DESCRIPTION OF THE CHAIRMAN’S AMENDMENT 

IN THE NATURE OF A SUBSTITUTE 

TO H.R. 5719, THE 

TAXPAYER ASSISTANCE AND SIMPLIFICATION 

ACT OF 2008 

Scheduled for Markup 

by the 

COMMITTEE ON WAYS AND MEANS 

on April 9, 2008 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

April 9, 2008 

JCX-28-08
i 

CONTENTS 

Page

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

I. AMENDMENTS TO THE CHAIRMAN’S MARK.......................................................... 2 

1. Health savings account substantiation requirement...................................................... 2 

2. Increase in information return penalties ....................................................................... 2 

3. Increase in penalty for failure to file partnership returns.............................................. 2 

4. Penalty for failure to file S corporation returns ............................................................ 2 

II. ADDITIONAL PROVISION ............................................................................................. 3 

1. Certain domestically controlled foreign persons performing services under 

contract with United States Government treated as American employers ................... 3 
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. 5719, the 

Taxpayer Assistance and Simplification Act of 2008, which is to be marked up by the 

Committee on Ways and Means on April 9, 2008. 

 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. 5719, the Taxpayer Assistance and 

Simplification Act of 2008 (JCX-28-08), April 9, 2008. This document can also be found on our website 

at www.house.gov/jct. 
2 

I. AMENDMENTS TO THE CHAIRMAN’S MARK 

1. Health savings account substantiation requirement 

Under the Chairman’s amendment, substantiation of qualified medical expenses is 

effective for amounts distributed from health savings accounts after December 31, 2010. 

2. Increase in information return penalties 

The Chairman’s amendment deletes the provision increasing the penalties for failing to 

file correct information returns, for failing to furnish correct payee statements, and for failing to 

comply with other information reporting requirements. 

3. Increase in penalty for failure to file partnership returns 

The Chairman’s amendment deletes the provision increasing the penalty for failure to file 

partnership returns. 

4. Penalty for failure to file S corporation returns 

The Chairman’s amendment deletes the provision increasing the penalty for failure to file 

S corporation returns. 
3 

II. ADDITIONAL PROVISION 

1. Certain domestically controlled foreign persons performing services under contract with 

United States Government treated as American employers 

Present Law

In general

Under the Federal Insurance Contributions Act (“FICA”), separate taxes are imposed on 

every employer and employee with respect to wages paid to such employer’s employees.2 These 

two taxes are commonly referred to as the employer’s and the employee’s share of FICA. The 

employee’s share of FICA is collected by means of payroll withholding by the employee’s 

employer. 

For both the employer and the employee’s share of FICA, the tax consists of two parts: 

(1) old age, survivor, and disability insurance (“OASDI”), which correlates to the Social Security 

program that provides monthly benefits after retirement, disability, or death; and (2) Medicare 

hospital insurance (“HI”). The OASDI tax rate is 6.2 percent on both the employee and 

employer (for a total rate of 12.4 percent). The OASDI tax rate applies to wages up to the 

OASDI wage base ($102,000 for 2008). The HI tax rate is 1.45 percent on both the employee 

and the employer (for a total rate of 2.9 percent). Unlike the OASDI tax, the HI tax is not 

limited to a specific amount of wages, but applies to all wages. 

For purposes of the employer’s and employee’s share of FICA, wages generally means 

all remuneration for employment including the cash value of all remuneration paid in a medium 

other than cash. However, the general definition of wages is subject to a number of special rules 

and exceptions.3

 

Employment for FICA purposes generally means any service of whatever nature 

performed by an employee for the employer (irrespective of the citizenship or residence of 

either) within the United States. In the case of service outside the United States, employment 

also includes service performed by a United States citizen or resident as an employee for an 

American employer. As in the case of the definition of wages, the definition of employment is 

also subject to a number of exceptions and special rules.4

 An American employer is defined as 

an employer which is: (1) the United States or any instrumentality thereof; (2) an individual who 

is a resident of the United States; (3) a partnership, if at least two-thirds of the partners are 

 2

 Secs. 3101-3128 (FICA). Sections 3501-3510 provide additional rules. 

3

 Sec. 3121(a). 

4

 Sec. 3121(b). For example, employment for FICA purposes includes certain service with 

respect to American vessels or aircrafts and also includes service that is designated as employment under 

an agreement entered into under section 233 of the Social Security Act. 
4 

United States residents; (4) a trust, if all of the trustees are United States residents; or (5) a 

corporation organized under the laws of the United States or any of the States.5

Section 3121(l) agreements 

An American employer may enter into a voluntary agreement with the Secretary of the 

Treasury to extend coverage of the insurance system of Title II of the Social Security Act to 

service performed outside the United States in the case of certain employees. Specifically, such 

an agreement may be entered into with respect to employees of a foreign affiliate of the 

American employer who are United States citizens or residents.6 Such an agreement is 

commonly referred to as a "section 3121(l) agreement", and is entered into by completing 

Internal Revenue Service Form 2032. A foreign affiliate for purposes of the section 3121(l) 

agreement is any foreign entity in which the American employer has at least a 10-percent 

interest.7 

If a section 3121(l) agreement is entered into, the American employer agrees to pay the 

Secretary of the Treasury amounts equivalent to the employer and employee’s share of FICA 

(including amounts equivalent to interest, additional taxes, and penalties which would be 

applicable) with respect to the remuneration which would be wages if the services covered by the 

agreement constituted employment for purposes of FICA. In addition, the American employer 

agrees to comply with such regulations relating to payments and reports as the Secretary of the 

Treasury may prescribe.8

 A section 3121(l) agreement may not be terminated with respect to a 

foreign affiliate after June 15, 1989.9

In the case of a domestic corporation, a deduction is allowed for amounts paid or incurred 

pursuant to a section 3121(l) agreement with respect to services performed by United States 

citizens employed by foreign subsidiary corporations.10 Any reimbursement of any amount 

previously allowed as a deduction is included in gross income in the year received. 

Totalization agreements

Under section 233 of the Social Security Act, the President of the United States is 

authorized to enter into agreements establishing totalization arrangements between the social 

security system of the United States and the social security system of a foreign country (referred 

 5

 Sec. 3121(h). 

6

 Sec. 3121(l). 

7

 Sec. 3121(l)(6). 

8

 Sec. 3121(l)(1). 

9

 Sec. 3121(l)(3). 

10 Sec. 176. 
5 

to as a “totalization agreement”).11 The purposes of a totalization agreement are (1) to establish 

entitlement to and the amount of old-age, survivors, disability, or derivative benefits based on a 

combination of an individual’s periods of coverage under the United States social security 

system and the social security system of a foreign country, and (2) to prevent imposition of 

employment taxes by two countries on the same wages. 

For purposes of FICA, during any period in which a totalization agreement is in effect, 

wages paid to an individual are exempt from the employer’s and employee’s share of FICA to 

the extent such wages are subject under the agreement exclusively to the laws applicable to the 

foreign country’s social security system.12

Description of Proposal

Under the proposal, a foreign person is treated as an American employer with respect to 

certain employees for purposes of determining whether their employment is subject to the 

employer’s and employee’s share of FICA. Specifically, a foreign person is treated as an 

American employer with respect to an employee of the foreign person who is performing 

services in connection with a contract between the United States government (or any 

instrumentality thereof) and any member of any domestically controlled group of entities which 

includes such foreign person. Thus, under the proposal, service performed as an employee for 

such an employer outside of the United States by a United States citizen or resident in connection 

with such a contract is employment that is subject to FICA. A domestically controlled group of 

entities is a controlled group of entities the common parent of which is a domestic corporation. 

For this purpose, a controlled group of entities is as defined in section 1563(a)(1) except that the 

ownership threshold is 50 percent rather than 80 percent and certain other changes are made, 

including that certain partnerships may be considered members of a controlled group. The 

sections 3101(c) and 3111(c) exceptions for wages not subject to FICA as a result of a 

totalization agreement applies under the proposal. Also, this proposal does not apply to any 

services covered by an agreement under section 3121(l). 

The proposal provides that the common parent of the domestically controlled group of 

entities is jointly and severally liable for the FICA taxes for which the foreign person is liable as 

a result of the proposal. In addition, the common parent is liable for any penalty imposed on the 

foreign person with respect to any failure to pay the FICA taxes or any failure to file any return 

or statement with respect to such tax or wages subject to such tax. No deduction is allowed for 

any liability imposed on the common parent as a result of these joint and several liability rules. 

Effective Date

The proposal is effective for services performed after the date of enactment of the 

proposal. 

 11 42 U.S.C. sec. 433. 

12 Secs. 3101(c) and 3111(c).