DESCRIPTION OF THE CHAIRMAN’S AMENDMENT 

IN THE NATURE OF A SUBSTITUTE TO H.R. 3991, 

THE “TAXPAYER PROTECTION AND IRS 

ACCOUNTABILITY ACT OF 2002”

Scheduled for a Markup 

Before the 

HOUSE COMMITTEE ON WAYS AND MEANS 

on March 20, 2002

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

March 19, 2002

JCX-20-02
i

TABLE OF CONTENTS

Page

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

I. MODIFICATIONS TO THE PROPOSALS IN H.R. 3991, THE “TAXPAYER 

PROTECTION AND IRS ACCOUNTABILITY ACT OF 2002” ............................................. 2

A. Clarification of Application of Federal Tax Deposit Penalty ............................................. 2

B. Additional Considerations to be Taken into Account as Bases for Accepting 

an Offer in Compromise ..................................................................................................... 2

C. Study of Taxpayer Notification Alternatives...................................................................... 2

D. Disclosure in Judicial or Administrative Tax Proceedings of Return and Return 

Information of Persons Who Are Not Party to Such Proceedings..................................... 2

E. Elimination of Proposed Modification to Failure of IRS to Act on Determinations 

Treated as Exhaustion of Remedies.................................................................................... 2

F. Low-Income Taxpayer Clinics............................................................................................ 3

II. ADDITIONAL PROVISIONS................................................................................................... 3

A. Reporting Requirements of State and Local Political Organizations ................................. 3

B. Extend the Due Date for Electronically Filed Tax Returns ................................................ 7

C. Restoration of Retirement Savings After Improper Levy................................................... 7

D. Allow the Financial Management Service to Retain Transaction Fees from 

Levied Amounts.................................................................................................................. 8

E. Capital Gains Treatment to Apply to Outright Sales of Timber by Landowners............... 9
1

INTRODUCTION

This document, 1 prepared by the staff of the Joint Committee on Taxation, provides a 

description of the Chairman’s amendment in the nature of a substitute to H.R. 3991, the 

“Taxpayer Protection and IRS Accountability Act of 2002.” The House Committee on Ways 

and Means has scheduled a markup of this bill for March 20, 2002. 

 

1

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

the Chairman’s Amendment in the Nature of a Substitute to H.R. 3991, the “Taxpayer Protection 

and IRS Accountability Act of 2002” (JCX-20-02), March 19, 2002. 
2

I. MODIFICATIONS TO THE PROPOSALS 

IN H.R. 3991, THE “TAXPAYER PROTECTION 

AND IRS ACCOUNTABILITY ACT OF 2002”

A. Clarification of Application of Federal Tax Deposit Penalty

The proposal in the bill to repeal the 5 and 10 percent penalty rates and apply the 2 

percent rate in their place would be eliminated. Instead, the application of the Federal tax 

deposit penalty would be clarified so that the 10 percent penalty rate only applies in cases where 

the failure to deposit extends for more than 15 days.

B. Additional Considerations to be Taken into Account 

as Bases for Accepting an Offer in Compromise

The Chairman’s amendment would eliminate this proposal. 

C. Study of Taxpayer Notification Alternatives

The Chairman’s amendment would eliminate this proposal. 

D. Disclosure in Judicial or Administrative Tax Proceedings of 

Return and Return Information of Persons Who 

Are Not Party to Such Proceedings

The Chairman’s amendment would exempt from the notice and comment requirements of 

the bill actions to enjoin income tax return preparers,2 to enjoin promoters of abusive tax 

shelters,3 and to enjoin flagrant political expenditures of section 501(c)(3) organizations.4

E. Elimination of Proposed Modification to Failure of IRS to Act on

 Determinations Treated as Exhaustion of Remedies

The proposal in the bill to modify the present-law declaratory judgment procedure to 

provide that an organization is deemed to exhaust its administrative remedies in the case of a 

failure by an office, other than the office responsible for initial determinations, to make a 

determination at the expiration of 450 days after the request for a determination was made would 

be eliminated by the Chairman’s amendment. Accordingly, the present-law 270-day time period 

for IRS to consider a request before an organization is deemed to have exhausted administrative 

remedies would continue to apply to determinations by the initial office and to determinations by 

other offices.

 

2

 Sec. 7407.

3

 Sec. 7408.

4

 Sec. 7409.
3

F. Low-Income Taxpayer Clinics

The Chairman’s amendment would amend the definition of low-income taxpayer clinics 

by excluding from eligibility for grants clinics that provide tax return preparation (unless the 

return preparation is in connection with a controversy with the IRS). This replaces the provision 

of the bill that specifies that grants may not be used for any purpose other than those specified in 

the Code.

II. ADDITIONAL PROVISIONS

A. Reporting Requirements of State and Local Political Organizations

Present Law

In general

Under present law, section 527 provides a limited tax-exempt status to “political 

organizations,” meaning a party, committee, association, fund, account, or other organization 

(whether or not incorporated) organized and operated primarily for the purpose of directly or 

indirectly accepting contributions or making expenditures (or both) for an “exempt function.” 

These organizations generally are exempt from Federal income tax on contributions they receive, 

but are subject to tax on their net investment income and certain other income at the highest 

corporate income tax rate (“political organization taxable income”). Donors are exempt from 

gift tax on their contributions to such organizations. For purposes of section 527, the term 

“exempt function” means: the function of influencing or attempting to influence the selection, 

nomination, election, or appointment of any individual to any Federal, State, or local public 

office or office in a political organization, or the election of Presidential or Vice-Presidential 

electors, whether or not such individual or electors are selected, nominated, elected, or 

appointed.

Notice of section 527 organization

An organization is not treated as a section 527 organization unless it has given notice to 

the Secretary of the Treasury, electronically and in writing, that it is a section 527 organization. 

The notice is not required (1) of any person required to report as a political committee under the 

Federal Election Campaign Act of 1971, (2) by organizations that reasonably anticipate that their 

annual gross receipts will always be less than $25,000, and (3) organizations described in section 

501(c). All other organizations, including State and local candidate committees, are required to 

file the notice.

The notice is required to be transmitted no later than 24 hours after the date on which the 

organization is organized. The notice is required to include the following information: (1) the 

name and address of the organization and its electronic mailing address, (2) the purpose of the 

organization, (3) the names and addresses of the organization’s officers, highly compensated 

employees, contact person, custodian of records, and members of the organization’s Board of 

Directors, (4) the name and address of, and relationship to, any related entities, and (5) such 

other information as the Secretary may require.
4

The notice of status as a section 527 organization is required to be disclosed to the public 

by the IRS and by the organization. In addition, the Secretary of the Treasury is required to 

make publicly available on the Internet and at the offices of the IRS a list of all political 

organizations that file a notice with the Secretary under section 527 and the name, address, 

electronic mailing address, custodian of records, and contact person for such organization. The 

IRS is required to make this information available within five business days after the Secretary 

of the Treasury receives a notice from a section 527 organization.

An organization that fails to file the notice is not treated as a section 527 organization and 

its exempt function income is taken into account in determining taxable income.

Disclosure by political organizations of expenditures and contributors

A political organization that accepts a contribution or makes an expenditure for an 

exempt function during any calendar year is required to file with the Secretary of the Treasury 

certain reports. The following reports are required: either (1) in the case of a calendar year in 

which a regularly scheduled election is held, quarterly reports, a pre-election report, and a postgeneral election report and, in the case of any other calendar year, a report covering January 1 to 

June 30 and July 1 to December 31, or (2) monthly reports for the calendar year, except that, in 

lieu of the reports due for November and December of any year in which a regularly scheduled 

general election is held, a pre-general election report, a post-general election report, and a year 

end report are to be filed.

The reports are required to include the following information: (1) the amount of each 

expenditure made to a person if the aggregate amount of expenditures to such person during the 

calendar year equals or exceeds $500 and the name and address of the person (in the case of an 

individual, including the occupation and name of the employer of the individual); and (2) the 

name and address (in the case of an individual, including the occupation and name of employer 

of such individual) of all contributors that contributed an aggregate amount of $200 or more to 

the organization during the calendar year and the amount of the contribution.

The disclosure requirements do not apply (1) to any person required to report as a 

political committee under the Federal Election Campaign Act of 1971, (2) to any State or local 

committee of a political party or political committee of a State or local candidate, (3) to any 

organization that reasonably anticipates that it will not have gross receipts of $25,000 or more for 

any taxable year, (4) to any organization described in section 501(c), or (5) with respect to any 

expenditure that is an independent expenditure (as defined in section 301 of the Federal Election 

Campaign Act of 1971).

For purposes of the disclosure requirements, the term “election” means (1) a general, 

special, primary, or runoff election for a Federal office, (2) a convention or caucus of a political 

party that has authority to nominate a candidate for Federal office, (3) a primary election held for 

the selection of delegates to a national nominating convention of a political party, or (4) a 

primary election held for the expression of a preference for the nomination of individuals for 

election to the office of President.
5

The IRS is required to make available to the public any report filed by a political 

organization. In addition, the organization is required to make any such report available to the 

public. A penalty is imposed for failure to file a report or provide required information in the 

report.

Return requirements for section 527 organizations

Under present law, a section 527 organization that has political organization taxable 

income is required annually to file Form 1120-POL (Return of Organization Exempt from 

Income Tax). Section 527 organizations that do not have political organization taxable income 

but have gross receipts of $25,000 or more during the taxable year also are required to file an 

income tax return. The gross receipts requirement does not apply to political organizations that

are subject to section 527 solely by reason of section 527(f)(1) (which makes certain charities 

subject to section 527 based on the charity’s political activities). The annual return must be 

made available to the public by the organization and by the IRS. In addition, section 527 

organizations that are required to file Form 1120-POL also are required to file an annual 

information return, Form 990 (Return of Organization Exempt from Income Tax).

Description of Proposal

The proposal would provide that a political organization that is a political committee of a 

State or local candidate, or a local committee of a political party, as defined by State law, is 

exempt from the requirement to provide notice to the Secretary of its formation and purpose.

In addition, the proposal would exempt certain State or local political organizations from 

the requirement provided by section 527(j)(2) to file regular reports with the Secretary detailing 

contribution and expenditure information. To be exempt from such reporting requirements under 

the proposal: (1) the organization must not engage in any exempt function activities other than to 

influence or attempt to influence the selection, nomination, election, or appointment of any 

individual to any State or local public office or office in a State or local political organization; 

(2) during the calendar year, the organization must be required to report under State or local law 

information regarding the organization’s expenditures and contributions (including information 

regarding the person who makes such contribution or receives such expenditure) that is 

substantially similar to the information that otherwise would be required to be reported; (3) the 

agency with which such information is filed must make the filed information public; (4) the 

organization filing the information must make the information available for public inspection in 

a manner similar to that required of reports filed with the IRS; and (5) no candidate for 

nomination or election to Federal elective office or individual holding such a Federal office can 

control or materially participate in the direction of the organization, or direct, in whole or in part, 

expenditures or fundraising activities of the organization.

Under the proposal, a political organization would be required to file an income tax 

return (Form 1120-POL) only if such organization has political organization taxable income for 

the taxable year. Thus, political organizations without political organization taxable income and 

with gross receipts of at least $25,000 for the taxable year would no longer be required to file an 

income tax return. The proposal would change the present law rule that an information return 

(Form 990) is required to be filed by organizations that are required to file an income tax return. 
6

Instead, under the proposal, information returns would be required to be filed by political 

organizations that have gross receipts of $25,000 or more for the taxable year with the following 

exceptions: (1) State or local political organizations that are exempt from the 527(j) reporting 

requirement, (2) State or local committees of a political party, or political committees of a State 

or local candidate, as defined by State law, (3) a caucus or association of State or local elected 

officials, (4) a national association of State or local officials, (5) a committee of a candidate for 

Federal office authorized by section 301(6) of the Federal Election campaign Act, and (6) a 

national committee of a political party (as defined in section 301(14) of the Federal Election 

Campaign Act).5 In addition, under the proposal, political organizations with political 

organization taxable income and gross receipts for the taxable year of less than $25,000 would 

no longer be required to file an information return. Also, as under present law, the Secretary 

would have the discretion to waive the information return filing requirement.

The proposal would give the Secretary the authority to waive all or any portion of the 

taxes imposed on an organization for failure to notify the Secretary of the organization’s 

establishment or the penalties imposed for failure to file a report. Such waiver would be subject 

to a showing by the organization that the failure was due to reasonable cause and not to willful 

neglect.

The proposal would further provide that the Secretary in consultation with the Federal 

Election Commission shall publicize the effects of these changes and the interaction of the 

requirements to file a notification or report under section 527 and reports under the Federal 

Election Campaign Act of 1971.

Finally, the proposal would make the following technical corrections. The proposal 

would clarify that in computing taxable income for organizations that fail to notify the Secretary 

of their status as a political organization, all exempt function income, whether or not segregated 

for use for an exempt function, is taken into account. The proposal would also clarify that 

penalties imposed for failure to report under section 527(j) will be assessed and collected in the 

same manner as penalties imposed on exempt organizations for failure to file returns (sec. 

6652(c)). The proposal would apply the penalty for fraudulent returns, statements, or other 

documents (sec. 7207) to the notification (527(i)) and reporting (527(j)) requirements of political 

organizations. In addition, the proposal would eliminate the requirement that political 

organizations provide notice of their existence both in writing and electronically. Thus, either 

form of notice would be permitted. The proposal would further direct the Secretary to develop 

procedures for electronic filing of such notices and of reports required under section 527(j).

Effective Date

The technical corrections clarifying the treatment of unsegregated exempt function 

income and the treatment of penalties imposed under section 527(j) would be effective for 

 

5

 As under present law, the bill provides that organizations that are political 

organizations for a taxable year solely because of section 527(f)(1) (which provides for a tax on 

organizations exempt from tax under section 501(c) if such an organization makes an exempt 

function expenditure) are not required to file an information return.
7

failures to notify or report on or after the date of enactment. The requirement that the Secretary 

publicize the effects of the proposal would be effective on the date of enactment. All other 

provisions would be effective as of July 1, 2000. 

B. Extend the Due Date for Electronically Filed Tax Returns

Present Law

In general, individuals must file their income tax returns and pay the full amount owed by 

April 15 (sec. 6072(a)). This deadline applies regardless of the method the taxpayer may choose 

to submit the tax return to the IRS. The Secretary may grant reasonable extensions of time for 

filing returns, but in general the time for paying tax may not be extended (sec. 6081(a)). Failure 

to file or pay on a timely basis may subject the taxpayer to interest and penalties.

Description of Proposal

The proposal would extend the due date for filing and paying individual income taxes to 

April 30 provided that the taxpayer files the return electronically and pays the entire balance due 

electronically by that date. The due date for filing by any other method or for filing 

electronically but paying the balance due by non-electronic means would not be changed.

Effective Date

The proposal would be effective for returns filed after December 31, 2002.

C. Restoration of Retirement Savings After Improper Levy

Present Law

Distributions from an individual retirement arrangement (“IRA”) made on account of an 

IRS levy are includible in the gross income of the individual under the rules applicable to the 

IRA subject to the levy. Thus, in the case of a traditional IRA, the amount withdrawn as a result 

of a levy is includible in gross income except to the extent such amount represents a return of 

nondeductible contributions (i.e., basis). In the case of a Roth IRA, earnings on a distribution 

are excludable from gross income if the distribution is made (1) after the five-taxable year period 

beginning with the first taxable year for which the individual made a contribution to a Roth IRA 

and (2) after attainment of age 59-1/2 or on account of certain other circumstances. Amounts 

withdrawn from an IRA due to a levy, are not subject to the 10-percent early withdrawal tax, 

regardless of whether the amount is includible in income.

Present law provides rules under which the IRS returns amounts subject to a wrongful 

levy. In such cases, the IRS generally is required to pay interest on the amount subject to the 

wrongful levy at the overpayment rate.

Present law does not provide special rules to allow taxpayers to recontribute to an IRA 

amounts withdrawn from an IRA pursuant to a wrongful levy. Thus, if a taxpayer wishes to 

contribute such returned amounts to an IRA, the contribution would be subject to the normally 

applicable rules for IRA contributions.
8

Description of Proposal

Under the proposal, a taxpayer would be able to recontribute amounts returned by the 

IRS as a result of a wrongful levy (and interest thereon) within 60 days of receipt by the 

taxpayer, without regard to the normally applicable limits on IRA contributions. The 

contribution would have to be made to the same type of IRA from which the amounts were 

withdrawn. Interest paid by the IRS on the amount released from the levy6 that is contributed to 

the IRA would be considered an after-tax contribution for purposes of the taxpayer’s basis in the 

IRA. In addition, the any tax attributable to recontributed amounts would be abated.

Effective Date

The proposal would be effective for amounts returned to the taxpayer after December 31, 

2002.

D. Allow the Financial Management Service to Retain Transaction Fees from Levied Amounts

Present Law

To facilitate the collection of tax, the IRS can generally levy upon all property and rights 

to property of a taxpayer (sec. 6331). With respect to specified types of recurring payments,7 the 

IRS may impose a continuous levy of up to 15 percent of each payment, which generally 

continues in effect until the liability is paid (sec. 6331(h)). Continuous levies imposed by the 

IRS on specified Federal payments are administered by the Financial Management Service 

(FMS) of the Department of the Treasury. FMS is generally responsible for making most nondefense related Federal payments. FMS is required to charge the IRS for the costs of developing 

and operating this continuous levy program. The IRS pays these FMS charges out of its 

appropriations.

Description of Proposal

The proposal would allow FMS to retain a portion of the levied funds as payment of these 

FMS fees. The amount credited to the taxpayer’s account would not, however, be reduced by 

this fee.

Effective Date

The proposal would be effective on the date of enactment.

 

6

 Such interest would be excluded from the taxpayer’s gross income under another 

provision of the proposal.

7

 The payments to which this provision applies are (1) Federal payments (except 

payments for which eligibility is based on the income or assets of the taxpayer, (2) 

unemployment benefits, (3) workmen’s compensation, (4) wages, (5) certain public assistance 

payments, and (6) annuities or pensions under Railroad Retirement or Railroad Unemployment.
9

E. Capital Gains Treatment to Apply to Outright Sales of Timber by Landowners

Present Law

Under present law, a taxpayer disposing of timber held for more than one year is eligible 

for capital gains treatment in three situations. First, if the taxpayer sells or exchanges timber 

which is a capital asset (sec. 1221) or property used in the trade or business (sec. 1231), the gain 

generally is long-term capital gain; however, if the timber is held for sale to customers in the 

taxpayer’s business, the gain will be ordinary income. Second, if the taxpayer disposes of the 

timber with a retained economic interest, the gain is eligible for capital gain treatment (sec. 

631(b)). Third, if the taxpayer cuts standing timber, the taxpayer may elect to treat the cutting as 

a sale or exchange eligible for capital gains treatment (sec. 631(a)). 

Description of Proposal

The proposal would provide that timber (within the meaning of section 631) sold by the 

taxpayer, if the taxpayer held the timber (and the land from which it is cut) for more than one 

year, will be treated as property used in the trade or business under section 1231(b)(2). Thus, the 

gain generally will be eligible for capital gains treatment. This treatment will apply whether or 

not the timber would otherwise be a capital asset or property held for sale to customers.

Effective Date

The provision is effective for sales of timber after the date of enactment.