a. Due Process

i. Due process in IRS collection actions (Sec. 3401 of the Bill and new Secs. 6320 and 6330 of the Code)

Present Law

Levy is the IRS's administrative authority to seize a taxpayer's property to pay the taxpayer's tax liability. The IRS is entitled to seize a taxpayer's property by levy if the Federal tax lien has attached to such property. The Federal tax lien arises automatically where (1) a tax assessment has been made; (2) the taxpayer has been given notice of the assessment stating the amount and demanding payment; and (3) the taxpayer has failed to pay the amount assessed within ten days after the notice and demand.

The IRS may collect taxes by levy upon a taxpayer's property or rights to property (including accrued salary and wages) if the taxpayer neglects or refuses to pay the tax within 10 days after notice and demand that the tax be paid. Notice of the IRS's intent to collect taxes by levy must be given no less than 30 days (90 days in the case of a life insurance contract) before the day of the levy. The notice of levy must describe the procedures that will be used, the administrative appeals available to the taxpayer and the procedures relating to such appeals, the alternatives available to the taxpayer that could prevent levy, and the procedures for redemption of property and release of liens.

The effect of a levy on salary or wages payable to or received by a taxpayer is continuous from the date the levy is first made until it is released.

If the IRS district director finds that the collection of any tax is in jeopardy, collection by levy may be made without regard to either notice period. A similar rule applies in the case of termination assessments.

Reasons for Change

The Committee believes that taxpayers are entitled to protections in dealing with the IRS that are similar to those they would have in dealing with any other creditor. Accordingly, the Committee believes that the IRS should afford taxpayers adequate notice of collection activity and a meaningful hearing before the IRS deprives them of their property. When collection of tax is in jeopardy, the Committee believes it is appropriate to provide notice and a hearing promptly after the deprivation of property. The Committee believes that following procedures designed to afford taxpayers due process in collections will increase fairness to taxpayers.

Explanation of Provision

The provision establishes formal procedures designed to insure due process where the IRS seeks to collect taxes by levy (including by seizure). The due process procedures also apply after the Federal tax lien attaches, but before the notice of the Federal tax lien has been given to the taxpayer.

As under present law, notice of the intent to levy must be given at least 30 days (90 days in the case of a life insurance contract) before property can be seized or salary and wages garnished. During the 30-day (90-day) notice period, the taxpayer may demand a hearing to take place before an appeals officer who has had no prior involvement in the taxpayer's case. If the taxpayer demands a hearing within that period, the proposed collection action may not proceed until the hearing has concluded and the appeals officer has issued his or her determination.

During the hearing, the IRS is required to verify that all statutory, regulatory, and administrative requirements for the proposed collection action have been met. IRS verifications are expected to include (but not be limited to) showings that:

(1)the revenue officer recommending the collection action has verified the taxpayer's liability;

(2)the estimated expenses of levy and sale will not exceed the value of the property to be seized;

(3)the revenue officer has determined that there is sufficient equity in the property to be seized to yield net proceeds from sale to apply to the unpaid tax liabilities; and

(4)with respect to the seizure of the assets of a going business, the revenue officer recommending the collection action has thoroughly considered the facts of the case, including the availability of alternative collection methods, before recommending the collection action.

The taxpayer (or affected third party) is allowed to raise any relevant issue at the hearing. Issues eligible to be raised include (but are not limited to):

(1)challenges to the underlying liability as to existence or amount;

(2)appropriate spousal defenses;

(3)challenges to the appropriateness of collection actions; and

(4)collection alternatives, which could include the posting of a bond, substitution of other assets, an installment agreement or an offer-in-compromise.

Once the taxpayer has had a hearing with respect to an issue, the taxpayer would not be permitted to raise the same issue in another hearing.

The determination of the appeals officer is to address whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary. A proposed collection action should not be approved solely because the IRS shows that it has followed appropriate procedures.

The taxpayer may contest the determination of the appellate officer in Tax Court by filing a petition within 30 days of the date of the determination. The Tax Court is expected to review the appellate officer's determination for abuse of discretion and also may consider procedural issues, as under present law. The IRS may not take any collection action pursuant to the determination during such 30 day period or while the taxpayer's contest is pending in Tax Court.

IRS Appeals would retain jurisdiction over its determinations. IRS Appeals could enter an order requiring the IRS collection division to adhere to the original determination. In addition, the taxpayer would be allowed to return to IRS Appeals to seek a modification of the original determination based on any change of circumstances.

In the case of a continuous levy, the due process procedures would apply to the original imposition of the levy. Except in jeopardy and termination cases, continuous levy would not be allowed to begin without notice and an opportunity for a hearing. A determination allowing the continuous levy to proceed that is entered at the conclusion of a hearing would be subject to post determination adjustment on application by the taxpayer. Thus, taxpayers would have the right to have IRS Appeals review any continuous levy and take any changes in circumstances into account.

This provision does not apply in the case of jeopardy and termination assessments. Jeopardy and termination assessments would be subject to post-seizure review as part of the Appeals determination hearing as well as through any existing judicial procedure. A jeopardy or termination assessment must be approved by the IRS District Counsel responsible for the case. Failure to obtain District Counsel approval would render the jeopardy or termination assessment void.

Effective Date

The due process procedures apply to collection actions initiated more than six months after the date of enactment.

b. Examination Activities

i. Uniform application of confidentiality privilege to taxpayer communications with federally authorized practitioners (Sec. 3411 of the Bill and new Sec. 7525 of the Code)

Present Law

A common law privilege of confidentiality exists for communications between an attorney and client with respect to the legal advice the attorney gives the client. Communications protected by the attorney-client privilege must be based on facts of which the attorney is informed by the taxpayer, without the presence of strangers, for the purpose of securing the advice of the attorney. The privilege may not be claimed where the purpose of the communication is the commission of a crime or tort. The taxpayer must either be a client of the attorney or be seeking to become a client of the attorney.

The privilege of confidentiality applies only where the attorney is advising the client on legal matters. It does not apply in situations where the attorney is acting in other capacities. Thus, a taxpayer may not claim the benefits of the attorney-client privilege simply by hiring an attorney to perform some other function. For example, if an attorney is retained to prepare a tax return, the attorney-client privilege will not automatically apply to communications and documents generated in the course of preparing the return.

The privilege of confidentiality also does not apply where an attorney that is licensed to practice another profession is performing such other profession. For example, if a taxpayer retains an attorney who is also licensed as a certified public accountant (CPA), the taxpayer may not assert the attorney-client privilege with regard to communications made and documents prepared by the attorney in his role as a CPA.

The attorney-client privilege is limited to communications between taxpayers and attorneys. No equivalent privilege is provided for communications between taxpayers and other professionals authorized to practice before the Internal Revenue Service, such as accountants or enrolled agents.

Reasons for Change

The Committee believes that a right to privileged communications between a taxpayer and his or her advisor should be available in noncriminal proceedings before the IRS and in noncriminal proceedings in Federal courts with respect to such matters where the IRS is a party, so long as the advisor is authorized to practice before the IRS. A right to privileged communications in such situations should not depend upon whether the advisor is also licensed to practice law.

Explanation of Provision

The provision extends the present law attorney-client privilege of confidentiality to tax advice that is furnished to a client-taxpayer (or potential client-taxpayer) by any individual who is authorized under Federal law to practice before the IRS if such practice is subject to regulation under section 330 of Title 31, United States Code. Individuals subject to regulation under section 330 of Title 31, United States Code include attorneys, certified public accountants, enrolled agents and enrolled actuaries. Tax advice means advice that is within the scope of authority for such individual's practice with respect to matters under Title 26 (the Internal Revenue Code). The privilege of confidentiality may be asserted in any noncriminal tax proceeding before the IRS, as well as in noncriminal tax proceedings in the Federal Courts where the IRS is a party to the proceeding.

The provision allows taxpayers to consult with other qualified tax advisors in the same manner they currently may consult with tax advisors that are licensed to practice law. The provision does not modify the attorney-client privilege of confidentiality, other than to extend it to other authorized practitioners. The privilege established by the provision applies only to the extent that communications would be privileged if they were between a taxpayer and an attorney. Accordingly, the privilege does not apply to any communication between a certified public accountant, enrolled agent, or enrolled actuary and such individual's client (or prospective client) if the communication would not have been privileged between an attorney and the attorney's client or prospective client. For example, information disclosed to an attorney for the purpose of preparing a tax return is not privileged under present law. Such information would not be privileged under the provision whether it was disclosed to an attorney, certified public accountant, enrolled agent or enrolled actuary.

The privilege granted by the provision may only be asserted in noncriminal tax proceedings before the IRS and in the Federal Courts with regard to such noncriminal tax matters in proceedings where the IRS is a party. The privilege may not be asserted to prevent the disclosure of information to any regulatory body other than the IRS. The ability of any other regulatory body, including the Securities and Exchange Commission (SEC), to gain or compel information is unchanged by the provision. No privilege may be asserted under this provision by a taxpayer in dealings with such other regulatory bodies in an administrative or court proceeding.

Effective Date

The provision is effective with regard to communications made on or after the date of enactment.

ii. Limitation on financial status audit techniques (Sec. 3412 of the Bill and Sec. 7602 of the Code)

Present Law

The Secretary is authorized and required to make the inquiries and determinations necessary to insure the assessment of Federal income taxes. For this purpose, any reasonable method may be used to determine the amount of Federal income tax owed. The courts have upheld the use of financial status and economic reality examination techniques to determine the existence of unreported income in appropriate circumstances.

Reasons for Change

The Committee believes that financial status audit techniques are intrusive, and that their use should be limited to situations where the IRS already has indications of unreported income.

Explanation of Provision

The provision prohibits the IRS from using financial status or economic reality examination techniques to determine the existence of unreported income of any taxpayer unless the IRS has a reasonable indication that there is a likelihood of unreported income.

Effective Date

The provision is effective on the date of enactment.

iii. Software trade secrets protection (Sec. 3413 of the Bill and new Sec. 7612 of the Code)

Present Law

The Secretary of the Treasury is authorized to examine any books, papers, records, or other data that may be relevant or material to an inquiry into the correctness of any Federal tax return. The Secretary may issue and serve summonses necessary to obtain such data, including summonses on certain third-party record keepers. There are no specific statutory restrictions on the ability of the Secretary to demand the production of computer records, programs, code or similar materials.

Reasons for Change

The Committee believes that the intellectual property rights of the developers and owners of computer programs should be respected. The Committee is concerned that the examination of computer programs and source code by the IRS could lead to the diminution of those rights through the inadvertent disclosure of trade secrets and believes that special protection against such inadvertent disclosure should be established.

The Committee also believes that the indiscriminate examination of computer source code by the IRS is inappropriate. Accordingly, the Committee believes that a summons for the production of certain computer source code should only be issued where the IRS is not otherwise able to ascertain through reasonable efforts the manner in which a taxpayer has arrived at an item on a return, identifies with specificity the portion of the computer source code it seeks to examine, and determines that the need to see the source code outweighs the risk of unauthorized disclosure of trade secrets.

Explanation of Provision

Discovery of computer source code

The provision generally prohibits the Secretary from issuing a summons in a Federal tax matter for any portion of computer source code. Exceptions to the general rule are provided for inquiries into any criminal offense connected with the administration or enforcement of the internal revenue laws and for computer software source code that was developed by the taxpayer or a related person for internal use by the taxpayer or related person. Computer software source code is considered to have been developed for internal use by the taxpayer or a related person if the software is primarily used in the taxpayer or related person's trade or business, as opposed to being held for sale or license to others. Software is considered to be used in a trade or business if it is used in the provision of services to others. It is anticipated that software that was originally developed for internal use by the taxpayer or a related person will continue to be subject to the exception, even if the software is later transferred to another. For example, software may have originally been developed by the taxpayer to administer the taxpayer's employee benefits system. If that function and the software necessary to perform it is later transferred to an unrelated third party, the software would continue to be subject to the exception.

In addition, the prohibition of the general rule would not apply, and the Secretary would be allowed to summons computer source code if the Secretary: (1) is unable to otherwise reasonably ascertain the correctness of an item on a return from the taxpayer's books and records, or the computer software program and any associated data; (2) identifies with reasonable specificity the portion of the computer source code to be used to verify the correctness of the item; and (3) determines that the need for the source code outweighs the risks of disclosure of the computer source code. No inference is intended as to whether software is included in the definition of a taxpayer's books and records.

It is expected that the Secretary will make a good faith and significant effort to ascertain the correctness of an item prior to seeking computer source code. The portion of the computer source code to be used would be considered identified with reasonable specificity where, for example, the Secretary requests the portion of the code that is used to determine a particular item on the return, that otherwise is necessary to the determination of an item on the return, or that implements an accounting or other method.

The Committee is aware that the refusal of the taxpayer or the owner of the software to cooperate could, in certain situations, prevent the Secretary from establishing the factors necessary to support the summons of computer source code. Accordingly, the requirement that the Secretary be unable to otherwise reasonably ascertain the correctness of an item on a return from the taxpayer's books and records, or from the computer software program and any associated data, and the requirement that the Secretary have identified with reasonable specificity the portion of the computer source code requested, will be deemed to be satisfied where (1) the Secretary makes a good faith determination that it is not feasible to determine the correctness of the return item in question without access to the computer software program and associated data, (2) the Secretary makes a formal request for such program and any data from the taxpayer and requests such program from the owner of the source code after reaching such determination, and (3) the Secretary has not received such program and data within 180 days of making the formal request. In the case of requests to the taxpayer, the Committee expects that a formal request will take the form of an Information Document Request (IDR), summons, or similar document. The Committee intends that the Secretary actively pursue the recovery of such program and any data from the taxpayer before seeking to have the normal requirements deemed satisfied under this rule.

Additional protections against disclosure of computer software and source code

The provision establishes a number of protections against the disclosure and improper use of trade secrets and confidential information incident to the examination by the Secretary of any computer software program or source code that comes into the possession or control of the Secretary in the course of any examination with respect to any taxpayer. These protections include the following:

(1) Such software or source code may be examined only in connection with the examination of the taxpayer's return with regard to which it was received. It is expected that the taxpayer will be informed of any alternative data or settings to be used in the examination of the software. However, the Committee does not intend to provide the taxpayer with the right to monitor the examination of the software by the IRS on a key stroke by key stroke or similar basis.

(2) Such software or source code must be maintained in a secure area.

(3) Such source code may not be removed from the owner's place of business without the owner's consent unless such removal is pursuant to a court order. If the owner does not consent to the removal of source code from its place of business, the owner must make available the necessary equipment to review the source code. The owner shall have the right to require the use of equipment that is configured to prevent electronic communication outside the owner's place of business.

(4) Such software or source code may not be decompiled or disassembled.

(5) Such software or source code may only be copied as necessary to perform the specific examination. The owner of the software must be informed of any copies that are made, such copies must be numbered, and at the conclusion of the examination and any related court proceedings, all such copies must be accounted for and returned to the owner, permanently deleted, or destroyed. The Secretary must provide the owner of such software or source code with the names of any individuals who will have access to such software or source code. Source code may be copied (by the use of a scanner or otherwise) from written to machine readable form. However, any such machine readable copies shall be treated as separate copies and must be numbered, accounted for and returned or destroyed at the conclusion of the examination.

(6) If an individual who is not an officer or employee of the U.S. Government will examine the software or source code, such individual must enter into a written agreement with the Secretary that such individual will not disclose such software or source code to any person other than authorized employees or agents of the Secretary at any time, and that such individual will not participate in the development of software that is intended for a similar purpose as the summoned software for a period of two years.

Computer source code is the code written by a programmer using a programming language that is comprehensible to an appropriately trained person, is not machine readable, and is not capable of directly being used to give instructions to a computer. Computer source code also includes any related programmer's notes, design documents, memoranda and similar documentation and customer communications regarding the operation of the program (other than communications with the taxpayer or any person related to the taxpayer).

The Secretary's determination may be contested in any proceeding to enforce the summons, by any person to whom the summons is addressed. In any such proceeding, the court may issue any order that is necessary to prevent the disclosure of confidential information, including (but not limited to) the enforcement of the protections established by this provision.

Criminal penalties are provided where any person willfully divulges or makes known software that was obtained (whether or not by summons) for the purpose of examining a taxpayer's return in violation of this provision.

Effective Date

The provision is effective for summons issued and software acquired after the date of enactment. In addition, 90 days after the date of enactment, the protections against the disclosure and improper use of trade secrets and confidential information added by the provision (except for the requirement that the Secretary provide a written agreement from non-U.S. government officers and employees) apply to software and source code acquired on or before the date of enactment.

iv. Threat of audit prohibited to coerce tip reporting alternative commitment agreements (Sec. 3414 of the Bill)

Present Law

Restaurants may enter into Tip Reporting Alternative Commitment (TRAC) agreements. A restaurant entering into a TRAC agreement is obligated to educate its employees on their tip reporting obligations, to institute formal tip reporting procedures, to fulfill all filing and record keeping requirements, and to pay and deposit taxes. In return, the IRS agrees to base the restaurant's liability for employment taxes solely on reported tips and any unreported tips discovered during an IRS audit of an employee.

Reasons for Change

The Committee believes that it is inappropriate for the Secretary to use the threat of an IRS audit to induce participation in voluntary programs.

Explanation of Provision

The provision requires the IRS to instruct its employees that they may not threaten to audit any taxpayer in an attempt to coerce the taxpayer to enter into a TRAC agreement.

Effective Date

The provision is effective on the date of enactment.

v. Taxpayers allowed motion to quash all third-party summonses (Sec. 3415 of the bill and Sec. 7609(a) of the Code)

Present Law

When the IRS issues a summons to a "third-party recordkeeper" relating to the business transactions or affairs of a taxpayer, Code section 7609 requires that notice of the summons be given to the taxpayer within three days by certified or registered mail. The taxpayer is thereafter given up to 23 days to begin a court proceeding to quash the summons. If the taxpayer does so, third-party recordkeepers are prohibited from complying with the summons until the court rules on the taxpayer's petition or motion to quash, but the statute of limitations for assessment and collection with respect to the taxpayer is stayed during the pendency of such a proceeding. Third-party recordkeepers are generally persons who hold financial information about the taxpayer, such as banks, brokers, attorneys, and accountants.

Reasons for Change

The Committee believes that a taxpayer should have notice when the IRS uses its summons power to gather information in an effort to determine the taxpayer's liability. Expanding notice requirement to cover all third party summonses will ensure that taxpayer will receive notice and an opportunity to contest any summons issued to a third party in connection with the determination of their liability.

Explanation of Provision

The provision generally expands the current "third-party recordkeeper" procedures to apply to summonses issued to persons other than the taxpayer. Thus, the taxpayer whose liability is being investigated receives notice of the summons and is entitled to bring an action in the appropriate U.S. District Court to quash the summons. As under the current third-party recordkeeper provision, the statute of limitations on assessment and collection is stayed during the litigation, and certain kinds of summonses specified under current law are not subject to these requirements. No inference is intended with respect to the applicability of present law to summonses to the taxpayer or the scope of the authority to summons testimony, books, papers, or other records.

Effective Date

The provision is effective for summonses served after the date of enactment.

vi. Service of summonses to third-party recordkeepers permitted by mail (Sec. 3416 of the Bill and Sec. 7603 of the Code)

Present Law

Code section 7603 requires that a summons shall be served "by an attested copy delivered in hand to the person to whom it is directed or left at his last and usual place of abode." By contrast, if a third-party recordkeeper summons is served, section 7609 permits the IRS to give the taxpayer notice of the summons via certified or registered mail. Moreover, Rule 4 of the Federal Rules of Civil Procedure permits service of process by mail even in summons enforcement proceedings.

Reasons for Change

The Committee is concerned that, in certain cases, the personal appearance of an IRS official at a place of business for the purpose of serving a summons may be unnecessarily disruptive. The Committee believes that it is appropriate to permit service of summons, as well as notice of summons, by mail.

Explanation of Provision

The provision allows the IRS the option of serving any summons either in person or by mail.

Effective Date

The provision is effective for summonses served after the date of enactment.

vii. Prohibition on IRS contact of third parties without taxpayer pre-notification (Sec. 3417 of the Bill and Sec. 7602 of the Code)

Present Law

Third parties may be contacted by the IRS in connection with the examination of a taxpayer or the collection of the tax liability of the taxpayer. The IRS has the right to summon third-party recordkeepers under Code section 7609. In general, the taxpayer must be notified of the service of summons on a third party within three days of the date of service (Sec. 7609(a)). The IRS also has the right to seize property of the taxpayer that is held in the hands of third parties (Sec. 6331(a)). Except in jeopardy situations, the Internal Revenue Manual provides that IRS will personally contact the taxpayer and inform the taxpayer that seizure of the asset is planned.

Reasons for Change

The Committee believes that taxpayers should be notified before the IRS contacts third parties regarding examination or collection activities with respect to the taxpayer. Such contacts may have a chilling effect on the taxpayer's business and could damage the taxpayer's reputation in the community. Accordingly, the Committee believes that taxpayers should have the opportunity to resolve issues and volunteer information before the IRS contacts third parties.

Explanation of Provision

The provision requires the IRS to notify the taxpayer before contacting third parties regarding examination or collection activities (including summonses) with respect to the taxpayer. Contacts with government officials relating to matters such as the location of assets or the taxpayer's current address are not restricted by this provision. The provision does not apply to criminal tax matters, if the collection of the tax liability is in jeopardy, or if the taxpayer authorized the contact.

Effective Date

The provision is effective for contacts made after 180 days after the date of enactment.

c. Collection Activities.

i. Approval process for liens, levies, and seizures (Sec. 3421 of the Bill)

Present Law

Supervisory approval of liens, levies or seizures is only required under certain circumstances. For example, a levy on a taxpayer's principal residence is only permitted upon the written approval of the District Director or Assistant District Director (Sec. 6334(e)).

Reasons for Change

The Committee believes that the imposition of liens, levies, and seizures may impose significant hardships on taxpayers. Accordingly, the Committee believes that extra protection in the form of an administrative approval process is appropriate.

Explanation of Provision

The provision requires the IRS to implement an approval process under which any lien, levy or seizure would be approved by a supervisor, who would review the taxpayer's information, verify that a balance is due, and affirm that a lien, levy or seizure is appropriate under the circumstances. Circumstances to be considered include the amount due and the value of the asset. Failure to follow such procedures should result in disciplinary action against the supervisor and/or revenue officer.

In addition, the Treasury Inspector General for Tax Administration is required to collect information on the approval process and annually report to the tax-writing committees.

Effective Date

The provision is effective for collection actions commenced after date of enactment.

ii. Modifications to certain levy exemption amounts (Sec. 3431 of the Bill and Sec. 6334 of the Code)

Present Law

The Code authorizes the IRS to levy on all non-exempt property of the taxpayer. Property exempt from levy is described in section 6334. Section 6334(a)(2) exempts from levy up to $2,500 in value of fuel, provisions, furniture, and personal effects in the taxpayer's household. Section 6334(a)(3) exempts from levy up to $1,250 in value of books and tools necessary for the trade, business or profession of the taxpayer.

Reasons for Change

The Committee believes that a minimum amount of household items and equipment for taxpayer's business should be exempt from levy. To ensure that such exemption is meaningful, the amounts should be indexed for inflation.

Explanation of Provision

The provision increases the value of personal effects exempt from levy to $10,000 and the value of books and tools exempt from levy to $5,000. These amounts are indexed for inflation.

Effective Date

The provision is effective for collection actions taken after the date of enactment.

iii. Release of levy upon agreement that amount is uncollectible (Sec. 3432 of the bill and Sec. 6343 of the Code)

Present Law

Some have contended that the IRS does not release a wage levy immediately upon receipt of proof that the taxpayer is unable to pay the tax, but instead, the IRS levies on one period's wage payment before releasing the levy.

Reasons for Change

Congress believes that taxpayers should not have collection activity taken against them once the IRS has determined that the amounts are uncollectible.

Explanation of Provision

The IRS is required to immediately release a wage levy upon agreement with the taxpayer that the tax is not collectible.

Effective Date

The provision is effective for levies imposed after date of enactment.

iv. Levy prohibited during pendency of refund proceedings (Sec. 3433 of the Bill and Sec. 6331 of the Code)

Present Law

The IRS is prohibited from making a tax assessment (and thus prohibited from collecting payment) with respect to a tax liability while it is being contested in Tax Court. However, the IRS is permitted to assess and collect tax liabilities during the pendency of a refund suit relating to such tax liabilities, under the circumstances described below.

Generally, full payment of the tax at issue is a prerequisite to a refund suit. However, if the tax is divisible (such as employment taxes or the trust fund penalty under Code section 6672), the taxpayer need only pay the tax for the applicable period before filing a refund claim. Most divisible taxes are not within the Tax Court's jurisdiction; accordingly, the taxpayer has no pre-payment forum for contesting such taxes. In the case of divisible taxes, it is possible that the taxpayer could be properly under the refund jurisdiction of the District Court or the U.S. Court of Federal Claims and still be subject to collection by levy with respect to the entire amount of the tax at issue. The IRS's policy is generally to exercise forbearance with respect to collection while the refund suit is pending, so long as the interests of the Government are adequately protected (e.g., by the filing of a notice of Federal tax lien) and collection is not in jeopardy. Any refunds due the taxpayer may be credited to the unpaid portion of the liability pending the outcome of the suit.

Reasons for Change

The Committee believes that taxpayers who are litigating a refund action over divisible taxes should be protected from collection of the full assessed amount, because the court considering the refund suit may ultimately determine that the taxpayer is not liable.

Explanation of Provision

The provision requires the IRS to withhold collection by levy of liabilities that are the subject of a refund suit during the pendency of the litigation. This will only apply when refund suits can be brought without the full payment of the tax, i.e., in the case of divisible taxes. Collection by levy would be withheld unless jeopardy exists or the taxpayer waives the suspension of collection in writing (because collection will stop the running of interest and penalties on the tax liability). This provision will not affect the IRS's ability to collect other assessments that are not the subject of the refund suit, to offset refunds, to counterclaim in a refund suit or related proceeding, or to file a notice of Federal tax lien. The statute of limitations on collection is stayed for the period during which the IRS is prohibited from collecting by levy.

Effective Date

The provision is effective for refund suits brought with respect to tax years beginning after December 31, 1998.

v. Approval required for jeopardy and termination assessments and jeopardy levies (Sec. 3434 of the Bill and Sec. 7429(a) of the Code)

Present Law

In general, a 30-day waiting period is imposed after assessment of all types of taxes. In certain circumstances, the waiting period puts the collection of taxes at risk. The Code provides special procedures that allow the IRS to make jeopardy assessments or termination assessments in certain extraordinary circumstances, such as if the taxpayer is leaving or removing property from the United States (Sec. 6851), or if assessment or collection would be jeopardized by delay (Secs. 6861 and 6862). In jeopardy or termination situations, a levy may be made without the 30-days' notice of intent to levy that is ordinarily required by section 6331(d)(2). Jeopardy assessments apply when the tax year is over. Termination assessments apply to the current taxable year or the immediately preceding taxable year if the filing date has not yet passed. A termination assessment serves to terminate the taxable year for the purpose of computing the tax to be assessed and collected under the termination assessment procedure. Under both the jeopardy and termination assessment procedures, the IRS can assess the tax and immediately begin collection if any one of the following situations exists: (1) the taxpayer is or appears to be planning to depart the United States or to go into hiding; (2) the taxpayer is or appears to be planning to place property beyond the reach of the IRS by removing it from the country, hiding it, dissipating it, or by transferring it to other persons; or (3) the taxpayer's financial solvency is or appears to be imperiled. Because the same criteria apply to jeopardy and termination assessments, jeopardy and termination assessments are often entered at the same time against the same taxpayer.

The Code and regulations do not presently require Counsel to review jeopardy assessments, termination assessments, or jeopardy levies, although the Internal Revenue Manual does require Counsel review before such actions and it is current practice to make such a review. The IRS bears the burden of proof with respect to the reasonableness of a jeopardy or termination assessment or a jeopardy levy (Sec. 7429(g)).

Reasons for Change

The Committee believes that it is appropriate to require Counsel review and approval of jeopardy and termination levies, because such actions often involve difficult legal issues.

Explanation of Provision

The provision requires IRS Counsel review and approval before the IRS could make a jeopardy assessment, a termination assessment, or a jeopardy levy. If Counsel's approval was not obtained, the taxpayer would be entitled to obtain abatement of the assessment or release of the levy, and, if the IRS failed to offer such relief, to appeal first to IRS Appeals under the new due process procedure for IRS collections (described in E. 1, above) and then to court.

Effective Date

The provision is effective with respect to taxes assessed and levies made after the date of enactment.

vi. Increase in amount of certain property on which lien not valid (Sec. 3435 of the bill and Sec. 6323 of the Code)

Present Law

The Federal tax lien attaches to all property and rights in property of the taxpayer, if the taxpayer fails to pay the assessed tax liability after notice and demand (Sec. 6321). However, the Federal tax lien is not valid as to certain "superpriority" interests as defined in section 6323(b).

Two of these interests are limited by a specific dollar amount. Under section 6323(b)(4), purchasers of personal property at a casual sale are presently protected against a Federal tax lien attached to such property to the extent the sale is for less than $250. Section 6323(b)(7) provides protection to mechanic's lienors with respect to the repairs or improvements made to owner- occupied personal residences, but only to the extent that the contract for repair or improvement is for not more than $1,000.

In addition, a superpriority is granted under section 6323(b)(10) to banks and building and loan associations which make passbook loans to their customers, provided that those institutions retain the passbooks in their possession until the loan is completely paid off.

Reasons for Change

The Committee believes that it is appropriate to increase the dollar limits on the superpriority amounts because the dollar limits have not been increased for decades and do not reflect current prices or values.

Explanation of Provision

The provision increases the dollar limit in section 6323(b)(4) for purchasers at a casual sale from $250 to $1,000, and further increases the dollar limit in section 6323(b)(7) from $1,000 to $5,000 for mechanics lienors providing home improvement work for owner-occupied personal residences. The provision indexes these amounts for inflation. The provision also clarifies section 6323(b)(10) to reflect present banking practices, where a passbook-type loan may be made even though an actual passbook is not used.

Effective Date

The provision is effective on the date of enactment.

vii. Waiver of early withdrawal tax for IRS levies on employer-sponsored retirement plans or IRAs (Sec. 3436 of the Bill and Sec. 72(t)(2)(A) of the Code)

Present Law

Under present law, a distribution of benefits from any employer-sponsored retirement plan or an individual retirement arrangement ("IRA") generally is includible in gross income in the year it is paid or distributed, except to the extent the amount distributed represents the employee's after tax contributions or investment in the contract (i.e., basis). Special rules apply to certain lump-sum distributions from qualified retirement plans, distributions rolled over to an IRA or employer sponsored retirement plan, and lump-sum distributions of employer securities.

Distributions from qualified plans and IRAs prior to attainment of age 59-1/2 that are includible in income generally are subject to a 10-percent early withdrawal tax, unless an exception to the tax applies. An exception to the tax applies if the withdrawal is due to death or disability, is made in the form of certain periodic payments, or is used to pay medical expenses in excess of 7.5 percent of adjusted gross income ("AGI"). Certain additional exceptions to the tax apply separately to withdrawals from IRAs and qualified plans. Distributions from IRAs for education expenses, for up to $10,000 of first-time homebuyer expenses, or to unemployed individuals to purchase health insurance are not subject to the 10-percent early withdrawal tax. A distribution from a qualified plan made by an employee after separation from service after attainment of age 55 is not subject to the 10-percent early withdrawal tax.

Under present law, the IRS is authorized to levy on all non-exempt property of the taxpayer. Benefits under employer-sponsored retirement plans (including section 403(b) and 457 plans) and IRAs are not exempt from levy by the IRS.

Under present law, distributions from employer-sponsored retirement plans or IRAs made on account of an IRS levy are includible in the gross income of the individual, except to the extent the amount distributed represents after-tax contributions. In addition, the amount includible in income is subject to the 10-percent early withdrawal tax, unless an exception described above applies.

Reasons for Change

The Committee believes that the imposition of the 10-percent early withdrawal tax on amounts distributed from employer-sponsored retirement plans or IRAs on account of an IRS levy may impose significant hardships on taxpayers. Accordingly, the Committee believes such distributions should be exempt from the 10-percent early withdrawal tax.

Explanation of Provision

The provision provides an exception from the 10-percent early withdrawal tax for amounts withdrawn from any employer-sponsored retirement plan or an IRA that are subject to a levy by the IRS. The exception applies only if the plan or IRA is levied; it does not apply, for example, if the taxpayer withdraws funds to pay taxes in the absence of a levy, in order to release a levy on other interests, or in any other situation not addressed by the express statutory exceptions to the 10 percent early withdrawal tax.

Effective Date

The provision is effective for withdrawals after the date of enactment.

viii. Prohibition of sales of seized property at less than minimum bid (Sec. 3441 of the Bill and Sec. 6335(e) of the Code)

Present Law

Section 6335(e) requires that a minimum bid price be established for seized property offered for sale. To conserve the taxpayer's equity, the minimum bid price should normally be computed at 80 percent or more of the forced sale value of the property less encumbrances having priority over the Federal tax lien. If the group manager concurs, the minimum sales price may be set at less than 80 percent. The taxpayer is to receive notice of the minimum bid price within 10 days of the sale. The taxpayer has the opportunity to challenge the minimum bid price, which cannot be more than the tax liability plus the expenses of sale. Accordingly, if the minimum bid price is set at the tax liability plus the expenses of sale, the taxpayer's concurrence is not required. IRM 56(13)5.1(4). Section 6335 does not contemplate a sale of the seized property at less than the minimum bid price. Rather, if no person offers the minimum bid price, the IRS may buy the property at the minimum bid price or the property may be released to the owner. Code section 7433 provides civil damages for certain unauthorized collection actions.

Reasons for Change

The Committee believes that strengthening provisions regarding the minimum bid price, including preventing the IRS from selling the taxpayer's property for less than the minimum bid price, are appropriate to preserve taxpayers' rights.

Explanation of Provision

The provision prohibits the IRS from selling seized property for less than the minimum bid price. The provision provides that the sale of property for less than the minimum bid price would constitute an unauthorized collection action, which would permit an affected person to sue for civil damages pursuant to section 7433.

Effective Date

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

ix. Accounting of sales of seized property (Sec. 3442 of the Bill and Sec. 6340 of the Code)

Present Law

The IRS is authorized to seize and sell a taxpayer's property to satisfy an unpaid tax liability (Sec. 6331(b)). The IRS is required to give written notice to the taxpayer before seizure of the property (Sec. 6331(d)). The IRS must also give written notice to the taxpayer at least 10 days before the sale of the seized property.

The IRS is required to keep records of all sales of real property (Sec. 6340). The records must set forth all proceeds and expenses of the sale. The IRS is required to apply the proceeds first against the expenses of the sale, then against a specific tax liability on the seized property, if any, and finally against any unpaid tax liability of the taxpayer (Sec. 6342(a)). Any surplus proceeds are credited to the taxpayer or persons legally entitled to the proceeds.

Reasons for Change

The Committee believes that taxpayers are entitled to know how proceeds from the sale of their property seized by the IRS are applied to their tax liability.

Explanation of Provision

The provision requires the IRS to provide a written accounting of all sales of seized property, whether real or personal, to the taxpayer. The accounting must include a receipt for the amount credited to the taxpayer's account.

Effective Date

The provision is effective for seizures occurring after the date of enactment.

x. Uniform asset disposal mechanism (Sec. 3443 of the Bill)

Present Law

The IRS must sell property seized by levy either by public auction or by public sale under sealed bids (Sec. 6335(e)(2)(A)). These are often conducted by the revenue officer charged with collecting the tax liability.

Reasons for Change

The Committee believes that it is important for fairness and the appearance of propriety that revenue officers charged with collecting unpaid tax liability are not personally involved with the sale of seized property.

Explanation of Provision

The provision requires the IRS to implement a uniform asset disposal mechanism for sales of seized property. The disposal mechanism should be designed to remove any participation in the sale of seized assets by revenue officers. The provision authorizes the consideration of outsourcing of the disposal mechanism.

Effective Date

The provision requires a uniform asset disposal system to be implemented within two years from the date of enactment.

xi. Codification of IRS administrative procedures for seizure of taxpayer's property (Sec. 3444 of the Bill and Sec. 6331 of the Code)

Present Law

The IRS provides guidelines for revenue officers engaged in the collection of unpaid tax liabilities. The Internal Revenue Manual (IRM) 56(12)5.1 provides general guidelines for seizure actions: (1) the revenue officer must first verify the taxpayer's liability; (2) no levy may be made if the estimated expenses of levy and sale will exceed the fair market value of the property to be sized (Sec. 6331(f)); (3) no levy may be made on the date of an appearance in response to an administrative summons, unless jeopardy exists (Sec. 6331(g)); (4) the taxpayer should have an opportunity to read the levy form; (5) the revenue officer must attach a sufficient number of warning notices on the property to clearly identify the property to be seized; (6) the revenue officer must inventory the property to be seized; and (7) a revenue officer may not use force in the seizure of property.

Prior to the levy action, the revenue officer must determine that there is sufficient equity in the property to be seized to yield net proceeds from the sale to apply to unpaid tax liabilities. If it is determined after seizure that the taxpayer's equity is insufficient to yield net proceeds from sale to apply to the unpaid tax, the revenue officer will immediately release the seized property. See IRM 56(12)2.1.

IRS Policy Statement P-5-34 states that the facts of a case and alternative collection methods must be thoroughly considered before deciding to seize the assets of a going business. IRS Policy Statement P-5-16 advises reasonable forbearance on collection activity when the taxpayer's business has been affected by a major disaster such as flood, hurricane, drought, fire, etc., and whose ability to pay has been impaired by such disaster.

Reasons for Change

The Committee believes that the IRS procedures on collections provide important protections to taxpayers. Accordingly, the Committee believes that it is appropriate to codify those procedures to ensure that they are uniformly followed by the IRS.

Explanation of Provision

The provision codifies the IRS administrative procedures which require the IRS to investigate the status of property prior to levy. The Treasury Inspector General for Tax Administration would be required to review IRS compliance with seizure procedures and report annually to Congress.

Effective Date

The provision is effective on the date of enactment.

xii. Procedures for seizure of residences and businesses (Sec. 3445 of the Bill and Sec. 6334(a)(13) of the Code)

Present Law

Subject to certain procedural rules and limitations, the Secretary may seize the property of the taxpayer who neglects or refuses to pay any tax within 10 days after notice and demand. The IRS may not levy on the personal residence of the taxpayer unless the District Director (or the assistant District Director) personally approves in writing or in cases of jeopardy. There are no special rules for property that is used as a residence by parties other than the taxpayer.

IRS Policy Statement P-5-34 states that the facts of a case and alternative collection methods must be thoroughly considered before deciding to seize the assets of a going business.

Reasons for Change

The Committee is concerned that seizure of the taxpayer's principal residence is particularly disruptive for the taxpayer as well as the taxpayer's family. The seizure of any residence is disruptive to the occupants, and is not justified in the case of a small deficiency. In the case of seizure of a business, the seizure not only disrupts the taxpayer's life but also may adversely impact the taxpayer's ability to enter into an installment agreement or otherwise to continue to pay off the tax liability. Accordingly, the Committee believes that the taxpayer's principal residence or business should only be seized to satisfy tax liability as a last resort, and that any property used by any person as a residence should not be seized for a small deficiency.

Explanation of Provision

The provision prohibits the IRS from seizing real property that is used as a residence (by the taxpayer or another person) to satisfy an unpaid liability of $5,000 or less, including penalties and interest.

The provision requires the IRS to exhaust all other payment options before seizing the taxpayer's business or principal residence. The provision does not prohibit the seizure of a business or a principal residence, but would treat such seizure as a payment option of last resort. The provision does not apply in cases of jeopardy. It is anticipated that the IRS would consider installment agreements, offer-in-compromise, and seizure of other assets of the taxpayer before taking collection action against the taxpayer's business or principal residence.

Effective Date

The provision is effective on the date of enactment.

d. Provisions Relating to Examination and Collection Activities

i. Procedures relating to extensions of statute of limitations by agreement (Sec. 3461 of the Bill and Sec. 6502(a) of the Code)

Present Law

The statute of limitations within which the IRS may assess additional taxes is generally three years from the date a return is filed (Sec. 6501). Prior to the expiration of the statute of limitations, both the taxpayer and the IRS may agree in writing to extend the statute, using Form 872 or 872-A. An extension may be for either a specified period or an indefinite period. The statute of limitations within which a tax may be collected after assessment is 10 years after assessment (Sec. 6502). Prior to the expiration of the statute of limitations, both the taxpayer and the IRS may agree in writing to extend the statute, using Form 900.

Reasons for Change

The Committee believes that taxpayers should be fully informed of their rights with respect to the statute of limitations on assessment. The Committee is concerned that in some cases taxpayer have not been fully aware of their rights to refuse to extend the statute of limitations, and have felt that they had no choice but to agree to extend the statute of limitations upon the request of the IRS.

Moreover, the Committee believes that the IRS should collect all taxes within 10 years, and that such statute of limitation should not be extended.

Explanation of Provision

The provision eliminates the provision of present law that allows the statute of limitations on collections to be extended by agreement between the taxpayer and the IRS.

The provision also requires that, on each occasion on which the taxpayer is requested by the IRS to extend the statute of limitations on assessment, the IRS must notify the taxpayer of the taxpayer's right to refuse to extend the statute of limitations or to limit the extension to particular issues.

Effective Date

The provision applies to requests to extend the statute of limitations made after the date of enactment and to all extensions of the statute of limitations on collection that are open 180 days after the date of enactment.

ii. Offers-in-compromise (Sec. 3462 of the Bill and Sec. 7122 of the Code)

Present Law

Section 7122 of the Code permits the IRS to compromise a taxpayer's tax liability. An offer-in-compromise is a provision by the taxpayer to settle unpaid tax accounts for less than the full amount of the assessed balance due. An offer-in-compromise may be submitted for all types of taxes, as well as interest and penalties, arising under the Internal Revenue Code.

There are two bases on which an offer can be made: doubt as to liability for the amount owed and doubt as to ability to pay the amount owed.

A compromise agreement based on doubt as to ability to pay requires the taxpayer to file returns and pay taxes for five years from the date the IRS accepts the offer. Failure to do so permits the IRS to begin immediate collection actions for the original amount of the liability. The Internal Revenue Manual provides guidelines for revenue officers to determine whether an offer in-compromise is adequate. An offer is adequate if it reasonably reflects collection potential. Although the revenue officer is instructed to consider the taxpayer's assets and future and present income, the IRM advises that rejection of an offer solely based on narrow asset and income evaluations should be avoided.

Pursuant to the IRM, collection normally is withheld during the period an offer-in compromise is pending, unless it is determined that the offer is a delaying tactic and collection is in jeopardy.

Reasons for Change

The Committee believes that the ability to compromise tax liability and to make payments of tax liability by installment enhances taxpayer compliance. In addition, the Committee believes that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations and remain in the tax system. Accordingly, the Committee believes that the IRS should make it easier for taxpayers to enter into offer-in-compromise agreements, and should do more to educate the taxpaying public about the availability of such agreements.

Explanation of Provision

Rights of taxpayers entering into offers-in-compromise

The provision requires the IRS to develop and publish schedules of national and local allowances that will provide taxpayers entering into an offer-in-compromise with adequate means to provide for basic living expenses. The IRS also will be required to consider the facts and circumstances of a particular taxpayer's case in determining whether the national and local schedules are adequate for that particular taxpayer. If the facts indicate that use of scheduled allowances would be inadequate under the circumstances, the taxpayer would not be limited by the national or local allowances.

The provision prohibits the IRS from rejecting an offer-in-compromise from a low- income taxpayer solely on the basis of the amount of the offer. The provision provides that, in the case of an offer-in-compromise submitted solely on the basis of doubt as to liability, the IRS may not reject the offer merely because the IRS cannot locate the taxpayer's file. The provision prohibits the IRS from requesting a financial statement if the taxpayer makes an offer-in-compromise based solely on doubt as to liability.

Suspend collection by levy while offer-in-compromise is pending

The provision prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer's offer-in-compromise for that liability is being processed, (2) during the 30 days following rejection of an offer, and (3) during any period in which an appeal of the rejection of an offer is being considered. Taxpayers whose offers are rejected and who made good faith revisions of their offers and resubmitted them within 30 days of the rejection or return would be eligible for a continuous period of relief from collection by levy. This prohibition on collection by levy would not apply if the IRS determines that collection is in jeopardy or that the offer was submitted solely to delay collection. The provision provides that the statute of limitations on collection would be tolled for the period during which collection by levy is barred.

Procedures for reviews of rejections of offers-in-compromise and installment agreements

The provision requires that the IRS implement procedures to review all proposed IRS rejections of taxpayer offers-in-compromise and requests for installment agreements prior to the rejection being communicated to the taxpayer. The provision requires the IRS to allow the taxpayer to appeal any rejection of such offer or agreement to the IRS Office of Appeals. The IRS must notify taxpayers of their right to have an appeals officer review a rejected offer-in compromise on the application form for an offer-in-compromise.

Publication of taxpayer's rights with respect to offers-in-compromise

The provision requires the IRS to publish guidance on the rights and obligations of taxpayers and the IRS relating to offers in compromise, including a compliant spouse's right to apply to reinstate an agreement that would otherwise be revoked due to the nonfiling or nonpayment of the other spouse, providing all payments required under the compromise agreement are current.

Liberal acceptance policy

It is anticipated that the IRS will adopt a liberal acceptance policy for offers-in-compromise to provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes.

Effective Date

The provision is generally effective for offers-in-compromise submitted after the date of enactment. The provision suspending levy is effective with respect to offers-in-compromise pending on or made after the 60th day after the date of enactment.

iii. Notice of deficiency to specify deadlines for filing Tax Court petition (Sec. 3463 of the Bill and Sec. 6213(a) of the Code)

Present Law

Taxpayers must file a petition with the Tax Court within 90 days after the deficiency notice is mailed (150 days if the person is outside the United States) (Sec. 6213). If the petition is not filed within that time period, the Tax Court does not have jurisdiction to consider the petition.

Reasons for Change

The Committee believes that taxpayers should receive assistance in determining the time period within which they must file a petition in the Tax Court and that taxpayers should be able to rely on the computation of that period by the IRS.

Explanation of Provision

The provision requires the IRS to include on each deficiency notice the date determined by the IRS as the last day on which the taxpayer may file a petition with the Tax Court. The provision provides that a petition filed with the Tax Court by this date is treated as timely filed.

Effective Date

The provision applies to notices mailed after December 31, 1998.

iv. Refund or credit of overpayments before final determination (Sec. 3464 of the bill and Sec. 6213(a) of the Code)

Present Law

Generally, the IRS may not take action to collect a deficiency during the period a taxpayer may petition the Tax Court, or if the taxpayer petitions the Tax Court, until the decision of the Tax Court becomes final. Actions to collect a deficiency attempted during this period may be enjoined, but there is no authority for ordering the refund of any amount collected by the IRS during the prohibited period.

If a taxpayer contests a deficiency in the Tax Court, no credit or refund of income tax for the contested taxable year generally may be made, except in accordance with a decision of the Tax Court that has become final. Where the Tax Court determines that an overpayment has been made and a refund is due the taxpayer, and a party appeals a portion of the decision of the Tax Court, no provision exists for the refund of any portion of any overpayment that is not contested in the appeal.

Reasons for Change

The Committee believes that the Secretary should be allowed to refund the uncontested portion of an overpayment of taxes, without regard to whether other portions of the overpayment are contested, as well as amounts that were collected during a period in which collection is prohibited.

Explanation of Provision

The provision provides that a proper court (including the Tax Court) may order a refund of any amount that was collected within the period during which the Secretary is prohibited from collecting the deficiency by levy or other proceeding.

The provision also allows the refund of that portion of any overpayment determined by the Tax Court to the extent the overpayment is not contested on appeal.

Effective Date

The provision is effective on the date of enactment.

v. IRS procedures relating to appeal of examinations and collections (Sec. 3465 of the Bill and new Sec. 7123 of the Code)

Present Law

IRS Appeals operates through regional Appeals offices which are independent of the local District Director and Regional Commissioner's offices. The regional Directors of Appeals report to the National Director of Appeals of the IRS, who reports directly to the Commissioner and Deputy Commissioner. In general, IRS Appeals offices have jurisdiction over both pre-assessment and post-assessment cases. The taxpayer generally has an opportunity to seek Appeals jurisdiction after failing to reach agreement with the Examination function and before filing a petition in Tax Court, after filing a petition in Tax Court (but before litigation), after assessment of certain penalties, after a claim for refund has been rejected by the District Director's office, and after a proposed rejection of an offer-in-compromise in a collection case (Treas. Reg. Sec. 601.106(a)(1)).

In certain cases under Coordinated Examination Program procedures, the taxpayer has an opportunity to seek early Appeals jurisdiction over some issues while an examination is still pending on other issues (Rev. Proc. 96-9, 1996-1 C.B. 575). The early referral procedures also apply to employment tax issues on a limited basis (Announcement 97-52).

A mediation or alternative dispute resolution (ADR) process is also available in certain cases. ADR is used at the end of the administrative process as a final attempt to resolve a dispute before litigation. ADR is currently only available for cases with more than $10 million in dispute. ADR processes are also available in bankruptcy cases and cases involving a competent authority determination.

In April 1996, the IRS implemented a Collections Appeals Program within the Appeals function, which allows taxpayers to appeal lien, levy, or seizure actions proposed by the IRS. In January 1997, appeals for installment agreements proposed for termination were added to the program.

The local IRS Offices of Appeals are generally located in the same area as the District Director's Offices. The IRS has videoconferencing capability. The IRS does not have any program to provide for Appeals conferences by videoconferencing techniques.

Reasons for Change

The Committee believes that the IRS should be statutorily bound to follow the procedures that the IRS has developed to facilitate settlement in the IRS Office of Appeals. The Committee also believes that mediation, binding arbitration, early referral to Appeals, and other procedures would foster more timely resolution of taxpayers' problems with the IRS.

In addition, the Committee believes that the ADR process is valuable to the IRS and taxpayers and should be extended to all taxpayers.

The Committee believes that all taxpayers should enjoy convenient access to Appeals, regardless of their locality.

Explanation of Provision

The provision codifies existing IRS procedures with respect to early referrals to Appeals and the Collections Appeals Process. The provision also codifies the existing ADR procedures, as modified by eliminating the dollar threshold.

In addition, the IRS is required to establish a pilot program of binding arbitration for disputes of all sizes. Under the pilot program, binding arbitration must be agreed to by both the taxpayer and the IRS.

The provision requires the IRS to make Appeals officers available on a regular basis in each State, and consider videoconferencing of Appeals conferences for taxpayers seeking appeals in rural or remote areas.

Effective Date

The provision is effective as of the date of enactment.

vi. Application of certain fair debt collection practices (Sec. 3466 of the Bill and new Sec. 6304 of the Code)

Present Law

The Fair Debt Collection Practices Act provides a number of rules relating to debt collection practices. Among these are restrictions on communication with the consumer, such as a general prohibition on telephone calls outside the hours of 8:00 a.m. to 9:00 p.m. local time, and prohibitions on harassing or abusing the consumer. In general, these provisions do not apply to the Federal Government.

Reasons for Change

The Committee believes that the IRS should be at least as considerate to taxpayers as private creditors are required to be with their customers. Accordingly, the Committee believes that it is appropriate to require the IRS to comply with applicable portions of the Fair Debt Collection Practices Act, so that both taxpayers and the IRS are fully aware of these requirements.

Explanation of Provision

The provision makes the restrictions relating to communication with the taxpayer/debtor and the prohibitions on harassing or abusing the debtor applicable to the IRS by incorporating these provisions into the Internal Revenue Code. The restrictions relating to communication with the taxpayer/debtor are not intended to hinder the ability of the IRS to respond to taxpayer inquiries (such as answering telephone calls from taxpayers).

Effective Date

The provision is effective on the date of enactment.

vii. Guaranteed availability of installment agreements (Sec. 3467 of the Bill and Sec. 6159 of the Code)

Present Law

Section 6159 of the Code authorizes the IRS to enter into written agreements with any taxpayer under which the taxpayer is allowed to pay taxes owed, as well as interest and penalties, in installment payments if the IRS determines that doing so will facilitate collection of the amounts owed. An installment agreement does not reduce the amount of taxes, interest, or penalties owed. However, it does provide for a longer period during which payments may be made during which other IRS enforcement actions (such as levies or seizures) are held in abeyance. Many taxpayers can request an installment agreement by filing form 9465. This form is relatively simple and does not require the submission of detailed financial statements. The IRS in most instances readily approves these requests if the amounts involved are not large (in general, below $10,000) and if the taxpayer has filed tax returns on time in the past. Some taxpayers are required to submit background information to the IRS substantiating their application. If the request for an installment agreement is approved by the IRS, a user fee of $43 is charged. This user fee is in addition to the tax, interest, and penalties that are owed.

Reasons for Change

The Committee believes that the ability to make payments of tax liability by installment enhances taxpayer compliance. In addition, the Committee believes that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations. Accordingly, the Committee believes that the IRS should make it easier for taxpayers to enter into installment agreements.

Explanation of Provision

The provision requires the Secretary to enter an installment agreement, at the taxpayer's option, if:

(1) the liability is $10,000, or less (excluding penalties and interest);

(2) within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an installment agreement under this provision;

(3) if requested by the Secretary, the taxpayer submits financial statements, and the Secretary determines that the taxpayer is unable to pay the tax due in full;

(4) the installment agreement provides for full payment of the liability within 3 years; and

(5) the taxpayer agrees to continue to comply with the tax laws and the terms of the agreement for the period (up to 3 years) that the agreement is in place.

Effective Date

The provision is effective on the date of enactment.