DESCRIPTION OF THE CHAIRMAN’S AMENDMENT IN THE 

NATURE OF A SUBSTITUTE TO H.R. 3997, 

“HEROES EARNINGS ASSISTANCE AND RELIEF TAX ACT OF 2007” 

Scheduled for Markup 

by the 

HOUSE COMMITTEE ON WAYS AND MEANS 

on November 1, 2007 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

November 1, 2007 

JCX-107-07 
i 

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

I. BENEFITS FOR MILITARY AND VOLUNTEER FIREFIGHTERS ............................. 2 

A. Make Permanent the Election to Treat Combat Pay as Earned Income for 

Purposes of the Earned Income Credit.......................................................................... 2 

B. Modification of Qualified Mortgage Bond Program Rules for Veterans ..................... 3 

C. Survivor and Disability Payments with Respect to Qualified Military Service ........... 5 

D. Treatment of Differential Military Pay as Wages......................................................... 8 

E. Tax Treatment Related to Certain Benefits Provided to Volunteer Firefighters and 

Emergency Medical Responders................................................................................. 12 

F. Extension of the Statute of Limitations to File Claims for Refunds Relating to 

Disability Determinations by the Department of Veterans Affairs ............................ 14 

G. Treatment of Distributions to Individuals Called to Active Duty for at 

Least 180 Days............................................................................................................ 15 

H. Permanent Extension of Disclosure Authority to the Department of Veterans 

Affairs ......................................................................................................................... 17 

I. Contributions of Military Death Gratuities to Certain Tax-Favored Accounts .......... 18 

J. Exclusion of Gain on Sale of a Principal Residence by Certain Peace Corps 

Volunteers................................................................................................................... 21

II. IMPROVEMENTS IN SUPPLEMENTAL SECURITY INCOME ................................ 23 

A. Ensure Equitable Treatment of Military Families Under SSI..................................... 23 

B. Remove Penalties for Blind Veterans Under SSI ....................................................... 25 

C. Exclusion of Benefits for Americorps Volunteers Under SSI.................................... 26 

III. REVENUE RAISING PROPOSALS............................................................................... 27 

A. Increase in Penalty for Failure to File Partnership Returns ........................................ 27 

B. Penalty for Failure to File S Corporation Returns ...................................................... 28 

C. Increase in Information Return Penalties.................................................................... 29 

D. Minimum Failure to File Penalty................................................................................ 31 
1 

INTRODUCTION 

The House Committee on Ways and Means has scheduled a markup of the “Heroes 

Earnings Assistance and Relief Tax Act of 2007.” This document,1 prepared by the staff of the 

Joint Committee on Taxation, provides a description of the Chairman’s amendment in the nature 

of a substitute to H.R. 3997, the “Heroes Earnings Assistance and Relief Tax Act of 2007.” 

 1

 This document may be cited as follows: Joint Committee on Taxation, “Description of the 

Chairman’s Amendment in the Nature of a Substitute to H.R. 3997, the “Heroes Earnings Assistance and 

Relief Tax Act of 2007,” November 1, 2007, (JCX-107-07). This document can also be found on our 

website at www.house.gov/jct. 
2 

I. BENEFITS FOR MILITARY AND VOLUNTEER FIREFIGHTERS 

A. Make Permanent the Election to Treat Combat Pay as Earned Income 

for Purposes of the Earned Income Credit 

Present Law

In general

Subject to certain limitations, military compensation earned by members of the Armed 

Forces while serving in a combat zone may be excluded from gross income. In addition, for up 

to two years following service in a combat zone, military personnel may also exclude 

compensation earned while hospitalized from wounds, disease, or injuries incurred while serving 

in the combat zone. 

Child credit 

Combat pay that is otherwise excluded from gross income under section 112 is treated as 

earned income which is taken into account in computing taxable income for purposes of 

calculating the refundable portion of the child credit. 

Earned income credit

Any taxpayer may elect to treat combat pay that is otherwise excluded from gross income 

under section 112 as earned income for purposes of the earned income credit. This election is 

available with respect to any taxable year ending before January 1, 2008. 

Description of Proposal

The provision permanently extends the availability of the election to treat combat pay 

that is otherwise excluded from gross income under section 112 as earned income for purposes 

of the earned income credit. 

Effective Date

The provision is effective in taxable years beginning after December 31, 2007. 
3 

B. Modification of Qualified Mortgage Bond 

Program Rules for Veterans 

Present Law

In general

Private activity bonds are bonds that nominally are issued by States or local governments, 

but the proceeds of which are used (directly or indirectly) by a private person and payment of 

which is derived from funds of such private person. The exclusion from income for State and 

local bonds does not apply to private activity bonds, unless the bonds are issued for certain 

permitted purposes (“qualified private activity bonds”). The definition of a qualified private 

activity bond includes both qualified mortgage bonds and qualified veterans’ mortgage bonds. 

Qualified mortgage bonds

Qualified mortgage bonds are issued to make mortgage loans to qualified mortgagors for 

owner-occupied residences. The Code imposes several limitations on qualified mortgage bonds, 

including income limitations for homebuyers and purchase price limitations for the home 

financed with bond proceeds. In addition, qualified mortgage bonds generally cannot be used to 

finance a mortgage for a homebuyer who had an ownership interest in a principal residence in 

the three years preceding the execution of the mortgage (the “first-time homebuyer” 

requirement). 

Under a special rule, qualified mortgage bonds may be issued to finance mortgages for 

veterans who served in the active military without regard to the first-time homebuyer 

requirement. Present-law income and purchase price limitations apply to loans to veterans 

financed with the proceeds of qualified mortgage bonds. Veterans are eligible for the exception 

from the first-time homebuyer requirement without regard to the date they last served on active 

duty or the date they applied for a loan after leaving active duty. However, veterans may only 

use the exception one time, and the exception only applies to financing provided from bonds 

issued before January 1, 2008. 

Qualified veterans mortgage bonds

Qualified veterans’ mortgage bonds are private activity bonds the proceeds of which are 

used to make mortgage loans to certain veterans. Authority to issue qualified veterans’ mortgage 

bonds is limited to States that had issued such bonds before June 22, 1984. Qualified veterans’ 

mortgage bonds are not subject to the State volume limitations generally applicable to private 

activity bonds. Instead, annual issuance in each State is subject to a separate State volume 

limitation. The five States eligible to issue these bonds are Alaska, California, Oregon, Texas, 

and Wisconsin. 

In the case of qualified veterans’ mortgage bonds issued by California or Texas, 

mortgage loans only can be made to veterans who served on active duty before 1977 and who 

applied for the financing before the date 30 years after the last date on which such veteran left 

active service. In the case of qualified veterans’ mortgage bonds issued by the States of Alaska, 

Oregon, and Wisconsin, mortgage loans can be made to veterans who apply for financing before 
4 

the date 25 years after the last date on which such veteran left active service, without regard to 

the calendar year the veteran served on active duty. 

The annual volume of qualified veterans’ mortgage bonds that can be issued in California 

or Texas is based on the average amount of bonds issued in the respective State between 1979 

and 1984. In Alaska, Oregon, and Wisconsin, the annual limit on qualified veterans’ mortgage 

bonds that can be issued in years after 2009 is $25 million. This $25 million per-State limit is 

phased in from 2006 through 2009 by allowing the applicable percentage of the $25 million 

limit. The following table provides those percentages. 

Calendar Year: Applicable Percentage is: 

2006 20 percent 

2007 40 percent 

2008 60 percent 

2009 80 percent 

Unused allocation cannot be carried forward to subsequent years. 

Description of Proposal

Qualified mortgage bonds

The proposal permanently extends the limited exception from the first-time homebuyer 

requirement for veterans under the qualified mortgage bond program. 

Qualified veterans’ mortgage bonds

The proposal increases the annual limit on qualified veterans’ mortgage bonds that can be 

issued in Alaska, Oregon, and Wisconsin in years after 2009 to $100 million. For 2008 and 

2009, the $100 million limit is phased in by applying the present-law applicable percentages for 

those years (i.e., 60 percent in 2008 and 80 percent in 2009). 

With respect to qualified veterans’ mortgage bonds issued in California or Texas, the 

proposal repeals the requirement that veterans receiving loans financed with qualified veterans’ 

mortgage bonds must have served before 1977 and reduces the eligibility period to 25 years 

(rather than 30 years) following release from the military service. 

Effective Date

The proposal applies to bonds issued after December 31, 2007. 
5 

C. Survivor and Disability Payments with Respect 

to Qualified Military Service 

Present Law

Under the Uniformed Services Employment and Reemployment Rights Act of 1994 

(“USERRA”)2, which revised and restated the Federal law protecting veterans' reemployment 

rights, an employee who leaves a civilian job for qualified military service generally is entitled to 

be reemployed by the civilian employer if the individual returns to employment within a 

specified time period. In addition to reemployment rights, a returning veteran also is entitled to 

the restoration of certain pension, profit sharing and similar benefits that would have accrued, but 

for the employee's absence due to the qualified military service. The protections provided under 

USERRA do not apply if the veteran is not reemployed by the veteran's civilian employer. 

USERRA generally provides that for a reemployed veteran, service in the uniformed 

services is considered service with the employer for retirement plan vesting and benefit accrual 

purposes. The employer that reemploys the returning veteran is liable for funding any resulting 

obligation. USERRA also provides that the reemployed veteran is entitled to any accrued 

benefits that are contingent on the making of, or derived from, employee contributions or 

elective deferrals only to the extent the reemployed veteran makes payment to the plan with 

respect to such contributions or deferrals. No such payment may exceed the amount the 

reemployed veteran would have been permitted or required to contribute had the person 

remained continuously employed by the employer throughout the period of uniformed service. 

Under USERRA, any such payment to the plan must be made during the period beginning with 

the date of reemployment and whose duration is three times the reemployed veteran's period of 

uniform service, not to exceed five years. 

The Small Business Job Protection Act of 19963

 added section 414(u) to the Code to 

provide rules regarding the interaction of the USERRA protections with generally applicable 

rules that govern tax qualified retirement plans. For example, section 414(u) provides that if any 

make-up contribution is made by an employer or employee with respect to a reemployed veteran, 

then such contribution is not subject to the otherwise applicable plan contribution and deduction 

limits for the year in which the contribution is made (such as the sec. 402(g) annual limit on 

elective deferrals, which is generally $15,500 in 2007). Such limits are instead applied for the 

year to which the contribution relates had the individual continued to be employed by the 

employer during the period of uniformed service. 

Under section 414(u), a plan to which a make-up contribution is made on account of a 

reemployed veteran is not treated as failing to meet the qualified plan nondiscrimination, 

coverage, minimum participation, and top heavy rules4

 by reason of the making of such 

 2

 Pub. L. No. 103-353, 38 U.S.C. §§ 4301, ff. 

3

 Pub. L. No. 104-188. 

4

 I.e., Code sections 401(a)(4), 401(a)(26), 401(k)(3), 401(k)(11), 401(k)(12), 401(m), 

403(b)(12), 408(k)(3), 408(k)(6), 408(p), 410(b), and 416. 
6 

contribution. Consequently, for purposes of applying the requirements and tests associated with 

these rules, make-up contributions are not taken into account either for the year in which they are 

made or for the year to which they relate. 

In addition, section 414(u) provides for a special rule in the case of make-up 

contributions of salary reduction, employer matching, and after-tax employee amounts. A plan 

that provides for elective deferrals or employee contributions is treated as meeting the 

requirements of USERRA if the employer permits reemployed veterans to make additional 

elective deferrals or employee contributions under the plan during the period which begins on the 

date of reemployment and has the same length as the lesser of (1) the period of the individual's 

absence due to uniformed service multiplied by three or (2) five years. The employer is required 

to match any additional elective deferrals or employee contributions at the same rate that would 

have been required had the deferrals or contributions actually been made during the period of 

uniformed service. Additional elective deferrals, employer matching contributions, and 

employee contributions are treated as make-up contributions for purposes of the rule exempting 

such contributions from qualified plan nondiscrimination, coverage, minimum participation, and 

top heavy rules described above. 

Description of Proposal

The proposal adds a new tax qualification requirement for retirement plans that are 

qualified under section 401(a) of the Code (a “tax-qualified plan”). Under the new requirement, 

a tax-qualified plan must provide that, in the case of a participant who dies while performing 

qualified military service, the survivors of the participant must be entitled to any additional 

benefits (other than benefit accruals relating to the period of qualified military service) that 

would be provided under the plan had the participant resumed employment with the employer 

maintaining the plan and then terminated employment on account of death. Thus, if a plan 

provides for accelerated vesting, ancillary life insurance benefits, or other survivor benefits that 

are contingent upon a participant’s termination of employment on account of death, the plan 

must provide such benefits to the beneficiary of a participant who dies during qualified military 

service. 

Under the proposal, conforming amendments apply the new tax qualification requirement 

to section 403(b) tax-deferred annuities and eligible deferred compensation plans (described in 

section 457(b)) maintained by state and local governments. The proposal also conditions the 

deduction timing rule of section 404(a)(2) (permitting contributions for the purchase of employee 

retirement annuities that meet certain requirements applicable to tax-qualified retirement plans to 

be deducted in the year of payment) on satisfaction of the new qualification requirement. 

In addition, for benefit accrual purposes, the proposal permits a retirement plan to treat an 

individual who leaves service with the plan's sponsoring employer for qualified military service 

and who cannot be reemployed on account of death or disability as if the individual had been 

rehired as of the day before death or disability (a “deemed rehired employee”) and then had 

terminated employment on the date of death or disability. In the case of a deemed rehired 

employee, the plan is permitted to comply fully or partially with the benefit accrual restoration 

provisions that would be required under section 414(u) had the individual actually been rehired. 
7 

Subject to several conditions, if a plan complies fully or partially with the benefit accrual 

requirements of section 414(u), the special section 414(u) rules regarding the interaction of 

USERRA with the otherwise applicable benefit limitation and nondiscrimination rules apply. 

The first condition is that all employees performing qualified military service of the employer 

maintaining the plan who die or become disabled must be credited with benefits on a reasonably 

equivalent basis. Thus, differences in credited benefits on account of different compensation 

levels are permissible, but complying fully with the section 414(u) benefit accrual requirements 

with respect to highly compensated employees and complying partially with respect to nonhighly 

compensated employees is not permissible. The second condition is that if the plan credits 

deemed rehired employees with benefits that are contingent on employee contributions or 

elective contributions, the plan must determine the rate of employee contributions or elective 

deferrals on the basis of the actual average contributions or deferrals made by the employee 

during the 12-month period prior to military service (or if less, the average for the actual period 

of service). 

The proposal provides rules regarding the date by which a plan must be amended to 

comply with the proposal. In general, a plan must be amended on or before the last day of the 

plan year beginning on or after January 1, 2009. 

Effective Date

The proposal applies in the case of deaths and disabilities occurring on or after January 1, 

2007. 
8 

D. Treatment of Differential Military Pay as Wages 

Present Law

In general

In the case of an employee who is called to active duty with the United States uniformed 

services, some employers voluntarily agree to continue paying the compensation that the service 

member would otherwise have received from the employer during the service member’s period 

of active duty. Such compensation is commonly referred to as “differential pay.” 

Wage withholding

Differential pay is not treated as wages for purposes of the Federal income tax 

withholding rules that apply to an employer’s payment of wages. This is because the service 

member terminates the employment relationship with the employer that pays the differential pay 

upon being called for active duty.5

 

Retirement plans

Section 415 imposes limitations on the benefits that may be provided under a retirement 

plan that is qualified under Code section 401(a) (a “qualified plan”). For a defined contribution 

plan, section 415 limits the annual additions to a participant’s account under the plan to the lesser 

of a dollar amount ($45,000 in 2007) or 100 percent of the participant’s compensation. In the 

case of a defined benefit plan, section 415 generally limits the annual benefit payable under the 

plan to the lesser of a dollar amount ($180,000 in 2007) or 100 percent of the participant’s 

average compensation for the participant’s high three years. 

Final regulations issued in 2007 generally permit a plan to treat differential pay as 

compensation for purposes of section 415.6

 The section 415 limitations also apply to tax 

deferred annuities7

 and simplified employee pensions8 (“SEPs”). The definition of compensation 

in section 415 is used in limiting the amount that may be deferred under an eligible deferred 

compensation plan (described in section 457(b)). 

Limitation on in-service distributions

Under present law, certain types of contributions to a retirement plan are subject to 

restrictions that generally limit distributions to a participant prior to the participant severing 

employment with the employer that sponsors the plan. This limitation on in-service distributions 

 5

 See Rev. Rul. 69-136, 1969-1 C.B. 252. 

6

 Treas. Reg. section 1.415(c)-2(e)(4), 72 F.R. 16878 (April 5, 2007). 

7

 Section 403(b). 

8

 Section 408(k). 
9 

applies to: (1) elective deferrals under a qualified cash or deferred compensation arrangement (a 

“section 401(k) plan”); (2) amounts attributable to a salary reduction agreement under a section 

403(b) tax-sheltered annuity; (3) amounts contributed to a custodial account described in Code 

section 403(b)(7); and (4) amounts deferred under an eligible deferred compensation plan 

(described in Code section 457(b)). 

USERRA

Under the Uniformed Services Employment and Reemployment Rights Act of 1994 

(“USERRA”), which revised and restated the Federal law protecting veterans’ reemployment 

rights, an employee who leaves a civilian job for qualified military service generally is entitled to 

be reemployed by the civilian employer if the individual returns to employment within a 

specified time period. In addition to reemployment rights, a returning veteran also is entitled to 

the restoration of certain pension, profit sharing and similar benefits that would have accrued, but 

for the employee’s absence due to the qualified military service. Section 414(u) provides special 

rules that permit defined benefit plans and individual account plans to satisfy the requirements of 

USERRA. An individual account plan for this purpose is any defined contribution plan (such as 

a section 401(k) plan), and includes a section 403(b) tax sheltered annuity, a SEP, a qualified 

salary reduction arrangement under section 408(p) (“SIMPLE”), and an eligible deferred 

compensation plan (described in Code section 457(b)). Section 414(u) does not apply to a plan 

to which Chapter 43 of Title 38 of the United States Code does not apply. 

IRA contributions 

There are two general types of individual retirement arrangements (“IRAs”): traditional 

IRAs and Roth IRAs.9 Under Code section 219, the total amount that an individual may 

contribute to one or more IRAs for a year is generally limited to the lesser of: (1) a dollar 

amount ($4,000 for 2007); or (2) the amount of the individual’s compensation that is includible 

in gross income for the year. In the case of a married couple, contributions can be made up to 

the dollar limit for each spouse if the combined compensation of the spouses that is includible in 

gross income is at least equal to the contributed amount. For purposes of the IRA contribution 

limitations, compensation includes an individual’s net earnings from self employment. 

Description of Proposal

Wage withholding

The proposal amends the definition of wages for purposes of the Federal income tax 

withholding rules applicable to an employer’s payment of wages. The proposal includes as 

wages the employer’s payment of any differential wage payment to the employee. Differential 

wage payment is defined as any payment which: (1) is made by an employer to an individual 

with respect to any period during which the individual is performing service in the uniformed 

services while on active duty for a period of more than 30 days; and (2) represents all or a 

 9

 Secs. 408 and 408A. 
10 

portion of the wages that the individual would have received from the employer if the individual 

were performing services for the employer. 

Retirement plans

The proposal also provides rules relating to differential wage payments (as defined for 

purposes of wage withholding) for purposes of a retirement plan that is subject to section 414(u). 

Specifically, an individual receiving a differential wage payment is required to be treated as an 

employee of the employer making the payment and the differential wage payment is required to 

be treated as compensation. In addition, a retirement plan that is subject to section 414(u) is not 

treated as failing to meet certain requirements relating to minimum participation and 

nondiscrimination standards10 by reason of any contribution or benefit that is based on the 

differential wage payment if all of the sponsoring employer’s employees: (1) are entitled to 

differential wage payments on reasonably equivalent terms; and (2) if all employees eligible to 

participate in a retirement plan maintained by the employer are entitled to make contributions 

based on such differential payments on reasonably equivalent terms. 

Under the proposal, an individual is treated as having been severed from employment 

during any period the individual is performing service in the uniformed services while on active 

duty for a period of more than 30 days for purposes of the limitation on in-service distributions 

with respect to: (1) elective deferrals under a section 401(k) plan; (2) amounts attributable to a 

salary reduction agreement under a section 403(b) tax-sheltered annuity; (3) amounts contributed 

to a custodial account described in Code section 403(b)(7); and (4) amounts deferred under an 

eligible deferred compensation plan (described in Code section 457(b)). Thus, such individuals 

are not prohibited from receiving distributions on account of not severing employment. 

However, if any amounts are distributed on account of the foregoing rule, the individual is not 

permitted to make elective deferrals or employee contributions to the plan during the six month 

period beginning on the date of distribution. 

IRAs

For purposes of the limitation on contributions to an IRA, the proposal amends the term 

“compensation” to include differential wage payments (as defined for purposes of wage 

withholding). 

 10 These standards include the following: Section 401(a)(4) (prohibiting discrimination in 

contributions or benefits provided under qualified plans); section 401(a)(26) (providing minimum 

participation rules for qualified defined benefit plans); section 401(k)(3), (11), and (12) (providing 

discrimination rules for elective deferrals under qualified cash or deferred arrangements); section 401(m) 

(providing discrimination rules for employee contributions and employer matching contributions to 

qualified plans); 403(b)(12) (providing discrimination rules for section 403(b) tax sheltered annuities); 

section 408(k)(3), (k)(6), and (p) (providing discrimination rules for SEPs and SIMPLEs); section 410(b) 

(providing minimum coverage rules for qualified plans); and section 416 (requiring minimum benefits in 

the case of top heavy qualified plans). 
11 

Plan amendment timing

In general, the proposal permits a plan or annuity contract to be retroactively amended to 

comply with the proposal provided that the amendment is made no later than the last day of the 

first plan year beginning on or after January 1, 2009. Subject to certain conditions, a plan or 

annuity contract is treated as being operated in accordance with its terms during the period prior 

to amendment and, except as provided by the Secretary of the Treasury, the plan or annuity 

contract does not fail to meet the requirements of the Code or the Employee Retirement Income 

Security Act of 1974 (ERISA) by reason of the amendment. 

Effective Date

For purposes of the wage withholding rules, the proposal is effective with respect to 

remuneration paid after December 31, 2007. Otherwise, the proposal is effective with respect to 

years beginning after December 31, 2007. 
12 

E. Tax Treatment Related to Certain Benefits Provided to Volunteer 

Firefighters and Emergency Medical Responders 

Certain tax reductions or tax rebates provided by a State or local government

The Internal Revenue Service has provided guidance11 that reductions or rebates of taxes 

by State or local governments on account of services performed by members of qualified 

volunteer emergency response organizations are taxable income to the taxpayers receiving these 

reductions or rebates of taxes. 

Deduction for certain State or local taxes

For purposes of determining regular tax liability, an itemized deduction is permitted for 

certain State and local taxes paid, including individual income taxes, real property taxes, and 

personal property taxes. The itemized deduction is not permitted for purposes of determining a 

taxpayer’s alternative minimum taxable income. For taxable years beginning before January 1, 

2008, at the election of the taxpayer, an itemized deduction may be taken for State and local 

general sales taxes in lieu of the itemized deduction provided under present law for State and 

local income taxes. 

The otherwise allowable itemized deduction for these State or local taxes is not reduced 

by the amount of any reduction or rebate on account of services performed as a member of a 

qualified volunteer emergency response organization. 

Charitable deduction for certain expenses 

In computing taxable income, a taxpayer who itemizes deductions generally is allowed to 

deduct the amount of cash and the fair market value of property contributed to an organization 

described in section 501(c)(3), to a Federal, State, or local governmental entity, or to certain 

other organizations.12 The amount of the deduction allowable for a taxable year with respect to a 

charitable contribution of property may be reduced or limited depending on the type of property 

contributed, the type of charitable organization to which the property is contributed, and the 

income of the taxpayer. Within certain limitations, donors also are entitled to deduct their 

contributions to section 501(c)(3) organizations for Federal estate and gift tax purposes. 

Description of Proposal

Certain tax reductions or tax rebates provided by a State or local government

The bill provides an exclusion from gross income to members of qualified volunteer 

emergency response organizations for: (1) any qualified State or local tax benefit; and (2) any 

qualified reimbursement payment. A qualified State or local tax benefit is any reduction or 

 11 Chief Couns. Adv. 200302045 (Jan. 10, 2002) 

12 Sec. 170(a), (c), and (e). 
13 

rebate of certain taxes provided by State or local governments on account of services performed 

by individuals as members of a qualified volunteer emergency response organization. These 

taxes are limited to State or local income taxes, State or local real property taxes, and State or 

local personal property taxes. A qualified reimbursement payment is a payment provided by a 

State or political subdivision thereof on account of reimbursement for expenses incurred in 

connection with the performance of services as a member of a qualified volunteer emergency 

response organization. The amount of such qualified reimbursement payments is limited to $30 

for each month during which the taxpayer performs such services. 

A qualified volunteer emergency response organization is any volunteer organization: (1) 

which is organized and operated to provide firefighting or emergency medical services for 

persons in the State or its political subdivision; and (2) which is required (by written agreement) 

by the State or political subdivision to furnish firefighting or emergency medical services in such 

State or political subdivision. 

Denial of double benefits

The bill provides that the amount of State or local taxes taken into account in determining 

the deduction for taxes is reduced by the amount of any qualified State or local tax benefit. 

Also, the bill provides that expenses paid or incurred by the taxpayer in connection with 

the performance of services as a member of a qualified volunteer emergency response 

organization are taken into account for purposes of the charitable deduction only to the extent 

such expenses exceed the amount of any qualified reimbursement payment excluded from 

income under the bill. 

Effective Date

The provision is effective for taxable years beginning after the date of enactment. 
14 

F. Extension of the Statute of Limitations to File Claims for Refunds Relating 

to Disability Determinations by the Department of Veterans Affairs 

Present Law

In general, a taxpayer must file a claim for credit or refund within three years of the filing 

of the tax return or within two years of the payment of the tax, whichever expires later (if no tax 

return is filed, the two-year limit applies). A claim for credit or refund that is not filed within 

these time periods is rejected as untimely. 

Generally, military retirement benefits based on length of service are included in income, 

whereas veterans’ benefits based on a service-connected disability are excluded from income. If 

an individual receives includible retirement benefits and is later retroactively determined to be 

eligible for service-connected disability benefits, the portion of the retirement benefits 

attributable to the disability is retroactively excluded from income. In that case, the individual 

may claim a refund of the tax paid on the retroactively excluded benefits, subject to the statute of 

limitations on filing a refund claim. 

Description of Proposal

The provision extends the time period for filing claims for credits or refunds for retired 

military personnel who receive disability determinations from the Department of Veterans 

Affairs (e.g., determinations after the tax return is filed). Specifically, in the case of a 

determination after the date of enactment, the provision extends the period for filing such a 

refund claim until one year after the date of the disability determination (if later than the time 

periods allowed under present law). The provision applies to any taxable year which begins five 

years before the date of the determination or thereafter. In the case of a determination after 

December 31, 2000, and on or before the date of enactment, the period for filing a claim for 

credit or refund is extended until one year after the date of enactment (if later than the time 

periods allowed under present law). 

Effective Date

The provision is effective for claims for credits or refunds filed after the date of 

enactment. 
15 

G. Treatment of Distributions to Individuals Called 

to Active Duty for at Least 180 Days 

Present Law

Under present law, a taxpayer who receives a distribution from a qualified retirement 

plan prior to age 591⁄2, death, or disability generally is subject to a 10-percent early withdrawal 

tax on the amount includible in income, unless an exception to the tax applies. Among other 

exceptions, the early distribution tax does not apply to distributions made to an employee who 

separates from service after age 55, or to distributions that are part of a series of substantially 

equal periodic payments made for the life (or life expectancy) of the employee or the joint lives 

(or life expectancies) of the employee and his or her beneficiary. 

Certain amounts held in a qualified cash or deferred arrangement (a “section 401(k) 

plan”) or in a tax-sheltered annuity (a “section 403(b) annuity”) may not be distributed before 

severance from employment, age 591⁄2, death, disability, or financial hardship of the employee. 

Pursuant to amendments to section 72(t) made by the Pension Protection Act of 2006,13

the 10-percent early withdrawal tax does not apply to a qualified reservist distribution. A 

qualified reservist distribution is a distribution (1) from an IRA or attributable to elective 

deferrals under a section 401(k) plan, section 403(b) annuity, or certain similar arrangements, (2) 

made to an individual who (by reason of being a member of a reserve component as defined in 

section 101 of title 37 of the U.S. Code) was ordered or called to active duty for a period in 

excess of 179 days or for an indefinite period, and (3) that is made during the period beginning 

on the date of such order or call to duty and ending at the close of the active duty period. A 

section 401(k) plan or section 403(b) annuity does not violate the distribution restrictions 

applicable to such plans by reason of making a qualified reservist distribution. 

An individual who receives a qualified reservist distribution may, at any time during the 

two-year period beginning on the day after the end of the active duty period, make one or more 

contributions to an IRA of such individual in an aggregate amount not to exceed the amount of 

such distribution. The dollar limitations otherwise applicable to contributions to IRAs do not 

apply to any contribution made pursuant to this special repayment rule. No deduction is allowed 

for any contribution made under the special repayment rule. 

The special rules applicable to a qualified reservist distribution apply to individuals 

ordered or called to active duty after September 11, 2001, and before December 31, 2007. 

Description of Proposal 

The proposal extends the rules applicable to qualified reservist distributions to 

individuals ordered or called to active duty on or after December 31, 2007. 

 13 Pub. L. No. 109-280. 
16 

Effective Date

The proposal is effective upon enactment. 
17 

H. Permanent Extension of Disclosure Authority to 

the Department of Veterans Affairs 

Present Law

The Code prohibits disclosure of returns and return information, except to the extent 

specifically authorized by the 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 Internal Revenue Service (“IRS”) to another agency unless 

the other agency establishes procedures satisfactory to the IRS for safeguarding the tax 

information it receives (sec. 6103(p)). 

Among the disclosures permitted under the Code is disclosure of certain tax information 

to the Department of Veterans Affairs. Disclosure is permitted to assist the Department of 

Veterans Affairs in determining eligibility for, and establishing correct benefit amounts under, 

certain of its needs-based pension, health care, and other programs (sec. 6103(1)(7)(D)(viii)). 

The Department of Veterans Affairs disclosure provision was scheduled to expire after 

September 30, 2008. 

Description of Proposal

The proposal makes the disclosure authority to the Department of Veteran’s Affairs 

permanent. 

Effective Date

The provision is effective on the date of enactment. 
18 

I. Contributions of Military Death Gratuities 

to Certain Tax-Favored Accounts 

Present Law

Military death gratuities and SGLI

Section 1477 of Title 10 of the United States Code provides for the payment of a military 

death gratuity to an eligible survivor of a service member. Under Code section 134, as amended 

by the Military Family Tax Relief Act of 2003, the full amount of the military death gratuity is 

excludable from gross income. Pursuant to section 1967 of Title 38 of the United States Code, 

certain members of the uniformed services are automatically insured against death under the 

Servicemembers’ Group Life Insurance (“SGLI”) program. In general, life insurance proceeds 

are excludable from gross income under Code section 101. 

Roth IRAs

There are two general types of individual retirement arrangements (“IRAs”): traditional 

IRAs and Roth IRAs.14 In general, contributions (other than a rollover contribution) to a 

traditional IRA may be deductible, and distributions from a traditional IRA are includible in 

gross income to the extent not attributable to a return of nondeductible contributions. 

Contributions to a Roth IRA are not deductible, and qualified distributions from a Roth IRA are 

excludable from gross income. Distributions from a Roth IRA that are not qualified distributions 

are includible in gross income to the extent attributable to earnings. In general, a qualified 

distribution is a distribution that is made on or after the individual attains age 59-1⁄2, death, or 

disability or which is a qualified special purpose distribution. A distribution is not a qualified 

distribution if it is made within the five-taxable year period beginning with the taxable year for 

which an individual first made a contribution to a Roth IRA. 

The total amount that an individual may contribute to one or more IRAs for a year is 

generally limited to the lesser of: (1) a dollar amount ($4,000 for 2007); or (2) the amount of the 

individual’s compensation that is includible in gross income for the year. IRA contributions in 

excess of the applicable limit are generally subject to an excise tax of six percent per year until 

withdrawn. The contribution limit is reduced to the extent an individual makes contributions to 

any other IRA for the same taxable year. 

As under the rules relating to traditional IRAs, a contribution of up to the dollar limit for 

each spouse may be made to a Roth IRA provided the combined compensation of the spouses is 

at least equal to the contributed amount. The maximum annual contribution that can be made to 

a Roth IRA is phased out for taxpayers with adjusted gross income for the taxable year over 

certain indexed levels. The adjusted gross income phase-out ranges for 2007 are: (1) for single 

taxpayers, $99,000 to $114,000; (2) for married taxpayers filing joint returns, $156,000 to 

$166,000; and (3) for married taxpayers filing separate returns, $0 to $10,000. 

 14 Traditional IRAs are described in Code sec. 408, and Roth IRAs in Code section 408A. 
19 

The foregoing contribution limitations generally do not apply in the case of a rollover 

contribution to an IRA. If certain requirements are satisfied, a participant in a tax-qualified 

retirement plan, a tax-sheltered annuity,15 or a governmental section 457 plan may roll over 

distributions from the plan or annuity into a traditional IRA. For distributions after December 

31, 2007, certain taxpayers are permitted to make qualified rollover contributions from such 

plans or annuities into a Roth IRA (subject to inclusion in gross income of any amount that 

would be includible were it not part of the qualified rollover contribution). 

Coverdell Education Savings Accounts

Annual contributions to a Coverdell education savings account16 may not exceed $2,000 

(except in cases involving certain tax-free rollovers) and may not be made after the designated 

beneficiary reaches age 18. The maximum annual contribution that can be made to a Coverdell 

education savings account is phased out for taxpayers with adjusted gross income for the taxable 

year over certain indexed levels. Contributions to a Coverdell education savings account are not 

deductible. In general, a rollover is permitted between Coverdell education savings accounts for 

the benefit of the same beneficiary or member of such beneficiary's family. 

In general, a distribution from a Coverdell education savings account is includible in the 

gross income of the distributee. However, distributions from an account are excludable from the 

distributee’s gross income to the extent that the total distribution does not exceed the qualified 

education expenses incurred by the beneficiary during the year the distribution is made. 

Contributions to a Coverdell education savings account are treated as nontaxable investment in 

the contract. Thus, earnings on contributions are subject to tax if amounts withdrawn from the 

account exceed qualified education expenses. The portion of a distribution from a Coverdell 

education savings account that is includible in income (i.e., the portion allocable to earnings on 

contributions when a distribution exceeds qualified education expenses) is generally subject to an 

additional 10-percent tax. 

Description of Proposal

In the case of an individual who receives a military death gratuity or SGLI payment, the 

proposal permits the individual to contribute an amount no greater than the sum of the gratuity 

and SGLI payments received by the individual to a Roth IRA, notwithstanding the contributions 

limits that otherwise apply to contributions to Roth IRAs (e.g., the annual contribution limit and 

the income phase-out of the contribution dollar limit). The proposal also permits such an 

individual to contribute the gratuity and SGLI payments that the individual receives to one or 

more Coverdell education savings accounts, notwithstanding the $2,000 annual contribution limit 

and the income phase-out of the limit that would otherwise apply. The maximum amount that 

can be contributed to a Roth IRA or one or more Coverdell education savings accounts under the 

proposal is limited to the sum of the gratuity and SGLI payments that the individual receives. 

 15 Sec. 403(b). 

16 Coverdell education savings accounts are described in Code sec. 530. 
20 

The contribution of a military death gratuity or SGLI payment to a Roth IRA is treated as 

a qualified rollover contribution to the Roth IRA. Similarly, the contribution of a military death 

gratuity or SGLI payment to a Coverdell education savings account is treated as a permissible 

rollover to such an account. The contribution of a military death gratuity or SGLI payment to a 

Roth IRA or Coverdell education savings account cannot be made later than one year after the 

date on which the gratuity or SGLI payment is received by the individual. 

In the event of a subsequent distribution from a Roth IRA that is not a qualified 

distribution or a distribution from a Coverdell education savings account that is not a qualified 

education distribution, the amount of the distribution attributable to the contribution of the 

military death gratuity or SGLI payment is treated as nontaxable investment in the contract. 

Effective Date

The proposal is generally effective with respect to payments made on account of deaths 

from injuries occurring on or after the date of enactment. In addition, the proposal permits the 

contribution to a Roth IRA or a Coverdell education savings account of a military death gratuity 

or SGLI payment received by an individual with respect to a death from injury occurring on or 

after October 7, 2001, and before the date of enactment of the proposal if the individual makes 

the contribution to the account no later than one year after the date of enactment of the proposal. 
21 

J. Exclusion of Gain on Sale of a Principal Residence by Certain 

Peace Corps Volunteers 

Present Law

In general

Under present law, an individual taxpayer may exclude up to $250,000 ($500,000 if 

married filing a joint return) of gain realized on the sale or exchange of a principal residence. To 

be eligible for the exclusion, the taxpayer must have owned and used the residence as a principal 

residence for at least two of the five years ending on the sale or exchange. A taxpayer who fails 

to meet these requirements by reason of a change of place of employment, health, or, to the 

extent provided under regulations, unforeseen circumstances is able to exclude an amount equal 

to the fraction of the $250,000 ($500,000 if married filing a joint return) that is equal to the 

fraction of the two years that the ownership and use requirements are met. 

Uniformed services and Foreign Service

Present law also contains special rules relating to members of the uniformed services or 

the Foreign Service of the United States. An individual may elect to suspend for a maximum of 

10 years the five-year test period for ownership and use during certain absences due to service in 

the uniformed services or the Foreign Service of the United States. The uniformed services 

include: (1) the Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard); (2) 

the commissioned corps of the National Oceanic and Atmospheric Administration; and (3) the 

commissioned corps of the Public Health Service. If the election is made, the five-year period 

ending on the date of the sale or exchange of a principal residence does not include any period up 

to 10 years during which the taxpayer or the taxpayer’s spouse is on qualified official extended 

duty as a member of the uniformed services or in the Foreign Service of the United States. For 

these purposes, qualified official extended duty is any period of extended duty while serving at a 

place of duty at least 50 miles away from the taxpayer’s principal residence or under orders 

compelling residence in government furnished quarters. Extended duty is defined as any period 

of duty pursuant to a call or order to such duty for a period in excess of 90 days or for an 

indefinite period. The election may be made with respect to only one property for a suspension 

period. 

Intelligence community

Specified employees of the intelligence community may elect to suspend the running of 

the five-year test period during any period in which they are serving on extended duty. The term 

“employee of the intelligence community” means an employee of the Office of the Director of 

National Intelligence, the Central Intelligence Agency, the National Security Agency, the 

Defense Intelligence Agency, the National Geospatial-Intelligence Agency, or the National 

Reconnaissance Office. The term also includes employment with: (1) any other office within 

the Department of Defense for the collection of specialized national intelligence through 

reconnaissance programs; (2) any of the intelligence elements of the Army, the Navy, the Air 

Force, the Marine Corps, the Federal Bureau of Investigation, the Department of the Treasury, 

the Department of Energy, and the Coast Guard; (3) the Bureau of Intelligence and Research of 
22 

the Department of State; and (4) the elements of the Department of Homeland Security 

concerned with the analyses of foreign intelligence information. To qualify, a specified 

employee must move from one duty station to another and the new duty station must be located 

outside of the United States. The five-year period may not be extended by more than 10 years. 

The provision relating to employees of the intelligence community is effective for sales 

and exchanges before January 1, 2011. 

Description of Proposal

The bill creates a new rule for Peace Corps volunteers similar to the rules applicable to 

the uniformed services and Foreign Service and the intelligence community. Under this new 

rule, an individual may elect to suspend for a maximum of 10 years the five-year test period for 

ownership and use during certain absences due to volunteer service in the Peace Corps. If the 

election is made, the five-year period ending on the date of the sale or exchange of a principal 

residence does not include any period up to 10 years during which the taxpayer or the taxpayer’s 

spouse is serving as a Peace Corps volunteer. 

Effective Date

The provision is effective for taxable years beginning after December 31, 2007. 
23 

II. IMPROVEMENTS IN SUPPLEMENTAL SECURITY INCOME 

A. Ensure Equitable Treatment of Military Families Under SSI17

Present Law

Section 1612(a)(2) of the Social Security Act specifies that any income not defined as 

earned income by Section 1612(a)(1) of the act is considered unearned income. Section 

1612(b)(20) of the Social Security Act excludes military hostile fire pay and imminent danger 

pay from the SSI income calculation. 

Section SI 00830.540 of the POMS specifies the following regarding military 

compensation: 

• Only military basic pay is considered earned income; 

• Hostile fire pay and imminent danger pay are excluded from income; 

• In deeming situations only, any other type of pay received for serving in a combat 

zone is excluded from income; and 

• All other types of military pay are considered unearned income. 

Section 1612(a)(2) of the Social Security Act specifies that ISM is considered unearned 

income by the SSI program. Section 1612(a)(2)(A) of the Social Security Act establishes the 

VTR rule and states that if a person is receiving ISM then his or her SSI benefit is reduced by 

one-third of the SSI federal benefit rate. 

Section SI 00830.540 of the POMS specifies that payments made to or for a member of 

the uniformed services for housing at a military facility or for privatized military housing are 

considered ISM by the SSI program and subject to the SSA’s Presumed Maximum Value (PMV) 

rule. 

20 C.F.R. § 416.1140 establishes the PMV rule and states that if a person is subject to the 

PMV rule, then the value of the ISM provided to him or her is equal to the lesser of its actual 

value or one-third of the SSI federal benefit rate plus $20. The value of the ISM as determined 

by the PMV is considered unearned income. 

Description of Proposal

The bill expands the definition of earned income for the SSI program to include all cash 

remuneration paid to members of the uniformed services and not otherwise excluded by law. 

Hostile fire pay and imminent danger would continue to be excluded from the SSI income 

calculation under the provision of Section 1612(b)(20) of the act. 

 17 This description was not prepared by the staff of the Joint Committee on Taxation. It was 

provided by the majority staff of the House Committee on Ways and Means, Subcommittee on Income 

Security and Family Support. 
24 

The bill also specifies that any payments made to or for a member of the uniformed 

services for housing at a military facility or for privatized military housing shall be considered as 

in-kind support and maintenance (ISM) by the SSI program and subject to the One-Third 

Reduction (VTR) rule. 

Effective Date

The provision is effective with respect to benefits payable for months beginning after 60 

days after the date of the enactment. 
25 

B. Remove Penalties for Blind Veterans Under SSI18

Present Law

Section 1612(b) of the Social Security Act provides a list of income exclusions and 

contains no reference to State annuities for blind veterans. 20 C.F.R. § 416.1121 specifies that 

annuities and veterans benefits are considered unearned income by the SSI program unless 

excluded by law. 

Section 1613(a) of the Social Security Act provides a list of resource exclusions and 

contains no reference to state annuities for blind veterans. 20 C.F.R § 416.1201 specifies that any 

cash or liquid asset or any real or personal property that a person owns and could convert into 

cash is considered a resource by the SSI program unless excluded by law. 

Description of Proposal

The bill specifies that any money paid by a state to a blind veteran is excluded from the 

SSI income calculation. The bill also specifies that the value of any money paid by a state to a 

blind veteran in a given month shall not be counted as a resource by the SSI program in that 

month. 

Effective Date

The provision is effective with respect to benefits payable for months beginning after 60 

days after the date of the enactment. 

 18 This description was not prepared by the staff of the Joint Committee on Taxation. It was 

provided by the majority staff of the House Committee on Ways and Means, Subcommittee on Income 

Security and Family Support. 
26 

C. Exclusion of Benefits for Americorps Volunteers Under SSI19

Present Law

Section 1612(b) of the Social Security Act provides a list of income exclusions and 

contains no reference to the AmeriCorps program. 42 U.S.C. § 5044(f) specifies that payments 

made to volunteers in programs authorized under Chapter 66 of Title 42 of the United States 

Code are excluded from the SSI income calculation. The AmeriCorps*VISTA program, but not 

the AmeriCorps program falls under this exclusion (AmeriCorps*VISTA and AmeriCorps are 

different programs). 

Section SI 00830.537 of the POMS establishes the following rules for the treatment of 

Americorps payments: 

• AmeriCorps stipends or living allowance payments are considered earned income; 

• Food or shelter provided to AmeriCorps participants is ISM subject to the PMV rule; 

• AmeriCorps education awards used for education expenses are excluded from the SSI 

income calculation under the provisions of Section 1612(b)(7) of the Social Security 

Act; 

• Any part of an AmeriCorps education award not used for education expenses is 

considered earned income; and 

• Payments made in lieu of an education award are considered earned income. 

Description of Proposal

The bill specifies that any cash or in-kind benefit paid to a participant in the AmeriCorps 

program is excluded from the SSI income calculation. 

Effective Date

The provision is effective with respect to benefits payable for months beginning after 60 

days after the date of the enactment. 

 19 This description was not prepared by the staff of the Joint Committee on Taxation. It was 

provided by the majority staff of the House Committee on Ways and Means, Subcommittee on Income 

Security and Family Support. 
27 

III. REVENUE RAISING PROPOSALS 

A. Increase in Penalty for Failure to File Partnership Returns 

Present Law

A partnership generally is treated as a pass-through entity. Income earned by a 

partnership, whether distributed or not, is taxed to the partners. Distributions from the 

partnership generally are tax-free. The items of income, gain, loss, deduction or credit of a 

partnership generally are taken into account by a partner as allocated under the terms of the 

partnership agreement. If the agreement does not provide for an allocation, or the agreed 

allocation does not have substantial economic effect, then the items are to be allocated in 

accordance with the partners’ interests in the partnership. To prevent double taxation of these 

items, a partner's basis in its interest is increased by its share of partnership income (including 

tax-exempt income), and is decreased by its share of any losses (including nondeductible losses). 

Under present law, a partnership is required to file a tax return for each taxable year. The 

partnership’s tax return is required to include the names and addresses of the individuals who 

would be entitled to share in the taxable income if distributed and the amount of the distributive 

share of each individual. In addition to applicable criminal penalties, present law imposes a civil 

penalty for the failure to timely file a partnership return. The penalty is $50 per partner for each 

month (or fraction of a month) that the failure continues, up to a maximum of five months. 

Description of Proposal

Under the proposal, the period for calculating the monthly failure to file penalty for 

partnership returns is extended from five months to 12 months and the penalty amount is 

increased to $100 per partner. 

Effective Date

The proposal applies to returns required to be filed after the date of enactment. 
28 

B. Penalty for Failure to File S Corporation Returns 

Present Law

In general, an S corporation is not subject to corporate-level income tax on its items of 

income and loss. Instead, an S corporation passes through its items of income and loss to its 

shareholders. The shareholders take into account separately their shares of these items on their 

individual income tax returns. 

Under present law, S corporations are required to file a tax return for each taxable year. 

The S corporation’s tax return is required to include the following: the names and addresses of 

all persons owning stock in the corporation at any time during the taxable year; the number of 

shares of stock owned by each shareholder at all times during the taxable year; the amount of 

money and other property distributed by the corporation during the taxable year to each 

shareholder and the date of such distribution; each shareholder’s pro rata share of each item of 

the corporation for the taxable year; and such other information as the Secretary may require. 

Description of Proposal

The proposal imposes a monthly penalty for any failure to timely file an S corporation 

return or any failure to provide the information required to be shown on such a return. The 

penalty is $100 times the number of shareholders in the S corporation during any part of the 

taxable year for which the return was required, for each month (or a fraction of a month) during 

which the failure continues, up to a maximum of 12 months. 

Effective Date

The proposal applies to returns required to be filed after the date of enactment. 
29 

C. Increase in Information Return Penalties 

Present Law

Present law imposes information reporting requirements on participants in certain 

transactions. Under section 6721 of the Code, any person required to file a correct information 

return who fails to do so on or before the prescribed filing date is subject to a penalty that varies 

based on when, if at all, the correct information return is filed. If a person files a correct 

information return after the prescribed filing date but on or before the date that is 30 days after 

the prescribed filing date, the amount of the penalty is $15 per return (the “first-tier penalty”), 

with a maximum penalty of $75,000 per calendar year. If a person files a correct information 

return more than 30 days after the prescribed filing date but on or before August 1, the amount of 

the penalty is $30 per return (the “second-tier penalty”), with a maximum penalty of $150,000 

per calendar year. If a correct information return is not filed on or before August 1, of any year, 

the amount of the penalty is $50 per return (the “third-tier penalty”), with a maximum penalty of 

$250,000 per calendar year. 

Special lower maximum levels for this penalty apply to small businesses. Small 

businesses are defined as firms having average annual gross receipts for the most recent three 

taxable years that do not exceed $5 million. The maximum penalties for small businesses are: 

$25,000 (instead of $75,000) if the failures are corrected on or before 30 days after the 

prescribed filing date; $50,000 (instead of $150,000) if the failures are corrected on or before 

August 1; and $100,000 (instead of $250,000) if the failures are not corrected on or before 

August 1. 

Section 6722 of the Code also imposes penalties for failing to furnish correct payee 

statements to taxpayers. In addition, section 6723 imposes a penalty for failing to comply with 

other information reporting requirements. Under both section 6722 and section 6723, the penalty 

amount is $50 for each failure, up to a maximum of $100,000. 

Description of Proposal

The proposal increases the penalties for failing to file correct information returns, for 

failing to furnish correct payee statements, and for failing to comply with other information 

reporting requirements. Specifically, the proposal increases the penalties for failing to file 

correct information returns as follows: the first-tier penalty would be increased from $15 to $25, 

with a maximum penalty of $200,000 per calendar year; the second-tier penalty would be 

increased from $30 to $60, with a maximum penalty of $400,000 per calendar year; and the 

third-tier penalty would be increased from $50 to $100, with a maximum penalty of $600,000 

per calendar year. The maximum penalties for small businesses would be: $75,000 if the failures 

are corrected on or before 30 days after the prescribed filing date; $150,000 if the failures are 

corrected on or before August 1; and $250,000 if the failures are not corrected on or before 

August 1. 

The proposal increases both the penalty for failing to furnish correct payee statements to 

taxpayers and the penalty for failing to comply with other information reporting requirements 

penalties to $100 for each such failure, up to a maximum of $600,000 in a calendar year. 
30 

The proposal also increases the minimum penalty for intentional disregard of the 

information reporting requirements to $250 per return. 

Effective Date

The proposal is effective with respect to information returns required to be filed on or 

after January 1, 2008. 
31 

D. Minimum Failure to File Penalty 

Present Law

Under present law, a taxpayer who fails to file a tax return on a timely basis is subject to 

a penalty equal to five percent of the net amount of tax due for each month that the return is not 

filed, up to a maximum of five months or 25 percent.20 An exception from the penalty applies if 

the failure is due to reasonable cause. The net amount of tax due is the excess of the amount of 

the tax required to be shown on the return over the amount of any tax paid on or before the due 

date prescribed for the payment of tax.21

In the case of a failure to file a tax return within 60 days of the due date, present law 

imposes a minimum penalty equal to the lesser of $100 or 100 percent of the amount of tax 

required to be shown on the return. 

Description of Proposal

The proposal increases the minimum penalty for a failure to file a tax return within 60 

days of the due date to the lesser of $225 or 100 percent of the amount of tax required to be 

shown on the return. 

Effective Date

The proposal is effective for tax returns the due date for which (including extensions) is 

after December 31, 2007. 

 20 Sec. 6651(a)(1). 

21 Sec. 6651(b)(1).