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[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[S. 1669 Introduced in Senate (IS)]

105th CONGRESS
  2d Session
                                S. 1669

   To restructure the Internal Revenue Service and improve taxpayer 
                    rights, and for other purposes.

_______________________________________________________________________

                   IN THE SENATE OF THE UNITED STATES

                           February 24, 1998

    Mr. Bond (for himself, Mr. Cochran, Ms. Snowe, and Mr. Shelby) 
introduced the following bill; which was read twice and referred to the 
                          Committee on Finance

_______________________________________________________________________

                                 A BILL

 
   To restructure the Internal Revenue Service and improve taxpayer 
                    rights, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Putting the 
Taxpayer First Act of 1998''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--

Sec. 1. Short title; amendment of 1986 Code; table of contents.
                        TITLE I--TAXPAYER RIGHTS

Sec. 101. Court approval for seizure of taxpayer's property.
Sec. 102. Improved offers-in-compromise procedure.
Sec. 103. Clarification that attorney's fees are available in 
                            unauthorized-disclosure and browsing cases.
Sec. 104. Uniform application of confidentiality privilege for taxpayer 
                            communications with federally authorized 
                            practitioners.
Sec. 105. Taxpayer's right to have an IRS examination take place at 
                            another site.
Sec. 106. Prohibition on IRS contact of third parties without taxpayer 
                            pre-notification.
Sec. 107. Expansion of taxpayer's rights in administrative appeal.
                        TITLE II--PENALTY REFORM

Sec. 201. Imposition of interest on penalties only after a taxpayer's 
                            failure to pay.
Sec. 202. Repeal of the penalty for substantial understatement of 
                            income tax.
Sec. 203. Repeal of the failure-to-pay penalty.
           TITLE III--INTERNAL REVENUE SERVICE RESTRUCTURING

Sec. 301. Internal Revenue Service Board of Governors; Commissioner of 
                            Internal Revenue.
Sec. 302. Restructuring of IRS operations along customer lines.
Sec. 303. Greater independence of the Taxpayer Advocate.
Sec. 304. Greater independence of the Office of Appeals.
Sec. 305. Improved IRS written communications to taxpayers and tax 
                            forms.
                      TITLE IV--ELECTRONIC FILING

Sec. 401. Goals for electronic filing; electronic-filing advisory 
                            group.
Sec. 402. Report on electronic filing and its effect on small 
                            businesses.
                       TITLE V--REGULATORY REFORM

Sec. 501. Congressional review of Internal Revenue Service rules that 
                            increase revenue.
Sec. 502. Small business advocacy panels for the IRS.
Sec. 503. Taxpayer's election with respect to recovery of costs and 
                            certain fees.

                        TITLE I--TAXPAYER RIGHTS

SEC. 101. COURT APPROVAL FOR SEIZURE OF TAXPAYER'S PROPERTY.

    (a) In General.--Section 6331(a) is amended by adding at the end 
the following new paragraph:
            ``(2) Limitation on authority of secretary.--
        Notwithstanding paragraph (1)--
                    ``(A) General rule.--The Secretary shall not levy 
                upon any property or rights to property until--
                            ``(i) the taxpayer has received the notice 
                        described in subsection (a) which notifies the 
                        taxpayer of the opportunity for judicial review 
                        under this subparagraph and advises the 
                        taxpayer that criminal penalties may be imposed 
                        if the property is transferred or otherwise 
                        made unavailable for collection while such 
                        review is pending, and
                            ``(ii) a court of competent jurisdiction 
                        has determined, after the taxpayer has received 
                        notice and an opportunity for a hearing, that 
                        such levy is reasonable under the 
                        circumstances.
                    ``(B) Exception.--A court may waive the right to 
                notice and hearing under subparagraph (A) if the 
                Secretary demonstrates to the court's satisfaction 
                that--
                            ``(i) irreparable harm will occur with 
                        respect to the Secretary's ability to collect 
                        the tax if relief is not granted,
                            ``(ii) the Secretary has provided the 
                        taxpayer with notice and demand pursuant to 
                        section 6303(a),
                            ``(iii) the taxpayer has neglected or 
                        refused to pay the tax within 10 days after 
                        notice and demand, and
                            ``(iv) the Secretary has a reasonable 
                        probability of success on the merits with 
                        regard to the taxpayer's liability for the 
                        tax.''
    (b) Conforming Amendment.--Section 6331(a) is amended by striking 
``If any person'' and inserting:
            ``(1) In general.--If any person''.
    (c) Effective Date.--The amendments made by this section shall be 
effective for levies occurring on or after the date of the enactment of 
this Act.

SEC. 102. IMPROVED OFFERS-IN-COMPROMISE PROCEDURE.

    (a) In General.--Section 7122 (relating to compromises) is amended 
by adding at the end the following new subsection:
    ``(c) Offers in Compromise.--
            ``(1) In general.--If the Secretary receives an offer in 
        compromise which is based on the taxpayer's inability to pay 
        the taxpayer's tax liability in full, the Secretary shall 
        accept such offer in compromise if it reasonably reflects the 
        taxpayer's ability to pay.
            ``(2) Timely response.--
                    ``(A) General rule.--The Secretary shall accept, 
                reject, or make a counteroffer to an offer in 
                compromise described in paragraph (1) within 120 days 
                from the date that the offer is filed and reasonable 
                documentation is submitted regarding the taxpayer's 
                ability to pay.
                    ``(B) Failure to respond.--If the Secretary fails 
                to respond within such time, interest on the 
                underpayment under section 6601(a) shall be suspended 
                until such date as the Secretary responds. This 
                subparagraph shall not apply if the Secretary 
                reasonably determines that the taxpayer's offer in 
                compromise is frivolous.
                    ``(C) Unacceptable offers.--If the Secretary does 
                not accept an offer in compromise from a taxpayer--
                            ``(i) the Secretary shall provide a 
                        detailed description of the reasons that the 
                        offer was not accepted, and
                            ``(ii) the taxpayer may appeal the 
                        Secretary's determination to the Office of 
                        Appeals.
            ``(3) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the purposes of 
        this subsection, including regulations--
                    ``(A) establishing standards for acceptable offers 
                in compromise based on the economic reality of the 
                taxpayer's ability to pay, and
                    ``(B) providing for the application of this 
                subsection to offers in compromise made by small 
                businesses and the self-employed.''
    (b) Effective Date.--The amendments made by this section shall be 
effective for offers in compromise filed after the date of the 
enactment of this Act.

SEC. 103. CLARIFICATION THAT ATTORNEY'S FEES ARE AVAILABLE IN 
              UNAUTHORIZED-DISCLOSURE AND BROWSING CASES.

    (a) In General.--Subsection (a) of section 7430 (relating to 
awarding of costs and certain fees) is amended to read as follows:
    ``(a) In General.--In any administrative or court proceeding which 
is brought by or against the United States in connection with the 
determination, collection, or refund of any tax, interest, or penalty 
under this title (including any civil action under section 7431), the 
prevailing party may be awarded a judgment or settlement for--
            ``(1) reasonable administrative costs incurred in 
        connection with such administrative proceeding within the 
        Internal Revenue Service, and
            ``(2) reasonable litigation costs incurred in connection 
        with such court proceeding.''
    (b) Effective Date.--The amendments made by this section shall be 
effective for any proceeding which--
            (1) arises after the date of the enactment of this Act, or
            (2) arises on or before such date and which does not become 
        final before the 30th day after such date.

SEC. 104. UNIFORM APPLICATION OF CONFIDENTIALITY PRIVILEGE FOR TAXPAYER 
              COMMUNICATIONS WITH FEDERALLY AUTHORIZED PRACTITIONERS.

    (a) In General.--Chapter 77 (relating to miscellaneous provisions) 
is amended by adding at the end the following new section:

``SEC. 7525. UNIFORM APPLICATION OF CONFIDENTIALITY PRIVILEGE FOR 
              TAXPAYER COMMUNICATIONS WITH FEDERALLY AUTHORIZED 
              PRACTITIONERS.

    ``(a) General Rule.--With respect to tax advice, the same common 
law protections of confidentiality which apply to a communication 
between a taxpayer and an attorney shall also apply to a communication 
between a taxpayer and any federally authorized tax practitioner if the 
communication would be considered a privileged communication if it were 
between a taxpayer and an attorney.
    ``(b) Limitations.--Subsection (a) may only be asserted in--
            ``(1) noncriminal tax matters before the Internal Revenue 
        Service, and
            ``(2) proceedings in Federal courts with respect to such 
        matters.
    ``(c) Federally Authorized Tax Practitioner.--For purposes of this 
section, the term `federally authorized tax practitioner' means any 
individual who is authorized under Federal law to practice before the 
Internal Revenue Service but only if such practice is subject to 
Federal regulation under section 330 of title 31, United States Code.''
    (b) Conforming Amendment.--The table of sections for chapter 77 is 
amended by adding at the end the following new item:

                              ``Sec. 7525. Uniform application of 
                                        confidentiality privilege for 
                                        taxpayer communications with 
                                        federally authorized 
                                        practitioners.''

SEC. 105. TAXPAYER'S RIGHT TO HAVE AN IRS EXAMINATION TAKE PLACE AT 
              ANOTHER SITE.

    (a) In General.--Subsection (a) of section 7605 (relating to time 
and place of examination) is amended to read as follows:
    ``(a) Time and Place.--
            ``(1) In general.--The time and place of examination 
        pursuant to the provisions of section 6420(e)(2), 6421(g)(2), 
        6427(j)(2), or 7602 shall be such time and place as may be 
        fixed by the Secretary and as are reasonable under the 
        circumstances. In the case of a summons under authority of 
        paragraph (2) of section 7602, or under the corresponding 
        authority of section 6420(e)(2), 6421(g)(2), or 6427(j)(2), the 
        date fixed for appearance before the Secretary shall not be 
        less than 10 days from the date of the summons.
            ``(2) Limitation.--Upon request of a taxpayer, the 
        Secretary shall conduct any examination described in paragraph 
        (1) at a location other than the taxpayer's residence or place 
        of business, if such location is reasonably accessible to the 
        Secretary and the taxpayer's original books and records 
        pertinent to the examination are available at such location.''
    (b) Effective Date.--The amendments made by this section shall be 
effective for examinations occurring after the date of the enactment of 
this Act.

SEC. 106. PROHIBITION ON IRS CONTACT OF THIRD PARTIES WITHOUT TAXPAYER 
              PRE-NOTIFICATION.

    (a) In General.--Section 7602 (relating to examination of books and 
witnesses) is amended by redesignating subsection (c) as subsection (d) 
and by inserting after subsection (b) the following new subsection:
    ``(c) Limitation of Authority To Summon.--In the case of a taxpayer 
engaged in a trade or business, no summons concerning such trade or 
business may be issued under this title with respect to any person 
other than such taxpayer without providing reasonable notice to the 
taxpayer that such summons will be issued. This subsection shall not 
apply if the Secretary determines for good cause shown that such notice 
would jeopardize collection of any tax or any pending criminal 
investigation.''
    (b) Effective Date.--The amendments made by this section shall be 
effective for summons issued after the date of the enactment of this 
Act.

SEC. 107. EXPANSION OF TAXPAYER'S RIGHTS IN ADMINISTRATIVE APPEAL.

    (a) In General.--Subchapter B of chapter 63 (relating to 
assessment) is amended by adding before section 6212 the following new 
section:

``SEC. 6211A. NOTICE OF PROPOSED ADJUSTMENT.

    ``(a) Income Taxes.--At least 60 days prior to issuing a notice of 
deficiency under section 6212, the Secretary shall send a notice 
explaining the adjustments that the Secretary believes should be made 
to the amount shown as tax by the taxpayer on his return that would 
result in a deficiency. If the taxpayer does not agree with the 
Secretary's proposed adjustments, the taxpayer may appeal such proposed 
adjustments to the Office of Appeals.
    ``(b) Address for Notice of Proposed Adjustment.--The provisions of 
section 6212(b) shall apply with respect to mailing of the notice of 
proposed adjustment described in subsection (a).''
    (b) Employment Taxes.--Section 6205(b) is amended--
            (1) by adding at the end the following new paragraph:
            ``(2) Notice of proposed assessment.--At least 60 days 
        prior to making any assessment with respect to paragraph (1), 
        the Secretary shall send a notice of proposed assessment 
        (mailed to the taxpayer at its last known address) explaining 
        the adjustments that the Secretary believes should be made to 
        the amount paid or deducted with respect to any payment of 
        wages or compensation which would result in an underpayment. If 
        the taxpayer disagrees with the Secretary's adjustments, the 
        taxpayer may appeal such adjustments to the Office of 
        Appeals.'', and
            (2) by striking ``If less than'' and inserting:
            ``(1) In general.--If less than''.
    (b) Conforming Amendments.--The table of sections for subchapter B 
of chapter 63 is amended by inserting the following new item:

                              ``Sec. 6211A. Notice of proposed 
                                        adjustment.''
    (c) Effective Date.--The amendments made by this section shall be 
effective 60 days after the date of the enactment of this Act.

                        TITLE II--PENALTY REFORM

SEC. 201. IMPOSITION OF INTEREST ON PENALTIES ONLY AFTER A TAXPAYER'S 
              FAILURE TO PAY.

    (a) In General.--Section 6601(e)(2) is amended to read as follows:
            ``(2) Interest on penalties, additional amounts, or 
        additions to the tax.--Interest shall be imposed under 
        subsection (a) in respect of any assessable penalty, additional 
        amount, or addition to the tax only if such assessable penalty, 
        additional amount, or addition to the tax is not paid within 21 
        calendar days from the date of notice and demand therefor (10 
        business days if the amount for which such notice and demand is 
        made equals or exceeds $100,000), and in such case interest 
        shall be imposed only for the period from the date of the 
        notice and demand to the date of payment.''
    (b) Effective Date.--The amendments made by this section shall be 
effective for penalties assessed after the date of the enactment of 
this Act.

SEC. 202. REPEAL OF THE PENALTY FOR SUBSTANTIAL UNDERSTATEMENT OF 
              INCOME TAX.

    (a) In General.--Subsection (d) of section 6662 is repealed.
    (b) Conforming Amendments.--
            (1) Section 6662(b) is amended by striking paragraph (2) 
        and redesignating paragraphs (3), (4), and (5) as paragraphs 
        (2), (3), and (4), respectively.
            (2) Section 6662 is amended by redesignating subsections 
        (e), (f), (g), and (h) as subsections (d), (e), (f), and (g), 
        respectively.
            (3) Section 461(i)(3)(C) is amended to read as follows:
                    ``(C) any partnership or other entity, any 
                investment plan or arrangement, or any other plan or 
                arrangement if a significant purpose of such 
                partnership, entity, plan, or arrangement is the 
                avoidance or evasion of Federal income tax.''
            (4) Section 1274(b)(3)(B)(i) is amended by striking 
        ``section 6662(d)(2)(C)(iii)'' and inserting ``section 
        461(i)(3)(C)''.
            (5) Section 6013(e)(3) is amended to read as follows:
            ``(3) Substantial understatement.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `substantial understatement' means any 
                understatement which exceeds $500.
                    ``(B) Understatement.--For purposes of subparagraph 
                (A), the term ``understatement'' means the excess of--
                            ``(i) the amount of the tax required to be 
                        shown on the return for the taxable year, over
                            ``(ii) the amount of the tax imposed which 
                        is shown on the return, reduced by any rebate 
                        (within the meaning of section 6211(b)(2)).
                    ``(C) Reduction for understatement due to position 
                of taxpayer or disclosed item.--The amount of the 
                understatement under subparagraph (B) shall be reduced 
                by that portion of the understatement which is 
                attributable to--
                            ``(i) the tax treatment of any item by the 
                        taxpayer if there is or was substantial 
                        authority for such treatment, or
                            ``(ii) any item if--
                                    ``(I) the relevant facts affecting 
                                the item's tax treatment are adequately 
                                disclosed in the return or in a 
                                statement attached to the return, and
                                    ``(II) there is a reasonable basis 
                                for the tax treatment of such item by 
                                the taxpayer.
                    ``(D) Special rules in cases involving tax 
                shelters.--
                            ``(i) In general.--In the case of any item 
                        of a taxpayer which is attributable to a tax 
                        shelter--
                                    ``(I) subparagraph (C)(ii) shall 
                                not apply, and
                                    ``(II) subparagraph (C)(i) shall 
                                not apply unless (in addition to 
                                meeting the requirements of such 
                                subparagraph) the taxpayer reasonably 
                                believed that the tax treatment of such 
                                item by the taxpayer was more likely 
                                than not the proper treatment.
                            ``(ii) Tax shelter.--For purposes of this 
                        subparagraph, the term `tax shelter' has the 
                        meaning given such term by section 
                        461(i)(3)(C).
                    ``(E) Secretarial list.--The Secretary shall 
                prescribe (and revise not less frequently than 
                annually) a list of positions--
                            ``(i) for which the Secretary believes 
                        there is not substantial authority, and
                            ``(ii) which affect a significant number of 
                        taxpayers.
                Such list (and any revision thereof) shall be published 
                in the Federal Register.''
            (6) Section 6694(a) is amended--
                    (A) by striking ``section 6662(d)(2)(B)(ii)'' and 
                inserting ``section 6013(e)(3)(C)(ii)'' in paragraph 
                (3), and
                    (B) by adding at the end the following: ``For 
                purposes of paragraph (3), in applying section 
                6013(e)(3)(C)(ii)(II), in no event shall a corporation 
                be treated as having a reasonable basis for its tax 
                treatment of an item attributable to a multiple-party 
                financing transaction if such treatment does not 
                clearly reflect the income of the corporation.''
    (c) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 203. REPEAL OF THE FAILURE-TO-PAY PENALTY.

    (a) In General.--Section 6651(a) is amended by striking paragraphs 
(2) and (3).
    (b) Conforming Amendments to Section 6651.--
            (1) Section 6651(a) is amended--
                    (A) by striking ``In the case of failure--
            ``(1) to'' and inserting ``In the case of failure to'', and
                    (B) by striking the semicolon at the end of 
                paragraph (1) and inserting a period.
            (2) Section 6651(b) is amended--
                    (A) by striking ``For purposes of--
            ``(1) subsection (a)(1)'' and inserting ``For purposes of 
        subsection (a)'',
                    (B) by striking the comma at the end of paragraph 
                (1) and inserting a period, and
                    (C) by striking paragraphs (2) and (3).
            (3) Section 6651 is amended by striking subsections (c), 
        (d), and (e).
            (4) Section 6651(f) is amended by striking ``paragraph (1) 
        of''.
            (5) Section 6651(g) is amended to read as follows:
    ``(g) Treatment of Returns Prepared by Secretary Under Section 
6020(b).--In the case of any return made by the Secretary under section 
6020(b), such return shall be disregarded for purposes of determining 
the amount of the addition under subsection (a).''
            (6) Section 6651, as amended by paragraphs (3) and (4), is 
        amended by redesignating subsections (f) and (g) as subsections 
        (c) and (d), respectively.
            (7) The heading of section 6651 is amended to read as 
        follows:

``SEC. 6651. FAILURE TO FILE TAX RETURN.''

            (8) The table of sections for subchapter A of chapter 68 is 
        amended by striking the item relating to section 6651 and 
        inserting the following new item:

                              ``Sec. 6651. Failure to file tax 
                                        return.''
            (9) Section 5684(c)(2) is amended by striking ``or pay 
        tax''.
    (c) Effective Date.--The amendments made by this section shall be 
effective for failures to pay occurring after the date of the enactment 
of this Act.

           TITLE III--INTERNAL REVENUE SERVICE RESTRUCTURING

SEC. 301. INTERNAL REVENUE SERVICE BOARD OF GOVERNORS; COMMISSIONER OF 
              INTERNAL REVENUE.

    (a) In General.--Chapter 80 (relating to general rules) is amended 
by adding after section 7801 the following new section:

``SEC. 7801A. INTERNAL REVENUE SERVICE BOARD OF GOVERNORS; COMMISSIONER 
              OF INTERNAL REVENUE.

    ``(a) Internal Revenue Service Board of Governors.--
            ``(1) Establishment.--There is established within the 
        Department of the Treasury the Internal Revenue Service Board 
        of Governors (in this title referred to as the `Board').
            ``(2) Membership.--
                    ``(A) Composition.--The Board shall be composed of 
                5 members, of whom--
                            ``(i) 4 shall be individuals who are 
                        appointed by the President, by and with the 
                        advice and consent of the Senate, and
                            ``(ii) 1 shall be the Commissioner of 
                        Internal Revenue.
                Not more than 2 members of the Board appointed under 
                clause (i) may be affiliated with the same political 
                party.
                    ``(B) Qualifications.--Members of the Board 
                described in subparagraph (A)(i) shall be appointed 
                solely on the basis of their professional experience 
                and expertise in the following areas:
                            ``(i) The needs and concerns of taxpayers.
                            ``(ii) Organization development.
                            ``(iii) Customer service.
                            ``(iv) Operation of small businesses.
                            ``(v) Management of large businesses.
                            ``(vi) Information technology.
                            ``(vii) Compliance.
                In the aggregate, the members of the Board described in 
                subparagraph (A)(i) should collectively bring to bear 
                expertise in these enumerated areas.
                    ``(C) Terms.--Each member who is described in 
                subparagraph (A)(i) shall be appointed for a term of 5 
                years, except that of the members first appointed--
                            ``(i) 1 member who is affiliated with the 
                        same political party as the President shall be 
                        appointed for a term of 1 year,
                            ``(ii) 1 member who is not affiliated with 
                        the same political party as the President shall 
                        be appointed for a term of 2 years,
                            ``(iii) 1 member who is affiliated with the 
                        same political party as the President shall be 
                        appointed for a term of 3 years, and
                            ``(iv) 1 member who is not affiliated with 
                        the same political party as the President shall 
                        be appointed for a term of 4 years.
                A member of the Board may serve on the Board after the 
                expiration of the member's term until a successor has 
                taken office as a member of the Board.
                    ``(D) Reappointment.--An individual who is 
                described in subparagraph (A)(i) may be appointed to no 
                more than two 5-year terms on the Board.
                    ``(E) Vacancy.--Any vacancy on the Board--
                            ``(i) shall not affect the powers of the 
                        Board, and
                            ``(ii) shall be filled in the same manner 
                        as the original appointment.
                Any member appointed to fill a vacancy occurring before 
                the expiration of the term for which the member's 
                predecessor was appointed shall be appointed for the 
                remainder of that term.
                    ``(F) Removal.--
                            ``(i) In general.--A member of the Board 
                        may be removed at the will of the President.
                            ``(ii) Commissioner of internal revenue.--
                        An individual described in subparagraph (A)(ii) 
                        shall be removed upon termination of 
                        employment.
            ``(3) General responsibilities.--
                    ``(A) In general.--The Board shall oversee the 
                Internal Revenue Service in the administration, 
                management, conduct, direction, and supervision of the 
                execution and application of the internal revenue laws 
                or related statutes and tax conventions to which the 
                United States is a party.
                    ``(B) Consultation on tax policy.--The Board shall 
                be responsible for consulting with the Secretary of the 
                Treasury with respect to the development and 
                formulation of Federal tax policy relating to existing 
                or proposed internal revenue laws, related statutes, 
                and tax conventions.
            ``(4) Specific responsibilities.--The Board shall have the 
        following specific responsibilities:
                    ``(A) Strategic plans.--To review and approve 
                strategic plans of the Internal Revenue Service, 
                including the establishment of--
                            ``(i) mission and objectives, and standards 
                        of performance relative to either, and
                            ``(ii) annual and long-range strategic 
                        plans.
                    ``(B) Operational plans.--To review and approve the 
                operational functions of the Internal Revenue Service, 
                including--
                            ``(i) plans for modernization of the tax 
                        system,
                            ``(ii) plans for outsourcing or managed 
                        competition, and
                            ``(iii) plans for training and education.
                    ``(C) Management.--To--
                            ``(i) review and approve the Commissioner's 
                        selection, evaluation, and compensation of 
                        senior managers,
                            ``(ii) oversee the operation of the Office 
                        of the Taxpayer Advocate and the Office of 
                        Appeals, and
                            ``(iii) review and approve the 
                        Commissioner's plans for reorganization of the 
                        Internal Revenue Service.
                    ``(D) Budget.--To--
                            ``(i) review and approve the budget request 
                        of the Internal Revenue Service prepared by the 
                        Commissioner,
                            ``(ii) submit such budget request to the 
                        Secretary of the Treasury,
                            ``(iii) ensure that the budget request 
                        supports the annual and long-range strategic 
                        plans of the Internal Revenue Service, and
                            ``(iv) ensure appropriate financial audits 
                        of the Internal Revenue Service.
                The Secretary shall submit, without revision, the 
                budget request referred to in subparagraph (D) for any 
                fiscal year to the President who shall submit, without 
                revision, such request to Congress together with the 
                President's annual budget request for the Internal 
                Revenue Service for such fiscal year.
            ``(5) Board personnel matters.--
                    ``(A) Compensation of members.--Each member of the 
                Board who is described in subsection (b)(1)(A)(i) shall 
                be compensated at an annual rate equal to the rate for 
                Executive Schedule IV under title 5 of the United 
                States Code. The Commissioner shall receive no 
                additional compensation for service on the Board.
                    ``(B) Staff.--The Chairperson of the Board shall 
                have the authority to hire such personnel as may be 
                necessary to enable the Board to perform its duties.
            ``(6) Administrative matters.--
                    ``(A) Chair.--The Commissioner of Internal Revenue 
                shall serve as the chairperson of the Board.
                    ``(B) Committees.--The Board may establish such 
                committees as the Board determines appropriate.
                    ``(C) Meetings.--The Board shall meet at least once 
                each month and at such other times as the Board 
                determines appropriate.
                    ``(D) Quorum; voting requirements; delegation of 
                authorities.--3 members of the Board shall constitute a 
                quorum. All decisions of the Board with respect to the 
                exercise of its duties and powers under this section 
                shall be made by a majority vote of the members present 
                and voting. A member of the Board may not delegate to 
                any person the member's vote or any decisionmaking 
                authority or duty vested in the Board by the provisions 
                of this section.
                    ``(E) Reports.--The Board shall each year report to 
                the President and the Congress with respect to the 
                conduct of its responsibilities under this title.
    ``(b) Commissioner of Internal Revenue.--
            ``(1) Appointment.--There shall be in the Department of the 
        Treasury a Commissioner of Internal Revenue who shall be 
        appointed by the President, by and with the advice and consent 
        of the Senate, to a 5-year term. The appointment shall be made 
        without regard to political affiliation or activity.
            ``(2) Vacancy.--Any individual appointed to fill a vacancy 
        in the position of Commissioner occurring before the expiration 
        of the term for which such individual's predecessor was 
        appointed shall be appointed for the remainder of that term.
            ``(3) Removal.--The Commissioner may be removed at the will 
        of the President.
            ``(4) Duties.--Subject to the powers of the Board, the 
        Commissioner shall have such duties and powers as the Secretary 
        may prescribe, including the power to--
                    ``(A) administer, manage, conduct, direct, and 
                supervise the execution and application of the internal 
                revenue laws or related statutes and tax conventions to 
                which the United States is a party; and
                    ``(B) recommend to the President (after 
                consultation with the Board) a candidate for 
                appointment as Chief Counsel for the Internal Revenue 
                Service when a vacancy occurs, and recommend to the 
                President (after consultation with the Board) the 
                removal of such Chief Counsel.
        If the Secretary determines not to delegate a power specified 
        in subparagraph (A) or (B), such determination may not take 
        effect until 30 days after the Secretary notifies the 
        Committees on Finance, Appropriations, and Governmental Affairs 
        of the Senate, the Committees on Ways and Means, 
        Appropriations, and Government Reform and Oversight of the 
        House of Representatives, and the Joint Committee on Taxation.
            ``(5) Consultation with board.--The Commissioner shall 
        consult with the Board on all matters set forth in subsection 
        (a)(4).''
    (b) Conforming Amendments.--
            (1) Section 5315 of title 5, United States Code, is amended 
        by adding at the end the following new item:

                              ``Members, Internal Revenue Service Board 
                                        of Governors.''
            (2) Section 7701(a) (relating to definitions) is amended by 
        inserting after paragraph (46) the following new paragraph:
            ``(47) Board.--The term `Board' means the Board of 
        Governors of the Internal Revenue Service.''
            (3) The table of sections for subchapter A of chapter 80 is 
        amended by inserting after the item relating to section 7801 
        the following new item:

                              ``Sec. 7801A. Internal Revenue Service 
                                        Board of Governors; 
                                        Commissioner of Internal 
                                        Revenue.''
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        take effect on the date of the enactment of this Act.
            (2) Nominations to internal revenue service board of 
        governors.--The President shall submit nominations under 
        section 7801A(a) of the Internal Revenue Code of 1986, as added 
        by this section, to the Senate not later than 6 months after 
        the date of the enactment of this Act.
            (3) Current commissioner.--In the case of an individual 
        serving as Commissioner of Internal Revenue on the date of the 
        enactment of this Act who was appointed to such position before 
        such date, the 5-year term required by section 7801A(b)(1) of 
        the Internal Revenue Code of 1986, as added by this section, 
        shall begin as of the date of such appointment.

SEC. 302. RESTRUCTURING OF IRS OPERATIONS ALONG CUSTOMER LINES.

    (a) In General.--Subsection (a) of section 7802 (relating to the 
Commissioner of Internal Revenue) is amended to read as follows:
    ``(a) Organization of the Internal Revenue Service.--
            ``(1) In general.--The Internal Revenue Service shall be 
        organized into divisions representing the following types of 
        taxpayers:
                    ``(A) Individual taxpayers subject to wage 
                withholding.
                    ``(B) Small businesses and self-employed 
                individuals.
                    ``(C) Large businesses.
                    ``(D) Employee plans and exempt organizations.
                    ``(E) Trusts and estates.
                    ``(F) Such other divisions as the Board deems 
                necessary and appropriate.
            ``(2) Supervision and direction of divisions.--Each 
        division established by paragraph (1) shall be under the 
        supervision and direction of an Assistant Commissioner of 
        Internal Revenue. As the head of a division, each Assistant 
        Commissioner shall be responsible for carrying out the 
        functions of taxpayer services, examinations, collections, 
        counsel operations, and such other functions as the Board may 
        designate with respect to the taxpayers covered by the 
        division.''
    (b) Conforming Amendments.--
            (1) The section heading for section 7802 is amended to read 
        as follows:

``SEC. 7802. ORGANIZATION OF THE INTERNAL REVENUE SERVICE; TAXPAYER 
              ADVOCATE; OFFICE OF APPEALS.''

            (2) The table of sections for subchapter A of chapter 80 is 
        amended by striking the item relating to section 7802 and 
        inserting the following new item:

                              ``Sec. 7802. Organization of the Internal 
                                        Revenue Service; Taxpayer 
                                        Advocate; Office of Appeals.''
            (3) Subsection (b) of section 5109 of title 5, United 
        States Code, is amended by striking ``the employee appointed 
        under section 7802(b)'' and inserting ``an employee appointed 
        under section 7802(a)(2)''.
    (c) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 303. GREATER INDEPENDENCE OF THE TAXPAYER ADVOCATE.

    (a) In General.--Section 7802(d)(1) is amended to read as follows:
            ``(1) In general.--There is established in the Internal 
        Revenue Service an office to be known as the `Office of the 
        Taxpayer Advocate'. Such office shall be independent of all 
        other functions of the Internal Revenue Service and shall be 
        under the supervision and direction of an official to be known 
        as the `Taxpayer Advocate' who shall be appointed by, and 
        report directly to, the Board. The Taxpayer Advocate shall be 
        entitled to compensation at the same rate as the highest level 
        official reporting directly to the Commissioner of the Internal 
        Revenue.''
    (b) Conforming Amendments.--
            (1) Section 7802, as amended by subsection (a), is amended 
        by striking subsection (b) and by redesignating subsection (d) 
        as subsection (b).
            (2) Section 7802(b)(3), as so redesignated, is amended--
                    (A) by striking ``Commissioner of Internal 
                Revenue'' and inserting ``Board'', and
                    (B) by striking ``Commissioner'' each place it 
                appears in the text and heading and inserting 
                ``Board''.
    (c) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 304. GREATER INDEPENDENCE OF THE OFFICE OF APPEALS.

    (a) In General.--Section 7802(c) is amended to read as follows:
    ``(c) Office of Appeals.--
            ``(1) In general.--There is established in the Internal 
        Revenue Service an office to be known as the `Office of 
        Appeals'. Such office shall be independent of all other 
        functions of the Internal Revenue Service and shall be under 
        the supervision and direction of an officer to be known as the 
        `National Appeals Officer' who shall be appointed by, and 
        report directly to, the Board. The National Appeals Officer 
        shall be entitled to compensation at the same rate as the 
        highest level official reporting directly to the Commissioner 
        of the Internal Revenue.
            ``(2) Functions of office.--
                    ``(A) In general.--It shall be the function of the 
                Office of Appeals to resolve tax controversies, without 
                litigation, on a basis that is fair and impartial to 
                both the Government and the taxpayer and in a manner 
                that encourages voluntary compliance and public 
                confidence in the integrity and efficiency of the 
                Internal Revenue Service.
                    ``(B) Restrictions.--In carrying out its functions, 
                the Office of Appeals--
                            ``(i) shall consider only those issues 
                        concerning the taxpayer's return raised by the 
                        division established under subsection (a) prior 
                        to its referral to the Office, and
                            ``(ii) shall not have any communications 
                        with any officer or employee of the division 
                        with respect to such issues unless the 
                        taxpayer, or the taxpayer's representative, has 
                        the opportunity to be present for such 
                        communications.''
    (b) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 305. IMPROVED IRS WRITTEN COMMUNICATIONS TO TAXPAYERS AND TAX 
              FORMS.

    (a) Taxpayer-Communications Advisory Group.--
            (1) In general.--In order to ensure that the Internal 
        Revenue Service Board of Governors receives input from the 
        taxpayers who must comply with written communications from the 
        Internal Revenue Service, the Board shall, not later than 180 
        days after the date of the enactment of this Act, convene a 
        taxpayer-communications advisory group to review all--
                    (A) standardized letters, notices, bills, and other 
                written communications sent to taxpayers by the 
                Internal Revenue Service, and
                    (B) tax forms and instructions.
        The advisory group shall recommend to the Board the rewriting 
        of any standardized written document, form, or instruction 
        which it finds is not clear to, or easily understood by, the 
        taxpayers to whom it is directed.
            (2) Membership.--
                    (A) In general.--Members of the taxpayer-
                communications advisory group shall be appointed by the 
                Board and shall include at least one representative of 
                the following: individual taxpayers subject to 
                withholding; small businesses and the self-employed; 
                large businesses; trusts and estates; tax-exempt 
                organizations; tax practitioners, preparers, and other 
                tax professionals; and such other types of taxpayers 
                that the Board deems appropriate.
                    (B) Term.--A member of the advisory group shall be 
                appointed for a term of one year and may be reappointed 
                for one additional term.
    (b) Personnel and Other Matters.--
            (1) Members' compensation.--Each member of the advisory 
        group shall serve without compensation, but shall be allowed 
        travel expenses, including per diem in lieu of subsistence, at 
        rates authorized for employees of agencies under subchapter I 
        of chapter 57 of title 5, United States Code, while away from 
        their homes or regular places of business in performance of 
        services for the advisory group.
            (2) Details.--Any Federal Government employee may be 
        detailed to the advisory group without reimbursement, and such 
        detail shall be without interruption or loss of civil service 
        status or privilege.

                      TITLE IV--ELECTRONIC FILING

SEC. 401. GOALS FOR ELECTRONIC FILING; ELECTRONIC-FILING ADVISORY 
              GROUP.

    (a) In General.--It is the policy of Congress that--
            (1) paperless filing should be the preferred and most 
        convenient means of filing Federal tax and information returns,
            (2) electronic filing should be a voluntary option for 
        taxpayers, and
            (3) there be a goal that no more than 20 percent of all 
        such returns should be filed on paper by the year 2007.
    (b) Strategic Plan.--
            (1) In general.--Not later than 180 days after the date of 
        the enactment of this Act, the Secretary of the Treasury or the 
        Secretary's delegate (hereafter in this section referred to as 
        the ``Secretary''), in consultation with the Board of Governors 
        of the Internal Revenue Service and the electronic-filing 
        advisory group described in paragraph (4), shall establish a 
        plan to eliminate barriers, provide incentives, and use 
        competitive market forces to increase electronic filing 
        gradually over the next 10 years while maintaining processing 
        times for paper returns at 40 days.
            (2) Publication of plan.--The plan described in paragraph 
        (1) shall be published in the Federal Register and shall be 
        subject to public comment for 60 days from the date of 
        publication. Not later than 180 days after publication of such 
        plan, the Secretary shall publish a final plan in the Federal 
        Register.
            (3) Implementation of plan.--The Secretary shall prescribe 
        rules and regulations to implement the plan developed under 
        paragraph (1). Notwithstanding any other provision of law, the 
        Secretary shall--
                    (A) prescribe such rules and regulations in 
                accordance with section 553 (b), (c), (d), and (e) of 
                title 5, United States Code, and
                    (B) in connection with such rules and regulations, 
                perform an initial and final regulatory flexibility 
                analysis pursuant to sections 603 and 604 of title 5, 
                United States Code, and outreach pursuant to section 
                609 of title 5, United States Code.
            (4) Electronic-filing advisory group.--
                    (A) In general.--To ensure that the Secretary 
                receives input from the private sector in the 
                development and implementation of the plan required by 
                paragraph (1), not later than 60 days after the date of 
                enactment of this Act, the Secretary shall convene an 
                electronic-filing advisory group to include at least 
                one representative of individual taxpayers subject to 
                withholding, small businesses and the self-employed, 
                large businesses, trusts and estates, tax-exempt 
                organizations, tax practitioners, preparers, and other 
                tax professionals, computerized tax processors, and the 
                electronic-filing industry.
                    (B) Personnel and other matters.--The provisions of 
                section 305(b) of this Act shall apply to the advisory 
                group.
            (5) Termination.--The advisory group shall terminate on 
        December 31, 2008.
    (c) Promotion of Electronic Filing and Incentives.--Section 6011 is 
amended by redesignating subsection (f) as subsection (g) and by 
inserting after subsection (e) the following new subsection:
    ``(f) Promotion of Electronic Filing.--
            ``(1) In general.--The Secretary is authorized to promote 
        the benefits of and encourage the use of electronic tax 
        administration programs, as they become available, through the 
        use of mass communications and other means.
            ``(2) Incentives.--The Secretary may implement procedures 
        to provide for the payment of appropriate incentives for 
        electronically filed returns.''

SEC. 402. REPORT ON ELECTRONIC FILING AND ITS EFFECT ON SMALL 
              BUSINESSES.

    Not later than June 30 of each calendar year after 1997 and before 
2009, the Chairperson of the Internal Revenue Service Board of 
Governors, the Secretary of the Treasury, and the Chairperson of the 
electronic-filing advisory group established under section 401(b)(4) of 
this Act shall report to the Committees on Finance, Appropriations, 
Governmental Affairs, and Small Business of the Senate, the Committees 
on Ways and Means, Appropriations, Government Reform and Oversight, and 
Small Business of the House of Representatives, and the Joint Committee 
on Taxation, on--
            (1) the progress of the Internal Revenue Service in meeting 
        the goal of receiving 80 percent of tax and information returns 
        electronically by 2007,
            (2) the status of the plan required by section 401(b) of 
        this Act,
            (3) the legislative changes necessary to assist the 
        Internal Revenue Service in meeting such goal, and
            (4) the effects on small businesses and the self-employed 
        of electronically filing tax and information returns, including 
        a detailed description of the forms to be filed electronically, 
        the equipment and technology required for compliance, the cost 
        to a small business and self-employed individual of filing 
        electronically, implementation plans, and action to coordinate 
        Federal, State, and local electronic filing requirements.

                       TITLE V--REGULATORY REFORM

SEC. 501. CONGRESSIONAL REVIEW OF INTERNAL REVENUE SERVICE RULES THAT 
              INCREASE REVENUE.

    (a) In General.--Section 804(2) of title 5, United States Code, is 
amended to read as follows:
            ``(2) The term `major rule'--
                    ``(A) means any rule that--
                            ``(i) the Administrator of the Office of 
                        Information and Regulatory Affairs of the 
                        Office of Management and Budget finds has 
                        resulted in or is likely to result in--
                                    ``(I) an annual effect on the 
                                economy of $100,000,000 or more;
                                    ``(II) a major increase in costs or 
                                prices for consumers, individual 
                                industries, Federal, State, or local 
                                government agencies, or geographic 
                                regions; or
                                    ``(III) significant adverse effects 
                                on competition, employment, investment, 
                                productivity, innovation, or on the 
                                ability of United States-based 
                                enterprises to compete with foreign-
                                based enterprises in domestic and 
                                export markets; or
                            ``(ii)(I) is promulgated by the Internal 
                        Revenue Service; and
                            ``(II) the Administrator of the Office of 
                        Information and Regulatory Affairs of the 
                        Office of Management and Budget finds that the 
                        implementation and enforcement of the rule has 
                        resulted in or is likely to result in any net 
                        increase in Federal revenues over current 
                        practices in tax collection or revenues 
                        anticipated from the rule on the date of the 
                        enactment of the statute under which the rule 
                        is promulgated; and
                    ``(B) does not include any rule promulgated under 
                the Telecommunications Act of 1996 and the amendments 
                made by that Act.''
    (b) Effective Date.--The amendments made by this section shall be 
effective 90 days after the date of the enactment of this Act.

SEC. 502. SMALL BUSINESS ADVOCACY PANELS FOR THE IRS.

    (a) In General.--Section 609(d) of title 5, United States Code, is 
amended to read as follows:
    ``(d) For purposes of this section, the term `covered agency' means 
the Internal Revenue Service, the Environmental Protection Agency, and 
the Occupational Safety and Health Administration of the Department of 
Labor.''
    (b) Effective Date.--The amendments made by this section shall be 
effective 90 days after the date of the enactment of this Act.

SEC. 503. TAXPAYER'S ELECTION WITH RESPECT TO RECOVERY OF COSTS AND 
              CERTAIN FEES.

    (a) In General.--
            (1) Section 504(f) of title 5, United States Code, is 
        amended to read as follows:
    ``(f) A party may elect to recover costs, fees, or other expenses 
under this section or under section 7430 of the Internal Revenue Code 
of 1986.''
            (2) Section 2412(e) of title 28, United States Code, is 
        amended to read as follows:
    ``(e) A party may elect to recover costs, fees, or other expenses 
under this section or under section 7430 of the Internal Revenue Code 
of 1986.''
    (b) Coordination.--Section 7430 (relating to awarding of costs and 
certain fees) is amended by adding at the end the following new 
subsection:
    ``(g) Coordination With Equal Access to Justice Act.--This section 
shall not apply to any administrative or judicial proceeding with 
respect to which a taxpayer elects to recover costs, fees, or other 
expenses under section 504 of title 5, United States Code, or section 
2412 of title 28, United States Code.''
    (c) Effective Date.--The amendments made by this section shall be 
effective for proceedings initiated after the date of the enactment of 
this Act.

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