Description of Proposal

The proposal would permit (but not require) a court to reduce an award if the taxpayer
has not exhausted administrative remedies in the collection process.

Effective Date
The proposal would be effective for proceedings commenced after the date of enactment.
9. Modification to penalty for failure to collect and pay over tax
a. Preliminary notice requirement
Present Law
Under section 6672, a "responsible person" is subject to a penalty equal to the amount of
trust fund taxes that are not collected or paid to the government on a timely basis. An individual

the IRS has identified as a responsible person is permitted an administrative appeal on the
question of responsibility.

“- Description of Proposal

The proposal would require the IRS to issue a notice to an individual the IRS had
determined to be a responsible person with respect to unpaid trust fund taxes at least 60 days
prior to issuing a notice and demand for the penalty. The statute of limitations would not expire
before the date 90 days after the date on which the notice was mailed. The proposal would not
apply if the Secretary finds that the collection of the penalty is in jeopardy.

Effective Date
The proposal would apply to assessments made after June 30, 1996.
b. Disclosure of certain information where more than one person subject to penalty
Present Law

The IRS may not disclose to a responsible person the IRS's efforts to collect unpaid trust
fund taxes from other responsible persons, who may also be liable for the same tax liability.

Description of Proposal

The proposal would require the IRS, if requested in writing by a person considered by the
IRS to be a responsible person, to disclose in writing to that person the name of any other person

16



5. Collection activities
a. Modifications to lien and levy provisions

i. Withdrawal of public notice of lien

Present Law

The IRS files a notice of lien in the public record, in order to protect the priority of a tax
lien. A notice of tax lien provides public notice that a taxpayer owes the Government money.
The IRS is required to issue a certificate of release for such notices for erroneous liens only.

Description of Proposal

The proposal would allow the IRS to withdraw a public notice of tax lien prior to payment
in full by the indebted taxpayer without prejudice, if the Secretary determines that (1) the filing of
the notice was premature or otherwise not in accordance with the administrative procedures of
the IRS, (2) the taxpayer has entered into an installment agreement to satisfy the tax liability with
respect to which the lien was filed, (3) the withdrawal of the lien will facilitate collection of the
tax liability, or (4) the withdrawal of the lien would be in the best interests of the taxpayer (as
determined by the Taxpayer Advocate) and of the Government. The IRS must also provide a~
copy of the notice of withdrawal. The proposal also would require that, at the written request of
the taxpayer, the IRS make reasonable efforts to give notice of the withdrawal of a lien to
creditors, credit reporting agencies, and financial institutions specified by the taxpayer.

Effective Date
The proposal would be effective on the date of enactment.
ii, Return of levied property

Present Law

The IRS is authorized to return levied property to a taxpayer only when the taxpayer has
overpaid its liability with respect to tax, interest, and penalty,

Description of Proposal

The proposal.would allow the IRS to-return. property-(including money. deposited in the
Treasury) that has been levied upon if the Secretary determines that (1) the levy was premature or
otherwise not in accordance with the administrative procedures of the IRS, (2) the taxpayer has
entered into an installment agreement to satisfy the tax liability, (3) the return of the property will

10



Description of Proposal

The proposal would require that issuance of any designated summons with respect to a
corporation's tax return must be preceded by review of such issuance by the Regional Counsel,
Office of Chief Counsel to the IRS, for the Region in which the examination of the corporation's
return is being conducted. .

The proposal would also limit the use of a designated summons to corporations (or to any
third party to whom the corporation has transferred records) that are being examined as part of
the Coordinated Examination Program (CEP) or its successor. CEP audits cover about 1,600 of
the largest corporate taxpayers. If a corporation moves between CEP and non-CEP audit
categories, then only the tax years covered by the CEP may be the subject of a designated
summons.

The proposal would also require that the Treasury report annually to the Congress on the
number of designated summonses issued in the preceding 12 months.

Effective Date
The proposal would apply to summonses issued after date of enactment.
11. Relief from retroactive application of Treasury Department regulations
Present Law

Under section 7805(b), Treasury may prescribe the extent (if any) to which regulations
shall be applied without retroactive effect.

Description of Proposal

Temporary and proposed regulations would be required to have an effective date no
earlier than the date of publication in the Federal Register or the date on which any notice
substantially describing the expected contents of such regulation is issued to the public. However,
any regulations issued within 12 months of the enactment of the statutory provision to which the
regulation relates may be issued with retroactive effect. This proposal could be superseded by a
legislative grant authorizing the Treasury to prescribe the effective date with respect to a statutory
provision. The Treasury would be permitted to issue retroactive temporary or proposed
regulations to prevent abuse. The Treasury would also be permitted to issue retroactive
temporary, proposed, or. final regulations.to. correct.a procedural.defect-in the-issuance of a
regulation. Taxpayers could elect to apply a temporary or proposed regulation retroactively from
the date of publication of the regulation. Final regulations could take effect from the date of
publication of the temporary or proposed regulation to which they relate. The proposal would

20



INTRODUCTION

The House Committee on Ways and Means has scheduled a markup of proposed
"Taxpayer Bill of Rights 2" on September 18, 1995. This document, prepared by the staff of the
Joint Committee on Taxation, provides a description of the provisions of the proposed Taxpayer
Bill of Rights 2.'

' This document may be cited as follows: Joint Committee on Taxation, Description of
an Amendment in the Nature of a Substitute to the Chairman's Mark Relating to a Proposed
Taxpayer Bill of Rights 2 (JCX-36-95), September 18, 1995.

1


the IRS has determined to be a responsible person with respect to the tax liability. The IRS
would be required to disclose in writing whether it has attempted to collect this penalty from
other responsible persons, the general nature of those collection activities, and the amount (if any)
collected. Failure by the IRS to follow this provision would not absolve any individual for any
liability for this penalty.

Effective Date
The proposal would be effective on the date of enactment.
c. Right of contribution from multiple responsible parties
Present Law

A responsible person may seek to recover part of the amount which he has paid to the IRS.
from other individuals who also may have the obligations of a responsible person but who have
not yet contributed their proportionate share of their liability under section 6672. Taxpayers must
pursue such claims for contribution under state law (to the extent state law permits such claims).

The variations in state law sometimes make it difficult or impossible to press successful suits in
state courts to force a contribution from other responsible persons.

Description of Proposal

If more than one person is liable for this penalty, each person who paid the penalty would
be entitled to recover from other persons who are liable for the penalty an amount equal to the
excess of the amount paid by such person over such person's proportionate share of the penalty.
This proceeding would be a Federal cause of action and would be required to be entirely separate
from any proceeding involving IRS's collection of the penalty from any responsible party.

Effective Date
The provision would apply to penalties assessed after the date of enactment.
d. Board members of tax-exempt organizations
Present Law
Under section 6672, "responsible persons" of tax-exempt organizations are subject to a

penalty equal to the amount of trust.fund.taxes.that are not collected.and paid to the Government
on a timely basis.

17



remedies would not apply to information conveyed to an attorney, certified public accountant or
enrolled agent for the purpose of perpetrating a fraud or crime.

_ Effective Date
The proposal would apply to actions taken after the date of enactment.
e. Annual reminders to taxpayers with outstanding delinquent accounts
Present Law

There is no requirement in the Code that the IRS send annual reminders to persons who
have outstanding tax liabilities.

Numerous taxpayers become delinquent in paying their tax liability. The delinquencies
may occur because the person did not make enough payments through payroll withholding or
quarterly estimated payments or because of a major adjustment following an audit.

The IRS generally pursues larger tax deficiencies first, and then it pursues small
deficiencies. Because of the limited amount of IRS resources to work collection cases, cases with
smaller deficiencies may not be addressed for years. In the meantime, the taxpayer may come to
believe that the apparent lack of IRS collection activity means that it has abandoned its claim
against the taxpayer. The taxpayer may be surprised when the IRS resumes collection action
years later, when the 10-year statute of limitations on collections is close to expiring.

Description of Proposal

The proposal would require the IRS to send taxpayers an annual reminder of their
outstanding tax liabilities. The fact that a taxpayer did not receive a timely, annual reminder
notice would not affect the tax liability.

Effective Date
The proposal would require the IRS to send annual reminder notices beginning in 1996.
f. Five-year extension of authority for undercover operations

Present Law

The Anti-Drug Abuse Act of 1988 exempted IRS undercover operations from the
otherwise applicable statutory restrictions controlling the use of Government funds (which

generally provide that all receipts be deposited in the general fund of the Treasury and all
expenses be paid out of appropriated funds). In general, the exemption permits the IRS to

23



Effective Date
The proposal would apply to summonses issued after the date of enactment.

b. Safeguards relating to designated summonses

Present Law

The period for assessment of additional tax with respect to most tax returns, corporate or
otherwise, is three years. The IRS and the taxpayer can together agree to extend the period,
either for a specified period of time or indefinitely. The taxpayer may terminate an indefinite
agreement to extend the period by providing notice to the IRS.

During an audit, the IRS may informally request that the taxpayer provide additional
information necessary to arrive at a fair and accurate audit adjustment, if any adjustment is
warranted. Not all taxpayers cooperate by providing the requested information on a timely basis.
In some cases the IRS seeks information by issuing an administrative summons. Such a summons
will not be judicially enforced unless the Government (as a practical matter, the Department of
Justice) seeks and obtains an order for enforcement in Federal court. In addition, a taxpayer may
petition the court to quash an administrative summons where this is permitted by statute.”

In certain cases, the running of the assessment period is suspended during the period when
the parties are in court to obtain or avoid judicial enforcement of an administrative summons.
Such a suspension is provided in the case of litigation over a third-party summons (sec. 7609(e))
or litigation over a summons regarding the examination of a related party transaction. Such a
suspension can also occur with respect to a corporate tax return if a summons is issued at least 60
days before the day on which the assessment period (as extended) is scheduled to expire. In this
case, suspension is only permitted if the summons clearly states that it is a "designated summons"
for this purpose. Only one summons may be treated as a designated summons for purposes of any
one tax return. The limitations period is suspended during the judicial enforcement period of the
designated summons and of any other summons relating to the same tax return that is issued
within 30 days after the designated summons is issued.

Under current internal procedures of the IRS, no designated summons is issued unless first
reviewed by the Office of Chief Counsel to the IRS, including review by an IRS Deputy Regional
Counsel for the Region in which the examination of the corporation's return is being conducted.

? Petitions to quash are permitted, for example, in connection with the examination of certain
related party transactions under section 6038A(e)(4), and in the case of certain third-party
summonses under section 7609(b)(2).

19



b. Increased limit on attorney's fees
Present Law

Attorney's fees recoverable by prevailing parties as litigation or administrative costs are
limited to a maximum of $75 per hour. -

Description of Proposal

The proposal would raise the statutory rate to $110 per hour, indexed for inflation
beginning after 1996.

Effective Date
The proposal would apply to proceedings commenced after the date of enactment.
c. Failure to agree to extension not taken into account
Present Law

To qualify for an award of attorney's fees, the taxpayer must have exhausted the:
administrative remedies available within the IRS. The IRS has taken the position in regulations
that attorney's fees cannot be awarded if the taxpayer has not agreed to extend the statute of
limitations. In Minahan v. Commissioner, 88 T.C. 492 (1987), the Tax Court held that regulation
invalid insofar as it provides that a taxpayer's refusal to consent to extend the statute of limitations

is to be taken into account in determining whether the taxpayer has exhausted administrative
remedies available to the taxpayer.

Description of Proposal

The proposal would provide that any failure to agree to an extension of the statute of
limitations cannot be taken into account for purposes of determining whether a taxpayer has
exhausted the administrative remedies for purposes of determining eligibility for an award of
attorney's fees.

Effective Date

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

14



case to determine a common issue involved in numerous returns, the taxpayer would not be
eligible for abatement of the interest which accrues while waiting for the test case to be resolved.

Effective Date

The proposal would apply to interest accruing with respect to deficiencies or payments for
taxable years beginning after the date of enactment.

b. Review of IRS failure to abate interest

Present Law

Federal courts generally do not have the jurisdiction to review the IRS's failure to abate
interest.

Description of Proposal

The proposal would grant the Tax Court jurisdiction to determine whether the IRS's
failure to abate interest for an eligible taxpayer was an abuse of discretion. The action must be
brought within six months after the date of the Secretary's final determination not to abate
interest. An eligible taxpayer must meet the net worth and size requirements imposed ‘with
Tespect to awards of attorney's fees. No inference is intended as to whether under present law any
court has jurisdiction to review IRS's failure to abate interest.

Effective Date
The proposal would apply to requests for abatement after the date of enactment,
c. Extension of interest-free period for payment of tax after notice and demand
Present Law

In general, a taxpayer must pay interest on late payments of tax. An interest-free period of
10 days is provided to taxpayers who pay the tax due within 10 days of notice and demand.

Description of Proposal

The proposal would extend the interest-free period provided to taxpayers for the payment
of the tax liability reflected in.the notice from.10.days.to. 10.business days (21-calendar days,
provided that the total tax liability shown on the notice of deficiency is less than $100,000).



i. Report on netting of interest on overpayments and liabilities
Present Law

If any portion of a tax is satisfied through the crediting of an overpayment of tax, no
interest is imposed on that portion of the tax for any period during which, if the credit had not
been made, interest would have been allowable.

The Tax Reform Act of 1986 first implemented an interest rate differential. The
underpayment rate was set 1 percent higher than the overpayment rate. The Conference Report
to the Tax Reform Act of 1986 stated:

[t]o the extent a portion of tax due is satisfied by a credit of an overpayment, no
interest is imposed on that portion of the tax. Consequently, if an underpayment of
$1,000 occurs in year 1, and an overpayment of $1,000 occurs in year 2, no
interest is imposed in year 2 because of the rule of section 6601(f). The IRS can at
present net many of these offsetting overpayments and underpayments.
Nevertheless, the IRS will require a transition period during which to coordinate
differential interest rates...[t}he Secretary of the Treasury may prescribe
regulations providing for netting of tax underpayments and overpayments through
the period ending three years after the date of enactment of the bill. By that date,
the IRS should have implemented the most comprehensive netting procedures that
are consistent with sound administrative practice.

The Omnibus Budget Reconciliation Act of 1990 increased the underpayment rate on
certain large corporate underpayments to 3 percent higher than the overpayment rate. The
Conference Report stated:

Under present law, the Secretary has the authority to credit the amount of any
overpayment against any liability under the Code...to the extent a portion of tax
due is satisfied by a credit of an overpayment, no interest is imposed on that
portion of the tax... The Secretary should implement the most comprehensive
crediting procedures under section 6402 that are consistent with sound
administrative practice.

The General Agreement on Tariffs and Trade (GATT) reduced the overpayment rate on
certain corporate tax refunds. The legislative history of the GATT legislation stated that:

The Secretary.of the Treasury. should implement the most comprehensive crediting

procedures under section 6402 that are consistent with sound administrative
Practice, and should do so as rapidly as is practicable.

26



The second report would be on the activities of the Taxpayer Advocate during the
previous fiscal year. The report must identify the initiatives the Taxpayer Advocate has taken to
improve taxpayer services and IRS responsiveness, contain recommendations received from
individuals who have the authority to issue a Taxpayer Assistance Order (TAO), describe in detail
the progress made in implementing these recommendations, contain a summary of at least 20 of
the most serious problems which taxpayers have in dealing with the IRS, include
recommendations for such administrative and legislative action as may be appropriate to resolve
such problems, describe the extent to which regional problem resolution officers participate in the
selection and evaluation of local problem resolution officers, and to include other such
information as the Taxpayer Advocate may deem advisable. The Commissioner would be
required to establish internal procedures that will ensure a formal IRS response within three
months to all recommendations submitted to the Commissioner by the Taxpayer Advocate. This
second report is due not later than December 31 of each year.

The reports submitted to Congress by the Taxpayer Advocate would not be subject to
prior review by the Commissioner, the Secretary of the Treasury, any other officer or employee of
the Department of the Treasury, or the Office of Management and Budget. The objective is for
Congress to receive an unfiltered and candid report of the problems taxpayers are experiencing
and what can be done to address them. The reports by the Taxpayer Advocate would not be
official legislative recommendations of the Administration; providing official legislative

- recommendations would remain the responsibility of the Department of Treasury.

Effective Date

The proposal would be effective on the date of enactment. The first annual reports of the
Taxpayer Advocate would be due June and December, 1996.

b, Expansion of authority to issue Taxpayer Assistance Orders

Present Law

Section 7811(a) authorizes the Taxpayer Ombudsman to issue a Taxpayer Assistance
Order (TAO). TAOs may order the release of taxpayer property levied upon by the IRS and may
require the IRS to cease any action, or refrain from taking any action if, in the determination of
the Taxpayer Ombudsman, the taxpayer is suffering or about to suffer a significant hardship as a
result of the manner in which the internal revenue laws are being administered.

Description of Proposal

The proposal would provide the Taxpayer Advocate with broader authority to
affirmatively take any action as permitted by law with respect to taxpayers who would otherwise
suffer a significant hardship as a result of the manner in which the IRS is administering the tax
laws. In addition, the proposal would provide that a TAO may specify a time period within which


DESCRIPTION OF PROPOSED TAXPAYER BILL OF RIGHTS 2
1. Taxpayer Advocate —
a, Establishment of position of Taxpayer Advocate within Internal Revenue Service
Present Law

The Office of the Taxpayer Ombudsman was created by the Internal Revenue Service
(RS) in 1979. The Taxpayer Ombudsman's duties are to serve as the primary advocate, within
the IRS, for taxpayers. As the taxpayers’ advocate, the Taxpayer Ombudsman participates in an
ongoing review of IRS policies and procedures to determine their impact on taxpayers, receives
ideas from the public concerning tax administration, identifies areas of the tax law that confuse or
create an inequity for taxpayers, and supervises cases handled under the Problem Resolution
Program. Under current procedures, the Taxpayer Ombudsman is selected by the Commissioner
of the IRS and serves at the Commissioner's discretion.

Description of Proposal

The proposal would establish a new position, Taxpayer Advocate, within the IRS. ‘This
would replace the position of Taxpayer Ombudsman. The Taxpayer Advocate would be
appointed by and would report directly to the Commissioner. Compensation of the Taxpayer
Advocate would be at a level equal to that of the highest level official reporting directly to the
Deputy Commissioner of the IRS. :

The proposal also would establish the Office of Taxpayer Advocate within the IRS. The
functions of the office would be (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.

While the Taxpayer Advocate would not have direct line authority over the regional and
local Problem Resolution Officers (PROs), all PROs should take direction from the Taxpayer
Advocate and they should operate with sufficient independence to assure that taxpayer rights are
not being subordinated to pressure from local revenue officers, district directors, etc.
Accordingly, regional PROs are encouraged to actively participate in the selection and evaluation
of local PROs.

The Taxpayer Advocate would be required to make two annual reports to the tax-writing
Committees. The first report would contain the objectives of the Taxpayer Advocate for the next
calendar year. This report would contain full and substantive analysis, in addition to statistical
information, and would be due not later than June 30 of each year.



d. Award of litigation costs permitted in declaratory judgment proceedings
Present Law
Section 7430(b)(3) denies any reimbursement for attorney's fees in all declaratory

judgment actions, except those actions related to the revocation of an organization's qualification
under section 501(c)(3) (relating to tax-exempt status).

Description of Proposal

The proposal would eliminate the present-law restrictions on awarding attorney's fees in
all declaratory judgment proceedings.

Effective Date
The proposal would apply to proceedings commenced after the date of enactment.
8. Modification to recovery of civil damages for unauthorized collection actions
a. Increase in limit on recovery of civil damages for unauthorized collection actions
Present Law
A taxpayer may sue the United States for up to $100,000 of damages caused by an officer

or employee of the IRS who recklessly or intentionally disregards provisions of the Internal
Revenue Code or the Treasury regulations promulgated thereunder.

Description of Proposal
The proposal would increase the cap from $100,000 to $1 million.
Effective Date

The proposal would apply to actions by IRS employees that occur after the date of
enactment.

b. Court discretion to reduce award for litigation costs for failure to exhaust
administrative remedies -

Present Law

A taxpayer suing the United States for civil damages for unauthorized collection activities
must exhaust administrative remedies to be eligible for an award.

1S



b. Administrative review of termination of installment agreements

Present Law
~ A taxpayer whose request for an installment agreement is denied can appeal to
successively higher levels of Collection Division management, including the District Director.
The IRS is currently testing an appeal process for various collection actions, including installment
agreements, that will permit taxpayers to appeal these collection actions to Appeals Division
personnel.

Description of Proposal

The proposal would require the IRS to establish additional procedures for an independent
administrative review of terminations of installment agreements for taxpayers who request a
review.

Effective Date
The proposal would be effective on January 1, 1996.
3. Abatement of interest and penalties
a. Expansion of authority to abate interest
Present Law

Any assessment of interest on any deficiency attributable in whole or in part to any error
or delay by an officer or employee of the IRS (acting in his official capacity) in performing a
ministerial act may be abated.

Description of Proposal

The proposal would permit the IRS to abate interest with respect to any unreasonable
error or delay on the part of the IRS. The proposal would also expand the authority to abate
interest to managerial acts as well as ministerial acts. Such managerial acts would include
extensive delays resulting from: the loss of records by the IRS, IRS personnel transfers, extended
illnesses, extended personnel training, or extended leave. On the other hand, interest would not
be abated for delays resulting from general administrative decisions. For example, the taxpayer
could not claim that the IRS's decision on how.to. organize the processing of tax returns or its
delay in implementing an improved computer system resulted in an unreasonable delay in the
IRS's action on the taxpayer's tax return, and so the interest on any subsequent deficiency should
be waived. Also, if the taxpayer agrees to extend the statute of limitations in order to allow a test


not apply to any regulation relating to internal Treasury Department policies, practices, or
procedures. Present law with respect to rulings is unchanged.

Effective Date

The proposal would apply with respect to any temporary or proposed regulation filed on
or after the date of enactment with respect to statutes enacted on or after the date of enactment.

12. Miscellaneous provisions
a. Report on pilot program for appeal of enforcement actions
Present Law

A taxpayer who disagrees with an IRS collection action generally can only appeal to
successively higher levels of management in the Collection Division. Certain cases involving the
6672 penalty, offers-in-compromise, and employment tax issues may, however, be appealed to the
Appeals Division. The IRS recently conducted a pilot program to evaluate the merits of allowing
an independent appeal, by the taxpayer, to the Appeals Division of enforcement actions (including
lien, levy, and seizure actions).

Description of Proposal

The Secretary would be required to report to the tax-writing committees on the
effectiveness of the pilot program, together with any recommendations he may deem advisable.

Effective Date
The report is due by March 1, 1996.

b. Phone numbers of person providing payee statement required to be shown on
such statement

Present Law

Information returns must contain the name and address of the payor.

Description of Proposal
The proposal would require that information returns contain the name, address, and phone

number of the information contact. A payor may, for example, provide the name and phone
number of the department with the relevant information. It is intended that the telephone number

21



DESCRIPTION OF AN AMENDMENT
IN THE NATURE OF A SUBSTITUTE TO THE
CHAIRMAN'S MARK
RELATING TO A PROPOSED
TAXPAYER BILL OF RIGHTS 2

Scheduled for a Markup
by the
HOUSE COMMITTEE ON WAYS AND MEANS

on September 18, 1995

Prepared by the Staff
of the

JOINT COMMITTEE ON TAXATION

September 18, 1995

ICX-36-95


return filed during the marital years. When this spouse remarries, the new spouse's income may
become subject to levy in order to satisfy the tax deficiency of the prior spouse. In contrast, if the
couple did not live in a community property State, the second spouse's wages could not be levied
to pay a tax liability arising from this spouse's first marriage.

Description of Proposal

The proposal would direct the Treasury Department and the General Accounting Office
(GAO) to conduct separate studies analyzing the following matters:

(1) The effects of changing the current standard of "joint and several” liability for married
couples to a "proportionate" liability standard. That is, each spouse would be liable only for the
income tax attributable to the income of each spouse.

(2) The effects of requiring the IRS to be bound by the terms of a divorce decree which
addresses the responsibility for the tax liability on prior joint tax returns.

(3) Whether the current "innocent spouse" provisions provide meaningful relief to former
spouses.

(4) The effects of overturning the application of Poe v. Seaborn for income tax purposes *°
in community property States.

The Treasury Department and the GAO would be directed to examine the tax policy
implications, the equity implications, and operational changes which would face the IRS if the
liability standard were changed. For example, the studies would consider how a system of
proportionate liability would change the way the IRS communicates with taxpayers, conducts
audits of joint returns, and enforces tax lien and levies against married couples.

Effective Date
The studies would be due six months after the date of enactment.
b. Joint return may be made after separate returns without full payment of tax
Present Law
Taxpayers who file separate returns and subsequently determine that their tax liability
would have been less if they had filed a joint return are precluded by. statute from-reducing their

tax liability by filing jointly if they are unable to pay the entire amount of the joint return liability
before the expiration of the three-year period for making the election to file jointly.



Effective Date
The proposal would apply in the case of any notice and demand given after June 30, 1996.
4. Joint returns

a. Studies of joint and several liability for married persons filing joint tax
returns and other joint return-related issues

Present Law

Spouses who file a joint tax return are each fully responsible for the accuracy of the return
and for the full tax liability. This is true even though only one spouse may have earned the wages
or income which is shown on the return. This is "joint and several" liability. Spouses who wish to
avoid joint liability may file as a "married person filing separately."

Spouses often file a joint tax return but then are later separated or divorced. If the IRS
later disputes the accuracy of the joint tax returns, one spouse may be held liable for the entire tax
deficiency stemming from erroneous deductions or omitted income attributable to the other
spouse. Therefore, the "innocent" spouse may be held liable for the full deficiency in a subsequent
audit occurring after the separation or divorce. This has resulted in a serious hardship being
imposed on an "innocent spouse" in a number of cases.

In some cases, a couple addresses the responsibility for tax liability as part of their divorce
decree, However, these agreements are not binding on the IRS because the IRS was not a party
to the divorce proceeding. Thus, if a former spouse violates the tax responsibilities assigned to
him or her in a divorce decree, the other spouse may not rely on the decree in dealing with the
IRS.

While present law does contain provisions which give relief to certain innocent spouses in
these situations, the provisions are narrowly drawn and strictly interpreted. Therefore, many
former spouses are not able to qualify for the protections of the current "innocent spouse" rules.

In 1930, the Supreme Court ruled in Poe v. Seaborn, 282 U.S. 101 (1930), that all the
earnings of a married couple in community property States were part of the marital property to
which each spouse had an equal right. At the time, married couples generally welcomed this
decision because it allowed couples in community property States to benefit from income
"splitting" between the husband and wife for income tax purposes. Later, the Federal tax law was
changed to allow. all married taxpayers to.."split" their.income by.means. of filing a. joint tax return.

While the income-splitting effect of Poe v. Seaborn is now moot, the decision continues
to affect married couples in community property States, but in an adverse way. For example,
there are cases where a divorced spouse owes the IRS a tax liability based on his or her joint


Description of Proposal

The proposal would require the Secretary of the Treasury to issue a report to the tax-
writing committees to report on how the IRS has implemented netting procedures to date and to
discuss the policy and administrative implications of global netting. The Treasury would be
required to hold a public hearing to receive comments from any interested party prior to
submitting the report.

Effective Date

The report would be due six months after the date of enactment.

j. Credit for certain expenses incurred in connection with TCMP audits
Present Law

The IRS has announced that it will soon begin taxpayer compliance measurement program
(TCMP) audits of returns filed for taxable year 1994. There is no tax credit for expenses incurred
in connection with these audits. However, any expenses in connection with the determination,
collection, or refund of any tax are deductible under either section 162 or section 212(3).

Description of Proposal

The proposal would provide a refundable tax credit to individuals (not including estates,
trusts, or partnerships) for up to $3,000 of expenses otherwise deductible under either section 162
or section 212(3) incurred in connection with a TCMP audit of the taxpayer for taxable year
1994. In some circumstances, such as where a taxpayer has a net operating loss carryback,
adjustments may also be made to an earlier tax return of the taxpayer as a consequence of the
TCMP audit of the taxpayer for taxable year 1994. Expenses incurred with respect to this type of
adjustment on an earlier return would also be eligible for the credit, because they are incurred in
connection with the TCMP audit of the taxpayer for taxable year 1994. The $3,000 credit is the
total available with respect to an audit, regardless of whether the expenses are incurred in two (or
more) years. The credit would be in lieu of a deduction with respect to these expenses.

Effective Date
The proposal would be effective with respect to amounts paid or incurred after December

31, 1994, in taxable years ending after that date. The credit would be allowable with respect to
the taxable year in which the expenses are.incurred.

27


the TAO must be followed. Finally, the proposal would provide that only the Taxpayer
Advocate, the Commissioner of the IRS, the Deputy Commissioner, or a regional problem
resolution officer, may modify or rescind a TAO. Any official who modifies or rescinds a TAO
would be required to provide the Taxpayer Advocate a written explanation of the reasons for the
modification or rescission.

Effective Date
The proposal would be effective on the date of enactment.
2. Modifications to installment agreement provisions
a. Notification of reasons for termination of installment agreements
Present Law

Section 6159 authorizes the IRS to enter into written installment agreements with
taxpayers to facilitate the collection of tax liabilities. In general, the IRS has the Tight to terminate
(or in some instances, alter or modify) such agreements if the taxpayer provided inaccurate or
incomplete information before the agreement was entered into, if the taxpayer fails to make a
timely payment of an installment or another tax liability, if the taxpayer fails to provide the IRS*
with a requested update of financial condition, if the IRS determines that the financial condition of
the taxpayer has changed significantly, or if the IRS believes collection of the tax liability is in
jeopardy. If the IRS determines that the financial condition of a taxpayer that has entered into an
installment agreement has changed significantly, the IRS must provide the taxpayer with a written
notice that explains the IRS determination at least 30 days before altering, modifying or
terminating the installment agreement. No notice is statutorily required if the installment
agreement is altered, modified, or terminated for other reasons.

Description of Proposal

The proposal would require the IRS to notify taxpayers 30 days before altering,
modifying, or terminating any installment agreement for any reason other than that the collection
of tax is determined to be in jeopardy. The IRS must include in the notification an explanation of
why the IRS intends to take this action.

Effective Date

The proposal would be effective six-months-after the-date-of enactment: - -



Description of Proposal

The proposal would clarify that the section 6672 responsible person penalty is not to be
imposed on volunteer, unpaid members of any board of trustees or directors of a tax-exempt
organization to the extent such members are solely serving in an honorary capacity, do not
participate in the day-to-day or financial activities of the organization, and do not have actual
knowledge of the failure. The proposal could not operate in such’a way as to eliminate all
responsible persons from responsibility.

The proposal would require the IRS to develop materials to better inform board members
of tax-exempt organizations (including voluntary or honorary members) that they may be treated
as responsible persons. The IRS would be required to make such materials routinely available to
tax-exempt organizations. The proposal also would require the IRS to clarify its instructions to
IRS employees on application of the responsible person penalty with regard to honorary or
volunteer members of boards of trustees or directors of tax-exempt organizations.

Effective Date
The proposal would be effective on the date of enactment.
10. Modifications of rules relating to summonses
a, Enrolled agents included as third-party recordkeepers

Present Law

Section 7609 contains special procedures that the IRS must follow before it issues a third-
party summons. A third-party summons is a summons issued to a third-party recordkeeper
compelling him to provide information with respect to the taxpayer. An example of this would be
a summons served on a stock brokerage house to provide data on the securities trading of the
taxpayer-client.

Ifa third-party summons is served on a third-party recordkeeper listed in section
7609(a)(3), then the taxpayer must receive notice of the summons and have an opportunity to
challenge the summons in court. Otherwise the taxpayer has no statutory right to receive notice
of the summons and accordingly he will not have the opportunity to challenge it in court.

Section 7609(a)(3) lists attorneys and accountants as third-party recordkeepers, but it
does not list "enrolled agents", who are. authorized to.practice.before the IRS.. .

Description of Proposal

The proposal would include enrolled agents as third-party recordkeepers.

18



"churn" the income earned by an undercover operation to pay additional expenses incurred in the
undercover operation. The IRS is required to conduct a detailed financial audit of large
undercover operations in which the IRS is churning funds and to provide an annual audit report to

_the Congress on all such large undercover operations. The exemption originally expired on
December 31, 1989, and was extended by the Comprehensive Crime Control Act of 1990 to
December 31, 1991. The IRS has not had the authority to churn funds from its undercover
operations since 1991.

Description of Proposal

The proposal would reinstate the IRS's offset authority under section 7608(c) from the
date of enactment until January 1, 2001. The proposal would amend the IRS annual reporting
requirement under section 7608(c)(4)(B) to require the provision of the following data: (1) the
date the operation was initiated; (2) the date offsetting was approved; (3) the total current
expenditures and the amount and use of proceeds of the operation; (4) a detailed description of
the undercover operation projected to generate proceeds, including the potential violation being
investigated and whether the operation is being conducted under grand jury auspices; and (5) the
results of the operation to date, including the results of criminal proceedings.

Effective Date _
The proposal would be effective on the date of enactment.
g. Disclosure of returns on cash transactions

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)).

Under section 6050I, any person who receives more than $10,000 in cash in one
transaction (or two or more related transactions) in the course of a trade or business generally
must file an information return (Form 8300) with the IRS specifying the name, address, and
taxpayer identification number.of the person fromwhom-the-cash-was.received.and the amount of
cash received.

The Anti-Drug Abuse Act of 1988 provided a special rule permitting the IRS to disclose
these information returns to other Federal agencies for the purpose of administering Federal

24



10. Modification of Rules Relating to Summonses ............ 1. 18
a. Enrolled agents included as third-party recordkeepers....... 18
b. Safeguards relating to designated summonses ............. 19
11. Relief From Retroactive Application of Treasury Department
Regulations 20.0... ccc cece cece eens 20
12. Miscellaneous Provisions .............0..00.0cceeveeeeee 21
a. Report on pilot program for appeal of enforcement actions... 21
b. Phone numbers of person providing payee statement
required to be shown on such statement ................. 21
c. Required notice to taxpayers of certain payments . . . 22
d. Unauthorized enticement of information disclosure . . 22
e. Annual reminders to taxpayers with outstanding
delinquent accounts . 2.0... 0... eee cece cece e ee 23
f, Five-year extension of authority for undercover operations... 23
g. Disclosure of returns on cash transactions’ ............... 24
h. Disclosure of returns and return information to designee of
taxpayer 25
i. Study of netting of interest on overpayments and liabilities ... 25
j. Credit for certain expenses incurred in connection with
TCMP audits... 22. cece eee ee 27

Gi)



facilitate collection of the tax liability, or (4) the return of the property would be in the best
interests of the taxpayer (as determined by the Taxpayer Advocate) and the Government.

_ Effective Date
The proposal would be effective on the date of enactment.
iii. Modifications in certain levy exemption amounts
Present Law
Property exempt from levy includes personal property with a value of up to $1,650.

Description of Proposal

The proposal would increase the exemption amount to $2,500 for personal property. This
amount would be indexed for inflation commencing January 1, 1996.

Effective Date
The proposal would be effective with respect to levies issued after December 31, 1995.
b. Offers-in-compromise
Present Law
The IRS has the authority to settle a tax debt pursuant to an offer-in-compromise. IRS
regulations provide that such offers can be accepted if: the taxpayer is unable to pay the full
amount of the tax liability and it is doubtful that the tax, interest, and penalties can be collected or

there is doubt as to the validity of the actual tax liability. Amounts over $500 can only be

accepted if the reasons for the acceptance are documented in detail and supported by an opinion
of the IRS Chief Counsel.

Description of Proposal

The proposal would increase from $500 to $100,000 the amount requiring a written
opinion from the Office of Chief Counsel. Compromises below the $100,000 threshold would be
subject to continuing quality review by the IRS.

Effective Date

The proposal would be effective on the date of enactment.

11


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).

Effective Date
The proposal would be effective on the date of enactment.
7. Awarding of costs and certain fees

a. United States must establish that its position in a proceeding was substantially
justified

Present Law

Under section 7430, a taxpayer who successfully challenges a determination of deficiency
by the IRS may recover attorney's fees and other administrative and litigation costs if the taxpayer
qualifies as a "prevailing party." A taxpayer qualifies as a prevailing party if it: (1) establishes that
the position of the United States was not substantially justified; (2) substantially prevails with
respect to the amount in controversy or with respect to the most significant issue or set of issues
presented; and (3) meets certain net worth and (if the taxpayer is a business) size requirements. A
taxpayer must exhaust administrative remedies to be eligible to receive an award of attorney's
fees. :

Description of Proposal

The proposal would provide that, once a taxpayer substantially prevails over the IRS in a
tax dispute, the IRS will have the burden of proof to establish that it was substantially justified in
maintaining its position against the taxpayer. This would switch the current procedure which
places the burden of proof on the taxpayer to establish that the IRS was not substantially justified
in maintaining its position. Therefore, the successful taxpayer would receive an award of
attorney's fees unless the IRS satisfies its burden of proof. The proposal also would establish a
rebuttable presumption that the position of the United States was not substantially justified if the
IRS did not follow in the administrative proceeding (1) its published regulations, revenue rulings,
revenue procedures, information releases, notices, or announcements, or (2) a private letter ruling,
determination letter, or technical advice memorandum issued to the taxpayer. This provision
would only apply to the version of IRS guidance that is most current on the date the position was
taken.

... Effective Date

The proposal would be effective for proceedings commenced after the date of enactment.

13



a. Modifications to lien and levy provisions ............. _

i. Withdrawal of public notice oflien .................-
ii. Return of levied property .................00-00005
iii, Modifications in certain levy exemption amounts ...... .

b. Offers-in-compromise ............-0. 0.00 c cece eee eee ll
. Information Returns .. 2.2.0... 2 eee eee 11
a. Civil damages for fraudulent filing of information returns . . . iu
b. Requirement to conduct reasonable investigations of
information returns ..... 2.0.00. o eee eee 12
. Awarding of Costs and Certain Fees...... 2.000200 cece eee 13
a. United States must establish that its position in a proceeding
was substantially justified ................ eee eens 13
b. Increased limit on attorney fees ............. 00000 e eee 13
c. Failure to agree to extension not taken into account ........ 14
d. Award of litigation costs permitted in declaratory
judgment proceedings .............. 20.000 cece eee ee eee 14
. Modification to Recovery of Civil Damages for Unauthorized
Collection Actions ....... 2.00... cece eee eee ene nee 15
a. Increase in limit on recovery of civil damages for
unauthorized collection actions....................000. 15
b. Court discretion to reduce award for litigation costs for
failure to exhaust administrative remedies ................ 15

. Modification to Penalty for Failure to Collect and Pay Over Tax . 16

a. Preliminary notice requirement .....................0.. 16
b. Disclosure of certain information where more than one

person subject to penalty .............0.....0.0000008 16
c. Right of contribution from multiple responsible parties. .......-. 17
d. Board members of tax-exempt organizations ............. 17

Gi)



provide direct access to individuals with immediate resources to resolve a taxpayer's questions in
an expeditious manner.

Effective Date

The proposal would apply to statements required to be furnished after December 3 1, 1996
(determined without regard to any extension). :

c. Required notice to taxpayers of certain payments
Present Law
If the IRS receives a payment without sufficient information to properly credit it to a

taxpayer's account, the IRS may attempt to contact the taxpayer. If contact cannot be made, the
IRS places the payment in an unidentified remittance file.

Description of Proposal

The proposal would require the IRS to make reasonable efforts to notify, within 60 days,
those taxpayers who have made payments which the IRS cannot associate with the taxpayer.

Effective Date
The proposal would be effective on the date of enactment.
d. Unauthorized enticement of information disclosure
Present Law

There is no statutory disincentive for enticing a tax professional to disclose information
about clients in exchange for the favorable treatment.of the taxes of the professional.

Description of Proposal

If any officer or employee of the United States intentionally compromises the
determination or collection of any tax due from an attorney, certified public accountant, or
enrolled agent representing a taxpayer in exchange for information conveyed by the taxpayer to
the attorney, certified public accountant or enrolled agent for purposes of obtaining advice
concerning the taxpayer's tax liability, the. taxpayer-may. bring.a.civil-action for-damages against
the United States in a district court of the United States. Upon a finding of liability, damages
would equal the lesser of $500,000 or the sum of (1) actual economic damages sustained by the
taxpayer as a proximate result of the information disclosure and (2) the costs of the action, These

2



CONTENTS

INTRODUCTION ......... 00... c ccc eee een nes

DESCRIPTION OF PROPOSED TAXPAYER BILL
OF RIGHTS 2.10... cece cece eee eee

1. Taxpayer Advocate 2.00.0... cece cece eee nee

a. Establishment of Taxpayer Advocate within

Internal Revenue Service .........0.0. 00. c eee e eee
b. Expansion of authority to issue Taxpayer

Assistance Orders... 2.2.2.0 cence eee eee

2. Modifications to Installment Agreement Provisions ..........

a. Notification of reasons for termination of installment
agreements . 6... cece tenets

b. Administrative review of termination of installment
agreements .... 02.0... ec e eee e eee

3. Abatement of Interest and Penalties ..................0.0.

a. Expansion of authority to abate interest ................

b. Review of IRS failure to abate interest .................

c. Extension of interest-free period for payment of tax after
notice and demand ©... 2.0.0... eee e eee

4. Joint Returns 202... cece

a. Studies of joint and several liability for married persons

filing joint tax returns and other joint return-related issues . .
b. Joint return may be made after separate returns without

full payment of tax 6.0... eee ees Fees
c. Disclosure-of collection activities with respect to joint

TOUS 0... eee eee eens

@-



criminal statutes. The special rule originally was to expire after November 18, 1990, and was
extended by the Comprehensive Crime Control Act of 1990 to November 18, 1992.

Description of Proposal

The proposal would permanently extend the special rule for disclosing Form 8300
information. Moreover, the proposal would permit disclosures not only to Federal agencies but
also to State, local and foreign agencies and for civil, criminal and regulatory purposes (i.e.,
generally in the same manner as CTRs filed by financial institutions under the Bank Secrecy Act.)
Disclosure, however, would not be permitted to any such agency for purposes of tax
administration. The proposal also (1) would extend the dissemination policies and guidelines
under section 6103 to people having access to Form 8300 information, and (2) would apply
section 6103 sanctions to persons having access to Form 8300 information that disclose this
information without proper authorization.

Effective Date
The proposal would be effective on the date of enactment.
h. Disclosure of returns and return information to designee of taxpayer
Present Law

Under present law, the IRS is authorized to disclose the return of any taxpayer, or return
information pertaining to a taxpayer, to such person(s) as the taxpayer has designated in a written
request. However, the IRS's move to a paperless system depends on the ease and functionality of
electronic communication systems, e.g., telephones, facsimile machines, computers,
communications networks, etc.

Description of Proposal

The proposal would delete the word "written" from the requirement that "written consent"
from the taxpayer is necessary for the disclosure of taxpayer information to a designated third
party. Allowing the IRS to adopt alternatives to the written request requirement will expedite
such changes and facilitate the development and implementation of Tax System Modernization
projects. It is anticipated that the IRS will continue to utilize its regulatory authority to impose
reasonable restrictions on the form in which a request is made, and that IRS will in no event
accept an unconfirmed verbal request.

Effective Date

The proposal would be effective on the date of enactment.

25



Description of Proposal

The proposal would repeal the requirement of full payment of tax liability as a
precondition to switching from married filing separately status to married filing jointly status.

Effective Date
The proposal would apply to taxable years beginning after the date of the enactment.
c. Disclosure of collection activities with respect to joint returns
Present Law

The IRS does not disclose collection information to spouses that have filed a joint return.

Description of Proposal

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

Such requests would be required to be made in writing. The IRS would be allowed to
develop procedures to address the frequency of such requests in order to prevent taxpayers from
abusing this provision by making numerous requests without good cause. For example, one
request per quarter would be a reasonable rate unless the taxpayer had good cause to seek more
frequent information.

In making these disclosures, the IRS would be allowed to omit the current home address
and business location of the former spouse. This would prevent the disclosure of such personal
information to persons who might be hostile towards a former spouse.

Effective Date

The proposal would be effective on the date of enactment.


6. Information returns
a. Civil damages for fraudulent filing of information returns
Present Law

Federal law provides no private cause of action to a taxpayer who is injured because a
fraudulent information return has been filed with the IRS asserting that payments have been made
to the taxpayer.

Description of Proposal

The proposal would provide that, if any person willfully files a fraudulent information
return with respect to payments purported to have been made to another person, the other person
may bring a civil action for damages against the person filing that return. A copy of the complaint
initiating the action must be provided to the IRS. Recoverable damages would be the greater of
(1) $5,000 or (2) the amount of actual damages (including the costs of the action) and, in the
court's discretion, reasonable attomey's fees. The court would be required to specify in its
judgment the correct amount (if any) that. should have been reported on the information return.
An action seeking damages under this provision would be required to be brought within six years
after the filing of the fraudulent information return, or one year after the fraudulent information
return would have been discovered through the exercise of reasonable care, whichever is later.

Effective Date

The proposal would apply to fraudulent information returns filed after the date of
enactment.

b. Requirement to conduct reasonable investigations of information returns
Present Law

Deficiencies determined by the IRS are generally afforded a presumption of correctness.

Description of Proposal

The proposal would provide that, in any court proceeding, if a taxpayer asserts a
reasonable dispute with respect to any item of income reported on an information return (Form
1099 or Form W-2) filed by a third party.and the taxpayer has fully cooperated with the IRS, the
Government shall have the burden of producing reasonable and probative information conceming
the deficiency (in addition to the information returm itself). Fully cooperating with the IRS would
include (but would not be limited to) the following: bringing the reasonable dispute over the item
of income to the attention of the IRS within a reasonable period of time, and providing (within a

12