DESCRIPTION OF THE 

TAXPAYER ASSISTANCE AND SIMPLIFICATION 

ACT OF 2008 

Scheduled for Markup 

By the 

HOUSE COMMITTEE ON WAYS AND MEANS 

on April 9, 2008 

 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

 

April 8, 2008 

JCX-26-08
i 

CONTENTS 

Page

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

A. Modified Standard for Imposition of Tax Return Preparer Penalties............................. 2 

B. Removal of Cellular Telephones (or Similar Telecommunications Equipment) 

rom Listed Property ........................................................................................................ 4 

C. Delayed Implementation of Government Withholding Requirement............................. 7 

D. Employment Tax Treatment of Home Care Service Recipients..................................... 9 

E. Referrals to Low-Income Taxpayer Clinics.................................................................. 14 

F. Programs for the Benefit of Low-Income Taxpayers ................................................... 15 

G. Earned Income Credit Outreach.................................................................................... 16 

H. Prohibition on IRS Debt Indicators for Predatory Refund Anticipation Loans............ 19 

I. Study on Delivery of Tax Refunds ............................................................................... 20 

J. Extension of Time Limit for Return of Property for Wrongful Levy........................... 21 

K. Individuals Held Harmless on Improper Levy on Individual Retirement Plan ............ 22 

L. Taxpayer Notification of Suspected Identity Theft ...................................................... 24 

M. Repeal of Private Tax Collection Contracts.................................................................. 26 

N. Clarification of IRS Unclaimed Refund Authority....................................................... 27 

O. Prohibition on Misuse of Department of the Treasury Names and Symbols ............... 28 

P. Health Savings Account Substantiation Requirement .................................................. 30 

Q. Increase in Information Return Penalties...................................................................... 33 

R. Increase in Penalty for Failure to File Partnership Returns .......................................... 35 

S. Penalty for Failure to File S Corporation Returns ........................................................ 36 

T. Modifications to Corporate Estimated Tax Payments .................................................. 37 
1

INTRODUCTION 

The House Committee on Ways & Means has scheduled a markup on April 9, 2008, of 

the Taxpayer Assistance and Simplification Act of 2008. This document,1 prepared by the staff 

of the Joint Committee on Taxation provides a description of the Taxpayer Assistance and 

Simplification Act of 2008.

 1

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

Taxpayer Assistance and Simplification Act of 2008 (JCX-26-08), April 8, 2008. This document may be 

cited at www.house.gov/jct. 
2

A. Modified Standard for Imposition of Tax Return Preparer Penalties 

Present Law

Taxpayer standards

Present law imposes accuracy-related penalties on a taxpayer at a rate of 20 percent of the 

portion of any underpayment that is attributable to any substantial understatement of income tax. 

In determining whether a substantial understatement exists, the amount of the understatement 

generally is reduced by any portion attributable to an item if (1) the treatment of the item is 

supported by substantial authority, or (2) facts relevant to the tax treatment of the item were 

adequately disclosed and there was a reasonable basis for its tax treatment. 

In the case of a tax shelter item of a non-corporate taxpayer, the substantial 

understatement penalty does not apply if the taxpayer had substantial authority for the tax 

position and the taxpayer can demonstrate that he or she had a reasonable belief that the position 

is “more likely than not” the proper treatment. A taxpayer will be considered to have a 

reasonable belief that the treatment is more likely than not the proper treatment if the taxpayer 

relies upon the opinion of a professional advisor and the opinion is based upon the pertinent facts 

and authorities analyzed similar to the manner described in the substantial authority standard.2

Tax return preparer standards

Prior to enactment of the Small Business and Work Opportunity Tax Act of 2007, an 

income tax return preparer who prepared a tax return with respect to which there was an 

understatement of tax that was due to an undisclosed position for which there was not a realistic 

possibility of being sustained on its merits was liable for a $250 penalty. For a disclosed 

position, the preparer was liable only if the position was frivolous. 

Legislation enacted as part of the Small Business and Work Opportunity Tax Act of 2007 

broadened the scope of the preparer penalty by applying it to all tax return preparers and altered 

the standards of conduct a tax return preparer is required to meet in order to avoid the imposition 

of penalties for the preparation of a return with respect to which there is an understatement of 

tax. A tax return preparer now can be penalized for preparing a return on which there is an 

understatement of tax liability as a result of an “unreasonable position.” Any position that a 

return preparer does not reasonably believe is more likely than not to be sustained on its merits is 

an “unreasonable position” unless the position is disclosed on the return and there is a reasonable 

basis for the position. 

In general, the term “tax return preparer” is broadly defined as any person who prepares 

for compensation, or who employs one or more persons to prepare for compensation, any return 

 2

 Treas. Reg. sec. 1.6662-4(g). 
3

of tax or any claim for refund of tax.3

 Preparation of a substantial portion of a return is treated as 

if it were the preparation of such return. 

Description of Proposal

The proposal changes the standards for imposition of the tax return preparer penalty. The 

preparer standard for undisclosed positions is reduced to “substantial authority.” The preparer 

standard for disclosed positions is “reasonable basis.” For tax shelters and reportable 

transactions to which section 6662A applies (i.e., listed transactions and reportable transactions 

with significant avoidance or evasion purposes), a tax return preparer is required to have a 

reasonable belief that such a transaction was more likely than not to be sustained on its merits. 

Effective Date

The proposal generally is effective with respect to returns prepared after May 25, 2007. 

In the case of tax shelters and reportable transactions, the proposal is effective for returns 

prepared for taxable years ending after the date of enactment. 

 3

 Sec. 7701(a)(36)(A). 
4

B. Removal of Cellular Telephones 

(or Similar Telecommunications Equipment) from Listed Property 

Present Law

Employer Deduction

Property, including cellular telephones and similar equipment, used in carrying on a trade 

or business is subject to the general rules for deducting ordinary and necessary expenses under 

section 162. Under these rules, a taxpayer may properly claim depreciation deductions under the 

applicable cost recovery rules for only the portion of the cost of the property that is attributable 

to use in a trade or business.4 Similarly, the business portion of monthly telecommunication 

service is generally deductible, subject to capitalization rules, as an ordinary and necessary 

expense of carrying on a trade or business. 

In the case of certain listed property, special rules apply. Listed property generally is 

defined as (1) any passenger automobile; (2) any other property used as a means of 

transportation; (3) any property of a type generally used for purposes of entertainment, 

recreation, or amusement; (4) any computer or peripheral equipment; (5) any cellular telephone 

(or other similar telecommunications equipment);5

 and (6) any other property of a type specified 

in Treasury regulations.6

For listed property, no deduction is allowed unless the taxpayer adequately substantiates 

the expense and business usage of the property.7 Under the applicable regulations, a taxpayer 

must substantiate the elements of each expenditure or use of listed property, including (1) the 

amount (e.g., cost) of each separate expenditure and the amount of business or investment use, 

based on the appropriate measure (e.g., mileage for automobiles), and the total use of the 

property for the taxable period, (2) the date of the expenditure or use, and (3) the business 

purposes for the expenditure or use.8 The level of substantiation for business or investment use 

of listed property varies depending on the facts and circumstances. In general, the substantiation 

must contain sufficient information as to each element of every business or investment use.9 

 4

 Sec. 212 allows deductions for ordinary and necessary expenses paid or incurred for the 

production or collection of income. 

5

 Cellular telephones (or other similar telecommunications equipment) were added as listed 

property as part of the Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, sec. 7643 

(1989). 

6

 Sec. 280F(d)(4)(A). 

7

 Sec. 274(d)(4). 

8

 Temp. Reg. sec. 1.274-5T(b)(6). 

9

 Temp. Reg. sec. 1.274-5T(c)(2)(ii)(C). 
5

With regard to the business use of listed property made available by an employer for use 

by an employee, the employer may generally rely on adequate records maintained, and retained, 

by the employee or on the employee’s own statement if it is corroborated by other sufficient 

evidence, unless the employer knows or has reason to know that the statement, records, or other 

evidence are not accurate.10

Taxation of Employee

Gross income includes all income unless a specific exclusion applies.11 Exclusions from 

gross income are provided in the case of certain fringe benefits.12 Gross income does not include 

the value of de minimis fringe benefits. A de minimis fringe is any property or service the value 

of which is (after taking into account the frequency in which similar fringes are provided by the 

employer to the employer’s employees) so small as to make accounting for it unreasonable or 

administratively impracticable. An exclusion from employee gross income is also provided in 

the case of a working condition fringe.13 A working condition fringe is any property or services 

provided to an employee of the employer to the extent that, if the employee paid for such 

property or services, such payment would be allowable as a deduction under section 162 or 

167.14 Treasury regulations provide that an employee may not exclude from gross income as a 

working condition fringe any amount of the value of the availability of listed property provided 

by an employer to the employee, unless the employee substantiates for the period of availability 

the amount of the exclusion in accordance with the substantiation requirements discussed 

above.15 In general, under such requirements, in the case of listed property, the working 

condition fringe exception is allowed only in the case of substantiation of the employee’s 

personal use of the property and that the employer included an appropriate amount (based on 

such personal use) in the employee’s income.16

Cost Recovery

A taxpayer is allowed to recover through annual depreciation deductions the cost of 

certain property used in a trade or business or for the production of income. The amount of the 

depreciation deduction allowed with respect to tangible property for a taxable year is determined 

under the modified accelerated cost recovery system (“MACRS”). Under MACRS, different 

 10 Temp. Reg. sec. 1.274-5T(e)(2)(ii). 

11 Sec. 61. 

12 Sec. 132. 

13 Sec. 132(a)(3). 

14 Sec. 132(d). 

15 Temp. Reg. sec. 1.274-5T(e)(1). 

16 Temp. Reg. sec. 1.274-5T(e)(2). 
6

types of property generally are assigned applicable recovery periods and depreciation methods. 

The recovery periods applicable to most tangible personal property range from three to 25 years. 

The depreciation methods generally applicable to tangible personal property are the 200-percent 

and 150-percent declining balance methods, switching to the straight-line method for the taxable 

year in which the taxpayer’s depreciation deduction would be maximized. 

In the case of certain listed property, special depreciation rules apply. First, if for the 

taxable year that the property is placed in service the use of the property for trade or business 

purposes does not exceed 50 percent of the total use of the property, then the depreciation 

deduction with respect to such property is determined under the alternative depreciation 

system.17 The alternative depreciation system generally requires the use of the straight-line 

method and a recovery period equal to the class life of the property.18 Second, if an individual 

owns or leases listed property that is used by the individual in connection with the performance 

of services as an employee, no depreciation deduction, expensing allowance, or deduction for 

lease payments is available with respect to such use unless the use of the property is for the 

convenience of the employer and required as a condition of employment.19

Description of Proposal

The proposal removes cellular telephones (or other similar telecommunications 

equipment) from the definition of listed property. Thus, under the proposal, the heightened 

substantiation requirements that apply to listed property do not apply to cellular telephones (or 

other similar telecommunications equipment). 

Effective Date

The proposal is effective for taxable years beginning after December 31, 2008.

 17 Sec. 280F(b)(1). If for any taxable year after the year in which the property is placed in 

service the use of the property for trade or business purposes decreases to 50 percent or less of the total 

use of the property, then the amount of depreciation allowed in prior years in excess of the amount of 

depreciation that would have been allowed for such prior years under the alternative depreciation system 

is recaptured (i.e., included in gross income) for such taxable year. 

18 Sec. 168(g). 

19 Sec. 280F(d)(3). 
7 

C. Delayed Implementation of Government Withholding Requirement 

Present law

For payments made after December 31, 2010, the Code requires withholding at a threepercent rate on certain payments to persons providing property or services made by the 

Government of the United States, every State, every political subdivision thereof, and every 

instrumentality of the foregoing (including multi-State agencies). The withholding requirement 

applies regardless of whether the government entity making such payment is the recipient of the 

property or services. Political subdivisions of States (or any instrumentality thereof) with less 

than $100 million of annual expenditures for property or services that would otherwise be subject 

to withholding under this provision are exempt from the withholding requirement. 

Payments subject the three-percent withholding include any payment made in connection 

with a government voucher or certificate program which functions as a payment for property or 

services. For example, payments to a commodity producer under a government commodity 

support program are subject to the withholding requirement. The provision imposes information 

reporting requirements on the payments that are subject to withholding under the provision. 

The three-percent withholding requirement does not apply to any payments made through 

a Federal, State, or local government public assistance or public welfare program for which 

eligibility is determined by a needs or income test. The three-percent withholding requirement 

also does not apply to payments of wages or to any other payment with respect to which 

mandatory (e.g., U.S.-source income of foreign taxpayers) or voluntary (e.g., unemployment 

benefits) withholding applies under present law. The provision does not exclude payments that 

are potentially subject to backup withholding under section 3406. If, however, payments are 

actually being withheld under backup withholding, withholding does not apply. 

The three-percent withholding requirement also does not apply to the following: 

payments of interest; payments for real property; payments to tax-exempt entities or foreign 

governments; intra-governmental payments; payments made pursuant to a classified or 

confidential contract (as defined in section 6050M(e)(3)); and payments to government 

employees that are not otherwise excludable from the new withholding provision with respect to 

the employees’ services as employees. 

Description of Proposal

The proposal delays the effective date for the three-percent withholding requirement. 

Under the proposal, the requirement applies to payments made after December 31, 2011. 

The proposal directs the Secretary to study issues associated with the three-percent 

withholding requirement, including (1) the problems, if any, which are anticipated in 

administering and complying with such requirement, (2) the burdens, if any, that such 

requirements will place on small businesses (taking into account such mechanisms as may be 

necessary to administer such requirements), and (3) the application of such requirements to small 

expenditures for services and goods by governments. 
8 

The Secretary is to submit his report to the Senate Committee on Finance and House 

Committee on Ways and Means no later than six months after the date of enactment. 

Effective Date

The proposal is effective on the date of enactment. 
9 

D. Employment Tax Treatment of Home Care Service Recipients 

Present Law

In general

Employment taxes generally consist of the taxes under the Federal Insurance 

Contributions Act (“FICA”), the tax under the Federal Unemployment Tax Act (“FUTA”), and 

income taxes required to be withheld by employers from wages paid to employees (“income tax 

withholding”).20 

FICA 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. 

Under FUTA, employers must pay a tax of 6.2 percent of wages up to the FUTA wage 

base of $7,000. An employer may take a credit against its FUTA tax liability for its 

contributions to a State unemployment fund and, in certain cases, an additional credit for 

contributions that would have been required if the employer had been subject to a higher 

contribution rate under State law. For purposes of the credit, contributions means payments 

required by State law to be made by an employer into an unemployment fund, to the extent the 

payments are made by the employer without being deducted or deductible from employees’ 

remuneration. 

Employers generally are required to withhold income taxes from wages paid to 

employees. Withholding rates vary depending on the amount of wages paid, the length of the 

payroll period, and the number of withholding allowances claimed by the employee. 

Wages paid to employees, and FICA and income taxes withheld from the wages, are 

required to be reported on employment tax returns (Forms 940 and 941) and on Form W-2.21

A number of special rules apply in the case of household employees. An exception from 

FICA exists in the case of domestic service in a private home if the cash remuneration paid 

during the year by the employer to the employee for such service is less than $1,600 (for 2008).22 

An employer of a household employee is liable for FUTA if the employer paid wages of $1,000 

 20 Secs. 3101-3128 (FICA), 3201-3241 (the Railroad Retirement Tax Act), 3301-3311 (FUTA), 

and 3401-3404 (income tax withholding). Sections 3501-3510 provide additional rules. 

21 Secs. 6011 and 6051. 

22 Sec. 3121(a)(7)(B). 
10 

for such service in any calendar quarter in the calendar year or the preceding calendar year.23 An 

employer of a household employee is not required to withhold Federal income taxes from wages 

paid to household employees.24 Household employers may report employment taxes annually on 

Schedule H (filed with their annual Federal income tax return) rather than quarterly on Form 

941. 

Responsibility for employment tax compliance

Employment tax responsibility generally rests with the person who is the employer of an 

employee under a common-law test that has been incorporated into Treasury regulations.25 

Under the regulations, an employer-employee relationship generally exists if the person for 

whom services are performed has the right to control and direct the individual who performs the 

services, not only as to the result to be accomplished by the work, but also as to the details and 

means by which that result is accomplished. That is, an employee is subject to the will and 

control of the employer, not only as to what is to be done, but also as to how it is to be done. It is 

not necessary that the employer actually control the manner in which the services are performed, 

rather it is sufficient that the employer have a right to control. Whether the requisite control 

exists is determined on the basis of all the relevant facts and circumstances. The test of whether 

an employer-employee relationship exists is relevant in determining whether a worker is an 

employee or an independent contractor. However, the same test applies in determining whether 

a worker is an employee of one person or another.26 

In some cases, a person other than the common-law employer may be liable for 

employment taxes. For example, if wages are paid to an employee by a person other than the 

employer and the payor, rather than the employer, has control of the payment of the wages, the 

payor is responsible for complying with the applicable employment tax requirements.27 There 

 23 Sec. 3306(a)(3). 

24 Sec. 3401(a)(3). 

25 Treas. Reg. secs. 31.3121(d)-1(c)(1), 31.3306(i)-1(a), and 31.3401(c)-1. 

26 Issues relating to the classification of workers as employees or independent contractors are 

discussed in Joint Committee on Taxation, Present Law and Background Relating to Worker 

Classification for Federal Tax Purposes (JCX-26-07), May 2007. These issues are also discussed in Joint 

Committee on Taxation, Study of the Overall State of the Federal Tax System and Recommendations for 

Simplification, Pursuant to Section 8022(3)(B) of the Internal Revenue Code of 1986 (JCS-3-01), 

April 2001, at Vol. II, Part XV.A, at 539-550. 

27 Sec. 3401(d)(1) (for purposes of income tax withholding, if the employer does not have control 

of the payment of wages, the person having control of the payment of such wages is treated as the 

employer); Otte v. United States, 419 U.S. 43 (1974) (the person who has the control of the payment of 

wages is treated as the employer for purposes of withholding the employee’s share of FICA from wages); 

and In re Armadillo Corporation, 561 F.2d 1382 (10th Cir. 1977), and In re The Laub Baking Company v. 

United States, 642 F.2d 196 (6th Cir. 1981) (the person who has control of the payment of wages is the 

employer for purposes of the employer’s share of FICA and FUTA). The mere fact that wages are paid 

by a person other than the employer does not necessarily mean that the payor has control of the payment 
11 

are also special rules under which if a lender, surety or other person pays wages directly to an 

employee or group of employees, the lender, surety, or other person is responsible for 

employment taxes.28 There is also a special rule under which a qualified real estate agent, or 

direct seller of certain consumer products, performing services is not treated as an employee with 

respect to the person for whom the services are performed.29 

In addition, certain designated agents are jointly and severally liable with the employer 

for FICA tax and income tax withholding with respect to wages paid to the employer’s 

employees.30 These designated agents prepare and file employment tax returns using their own 

names and employer identification numbers.31 In contrast, reporting agents (often referred to as 

payroll service providers) are generally not liable for the employment taxes reported on their 

clients’ returns. Reporting agents prepare and file employment tax returns for their clients using 

the client’s name and employer identification number. 

Penalties apply in the case of failures to comply with information reporting 

requirements.32 In the case of failure to file a specified information return, a penalty of $50 for 

each return (not to exceed $100,000) is imposed.33 

Home-care services

Many elderly and disabled individuals receive in-home care through state and local 

government health and welfare programs.34 These programs generally are funded at least in part 

with Federal funds. In most cases, the service recipient (i.e., the elderly or disabled individual) is 

the common law employer. 

IRS guidance provides rules for State and local government agencies as to how they can 

serve as agents for disabled individuals and other welfare recipients who employ home-care 

 

of the wages. Rather, control depends on the facts and circumstances. See, e.g., Consolidated Flooring 

Services v. U.S., 38 Fed. Cl. 450 (1997), and Winstead v. U.S., 109 F. 3d 989 (4th Cir. 1997). 

28 Sec. 3505 

29 Sec. 3508 

30 Sec. 3504. The designated payroll agent rules do not apply for FUTA purposes. 

31 The employer’s name, address, and employer identification number, as well as the agent’s, are 

provided when the agent is designated by the employer. Form 2678 is used to designate an agent. 

32 Secs. 6721 - 6724. 

33 Sec. 6723. 

34 See National Taxpayer Advocate 2007 Annual Report to Congress, December 31, 2007 at 355. 
12 

service providers to assist them in their homes.35 In general, these rules provide that the elderly 

or disabled individual must complete a form designating the State or local government as their 

agent for employment tax purposes. Under IRS guidance, unlike the general rule for designated 

agents, a State that furnishes home-care service providers (or a third party subagent of the State) 

can act as an agent on behalf of the service recipient for FUTA purposes.36 As previously 

discussed, in the case of a State or local government or independent third party serving as an 

agent on behalf of the service recipient, the service recipient remains liable for payment of the 

employment taxes and for any associated penalties for noncompliance. 

Description of Proposal

The proposal provides that, in the case of amounts paid under a home care service 

program to a home care service provider by the fiscal administrator of such program, the fiscal 

administrator is solely liable for the payment of employment taxes with respect to amounts paid 

for services under the program. In such case, the home care service recipient is not liable for the 

payment of employment taxes. 

A home care service program is a State or local government program which is funded in 

whole or part by Federal funds and under which domestic services are provided to elderly or 

disabled individuals in their home. A home care service program does not include any program 

to the extent home care service recipients make payments to the home care service providers for 

such in-home domestic services. 

A home care service provider is an individual who provides domestic services to a home 

care service recipient under a home care service program. A home care service recipient is an 

individual receiving domestic services under a home care service program. A fiscal 

administrator is any person or governmental entity who pays amounts under a home care service 

program to home care service providers for the provision of domestic services under such 

program. 

Employment tax returns (i.e., Forms W-2, 940 and 941) must be made under the name 

and employer identification number of the fiscal administrator rather than that of the common 

law employer, the service recipient. The fiscal administrator is required, as prescribed by the 

Secretary, to report to the IRS the name, address, and social security number of each home care 

service recipient for whom amounts are paid by such fiscal administrator under the home care 

services program. This is intended to assist the IRS in preventing collection action against the 

 35 See Notice 2003-70, 2003-2 C.B. 916 (providing a proposed revenue procedure). See also,

Rev. Proc. 76-6, 1970-1 C.B. 420, as modified by Rev. Proc. 80-4, 1980-1 C.B. 581. 

36 Notice 2003-70, 2003-2 C.B. 916. This is not the case if the independent third party is 

designated as the agent directly by the employer. 
13 

elderly or disabled common law employer. In the case of failure to file the required report, a 

penalty is imposed.37 

Under the proposal, the Secretary may prescribe regulations or other guidance as may be 

necessary to carry out the purposes of the provision, including rules for timing of employment 

tax deposits. 

It is intended that the present law rules that apply in the case of household employees 

continue to apply under the proposal. Relevant thresholds under these rules are also determined 

with respect to each home care recipient. For example, it is intended that the exception from 

FICA for domestic service in a private home if cash remuneration paid during the year by the 

employer to the employee for such service is less than $1,600 (for 2008) would continue to 

apply. Similarly, FUTA would be required only if the employer paid wages of $1,000 for 

household service in any calendar quarter in the calendar year or the preceding calendar year. In 

addition, the present law exception from Federal income tax withholding for household 

employees would continue to apply. 

Effective Date

The proposal is effective for amounts paid after December 31, 2008. 

 37 The section 6723 present law penalties are increased under another section of the bill. Under 

that proposal, the penalty of $50 per report (not to exceed $100,000 per calendar year) is increased to 

$100 per report (not to exceed $1,500,000 per calendar year). 
14

E. Referrals to Low-Income Taxpayer Clinics 

Present Law

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

matching grants to certain qualified low-income taxpayer clinics.38 Eligible clinics are those that 

charge no more than a nominal fee to either represent low-income taxpayers in controversies 

with the IRS or provide tax information to individuals for whom English is a second language. 

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

A qualified low-income taxpayer clinic includes (1) a clinical program at an accredited 

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

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

described above or provides referrals to qualified representatives. A low-income taxpayer is an 

individual whose income does not exceed 250 percent of the poverty level, as determined in 

accordance with criteria established by the Director of the Office of Management and Budget 

(“OMB”). 

The Department of the Treasury prohibits its officers and employees from referring 

taxpayers to qualified low-income taxpayer clinics for advice and assistance. 

Description of Proposal

The proposal allows officers and employees of the Department of the Treasury to refer 

taxpayers for advice and assistance to qualified low-income taxpayer clinics that receive funding, 

notwithstanding any other provision of law. 

Effective Date

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

 38 Sec. 7526. 
15

F. Programs for the Benefit of Low-Income Taxpayers 

Present Law

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

matching grants to certain qualified low-income taxpayer clinics.39 Eligible clinics are those that 

charge no more than a nominal fee to either represent low-income taxpayers in controversies 

with the IRS or provide tax information to individuals for whom English is a second language. 

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

A qualified low-income taxpayer clinic includes (1) a clinical program at an accredited 

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

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

described above or provides referrals to qualified representatives. A low-income taxpayer is an 

individual whose income does not exceed 250 percent of the poverty level, as determined in 

accordance with criteria established by the Director of the Office of Management and Budget 

(“OMB”). 

Description of Proposal

The proposal authorizes the Secretary to make $10 million in matching grants for 

volunteer income tax programs. Volunteer income tax programs are programs that provide tax 

return preparation and filing services to low- and moderate-income (as determined by the 

Secretary) taxpayers. Under the proposal, volunteer income tax programs may not charge 

taxpayers for return preparation services. Volunteers assisting taxpayers through such programs 

must meet training requirements established by the Secretary. 

The authorization of $6 million for qualified low-income taxpayer clinics under present 

law also is increased to $10 million. 

Effective Date

The proposal is effective on the date of enactment. 

 39 Sec. 7526. 
16 

G. Earned Income Credit Outreach 

Present Law

In general

Low and moderate-income taxpayers may be eligible for the refundable earned income 

credit (“EIC”).40 Generally, the amount of the EIC is based on the presence and number of 

qualifying children in the taxpayer’s family, as well as on adjusted gross income (“AGI”) and 

earned income.41 Other rules also apply. 

Three separate schedules apply in computing the taxpayer’s EIC: (1) one schedule for 

taxpayers with no qualifying children; (2) one schedule for taxpayers with one qualifying child; 

and (3) one schedule for taxpayers with more than one qualifying child.42

The EIC generally equals a specified percentage of earned income up to a maximum 

dollar amount. The maximum amount applies over a certain income range and then diminishes 

to zero over a specified phaseout range. For taxpayers with earned income (or AGI, if greater) in 

excess of the beginning of the phaseout range, the maximum EIC amount is reduced by the 

phaseout rate multiplied by the amount of earned income (or AGI, if greater) in excess of the 

beginning of the phaseout range. For taxpayers with earned income (or AGI, if greater) in excess 

of the end of the phaseout range, no credit is allowed. All income thresholds are adjusted 

annually for inflation. 

Wage withholding

In general, the Code requires employers to withhold income tax on wages paid to 

employees, including wages and salaries of employees or elected officials of Federal, State, and 

local government units. Withholding rates vary depending on the amount of wages paid, the 

length of the payroll period, and the number of withholding allowances claimed by the 

 40 The EIC is a refundable credit, meaning that if the amount of the credit exceeds the taxpayer’s 

Federal income tax liability, the excess is payable to the taxpayer as a direct transfer payment. Under an 

advance payment system, eligible taxpayers may elect to receive a portion of the credit in their paychecks, 

rather than waiting to claim a refund on their tax return filed by April 15 of the following year. 

41 Earned income is defined as (1) wages, salaries, tips, and other employee compensation, but 

only if such amounts are includible in gross income, plus (2) the amount of the taxpayer’s net selfemployment earnings. 

42 In general, a child is a qualifying child of a taxpayer if the child satisfies each of three tests: 

(1) the child has the same principal place of abode as the taxpayer for more than one-half of the taxable 

year; (2) the child has a specified relationship to the taxpayer; and (3) the child has not yet attained a 

specified age. A tie-breaking rule applies if more than one taxpayer claims a child as a qualifying child. 
17 

employee. The Code also requires that employers report wage withholding information annually 

to the IRS and their employees (e.g., Form W-2 and Form W-3).43

EIC outreach and assistance

Pre-tax return filing

The IRS has developed an outreach effort to inform taxpayers potentially eligible for the 

EIC and their employers about the EIC and how to claim the credit. One such public notice, 

contained in IRS Notice 797 (Rev. 12-2006), explains the EIC, its eligibility rules, and how to 

claim the credit. In addition, the IRS works with employers, community groups and other 

stakeholders to inform eligible taxpayers of the EIC. The IRS also helps taxpayers below certain 

income levels compute their Federal income tax liability, including the amount of EIC, if any. 

Post-tax return filing

The IRS sends out notice letters addressed to taxpayers who it has identified as 

potentially eligible for the EIC in the immediately prior taxable year. 

The notice letters are different depending on the presence of a qualifying child or children 

in the taxpayer’s household. If the IRS identifies a taxpayer with one or more qualifying 

children as potentially eligible for the EIC, the notice letter informs the taxpayer that IRS records 

indicate that: (1) the taxpayer’s income falls in the eligible range to receive the EIC; (2) the 

taxpayer has one or more dependents who may be an EIC qualifying child; and (3) the taxpayer 

did not claim the EIC for the applicable taxable year on his or her return filed with the IRS. If 

the IRS identifies a taxpayer without qualifying children as potentially eligible for the EIC, the 

notice letter informs the taxpayer that IRS records indicate that: (1) the taxpayer’s income falls in 

the eligible range to receive the EIC and (2) the taxpayer did not claim the EIC for the applicable 

taxable year on his or her return filed with the IRS. 

In all cases, the notice letters ask the taxpayers to complete an “EIC Eligibility CheckSheet” and, if the check-sheet indicates eligibility for the EIC, to return it to the IRS. The EIC 

Eligibility Check-Sheet requests the taxpayer to provide all the information necessary to 

determine EIC eligibility. The EIC Eligibility Check-Sheet is completed under penalty of 

perjury by the taxpayer (and the taxpayer’s spouse in the case of a joint return). The IRS reviews 

the information submitted by the taxpayer and either: (1) sends any applicable refund within 

eight weeks (net of any other amounts the IRS is required to collect), or (2) sends an explanation 

to the taxpayer stating why the taxpayer does not qualify for the EIC. 

The notice letters also provide information to help eligible taxpayers correctly claim the 

EIC in future taxable years. 

Under present law, these notice letters are sent by the IRS only to individuals who have 

filed a tax return for the applicable taxable year. The absence of the taxpayer’s filed tax return, 

 43 Information returns, such as Form W-2, are returns within the meaning of section 6103(b)(1). 
18 

notwithstanding the receipt by the IRS of return information or an information return (e.g., Form 

W-2 indicating wage withholding on the taxpayer) from the taxpayer’s employer does not trigger 

a notice letter to the taxpayer. 

Limitations on credits and refunds 

Under section 6511, a claim for credit or refund of overpayment of tax with respect to 

which a return must be filed must be made within the later of: (1) three years from the time the 

return was filed or (2) two years from the time the tax was paid. If no return was filed by the 

taxpayer, then the applicable time period ends two years after the tax was paid. 

Description of Proposal

The proposal requires the IRS to provide annually, and to the extent possible,44 notice to 

all taxpayers who have been identified based on return or return information as being potentially 

eligible for the EIC in any taxable year for which a claim for credit or refund is not barred by the 

limitation period under section 6511. Such notice must be in writing, address all open tax years, 

and be sent to the last known address of such taxpayers: (1) who did not file a claim for the EIC 

for such taxable year, and (2) who the IRS identified as potentially eligible for the EIC for such 

taxable year based on a return or return information (as defined in sec. 6103(b)). 

Upon receipt of this notice letter, the taxpayer who had filed a return for the applicable 

taxable years would complete the applicable EIC Eligibility Check-Sheet for each of the 

applicable taxable years. It is anticipated that this Check-Sheet would ask for all the information 

relating to the taxpayer’s eligibility for the EIC (e.g., earned income, AGI, presence and number 

of qualifying children, and taxpayer identification numbers). If eligible for the EIC, in one or 

more of the applicable taxable years, the taxpayer would return the EIC Eligibility Check-Sheet 

to the IRS for any refund (including wages withheld by the taxpayer’s employer). In the case of 

an eligible taxpayer who had not filed a return for the applicable taxable years, the taxpayer 

would be instructed to file a tax return claiming the EIC with the IRS for any refund (including 

wages withheld by the taxpayer’s employer) for each of the applicable taxable years. 

Effective Date

The proposal is effective on the date of enactment. 

 44 It is anticipated that the type of available return information and available IRS resources will 

affect the IRS’s ability to issue the additional notice letters contemplated under this proposal. 
19

H. Prohibition on IRS Debt Indicators for Predatory 

Refund Anticipation Loans 

Present Law

A refund anticipation loan is a loan made by a commercial lender to a taxpayer based on 

the refund the taxpayer expects to receive. The loan is a private contract between the taxpayer 

and a commercial lender. The Code does not regulate the making of refund anticipation loans, 

but consumer groups, the Commissioner of the IRS, and the National Taxpayer Advocate all 

have raised concerns over the high interest rates and fees associated with such loans.45

Certain tax practitioners that file returns electronically and financial institutions may 

obtain a debt indicator from the IRS for their customer taxpayers. A debt indicator facilitates the 

making of refund anticipation loans because it tells whether or not a taxpayer has any scheduled 

offsets against a claimed refund. Thus, a debt indicator reduces the lender’s risk of making a 

refund anticipation loan because it informs the lender whether the taxpayer’s refund will be paid 

or reduced for certain debts. 

Description of Proposal

The proposal prohibits the Secretary from providing a debt indicator to any person with 

respect to any refund anticipation loan if the Secretary determines that the business practices of 

such person involve refund anticipation loans and related charges and fees that are predatory. 

Under the proposal, a refund anticipation loan is any loan of money or any other thing of value to 

a taxpayer secured by the taxpayer’s anticipated receipt of a Federal tax refund. For purposes of 

the proposal, a debt indicator means a notification provided to a tax practitioner or financial 

institution pursuant to a program or procedure that a taxpayer’s refund will be reduced or offset 

to repay debts for delinquent Federal or State taxes, student loans, child support, or other Federal 

agency debt. 

Effective Date

The proposal is effective on the date of enactment.

 45 See e.g., National Taxpayer Advocate, 2005 Annual Report to Congress, Publication 2104 

(Rev. 12-2005), at 162. 
20

I. Study on Delivery of Tax Refunds 

Present Law

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

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

electronically transmit to them their tax refunds. 

Description of Proposal

The proposal requires the Secretary to conduct a study, in consultation with the National 

Taxpayer Advocate, of the implementation of a program to deliver tax refunds through debit 

cards or other electronic means. The proposal requires the Secretary to submit a report to 

Congress on the results of such study no later than one year after the date of enactment. 

Effective Date

The proposal is effective on the date of enactment. 
21

J. Extension of Time Limit for Return of Property for Wrongful Levy 

Present Law

The IRS is authorized to return property that has been wrongfully levied upon.46 In 

general, monetary proceeds from the sale of levied property upon, or an amount equal to the 

amount of money levied upon, may be returned within nine months of the date of the levy. 

Generally, any person (other than the person against whom is assessed the tax out of 

which such levy arose) who claims an interest in levied property may bring a civil action for 

wrongful levy in a district court of the United States.47 Generally, an action for wrongful levy 

must be brought within nine months from the date of levy.48 However, if a claim for a return of 

property is made to the IRS, the nine-month period is extended for the shorter of a period of 12 

months from the date of filing of such request or six months from the date of mailing of an IRS 

notice of disallowance of such request.49

Description of Proposal

The proposal extends from nine months to two years the period for returning money and 

the monetary proceeds from the sale of property that has been wrongfully levied upon. 

The proposal also extends from nine months to two years the period for bringing a civil 

action for wrongful levy. 

Effective Date

The proposal is effective with respect to: (1) levies made after the date of enactment and 

(2) levies made on or before the date of enactment provided that the nine-month period has not 

expired as of the date of enactment.

 46 Sec. 6343. 

47 Sec. 7426(a)(1). 

48 Sec. 6532. 

49 Sec. 6532(c)(2). 
22 

K. Individuals Held Harmless on Improper Levy 

on Individual Retirement Plan 

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 distributed 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 an incorrect 

levy. For example, amounts withdrawn from an IRA pursuant to a levy are returned to the 

individual owning the IRA in the case of a wrongful levy or if the levy was not in accordance 

with IRS administrative procedures. In the case of a wrongful levy, the IRS is required to pay 

interest on the amount returned to the individual at the overpayment rate. The IRS is not 

required to pay interest if the levy was not in accordance with IRS administrative procedures. 

Present law does not provide special rules to allow an individual to recontribute to an 

IRA amounts withdrawn from an IRA pursuant to a levy and later returned to the individual by 

the IRS (or interest thereon). Thus, if an individual wishes to contribute such returned amounts 

to an IRA, the contribution is subject to the normally applicable rules for IRA contributions. 

Description of Proposal

Under the proposal, an individual is able to recontribute to an IRA amounts withdrawn 

pursuant to a levy and returned by the IRS (and any interest thereon) within 60 days of receipt by 

the individual, without regard to the normally applicable limits on IRA contributions and 

rollovers. The proposal applies to levied amounts returned to the individual because the levy 

(1) was wrongful or (2) is determined to be premature or otherwise not in accordance with 

administrative procedures. The recontribution may be made to the same IRA or to any other 

individuated retirement plan (other than an endowment contract) to which a rollover from the 

IRA levied upon is permitted. That is, the recontribution may be made to the same IRA or to an 

IRA of the same type. 

Under the proposal, the IRS is required to pay interest on amounts returned to the 

individual at the overpayment rate in the case of a levy that is determined to be premature or 

otherwise not in accordance with administrative procedures (as well as in the case of a wrongful 

levy under present law). Interest paid by the IRS on the amount returned to the individual is 

excludable from gross income if the interest is contributed to an IRA under the provision. An 

amount contributed to an IRA under the provision will only be treated as interest paid by the IRS 

to the extent the total amount contributed under the provision exceeds the amount of the levy. 
23 

Any tax attributable to an amount distributed from an IRA by reason of a levy is abated if 

the amount is recontributed to an IRA pursuant to the provision. 

Effective Date

The proposal is effective for levied amounts (and interest thereon) returned to individuals 

after the date of enactment. 
24 

L. Taxpayer Notification of Suspected Identity Theft 

Present Law

Section 6103 provides that returns and return information are confidential and may not be 

disclosed by the Internal Revenue Service (“IRS”), other Federal employees, State employees, 

and certain others having access to the information except as provided in the Code.50 The 

definition of “return information” is very broad and includes any information gathered by the 

IRS with respect to a person’s liability or possible liability under the Code for any tax, penalty, 

interest, fine, forfeiture, or other imposition or offense.51 Thus, information gathered by the IRS 

in connection with an investigation of a person for a Title 26 offense, such as fraud, is the return 

information of the person being investigated and is subject to the confidentiality restrictions of 

section 6103. 

In July 2007, the IRS established the Privacy, Information Protection, and Data Security 

Office. Within that office is the Identity Theft and Incident Management office, which is 

responsible for implementing the IRS identity theft strategy and coordinating efforts within the 

IRS to provide assistance and consistent treatment to taxpayers who are victims of identity theft. 

The IRS also recently implemented a pilot program to notify IRS-identified tax fraud victims of 

identity theft. 

 50 Sec. 6103(a). 

51 Sec. 6103(b)(2). Return information is 

• a taxpayer’s identity, the nature, source, or amount of his income, payments, receipts, 

deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, 

deficiencies, overassessments, or tax payments, whether the taxpayer’s return was, is 

being, or will be examined or subject to other investigation or processing, or any other 

data, received by, recorded by, prepared by, furnished to, or collected by the Secretary 

with respect to a return or with respect to the determination of the existence, or possible 

existence, of liability (or the amount thereof) of any person under this title for any tax, 

penalty, interest, fine, forfeiture, or other imposition, or offense, 

• any part of any written determination or any background file document relating to such 

written determination (as such terms are defined in section 6110(b)) which is not open to 

public inspection under section 6110, 

• any advance pricing agreement entered into by a taxpayer and the Secretary and any 

background information related to such agreement or any application for an advance 

pricing agreement, and 

• any closing agreement under section 7121, and any similar agreement, and any 

background information related to such an agreement or request for such an agreement. 

Return information does not include data in a form which cannot be associated with, or otherwise 

identify, directly or indirectly, a particular taxpayer. 
25 

Description of Proposal

The proposal provides that if, in the course of an investigation under the internal revenue 

laws, the Secretary determines that there was, or may have been, an unauthorized use of a 

taxpayer’s identity or that of a dependent of the taxpayer, the Secretary shall, to the extent 

permitted by law, (1) as soon as practicable and without jeopardizing such investigation, notify 

the taxpayer of such determination, and (2) if any person is criminally charged by indictment or 

information with respect to such unauthorized use, notify such taxpayer as soon as practicable of 

such charge. Under the proposal, the IRS is not required to make such notification if disclosure 

would be barred by any statute (other than Title 26) or would be, for example, in violation of 

grand jury secrecy rules.52 Further, notification would not be required if the IRS is unable to 

obtain an address or other contact information for the taxpayer. In such case notification would 

not be practicable because the IRS would not have the necessary information to notify that 

person. 

Effective Date

The proposal applies to determinations made after the date of enactment. 

 52 Persons bound by the rule of grand jury secrecy in Fed. R. Crim. P. 6(e)(2) are subject to 

prosecution for criminal contempt under 18 U.S.C. sec. 401 for the unauthorized disclosure of grand jury 

information. Thus, under the proposal, a notification that was in violation of the grand jury secrecy rules 

would not be “permitted by law” within the meaning of the proposal. 
26 

M. Repeal of Private Tax Collection Contracts 

Present Law

Under present law, the IRS may use private debt collection companies to locate and 

contact taxpayers owing outstanding tax liabilities of any type and to arrange payment of those 

taxes by the taxpayers. 

Description of Proposal

The proposal repeals the authority for the IRS to enter into, renew, or extend any private 

debt collection contract. 

Effective Date

The proposal generally is effective on the date of enactment, except for any contract 

which was entered into before July 18, 2007, and is not renewed or extended on or after March 1, 

2008. The proposal also provides that any private debt collection contract which is entered into 

on or after July 18, 2007, and any extension or renewal of any private debt collection contract on 

or after March 1, 2008, shall be void. 
27 

N. Clarification of IRS Unclaimed Refund Authority 

Present Law

When the IRS is unable to find a taxpayer due a refund, present law provides that the IRS 

may use “the press or other media” to notify the taxpayer of the refund. Section 6103(m) allows 

the IRS to give the press taxpayer identity information for this purpose. Taxpayer identity 

includes name, mailing address, taxpayer identification number, or combination thereof.53

The IRS believes that the current statutory framework of “press and other media” does 

not permit disclosures via the Internet. The legislative history of the present-law provision does 

not address the meaning of “press and other media.” At the time of the statute’s enactment in 

1976, the press (newspapers and periodicals) and other traditional media were the only means 

available for the IRS to distribute undelivered refund information to the public. Thus, the IRS 

interprets the term “other media” to exclude the Internet. 

Description of Proposal

The proposal allows the IRS to use any means of “mass communication,” including the 

Internet, to notify the taxpayer of an undelivered refund. 

Effective Date

The proposal is effective on the date of enactment. 

 

 53 Sec. 6103(b)(6). 
28 

O. Prohibition on Misuse of Department of the Treasury Names 

and Symbols 

Present Law

Section 333 of Title 31 prohibits the use, in connection with advertisements, solicitations, 

and other business activities, of the words, abbreviations, titles, letters, symbols, or emblems 

associated with the Department of the Treasury (and services, bureaus, offices, or subdivisions of 

the Department, including the IRS) in a manner which could reasonably be interpreted as 

conveying a connection with or approval by the Department of the Treasury (or one of its 

bureaus, offices, or subdivisions) in the absence of such connection or approval. 

The provision provides for a civil penalty of not more than $5,000 per violation (or not 

more than $25,000 in the case of a broadcast or telecast). In addition, the provision provides a 

criminal penalty of not more than $10,000 (or not more than $50,000 in the case of a broadcast 

or telecast) or imprisonment of not more than one year, or both, in any case in which the 

prohibition is knowingly violated. Any determination of whether there is a violation is made 

without regard to the use of a disclaimer of affiliation with the Federal Government. 

The IRS has issued warnings to taxpayers about Internet sites that resemble the official 

IRS site: 

Taxpayers may be confused by the proliferation of Internet sites that contain some form 

of the Internal Revenue Service name or IRS acronym with a .com, .net, .org or other 

designation in the address instead of .gov. Since many of these sites also bear a striking 

resemblance to the real IRS site, taxpayers may be misled into thinking that the site they 

have accessed is indeed the official IRS government site. These sites are not the official 

IRS Web site and have no connection to the official IRS site or to the IRS.54

The IRS also has issued a number of warnings ongoing Internet scams.55 The e-mails 

claim to be from the IRS and direct the consumer to a link (often resembling the IRS website) 

that requests personal and financial information. The practice is called “phishing” for 

information. Once the information is obtained, it could be used in identity theft and stealing a 

taxpayer’s financial assets. Taxpayers who receive an unsolicited e-mail communication 

claiming to be from the IRS can forward the message to the IRS. The IRS reports it has received 

almost 33,000 forwarded e-mail scams.56 

 54 Internal Revenue Service, IRS Urges Caution about Internet Sites that Resemble the Official 

IRS Site (IR-2007-58, March 13, 2007). 

55 Internal Revenue Service, Identity Theft E-mail Scams a Growing Problem (FS-2008-9, 

January 2008). 

56 Id. 
29 

Description of Proposal

The proposal clarifies that “phishing,” misleading websites, and other mass 

communications by electronic means, which could reasonably be interpreted as falsely 

conveying a connection to or approval by the Department of the Treasury (or its components), 

are subject to the civil penalty of $25,000 per violation and criminal penalty of $50,000 per 

violation, currently applicable to broadcasts and telecasts. The proposal reaffirms that the use of 

the words, abbreviations, titles, letters, symbols, or emblems associated with the Department of 

the Treasury (and services, bureaus, offices or subdivisions of the Department, including the 

IRS) in an Internet domain name is covered by 31 U.S.C. sec. 333. 

Effective Date

The proposal is effective for violations occurring after the date of enactment. 
30 

P. Health Savings Account Substantiation Requirement 

Present Law

Health savings accounts

Present law section 223 provides that individuals with a high deductible health plan (and 

no other health plan other than a plan that provides certain permitted coverage)57 may establish a 

health savings account (“HSA”). An HSA is a tax-exempt trust or custodial account. Subject to 

certain limitations, contributions made to an HSA by an individual are deductible above-the-line 

for income tax purposes and contributions made by an employer (including contributions made 

through a cafeteria plan through salary reduction) are excludable from income and wages. 

Earnings on amounts in an HSA accumulate on a tax-free basis. 

Distributions from an HSA that are for qualified medical expenses are excludable from 

gross income. Distributions from an HSA that are not used for qualified medical expenses are 

includible in gross income and are subject to an additional tax of 10 percent. However, the 

additional 10-percent tax does not apply if the distribution is made after death, disability, or the 

individual attains the age of Medicare eligibility (i.e., age 65). Under present law, the individual 

maintaining the HSA is responsible for determining if the distribution was made for a qualified 

medical expense and whether the amount should be included in income and subject to the 10-

percent additional tax. 

HSAs provide the opportunity to pay for current out-of-pocket medical expenses on a 

tax-favored basis, as well as the ability to save for future medical and nonmedical expenses on a 

tax-favored basis. To the extent that amounts in an HSA are not used for qualified expenses, an 

HSA provides tax benefits similar to an individual retirement arrangement (“IRA”).58 

Qualified medical expenses generally are defined as under section 213(d) and include 

expenses for diagnosis, cure, mitigation, treatment, or prevention of disease, including 

prescription drugs, transportation primarily for and essential to such care, and qualified long-

 57 An individual with other coverage in addition to a high deductible health plan is still eligible 

for an HSA if such other coverage is certain permitted insurance or permitted coverage. Permitted 

insurance is: (1) insurance if substantially all of the coverage provided under such insurance relates to (a) 

liabilities incurred under worker’s compensation law, (b) tort liabilities, (c) liabilities relating to 

ownership or use of property (e.g., auto insurance), or (d) such other similar liabilities as the Secretary 

may prescribe by regulations; (2) insurance for a specified disease or illness; and (3) insurance that 

provides a fixed payment for hospitalization. Permitted coverage is coverage (whether provided through 

insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care. Effective 

after December 20, 2006, with respect to coverage for years beginning after December 31, 2006, certain 

coverage under an FSA is disregarded in determining eligibility for an HSA. 

58 Other tax-favored vehicles may also be used to save for future medical expenses, but do not 

provide the same tax benefits. For example, funds in an IRA may be used to pay medical expenses, but 

distributions for medical expenses are includible in gross income to the same extent as other IRA 

distributions. 
31 

term care expenses. Qualified medical expenses do not include expenses for insurance other 

than for (1) long-term care insurance, (2) premiums for health coverage during any period of 

continuation coverage required by Federal law, (3) premiums for health care coverage while an 

individual is receiving unemployment compensation under Federal or State law, and (4) 

premiums for individuals who have attained the age of Medicare eligibility, other than premiums 

for Medigap policies. 

A high deductible health plan is a health plan that has a deductible that is at least $1,100 

for self-only coverage or $2,200 for family coverage (for 2008) and that has an out-of-pocket 

expense limit that is no more than $5,600 in the case of self-only coverage and $11,200 in the 

case of family coverage (for 2008).59

For 2008, the maximum aggregate annual contribution that can be made to an HSA is 

$2,900 in the case of self-only coverage and $5,800 in the case of family coverage.60 The annual 

contribution limits are increased for individuals who have attained age 55 by the end of the 

taxable year (referred to as “catch up contributions”). In the case of policyholders and covered 

spouses who are age 55 or older, the HSA annual contribution limit is greater than the otherwise 

applicable limit by $900 in 2008, and $1,000 in 2009 and thereafter. Contributions, including 

catch-up contributions, cannot be made once an individual is enrolled in Medicare. 

Health flexible spending arrangements

Health flexible spending arrangements (“FSAs”) are commonly used by employers to 

reimburse medical expenses of their employees (and their spouses and dependents). Health 

FSAs typically are funded on a salary reduction basis, meaning that employees are given the 

option to reduce current compensation and instead have the compensation used to reimburse the 

employee for medical expenses. If the health FSA meets certain requirements, the compensation 

that is forgone is not includible in gross income or wages for employment tax purposes and 

reimbursements for medical care from the health FSA are excludable from gross income and 

wages. Health FSAs are subject to the requirements relating to cafeteria plans generally, 

including a requirement that a cafeteria plan generally may not provide deferred compensation.61

This requirement is often referred to as the “use-it-or-lose-it-rule.”62 Health FSAs are subject to 

 59 These amounts are indexed for inflation. 

60 These amounts are the same as the maximum deductible amounts permitted under a high 

deductible plan for purposes of Archer medical savings accounts (“MSAs”) and are indexed for inflation. 

In the case of individuals who are married to each other, if either spouse has family coverage, both 

spouses are treated as only having the family coverage with the lowest deductible and the contribution 

limit is divided equally between them unless they agree on a different division. Limitations based on the 

amount of the deductible under the high deductible plan applied to years beginning before January 1, 

2007. 

61 Sec. 125(d)(2). 

62 This requirement has been interpreted to mean that amounts remaining in a health FSA as of 

the end of a plan year must be forfeited by the employee. However, Treasury guidance allows a grace 
32 

certain other requirements, including rules that require that the FSA have certain characteristics 

similar to insurance. In addition, health FSAs are also subject to certain requirements relating to 

substantiation of expenses.63

Description of Proposal

The proposal provides that in the case of a health savings account distribution, in order to 

be a qualified medical expense, the amount must be substantiated in a manner similar to that 

required for health flexible spending arrangements. It is intended that substantiation is required 

to the trustee (or to a party designated by the trustee). As under present law, distributions from a 

HSA would be allowed for any purpose. Substantiated expenses would be excludable from 

income. Expenses not substantiated would be includible in income and subject to the 10-percent 

additional tax. Under the proposal, not later than January 15 of each calendar year, the HSA 

trustee is required to report to the account beneficiary and to the Secretary, the name, address and 

identifying number of the account beneficiary and the amount paid or distributed out of the HSA 

for the preceding year not substantiated. 

Effective Date

The proposal is effective with respect to amounts paid or distributions made out of a 

health savings account after December 31, 2008. 

 

period not to exceed two and one-half months immediately following the end of the plan year during 

which unused amounts may be used. Notice 2005-42, 2005-23 I.R.B. 1204. Prop. Treas. Reg. sec. 1.125-

1. 

63 See Prop. Treas. Reg. sec. 1.125-6. See also, Notice 2002-45, 2002-2 C.B. 93, Rev. Rul. 2003-

43, 2003-1 C.B. 935; Notice 2006-69, 2006-2 C.B. 107; and Notice 2007-2, 2007-1 C.B. 254. 
33 

Q. Increase in Information Return Penalties 

Present Law

Present law imposes information reporting requirements on participants in certain 

transactions. Under section 6721 of the Code, any person required to file a correct information 

return who fails to do so on or before the prescribed filing date is subject to a penalty that varies 

based on when, if at all, the correct information return is filed. If a person files a correct 

information return after the prescribed filing date but on or before the date that is 30 days after 

the prescribed filing date, the amount of the penalty is $15 per return (the “first-tier penalty”), 

with a maximum penalty of $75,000 per calendar year. If a person files a correct information 

return more than 30 days after the prescribed filing date but on or before August 1, the amount of 

the penalty is $30 per return (the “second-tier penalty”), with a maximum penalty of $150,000 

per calendar year. If a correct information return is not filed on or before August 1, of any year, 

the amount of the penalty is $50 per return (the “third-tier penalty”), with a maximum penalty of 

$250,000 per calendar year. 

Special lower maximum levels for this penalty apply to small businesses. Small 

businesses are defined as firms having average annual gross receipts for the most recent three 

taxable years that do not exceed $5 million. The maximum penalties for small businesses are: 

$25,000 (instead of $75,000) if the failures are corrected on or before 30 days after the 

prescribed filing date; $50,000 (instead of $150,000) if the failures are corrected on or before 

August 1; and $100,000 (instead of $250,000) if the failures are not corrected on or before 

August 1. 

Section 6722 of the Code also imposes penalties for failing to furnish correct payee 

statements to taxpayers. In addition, section 6723 imposes a penalty for failing to comply with 

other information reporting requirements. Under both section 6722 and section 6723, the penalty 

amount is $50 for each failure, up to a maximum of $100,000. 

Description of Proposal

The proposal increases 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. Specifically, the proposal increases the penalties for failing to file 

correct information returns as follows: the first-tier penalty would be increased from $15 to $25, 

with a maximum penalty of $250,000 per calendar year; the second-tier penalty would be 

increased from $30 to $60, with a maximum penalty of $500,000 per calendar year; and the 

third-tier penalty would be increased from $50 to $100, with a maximum penalty of $1,500,000 

per calendar year. The maximum penalties for small businesses would be: $75,000 if the failures 

are corrected on or before 30 days after the prescribed filing date; $200,000 if the failures are 

corrected on or before August 1; and $500,000 if the failures are not corrected on or before 

August 1. 

The proposal increases both the penalty for failing to furnish correct payee statements to 

taxpayers and the penalty for failing to comply with other information reporting requirements 

penalties to $100 for each such failure, up to a maximum of $1,500,000 in a calendar year. 
34 

The proposal also increases the minimum penalty for intentional disregard of the 

information reporting requirements to $250 per return. 

Effective Date

The proposal is effective with respect to information returns required to be filed after 

December 31, 2008. 
35 

R. Increase in Penalty for Failure to File Partnership Returns 

Present Law

A partnership generally is treated as a pass-through entity. Income earned by a 

partnership, whether distributed or not, is taxed to the partners. Distributions from the 

partnership generally are tax-free. The items of income, gain, loss, deduction or credit of a 

partnership generally are taken into account by a partner as allocated under the terms of the 

partnership agreement. If the agreement does not provide for an allocation, or the agreed 

allocation does not have substantial economic effect, then the items are to be allocated in 

accordance with the partners’ interests in the partnership. To prevent double taxation of these 

items, a partner’s basis in its interest is increased by its share of partnership income (including 

tax-exempt income), and is decreased by its share of any losses (including nondeductible losses). 

Under present law, a partnership is required to file a tax return for each taxable year. The 

partnership’s tax return is required to include the names and addresses of the individuals who 

would be entitled to share in the taxable income if distributed and the amount of the distributive 

share of each individual. In addition to applicable criminal penalties, present law imposes a civil 

penalty for the failure to timely file a partnership return. The penalty generally is $85 per partner 

for each month (or fraction of a month) that the failure continues, up to a maximum of 12 

months. 

Description of Proposal

Under the proposal, the penalty for failure to file partnership returns is increased by $15 

per partner. 

Effective Date

The proposal applies to returns required to be filed after December 31, 2008. 
36 

S. Penalty for Failure to File S Corporation Returns 

Present Law

In general, an S corporation is not subject to corporate-level income tax on its items of 

income and loss. Instead, an S corporation passes through its items of income and loss to its 

shareholders. The shareholders take into account separately their shares of these items on their 

individual income tax returns. 

Under present law, S corporations are required to file a tax return for each taxable year. 

The S corporation’s tax return is required to include the following: the names and addresses of 

all persons owning stock in the corporation at any time during the taxable year; the number of 

shares of stock owned by each shareholder at all times during the taxable year; the amount of 

money and other property distributed by the corporation during the taxable year to each 

shareholder and the date of such distribution; each shareholder’s pro rata share of each item of 

the corporation for the taxable year; and such other information as the Secretary may require. 

Present law imposes a monthly penalty for any failure to timely file an S corporation 

return or any failure to provide the information required to be shown on such a return. The 

penalty is $85 times the number of shareholders in the S corporation during any part of the 

taxable year for which the return was required, for each month (or a fraction of a month) during 

which the failure continues, up to a maximum of 12 months. 

Description of Proposal

Under the proposal, the penalty for failure to file S corporation returns is increased by 

$15 per shareholder. 

Effective Date

The proposal applies to returns required to be filed after December 31, 2008. 
37 

T. Modifications to Corporate Estimated Tax Payments 

Present Law

In general

In general, corporations are required to make quarterly estimated tax payments of their 

income tax liability. For a corporation whose taxable year is a calendar year, these estimated tax 

payments must be made by April 15, June 15, September 15, and December 15. 

Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”) 

TIPRA provided the following special rules: 

In case of a corporation with assets of at least $1 billion, the payments due in July, 

August, and September, 2012, shall be increased to 106.25 percent of the payment otherwise due 

and the next required payment shall be reduced accordingly. 

In case of a corporation with assets of at least $1 billion, the payments due in July, 

August, and September, 2013, shall be increased to 100.75 percent of the payment otherwise due 

and the next required payment shall be reduced accordingly. 

Subsequent legislation

Several public laws have been enacted since TIPRA which further increase the 

percentage of payments due under each of the two special rules enacted by TIPRA described 

above. 

Description of Proposal

Under the proposal, in the case of a corporation with assets of at least $1 billion, the 

payments due in July, August, and September, 2013, the otherwise applicable payment is 

increased by 0.25 percent of the payment otherwise due and the next required payment shall be 

reduced accordingly. 

Effective Date

The proposal is effective on the date of enactment.