The mailing of such notice must precede any notice and demandfor payment of the penalty by at least 60 days. The statute of limitations shall not expire beforethe date 90 days after the date in which the notice was mailed. These restrictions do not apply ifthe Secretary finds the collection of the penalty is in jeopardy.

**Description of Proposal**

	The proposal would permit in person delivery, as an alternative to delivery by mail, of apreliminary notice that the IRS intends to assess a 100 percent penalty.  (In some cases, personaldelivery may better assure that the recipient actually receives notice.)

**Effective Date
	The proposal would be effective on the date of enactment.

**14.  Allow taxpayers to quash third-party summonses**

**Present Law**

	When the IRS issues a summons to a "third-party record keeper" relating to the businesstransactions or affairs of a taxpayer, Code section 7609 requires that notice of the summons begiven to the taxpayer within three days by certified or registered mail. The taxpayer is thereaftergiven up to 23 days to begin a court proceeding to quash the summons. If the taxpayer does so,third-party record keepers are prohibited from complying with the summons until the court ruleson the taxpayer's petition or motion to quash, but the statute of limitations for assessment andcollection with respect to the taxpayer is stayed during the pendency of such a proceeding.Third-party record keepers are generally persons who hold financial information about thetaxpayer, such as banks, brokers, attorneys, and accountants.

**Description of Proposal**

	The proposal would generally expand the current "third-party record keeper" proceduresto apply to summonses issued to persons other than the taxpayer. Thus, the taxpayer whoseliability is being investigated would receive notice of the summons and would be entitled to bringan action in the appropriate U.S. District Court to quash the summons.  As under the currentthird-party record keeper provision, the statute of limitations on assessment and collection wouldbe stayed pending the litigation, and certain kinds of summonses specified under current lawwould not be subject to these requirements.

**Effective Date**
	The proposal would be effective for summonses served after the date of enactment.

**15.  Permit service of summonses by mail**

**Present Law**

	Code section 7603 requires that a summons shall be served "by an attested copy deliveredin hand to the person to whom it is directed or left at his last and usual place of abode." Bycontrast, if a third-party recordkeeper summons is served, section 7609 permits the IRS to givethe taxpayer notice of the summons via certified or registered mail. Moreover, Rule 4 of theFederal Rules of Civil Procedure permits service of process by mail even in summons enforcementproceedings.

**Description of Proposal**

	The proposal would permit the IRS the option of serving any summons either in person orby mail.  

**Effective Date**

	The proposal would be effective for summonses served after the date of enactment.

**16.  Provide new remedy for third parties who claim that the IRS has filed an erroneouslien**

**Present Law**

	Prior to 1995, the provisions governing jurisdiction over refund suits had generally beeninterpreted to apply only if an action was brought by the taxpayer against whom tax was assessed.Remedies for third parties from whom tax was collected (rather than assessed) were found inother provisions of the Internal Revenue Code. The Supreme Court held in Williams v. UnitedStates, 115 S.Ct. 1611 (1995), however, that a third party who paid another person's tax underprotest to remove a lien on the third party's property could bring a refund suit, because she had noother adequate administrative or judicial remedy. In Williams, the IRS had filed a nominee lienagainst property that was owned by the taxpayer's former spouse and that was under a contractfor sale. In order to complete the sale, the former spouse paid the amount of the lien underprotest, and then sued in district court to recover the amount paid. The Supreme Court held thatparties who are forced to pay another's tax under duress could bring a refund suit, because noother judicial remedy was adequate.

**Description of Proposal**

	The proposal would create an administrative procedure similar to the wrongful levyremedy for third parties in section 7426. Under this procedure, a record owner of property againstwhich a Federal tax lien had been filed could obtain a certificate of discharge of property from thelien as a matter of right. The third party would be required to apply to the Secretary of theTreasury for such a certificate and either to deposit cash or to furnish a bond sufficient to protectthe lien interest of the United States. Although the Secretary would determine the amount of thebond necessary to protect the Government's lien interest, the Secretary would have no discretionto refuse to issue a certificate of discharge if this procedure was followed, thus curing the defectin this remedy that the Supreme Court found in Williams. A certificate of discharge of propertyfrom a lien issued pursuant to the procedure would enable the record owner to sell the propertyfree and clear of the Federal tax lien in all circumstances. The proposal also would authorize therefund of all or part of the amount deposited, plus interest at the same rate that would be made onan overpayment of tax by the taxpayer, or the release of all or part of the bond, if the Secretaryotherwise satisfies the tax liability or determines that the United States does not have a lieninterest or has a lesser lien interest than the amount initially determined.

	The proposal would also establish a judicial cause of action for third parties challenging alien that is similar to the wrongful levy remedy in section 7426. The period within which such anaction must be commenced would be 120 days to ensure an early resolution of the parties'interests.  Upon conclusion of the litigation, the IRS would be authorized to apply the deposit orbond to the assessed liability and to refund to the third party any amount in excess of the liability,plus interest, or to release the bond. Actions to quiet title under 28 U.S.C. �2410 would still beavailable to persons who did not seek the expedited review permitted under the new statutoryprocedure.

**Effective Date**

	The proposal would be effective on the date of enactment.

**17.  Waiver of early withdrawal tax for IRS levies on employer-sponsored retirement plansor IRAs**

**Present Law**
	Under present law, a distribution of benefits from any employer-sponsored retirement planor an individual retirement arrangement ("IRA") generally is includible in gross income in the yearit is paid or distributed, except to the extent the amount distributed represents the employee'safter-tax contributions or investment in the contract (i.e., basis). Special rules apply to certainlump-sum distributions from qualified retirement plans, distributions rolled over to an IRA, andlump-sum distributions of employer securities.

	Distributions from qualified plans and IRAs prior to attainment of age 59-1/2 that areincludible in income generally are subject to a 10-percent early withdrawal tax, unless anexception to the tax applies.  An exception to the tax applies if the withdrawal is due to death ordisability, is made in the form of certain periodic payments, is used to pay medical expenses inexcess of 7.5 percent of adjusted gross income ("AGI"), or is used to purchase health insurance ofan unemployed individual. Certain additional exceptions to the tax apply separately to withdrawalsfrom IRAs and qualified plans. Distributions from IRAs for education expenses and for up to$10,000 of first-time homebuyer expenses are not subject to the 10-percent early withdrawal tax.A distribution from a qualified plan made by an employee after separation from service afterattainment of age 55 is not subject to the 10-percent early withdrawal tax.

	Under present law, the IRS is authorized to levy on all non-exempt property of thetaxpayer. Benefits under employer-sponsored retirement plans (including section 403(b) and 457plans) and IRAs are not exempt from levy by the IRS. 

	Under present law, distributions from employer-sponsored retirement plans or IRAs madeon account of an IRS levy are includible in the gross income of the individual, except to the extentthe amount distributed represents after-tax contributions. In addition, the amount includible inincome is subject to the 10-percent early withdrawal tax, unless an exception described aboveapplies.

**Description of Proposal**
****The proposal would provide an exception from the 10-percent early withdrawal tax foramounts withdrawn from any employer-sponsored retirement plan or an IRA that are subject to alevy by the IRS.

**Effective Date**
****The proposal would be effective for withdrawals subject to an IRS levy after the date ofenactment.

**18.  Prohibit seizure of residences in small deficiency cases**

**Present Law**

	Subject to certain procedural rules and limitations, the Secretary may seize the property ofthe taxpayer who neglects or refuses to pay any tax within 10 days after notice and demand.  TheIRS may not levy on the personal residence of the taxpayer unless the District Director (or theassistant District Director) personally approves in writing or in cases of jeopardy.  

**Description of Proposal**

	The proposal would prohibit the IRS from seizing real property that is used as a residence(by the taxpayer or another person) to satisfy an unpaid liability of $5,000 or less, includingpenalties and interest.

**Effective Date
	The proposal would be effective on the date of enactment.

**K.  Offers-in-Compromise**

**1.  Rights of taxpayers entering into offers-in-compromise**

**Present Law**

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

	There are two bases on which an offer can be made: doubt as to liability for the amountowed and doubt as to ability to pay the amount owed.

	A compromise agreement based on doubt as to ability to pay requires the taxpayer to filereturns and pay taxes for five years from the date the IRS accepts the offer.  Failure to do sopermits the IRS to begin immediate collection actions for the original amount of the liability.

**Description of Proposal**

	The proposal would require the IRS to develop and publish schedules of national and localallowances that will provide taxpayers entering into an offer-in-compromise with adequate meansto provide for basic living expenses.  The IRS would also be required to consider the facts andcircumstances of a particular taxpayer's case in determining whether the national and localschedules are adequate for that particular taxpayer.  If the facts indicate that use of scheduledallowances would be inadequate under the circumstances, the taxpayer would not be limited bythe national or local allowances.  The proposal also would allow a compliant spouse to apply toreinstate an agreement that would otherwise be revoked due to the nonfiling or nonpayment of theother spouse, providing all payments required under the compromise agreement are current.Finally, the proposal would require the IRS to publish guidance on the rights and obligations oftaxpayers and the IRS relating to offers in compromise.

**Effective Date**

	The proposal would be effective on the date of enactment.

**2.  Prohibit IRS rejection of low income taxpayer's offer-in-compromise based on amountof offer**

**Present Law**

	The Internal Revenue Manual(22) provides guidelines for revenue officers to determinewhether an offer-in-compromise is adequate.  An offer is adequate if it reasonably reflectscollection potential.  Although the revenue officer is instructed to consider the taxpayer's assetsand future and present income, the IRM advises that rejection of an offer solely based on narrowasset and income evaluations should be avoided.

**Description of Proposal**

	The proposal would prohibit the IRS from rejecting an offer-in-compromise from a lowincome taxpayer solely on the basis of the amount of the offer. 

**Effective Date**

	The proposal would be effective for offers-in-compromise submitted after the date ofenactment.

**3.  Prohibit the IRS from rejecting an offer-in-compromise solely based on a dispute as toliability because the taxpayer's file cannot be located by the IRS**

**Present Law**

	Section 7122 of the Code permits the IRS to compromise a taxpayer's tax liability.  Anoffer-in-compromise is a proposal to settle unpaid tax accounts for less than the full amount of theassessed balance due.

	There are two bases on which an offer can be made by the taxpayer: doubt as to liabilityfor the amount owed and doubt as to ability to pay the amount owed.

**Description of Proposal**

	The proposal would provide that, in the case of an offer-in-compromise submitted solelyon the basis of doubt as to liability, the IRS may not reject the offer merely because the IRScannot locate the taxpayer's file. 

**Effective Date**

	The provision would be effective for offers in compromise submitted after the date ofenactment.

**4.  Prohibit the IRS from requiring a financial statement for offer-in-compromise basedsolely on doubt as to liability**

**Present Law
	The instructions to Form 656 ("Offer in Compromise") note that financial information isonly required to be supplied when submitting an offer based on doubt as to collectibility.  Somehave observed that the IRS may not be following this instruction.

**Description of Proposal
	The proposal would prohibit the IRS from requesting a financial statement if the taxpayermakes an offer-in-compromise based solely on doubt as to liability.

**Effective Date
	The proposal would be effective on the date of enactment. 

**5.  Suspend collection by levy while offer-in-compromise is pending**

**Present Law**

	Pursuant to the Internal Revenue Manual, collection normally is withheld during theperiod an offer-in-compromise is pending, unless it is determined that the offer is a delaying tacticand collection is in jeopardy.

**Description of Proposal**

	The proposal would prohibit the IRS from collecting a tax liability by levy (1) during anyperiod that a taxpayer's offer-in-compromise for that liability is being processed, (2) during the 30days following rejection of an offer, and (3) during any period in which an appeal of the rejectionof an offer is being considered.  Return of an offer-of-compromise as unprocessable would beconsidered a rejection for this purpose.  Taxpayers whose offers are either rejected or returned asunprocessable and who made good faith revisions of their offers and resubmitted them within 30days of the rejection or return would be eligible for a continuous period of relief from collectionby levy.  This prohibition on collection by levy would not apply if the IRS determines thatcollection is in jeopardy or that the offer was submitted solely to delay collection.  The proposalwould provide that the statute of limitations on collection would be tolled for the period duringwhich collection by levy is barred.

**Effective Date**

	The proposal would be effective with respect to taxes assessed on or after 60 days afterthe date of enactment.

**6.  Rejected offers-in-compromise and requests for installment agreements to be reviewed**

**Present Law**

	After an offer-in-compromise is rejected, the taxpayer has the opportunity to appeal therejection in IRS Appeals.

**Description of Proposal**

	The proposal would require that the IRS must implement procedures for it to review allproposed IRS rejections of taxpayer offers-in-compromise and requests for installmentagreements prior to the rejection being communicated to the taxpayer.

**Effective Date**

	The proposal would be effective for offers and requests made after the date of enactment.

**7. Liberal acceptance policy for offers-in-compromise**

**Present Law**

	No provision.

**Description of Proposal**

	The proposal would provide that the IRS should implement liberal acceptance proceduresfor offers-in-compromise to provide an incentive for taxpayers to continue to file tax returns andcontinue to pay their taxes.

**Effective Date**

	The proposal would be effective on the date of enactment

**L.  Additional Items**

**1.  Basis for evaluation of IRS employees**

**Present Law**

	The IRS is prohibited from using records of tax enforcement results to evaluate IRSemployees directly involved in collection activities and the employees' immediate supervisors.

**Description of Proposal**

	The proposal would prohibit using records of tax enforcement results to evaluate or toprovide bonuses to any IRS employee.  The proposal would also require the Treasury InspectorGeneral to report to the Senate Finance and House Ways and Means Committees annually onwhether the law is being followed.

**Effective Date**

	The proposal would be effective on the date of enactment.

**2.  IRS employee contacts**

**Present Law**

	The IRS sends many different notices to taxpayers.  Some (but not all) of these noticescontain a name and telephone number of an IRS employee who the taxpayer may call if thetaxpayer has any questions.

**Description of Proposal**

	The proposal would require that all IRS notices and correspondence contain a name andtelephone number of an IRS employee who the taxpayer may call.  In addition, to the extentpracticable and where it is advantageous to the taxpayer, the IRS should assign one employee tohandle a matter with respect to a taxpayer until that matter is resolved.

**Effective Date**

	The proposal would be effective 60 days after the date of enactment.

**3.  Use of pseudonyms by IRS employees**

**Present Law**

	The Federal Service Impasses Panel has ruled that if an employee believes that use of theemployee's last name only will identify the employee due to the unique nature of the employee'slast name, and/or nature of the office locale, then the employee may "register" a pseudonym withthe employee's supervisor.

**Description of Proposal**

	The proposal would require that an employee provide adequate justification, such asprotecting personal safety, for the use of a pseudonym as part of the request and that managementmust approve the request to use a pseudonym before it may be used.

**Effective Date**

	The proposal would be effective on the date of enactment.

**4.  Conferences of right in the National Office of IRS**

**Present Law**

	In any matter involving the submission of a substantive legal matter involving a specifictaxpayer to the National Office of the IRS, the taxpayer is entitled to at least one conference (the"conference of right") at which it can explain its position.

**Description of Proposal**

	The proposal would give a taxpayer the right to limit participation in its conference ofright to IRS national office personnel.

**Effective Date**

	The proposal would be effective on the date of enactment.

**5.  Illegal tax protestor designations**

**Present Law**

	The IRS designates individuals who meet certain criteria as "illegal tax protestors" in theIRS Master File.  

**Description of Proposal**

	The proposal would prohibit the use by the IRS of the "illegal tax protestor" designation. The IRS would, however, be permitted to designate that appropriate taxpayers are nonfilers; IRSmust also remove the nonfiler designation once the taxpayer has filed tax returns for twoconsecutive years and paid all taxes shown on those returns.  The Treasury Inspector Generalwould be required to report to Congress annually regarding IRS compliance with the proposal.   

**Effective Date**

	The proposal would be effective on the date of enactment. 

**6.  Allow tax-writing committees to obtain confidential information from IRS whistleblowers**

**Present Law**

	Tax return information generally may not be disclosed, except as specifically provided bystatute.  The Secretary of the Treasury may furnish tax return information to the Committee onFinance, the Committee on Ways and Means and the Joint Committee on Taxation upon a writtenrequest from the chairmen of such committees.  If the information can be associated with, orotherwise identify, directly or indirectly, a particular taxpayer, the information may by furnished tothe committee only while sitting in closed executive session unless such taxpayer otherwiseconsents in writing to such disclosure.

**Description of Proposal**

	The proposal would allow any employee of the IRS to disclose tax return informationdirectly to the Chairman of  the Committee on Finance, the Chairman of the Committee on Waysand Means or the Chief of Staff of the Joint Committee on Taxation provided: (1) such disclosureis for the purpose of disclosing an incident of employee or taxpayer abuse and (2) the chairman ofthe committee to which the information will be disclosed gives prior approval for the disclosure inwriting.

**Effective Date**

	The proposal would be effective on the date of enactment.

**IV.  CONGRESSIONAL ACCOUNTABILITY FOR THE IRS**

**A.  Funding for Century Date Change**
**Present Law
	No specific provision.

**Description of Proposal**

	Operations of the IRS computer systems are critical to the running of the Federal taxsystem.  Accordingly, the proposal would provide that it is the sense of the Senate that the IRSshould place resolving the century date change computing problems as a high priority.

**Effective Date**

	The proposal would be effective on the date of enactment.

**B.  Tax Law Complexity Analysis**

**Present Law**

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

**Description of Proposal**

	The IRS would be required to report to the tax writing committees annually regardingsources of complexity in the Federal tax laws.  Factors the IRS may take into account include:frequently asked questions by taxpayers; common errors made by taxpayers in filling out returns;areas of the law that frequently result in disagreements between taxpayers and the IRS; majorareas in which there is no or incomplete published guidance or in which the law is uncertain; areasin which revenue agents make frequent errors in interpreting or applying the law; impact of recentlegislation on complexity; information regarding forms, including a listing of IRS forms, the timeit takes for taxpayers to complete and review forms, the number of taxpayers who use each form,and how the time required changed as a result of recently enacted legislation; andrecommendations for reducing complexity.

**Effective Date**

	The proposal would be effective on the date of enactment.

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

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

	The Tax Court recently addressed the issue of when vacation pay and severance pay areconsidered deferred compensation in Schmidt Baking Co., Inc., 107 T.C. 271 (1996).  In SchmidtBaking, the taxpayer was an accrual basis taxpayer with a fiscal year that ended December 28,1991.  The taxpayer funded its accrued vacation and severance pay liabilities for 1991 bypurchasing an irrevocable letter of credit on March 13, 1992.  The parties stipulated that the letterof credit represented a transfer of substantially vested interest in property to employees forpurposes of section 83, and that the fair market value of such interest was includible in theemployees' gross incomes for 1992 as a result of the transfer.(23)  The Tax Court held that thepurchase of the letter of credit, and the resulting income inclusion, constituted payment of thevacation and severance pay within the 2-1/2 month period.  Thus, the vacation and severance paywere treated as received by the employees within the 2-1/2 month period and were not treated asdeferred compensation.  The vacation pay and severance pay were deductible by the taxpayer forits 1991 fiscal year pursuant to its normal accrual method of accounting.

**Description of Proposal
	Under the proposal, for purposes of determining whether an item of compensation isdeferred compensation (under Code sec. 404), the compensation would not be considered to bepaid or received until actually received by the employee.  In addition, an item of deferredcompensation would not be considered paid to an employee until actually received by theemployee.  The proposal is intended to overrule the result in Schmidt Baking.  For example, withrespect to the determination of whether vacation pay is deferred compensation, the fact that thevalue of the vacation pay is includible in the income of employees within the applicable 2-1/2month period would not be relevant.  Rather, the vacation pay must have been actually receivedby employees within the 2-1/2 month period in order for the compensation not to be treated asdeferred compensation.

	 It is intended that similar arrangements, in addition to the letter of credit approach used inSchmidt Baking, would not constitute actual receipt by the employee, even if there is an incomeinclusion.  Thus, for example, actual receipt would not include the furnishing of a note or letter orother evidence of indebtedness of the taxpayer, whether or not the evidence is guaranteed by anyother instrument or by any third party.  As a further example, actual receipt would not include apromise of the taxpayer to provide service or property in the future (whether or not the promise isevidenced by a contract or other written agreement).  In addition, actual receipt would not includean amount transferred as a loan, refundable deposit, or contingent payment.  Amounts set aside ina trust for employees would not be considered to be actually received by the employee.

	The proposal would not change the rule under which deferred compensation (other thanvacation pay and deferred compensation under qualified plans) is deductible in the year includiblein the gross income of employees participating in the plan if separate accounts are maintained foreach employee. 

	While Schmidt Baking involved only vacation pay and severance pay, there is concern thatthis type of arrangement may be tried to circumvent other provisions of the Code where paymentis required in order for a deduction to occur. Thus, it is intended that the Secretary will preventthe use of similar arrangements.  No inference is intended that the result in Schmidt Baking ispresent law beyond its immediate facts or that the use of similar arrangements is permitted underpresent law.  

	The proposal would not affect the determination of whether an item is includible inincome.  Thus, for example, using the mechanism in Schmidt Baking for vacation pay would stillresult in income inclusion to the employees, but the employer would not be entitled to a deductionfor the vacation pay until actually paid to and received by the employees.

**Effective Date**

	The proposal would be effective for taxable years ending after the date of enactment.  Anychange in method of accounting required by the bill is treated as initiated by the taxpayer with theconsent of the Secretary of the Treasury.  Any adjustment required by section 481 as a result ofthe change will be taken into account in the year of the change.

**B.  Modify Foreign Tax Credit Carryover Rules
**Present Law**

	U.S. persons may credit foreign taxes against U.S. tax on foreign source income. Theamount of foreign tax credits that can be claimed in a year is subject to a limitation that preventstaxpayers from using foreign tax credits to offset U.S. tax on U.S. source income. Separateforeign tax credit limitations are applied to specific categories of income.

	The amount of creditable taxes paid or accrued (or deemed paid) in any taxable yearwhich exceeds the foreign tax credit limitation is permitted to be carried back two years andforward five years.  The amount carried over may be used as a credit in a carryover year to theextent the taxpayer otherwise has excess foreign tax credit limitation for such year. The separateforeign tax credit limitations apply for purposes of the carryover rules.

**Description of Proposal**

	The proposal would reduce the carryback period for excess foreign tax credits from twoyears to one year. The proposal also would extend the excess foreign tax credit carryforwardperiod from five years to seven years.

**Effective Date**

	The proposal would apply to foreign tax credits arising in taxable years beginning after thedate of enactment.

**C.  Clarify and Expand Mathematical Error Procedures
**Present Law**

**Taxpayer identification numbers ("TIN"s)**

	The IRS may deny a personal exemption for a taxpayer, the taxpayer's spouse or thetaxpayer's dependents if the taxpayer fails to provide a correct TIN for each person for whom thetaxpayer claims an exemption. This TIN requirement also indirectly effects other tax benefitscurrently conditioned on a taxpayer being able to claim a personal exemption for a dependent(e.g., head-of-household filing status and the dependent care credit). Other tax benefits, includingthe adoption credit, the child tax credit, the Hope Scholarship credit and Lifetime Learning credit,and the earned income credit also have TIN requirements. For most individuals, their TIN is theirSocial Security Number ("SSN"). The mathematical and clerical error procedure currently appliesto the omission of a correct TIN for purposes of personal exemptions and all of the credits listedabove except for the adoption credit.

**Mathematical or clerical errors**

	The IRS may summarily assess additional tax due as a result of a mathematical or clericalerror without sending the taxpayer a notice of deficiency and giving the taxpayer an opportunityto petition the Tax Court. Where the IRS uses the summary assessment procedure formathematical or clerical errors, the taxpayer must be given an explanation of the asserted errorand a period of 60 days to request that the IRS abate its assessment. The IRS may not proceed tocollect the amount of the assessment until the taxpayer has agreed to it or has allowed the 60-dayperiod for objecting to expire. If the taxpayer files a request for abatement of the assessmentspecified in the notice, the IRS must abate the assessment. Any reassessment of the abatedamount is subject to the ordinary deficiency procedures. The request for abatement of theassessment is the only procedure a taxpayer may use prior to paying the assessed amount in orderto contest an assessment arising out of a mathematical or clerical error. Once the assessment issatisfied, however, the taxpayer may file a claim for refund if he or she believes the assessmentwas made in error.

**Description of Proposal**

	The proposal would provide in the application of the mathematical and clerical errorprocedure that a correct TIN is a TIN that was assigned by the Social Security Administration (orin certain limited cases, the IRS) to the individual identified on the return. For this purpose theIRS would be authorized to determine that the individual identified on the tax return correspondsin every aspect (including, name, age, date of birth, and SSN) to the individual to whom the TINis issued. The IRS would be authorized to use the mathematical and clerical error procedure todeny eligibility for the dependent care tax credit, the child tax credit, and the earned income crediteven though a correct TIN has been supplied if the IRS determines that the statutory agerestrictions for eligibility for any of the respective credits is not satisfied (e.g., the TIN issued forthe child claimed as the basis of the child tax credit identifies the child as over the age of 17 at theend of the taxable year).

**Effective Date**

	The proposal would be effective for taxable years ending after the date of enactment.

**D.  Freeze Grandfathered Status of Stapled REITs**

**Present Law**

	A real estate investment trust ("REIT") is an entity that receives most of its income frompassive real estate related investments, and the portion of whose income that is distributed to theinvestors each year generally is taxed to the investors without being subject to tax at the REITlevel.  A REIT must satisfy a number of tests on a year-by-year basis including the source-of-income tests, which require at least 95 percent of its gross income generally must be derived fromrents, dividends, interest and certain other passive sources (the "95-percent test").  In addition, atleast 75 percent of its income generally must be from real estate sources, including rents from realproperty and interest on mortgages secured by real property (the "75-percent test").

	In a stapled REIT structure, both the shares of a REIT and a C corporation are subject toa provision that they may not be sold separately.  Thus, the REIT and the C corporation haveidentical ownership at all times.  In the Deficit Reduction Act of 1984 (the "1984 Act"), Congressprovided that, in applying the tests for REIT status, all stapled entities are treated as one entity. Although the 1984 Act generally was effective upon enactment, it included a grandfather rule thatprovided that the new provision did not apply to a REIT that was a part of a group of stapledentities if the group of entities was stapled on June 30, 1983, and included a REIT on that date.

**Description of Proposal**

**General rule**

	The proposal would limit the tax benefits of the existing stapled REITs that qualify underthe 1984 Act's grandfather rules.  Under the proposal, the REIT and all stapled entities would betreated as a single entity for purposes of determining REIT status with respect to real propertyinterests held by the REIT, a stapled entity, or a subsidiary or partnership in which a 10-percent orgreater interest is owned by a stapled entity (the "REIT group"), unless the real property interestis a grandfathered property.  Thus, the activities and gross income of a REIT group with respectto non-grandfathered real property interests held by any member of the REIT group would betreated as activities and income of the REIT for purposes of the provisions of the REIT rules thatdepend on the REIT's gross income (i.e., the 95-percent test and the 75-percent test).  

If a REIT or stapled entity owns, directly or indirectly, a 10-percent-or-greater interest in asubsidiary or partnership that holds a real property interest, the above rules would apply withrespect to a proportionate part of the subsidiary's or partnership's property, activities and grossincome.   The bill would not apply to a stapled REIT's ownership of a corporate subsidiary,although a stapled REIT would be subject to the normal restrictions on a REIT's ownership ofstock in a corporation.  Similar rules attributing the proportionate part of the subsidiary's orpartnership's real estate interests and gross income would apply when a REIT or stapled entityacquires a 10-percent-or-greater interest (or in the case of a previously-owned entity, acquires anadditional interest) after March 26, 1998, with exceptions for interests acquired pursuant toagreements or announcements described below.

**Grandfathered properties**

	Under the proposal, grandfathered properties generally are those properties that had beenacquired by a member of the REIT group on or before March 26, 1998.  In addition,grandfathered properties include properties acquired by a member of the REIT group after March26, 1998, pursuant to a written agreement which was binding on March 26, 1998, and all timesthereafter.  Grandfathered properties also include certain properties, the acquisition of which weredescribed in a public announcement or in a filing with the Securities and Exchange Commissionon or before March 26, 1998.  While a property does not lose its status as a grandfatheredproperty by reason of a repair to, an improvement of, or a lease of, a grandfathered property, aproperty loses its status as a grandfathered property to the extent that there is an expansion thateither (1) is beyond the boundaries of the land of the otherwise grandfathered property or (2) is animprovement of an otherwise grandfathered property that is placed in service after December 31,1999, which changes the use of the property and whose cost is greater than 200 percent of (a) theundepreciated cost of the property (prior to the improvement) or (b) in the case of propertyacquired where there is a substituted basis, the fair market value of the property on the date thatthe property was acquired by the stapled entity or the REIT. 

	If a stapled REIT is not stapled as of March 26, 1998, or if it fails to qualify as a REIT asof such date or any time thereafter, no properties of any member of the REIT group would betreated as grandfathered properties, and thus the general provisions of the proposal describedabove would apply to all properties held by the group. 

**Mortgage rules**

	Special rules would apply where the REIT or a stapled entity acquires a mortgage interest after March 26, 1998, where a member of the REIT group performs services with respect to theproperty secured by the mortgage.   In such cases, all interest on the mortgage and all grossincome received by a member of  the REIT group from the activity would be treated as income ofthe REIT that does not qualify as a type of income that counts toward the 75-percent and 95-percent tests.  An exception would be provided for mortgages the interest on which does notexceed an arm's-length rate and which would be treated as interest for purposes of the REIT rules(e.g., the 75-percent and 95-percent tests, above).  The exception for existing mortgages wouldcease to apply if the mortgage is refinanced and the principal amount is increased in suchrefinancing.

**Other rules**

	The Secretary of the Treasury would be given authority to prescribe such guidance as maybe necessary or appropriate to carry out the purposes of the provision, including guidance toprevent the double counting of income and to prevent transactions that would avoid the purposesof the provision.

**Effective Date**

	The proposal would be effective for taxable years ending after March 26, 1998.

1.   The "Tax Technical Corrections Act of 1997" was reported by the House Committee onWays and Means in H.R. 2645 (H.Rept. 105-356, October 29, 1997).
2.   This document may be cited as follows: Joint Committee on Taxation,*Description ofSenate Finance Committee Chairman's Mark Relating to Reform and Restructuring of theInternal Revenue Service* (JCX-17-98), March 26, 1998.
3.   A separate document provides a description of the Chairman's mark relating to taxtechnical correction provisions.
4.   Code sec. 7801(a).
5.   The prohibition on receipt of compensation applies regardless of whether the servicesare performed by the Federal employee or someone else.  For example, it would preclude aFederal employee from sharing in the compensation received by a partner of the Federal employeewith respect to covered matters.
6.   More stringent rules apply to regular Federal Government employees.  Such employeescannot receive compensation for representational services (whether rendered by the individual oranother) in matters in which the United States is a party or has a direct and substantial interestbefore any department, agency or court.  In addition, a Federal Government employee cannot actas agent or attorney (whether or not for compensation) for prosecuting any claim against theUnited States or act as agent or attorney for anyone before any department, agency, or court inwhich the United States is a party or has a direct and substantial interest.  
7.    All Federal Government employees are permanently prohibited from representing aparty other than the government in connection with a particular matter (1) in which thegovernment is a party or has an interest, (2) in which the individual participated personally andsubstantially, and (3) which involved a specific party or parties at the time of their participation. In addition, Federal employees cannot, within 2 years after terminating employment represent, anyperson other than the United States in connection with any matter (1) in which the government isa party or has a direct and substantial interest, (2) which the person knows or reasonably shouldknow was actually pending under his or her official responsibility within one year beforetermination of employment, and (3) which involved a specific party or parties at the time it waspending
8.   The proposal would not affect the Commissioner's access to section 6103 informationor the application of the anti-browsing rules to the Commissioner.
9.   Code sec. 7802(a).
10.   Treasury Order 150-10 (April 22, 1982).
11.   See, e.g., Treasury Order 111-2 (March 16, 1981), which delegates to the AssistantSecretary (Tax Policy) the exclusive authority to make the final determination of the TreasuryDepartment's position with respect to issues of tax policy arising in connection with regulations,published Revenue Rulings and Revenue Procedures, and tax return forms and to determine thetime, form and manner for the public communication of such position.
12.   Code section 7802(b).
13.   S. Rept. 93-383, 108 (1973).  See also H. Rept. 93-807, 104 (1974).
14.   Code section 7802(b)(2).
15.   To facilitate the reorganization of the IRS, the proposal would permit the elimination ofthe statutory requirement contained in section 7802(b) that there be an "Office of Employee Plansand Exempt Organizations" under the supervision and direction of an Assistant Commissioner.  Inthe event such statutory authority is eliminated, however, it is intended that a comparablestructure be created administratively to ensure that adequate resources within the IRS are devotedto oversight of the tax-exempt sector.
16.   The Treasury Department organization includes the Departmental offices as well as theBureau of Alcohol, Tobacco and Firearms ("ATF"), the Office of the Comptroller of the Currency("OCC"), the U.S. Customs Service ("Customs"), the Bureau of Engraving and Printing, theFederal Law Enforcement Training Center, the Financial Management Service, the U.S. Mint, theBureau of the Public Debt, the U.S. Secret Service ("Secret Service"), the Office of ThriftSupervision, and the IRS.
17.   The first MOU was entered into in 1990 and the second in 1994.
18.   Treasury Directive 40-01 (September 21, 1992) reiterates that the Treasury IG isresponsible for investigating alleged misconduct on the part of IRS employees at the grade 15level and above, all employees of the Office of the Chief Inspector.  In addition, TreasuryDirective 40-01 states that the Treasury IG is responsible for investigating alleged misconduct onthe part of Office of Chief Counsel employees (excluding employees of the National Director,Office of Appeals).
19. Welch v. Helvering, 290 U.S. 111, 115 (1933).
20. Danville Plywood Corp. v. U.S. , U.S. Cl. Ct., 63 AFTR 2d 89-1036, 1043 (1989);citations omitted.
21.   Public Law 95-600 (November 6, 1978), as amended by section 1122 of the SmallBusiness Job Protection Act of 1996 (Public Law 104-188; August 20, 1996).
22.  IRM 57(10)(10).1
23.   While the rules of section 83 may govern the income inclusion, section 404 governs thededuction if the amount involved is deferred compensation.
**Joint Committee on Taxation**

**March 27, 1998**

**ERRATA FOR JCX-17-98**

**DESCRIPTION OF SENATE FINANCE COMMITTEE**

**CHAIRMAN'S MARK RELATING TO**

**REFORM AND RESTRUCTURING OF THE**

**INTERNAL REVENUE SERVICE**

**Effective date of Item V.B.  Modify Foreign Tax Credit Carryover Rules should be revisedto read as follows:**

	The proposal would apply to foreign tax credits arising in taxable years ending after thedate of enactment.

**Insert at the end of the document the following new item (and add heading to theContents):**

**E.  Make Certain Trade Receivables Ineligible for Mark-to-Market Treatment**

**Present Law**

	 In general, dealers in securities are required to use a mark-to-market method ofaccounting for securities (sec. 475).  Exceptions to the mark-to-market rule are provided forsecurities held for investment, certain debt instruments and obligations to acquire debt instrumentsand certain securities that hedge securities.  A dealer in securities is a taxpayer who regularlypurchases securities from or sells securities to customers in the ordinary course of a trade orbusiness, or who regularly offers to enter into, assume, offset, assign, or otherwise terminatepositions in certain types of securities with customers in the ordinary course of a trade orbusiness.  A security includes (1) a share of stock, (2) an interest in a widely held or publiclytraded partnership or trust, (3) an evidence of indebtedness, (4) an interest rate, currency, orequity notional principal contract, (5) an evidence of an interest in, or derivative financialinstrument in, any of the foregoing securities, or any currency, including any option, forwardcontract, short position, or similar financial instrument in such a security or currency, or (6) aposition that is an identified hedge with respect to any of the foregoing securities.

	Treasury regulations provide that if a taxpayer would be a dealer in securities only becauseof its purchases and sales of debt instruments that, at the time of purchase or sale, are customerpaper with respect to either the taxpayer or a corporation that is a member of the sameconsolidated group, the taxpayer will not normally be treated as a dealer in securities.  However,the regulations allow such a taxpayer to elect out of this exception to dealer status.(1)  For thispurpose, a debt instrument is customer paper with respect to a person if: (1) the person's principalactivity is selling nonfinancial goods or providing nonfinancial services; (2) the debt instrumentwas issued by the purchaser of the goods or services at the time of the purchase of those goodsand services in order to finance the purchase; and (3) at all times since the debt instrument wasissued, it has been held either by the person selling those goods or services or by a corporationthat is a member of the same consolidated group as that person.

**Description of Proposal**

	The proposal would provide that certain trade receivables would not be eligible for mark-to-market treatment, whether the taxpayer is a securities dealer required to use mark-to-markettreatment or elects such treatment under the Treasury regulation.  The trade receivables thatwould be excluded would include non-interest bearing receivables, and account, note and tradereceivables unrelated to an active business of a securities dealer.  The proposal would grant theTreasury regulatory authority to carry out the purposes of the proposal.  The proposal would notaffect the non-accrual experience method of accounting for service providers.

**Effective Date**

	The proposal generally would be effective for taxable years ending after the date ofenactment.  Adjustments required under section 481 as a result of the change in method ofaccounting would be required to be taken into account ratably over the four-year period beginningin the first taxable year for which the proposal is in effect.

1.   Treas. reg. sec. 1.475(c)-1(b), issued December 23, 1996; the "customer paperelection."******************************************************************