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.