4. Limitation on financial status audit techniques

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.

Description of Proposal

The proposal would prohibit 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 proposal would be effective on the date of enactment.

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

Description of Proposal

The proposal would generally prohibit the Secretary from issuing a summons in a Federal tax matter for any portion of computer source code. Exceptions to the general rule would be 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. In addition, 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 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. It is expected that the Secretary will make a good faith, bona fide 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 relates to an item on the return, that implements an accounting or other method.

The requirements 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 the computer software program and associated data and that the Secretary have identified with reasonable specificity the portion of the computer source code requested would 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 data of both the taxpayer and the owner of the program after reaching such determination, and (3) the Secretary has not received such program and data within 180 days of making the formal request.

The proposal also 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 summoned computer software program or source code. Summoned software or source code could be examined only in connection with the examination of the taxpayer's return with regard to which it was summoned. Summoned software or source code must be maintained in a secure area. Summoned 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. Summoned software or source code could not be decompiled or disassembled, and it 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 summoned software or source code with the names of any individuals who will have access to such software or source code and, in the case of individuals that are not employees of the U.S. Government, a written agreement 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.

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 the enforcement of the protections established by this proposal.

Effective Date

The proposal would be effective for summons issued 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 proposal (except for the requirement that the Secretary provide a written agreement from non-U.S. government employees) would apply to summons of software and source code issued before the date of enactment.

6. Extensions of statute of limitations by agreement

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). The statute of limitations within which a tax may be collected 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.

Description of Proposal

The proposal would eliminate 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 proposal would also require 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.

The Treasury Inspector General would be required to collect information on extensions of the statute of limitations and annually report to the tax writing committees.

Effective Date

The proposal would apply 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.

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

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.

Description of Proposal

The proposal would require 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 proposal would provide that a petition filed with the Tax Court by this date would be treated as timely filed.

Effective Date

The proposal would apply to notices mailed after December 31, 1998.

8. Refund or credit of overpayments before final determination

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.

Description of Proposal

The proposal would provide 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 proposal would also allow 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 proposal would be effective on the date of enactment.

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

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.

Description of Proposal

The proposal would require 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 proposal would be effective on the date of enactment.

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

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.

Description of Proposal

The proposal would codify existing IRS procedures with respect to early referrals to Appeals and the Collections Appeals Process. The proposal would also codify the ADR procedures and eliminate the dollar threshold. The proposal would direct the IRS to establish an independent Appeals function and to prohibit ex parte communications between IRS employees and Appeals officers with respect to any particular taxpayer's case that is pending in Appeals.

Effective Date

The proposal would be effective as of the date of enactment.