DESCRIPTION OF THE CHAIRMAN’S MARK 

OF S. 1321, 

THE “TELEPHONE EXCISE TAX REPEAL ACT OF 2005” 

AND S. 832, 

THE “TAXPAYER PROTECTION AND ASSISTANCE ACT OF 2005” 

Scheduled for Markup 

by the 

SENATE COMMITTEE ON FINANCE 

on June 28, 2006 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

June 26, 2006 

JCX-25-06
 

i 

CONTENTS 

Page

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

I. REPEAL OF THE TELEPHONE EXCISE TAX .............................................................. 2 

A. Repeal Excise Tax on Communications Services......................................................... 2 

II. TAXPAYER PROTECTION AND ASSISTANCE .......................................................... 4 

A. Low-Income Taxpayer Clinics ..................................................................................... 4 

B. Enrolled Agents ............................................................................................................ 5

C. Regulation of Federal Tax Return Preparers ................................................................ 6 

D. Regulation of Refund Anticipation Loan Facilitators................................................... 8 

E. Taxpayer Access to Financial Institutions .................................................................. 10 

F. Use of Practitioner Fee................................................................................................ 11 
 

1 

INTRODUCTION 

The Senate Committee on Finance has scheduled a markup of S. 1321, the “Telephone 

Excise Tax Repeal Act of 2005” and S. 832, the “Taxpayer Protection and Assistance Act of 

2005” for June 28, 2006. This document,1

 prepared by the staff of the Joint Committee on 

Taxation, provides a description of the Chairman’s Mark of S. 1321 and S. 832. 

 1

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

Chairman’s Mark of S. 1321, the “Telephone Excise Tax Repeal Act of 2005” and S. 832, the “Taxpayer 

Protection and Assistance Act of 2005” (JCX-25-06), June 26, 2006.
 

2 

I. REPEAL OF THE TELEPHONE EXCISE TAX 

A. Repeal Excise Tax on Communications Services 

Present Law

The Internal Revenue Code of 1986 (the “Code”) imposes a three-percent Federal excise 

tax on amounts paid for communications services. Communications services are defined as 

“local telephone service,” “toll telephone service,” and “teletypewriter exchange service.”2

 The 

person paying for the service (i.e., the consumer) is liable for payment of the tax. Service 

providers are required to collect the tax; however, if a consumer refuses to pay, the service 

provider is not liable for the tax and is not subject to penalty for failure to collect if reasonable 

efforts to collect have been made. Instead, the service provider must report the delinquent 

consumer’s name and address to the IRS, which then must attempt to collect the tax.3

Local telephone service is defined as the provision of voice-quality telephone access to a 

local telephone system that provides access to substantially all persons having telephone stations 

constituting a part of the local system.4

 

Toll telephone service (which is essentially long distance telephone service) is defined as 

voice quality communication for which (1) there is a toll charge that varies with the distance and 

elapsed transmission time of each individual call and payment for which occurs in the United 

States, or (2) a service (such as a wide area telephone service, or “WATS”) which, for a periodic 

charge (determined as a flat amount or upon the basis of total elapsed transmission time), entitles 

the subscriber to an unlimited number of telephone calls to or from an area outside the 

subscriber’s local system area. 

Telephone companies have historically collected excise tax on a toll telephone service 

even if the toll charge on such service does not vary with both distance and elapsed transmission 

time. However, in several recent cases, the Courts of Appeals held that the Federal excise tax on 

communications services does not apply to long distance (i.e., toll telephone) services sold at flat 

 2

 Sec. 4251. “Teletypewriter exchange service” refers to a data system that provides access from 

a teletypewriter or other data station to a teletypewriter exchange system and the privilege of 

intercommunication by that station with substantially all persons having teletypewriter or other data 

stations in the same exchange system. While it is understood that the system to which the definition was 

initially intended to apply is no longer in use, the definition may fit other services provided now or that 

may be provided in the future. 

3

 In general, the amount of tax is based on the sum of charges for taxable services included in the 

bill. If the person who renders the bill groups individual items for purposes of rendering the bill and 

computing the tax, then the tax base with respect to each such group is the sum of all items within that 

group. The tax on any remaining items not included in any such group is based on the charge for each 

item separately. Sec. 4254(a). 

4

 The access to substantially all persons having telephone stations constituting a part of the local 

system is sometimes referred to as access to the public switched telephone network. 
 

3 

per-minute rates for interstate, intrastate, and international calls. The courts concluded that the 

excise tax did not apply because a flat per-minute rate does not vary with both distance and 

transmission time as required by the statute.5

 In response to these court decisions, the Internal 

Revenue Service issued a notice that directs telephone companies to cease collecting and paying 

over tax on long distance services and bundled services that are billed after July 31, 2006.6 The 

Federal excise tax on local-only telephone service remains in effect. 

Description of Proposal

The proposal repeals the excise tax on communications services in its entirety. 

Effective Date

The proposal applies to amounts paid pursuant to bills rendered more than 90 days after 

the date of enactment.

 5

 See, e.g., Reese Bros. v. United States, 2006 U.S. App. LEXIS 11468 (3d Cir. May 9, 2006); 

Fortis v. United States, U.S. App. LEXIS 10749 (2d Cir. Apr. 27, 2006); American Bankers Insurance 

Group v. United States, 408 F.3d 1328 (11th Cir. 2005); Office Max, Inc. v. United States, 428 F.3d 583 

(6th Cir. 2005); Nat’l R.R. Passenger Corp. v. United States, 431 F.3d 374 (D.C. Cir. 2005). 

6

 Notice 2006-50, 2006-50 I.R.B. 1141 (May 26, 2006). The notice defines long distance 

services as “telephonic quality communications with persons whose telephones are outside the local 

telephone system of the caller.” Bundled services are defined as “local and long distance services 

provided under a plan that does not separately state the charge for the local telephone services.” 
 

4

II. TAXPAYER PROTECTION AND ASSISTANCE 

A. Low-Income Taxpayer Clinics 

Present Law

The Code provides that the Secretary is authorized to provide up to $6 million per year in 

matching grants to certain low-income taxpayer clinics.7

 Eligible clinics are 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 (“controversy 

clinics”). No clinic can receive more than $100,000 per year. 

A “controversy clinic” includes (1) a clinical program at an accredited law, business, or 

accounting school, in which students represent low-income taxpayers, or (2) an organization 

described in section 501(c) which either represents low-income taxpayers as described above or 

provides referrals to qualified representatives. A low-income taxpayer is an individual whose 

income does not exceed 250 percent of the poverty level, as determined in accordance with 

criteria established by the Director of the Office of Management and Budget. 

Description of Proposal

The proposal authorizes $10 million in matching grants for low-income taxpayer return 

preparation clinics (“return preparation clinics”). Return preparation clinics are clinics that 

provide routine tax return preparation and filing services to low-income taxpayers for not more 

than a nominal fee. Under the proposal, return preparation clinics eligible to receive grants 

include eligible educational institutions as defined in section 529(e)(5) and organizations 

described in section 501(c). 

The proposal prohibits the use of grants for overhead expenses at both controversy clinics 

and return preparation clinics. The proposal also authorizes the IRS to use mass 

communications, referrals, and other means to promote the benefits and encourage the use of 

low-income controversy clinics and return preparation clinics. 

The authorization of $6 million for controversy clinics under present law is also increased 

to $10 million. 

Effective Date

The proposal is effective for grants made after the date of enactment.

 7

 Sec. 7526. 
 

5

B. Enrolled Agents 

Present Law

Treasury Department Circular No. 230 provides rules relating to practice before the 

Internal Revenue Service (the “IRS”) by attorneys, certified public accountants, enrolled agents, 

enrolled actuaries, and others. 

Description of Proposal

The proposal permits the Secretary to promulgate regulations to regulate the conduct of 

enrolled agents in regard to their practice before the IRS, and to permit enrolled agents meeting 

the Secretary’s qualifications to use the credentials or designation “enrolled agent,” “EA,” or 

“E.A.” 

Effective Date

The proposal is effective on the date of enactment. 
 

6

C. Regulation of Federal Tax Return Preparers 

Present Law

The Secretary is authorized to regulate the practice of representatives of persons before 

the Treasury.8

 The Secretary is also authorized to suspend or disbar from practice before the 

Treasury a representative who is incompetent, who is disreputable, who violates the rules 

regulating practice before the Treasury, or who (with intent to defraud) willfully and knowingly 

misleads or threatens the person being represented (or a person who may be represented). The 

rules promulgated by the Secretary pursuant to this proposal are contained in Circular 230. In 

general, the preparation and filing of tax returns (absent further involvement) has not been 

considered within the scope of the Circular 230 provisions. 

Description of Proposal

The proposal expands the Secretary’s authority to regulate the practice of representatives 

before the Treasury to include individuals preparing Federal tax returns and other submissions to 

the IRS for compensation (“compensated preparers”). The Secretary is required to issue 

regulations no later than one year after the date of enactment establishing eligibility requirements 

for compensated preparers. Practitioners authorized to practice before the IRS that are subject to 

oversight under regulations in effect on the date of enactment of the proposal are excluded from 

the regulations establishing eligibility requirements for compensated preparers. 

The proposal requires the Secretary to develop and administer an examination to establish 

the competency of compensated preparers. Under the proposal, the examination shall be 

designed to test the preparer’s knowledge of technical tax issues, including the earned income 

credit, and the ethical standards for the preparation of tax returns. The proposal authorizes the 

Secretary to contract for both the development and administration of the examination. 

Under the proposal, the compensated preparer regulations shall also require compensated 

preparers to renew their eligibility every three years. As part of this renewal, compensated 

preparers shall be required to establish completion of continuing education requirements in a 

manner set forth by the Secretary in regulations. Compensated preparers failing to meet the 

eligibility requirements are subject to suspension or termination. 

The proposal also establishes the Office of Professional Responsibility within the IRS 

under the supervision and direction of the Director, an official reporting directly to the 

Commissioner, IRS. The Director, Office of Professional Responsibility will be entitled to 

compensation at the same rate as the highest rate of basic pay established for the Senior 

Executive Service, or, if higher, at a rate fixed under the critical pay authority established under 

section 9503 of title 5. 

The proposal authorizes the Secretary to appoint administrative law judges to conduct 

hearings of any action by the Office of Professional Responsibility to impose sanctions on 

 8

 31 U.S.C. sec. 330. 
 

7

compensated preparers and other representatives practicing before the Treasury. Under the 

proposal, hearing records shall be open to the public. In addition, the Office of Professional 

Responsibility shall make public information regarding any sanction imposed on a 

representative, including the identity of the representative and the conduct which gave rise to the 

sanction. 

Under the proposal, the Secretary may impose fees for the registration and renewal of 

compensated preparers. Such fees shall be made available to the Office of Professional 

Responsibility for the purpose of reimbursing the costs of administering and enforcing the rules 

and regulations regulating practice before the Treasury. 

The proposal also provides that the Secretary shall conduct a public awareness campaign 

to encourage taxpayers to use competent professionals in the preparation of their tax returns and 

other Federal tax matters. The public awareness campaign shall be conducted in a manner to 

inform the public of the registration requirements imposed on compensated preparers and the 

general requirement that preparers must sign the return and provide their registration number on 

the return. 

The proposal also increases the penalties on tax return preparers who fail to sign a return 

or fail to provide an identifying number on a return from $50 to $500 per return. In addition, 

amounts collected from the imposition of penalties under sections 6694 and 6695 or under the 

regulations promulgated under section 330 of title 31 shall be directed to the Office of 

Professional Responsibility for the administration of the public awareness campaign. The 

proposal also permits the Secretary to use any funds specifically appropriated for earned income 

credit compliance to improve compliance with the rules regulating practice before the Treasury. 

Effective Date

The proposal is effective on the date of enactment.
 

8

D. Regulation of Refund Anticipation Loan Facilitators 

Present Law

The Secretary is authorized to regulate the practice of representatives of persons before 

the Treasury.9

 The Secretary is also authorized to suspend or disbar from practice before the 

Treasury a representative who is incompetent, who is disreputable, who violates the rules 

regulating practice before the Treasury, or who (with intent to defraud) willfully and knowingly 

misleads or threatens the person being represented (or a person who may be represented). The 

rules promulgated by the Secretary pursuant to this proposal are contained in Circular 230. In 

general, the preparation and filing of tax returns (absent further involvement) has not been 

considered within the scope of these Circular 230 proposals. 

Section 6103 generally provides that return and return information are confidential and 

cannot be disclosed unless authorized by title 26. The definition of return information is very 

broad, and includes, among other things, information with respect to the determination of the 

existence or possible existence of liability of any person for any penalty under the Code. 

Description of Proposal

The proposal requires the annual registration with the Secretary of refund loan 

facilitators. A refund loan facilitator is any person who originates the electronic submission of 

income tax returns for another person and, in connection with the electronic submission, solicits, 

processes, or otherwise facilitates the making of a refund anticipation loan to the individual 

taxpayer on whose behalf the tax return is submitted. The annual registration shall include the 

name, address, and TIN of the refund loan facilitator applicant and a schedule of the applicant’s 

fees for such year. 

 The proposal requires refund loan facilitators to disclose to taxpayers, both orally and in 

writing, that they may file an electronic tax return without applying for a refund anticipation loan 

and the cost of filing such an electronic return compared to the cost of the refund anticipation 

loan. In addition, the proposal requires refund loan facilitators to disclose to taxpayers all fees 

and interest charges associated with a refund anticipation loan and provide a comparison with 

fees and interest charges associated with other types of consumer credit, as well as fees and 

interest charges for similar refund anticipation loans. Refund loan facilitators also must disclose 

to taxpayers the expected time within which tax refunds are typically paid based on different 

filing options, the risk that the full amount of the refund may not be paid or received within the 

expected time, and additional costs the taxpayer may incur in connection with the refund 

anticipation loan if the tax refund is delayed or not paid. 

In addition to the above disclosure requirements, refund loan facilitators must disclose to 

taxpayers whether the refund anticipation loan agreement includes a debt collection offset 

arrangement. Debt collection offsets are arrangements between refund loan facilitators and a 

taxpayer’s creditor to offset the taxpayer’s expected refund against an outstanding liability owed 

 9

 31 U.S.C. sec. 330. 
 

9

to the creditor. The Secretary is authorized to require refund loan facilitators to disclose any 

other information deemed necessary. 

The proposal amends the Code to permit the Secretary to impose monetary penalties on 

refund loan facilitators who fail to meet the registration or disclosure requirements, unless such 

failure was due to reasonable cause. The penalty for failure to register is not to exceed the gross 

income derived from all refund anticipation loans during the period the refund loan facilitator 

was not registered. The penalty for failure to disclose the information required by the proposal is 

not to exceed the gross income derived from all refund anticipation loans with respect to which 

the refund loan facilitator failed to provide the required disclosure information. 

The proposal also amends the privacy rules under the Code to permit the Secretary to 

disclose the name of any person with respect to whom a penalty has been imposed for failing to 

meet the registration or disclosure requirements of the proposal. 

The proposal provides that the Secretary shall conduct a public awareness campaign to 

educate the public on the costs associated with refund anticipation loans, including the costs as 

compared to other forms of credit. The public awareness campaign shall be conducted in a 

manner that educates the public on making sound financial decisions with respect to refund 

anticipation loans. Amounts collected from the imposition of penalties on refund loan 

facilitators shall be directed to the IRS for the administration of the public awareness campaign. 

Effective Date

The proposal is effective on the date that is one year after the date of enactment.
 

10

E. Taxpayer Access to Financial Institutions 

Present Law

A large number of individual taxpayers do not have bank accounts. Because of this, 

these taxpayers are unable to participate fully in electronic filing, because the IRS cannot 

electronically transmit their tax refunds to them. 

Description of Proposal

The proposal authorizes the Secretary of the Treasury to award demonstration project 

grants (totaling up to $10 million) to eligible entities to provide tax preparation assistance in 

connection with establishing an account in a Federally insured depositary institution for 

individuals that do not have such an account. Entities eligible to receive grants are: tax-exempt 

organizations described in section 501(c)(3), Federally insured depositary institutions, State or 

local governmental agencies, community development financial institutions, Indian tribal 

organizations, Alaska native corporations, native Hawaiian organizations, and labor 

organizations. 

Under the proposal, the recipient of a grant may not use more than six percent of the total 

amount of such grant for administrative purposes. For each fiscal year in which a grant is 

awarded, the Secretary is required to submit a report to Congress describing the amount of grants 

distributed and the activities funded. 

The proposal also requires the Secretary to conduct a study of the implementation of a 

program to deliver tax refunds through debit cards or other electronic means. The proposal 

requires the Secretary to submit a report to Congress on the results of such study no later than 

one year after the date of enactment. 

Effective Date

The proposal is effective on the date of enactment.
 

11 

F. Use of Practitioner Fee 

Present Law

The United States Tax Court (“Tax Court”) is authorized to impose a fee of up to $30 per 

year on practitioners admitted to practice before the Tax Court.10 These fees are to be used to 

employ independent counsel to pursue disciplinary matters. 

Description of Proposal

The proposal provides that Tax Court fees imposed on practitioners also are available to 

provide services to pro se taxpayers (i.e., a taxpayer representing himself) that will assist such 

taxpayers in controversies before the Court. For example, fees could be used for programs to 

educate pro se taxpayers on the procedural requirements for contesting a tax deficiency before 

the Tax Court. 

Effective Date

The proposal is effective on the date of enactment. 

 10 Sec. 7475.