Description of Senate Finance Committee Chairman's Mark Relating to Reform and Restructuring of the Internal Revenue Service

Scheduled for Markup by the Senate Committee on Finance March 31, 1998

Prepared by the Staff of the Joint Committee on Taxation March 26, 1998

JCX-17-98

CONTENTS, Page

INTRODUCTION 1

I. Executive Branch Governance 2

A. IRS Restructuring and Creation of IRS Oversight Board 2

1. IRS restructuring and mission 2

2. Establishment and duties of IRS Oversight Board 3

B. Appointment and Duties of IRS Commissioner and Chief Counsel 9

1. IRS Commissioner 9

2. IRS Chief Counsel 10

C. Structure and Funding of the Employee Plans and Exempt Organizations Division ("EP/EO") 12

D. Taxpayer Advocate 14

E. Prohibition on Executive Branch Influence Over Taxpayer Audits 16

F. Treasury Office of Inspector General; IRS Office of the Chief Inspector 18

G. IRS Personnel Flexibilities 26

II. Electronic Filing 31

A. Electronic Filing of Tax and Information Returns 31

B. Time for Filing Certain Information Returns With the IRS 32

C. Paperless Electronic Filing 33

D. Return-Free Tax System 34

E. Access to Account Information 35

III. Taxpayer Bill of Rights 3 36

A. Burden of Proof 36

B. Proceedings by Taxpayers 39

1. Expansion of authority to award costs and certain fees 39

2. Civil damages with respect to unauthorized collection actions 40

3. Increase in size of cases permitted on small case calendar 40

4. Expand Tax Court jurisdiction to include determination of penalties under section 6672 of the Code 41

5. Actions for refund with respect to certain estates which have elected the installment method of payment 42

6. Provide Tax Court jurisdiction to review an adverse IRS determination of a bond issue's tax-exempt status 43

C. Relief for Innocent Spouses and Persons With Disabilities 45

1. Innocent spouse relief 45

2. Reports on collection activity against spouses 48 3. Suspension of statute of limitations on filing refund claims during periods of disability 48

D. Provisions Relating to Interest and Penalties 50

1. Elimination of interest differential on overlapping periods of interest on income tax overpayments and underpayments 50

2. Increase in overpayment rate payable to taxpayers other than corporations 51

3. Elimination of penalty on individual's failure to pay during installment agreement 51

4. Mitigation of failure to deposit penalty 52

5. Suspend accrual of interest and penalties if IRS fails to contact taxpayer within 1 year 52

6. Notices of penalties must show computation 53

7. Management approval required for certain penalties 53

E. Protections for Taxpayers Subject to Audit or Collection 54

1. Due process in IRS collection actions 54

2. Privilege of confidentiality extended to taxpayer's dealings with non-attorneys authorized to practice before IRS 56

3. Expansion of authority to issue taxpayer assistance orders 57

4. Limitation on financial status audit techniques 58

5. Limitation on authority to require production of computer source code 58

6. Extensions of statute of limitations by agreement 60

7. Notice of deficiency to specify deadlines for filing Tax Court petition 61

8. Refund or credit of overpayments before final determination 61

9. Threat of audit prohibited to coerce Tip Report Alternative Commitment Agreements 62

10. Codify existing IRS procedures relating to appeal of examinations and collections and increase independence of appeals function 62

11. Appeals videoconferencing alternative for rural areas 63

12. Require IRS to notify taxpayer before contacting third parties regarding IRS examination or collection activities with respect to the taxpayer 64

F. Disclosures to Taxpayers 65

1. Explanation of joint and several liability 65

2. Explanation of taxpayers' rights in interviews with the IRS 65

3. Disclosure of criteria for examination selection 66

4. Explanation of appeals and collection process 66

5. Require IRS to explain reason for denial for refund 67

G. Low-Income Taxpayer Clinics 68

H. Other Taxpayer Rights Provisions 69

1. Cataloging complaints 69

2. Archive of records of the IRS 69

3. Payment of taxes 70

4. Clarification of authority of Secretary relating to the making of elections 70

I. Studies 71

1. Study of penalty administration 71

2. Study of confidentiality of tax return information 71

J. Limits on Seizure Authority 73

1. IRS to implement approval process for liens, levies, or seizures 73

2. Prohibit sales of seized property at less than minimum bid 73

3. IRS to provide accounting and receipt to taxpayer for property seized and sold 74

4. Uniform asset disposal mechanism 75

5. Increase exempt amounts for personal effects and tools 75

6. Require IRS to immediately release levy upon agreement that amount is not collectible 76

7. Codify IRS administrative procedures for seizure of taxpayer's property 76

8. Suspend collection by levy during refund suit 77

9. Require district counsel review of jeopardy and termination assessments and jeopardy levies 78

10. Codify certain fair debt collection practices 79

11. Ensure availability of installment agreements 79

12. Increase superpriority dollar limits 80

13. Permit personal delivery of section 6672(b) notices 81

14. Allow taxpayers to quash all third-party summonses 82

15. Permit service of summonses by mail 82

16. Provide new remedy for third parties who claim that the IRS has filed an erroneous lien 83

17. Waiver of early withdrawal tax for IRS levies on employer- sponsored retirement plans or IRAs 84

18. Prohibit seizure of residences in small deficiency cases 85

K. Offers-in-Compromise 86

1. Rights of taxpayers entering into offers-in-compromise 86

2. Prohibit IRS rejection of low income taxpayer's offer-in-compromise based on amount of offer 87

3. Prohibit IRS rejection an offer-in-compromise solely based on a dispute as to liability because the taxpayer's file cannot be located by IRS 87

4. Prohibit the IRS from requiring a financial statement for offer-in- compromise based solely on doubt as to liability 88

5. Suspend collection by levy while offer-in-compromise is pending 88

6. Rejected offers-in-compromise and requests for installment agreements to be reviewed 89

7. Liberal acceptance policy for offers-in-compromise 89

L. Additional Items 90

1. Basis for evaluation of IRS employees 90

2. IRS employee contacts 90

3. Use of pseudonyms by IRS employees 91

4. Conference of right in the National Office of IRS 91

5. Illegal tax protestor designations 91

6. Allow tax writing committees to obtain data from IRS employees 92

IV. Congressional Accountability for the IRS 93

A. Funding for Century Date Change 93

B. Tax Law Complexity Analysis 94

V. Revenue Offsets 95

A. Employer Deduction for Vacation and Severance Pay 95

B. Modify Foreign Tax Credit Carryover Rules 98

C. Clarify and Expand Mathematical Error Procedures 99

D. Freeze Grandfathered Status of Stapled REITs 101

Introduction

On November 5, 1997, the House passed H.R. 2676, the "Internal Revenue Service Restructuring and Reform Act of 1997." Titles I-V of H.R. 2676, as passed by the House, were as reported by the House Committee on Ways and Means on October 31, 1997 (H. Rept. 105-364, Part I) and contain provisions relating to executive branch governance of the IRS, electronic filing, Taxpayer Bill of Rights 3, Congressional oversight, and a revenue offset. Title VI of H.R. 2676, as passed by the House, contains the "Tax Technical Corrections Act of 1997," which was added as a House amendment to H.R. 2676.

The Senate Finance Committee has scheduled a markup relating to Internal Revenue Service ("IRS") reform and restructuring proposals, including taxpayer protections, on March 31, 1998.

This document prepared by the staff of the Joint Committee on Taxation, contains a description of the Finance Committee Chairman's mark relating to Executive Branch Governance of the IRS (Part I), Electronic Filing (Part II), Taxpayer Bill of Rights 3 (Part III), Congressional Accountability for the IRS (Part IV), and Revenue Offsets (Part V).