12. Increase superpriority dollar limits
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.
Description of Proposal
The proposal would increase the dollar limit in section 6323(b)(4) for purchasers at a casual
sale from $250 to $1,000, and it would increase 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 proposal would index these amounts for inflation. The proposal also would clarify
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 proposal would be effective on the date of enactment.
13. Permit personal delivery of section 6672(b) notices
Present Law
Any person who is required to collect, truthfully account for, and pay over any tax imposed
by the Internal Revenue Code who willfully fails to do so is liable for a penalty equal to the amount
of the tax (Code Sec. 6672(a)). Before the IRS may assess any such "100 percent penalty," it must
mail a written preliminary notice informing the person of the proposed penalty to that person's last
known address. The mailing of such notice must precede any notice and demand for payment of
the penalty by at least 60 days. The statute of limitations shall not expire before the date 90 days
after the date in which the notice was mailed. These restrictions do not apply if the Secretary finds
the collection of the penalty is in jeopardy.
Description of Proposal
The proposal would permit in person delivery, as an alternative to delivery by mail, of a
preliminary notice that the IRS intends to assess a 100 percent penalty. (In some cases, personal
delivery may better assure that the recipient actually receives notice.)
Effective Date
The proposal would be effective on the date of enactment.
14. Allow taxpayers to quash third-party summonses
Present Law
When the IRS issues a summons to a "third-party record keeper" 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 record keepers 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 record keepers are generally persons who hold financial information about the
taxpayer, such as banks, brokers, attorneys, and accountants.
Description of Proposal
The proposal would generally expand the current "third-party record keeper" procedures to
apply to summonses issued to persons other than the taxpayer. Thus, the taxpayer whose liability
is being investigated would receive notice of the summons and would be entitled to bring an action
in the appropriate U.S. District Court to quash the summons. As under the current third-party
record keeper provision, the statute of limitations on assessment and collection would be stayed
pending the litigation, and certain kinds of summonses specified under current law would not be
subject to these requirements.
Effective Date
The proposal would be effective for summonses served after the date of enactment.
15. Permit service of summonses by mail
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.
Description of Proposal
The proposal would permit the IRS the option of serving any summons either in person or
by mail.
Effective Date
The proposal would be effective for summonses served after the date of enactment.
16. Provide new remedy for third parties who claim that the IRS has filed an
erroneous lien
Present Law
Prior to 1995, the provisions governing jurisdiction over refund suits had generally been
interpreted to apply only if an action was brought by the taxpayer against whom tax was assessed.
Remedies for third parties from whom tax was collected (rather than assessed) were found in other
provisions of the Internal Revenue Code. The Supreme Court held in Williams v. United States,
115 S.Ct. 1611 (1995), however, that a third party who paid another person's tax under protest to
remove a lien on the third party's property could bring a refund suit, because she had no other
adequate administrative or judicial remedy. In Williams, the IRS had filed a nominee lien against
property that was owned by the taxpayer's former spouse and that was under a contract for sale. In
order to complete the sale, the former spouse paid the amount of the lien under protest, and then
sued in district court to recover the amount paid. The Supreme Court held that parties who are
forced to pay another's tax under duress could bring a refund suit, because no other judicial
remedy was adequate.
Description of Proposal
The proposal would create an administrative procedure similar to the wrongful levy remedy
for third parties in section 7426. Under this procedure, a record owner of property against which a
Federal tax lien had been filed could obtain a certificate of discharge of property from the lien as a
matter of right. The third party would be required to apply to the Secretary of the Treasury for such
a certificate and either to deposit cash or to furnish a bond sufficient to protect the lien interest of
the United States. Although the Secretary would determine the amount of the bond necessary to
protect the Government's lien interest, the Secretary would have no discretion to refuse to issue a
certificate of discharge if this procedure was followed, thus curing the defect in this remedy that the
Supreme Court found in Williams. A certificate of discharge of property from a lien issued
pursuant to the procedure would enable the record owner to sell the property free and clear of the
Federal tax lien in all circumstances. The proposal also would authorize the refund of all or part of
the amount deposited, plus interest at the same rate that would be made on an overpayment of tax
by the taxpayer, or the release of all or part of the bond, if the Secretary otherwise satisfies the tax
liability or determines that the United States does not have a lien interest or has a lesser lien interest
than the amount initially determined.
The proposal would also establish a judicial cause of action for third parties challenging a
lien that is similar to the wrongful levy remedy in section 7426. The period within which such an
action must be commenced would be 120 days to ensure an early resolution of the parties'
interests. Upon conclusion of the litigation, the IRS would be authorized to apply the deposit or
bond to the assessed liability and to refund to the third party any amount in excess of the liability,
plus interest, or to release the bond. Actions to quiet title under 28 U.S.C. §2410 would still be
available to persons who did not seek the expedited review permitted under the new statutory
procedure.
Effective Date
The proposal would be effective on the date of enactment.
17. Waiver of early withdrawal tax for IRS levies on employer-sponsored
retirement plans or IRAs
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, 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, is used to pay medical expenses in excess of 7.5
percent of adjusted gross income ("AGI"), or is used to purchase health insurance of an
unemployed individual. Certain additional exceptions to the tax apply separately to withdrawals
from IRAs and qualified plans. Distributions from IRAs for education expenses and for up to
$10,000 of first-time homebuyer expenses 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.
Description of Proposal
The proposal would provide 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.
Effective Date
The proposal would be effective for withdrawals subject to an IRS levy after the date of
enactment.
