Description of Proposal

The Administration’s budget proposal would amend the Code to provide that a
continuous levy is also applicable to non-means tested recurring Federal payments. This is
defined as a Federal payment for which eligibility is not based on the income and/or assets of a
payee. For example, Social Security payments, which are subject to levy under present law,
would become subject to continuous levy.

In addition, the Administration’s budget proposal would provide that this levy would
attach up to 15 percent of any salary or pension payment due the taxpayer. This rule would
explicitly replace the other specifically enumerated exemptions from levy in the Code. Under the
Administration’s budget proposal, the continuous levy could apply to the entire amount of a
Federal payment that is not salary or a pension payment. Under the Administration’s EIC
proposal, a continuous levy of up to 15 percent could also apply to unemployment benefits and
means-tested public assistance.

Effective Date

The Administration’s budget proposal would be effective for levies issued after the date
of enactment. The Administration’s EIC proposal would be effective for levies issued after “~*~
December 31, 1997.

-12-



Under present law, an individual is not eligible for the earned income credit if the
aggregate amount of "disqualified income" of the taxpayer for the taxable year exceeds $2,250.
Disqualified income is the sum of: (1) interest (taxable and tax-exempt); (2) dividends; (3) net
rent and royalty income (if greater than zero); (4) capital gain net income; and (5) net passive
income (if greater than zero) that is not self-employment income. The $2,250 threshold is
indexed for inflation.

The earned income amount and the phaseout amount are indexed for inflation.

Earned income

Under present law, earned income means the sum of (1) wages, salaries, tips, and other~
employee compensation, and (2) the amount of the taxpayer’s net earnings from self employment
for the taxable year, determined without regard to the deduction for one-half of the taxpayer’s
self-employment taxes (Code sec. 164(f)). For purposes of this definition, earned income is
computed without regard to any community property laws, pension and annuity payments are not
treated as earned income, certain amounts relating to nonresident aliens are disregarded, and no
amount received by inmates for services in penal institutions is treated as earned income.

Eligible individual

-. Under present law, an individual is an eligible individual entitled to claim the EIC for a
year if

(1) the individual has a qualifying child for the taxable year, or

(2) the individual does not have a qualifying child, but satisfies the following
requirements:

(i) __ the individual’s principal place of abode is in the United States for more
than 1/2 of the year,

(i) _ the individual (or, if the individual is married, either the individual or the
individual’s spouse) has attained age 25, but has not attained age 65 before
the close of the year, and

ii) the individual is not a dependent for whom a dependency exemption is
allowed on another taxpayer’s return for a taxable year beginning in the
same calendar year as the taxable year of the individual.

An individual is not an eligible individual for the year if the individual (1) is a qualifying
child of another taxpayer, (2) claims any exclusion from income under Code section 911 for
citizens or residents living abroad, (3) is a nonresident alien individual for any portion of the
year unless the individual is treated as a U.S. resident for the year under Code section 6013, or
(4) does not include the individual’s taxpayer identification number (“TIN”) or the individual’s
spouse’s TIN on the tax return.

3-


E. Simplification of Foster Child Definition
Present law

For purposes of the EIC, qualifying children may include foster children who reside with
the taxpayer for a full year, if the taxpayer “cares for the foster children as the taxpayer’s own
children.” (Code sec. 32(c)(3)(B)(iii)()). All EIC qualifying children (including foster children)
must either be under the age of 19 (24 if a full-time student) or permanently and totally disabled.
There is no requirement that the foster child either be: (1) placed in the household by a foster
care agency or (2) a relative of the taxpayer.

Description of Proposal

A foster child would be defined as a child who (1) is under the age of 19 (24 if a full-time
student), (2) is cared for by the taxpayer as if he or she were the taxpayer’s own child, and (3)
either is the taxpayer’s niece, nephew, or sibling or was placed in the taxpayer’s home by an
agency of a State or one of its political subdivisions or by a tax-exempt child placement agency
licensed by a State.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 1997.

-16-



I. INTERNAL REVENUE SERVICE COMPLIANCE STUDY

In April 1997, the Internal Revenue Service (“IRS”) released a study of EIC filers for tax
year 1994. This study based on a final sample of 2046 tax returns examined both paper and
electronic returns that were accepted by the IRS through April 21, 1995; this represents about 80
percent of the EIC filing population for that tax year 1994. The study found that the total
amount of erroneously overclaimed and accepted EIC amounts for tax year 1994 amounted to
$4.44 billion (25.8 percent of the total EIC claimed and accepted for that tax year 1994). The
study determined that the overclaim rate should be adjusted down to $4.05 billion (23.5 percent
of the total EIC claimed and accepted for tax year), to reflect the full effects of IRS enforcement
activities which were in effect during the next tax year 1995, Also, certain EIC legislation
enacted after tax year 1994, (i.e., mathematical and clerical error treatment for the failure to
provide valid TINs for qualifying children), was estimated to reduce the overclaimed amount by
an additional $489 million down to $3.56 billion. This would have lowered the overclaim rate to
20.7 percent for tax year 1994 had the mathematical and clerical error rule been in place for the
year.

-8-



Mathematical or clerical errors

The IRS may summarily assess additional tax due as a result of a mathematical or clerical
error without sending the taxpayer a notice of deficiency and giving the taxpayer an opportunity
to petition the Tax Court. If an individual fails to provide a correct TIN, such omission is treated
as a mathematical or clerical error. Also, if an individual who claims the EIC with respect to net
earnings from self employment fails to pay the proper amount of self-employment tax on such
net earnings, the failure is treated as a mathematical or clerical error for purposes of the amount
of EIC claimed. Where the IRS uses the summary assessment procedure for mathematical or
clerical errors, the taxpayer must be given an explanation of the asserted error and a period of 60
days to request that the IRS abate its assessment. The IRS may not proceed to collect the ~
amount of the assessment until the taxpayer has agreed to it or has allowed the 60-day period for
objecting to expire. If the taxpayer files a request for abatement of the assessment specified in
the notice, the IRS must abate the assessment. Any reassessment of the abated amount is subject
to the ordinary deficiency procedures. The request for abatement of the assessment is the only
procedure a taxpayer may use prior to paying the assessed amount in order to contest an
assessment arising out of a mathematical or clerical error. Once the assessment is satisfied,
however, the taxpayer may file a claim for refund if he or she believes the assessment was made
in error.

5=


Qualifying child

A qualifying child must meet a relationship test, an age test, an identification test, and a
residence test. Under the relationship and age tests, an individual is eligible for the EIC with
respect to another person only if that other person: (1) is a son, daughter, or adopted child (or a
descendent of a son, daughter, or adopted child); a stepson or stepdaughter; or a foster child of
the taxpayer (a foster child is defined as a person whom the individual cares for as the
individual’s child; it is not necessary to have a placement through a foster care agency); and (2)
is under the age of 19 at the close of the taxable year (or is under the age of 24 at the end of the
taxable year and was a full-time student during the taxable year), or is permanently and totally
disabled. Also, if the qualifying child is married at the close of the year, the individual may
claim the EIC for that child only if the individual may also claim that child as a dependent.

To satisfy the identification test, an individual must include on their tax return the name,
age, and TIN of each qualifying child.

The residence test requires that a qualifying child must have the same principal place of
abode as the taxpayer for more than one-half of the taxable year (for the entire taxable year in the

case of a foster child), and that this principal place of abode must be located in the United States: .-»1. .:.

For purposes of determining whether a qualifying child meets the residence test, the principal
place of abode shall be treated as in the United States for any period during which a member of
the Armed Forces is stationed outside the United States while serving on extended active duty.

Advance payment

An individual with qualifying children may elect to receive the credit on an advance basis
by furnishing an advance payment certificate to his or her employer. For such an individual, the
employer makes an advance payment of the credit at the time wages are paid. The amount of
advance payment allowable in a taxable year is limited to 60 percent of the maximum credit
available to an individual with one qualifying child.

TIN requirement

Under present law, for purposes of determining who is an eligible individual and who is a
qualifying child, a TIN means a social security number issued to an individual by the Social
Security Administration other than a social security number issued pursuant to clause (II) (or that
portion of clause (III) that relates to clause (II) of section 205(c)(2)(B)(i) of the Social Security - >
Act relating to the issuance of a Social Security number to an individual applying for or
receiving Federally funded benefits.

-4-



F. Advance Payment Demonstration Projects
Present law

Qualifying individuals can claim the EIC when filing their tax returns at the end of the
year. Alternatively, qualifying individuals with children have the choice of obtaining a portion
of the EIC in advance through their employers, and claiming the balance of the EIC upon filing
their income tax returns at the end of the year. The annual advanced EIC payment cannot exceed
60 percent of the maximum full-year EIC for a family with one child ($1,326 for 1997).

Description of Proposal “o>

The Secretary of the Treasury could select four States to provide advance payments of
the EIC to wage earners through State agencies rather than employers for a three-year period.
The four States would be selected from those States applying for Participation in the
demonstration project. States would be required to verify eligibility for the EIC before paying
out the credit. Effects on advance payment participation and compliance would be studied by
the Treasury Department.

Effective Date

Applications would be submitted by the States to the Treasury Department during 1998
for demonstration projects to begin in January 1999,

-17-


rate increases over time and equals 36 percent for 1995 and 40 percent for 1996 and thereafter.
The phaseout rate is 20.22 percent for 1995 and 21.06 percent for 1996 and thereafter.

OBRA 1993 also extended the EIC to taxpayers with no qualifying children. This credit
for taxpayers with no qualifying children is available to taxpayers over age 24 and below age 65.
Finally, OBRA 1993 repealed the supplemental young child credit and the supplemental health
insurance credit.

The implementing legislation for the General Agreements on Tariffs and Trade, enacted

* in 1994, made a number of modifications to the EIC. First, it denied the EIC to inmates for any
amount received for services provided by the inmate in a penal institution. Second, it generally
made nonresident aliens ineligible to claim the EIC. Third, it deemed that a member of the
Armed Forces stationed outside the United States while serving on extended active duty would
satisfy the test that the principal place of abode be within the United States. Fourth, it required
that members of the Armed Forces receive annual reports from the Department of Defense of
earned income (which includes nontaxable earned income such as amounts received as basic
allowances for housing and subsistence). Fifth, it required a TIN for each qualifying child
regardless of the dependent’s age. Prior to the legislation, taxpayers had to provide a TIN only
for qualifying children who attained the age of one before the close of the taxpayer’s taxable
year.

Under the Self-Employed Person’s Health Care Reduction Extension Act of 1995,
effective for taxable years beginning after December 31, 1995, a taxpayer is not eligible for the
EIC if the aggregate amount of disqualified income (i.e., taxable and tax-exempt interest,
dividends, and (if greater than zero) net rent and royalty income) of the taxpayer for the taxable
year exceeds $2,350 (“the disqualified income test”).

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 included
several changes to the EIC. First, it modified the disqualified income test by adding capital gain
net income and net passive income (if greater than zero) that is not self-employment income to
the definition of disqualified income, and by reducing the threshold above which an individual is
not eligible for the EIC from $2,350 to $2,200 (indexed for inflation). Second, it modified the
definition of AGI used for phasing out the earned income credit by disregarding certain losses.
The losses disregarded are: (1) net capital losses (if grater than zero); (2) net loses from trusts
and estates, (3) net losses from nonbusiness rents and royalties; and (4) 50 percent of the net
losses from businesses, computed separately with respect to sole proprietorships (other than in
farming), sole proprietorships in farming, and other businesses. Third, it applied mathematical
and clerical error treatment to the failure to provide a correct Social Security Number (SSN) or
to pay the proper amount of self-employment tax on net self-employment earnings on which an
EIC is claimed. Finally, it denied the EIC to individuals whose SSNs were issued solely for
purposes of the individual applying for or receiving Federally funded benefits.

-7-



DESCRIPTION OF THE ADMINISTRATION’S
PROPOSALS RELATING TO
THE EARNED INCOME CREDIT

Scheduled for a Public Hearing
Before the
HOUSE COMMITTEE ON WAYS AND MEANS

on

May 8, 1997

Prepared by the Staff
of the

JOINT COMMITTEE ON TAXATION

May 7, 1997

JCX-14-97



B. Recertification Required When Taxpayer
Found to be Ineligible for EIC in Past

Present law

If an individual fails to provide a correct TIN and claims the EIC, such omission is
treated as a mathematical or clerical error. Also, if an individual who claims the EIC with
respect to net earnings from self employment fails to pay the proper amount of self-employment
tax on such net earnings, the failure is treated as a mathematical or clerical error for purposes of
the amount of EIC claimed. Generally, taxpayers have 60 days in which they can either provide
a correct TIN or request that the IRS follow the current-law deficiency procedures. If a taxpayer
fails to respond within this period, he or she must file an amended return with a correct TIN or
clarify that any self-employment tax has been paid in order to obtain the EIC originally claimed.

The IRS must follow deficiency procedures when investigating other types of
questionable EIC claims. Under these procedures, contact letters are first sent to the taxpayer. If
the necessary information is not provided by the taxpayer, a statutory notice of deficiency is sent
by certified mail, notifying the taxpayer that the adjustment will be assessed unless the taxpayer
files a petition in Tax Court within 90 days. If a petition is not filed within that time and there is
no other response to the statutory notice, the assessment is made and the EIC is denied:

- Description of Proposal

A taxpayer who has been denied the EIC as a result of deficiency procedures would be
ineligible to claim the EIC in subsequent years unless evidence of eligibility for the credit is
provided by the taxpayer. To demonstrate current eligibility, the taxpayer would be required to
meet evidentiary requirements established by the Secretary of the Treasury. The evidentiary
requirements have not yet been specified. Failure to provide this information when claiming the
EIC would be treated as a mathematical or clerical error. If a taxpayer is recertified as eligible
for the credit, the taxpayer would not be required to provide this information in the future unless
the IRS again denies the EIC as a result of a deficiency procedure. Ineligibility for the EIC
under the proposal would be subject to review by the courts.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 1997.

-10-



IV. DESCRIPTION OF ADMINISTRATION PROPSALS
A. Deny EIC Eligibility for Prior Acts of Recklessness or Fraud
Present Law

The accuracy-related penalty, which is imposed at a rate of 20 percent, applies to the
portion of any underpayment that is attributable to (1) negligence, (2) any substantial
understatement of income tax, (3) any substantial valuation overstatement, (4) any substantial
overstatement of pension liabilities, or (5) any substantial estate or gift tax valuation
understatement (sec. 6662). Negligence includes any careless, reckless, or intentional disregard
of rules or regulations, as well as any failure to make a reasonable attempt to comply with the
provisions of the Code.

The fraud penalty, which is imposed at a rate of 75 percent, applies to the portion of any
underpayment that is attributable to fraud (sec. 6663).

Neither the accuracy-related penalty nor the fraud penalty is imposed with respect to any
portion of an underpayment if it is shown that there was a reasonable cause for that portion and
that the taxpayer acted in good faith with respect to that portion.

Description of Proposal

A taxpayer who fraudulently claims the EIC would be ineligible to claim the EIC for a
subsequent period of 10 years. In addition, a taxpayer who erroneously claims the EIC due to
reckless or intentional disregard of rules or regulations would be ineligible to claim the EIC for a
subsequent period of two years. These sanctions would be in addition to any other penalty
imposed under present law. The determination of fraud or of reckless or intentional disregard of
tules or regulations would be made in a deficiency proceeding (which would provide for judicial
review).

Effective Date

The proposal would be effective for taxable years beginning after December 31, 1997.



I. LEGISLATIVE BACKGROUND

The EIC was enacted in 1975 as a means of targeting tax relief to working low-income
taxpayers with children, providing relief from the Social Security payroll tax for these taxpayers,
and improving incentives to work. As originally enacted, the credit equaled 10 percent of the
first $4,000 of earned income (i.e., a maximum credit of $400). The credit began to be phased
out for taxpayers with earned income (or AGI, if greater) above $4,000, and was entirely phased
out for taxpayers with income of $8,000.

The Revenue Act of 1978 increased the maximum credit to $500 (10 percent of the first
$5,000 of earned income). Also, the income level at which the phaseout began was raised to
$6,000, with a complete phaseout not occurring until an income level. of $10,000. The Deficit
Reduction Act of 1984 increased the maximum credit to $550 (11 percent of the first $5,000 of
earned income) and the credit was phased out beginning at $6,500 of income and ending at
$11,000.

The Tax Reform Act of 1986 increased the maximum credit to $800 (14 percent of the
first $5,714 of earned income), beginning in 1987. The maximum credit was reduced by 10
cents for each dollar of earned income (or AGI, if greater) in excess of $9,000 ($6,500 in 1987).
These $5,714 and $9,000 amounts (stated above in 1985 dollars) were indexed for inflation: *"

The Omnibus Budget Reconciliation Act of 1990 (“OBRA 1990”) substantially increased
the maximum amount of the basic credit and added an adjustment to reflect family size. OBRA
1990 also created two additional credits as part of the EIC: the supplemental young child credit
and the supplemental health insurance credit. Both of these supplemental credits'‘used the same
base as the basic EIC.

OBRA 1990 also modified the definition of taxpayers eligible for the EIC. Under prior
law, taxpayers were required to file a joint return or file as a head of household or surviving
spouse in order to be eligible for the EIC. OBRA 1990 generally broadened the set of eligible
taxpayers and set out uniform requirements for qualifying children. The definition of
“qualifying child” enacted in OBRA 1990 is described in the present-law section.

The Omnibus Budget Reconciliation Act of 1993 (“OBRA 1993”) expanded the EIC in
several ways. For taxpayers with one qualifying child, the EIC was increased to 26.3 percent of
the first $7,750 of earned income in 1994. For 1995 and thereafter, the credit rate was increased
to 34 percent. In 1995, the maximum amount of earned income on which the credit could be
claimed is $6,160 (this is a $6,000 base in 1994, adjusted for inflation). The phaseout rate for~°~
1994 and thereafter is 15.98 percent. ‘

For taxpayers with two or more qualifying children, the EIC was increased to 30 percent

of the first $8,425 of eamed income in 1994. The maximum credit for 1994 was $2,527 and was
reduced by 17.68 percent of earned income (or AGI, if greater) in excess of $11,000. The credit

-6-



I. DESCRIPTION OF PRESENT-LAW EARNED
INCOME CREDIT PROVISIONS

In general

Certain eligible low-income workers are entitled to claim a refundable earned income

credit (EIC) (sec. 32 of the Internal Revenue Code of 1986 (“Code”)). A refundable credit is a
credit that not only reduces an individual's tax liability but allows refunds to the individual in
excess of income tax liability. The amount of the credit an eligible individual may claim depends

» upon whether the individual has one, more than one, or no qualifying children, and is determined
by multiplying the credit rate by the individual's earned income’ up to an earned income amount:
The maximum amount of the credit is the product of the credit rate and the eamed income
amount. The credit is reduced by the amount of alternative minimum tax (“AMT”) the taxpayer
owes for the year. The EIC is phased out above certain income levels. For individuals with
earned income or modified adjusted gross income (“modified AGI”), in excess of the beginning
of the phaseout range, the maximum credit amount is reduced by the phaseout rate multiplied by
the amount of earned income (or modified AGI, if greater) in excess of the beginning of the
phaseout range. For individuals with earned income (or modified AGI, if greater) in excess of the
end of the phaseout range, no credit is allowed. Modified AGI means AGI, but for this purpose .
does not include the following amounts: (1) net capital losses (if greater than zero); (2) net
losses from trusts and estates; (3) net losses from nonbusiness rents and royalties; and (4) 50
percent of the net losses from business, computed separately with respect to sole proprietorships
(other than in farming), sole proprietorships in farming, and other businesses. Amounts
attributable to a business that consists of the performance of services by the taxpayer as an
employee are not taken into account for purposes of (4).

The parameters for the EIC for 1997 are given in the following table:
Earned Income Credit Parameters (1997)

Two or more

qualifying One qualifying No qualifying
children child children
Credit rate (percent) 40.00 34.00 7.65
Earned income amount $9,140 $6,500 $4,340
Maximum credit $3,656 $2,210 $332
Phaseout begins $11,930 $11,930 $5,430
Phaseout rate (percent) 21.06 15.98 7.65
Phaseout ends $29,290 $25,760 $9,770

* In the case of a married individual who files a joint return with his or her spouse, the
income for purposes of these tests is the combined income of the couple.

-2-


2. Modifications of levy exemptions
Present Law
The Code exempts from levy workmen's compensation payments," annuity or pension

payments under the Railroad Retirement Act and benefits under the Railroad Unemployment
Insurance Act'* described above, unemployment benefits! and means-tested public assistance.'*

Description ‘of Proposal

The Administration’s budget proposal would provide that the following property is not
exempt from levy if the Secretary of the Treasury (or his delegate) approves the levy of such
property:

(1) workmen's compensation payments,!” and

(2) annuity or pension payments under the Railroad Retirement Act and benefits under
the Railroad Unemployment Insurance Act.

The Administration’s EIC proposal would provide that the following property is not
exempt from levy if the Secretary of the Treasury (or his delegate) approves the levy of such
property:

(1) unemployment benefits, and

(2) means-tested public assistance.

Effective Date
The Administration’s budget proposal would apply to levies issued after the date of

enactment. The Administration’s EIC proposal would apply to levies issued after December 3 1,
1997,

® Sec. 6334(a)(7).

Sec. 6334(a)(6).

5 Sec. 6334(a)(4).

5 Sec. 6334(a)(11).

‘7 Many workmen's compensation payments are made by States. The heading of the new
subsection of the Code (but not the text of the subsection itself) refers to "Federal" payments. A
clarification of this matter may be desirable.

-13-


Description of Proposal

Return preparers would be required to fulfill certain due diligence requirements with
respect to returns they prepare claiming the EIC. The due diligence requirements have not yet
been specified. The penalty for failure to meet these requirements would range from $50 to the
full amount of the EIC overclaimed. This penalty would be in addition to any other penalty
imposed under present law.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 1997.

-15-


INTRODUCTION

The House Committee on Ways and Means has scheduled a public hearing on May 8,
1997, on the Administration’s proposals relating to the earned income credit. On April 23, 1997,
the Department of Treasury released eight proposals to reduce errors on tax returns with respect
to the earned income credit (“EIC”).’

This document,” prepared by the staff of the Joint Committee on Taxation in connection
with the May 8 Committee hearing, provides a description of present-law earned income credit
' provisions (Part I), a brief legislative background (Part II), a summary description of the April
1997 IRS compliance study (Part III), and a description of the Administration’ s legislative
proposals (Part IV).

> The Administration proposals also include two administrative actions to be undertaken...
relating to EIC compliance. These actions are continued IRS efforts to improve: (1) compliance
by providing additional IRS personnel to work on EIC issues and, (2) awareness of, access to,
and resources for volunteers in the IRS-sponsored Volunteer Income Tax Assistance (“VITA”)
program.

® This document may be cited as follows: Joint Committee on Taxation, Description of
the Administration’s Proposals Relating to the Eamed Income Credit (JCX-14-97), May 7, 1997.

-1-


CONTENTS

INTRODUCTION ...0 22.0 c cece eee eee
I. DESCRIPTION OF PRESENT-LAW EARNED INCOME CREDIT
PROVISIONS. .... 20.000 ccc eee
I. LEGISLATIVE BACKGROUND ........................0..04.
I. INTERNAL REVENUE SERVICE COMPLIANCE STUDY ........
IV. DESCRIPTION OF ADMINISTRATION’S PROPOSALS ..........
A. Deny EIC Eligibility for Prior Acts of Recklessness or Fraud .......
B. Recertification Required When Taxpayer Found to be Ineligible for
- the FIC in Past 220s
C. Establish IRS Continuous Levy and Improve Debt Collection .......
1. Continuous levy 2.2.02... ccc eee eee
2. Modifications of levy exemptions
D. Due Diligence Requirements for Paid Preparers .................
E. Simplification of Foster Child Definition .............0..0......
F. Advance Payment Demonstration Projects .................-0..

@

10

11
13

14

16

17


C. Establish IRS Continuous Levy and Improve Debt Collection

1. Continuous levy
Present Law

If any person is liable for any internal revenue tax and does not pay it within 10 days
after notice and demand* by the IRS, the IRS may then collect the tax by levy upon all property
and rights to property belonging to the person,’ unless there is an explicit statutory restriction on
doing so. A levy is the seizure of the person's property or rights to property. Property that is not
cash is sold pursuant to statutory requirements.°

In general, a levy does not apply to property acquired after the date of the levy,’
regardless of whether the property is held by the taxpayer or by a third party (such as a bank) on
~ behalf of a taxpayer. Successive seizures may be necessary if the initial seizure is insufficient to
satisfy the liability.* The only exception to this rule is for salary and wages.” A levy on salary
and wages is continuous from the date it is first made until the date it is fully paid or becomes
unenforceable.

A minimum exemption is provided for salary and wages.” It is computed on'a weekly:
basis by adding the value of the standard deduction plus the aggregate value of personal
exemptions to which the taxpayer is entitled, divided by 52."' For a family of four for taxable
year 1996, the weekly minimum exemption is $325.

* Notice and demand is the notice given to a person liable for tax stating that the tax has
been assessed and demanding that payment be made. The notice and demand must be mailed to
the person's last known address or left at the person's dwelling or usual place of business (sec.
6303).

5 Sec. 6331.

© Secs. 6335-6343.
7 Sec. 6331(b).

® Sec. 6331(c).

° Sec. 6331(e).
Sec. 6334(a)(9).
TM Sec. 6334(d).

” Standard deduction of $6,700 plus four personal exemptions at $2,550 each equals
$16,900, which when divided by 52 equals $325.

-1l-


D. Due Diligence Requirements for Paid Preparers
Present Law

There are several penalties that apply in the case of an understatement of tax that is
caused by an income tax return preparer. First, if any part of an understatement of tax on a
return or claim for refund is attributable to a position for which there was not a realistic
possibility of being sustained on its merits and if any person who is an income tax return
preparer with respect to such return or claim for refund knew (or reasonably should have known)

- of such position and such position was not disclosed or was frivolous, then that return preparer is

subject to a penalty of $250 with respect to that return or claim (sec. 6694(a)). The penalty is not
imposed if there is reasonable cause for the understatement and the return preparer acted in good
faith.

In addition, if any part of an understatement of tax on a return or claim for refund is
attributable to a willful attempt by an income tax return preparer to understate the tax liability of
another person or to any reckless or intentional disregard of rules or regulations by an income tax
return preparer, then the income tax return preparer is subject to a penalty of $1,000 with respect
to that return or claim (sec. 6694(b)).

Also, a penalty for aiding and abetting the understatement of tax liability is imposed in
cases where any person aids, assists in, procures, or advises with respect to the preparation or
presentation of any portion of a return or other document if (1) the person knows or has reason to
believe that the return or other document will be used in connection with any material matter
arising under the tax laws, and (2) the person knows that if the portion of the return or other
document were so used, an understatement of the tax liability of another person would result
(sec. 6701).

Additional penalties are imposed on return preparers with respect to each failure to (1)
furnish a copy of a return or claim for refund to the taxpayer, (2) sign the return or claim for
refund, (3) furnish his or her identifying number, (4) retain a copy or list of the returns prepared, -
and (5) file a correct information return (sec. 6695). The penalty is $50 for each failure and the
total penalties imposed for any single type of failure for any calendar year are limited to $25,000.

-14-