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TBOR TAOsM:\WPCORP\WPWIN61\TEMPLATE\JC1TMPLT.WPTM:\WPCORP\WPWIN61\TEMPLATE\JC1TMPLT.WPT  ATF OCC MOUs MOU FTEsredesignated SESproactive UNAXmitigations secs _Ý ƒ ·–$ÝÓ  Óà  àòòÚ  Ú16Ú  ÚóóÝ  Ý€€The€Treasury€Department€organization€includes€the€Departmental€offices€as€well€as€theÐ ° ÐBureau€of€Alcohol,€Tobacco€and€Firearms€(ð ðATFðð),€the€Office€of€the€Comptroller€of€theÏCurrency€(ð ðOCCðð),€the€U.S.€Customs€Service€(ð ðCustomsðð),€the€Bureau€of€Engraving€andÏPrinting,€the€Federal€Law€Enforcement€Training€Center,€the€Financial€Management€Service,€theÏU.S.€Mint,€the€Bureau€of€the€Public€Debt,€the€U.S.€Secret€Service€(ð ðSecret€Serviceðð),€the€OfficeÏof€Thrift€Supervision,€and€the€IRS. Ý ƒ ·–$ÝÓ  Óà  àòòÚ  Ú17Ú  ÚóóÝ  Ý€€The€first€MOU€was€entered€into€in€1990€and€the€second€in€1994. DÝ ƒ ·–$ÝÓ  Óà  àòòÚ  Ú18Ú  ÚóóÝ  Ý€€Treasury€Directive€40„01€(September€21,€1992)€reiterates€that€the€Treasury€IG€isÐ ° Ðresponsible€for€investigating€alleged€misconduct€on€the€part€of€IRS€employees€at€the€grade€15Ïlevel€and€above,€all€employees€of€the€Office€of€the€Chief€Inspector.€€In€addition,€TreasuryÏDirective€40„01€states€that€the€Treasury€IG€is€responsible€for€investigating€alleged€misconduct€onÏthe€part€of€Office€of€Chief€Counsel€employees€(excluding€employees€of€the€National€Director,ÏOffice€of€Appeals). ÙÝ ƒ ·–ÿÝÓ  ÓÑT@RY”3Ø'c$"Small Circleð"ðà0 àÝ ƒz]!ÝÓ  ÓÑTRY3Ø' Ž Ðà@ÏÏìàAND€REFORM€ACT€OF€1998ˆÌÌÌÌà@ÆÆ%ìàó ó___________ˆÐ Ð  ÐÌÌà@ê ê ìàApril€__,€1998.„„Ordered€to€be€printedˆÌÌÌÌà@ÆÆ%ìà___________ˆÌÌÌÓ  ÓMr.€Roth,€from€the€Committee€on€FinanceÌÓ‹Óà@00ìàsubmitted€the€followingˆÌÌÌà@ØØ$ìàR€E€P€O€R€T€ˆÌÌÌà@ssìà[To€accompany€H.R.€2676]€€ˆÌÌÌÌà  àThe€Committee€on€Finance,€to€which€was€referred€the€bill€(H.R.€2676)€to€amend€theÏInternal€Revenue€Code€of€1986€to€restructure€and€reform€the€Internal€Revenue€Service,€and€forÏother€purposes,€having€considered€the€same,€reports€favorably€thereon€with€an€amendment€andÏrecommends€that€the€bill€as€amended€do€pass.òòÐ  ¨%ø % ÐÔ_ÔØØò òÓ  ÓÑ  ÑCONTENTSóóÐ ° ÐÓÔÓó óÌòòà  àà ` àà ¸ àà  àà h àà À àà  àà p àà È àà  àà x àà Ð àóóÌÌÓ0°XFܤü!€%ŒX°œX0Óà‘ÆÆ Fàò òI.ˆà Ü àLEGISLATIVE€BACKGROUNDó óàÓ¤¤C¤..."àˆà‘ü!ü!Hü!àˆÐ pÀ Ðà‘FF FàˆÌò òà‘xxFàII.ˆà Ü àEXPLANATION€OF€THE€BILLó óàÓ¤¤C¤.ÖÖ#àˆÐ P   ÐÌÓK%° XFÜž` ¤ü!€%ŒX°XFܤü!€%ŒXKÓà‘FF Fàˆà Ü àTITLE€I.à ` àEXECUTIVE€BRANCH€GOVERNANCE€AND€MANAGEMENTÐ 0 € Ðà‘FF Fàˆà Ü àà  àà ž àà ` àOF€THE€IRSàÓ¤¤C¤.€ € àˆà‘ü!ü!Hü!àˆÐ  p  Ðà‘FF FàˆÌà‘FF Fàˆà Ü àA.à  àIRS€Restructuring€and€Creation€of€IRS€Oversight€BoardàÓ¤¤C¤.ˆˆDàˆà‘ü!ü!Hü!àˆÐ P  ÐÌà‘FF Fàˆà Ü àà  à1.€€IRS€restructuring€and€mission€(secs.€1001„1002)àÓ¤¤C¤.$$BàˆÐ à0  Ðà‘FF Fàˆà Ü àà  à2.€€Establishment€and€duties€of€IRS€Oversight€Board€(sec.€1101)àÓ¤¤C¤.NàˆÐ Ð  ÐÌà‘FF Fàˆà Ü àB.à  àAppointment€and€Duties€of€IRS€Commissioner€and€Chief€Counsel€andÐ ° Ðà‘FF Fàˆà Ü àà  àOther€PersonnelàÓ¤¤C¤.  àˆÐ  ð ÐÌà‘FF Fàˆà Ü àà  à1.€€IRS€Commissioner€and€other€personnel€(secs.€1102(a)€and€1104)àÓ¤¤C¤.::PàˆÐ €Ð Ðà‘FF Fàˆà Ü àà  à2.€€IRS€Chief€Counsel€(sec.€1102(a))àÓ¤¤C¤.nn3àˆÐ pÀ ÐÌà‘FF Fàˆà Ü àC.à  àStructure€and€Funding€of€the€Employee€Plans€and€Exempt€OrganizationsÐ P  Ðà‘FF Fàˆà Ü àà  àDivision€(ð ðEP/EOðð)€(sec.€1101)àÓ¤¤C¤.ôô-àˆà‘ü!ü!Hü!àˆÐ @ ÐÌà‘FF Fàˆà Ü àD.à  àTaxpayer€Advocate€(secs.€1102(a),€(c),€and€(d))àÓ¤¤C¤.ÖÖ>àˆà‘ü!ü!Hü!àˆÐ  p ÐÌà‘FF Fàˆà Ü àE.à  àTreasury€Office€of€Inspector€General;€IRS€Office€of€the€ChiefÐ P Ðà‘FF Fàˆà Ü àà  àInspector€(secs.€1102(a)€and€1103)àÓ¤¤C¤.ÔÔ1àˆÐ ð@ ÐÌà‘FF Fàˆà Ü àF.à  àProhibition€on€Executive€Branch€Influence€Over€Taxpayer€AuditsÐ Ð  Ðà‘FF Fàˆà Ü àà  à(sec.€1105)àÓ¤¤C¤.~ ~ àˆà‘ü!ü!Hü!àˆÐ À! 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ÐÌà‘FF Fàˆà Ü àL.à  àAmendments€to€Title€XIII€of€the€1997€Act€Relating€to€Estate,€Gift€andÐ ((Ð # Ðà‘FF Fàˆà Ü àà  àTrust€SimplificationàÓ¤¤C¤.Z Z #àˆà‘ü!ü!Hü!àˆÐ )À!$ ÐÌà‘FF Fàˆà Ü àà  à1.à 4 àClarification€of€treatment€of€revocable€trusts€for€purposes€of€the€Ð ø* #& Ðà‘FF Fàˆà Ü àà  àà 4 àgeneration„skipping€transfer€tax€(sec.€6013(a))àÓ¤¤C¤.®®@àˆà‘ü!ü!Hü!àˆÐ è+$' Ðà‘FF Fàˆà Ü àà  à2.à 4 àProvision€of€regulatory€authority€for€simplified€reporting€of€funeral€trusts€Ð X Ðà‘FF Fàˆà Ü àà  àà 4 àterminated€during€taxable€year€(sec.€6013(b))àÓ¤¤C¤.PP>àˆà‘ü!ü!Hü!àˆÐ Hð ÐÌà‘FF Fàˆà Ü àÔ& ° ÔM.à  àAmendment€to€Title€XIV€of€the€1997€Act€Relating€to€Excise€Tax€Ð ( Ð Ðà‘FF Fàˆà Ü àà  àSimplificationàÓ¤¤C¤.‚ ‚ àˆà‘ü!ü!Hü!àˆÐ  À ÐÌà‘FF Fàˆà Ü àà  à1.à 4 àClarification€of€provision€allowing€wine€imported€in€bulk€to€be€transferred€Ð ø   Ðà‘FF Fàˆà Ü àà  àà 4 àto€a€U.S.€winery€without€payment€of€tax€(sec.€6014)àÓ¤¤C¤.jjDàÔ'°( ê½Ôˆà‘ü!ü!Hü!àˆÐ è  ÐÌà‘FF Fàˆà Ü àN.à  àAmendments€to€Title€XV€of€the€1997€Act€Relating€to€Pensions€andÐ Èp  Ðà‘FF Fàˆà Ü àà  àEmployee€BenefitsàÓ¤¤C¤.þ þ àˆà‘ü!ü!Hü!àˆÐ ¸`  ÐÌà‘FF Fàˆà Ü àà  à1.à 4 àTreatment€of€certain€disability€payments€to€public€safety€employeesÐ ˜@  Ðà‘FF Fàˆà Ü àà  àà 4 à(sec.€6015(c))àÓ¤¤C¤.† † àˆà‘ü!ü!Hü!àˆÐ ˆ0  ÐÌà‘FF Fàˆà Ü àO.à  àAmendments€to€Title€XVI€of€the€1997€Act€Relating€to€TechnicalÐ h Ðà‘FF Fàˆà Ü àà  àCorrectionsàÓ¤¤C¤.¬ ¬ àˆà‘ü!ü!Hü!àˆÐ X ÐÌà‘FF Fàˆà Ü àà  à1.à 4 àApplication€of€requirements€for€SIMPLE€IRAs€in€the€case€ofÐ 8à Ðà‘FF Fàˆà Ü àà  àà 4 àmergers€and€acquisitions€(sec.€6016(a))àÓ¤¤C¤.zz8àˆà‘ü!ü!Hü!àˆÐ (Ð Ðà‘FF Fàˆà Ü àà  à2.à 4 àTreatment€of€Indian€tribal€governments€under€section€403(b)Ð À Ðà‘FF Fàˆà Ü àà  àà 4 à(sec.€6016(a))àÓ¤¤C¤.† † àˆà‘ü!ü!Hü!àˆÐ ° ÐÌà‘FF Fàˆà Ü àòòTECHNICAL€CORRECTIONS€TO€OTHER€TAX€LEGISLATIONóóàÓ¤¤C¤.þþ:àˆà‘ü!ü!Hü!àˆÐ è ÐÌà‘FF Fàˆà Ü àA.à  àTreatment€of€Adoption€Tax€Credit€Ô_ÔCarryoversÔ_Ô€(sec.€6017)àÓ¤¤C¤.Fàˆà‘ü!ü!Hü!àˆÐ Èp ÐÌà‘FF Fàˆà Ü àB.à  àDisclosure€Requirements€for€Apostolic€Organizations€(sec.€6018)àÓ¤¤C¤.vvNàˆà‘ü!ü!Hü!àˆÐ ¨ P ÐÌà‘FF Fàˆà Ü àC.à  àAllow€Deduction€for€Unused€Employer€Social€Security€Credit€(sec.€6019)àÓ¤¤C¤.""Uàˆà‘ü!ü!Hü!àˆÐ ˆ"0 ÐÌà‘FF Fàˆà Ü àD.à  àEarned€Income€Credit€Qualification€Rules€(sec.€6020)àÓ¤¤C¤.ÜÜCàˆà‘ü!ü!Hü!àˆÐ h$ ÐÌà‘**Fàò òIII.ˆà Ü àBUDGET€EFFECTS€OF€THE€BILLó óàÓ¤¤C¤.&àˆÐ H&ð! ÐÌà‘FF Fàˆà Ü àA.à  àCommittee€EstimatesàÓ¤¤C¤.¾ ¾ "àˆÐ ((Ð # ÐÌà‘FF Fàˆà Ü àB.à  àBudget€Authority€and€Tax€ExpendituresàÓ¤¤C¤.4àˆÐ *°"% ÐÌà‘FF Fàˆà Ü àC.à  àConsultation€with€Congressional€Budget€OfficeàÓ¤¤C¤.êê<àˆÐ è+$' Їò òà‘66FàIV.ˆà Ü àVOTES€OF€THE€COMMITTEEó óàÓ¤¤C¤.ââ"àˆÐ X ÐÌò òÔ& À Ôà‘„„ FàV.ˆà Ü àREGULATORY€IMPACT€AND€OTHER€MATTERSó óàÓ¤¤C¤.ÊÊ/àˆÐ 8 à ÐÌà‘FF Fàˆà Ü àA.à  àRegulatory€ImpactàÓ¤¤C¤.Ü Ü àˆÐ  À ÐÔ'À8 _ËÔÌà‘FF Fàˆà Ü àB.à  àUnfunded€Mandates€StatementàÓ¤¤C¤.²²*àˆÐ ø   ÐÌò òVI.à  àCHANGES€IN€EXISTING€LAW€MADE€BY€THE€BILL,€ASР؀ Ðà‘FF Fàˆà Ü àà  àREPORTEDó óàÓ¤¤C¤.` ` àˆÐ  Èp  ÐÙÙØ ØÓ6 °§X° X„FÜ‚,¤ü!(#X6ÓÑ€ÑÖ€àÖÑ  Ñà@Ñ Ñ ìàò òI.€€LEGISLATIVE€BACKGROUNDˆÐ ° ÐÌà@OO ìàA.€€Committee€ActionˆÌÌòòCommittee€considerationó óóóÐ pÀ ÐÌà  àThe€Committee€on€Finance€marked€up€H.R.€2676€(the€"Internal€Revenue€ServiceÏRestructuring€and€Reform€Act€of€1998")€on€March31,€1998.€€The€Committee€adopted€ChairmanÏRothððs€amendment€in€the€nature€of€a€substitute,€as€amended,€and€ordered€the€bill,€as€amended,Ïfavorably€reported€by€a€roll€call€vote€of€12„0€(20„0€including€proxy€votes).€€The€bill€also€includesÏtax€technical€corrections€provisions.ÌÌò òòòCommittee€and€Subcommittee€hearingsóóó óÐ ð@  ÐÌà  àThe€Committee€held€several€public€hearings€during€the€105th€Congress€as€part€of€itsÏinvestigation€of€the€operations€and€structure€of€the€Internal€Revenue€Service€(ð ðIRSðð).€€A€series€ofÏinvestigative€hearings€were€held€by€the€full€committee€on€September23„25,€1997,€whichÏexamined€both€the€internal€and€public€conduct€of€the€IRS.€€The€Finance€CommitteeððsÏSubcommittee€on€Taxation€and€IRS€Oversight€held€a€field€hearing€in€Oklahoma€City,€OklahomaÏon€December3,€1997,€regarding€IRS€management€and€operations€in€the€Oklahoma„ArkansasÏDistrict.ÌÌà  àThe€Finance€Committee€continued€public€hearings€on€IRS€administration,€includingÏtaxpayer€rights,€on€January€28€and€29€and€on€February5,€11,€and€25,€1998.€€The€hearing€onÏFebruary11,€1998,€focused€on€the€tax€treatment€of€"innocent€spouses."ÌÌò òÓ  ÓB.€€Commission€Reportó óÐ ` ÐÓßÓÓÌà  àThe€National€Commission€on€Restructuring€the€Internal€Revenue€Service€(theÏð ðCommissionðð)€was€established€to€review€the€practices€of€the€IRS€and€to€make€recommendationsÏfor€modernizing€and€improving€its€efficiency€and€taxpayer€services.€€The€Commission€report€wasÏissued€on€June25,€1997,׃×Ý ƒ #ÃÝòòÚ  Ú1Ú  ÚóóÝ  Ý×  ×€and€contained€recommendations€relating€to€executive€branchÐ À! Ðgovernance€and€management€of€the€IRS,€Congressional€oversight€of€the€IRS,€personnelÏflexibilities,€customer€service€and€compliance,€technology€modernization,€electronic€filing,€taxÏlaw€simplification,€taxpayer€rights€and€financial€accountability.Ð  $à" Ðà  àS.1096€(the€ð ðInternal€Revenue€Service€Restructuring€and€Reform€Act€of€1997"),Ïintroduced€on€July30,€1997,€by€Senators€Kerrey€and€Ô_ÔGrassleyÔ_Ô,€generally€followed€theÏCommissionððs€recommendations.€€A€similar€bill,€H.R.€2676,€was€passed€by€the€House€onÏNovember5,€1997.׃×Ý ƒ #ÃÝòòÚ  Ú2Ú  ÚóóÝ  Ý×  ×Ð  €Ð ÐÓ  Óò òII.€€EXPLANATION€OF€THE€BILLÐ ° ÐÌTITLE€I.€€EXECUTIVE€BRANCH€GOVERNANCEÌAND€MANAGEMENT€OF€THE€IRSÌÓ«ØÓòòÌÓ  ÓóóA.€€IRS€Restructuring€and€Creation€of€IRS€Oversight€Boardó óÐ ` ° ÐÓ@ÙÓÌò ò1.€€IRS€mission€and€restructuring€(secs.€1001€and€1002€of€the€bill)Ð @  ÐÌà@ÕÕ%ìàòòPresent€Lawóóó óˆÐ  p  ÐÌòòò òIRS€mission€statementóóó óÐ P  ÐÌà  àThe€IRS€mission€statement€provides€that:ÌÌà0  àThe€purpose€of€the€Internal€Revenue€Service€is€to€collect€the€proper€amount€of€taxÏrevenue€at€the€least€cost;€serve€the€public€by€continually€improving€the€quality€of€ourÏproducts€and€services;€and€perform€in€a€manner€warranting€the€highest€degree€of€publicÏconfidence€in€our€integrity€and€fairness.Ð (#(# ÐÌòòò òIRS€organizational€planó óóóÐ pÀ ÐÌà  àUnder€Reorganization€Plan€No.€1€of€1952,€the€Internal€Revenue€Service€(ð ðIRSðð)€isÏorganized€into€a€3„tier€geographic€structure€with€a€multi„functional€National€Office,€RegionalÏOffices,€and€District€Offices.€€A€number€of€IRS€reorganizations€have€occurred€since€then,€but€noÏmajor€changes€have€been€made€to€the€basic€3„tier€structure.€€Presently,€as€a€result€of€a€1995Ïreorganization,€there€is€a€Regional€Commissioner,€a€Regional€Counsel€and€a€Regional€DirectorÏof€Appeals€for€each€of€the€following€4€regions:€(1)€the€Northeast€Region€(headquartered€in€NewÏYork);€(2)€the€Southeast€Region€(Atlanta);€(3)€the€Midstates€Region€(Dallas);€and€(4)€the€WesternÏRegion€(San€Francisco).€€There€are€33€District€Offices,€10€service€centers,€and€3€computingÏcenters.ÌÌò òòòà@••!ìàReasons€for€Changeóóó óˆÐ °"  ÐÌà  àThe€Committee€believes€that€a€key€reason€for€taxpayer€frustration€with€the€IRS€is€the€lackÏof€appropriate€attention€to€taxpayer€needs.€€At€a€minimum,€taxpayers€should€be€able€to€receiveÏfrom€the€IRS€the€same€level€of€service€expected€from€the€private€sector.€€For€example,€taxpayerÏinquiries€should€be€answered€promptly€and€accurately;€taxpayers€should€be€able€to€obtain€timelyÏresolutions€of€problems€and€information€regarding€activity€on€their€accounts;€and€taxpayersÏshould€be€treated€fairly€and€courteously€at€all€times.€€The€Commissioner€of€Internal€Revenue€hasÏindicated€his€interest€in€improving€customer€service.€€The€Committee€believes€that€taxpayerÏservice€is€of€such€importance€that€the€Committee€should€not€only€support€the€CommissionerððsÏefforts,€but€also€mandate€that€a€key€part€of€the€IRS€mission€must€be€taxpayer€service.€Ð ,`'* ÐÔ_Ô‡à  àThe€Commissioner€has€announced€a€broad€outline€of€a€plan€to€reorganize€the€structure€ofÏthe€IRS€in€order€to€help€make€the€IRS€more€oriented€toward€assisting€taxpayers€and€providingÏbetter€taxpayer€service.€€Under€this€plan,€the€present€regional€structure€would€be€replaced€with€aÏstructure€based€on€units€that€serve€particular€groups€of€taxpayers€with€similar€needs.€€TheÏCommissioner€has€currently€identified€four€different€groups€of€taxpayers€with€similar€needs:Ïindividual€taxpayers,€small€businesses,€large€businesses,€and€the€tax„exempt€sector€(includingÏemployee€plans,€exempt€organizations€and€State€and€local€governments).€€Under€this€structure,Ïeach€unit€would€be€charged€with€end„to„end€responsibility€for€serving€a€particular€group€ofÏtaxpayers.€€The€Commissioner€believes€that€this€type€of€structure€will€solve€many€of€theÏproblems€taxpayers€encounter€now€with€the€IRS.€€For€example,€each€of€the€33€district€offices€andÏ10€service€centers€are€now€required€to€deal€with€every€kind€of€taxpayer€and€every€type€of€issue.€ÏThe€proposed€plan€would€enable€IRS€personnel€to€understand€the€needs€and€problems€affectingÏparticular€groups€of€taxpayers,€and€better€address€those€issues.€€The€present„law€structure€alsoÏimpedes€continuity€and€accountability.€€For€example,€if€a€taxpayer€moves,€the€responsibility€forÏthe€taxpayerððs€account€moves€to€another€geographical€area.€€Further,€every€taxpayer€is€servicedÏby€both€a€service€center€and€at€least€one€district.€€Thus,€many€taxpayers€have€to€deal€withÏdifferent€IRS€offices€on€the€same€issues.€€The€proposed€structure€would€eliminate€many€of€theseÏproblems.ÌÌà  àThe€Committee€believes€that€the€current€IRS€organizational€structure€is€one€of€the€factorsÏcontributing€to€the€inability€of€the€IRS€to€properly€serve€taxpayers€and€the€proposed€structureÏwould€help€enable€the€IRS€to€better€serve€taxpayers€and€provide€the€necessary€level€of€servicesÏand€accountability€to€taxpayers.€€The€Committee€supports€the€Commissioner€in€his€efforts€toÏmodernize€and€update€the€IRS€and€believes€it€appropriate€to€provide€statutory€direction€for€theÏreorganization€of€the€IRS.€€ÌÌà@ÅÅìàò òòòExplanation€of€ProvisionˆÐ ` ÐÌóóó óà  àThe€IRS€is€directed€to€revise€its€mission€statement€to€provide€greater€emphasis€on€servingÐ ð@ Ðthe€public€and€meeting€the€needs€of€taxpayers.ÌÌà  àThe€IRS€Commissioner€is€directed€to€restructure€the€IRS€by€eliminating€or€substantiallyÏmodifying€the€present„law€three„tier€geographic€structure€and€replacing€it€with€an€organizationalÏstructure€that€features€operating€units€serving€particular€groups€of€taxpayers€with€similar€needs.€ÏThe€plan€is€also€required€to€ensure€an€independent€appeals€function€within€the€IRS.€€As€part€ofÏensuring€an€independent€appeals€function,€the€reorganization€plan€is€to€prohibit€ex€parteÏcommunications€between€appeals€officers€and€other€IRS€employees€to€the€extent€suchÏcommunications€appear€to€compromise€the€independence€of€the€appeals€officers.€€The€legality€ofÏIRS€actions€will€not€be€affected€pending€further€appropriate€statutory€changes€relating€to€such€aÏreorganization€(e.g.,€eliminating€statutory€references€to€obsolete€positions).ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ  +p&) ÐÐ ,`'* Ðà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌò ò2.€€Establishment€and€duties€of€IRS€Oversight€Board€(sec.€1101€of€the€bill€and€sec.€7802€ofÐ à Ðthe€Code)ó óÐ €Ð ÐÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ ` ° ÐÌà  àUnder€present€law,€the€administration€and€enforcement€of€the€internal€revenue€laws€areÏperformed€by€or€under€the€supervision€of€the€Secretary€of€the€Treasury.׃,×Ý ƒ #ÃÝòòÚ  Ú3Ú  ÚóóÝ  Ý×  ×€€The€Secretary€hasÐ 0 € Ðdelegated€the€responsibility€to€administer€and€enforce€the€Internal€Revenue€laws€to€theÏCommissioner.€€The€Commissioner€has€the€final€authority€of€the€IRS€concerning€the€substantiveÏinterpretation€of€the€tax€laws€as€reflected€in€legislative€and€regulatory€proposals,€revenue€rulings,Ïletter€rulings,€and€technical€advice€memoranda.€€Under€present€law,€the€duties€of€the€ChiefÏCounsel€of€the€IRS€are€prescribed€by€the€Secretary.€€The€Secretary€has€delegated€authority€overÏthe€Chief€Counsel€to€General€Counsel€of€the€Treasury.€€The€General€Counsel€has€delegatedÏauthority€to€serve€as€the€legal€adviser€to€the€Commissioner€to€the€Chief€Counsel.ÌÌà  àFederal€employees€are€subject€to€rules€designed€to€prevent€conflicts€of€interest€or€theÏappearance€of€conflicts€of€interest.€€The€rules€applicable€to€any€particular€employee€depend€inÏpart€on€whether€the€employee€is€a€regular,€full„time€Federal€Government€employee€or€a€specialÏgovernment€employee,€the€length€of€service€of€the€employee€and€the€pay€grade€of€the€employee.€ÏA€"special€government€employee"€is,€in€general,€an€officer€or€employee€of€the€executive€orÏlegislative€branch€of€the€U.S.€government€who€is€appointed€or€employed€to€perform€(with€orÏwithout€compensation)€for€not€to€exceed€130€days€during€any€period€of€365€days,€temporaryÏduties€either€on€a€full„time€or€intermittent€basis.€€Violations€of€the€ethical€conduct€rules€areÏgenerally€punishable€by€imprisonment€for€up€to€1€year€(5€years€in€the€case€of€wilful€conduct),€aÏcivil€fine,€or€both.€€€The€amount€of€the€fine€with€respect€to€each€violation€cannot€exceed€theÏgreater€of€$50,000€or€the€compensation€received€by€the€employee€in€connection€with€theÏprohibited€conduct.ÌÌà  àUnder€the€ethical€conduct€rules,€all€Federal€Government€employees€(including€specialÏgovernment€employees)€are€precluded€from€participating€in€a€matter€in€which€the€employee€(or€aÏrelated€party)€has€a€financial€interest.€€In€addition,€special€government€employees€cannotÏrepresent€a€party€(whether€or€not€for€compensation)€or€receive€compensation€for€representation€ofÏa€party׃-€×Ý ƒ #ÃÝòòÚ  Ú4Ú  ÚóóÝ  Ý×  ×€in€relation€to€a€matter€(1)€in€which€the€employee€has€at€any€time€participated€personallyÐ $à" Ðand€substantially,€or€(2)€which€is€pending€in€the€department€or€agency€of€the€Government€inÏwhich€the€special€government€employee€is€serving.€€In€the€case€of€a€special€governmentÏemployee€who€has€served€in€a€department€no€more€than€60€days€during€the€immediatelyÏpreceding€365€days,€item€(2)€does€not€apply.€€Thus,€for€example,€such€an€individual€can€receiveÏcompensation€for€representational€services€with€respect€to€matters€pending€in€the€department€inÏwhich€the€employee€serves,€as€long€as€it€is€not€a€matter€involving€parties€in€which€the€employeeÏpersonally€and€substantially€participated.׃.×Ý ƒ #ÃÝòòÚ  Ú5Ú  ÚóóÝ  Ý×  ×Ð P   ÐÌà  àThe€conflict€of€interest€rules€also€impose€restrictions€on€what€a€Federal€GovernmentÏemployee€can€do€after€leaving€the€Government.€Under€these€rules,€senior€level€officers€andÏemployees€(including€special€government€employees)€who€served€at€least€60€days€cannotÏrepresent€anyone€other€than€the€United€States€before€the€individual's€former€department€orÏagency€for€1€year€after€terminating€employment.€€Whether€an€employee€is€a€senior€level€officerÏor€employee€is€determined€by€pay€grade.€€The€one„year€post€employment€restriction€does€notÏapply€to€special€government€employees€who€serve€less€than€60€days€during€the€365„day€periodÏbefore€termination€of€employment.׃/ ×Ý ƒ #ÃÝòòÚ  Ú6Ú  ÚóóÝ  Ý×  ×Ð À ÐÌà  àFederal€employees€with€pay€grades€above€certain€levels€(and€who€have€at€least€60€days€ofÏservice)€are€required€to€file€annually€public€financial€disclosures.ÌÌò òòòà@••!ìàReasons€for€Changeó óóóˆÐ pÀ Ðâ âÔ_Ôò òÐ `° Ðó óà  àThe€Committee€believes€that€a€well„run€IRS€is€critical€to€the€operation€of€our€tax€system.€Ð ° Ðâ âPublic€confidence€in€the€IRS€must€be€restored€so€that€our€system€of€voluntary€compliance€willÏnot€be€compromised.€€The€Committee€believes€that€most€Americans€are€willing€to€pay€their€fairÏshare€of€taxes,€and€that€public€confidence€in€the€IRS€is€key€to€maintaining€that€willingness.ÌÌà  àThe€National€Commission€on€Restructuring€the€IRS€(the€ð ðRestructuring€Commissionðð)€Ïconducted€a€year„long€study€of€the€IRS€and€found€that€a€number€of€factors€contribute€to€currentÏIRS€management€problems.€€The€Restructuring€Commission€found€that,€while€the€Treasury€isÏresponsible€for€IRS€oversight,€it€has€generally€provided€little€consistent€strategic€oversight€orÏguidance€to€the€IRS.€€The€Secretary€and€Deputy€Secretary€have€many€other€broad€responsibilitiesÏand€generally€leave€the€IRS€largely€independent.€€The€average€tenure€of€an€IRS€Commissioner€isÏunder€3€years,€as€is€the€average€tenure€of€senior€Treasury€officials€responsible€for€IRS€oversight.€ÏMany€of€the€issues€that€need€to€be€addressed€by€the€IRS€require€expertise€in€various€areas,Ïparticularly€management€and€technology.ÌÌà  àThe€Restructuring€Commission€concluded€the€following:ÌÌà0  àð ðproblems€throughout€the€IRS€cannot€be€solved€without€focus,€consistency€and€directionÏfrom€the€top.€€The€current€structure,€which€includes€Congress,€the€President,€theÏDepartment€of€the€Treasury,€and€the€IRS€itself,€does€not€allow€the€IRS€to€set€and€maintainÏconsistent€long„term€strategy€and€priorities,€nor€to€develop€and€execute€focused€plans€forÏimprovement.€€Additionally,€the€structure€does€not€ensure€that€the€IRS€budget,€staffingÏand€technology€are€targeted€toward€achieving€organizational€success.ððÐ (#(# ÐÌà  àThe€Committee€shares€the€concerns€of€the€Commission,€and€believes€that€fundamentalÏchange€in€IRS€management€and€oversight€is€essential.€€The€Committee€believes€that€a€newÏmanagement€structure€that€will€bring€greater€expertise€in€needed€areas,€and€more€focus€andÏcontinuity€will€help€the€IRS€to€become€an€efficient,€responsive,€and€respected€agency€that€actsÏappropriately€in€carrying€out€its€functions.€Ìà  àÌà  àThe€Committee€believes€that€private€sector€input€is€a€necessary€part€of€any€newÏmanagement€structure.€€The€Committee€believes€that€appropriate€ethics€rules€should€be€applied€toÏthe€private€sector€members€of€the€new€IRS€management€in€order€to€enhance€the€ability€of€suchÏmembers€to€demonstrate€impartiality€in€the€performance€of€their€duties,€while€not€undulyÏrestricting€the€available€pool€of€potential€candidates.Ìà  à€Ìà  àThe€Committee€is€aware€that€the€taxpaying€public€does€not€relish€contacts€with€theÏagency€responsible€for€collecting€taxes.€€Nevertheless,€by€establishing€a€new€managementÏstructure€that€will€better€enable€the€IRS€to€develop€and€fulfill€long„term€goals,€the€CommitteeÏbelieves€the€IRS€will€provide€better€service€and€reduce€IRS€contact€with€taxpayers.€€TheÏCommittee€is€also€aware€that€changes€being€made€to€IRS€management€structure€are€not€the€finalÏstep,€and€that€continued€oversight€of€the€IRS,€by€Congress€as€well€as€the€Administration,€isÏnecessary€in€order€to€ensure€long„term€progress.à@ìì*ìàˆÐ  ,`'* ÐÓ  Óòòò òExplanation€of€Provisionó óóóÐ ° ÐÓ'ÓÌò òòòDuties,€responsibilities,€and€powers€of€the€IRS€Oversight€Boardóóó óÐ à ÐÌà  àThe€bill€provides€for€the€establishment€within€the€Treasury€Department€of€the€InternalÏRevenue€Service€Oversight€Board€(referred€to€as€the€ð ðBoardðð).€€The€general€responsibilities€ofÏthe€Board€are€to€oversee€the€IRS€in€the€administration,€management,€conduct,€direction,€andÏsupervision€of€the€execution€and€application€of€the€internal€revenue€laws.€€As€part€of€its€oversightÏresponsibilities,€the€Board€has€the€responsibility€to€ensure€that€the€organization€and€operation€ofÏthe€IRS€allows€it€to€carry€out€its€mission.€€The€Board€will€sunset€September€30,€2008.ÌÓ*°X‚X4¸ —X°§X*ÓÌà  àThe€Board€has€the€following€specific€responsibilities:€(1)€to€review€and€approve€strategicÏplans€of€the€IRS,€including€the€establishment€of€mission€and€objectives€(and€standards€ofÏperformance)€and€annual€and€long„range€strategic€plans;€(2)€to€review€the€operational€functionsÏof€the€IRS,€including€plans€for€modernization€of€the€tax€administration€system,€outsourcing€orÏmanaged€competition,€and€training€and€education;€(3)€to€review€and€approve€the€CommissionerððsÏplans€for€major€reorganization€of€the€IRS€(except€that€the€approval€authority€does€not€apply€toÏthe€reorganization€provided€for€under€the€bill);€and€(4)€to€review€operations€of€the€IRS€in€order€toÏensure€the€proper€treatment€of€taxpayers.€€The€Board€also€has€the€following€specificÏresponsibilities€relating€to€management:€(1)€to€recommend€to€the€President€candidates€forÏCommissioner€(and€to€recommend€the€removal€of€the€Commissioner);€(2)€taking€into€account€theÏrecommendations,€if€any,€of€the€Commissioner,€to€recommend€to€the€Secretary€3€candidates€forÏappointment€as€the€National€Taxpayer€Advocate€from€individuals€who€have€a€background€inÏcustomer€service€and€tax€law,€and€experience€representing€individual€taxpayers€(and€toÏrecommend€the€removal€of€the€National€Taxpayer€Advocate);€(3)€to€review€the€CommissionerððsÏselection,€evaluation,€and€compensation€of€IRS€senior€executives€who€have€programÏmanagement€responsibility€over€significant€functions€of€the€IRS;€(4)€and€to€review€procedures€ofÏthe€IRS€relating€to€financial€audits.ÌÌà  àIn€addition,€the€Board€will€review€and€approve€the€budget€request€of€the€IRS€prepared€byÏthe€Commissioner,€submit€such€budget€request€to€the€Secretary,€and€ensure€that€the€budgetÏrequest€supports€the€annual€and€long„range€strategic€plans€of€the€IRS.€€The€Secretary€is€requiredÏto€submit€the€budget€request€approved€by€the€Board€to€the€President,€who€is€required€to€submitÏsuch€request,€without€revision,€to€the€Congress€together€with€the€Presidentððs€annual€budgetÏrequest€for€the€IRS.€€The€bill€does€not€affect€the€ability€of€the€President€to€include,€in€addition,Ïhis€own€budget€request€relating€to€the€IRS.€ÌÌà  àIt€is€intended€that€the€Board€will€reach€a€formal€decision€on€all€matters€subject€to€itsÏreview.€€With€respect€to€those€matters€over€which€the€Board€has€approval€authority,€the€BoardððsÏdecisions€will€be€determinative.€€Ì€Ìà  àThe€Board€has€no€responsibilities€or€authority€with€respect€to€the€development€andÏformulation€of€Federal€tax€policy€relating€to€existing€or€proposed€internal€revenue€laws.€€InÐ ,`'* Ðaddition,€the€Board€has€no€authority€(1)€to€intervene€in€specific€taxpayer€cases,€includingÏÔ_Ôcompliance€activities€involving€specific€taxpayers€such€as€criminal€investigations,€examinations,Ïand€collection€activities,€(2)€to€engage€in€specific€procurement€activities€of€the€IRS€(e.g.,Ïselecting€vendors€or€awarding€contracts),€or€(3)€to€intervene€in€specific€individual€personnelÏmatters.ÌÌà  àBoard€members€would€have€limited€access€to€confidential€tax€return€and€returnÏinformation€under€section€6103.€€This€limited€access€would€permit€the€Board€to€receive€suchÏinformation€(i.e.,€information€that€has€not€been€redacted€to€remove€confidential€tax€return€andÏreturn€information)€from€the€Treasury€IG€for€Tax€Administration€or€the€Commissioner€inÏconnection€with€reports€made€to€the€Board.€€This€access€to€section€6103€information€does€notÏinclude€the€taxpayerððs€name,€address,€or€taxpayer€or€employer€identification€number.€€The€BoardÏmembers€are€subject€to€the€anti„browsing€rules€applicable€to€IRS€employees€under€present€law.׃0×Ý ƒ #ÃÝòòÚ  Ú7Ú  ÚóóÝ  Ý×  ×Ð ð@  ÐÌà  à€€In€exercising€its€duties,€it€is€expected€that€the€members€of€the€Board€shall€maintainÏappropriate€confidentiality€(e.g.,€regarding€enforcement€matters).Ìà  àÌà  àThe€Board€is€required€to€report€each€year€regarding€the€conduct€of€its€responsibilities.€ÏThe€annual€report€shall€be€provided€to€the€President€and€the€House€Committees€on€Ways€andÏMeans,€Government€Reform€and€Oversight,€and€Appropriations€and€the€Senate€Committees€onÏFinance,€Governmental€Affairs,€and€Appropriations.€€In€addition,€the€Board€is€required€to€reportÏto€the€Ways€and€Means€and€Finance€Committees€if€the€IRS€does€not€address€problems€identifiedÏby€the€Board.ÌÌ€à  àIt€is€expected€that€the€Treasury€Department€will€no€longer€utilize€the€IRS€ManagementÐ 0€ ÐBoard€once€the€new€Board€created€by€the€bill€is€in€place,€as€the€functions€of€the€IRS€ManagementÏBoard€would€be€taken€over€by€the€new€Board.ÌÌòòò òComposition€of€the€Boardóóó óÐ ð@ ÐÌà  àThe€Board€is€composed€of€9€members.€€Six€of€the€members€are€so„called€ð ðprivate„lifeððÏmembers€who€are€not€otherwise€Federal€officers€or€employees.€€These€private„life€members€are€Ïappointed€by€the€President,€with€the€advice€and€consent€of€the€Senate.€€The€other€members€are:Ì(1)€the€Secretary€(or,€if€the€Secretary€so€designates,€the€Deputy€Secretary);€(2)€the€Commissioner;Ïand€(3)€a€representative€from€an€employee€organization€that€represents€a€substantial€number€ofÏIRS€employees€and€who€is€appointed€by€the€President,€with€the€advice€and€consent€of€the€Senate.€Ïâ âIn€appointing€the€representative€of€an€employee€organization,€the€President€is€not€required€toÐ p&À!$ Ðchoose€an€individual€recommended€by€the€employee€organization,€but€may€choose€whoever€theÏPresident€determines€to€be€an€appropriate€representative€of€the€employee€organization.Ìâ âÌà  àThe€private„life€members€of€the€Board€will€be€appointed€without€regard€to€politicalÏaffiliation€and€based€solely€on€their€expertise€in€the€following€areas:€(1)€management€of€largeÏservice€organizations;€(2)€customer€service;€(3)€the€Federal€tax€laws,€including€administrationÏand€compliance;€(4)€information€technology;€(5)€organization€development;€and€(6)€the€needsÏand€concerns€of€taxpayers.€€In€the€aggregate,€the€private„life€members€of€the€Board€shouldÏcollectively€bring€to€bear€expertise€in€these€enumerated€areas.€ÌÌà  àA€private„life€Board€member€and€the€employee€representative€Board€member€may€beÏremoved€at€the€will€of€the€President.€€In€addition,€the€Secretary€(or€Deputy€Secretary)€and€theÏIRS€Commissioner€are€automatically€removed€from€the€Board€upon€his€or€her€termination€ofÏemployment€as€such.€Ì€€Ìò òòòCompensation€of€Board€membersóóó óÐ À ÐÌà  àThe€private„life€members€of€the€Board€will€be€compensated€at€a€rate€of€$30,000€per€year,Ïexcept€that€the€Chair€would€be€compensated€at€a€rate€of€$50,000€a€year.€€The€other€BoardÏmembers€will€receive€no€compensation€for€their€services€as€a€Board€member.€€€All€members€ofÏthe€Board€are€entitled€to€travel€expenses€for€purposes€of€attending€Board€meetings€or€visiting€IRSÏoffices€in€connection€with€Board€functions.ÌÌò òòòEthical€conduct€rulesÐ @ ÐÌà  àà 4 àó óPrivate„life€membersóóÐ  p ÐÌà  àUnder€the€bill,€the€private„life€Board€members€are€subject€to€the€public€financialÏdisclosure€rules€applicable€to€Federal€government€employees€above€certain€pay€grades€and€whoÏhave€at€least€60€days€of€service.€€Thus,€the€private„life€Board€members€are€required€to€file€aÏpublic€financial€disclosure€report€for€purposes€of€confirmation,€annually€during€their€tenure€onÏthe€Board,€and€upon€termination€of€appointment.ÌÌà  àThe€ethical€conduct€rules€applicable€to€private„life€Board€members€depend€on€whether€orÏnot€such€members€are€determined€to€be€ð ðspecial€government€employeesðð€under€the€present„lawÏrules.€€It€is€expected€that€they€generally€will€be.€€In€that€case,€they€will€be€subject,€at€a€minimum,Ïto€the€ethical€conduct€rules€applicable€to€special€government€employees.€€In€addition,€during€theirÏterm€as€a€Board€member,€a€private„life€Board€member€cannot€represent€any€party€(whether€or€notÏfor€compensation)€with€respect€to€(1)€any€matter€before€the€Board€or€the€IRS,€€(2)€any€tax„relatedÏmatter€before€the€Treasury€Department€or€(3)€any€court€proceeding€with€respect€to€a€matterÏdescribed€in€(1)€or€(2).€€Thus,€for€example,€the€day€after€appointment€to€the€Board,€a€private„lifeÏBoard€member€could€not€meet€with€representatives€of€the€IRS€or€Treasury€on€behalf€of€a€client€orÏthe€Board€memberððs€corporate€employer€with€respect€to€proposed€tax€regulations.€€On€the€otherÐ ,`'* Ðhand,€the€Board€member€could,€for€example,€represent€clients€before€the€U.S.€Customs€Service.€ÏThe€special€rules€applicable€to€private„life€Board€members€generally€do€not€preclude€the€BoardÏmember€from€sharing€in€compensation€from€representation€of€clients€by€another€person€(e.g.,€aÏpartner€of€the€Board€member)€before€the€IRS€or€Treasury.׃1×Ý ƒ #ÃÝòòÚ  Ú8Ú  ÚóóÝ  Ý×  ×€€Ð €Ð ÐÌà  àIn€addition,€private„life€Board€members€are€subject€to€the€1„year€post€employmentÏrestriction€applicable€to€individuals€above€certain€pay€grades€and€who€have€served€at€least€60Ïdays€(whether€or€not€the€members€are€special€government€employees€under€the€present„lawÏrules).ÌÌà  àIf€the€Board€members€are€determined€not€to€be€special€government€employees€under€theÏpresent„law€rules,€then€they€will€be€subject€to€the€ethical€conduct€rules€relating€to€regular€FederalÏGovernment€employees.ÌÌà  àà 4 àòòRepresentative€of€employee€organizationóóÐ Ð  ÐÌà  àIn€general,€the€bill€provides€that€the€employee€representative€or€Board€member€is€subjectÏto€the€same€ethical€conduct€rules€as€the€private„life€Board€members.€€However,€the€bill€modifiesÏthe€otherwise€applicable€ethical€conduct€rules€so€that€they€do€not€preclude€the€employeeÏrepresentative€from€carrying€out€his€or€her€duties€as€a€Board€member€and€his€or€her€duties€withÏrespect€to€the€employee€organization.€€In€particular,€the€employee€representative€is€not€prohibitedÏfrom€(1)€representing€the€interests€of€the€employee€organization€before€the€Federal€GovernmentÏon€any€matter,€or€(2)€acting€on€a€Board€matter€because€the€employee€organization€has€a€financialÏinterest€in€the€matter.€€In€addition,€the€employee€representative€can€continue€to€receive€his€or€herÏcompensation€from€the€employee€organization.׃2@×Ý ƒ #ÃÝòòÚ  Ú9Ú  ÚóóÝ  Ý×  ×Ð 0€ ÐÌà  àThe€employee€representative€is€subject€to€the€same€public€financial€disclosure€rules€as€theÏprivate„life€Board€members.€€In€addition,€the€employee€organization€is€required€to€provide€anÏannual€financial€report€with€the€House€Ways€and€Means€Committee€and€the€Senate€FinanceÏCommittee.€€Such€report€is€required€to€include€the€compensation€paid€to€the€individual€servingÏon€the€Board,€the€compensation€of€individuals€employed€by€the€employee€organization,€andÏmembership€dues€collected€by€the€Ô_Ôorganization.Ð À! Їà  àThe€employee€representative€is€subject€to€the€same€1„year€post€employment€restrictionÏapplicable€to€the€private„life€Board€members,€except€to€the€extent€the€representative€is€acting€inÏhis€capacity€as€a€representative€of€the€employee€organization.ÌÌòòò òÔ& ° ÔAdministrative€mattersÐ pÀ ÐÌà  àó óà 4 àTerm€of€appointmentsóóÐ P   ÐÌà  àThe€6€private„life€Board€members€will€beÔ'°px>Ô€appointed€for€5„year€terms.€€The€private„lifeÏmembers€may€serve€no€more€than€two€5„year€terms.€€Board€member€terms€will€be€staggered,€as€aÏresult€of€a€special€rule€providing€that€some€private„life€members€first€appointed€to€the€BoardÏwould€serve€terms€of€less€than€5€years.€€Under€this€rule,€2€members€first€appointed€will€have€aÏterm€of€2€years,€2€for€a€term€of€€4€years,€and€2€for€a€term€of€5€years.€€The€terms€of€the€initialÏBoard€members€will€run€from€the€date€of€employment.€€Subsequent€terms€will€run€fromÏexpiration€of€the€previous€term.€€A€Board€member€appointed€to€fill€a€vacancy€before€theÏexpiration€of€a€term€will€be€appointed€to€the€remainder€of€the€term.€€Of€course,€such€a€memberÏcould€be€appointed€to€subsequent€5„year€term.ÌÌà  àà 4 àòòChair€of€the€BoardóóÐ à ÐÌà  àThe€members€of€the€Board€are€to€elect€a€Chair€from€the€private„life€members€for€a€2„yearÏterm.€€€Except€as€otherwise€provided€by€a€majority€of€the€Board,€the€authority€of€the€ChairÏincludes€the€authority€to€hire€appropriate€staff,€call€meetings,€establish€committees,€establish€theÏagenda€for€meetings,€and€develop€rules€for€the€conduct€of€business.ÌÌà  àà 4 àòòMeetingsóóÐ  p ÐÌà  àThe€Board€is€required€to€meet€on€a€regular€basis€(as€determined€necessary€by€the€Chair),Ïbut€no€less€frequently€than€quarterly.€€The€Board€can€meet€privately,€and€is€not€subject€to€publicÏdisclosure€laws.Ì€Ìà  à€A€quorum€of€5€members€is€required€in€order€for€the€Board€to€conduct€business.€€ActionsÏof€the€Board€can€be€taken€by€a€majority€vote€of€those€members€present€and€voting.ÌÌà  àà 4 àòòStaffingóóÐ $à" ÐÌà  àThe€Chair€is€authorized€to€hire€(and€terminate)€such€personnel€as€the€Chair€findsÏnecessary€to€enable€the€Board€to€carry€out€its€duties.€€In€addition,€the€Board€will€have€such€staffÏas€detailed€by€the€Commissioner€or€from€another€Federal€agency€at€the€request€of€the€Chair€ofÏthe€Board.€€The€Chair€can€procure€temporary€and€intermittent€services€under€section€3109(b)€ofÏtitle€5€of€the€U.S.€Ô_ÔCode.Ô_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÐ  0*€%( Ðà  àà 4 àòòClaims€against€Board€membersóóÐ ° ÐÌà  àThe€private„life€members€of€the€Board€have€no€personal€liability€under€Federal€law€withÏrespect€to€any€claim€arising€out€of€or€resulting€form€an€act€or€omission€by€the€Board€memberÏwithin€the€scope€of€service€as€a€Board€member.€€The€bill€does€not€limit€personal€liability€forÏcriminal€acts€or€omissions,€wilful€or€malicious€conduct,€acts€or€omissions€for€private€gain,€or€anyÏother€act€or€omission€outside€the€scope€of€service€as€a€Board€member.€€The€bill€does€not€affectÏany€other€immunities€and€protections€that€may€be€available€under€applicable€law€or€any€otherÏright€or€remedy€against€the€United€States€under€applicable€law,€or€limit€or€alter€the€immunitiesÏthat€are€available€under€applicable€law€for€Federal€officers€and€employees.€€ÌÌò òòòÓ  ÓEffective€Dateóóó óÐ P  ÐÓ5KÓÌà  àThe€provision€relating€to€the€Board€is€effective€on€the€date€of€enactment.€€The€President€isÏdirected€to€submit€nominations€for€Board€members€to€the€Senate€within€6€months€of€the€date€ofÏenactment.€€The€legality€of€the€actions€of€the€IRS€are€not€affected€pending€appointment€of€theÏBoard.ÌÌà@ÕÕìàò òB.€€Appointment€and€Duties€of€IRS€Commissioner€and€Chief€Counsel€and€Other€PersonnelˆÐ à ÐÌ1.€€IRS€Commissioner€and€other€personnel€(secs.€1102(a)€and€1104€of€the€bill€and€secs.€7803Ïand€7804€of€the€Code)ó óÐ `° ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ @ ÐÌà  àWithin€the€Department€of€the€Treasury€is€a€Commissioner€of€Internal€Revenue,€who€isÏappointed€by€the€President,€with€the€advice€and€consent€of€the€Senate.€€The€Commissioner€hasÏsuch€duties€and€powers€as€may€be€prescribed€by€the€Secretary.׃3×Ý ƒ #ÃÝòòÚ  Ú10Ú  ÚóóÝ  Ý×  ×€€The€Secretary€has€delegated€toÐ P Ðthe€Commissioner€the€administration€and€enforcement€of€the€internal€revenue€laws.׃5€×Ý ƒ #ÃÝòòÚ  Ú11Ú  ÚóóÝ  Ý×  ×€€TheÐ ð@ ÐCommissioner€generally€does€not€have€authority€with€respect€to€tax€policy€matters.׃68×Ý ƒ #ÃÝòòÚ  Ú12Ú  ÚóóÝ  Ý×  ×Ð à0 Ðâ âÐ Ð  ÐÔ_Ôà  àThe€Secretary€is€authorized€to€employ€such€persons€as€the€Secretary€deems€appropriateÏâ âfor€the€administration€and€enforcement€of€the€internal€revenue€laws€and€to€assign€posts€of€duty.ÌÌò òòòà@ÅÅìàExplanation€of€ProvisionˆÐ €Ð Ðóóó óÌà  à€As€under€present€law,€the€Commissioner€is€appointed€by€the€President,€with€the€adviceÏand€consent€of€the€Senate,€and€may€be€removed€at€will€by€the€President.€€Under€the€bill,€one€ofÏthe€qualifications€of€the€Commissioner€is€demonstrated€ability€in€management.€€TheÏCommissioner€is€appointed€to€a€5„year€term,€beginning€with€the€date€of€appointment.€€TheÏCommissioner€may€be€reappointed€for€more€than€one€5„year€term.€€The€Board€recommendsÏcandidates€to€the€President€for€the€position€of€Commissioner;€however,€the€President€is€not€Ïrequired€to€nominate€for€Commissioner€a€candidate€recommended€by€the€Board.€€The€Board€hasÏthe€authority€to€recommend€the€removal€of€the€Commissioner.€ÌÌà  àThe€Commissioner€has€such€duties€and€powers€as€prescribed€by€the€Secretary.€€UnlessÏotherwise€specified€by€the€Secretary,€such€duties€and€powers€include€the€power€to€administer,Ïmanage,€conduct,€direct,€and€supervise€the€execution€and€application€of€the€internal€revenue€lawsÏor€related€statutes€and€tax€conventions€to€which€the€United€States€is€a€party,€to€exercise€the€IRSððÏfinal€authority€concerning€the€substantive€interpretation€of€the€tax€laws,€to€recommend€to€theÏPresident€a€candidate€for€Chief€Counsel€(and€recommend€the€removal€of€the€Chief€Counsel),€andÏto€recommend€candidates€for€the€position€of€National€Taxpayer€Advocate€to€the€IRS€Board.€€IfÏthe€Secretary€determines€not€to€delegate€such€specified€duties€to€the€Commissioner,€suchÏdetermination€will€€not€take€effect€until€30€days€after€the€Secretary€notifies€the€HouseÏCommittees€on€Ways€and€Means,€Government€Reform€and€Oversight,€and€Appropriations,€andÏthe€Senate€Committees€on€Finance,€Governmental€Affairs,€and€Appropriations.€€TheÏCommissioner€is€to€consult€with€the€Board€on€all€matters€within€the€Boardððs€authority€(other€thanÏthe€recommendation€of€candidates€for€Commissioner€and€the€recommendation€to€remove€theÏCommissioner).ÌÌà  àUnless€otherwise€specified€by€the€Secretary,€the€Commissioner€is€authorized€to€employÏsuch€persons€as€the€Commissioner€deems€proper€for€the€administration€and€enforcement€of€theÏinternal€revenue€laws€and€is€required€to€issue€all€necessary€directions,€instructions,€orders,€andÏrules€applicable€to€such€persons.€€Unless€otherwise€provided€by€the€Secretary,€the€CommissionerÏwill€determine€and€designate€the€posts€of€duty.ÌÌòòÓ  Óò òEffective€Dateó óóóÐ €%Ð # ÐÓp[ÓÌà  àThe€provisions€relating€to€the€Commissioner€are€effective€on€the€date€of€enactment.€€TheÏprovision€relating€to€the€5„year€term€of€office€applies€to€the€Commissioner€in€office€on€the€dateÏof€enactment.€€The€5„year€term€runs€from€the€date€of€appointment.€ÌÌò ò2.€€IRS€Chief€Counsel€(sec.€1102(a)€and€sec.€7803€of€the€Code)ó óÐ  +p&) ÐÐ ,`'* Ðà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ° ÐÌà  àThe€President€is€authorized€to€appoint,€by€and€with€the€consent€of€the€Senate,€an€AssistantÏGeneral€Counsel€of€the€Treasury,€who€is€the€Chief€Counsel€of€the€IRS.€€The€Chief€Counsel€is€theÏchief€law€officer€for€the€IRS€and€has€such€duties€as€may€be€prescribed€by€the€Secretary.€€TheÏSecretary€has€delegated€authority€over€the€Chief€Counsel€to€the€Treasury€General€Counsel.€€TheÏChief€Counsel€does€not€report€to€the€Commissioner,€but€to€the€Treasury€General€Counsel.€€AsÏdelegated€by€the€Treasury€General€Counsel,€the€duties€of€the€Chief€Counsel€include:€(1)€to€be€theÏlegal€advisor€to€the€Commissioner€and€his€or€her€officers€and€employees;€(2)€to€furnish€such€legalÏopinions€as€may€be€required€in€the€preparation€and€review€of€rulings€and€memoranda€of€technicalÏadvice€and€the€performance€of€other€duties€delegated€to€the€Chief€Counsel;€(3)€to€prepare,Ïreview,€or€assist€in€the€preparation€of€proposed€legislation,€treaties,€regulations€and€ExecutiveÏOrders€relating€to€laws€affecting€the€IRS;€(4)€to€represent€the€Commissioner€in€cases€before€theÏTax€Court;€(5)€to€determine€what€civil€actions€should€be€brought€in€the€courts€under€the€lawsÏaffecting€the€IRS€and€to€prepare€recommendations€to€the€Department€of€Justice€for€theÏcommencement€of€such€actions€and€to€authorize€or€sanction€commencement€of€such€actions.ÌÌà@ÅÅìàò òòòExplanation€of€ProvisionˆÐ  ð Ðóóó óÌà  àAs€under€present€law,€the€Chief€Counsel€is€appointed€by€the€President,€with€the€adviceÏand€consent€of€the€Senate.€€Under€the€bill,€the€Chief€Counsel€is€not€an€Assistant€General€CounselÏof€the€Treasury€and€reports€directly€to€the€Commissioner.ÌÌà  àThe€Chief€Counsel€has€such€duties€and€powers€as€prescribed€by€the€Secretary.€€UnlessÏotherwise€specified€by€the€Secretary,€these€duties€include€the€duties€currently€delegated€to€theÏChief€Counsel€as€described€above.€€If€the€Secretary€determined€not€to€delegate€such€specifiedÏduties€to€the€Chief€Counsel,€such€determination€is€subject€to€the€same€notice€requirementÏapplicable€to€changes€in€the€delegation€of€authority€with€respect€to€the€Commissioner.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ à0 ÐÌà  àThe€provision€is€generally€effective€on€the€date€of€enactment.€€The€provision€providingÏthat€the€Chief€Counsel€reports€directly€to€the€Commissioner€is€effective€90€days€after€the€date€ofÏenactment.ÌÌò òà@‹‹ìàC.€€Structure€and€Funding€of€the€Employee€Plans€and€Exemptà@@ìà€Organizations€Division€à@@H H ìàˆÐ €%Ð # Ð(ð ðEP/EOðð)€(sec.€1102€of€the€bill€and€sec.€7803€of€the€Code)ó óÐ p&À!$ ÐÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ P( #& ÐÌà  àPrior€to€1974,€no€one€specific€office€in€the€IRS€had€primary€responsibility€for€employeeÏplans€and€tax„exempt€organizations.€€As€part€of€the€reforms€contained€in€the€EmployeeÏRetirement€Income€Security€Act€of€1974€(ð ðERISAðð),€Congress€statutorily€created€the€Office€ofÐ ,`'* ÐEmployee€Plans€and€Exempt€Organizations€(ð ðEP/EOðð)€under€the€direction€of€an€AssistantÏCommissioner.׃:×Ý ƒ #ÃÝòòÚ  Ú13Ú  ÚóóÝ  Ý×  ×€€EP/EO€was€created€to€oversee€deferred€compensation€plans€governed€byÐ  ð Ðsections€401„414€of€the€Code€and€organizations€exempt€from€tax€under€Code€section€501(a).€ÌÌà  àIn€general,€EP/EO€was€established€in€response€to€concern€about€the€level€of€IRSÏresources€devoted€to€oversight€of€employee€plans€and€exempt€organizations.€€The€legislativeÏhistory€of€Code€section€7802(b)€states€that,€with€respect€to€administration€of€laws€relating€toÏemployee€plans€and€exempt€organizations,€ð ðthe€natural€tendency€is€for€the€Service€to€emphasizeÏthose€areas€that€produce€revenue€rather€than€those€areas€primarily€concerned€with€maintainingÏthe€integrity€and€carrying€out€the€purposes€of€exemption€provisions.ðð׃$€×Ý ƒ #ÃÝòòÚ  Ú14Ú  ÚóóÝ  Ý×  ×€€Ð  p  ÐÌà  àTo€provide€funding€for€the€new€EP/EO€office,€ERISA€authorized€the€appropriation€of€anÏamount€equal€to€the€sum€of€the€section€4940€excise€tax€on€investment€income€of€privateÏfoundations€(assuming€a€rate€of€2€percent)€as€would€have€been€collected€during€the€secondÏpreceding€year€plus€the€greater€of€the€same€amount€or€$30€million.׃<8×Ý ƒ #ÃÝòòÚ  Ú15Ú  ÚóóÝ  Ý×  ×€€€However,€amounts€raisedÐ Ð  Ðby€the€section€4940€excise€tax€have€never€been€dedicated€to€the€administration€of€EP/EO,€but€areÏtransferred€instead€to€general€revenues.€€Thus,€the€level€of€EP/EO€funding,€like€that€of€the€rest€ofÏthe€IRS,€is€dependent€on€annual€Congressional€appropriations€to€the€Treasury€Department.ÌÌà@••!ìàò òòòReasons€for€Changeóóó óˆÐ €Ð Ðà  àÌà  àTo€facilitate€the€reorganization€of€the€IRS€along€functional€lines,€the€Committee€believesÏthat€the€statutory€provision€requiring€the€establishment€of€the€Office€of€Employee€Plans€andÏExempt€Organizations€under€the€direction€of€an€Assistant€Commissioner€should€be€eliminated.€ÏIn€addition,€because€the€funding€formula€for€EP/EO€set€forth€in€section€7802(b)(2)€would,€ifÏutilized,€result€in€an€unstable€level€of€funding€that€may€bear€little€or€no€relation€to€the€amount€ofÏfinancial€resources€actually€required€by€the€EP/EO€division,€the€Committee€believes€that€it€isÏappropriate€to€repeal€the€funding€mechanism.ÌÌÔ&  Ôà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ à0 ÐÌà  àThe€bill€eliminates€the€statutory€requirement€contained€in€section€7802(b)€that€there€be€anÏð ðOffice€of€Employee€Plans€and€Exempt€Organizationsðð€under€the€supervision€and€direction€of€anÏAssistant€Commissioner.€€The€Committee€intends€that€a€comparable€structure€be€createdÏadministratively€to€ensure€that€adequate€resources€within€the€IRS€are€devoted€to€oversight€of€theÏtax„exempt€Ô_Ôsector.Ô'Ð%sÔÐ €%Ð # Їà  àIn€addition,€because€the€funding€formula€for€EP/EO€set€forth€in€section€7802(b)(2)€would,Ïif€utilized,€result€in€an€unstable€level€of€funding€that€may€bear€little€or€no€relation€to€the€amountÏof€financial€resources€actually€required€by€the€EP/EO€division,€the€bill€repeals€the€fundingÏmechanism.€€Thus,€the€appropriate€level€of€funding€for€EP/EO€is,€consistent€with€currentÏpractice,€subject€to€annual€Congressional€appropriations,€as€are€other€functions€within€the€IRS.€ÏIn€this€regard,€however,€the€Committee€believes€that,€given€the€magnitude€of€the€sectors€EP/EOÏis€charged€with€regulating,€as€well€as€the€unique€nature€of€its€mandate,€an€adequately€fundedÏEP/EO€is€extremely€important€to€the€efficient€and€fair€administration€of€the€Federal€tax€system.€ÏAccordingly,€financial€resources€for€EP/EO€should€not€be€constrained€on€the€basis€that€EP/EO€isÏa€ð ðnon„coreðð€IRS€function;€rather,€EP/EO,€like€all€functions€of€the€IRS,€should€be€funded€so€as€toÏpromote€the€efficient€and€fair€administration€of€the€Federal€tax€system.ÌÌà  à€For€example,€it€is€important€to€allocate€sufficient€funds€for€EP/EO€staffing€adequately€toÏmonitor€and€assist€businesses€in€establishing€and€maintaining€retirement€plans.€€Recently,€inÏRevenue€Procedure€98„22,€the€IRS€announced€the€expansion€of€the€self„correction€programs€itÏoffers€employers€to€encourage€companies€to€identify€and€correct€errors€without€incurringÏsignificant€penalties.€€These€changes€are€welcomed,€and€it€is€not€intended€that€the€elimination€ofÏthe€statutory€requirement€contained€in€section€7802(b)(1)€or€the€self„funding€mechanismÏdescribed€in€section€7802(b)(2)€impede€the€implementation€of€these€and€EP/EOððs€other€programsÏand€activities.€€Rather,€it€is€intended€that€there€be€adequate€funding€for€EP/EO,€including€theseÏself„correction€programs€that€will€encourage€the€establishment€and€continuation€of€retirementÏplans€to€increase€coverage€of€American€workers€while€protecting€the€rights€of€employees€toÏbenefits€under€these€plans€and€maintaining€the€integrity€and€purposes€of€the€exemptionÏprovisions.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ  p ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.Ìò òÓ  ÓÐ  ð@ ÐD.€€Taxpayer€Advocate€(secs.€1102(a),€(c),€and€(d)€of€the€bill€and€sec.€7803(c)€of€the€Code)ÌÓ  ÓÌó óà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ à Ðòòò òÌTaxpayer€Advocateó óóóÐ pÀ ÐÌà  àIn€1996,€the€Taxpayer€Bill€of€Rights€2€(ð ðTBOR€2ðð)€established€the€position€of€TaxpayerÏAdvocate,€which€replaced€the€position€of€Taxpayer€Ombudsman,€created€in€1979€by€the€IRS.€€ÏThe€Taxpayer€Advocate€is€appointed€by€and€reports€directly€to€the€IRS€Commissioner.€€ÌÌà  àTBOR€2€also€created€the€Office€of€the€Taxpayer€Advocate.€€€The€functions€of€the€officeÏare€(1)€to€assist€taxpayers€in€resolving€problems€with€the€IRS,€(2)€to€identify€areas€in€whichÏtaxpayers€have€problems€in€dealings€with€the€IRS,€(3)€to€propose€changes€(to€the€extent€possible)Ïin€the€administrative€practices€of€the€IRS€that€will€mitigate€those€problems,€and€(4)€to€identifyÏpotential€legislative€changes€that€may€mitigate€those€Ô_Ôproblems.Ô_ÔÔ_ÔÔ_ÔÌÌòòò òTaxpayer€assistance€ordersó óóóÐ ° ÐÌà  àTaxpayers€can€request€that€the€Taxpayer€Advocate€issue€a€taxpayer€assistance€orderÏ(ð ðTAOðð)€if€the€taxpayer€is€suffering€or€about€to€suffer€a€significant€hardship€as€a€result€of€theÏmanner€in€which€the€internal€revenue€laws€are€being€administered.€€A€TAO€may€require€the€IRSÏto€release€property€of€the€taxpayer€that€has€been€levied€upon,€or€to€cease€any€action,€take€anyÏaction€as€permitted€by€law,€or€refrain€from€taking€any€action€with€respect€to€the€taxpayer.ÌÌà  àUnder€present€law,€the€direct€point€of€contact€for€taxpayers€seeking€taxpayer€assistanceÏorders€is€a€problem€resolution€officer€appointed€by€a€District€Director€or€a€Regional€Director€ofÏAppeals.€The€Taxpayer€Advocate€has€designated€the€authority€što€issue€taxpayer€assistance€ordersÏto€the€local€and€regional€problem€resolution€officers.ÌÌòòò òReports€of€the€Taxpayer€Advocateó óóóÐ à0 ÐÌà  àThe€Taxpayer€Advocate€is€required€to€report€annually€to€the€House€Committee€on€WaysÏand€Means€and€the€Senate€Finance€Committee€on€the€objectives€of€the€Taxpayer€Advocate€forÏthe€up„coming€fiscal€year.€€This€report€is€required€to€be€provided€no€later€than€June€30€of€eachÏcalendar€year€and€is€to€contain€full€and€substantive€analysis,€in€addition€to€statistical€information.€ÏÌà  àThe€Taxpayer€Advocate€is€also€required€to€report€annually€to€the€House€Committee€onÏWays€and€Means€and€the€Senate€Finance€Committee€on€the€activities€of€the€Taxpayer€AdvocateÏduring€the€most€recently€ended€fiscal€year.€€This€report€is€required€to€be€provided€no€later€thanÏDecember€31€of€each€calendar€year,€and€is€to€contain€full€and€substantive€analysis,€in€addition€toÏstatistical€information.€€This€report€is€also€required€to:€(1)€identify€the€initiatives€the€TaxpayerÏÔ_ÔAdvocate€has€taken€on€improving€taxpayer€services€and€IRS€responsiveness;€(2)€containÏrecommendations€received€from€individuals€with€the€authority€to€issue€TAOs;€(3)€contain€aÐ ,`'* Ðsummary€of€at€least€20€of€the€most€serious€problems€encountered€by€taxpayers,€including€aÏdescription€of€the€nature€of€such€problems;€(4)€contain€an€inventory€of€the€items€described€in€(1),Ï(2),€and€(3)€for€which€action€has€been€taken€and€the€result€of€such€action;€(5)€contain€anÏinventory€of€the€items€described€in€(1),€(2),€and€(3)€for€which€action€remains€to€be€completed€andÏthe€period€during€which€each€item€has€remained€on€such€inventory;€(6)€contain€an€inventory€ofÏthe€items€described€in€(1),€(2)€and€(3)€for€which€no€action€has€been€taken,€the€period€duringÏwhich€the€item€has€remained€on€the€inventory,€the€reasons€for€the€inaction,€and€identify€any€IRSÏofficial€who€is€responsible€for€the€inaction;€(7)€identify€any€TAO€that€was€not€honored€by€theÏIRS€in€a€timely€manner;€(8)€contain€recommendations€for€such€administrative€and€legislativeÏaction€as€may€be€appropriate€to€resolve€problems€encountered€by€taxpayers;€(9)€describe€theÏextent€to€which€regional€problem€resolution€officers€participate€in€the€selection€and€evaluation€ofÏlocal€problem€resolution€officers,€and€(10)€include€such€other€information€as€the€TaxpayerÏAdvocate€deems€advisable.ÌÌà  àThe€reports€of€the€Taxpayer€Advocate€are€to€be€submitted€directly€to€the€CongressionalÏCommittees€without€prior€review€or€comment€from€the€Commissioner,€Secretary,€any€otherÏofficer€or€employee€of€the€Treasury,€or€the€Office€of€Management€and€Budget.€ÌÌà@••!ìàò òòòReasons€for€Changeóóó óˆÐ à ÐÌà  àThe€Committee€believes€that€the€Taxpayer€Advocate€serves€an€important€role€within€theÏIRS€in€terms€of€preserving€taxpayer€rights€and€solving€problems€that€taxpayers€encounter€in€theirÏdealings€with€the€IRS.€€To€that€end,€it€is€appropriate€that€the€IRS€Oversight€Board€have€input€inÏthe€selection€of€the€Taxpayer€Advocate.€€Due€to€the€enhanced€powers€of€the€Taxpayer€AdvocateÏin€TBOR2€and€this€bill,€the€Committee€has€been€advised€that€the€Taxpayer€Advocate€should€beÏappointed€by€the€Secretary€to€avoid€constitutional€problems.€€In€addition,€the€Committee€believesÏthat€the€Taxpayer€Advocate€should€have€experience€appropriate€to€the€position€and€that€theÏTaxpayer€Advocateððs€objectivity€would€be€best€preserved€by€limiting€prior€and€futureÏemployment€with€the€IRS.€€The€Committee€also€believes€that€the€reporting€requirements€of€theÏTaxpayer€Advocate€should€be€targeted€not€only€towards€solving€problems€with€the€IRS€but€alsoÏtowards€preventing€problems€before€they€arise.ÌÌà  àThe€Committee€believes€that€the€Taxpayer€Advocate€must€have€broad€discretion€toÏprovide€relief€to€taxpayers.€€In€determining€whether€a€taxpayer€assistance€order€should€be€issued,Ïthe€Taxpayer€Advocate€should€consider€certain€factors€as€constituting€a€ð ðsignificant€hardshipðð€forÏthe€taxpayer.€€In€addition€to€providing€relief€if€the€taxpayer€is€about€to€suffer€a€significantÏhardship,€the€Taxpayer€Assistance€Order€should€be€issued€in€other€appropriate€situations,€such€asÏif€there€is€an€immediate€threat€of€adverse€action,€if€there€has€been€a€delay€of€more€than€30€days€inÏresolving€the€taxpayerððs€account€problems,€the€taxpayer€will€have€to€pay€significant€costs€if€reliefÏis€not€granted,€or€the€taxpayer€will€suffer€irreparable€injury,€or€long„term€adverse€impact,€if€reliefÏis€not€granted.€€The€Committee€believes€that€the€Taxpayer€Advocate€should€have€flexibility€toÏissue€a€TAO€under€any€appropriate€circumstances,€not€only€when€one€of€the€listed€factors€exists.ÌÐ ,`'* Ðà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ° ÐÌòòò òNational€Taxpayer€Advocateóóó óÐ à ÐÌà  àThe€bill€renames€the€Taxpayer€Advocate€the€ð ðNational€Taxpayer€Advocate.ðð€€The€billÏprovides€that€the€IRS€Oversight€Board€is€to€recommend€to€the€Secretary€3€candidates€forÏNational€Taxpayer€Advocate€from€among€individuals€with€a€background€in€customer€service€asÏwell€as€tax€law€and€with€experience€representing€individual€taxpayers.€€The€Secretary€is€requiredÏto€choose€a€National€Taxpayer€Advocate€from€among€the€individuals€recommended€by€theÏOversight€Board.€€An€individual€may€be€appointed€as€the€National€Taxpayer€Advocate€only€if€theÏindividual€was€not€an€officer€or€employee€of€the€IRS€during€the€2„year€period€ending€with€suchÏappointment€and€the€individual€agrees€not€to€accept€employment€with€the€IRS€for€at€least€5€yearsÏafter€ceasing€to€be€the€National€Taxpayer€Advocate.€ÌÌà  àThe€bill€replaces€the€present„law€problem€resolution€system€with€a€system€of€localÏTaxpayer€Advocates€who€report€directly€to€the€National€Taxpayer€Advocate€and€who€will€beÏemployees€of€the€Taxpayer€Advocateððs€Office,€independent€from€the€IRS€examination,Ïcollection,€and€appeals€functions.€€€€The€National€Taxpayer€Advocate€has€the€responsibility€toÏevaluate€and€take€personnel€actions€(including€dismissal)€with€respect€to€any€local€TaxpayerÏAdvocate€or€any€employee€in€the€Office€of€the€National€Taxpayer€Advocate.€€In€conjunction€withÏthe€Commissioner,€the€National€Taxpayer€Advocate€is€required€to€develop€career€paths€for€localÏTaxpayer€Advocates.ÌÌà  à€The€National€Taxpayer€Advocate€is€required€to€monitor€the€coverage€and€geographicalÏallocation€of€the€local€Taxpayer€Advocates,€develop€guidance€to€be€distributed€to€all€IRS€officersÏand€employees€outlining€the€criteria€for€referral€of€taxpayer€inquires€to€local€taxpayer€advocates,Ïensure€that€the€local€telephone€number€for€the€local€taxpayer€advocate€is€published€and€availableÏto€taxpayers.ÌÌà  àEach€local€Taxpayer€Advocate€may€consult€with€the€appropriate€supervisory€personnel€ofÏthe€IRS€regarding€the€daily€operation€of€the€office€of€the€Taxpayer€Advocate.€€At€the€initialÏmeeting€with€any€taxpayer€seeking€the€assistance€of€the€Office€of€the€Taxpayer€Advocate,€theÏlocal€taxpayer€advocate€is€required€to€notify€the€taxpayer€that€the€Office€operated€independentlyÏof€any€other€IRS€office€and€reports€directly€to€Congress€through€the€National€TaxpayerÏAdvocate.€At€the€discretion€of€the€local€taxpayer€advocate,€the€advocate€shall€not€disclose€to€theÏIRS€any€contact€with€or€information€provided€by€the€taxpayer.€€€Each€local€office€of€the€TaxpayerÏAdvocate€is€to€maintain€a€separate€phone,€facsimile,€and€other€electronic€communication€access,Ïand€a€separate€post€office€address.ÌÌà  àThe€IRS€would€be€required€to€publish€the€taxpayerððs€right€to€contact€the€local€TaxpayerÏAdvocate€on€the€statutory€notice€of€deficiency.€€ÌÌÐ ,`'* Їòòò òTaxpayer€assistance€ordersóóó óÐ ° ÐÌà  àThe€provision€expands€the€circumstances€under€which€a€TAO€may€be€issued.€€The€billÏprovides€that€a€ð ðsignificant€hardshipðð€is€deemed€to€occur€if€one€of€the€following€four€factorsÏexists:€€(1)€there€is€an€immediate€threat€of€adverse€action;€(2)€there€has€been€a€delay€of€more€thanÏ30€days€in€resolving€the€taxpayerððs€account€problems;€(3)€the€taxpayer€will€have€to€payÏsignificant€costs€(including€fees€for€professional€services)€if€relief€is€not€granted;€or€(4)€theÏtaxpayer€will€suffer€irreparable€injury,€or€a€long„term€adverse€impact,€if€relief€is€not€granted.€ÏThese€factors€are€not€an€exclusive€list€of€what€constitutes€a€significant€hardship;€a€TAO€may€alsoÏbe€issued€in€other€circumstances€in€which€it€is€determined€that€the€taxpayer€is€or€will€suffer€aÏsignificant€hardship.€The€Taxpayer€Advocate€is€also€authorized€to€issue€a€TAO€in€anyÏcircumstances€that€the€Taxpayer€Advocate€considers€appropriate€for€the€issuance€of€a€TAO.€€ÌÌà  àIn€determining€whether€to€issue€a€TAO€in€cases€in€which€the€IRS€failed€to€followÏapplicable€published€guidance€(including€procedures€set€forth€in€the€Internal€Revenue€Manual),Ïthe€Taxpayer€Advocate€is€to€construe€the€matter€in€a€manner€most€favorable€to€the€taxpayer.ÌÐ  ° Ðòòò òReports€of€the€National€Taxpayer€Advocateóóó óÐ ° ÐÌà  àThe€provision€requires€the€annual€report€regarding€the€activities€of€the€National€TaxpayerÏAdvocate€for€the€most€recently€ended€fiscal€year€to€(in€addition€to€the€information€required€underÏpresent€law):€(1)€identify€areas€of€the€tax€law€that€impose€significant€compliance€burdens€onÏtaxpayers€or€the€IRS,€including€specific€recommendations€for€remedying€such€problems;€and€(2)Ïidentify€the€10€most€litigated€issues€for€each€category€of€taxpayers,€including€recommendationsÏfor€mitigating€such€disputes.Ì€Ìà@””#ìàò òòòEffective€Dateó óóóˆÐ  p  ÐÌà  àThe€provision€is€generally€effective€on€the€date€of€enactment.€€During€the€period€beforeÏthe€appointment€of€the€IRS€Oversight€Board,€the€National€Taxpayer€Advocate€shall€be€appointedÏby€the€Secretary€(taking€into€consideration€individuals€nominated€by€the€Commissioner)€fromÏamong€individuals€who€have€a€background€in€customer€service€as€well€as€tax€law€and€experienceÏin€representing€individual€taxpayers.€€The€provision€providing€that€the€Taxpayer€AdvocateÏreports€directly€to€the€Commissioner,€the€provision€providing€that€the€Taxpayer€Advocate€isÏappointed€by€the€Secretary,€and€the€restrictions€on€previous€and€subsequent€employment€of€theÏTaxpayer€Advocate€do€not€apply€to€the€individual€serving€as€the€Taxpayer€Advocate€on€the€dateÏof€enactment.ÌÐ  pÀ Ðà@ttìàò òE.€€Treasury€Office€of€Inspector€General;€IRS€Office€of€the€Chief€Inspectoró óˆÐ ° Ðò òÓ  Ó(secs.€1102€and€1103€of€the€bill,€sec.€7803(d)€of€the€Code,Ð  ð Ðand€secs.€2,€8D,€and€9€of€the€Inspector€General€Act€of€1978)ó óÐ à ÐÌÓ£®Óà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ pÀ ÐÌò òòòTreasury€Inspector€Generaló óóóÐ P   ÐÌà  àThe€Treasury€Office€of€Inspector€General€(ð ðTreasury€IGðð)€was€established€in€1988€andÏcharged€with€conducting€independent€audits,€investigations€and€review€to€help€the€Department€ofÏTreasury€accomplish€its€mission,€improve€its€programs€and€operations,€promote€economy,Ïefficiency€and€effectiveness,€and€prevent€and€detect€fraud€and€abuse.€€The€Treasury€IG€derives€itsÏstatutory€authority€under€the€Inspector€General€Act€of€1978,€as€amended€(ð ðIG€Act€of€1978").€ÌÌà  àòòAppointment€and€qualificationsÐ Ð  ÐóóÌà  àThe€IG€Act€of€1978€provides€that€the€Treasury€IG€is€selected€by€the€President,€with€theÏadvice€and€consent€of€the€Senate,€without€regard€to€political€affiliation€and€solely€on€the€basis€ofÏintegrity€and€demonstrated€ability€in€accounting,€auditing,€financial€analysis,€law,€managementÏanalysis,€public€administration,€or€investigations.€The€Treasury€IG€can€be€removed€from€officeÏby€the€President.€€The€President€must€communicate€the€reasons€for€such€removal€to€both€HousesÏof€Congress.ÌÌòòà  àDuties€and€responsibilitiesÐ @ ÐóóÌà  àThe€Treasury€IG€generally€is€authorized€to€conduct,€supervise€and€coordinate€internalÏaudits€and€investigations€relating€to€the€programs€and€operations€of€the€Treasury,€including€all€ofÏits€bureaus€and€offices.׃F×Ý ƒ #ÃÝòòÚ  Ú16Ú  ÚóóÝ  Ý×  ×€€Special€rules€apply,€however,€with€respect€to€the€Treasury€IGððsÐ P Ðjurisdiction€over€ATF,€Customs,€the€Secret€Service€and€the€IRS„„the€four€so„called€ð ðlawÏenforcement€bureaus.ðð€€Upon€its€establishment,€the€Treasury€IG€assumed€the€internal€auditÏfunctions€previously€performed€by€the€offices€of€€internal€affairs€of€ATF,€Customs€and€the€SecretÏService.€€Although€the€Treasury€IG€was€granted€oversight€responsibility€for€the€internalÏinvestigations€performed€by€the€Office€of€Internal€Affairs€of€ATF,€the€Office€of€Internal€AffairsÏof€Customs,€and€the€Office€of€Inspections€of€the€Secret€Service,€the€internal€investigation€orÏinspection€functions€of€these€offices€remained€with€the€respective€bureaus.€€The€Treasury€IG€didÐ $à" Ðnot€assume€responsibility€for€either€the€internal€audit€or€inspection€functions€of€the€IRS€Office€ofÏthe€Chief€Inspector.€However,€it€was€directed€to€oversee€the€internal€audits€and€internalÏinvestigations€performed€by€the€IRS€Office€of€the€Chief€Inspector.€€ÌÌà  àThe€Commissioner€and€the€Treasury€IG€have€entered€into€two€Memorandums€ofÏUnderstanding€(ð ðMOUsðð)׃G×Ý ƒ #ÃÝòòÚ  Ú17Ú  ÚóóÝ  Ý×  ×€to€clarify€the€respective€roles€of€the€IRS€Office€of€the€Chief€InspectorÐ ` ° Ðand€the€Treasury€IG€in€two€primary€areas:€(1)€the€investigation€of€allegations€of€wrongdoing€byÏIRS€executives€and€employees€in€situations€where€the€independence€of€the€Office€of€the€ChiefÏInspector€could€be€questioned,€and€(2)€oversight€by€the€Treasury€IG€of€the€IRS€Office€of€theÏChief€Inspector.׃H€×Ý ƒ #ÃÝòòÚ  Ú18Ú  ÚóóÝ  Ý×  ×€€Pursuant€to€the€1990€MOU,€the€Commissioner€agreed€to€transfer€21€FTEs€andÐ  p  Ð$1.9€million€from€the€IRS€appropriation€to€the€Treasury€IG€appropriation€to€be€used€for€theÏfollowing€purposes:€(1)€oversight€of€the€operations€of€the€Office€of€the€Chief€Inspector;€(2)Ïconduct€of€special€reviews€of€IRS€operations;€(3)€investigation€of€allegations€of€misconductÏconcerning€the€Commissioner,€the€Senior€Deputy€Commissioner,€and€employees€of€the€IRSÏOffice€of€the€Chief€Inspector;€and€(4)€investigation€of€allegations€of€misconduct€where€theÏindependence€of€the€IRS€Office€of€the€Chief€Inspector€might€be€questioned.€€With€respect€to€itemÏ(4),€the€Commissioner€and€Treasury€IG€agreed€that€all€allegations€of€misconduct€involving€IRSÏexecutives€and€managers€(Grade€15€and€above),€as€well€as€any€other€allegation€involvingÏð ðsignificant€or€notoriousðð€matters€were€to€be€referred€to€the€Treasury€IG,€and€that€investigationsÏarising€out€of€such€referrals€generally€would€be€conducted€by€the€Treasury€IG.ÌÌà  àIn€general,€under€the€IG€Act€of€1978,€Inspectors€General€are€instructed€to€reportÏexpeditiously€to€the€Attorney€General€whenever€the€Inspector€General€has€reasonable€grounds€toÏbelieve€there€has€been€a€violation€of€Federal€criminal€law.€€However,€in€matters€involvingÏcriminal€violations€of€the€Internal€Revenue€Code,€the€Treasury€IG€may€report€to€the€AttorneyÏGeneral€only€those€offenses€under€section€7214€of€the€Code€(unlawful€acts€of€revenue€officers€orÏagents,€including€extortion,€bribery€and€fraud)€without€the€consent€of€the€Commissioner.ÌÌòòà  àAuthorityóóÐ ð@ ÐÌà  àThe€Treasury€IG€reports€to€and€is€under€the€general€supervision€of€the€Secretary€ofÏâ âTreasury,€acting€through€the€Deputy€Secretary.€€In€general,€the€Secretary€cannot€prevent€Ô_ÔorÐ À! Ðprohibit€the€Treasury€IG€from€initiating,€carrying€out,€or€completing€any€audit€or€investigation€orÏfrom€issuing€any€subpoena€during€the€course€of€any€audit€or€investigation.€€Ìâ âÌà  àHowever,€section€8D€of€the€IG€Act€of€1978€grants€the€Secretary€authority€to€prohibitÏaudits€or€investigations€by€the€Treasury€IG€under€certain€circumstances.€€In€particular,€theÏTreasury€IG€is€under€the€authority,€direction,€and€control€of€the€Secretary€with€respect€to€auditsÏor€investigations,€or€the€issuance€of€subpoenas,€which€require€access€to€sensitive€informationÏconcerning:€(1)€ongoing€criminal€investigations€or€proceedings;€(2)€undercover€operations;€(3)Ïthe€identity€of€confidential€sources,€including€protected€witnesses;€(4)€deliberations€and€decisionsÏon€policy€matters,€including€documented€information€used€as€a€basis€for€making€policyÏdecisions,€the€disclosure€of€which€could€reasonably€be€expected€to€have€a€significant€influenceÏon€the€economy€or€market€behavior;€(5)€intelligence€or€counterintelligence€matters;€(6)€otherÏmatters€the€disclosure€of€which€would€constitute€a€serious€threat€to€national€security€or€to€theÏprotection€of€certain€persons.€€With€respect€to€audits,€investigations€or€subpoenas€that€requireÏaccess€to€the€above„listed€information,€the€Secretary€may€prohibit€the€Treasury€IG€from€carryingÏout€such€audit,€investigation€or€subpoena€if€the€Secretary€determines€that€such€prohibition€isÏnecessary€to€prevent€the€disclosure€of€such€information€or€to€prevent€significant€impairment€toÏthe€national€interests€of€the€United€States.€€The€Secretary€must€provide€written€notice€of€such€aÏprohibition€to€the€Treasury€IG,€who€must,€in€turn,€transmit€a€copy€of€such€notice€to€theÏCommittees€on€Government€Reform€and€Oversight€and€Ways€and€Means€of€the€House€and€the€ÏCommittees€on€Governmental€Affairs€and€Finance€of€the€Senate.ÌÌà  àòòAccess€to€taxpayer€returns€and€return€informationóóÐ P  ÐÌà  àThe€Treasury€IG€has€access€to€taxpayer€returns€and€return€information€under€sectionÏ6103(h)(1)€of€the€Code.€€However,€such€access€is€subject€to€certain€special€requirements,Ïincluding€the€requirement€that€the€Treasury€IG€notify€the€IRS€Office€of€the€Chief€Inspector€(orÏthe€Deputy€Commissioner€in€certain€circumstances)€of€its€intent€to€access€returns€and€returnÏinformation.ÌÌà  àòòReporting€requirementsóóÐ Ð  ÐÌà  àUnder€the€IG€Act€of€1978,€the€Treasury€IG€reports€to€the€Congress€semiannually€on€itsÏactivities.€€Reports€from€the€Treasury€IG€are€transmitted€to€the€Committees€on€GovernmentÏReform€and€Oversight€and€Ways€and€Means€of€the€House€and€the€Committees€on€GovernmentalÏAffairs€and€Finance€of€the€Senate.ÌÌà  àòòResourcesóóÐ `'°"% ÐÌà  àFor€fiscal€year€1997,€the€Treasury€IG€had€296€FTEs€and€total€funding€of€$29.7€million.€Ï174€FTEs€were€assigned€to€the€Treasury€IGððs€audit€function€and€61€were€assigned€to€theÏâ âinvestigative€function.€€The€remaining€FTEs€were€divided€among€the€following€functions:Ð  +p&) Ðevaluations,€legal,€program,€technology€and€administrative€support.€€Of€the€total€Treasury€IGÏFTEs,€approximately€23€were€used€for€IRS€oversight€activities€in€fiscal€year€1997.Ìâ âÌÔ_ÔÔ_ÔÔ_Ôò òòòIRSÔ_Ô€Office€of€Chief€Inspectoró óóóÐ €Ð ÐÌà  àThe€IRS€Office€of€the€Chief€Inspector€(also€known€as€the€ð ðInspection€Serviceðð)€wasÏestablished€on€October€1,€1951,€in€response€to€publicity€revealing€widespread€corruption€in€theÏIRS.€€At€the€time€of€its€creation,€President€Harry€S.€Truman€stated,€ð ðA€strong,€vigorousÏinspection€service€will€be€established€and€will€be€made€completely€independent€of€the€rest€of€theÏInternal€Revenue€Service.ðð€ÌÌÔ&   Ôà  àòòAppointment€of€the€Chief€InspectoróóÐ P  ÐÌà  àIn€1952,€the€Office€of€the€Assistant€Commissioner€(Inspection)€was€established.€€TheÏoffice€was€Ô_ÔredesignatedÔ_Ô€as€the€Office€of€the€Chief€Inspector€on€March€25,€1990.€€The€ChiefÏInspector€is€appointed€by€the€Commissioner.€€In€this€regard,€pursuant€to€Treasury€Director€40„01,ÏÔ' <ÒÔthe€Commissioner€must€consult€with€the€Treasury€IG€before€selecting€candidates€for€the€positionÏof€Chief€Inspector€(and€all€other€senior€executive€service€(ð ðSESðð)€positions€in€the€Office€of€theÏChief€Inspector).€€The€Commissioner€must€also€consult€with€the€Treasury€IG€regarding€annualÏperformance€appraisals€for€the€Chief€Inspector€and€other€SES€officials.ÌÌà  àThe€Office€of€the€Chief€Inspector€consists€of€a€National€Office€and€the€offices€of€theÏRegional€Inspectors.€€The€offices€of€the€Regional€Inspectors€are€located€in€the€same€cities€andÏhave€the€same€geographic€boundaries€as€the€offices€of€the€four€IRS€Regional€Commissioners.€ÏThe€Regional€Inspectors€report€directly€to€the€Chief€Inspector.ÌÌà  àòòDuties€and€responsibilitiesÐ ` ÐóóÌà  àThe€Office€of€the€Chief€Inspector€generally€is€responsible€for€carrying€out€internal€auditsÏand€investigations€that:€(1)€promote€the€economic,€efficient,€and€effective€administration€of€theÏnationððs€tax€laws;€(2)€detect€and€deter€fraud€and€abuse€in€IRS€programs€and€operations;€and€(3)Ïprotect€the€IRS€against€external€attempts€to€corrupt€or€threaten€its€employees.€€€The€ChiefÏInspector€reports€directly€to€the€Commissioner€and€Deputy€Commissioner€of€the€IRS.€€ÌÌà  àThe€IRS€Inspection€Service€is€divided€into€three€functions:€Internal€Security,€InternalÏAudit,€and€Integrity€Investigations€and€Activities.€€Internal€Securityððs€responsibilities€includeÏcriminal€investigations€(employee€conduct,€bribery,€assault€and€threat€and€investigations€of€non„¼IRS€employees€for€acts€such€as€impersonation,€theft,€enrolled€agent€misconduct,€disclosure,€andÏanti„domestic€terrorism)€investigative€support€activities€(including€forensic€lab,€computerÏinvestigative€support,€and€maintenance€of€law€enforcement€equipment),€protection,€andÏbackground€investigations.€€Ìâ âÔ_ÔÐ  +p&) Ðà  àInternal€Audit€is€responsible€for€providing€IRS€management€with€independent€reviewsÏâ âand€appraisals€of€all€IRS€activities€and€operations.€€In€addition,€Internal€Audit€makesÏrecommendations€to€improve€the€efficiency€and€effectiveness€of€programs€and€to€assist€IRSÏofficials€in€carrying€out€their€program€and€operational€responsibilities.€€In€this€regard,€InternalÏAudit€generally€conducts€performance€reviews€(program€audits,€system€development€audits,Ïinternal€control€audits)€and€financial€reviews€(financial€statement€audits€and€financial€relatedÏreviews).€€ÌÌà  àIntegrity€Investigations€and€Activities€are€joint€internal€audit€and€internal€securityÏoperations€undertaken€as€a€proactive€effort€to€detect€and€deter€fraud€and€abuse€within€the€IRS.€ÏIntegrity€Investigations€and€Activities€also€includes€the€UNAX€Central€Case€DevelopmentÏCenter.€€The€Center€was€developed€in€October,€1997,€in€response€to€the€Taxpayer€BrowsingÏProtection€Act€of€1997.€€Its€purpose€is€to€detect€unauthorized€accesses€to€IRS€computer€systemsÏby€IRS€employees€and€to€refer€such€instances€to€Internal€Security€investigators€for€furtherÏinvestigation.ÌÌà  àòòAuthorityÐ ° ÐÌà  àóóThe€Chief€Inspector€derives€specific€and€general€authority€from€delegation€by€the€Ð à ÐCommissioner€and€Deputy€Commissioner.€€In€addition,€under€section€7608(b)€of€the€Code,€theÏChief€Inspector€is€authorized€to€perform€certain€functions€in€connection€with€the€duty€ofÏenforcing€any€of€the€criminal€provisions€of€the€Code,€including€executing€and€serving€search€andÏarrest€warrants,€serving€subpoenas€and€summonses,€making€arrests€without€warrant,€carryingÏfirearms,€and€seizing€property€subject€to€forfeiture€under€the€Code.ÌÌà  àòòAccess€to€taxpayer€returns€and€return€informationÐ  p ÐÌà  àóóThe€Office€of€the€Chief€Inspector€has€full€access€to€taxpayer€returns€and€returnÐ P Ðinformation.òòÐ ð@ ÐÌà  àReporting€requirementsÌÌà  àóóThe€Office€of€the€Chief€Inspector€reports€facts€developed€through€its€internal€audit€andÐ °"  Ðinternal€security€activities€to€IRS€management€officials,€who€are€charged€with€the€responsibilityÏof€reviewing€IRS€activities.€€The€results€of€the€Chief€Inspectorððs€internal€audit€and€internalÏsecurity€activities€also€are€reported€to€the€Treasury€IG€and€are€included€in€the€Treasury€IGððsÏsemiannual€reports€to€Congress.ÌÌà  àInternal€audit€reports€prepared€by€the€Office€of€the€Chief€Inspector€are€provided€monthlyÏto€the€Government€Accounting€Office,€as€well€as€to€the€House€and€Senate€AppropriationsÏCommittees.€€In€addition,€a€monthly€list€of€Internal€Audit€reports€is€provided€to€Treasury€and€theÏOffice€of€Management€and€Budget.€€Reports€of€Investigation€regarding€criminal€conduct€areÏreferred€to€the€Department€of€Justice€for€prosecution.òòÐ ,`'* Їà  àResourcesóóÐ H ÐÌà  àThe€IRS€Office€of€the€Chief€Inspector€had€1,202€FTEs€for€1997€and€total€funding€ofÏ$100.1€million.€€Of€these€FTEs,€approximately€442€performed€Internal€Audit€functions,€511Ïperformed€Internal€Security€functions,€and€94€performed€Integrity€Investigations€and€Activities.€ÏOf€the€remaining€FTEs,€approximately€95€were€dedicated€to€information€technology€functionsÏand€60€staffed€the€offices€of€the€Chief€Inspector€and€the€Regional€Inspectors.Ìà  àÌà@••!ìàò òòòReasons€for€Changeó óóóˆÐ È € ÐÌà  àThe€Committee€believes€that€the€current€IRS€Office€of€the€Chief€Inspector€lacks€sufficientÏstructural€and€actual€autonomy€from€the€agency€it€is€charged€with€monitoring€and€overseeing.€ÏFurther,€the€current€relationship€between€the€Treasury€IG€and€the€IRS€Office€of€the€ChiefÏInspector€does€not€foster€appropriate€oversight€over€the€IRS.€€The€Committee€believes€that€theÏestablishment€of€an€independent€Inspector€General€within€the€Department€of€Treasury€whoseÏprimary€focus€and€responsibility€will€be€to€audit,€investigate,€and€evaluate€IRS€programs€willÏimprove€the€quality€as€well€as€the€credibility€of€IRS€oversight.ÌÑH°ÑÑH°Ñò òÌó óÔ&  Ôà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ (à ÐÌò òòòIn€generaló óóóÐ À ÐÌà  àThe€bill€establishes€a€new,€independent,€Treasury€Inspector€General€for€TaxÏAdministration€(ð ðTreasury€IG€for€Tax€Administrationðð)€within€the€Department€of€Treasury.€€TheÏIRS€Office€of€the€Chief€Inspector€is€eliminated,€and€all€of€its€powers€and€responsibilities€Ô'(¿ëÔareÏtransferred€to€the€Treasury€IG€for€Tax€Administration.€The€Treasury€IG€for€Tax€AdministrationÏhas€the€powers€and€responsibilities€generally€granted€to€Inspectors€General€under€the€IG€Act€ofÏ1978,€without€the€limitations€that€currently€apply€to€the€Treasury€IG€under€section€D€of€the€Act.€ÏThe€role€of€the€existing€Treasury€IG€is€redefined€to€exclude€responsibility€for€the€IRS.€€TheÏTreasury€IG€for€Tax€Administration€is€under€the€supervision€of€the€Secretary€of€Treasury,€withÏcertain€additional€reporting€to€the€Board€and€the€Congress.ÌÌò òòòAppointment€and€qualifications€of€Treasury€IG€for€Tax€Administrationó óóóÐ H!  ÐÌà  àThe€Treasury€IG€for€Tax€Administration€is€selected€by€the€President,€with€the€advice€andÏconsent€of€the€Senate.€€The€Treasury€IG€for€Tax€Administration€can€be€removed€from€office€byÏthe€President.€€The€President€must€communicate€the€reasons€for€such€removal€to€both€Houses€ofÏCongress.ÌÌà  àThe€Treasury€IG€for€Tax€Administration€must€be€selected€without€regard€to€politicalÏaffiliation€and€solely€on€the€basis€of€integrity€and€demonstrated€ability€in€accounting,€auditing,Ïfinancial€analysis,€law,€management€analysis,€public€administration,€or€investigations.€€InÏaddition,€however,€the€Treasury€IG€for€Tax€Administration€should€have€experience€in€taxÏadministration€and€demonstrated€ability€to€lead€a€large€and€complex€organization.€€The€TreasuryÏIG€for€Tax€Administration€may€not€be€employed€by€the€IRS€within€the€two€years€preceding€andÏthe€five€years€following€his€or€her€appointment.Ð x-0*- Їà  àThe€Treasury€IG€for€Tax€Administration€is€required€to€appoint€an€Assistant€InspectorÏGeneral€for€Auditing€and€an€Assistant€Inspector€for€Inspections.€€Under€the€bill,€such€appointees,Ïas€well€as€any€Deputy€Inspector€General(s)€appointed€by€the€Treasury€IG€for€Tax€Administration,Ïmay€not€be€employed€by€the€IRS€within€the€two€years€preceding€and€the€five€years€followingÏtheir€appointments.ÌÌò òòòÔ& À ÔDuties€and€responsibilities€of€Treasury€IG€for€Tax€Administrationó óóóÐ è  ÐÌà  àThe€Treasury€IG€for€Tax€Administration€has€the€present„law€duties€and€responsibilitiesÏcurrently€delegated€to€the€Treasury€IG€with€respect€to€the€IRS.€€In€addition,€the€Ô'Àè2õÔTreasury€IG€forÏTax€Administration€assumes€all€of€the€duties€and€responsibilities€currently€delegated€to€the€IRSÏOffice€of€the€Chief€Inspector.€€The€Treasury€IG€for€Tax€Administration€has€jurisdiction€over€IRSÏmatters,€as€well€as€matters€involving€the€Board.ÌÌà  àAccordingly,€the€Treasury€IG€for€Tax€Administration€is€charged€with€conducting€audits,Ïinvestigations,€and€evaluations€of€IRS€programs€and€operations€(including€the€Board)€to€promoteÏthe€economic,€efficient€and€effective€administration€of€the€nationððs€tax€laws€and€to€detect€andÏdeter€fraud€and€abuse€in€IRS€programs€and€operations.€€In€this€regard,€the€Treasury€IG€for€TaxÏAdministration€specifically€is€directed€to€evaluate€the€adequacy€and€security€of€IRS€technologyÏon€an€ongoing€basis.€€In€addition,€the€Treasury€IG€for€Tax€Administration€is€responsible€forÏprotecting€the€IRS€against€external€attempts€to€corrupt€or€threaten€its€employees.€€The€TreasuryÏIG€for€Tax€Administration€is€charged€with€investigating€allegations€of€criminal€misconduct€(e.g.,ÏCode€sections€7212€,€7213,€7214,€7216€and€new€section€7217),€as€well€as€administrativeÏmisconduct€(e.g.,€violations€of€€the€Taxpayer€Bill€of€Rights€and€the€Taxpayer€Bill€of€Rights€2,€theÏOffice€of€Government€Ethics€Standards€of€Ethical€Conduct€and€the€IRS€Supplemental€StandardsÏof€Ethical€Conduct).€€ÌÌà  àIn€addition,€the€bill€directs€the€Treasury€IG€for€Tax€Administration€to€implement€aÏprogram€periodically€to€audit€at€least€one€percent€of€all€determinations€(identified€through€aÏrandom€selection€process)€where€the€IRS€has€asserted€either€section€6103€(directly€or€inÏconnection€with€the€Freedom€of€Information€Act€or€the€Privacy€Act)€or€law€enforcementÏconsiderations€(i.e.,€executive€privilege)€as€a€rationale€for€refusing€to€disclose€requestedÏinformation.€€The€program€must€be€implemented€within€6€months€after€establishment€of€theÏTreasury€IG€for€Tax€Administration.€€The€Treasury€IG€for€Tax€Administration€is€directed€toÏreport€any€findings€of€improper€assertion€of€section€6103€or€law€enforcement€considerations€toÏthe€Board.€€ÌÌà  àFurther,€the€Treasury€IG€for€Tax€Administration€is€directed€to€establish€a€toll„freeÏconfidential€telephone€number€for€taxpayers€to€register€complaints€of€misconduct€by€IRSÏemployees€and€to€publish€the€telephone€number€in€IRS€Publication€1.ÌÌà  àThere€are€no€restrictions€on€the€Treasury€IG€for€Tax€Administrationððs€ability€to€referÏmatters€to€the€Department€of€Justice.€€Thus,€the€Treasury€IG€for€Tax€Administration€is€requiredÏto€report€to€the€Attorney€General€whenever€the€Treasury€IG€for€Tax€Administration€hasÏreasonable€grounds€to€believe€that€there€has€been€a€violation€of€Federal€criminal€law.€ÌÐ x-0*- Ðò òòòÔ& À ÔAuthority€of€Treasury€IG€for€Tax€AdministrationóóÐ H Ðó óÌà  àThe€Treasury€IG€for€Tax€Administration€reports€to€and€is€under€the€general€supervision€ofÏthe€Secretary€of€Treasury.€€Under€the€bill,€the€Secretary€cannot€prevent€or€prohibit€the€Ô'ÀHÔTreasuryÏIG€for€Tax€Administration€from€initiating,€carrying€out,€or€completing€any€audit€or€investigationÏor€from€issuing€any€subpoena€during€the€course€of€any€audit€or€investigation.€ÌÌà  àUnder€the€bill,€the€Treasury€IG€for€Tax€Administration€must€provide€to€the€Board€allÏreports€regarding€IRS€matters€on€a€timely€basis€and€conduct€audits€or€investigations€requested€byÏthe€Board.€€The€Treasury€IG€for€Tax€Administration€also€must,€in€a€timely€manner,€conduct€suchÏaudits€or€investigations€and€provide€such€reports€as€may€be€requested€by€the€Commissioner.ÌÌà  àIn€carrying€out€the€duties€and€responsibilities€described€above,€the€Treasury€IG€for€TaxÏAdministration€has€the€present„law€authority€generally€granted€to€Inspectors€General€under€theÏIG€Act€of€1978.€€The€limitations€on€the€authority€of€the€Treasury€IG€under€such€Act€do€not€applyÏto€the€Treasury€IG€for€Tax€Administration.€€In€addition,€the€Treasury€IG€for€Tax€AdministrationÏhas€the€authority€granted€to€the€IRS€Office€of€the€Chief€Inspector€under€present„law€Code€sectionÏ7608,€including€the€right€to€execute€and€serve€search€and€arrest€warrants,€to€serve€subpoenas€andÏsummonses,€to€make€arrests€without€warrant,€to€carry€firearms,€and€to€seize€property€subject€toÏforfeiture€under€the€Code.ÌÌò òòòResourcesóóÐ ø° ÐÌó óà  àTo€ensure€that€the€Treasury€IG€for€Tax€Administration€has€sufficient€resources€to€carryÐ Ø Ðout€his€or€her€duties€and€responsibilities€under€the€bill,€all€but€300€FTEs€from€the€IRS€Office€ofÏthe€Chief€Inspector€are€transferred€to€the€Treasury€IG€for€Tax€Administration.€€Such€FTEsÏinclude€all€of€the€FTEs€performing€investigative€functions€in€the€Office€of€the€Chief€InspectorÏInternal€Security€and€Integrity€Investigations€and€Activities.€€In€addition,€the€21€FTEs€previouslyÏtransferred€from€Inspection€to€Treasury€IG€pursuant€to€the€1990€MOU€to€perform€oversight€ofÏthe€IRS€are€transferred€to€the€Treasury€IG€for€Tax€Administration.€ÌÌà  àThe€Commissioner€will€retain€approximately€300€FTEs€from€the€IRS€Office€of€the€ChiefÏInspector€to€staff€an€audit€function€(including€support€staff)€for€internal€IRS€managementÏpurposes.€€Like€other€IRS€functions,€however,€this€audit€function€is€subject€to€oversight€andÏreview€by€the€Treasury€IG€for€Tax€Administration.ÌÌò òòòAccess€to€taxpayer€returns€and€return€informationóóÐ %À!$ ÐÌó óà  àTaxpayer€returns€and€return€information€are€available€for€inspection€by€the€Treasury€IGÐ è& #& Ðfor€Tax€Administration€pursuant€to€section€6103(h)(1).€€Thus,€the€Treasury€IG€for€TaxÏAdministration€has€the€same€access€to€taxpayer€returns€and€return€information€as€does€the€ChiefÏInspector€under€present€law.ÌÌò òòòReporting€requirementsó óóóÐ ˜+P(+ Ðâ âÐ ˆ,@), Ðà  àThe€Treasury€IG€for€Tax€Administration€is€subject€to€the€semiannual€reportingÏâ ârequirements€set€forth€in€section€5€of€the€IG€Act€of€1978.€€As€under€present€law,€reports€are€madeÏto€the€Committees€on€Government€Reform€and€Oversight€and€Ways€and€Means€of€the€House€andÏthe€Committees€on€Governmental€Affairs€and€Finance€of€the€Senate.€€The€reports€must€containÏthe€information€that€is€required€to€be€reported€by€the€Treasury€IG€with€respect€to€the€IRS€underÏpresent€law,€as€well€as€information€regarding€the€source,€nature€and€status€of€taxpayer€complaintsÏand€allegations€of€serious€misconduct€by€IRS€employees€received€by€the€IRS€or€by€the€TreasuryÏIG€for€Tax€Administration.€€In€addition,€the€Treasury€IG€for€Tax€Administration€is€required€toÏreport€annually€on€€certain€additional€information€(e.g.,€regarding€the€use€of€enforcementÏstatistics€in€evaluating€IRS€employees,€the€implementation€of€various€taxpayer€rights€protections,Ïand€IRS€employee€terminations€and€mitigations)€required€by€the€bill.ÌÌò òòòTreasury€IGó óóóÐ ˆ@  ÐÌà  àThe€Treasury€IG€generally€continues€to€have€its€present„law€responsibilities€and€authorityÏwith€respect€to€all€Treasury€functions€other€than€the€IRS€and€the€Board.€€However,€the€TreasuryÏIG€generally€does€not€have€access€to€taxpayer€returns€and€return€information€under€section€6103Ï(unless€the€Secretary€specifically€authorizes€such€access).ÌÌà  àThe€Treasury€IG€for€Tax€Administration€operates€independently€of€the€Treasury€IG.€€TheÏSecretary€of€Treasury€is€directed€to€establish€procedures€pursuant€to€which€the€Treasury€IG€forÏTax€Administration€and€the€Treasury€IG€shall€coordinate€audits€and€investigations€in€casesÏinvolving€overlapping€jurisdiction.ÌÌà  àThe€Treasury€IG€continues€to€have€responsibility€for€providing€an€opinion€on€theÏDepartment€of€Treasuryððs€consolidated€financial€statement€as€required€under€the€Chief€FinancialÏOfficer€Act.€€The€Treasury€IG€for€Tax€Administration€is€responsible€for€rendering€an€opinion€onÏthe€IRS€custodial€and€administrative€accounts€(to€the€extent€the€Government€Accounting€OfficeÏdoes€not€exercise€its€option€to€preempt€under€the€CFO€Act).€€ÌÌÔ& Ð Ôà@””#ìàò òòòEffective€Dateó óˆÐ h  ÐÌà  àóóThe€provision€is€effective€180€days€after€the€date€of€enactment.Ô'ÐhÔÔÐ  H!  Ðò òÓ  Óà@@--ìàE.€€Prohibition€on€Executive€Branch€Influence€à@@9 9 ìàOver€à@@ÄÄìàTaxpayer€Audits€Ð H Ð(sec.€1105€of€the€bill€and€new€sec.€7217€of€the€Code)ó óÐ 8ð ÐÓšÓÌò òòòà@ÕÕ%ìàPresent€Lawà@@ìì*ìàóóó óˆÐ Ð ÐÌà  àThere€is€no€explicit€prohibition€in€the€Code€on€high„level€Executive€Branch€influenceÏover€taxpayer€audits€and€collection€activity.ÌÌà  àThe€Internal€Revenue€Code€prohibits€disclosure€of€tax€returns€and€return€information,Ïexcept€to€the€extent€specifically€authorized€by€the€Internal€Revenue€Code€(sec.€6103).€ÏUnauthorized€disclosure€is€a€felony€punishable€by€a€fine€not€exceeding€$5,000€or€imprisonment€Ïof€not€more€than€five€years,€or€both€(sec.€7213).€€An€action€for€civil€damages€also€may€beÏbrought€for€unauthorized€disclosure€(sec.€7431).ÌÌò òòòÓ  ÓReasons€for€Changeóóó óÐ h  ÐÌÓ!Óà  àThe€Committee€believes€that€the€perception€that€it€is€possible€that€high„level€ExecutiveÏBranch€influence€over€taxpayer€audits€and€collection€activity€could€occur€has€a€negativeÏinfluence€on€taxpayersðð€views€of€the€tax€system.€€Accordingly,€the€Committee€believes€that€it€isÏappropriate€to€prohibit€such€influence.ÌÌà@ÅÅìàò òòòExplanation€of€ProvisionˆÐ ø° ÐÌó óóóà  àThe€bill€makes€it€unlawful€for€a€specified€person€to€request€that€any€officer€or€employeeÐ Ø Ðof€the€IRS€conduct€or€terminate€an€audit€or€otherwise€investigate€or€terminate€the€investigation€ofÏany€particular€taxpayer€with€respect€to€the€tax€liability€of€that€taxpayer.€€The€prohibition€appliesÏto€the€President,€the€Vice€President,€and€employees€of€the€executive€offices€of€either€theÏPresident€or€Vice€President,€as€well€as€any€individual€(except€the€Attorney€General)€serving€in€aÏposition€specified€in€section€5312€of€Title€5€of€the€United€States€Code€(these€are€generallyÏCabinet„level€positions).€€The€prohibition€applies€to€both€direct€requests€and€requests€madeÏthrough€an€intermediary.€€In€the€case€of€a€law€enforcement€action€authorized€by€the€AttorneyÏGeneral,€discussions€involving€specified€persons€with€respect€to€that€law€enforcement€actionÏshall€not€be€considered€to€be€requests€made€through€an€intermediary.ÌÌà  àAny€request€made€in€violation€of€this€rule€must€be€reported€by€the€IRS€employee€toÏwhom€the€request€was€made€to€the€Chief€Inspector€of€the€IRS.€€The€Chief€Inspector€has€theÏauthority€to€investigate€such€violations€and€to€refer€any€violations€to€the€Department€of€JusticeÏfor€possible€prosecution,€as€appropriate.€€Anyone€convicted€of€violating€this€provision€will€beÏpunished€by€imprisonment€of€not€more€than€5€years€or€a€fine€not€exceeding€$5,000€(or€both).Ì€Ìà  àThree€exceptions€to€the€general€prohibition€apply.€€First,€the€prohibition€does€not€apply€toÏa€request€made€to€a€specified€person€by€or€on€behalf€of€a€taxpayer€that€is€forwarded€by€theÏspecified€person€to€the€IRS.€€This€exception€is€intended€to€cover€two€types€of€situations.€€TheÏfirst€situation€is€where€a€taxpayer€(or€a€taxpayerððs€representative)€writes€to€a€specified€personÏseeking€assistance€in€resolving€a€difficulty€with€the€IRS.€€This€exception€permits€the€specifiedÏperson€who€receives€such€a€request€to€forward€it€to€the€IRS€for€resolution€without€violating€Ô_ÔtheÐ x-0*- Ðgeneral€prohibition.€€The€second€situation€that€this€first€exception€is€intended€to€cover€is€an€auditÏor€investigation€by€the€IRS€of€a€Presidential€nominee.€€Under€present€law€(sec.€6103(c)),Ïnominees€for€Presidentially€appointed€positions€consent€to€disclosure€of€their€tax€returns€andÏreturn€information€so€that€background€checks€may€be€conducted.€€Sometimes€an€audit€or€otherÏinvestigation€is€initiated€as€part€of€that€background€check.€€The€Committee€anticipates€that€anyÏsuch€audit€or€investigation€that€is€part€of€such€a€background€check€will€be€encompassed€withinÏthis€first€exception.ÌÌà  àThe€second€exception€to€the€general€prohibition€applies€to€requests€for€disclosure€ofÏreturns€or€return€information€under€section€6103€if€the€request€is€made€in€accordance€with€theÏrequirements€of€section€6103.ÌÌà  àThe€third€exception€to€the€general€prohibition€applies€to€requests€made€by€the€SecretaryÏof€the€Treasury€as€a€consequence€of€the€implementation€of€a€change€in€tax€policy.ÌÌà@””#ìàò òòòEffective€DateˆÐ X ÐÌà  àó óóóThe€provision€applies€to€violations€occurring€after€the€date€of€enactment.Ð  8ð ÐÓ  Óò òG.€€IRS€Personnel€FlexibilitiesÐ H ÐÓž(Óà@' ' ìà(Secs.€1201„1205€of€the€bill€and€new€chapter€95€of€Title€5,€U.S.C.)ó óˆÐ 8ð ÐÌà@ÕÕ%ìàòòò òPresent€Lawó óˆÐ Ð ÐÌà  àóóThe€IRS€is€subject€to€the€personnel€rules€and€procedures€set€forth€in€title€5,€United€StatesÐ ø° ÐCode.€Under€these€rules,€IRS€employees€generally€are€classified€under€the€General€Schedule€orÏthe€Senior€Executive€Service.ÌÌà@••!ìàò òòòReasons€for€ChangeˆÐ ¸ p  ÐÌà  àó óóóThe€Committee€believes€that€as€part€of€restructuring€the€IRS,€the€Commissioner€shouldÐ ˜ P  Ðhave€the€ability€to€bring€in€experts€and€the€flexibility€to€revitalize€the€current€IRS€workforce.€The€Ïcurrent€hiring€practices€often€inhibit€the€ability€of€the€Commissioner€to€change€the€IRSððÏinstitutional€culture.€Commissioner€Ô_ÔRossottiÔ_Ô€has€indicated€that€in€order€to€maximize€efforts€toÏtransform€the€IRS€into€an€efficient,€modern€and€responsive€agency,€the€ability€to€recruit€andÏretain€a€top„notch€leadership€and€technical€team€is€critical.ÌÌà  àThe€Committee€believes€the€IRS€needs€the€flexibility€to€recruit€employees€from€theÏprivate€sector,€to€redesign€its€salary€and€incentive€structures€to€reward€employees€who€meet€theirÏobjectives,€and€to€hold€non„performers€accountable.€Personnel€and€pay€flexibilities€are€necessaryÏprerequisites€for€larger€fundamental€changes€in€the€IRS.ÌÌà  àThe€Committee€wants€to€support€the€Commissionerððs€initiatives€to€reposition€the€currentÏIRS€workforce€as€part€of€implementing€a€new€organization€designed€around€the€needs€ofÏtaxpayers.€ÌÌà@ÅÅìàòòò òExplanation€of€ProvisionˆÐ ˜P ÐÌIn€generalÌóóó óà  àÌà  àThe€bill€amends€title€5€of€the€United€States€Code€to€provide€certain€personnel€flexibilitiesÏto€the€IRS.€In€general,€the€bill€provides€that€the€IRS€exercise€the€personnel€flexibilitiesÏconsistently€with€existing€rules€relating€to€merit€system€principles,€prohibited€personnelÏpractices,€and€preference€eligibles.€In€those€cases€where€the€exercise€of€personnel€flexibilitiesÏwould€affect€members€of€the€employeesðð€union,€such€employeesðð€will€not€be€subject€to€theÏexercise€of€any€flexibility€unless€there€is€a€written€agreement€between€the€IRS€and€theÏemployeesðð€union.€Negotiation€impasses€between€the€IRS€and€the€employeesðð€union€may€beÏappealed€to€the€Federal€Services€Impasse€Panel.ÌÌòòò òSenior€management€and€technical€positionsó óÐ È(€%( ÐÌà  àà 4 àStreamlined€critical€pay€authorityóóÐ ¨*`'* ÐÌà  àThe€bill€provides€a€streamlined€process€for€the€Secretary€of€the€Treasury,€or€his€delegate,Ïto€fix€the€compensation€of,€and€appoint€up€to€40€individuals€to,€designated€critical€technical€andÐ x-0*- ÐÔ_Ôprofessional€positions,€provided€that:€(1)€the€positions€require€expertise€of€an€extremely€highÏlevel€in€a€technical,€administrative€or€professional€field€and€are€critical€to€the€IRS;€(2)€exercise€ofÏthe€authority€is€necessary€to€recruit€or€retain€an€individual€exceptionally€well€qualified€for€theÏposition;€(3)€designation€of€such€positions€is€approved€by€the€Secretary;€(4)€the€terms€of€suchÏappointments€are€limited€to€no€more€than€four€years;€(5)€appointees€to€such€positions€are€not€IRSÏemployees€immediately€prior€to€such€appointment;€and€(6)€the€total€annual€compensation€for€anyÏposition€(including€performance€bonuses)€does€not€exceed€the€rate€of€pay€of€the€Vice€PresidentÏ(currently€$175,400).Ìà  àÌà  à€These€appointments€are€not€subject€to€the€otherwise€applicable€requirements€under€titleÏ5.€All€such€appointments€will€be€excluded€from€the€collective€bargaining€unit€and€theÏappointments€will€not€be€subject€to€approval€of€the€Office€of€Management€and€Budget€(ð ðOMBðð)Ïor€the€Office€of€Personnel€Management€(ð ðOPMðð).ÌÌà  àThe€streamlined€authority€will€be€limited€to€a€period€of€10€years.€ÌÌà  àà 4 àòòCritical€pay€authorityóóÐ H ÐÌà  àThe€bill€provides€OMB€with€authority€to€set€the€pay€for€certain€critical€pay€positionsÏrequested€by€the€Secretary€under€section€5377€of€title€5€of€the€United€States€Code€at€levels€higherÏthan€authorized€under€current€law.€These€critical€pay€positions€would€be€critical,€technical,Ïadministrative€and€professional€positions€other€than€those€designated€under€the€streamlinedÏauthority.€Under€the€bill,€OMB€is€authorized€to€approve€requests€for€critical€position€pay€up€toÏthe€rate€of€pay€of€the€Vice€President€(currently€$175,400).òòò òÐ Ø ÐÌó óóóà  àòòà 4 àRecruitment,€retention€and€relocation€incentivesóóÐ ¸p ÐÌà  àThe€bill€authorizes€the€Secretary€to€vary€from€the€existing€provisions€governingÏrecruitment,€retention€and€relocation€incentives.€The€authority€will€be€for€a€period€of€10€yearsÏand€will€be€subject€to€OPM€approval.ÌÌà  àà 4 àòòCareer„reserve€Senior€Executive€Service€(ð ðSESðð)€positionsóóÐ X  ÐÌà  àThe€bill€broadens€the€definition€of€a€ð ðcareer€reserved€positionðð€in€the€SES€to€include€aÏlimited€emergency€appointee€or€a€limited€term€appointee€who,€immediately€upon€entering€theÏcareer„reserved€position,€was€serving€under€a€career€or€a€career„conditional€appointment€outsideÏthe€SES€or€whose€limited€emergency€or€limited€term€appointment€is€approved€in€advance€byÏOPM.€The€number€of€appointments€to€these€SES€positions€will€be€limited€to€up€to€10€percent€ofÏthe€total€number€of€SES€positions€available€to€the€IRS.€€These€positions€will€be€limited€to€a€3Ïyear€term,€with€the€option€of€extending€the€term€for€2€more€3„year€terms.ÌÌà  àòòà 4 àVariable€compensationóóÐ ¸)p&) ÐÌà  àThe€bill€provides€the€Secretary€with€the€authority€to€provide€performance€bonus€awardsÏto€IRS€senior€executives€of€up€to€one„third€of€the€individualððs€annual€compensation.€The€bonusÏaward€would€be€based€on€meeting€preset€performance€goals€established€by€the€IRS.€AnÐ x-0*- Ðindividualððs€total€annual€compensation,€including€the€bonus,€can€not€exceed€the€rate€of€pay€of€theÏVice€President.€The€authority€will€not€be€subject€to€OPM€approval.€ÌÌà  àIt€is€anticipated€that€the€bonuses€will€not€be€available€to€more€than€25€IRS€seniorÏexecutives€annually.ÌÌò òòòGeneral€workforceÐ è  ÐÌà  àó óà 4 àPerformance€management€systemóóÐ È € ÐÌà  àThe€bill€permits€the€Secretary€to€establish€a€new€performance€management€system€whichÏwill€maintain€individual€accountability€by:€(1)€establishing€one€or€more€retention€standards€forÏeach€employee€related€to€the€work€of€the€employee€and€expressed€in€terms€of€performance;€(2)Ïproviding€for€periodic€performance€evaluations€to€determine€whether€employees€are€meeting€theÏapplicable€retention€standard;€and€(3)€taking€appropriate€action,€in€accordance€with€applicableÏlaws,€with€respect€to€any€employee€whose€performance€does€not€meet€established€retentionÏstandards.ÌÌà  àThe€bill€requires€that€the€performance€management€system€provide€for:€(1)€establishingÏgoals€or€objectives€for€individual,€group€or€organizational€performance€and€taxpayer€serviceÏsurveys;€(2)€communicating€such€goals€or€objectives€to€employees;€and€(3)€using€such€goals€orÏobjectives€to€make€performance€distinctions€among€employees€or€groups€of€employees.ÌÌà  àIt€is€intended€that€in€no€event€will€performance€measures€be€used€which€rank€employeesÏor€groups€of€employees€based€on€enforcement€results,€establish€dollar€goals€for€assessments€orÏcollections,€or€otherwise€undermine€fair€treatment€of€taxpayers.ÌÌà  àòòà 4 àAwardsóóÐ ˜P ÐÌà  àThe€bill€provides€the€Secretary€the€authority€to€establish€an€awards€program€for€IRSÏemployees.€The€program€will€be€designed€to€provide€incentives€for€and€recognition€of€individual,Ïgroup€and€organizational€achievements.€The€Secretary€will€have€the€authority€to€provide€awardsÏbetween€$10,000€and€$25,000€without€OPM€approval.€òòò òÐ H!  ÐÌà  àó óóóThese€awards€will€be€based€on€performance€under€the€new€performance€managementÐ (#à" Ðsystem,€and€in€no€case€will€awards€be€made€(or€performance€measured)€based€on€tax€enforcementÏresults.ÌÌà  àà 4 àòòWorkforce€classification€and€pay€bandingóóÐ è& #& ÐÌà  àThe€bill€provides€the€Secretary€with€authority€to€establish€one€or€more€broad€band€payÏsystems€covering€all€or€any€portion€of€the€IRS€workforce,€subject€to€OPM€criteria.€At€aÏminimum,€the€OPM€criteria€will€have€to:€(1)€ensure€that€the€pay€band€system€maintain€theÏconcept€of€equal€pay€for€substantially€equal€work;€(2)€establish€the€minimum€and€maximumÏnumber€of€grades€that€may€be€combined€into€pay€bands;€(3)€establish€requirements€for€settingÏminimum€and€maximum€rates€of€pay€in€a€pay€band;€(4)€establish€requirements€for€adjusting€Ô_ÔtheÐ x-0*- Ðpay€of€an€employee€within€a€pay€band;€(5)€establish€requirements€for€setting€the€pay€of€aÏsupervisory€employee€in€a€pay€band;€and€(6)€establish€requirements€and€methodologies€forÏsetting€the€pay€of€an€employee€upon€conversion€to€a€broad„banded€system,€initial€appointment,Ïchange€of€position€or€type€of€appointment€and€movement€between€a€broad„banded€system€andÏanother€pay€system.ÌÌà  àòòà 4 àWorkforce€staffingò òóóÐ è  ÐÌà  àó óThe€bill€provides€the€IRS€with€flexibility€in€filling€certain€permanent€appointments€withÐ È € Ðqualified€temporary€employees.€A€qualified€temporary€employee€is€defined€as€a€temporaryÏemployee€of€the€IRS€with€at€least€two€years€of€continuous€service,€who€has€met€all€applicableÏretention€standards€and€who€meets€the€minimum€qualifications€for€the€vacant€position.ÌÌà  àThe€bill€authorizes€the€IRS€to€establish€category€rating€systems€for€evaluating€jobÏapplicants,€under€which€qualified€candidates€are€divided€into€two€or€more€quality€categories€onÏthe€basis€of€relative€degrees€of€merit,€rather€than€assigned€individual€numerical€ratings.€ManagersÏwill€be€authorized€to€select€any€candidate€from€the€highest€quality€category,€and€will€not€beÏlimited€to€the€three€highest€ranked€candidates.€In€administering€these€category€rating€systems,€theÏIRS€generally€will€be€required€to€list€preference€eligibles€ahead€of€other€individuals€within€eachÏquality€category.€The€appointing€authority,€however,€could€select€any€candidate€from€the€highestÏquality€category,€as€long€as€existing€requirements€relating€to€passing€over€preference€eligibles€areÏsatisfied.ÌÌà  àThe€bill€authorizes€the€IRS€to€establish€probation€periods€for€IRS€employees€of€up€to€3Ïyears,€when€it€is€determined€that€a€shorter€period€will€not€be€sufficient€for€an€employee€toÏdemonstrate€proficiency€in€a€position.ÌÌò òòòVoluntary€separation€incentivesó óóóÐ ˜P ÐÌà  àThe€bill€provides€authority€to€the€IRS€to€use€Voluntary€Separation€Incentive€PayÏ(ð ðbuyoutsðð)€through€December€31,€2002.€The€use€of€voluntary€separation€incentive€is€notÏintended€to€necessarily€reduce€the€total€number€of€Full€Time€Equivalents€(ð ðFTEðð)€positions€inÏthe€IRS.ÌÌò òòòDemonstration€projectsóóó ó€Ð (#à" ÐÌà  àThe€bill€provides€the€IRS€with€authority€to€conduct€one€or€more€demonstration€projectsÏthrough€a€streamlined€process.€The€authority€will€enable€the€IRS€to€test€new€approaches€toÏHuman€Resource€Management.€The€bill€provides€authority€to€the€Secretary€and€OPM€to€waiveÏthe€termination€of€a€demonstration€project,€thereby€making€it€permanent.€At€least€90€days€prior€toÏwaiving€the€termination€date€OPM€will€be€required€to€publish€a€notice€of€such€intent€in€theÏFederal€Register€and€inform€the€appropriate€Committees€(including€the€House€Ways€and€MeansÏCommittee,€the€House€Government€Reform€and€Oversight€Committee,€the€Senate€FinanceÏCommittee€and€the€Senate€Governmental€Affairs€Committee)€of€both€Houses€of€Congress€inÏÔ_Ôwriting.Ô_ÔÔ_ÔÔ_ÔÌÐ x-0*- Їòòò òPerformance€measuresóóó óÐ H ÐÌà  àThe€IRS€is€directed€to€develop€employee€performance€measures€that€favor€taxpayerÏservice€and€prohibit€awarding€merit€pay€or€bonuses€that€are€based€on€enforcement€quotas,€goals,Ïor€statistics.ÌÌò òòòViolations€for€which€IRS€employees€may€be€terminatedóóÐ è  ÐÌà  àó óThe€bill€requires€the€IRS€to€terminate€an€employee€for€certain€proven€violationsÐ È € Ðcommitted€by€the€employee€in€connection€with€the€performance€of€official€duties.€The€violationsÏinclude:€(1)€failure€to€obtain€the€required€approval€signatures€on€documents€authorizing€theÏseizure€of€a€taxpayerððs€home,€personal€belongings,€or€business€assets;€(2)€providing€a€falseÏstatement€under€oath€material€to€a€matter€involving€a€taxpayer;€(3)€falsifying€or€destroyingÏdocuments€to€avoid€uncovering€mistakes€made€by€the€employee€with€respect€to€a€matterÏinvolving€a€taxpayer;€(4)€assault€or€battery€on€a€taxpayer€or€other€IRS€employee;€(5)€violation€ofÏthe€civil€rights€of€a€taxpayer€or€other€IRS€employee;€€(6)€violations€of€the€Internal€Revenue€Code,ÏTreasury€Regulations,€or€policies€of€the€IRS€(including€the€Internal€Revenue€Manual)€for€theÏpurpose€of€retaliating€or€harassing€a€taxpayer€or€other€IRS€employee;€and€(7)€wilful€misuse€ofÏsection€6103€for€the€purpose€of€concealing€data€from€a€Congressional€inquiry.ÌÌà  àThe€bill€provides€non„Ô_ÔdelegableÔ_Ô€authority€to€the€Commissioner€to€determine€thatÏmitigating€factors€exist,€that,€in€the€Commissionerððs€sole€discretion,€mitigate€against€terminatingÏthe€employee.€The€bill€also€provides€that€the€Commissioner,€in€his€sole€discretion,€may€establishÏa€procedure€which€will€be€used€to€determine€whether€an€individual€should€be€referred€for€such€aÏdetermination€by€the€Commissioner.€The€Treasury€IG€is€required€to€track€employee€terminationsÏand€terminations€that€would€have€occurred€had€the€Commissioner€not€determined€that€there€wereÏmitigation€factors€and€include€such€information€in€the€IGððs€annual€report.ÌÌò òòòIRS€employee€training€programÐ ˆ@ ÐÌà  àó óóóThe€bill€requires€the€IRS€to€place€a€high€priority€on€employee€training€and€to€adequatelyÐ h  Ðfund€employee€training€programs.€€The€bill€also€requires€the€IRS€to€provide€to€the€CongressionalÏtax€writing€committees€a€comprehensive€multi„year€plan€to:€(1)€ensure€adequate€customer€serviceÏtraining;€(2)€review€the€organizational€design€of€customer€service;€(3)€implement€a€performanceÏdevelopment€system;€and€(4)€provide,€in€fiscal€year€1999,€sixteen€to€twenty„four€hours€of€conflictÏmanagement€training€for€collection€employees.ÌÌà@””#ìàò òòòEffective€DateˆÐ ø%°"% ÐÌà  àó óóóThe€provision,€other€than€the€IRS€employee€training€program€provision,€is€effective€onÐ Ø'$' Ðthe€date€of€enactment.€The€provision€relating€to€the€IRS€employee€training€program€is€effectiveÏ90€days€after€the€date€of€enactment.Ð  ¸)p&) ÐÔ_Ôò òÓ  ÓTITLE€II.€€ELECTRONIC€FILINGó óÐ H ÐÓqdÓÌò òÓ  ÓA.€€€Electronic€Filing€of€Tax€and€Information€Returns€(sec.€2001€of€the€bill)€Ð (à Ðó óÓÅdÓÌÓ  Óòòò òPresent€Lawó óóóÐ À ÐÓHeÓÌà  àTreasury€Regulations€section€1.6012„5€provides€that€the€Commissioner€may€authorize€aÏtaxpayer€to€elect€to€file€a€composite€return€in€lieu€of€a€paper€return.€€An€electronically€filed€returnÏis€a€composite€return€consisting€of€electronically€transmitted€data€and€certain€paper€documentsÏthat€cannot€be€electronically€transmitted.€ÌÌà  àThe€IRS€periodically€publishes€a€list€of€the€forms€and€schedules€that€may€beÏelectronically€transmitted,€as€well€as€a€list€of€forms,€schedules,€and€other€information€that€cannotÏbe€electronically€filed.ÌÌà  àDuring€the€1997€tax€filing€season,€the€IRS€received€approximately€20€million€individualÏincome€tax€returns€electronically.ÌÌÓ  Óòòò òReasons€for€Changeó óóóÐ (à ÐÓGhÓÌà  àThe€Committee€believes€that€the€implementation€of€a€comprehensive€strategy€toÏencourage€electronic€filing€of€tax€and€information€returns€holds€significant€potential€to€benefitÏtaxpayers€and€make€the€IRS€returns€processing€function€more€efficient.€€For€example,€the€errorÏrate€associated€with€processing€paper€tax€returns€is€approximately€20€percent,€half€of€which€isÏattributable€to€the€IRS€and€half€to€error€in€taxpayer€data.€€Because€electronically„filed€returnsÏusually€are€prepared€using€computer€software€programs€with€built„in€accuracy€checks,€undergoÏpre„screening€by€the€IRS,€and€experience€no€key€punch€errors,€electronic€returns€have€an€errorÏrate€of€less€than€one€percent.€€Thus,€the€Committee€believes€that€an€expansion€of€electronic€filingÏwill€significantly€reduce€errors€(and€the€resulting€notices€that€are€triggered€by€such€errors).€€InÏaddition,€taxpayers€who€file€their€returns€electronically€receive€confirmation€from€the€IRS€thatÏtheir€return€was€received.ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ H!  ÐÓulÓÌà  àThe€provision€states€that€the€policy€of€Congress€is€to€promote€paperless€filing,€with€aÏlong„range€goal€of€providing€for€the€filing€of€at€least€80€percent€of€all€tax€returns€in€electronicÏform€by€the€year€2007.€€The€provision€requires€the€Secretary€of€the€Treasury€to€establish€aÏstrategic€plan€to€eliminate€barriers,€provide€incentives,€and€use€competitive€market€forces€toÏincrease€taxpayer€use€of€electronic€filing.€€The€provision€requires€all€returns€prepared€inÏelectronic€form€but€filed€in€paper€form€to€be€filed€electronically,€to€the€extent€feasible,€by€theÏyear€2002.€€ÌÌà  àThe€provision€requires€the€Secretary€to€create€an€electronic€commerce€advisory€group€andÏto€report€annually€to€the€tax„writing€committees€on€the€IRSððs€progress€in€implementing€its€planÏto€meet€the€goal€of€80€percent€electronic€filing€by€2007.ÌÔ_ÔÐ x-0*- Ðò òòòÔ& À Ôà@””#ìàEffective€DateóóˆÐ H ÐÌà  àó óThe€provision€is€effective€on€the€date€of€enactment.Ð (à Ðò òÔ'ÀHHpÔÌÓ  ÓB.€€Due€Date€for€Certain€Information€Returns€(sec.€2002€of€the€bill€Ìand€sec.€6071€of€the€Code)€Ìó óÓýpÓÌòòò òà@ÕÕ%ìàPresent€Lawó óóóˆÐ Ø  ÐÌà  àInformation€such€as€the€amount€of€dividends,€partnership€distributions,€and€interest€paidÏduring€the€calendar€year€must€be€supplied€to€taxpayers€by€the€payors€by€January€31€of€theÏfollowing€calendar€year.€€The€payors€must€file€an€information€return€with€the€IRS€with€theÏinformation€by€February€28€of€the€year€following€the€calendar€year€for€which€the€return€must€beÏfiled.€€Under€present€law,€the€due€date€for€filing€information€returns€with€the€IRS€is€the€sameÏwhether€such€returns€are€filed€on€paper,€on€magnetic€media,€or€electronically.€€Most€informationÏreturns€are€filed€on€magnetic€media€(such€as€computer€tapes),€which€are€physically€shipped€to€theÏIRS.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ (à ÐÓhtÓÌà  àThe€Committee€believes€that€encouraging€information€return€filers€to€file€electronicallyÏwill€substantially€increase€the€efficiency€of€the€tax€system€by€avoiding€the€need€to€convert€theÏinformation€from€magnetic€media€or€paper€to€electronic€form€before€return€matching.ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóРȀ ÐÓÍuÓÌà  àThe€provision€provides€an€incentive€to€filers€of€information€returns€to€use€electronic€filingÏby€extending€the€due€date€for€filing€such€returns€from€February€28€(under€present€law)€to€MarchÏ31€of€the€year€following€the€calendar€year€to€which€the€return€relates.€€ÌÌà  àThe€provision€also€requires€the€Treasury€to€issue€a€study€evaluating€the€merits€andÏdisadvantages,€if€any,€of€extending€the€deadline€for€providing€taxpayers€with€copies€ofÏinformation€returns€from€January€31€to€February€15€(Forms€W„2€would€still€be€required€to€beÏfurnished€by€January€31).ÌÌò òòòà@””#ìàEffective€Dateó óóóˆÐ $Ð # ÐÌà  àThe€extension€of€the€due€date€for€filing€returns€applies€to€information€returns€required€toÏbe€filed€after€December€31,€1999.€€The€Treasury€study€is€due€by€December€31,€1998.Ìò òà@ìì*ìàˆÐ  Ø'$' ÐÓ  ÓC.€€Paperless€Electronic€Filing€(sec.€2003€of€the€bill€and€sec.€6061€of€the€Code)€Ìó óÓyÓÌòòò òà@ÕÕ%ìàPresent€Lawó óóóˆÐ (à ÐÌà  àCode€section€6061€requires€that€tax€forms€be€signed€as€required€by€the€Secretary.€€TheÏIRS€will€not€accept€an€electronically€filed€return€unless€it€has€also€received€a€Form€8453,€whichÏis€a€paper€form€that€contains€signature€information€of€the€filer.€ÌÌà  àA€return€generally€is€considered€timely€filed€when€it€is€received€by€the€IRS€on€or€beforeÏthe€due€date€of€the€return.€€If€the€requirements€of€Code€section€7502€are€met,€timely€mailing€isÏtreated€as€timely€filing.€€If€the€return€is€mailed€by€registered€mail,€the€dated€registration€statementÏis€prima€facie€evidence€of€delivery.€As€an€electronically€filed€return€is€not€mailed,€section€7502Ïdoes€not€apply.€€€ÌÌà  àThe€IRS€periodically€publishes€a€list€of€the€forms€and€schedules€that€may€beÏelectronically€transmitted,€as€well€as€a€list€of€forms,€schedules,€and€other€information€that€cannotÏbe€electronically€filed.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ (à ÐÓÐ}ÓÌà  àElectronically€filed€returns€cannot€provide€the€maximum€efficiency€for€taxpayers€and€theÏIRS€under€current€rules€that€require€signature€information€to€be€filed€on€paper.€€Also,€taxpayersÏneed€to€know€how€the€IRS€will€determine€the€filing€date€of€a€return€filed€electronically.€€TheÏCommittee€believes€that€more€types€of€returns€could€be€filed€electronically€if€proper€proceduresÏwere€in€place.€€Also,€as€the€IRS€shifts€to€a€paperless€tax€return€system,€the€Committee€intends€forÏthe€IRS€to€assist€taxpayers€in€shifting€to€paperless€record€retention.ÌÌÓ  Óòòò òExplanation€of€ProvisionÐ ˜P Ðó óóóÓM€ÓÌà  àThe€provision€requires€the€Secretary€to€develop€procedures€that€would€eliminate€the€needÏto€file€a€paper€form€relating€to€signature€information.€€Until€the€procedures€are€in€place,€theÏprovision€authorizes€the€Secretary€to€provide€for€alternative€methods€of€signing€all€returns,Ïdeclarations,€statements,€or€other€documents.€€An€alternative€method€of€signature€would€beÏtreated€identically,€for€both€civil€and€criminal€purposes,€as€a€signature€on€a€paper€form.ÌÌà  àThe€provision€also€provides€rules€for€determining€when€electronic€returns€are€deemedÏfiled€and€to€make€it€possible€for€taxpayers€to€authorize,€on€electronically€filed€returns,€personsÏ(such€as€return€preparers)€to€whom€information€may€be€disclosed€pursuant€to€section€6103.ÌÌà  àThe€provision€requires€the€Secretary€to€establish€procedures,€to€the€extent€practicable,€toÏreceive€all€forms€electronically€for€taxable€periods€beginning€after€December€31,€1998.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ ¨*`'* ÐÓ  ÓÌÓŸ„Óà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÐ  x-0*- Ðò òà@    ìàD.€€Return„Free€Tax€System€(€sec.€2004€of€the€bill)ˆÐ H ÐÌòòà@ÕÕ%ìàPresent€LawóóˆÐ (à Ðó óÌà  àUnder€present€law,€taxpayers€generally€are€required€to€calculate€their€own€tax€liabilitiesÏand€submit€returns€showing€their€calculations.ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌò òòòÓ  ÓReasons€for€Changeó óóóÐ Ø  ÐÌÓ‹†Óà  àThe€Committee€believes€that€it€would€benefit€taxpayers€to€be€relieved,€to€the€extentÏfeasible,€€from€the€burden€of€determining€tax€liability€and€filing€returns.€ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ ˆ@  ÐÓ„‡ÓÌà  àThe€provision€requires€the€Secretary€or€his€delegate€to€study€the€feasibility€of,€andÏdevelop€procedures€for,€the€implementation€of€a€return„free€tax€system€for€appropriateÏindividuals€for€taxable€years€beginning€after€2007.€€The€Secretary€is€required€annually€to€reportÏto€the€tax„writing€committees€on€the€progress€of€the€development€of€such€system.€The€Secretary€Ïis€required€to€make€the€first€report€on€the€development€of€the€return„free€tax€system€to€the€tax„¼writing€committees€by€June€30,€2000.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ ø° ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌà@¶ ¶ ìàò òE.€€Access€to€Account€Information€(sec.€2005€of€the€bill)ó óˆÐ ¸p ÐÌÓ  Óòòò òPresent€Lawó óóóÐ ˜P ÐÓÊŠÓÌà  àTaxpayers€who€file€their€returns€electronically€cannot€review€their€accountsÏelectronically.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ H!  ÐÓƒ‹ÓÌà  àThe€Committee€believes€that€it€would€be€desirable€for€a€taxpayer€(or€the€taxpayerððsÏdesignee)€to€be€able€to€review€that€taxpayerððs€account€electronically,€but€only€if€all€necessaryÏprivacy€safeguards€are€in€place.ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ è& #& ÐÓ¶ŒÓÌà  àThe€provision€requires€the€Secretary€to€develop€procedures€not€later€than€December€31,Ï2006,€under€which€a€taxpayer€filing€returns€electronically€(or€the€taxpayerððs€designee€underÏsection€6103(c))€could€review€the€taxpayerððs€own€account€electronically,€but€only€if€all€necessaryÏÔ_Ôprivacy€safeguards€are€in€place€by€that€date.€€The€Secretary€is€required€to€issue€an€interimÏprogress€report€to€the€tax„writing€committees€by€December€31,€2003.ÌÐ x-0*- Ðà@””#ìàò òòòEffective€Dateó óóóˆÐ H ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.Ð  (à Ðò òÓ  ÓTITLE€III.€€TAXPAYER€PROTECTION€AND€RIGHTSó óÐ H ÐÌò òA.€€à0 @„ àBurden€of€Proof€(sec.€3001€of€the€bill€and€new€sec.€7491€of€the€Code)ó óÐ (à ÐÓ  ÓÌà@ÕÕ%ìàòòò òPresent€LawˆÐ À Ðó óóóÌà  àUnder€present€law,€a€rebuttable€presumption€exists€that€the€Commissioner's€determinationÏof€tax€liability€is€correct.׃Q×Ý ƒ #ÃÝòòÚ  Ú19Ú  ÚóóÝ  Ý×  ×€€ð ðThis€presumption€in€favor€of€the€Commissioner€is€a€proceduralÐ Ø  Ðdevice€that€requires€the€plaintiff€to€go€forward€with€prima€facie€evidence€to€support€a€findingÏcontrary€to€the€Commissioner's€determination.€€Once€this€procedural€burden€is€satisfied,€theÏtaxpayer€must€still€carry€the€ultimate€burden€of€proof€or€persuasion€on€the€merits.€€Thus,€theÏplaintiff€not€only€has€the€burden€of€proof€of€establishing€that€the€Commissioner's€determinationÏwas€incorrect,€but€also€of€establishing€the€merit€of€its€claims€by€a€preponderance€of€theÏevidenceðð.׃R€×Ý ƒ #ÃÝòòÚ  Ú20Ú  ÚóóÝ  Ý×  ×Ð x0  ÐÌà  àThe€general€rebuttable€presumption€that€the€Commissioner's€determination€of€tax€liabilityÏis€correct€is€a€fundamental€element€of€the€structure€of€the€Internal€Revenue€Code.€€Although€thisÏpresumption€is€judicially€based,€rather€than€legislatively€based,€there€is€considerable€evidenceÏthat€the€presumption€has€been€repeatedly€considered€and€approved€by€the€Congress.€€This€is€theÏcase€because€the€Internal€Revenue€Code€contains€a€number€of€civil€provisions€that€explicitlyÏplace€the€burden€of€proof€on€the€Commissioner€in€specifically€designated€circumstances.€€TheÏCongress€would€have€enacted€these€provisions€only€if€it€recognized€and€approved€of€the€generalÏrule€of€presumptive€correctness€of€the€Commissioner's€determination.€€A€list€of€these€civilÏprovisions€follows.ÌÌà  à(1)€€òòFraudóó.„„Any€proceeding€involving€the€issue€of€whether€the€taxpayer€has€been€guiltyÐ ¸p Ðof€fraud€with€intent€to€evade€tax€(secs.€7454(a)€and€7422(e)).ÌÌà  à(2)€òòRequired€reasonable€verification€of€information€returnsóó.„„In€any€court€proceeding,€if€aÐ ˆ@ Ðtaxpayer€asserts€a€reasonable€dispute€with€respect€to€any€item€of€income€reported€on€anÏinformation€returned€filed€with€the€Secretary€by€a€third€party€and€the€taxpayer€has€fullyÏcooperated€with€the€Secretary€(including€providing,€within€a€reasonable€period€of€time,€access€toÏand€inspection€of€all€witnesses,€information,€and€documents€within€the€control€of€the€taxpayer€asÏreasonably€requested€by€the€Secretary),€the€Secretary€has€the€burden€of€producing€reasonable€andÏprobative€information€concerning€such€deficiency€in€addition€to€such€information€return€(sec.Ï6201(d)).ÌÌà  à(3)€€òòFoundation€managersóó.„„Any€proceeding€involving€the€issue€of€whether€a€foundationÐ ø%°"% Ðmanager€has€knowingly€participated€in€prohibited€transactions€(sec.€7454(b)).ÌÐ Ø'$' Ðà  à(4)€€òòTransferee€liabilityóó.„„Any€proceeding€in€the€Tax€Court€to€show€that€a€petitioner€isÐ H Ðliable€as€a€transferee€of€property€of€a€taxpayer€(sec.€6902(a)).ÌÌà  à(5)€€òòReview€of€jeopardy€levy€or€assessment€proceduresóó.„„Any€proceeding€to€review€theÐ Ð Ðreasonableness€of€a€jeopardy€levy€or€jeopardy€assessment€(sec.€7429(g)(1)).ÌÌà  à(6)€€òòProperty€transferred€in€connection€with€performance€of€servicesóó.„„In€the€case€ofÐ è  Ðproperty€subject€to€a€restriction€that€by€its€terms€will€never€lapse€and€that€allows€the€transferee€toÏsell€only€at€a€price€determined€under€a€formula,€the€price€is€deemed€to€be€fair€market€value€unlessÏestablished€to€the€contrary€by€the€Secretary€(sec.€83(d)(1)).ÌÌà  à(7)€€òòIllegal€bribes,€kickbacks,€and€other€paymentsóó.„„As€to€whether€a€payment€constitutesÐ ˜ P  Ðan€illegal€bribe,€illegal€kickback,€or€other€illegal€payment€(sec.€162(c)(1)€and€(2)).ÌÌà  à(8)€€òòGolden€parachute€paymentsóó.„„As€to€whether€a€payment€is€a€parachute€payment€onÐ h  Ðaccount€of€a€violation€of€any€generally€enforced€securities€laws€or€regulations€(sec.Ï280G(b)(2)(B)).ÌÌà  à(9)€€òòUnreasonable€accumulation€of€earnings€and€profitsóó.„„In€any€Tax€Court€proceeding€asÐ (à Ðto€whether€earnings€and€profits€have€been€permitted€to€accumulate€beyond€the€reasonable€needsÏof€the€business,€provided€that€the€Commissioner€has€not€fulfilled€specified€proceduralÏrequirements€(sec.€534).ÌÌà  à(10)€€òòExpatriationóó.„„As€to€whether€it€is€reasonable€to€believe€that€an€individual's€loss€ofÐ Ø Ðcitizenship€would€result€in€a€substantial€reduction€in€the€individual's€income€taxes€or€transferÏtaxes€(secs.€877(e),€2107(e),€2501(a)(4)).€ÌÌà  à(11)€€òòPublic€inspection€of€written€determinationsóó.„„In€any€proceeding€seeking€additionalÐ ˜P Ðdisclosure€of€information€(sec.€6110(f)(4)(A)).ÌÌà  à(12)€€òòPenalties€for€promoting€abusive€tax€shelters,€aiding€and€abetting€the€understatementÐ h  Ðof€tax€liability,€and€filing€a€frivolous€income€returnóó.„„As€to€whether€the€person€is€liable€for€theÐ X  Ðpenalty€(sec.€6703(a)).ÌÌà  à(13)€€òòIncome€tax€return€preparers'€penaltyóó.„„As€to€whether€a€preparer€has€willfullyÐ (#à" Ðattempted€to€understate€tax€liability€(sec.€7427).ÌÌà  à(14)€€òòStatus€as€employeesóó.„„As€to€whether€individuals€are€employees€for€purposes€ofÐ ø%°"% Ðemployment€taxes€(pursuant€to€the€safe€harbor€provisions€of€section€530€of€the€Revenue€Act€ofÏ1978).׃T×Ý ƒ #ÃÝòòÚ  Ú21Ú  ÚóóÝ  Ý×  ×Ð Ø'$' ÐÌÐ ¸)p&) ЇÓ  Óòòò òReasons€for€Changeó óóóÐ H ÐÓ¦ÓÌà  àThe€Committee€is€concerned€that€individual€and€small€business€taxpayers€frequently€areÏat€a€disadvantage€when€forced€to€litigate€with€the€Internal€Revenue€Service.€€The€CommitteeÏbelieves€that€the€present€burden€of€proof€rules€contribute€to€that€disadvantage.€€The€CommitteeÏbelieves€that,€all€other€things€being€equal,€facts€asserted€by€individual€and€small€businessÏtaxpayers€who€cooperate€with€the€IRS€and€satisfy€relevant€recordkeeping€and€substantiationÏrequirements€should€be€accepted.€€The€Committee€believes€that€shifting€the€burden€of€proof€toÏthe€Secretary€in€such€circumstances€will€create€a€better€balance€between€the€IRS€and€suchÏtaxpayers,€without€encouraging€tax€avoidance.€€ÌÌà  àThe€Committee€believes€that€it€is€inappropriate€for€the€IRS€to€rely€solely€on€statisticalÏinformation€on€unrelated€taxpayers€to€reconstruct€unreported€income€of€an€individual€taxpayer.€ÏThe€Committee€also€believes€that,€in€a€court€proceeding,€the€IRS€should€not€be€able€to€rest€on€itsÏpresumption€of€correctness€if€it€does€not€provide€any€evidence€whatsoever€relating€to€penalties.ÌÌà  àà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ H ÐÌà  àThe€provision€provides€that€the€Secretary€shall€have€the€burden€of€proof€in€any€courtÏproceeding€with€respect€to€a€factual€issue€if€the€taxpayer€introduces€credible€evidence€withÏrespect€to€the€factual€issue€relevant€to€ascertaining€the€taxpayerððs€income€tax€liability.€€FourÏconditions€apply.€€First,€the€taxpayer€must€comply€with€the€requirements€of€the€Internal€RevenueÏCode€and€the€regulations€issued€thereunder€to€substantiate€any€item€(as€under€present€law).€ÏSecond,€the€taxpayer€must€maintain€records€required€by€the€Code€and€regulations€(as€underÏpresent€law).€€Third,€the€taxpayer€must€cooperate€with€reasonable€requests€by€the€Secretary€forÏmeetings,€interviews,€witnesses,€information,€and€documents€(including€providing,€within€aÏreasonable€period€of€time,€access€to€and€inspection€of€witnesses,€information,€and€documentsÏwithin€the€control€of€the€taxpayer,€as€reasonably€requested€by€the€Secretary).€€Cooperation€alsoÏincludes€providing€reasonable€assistance€to€the€Secretary€in€obtaining€access€to€and€inspection€ofÏwitnesses,€information,€or€documents€not€within€the€control€of€the€taxpayer€(including€anyÏwitnesses,€information,€or€documents€located€in€foreign€countries׃U×Ý ƒ #ÃÝòòÚ  Ú22Ú  ÚóóÝ  Ý×  ×).€€A€necessary€element€of€Ð h  Ðcooperating€with€the€Secretary€is€that€the€taxpayer€must€exhaust€his€or€her€administrativeÏremedies€(including€any€appeal€rights€provided€by€the€IRS).€€The€taxpayer€is€not€required€toÏagree€to€extend€the€statute€of€limitations€to€be€considered€to€have€cooperated€with€the€Secretary.ÏCooperating€also€means€that€the€taxpayer€must€establish€the€applicability€of€any€privilege.€€ÏFourth,€taxpayers€other€than€individuals€must€meet€the€net€worth€limitations€that€apply€forÏawarding€attorneyððs€fees€(accordingly,€no€net€worth€limitation€would€be€applicable€toÏindividuals).€€Corporations,€trusts,€and€partnerships€whose€net€worth€exceeds€$7€million€are€notÏeligible€for€the€benefits€of€the€provision.€The€taxpayer€has€the€burden€of€proving€that€it€meetsÏeach€of€these€conditions,€because€they€are€necessary€prerequisites€to€establishing€that€the€burdenÏof€proof€is€on€the€Secretary.ÌÐ ¸)p&) Ðà  àThe€burden€will€shift€to€the€Secretary€under€this€provision€only€if€the€taxpayer€firstÏintroduces€credible€evidence€with€respect€to€a€factual€issue€relevant€to€ascertaining€the€taxpayerððsÏincome€tax€liability.€€Credible€evidence€is€the€quality€of€evidence€which,€after€critical€analysis,Ïthe€court€would€find€sufficient€upon€which€to€base€a€decision€on€the€issue€if€no€contrary€evidenceÏwere€submitted€(without€regard€to€the€judicial€presumption€of€IRS€correctness).€€A€taxpayer€hasÏnot€produced€credible€evidence€for€these€purposes€if€the€taxpayer€merely€makes€implausibleÏfactual€assertions,€frivolous€claims,€or€tax€protestor„type€arguments.€€The€introduction€ofÏevidence€will€not€meet€this€standard€if€the€court€is€not€convinced€that€it€is€worthy€of€belief.€€IfÏafter€evidence€from€both€sides,€the€court€believes€that€the€evidence€is€equally€balanced,€the€courtÏshall€find€that€the€Secretary€has€not€sustained€his€burden€of€proof.ÌÌà  àNothing€in€the€provision€shall€be€construed€to€override€any€requirement€under€the€CodeÏor€regulations€to€substantiate€any€item.€€Accordingly,€taxpayers€must€meet€applicableÏsubstantiation€requirements,€whether€generally€imposed׃[×Ý ƒ #ÃÝòòÚ  Ú23Ú  ÚóóÝ  Ý×  ×€or€imposed€with€respect€to€specificÐ x0  Ðitems,€such€as€charitable€contributions׃^P×Ý ƒ #ÃÝòòÚ  Ú24Ú  ÚóóÝ  Ý×  ×€or€meals,€entertainment,€travel,€and€certain€otherÐ h  Ðexpenses.׃a×Ý ƒ #ÃÝòòÚ  Ú25Ú  ÚóóÝ  Ý×  ×€€€Substantiation€requirements€include€any€requirement€of€the€Code€or€regulations€thatÐ X Ðthe€taxpayer€establish€an€item€to€the€satisfaction€of€the€Secretary.׃dÀ×Ý ƒ #ÃÝòòÚ  Ú26Ú  ÚóóÝ  Ý×  ×€€Taxpayers€who€fail€toÐ H Ðsubstantiate€any€item€in€accordance€with€the€legal€requirement€of€substantiation€will€not€haveÏsatisfied€the€legal€conditions€that€are€prerequisite€to€claiming€the€item€on€the€taxpayerððs€taxÏreturn€and€will€accordingly€be€unable€to€avail€themselves€of€this€provision€regarding€the€burdenÏof€proof.€€Thus,€if€a€taxpayer€required€to€substantiate€an€item€fails€to€do€so€in€the€manner€requiredÏ(or€destroys€the€substantiation),€this€burden€of€proof€provision€is€inapplicable.׃gH ×Ý ƒ #ÃÝòòÚ  Ú27Ú  ÚóóÝ  Ý×  ×Ð ø° ÐÌà  àThe€provision€also€provides€that€in€any€instance€in€which€the€Secretary€uses€statisticalÏinformation€from€unrelated€taxpayers€solely€to€reconstruct€an€individual€taxpayerððs€income€(suchÏas€average€income€for€taxpayers€in€the€area€in€which€the€taxpayer€lives),€the€burden€of€proof€is€onÏthe€Secretary€with€respect€to€the€item€of€income€that€was€reconstructed€by€the€Secretary.ÌÐ ˜P Ðà  àFurther,€the€provision€provides€that,€in€any€court€proceeding,€the€Secretary€must€initiallyÏcome€forward€with€evidence€that€it€is€appropriate€to€apply€a€particular€penalty€to€the€taxpayerÏbefore€the€court€can€impose€the€penalty.€€This€provision€is€not€intended€to€require€the€SecretaryÏto€introduce€evidence€of€elements€such€as€reasonable€cause€or€substantial€authority.€€Rather,€theÏSecretary€must€come€forward€initially€with€evidence€regarding€the€appropriateness€of€applying€aÏparticular€penalty€to€the€taxpayer;€if€the€taxpayer€believes€that,€because€of€reasonable€cause,Ïsubstantial€authority,€or€a€similar€provision,€it€is€inappropriate€to€impose€the€penalty,€it€is€theÏtaxpayerððs€responsibility€(and€not€the€Secretaryððs€obligation)€to€raise€those€issues.€ÌÌà@””#ìàòòò òEffective€Dateó óóóˆÐ ¸ p  ÐÌà  àThe€provision€applies€to€court€proceedings€arising€in€connection€with€examinationsÏcommencing€after€the€date€of€enactment.Ìò òÓ  ÓÌB.€€Proceedings€by€Taxpayersó óÐ h  ÐÓ  ÓÌò ò1.€€Expansion€of€authority€to€award€costs€and€certain€fees€(sec.€3101€of€the€bill€and€sec.€7430Ð H Ðof€the€Code)ó óÐ 8ð ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ Ð ÐÌà  àAny€person€who€substantially€prevails€in€any€action€by€or€against€the€United€States€inÏconnection€with€the€determination,€collection,€or€refund€of€any€tax,€interest,€or€penalty€may€beÏawarded€reasonable€administrative€costs€incurred€before€the€IRS€and€reasonable€litigation€costsÏincurred€in€connection€with€any€court€proceeding.€€Reasonable€administrative€costs€are€definedÏas€(1)€any€administrative€fees€or€similar€charges€imposed€by€the€IRS€and€(2)€expenses,€costs€andÏfees€related€to€attorneys,€expert€witnesses,€and€studies€or€analyses€necessary€for€preparation€ofÏthe€case,€to€the€extent€that€such€costs€are€incurred€before€earlier€of€the€date€of€the€notice€ofÏdecision€by€IRS€Appeals€or€the€notice€of€deficiency€(sec.€7430(c)(2)).€€Net€worth€limitationsÏapply.ÌÌà  àReasonable€litigation€costs€include€reasonable€fees€paid€or€incurred€for€the€services€ofÏattorneys,€except€that€the€attorneyððs€fees€will€not€be€reimbursed€at€a€rate€in€excess€of€$110€perÏhour€(indexed€for€inflation)€unless€the€court€determines€that€a€special€factor,€such€as€the€limitedÏavailability€of€qualified€attorneys€for€the€proceeding,€justifies€a€higher€rate.€ÌÌà  àRule€68€of€the€Federal€Rules€of€Civil€Procedure€(FRCP)€provides€a€procedure€underÏwhich€a€party€may€recover€costs€if€the€partyððs€offer€for€judgment€was€rejected€and€the€subsequentÏcourt€judgment€was€less€favorable€to€the€opposing€party€than€the€offer.€€€The€offering€partyððsÏcosts€are€limited€to€the€costs€(excluding€attorneyððs€fees)€incurred€after€the€offer€was€made.€€TheÏFRCP€generally€apply€to€tax€litigation€in€the€district€courts€and€the€United€States€Court€ofÏFederal€Claims.€€ÌÌà  àCode€section€7431€permits€the€award€of€civil€damages€for€unauthorized€inspection€orÏâ âdisclosure€of€return€information.€€The€Federal€appellate€courts€are€split€over€whether€a€party€whoÐ ˆ,@), Ðsubstantially€prevails€over€the€United€States€in€an€action€under€Code€section€7431€is€eligible€forÏan€award€of€fees€and€reasonable€costs.׃\×Ý ƒ #ÃÝòòÚ  Ú28Ú  ÚóóÝ  Ý×  ×Ð 8ð Ðâ âÌÓ  Óòòò òReasons€for€ChangeÐ Ð Ðó óóóÓþÌÓÌà  àThe€Committee€believes€that€taxpayers€should€be€allowed€to€recover€the€reasonableÏadministrative€costs€they€incur€where€the€IRS€takes€a€position€against€the€taxpayer€that€is€notÏsubstantially€justified,€beginning€at€the€time€that€the€IRS€establishes€its€initial€position€by€Ïissuing€a€letter€of€proposed€deficiency€which€allows€the€taxpayer€an€opportunity€forÏadministrative€review€by€the€IRS€Office€of€Appeals.€ÌÌà  àThe€Committee€believes€that€the€pro€bono€publicum€representation€of€taxpayers€shouldÏbe€encouraged€and€the€value€of€the€legal€services€rendered€in€these€situations€should€beÏrecognized.€€Where€the€IRS€takes€positions€that€are€not€substantially€justified,€it€should€not€beÏrelieved€of€its€obligation€to€bear€reasonable€administrative€and€litigation€costs€becauseÏrepresentation€was€provided€the€taxpayer€on€a€pro€bono€basis.ÌÌà  àThe€Committee€is€concerned€that€the€IRS€may€continue€to€litigate€issues€that€haveÏpreviously€been€decided€in€favor€of€taxpayers€in€other€circuits.€€The€Committee€believes€that€thisÏplaces€an€undue€burden€on€taxpayers€that€are€required€to€litigate€such€issues.€€Accordingly,€theÏCommittee€believes€it€is€important€that€the€court€take€into€account€whether€the€IRS€has€lost€in€theÏcourts€of€appeals€of€other€circuits€on€similar€issues€in€determining€whether€the€IRS€has€taken€aÏposition€that€is€not€substantially€justified€and€thus€liable€for€reasonable€administrative€andÏlitigation€costs.ÌÌà  àThe€Committee€believes€that€settlement€of€tax€cases€should€be€encouraged€wheneverÏpossible.€€Accordingly,€the€Committee€believes€that€the€application€of€a€rule€similar€to€FRCP€68Ïis€appropriate€to€provide€an€incentive€for€the€IRS€to€settle€taxpayersðð€cases€for€appropriateÏamounts,€by€requiring€reimbursement€of€taxpayerððs€costs€when€the€IRS€fails€to€do€so.€€ÌÌà  àThe€Committee€believes€that€when€the€IRS€violates€taxpayerððs€right€to€privacy€byÏengaging€in€unauthorized€inspection€or€disclosure€activities,€it€is€appropriate€to€reimburseÏtaxpayers€for€the€costs€of€their€damages.€€Ìà  àÌòòò òà@ÅÅìàExplanation€of€Provisionó óóóˆÐ (#à" ÐÌà  àThe€provision:Ìà  àÌà0  à€(1)€moves€the€point€in€time€after€which€reasonable€administrative€costs€can€be€awardedÏto€the€date€on€which€the€first€letter€of€proposed€deficiency€which€allows€the€taxpayer€anÏopportunity€for€administrative€review€in€the€IRS€Office€of€Appeals€is€sent;€ÐÈ(€%((#(# Їà0  à(2)€permits€awards€of€reasonable€attorneyððs€fees€by€deleting€the€hourly€rate€caps€(and€theÏexceptions€to€those€caps);Ð (#(# ÐÌà0  à€(3)€permits€the€award€of€reasonable€attorneyððs€fees€to€specified€persons€who€represent€forÏno€more€than€a€nominal€fee€a€taxpayer€who€is€a€prevailing€party;€€Ð (#(# ÐÌà0  à(4)€provides€that€in€determining€whether€the€position€of€the€United€States€wasÏsubstantially€justified,€the€court€shall€take€into€account€whether€the€United€States€has€lostÏin€other€courts€of€appeal€on€substantially€similar€issues;€Ð (#(# ÐÌà0  à(5)€provides€that€if€a€taxpayer€makes€an€offer€after€the€taxpayer€has€a€right€toÏadministrative€review€in€the€IRS€Office€of€Appeals,€the€IRS€rejects€the€offer,€and€later€theÏIRS€obtains€a€judgment׃f×Ý ƒ #ÃÝòòÚ  Ú29Ú  ÚóóÝ  Ý×  ×€against€the€taxpayer€in€an€amount€that€is€equal€to€or€less€thanÐ ˆ@  Ðthe€taxpayerððs€offer€for€the€amount€of€the€tax€liability€(excluding€interest),€reasonableÏcosts€and€attorneyððs€fees€from€the€date€of€the€offer€would€be€awarded;€andÐ (#(# ÐÌà0  à(6)€permits€the€award€of€attorneyððs€fees€in€actions€for€civil€damages€for€unauthorizedÏinspection€or€disclosure€of€taxpayer€returns€and€return€information.€Ð (#(# ÐÌThe€above€rules€for€making€awards€apply€subject€to€the€same€net€worth€limitations€as€underÏpresent€law.€ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ è  ÐÌà  àThe€provision€applies€to€eligible€costs€and€services€incurred€more€than€180€days€after€theÏdate€of€enactment.ÌÌò ò2.€€Civil€damages€for€collection€actions€(sec.€3102€of€the€bill€and€secs.€7426€and€7433€of€theÐ ˜P ÐCode)ó óÐ ˆ@ ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ h  ÐÌà  àA€taxpayer€may€sue€the€United€States€for€up€to€$1€million€of€civil€damages€caused€by€anÏofficer€or€employee€of€the€IRS€who€recklessly€or€intentionally€disregards€provisions€of€theÏInternal€Revenue€Code€or€Treasury€regulations€in€connection€with€the€collection€of€Federal€taxÏwith€respect€to€the€taxpayer.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ø%°"% ÐÌÓÁßÓà  àThe€Committee€believes€that€taxpayers€should€also€be€able€to€recover€economic€damagesÏthey€incur€as€a€result€of€the€negligent€disregard€of€the€Code€or€regulations€by€an€officer€orÏemployee€of€the€IRS€in€connection€with€a€collection€matter.€€The€Committee€also€believes€thatÐ ¸)p&) Ðtaxpayers€should€be€able€to€recover€civil€damages€they€incur€as€a€result€of€a€willful€violation€ofÏthe€Bankruptcy€Code€by€an€officer€or€employee€of€the€IRS.€€As€third€parties€may€also€be€subjectÏto€IRS€collection€actions,€the€Committee€believes€that€it€is€appropriate€to€afford€them€theÏopportunity€to€recover€damages€for€unauthorized€collection€actions.€€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ø° ÐÌà  àThe€provision€permits€(1)€up€to€$100,000€in€civil€damages€caused€by€an€officer€orÏemployee€of€the€IRS€who€negligently€disregards€provisions€of€the€Internal€Revenue€Code€orÏTreasury€regulations€in€connection€with€the€collection€of€Federal€tax€with€respect€to€the€taxpayer,Ïand€(2)€up€to€$1€million€in€civil€damages€caused€by€an€officer€or€employee€of€the€IRS€whoÏwillfully€violates€provisions€of€the€Bankruptcy€Code€relating€to€automatic€stays€or€discharges.€€ÏThe€provision€also€provides€that€persons€other€than€the€taxpayer€may€sue€for€civil€damages€forÏunauthorized€collection€actions.€€No€person€is€entitled€to€seek€civil€damages€in€a€court€of€lawÏwithout€first€exhausting€administrative€remedies.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ H ÐÌà  àThe€provision€is€effective€with€respect€to€actions€of€officers€or€employees€of€the€IRSÏoccurring€after€the€date€of€enactment.ÌÌò ò3.€€Increase€in€size€of€cases€permitted€on€small€case€calendar€(sec.€3103€of€the€bill€and€sec.Ð ø° Ð7463€of€the€Code)ó óÐ è  ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ È€ ÐÌà  àTaxpayers€may€choose€to€contest€many€tax€disputes€in€the€Tax€Court.€€Special€small€caseÏprocedures€apply€to€disputes€involving€$10,000€or€less,€if€the€taxpayer€chooses€to€utilize€theseÏprocedures€(and€the€Tax€Court€concurs)€(sec.€7463).€€The€IRS€cannot€require€the€taxpayer€to€useÏthe€small€case€procedures.€€The€Tax€Court€generally€concurs€with€the€taxpayerððs€request€to€useÏthe€small€case€procedures,€unless€it€decides€that€the€case€involves€an€issue€that€should€be€heardÏunder€the€normal€procedures.€€After€the€case€has€commenced,€the€Tax€Court€may€order€that€theÏsmall€case€procedures€should€be€discontinued€only€if€(1)€there€is€reason€to€believe€that€theÏamount€in€controversy€will€exceed€$10,000€or€(2)€justice€would€require€the€change€in€procedure.€€ÌÌà  àSmall€tax€cases€are€conducted€as€informally€as€possible.€€Neither€briefs€nor€oralÏarguments€are€required€and€strict€rules€of€evidence€are€not€applied.€€Most€taxpayers€representÏthemselves€in€small€tax€cases,€although€they€may€be€represented€by€anyone€admitted€to€practiceÏbefore€the€Tax€Court.€€Decisions€in€a€case€conducted€under€small€case€procedures€are€neitherÏprecedent€for€future€cases€nor€reviewable€upon€appeal€by€either€the€government€or€the€taxpayer.€€ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ¸)p&) ÐÓPìÓÌà  àThe€Committee€believes€that€use€of€the€small€case€procedures€should€be€expanded.ÌÐ  ˆ,@), ÐÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ 8ð ÐÌà  àThe€provision€increases€the€cap€for€small€case€treatment€from€$10,000€to€$50,000.€€TheÏCommittee€recognizes€that€an€increase€of€this€size€may€encompass€a€small€number€of€cases€ofÏsignificant€precedential€value.€€Accordingly,€the€Committee€anticipates€that€the€Tax€Court€willÏcarefully€consider€IRS€objections€to€small€case€treatment,€such€as€objections€based€upon€theÏpotential€precedential€value€of€the€case.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ ¸ p  ÐÌà  àThe€provision€applies€to€proceedings€commenced€after€the€date€of€enactment.ÌÌò ò4.€€Expansion€of€Tax€Court€jurisdiction€to€responsible€person€penalties€(sec.€3104€of€the€billÐ x0  Ðand€sec.€6672€of€the€Code)ó óÐ h  ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ H ÐÌà  àIn€general,€employers€are€required€to€withhold€income€taxes€(sec.€3402)€and€socialÏsecurity€taxes€(sec.€3102)€from€their€employeeððs€wages.€€These€withheld€taxes€constitute€a€trustÏin€favor€of€the€United€States€from€the€time€that€the€employer€deducts€them€from€the€employeeððsÏwages,€and€the€employer€is€liable€to€the€government€for€the€payment€of€such€taxes€(sec.€7501(a)).ÏSection€6672€subjects€all€persons€considered€responsible€for€the€withholding€and€payment€ofÏtaxes€to€a€penalty€equal€to€the€amount€of€taxes€due€where€the€employer€fails€to€turn€over€suchÏfunds€to€the€government€(the€ð ðresponsible€personðð€penalty,€also€known€as€the€ð ð100€percentððÏpenalty).€€Generally,€the€determination€of€whether€a€person€is€a€ð ðresponsible€personðð€is€aÏquestion€of€the€personððs€status,€duty,€and€authority€in€the€context€of€the€business€which€has€failedÏto€collect€and€pay€over€taxes€required€to€be€withheld.€€A€responsible€person€penalty€may€also€beÏimposed€on€a€payroll€lender€(sec.€3505).€€ÌÌà  àThe€Tax€Court€has€no€jurisdiction€over€the€determination€of€the€correctness€of€theÏassessment€of€the€responsible€person€penalty.€€Accordingly,€as€the€Tax€Court€is€the€only€pre„¼payment€forum€for€the€determination€of€tax€liability,€the€imposition€of€the€responsible€personÏpenalty€can€only€be€challenged€in€a€refund€suit€in€the€appropriate€district€court€or€the€U.S.€CourtÏof€Federal€Claims€after€payment€of€such€penalty.€€The€responsible€person€penalty€is€a€divisibleÏtax.€€Thus,€unlike€a€refund€suit€for€income€taxes,€a€responsible€person€need€not€pay€the€fullÏamount€of€the€assessment€to€invoke€the€jurisdiction€of€the€district€court€or€the€U.S.€Court€ofÏFederal€Claims.€€Instead,€the€alleged€responsible€person€may€commence€a€refund€suit€afterÏpayment€of€the€portion€of€the€penalty€attributable€to€one€employee€for€one€quarter.€€ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ È(€%( ÐÓÙ÷ÓÌà  àThe€Committee€is€concerned€that€persons€who€have€a€responsible€person€penalty€assessedÏagainst€them€must€pay€a€portion€of€the€penalty€before€challenging€the€imposition€of€the€penalty,Ïbefore€there€is€a€judicial€determination€that€they€have€any€liability.€€ÌÐ x-0*- ЇÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ 8ð ÐÌà  àThe€provision€provides€Tax€Court€jurisdiction€over€the€ð ðresponsible€personðð€penalty.€ÏAccordingly,€the€responsible€person€does€not€have€to€make€a€payment€before€challenging€theÏimposition€of€the€penalty.€€ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ Ø  ÐÌà  àThe€provision€applies€to€penalties€imposed€after€the€date€of€enactment.ÌÌò ò5.€€Actions€for€refund€with€respect€to€certain€estates€which€have€elected€the€installmentÐ ˜ P  Ðmethod€of€payment€(sec.€3105€of€the€bill€and€sec.€7422€of€the€Code)ó óÐ ˆ@  ÐÌò òà@ÕÕ%ìàòòPresent€Lawó óóóˆÐ h  ÐÌà  àIn€general,€the€U.S.€Court€of€Federal€Claims€and€the€U.S.€district€courts€have€jurisdictionÏover€suits€for€the€refund€of€taxes,€as€long€as€full€payment€of€the€assessed€tax€liability€has€beenÏmade.€€òòFlora€v.€United€Statesóó,€357€U.S.€63€(1958),€affððd€on€rehððg,€362€U.S.€145€(1960).€€UnderÐ (à ÐCode€section€6166,€if€certain€conditions€are€met,€the€executor€of€a€decedentððs€estate€may€elect€toÏpay€the€estate€tax€attributable€to€certain€closely„held€businesses€over€a€14„year€period.€€CourtsÏhave€held€that€U.S.€district€courts€and€the€U.S.€Court€of€Federal€Claims€do€not€have€jurisdictionÏover€claims€for€refunds€by€taxpayers€deferring€estate€tax€payments€pursuant€to€section€6166Ïunless€the€entire€estate€tax€liability€has€been€paid€(i.e.,€timely€payment€of€the€installments€dueÏprior€to€the€bringing€of€an€action€is€not€sufficient€to€invoke€jurisdiction).€€See,€e.g.,€òòRocovich€v.РȀ ÐUnited€Statesóó,€933€F.2d€991€(Fed.€Cir.€1991),€òòAbruzzo€v.€United€Statesóó,€24€Ct.€Cl.€668€(1991).€Ð ¸p ÐUnder€section€7479,€the€U.S.€Tax€Court€has€limited€authority€to€provide€declaratory€judgmentsÏregarding€initial€or€continuing€eligibility€for€deferral€under€section€6166.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ x0 ÐÌÓùÓà  àThe€Committee€believes€that€the€refund€jurisdiction€of€the€U.S.€Court€of€Federal€ClaimsÏand€the€U.S.€district€courts€should€apply€without€regard€to€whether€the€taxpayer€has€elected,€andÏthe€Secretary€accepted,€the€payment€of€that€tax€in€installments.ÌÌà@““ìà€€à@@ÆÆìàò òòòExplanation€of€Provisionóóó óˆÐ $Ð # ÐÌà  àThe€provision€grants€the€U.S.€Court€of€Federal€Claims€and€the€U.S.€district€courtsÏjurisdiction€to€determine€the€correct€amount€of€estate€tax€liability€(or€refund)€in€actions€broughtÏby€taxpayers€deferring€estate€tax€payments€under€section€6166,€as€long€certain€conditions€areÏmet.€€In€order€to€qualify€for€the€provision,€(1)€the€estate€must€have€made€an€election€pursuant€toÏsection€6166,€(2)€the€estate€must€have€fully€paid€each€installment€of€principal€and/or€interest€dueÏ(and€all€non„6166„related€estate€taxes€due)€before€the€date€the€suit€is€filed,€(3)€no€portion€of€theÏpayments€due€may€have€been€accelerated,€(4)€there€must€be€no€suits€for€declaratory€judgmentÏpursuant€to€section€7479€pending,€and€(5)€there€must€be€no€outstanding€deficiency€notices€againstÏthe€estate.€€€In€general,€to€the€extent€that€a€taxpayer€has€previously€litigated€its€estate€tax€Ô_Ôliability,Ð x-0*- Ðthe€taxpayer€would€not€be€able€to€take€advantage€of€this€procedure€under€principles€of€resÏjudicata.€€Taxpayers€are€not€relieved€of€the€liability€to€make€any€installment€payments€thatÏbecome€due€during€the€pendency€of€the€suit€(i.e.,€failure€to€make€such€payments€would€subjectÏthe€taxpayer€to€the€existing€provisions€of€section€6166(g)(3)).ÌÌà  àThe€provision€further€provides€that€once€a€final€judgment€has€been€entered€by€a€districtÏcourt€or€the€U.S.€Court€of€Federal€Claims,€the€IRS€is€not€permitted€to€collect€any€amountÏdisallowed€by€the€court,€and€any€amounts€paid€by€the€taxpayer€in€excess€of€the€amount€the€courtÏfinds€to€be€currently€due€and€payable€are€refunded€to€the€taxpayer,€with€interest.€€Lastly,€theÏprovision€provides€that€the€two„year€statute€of€limitations€for€filing€a€refund€action€is€suspendedÏduring€the€pendency€of€any€action€brought€by€a€taxpayer€pursuant€to€section€7479€for€aÏdeclaratory€judgment€as€to€an€estateððs€eligibility€for€section€6166.€ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ x0  ÐÌà  àThe€provision€is€effective€with€respect€to€claims€for€refunds€filed€after€the€date€ofÏenactment.ÌÌò ò6.€€Tax€Court€jurisdiction€to€review€an€adverse€IRS€determination€of€a€bond€issueððs€tax„Ð (à Ðexempt€status€(sec.€3106€of€the€bill€and€sec.€7478€of€the€Code)Ìó óÌò òòòà@ÕÕ%ìàPresent€Lawóóó óˆÐ ø° ÐÌà  àInterest€on€debt€incurred€by€States€or€local€governments€generally€is€excluded€from€grossÏincome€if€the€proceeds€of€the€borrowing€are€used€to€carry€out€governmental€functions€of€thoseÏentities€and€the€debt€is€repaid€with€governmental€funds€(sec.€103).€€Interest€on€debt€incurred€byÏthose€governments€where€the€proceeds€are€used€to€finance€activities€of€other€persons€and€theÏrepayment€of€which€is€derived€from€the€funds€of€such€other€person€(e.g.,€private€activity€bonds),Ïis€taxable€unless€a€specific€exception€is€included€in€the€Code.ÌÌà  àIn€general,€an€initial€determination€of€whether€interest€on€State€or€local€government€bondsÏis€tax„exempt€is€made€by€issuers€when€the€bonds€are€issued.€€This€initial€determination€is€madeÏby€reference€to€how€the€bond€proceeds€are€ð ðto€be€usedðð€(sec.€141).€€Intentional€acts€after€the€dateÏof€issuance€to€use€bond„financed€property€(indirectly,€a€use€of€bond€proceeds)€in€a€manner€notÏqualifying€for€tax€exemption€may€render€interest€on€the€bonds€taxable,€retroactive€to€the€date€ofÏissuance.€€Like€other€tax€positions€taken€by€taxpayers,€this€initial€determination,€and€issuerÏdecisions€relating€to€the€effect€of€subsequent€actions€are€subject€to€review€and€challenge€by€theÏIRS€under€regular€examination€procedures.ÌÌà  àA€State€or€local€government€that€seeks€to€issue€bonds,€the€interest€on€which€is€intended€toÏbe€excludable€from€gross€income€under€section€103,€can€request€a€ruling€from€the€IRS€regardingÏthe€eligibility€of€such€bonds€for€tax„exemption.€€The€prospective€issuer€can€challenge€the€IRSððsÏdetermination€(or€failure€to€make€a€timely€determination)€in€a€declaratory€judgment€proceed€theÏin€the€Tax€Court€under€Code€section€7478.€€Because€bondholders,€€not€issuers,€are€the€partiesÏwhose€tax€liability€is€affected,€issuers€are€not€allowed€to€litigate€the€tax„exempt€status€of€theÏbonds€directly€after€the€bonds€are€issued.Ð x-0*- ЇÌÔ_ÔÔ_ÔÌò òòòÓ  ÓReasons€for€Changeó óóóÐ (à ÐÓÓÌà  àThe€Committee€believes€that€issuers€of€governmental€bonds,€as€parties€with€a€strongÏincentive€to€ensure€the€continued€tax„exemption€of€outstanding€bonds,€should€have€theÏopportunity€to€challenge€IRS€revocations€of€the€tax„exempt€status€of€the€bonds,€to€protect€theÏholders€of€those€bonds€and€the€market€better.€€ÌÌò òòòà@ÅÅìàExplanation€of€Provisionó óóóˆÐ ¸ p  ÐÌà  àThe€provision€extends€the€declaratory€judgment€procedures€currently€applicable€toÏprospective€bond€issuers€to€issuers€of€outstanding€bonds.€€The€issuer€must€provide€adequateÏnotice׃h×Ý ƒ #ÃÝòòÚ  Ú30Ú  ÚóóÝ  Ý×  ×€to€outstanding€bondholders,€and€the€bondholders€are€authorized€to€intervene€in€courtÐ x0  Ðproceedings€brought€under€this€provision.€€The€statute€of€limitations€on€assessment€andÏcollection€of€the€tax€liability€of€the€bondholders€is€suspended€during€the€pendency€of€theÏproceeding.€€ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ (à ÐÌà  àThe€provision€applies€to€determinations€of€tax„exempt€status€made€after€the€date€ofÏenactment.€€A€special€rule€provides€that,€in€the€case€of€a€determination€under€a€technical€adviceÏmemorandum€the€public€release€of€which€occurs€within€one€year€of€the€date€of€enactment,€aÏpleading€may€be€filed€not€later€than€90€days€after€the€date€of€enactment.€ÌÌò ò7.€€Civil€action€for€release€of€erroneous€lien€(sec.€3107€of€the€bill€and€sec.€6325€of€the€Code)Ð ¸p ÐÌÓ  ÓòòPresent€Lawóóó óÐ ˜P ÐÓÂÓÌà  àPrior€to€1995,€the€provisions€governing€jurisdiction€over€refund€suits€had€generally€beenÏinterpreted€to€apply€only€if€an€action€was€brought€by€the€taxpayer€against€whom€tax€wasÏassessed.€Remedies€for€third€parties€from€whom€tax€was€collected€(rather€than€assessed)€wereÏfound€in€other€provisions€of€the€Internal€Revenue€Code.€The€Supreme€Court€held€in€òòWilliams€v.Ð H!  ÐUnited€Statesóó,€115€Ô_ÔS.CtÔ_Ô.€1611€(1995),€however,€that€a€third€party€who€paid€another€person's€taxÐ 8"ð! Ðunder€protest€to€remove€a€lien€on€the€third€party's€property€could€bring€a€refund€suit,€because€sheÏhad€no€other€adequate€administrative€or€judicial€remedy.€In€òòWilliamsóó,€the€IRS€had€filed€aÐ $Ð # Ðnominee€lien€against€property€that€was€owned€by€the€taxpayer's€former€spouse€and€that€wasÏunder€a€contract€for€sale.€In€order€to€complete€the€sale,€the€former€spouse€paid€the€amount€of€theÏâ âlien€under€protest,€and€then€sued€in€district€court€to€recover€the€amount€paid.€The€Supreme€CourtÐ è& #& ÐÔ_Ôheld€that€parties€who€are€forced€to€pay€another's€tax€under€duress€could€bring€a€refund€suit,Ïbecause€no€other€judicial€remedy€was€adequate.Ìâ âÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ À ÐÓóÓÌà  àThe€Committee€believes€that€third€parties€should€have€a€mechanism€to€release€anÏerroneous€tax€lien.€€Accordingly,€the€Committee€believes€it€is€appropriate€to€provide€reliefÏsimilar€to€that€provided€to€third€parties€who€are€subject€to€wrongful€levy€of€property.ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ ¨ `  ÐÓO ÓÌà  àThe€provision€creates€an€administrative€procedure€similar€to€the€wrongful€levy€remedyÏfor€third€parties€in€section€7426.€Under€this€procedure,€a€record€owner€of€property€against€whichÏa€Federal€tax€lien€had€been€filed€could€obtain€a€certificate€of€discharge€of€property€from€the€lienÏas€a€matter€of€right.€The€third€party€would€be€required€to€apply€to€the€Secretary€of€the€TreasuryÏfor€such€a€certificate€and€either€to€deposit€cash€or€to€furnish€a€bond€sufficient€to€protect€the€lienÏinterest€of€the€United€States.€Although€the€Secretary€would€determine€the€amount€of€the€bondÏnecessary€to€protect€the€Government's€lien€interest,€the€Secretary€would€have€no€discretion€toÏrefuse€to€issue€a€certificate€of€discharge€if€this€procedure€was€followed,€thus€curing€the€defect€inÏthis€remedy€that€the€Supreme€Court€found€in€òòWilliamsóó.€A€certificate€of€discharge€of€propertyÐ À Ðfrom€a€lien€issued€pursuant€to€the€procedure€would€enable€the€record€owner€to€sell€the€propertyÏfree€and€clear€of€the€Federal€tax€lien€in€all€circumstances.€The€provision€also€authorizes€theÏrefund€of€all€or€part€of€the€amount€deposited,€plus€interest€at€the€same€rate€that€would€be€made€onÏan€overpayment€of€tax€by€the€taxpayer,€or€the€release€of€all€or€part€of€the€bond,€if€the€tax€liabilityÏis€satisfied€or€the€Secretary€determines€that€the€United€States€does€not€have€a€lien€interest€or€has€aÏlesser€lien€interest€than€the€amount€initially€determined.ÌÌà  àThe€provision€also€establishes€a€judicial€cause€of€action€for€third€parties€challenging€a€lienÏthat€is€similar€to€the€wrongful€levy€remedy€in€section€7426.€The€period€within€which€such€anÏaction€must€be€commenced€would€be€120€days€after€the€date€the€certificate€of€discharge€is€issuedÏto€ensure€an€early€resolution€of€the€parties'€interests.€€Upon€conclusion€of€the€litigation,€the€IRSÏwould€be€authorized€to€apply€the€deposit€or€bond€to€the€assessed€liability€and€to€refund€to€theÏthird€party€any€amount€in€excess€of€the€liability,€plus€interest,€or€to€release€the€bond.€Actions€toÏquiet€title€under€28€U.S.C.€ðð2410€would€still€be€available€to€persons€who€did€not€seek€theÏexpedited€review€permitted€under€the€new€statutory€procedure.ÌÌà@””#ìàòòò òEffective€Dateó óóóˆÐ ø%°"% ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÐ  È(€%( Ðò òÓ  ÓC.€€Relief€for€Innocent€Spouses€and€for€Taxpayers€Unable€to€ManageÐ H ÐTheir€Financial€Affairs€Due€to€Disabilitiesó óÐ 8ð ÐÓæ)ÓÌò ò1.€€Spousal€election€to€limit€joint€and€several€liability€on€joint€return€(sec.€3201€of€the€billÐ Ð Ðand€new€sec.€6015€of€the€Code)ó óÐ À ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ è  ÐÌà  àRelief€from€liability€for€tax,€interest€and€penalties€is€available€for€ð ðinnocent€spousesðð€inÏcertain€circumstances.€€To€qualify€for€such€relief,€the€innocent€spouse€must€establish:€(1)€that€aÏjoint€return€was€made;€(2)€that€an€understatement€of€tax,€which€exceeds€the€greater€of€$500€or€aÏspecified€percentage€of€the€innocent€spouseððs€adjusted€gross€income€for€the€preadjustment€(mostÏrecent)€year,€is€attributable€to€a€grossly€erroneous€item€of€the€other€spouse;€(3)€that€in€signing€theÏreturn,€the€innocent€spouse€did€not€know,€and€had€no€reason€to€know,€that€there€was€anÏunderstatement€of€tax;€and€(4)€that€taking€into€account€all€the€facts€and€circumstances,€it€isÏinequitable€to€hold€the€innocent€spouse€liable€for€the€deficiency€in€tax.€€The€specified€percentageÏof€adjusted€gross€income€is€10€percent€if€adjusted€gross€income€is€$20,000€or€less.€€Otherwise,Ïthe€specified€percentage€is€25€percent.ÌÌà  àThe€proper€forum€for€contesting€the€Secretaryððs€denial€of€innocent€spouse€relief€isÏdetermined€by€whether€an€underpayment€is€asserted€or€the€taxpayer€is€seeking€a€refund€ofÏoverpaid€taxes.€€Accordingly,€the€Tax€Court€may€not€have€jurisdiction€to€review€all€denials€ofÏinnocent€spouse€relief.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóРȀ ÐÓf0ÓÌà  àThe€Committee€is€concerned€that€the€innocent€spouse€provisions€of€present€law€areÏinadequate.€€The€Committee€believes€that€a€system€based€on€separate€liabilities€will€provideÏbetter€protection€for€innocent€spouses€than€the€current€system.€€The€Committee€generallyÏbelieves€that€an€electing€spouseððs€liability€should€be€satisfied€by€the€payment€of€the€taxÏattributable€to€that€spouseððs€income€and€that€an€election€to€limit€a€spouseððs€liability€to€thatÏamount€is€appropriate.€€ÌÌà  àThe€Committee€intends€that€this€election€be€available€to€limit€the€liability€of€spouses€forÏtax€attributable€to€items€of€which€they€had€no€knowledge.€€The€Committee€is€concerned€thatÏtaxpayers€not€be€allowed€to€abuse€these€rules€by€knowingly€signing€false€returns,€or€byÏtransferring€assets€for€the€purpose€of€avoiding€the€payment€of€tax€by€the€use€of€this€election.€€TheÏCommittee€believes€that€rules€restricting€the€ability€of€taxpayers€to€limit€their€liability€in€suchÏsituations€are€appropriate.ÌÌà  àThe€Committee€believes€that€taxpayers€need€to€be€informed€of€their€right€to€make€thisÏelection€and€that€the€IRS€is€the€best€source€of€that€information.€€The€Committee€also€believes€thatÏthe€IRS€should€take€appropriate€steps€to€insure€that€both€spouses€are€made€aware€of€their€taxÏsituation,€and€not€rely€on€a€single€notice€sent€to€a€single€address€to€inform€both€spouses.€ÌÌÐ x-0*- Їò òòòÓ  ÓExplanation€of€Provisionóóó óÐ H Ðà @ àÌò òòòÓ  ÓIn€generalÐ (à Ðóóó óÌà  àThe€bill€modifies€the€innocent€spouse€provisions€to€permit€a€spouse€to€elect€to€limit€his€orÏher€liability€for€unpaid€taxes€on€a€joint€return€to€the€spouseððs€separate€liability€amount.€€In€theÏcase€of€a€deficiency€arising€from€a€joint€return,€a€spouse€would€be€liable€only€to€the€extent€itemsÏgiving€rise€to€the€deficiency€are€allocable€to€the€spouse.€Special€rules€apply€to€prevent€theÏinappropriate€use€of€the€election.ÌÌà  àItems€are€generally€allocated€between€spouses€in€the€same€manner€as€they€would€haveÏbeen€allocated€had€the€spouses€filed€separate€returns.€€The€Secretary€may€prescribe€other€methodsÏof€allocation€by€regulation.€€The€allocation€of€items€is€to€be€accomplished€without€regard€toÏcommunity€property€laws.€€ÌÌà  àThe€election€applies€to€all€unpaid€taxes€under€subtitle€A€of€the€Internal€Revenue€Code,Ïincluding€the€income€tax€and€the€self„employment€tax.€€The€election€may€be€made€at€any€timeÏnot€later€than€2€years€after€collection€activities€begin€with€respect€to€the€electing€spouse.€€TheÏCommittee€intends€that€2€year€period€not€begin€until€collection€activities€have€been€undertakenÏagainst€the€electing€spouse€that€have€the€effect€of€giving€the€spouse€notice€of€the€IRSðð€intentionÏto€collect€the€joint€liability€from€such€spouse.€€For€example,€garnishment€of€wages,€a€notice€ofÏintent€to€levy€against€the€property€of€the€electing€spouse€would€constitute€collection€activityÏagainst€the€electing€spouse.€€The€mailing€of€a€notice€of€deficiency€and€demand€for€payment€to€theÏlast€known€address€of€the€electing€spouse,€addressed€to€both€spouses,€would€not.€ÌÌà  àThe€Tax€Court€has€jurisdiction€of€disputes€arising€from€the€separate€liability€election.€€ForÏexample,€a€spouse€who€makes€the€separate€liability€election€may€petition€the€Tax€Court€toÏdetermine€the€limits€on€liability€applicable€under€this€provision.€€The€Tax€Court€is€authorized€toÏestablish€rules€that€would€allow€the€Secretary€of€the€Treasury€and€the€electing€spouse€to€require,Ïwith€adequate€notice,€the€other€spouse€to€become€a€party€to€any€proceeding€before€the€Tax€Court.€ÏThe€Secretary€of€the€Treasury€is€required€to€develop€a€separate€form€with€instructions€forÏtaxpayers€to€use€in€electing€to€limit€liability.ÌÌò òòòAllocations€of€itemsóóó óÐ 8"ð! ÐÌà  àUnder€the€bill,€allocation€of€items€of€income€and€deduction€follows€the€present„law€rulesÏdetermining€which€spouse€is€responsible€for€reporting€an€item€when€the€spouses€use€the€married,Ïfiling€separate€filing€status.€€The€Secretary€of€the€Treasury€is€granted€authority€to€prescribeÏregulations€providing€simplified€methods€of€allocating€items.ÌÌà  àIn€general,€apportionment€of€items€of€income€are€expected€to€follow€the€source€of€theÏincome.€€Wage€income€is€allocated€to€the€spouse€performing€the€job€and€receiving€the€Form€W„2.€ÏBusiness€and€investment€income€(including€any€capital€gains)€is€allocated€in€the€same€proportionÏas€the€ownership€of€the€business€or€investment€that€produces€the€income.€€Where€ownership€ofÏâ âthe€business€or€investment€is€held€by€both€spouses€as€joint€tenants,€it€is€expected€that€any€incomeÐ ˆ,@), Ðis€allocated€equally€to€each€spouse,€in€the€absence€of€clear€and€convincing€evidence€supporting€aÏdifferent€allocation.Ìâ âÌà  àThe€allocation€of€business€deductions€is€expected€to€follow€the€ownership€of€the€business.€ÏPersonal€deduction€items€are€expected€to€be€allocated€equally€between€spouses,€unless€theÏevidence€shows€that€a€different€allocation€is€appropriate.€€For€example,€a€charitable€contributionÏnormally€wold€be€allocated€equally€to€both€spouses.€€However,€if€the€wife€provides€evidence€thatÏthe€deduction€relates€to€the€contribution€of€an€asset€that€was€the€sole€property€of€the€husband,€anyÏdeficiency€assessed€because€it€is€later€determined€that€the€value€of€the€property€was€overstatedÏwould€be€allocated€to€the€husband.ÌÌà  àItems€of€loss€or€deduction€are€allocated€to€a€spouse€only€to€the€extent€that€incomeÏattributable€to€the€spouse€was€offset€by€the€deduction€or€loss.€€Any€remainder€is€allocated€to€theÏother€spouse.ÌÌà  à€Income€tax€withholding€is€allocated€to€the€spouse€from€whose€paycheck€the€tax€wasÏwithheld.€€Estimated€tax€payments€are€generally€expected€to€be€allocated€to€the€spouse€who€madeÏthe€payments.€€If€the€payments€were€made€jointly,€the€payments€are€expected€to€be€allocatedÏequally€to€each€spouse,€in€the€absence€of€evidence€supporting€a€different€allocation.ÌÌà  àThe€allocation€of€items€is€to€be€made€without€regard€to€the€community€property€laws€ofÏany€jurisdiction.€Ìà  àÌà  àIf€the€electing€spouse€establishes€that€he€or€she€did€not€know,€and€had€no€reason€to€know,Ïof€an€item€and,€considering€all€the€facts€and€circumstances,€it€is€inequitable€to€hold€the€electingÏspouse€responsible€for€any€unpaid€tax€or€deficiency€attributable€to€such€item,€the€item€may€beÏequitably€reallocated€to€the€other€spouse.€€In€cases€where€the€IRS€proves€fraud,€the€IRS€mayÏdistribute,€apportion,€or€allocate€any€item€between€spouses.ÌÌòòò òTax€deficienciesÐ x0 Ðó óÌóóà  àIf€a€spouse€makes€the€separate€liability€election,€the€liability€for€deficiencies€determinedÐ X  Ðafter€a€joint€return€is€filed€is€allocated€to€the€spouse€whose€item€gives€rise€to€the€deficiency.€€ForÏexample,€if€a€deficiency€is€assessed€after€an€IRS€audit€that€relates€to€the€husbandððs€income€that€heÏfailed€to€report€on€the€return,€the€entire€deficiency€is€allocated€to€the€husband.€€If€the€wife€electsÏseparate€liability,€she€owes€none€of€the€deficiency.€€The€deficiency€is€the€sole€responsibility€ofÏthe€husband€who€failed€to€report€the€income.ÌÌà  àIf€the€deficiency€relates€to€the€items€of€both€spouses,€the€separate€liability€for€theÏdeficiency€is€allocated€between€the€spouses€in€the€same€proportion€as€the€net€items€taken€intoÏaccount€in€determining€the€deficiency.€€If€the€deficiency€arises€as€a€result€of€the€denial€of€an€itemÏof€deduction€or€credit,€the€amount€of€the€deficiency€allocated€to€the€spouse€to€whom€the€item€ofÏdeduction€or€credit€is€allocated€is€limited€to€the€amount€of€income€or€tax€allocated€to€such€spouseÏthat€was€offset€by€the€deduction€or€credit.€€The€remainder€of€the€liability€is€allocated€to€the€otherÏspouse€to€reflect€the€fact€that€income€or€tax€allocated€to€that€spouse€was€originally€offset€by€aÏportion€of€the€disallowed€deduction€or€credit.Ð x-0*- Їà  àFor€example,€a€married€couple€files€a€joint€return€with€wage€income€of€$100,000Ïallocable€to€the€wife€and€€$30,000€of€self€employment€income€allocable€to€the€husband.€OnÏexamination,€a€$20,000€deduction€allocated€to€the€husband€is€disallowed,€resulting€in€aÏdeficiency€of€$5,600.€€Under€the€provision,€the€liability€is€allocated€in€proportion€to€the€itemsÏgiving€rise€to€the€deficiency.€€Since€the€only€item€giving€rise€to€the€deficiency€is€allocable€to€theÏhusband,€and€because€he€reported€sufficient€income€to€offset€the€item€of€deduction,€the€entireÏdeficiency€is€allocated€to€the€husband€and€the€wife€has€no€liability€with€regard€to€the€deficiency,Ïregardless€of€the€ability€of€the€IRS€to€collect€the€deficiency€from€the€husband.ÌÌà  àIf€the€joint€return€had€shown€only€$15,000€(instead€of€$30,000)€of€self€employmentÏincome€for€the€husband,€the€income€offset€limitation€rule€discussed€above€would€apply.€€In€thisÏcase,€the€disallowed€$20,000€deduction€entirely€offsets€the€$15,000€of€income€of€the€husband,Ïand€$5,000€remains.€€This€remaining€$5,000€of€the€disallowed€deduction€offsets€income€of€theÏwife.€€The€liability€for€the€deficiency€is€therefore€divided€in€proportion€to€the€amount€of€incomeÏoffset€for€each€spouse.€€In€this€example,€the€husband€is€liable€for€3/4€of€the€deficiency€($4,200),Ïand€the€wife€is€liable€for€the€remaining€1/4€($1,400).ÌÌà  àThe€rule€that€the€election€will€not€apply€to€the€extent€any€deficiency€is€attributable€to€anÏitem€the€electing€spouse€had€actual€knowledge€of€is€expected€to€be€applied€by€treating€the€item€asÏfully€allocable€to€both€spouses.€€For€example€a€married€couple€files€a€joint€return€with€wageÏincome€of€$150,000€allocable€to€the€wife€and€€$30,000€of€self€employment€income€allocable€toÏthe€husband.€On€examination,€an€additional€$20,000€of€the€husbandððs€self€employment€income€isÏdiscovered,€resulting€in€a€deficiency€of€$9,000.€€The€IRS€proves€that€the€wife€had€actualÏknowledge€that€$5,000€of€this€additional€self€employment€income,€but€had€no€knowledge€of€theÏremaining€$15,000.€€In€this€case,€the€husband€would€be€liable€for€the€full€amount€of€theÏdeficiency,€since€the€item€giving€rise€to€the€deficiency€is€fully€allocable€to€him.€€In€addition,€theÏwife€would€be€liable€for€the€amount€that€would€have€been€calculated€as€the€deficiency€based€onÏthe€$5,000€of€unreported€income€of€which€she€had€actual€knowledge.€€The€IRS€would€be€allowedÏto€collect€that€amount€from€either€spouse,€while€the€remainder€of€the€deficiency€could€beÏcollected€from€only€the€husband.ÌÌòòò òTax€shown€on€a€return,€but€not€paidó óóóÐ X  ЀÌà  àThe€separate€liability€election€also€applies€in€situations€where€the€tax€shown€on€a€jointÏreturn€is€not€paid€with€the€return.€€In€this€case,€the€amount€determined€under€the€separate€liabilityÏelection€equals€the€amount€that€would€have€been€reported€by€the€electing€spouse€on€a€separateÏreturn.€However,€if€any€item€of€credit€or€deduction€would€be€disallowed€solely€because€a€separateÏreturn€is€filed,€the€item€of€credit€or€deduction€will€be€computed€without€regard€to€suchÏprohibitionòò׃s×Ý ƒ #ÃÝò…òÚ  Ú31Ú  Úó…óÝ  Ý×  ×óó.€€Similarly,€a€base€amount€and€an€adjusted€base€amount€will€be€allowed€in€Ô_ÔtheÐ è& #& Ðdetermination€of€the€taxable€portion€of€social€security€and€tier€1€railroad€retirement€benefitsÏwithout€regard€to€the€rule€in€section€86(c).€€The€calculation€of€the€tax€that€would€be€shown€on€theÏseparate€return€does€not€constitute€the€filing€of€a€separate€return.€€Other€actions€whose€characterÏmay€have€been€dependent€upon€the€joint€filing€status€of€the€taxpayer€(for€example,€the€making€ofÏa€deductible€IRA€contribution€under€section€219)€are€unaffected€by€the€election.ÌÌà  àThe€separate€liability€election€may€not€be€used€to€create€a€refund,€or€to€direct€a€refund€to€aÏparticular€spouse.€€€ÌÌòòò òSpecial€rulesó óóóÐ ¸ p  ÐÌà  àSpecial€rules€apply€to€prevent€the€inappropriate€use€of€the€election.ÌÌà  àFirst,€if€the€IRS€demonstrates€that€assets€were€transferred€between€the€spouses€in€aÏfraudulent€scheme€joined€in€by€both€spouses,€neither€spouse€is€eligible€to€make€the€electionÏunder€the€provision€(and€consequently€joint€and€several€liability€applies€to€both€spouses).ÌÌà  àSecond,€if€the€IRS€proves€that€the€electing€spouse€had€actual€knowledge€that€an€item€on€aÏreturn€is€incorrect,€the€election€will€not€apply€to€the€extent€any€deficiency€is€attributable€to€suchÏitem.€€Such€actual€knowledge€must€be€established€by€the€evidence€and€shall€not€be€inferred€basedÏon€indications€that€the€electing€spouse€had€a€reason€to€know.ÌÌà  àThird,€Ô_ÔtheÔ_Ô€limitation€on€the€liability€of€an€electing€spouse€is€increased€by€the€value€of€anyÏdisqualified€assets€received€from€the€other€spouse.€€Disqualified€assets€include€any€property€orÏright€to€property€€that€was€transferred€to€an€electing€spouse€if€the€principle€purpose€of€the€transferÏis€the€avoidance€of€tax€(including€the€avoidance€of€payment€of€tax).€€A€rebuttable€presumptionÏexists€that€a€transfer€is€made€for€tax€avoidance€purposes€if€the€transfer€was€made€less€than€oneÏyear€before€the€earlier€of€the€payment€due€date€or€the€date€of€the€notice€of€proposed€deficiency.€ÏThe€rebuttable€presumption€does€not€apply€to€transfers€pursuant€to€a€decree€of€divorce€or€separateÏmaintenance.€€The€presumption€may€be€rebutted€by€a€showing€that€the€principal€purpose€of€theÏtransfer€was€not€the€avoidance€of€tax€or€the€payment€of€tax.ÌÌòòò òNotification€of€taxpayersó óóóÐ H!  ÐÌà  àThe€Internal€Revenue€Service€is€required€to€notify€all€taxpayers€who€have€filed€jointÏreturns€of€their€rights€to€elect€to€limit€their€joint€and€several€liability€under€this€provision.€€It€isÏexpected€that€notice€will€appear€in€appropriate€IRS€publications,€including€IRS€Publication€1,Ïand€in€collection€related€notices€sent€to€taxpayers.ÌÌà  àThe€Internal€Revenue€Service€should,€whenever€practicable,€send€appropriateÏnotifications€separately€to€each€spouses.€€For€example,€where€notifications€are€being€sent€byÏregistered€mail,€it€is€expected€a€separate€notice€will€be€sent€by€registered€mail€to€each€spouse.€ÏThis€is€intended€to€increase€the€likelihood€that€separated€or€divorced€spouses€will€each€receiveÐ ¨*`'* ÐÔ_Ôsuch€notices,€as€well€as€increase€the€likelihood€that€the€Internal€Revenue€Service€will€be€madeÏaware€of€address€changes€that€apply€to€one,€but€not€both€spouses.Ì€€Ìà@””#ìàòòò òEffective€Dateó óóóˆÐ Ð ÐÌà  àThe€provision€applies€to€any€liability€for€tax€arising€after€the€date€of€enactment€and€anyÏliability€for€tax€arising€on€or€before€such€date,€but€remaining€unpaid€as€of€such€date.ÌÌà  àThe€period€in€which€an€election€may€be€made€under€the€provision€will€not€expire€beforeÏthe€date€that€is€2€years€after€the€date€of€the€first€collection€action€undertaken€against€the€electingÏspouse€on€or€after€the€date€of€enactment€that€has€the€effect€of€giving€the€spouse€notice€of€the€IRSððÏintention€to€collect€the€joint€liability€from€the€spouse.€€However,€this€rule€does€not€extend€theÏstatute€of€limitations.ÌÌà  àAn€individual€may€elect€under€the€provision€without€regard€to€whether€such€individualÏhas€previously€been€denied€innocent€spouse€relief€under€present€law.Ì€Ìò ò2.€€Suspension€of€statute€of€limitations€on€filing€refund€claims€during€periods€of€disabilityÐ 8ð Ð(sec.€3202€of€the€bill€and€sec.€6511€of€the€Code)€Ìó óÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ À ÐÌà  àIn€general,€a€taxpayer€must€file€a€refund€claim€within€three€years€of€the€filing€of€the€returnÏor€within€two€years€of€the€payment€of€the€tax,€whichever€period€expires€later€(if€no€return€is€filed,Ïthe€two„year€limit€applies)€(sec.€6511(a)).€€A€refund€claim€that€is€not€filed€within€these€timeÏperiods€is€rejected€as€untimely.ÌÌà  àThere€is€no€explicit€statutory€rule€providing€for€equitable€tolling€of€the€statute€ofÏlimitations.€€The€U.S.€Supreme€Court€has€held€that€Congress€did€not€intend€the€equitable€tollingÏdoctrine€to€apply€to€the€statutory€limitations€of€section€6511€on€the€filing€of€tax€refund€claims.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ X  ÐÓ“pÓÌà  àThe€Committee€believes€that,€in€cases€of€severe€disability,€equitable€tolling€should€beÏconsidered€in€the€application€of€the€statutory€limitations€on€the€filing€of€tax€refund€claims.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ %À!$ ÐÌà  àThe€provision€permits€equitable€tolling€of€the€statute€of€limitations€for€refund€claims€ofÏan€individual€taxpayer€during€any€period€of€the€individualððs€life€in€which€he€or€she€is€unable€toÏmanage€his€or€her€financial€affairs€by€reason€of€a€medically€determinable€physical€or€mentalÏimpairment€that€can€be€expected€to€result€in€death€or€to€last€for€a€continuous€period€of€not€lessÏthan€12€months.€€€Tolling€does€not€apply€during€periods€in€which€the€taxpayer's€spouse€or€anotherÏperson€is€authorized€to€act€on€the€taxpayer's€behalf€in€financial€matters.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ x-0*- Їà  àThe€provision€applies€to€periods€of€disability€before,€on,€or€after€the€date€of€enactment€butÏdoes€not€apply€to€any€claim€for€refund€or€credit€which€(without€regard€to€the€provision)€is€barredÏby€the€statute€of€limitations€as€of€January€1,€1998.ÌÐ  Ð Ðò òÓ  ÓD.€€Provisions€Relating€to€Interest€and€Penaltiesó óÐ H ÐÓ  ÓÌò ò1.€€Elimination€of€interest€differential€on€overlapping€periods€of€interest€on€income€taxÐ (à Ðoverpayments€and€underpayments€(sec.€3301€of€the€bill€and€sec.€6621€of€the€Code)ó óÐ Ð ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ø° ÐÌà  àA€taxpayer€that€underpays€its€taxes€is€required€to€pay€interest€on€the€underpayment€at€aÏrate€equal€to€the€Federal€short€term€interest€rate€plus€three€percentage€points.€€A€special€ð ðhotÏinterestðð€rate€equal€to€the€Federal€short€term€interest€rate€plus€five€percentage€points€applies€inÏthe€case€of€certain€large€corporate€underpayments.Ìà  àÌà  àA€taxpayer€that€overpays€its€taxes€receives€interest€on€the€overpayment€at€a€rate€equal€toÏthe€Federal€short€term€interest€rate€plus€two€percentage€points.€€In€the€case€of€corporateÏoverpayments€in€excess€of€$10,000,€this€is€reduced€to€the€Federal€short€term€interest€rate€plusÏone„half€of€a€percentage€point.ÌÌà  àIf€a€taxpayer€has€an€underpayment€of€tax€from€one€year€and€an€overpayment€of€tax€from€aÏdifferent€year€that€are€outstanding€at€the€same€time,€the€IRS€will€typically€offset€the€overpaymentÏagainst€the€underpayment€and€apply€the€appropriate€interest€to€the€resulting€net€underpayment€orÏoverpayment.€€However,€if€either€the€underpayment€or€overpayment€has€been€satisfied,€the€IRSÏwill€not€typically€offset€the€two€amounts,€but€rather€will€assess€or€credit€interest€on€the€fullÏunderpayment€or€overpayment€at€the€underpayment€or€overpayment€rate.€€This€has€the€effect€ofÏassessing€the€underpayment€at€the€higher€underpayment€rate€and€crediting€the€overpayment€at€theÏlower€overpayment€rate.€€This€results€in€the€taxpayer€being€assessed€a€net€interest€charge,€even€ifÏthe€amounts€of€the€overpayment€and€underpayment€are€the€same.ÌÌÔ‡uX«”XXXÔà  à€€The€Secretary€has€the€authority€to€credit€the€amount€of€any€overpayment€against€anyÐ ˜P Ðliability€under€the€Code.Ô#†XùXXuX«”ú|#ÔÔ‡uX«”XXXùÔ׃z×Ý ƒ #ÃÝòòÚ  Ú32Ú  ÚóóÝ  Ý×  ×€Congress€has€previously€directed€the€Internal€Revenue€Service€toÐ ˆ@ Ðimplement€procedures€for€ð ðnettingðð€overpayments€and€underpayments€to€the€extent€a€portion€ofÏtax€due€is€satisfied€by€a€credit€of€an€overpayment.׃{€×Ý ƒ #ÃÝòòÚ  Ú33Ú  ÚóóÝ  Ý×  ×Ô#†XùXXuX«”Ë}#ÔÔ‡uX«”XXXùÔÐ h  ÐÌà@••!ìàò òòòReasons€for€Changeó óóóˆÐ H!  ÐÔ_Ôâ âÔ#†XùXXuX«”¡#ÔÔ‡uX«”XXXùÔÐ 8"ð! Ðà  àThe€Committee€believes€that€taxpayers€should€be€charged€interest€only€on€the€amountÏâ âthey€actually€owe,€taking€into€account€overpayments€and€underpayments€from€all€open€years.Ô#†XùXXuX«”Y€#ÔÔ‡uX«”XXXùԀР8ð ÐThe€Committee€does€not€believe€that€the€different€interest€rates€provided€for€overpayments€andÏunderpayments€were€ever€intended€to€result€in€the€charging€of€the€differential€on€periods€ofÏmutual€indebtedness.ÌÌà  àThe€Committee€is€also€concerned€that€current€practices€provide€an€incentive€to€taxpayersÏto€delay€the€payment€of€underpayments€they€do€not€contest,€so€that€the€underpayments€will€beÏavailable€to€offset€any€overpayments€that€are€later€determined.€€The€Committee€believes€that€thisÏis€contrary€to€sound€tax€administrative€practice€and€that€taxpayers€should€not€be€disadvantagedÏsolely€because€they€promptly€pay€their€tax€bills.Ô#†XùXXuX«”t#ÔÔ‡wX«”XXXùÔÐ ¨ `  ÐÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ˆ@  ÐÌà  àThe€provision€establishes€a€net€interest€rate€of€zero€on€equivalent€amounts€ofÏoverpayment€and€underpayment€that€exist€for€any€period.€€Each€overpayment€and€underpaymentÏis€considered€only€once€in€determining€whether€equivalent€amounts€of€overpayment€andÏunderpayment€exist.€The€special€rules€that€increase€the€interest€rate€paid€on€large€corporateÏunderpayments€and€decrease€the€interest€rate€received€on€corporate€underpayments€in€excess€ofÏ$10,000€do€not€prevent€the€application€of€the€net€zero€rate.€€The€provision€applies€to€incomeÏtaxes€and€self„employment€taxes.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ è  ÐÌà  àThe€provision€applies€to€interest€for€calendar€quarters€beginning€after€the€date€ofÏenactment.€€Until€such€time€as€procedures€are€implemented€that€allow€for€the€automaticÏapplication€of€this€provision€by€the€IRS,€the€Committee€expects€that€the€Secretary€will€promptlyÏand€carefully€consider€any€taxpayerððs€request€to€have€interest€charges€recalculated€in€accordanceÏwith€this€provision.€€It€is€expected€that€the€Secretary€will€extend€the€statute€of€limitations€onÏassessment€where€necessary€to€allow€for€the€consideration€of€such€requests.ÌÌà  à€€In€light€of€past€Congressional€statements€urging€the€Secretary€to€eliminate€interest€rateÏdifferentials€in€these€circumstances,€and€taking€into€consideration€Congressðð€belief€that€theÏSecretary€may€do€so,€the€Committee€continues€to€expect€that€the€Secretary€will€implement€theÏmost€comprehensive€interest€netting€procedures€that€are€consistent€with€sound€administrativeÏpractice,€and€not€only€those€affected€by€this€provision.Ìà@ìì*ìàˆÌò òÔ&  Ô2.€€Increase€in€overpayment€rate€payable€to€taxpayers€other€than€corporations€(sec.€3302€ofÐ ø%°"% Ðthe€bill€and€sec.€6621(a)(1)€of€the€Code)ó óÐ è& #& ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ È(€%( ÐÌà  àA€taxpayer€that€underpays€its€taxes€is€required€to€pay€interest€on€the€underpayment€at€aÏrate€equal€to€the€Federal€short„term€interest€rate€(AFR)€plus€three€percentage€points.€A€taxpayerÔ'ø%^‹ÔÏthat€overpays€its€taxes€receives€interest€on€the€overpayment€at€a€rate€equal€to€the€Federal€short„¼term€interest€rate€(AFR)€plus€two€percentage€points.Ð x-0*- ЇÌÔ_Ôò òòòÔ_ÔÓ  ÓReasons€for€Changeó óóóÐ 8ð ÐÓ ŽÓÌà  àThe€Committee€believes€that€the€interest€differential€for€noncorporate€taxpayers€should€beÏeliminated.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ è  ÐÌà  àThe€provision€provides€that€the€overpayment€interest€rate€will€be€AFR€plus€threeÏpercentage€points,€except€that€for€corporations,€the€rate€remains€at€AFR€plus€two€percentageÏpoints.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ ˆ@  ÐÌà  àThe€provision€applies€to€interest€for€calendar€quarters€beginning€after€the€date€ofÏenactment.ÌÌò ò3.€€Elimination€of€penalty€for€individualððs€failure€to€pay€during€period€of€installmentÐ 8ð Ðagreement€(sec.€3303€of€the€bill€and€sec.€6651€of€the€Code)ó óÐ (à ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ À ÐÌà  àTaxpayers€who€fail€to€pay€their€taxes€are€subject€to€a€penalty€of€one„half€percent€perÏmonth€on€the€unpaid€amount,€up€to€a€maximum€of€25€percent€(sec.€6651(a)).€€If€the€liability€isÏshown€on€the€return,€the€penalty€begins€to€accrue€on€the€date€prescribed€for€payment€of€the€taxÏ(with€regard€to€extensions€(sec.€6651(a)(2)).€€If€the€liability€should€have€been€shown€on€the€returnÏbut€was€not,€the€penalty€generally€begins€to€accrue€after€the€date€that€is€21€days€from€the€date€ofÏthe€IRS€notice€and€demand€for€payment€with€respect€to€such€liability€(sec.€6651(a)(3)).€ÏTaxpayers€who€make€installment€payments€pursuant€to€an€agreement€with€the€IRS€(under€sec.Ï6159)€are€also€subject€to€this€penalty€(Treas.€reg.€sec.€301.6159„1(f)€and€sec.€6601(b)).€ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ X  ÐÓ”ÓÌà  àThe€Committee€believes€that€it€is€inappropriate€to€apply€the€penalty€for€failure€to€payÏtaxes€to€taxpayers€who€are€in€fact€paying€their€taxes€through€an€installment€agreement.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ %À!$ ÐÌà  àThe€provision€provides€that€the€penalty€for€failure€to€pay€taxes€is€not€imposed€withÏrespect€to€the€tax€liability€of€an€individual€for€any€month€in€which€an€installment€paymentÏagreement€with€the€IRS€(under€sec.€6159)€is€in€effect,€provided€that€the€individual€filed€the€taxÏreturn€in€a€timely€manner€(including€extensions).Ì€Ìà@””#ìàò òòòEffective€Dateó óóóˆÐ ˜+P(+ Ðâ âÐ ˆ,@), ÐÔ_Ôà  àThe€provision€is€effective€for€installment€agreement€payments€made€after€the€date€ofÏâ âenactment.ò òÐ 8ð ÐÌÔ&   Ô4.€€Mitigation€of€failure€to€deposit€penalty€(sec.€3304€of€the€bill€and€sec.€6656(a)€of€the€Code)ó óÐ Ð ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ø° ÐÌà  àDeposits€of€payroll€taxes€are€allocated€to€the€earliest€period€for€which€such€a€deposit€isÏdue.€€If€a€taxpayer€misses€or€makes€an€insufficient€deposit,€later€deposits€will€first€be€applied€toÔ' 3˜ÔÏsatisfy€the€shortfall€for€the€earlier€period;€the€remainder€is€then€applied€to€satisfy€the€obligationÏfor€the€current€period.€€If€the€depositor€is€not€aware€this€is€taking€place,€cascading€penalties€mayÏresult€as€payments€that€would€otherwise€be€sufficient€to€satisfy€current€liabilities€are€applied€toÏsatisfy€earlier€shortfalls.ÌÌà  àCode€section€6656(c)€authorizes€the€Secretary€to€waive€the€failure€to€make€depositÏpenalty€for€inadvertent€failures€by€first„time€depositors€of€employment€taxes.€€ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ 8ð ÐÓÛ›ÓÌà  àThe€Committee€believes€that€the€cascading€penalty€effect€is€unfair€and€that€depositorsÏshould€be€able€to€designate€payments€to€minimize€its€effect.€€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ è  Ðà  àÌà  àThe€provision€allows€the€taxpayer€to€designate€the€period€to€which€each€deposit€isÏapplied.€The€designation€must€be€made€no€later€than€90€days€of€the€related€IRS€penalty€notice.€ÏThe€provision€also€extends€the€authorization€to€waive€the€failure€to€deposit€penalty€to€the€firstÏdeposit€a€taxpayer€is€required€to€make€after€the€taxpayer€is€required€to€change€the€frequency€ofÏthe€taxpayerððs€deposits.€€ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ h  ÐÌà  àThe€provision€applies€to€deposits€made€more€than€180€days€after€the€date€of€enactment.Ìò òÌ5.€€Suspension€of€€interest€and€certain€penalties€where€Secretary€fails€to€contact€individualÏtaxpayer€(sec.€3305€of€the€bill€and€sec.€6404€of€the€Code)ó óÐ $Ð # ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ø%°"% ÐÌà  àIn€general,€interest€and€penalties€accrue€during€periods€for€which€taxes€are€unpaid€withoutÏregard€to€whether€the€taxpayer€is€aware€that€there€is€tax€due.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ¨*`'* ÐÓ ¡ÓÌà  àThe€Committee€believes€that€the€IRS€should€promptly€inform€taxpayers€of€theirÏobligations€with€respect€to€tax€deficiencies€and€amounts€due.€€In€addition,€the€Committee€isÐ x-0*- Ðconcerned€that€accrual€of€interest€and€penalties€absent€prompt€resolution€of€tax€deficiencies€mayÏlead€to€the€perception€that€the€IRS€is€more€concerned€about€collecting€revenue€than€in€resolvingÏtaxpayerððs€problems.€€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ À ÐÌà  àThe€provision€suspends€the€accrual€of€penalties€and€interest€after€1€year€if€the€IRS€has€notÏsent€the€taxpayer€a€notice€of€deficiency€within€1€year€following€the€date€which€is€the€later€of€(1)Ïthe€original€due€date€of€the€return€or€(2)€the€date€on€which€the€individual€taxpayer€timely€filed€theÏreturn.€€The€suspension€only€applies€to€taxpayers€who€file€a€timely€tax€return.€The€provisionÏapplies€only€to€individuals€and€does€not€apply€to€the€failure€to€pay€penalty,€in€the€case€of€fraud,Ïor€with€respect€to€criminal€penalties.€€Interest€and€penalties€resume€21€days€after€the€IRS€sends€aÏnotice€and€demand€for€payment€to€the€taxpayer.ÌÌò òòòà@””#ìàEffective€Dateó óóóˆÐ h  ÐÌà  àThe€provision€is€effective€for€taxable€years€ending€after€the€date€of€enactment.Ìò òÌ6.€€Procedural€requirements€for€imposition€of€penalties€and€additions€to€tax€(sec.€3306€ofÏthe€bill€and€new€sec.€6751€of€the€Code)ó óÐ Ð ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ø° ÐÌà  àPresent€law€does€not€require€the€IRS€to€show€how€penalties€are€computed€on€the€notice€ofÏpenalty.€€€In€some€cases,€penalties€may€be€imposed€without€supervisory€approval.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ¨` ÐÓ¨ÓÌà  àThe€Committee€believes€that€taxpayers€are€entitled€to€an€explanation€of€the€penaltiesÏimposed€upon€them.€The€Committee€believes€that€penalties€should€only€be€imposed€whereÏappropriate€and€not€as€a€bargaining€chip.€€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ H!  ÐÌà  àEach€notice€imposing€a€penalty€is€required€to€include€the€name€of€the€penalty,€the€codeÏsection€imposing€the€penalty,€and€a€computation€of€the€penalty.€€ÌÌà  àThe€provision€also€requires€the€specific€approval€of€IRS€management€to€assess€all€non„¼computer€generated€penalties€unless€excepted.€€This€provision€does€not€apply€to€failure€to€fileÏpenalties,€failure€to€pay€penalties,€or€to€penalties€for€failure€to€pay€estimated€tax.€ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ ¸)p&) ÐÌà  àThe€provision€applies€to€notices€issued,€and€penalties€assessed,€more€than€180€days€afterÏthe€date€of€enactment.ÌÐ x-0*- Їò ò7.€€Personal€delivery€of€notice€of€penalty€under€section€6672€(sec.€3307€of€the€bill€and€sec.Ð H Ð6672(b)€of€the€Code)ó óÐ 8ð ÐÌÓ  Óòòò òPresent€Lawó óóóÐ Ð ÐÓǬÓÌà  àAny€person€who€is€required€to€collect,€truthfully€account€for,€and€pay€over€any€taxÏimposed€by€the€Internal€Revenue€Code€who€willfully€fails€to€do€so€is€liable€for€a€penalty€equal€toÏthe€amount€of€the€tax€(Code€sec.€6672(a)).€€Before€the€IRS€may€assess€any€such€ð ð100„percentÏpenalty,ðð€it€must€mail€a€written€preliminary€notice€informing€the€person€of€the€proposed€penaltyÏto€that€person's€last€known€address.€The€mailing€of€such€notice€must€precede€any€notice€andÏdemand€for€payment€of€the€penalty€by€at€least€60€days.€The€statute€of€limitations€on€assessments€Ïshall€not€expire€before€the€date€90€days€after€the€date€on€which€the€notice€was€mailed.€TheseÏrestrictions€do€not€apply€if€the€Secretary€finds€the€collection€of€the€penalty€is€in€jeopardy.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ h  ÐÓ°ÓÌà  àThe€imposition€of€the€100„percent€penalty€is€a€serious€matter.€€The€Committee€believesÏthat€permitting€personal€service€of€the€preliminary€notice€required€under€Code€section€6672€mayÏafford€taxpayers€the€opportunity€to€resolve€cases€involving€the€100„percent€penalty€at€an€earlierÏstage.€€ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ ø° ÐÓ‘±ÓÌà  àThe€provision€permits€in€person€delivery,€as€an€alternative€to€delivery€by€mail,€of€aÏpreliminary€notice€that€the€IRS€intends€to€assess€a€100„percent€penalty.€€(In€some€cases,€personalÏdelivery€may€better€assure€that€the€recipient€actually€receives€notice.)ÌÌò òòòà@””#ìàEffective€Dateó óóóˆÐ ˜P ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌò ò8.€€Notice€of€interest€charges€(sec.€3308€of€the€bill€and€new€sec.€6631€of€the€Code)ó óÐ X  ÐÌò òòòà@ÕÕ%ìàPresent€Lawó óóóˆÐ 8"ð! ÐÌà  àTaxpayer€generally€must€pay€interest€on€amounts€due€to€the€IRS.ÌÌà@••!ìàò òòòReasons€for€Changeó óóóˆÐ ø%°"% ÐÌà  àThe€Committee€believes€that€taxpayers€should€be€provided€the€detail€to€support€theÏamount€of€interest€charged€by€the€IRS.€The€computation€of€interest€is€a€complex€calculation,Ïoften€involving€multiple€interest€rates.€€The€Committee€believes€that€it€is€appropriate€to€requireÏthe€IRS€to€give€notice€to€the€taxpayer€that€interest€is€being€charged,€how€it€is€calculated,€and€theÏtotal€amount€of€the€interest.€€ÌÌÐ x-0*- Ðà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ H ÐÌà  àThe€provision€requires€every€IRS€notice€that€includes€an€amount€of€interest€required€to€beÏpaid€by€the€taxpayer€that€is€sent€to€an€individual€taxpayer€to€include€a€detailed€computation€of€theÏinterest€charged€and€a€citation€to€the€Code€section€under€which€such€interest€is€imposed.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ è  ÐÌà  àThe€provision€applies€to€notices€issued€after€June€30,€2000.ÌÌò òÓ  ÓE.€€Protections€for€Taxpayers€Subject€to€Audit€or€Collection€ActivitiesÐ ¨ `  ÐÓ  ÓÌà@ii#ìàa.€€Due€ProcessˆÌÌi.€€Due€process€in€IRS€collection€actions€(sec.€3401€of€the€bill€and€new€secs.€6320€and€6330€ofÏthe€Code)ÌÌòòÓ  ÓPresent€Lawóó€Ð 8ð ÐÓ„¹ÓÌó óà  àLevy€is€the€IRS's€administrative€authority€to€seize€a€taxpayer's€property€to€pay€theÐ Ð Ðtaxpayer's€tax€liability.€The€IRS€is€entitled€to€seize€a€taxpayer's€property€by€levy€if€the€Federal€taxÏlien€has€attached€to€such€property.€The€Federal€tax€lien€arises€automatically€where€(1)€a€taxÏassessment€has€been€made;€(2)€the€taxpayer€has€been€given€notice€of€the€assessment€stating€theÏamount€and€demanding€payment;€and€(3)€the€taxpayer€has€failed€to€pay€the€amount€assessedÏwithin€ten€days€after€the€notice€and€demand.€ÌÌà  àThe€IRS€may€collect€taxes€by€levy€upon€a€taxpayerððs€property€or€rights€to€propertyÏ(including€accrued€salary€and€wages)€if€the€taxpayer€neglects€or€refuses€to€pay€the€tax€within€10Ïdays€after€notice€and€demand€that€the€tax€be€paid.€€Notice€of€the€IRSððs€intent€to€collect€taxes€byÏlevy€must€be€given€no€less€than€30€days€(90€days€in€the€case€of€a€life€insurance€contract)€beforeÏthe€day€of€the€levy.€€The€notice€of€levy€must€describe€the€procedures€that€will€be€used,€theÏadministrative€appeals€available€to€the€taxpayer€and€the€procedures€relating€to€such€appeals,€€theÏalternatives€available€to€the€taxpayer€that€could€prevent€levy,€and€the€procedures€for€redemptionÏof€property€and€release€of€liens.ÌÌà  àThe€effect€of€a€levy€on€salary€or€wages€payable€to€or€received€by€a€taxpayer€is€continuousÏfrom€the€date€the€levy€is€first€made€until€it€is€released.ÌÌà  àIf€the€IRS€district€director€finds€that€the€collection€of€any€tax€is€in€jeopardy,€collection€byÏlevy€may€be€made€without€regard€to€either€notice€period.€€A€similar€rule€applies€in€the€case€ofÏtermination€assessments.ÌÌÓ  Óòòò òReasons€for€Changeó óóóÐ ¨*`'* ÐÓDÀÓÌà  àThe€Committee€believes€that€taxpayers€are€entitled€to€protections€in€dealing€with€the€IRSÏthat€are€similar€to€those€they€would€have€in€dealing€with€any€other€creditor.€€Accordingly,€theÐ x-0*- ÐCommittee€believes€that€the€IRS€should€afford€taxpayers€adequate€notice€of€collection€activityÏand€a€meaningful€hearing€before€the€IRS€deprives€them€of€their€property.€€When€collection€of€taxÏis€in€jeopardy,€the€Committee€believes€it€is€appropriate€to€provide€notice€and€a€hearing€promptlyÏafter€the€deprivation€of€property.€€The€Committee€believes€that€following€procedures€designed€toÏafford€taxpayers€due€process€in€collections€will€increase€fairness€to€taxpayers.ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ è  ÐÌÓCÃÓà  àThe€provision€establishes€formal€procedures€designed€to€insure€due€process€where€theÏIRS€seeks€to€collect€taxes€by€levy€(including€by€seizure).€€The€due€process€procedures€also€applyÏafter€the€Federal€tax€lien€attaches,€but€before€the€notice€of€the€Federal€tax€lien€has€been€given€toÏthe€taxpayer.ÌÌà  àAs€under€present€law,€notice€of€the€intent€to€levy€must€be€given€at€least€30€days€(90€daysÏin€the€case€of€a€life€insurance€contract)€before€property€can€be€seized€or€salary€and€wagesÏgarnished.€€During€the€30„day€(90„day)€notice€period,€the€taxpayer€may€demand€a€hearing€to€takeÏplace€before€an€appeals€officer€who€has€had€no€prior€involvement€in€the€taxpayerððs€case.€€€If€theÏtaxpayer€demands€a€hearing€within€that€period,€the€proposed€collection€action€may€not€proceedÏuntil€the€hearing€has€concluded€and€the€appeals€officer€has€issued€his€or€her€determination.ÌÌà  à€During€the€hearing,€the€IRS€is€required€to€verify€that€all€statutory,€regulatory,€andÏadministrative€requirements€for€the€proposed€collection€action€have€been€met.€€IRS€verificationsÏare€expected€to€include€(but€not€be€limited€to)€showings€that:ÌÌÓ6°XƒXŒ ¸ —X°X‚X4¸ —X6Óà  àà ` àÔ& à Ô(1)à0 Œ àthe€revenue€officer€recommending€the€collection€action€has€verified€theРȀ Ðtaxpayerððs€liability;Ô'àÈfÈÔÐ Œ (#Œ (# ÐÌà  àà ` à(2)à0 Œ àthe€estimated€expenses€of€levy€and€sale€will€not€exceed€the€value€of€theÐ ˜P Ðproperty€to€be€seized;Ð Œ (#Œ (# ÐÌà  àà ` à(3)à0 Œ àthe€revenue€officer€has€determined€that€there€is€sufficient€equity€in€theÐ h  Ðproperty€to€be€seized€to€yield€net€proceeds€from€sale€to€apply€to€the€unpaid€taxÏliabilities;€andÐ Œ (#Œ (# ÐÌà  àà ` à(4)à0 Œ àwith€respect€to€the€seizure€of€the€assets€of€a€going€business,€the€revenueÐ (#à" Ðofficer€recommending€the€collection€action€has€thoroughly€considered€theÏfacts€of€the€case,€including€the€availability€of€alternative€collection€methods,Ïbefore€recommending€the€collection€action.Ð Œ (#Œ (# ЀÌà  àThe€taxpayer€(or€affected€third€party)€is€allowed€to€raise€any€relevant€issue€at€the€hearing.€ÏIssues€eligible€to€be€raised€include€(but€are€not€limited€to):Ìà  àÌà0  àà0` (#(#à(1)à Œ àchallenges€to€the€underlying€liability€as€to€existence€or€amount;Ш*`'*` (#` (# ÐÌà0  àà0` (#(#à(2)à0Œ ` (#` (#àappropriate€spousal€defenses;Ј,@),Œ (#Œ (# ÐÐ x-0*- Ðà0  àà0` (#(#à(3)à Œ àchallenges€to€the€appropriateness€of€collection€actions;€andÐH` (#` (# ÐÌà0  àà0` (#(#à(4)à0Œ ` (#` (#àcollection€alternatives,€which€could€include€the€posting€of€a€bond,€substitutionÐ (à Ðof€other€assets,€an€installment€agreement€or€an€offer„in„compromise.Ð Œ (#Œ (# ÐÌOnce€the€taxpayer€has€had€a€hearing€with€respect€to€an€issue,€the€taxpayer€would€not€be€permittedÏto€raise€the€same€issue€in€another€hearing.ÌÌà  àThe€determination€of€the€appeals€officer€is€to€address€whether€the€proposed€collectionÏaction€balances€the€need€for€the€efficient€collection€of€taxes€with€the€legitimate€concern€of€theÏtaxpayer€that€the€collection€action€be€no€more€intrusive€than€necessary.€€A€proposed€collectionÏaction€should€not€be€approved€solely€because€the€IRS€shows€that€it€has€followed€appropriateÏprocedures.ÌÌà  àThe€taxpayer€may€contest€the€determination€of€the€appellate€officer€in€Tax€Court€by€filingÏa€petition€within€30€days€of€the€date€of€the€determination.€€The€Tax€Court€is€expected€to€reviewÏthe€appellate€officerððs€determination€for€abuse€of€discretion€and€also€may€consider€proceduralÏissues,€as€under€present€law.€€The€IRS€may€not€take€any€collection€action€pursuant€to€theÏdetermination€during€such€30€day€period€or€while€the€taxpayerððs€contest€is€pending€in€Tax€Court.ÌÌà  àIRS€Appeals€would€retain€jurisdiction€over€its€determinations.€€IRS€Appeals€could€enterÏan€order€requiring€the€IRS€collection€division€to€adhere€to€the€original€determination.€€InÏaddition,€the€€taxpayer€would€be€allowed€to€return€to€IRS€Appeals€to€seek€a€€modification€of€theÏoriginal€determination€based€on€any€change€of€circumstances.ÌÌà  àIn€the€case€of€a€continuous€levy,€the€due€process€procedures€would€apply€to€the€originalÏimposition€of€the€levy.€€Except€in€jeopardy€and€termination€cases,€continuous€levy€would€not€beÏallowed€to€begin€without€notice€and€an€opportunity€for€a€hearing.€€A€determination€allowing€theÏcontinuous€levy€to€proceed€that€is€entered€at€the€conclusion€of€a€hearing€would€be€subject€to€Ïpost„determination€adjustment€on€application€by€the€taxpayer.€€Thus,€taxpayers€would€have€theÏright€to€have€IRS€Appeals€review€any€continuous€levy€and€take€any€changes€in€circumstancesÏinto€account.ÌÌà  àThis€provision€does€not€apply€in€the€case€of€jeopardy€and€termination€assessments.€ÏJeopardy€and€termination€assessments€would€be€subject€to€post„seizure€review€as€part€of€theÏAppeals€determination€hearing€as€well€as€through€any€existing€judicial€procedure.€€A€jeopardy€orÏtermination€assessment€must€be€approved€by€the€IRS€District€Counsel€responsible€for€the€case.ÏFailure€to€obtain€District€Counsel€approval€would€render€the€jeopardy€or€termination€assessmentÏvoid.ÌÌòòò òÓ  ÓEffective€Dateó óóóÐ È(€%( ÐÓÙÓÌà  àThe€due€process€procedures€apply€to€collection€actions€initiated€more€than€six€monthsÏafter€the€date€of€enactment.ÌÌà@ššìàò òb.€€Examination€Activitiesó óˆÐ x-0*- Їò òi.€€Uniform€application€of€confidentiality€privilege€to€taxpayer€communications€withÐ H Ðfederally€authorized€practitioners€(sec.€3411€of€the€bill€and€new€sec.€7525€of€the€Code)Ìó óÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ Ð ÐÌÔ#†XùXXwX«”S„#ÔÔ‡uX«”XXXùÔà  àA€common€law€privilege€of€confidentiality€exists€for€communications€between€anÐ ø° Ðattorney€and€client€with€respect€to€the€legal€advice€the€attorney€gives€the€client.€€CommunicationsÏprotected€by€the€attorney„client€privilege€must€be€based€on€facts€of€which€the€attorney€isÏinformed€by€the€taxpayer,€without€the€presence€of€strangers,€for€the€purpose€of€securing€theÏadvice€of€the€attorney.€€The€privilege€may€not€be€claimed€where€the€purpose€of€theÏcommunication€is€the€commission€of€a€crime€or€tort.€The€taxpayer€must€either€be€a€client€of€theÏattorneyÔ#†XùXXuX«”YÛ#ÔÔ‡uX«”XXXùÔ€or€be€seeking€to€become€a€client€of€the€attorneyÔ#†XùXXuX«”áÝ#ÔÔ‡uX«”XXXùÔ.Ð ˜ P  ÐÌà  àThe€privilege€of€confidentiality€applies€only€where€the€attorney€is€advising€the€client€onÏlegal€matters.€€It€does€not€apply€in€situations€where€the€attorney€is€acting€in€other€capacities.€ÏThus,€a€taxpayer€may€not€claim€the€benefits€of€the€attorney„client€privilege€simply€by€hiring€anÏattorney€to€perform€some€other€function.€€For€example,€if€an€attorney€is€retained€to€prepare€a€taxÏreturn,€the€attorney„client€privilege€will€not€automatically€apply€to€communications€andÏdocuments€generated€in€the€course€of€preparing€the€return.ÌÌà  àThe€privilege€of€confidentiality€also€does€not€apply€where€an€attorney€that€is€licensed€toÏpractice€another€profession€is€performing€such€other€profession.€€For€example,€if€a€taxpayerÏretains€an€attorney€who€is€also€licensed€as€a€certified€public€accountant€(CPA),€the€taxpayer€mayÏnot€assert€the€attorney„client€privilege€with€regard€to€communications€made€and€documentsÏprepared€by€the€attorney€in€his€role€as€a€CPA.€€ÌÌà  àThe€attorney„client€privilege€is€limited€to€communications€between€taxpayers€andÏattorneys.€€No€equivalent€privilege€is€provided€for€communications€between€taxpayers€and€otherÏprofessionals€authorized€to€practice€before€the€Internal€Revenue€Service,€such€as€accountants€orÏenrolled€agents.Ô#†XùXXuX«”TÞ#ÔÔ‡wX«”XXXùÔÐ x0 Ðà  àÌÓ  Óòòò òReasons€for€Changeó óóóÐ X  ÐÓðãÓÔ#†XùXXwX«”¯ã#ÔÔ‡uX«”XXXùÔÌà  àThe€Committee€believes€that€a€right€to€privileged€communications€between€a€taxpayerÏand€his€or€her€advisor€should€be€available€in€noncriminal€proceedings€before€the€IRS€and€inÏnoncriminal€proceedings€in€Federal€courts€with€respect€to€such€matters€where€the€IRS€is€a€party,Ïso€long€as€the€advisor€is€authorized€to€practice€before€the€IRS.€€A€right€to€privilegedÏcommunications€in€such€situations€should€not€depend€upon€whether€the€advisor€is€also€licensedÏto€practice€law.Ô#†XùXXuX«”bä#ÔÔ‡wX«”XXXùÔÐ è& #& ÐÓ)ÓÌÓ¼æÓà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ È(€%( ÐÌà  àThe€provision€extends€the€present€law€attorney„client€privilege€of€confidentiality€to€taxÏadvice€that€is€furnished€to€a€client„taxpayer€(or€potential€client„taxpayer)€by€any€individual€whoÏis€authorized€under€Federal€law€to€practice€before€the€IRS€if€such€practice€is€subject€to€regulationÏunder€section€330€of€Title€31,€United€States€Code.€€Individuals€subject€to€regulation€Ô_ÔunderÐ x-0*- Ðsection€330€of€Title€31,€United€States€Code€include€attorneys,€certified€public€accountants,Ïenrolled€agents€and€enrolled€actuaries.€€Tax€advice€means€advice€that€is€within€the€scope€ofÏauthority€for€such€individualððs€practice€with€respect€to€matters€under€Title€26€(the€InternalÏRevenue€Code).€€The€privilege€of€confidentiality€may€be€asserted€in€any€noncriminal€taxÏproceeding€before€the€IRS,€as€well€as€in€noncriminal€tax€proceedings€in€the€Federal€Courts€whereÏthe€IRS€is€a€party€to€the€proceeding.ÌÌà  àThe€provision€allows€taxpayers€to€consult€with€other€qualified€tax€advisors€in€the€sameÏmanner€they€currently€may€consult€with€tax€advisors€that€are€licensed€to€practice€law.€€TheÏprovision€does€not€modify€the€attorney„client€privilege€of€confidentiality,€other€than€to€extend€itÏto€other€authorized€practitioners.€€The€privilege€established€by€the€provision€applies€only€to€theÏextent€that€communications€would€be€privileged€if€they€were€between€a€taxpayer€and€an€attorney.ÏAccordingly,€the€privilege€does€not€apply€to€any€communication€between€a€certified€publicÏaccountant,€enrolled€agent,€or€enrolled€actuary€and€such€individualððs€client€(or€prospective€client)Ïif€the€communication€would€not€have€been€privileged€between€an€attorney€and€the€attorneyððsÏclient€or€prospective€client.€€For€example,€information€disclosed€to€an€attorney€for€the€purpose€ofÏpreparing€a€tax€return€is€not€privileged€under€present€law.€€Such€information€would€not€beÏprivileged€under€the€provision€whether€it€was€disclosed€to€an€attorney,€certified€publicÏaccountant,€enrolled€agent€or€enrolled€actuary.ÌÌà  àThe€privilege€granted€by€the€provision€may€only€be€asserted€in€noncriminal€taxÏproceedings€before€the€IRS€and€in€the€Federal€Courts€with€regard€to€such€noncriminal€tax€mattersÏin€proceedings€where€the€IRS€is€a€party.€€The€privilege€may€not€be€asserted€to€prevent€theÏdisclosure€of€information€to€any€regulatory€body€other€than€the€IRS.€€The€ability€of€any€otherÏregulatory€body,€including€the€Securities€and€Exchange€Commission€(SEC),€to€gain€or€compelÏinformation€is€unchanged€by€the€provision.€€No€privilege€may€be€asserted€under€this€provision€byÏa€taxpayer€in€dealings€with€such€other€regulatory€bodies€in€an€administrative€or€court€proceeding.€ÏÌà@””#ìàò òòòEffective€Dateó óóóˆÐ ˆ@ ÐÌà  àThe€provision€is€effective€with€regard€to€communications€made€on€or€after€the€date€ofÏenactment.ÌÌò òii.€€Limitation€on€financial€status€audit€techniques€(sec.€3412€of€the€bill€and€sec.€7602€of€theÐ 8"ð! ÐCode)€ó óÐ (#à" ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ %À!$ ÐÌà  àThe€Secretary€is€authorized€and€required€to€make€the€inquiries€and€determinationsÏnecessary€to€insure€the€assessment€of€Federal€income€taxes.€€For€this€purpose,€any€reasonableÏmethod€may€be€used€to€determine€the€amount€of€Federal€income€tax€owed.€€The€courts€haveÏupheld€the€use€of€financial€status€and€economic€reality€examination€techniques€to€determine€theÏexistence€of€unreported€income€in€appropriate€circumstances.ÌÔ_ÔÔ_ÔÌÓ  Óòòò òReasons€for€Changeó óóóÐ ˆ,@), ÐÓõÓÐ x-0*- Ðà  àThe€Committee€believes€that€financial€status€audit€techniques€are€intrusive,€and€that€theirÏuse€should€be€limited€to€situations€where€the€IRS€already€has€indications€of€unreported€income.€ÌÌò òòòÓ  ÓExplanation€of€Provisionóóó óÐ Ð ÐÓ  ÓÌà  àThe€provision€prohibits€the€IRS€from€using€financial€status€or€economic€realityÏexamination€techniques€to€determine€the€existence€of€unreported€income€of€any€taxpayer€unlessÏthe€IRS€has€a€reasonable€indication€that€there€is€a€likelihood€of€unreported€income.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ ¸ p  ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌò òiii.€€Software€trade€secrets€protectionó ó€ò ò(sec.€3413€of€the€bill€and€new€sec.€7612€of€the€Code)ó óÐ x0  ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ X ÐÌà  àThe€Secretary€of€the€Treasury€is€authorized€to€examine€any€books,€papers,€records,€orÏother€data€that€may€be€relevant€or€material€to€an€inquiry€into€the€correctness€of€any€Federal€taxÏreturn.€The€Secretary€may€issue€and€serve€summonses€necessary€to€obtain€such€data,€includingÏsummonses€on€certain€third„party€record€keepers.€€There€are€no€specific€statutory€restrictions€onÏthe€ability€of€the€Secretary€to€demand€the€production€of€computer€records,€programs,€code€orÏsimilar€materials.ÌÌÓ  Óòòò òReasons€for€Changeó óóóРȀ ÐÓÜúÓÌà  àÔ#†XùXXwX«”ˆæ#ÔÔ‡uX«”XXXùÔThe€Committee€believes€that€the€intellectual€property€rights€of€the€developers€and€ownersÐ ¨` Ðof€computer€programs€should€be€respected.€€The€Committee€is€concerned€that€the€examination€ofÏcomputer€programs€and€source€code€by€the€IRS€could€lead€to€the€diminution€of€those€rightsÏthrough€the€inadvertent€disclosure€of€trade€secrets€and€believes€that€special€protection€againstÏsuch€inadvertent€disclosure€should€be€established.ÌÌà  àThe€Committee€also€believes€that€the€indiscriminate€examination€of€computer€sourceÏcode€by€the€IRS€is€inappropriate.€€Accordingly,€the€Committee€believes€that€a€summons€for€theÏproduction€of€certain€computer€source€code€should€only€be€issued€where€the€IRS€is€not€otherwiseÏable€to€ascertain€through€reasonable€efforts€the€manner€in€which€a€taxpayer€has€arrived€at€an€itemÏon€a€return,€identifies€with€specificity€the€portion€of€the€computer€source€code€it€seeks€toÏexamine,€and€determines€that€the€need€to€see€the€source€code€outweighs€the€risk€of€unauthorizedÏdisclosure€of€trade€secrets.ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ#†XùXXuX«”[û#ÔÔ‡wX«”XXXùÔÔ_ÔÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ È(€%( ÐÌòòò òDiscovery€of€computer€source€codeó óóóÐ ¨*`'* ÐÌà  àThe€provision€generally€prohibits€the€Secretary€from€issuing€a€summons€in€a€Federal€taxÏmatter€for€any€portion€of€computer€source€code.€€Exceptions€to€the€general€rule€are€provided€forÐ x-0*- Ðinquiries€into€any€criminal€offense€connected€with€the€administration€or€enforcement€of€theÏinternal€revenue€laws€and€for€computer€software€source€code€that€was€developed€by€the€taxpayerÏor€a€related€person€for€internal€use€by€the€taxpayer€or€related€person.€€Computer€software€sourceÏcode€is€considered€to€have€been€developed€for€internal€use€by€the€taxpayer€or€a€related€person€ifÏthe€software€is€primarily€used€in€the€taxpayer€or€related€personððs€trade€or€business,€as€opposed€toÏbeing€held€for€sale€or€license€to€others.€€Software€is€considered€to€be€used€in€a€trade€or€business€ifÏit€is€used€in€the€provision€of€services€to€others.€€It€is€anticipated€that€software€that€was€originallyÏdeveloped€for€internal€use€by€the€taxpayer€or€a€related€person€will€continue€to€be€subject€to€theÏexception,€even€if€the€software€is€later€transferred€to€another.€€For€example,€software€may€haveÏoriginally€been€developed€by€the€taxpayer€to€administer€the€taxpayerððs€employee€benefits€system.€ÏIf€that€function€and€the€software€necessary€to€perform€it€is€later€transferred€to€an€unrelated€thirdÏparty,€the€software€would€continue€to€be€subject€to€the€exception.ÌÌà  àIn€addition,€the€prohibition€of€the€general€rule€would€not€apply,€and€the€Secretary€wouldÏbe€allowed€to€summons€computer€source€code€if€the€Secretary:€€(1)€is€unable€to€otherwiseÏreasonably€ascertain€the€correctness€of€an€item€on€a€return€from€the€taxpayerððs€books€and€records,Ïor€the€computer€software€program€and€any€associated€data;€(2)€identifies€with€reasonableÏspecificity€the€portion€of€the€computer€source€code€to€be€used€to€verify€the€correctness€of€theÏitem;€and€(3)€determines€that€the€need€for€the€source€code€outweighs€the€risks€of€disclosure€of€theÏcomputer€source€code.€€No€inference€is€intended€as€to€whether€software€is€included€in€theÏdefinition€of€a€taxpayerððs€books€and€records.ÌÌà  àIt€is€expected€that€the€Secretary€will€make€a€good€faith€and€significant€effort€to€ascertainÏthe€correctness€of€an€item€prior€to€seeking€computer€source€code.€€The€portion€of€the€computerÏsource€code€to€be€used€would€be€considered€identified€with€reasonable€specificity€where,€forÏexample,€the€Secretary€requests€the€portion€of€the€code€that€is€used€to€determine€a€particular€itemÏon€the€return,€that€otherwise€is€necessary€to€the€determination€of€an€item€on€the€return,€or€thatÏimplements€an€accounting€or€other€method.€ÌÌà  àThe€Committee€is€aware€that€the€refusal€of€the€taxpayer€or€the€owner€of€the€software€toÏcooperate€could,€in€certain€situations,€prevent€the€Secretary€from€establishing€the€factorsÏnecessary€to€support€the€summons€of€computer€source€code.€€Accordingly,€the€requirement€thatÏthe€Secretary€be€unable€to€otherwise€reasonably€ascertain€the€correctness€of€an€item€on€a€returnÏfrom€the€taxpayerððs€books€and€records,€or€from€the€computer€software€program€and€anyÏassociated€data,€and€the€requirement€that€the€Secretary€have€identified€with€reasonable€specificityÏthe€portion€of€the€computer€source€code€requested,€will€be€deemed€to€be€satisfied€where€(1)€theÏSecretary€makes€a€good€faith€determination€that€it€is€not€feasible€to€determine€the€correctness€ofÏthe€return€item€in€question€without€access€to€the€computer€software€program€and€associated€data,Ï(2)€the€Secretary€makes€a€formal€request€for€such€program€and€any€data€from€the€taxpayer€andÏrequests€such€program€from€the€owner€of€the€source€code€after€reaching€such€determination,€andÏ(3)€the€Secretary€has€not€received€such€program€and€data€within€180€days€of€making€the€formalÏrequest.€€In€the€case€of€requests€to€the€taxpayer,€the€Committee€expects€that€a€formal€request€willÏtake€the€form€of€an€Information€Document€Request€(IDR),€summons,€or€similar€document.€€TheÏCommittee€intends€that€the€Secretary€actively€pursue€the€recovery€of€such€program€and€any€dataÏÔ_Ôfrom€the€taxpayer€before€seeking€to€have€the€normal€requirements€deemed€satisfied€under€thisÏrule.€€Ð x-0*- Їò òòòAdditional€protections€against€disclosure€of€computer€software€and€source€codeÐ H Ðóóó óÌà  àThe€provision€establishes€a€number€of€protections€against€the€disclosure€and€improper€useÏof€trade€secrets€and€confidential€information€incident€to€the€examination€by€the€Secretary€of€anyÏcomputer€software€program€or€source€code€that€comes€into€the€possession€or€control€of€theÏSecretary€in€the€course€of€any€examination€with€respect€to€any€taxpayer.€€These€protectionsÏinclude€the€following:ÌÌà  à(1)€Such€software€or€source€code€may€be€examined€only€in€connection€with€theÏexamination€of€the€taxpayerððs€return€with€regard€to€which€it€was€received.€€It€is€expected€that€theÏtaxpayer€will€be€informed€of€any€alternative€data€or€settings€to€be€used€in€the€examination€of€theÏsoftware.€€However,€the€Committee€does€not€intend€to€provide€the€taxpayer€with€the€right€toÏmonitor€the€examination€of€the€software€by€the€IRS€on€a€key€stroke€by€key€stroke€or€similarÏbasis.€ÌÌà  à(2)€Such€software€or€source€code€must€be€maintained€in€a€secure€area.ÌÌà  à(3)€Such€source€code€may€not€be€removed€from€the€ownerððs€place€of€business€without€theÏownerððs€consent€unless€such€removal€is€pursuant€to€a€court€order.€€If€the€owner€does€not€consentÏto€the€removal€of€source€code€from€its€place€of€business,€the€owner€must€make€available€theÏnecessary€equipment€to€review€the€source€code.€€The€owner€shall€have€the€right€to€require€the€useÏof€equipment€that€is€configured€to€prevent€electronic€communication€outside€the€ownerððs€place€ofÏbusiness.ÌÌà  à(4)€Such€software€or€source€code€may€not€be€decompiled€or€disassembled.ÌÌà  à(5)€Such€software€or€source€code€may€only€be€copied€as€necessary€to€perform€the€specificÏexamination.€€The€owner€of€the€software€must€be€informed€of€any€copies€that€are€made,€suchÏcopies€must€be€numbered,€and€at€the€conclusion€of€the€examination€and€any€related€courtÏproceedings,€all€such€copies€must€be€accounted€for€and€returned€to€the€owner,€permanentlyÏdeleted,€or€destroyed.€€The€Secretary€must€provide€the€owner€of€such€software€or€source€codeÏwith€the€names€of€any€individuals€who€will€have€access€to€such€software€or€source€code.€€SourceÏcode€may€be€copied€(by€the€use€of€a€scanner€or€otherwise)€from€written€to€machine€readableÏform.€€€However,€any€such€machine€readable€copies€shall€be€treated€as€separate€copies€and€mustÏbe€numbered,€accounted€for€and€returned€or€destroyed€at€the€conclusion€of€the€examination.ÌÌà  à(6)€If€an€individual€who€is€not€an€officer€or€employee€of€the€U.S.€Government€willÏexamine€the€software€or€source€code,€such€individual€must€enter€into€a€written€agreement€withÏthe€Secretary€that€such€individual€will€not€disclose€such€software€or€source€code€to€any€personÏother€than€authorized€employees€or€agents€of€the€Secretary€at€any€time,€and€that€such€individualÏwill€not€participate€in€the€development€of€software€that€is€intended€for€a€similar€purpose€as€theÏsummoned€software€for€a€period€of€two€years.ÌÌà  àComputer€source€code€is€the€code€written€by€a€programmer€using€a€programmingÏlanguage€that€is€comprehensible€to€an€appropriately€trained€person,€is€not€machine€readable,€andÏis€not€capable€of€directly€being€used€to€give€instructions€to€a€computer.€€Computer€source€codeÐ x-0*- Ðalso€includes€any€related€programmerððs€notes,€design€documents,€memoranda€and€similarÏdocumentation€and€customer€communications€regarding€the€operation€of€the€program€(other€thanÏcommunications€with€the€taxpayer€or€any€person€related€to€the€taxpayer).ÌÌà  àThe€Secretaryððs€determination€may€be€contested€in€any€proceeding€to€enforce€theÏsummons,€by€any€person€to€whom€the€summons€is€addressed.€€In€any€such€proceeding,€the€courtÏmay€issue€any€order€that€is€necessary€to€prevent€the€disclosure€of€€confidential€information,Ïincluding€(but€not€limited€to)€the€enforcement€of€the€protections€established€by€this€provision.ÌÌà  àCriminal€penalties€are€provided€where€any€person€willfully€divulges€or€makes€knownÏsoftware€that€was€obtained€(whether€or€not€by€summons)€for€the€purpose€of€examining€aÏtaxpayerððs€return€in€violation€of€this€provision.€ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ x0  ÐÌà  àThe€provision€is€effective€for€summons€issued€and€software€acquired€after€the€date€ofÏenactment.€€In€addition,€90€days€after€the€date€of€enactment,€the€protections€against€šthe€disclosureÏand€improper€use€of€trade€secrets€and€confidential€information€added€by€the€provision€(except€forÏthe€requirement€that€the€Secretary€provide€a€written€agreement€from€non„U.S.€governmentÏofficers€and€employees)€apply€to€software€and€source€code€acquired€on€or€before€the€date€ofÏenactment.€š€ÌÌò òiv.€€Threat€of€audit€prohibited€to€coerce€tip€reporting€alternative€commitment€agreementsÐ è  Ð(sec.€3414€of€the€bill)€ó óÐ Ø ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ¸p ÐÌà  àRestaurants€may€enter€into€Tip€Reporting€Alternative€Commitment€(TRAC)€agreements.€ÏA€restaurant€entering€into€a€TRAC€agreement€is€obligated€to€educate€its€employees€on€their€tipÏreporting€obligations,€to€institute€formal€tip€reporting€procedures,€to€fulfill€all€filing€and€recordÏkeeping€requirements,€and€to€pay€and€deposit€taxes.€€In€return,€the€IRS€agrees€to€base€theÏrestaurantððs€liability€for€employment€taxes€solely€on€reported€tips€and€any€unreported€tipsÏdiscovered€during€an€IRS€audit€of€an€employee.ÌÌÓ  Óòòò òReasons€for€Changeó óóóÐ (#à" ÐÓ¸&ÓÌà  àThe€Committee€believes€that€it€is€inappropriate€for€the€Secretary€to€use€the€threat€of€anÏIRS€audit€to€induce€participation€in€voluntary€programs.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ Ø'$' ÐÌà  àThe€provision€requires€the€IRS€to€instruct€its€employees€that€they€may€not€threaten€toÏaudit€any€taxpayer€in€an€attempt€to€coerce€the€taxpayer€to€enter€into€a€TRAC€agreement.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ ˆ,@), ÐÐ x-0*- Ðà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌò òv.€€Taxpayers€allowed€motion€to€quash€all€third„party€summonses€(sec.€3415€of€the€bill€andÐ (à Ðsec.€7609(a)€of€the€Code)ó óÐ Ð ÐÌÓ  Óòòò òPresent€Lawó óóóÐ ø° ÐÓî)ÓÌà  àWhen€the€IRS€issues€a€summons€to€a€ð ðthird-party€recordkeeperðð€relating€to€the€businessÏtransactions€or€affairs€of€a€taxpayer,€Code€section€7609€requires€that€notice€of€the€summons€beÏgiven€to€the€taxpayer€within€three€days€by€certified€or€registered€mail.€The€taxpayer€is€thereafterÏgiven€up€to€23€days€to€begin€a€court€proceeding€to€quash€the€summons.€If€the€taxpayer€does€so,Ïthird-party€recordkeepers€are€prohibited€from€complying€with€the€summons€until€the€court€rulesÏon€the€taxpayer's€petition€or€motion€to€quash,€but€the€statute€of€limitations€for€assessment€andÏcollection€with€respect€to€the€taxpayer€is€stayed€during€the€pendency€of€such€a€proceeding.ÏThird-party€recordkeepers€are€generally€persons€who€hold€financial€information€about€theÏtaxpayer,€such€as€banks,€brokers,€attorneys,€and€accountants.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ 8ð ÐÓ}-ÓÌà  àThe€Committee€believes€that€a€taxpayer€should€have€notice€when€the€IRS€uses€itsÏsummons€power€to€gather€information€in€an€effort€to€determine€the€taxpayerððs€liability.€ÏExpanding€notice€requirement€to€cover€all€third€party€summonses€will€ensure€that€taxpayer€willÏreceive€notice€and€an€opportunity€to€contest€any€summons€issued€to€a€third€party€in€connectionÏwith€the€determination€of€their€liability.€€ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ ¸p ÐÓk/ÓÌà  àThe€provision€generally€expands€the€current€ð ðthird-party€recordkeeperðð€procedures€toÏapply€to€summonses€issued€to€persons€other€than€the€taxpayer.€Thus,€the€taxpayer€whose€liabilityÏis€being€investigated€receives€notice€of€the€summons€and€is€entitled€to€bring€an€action€in€theÏappropriate€U.S.€District€Court€to€quash€the€summons.€€As€under€the€current€third-partyÏrecordkeeper€provision,€the€statute€of€limitations€on€assessment€and€collection€is€stayed€duringÏthe€litigation,€and€certain€kinds€of€summonses€specified€under€current€law€are€not€subject€to€theseÏrequirements.€€No€inference€is€intended€with€respect€to€the€applicability€of€present€law€toÏsummonses€to€the€taxpayer€or€the€scope€of€the€authority€to€summons€testimony,€books,€papers,€orÏother€records.ÌÌà@””#ìàòòò òEffective€DateˆÐ ø%°"% Ðó óóóÌà  àThe€provision€is€effective€for€summonses€served€after€the€date€of€enactment.ÌÌò òvi.€€Service€of€summonses€to€third„party€recordkeepers€permitted€by€mail€(sec.€3416€of€theÐ ¸)p&) Ðbill€and€sec.€7603€of€the€Code)ó óÐ ¨*`'* ÐÌÓ  Óòòò òPresent€Lawó óóóÐ ˆ,@), ÐÓ4ÓÐ x-0*- Ðà  àCode€section€7603€requires€that€a€summons€shall€be€served€ð ðby€an€attested€copy€deliveredÏin€hand€to€the€person€to€whom€it€is€directed€or€left€at€his€last€and€usual€place€of€abode.ðð€ByÏcontrast,€if€a€third-party€recordkeeper€summons€is€served,€section€7609€permits€the€IRS€to€giveÏthe€taxpayer€notice€of€the€summons€via€certified€or€registered€mail.€Moreover,€Rule€4€of€theÏFederal€Rules€of€Civil€Procedure€permits€service€of€process€by€mail€even€in€summonsÏenforcement€proceedings.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ Ø  ÐÓp6ÓÌà  àThe€Committee€is€concerned€that,€in€certain€cases,€the€personal€appearance€of€an€IRSÏofficial€at€a€place€of€business€for€the€purpose€of€serving€a€summons€may€be€unnecessarilyÏdisruptive.€€The€Committee€believes€that€it€is€appropriate€to€permit€service€of€summons,€as€wellÏas€notice€of€summons,€by€mail.€€ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ h  ÐÓø7ÓÌà  àThe€provision€allows€the€IRS€the€option€of€serving€any€summons€either€in€person€or€byÏmail.€€ÌÌà@””#ìàòòò òEffective€Dateó óóóˆÐ Ð ÐÌà  àThe€provision€is€effective€for€summonses€served€after€the€date€of€enactment.ÌÌò òvii.€€Prohibition€on€IRS€contact€of€third€parties€without€taxpayer€pre„notification€(sec.€3417Ð Ø Ðof€the€bill€and€sec.€7602€of€the€Code)ÌÌà@ÕÕ%ìàòòPresent€Lawó óóóˆÐ ¨` ÐÌà  àThird€parties€may€be€contacted€by€the€IRS€in€connection€with€the€examination€of€aÏtaxpayer€or€the€collection€of€the€tax€liability€of€the€taxpayer.€€The€IRS€has€the€right€to€summonÏthird„party€recordkeepers€under€Code€section€7609.€€In€general,€the€taxpayer€must€be€notified€ofÏthe€service€of€summons€on€a€third€party€within€three€days€of€the€date€of€service€(sec.€7609(a)).€ÏThe€IRS€also€has€the€right€to€seize€property€of€the€taxpayer€that€is€held€in€the€hands€of€thirdÏparties€(sec.€6331(a)).€€Except€in€jeopardy€situations,€the€Internal€Revenue€Manual€provides€thatÏIRS€will€personally€contact€the€taxpayer€and€inform€the€taxpayer€that€seizure€of€the€asset€isÏplanned.€€ÌÌÓ  Óòòò òReasons€for€Changeó óóóÐ ø%°"% ÐÓà<ÓÌà  àThe€Committee€believes€that€taxpayers€should€be€notified€before€the€IRS€contacts€thirdÏparties€regarding€examination€or€collection€activities€with€respect€to€the€taxpayer.€€Such€contactsÏmay€have€a€chilling€effect€on€the€taxpayerððs€business€and€could€damage€the€taxpayerððs€reputationÏin€the€community.€€Accordingly,€the€Committee€believes€that€taxpayers€should€have€theÏopportunity€to€resolve€issues€and€volunteer€information€before€the€IRS€contacts€third€parties.€€€€ÌÌà@ÅÅìàò òòòExplanation€of€Ô_ÔProvisionó óóóˆÐ x-0*- Їà  àThe€provision€requires€the€IRS€to€notify€the€taxpayer€before€contacting€third€partiesÏregarding€examination€or€collection€activities€(including€summonses)€with€respect€to€theÏtaxpayer.€€Contacts€with€government€officials€relating€to€matters€such€as€the€location€of€assets€orÏthe€taxpayerððs€current€address€are€not€restricted€by€this€provision.€€The€provision€does€not€applyÏto€criminal€tax€matters,€if€the€collection€of€the€tax€liability€is€in€jeopardy,€or€if€the€taxpayerÏauthorized€the€contact.Ìà  àÌà@””#ìàò òòòEffective€Dateó óóóˆÐ Ø  ÐÌà  àThe€provision€is€effective€for€contacts€made€after€180€days€after€the€date€of€enactment.ÌÌò òÓ  Óc.€€Collection€Activitiesó óÐ ˜ P  ÐÌÓ  Óò òi.€€Approval€process€for€liens,€levies,€and€seizures€(sec.€3421€of€the€bill)Ð x0  ÐÌÓ  ÓòòPresent€LawóóÐ X ÐÓÝBÓÌó óà  àSupervisory€approval€of€liens,€levies€or€seizures€is€only€required€under€certainÐ 8ð Ðcircumstances.€€For€example,€a€levy€on€a€taxpayerððs€principal€residence€is€only€permitted€uponÏthe€written€approval€of€the€District€Director€or€Assistant€District€Director€(sec.€6334(e)).€ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ø° ÐÓ[DÓà  àÌà  àThe€Committee€believes€that€the€imposition€of€liens,€levies,€and€seizures€may€imposeÏsignificant€hardships€on€taxpayers.€€Accordingly,€the€Committee€believes€that€extra€protection€inÏthe€form€of€an€administrative€approval€process€is€appropriate.€ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ ˜P ÐÓµEÓÌà  àThe€provision€requires€the€IRS€to€implement€an€approval€process€under€which€any€lien,Ïlevy€or€seizure€would€be€approved€by€a€supervisor,€who€would€review€the€taxpayerððsÏinformation,€verify€that€a€balance€is€due,€and€affirm€that€a€lien,€levy€or€seizure€is€appropriateÏunder€the€circumstances.€€Circumstances€to€be€considered€include€the€amount€due€and€the€valueÏof€the€asset.€€Failure€to€follow€such€procedures€should€result€in€disciplinary€action€against€theÏsupervisor€and/or€revenue€officer.€€ÌÌà  àIn€addition,€the€Treasury€Inspector€General€for€Tax€Administration€is€required€to€collectÏinformation€on€the€approval€process€and€annually€report€to€the€tax„writing€committees.ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌà@””#ìàòòò òEffective€Dateó óóóˆÐ Ø'$' ÐÌà  àThe€provision€is€effective€for€collection€actions€commenced€after€date€of€enactment.ÌÌÔ_Ôò òii.€€Modifications€to€certain€levy€exemption€amounts€(sec.€3431€of€the€bill€and€sec.€6334€ofÐ ˜+P(+ Ðthe€Code)ó óÐ ˆ,@), ÐÔ_ÔÐ x-0*- ÐÓ  Óòòò òPresent€Lawó óóóÐ H ÐÓxJÓÌà  àThe€Code€authorizes€the€IRS€to€levy€on€all€non„exempt€property€of€the€taxpayer.€ÏProperty€exempt€from€levy€is€described€in€section€6334.€€Section€6334(a)(2)€exempts€from€levyÏup€to€$2,500€in€value€of€fuel,€provisions,€furniture,€and€personal€effects€in€the€taxpayerððsÏhousehold.€€Section€6334(a)(3)€exempts€from€levy€up€to€$1,250€in€value€of€books€and€toolsÏnecessary€for€the€trade,€business€or€profession€of€the€taxpayer.ÌÓ  Óòòò òÌReasons€for€Changeó óóóÐ È € ÐÓwLÓÌà  àThe€Committee€believes€that€a€minimum€amount€of€household€items€and€equipment€forÏtaxpayerððs€business€should€be€exempt€from€levy.€€To€ensure€that€such€exemption€is€meaningful,Ïthe€amounts€should€be€indexed€for€inflation.€Ìà  àà ` àà Œ àà ¸ àà  àà h àòòò òÌÓ  ÓExplanation€of€Provisionó óóóÐ h  ÐÓNÓÌà  àThe€provision€increases€the€value€of€personal€effects€exempt€from€levy€to€$10,000€andÏthe€value€of€books€and€tools€exempt€from€levy€to€$5,000.€€These€amounts€are€indexed€forÏinflation.ÌÌà@””#ìàòòò òEffective€Dateó óóóˆÐ À ÐÌà  àThe€provision€is€effective€for€collection€actions€taken€after€the€date€of€enactment.ÌÌò òiii.€€Release€of€levy€upon€agreement€that€amount€is€uncollectible€(sec.€3432€of€the€bill€andРȀ Ðsec.€6343€of€the€Code)ó óÐ ¸p ÐÌÓ  Óòòò òPresent€Lawó óóóÐ ˜P ÐÓbPÓÌà  àSome€have€contended€that€the€IRS€does€not€release€a€wage€levy€immediately€upon€receiptÏof€proof€that€the€taxpayer€is€unable€to€pay€the€tax,€but€instead,€the€IRS€levies€on€one€periodððsÏwage€payment€before€releasing€the€levy.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ 8"ð! ÐÓ¡QÓÌà  àCongress€believes€that€taxpayers€should€not€have€collection€activity€taken€against€themÏonce€the€IRS€has€determined€that€the€amounts€are€uncollectible.€ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ è& #& ÐÓÑRÓÌà  àThe€IRS€is€required€to€immediately€release€a€wage€levy€upon€agreement€with€the€taxpayerÏthat€the€tax€is€not€collectible.ÌÌà@””#ìàòòò òÔ& Ð ÔEffective€Dateó óóóˆÐ ˜+P(+ ÐÌà  àThe€provision€is€effective€for€levies€imposed€after€date€of€enactment.Ô'И+ÅSÔÐ x-0*- Їò òiv.€€Levy€prohibited€during€pendency€of€refund€proceedings€(sec.€3433€of€the€bill€and€sec.Ð H Ð6331€of€the€Code)ó óÐ 8ð ÐÌÓ  Óòòò òPresent€Lawó óóóÐ Ð ÐÓUÓÌà  àThe€IRS€is€prohibited€from€making€a€tax€assessment€(and€thus€prohibited€from€collectingÏpayment)€with€respect€to€a€tax€liability€while€it€is€being€contested€in€Tax€Court.€However,€theÏIRS€is€permitted€to€assess€and€collect€tax€liabilities€during€the€pendency€of€a€refund€suit€relatingÏto€such€tax€liabilities,€under€the€circumstances€described€below.ÌÌà  àGenerally,€full€payment€of€the€tax€at€issue€is€a€prerequisite€to€a€refund€suit.€€However,€ifÏthe€tax€is€divisible€(such€as€employment€taxes€or€the€trust€fund€penalty€under€Code€section€6672),Ïthe€taxpayer€need€only€pay€the€tax€for€the€applicable€period€before€filing€a€refund€claim.€€MostÏdivisible€taxes€are€not€within€the€Tax€Court's€jurisdiction;€accordingly,€the€taxpayer€has€noÏpre-payment€forum€for€contesting€such€taxes.€In€the€case€of€divisible€taxes,€it€is€possible€that€theÏtaxpayer€could€be€properly€under€the€refund€jurisdiction€of€the€District€Court€or€the€U.S.€Court€ofÏFederal€Claims€and€still€be€subject€to€collection€by€levy€with€respect€to€the€entire€amount€of€theÏtax€at€issue.€The€IRS's€policy€is€generally€to€exercise€forbearance€with€respect€to€collection€whileÏthe€refund€suit€is€pending,€so€long€as€the€interests€of€the€Government€are€adequately€protectedÏ(e.g.,€by€the€filing€of€a€notice€of€Federal€tax€lien)€and€collection€is€not€in€jeopardy.€Any€refundsÏdue€the€taxpayer€may€be€credited€to€the€unpaid€portion€of€the€liability€pending€the€outcome€of€theÏsuit.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ Ø ÐÓ[ÓÌà  àThe€Committee€believes€that€taxpayers€who€are€litigating€a€refund€action€over€divisibleÏtaxes€should€be€protected€from€collection€of€the€full€assessed€amount,€because€the€courtÏconsidering€the€refund€suit€may€ultimately€determine€that€the€taxpayer€is€not€liable.€€ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ x0 ÐÓy\ÓÌà  àThe€provision€requires€the€IRS€to€withhold€collection€by€levy€of€liabilities€that€are€theÏsubject€of€a€refund€suit€during€the€pendency€of€the€litigation.€This€will€only€apply€when€refundÏsuits€can€be€brought€without€the€full€payment€of€the€tax,€i.e.,€in€the€case€of€divisible€taxes.ÏCollection€by€levy€would€be€withheld€unless€jeopardy€exists€or€the€taxpayer€waives€theÏsuspension€of€collection€in€writing€(because€collection€will€stop€the€running€of€interest€andÏpenalties€on€the€tax€liability).€This€provision€will€not€affect€the€IRS's€ability€to€collect€otherÏassessments€that€are€not€the€subject€of€the€refund€suit,€to€offset€refunds,€to€counterclaim€in€aÏrefund€suit€or€related€proceeding,€or€to€file€a€notice€of€Federal€tax€lien.€The€statute€of€limitationsÏon€collection€is€stayed€for€the€period€during€which€the€IRS€is€prohibited€from€collecting€by€levy.ÌÌà@””#ìàòòò òEffective€Dateó óóóˆÐ ¸)p&) ÐÔ_ÔÌà  àThe€provision€is€effective€for€refund€suits€brought€with€respect€to€tax€years€beginningÏafter€December€31,€1998.ÌÔ_ÔÐ x-0*- Ðò òv.€€Approval€required€for€jeopardy€and€termination€assessments€and€jeopardy€levies€(sec.Ð H Ð3434€of€the€bill€and€sec.€7429(a)€of€the€Code)Ìó óÌÓ  Óòòò òPresent€Lawó óóóÐ Ð ÐÓÒaÓÌà  àIn€general,€a€30„day€waiting€period€is€imposed€after€assessment€of€all€types€of€taxes.€€InÏcertain€circumstances,€the€waiting€period€puts€the€collection€of€taxes€at€risk.€The€Code€providesÏspecial€procedures€that€allow€the€IRS€to€make€jeopardy€assessments€or€termination€assessmentsÏin€certain€extraordinary€circumstances,€such€as€if€the€taxpayer€is€leaving€or€removing€propertyÏfrom€the€United€States€(sec.€6851),€or€if€assessment€or€collection€would€be€jeopardized€by€delayÏ(secs.€6861€and€6862).€€€In€jeopardy€or€termination€situations,€a€levy€may€be€made€without€theÏ30„days'€notice€of€intent€to€levy€that€is€ordinarily€required€by€section€6331(d)(2).€€JeopardyÏassessments€apply€when€the€tax€year€is€over.€€Termination€assessments€apply€to€the€currentÏtaxable€year€or€the€immediately€preceding€taxable€year€if€the€filing€date€has€not€yet€passed.€€AÏtermination€assessment€serves€to€terminate€the€taxable€year€for€the€purpose€of€computing€the€taxÏto€be€assessed€and€collected€under€the€termination€assessment€procedure.€€Under€both€theÏjeopardy€and€termination€assessment€procedures,€the€IRS€can€assess€the€tax€and€immediatelyÏbegin€collection€if€any€one€of€the€following€situations€exists:€(1)€the€taxpayer€is€or€appears€to€beÏplanning€to€depart€the€United€States€or€to€go€into€hiding;€(2)€the€taxpayer€is€or€appears€to€beÏplanning€to€place€property€beyond€the€reach€of€the€IRS€by€removing€it€from€the€country,€hidingÏit,€dissipating€it,€or€by€transferring€it€to€other€persons;€or€(3)€the€taxpayerððs€financial€solvency€isÏor€appears€to€be€imperiled.€€Because€the€same€criteria€apply€to€jeopardy€and€terminationÏassessments,€jeopardy€and€termination€assessments€are€often€entered€at€the€same€time€against€theÏsame€taxpayer.€€€ÌÌà  àThe€Code€and€regulations€do€not€presently€require€Counsel€to€review€jeopardyÏassessments,€termination€assessments,€or€jeopardy€levies,€although€the€Internal€Revenue€ManualÏdoes€require€Counsel€review€before€such€actions€and€it€is€current€practice€to€make€such€a€review.€ÏThe€IRS€bears€the€burden€of€proof€with€respect€to€the€reasonableness€of€a€jeopardy€or€terminationÏassessment€or€a€jeopardy€levy€(sec.€7429(g)).ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ X  ÐÓ jÓÌà  àThe€Committee€believes€that€it€is€appropriate€to€require€Counsel€review€and€approval€ofÏjeopardy€and€termination€levies,€because€such€actions€often€involve€difficult€legal€issues.€€ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ %À!$ ÐÓíkÓÌà  àThe€provision€requires€IRS€Counsel€review€and€approval€before€the€IRS€could€make€aÏjeopardy€assessment,€a€termination€assessment,€or€a€jeopardy€levy.€If€Counsel's€approval€was€notÏobtained,€the€taxpayer€would€be€entitled€to€obtain€abatement€of€the€assessment€or€release€of€theÏlevy,€and,€if€the€IRS€failed€to€offer€such€relief,€to€appeal€first€to€IRS€Appeals€under€the€new€dueÏprocess€procedure€for€IRS€collections€(described€in€E.€1,€above)€and€then€to€court.ÌÌÔ_Ôà@””#ìàòòò òEffective€Dateó óóóˆÐ ˆ,@), ÐÐ x-0*- Ðà  àThe€provision€is€effective€with€respect€to€taxes€assessed€and€levies€made€after€the€date€ofÏenactment.ÌÌò òvi.€€Increase€in€amount€of€certain€property€on€which€lien€not€valid€(sec.€3435€of€the€bill€andÐ Ð Ðsec.€6323€of€the€Code)ó óÐ À ÐÌÓ  Óòòò òPresent€Lawó óóóÐ è  ÐÓoÓÌà  àThe€Federal€tax€lien€attaches€to€all€property€and€rights€in€property€of€the€taxpayer,€if€theÏtaxpayer€fails€to€pay€the€assessed€tax€liability€after€notice€and€demand€(sec.€6321).€However,€theÏFederal€tax€lien€is€not€valid€as€to€certain€ð ðsuperpriorityðð€interests€as€defined€in€section€6323(b).ÌÌà  àTwo€of€these€interests€are€limited€by€a€specific€dollar€amount.€Under€section€6323(b)(4),Ïpurchasers€of€personal€property€at€a€casual€sale€are€presently€protected€against€a€Federal€tax€lienÏattached€to€such€property€to€the€extent€the€sale€is€for€less€than€$250.€Section€6323(b)(7)€providesÏprotection€to€mechanic's€lienors€with€respect€to€the€repairs€or€improvements€made€to€owner-Ïoccupied€personal€residences,€but€only€to€the€extent€that€the€contract€for€repair€or€improvement€isÏfor€not€more€than€$1,000.ÌÌà  àIn€addition,€a€superpriority€is€granted€under€section€6323(b)(10)€to€banks€and€buildingÏand€loan€associations€which€make€passbook€loans€to€their€customers,€provided€that€thoseÏinstitutions€retain€the€passbooks€in€their€possession€until€the€loan€is€completely€paid€off.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ Ø ÐÓGtÓÌà  àThe€Committee€believes€that€it€is€appropriate€to€increase€the€dollar€limits€on€theÏsuperpriority€amounts€because€the€dollar€limits€have€not€been€increased€for€decades€and€do€notÏreflect€current€prices€or€values.€€ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ x0 ÐÓtuÓÌà  àThe€provision€increases€the€dollar€limit€in€section€6323(b)(4)€for€purchasers€at€a€casualÏsale€from€$250€to€$1,000,€and€further€increases€the€dollar€limit€in€section€6323(b)(7)€from€$1,000Ïto€$5,000€for€mechanics€lienors€providing€home€improvement€work€for€owner-occupied€personalÏresidences.€The€provision€indexes€these€amounts€for€inflation.€The€provision€also€clarifies€sectionÏ6323(b)(10)€to€reflect€present€banking€practices,€where€a€passbook-type€loan€may€be€made€evenÏthough€an€actual€passbook€is€not€used.ÌÌà@””#ìàòòò òEffective€Dateó óóóˆÐ è& #& ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌò òvii.€€Waiver€of€early€withdrawal€tax€for€IRS€levies€on€employer„sponsored€retirement€plansÐ ¨*`'* Ðor€IRAs€(sec.€3436€of€the€bill€and€sec.€72(t)(2)(A)€of€the€Code)ó óÐ ˜+P(+ ÐÌò òòòà@ÕÕ%ìàPresent€Lawó óóóˆÐ x-0*- Їà  àUnder€present€law,€a€distribution€of€benefits€from€any€employer„sponsored€retirementÏplan€or€an€individual€retirement€arrangement€(ð ðIRAðð)€generally€is€includible€in€gross€income€inÏthe€year€it€is€paid€or€distributed,€except€to€the€extent€the€amount€distributed€represents€theÏemployeeððs€after„tax€contributions€or€investment€in€the€contract€(i.e.,€basis).€Special€rules€applyÏto€certain€lump„sum€distributions€from€qualified€retirement€plans,€distributions€rolled€over€to€anÏIRA€or€employer„sponsored€retirement€plan,€and€lump„sum€distributions€of€employer€securities.ÌÌà  àDistributions€from€qualified€plans€and€IRAs€prior€to€attainment€of€age€59„1/2€that€areÏincludible€in€income€generally€are€subject€to€a€10„percent€early€withdrawal€tax,€unless€anÏexception€to€the€tax€applies.€€An€exception€to€the€tax€applies€if€the€withdrawal€is€due€to€death€orÏdisability,€is€made€in€the€form€of€certain€periodic€payments,€or€is€used€to€pay€medical€expenses€inÏexcess€of€7.5€percent€of€adjusted€gross€income€(ð ðAGIðð).€Certain€additional€exceptions€to€the€taxÏapply€separately€to€withdrawals€from€IRAs€and€qualified€plans.€Distributions€from€IRAs€forÏeducation€expenses,€for€up€to€$10,000€of€first„time€homebuyer€expenses,€or€to€unemployedÏindividuals€to€purchase€health€insurance€are€not€subject€to€the€10„percent€early€withdrawal€tax.€AÏdistribution€from€a€qualified€plan€made€by€an€employee€after€separation€from€service€afterÏattainment€of€age€55€is€not€subject€to€the€10„percent€early€withdrawal€tax.ÌÌà  àUnder€present€law,€the€IRS€is€authorized€to€levy€on€all€non„exempt€property€of€theÏtaxpayer.€Benefits€under€employer„sponsored€retirement€plans€(including€section€403(b)€and€457Ïplans)€and€IRAs€are€not€exempt€from€levy€by€the€IRS.€ÌÌà  àUnder€present€law,€distributions€from€employer„sponsored€retirement€plans€or€IRAs€madeÏon€account€of€an€IRS€levy€are€includible€in€the€gross€income€of€the€individual,€except€to€theÏextent€the€amount€distributed€represents€after„tax€contributions.€In€addition,€the€amountÏincludible€in€income€is€subject€to€the€10„percent€early€withdrawal€tax,€unless€an€exceptionÏdescribed€above€applies.ÌÌò òòòà@••!ìàReasons€for€Changeó óóóˆÐ ˆ@ ÐÌà  àThe€Committee€believes€that€the€imposition€of€the€10„percent€early€withdrawal€tax€onÏamounts€distributed€from€employer„sponsored€retirement€plans€or€IRAs€on€account€of€an€IRSÏlevy€may€impose€significant€hardships€on€taxpayers.€Accordingly,€the€Committee€believes€suchÏdistributions€should€be€exempt€from€the€10„percent€early€withdrawal€tax.€ÌÌà@ÅÅìàò òòòExplanation€of€ProvisionˆÐ $Ð # ÐÌà  àó óóóThe€provision€provides€an€exception€from€the€10„percent€early€withdrawal€tax€forÐ ø%°"% Ðamounts€withdrawn€from€any€employer„sponsored€retirement€plan€or€an€IRA€that€are€subject€to€aÏlevy€by€the€IRS.€The€exception€applies€only€if€the€plan€or€IRA€is€levied;€it€does€not€apply,€forÏexample,€if€the€taxpayer€withdraws€funds€to€pay€taxes€in€the€absence€of€a€levy,€in€order€to€releaseÏa€levy€on€other€interests,€or€in€any€other€situation€not€addressed€by€the€express€statutoryÏexceptions€to€the€10„percent€early€withdrawal€tax.ÌÌà@””#ìàò òòòEffective€DateˆÐ ˆ,@), ÐÐ x-0*- Ðà  àó óóóThe€provision€is€effective€for€withdrawals€after€the€date€of€enactment.Ð H ÐÌò òviii.€€Prohibition€of€sales€of€seized€property€at€less€than€minimum€bid€(sec.€3441€of€the€billÐ (à Ðand€sec.€6335(e)€of€the€Code)ó óÐ Ð ÐÌÓ  Óòòò òPresent€Lawó óóóÐ ø° ÐÓq‡ÓÌà  àSection€6335(e)€requires€that€a€minimum€bid€price€be€established€for€seized€propertyÏoffered€for€sale.€€To€conserve€the€taxpayerððs€equity,€the€minimum€bid€price€should€normally€beÏcomputed€at€80€percent€or€more€of€the€forced€sale€value€of€the€property€less€encumbrancesÏhaving€priority€over€the€Federal€tax€lien.€€If€the€group€manager€concurs,€the€minimum€sales€priceÏmay€be€set€at€less€than€80€percent.€€The€taxpayer€is€to€receive€notice€of€the€minimum€bid€priceÏwithin€10€days€of€the€sale.€€The€taxpayer€has€the€opportunity€to€challenge€the€minimum€bid€price,Ïwhich€cannot€be€more€than€the€tax€liability€plus€the€expenses€of€sale.€€Accordingly,€if€theÏminimum€bid€price€is€set€at€the€tax€liability€plus€the€expenses€of€sale,€the€taxpayerððs€concurrenceÏis€not€required.€€IRM€56(13)5.1(4).€€Section€6335€does€not€contemplate€a€sale€of€the€seizedÏproperty€at€less€than€the€minimum€bid€price.€€Rather,€if€no€person€offers€the€minimum€bid€price,Ïthe€IRS€may€buy€the€property€at€the€minimum€bid€price€or€the€property€may€be€released€to€theÏowner.€€Code€section€7433€provides€civil€damages€for€certain€unauthorized€collection€actions.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ À ÐÓ=ŒÓÔ& P ÔÌà  àThe€Committee€believes€that€strengthening€provisions€regarding€the€minimum€bid€price,Ïincluding€preventing€the€IRS€from€selling€the€taxpayerððs€property€for€less€than€the€minimum€bidÏprice,€€are€appropriate€to€preserve€taxpayersðð€rights.òòò òРȀ ÐÌÓ  ÓExplanation€of€Provisionó óóóÐ ¨` ÐÓ­ÓÌà  àThe€provision€prohibits€the€IRS€from€selling€seized€property€for€less€than€the€minimumÏbid€price.€€The€provision€provides€that€the€sale€of€property€for€less€than€the€minimum€bid€priceÏwould€constitute€an€unauthorized€collection€action,€which€would€permit€an€affected€person€to€sueÏfor€civil€damages€pursuant€toÔ'P ø†ŒÔ€section€7433.ÌÌà@””#ìàòòò òEffective€Dateó óóóˆÐ 8"ð! ÐÌà  àThe€provision€is€effective€for€sales€occurring€after€the€date€of€enactment.ÌÌò òix.€€Accounting€of€sales€of€seized€property€(sec.€3442€of€the€bill€and€sec.€6340€of€the€Code)ó óÐ ø%°"% ÐÌÓ  Óòòò òPresent€Lawó óóóÐ Ø'$' ÐÓwÓÌà  àThe€IRS€is€authorized€to€seize€and€sell€a€taxpayerððs€property€to€satisfy€an€unpaid€taxÏliability€(sec.€6331(b)).€€The€IRS€is€required€to€give€written€notice€to€the€taxpayer€before€seizureÏof€the€property€(sec.€6331(d)).€€€The€IRS€must€also€give€written€notice€to€the€taxpayer€at€least€10Ïdays€before€the€sale€of€the€seized€property.ÌÔ_ÔÐ x-0*- Ðà  àThe€IRS€is€required€to€keep€records€of€all€sales€of€real€property€(sec.€6340).€€The€recordsÏmust€set€forth€all€proceeds€and€expenses€of€the€sale.€€The€IRS€is€required€to€apply€the€proceedsÏfirst€against€the€expenses€of€the€sale,€then€against€a€specific€tax€liability€on€the€seized€property,€ifÏany,€and€finally€against€any€unpaid€tax€liability€of€the€taxpayer€(sec.€6342(a)).€€Any€surplusÏproceeds€are€credited€to€the€taxpayer€or€persons€legally€entitled€to€the€proceeds.€€ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ è  ÐÓ.”Óòòò òÌó óóóà  àThe€Committee€believes€that€taxpayers€are€entitled€to€know€how€proceeds€from€the€saleÐ È € Ðof€their€property€seized€by€the€IRS€are€applied€to€their€tax€liability.€€Ìòòò òÌÓ  ÓExplanation€of€Provisionó óóóÐ ˜ P  ÐÓK•ÓÌà  àThe€provision€requires€the€IRS€to€provide€a€written€accounting€of€all€sales€of€seizedÏproperty,€whether€real€or€personal,€to€the€taxpayer.€€The€accounting€must€include€a€receipt€for€theÏamount€credited€to€the€taxpayerððs€account.ÌÌò òòòà@””#ìàEffective€Dateó óóóˆÐ 8ð ÐÌà  àThe€provision€is€effective€for€seizures€occurring€after€the€date€of€enactment.ÌÌò òx.€€Uniform€asset€disposal€mechanism€(sec.€3443€of€the€bill)ó óÐ ø° ÐÌÓ  Óòòò òPresent€Lawó óóóÐ Ø ÐÓ‡—ÓÌà  àThe€IRS€must€sell€property€seized€by€levy€either€by€public€auction€or€by€public€sale€underÏsealed€bids€(sec.€6335(e)(2)(A)).€€These€are€often€conducted€by€the€revenue€officer€charged€withÏcollecting€the€tax€liability.ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌò òòòÓ  ÓReasons€for€Changeó óóóÐ x0 ÐÓ™Óà  àÌà  àThe€Committee€believes€that€it€is€important€for€fairness€and€the€appearance€of€proprietyÏthat€revenue€officers€charged€with€collecting€unpaid€tax€liability€are€not€personally€involved€withÏthe€sale€of€seized€property.€€ÌÌÓ  Óòòò òÔ& À ÔExplanation€of€Provisionó óóóÐ $Ð # ÐÓ\šÓÌà  àThe€provision€requires€the€IRS€to€implement€a€uniform€asset€disposal€mechanism€forÏsales€of€seized€property.€€The€disposal€mechanism€should€be€designed€to€remove€anyÔ'À$nšÔÏparticipation€in€the€sale€of€seized€assets€by€revenue€officers.€The€provision€authorizes€theÏconsideration€of€outsourcing€of€the€disposal€mechanism.ÌÌà@””#ìàòòò òEffective€Dateó óóóˆÐ ¨*`'* ÐÔ_ÔÌà  àThe€provision€requires€a€uniform€asset€disposal€system€to€be€implemented€within€twoÏyears€from€the€date€of€Ô_Ôenactment.Ð x-0*- Їò òxi.€€Codification€of€IRS€administrative€procedures€for€seizure€of€taxpayerððs€property€(sec.Ð H Ð3444€of€the€bill€and€sec.€6331€of€the€Code)ó óÐ 8ð ÐÌÓ  Óòòò òPresent€Lawó óóóÐ Ð ÐÓÍÓÌà  àThe€IRS€provides€guidelines€for€revenue€officers€engaged€in€the€collection€of€unpaid€taxÏliabilities.€€The€Internal€Revenue€Manual€(IRM)€56(12)5.1€provides€general€guidelines€forÏseizure€actions:€(1)€the€revenue€officer€must€first€verify€the€taxpayerððs€liability;€(2)€no€levy€mayÏbe€made€if€the€estimated€expenses€of€levy€and€sale€will€exceed€the€fair€market€value€of€theÏproperty€to€be€sized€(sec.€6331(f));€(3)€no€levy€may€be€made€on€the€date€of€an€appearance€inÏresponse€to€an€administrative€summons,€unless€jeopardy€exists€(sec.€6331(g));€(4)€the€taxpayerÏshould€have€an€opportunity€to€read€the€levy€form;€(5)€the€revenue€officer€must€attach€a€sufficientÏnumber€of€warning€notices€on€the€property€to€clearly€identify€the€property€to€be€seized;€(6)€theÏrevenue€officer€must€inventory€the€property€to€be€seized;€and€(7)€a€revenue€officer€may€not€useÏforce€in€the€seizure€of€property.ÌÌà  àPrior€to€the€levy€action,€the€revenue€officer€must€determine€that€there€is€sufficient€equityÏin€the€property€to€be€seized€to€yield€net€proceeds€from€the€sale€to€apply€to€unpaid€tax€liabilities.€ÏIf€it€is€determined€after€seizure€that€the€taxpayerððs€equity€is€insufficient€to€yield€net€proceedsÏfrom€sale€to€apply€to€the€unpaid€tax,€the€revenue€officer€will€immediately€release€the€seizedÏproperty.€€See€IRM€56(12)2.1.ÌÌà  àIRS€Policy€Statement€P„5„34€states€that€the€facts€of€a€case€and€alternative€collectionÏmethods€must€be€thoroughly€considered€before€deciding€to€seize€the€assets€of€a€going€business.€ÏIRS€Policy€Statement€P„5„16€advises€reasonable€forbearance€on€collection€activity€when€theÏtaxpayerððs€business€has€been€affected€by€a€major€disaster€such€as€flood,€hurricane,€drought,€fire,Ïetc.,€and€whose€ability€to€pay€has€been€impaired€by€such€disaster.ÌÔ_ÔÔ_ÔÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ˆ@ ÐÓ<¥ÓÌà  àThe€Committee€believes€that€the€IRS€procedures€on€collections€provide€importantÏprotections€to€taxpayers.€€Accordingly,€the€Committee€believes€that€it€is€appropriate€to€codifyÏthose€procedures€to€ensure€that€they€are€uniformly€followed€by€the€IRS.€€ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ (#à" ÐÓ¦ÓÌà  àThe€provision€codifies€the€IRS€administrative€procedures€which€require€the€IRS€toÏinvestigate€the€status€of€property€prior€to€levy.€€The€Treasury€Inspector€General€for€TaxÏAdministration€would€be€required€to€review€IRS€compliance€with€seizure€procedures€and€reportÏannually€to€Congress.€€ÌÌà@””#ìàòòò òEffective€Dateó óóóˆÐ ¸)p&) ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.Ìâ âÐ ˆ,@), Ðò òxii.€€€Procedures€for€seizure€of€residences€and€businesses€(sec.€3445€of€the€bill€and€sec.Ð H Ðâ â6334(a)(13)€of€the€Code)Ìó óÌÓ  Óòòò òPresent€Lawó óóóÐ Ð ÐÓM©ÓÌà  àSubject€to€certain€procedural€rules€and€limitations,€the€Secretary€may€seize€the€propertyÏof€the€taxpayer€who€neglects€or€refuses€to€pay€any€tax€within€10€days€after€notice€and€demand.€ÏThe€IRS€may€not€levy€on€the€personal€residence€of€the€taxpayer€unless€the€District€Director€(orÏthe€assistant€District€Director)€personally€approves€in€writing€or€in€cases€of€jeopardy.€€There€areÏno€special€rules€for€property€that€is€used€as€a€residence€by€parties€other€than€the€taxpayer.€€ÌÌà  àIRS€Policy€Statement€P„5„34€states€that€the€facts€of€a€case€and€alternative€collectionÏmethods€must€be€thoroughly€considered€before€deciding€to€seize€the€assets€of€a€going€business.€ÌÌò òòòà@••!ìàReasons€for€Changeó óóóˆÐ h  ÐÌà  àThe€Committee€is€concerned€that€seizure€of€the€taxpayerððs€principal€residence€isÏparticularly€disruptive€for€the€taxpayer€as€well€as€the€taxpayerððs€family.€€The€seizure€of€anyÏresidence€is€disruptive€to€the€occupants,€and€is€not€justified€in€the€case€of€a€small€deficiency.€€InÏthe€case€of€seizure€of€a€business,€the€seizure€not€only€disrupts€the€taxpayerððs€life€but€also€mayÏadversely€impact€the€taxpayerððs€ability€to€enter€into€an€installment€agreement€or€otherwise€toÏcontinue€to€pay€off€the€tax€liability.€€Accordingly,€the€Committee€believes€that€the€taxpayerððsÏprincipal€residence€or€business€should€only€be€seized€to€satisfy€tax€liability€as€a€last€resort,€andÏthat€any€property€used€by€any€person€as€a€residence€should€not€be€seized€for€a€small€deficiency.€€€ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌò òòòà@ÅÅìàExplanation€of€Provisionó óóóˆÐ ¸p ÐÌà  àThe€provision€prohibits€the€IRS€from€seizing€real€property€that€is€used€as€a€residence€(byÏthe€taxpayer€or€another€person)€to€satisfy€an€unpaid€liability€of€$5,000€or€less,€including€penaltiesÏand€interest.ÌÌà  àThe€provision€requires€the€IRS€to€exhaust€all€other€payment€options€before€seizing€theÏtaxpayerððs€€business€or€principal€residence.€€The€provision€does€not€prohibit€the€seizure€of€aÏbusiness€or€a€principal€residence,€but€would€treat€such€seizure€as€a€payment€option€of€last€resort.€ÏThe€provision€does€not€apply€in€cases€of€jeopardy.€€It€is€anticipated€that€the€IRS€would€considerÏinstallment€agreements,€offer„in„compromise,€and€seizure€of€other€assets€of€the€taxpayer€beforeÏtaking€collection€action€against€the€taxpayerððs€business€or€principal€residence.€€ÌÌò òòòà@””#ìàEffective€Dateó óóóˆÐ è& #& ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.€€ÌÌò òÓ  Ód.€€Provisions€Relating€to€Examination€and€Collection€ActivitiesÐ ¨*`'* ÐÌÔ_ÔÓþ³Ói.€€Procedures€relating€to€extensions€of€statute€of€limitations€by€agreement€(sec.€3461€of€theÏbill€and€sec.€6502(a)€of€the€Code)ó óÐ x-0*- Їà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ H ÐÌà  àThe€statute€of€limitations€within€which€the€IRS€may€assess€additional€taxes€is€generallyÏthree€years€from€the€date€a€return€is€filed€(sec.€6501).׃„×Ý ƒ #ÃÝòòÚ  Ú34Ú  ÚóóÝ  Ý×  ×€€Prior€to€the€expiration€of€the€statute€ofÐ Ð Ðlimitations,€both€the€taxpayer€and€the€IRS€may€agree€in€writing€to€extend€the€statute,€using€FormÏ872€or€872„A.€€An€extension€may€be€for€either€a€specified€period€or€an€indefinite€period.€€TheÏstatute€of€limitations€within€which€a€tax€may€be€collected€after€assessment€is€10€years€afterÏassessment€(sec.€6502).€€Prior€to€the€expiration€of€the€statute€of€limitations,€both€the€taxpayer€andÏthe€IRS€may€agree€in€writing€to€extend€the€statute,€using€Form€900.ÌÌà@••!ìàò òòòReasons€for€Changeó óóóˆÐ ¨ `  ÐÌà  àThe€Committee€believes€that€taxpayers€should€be€fully€informed€of€their€rights€withÏrespect€to€the€statute€of€limitations€on€assessment.€€The€Committee€is€concerned€that€in€someÏcases€taxpayer€have€not€been€fully€aware€of€their€rights€to€refuse€to€extend€the€statute€ofÏlimitations,€and€have€felt€that€they€had€no€choice€but€to€agree€to€extend€the€statute€of€limitationsÏupon€the€request€of€the€IRS.€€ÌÌà  àMoreover,€the€Committee€believes€that€the€IRS€should€collect€all€taxes€within€10€years,Ïand€that€such€statute€of€limitation€should€not€be€extended.€€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ø° ÐÌà  àThe€provision€eliminates€the€provision€of€present€law€that€allows€the€statute€of€limitationsÏon€collections€to€be€extended€by€agreement€between€the€taxpayer€and€the€IRS.€ÌÌà  àThe€provision€šalsoš€requires€that,€on€each€occasion€on€which€the€taxpayer€is€requested€byÏthe€IRS€to€extend€the€statute€of€limitations€on€assessment,€the€IRS€must€notify€the€taxpayer€of€theÏtaxpayerððs€right€to€refuse€to€extend€the€statute€of€limitations€or€to€limit€the€extension€to€particularÏissues.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ X  ÐÌà  àThe€provision€applies€to€requests€to€extend€the€statute€of€limitations€made€after€the€dateÏof€enactment€and€to€all€extensions€of€the€statute€of€limitations€on€collection€that€are€open€180Ïdays€after€the€date€of€enactment.Ìò òÌii.€€Offers„in„compromise€(sec.€3462€of€the€bill€and€sec.€7122€of€the€Code)ó óÐ ø%°"% ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ Ø'$' ÐÔ_Ôâ âÐ È(€%( Ðà  àSection€7122€of€the€Code€permits€the€IRS€to€compromise€a€taxpayerððs€tax€liability.€€AnÏâ âoffer„in„compromise€is€a€provision€by€the€taxpayer€to€settle€unpaid€tax€accounts€for€less€than€theÏfull€amount€of€the€assessed€balance€due.€€An€offer„in„compromise€may€be€submitted€for€all€typesÏof€taxes,€as€well€as€interest€and€penalties,€arising€under€the€Internal€Revenue€Code.ÌÌà  àThere€are€two€bases€on€which€an€offer€can€be€made:€doubt€as€to€liability€for€the€amountÏowed€and€doubt€as€to€ability€to€pay€the€amount€owed.ÌÌà  àA€compromise€agreement€based€on€doubt€as€to€ability€to€pay€requires€the€taxpayer€to€fileÏreturns€and€pay€taxes€for€five€years€from€the€date€the€IRS€accepts€the€offer.€€Failure€to€do€soÏpermits€the€IRS€to€begin€immediate€collection€actions€for€the€original€amount€of€the€liability.€ÏThe€Internal€Revenue€Manual׃…×Ý ƒ #ÃÝòòÚ  Ú35Ú  ÚóóÝ  Ý×  ×€provides€guidelines€for€revenue€officers€to€determine€whether€anÐ ˜ P  Ðoffer„in„compromise€is€adequate.€€An€offer€is€adequate€if€it€reasonably€reflects€collectionÏpotential.€€Although€the€revenue€officer€is€instructed€to€consider€the€taxpayerððs€assets€and€futureÏand€present€income,€the€IRM€advises€that€rejection€of€an€offer€solely€based€on€narrow€asset€andÏincome€evaluations€should€be€avoided.ÌÌà  àPursuant€to€the€IRM,€collection€normally€is€withheld€during€the€period€an€offer„in„¼compromise€is€pending,€unless€it€is€determined€that€the€offer€is€a€delaying€tactic€and€collection€isÏin€jeopardy.ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌÓ  Óòòò òReasons€for€Changeó óóóÐ ø° ÐÓ‘ÅÓÌà  àThe€Committee€believes€that€the€ability€to€compromise€tax€liability€and€to€makeÏpayments€of€tax€liability€by€installment€enhances€taxpayer€compliance.€€In€addition,€theÏCommittee€believes€that€the€IRS€should€be€flexible€in€finding€ways€to€work€with€taxpayers€whoÏare€sincerely€trying€to€meet€their€obligations€and€remain€in€the€tax€system.€€Accordingly,€theÏCommittee€believes€that€the€IRS€should€make€it€easier€for€taxpayers€to€enter€into€offer„in„¼compromise€agreements,€and€should€do€more€to€educate€the€taxpaying€public€about€theÏavailability€of€such€agreements.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ X  ÐÌòòò òRights€of€taxpayers€entering€into€offers„in„compromiseó óóóÐ 8"ð! ÐÌà  àThe€provision€requires€the€IRS€to€develop€and€publish€schedules€of€national€and€localÏallowances€that€will€provide€taxpayers€entering€into€an€offer„in„compromise€with€adequateÏmeans€to€provide€for€basic€living€expenses.€€The€IRS€also€will€be€required€to€consider€the€factsÏand€circumstances€of€a€particular€taxpayerððs€case€in€determining€whether€the€national€and€localÏschedules€are€adequate€for€that€particular€taxpayer.€€If€the€facts€indicate€that€use€of€scheduledÏÔ_Ôallowances€would€be€inadequate€under€the€circumstances,€the€taxpayer€would€not€be€limited€byÏthe€national€or€local€allowances.€€ÌÔ_ÔÐ ¨*`'* Ðà  àThe€provision€prohibits€the€IRS€from€rejecting€an€offer„in„compromise€from€a€low„Ïincome€taxpayer€solely€on€the€basis€of€the€amount€of€the€offer.׃†×Ý ƒ #ÃÝòòÚ  Ú36Ú  ÚóóÝ  Ý×  ×€€The€provision€provides€that,€inÐ 8ð Ðthe€case€of€an€offer„in„compromise€submitted€solely€on€the€basis€of€doubt€as€to€liability,€the€IRSÏmay€not€reject€the€offer€merely€because€the€IRS€cannot€locate€the€taxpayerððs€file.€€The€provisionÏprohibits€the€IRS€from€requesting€a€financial€statement€if€the€taxpayer€makes€an€offer„in„¼compromise€based€solely€on€doubt€as€to€liability.Ìà  àÌòòò òSuspend€collection€by€levy€while€offer„in„compromise€is€pendingó óóóÐ Ø  ÐÌà  àThe€provision€prohibits€the€IRS€from€collecting€a€tax€liability€by€levy€(1)€during€anyÏperiod€that€a€taxpayerððs€offer„in„compromise€for€that€liability€is€being€processed,€(2)€during€theÏ30€days€following€rejection€of€an€offer,€and€(3)€during€any€period€in€which€an€appeal€of€theÏrejection€of€an€offer€is€being€considered.€Taxpayers€whose€offers€are€rejected€and€who€madeÏgood€faith€revisions€of€their€offers€and€resubmitted€them€within€30€days€of€the€rejection€or€returnÏwould€be€eligible€for€a€continuous€period€of€relief€from€collection€by€levy.€€This€prohibition€onÏcollection€by€levy€would€not€apply€if€the€IRS€determines€that€collection€is€in€jeopardy€or€that€theÏoffer€was€submitted€solely€to€delay€collection.€€The€provision€provides€that€the€statute€ofÏlimitations€on€collection€would€be€tolled€for€the€period€during€which€collection€by€levy€is€barred.ÌÔ_ÔÔ_ÔÌòòò òProcedures€for€reviews€of€rejections€of€offers„in„compromise€and€installment€agreementsó óóóÐ Ð ÐÌà  àThe€provision€requires€that€the€IRS€implement€procedures€to€review€all€proposed€IRSÏrejections€of€taxpayer€offers„in„compromise€and€requests€for€installment€agreements€prior€to€theÏrejection€being€communicated€to€the€taxpayer.€€The€provision€requires€the€IRS€to€allow€theÏtaxpayer€to€appeal€any€rejection€of€such€offer€or€agreement€to€the€IRS€Office€of€Appeals.€€TheÏIRS€must€notify€taxpayers€of€their€right€to€have€an€appeals€officer€review€a€rejected€offer„in„¼compromise€on€the€application€form€for€an€offer„in„compromise.ÌÌòòò òPublication€of€taxpayerððs€rights€with€respect€to€offers„in„compromiseó óóóÐ ˆ@ ÐÌà  àThe€provision€requires€the€IRS€to€publish€guidance€on€the€rights€and€obligations€ofÏtaxpayers€and€the€IRS€relating€to€offers€in€compromise,€including€a€compliant€spouseððs€right€toÏapply€to€reinstate€an€agreement€that€would€otherwise€be€revoked€due€to€the€nonfiling€orÏnonpayment€of€the€other€spouse,€providing€all€payments€required€under€the€compromiseÏagreement€are€current.€ÌÌòòò òLiberal€acceptance€policyó óóóÐ %À!$ ÐÌà  àIt€is€anticipated€that€the€IRS€will€adopt€a€liberal€acceptance€policy€for€offers„in„¼compromise€to€provide€an€incentive€for€taxpayers€to€continue€to€file€tax€returns€and€continue€toÏpay€their€taxes.ÌÐ ¸)p&) Ðà@””#ìàò òòòEffective€Dateóóó óˆÐ H ÐÌà  àThe€provision€is€generally€effective€for€offers„in„compromise€submitted€after€the€date€ofÏenactment.€€The€provision€suspending€levy€is€effective€with€respect€to€offers„in„compromiseÏpending€on€or€made€after€the€60th€day€after€the€date€of€enactment.ÌÌò òÔ&   Ôiii.€€Notice€of€deficiency€to€specify€deadlines€for€filing€Tax€Court€petition€(sec.€3463€of€theÐ è  Ðbill€and€sec.€6213(a)€of€the€Code)ó óÐ Ø  ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ¸ p  ÐÌà  àTaxpayers€must€file€a€petition€with€the€Tax€Court€within€90€days€after€the€deficiencyÔ' èÏØÔÏnotice€is€mailed€(150€days€if€the€person€is€outside€the€United€States)€(sec.€6213).€€If€the€petition€isÏnot€filed€within€that€time€period,€the€Tax€Court€does€not€have€jurisdiction€to€consider€theÏpetition.ÌÌÓ  Óòòò òReasons€for€Changeó óóóÐ H ÐÓÛÓÌà  àThe€Committee€believes€that€taxpayers€should€receive€assistance€in€determining€the€timeÏperiod€within€which€they€must€file€a€petition€in€the€Tax€Court€and€that€taxpayers€should€be€ableÏto€rely€on€the€computation€of€that€period€by€the€IRS.ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ è  ÐÌà  àThe€provision€requires€the€IRS€to€include€on€each€deficiency€notice€the€date€determinedÏby€the€IRS€as€the€last€day€on€which€the€taxpayer€may€file€a€petition€with€the€Tax€Court.€€TheÏprovision€provides€that€a€petition€filed€with€the€Tax€Court€by€this€date€is€€treated€as€timely€filed.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ ˆ@ ÐÌà  àThe€provision€applies€to€notices€mailed€after€December€31,€1998.ÌÌò òiv.€€Refund€or€credit€of€overpayments€before€final€determination€(sec.€3464€of€the€bill€andÐ H!  Ðsec.€6213(a)€of€the€Code)ó óÐ 8"ð! ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ $Ð # ÐÌà  àGenerally,€the€IRS€may€not€take€action€to€collect€a€deficiency€during€the€period€aÏtaxpayer€may€petition€the€Tax€Court,€or€if€the€taxpayer€petitions€the€Tax€Court,€until€the€decisionÏof€the€Tax€Court€becomes€final.€€Actions€to€collect€a€deficiency€attempted€during€this€period€mayÏbe€enjoined,€but€there€is€no€authority€for€ordering€the€refund€of€any€amount€collected€by€the€IRSÏduring€the€prohibited€period.ÌÌÔ_Ôà  àIf€a€taxpayer€contests€a€deficiency€in€the€Tax€Court,€no€credit€or€refund€of€income€tax€forÏthe€contested€taxable€year€generally€may€be€made,€except€in€accordance€with€a€decision€of€theÏTax€Court€that€has€become€final.€€Where€the€Tax€Court€determines€that€an€overpayment€has€Ô_ÔbeenÐ x-0*- Ðmade€and€a€refund€is€due€the€taxpayer,€and€a€party€appeals€a€portion€of€the€decision€of€the€TaxÏCourt,€no€provision€exists€for€the€refund€of€any€portion€of€any€overpayment€that€is€not€contestedÏin€the€appeal.ÌÌÓ  Óòòò òReasons€for€Changeó óóóÐ À ÐÓVãÓÌà  àThe€Committee€believes€that€the€Secretary€should€be€allowed€to€refund€the€uncontestedÏportion€of€an€overpayment€of€taxes,€without€regard€to€whether€other€portions€of€the€overpaymentÏare€contested,€as€well€as€amounts€that€were€collected€during€a€period€in€which€collection€isÏprohibited.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ˜ P  ÐÌà  àThe€provision€provides€that€a€proper€court€(including€the€Tax€Court)€may€order€a€refundÏof€any€amount€that€was€collected€within€the€period€during€which€the€Secretary€is€prohibited€fromÏcollecting€the€deficiency€by€levy€or€other€proceeding.€ò òÐ X ÐÌó óà  àThe€provision€also€allows€the€refund€of€that€portion€of€any€overpayment€determined€byÐ 8ð Ðthe€Tax€Court€to€the€extent€the€overpayment€is€not€contested€on€appeal.ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌà@””#ìàò òòòEffective€Dateó óóóˆÐ À ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌò òv.€€IRS€procedures€relating€to€appeal€of€examinations€and€collections€(sec.€3465€of€the€billРȀ Ðand€new€sec.€7123€of€the€Code)ó óÐ ¸p ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ˜P ÐÌà  àIRS€Appeals€operates€through€regional€Appeals€offices€which€are€independent€of€theÏlocal€District€Director€and€Regional€Commissionerððs€offices.€€The€regional€Directors€of€AppealsÏreport€to€the€National€Director€of€Appeals€of€the€IRS,€who€reports€directly€to€the€CommissionerÏand€Deputy€Commissioner.€€In€general,€IRS€Appeals€offices€have€jurisdiction€over€both€pre„¼assessment€and€post„assessment€cases.€€The€taxpayer€generally€has€an€opportunity€to€seekÏAppeals€jurisdiction€after€failing€to€reach€agreement€with€the€Examination€function€and€beforeÏfiling€a€petition€in€Tax€Court,€after€filing€a€petition€in€Tax€Court€(but€before€litigation),€afterÏassessment€of€certain€penalties,€after€a€claim€for€refund€has€been€rejected€by€the€DistrictÏDirectorððs€office,€and€after€a€proposed€rejection€of€an€offer„in„compromise€in€a€collection€caseÏ(Treas.€Reg.€sec.€601.106(a)(1)).ÌÌà  àIn€certain€cases€under€Coordinated€Examination€Program€procedures,€the€taxpayer€has€anÏopportunity€to€seek€early€Appeals€jurisdiction€over€some€issues€while€an€examination€is€stillÏpending€on€other€issues€(Rev.€Proc.€96„9,€1996„1€C.B.€575).€€The€early€referral€procedures€alsoÏapply€to€employment€tax€issues€on€a€limited€basis€(Announcement€97„52).Ìâ âÔ_ÔÐ ˆ,@), Ðà  àA€mediation€or€alternative€dispute€resolution€(ADR)€process€is€also€available€in€certainÏâ âcases.€€ADR€is€used€at€the€end€of€the€administrative€process€as€a€final€attempt€to€resolve€a€disputeÏbefore€litigation.€€ADR€is€currently€only€available€for€cases€with€more€than€$10€million€inÏdispute.€€ADR€processes€are€also€available€in€bankruptcy€cases€and€cases€involving€a€competentÏauthority€determination.ÌÌà  àIn€April€1996,€the€IRS€implemented€a€Collections€Appeals€Program€within€the€AppealsÏfunction,€which€allows€taxpayers€to€appeal€lien,€levy,€or€seizure€actions€proposed€by€the€IRS.€€InÏJanuary€1997,€appeals€for€installment€agreements€proposed€for€termination€were€added€to€theÏprogram.ÌÌà  àThe€local€IRS€Offices€of€Appeals€are€generally€located€in€the€same€area€as€the€DistrictÏDirectorððs€Offices.€€The€IRS€has€videoconferencing€capability.€€The€IRS€does€not€have€anyÏprogram€to€provide€for€Appeals€conferences€by€videoconferencing€techniques.€ÌÌÓ  Óòòò òReasons€for€Changeó óóóÐ X ÐÓ›ñÓÌà  àThe€Committee€believes€that€the€IRS€should€be€statutorily€bound€to€follow€the€proceduresÏthat€the€IRS€has€developed€to€facilitate€settlement€in€the€IRS€Office€of€Appeals.€€The€CommitteeÏalso€believes€that€mediation,€binding€arbitration,€early€referral€to€Appeals,€and€other€proceduresÏwould€foster€more€timely€resolution€of€taxpayersðð€problems€with€the€IRS.€€ÌÌà  à€In€addition,€the€Committee€believes€that€the€ADR€process€is€valuable€to€the€IRS€andÏtaxpayers€and€should€be€extended€to€all€taxpayers.€ÌÌà  àThe€Committee€believes€that€all€taxpayers€should€enjoy€convenient€access€to€Appeals,Ïregardless€of€their€locality.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ˆ@ ÐÌà  àThe€provision€codifies€existing€IRS€procedures€with€respect€to€early€referrals€to€AppealsÏand€the€Collections€Appeals€Process.€€The€provision€also€codifies€the€existing€ADR€procedures,Ïas€modified€by€eliminating€the€dollar€threshold.€€Ìà  àÌà  àIn€addition,€the€IRS€is€required€to€establish€a€pilot€program€of€binding€arbitration€forÏdisputes€of€all€sizes.€€Under€the€pilot€program,€binding€arbitration€must€be€agreed€to€by€both€theÏtaxpayer€and€the€IRS.€€Ìà  àÌà  àThe€provision€requires€the€IRS€to€make€Appeals€officers€available€on€a€regular€basis€inÏeach€State,€and€consider€videoconferencing€of€Appeals€conferences€for€taxpayers€seeking€appealsÏin€rural€or€remote€areas.€€ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ ¨*`'* ÐÌà  àThe€provision€is€effective€as€of€the€date€of€enactment.ÌÐ x-0*- Ðò òvi.€€Application€of€certain€fair€debt€collection€practices€(sec.€3466€of€the€bill€and€new€sec.Ð H Ð6304€of€the€Code)ó óÐ 8ð ÐÌòòò òÓ  ÓPresent€Lawó óóóÐ Ð ÐÓÛøÓÌà  àThe€Fair€Debt€Collection€Practices€Act€provides€a€number€of€rules€relating€to€debtÏcollection€practices.€Among€these€are€restrictions€on€communication€with€the€consumer,€such€asÏa€general€prohibition€on€telephone€calls€outside€the€hours€of€8:00€a.m.€to€9:00€p.m.€local€time,Ïand€prohibitions€on€harassing€or€abusing€the€consumer.€In€general,€these€provisions€do€not€applyÏto€the€Federal€Government.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ˜ P  ÐÓÀúÓÌà  àThe€Committee€believes€that€the€IRS€should€be€at€least€as€considerate€to€taxpayers€asÏprivate€creditors€are€required€to€be€with€their€customers.€€Accordingly,€the€Committee€believesÏthat€it€is€appropriate€to€require€the€IRS€to€comply€with€applicable€portions€of€the€Fair€DebtÏCollection€Practices€Act,€so€that€both€taxpayers€and€the€IRS€are€fully€aware€of€theseÏrequirements.€ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ Ð ÐÓüÓÌà  àThe€provision€makes€the€restrictions€relating€to€communication€with€the€taxpayer/debtorÏand€the€prohibitions€on€harassing€or€abusing€the€debtor€applicable€to€the€IRS€by€incorporatingÏthese€provisions€into€the€Internal€Revenue€Code.€The€restrictions€relating€to€communication€withÏthe€taxpayer/debtor€are€not€intended€to€hinder€the€ability€of€the€IRS€to€respond€to€taxpayerÏinquiries€(such€as€answering€telephone€calls€from€taxpayers).ÌÌà@””#ìàòòò òEffective€Dateó óóóˆÐ ˜P ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌò òvii.€€Guaranteed€availability€of€installment€agreements€(sec.€3467€of€the€bill€and€sec.€6159€ofÐ X  Ðthe€Code)ó óÐ H!  ÐÌÓ  Óòòò òPresent€LawÐ (#à" Ðó óóóÓÄÿÓÌà  àSection€6159€of€the€Code€authorizes€the€IRS€to€enter€into€written€agreements€with€anyÏtaxpayer€under€which€the€taxpayer€is€allowed€to€pay€taxes€owed,€as€well€as€interest€and€penalties,Ïin€installment€payments€if€the€IRS€determines€that€doing€so€will€facilitate€collection€of€theÏamounts€owed.€An€installment€agreement€does€not€reduce€the€amount€of€taxes,€interest,€orÏpenalties€owed.€€However,€it€does€provide€for€a€longer€period€during€which€payments€may€beÏmade€during€which€other€IRS€enforcement€actions€(such€as€levies€or€seizures)€are€held€inÏabeyance.€Many€taxpayers€can€request€an€installment€agreement€by€filing€form€9465.€This€formÏis€relatively€simple€and€does€not€require€the€submission€of€detailed€financial€statements.€The€IRSÏin€most€instances€readily€approves€these€requests€if€the€amounts€involved€are€not€large€(inÏgeneral,€below€$10,000)€and€if€the€taxpayer€has€filed€tax€returns€on€time€in€the€past.€SomeÐ x-0*- Ðtaxpayers€are€required€to€submit€background€information€to€the€IRS€substantiating€theirÏapplication.€If€the€request€for€an€installment€agreement€is€approved€by€the€IRS,€a€user€fee€of€$43Ïis€charged.€This€user€fee€is€in€addition€to€the€tax,€interest,€and€penalties€that€are€owed.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ À ÐÓçÓÌà  àThe€Committee€believes€that€the€ability€to€make€payments€of€tax€liability€by€installmentÏenhances€taxpayer€compliance.€€In€addition,€the€Committee€believes€that€the€IRS€should€beÏflexible€in€finding€ways€to€work€with€taxpayers€who€are€sincerely€trying€to€meet€theirÏobligations.€€Accordingly,€the€Committee€believes€that€the€IRS€should€make€it€easier€forÏtaxpayers€to€enter€into€installment€agreements.ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ ˆ@  ÐÓÑÓÌà  àThe€provision€requires€the€Secretary€to€enter€an€installment€agreement,€at€the€taxpayer'sÏoption,€if:ÌÌà  à(1)€the€liability€is€$10,000,€or€less€(excluding€penalties€and€interest);ÌÌà  à(2)€within€the€previous€5€years,€the€taxpayer€has€not€failed€to€file€or€to€pay,€nor€entered€anÏinstallment€agreement€under€this€provision;ÌÌà  à(3)€if€requested€by€the€Secretary,€the€taxpayer€submits€financial€statements,€and€theÏSecretary€determines€that€the€taxpayer€is€unable€to€pay€the€tax€due€in€full;ÌÌà  à(4)€the€installment€agreement€provides€for€full€payment€of€the€liability€within€3€years;€andÌÌà  à(5)€the€taxpayer€agrees€to€continue€to€comply€with€the€tax€laws€and€the€terms€of€theÏagreement€for€the€period€(up€to€3€years)€that€the€agreement€is€in€place.ÌÌò òòòà@””#ìàEffective€Dateó óóóˆÐ h  ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌò òÓ  ÓF.€€Disclosures€to€Taxpayersó óÐ (#à" ÐÓ  ÓÌò ò1.€€Explanation€of€joint€and€several€liability€(sec.€3501€of€the€bill)ó óÐ %À!$ ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ è& #& ÐÌà  àIn€general,€spouses€who€file€a€joint€tax€return€are€each€fully€responsible€for€the€accuracyÏof€the€tax€return€and€for€the€full€liability.€€Spouses€who€wish€to€avoid€such€joint€and€severalÏliability€may€file€as€married€persons€filing€separately.€€Special€rules€apply€in€the€case€of€innocentÏspouses€pursuant€to€section€6013(e).ÌÌÓ  Óòòò òReasons€for€Ô_ÔChangeó óóóÐ x-0*- ÐÓ ÓÌà  àThe€Committee€believes€that€married€taxpayers€need€to€clearly€understand€the€legalÏimplications€of€signing€a€joint€return€and€that€it€is€appropriate€for€the€IRS€to€provide€theÏinformation€necessary€for€that€understanding.€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ø° ÐÌà  àThe€provision€requires€that,€no€later€than€180€days€after€the€date€of€enactment,€the€IRSÏmust€establish€procedures€clearly€to€alert€married€taxpayers€of€their€joint€and€several€liability€onÏall€appropriate€tax€publications€and€instructions€and€of€the€availability€of€electing€separateÏliability.€€It€is€anticipated€that€the€IRS€will€make€an€appropriate€cross„reference€to€theseÏstatements€near€the€signature€line€on€appropriate€tax€forms.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ x0  ÐÌà  àThe€provision€requires€that€the€procedures€be€established€as€soon€as€practicable,€but€noÏlater€than€180€days€after€the€date€of€enactment.ÌÌò ò2.€€Explanation€of€taxpayersðð€rights€in€interviews€with€the€IRS€(sec.€3502€of€the€bill)ó óÐ (à ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ À ÐÌà  àPrior€to€or€at€initial€in„person€audit€interviews,€the€IRS€must€explain€to€taxpayers€theÏaudit€process€and€taxpayersðð€rights€under€that€process€(sec.€7521).€€In€addition,€prior€to€or€atÏinitial€in„person€collection€interviews,€the€IRS€must€explain€the€collection€process€and€taxpayersððÏrights€under€that€process.€€If€a€taxpayer€clearly€states€during€an€interview€with€the€IRS€that€theÏtaxpayer€wishes€to€consult€with€the€taxpayerððs€representative,€the€interview€must€be€suspended€toÏafford€the€taxpayer€a€reasonable€opportunity€to€consult€with€the€representative.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ x0 ÐÓVÓÌà  àThe€Committee€believes€that€taxpayers€should€be€more€fully€informed€of€their€rights€toÏrepresentation€in€dealings€with€the€IRS,€and€that€those€rights€should€be€respected.ÌÔ_ÔÔ_ÔÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ (#à" ÐÌà  àThe€provision€requires€that€the€IRS€rewrite€Publication€1€(ð ðYour€Rights€as€a€Taxpayerðð)Ïto€more€clearly€inform€taxpayers€of€their€rights€(1)€to€be€represented€by€a€representative€and€(2)€ifÏthe€taxpayer€is€so€represented,€that€the€interview€may€not€proceed€without€the€presence€of€theÏrepresentative€unless€the€taxpayer€consents.ÌÌà  àIn€addition,€the€provision€requires€the€Treasury€Inspector€General€for€Tax€AdministrationÏto€report€annually€as€to€whether€IRS€employees€are€directly€contacting€taxpayers€who€haveÏindicated€that€they€prefer€their€representatives€be€contacted.ÌÌÔ_Ôò òòòà@””#ìàEffective€Ô_ÔDateó óóóˆÐ x-0*- Їà  àThe€addition€to€Publication€1€must€be€made€not€later€than€180€days€after€the€date€ofÏenactment.€€The€annual€reports€would€begin€in€1999.ÌÌò ò3.€€Disclosure€of€criteria€for€examination€selection€(sec.€3503€of€the€bill)ó óÐ Ð ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ø° ÐÌà  àThe€IRS€examines€Federal€tax€returns€to€determine€the€correct€liability€of€taxpayers.€€TheÏIRS€selects€returns€to€be€audited€in€a€number€of€ways,€such€as€through€a€computerizedÏclassification€system€(the€discriminant€function€(ð ðDIFðð)€system).ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ˜ P  ÐÌÓÏÓà  àThe€Committee€believes€it€is€important€that€taxpayers€understand€the€reasons€they€may€beÏselected€for€examination.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ H ÐÌà  àThe€provision€requires€that€IRS€add€to€Publication€1€(ð ðYour€Rights€as€a€Taxpayerðð)€aÏstatement€which€sets€forth€in€simple€and€nontechnical€terms€the€criteria€and€procedures€forÏselecting€taxpayers€for€examination.€€The€statement€must€not€include€any€information€theÏdisclosure€of€which€would€be€detrimental€to€law€enforcement.€€The€statement€must€specify€theÏgeneral€procedures€used€by€the€IRS,€including€whether€taxpayers€are€selected€for€examination€onÏthe€basis€of€information€in€the€media€or€from€informants.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ ¸p ÐÌà  àThe€addition€to€Publication€1€must€be€made€not€later€than€180€days€after€the€date€ofÏenactment.ÌÌò ò4.€€Explanations€of€appeals€and€collection€process€(sec.€3504€of€the€bill)ó óÐ h  ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ H!  ÐÌà  àThere€is€no€statutory€requirement€that€specific€notices€be€given€to€taxpayers€along€withÏthe€first€letter€of€proposed€deficiency€that€allows€the€taxpayer€an€opportunity€for€administrativeÏreview€in€the€IRS€Office€of€Appeals.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ è& #& ÐÌÓD Óà  àThe€Committee€believes€it€is€important€that€taxpayers€understand€they€have€a€right€toÏhave€any€assessment€reviewed€by€the€IRS€Office€of€Appeals,€as€well€as€be€informed€of€the€stepsÏthey€must€take€to€obtain€that€review.€€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ˆ,@), ÐÐ x-0*- Ðà  àThe€provision€requires€that,€no€later€than€180€days€after€the€date€of€enactment,€aÏdescription€of€the€entire€process€from€examination€through€collections,€including€the€assistanceÏavailable€to€taxpayers€from€the€Taxpayer€Advocate€at€various€points€in€the€process,€be€providedÏwith€the€first€letter€of€proposed€deficiency€that€allows€the€taxpayer€an€opportunity€forÏadministrative€review€in€the€IRS€Office€of€Appeals.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ è  ÐÌà  àThe€provision€requires€that€the€explanation€be€included€as€soon€as€practicable,€but€noÏlater€than€180€days€after€the€date€of€enactment.ÌÌò ò5.€€Explanation€of€reason€for€refund€denial€(sec.€3505€of€the€bill€and€new€sec.€6402(j)€of€theÐ ˜ P  ÐCode)ó óÐ ˆ@  ÐÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ h  ÐÌà  àThe€Examination€Division€of€the€IRS€examines€claims€for€refund€submitted€by€taxpayers.€ÏThe€Internal€Revenue€Manual€requires€examination€or€other€audit€action€on€refund€claims€withinÏ30€days€after€receipt€of€the€claims.€€The€refund€claim€is€preliminarily€examined€to€determine€if€itÏshould€be€disallowed€because€it€(1)€was€untimely€filed,€(2)€was€based€solely€on€allegedÏunconstitutionality€of€the€Revenue€Acts,€(3)€was€already€waived€by€the€taxpayer€as€considerationÏfor€a€settlement,€(4)€covers€a€taxable€year€and€issues€which€were€the€subject€of€a€final€closingÏagreement€or€an€offer€in€compromise,€or€(5)€relates€to€a€return€closed€on€the€basis€of€a€final€orderÏof€the€Tax€Court.€€In€those€cases,€the€taxpayer€will€receive€a€form€from€the€IRS€stating€that€theÏclaim€for€refund€cannot€be€considered.€€Other€cases€will€be€examined€as€quickly€as€possible€andÏthe€disposition€of€the€case,€including€the€reasons€for€the€disallowance€or€partial€disallowance€ofÏthe€refund€claim,€must€be€stated€in€the€portion€of€the€revenue€agentððs€report€that€is€sent€to€theÏtaxpayer.€ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌò òòòÓ  ÓReasons€for€Changeó óóóÐ x0 ÐÓµ)ÓÌà  àThe€Committee€believes€that€taxpayers€are€entitled€to€an€explanation€of€the€reason€for€theÏdisallowance€or€partial€disallowance€of€a€refund€claim€so€that€the€taxpayer€may€appropriatelyÏrespond€to€the€IRS.€€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ $Ð # ÐÌà  àThe€provision€requires€the€IRS€to€notify€the€taxpayer€of€the€specific€reasons€for€theÏdisallowance€(or€partial€disallowance)€of€the€refund€claim.€€ÌÌò òòòà@””#ìàEffective€Dateó óóóˆÐ È(€%( ÐÌà  àThe€provision€is€effective€180€days€after€the€date€of€enactment.ÌÌÔ_Ôò ò6.€€Statements€to€taxpayers€with€installment€agreements€(sec.€3506€of€the€bill)Ð ˆ,@), ÐÐ x-0*- Ðà@ÕÕ%ìàòòPresent€Lawó óóóˆÐ H ÐÌà  àA€taxpayer€entering€into€an€installment€agreement€to€pay€tax€liabilities€due€to€the€IRSÏmust€complete€a€Form€433„D€which€sets€forth€the€installment€amounts€to€be€paid€monthly€andÏthe€total€amount€of€tax€due.€€The€IRS€does€not€provide€the€taxpayer€with€an€annual€statementÏreflecting€the€amounts€paid€and€the€amount€due€remaining.€ÌÌà@••!ìàò òòòReasons€for€Changeó óóóˆÐ Ø  ÐÌà  àThe€Committee€believes€that€taxpayers€who€enter€into€an€installment€agreement€shouldÏbe€kept€informed€of€amounts€applied€towards€the€outstanding€tax€liability€and€amounts€remainingÏdue.€€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ x0  ÐÌà  àThe€provision€requires€the€IRS€to€send€every€taxpayer€in€an€installment€agreement€anÏannual€statement€of€the€initial€balance€owed,€the€payments€made€during€the€year,€and€theÏremaining€balance.€€ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ Ð ÐÌà  àThe€provision€is€effective€no€later€than€180€days€after€the€date€of€enactment.€€ÌÌò ò7.€€Notification€of€change€in€tax€matters€partner€(sec.€3507€of€the€bill€and€sec.€6231(a)(7)€ofÐ Ø Ðthe€Code)ÌÌà@ÕÕ%ìàòòPresent€Lawó óóóˆÐ ¨` ÐÌà  àIn€general,€the€tax€treatment€of€items€of€partnership€income,€loss,€deductions€and€creditsÏare€determined€at€the€partnership€level€in€a€unified€partnership€proceeding€rather€than€in€separateÏproceedings€with€each€partner.€€In€providing€notice€to€taxpayers€with€respect€to€partnershipÏproceedings,€the€IRS€relies€on€information€furnished€by€a€party€designated€as€the€tax€mattersÏpartner€(TMP)€of€the€partnership.€€The€TMP€is€required€to€keep€each€partner€informed€of€allÏadministrative€and€judicial€proceedings€with€respect€to€the€partnership€(sec.€6233(g)).€€UnderÏcertain€circumstances,€the€IRS€may€require€the€resignation€of€the€incumbent€TMP€and€designateÏanother€partner€as€the€TMP€of€a€partnership€(sec.€6231(a)(7)).€€ÌÌà@••!ìàò òòòReasons€for€Changeó óóóˆÐ ø%°"% ÐÌà  àThe€Committee€is€concerned€that,€in€cases€where€the€IRS€designates€the€TMP,€that€theÏother€partners€may€be€unaware€of€such€designation.€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ ¨*`'* ÐÌà  àThe€provision€requires€the€IRS€to€notify€all€partners€of€any€resignation€of€the€tax€mattersÏpartner€that€is€required€by€the€IRS,€and€to€notify€the€partners€of€any€successor€tax€matters€partner.€Ð x-0*- Їà@””#ìàò òòòEffective€Dateó óóóˆÐ H ÐÌà  àThe€provision€applies€to€selections€of€tax€matters€partners€made€by€the€Secretary€after€theÏdate€of€enactment.ÌÌò òà@¯¯ìàG.€€Low„Income€Taxpayer€Clinics€(sec.€3601€of€the€bill€and€new€sec.€7526€of€the€Code)ó óˆÐ ø° ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ Ø  ÐÌà  àThere€are€no€provisions€in€present€law€providing€for€assistance€to€clinics€that€assist€low„¼income€taxpayers.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ˆ@  ÐÓû8ÓÌà  àThe€Committee€believes€that€the€provision€of€tax€services€by€accredited€nominal€feeÏclinics€to€low„income€individuals€and€those€for€whom€English€is€a€second€language€will€improveÏcompliance€with€the€Federal€tax€laws€and€should€be€encouraged.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ (à ÐÌà  àThe€Secretary€is€authorized€to€provide€up€to€€$3,000,000€per€year€in€matching€grants€toÏcertain€low„income€taxpayer€clinics.€No€clinic€could€receive€more€than€$100,000€per€year.ÌÌà  àEligible€clinics€would€be€those€that€charge€no€more€than€a€nominal€fee€to€either€representÏlow„income€taxpayers€in€controversies€with€the€IRS€or€provide€tax€information€to€individuals€forÏwhom€English€is€a€second€language.ÌÌà  àA€ð ðclinicðð€would€include€(1)€a€clinical€program€at€an€accredited€law€school,€an€accreditedÏbusiness€school,€or€an€accredited€accounting€school,€in€which€students€represent€low„incomeÏtaxpayers,€or€(2)€an€organization€exempt€from€tax€under€Code€section€501(c)€which€eitherÏrepresents€low„income€taxpayers€or€provides€referral€to€qualified€representatives.ÌÌà@””#ìàòòò òEffective€DateˆÐ H!  Ðó óóóÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌÓ  Óò òH.€€Other€ProvisionsÐ %À!$ Ðó óÓ  ÓÌò ò1.€€Cataloging€complaints€(sec.€3701€of€the€bill)ó óÐ è& #& ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ È(€%( ÐÌà  àThe€IRS€is€required€to€make€an€annual€report€to€the€Congress,€beginning€in€1997,€on€allÏcategories€of€instances€involving€allegations€of€misconduct€by€IRS€employees,€arising€eitherÏâ âfrom€internally€identified€cases€or€from€taxpayer€or€third„party€initiated€complaints.€€The€reportÐ ˆ,@), Ðmust€identify€the€nature€of€the€misconduct€or€complaint,€the€number€of€instances€received€byÏcategory,€and€the€disposition€of€the€complaints.Ìâ âÌò òòòÓ  ÓReasons€for€Changeó óóóÐ Ð ÐÓí@ÓÌà  àThe€Committee€believes€that€all€allegations€of€misconduct€by€IRS€employees€must€beÏcarefully€investigated.€€The€Committee€also€believes€that€the€annual€report€to€Congress€will€helpÏdevelop€a€public€perception€that€the€IRS€takes€such€allegations€of€misconduct€seriously.€€€TheÏCommittee€is€concerned€that,€in€the€absence€of€records€detailing€taxpayer€complaints€ofÏmisconduct€on€an€individual€employee€basis,€€the€IRS€will€not€be€able€to€adequately€investigateÏsuch€allegations€or€properly€prepare€the€required€report.€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ˆ@  ÐÌà  àThe€provision€requires€that,€in€collecting€data€for€this€report,€records€of€taxpayerÏcomplaints€of€misconduct€by€IRS€employees€must€be€maintained€on€an€individual€employeeÏbasis.€€These€individual€records€are€not€to€be€listed€in€the€report.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ (à ÐÌà  àThe€requirement€is€effective€on€the€date€of€enactment.ÌÌò ò2.€€Archive€of€records€of€Internal€Revenue€Service€(sec.€3702€of€the€bill€and€sec.€6103€of€theÐ è  ÐCode)ó óÐ Ø ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ¸p ÐÌà  àThe€IRS€is€obligated€to€transfer€agency€records€to€the€National€Archives€and€RecordsÏAdministration€(ð ðNARAðð)€for€retention€or€disposal.€€The€IRS€is€also€obligated€to€protectÏconfidential€taxpayer€records€from€disclosure.€€These€two€obligations€have€created€conflictÏbetween€NARA€and€the€IRS.€€Under€present€law,€€the€IRS€determines€whether€records€containÏtaxpayer€information.€€Once€the€IRS€has€made€that€determination,€NARA€is€not€permitted€toÏexamine€those€records.€€NARA€has€expressed€concern€that€the€IRS€may€be€using€the€disclosureÏprohibition€to€improperly€conceal€agency€records€with€historical€significance.€€ÌÌò òòòIRS€obligation€to€archive€recordsóóó óÐ $Ð # ÐÌà  àThe€IRS,€like€all€other€Federal€agencies,€must€create,€maintain,€and€preserve€agencyÏrecords€in€accordance€with€section€3101€of€title€44€of€the€United€States€Code.€€NARA€is€theÏGovernment€agency€responsible€for€overseeing€the€management€of€the€records€of€the€FederalÏâ âgovernment.׃Š×Ý ƒ #ÃÝòòÚ  Ú37Ú  ÚóóÝ  Ý×  ×€€Federal€agencies€are€required€to€deposit€significant€and€historical€records€withÐ È(€%( ÐNARA.׃‹×Ý ƒ #ÃÝòòÚ  Ú38Ú  ÚóóÝ  Ý×  ×€€The€head€of€each€Federal€agency€must€also€establish€safeguards€against€the€removal€orÐ H Ðâ âloss€of€records.×ƒŽ€×Ý ƒ #ÃÝòòÚ  Ú39Ú  ÚóóÝ  Ý×  ׀Р8ð ÐÌòòò òAuthority€of€NARAóóÐ Ð Ðó óÌà  àNARA€is€authorized,€under€the€Federal€Records€Act,€to€establish€standards€for€theÏselective€retention€of€records€of€continuing€value.׃‘8×Ý ƒ #ÃÝòòÚ  Ú40Ú  ÚóóÝ  Ý×  ×€€NARA€has€the€statutory€authority€to€inspectÐ è  Ðrecords€management€practices€of€Federal€agencies€and€to€make€recommendations€forÏimprovement.׃”ð×Ý ƒ #ÃÝòòÚ  Ú41Ú  ÚóóÝ  Ý×  ×€€The€head€of€each€Federal€agency€must€submit€to€NARA€a€list€of€records€to€beÐ È € Ðdestroyed€and€a€schedule€for€such€destruction.׃—¨×Ý ƒ #ÃÝòòÚ  Ú42Ú  ÚóóÝ  Ý×  ×€€NARA€examines€the€list€to€determine€if€any€ofÐ ¸ p  Ðthe€records€on€the€list€have€sufficient€administrative,€legal€research,€or€other€value€to€warrantÏtheir€continued€preservation.€€In€many€cases,€the€description€of€the€record€on€the€list€is€sufficientÏfor€NARA€to€make€the€determination.€€For€example,€NARA€does€not€need€to€inspect€PresidentialÏtax€returns€to€determine€that€they€have€historical€value€and€should€be€retained.€€In€some€cases,ÏNARA€may€find€it€helpful€to€examine€a€particular€record.€€NARA€has€general€authority€toÏinspect€records€solely€for€the€purpose€of€making€recommendations€for€the€improvement€ofÏrecords€management€practices.׃š` ×Ý ƒ #ÃÝòòÚ  Ú43Ú  ÚóóÝ  Ý×  ×€€However,€tax€returns€and€return€information€can€only€beÐ H Ðdisclosed€under€the€authority€provided€in€section€6103€of€the€Internal€Revenue€Code.€There€is€noÏexception€to€the€disclosure€prohibition€for€records€management€inspection€by€NARA.׃ ×Ý ƒ #ÃÝòòÚ  Ú44Ú  ÚóóÝ  Ý×  ×€€Ð (à ÐÌà  àIn€connection€with€its€evaluation€of€the€records€management€system€of€the€IRS,€NARAÏnoted€several€instances€where€the€disclosure€prohibitions€of€Code€section€6103€complicated€theirÏreview€of€many€IRS€records.€€ÌÌà  àNARA€is€also€responsible€for€the€custody,€use€and€withdrawal€of€records€transferred€toÏit.׃ Ð ×Ý ƒ #ÃÝòòÚ  Ú45Ú  ÚóóÝ  Ý×  ×€€Statutory€provisions€that€restrict€public€access€to€the€records€in€the€hands€of€the€agency€fromÐ ¸p Ðwhich€the€records€were€transferred€also€apply€to€NARA.€€Thus,€if€a€confidential€record,€such€as€aÏPresidential€tax€return,€is€transferred€to€NARA€for€archival€storage,€NARA€is€not€permitted€toÏâ âdisclose€it.€€In€general,€the€application€of€such€restrictions€to€records€in€the€hands€of€NARAÐ ˆ@ Ðexpire€after€the€records€have€been€in€existence€for€30€years.׃£×Ý ƒ #ÃÝòòÚ  Ú46Ú  ÚóóÝ  Ý×  ×€€The€issue€of€whether€the€specificÐ H Ðâ âdisclosure€prohibition€of€section€6103€takes€precedence€over€the€general€30„year€expiration€ofÏrestrictions€generally€applicable€to€records€in€the€hands€of€NARA€has€not€been€addressed€by€aÏcourt,€but€an€informal€advisory€opinion€from€the€Office€of€Legal€Counsel€of€the€AttorneyÏGeneral€concluded€that€the€30„year€expiration€provision€would€not€reach€records€subject€toÏsection€6103.׃¦€×Ý ƒ #ÃÝòòÚ  Ú47Ú  ÚóóÝ  Ý×  ×€€Ð ø° ÐÌò òòòConfidentiality€requirementsóóó óÐ Ø  ÐÌà  àThe€IRS€must€preserve€the€confidentiality€of€taxpayer€information€contained€in€FederalÏincome€tax€returns.€€Such€information€may€not€be€disclosed€except€as€authorized€under€CodeÏsection€6103.€€Section€6103€was€substantially€revised€in€1976€to€address€Congressðð€concern€thatÏtax€information€was€being€used€by€Federal€agencies€in€pursuit€of€objectives€unrelated€toÏadministration€and€enforcement€of€the€tax€laws.€€Congress€believed€that€the€wide„spread€use€ofÏtax€information€by€agencies€other€than€the€IRS€could€adversely€affect€the€willingness€ofÏtaxpayers€to€comply€voluntarily€with€the€tax€laws€and€could€undermine€the€countryððs€self„¼assessment€tax€system.׃©(×Ý ƒ #ÃÝòòÚ  Ú48Ú  ÚóóÝ  Ý×  ×€€€Section€6103€does€not€authorize€the€disclosure€of€confidential€returnÐ H Ðinformation€to€NARA.€ÌÌà  àSection€6103€restricts€the€disclosure€of€returns€and€return€information€only.€€ReturnÏmeans€any€tax€or€information€return,€declaration€of€estimated€tax,€or€claim€for€refund,€includingÏschedules€and€attachments€thereto,€filed€with€the€IRS.€€Return€information€includes€theÏtaxpayerððs€name;€nature€and€source€or€amount€of€income;€and€whether€the€taxpayerððs€return€isÏunder€investigation.€€Section€6103(b)(2)€provides€that€ð ðnothing€in€any€other€provision€of€lawÏshall€be€construed€to€require€the€disclosure€of€standards€used€or€to€be€used€for€the€selection€ofÏreturns€for€examination,€or€data€used€or€to€be€used€for€determining€such€standards,€if€theÏSecretary€determines€that€such€disclosure€will€seriously€impair€assessment,€collection,€orÏenforcement€under€the€internal€revenue€laws.ðð€€Section€6103€does€not€restrict€the€disclosure€ofÏother€records€required€to€be€maintained€by€the€IRS,€such€as€records€documenting€agency€policy,Ïprograms€and€activities,€and€agency€histories.€€Such€records€are€required€to€be€made€available€toÏthe€public€under€the€Freedom€of€Information€Act€(ð ðFOIAðð).׃¬à×Ý ƒ #ÃÝòòÚ  Ú49Ú  ÚóóÝ  Ý×  ×€€Ð h  ÐÌà  àThe€Internal€Revenue€Code€prohibits€disclosure€of€tax€returns€and€return€information,Ïexcept€to€the€extent€specifically€authorized€by€the€Internal€Revenue€Code€(sec.€6103).€Ïâ âUnauthorized€disclosure€is€a€felony€punishable€by€a€fine€not€exceeding€$5,000€or€imprisonment€Ð (#à" Ðof€not€more€than€five€years,€or€both€(sec.€7213).€€An€action€for€civil€damages€also€may€beÏbrought€for€unauthorized€disclosure€(sec.€7431).Ìâ âÌà@••!ìàò òòòReasons€for€Changeó óóóˆÐ Ð ÐÌà  àThe€Committee€believes€that€it€is€appropriate€to€permit€disclosure€to€NARA€for€purposesÏof€scheduling€records€for€destruction€or€retention,€while€at€the€same€time€preserving€theÏconfidentiality€of€taxpayer€information€in€those€documents.ÌÌà@ÅÅìàò òòòExplanation€of€ProvisionˆÐ ¸ p  Ðó óóóÌà  àThe€provision€provides€an€exception€to€the€disclosure€rules€to€require€IRS€to€disclose€IRSÏrecords€to€officers€or€employees€of€NARA,€upon€written€request€from€the€U.S.€Archivist,€forÏpurposes€of€the€appraisal€of€such€records€for€destruction€or€retention.€€The€present„lawÏprohibitions€on€and€penalties€for€disclosure€of€tax€information€would€generally€apply€to€NARA.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ H ÐÌà  àThe€provision€is€effective€for€requests€made€by€the€Archivist€after€the€date€of€enactment.ÌÌò ò3.€€Payment€of€taxes€(sec.€3703€of€the€bill)ó óÐ À ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ è  ÐÌà  àThe€Code€provides€that€it€is€lawful€for€the€Secretary€to€accept€checks€or€money€orders€asÏpayment€for€taxes,€to€the€extent€and€under€the€conditions€provided€in€regulations€prescribed€byÏthe€Secretary€(sec.€6311).€€Those€regulations€state€that€checks€or€money€orders€should€be€madeÏpayable€to€the€Internal€Revenue€Service.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ x0 ÐÓiÓÌà  àThe€Committee€believes€that€it€more€appropriate€that€checks€be€made€payable€to€theÏUnited€States€Treasury.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ (#à" ÐÌà  àThe€provision€requires€the€Secretary€or€his€delegate€to€establish€such€rules,€regulations,Ïand€procedures€as€are€necessary€to€allow€payment€of€taxes€by€check€or€money€order€to€be€madeÏpayable€to€the€United€States€Treasury.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ È(€%( ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌò ò4.€€Clarification€of€authority€of€Secretary€relating€to€the€making€of€elections€(sec.€3704€ofÐ ˆ,@), Ðthe€bill€and€sec.€7805€of€the€Ô_ÔCode)ó óÐ x-0*- Їà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ H ÐÌà  àExcept€as€otherwise€provided,€elections€provided€by€the€Code€are€to€be€made€in€suchÏmanner€as€the€Secretary€shall€by€regulations€or€forms€prescribe.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ø° ÐÓ1mÓÌà  àThe€Committee€wishes€to€eliminate€any€confusion€over€the€type€of€guidance€in€which€theÏSecretary€may€prescribe€the€manner€of€making€any€election.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ¨ `  ÐÌà  àThe€provision€clarifies€that,€except€as€otherwise€provided,€the€Secretary€may€prescribe€theÏmanner€of€making€of€any€election€by€any€reasonable€means.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ X ÐÌà  àThe€provision€is€effective€as€of€the€date€of€enactment.ÌÌò ò5.€€IRS€employee€contacts€(sec.€3705€of€the€bill)ó óÐ Ð ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ø° ÐÌà  àThe€IRS€sends€many€different€notices€to€taxpayers.€€Some€(but€not€all)€of€these€noticesÏcontain€a€name€and€telephone€number€of€an€IRS€employee€who€the€taxpayer€may€call€if€theÏtaxpayer€has€any€questions.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ˜P ÐÓþpÓÌà  àThe€Committee€believes€that€it€is€important€that€taxpayers€receive€prompt€answers€toÏtheir€questions€about€their€tax€liability.€€Many€taxpayers€report€frustration€because€they€cannotÏdetermine€the€appropriate€IRS€employee€to€contact€for€information.€€ÌÔ_ÔÔ_ÔÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ 8"ð! ÐÌà  àThe€provision€requires€that€all€IRS€notices€and€correspondence€contain€a€name€andÏtelephone€number€of€an€IRS€employee€whom€the€taxpayer€may€call.€€In€addition,€to€the€extentÏpracticable€and€where€it€is€advantageous€to€the€taxpayer,€the€IRS€should€assign€one€employee€toÏhandle€a€matter€with€respect€to€a€taxpayer€until€that€matter€is€resolved.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ È(€%( ÐÌà  àThe€provision€is€effective€60€days€after€the€date€of€enactment.ÌÌò ò6.€€Use€of€pseudonyms€by€IRS€employees€(sec.€3706€of€the€bill)ó óÐ ˆ,@), ÐÐ x-0*- Ðà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ H ÐÌà  àThe€Federal€Service€Impasses€Panel€has€ruled€that€if€an€employee€believes€that€use€of€theÏemployeeððs€last€name€only€will€identify€the€employee€due€to€the€unique€nature€of€the€employeeððsÏlast€name,€and/or€nature€of€the€office€locale,€then€the€employee€may€ð ðregisterðð€a€pseudonym€withÏthe€employeeððs€supervisor.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ Ø  ÐÓ¹vÓÌà  àThe€Committee€is€concerned€that€IRS€employees€may€use€pseudonyms€in€inappropriateÏcircumstances.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ˆ@  ÐÌà  àThe€provision€provides€that€an€IRS€employee€may€use€a€pseudonym€only€if€(1)€adequateÏjustification,€such€as€protecting€personal€safety,€for€using€the€pseudonym€was€provided€by€theÏemployee€as€part€of€the€employeeððs€request€and€(2)€management€has€approved€the€request€to€useÏthe€pseudonym€prior€to€its€use.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ Ð ÐÌà  àThe€provision€is€effective€with€respect€to€requests€made€after€the€date€of€enactment.ÌÌò ò7.€€Conferences€of€right€in€the€National€Office€of€IRS€(sec.€3707€of€the€bill)ó óÐ Ø ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ¸p ÐÌà  àIn€any€matter€involving€the€submission€of€a€substantive€legal€matter€involving€a€specificÏtaxpayer€to€the€National€Office€of€the€IRS,€the€taxpayer€is€entitled€to€at€least€one€conference€(theÏð ðconference€of€rightðð)€at€which€it€can€explain€its€position.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ X  ÐÓe{ÓÌà  àThe€Committee€is€concerned€that€the€presence€of€the€IRS€employee€with€whom€theÏtaxpayer€has€previously€dealt€may€hinder€efficient€resolution€of€the€issue€in€the€National€Office.ÌÔ_ÔÔ_ÔÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ %À!$ ÐÌà  àThe€provision€gives€a€taxpayer€the€right€to€limit€participation€in€its€conference€of€right€toÏIRS€national€office€personnel.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ ¸)p&) ÐÌà  àThe€provision€is€effective€with€respect€to€requests€made€after€the€date€of€enactment.ÌÌò ò8.€€Illegal€tax€protester€designations€(sec.€3708€of€the€bill)ó óÐ x-0*- Їà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ H ÐÌà  àThe€IRS€designates€individuals€who€meet€certain€criteria€as€ð ðillegal€tax€protestersðð€in€theÏIRS€Master€File.€€ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ ø° ÐÓ-ÓÌà  àThe€Committee€is€concerned€that€taxpayers€may€be€stigmatized€by€a€designation€as€anÏð ðillegal€tax€protester.ðð€€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ¨ `  ÐÌà  àThe€provision€prohibits€the€use€by€the€IRS€of€the€ð ðillegal€tax€protesterðð€designation.€AnyÏextant€designation€in€the€individual€master€file€(the€main€computer€file)€must€be€removed€andÏany€other€extant€designation€(such€as€on€paper€records€that€have€been€archived)€must€beÏdisregarded.€€The€IRS€is,€however,€permitted€to€designate€appropriate€taxpayers€as€nonfilers.€ÏThe€IRS€must€remove€the€nonfiler€designation€once€the€taxpayer€has€filed€valid€tax€returns€forÏtwo€consecutive€years€and€paid€all€taxes€shown€on€those€returns.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ Ð ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.€ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌò ò9.€€Provision€of€confidential€information€to€Congress€by€whistleblowers€(sec.€3709€of€the€billÐ Ø Ðand€sec.€6103(f)€of€the€Code)ÌÌÓ  ÓòòPresent€LawóóÐ ¨` ÐÓ$„ÓÌó óà  àTax€return€information€generally€may€not€be€disclosed,€except€as€specifically€provided€byÐ ˆ@ Ðstatute.€€The€Secretary€of€the€Treasury€may€furnish€tax€return€information€to€the€Committee€onÏFinance,€the€Committee€on€Ways€and€Means€and€the€Joint€Committee€on€Taxation€upon€aÏwritten€request€from€the€chairmen€of€such€committees.€€If€the€information€can€be€associated€with,Ïor€otherwise€identify,€directly€or€indirectly,€a€particular€taxpayer,€the€information€may€byÏfurnished€to€the€committee€only€while€sitting€in€closed€executive€session€unless€such€taxpayerÏotherwise€consents€in€writing€to€such€disclosure.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ %À!$ ÐÓî†ÓÌà  àThe€Committee€believes€that€it€is€appropriate€to€have€the€opportunity€to€receive€tax€returnÏinformation€directly€from€whistleblowers.ÌÌÓ  Óòòò òExplanation€of€Provisionó óóóÐ ¸)p&) ÐÓˇÓÌà  àThe€provision€allows€any€person€who€is€(or€was)€authorized€to€receive€confidential€taxÏreturn€information€to€disclose€tax€return€information€directly€to€the€Chairman€of€€the€SenateÏCommittee€on€Finance,€the€Chairman€of€the€House€Committee€on€Ways€and€Means€or€the€ChiefÐ x-0*- Ðof€Staff€of€the€Joint€Committee€on€Taxation€provided:€(1)€such€disclosure€is€for€the€purpose€ofÏdisclosing€an€incident€of€IRS€employee€or€taxpayer€abuse,€and€(2)€the€Chairman€of€theÏcommittee€to€which€the€information€will€be€disclosed€gives€prior€approval€for€the€disclosure€inÏwriting.ÌÌÓ  Óò òòòÔ& Ð ÔEffective€Dateóóó óÐ ø° ÐÓoŠÓÌà  àThe€provision€is€effective€on€the€date€of€enactment.Ô'ÐøŠÔÌÌò ò10.€€Listing€of€local€IRS€telephone€numbers€and€addresses€(sec.€3710€of€the€bill)ó óÐ ¸ p  ÐÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ ˜ P  ÐÌà  àThe€IRS€is€not€statutorily€required€to€publish€the€local€telephone€number€or€address€of€itsÏlocal€offices,€and€generally€does€not€do€so.ÌÌà@••!ìàò òòòReasons€for€Changeó óóóˆÐ H ÐÌà  àThe€Committee€believes€that€every€taxpayer€should€have€convenient€access€to€the€IRS.€€ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ À ÐÌà  àThe€provision€requires€the€IRS,€as€soon€as€is€practicable€but€no€later€than€180€days€afterÏthe€date€of€enactment,€€to€publish€addresses€and€local€telephone€numbers€of€local€IRS€offices€inÏappropriate€local€telephone€directories.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ ¨` ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.€ÌÌò ò11.€€Identification€of€return€preparers€(sec.€3711€of€the€bill€and€sec.€6109(a)€of€the€Code)ó óÐ h  ÐÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ H!  ÐÌà  àAny€return€or€claim€for€refund€prepared€by€an€income€tax€return€preparer€must€bear€theÏsocial€security€number€of€the€return€preparer,€if€such€preparer€is€an€individual€(sec.€6109(a)).ÌÌà@••!ìàò òòòReasons€for€Changeó óóóˆÐ ø%°"% ÐÌà  àThe€Committee€is€concerned€that€inappropriate€use€might€be€made€of€a€preparerððs€socialÏsecurity€number.ÌÌà@““ìàò òòòExplanation€of€Provisionóóó 󀀈Ð ¨*`'* ÐÌà  àThe€provision€authorizes€the€IRS€to€approve€alternatives€to€Social€Security€numbers€toÏidentify€tax€return€preparers.Ð x-0*- Їà@””#ìàò òòòEffective€Dateó óóóˆÐ H ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.€€ÌÌò ò12.€€Offset€of€past„due,€legally€enforceable€State€income€tax€obligations€againstÐ À Ðoverpayments€(sec.€3712€of€the€bill€and€new€sec.€6402(e)€of€the€Code)òòÐ ø° ÐÌà@ÕÕ%ìàPresent€Lawó óóóˆÐ Ø  ÐÌà  àOverpayments€of€Federal€tax€may€be€used€to€pay€past„due€child€support€and€debts€owedÏto€Federal€agencies€(sec.€6402),€without€the€consent€of€the€taxpayer.€€Such€amount€for€past„dueÏchild€support€may€be€paid€directly€to€a€State.€€Present€law€provides€that€offsets€are€made€in€theÏfollowing€priority:€(1)€child€support;€and€(2)€other€Federal€debts,€in€the€order€in€which€such€debtsÏaccrued.€€ÌÌà@••!ìàò òòòReasons€for€Changeó óóóˆÐ X ÐÌà  àThe€Committee€believes€that€it€is€appropriate€to€permit€States€to€collect€past„due,€legallyÏenforceable€income€tax€debts€that€have€been€reduced€to€judgment€from€Federal€taxÏoverpayments.€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ø° ÐÌà  àThe€provision€permits€States€to€participate€in€the€IRS€refund€offset€program€for€past-due,Ïlegally€enforceable€State€income€tax€debts€that€have€been€reduced€to€judgment,€providing€theÏperson€making€the€Federal€tax€overpayment€has€shown€on€the€return€establishing€theÏoverpayment€an€address€that€is€within€the€State€seeking€the€tax€offset.€€The€offset€applies€afterÏthe€offsets€provided€in€present€law€for€internal€revenue€tax€liabilities,€past-due€support,€andÏpast-due,€legally€enforceable€obligations€owed€a€Federal€agency.€€The€offset€occurs€before€theÏdesignation€of€any€refund€toward€future€Federal€tax€liability.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ X  ÐÌà  àThe€provision€applies€to€Federal€income€tax€refunds€payable€after€December€31,€1998.ÌÌò ò13.€€Moratorium€regarding€regulations€under€Notice€98„11€(sec.€3713(a)(1)€of€the€bill)ó óÐ $Ð # ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ø%°"% ÐÌò òòòOverviewóóó óÐ Ø'$' ÐÌà  àU.S.€citizens€and€residents€and€U.S.€corporations€are€taxed€currently€by€the€United€StatesÏon€their€worldwide€income,€subject€to€a€credit€against€U.S.€tax€on€foreign„source€income€forÏforeign€income€taxes€paid€with€respect€to€such€income.€A€foreign€corporation€generally€is€notÏsubject€to€U.S.€tax€on€its€income€from€operations€outside€the€United€States.ÌÐ x-0*- Ðà  àIncome€of€a€foreign€corporation€generally€is€taxed€by€the€United€States€when€it€isÏrepatriated€to€the€United€States€through€payment€to€the€corporationððs€U.S.€shareholders,€subjectÏto€a€foreign€tax€credit.€However,€various€regimes€imposing€current€U.S.€tax€on€income€earnedÏthrough€a€foreign€corporation€are€reflected€in€the€Code.€One€anti„deferral€regime€set€forth€in€theÏCode€is€the€controlled€foreign€corporation€rules€of€subpart€F€(secs.€951„964).€ÌÌà  àA€controlled€foreign€corporation€(ð ðCFCðð)€is€defined€generally€as€any€foreign€corporationÏif€U.S.€persons€own€more€than€50€percent€of€the€corporationððs€stock€(measured€by€vote€or€value),Ïtaking€into€account€only€those€U.S.€persons€that€own€at€least€10€percent€of€the€stock€(measuredÏby€vote€only)€(sec.€957).€Stock€ownership€includes€not€only€stock€owned€directly,€but€also€stockÏowned€indirectly€or€constructively€(sec.€958).€ÌÌà  àThe€United€States€generally€taxes€the€U.S.€10„percent€shareholders€of€a€CFC€currently€onÏtheir€pro€rata€shares€of€certain€income€of€the€CFC€(so„called€ð ðsubpart€F€incomeðð)€(sec.€951).€InÏeffect,€the€Code€treats€those€shareholders€as€having€received€a€current€distribution€out€of€theÏÔ_ÔCFCððs€subpart€F€income.€Such€shareholders€also€are€subject€to€current€U.S.€tax€on€their€pro€rataÏshares€of€the€CFCððs€earnings€invested€in€U.S.€property€(sec.€951).€The€foreign€tax€credit€mayÏreduce€the€U.S.€tax€on€these€amounts.€€ÌÌà  àSubpart€F€income€includes,€among€other€items,€foreign€base€company€income€(sec.€952).ÏForeign€base€company€income,€in€turn,€includes€foreign€personal€holding€company€income,Ïforeign€base€company€sales€income,€foreign€base€company€services€income,€foreign€baseÏcompany€shipping€income€and€foreign€base€company€oil€related€income€(sec.€954).€ForeignÏpersonal€holding€company€income€includes,€among€other€items,€dividends,€interest,€rents€andÏroyalties.€An€exception€from€foreign€personal€holding€company€income€applies€to€certainÏdividends€and€interest€received€from€a€related€person€which€is€created€or€organized€in€the€sameÏcountry€as€the€CFC€and€which€has€a€substantial€part€of€its€assets€in€that€country,€and€to€certainÏrents€and€royalties€received€from€a€related€person€for€the€use€of€property€in€the€same€country€inÏwhich€the€CFC€was€created€or€organized€(the€so„called€ð ðsame„country€exceptionðð).ÌÌà  àForeign€base€company€sales€income€includes€income€derived€by€a€CFC€from€certainÏrelated„party€transactions,€including€the€purchase€of€personal€property€from€a€related€person€andÏits€sale€to€any€person,€the€purchase€of€personal€property€from€any€person€and€its€sale€to€a€relatedÏperson,€and€the€purchase€or€sale€of€personal€property€on€behalf€of€a€related€person,€where€theÏproperty€which€is€purchased€or€sold€is€manufactured€outside€the€country€in€which€the€CFC€wasÏcreated€or€organized€and€the€property€is€purchased€or€sold€for€use€or€consumption€outside€suchÏforeign€country.€A€special€branch€rule€applies€for€purposes€of€determining€a€CFCððs€foreign€baseÏcompany€sales€income.€Under€this€rule,€a€branch€of€a€CFC€is€treated€as€a€separate€corporationÏ(only€for€purposes€of€determining€the€CFCððs€foreign€base€company€sales€income)€where€theÏactivities€of€the€CFC€through€the€branch€outside€the€CFCððs€country€of€incorporation€haveÏsubstantially€the€same€effect€as€if€such€branch€were€a€subsidiary.ÌÌà  àBecause€of€differences€in€U.S.€and€foreign€laws,€it€is€possible€for€a€taxpayer€to€enter€intoÏtransactions€that€are€treated€in€one€manner€for€U.S.€tax€purposes€and€in€another€manner€forÏforeign€tax€purposes.€These€transactions€are€referred€to€as€hybrid€transactions.€For€example,€aÏhybrid€transaction€may€involve€the€use€of€an€entity€that€is€treated€as€a€corporation€for€purposes€ofÐ x-0*- Ðthe€tax€law€of€one€jurisdiction€but€is€treated€as€a€branch€or€partnership€for€purposes€of€the€tax€lawÏof€another€jurisdiction.ÌÌò òòòNotice€98„11€and€the€regulations€issued€thereunderóóó óÐ Ð ÐÌà  àNotice€98„11,€issued€on€January€16,€1998,€addresses€the€treatment€of€hybrid€branchesÏunder€the€subpart€F€provisions€of€the€Code.€The€Notice€states€that€the€Treasury€Department€andÏthe€Internal€Revenue€Service€have€concluded€that€the€use€of€certain€arrangements€involvingÏhybrid€branches€is€contrary€to€the€policy€and€rules€of€subpart€F.€The€hybrid€branch€arrangementsÏidentified€in€Notice€98„11€involve€structures€that€are€characterized€for€U.S.€tax€purposes€as€partÏof€a€CFC€but€are€characterized€for€purposes€of€the€tax€law€of€the€country€in€which€the€CFC€isÏincorporated€as€a€separate€entity.€The€Notice€states€that€regulations€will€be€issued€to€prevent€theÏuse€of€hybrid€branch€arrangements€to€reduce€foreign€tax€while€avoiding€the€correspondingÏcreation€of€subpart€F€income.€The€Notice€states€that€such€regulations€will€provide€that€the€branchÏand€the€CFC€will€be€treated€as€separate€corporations€for€purposes€of€subpart€F.€The€Notice€Ô_ÔalsoÏstates€that€similar€issues€raised€under€subpart€F€by€certain€partnership€or€trust€arrangements€willÏbe€addressed€in€separate€regulation€projects.ÌÌà  àOn€March€23,€1998,€temporary€and€proposed€regulations€were€issued€to€address€theÏissues€raised€in€Notice€98„11€and€to€address€certain€partnership€and€other€issues€raised€underÏsubpart€F.€Under€the€regulations,€certain€payments€between€a€CFC€and€its€hybrid€branch€orÏbetween€hybrid€branches€of€the€CFC€(so„called€ð ðhybrid€branch€paymentsðð)€are€treated€as€givingÏrise€to€subpart€F€income.€The€regulations€generally€provide€that€non„subpart€F€income€of€theÏCFC,€in€the€amount€of€the€hybrid€branch€payment,€is€recharacterized€as€subpart€F€income€of€theÏCFC€if:€(1)€the€hybrid€branch€payment€reduces€the€foreign€tax€of€the€payor,€(2)€the€hybrid€branchÏpayment€would€have€been€foreign€personal€holding€company€income€if€made€between€separateÏCFCs,€and€(3)€there€is€a€disparity€between€the€effective€tax€rate€on€the€payment€in€the€hands€ofÏthe€payee€and€the€effective€tax€rate€that€would€have€applied€if€the€income€had€been€taxed€in€theÏhands€of€the€payor.€The€regulations€also€apply€to€other€hybrid€branch€arrangements€involving€aÏpartnership,€including€a€CFCððs€proportionate€share€of€any€hybrid€branch€payment€made€betweenÏa€partnership€in€which€the€CFC€is€a€partner€and€a€hybrid€branch€of€the€partnership€or€betweenÏhybrid€branches€of€such€a€partnership.€Under€the€regulations,€if€a€partnership€is€treated€as€fiscallyÏtransparent€by€the€CFCððs€taxing€jurisdiction,€the€recharacterization€rules€are€applied€by€treatingÏthe€hybrid€branch€payment€as€if€it€had€been€made€directly€between€the€CFC€and€the€hybridÏbranch,€or€as€if€the€hybrid€branches€of€the€partnership€were€hybrid€branches€of€the€CFC,€asÏapplicable.€If€the€partnership€is€treated€as€a€separate€entity€by€the€CFCððs€taxing€jurisdiction,€theÏrecharacterization€rules€are€applied€to€treat€the€partnership€as€if€it€were€a€CFC.ÌÌà  àThe€regulations€also€address€the€application€of€the€same„country€exception€to€the€foreignÏpersonal€holding€company€income€rules€under€subpart€F€in€the€case€of€certain€hybrid€branchÏarrangements.€Under€the€regulations,€the€same„country€exception€applies€to€payments€by€a€CFCÏto€a€hybrid€branch€of€a€related€CFC€only€if€the€payment€would€have€qualified€for€the€exception€ifÏthe€hybrid€branch€had€been€a€separate€CFC€incorporated€in€the€jurisdiction€in€which€the€paymentÏis€subject€to€tax€(other€than€a€withholding€tax).€The€regulations€provide€additional€rules€regardingÏthe€application€of€the€same„country€exception€in€the€case€of€certain€hybrid€arrangementsÏinvolving€a€partnership.€Ð x-0*- Їà  àThe€regulations€generally€apply€to€amounts€paid€or€accrued€pursuant€to€hybrid€branchÏarrangements€entered€into€or€substantially€modified€on€or€after€January€16,€1998.€As€a€result,€theÏregulations€generally€do€not€apply€to€amounts€paid€or€accrued€pursuant€to€hybrid€branchÏarrangements€entered€into€before€January€16,€1998€and€not€substantially€modified€on€or€after€thatÏdate.€ÌÌà  àIn€the€case€of€certain€hybrid€arrangements€involving€partnerships,€the€regulationsÏgenerally€apply€to€amounts€paid€or€accrued€pursuant€to€such€arrangements€entered€into€orÏsubstantially€modified€on€or€after€March€23,€1998.€As€a€result,€the€regulations€generally€do€notÏapply€to€amounts€paid€or€accrued€pursuant€to€such€arrangements€entered€into€before€March€23,Ï1998€and€not€substantially€modified€on€or€after€that€date.ÌÌà@••!ìàò òòòReasons€for€Changeóóó óˆÐ ˆ@  ÐÌÔ_Ôà  àNotice€98„11€and€the€regulations€issued€thereunder€address€complex€international€taxÏissues€relating€to€the€treatment€of€hybrid€transactions€under€the€subpart€F€provisions€of€the€Code.ÏThe€impact€of€such€administrative€guidance€on€U.S.€businesses€operating€abroad€may€beÏsubstantial.€The€Committee€believes€that€it€is€appropriate€to€place€a€moratorium€on€theÏimplementation€of€the€regulations€with€respect€to€Notice€98„11€so€that€these€important€issues€canÏbe€considered€by€the€Congress.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ø° ÐÌà  àThe€bill€provides€that€no€temporary€or€final€regulations€with€respect€to€Notice€98„11€mayÏbe€implemented€prior€to€six€months€after€the€date€of€enactment€of€this€provision.€ThisÏmoratorium€applies€to€the€regulations€with€respect€to€hybrid€branches€and€to€the€regulations€withÏrespect€to€hybrid€arrangements€involving€partnerships.€It€is€intended€that€the€moratoriumÏdelaying€implementation€of€the€regulations€would€not€require€a€modification€to€the€effectiveÏdates€of€the€regulations.€No€inference€is€intended€regarding€the€authority€of€the€Department€ofÏthe€Treasury€or€the€Internal€Revenue€Service€to€issue€the€Notice€or€the€regulations.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ X  ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌò ò14.€€Sense€of€the€Senate€regarding€Notices€98„5€and€98„11€(secs.€3713(a)(2)€and€(b)€of€theÐ $Ð # Ðbill)ó óÐ %À!$ ÐÌà@ÕÕ%ìàò òòòPresent€LawóóˆÐ è& #& Ðó óÌò òòòOverviewó óóóÐ È(€%( ÐÌà  àU.S.€citizens€and€residents€and€U.S.€corporations€are€taxed€currently€by€the€United€StatesÏon€their€worldwide€income.€U.S.€persons€may€credit€foreign€taxes€against€U.S.€tax€on€foreign„¼â âsource€income.€The€amount€of€foreign€tax€credits€that€can€be€claimed€in€a€year€is€subject€to€aÐ ˆ,@), Ðlimitation€that€prevents€taxpayers€from€using€foreign€tax€credits€to€offset€U.S.€tax€on€U.S.„sourceÏincome.€Separate€limitations€are€applied€to€specific€categories€of€income.Ìâ âÌà  àA€foreign€corporation€generally€is€not€subject€to€U.S.€tax€on€its€income€from€operationsÏoutside€the€United€States.€Income€of€a€foreign€corporation€generally€is€taxed€by€the€United€StatesÏwhen€it€is€repatriated€to€the€United€States€through€payment€to€the€corporationððs€U.S.Ïshareholders,€subject€to€a€foreign€tax€credit.€However,€various€regimes€imposing€current€U.S.€taxÏon€income€earned€through€a€foreign€corporation€are€reflected€in€the€Code.€One€anti„deferralÏregime€set€forth€in€the€Code€is€the€controlled€foreign€corporation€rules€of€subpart€F€(secs.€951„¼964).€ÌÌà  àA€controlled€foreign€corporation€(ð ðCFCðð)€is€defined€generally€as€any€foreign€corporationÏif€U.S.€persons€own€more€than€50€percent€of€the€corporationððs€stock€(measured€by€vote€or€value),Ïtaking€into€account€only€those€U.S.€persons€that€own€at€least€10€percent€of€the€stock€(measuredÏby€vote€only)€(sec.€957).€Stock€ownership€includes€not€only€stock€owned€directly,€but€also€stockÏowned€indirectly€or€constructively€(sec.€958).€ÌÌà  àThe€United€States€generally€taxes€the€U.S.€10„percent€shareholders€of€a€CFC€currently€onÏtheir€pro€rata€shares€of€certain€income€of€the€CFC€(so„called€ð ðsubpart€F€incomeðð)€(sec.€951).€InÏeffect,€the€Code€treats€those€shareholders€as€having€received€a€current€distribution€out€of€theÏCFCððs€subpart€F€income.€Such€shareholders€also€are€subject€to€current€U.S.€tax€on€their€pro€rataÏshares€of€the€CFCððs€earnings€invested€in€U.S.€property€(sec.€951).€The€foreign€tax€credit€mayÏreduce€the€U.S.€tax€on€these€amounts.€€ÌÌà  àSubpart€F€income€includes,€among€other€items,€foreign€base€company€income€(sec.€952).ÏForeign€base€company€income,€in€turn,€includes€foreign€personal€holding€company€income,Ïforeign€base€company€sales€income,€foreign€base€company€services€income,€foreign€baseÏcompany€shipping€income€and€foreign€base€company€oil€related€income€(sec.€954).€ForeignÏpersonal€holding€company€income€includes,€among€other€items,€dividends,€interest,€rents€andÏroyalties.€An€exception€from€foreign€personal€holding€company€income€applies€to€certainÏdividends€and€interest€received€from€a€related€person€which€is€created€or€organized€in€the€sameÏcountry€as€the€CFC€and€which€has€a€substantial€part€of€its€assets€in€that€country,€and€to€certainÏrents€and€royalties€received€from€a€related€person€for€the€use€of€property€in€the€same€country€inÏwhich€the€CFC€was€created€or€organized€(the€so„called€ð ðsame„country€exceptionðð).ÌÌà  àForeign€base€company€sales€income€includes€income€derived€by€a€CFC€from€certainÏrelated„party€transactions,€including€the€purchase€of€personal€property€from€a€related€person€andÏits€sale€to€any€person,€the€purchase€of€personal€property€from€any€person€and€its€sale€to€a€relatedÏperson,€and€the€purchase€or€sale€of€personal€property€on€behalf€of€a€related€person,€where€theÏproperty€which€is€purchased€or€sold€is€manufactured€outside€the€country€in€which€the€CFC€wasÏcreated€or€organized€and€the€property€is€purchased€or€sold€for€use€or€consumption€outside€suchÏforeign€country.€A€special€branch€rule€applies€for€purposes€of€determining€a€CFCððs€foreign€baseÏcompany€sales€income.€Under€this€rule,€a€branch€of€a€CFC€is€treated€as€a€separate€corporationÏ(only€for€purposes€of€determining€the€CFCððs€foreign€base€company€sales€income)€where€theÏactivities€of€the€CFC€through€the€branch€outside€the€CFCððs€country€of€incorporation€haveÏsubstantially€the€same€effect€as€if€such€branch€were€a€subsidiary.Ð x-0*- Їà  àBecause€of€differences€in€U.S.€and€foreign€laws,€it€is€possible€for€a€taxpayer€to€enter€intoÏtransactions€that€are€treated€in€one€manner€for€U.S.€tax€purposes€and€in€another€manner€forÏforeign€tax€purposes.€These€transactions€are€referred€to€as€hybrid€transactions.€For€example,€aÏhybrid€transaction€may€involve€the€use€of€an€entity€that€is€treated€as€a€corporation€for€purposes€ofÏthe€tax€law€of€one€jurisdiction€but€is€treated€as€a€branch€or€partnership€for€purposes€of€the€tax€lawÏof€another€jurisdiction.ÌÌò òòòNotices€98„5€and€98„11óóó óÐ Ø  ÐÌà  àNotice€98„5,€issued€on€December€23,€1997,€addresses€the€treatment€of€certain€types€ofÏtransactions€under€the€foreign€tax€credit€provisions€of€the€Code.€The€Notice€states€that€theÏTreasury€Department€and€the€Internal€Revenue€Service€have€concluded€that€the€use€of€certainÏtransactions€creates€the€potential€for€foreign€tax€credit€abuse.€The€Notice€states€that€suchÏtransactions€typically€involve€either:€(1)€the€acquisition€of€an€asset€that€generates€an€incomeÏstream€(e.g.,€royalties€or€interest)€subject€to€a€foreign€withholding€tax,€or€(2)€the€effectiveÏduplication€of€tax€benefits€through€the€use€of€certain€structures€designed€to€exploitÏinconsistencies€between€U.S.€and€foreign€tax€laws.€The€Notice€includes€five€specific€transactionsÏas€illustrations€of€arrangements€creating€the€potential€for€foreign€tax€credit€abuse.€The€NoticeÏstates€that€it€is€intended€that€regulations€will€be€issued€to€disallow€foreign€tax€credits€for€abusiveÏtransactions€in€cases€where€the€reasonably€expected€economic€profit€from€the€transaction€isÏinsubstantial€compared€to€the€value€of€the€foreign€tax€credits€expected€to€be€obtained€as€a€resultÏof€the€arrangement.€The€Notice€further€states€that€it€is€intended€that€regulations€generally€willÏapply€with€respect€to€such€transactions€for€taxes€paid€or€accrued€on€or€after€December€23,€1997.ÏRegulations€have€not€yet€been€issued€under€Notice€98„5.ÌÌà  àNotice€98„11,€issued€on€January€16,€1998,€addresses€the€treatment€of€hybrid€branchesÏunder€the€subpart€F€provisions€of€the€Code.€The€Notice€states€that€the€Treasury€Department€andÏthe€Internal€Revenue€Service€have€concluded€that€the€use€of€certain€arrangements€involvingÏhybrid€branches€is€contrary€to€the€policy€and€rules€of€subpart€F.€The€hybrid€branch€arrangementsÏidentified€in€Notice€98„11€involve€structures€that€are€characterized€for€U.S.€tax€purposes€as€partÏof€a€CFC€but€are€characterized€for€purposes€of€the€tax€law€of€the€country€in€which€the€CFC€isÏincorporated€as€a€separate€entity.€The€Notice€states€that€regulations€will€be€issued€to€prevent€theÏuse€of€hybrid€branch€arrangements€to€reduce€foreign€tax€while€avoiding€the€correspondingÏcreation€of€subpart€F€income.€The€Notice€states€that€such€regulations€will€provide€that€the€branchÏand€the€CFC€will€be€treated€as€separate€corporations€for€purposes€of€subpart€F.€The€Notice€alsoÏstates€that€similar€issues€raised€under€subpart€F€by€certain€partnership€or€trust€arrangements€willÏbe€addressed€in€separate€regulation€projects.ÌÌà  àOn€March€23,€1998,€temporary€and€proposed€regulations€were€issued€to€address€theÏissues€raised€in€Notice€98„11€and€to€address€certain€partnership€and€other€issues€raised€underÏsubpart€F.€Under€the€regulations,€certain€payments€between€a€CFC€and€its€hybrid€branch€orÏbetween€hybrid€branches€of€the€CFC€(so„called€ð ðhybrid€branch€paymentsðð)€are€treated€as€givingÏrise€to€subpart€F€income.€The€regulations€generally€provide€that€non„subpart€F€income€of€theÏCFC,€in€the€amount€of€the€hybrid€branch€payment,€is€recharacterized€as€subpart€F€income€of€theÏCFC€if:€(1)€the€hybrid€branch€payment€reduces€the€foreign€tax€of€the€payor,€(2)€the€hybrid€branchÏpayment€would€have€been€foreign€personal€holding€company€income€if€made€between€separateÐ x-0*- ÐCFCs,€and€(3)€there€is€a€disparity€between€the€effective€tax€rate€on€the€payment€in€the€hands€ofÏthe€payee€and€the€effective€tax€rate€that€would€have€applied€if€the€income€had€been€taxed€in€theÏhands€of€the€payor.€The€regulations€also€apply€to€other€hybrid€branch€arrangements€involving€aÏpartnership,€including€a€CFCððs€proportionate€share€of€any€hybrid€branch€payment€made€betweenÏa€partnership€in€which€the€CFC€is€a€partner€and€a€hybrid€branch€of€the€partnership€or€betweenÏhybrid€branches€of€such€a€partnership.€Under€the€regulations,€if€a€partnership€is€treated€as€fiscallyÏtransparent€by€the€CFCððs€taxing€jurisdiction,€the€recharacterization€rules€are€applied€by€treatingÏthe€hybrid€branch€payment€as€if€it€had€been€made€directly€between€the€CFC€and€the€hybridÏbranch,€or€as€if€the€hybrid€branches€of€the€partnership€were€hybrid€branches€of€the€CFC,€asÏapplicable.€If€the€partnership€is€treated€as€a€separate€entity€by€the€CFCððs€taxing€jurisdiction,€theÏrecharacterization€rules€are€applied€to€treat€the€partnership€as€if€it€were€a€CFC.ÌÌà  àThe€regulations€also€address€the€application€of€the€same„country€exception€to€the€foreignÏpersonal€holding€company€income€rules€under€subpart€F€in€the€case€of€certain€hybrid€branchÏarrangements.€Under€the€regulations,€the€same„country€exception€applies€to€payments€by€a€CFCÏto€a€hybrid€branch€of€a€related€CFC€only€if€the€payment€would€have€qualified€for€the€exception€ifÏthe€hybrid€branch€had€been€a€separate€CFC€incorporated€in€the€jurisdiction€in€which€the€paymentÏis€subject€to€tax€(other€than€a€withholding€tax).€The€regulations€provide€additional€rules€regardingÏthe€application€of€the€same„country€exception€in€the€case€of€certain€hybrid€arrangementsÏinvolving€a€partnership.€ÌÌà  àThe€regulations€generally€apply€to€amounts€paid€or€accrued€pursuant€to€hybrid€branchÏarrangements€entered€into€or€substantially€modified€on€or€after€January€16,€1998.€As€a€result,€theÏregulations€generally€do€not€apply€to€amounts€paid€or€accrued€pursuant€to€hybrid€branchÏarrangements€entered€into€before€January€16,€1998€and€not€substantially€modified€on€or€after€thatÏdate.€ÌÌà  àIn€the€case€of€certain€hybrid€arrangements€involving€partnerships,€the€regulationsÏgenerally€apply€to€amounts€paid€or€accrued€pursuant€to€such€arrangements€entered€into€orÏsubstantially€modified€on€or€after€March€23,€1998.€As€a€result,€the€regulations€generally€do€notÏapply€to€amounts€paid€or€accrued€pursuant€to€such€arrangements€entered€into€before€March€23,Ï1998€and€not€substantially€modified€on€or€after€that€date.ÌÌà@••!ìàò òòòReasons€for€Changeóóó óˆÐ 8"ð! ÐÌà  àThe€subpart€F€provisions€of€the€Code€reflect€a€balancing€of€various€policy€objectives.ÏAny€modification€or€refinement€to€that€balance€should€be€the€subject€of€serious€and€thoughtfulÏdebate.€It€is€the€Committeeððs€view€that€any€significant€policy€developments€with€respect€to€theÏsubpart€F€provisions,€such€as€those€addressed€by€Notice€98„11€and€the€regulations€issuedÏthereunder,€should€be€considered€by€the€Congress€as€part€of€the€normal€legislative€process.€TheÏCommittee€also€believes€that€any€regulations€issued€under€Notice€98„5€should€be€limited€to€theÏspecific€transactions€described€therein.€Moreover,€the€Committee€is€concerned€about€theÏpotential€disruptive€effect€of€the€issuance€of€an€administrative€notice€that€describes€generalÏprinciples€to€be€reflected€in€regulations€that€will€be€issued€in€the€future,€but€provides€that€suchÏfuture€regulations€will€be€effective€as€of€the€date€of€issuance€of€the€notice.€ÌÔ_ÔÐ x-0*- Ðà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ H ÐÌà  àThe€bill€provides€that€it€is€the€sense€of€the€Senate€that€the€Department€of€the€Treasury€andÏthe€Internal€Revenue€Service€should€withdraw€Notice€98„11€and€the€regulations€issuedÏthereunder,€and€that€the€Congress,€and€not€the€Department€of€the€Treasury€nor€the€InternalÏRevenue€Service,€should€determine€the€international€tax€policy€issues€relating€to€the€treatment€ofÏhybrid€transactions€under€the€subpart€F€provisions€of€the€Code.ÌÌà  àThe€bill€further€provides€that€it€is€the€sense€of€the€Senate€that€the€Department€of€theÏTreasury€and€the€Internal€Revenue€Service€should€limit€any€regulations€issued€under€Notice€98„5Ïto€the€specific€transactions€described€therein.€In€addition,€such€regulations€should:€(a)€not€affectÏtransactions€undertaken€in€the€ordinary€course€of€business,€(b)€not€have€an€effective€date€anyÏearlier€than€the€date€of€issuance€of€proposed€regulations,€and€(c)€be€issued€in€accordance€withÏnormal€regulatory€procedures€which€include€an€opportunity€for€comment.€Nothing€in€this€senseÏof€the€Senate€should€be€construed€to€limit€the€ability€of€the€Department€of€the€Treasury€or€theÏInternal€Revenue€Service€to€address€abusive€transactions.ÌÔ_ÔÔ_ÔÌà@””#ìàò òòòEffective€Dateóóó óˆÐ 8ð ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌò òÓ  ÓI.€€Studiesó óÐ ø° ÐÓ£öÓÌò ò1.€€Administration€of€penalties€and€interest€(sec.€3801€of€the€bill)ó óÐ Ø ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ¸p ÐÌà  àThe€last€major€comprehensive€revision€of€the€overall€penalty€structure€in€the€InternalÏRevenue€Code€was€the€ð ðImproved€Penalty€Administration€and€Compliance€Tax€Act,ðð€enacted€asÏpart€of€the€Omnibus€Budget€Reconciliation€Act€of€1989.ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ X  ÐÓ„øÓÌà  àThe€Committee€believes€that€it€is€appropriate€to€undertake€a€study€of€penalty€and€interestÏadministration,€which€will€provide€the€Committee€with€legislative€and€administrativeÏrecommendations€for€improvement€of€the€current€penalty€and€interest€structure.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ ø%°"% ÐÌà  àThe€provision€requires€the€Joint€Committee€on€Taxation€and€the€Treasury€to€each€conductÏa€separate€study€reviewing€the€interest€and€penalty€provisions€of€the€Code€(including€theÏadministration€and€implementation€of€the€penalty€reform€provisions€of€the€Omnibus€BudgetÏReconciliation€Act€of€1989),€and€making€any€legislative€and€administrative€recommendations€itÏdeems€appropriate€to€simplify€penalty€administration€and€reduce€taxpayer€burden.€€The€studiesÏâ âmust€also€include€an€analysis€of€the€interest€provisions€in€the€Code,€including€legislative€andÐ ˆ,@), ÐÔ_Ôadministrative€recommendations€deemed€appropriate€to€simplify€the€administration€of€theÏinterest€provisions€and€to€reduce€taxpayer€burden.€€Ìâ âÌà@””#ìàò òòòEffective€Dateóóó óˆÐ Ð ÐÌà  àThe€reports€must€be€provided€not€later€than€nine€months€after€the€date€of€enactment.ÌÌò ò2.€€Confidentiality€of€tax€return€information€(sec.€3802€of€the€bill)ó óÐ Ø  ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ¸ p  ÐÌà  àThe€Internal€Revenue€Code€prohibits€disclosure€of€tax€returns€and€return€information,Ïexcept€to€the€extent€specifically€authorized€by€the€Internal€Revenue€Code€(sec.€6103).€ÏUnauthorized€disclosure€is€a€felony€punishable€by€a€fine€not€exceeding€$5,000€or€imprisonment€Ïof€not€more€than€five€years,€or€both€(sec.€7213).€€An€action€for€civil€damages€also€may€beÏbrought€for€unauthorized€disclosure€(sec.€7431).€€No€tax€information€may€be€furnished€by€theÏIRS€to€another€agency€unless€the€other€agency€establishes€procedures€satisfactory€to€the€IRS€forÏsafeguarding€the€tax€information€it€receives€(sec.€6103(p)).ÌÌò òòòÓ  ÓReasons€for€Changeó óóóÐ Ð ÐÓÜÓÌà  àThe€Committee€believes€that€a€study€of€the€confidentiality€provisions€will€be€useful€inÏassisting€the€Committee€in€determining€whether€improvements€can€be€made€to€these€provisions.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ È€ ÐÌà  àThe€provision€requires€the€Joint€Committee€on€Taxation€and€Treasury€to€each€conduct€aÏseparate€study€on€provisions€regarding€taxpayer€confidentiality.€€The€studies€are€to€examineÏpresent„law€protections€of€taxpayer€privacy,€the€need,€if€any,€for€third€parties€to€use€tax€returnÏinformation,€whether€greater€levels€of€voluntary€compliance€can€be€achieved€by€allowing€theÏpublic€to€know€who€is€legally€required€to€file€tax€returns€but€does€not€do€so,€and€theÏinterrelationship€of€the€taxpayer€confidentiality€provisions€in€the€Internal€Revenue€Code€withÏthose€elsewhere€in€the€United€States€Code€(such€as€the€Freedom€of€Information€Act).€ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ (#à" ÐÌà  àThe€findings€of€the€studies,€along€with€any€recommendations,€are€required€to€be€reportedÏto€the€Congress€no€later€than€one€year€after€the€date€of€enactment.Ð  ø%°"% Ðò òÓ  ÓTITLE€IV.€€CONGRESSIONAL€ACCOUNTABILITY€FOR€THE€IRSó óÐ H ÐÓÂÓòòÌà@2 2 ìàóóò òA.€€Century€Date€Change€(sec.€4001€of€the€bill)ˆÐ (à Ðó óòòÌò òà@ÕÕ%ìàPresent€Lawóóó óˆÐ À ÐÌà  àNo€specific€provision.ÌÌà@••!ìàò òòòReasons€for€Changeóóó óˆÐ È € ÐÌà  àOperations€of€the€IRS€computer€systems€are€critical€to€the€viability€of€the€Federal€taxÏsystem.€€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ x0  ÐÌà  àThe€bill€provides€that€it€is€the€sense€of€the€Congress€that€the€IRS€should€place€resolvingÏthe€century€date€change€computing€problems€as€a€high€priority.€€The€bill€also€provides€that€theÏCommissioner€shall€expeditiously€submit€a€report€to€the€Congress€on€the€overall€impact€of€theÏbill€on€the€ability€of€the€IRS€to€resolve€the€century€date€change€computing€problems€and€theÏprovisions€of€the€bill€that€will€require€significant€amounts€of€computer€programming€changesÏprior€to€December€31,€1999,€in€order€to€carry€out€the€provisions.€€It€is€expected€that€this€reportÏwill€be€submitted€within€14€days€of€the€date€of€Committee€action€on€the€bill.ÌÌà@””#ìàò òòòEffective€Dateóóó óˆÐ Ø ÐÌà  àThe€provision€is€effective€on€the€date€of€enactment.ÌÌà@Ô Ô ìàò òB.€€Tax€Law€Complexity€Analysis€(sec.€4002€of€the€bill)ó óˆÐ ˜P ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ x0 ÐÌà  àPresent€law€does€not€require€a€formal€complexity€analysis€with€respect€to€changes€to€theÏtax€laws.ÌÌà@••!ìàò òòòReasons€for€Changeóóó óˆÐ (#à" ÐÌà  àThe€National€Commission€on€Restructuring€the€IRS€found€a€clear€connection€between€theÏcomplexity€of€the€Internal€Revenue€Code€and€the€difficulty€of€tax€law€administration€andÏtaxpayer€frustration.€€The€Committee€shares€the€concern€that€complexity€is€a€serious€problemÏwith€the€Federal€tax€system.€€Complexity€and€frequent€changes€in€the€tax€laws€create€burdens€forÏboth€the€IRS€and€taxpayers.€€Failure€to€address€complexity€may€ultimately€reduce€voluntaryÏcompliance.ÌÌà  àThe€Committee€is€aware€that€it€may€not€be€possible€or€desirable€to€eliminate€allÏcomplexity€in€the€tax€system.€€There€are€many€objectives€of€a€tax€system€and€particular€taxÏprovisions,€and€simplicity€is€only€one.€€In€some€cases€other€policies,€such€as€fairness,€Ô_ÔmayÐ x-0*- Ðoutweigh€concerns€about€complexity.€€Nevertheless,€the€Committee€believes€complexity€of€theÏtax€system€should€be€reduced€whenever€possible.€€€Accordingly,€the€Committee€believes€itÏappropriate€to€introduce€new€procedural€rules€that€will€focus€attention€on€complexity.€€TheÏCommittee€also€believes€that€the€tax„writing€committees€should€receive€periodic€input€from€theÏIRS€regarding€areas€of€the€law€that€cause€problems€for€taxpayers.€€This€input€will€be€valuable€inÏdeveloping€future€legislation.ÌÌà  àà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ Ø  Ðòòò òÌIRS€report€on€complexityó óóóÐ ¸ p  ÐÌà  àThe€IRS€is€to€report€to€the€House€Ways€and€Means€Committee€and€the€Senate€FinanceÏCommittee€annually€regarding€sources€of€complexity€in€the€administration€of€the€Federal€taxÏlaws.€€Factors€the€IRS€may€take€into€account€include:€(1)€frequently€asked€questions€byÏtaxpayers;€(2)€common€errors€made€by€taxpayers€in€filling€out€returns;€(3)€areas€of€the€law€thatÏfrequently€result€in€disagreements€between€taxpayers€and€the€IRS;€(4)€major€areas€in€which€thereÏis€no€or€incomplete€published€guidance€or€in€which€the€law€is€uncertain;€(5)€areas€in€whichÏrevenue€agents€make€frequent€errors€in€interpreting€or€applying€the€law;€(6)€impact€of€recentÏlegislation€on€complexity;€(7)€information€regarding€forms,€including€a€listing€of€IRS€forms,€theÏtime€it€takes€for€taxpayers€to€complete€and€review€forms,€the€number€of€taxpayers€who€use€eachÏform,€and€how€the€time€required€changed€as€a€result€of€recently€enacted€legislation;€and€(8)Ïrecommendations€for€reducing€complexity€in€the€administration€of€the€Federal€tax€system.ÌÌòòò òÔ& À ÔComplexity€analysis€with€respect€to€current€legislationóóó óÐ Ø ÐÌà  àThe€bill€requires€the€Joint€Committee€on€Taxation€(in€consultation€with€the€IRS€andÏTreasury)€to€provide€an€analysis€of€complexity€or€administrability€concerns€raised€by€taxÔ'ÀØÔÏprovisions€of€widespread€applicability€to€individuals€or€small€businesses.€€The€analysis€is€to€beÏincluded€in€any€Committee€Report€of€the€House€Ways€and€Means€Committee€or€Senate€FinanceÏCommittee€or€Conference€Report€containing€tax€provisions,€or€provided€to€the€Members€of€theÏrelevant€Committee€or€Committees€as€soon€as€practicable€after€the€report€is€filed.€The€analysis€isÏto€include:€(1)€an€estimate€of€the€number€and€type€of€taxpayers€affected;€and€(2)€if€applicable,€theÏincome€level€of€affected€individual€taxpayers.€€In€addition,€such€analysis€should€include,€ifÏdeterminable,€the€following:€(1)€the€extent€to€which€existing€tax€forms€would€require€revisionÏand€whether€a€new€form€or€forms€would€be€required;€(2)€whether€and€to€what€extent€taxpayersÏwould€be€required€to€keep€additional€records;€(3)€the€estimated€cost€to€taxpayers€to€comply€withÏthe€provision;€(4)€the€extent€to€which€enactment€of€the€provision€would€require€the€IRS€toÏdevelop€or€modify€regulatory€guidance;€(5)€whether€and€to€what€extent€the€provision€can€beÏexpected€to€lead€to€disputes€between€taxpayers€and€the€IRS;€and€(6)€how€the€IRS€can€be€expectedÏto€respond€to€the€provision€(including€the€impact€on€internal€training,€whether€the€InternalÏRevenue€Manual€would€require€revision,€whether€the€change€would€require€reprogramming€ofÏcomputers,€and€the€extent€to€which€the€IRS€would€be€required€to€divert€or€redirect€resources€inÏresponse€to€the€provision).ÌÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌà@””#ìàò òòòEffective€Dateóóó óˆÐ ˆ,@), ÐÐ x-0*- Ðà  àThe€provision€requiring€the€Joint€Committee€on€Taxation€to€provide€a€complexityÏanalysis€is€effective€with€respect€to€legislation€considered€on€or€after€January€1,€1999.€€TheÏprovision€requiring€the€IRS€to€report€on€sources€of€complexity€is€effective€on€the€date€ofÏenactment.ÌÐ  À ÐÔ_Ôò òà@MMìàTITLE€V.€€REVENUE€OFFSETSó óˆÐ H Ðò òÌà@\ \ ìàA.€€Employer€Deduction€for€Vacation€and€Severance€Pay€ˆÌÓ  Ó(sec.€5001€of€the€bill€and€sec.€404€of€the€Code)ó óÐ Ð ÐÓTÓÌòòà@ÕÕ%ìàò òPresent€Lawóóó óˆÐ ø° ÐÌà  à€For€deduction€purposes,€any€method€or€arrangement€that€has€the€effect€of€a€planÏdeferring€the€receipt€of€compensation€or€other€benefits€for€employees€is€treated€as€a€deferredÏcompensation€plan€(sec.€404(b)).€€In€general,€contributions€under€a€deferred€compensation€planÏ(other€than€certain€pension,€profit„sharing€and€similar€plans)€are€deductible€in€the€taxable€year€inÏwhich€an€amount€attributable€to€the€contribution€is€includible€in€income€of€the€employee.€ÏHowever,€vacation€pay€which€is€treated€as€deferred€compensation€is€deductible€for€the€taxableÏyear€of€the€employer€in€which€the€vacation€pay€is€paid€to€the€employee€(sec.€404(a)(5)).€€ÌÌà  àTemporary€Treasury€regulations€provide€that€a€plan,€method,€or€arrangement€defers€theÏreceipt€of€compensation€or€benefits€to€the€extent€it€is€one€under€which€an€employee€receivesÏcompensation€or€benefits€more€than€a€brief€period€of€time€after€the€end€of€the€employerððs€taxableÏyear€in€which€the€services€creating€the€right€to€such€compensation€or€benefits€are€performed.€€AÏplan,€method€or€arrangement€is€presumed€to€defer€the€receipt€of€compensation€for€more€than€aÏbrief€period€of€time€after€the€end€of€an€employerððs€taxable€year€to€the€extent€that€compensation€isÏreceived€after€the€15th€day€of€the€3rd€calendar€month€after€the€end€of€the€employerððs€taxable€yearÏin€which€the€related€services€are€rendered€(the€ð ð2„1/2€monthðð€period).€€A€plan,€method€orÏarrangement€is€not€considered€to€defer€the€receipt€of€compensation€or€benefits€for€more€than€aÏbrief€period€of€time€after€the€end€of€the€employerððs€taxable€year€to€the€extent€that€compensationÏor€benefits€are€received€by€the€employee€on€or€before€the€end€of€the€applicable€2„1/2€monthÏperiod.€€(Temp.€Treas.€Reg.€sec.€1.404(b)„1T€A„2).ÌÌà  àThe€Tax€Court€recently€addressed€the€issue€of€when€vacation€pay€and€severance€pay€areÏconsidered€deferred€compensation€in€òòSchmidt€Baking€Co.,€Inc.óó,€107€T.C.€271€(1996).€€In€òòSchmidtÐ x0 ÐBaking,óó€the€taxpayer€was€an€accrual€basis€taxpayer€with€a€fiscal€year€that€ended€December€28,Ð h  Ð1991.€€The€taxpayer€funded€its€accrued€vacation€and€severance€pay€liabilities€for€1991€byÏpurchasing€an€irrevocable€letter€of€credit€on€March€13,€1992.€€The€parties€stipulated€that€the€letterÏof€credit€represented€a€transfer€of€substantially€vested€interest€in€property€to€employees€forÏpurposes€of€section€83,€and€that€the€fair€market€value€of€such€interest€was€includible€in€theÏemployeesðð€gross€incomes€for€1992€as€a€result€of€the€transfer.׃“×Ý ƒ #ÃÝòòÚ  Ú50Ú  ÚóóÝ  Ý×  ×€€The€Tax€Court€held€that€theÐ $Ð # Ðpurchase€of€the€letter€of€credit,€and€the€resulting€income€inclusion,€constituted€payment€of€theÏvacation€and€severance€pay€within€the€2„1/2€month€period.€€Thus,€the€vacation€and€severance€payÏwere€treated€as€received€by€the€employees€within€the€2„1/2€month€period€and€were€not€treated€asÏdeferred€compensation.€€The€vacation€pay€and€severance€pay€were€deductible€by€the€taxpayer€forÏits€1991€fiscal€year€pursuant€to€its€normal€accrual€method€of€accounting.ÌÐ ¸)p&) Ðòòò òÓ  ÓReasons€€for€ChangeÐ H ÐÓm,ÓÌóóó óà  àThe€Committee€believes€that€the€decision€in€òòSchmidt€Bakingóó€reaches€an€inappropriateÐ (à Ðand€unintended€result.€€To€permit€methods€such€as€that€used€in€òòSchmidt€Bakingóó€to€be€consideredÐ Ð Ðpayment€or€receipt€would€allow€taxpayers€to€avoid€the€2„1/2€month€rule€and€inappropriatelyÏaccelerate€deductions.€€The€Committee€believes€that€the€intent€of€the€2„1/2€rule€was€clearly€toÏprovide€that€a€deduction€for€deferred€compensation€is€not€available€for€the€current€taxable€yearÏunless€the€compensation€is€actually€paid€to€employees€within€2„1/2€months€after€the€end€of€theÏyear.€€Moreover,€previous€legislative€histories€reflect€Congressional€intent€and€understanding€thatÏcompensation€actually€paid€beyond€the€2„1/2€month€period€is€deferred€compensation.׃•×Ý ƒ #ÃÝòòÚ  Ú51Ú  ÚóóÝ  Ý×  ×Ð ¸ p  ÐÌà  àFurther,€the€Committee€is€concerned€that€taxpayers€may€inappropriately€extend€theÏrationale€of€òòSchmidt€Bakingóó€to€other€situations€in€which€a€deduction€or€other€tax€consequencesÐ ˆ@  Ðare€contingent€upon€an€item€being€paid.€€The€Committee€does€not€believe€that,€as€a€general€rule,€Ïletters€of€credit€and€similar€mechanisms€should€be€considered€payment€for€any€purposes€of€theÏCode.Ìò òòòÌà@ÅÅìàExplanation€of€ProvisionÔ& À Ôóóó óˆÐ 8ð ÐÌà  àUnder€the€bill,€for€purposes€of€determining€whether€an€item€of€compensation€is€deferredÏcompensationò ò€ó ó(under€Code€sec.€404),€the€compensationÔ'À¸2Ô€is€not€considered€to€be€paid€or€receivedÐ À Ðuntil€actually€received€by€the€employee.€€In€addition,€an€item€of€deferred€compensation€is€notÏconsidered€paid€to€an€employee€until€actually€received€by€the€employee.€€The€provision€isÏintended€to€overrule€the€result€inòò€Schmidt€Bakingóó.€€For€example,€with€respect€to€theÐ Ø Ðdetermination€of€whether€vacation€pay€is€deferred€compensation,€the€fact€that€the€value€of€theÏvacation€pay€is€includible€in€the€income€of€employees€within€the€applicable€2„1/2€month€periodÏwould€not€be€relevant.€€Rather,€the€vacation€pay€must€have€been€actually€received€by€employeesÏwithin€the€2„1/2€month€period€in€order€for€the€compensation€not€to€be€treated€as€deferredÏcompensation.ÌÌà  à€It€is€intended€that€similar€arrangements,€in€addition€to€the€letter€of€credit€approach€usedÏin€òòSchmidt€Bakingóó,€do€not€constitute€actual€receipt€by€the€employee,€even€if€there€is€an€incomeÐ X  Ðinclusion.€€Thus,€for€example,€actual€receipt€does€not€include€the€furnishing€of€a€note€or€letter€orÏother€evidence€of€indebtedness€of€the€taxpayer,€whether€or€not€the€evidence€is€guaranteed€by€anyÏother€instrument€or€by€any€third€party.€€As€a€further€example,€actual€receipt€does€not€include€aÏpromise€of€the€taxpayer€to€provide€service€or€property€in€the€future€(whether€or€not€the€promise€isÏevidenced€by€a€contract€or€other€written€agreement).€€In€addition,€actual€receipt€does€not€includeÏan€amount€transferred€as€a€loan,€refundable€deposit,€or€contingent€payment.€€Amounts€set€aside€inÏa€trust€for€employees€are€not€considered€to€be€actually€received€by€the€employee.Ìà  àÌà  àThe€provision€does€not€change€the€rule€under€which€deferred€compensation€(other€thanÏâ âvacation€pay€and€deferred€compensation€under€qualified€plans)€is€deductible€in€the€Ô_ÔyearÐ ¸)p&) Ðincludible€in€the€gross€income€of€employees€participating€in€the€plan€if€separate€accounts€areÏmaintained€for€each€employee.€Ìâ âÌà  àWhile€òòSchmidt€Bakingóó€involved€only€vacation€pay€and€severance€pay,€there€is€concernÐ Ð Ðthat€this€type€of€arrangement€may€be€tried€to€circumvent€other€provisions€of€the€Code€whereÏpayment€is€required€in€order€for€a€deduction€to€occur.€Thus,€it€is€intended€that€the€Secretary€willÏprevent€the€use€of€similar€arrangements.€€No€inference€is€intended€that€the€result€in€òòSchmidtÐ è  ÐBakingóó€is€present€law€beyond€its€immediate€facts€or€that€the€use€of€similar€arrangements€isÐ Ø  Ðpermitted€under€present€law.€€ÌÌà  àThe€provision€does€not€affect€the€determination€of€whether€an€item€is€includible€inÏincome.€€Thus,€for€example,€using€the€mechanism€in€òòSchmidt€Bakingóó€for€vacation€pay€could€stillÐ ˜ P  Ðresult€in€income€inclusion€to€the€employees,€but€the€employer€would€not€be€entitled€to€aÏdeduction€for€the€vacation€pay€until€actually€paid€to€and€received€by€the€employees.Ìà  àÌà@””#ìàò òòòEffective€Dateóóó óˆÐ X ÐÌà  àThe€provision€is€effective€for€taxable€years€ending€after€the€date€of€enactment.€€AnyÏchange€in€method€of€accounting€required€by€the€bill€is€treated€as€initiated€by€the€taxpayer€withÏthe€consent€of€the€Secretary€of€the€Treasury.€€Any€adjustment€required€by€section€481€as€a€resultÏof€the€change€will€be€taken€into€account€in€the€year€of€the€change.ÌÌò òÓ  ÓB.€€Modify€Foreign€Tax€Credit€Carryover€RulesÐ è  Ð(sec.€5002€of€the€bill€and€sec.€904€of€the€Code)ó óÐ Ø ÐÓb@ÓÌà@ÕÕ%ìàòòò òPresent€Lawó óóóˆÐ ¸p ÐÌà  àU.S.€persons€may€credit€foreign€taxes€against€U.S.€tax€on€foreign€source€income.€TheÏamount€of€foreign€tax€credits€that€can€be€claimed€in€a€year€is€subject€to€a€limitation€that€preventsÏtaxpayers€from€using€foreign€tax€credits€to€offset€U.S.€tax€on€U.S.€source€income.€SeparateÏforeign€tax€credit€limitations€are€applied€to€specific€categories€of€income.ÌÌà  àThe€amount€of€creditable€taxes€paid€or€accrued€(or€deemed€paid)€in€any€taxable€yearÏwhich€exceeds€the€foreign€tax€credit€limitation€is€permitted€to€be€carried€back€two€years€andÏforward€five€years.€€The€amount€carried€over€may€be€used€as€a€credit€in€a€carryover€year€to€theÏextent€the€taxpayer€otherwise€has€excess€foreign€tax€credit€limitation€for€such€year.€The€separateÏforeign€tax€credit€limitations€apply€for€purposes€of€the€carryover€rules.ÌÌà@••!ìàò òòòReasons€for€Changeóóó óˆÐ è& #& ÐÌà  àThe€Committee€believes€that€reducing€the€carryback€period€for€foreign€tax€credits€to€oneÏyear€and€increasing€the€carryforward€period€to€seven€years€will€reduce€some€of€the€complexityÏassociated€with€carrybacks€while€continuing€to€address€the€timing€differences€between€U.S.€andÏforeign€tax€rules.ÌÌÐ x-0*- Їà@ÅÅìàòòò òExplanation€of€Provisionóóó óˆÐ H ÐÌà  àThe€bill€reduces€the€carryback€period€for€excess€foreign€tax€credits€from€two€years€to€oneÏyear.€The€bill€also€extends€the€excess€foreign€tax€credit€carryforward€period€from€five€years€toÏseven€years.ÌÌà@””#ìàòòò òEffective€Dateóóó óˆÐ è  ÐÌà  àThe€provision€applies€to€foreign€tax€credits€arising€in€taxable€years€ending€after€the€dateÏof€enactment.ÌÌò òÓ  ÓC.€€Clarify€and€Expand€Mathematical€Error€ProceduresÐ ˜ P  Ѐ€€€(sec.€5003€of€the€bill€and€sec.€6213(g)(2)€of€the€Code)ó óÐ ˆ@  ÐÓ  ÓÌà@ÕÕ%ìàòòò òPresent€Lawó óóóˆÐ h  ÐÌòòò òTaxpayer€identification€numbers€(ð ðTINsðð)ó óóóÐ H ÐÌà  àThe€IRS€may€deny€a€personal€exemption€for€a€taxpayer,€the€taxpayer's€spouse€or€theÏtaxpayer's€dependents€if€the€taxpayer€fails€to€provide€a€correct€TIN€for€each€person€for€whom€theÏtaxpayer€claims€an€exemption.€This€TIN€requirement€also€indirectly€effects€other€tax€benefitsÏcurrently€conditioned€on€a€taxpayer€being€able€to€claim€a€personal€exemption€for€a€dependentÏ(e.g.,€head-of-household€filing€status€and€the€dependent€care€credit).€Other€tax€benefits,€includingÏthe€adoption€credit,€the€child€tax€credit,€the€Hope€Scholarship€credit€and€Lifetime€LearningÏcredit,€and€the€earned€income€credit€also€have€TIN€requirements.€For€most€individuals,€their€TINÏis€their€Social€Security€Number€(ð ðSSNðð).€The€mathematical€and€clerical€error€procedure€currentlyÏapplies€to€the€omission€of€a€correct€TIN€for€purposes€of€personal€exemptions€and€all€of€theÏcredits€listed€above€except€for€the€adoption€credit.ÌÌòòò òMathematical€or€clerical€errorsó óóóÐ x0 ÐÌà  àThe€IRS€may€summarily€assess€additional€tax€due€as€a€result€of€a€mathematical€or€clericalÏerror€without€sending€the€taxpayer€a€notice€of€deficiency€and€giving€the€taxpayer€an€opportunityÏto€petition€the€Tax€Court.€Where€the€IRS€uses€the€summary€assessment€procedure€forÏmathematical€or€clerical€errors,€the€taxpayer€must€be€given€an€explanation€of€the€asserted€errorÏand€a€period€of€60€days€to€request€that€the€IRS€abate€its€assessment.€The€IRS€may€not€proceed€toÏcollect€the€amount€of€the€assessment€until€the€taxpayer€has€agreed€to€it€or€has€allowed€the€60„dayÏperiod€for€objecting€to€expire.€If€the€taxpayer€files€a€request€for€abatement€of€the€assessmentÏspecified€in€the€notice,€the€IRS€must€abate€the€assessment.€Any€reassessment€of€the€abatedÏamount€is€subject€to€the€ordinary€deficiency€procedures.€The€request€for€abatement€of€theÏassessment€is€the€only€procedure€a€taxpayer€may€use€prior€to€paying€the€assessed€amount€in€orderÏto€contest€an€assessment€arising€out€of€a€mathematical€or€clerical€error.€Once€the€assessment€isÏsatisfied,€however,€the€taxpayer€may€file€a€claim€for€refund€if€he€or€she€believes€the€assessmentÏwas€made€in€error.ÌÌÐ x-0*- Їà@••!ìàò òòòReasons€for€Changeó óóóˆÐ H ÐÌà  àThe€Committee€believes€that€it€is€appropriate€to€provide€additional€guidance€to€theÏInternal€Revenue€Service€with€respect€to€the€application€of€the€TIN€requirement.€€It€will€alsoÏimprove€compliance€to€allow€the€IRS€to€use€date€of€birth€data,€from€the€Social€SecurityÏAdministration,€to€determine€ineligibility€for€the€dependent€care€credit,€the€child€tax€credit€andÏthe€earned€income€credit.€€Once€this€determination€is€made,€the€Committee€believes€that€the€IRSÏshould€use€the€mathematical€and€clerical€error€procedure€to€correctly€assess€the€tax€due€withÏrespect€to€affected€tax€returns.ÌÌÔ& ° Ôà@ÅÅìàòòò òExplanation€of€Provisionó óóóˆÐ ¨ `  ÐÌà  àThe€bill€provides€in€the€application€of€the€mathematical€and€clerical€error€procedure€that€aÏcorrect€TIN€is€a€TIN€that€was€assigned€by€the€Social€Security€Administration€(or€in€certainÏÔ'°¨ YTÔlimited€cases,€the€IRS)€to€the€individual€identified€on€the€return.€For€this€purpose€the€IRS€isÏauthorized€to€determine€that€the€individual€identified€on€the€tax€return€corresponds€in€everyÏaspect€(including,€name,€age,€date€of€birth,€and€SSN)€to€the€individual€to€whom€the€TIN€isÏissued.€The€IRS€also€is€authorized€to€use€the€mathematical€and€clerical€error€procedure€to€denyÏeligibility€for€the€dependent€care€tax€credit,€the€child€tax€credit,€and€the€earned€income€creditÏeven€though€a€correct€TIN€has€been€supplied€if€the€IRS€determines€that€the€statutory€ageÏrestrictions€for€eligibility€for€any€of€the€respective€credits€is€not€satisfied€(e.g.,€the€TIN€issued€forÏthe€child€claimed€as€the€basis€of€the€child€tax€credit€identifies€the€child€as€over€the€age€of€17€atÏthe€end€of€the€taxable€year).ÌÌà@””#ìàòòò òEffective€Dateó óóóˆÐ È€ ÐÌà  àThe€provision€is€effective€for€taxable€years€ending€after€the€date€of€enactment.ÌÐ  ˜P ÐÔ_Ôò òÔ_ÔÓ  ÓD.€€Freeze€Grandfather€Status€of€Stapled€REITs€(sec.€5004€of€the€bill)ó óÐ H ÐÓ„YÓÌà  àà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ (à ÐÌÓ- °X›X°XƒXŒ ¸ —X-Óò òòòIn€generalóóó óÐ À ÐÌà  àA€real€estate€investment€trust€("REIT")€is€an€entity€that€receives€most€of€its€income€fromÏpassive€real€estate€related€investments€and€that€essentially€receives€pass„through€treatment€forÏincome€that€is€distributed€to€shareholders.€€If€an€electing€entity€meets€the€qualifications€for€REITÏstatus,€the€portion€of€its€income€that€is€distributed€to€the€investors€each€year€generally€is€taxed€toÏthe€investors€without€being€subjected€to€a€tax€at€the€REIT€level.€€In€general,€a€REIT€must€deriveÏits€income€from€passive€sources€and€not€engage€in€any€active€trade€or€business.€ÌÌò òòòRequirements€for€REIT€statusóóó óÐ x0  ÐÌà  àA€REIT€must€satisfy€a€number€of€tests€on€a€year„by„year€basis€that€relate€to€the€entity'sÏ(1)€organizational€structure,€(2)€source€of€income,€(3)€nature€of€assets,€and€(4)€distribution€ofÏincome.€€These€tests€are€intended€to€allow€pass„through€treatment€only€if€there€is€a€pooling€ofÏinvestment€arrangement,€if€the€entityððs€investments€are€basically€in€real€estate€assets,€and€itsÏincome€is€passive€income€from€real€estate€investment,€as€contrasted€with€income€from€theÏoperation€of€a€business€involving€real€estate.€€In€addition,€substantially€all€of€the€entityððs€incomeÏmust€be€passed€through€to€its€shareholders€on€a€current€basis.Ìà  àÌà  àUnder€the€organizational€structure€tests,€except€for€the€first€taxable€year€for€which€anÏentity€elects€to€be€a€REIT,€the€beneficial€ownership€of€the€entity€must€be€held€by€100€or€moreÏpersons.€€Generally,€no€more€than€50€percent€of€the€value€of€the€REIT's€stock€can€be€owned€byÏfive€or€fewer€individuals€during€the€last€half€of€the€taxable€year.ÌÌà  àUnder€the€source„of„income€tests,€at€least€95€percent€of€its€gross€income€generally€mustÏbe€derived€from€rents,€dividends,€interest€and€certain€other€passive€sources€(the€"95„percentÏtest").€€€In€addition,€at€least€75€percent€of€its€income€generally€must€be€from€real€estate€sources,Ïincluding€rents€from€real€property€and€interest€on€mortgages€secured€by€real€property€(the€"75„¼percent€test").ÌÌà  àFor€purposes€of€these€tests,€rents€from€real€property€generally€include€charges€for€servicesÏcustomarily€rendered€in€connection€with€the€rental€of€real€property,€whether€or€not€such€chargesÏare€separately€stated.€€Where€a€REIT€furnishes€non„customary€services€to€tenants,€amountsÏreceived€generally€are€not€treated€as€qualifying€rents€unless€the€services€are€furnished€through€anÏindependent€contractor€from€whom€the€REIT€does€not€derive€any€income.€€In€general,€anÏindependent€contractor€is€a€person€who€does€not€own€more€than€a€35„percent€interest€in€theÏREIT,€and€in€which€no€more€than€a€35„percent€interest€is€held€by€persons€with€a€35„percent€orÏgreater€interest€in€the€REIT.ÌÌà  àTo€satisfy€the€REIT€asset€requirements,€at€the€close€of€each€quarter€of€its€taxable€year,€anÏentity€must€have€at€least€75€percent€of€the€value€of€its€assets€invested€in€real€estate€assets,€cashÏÔ_Ôand€cash€items,€and€government€securities.€€Not€more€than€25€percent€of€the€value€of€the€REIT'sÐ x-0*- Ðassets€can€be€invested€in€securities€(other€than€government€securities€and€other€securitiesÏdescribed€in€the€preceding€sentence).€€The€securities€of€any€one€issuer€may€not€comprise€moreÏthan€five€percent€of€the€value€of€a€REIT's€assets.€€Moreover,€the€REIT€may€not€own€more€than€10Ïpercent€of€the€outstanding€securities€of€any€one€issuer,€determined€by€voting€power.ÌÌà  àA€REIT€is€permitted€to€have€a€wholly„owned€subsidiary€subject€to€certain€restrictions.€€AÏREIT's€subsidiary€is€treated€as€one€with€the€REIT.ÌÌà  àThe€income€distribution€requirement€provides€generally€that€at€least€95€percent€of€aÏREIT's€income€(with€certain€minor€exceptions)€must€be€distributed€to€shareholders€as€dividends.Ìà  àÌò òòòStapled€REITsóóó óÐ ˜ P  ÐÌà  àIn€a€stapled€REIT€structure,€both€the€shares€of€a€REIT€and€a€C€corporation€may€be€traded,Ïbut€are€subject€to€a€provision€that€they€may€not€be€sold€separately.€€Thus,€the€REIT€and€the€CÏcorporation€have€identical€ownership€at€all€times.ÌÌà  àIn€the€Deficit€Reduction€Act€of€1984€(the€"1984€Act"),€Congress€required€that,€inÏapplying€the€tests€for€REIT€status,€all€stapled€entities€are€treated€as€one€entity€(sec.€269B(a)(3)).€ÏThe€1984€Act€included€grandfather€rules,€one€of€which€provided€that€certain€then„existing€stapledÏREITs€were€not€subject€to€the€new€provision€(sec.€136(c)(3)€of€the€1984€Act).€€That€grandfatherÏrule€provided€that€the€new€provision€did€not€apply€to€a€REIT€that€was€a€part€of€a€group€of€stapledÏentities€if€the€group€of€entities€was€stapled€on€June€30,€1983,€and€included€a€REIT€on€that€date.Ìà  à¹Ó  Óà @ àà @` àà @¸ àà @ àà @h àòòò òReasons€for€Changeó óóóРȀ ÐÓ%mÓÌà  àIn€the€1984€Act,€Congress€eliminated€the€tax€benefits€of€the€stapled€REIT€structure€out€ofÏconcern€that€it€could€effectively€result€in€one€level€of€tax€on€active€corporate€business€incomeÏthat€would€otherwise€be€subject€to€two€levels€of€tax.€€Congress€also€believed€that€allowing€aÏcorporate€business€to€be€stapled€to€a€REIT€was€inconsistent€with€the€policy€that€led€Congress€toÏcreate€REITs.ÌÌà  àAs€part€of€the€1984€Act€provision,€Congress€provided€grandfather€relief€to€the€smallÏnumber€of€stapled€REITs€that€were€already€in€existence.€€Since€1984,€however,€many€of€theÏgrandfathered€stapled€REITs€have€been€acquired€by€new€owners.€€Some€have€entered€into€newÏlines€of€businesses,€and€most€of€the€grandfathered€REITs€have€used€the€stapled€structure€toÏengage€in€large„scale€acquisitions€of€assets.€€The€Committee€believes€that€such€unlimited€reliefÏfrom€a€general€tax€provision€by€a€handful€of€taxpayers€raises€new€questions€not€only€of€fairness,Ïbut€of€unfair€competition,€because€the€stapled€REITs€are€in€direct€competition€with€otherÏcompanies€that€cannot€use€the€benefits€of€the€stapled€structure.à È àÐ Ø'$' ЀÌà  àThe€Committee€believes€that€it€would€be€unfair€to€remove€the€benefit€of€the€stapled€REITÏstructure€with€respect€to€real€estate€interests€that€have€already€been€acquired.€€On€the€other€hand,Ïthe€Committee€believes€that€future€acquisitions€of€interests€in€real€property€by€theseÏgrandfathered€entities,€or€improvements€of€property€that€are€tantamount€to€new€acquisitions,Ïshould€not€be€accorded€the€benefits€of€the€stapled€REIT€structure.€€Accordingly,€the€rules€of€Ô_ÔtheÐ x-0*- ÐCommittee€bill€generally€apply€with€respect€to€real€property€interests€acquired€by€the€REIT€or€aÏstapled€entity€after€March€26,€1998,€pursuant€to€transactions€not€in€progress€on€that€date.€ÏFurther,€the€Committee€is€concerned€that€the€some€of€the€benefit€of€the€stapled€REIT€structureÏcan€be€derived€through€mortgages€and€interests€in€subsidiaries€and€partnerships.€€Accordingly,Ïthe€Committee€bill€provides€rules€for€mortgages€acquired€after€March€26,€1998,€and€indirectÏacquisitions€of€real€property€interests€through€entities€after€such€date€(with€transition€reliefÏsimilar€to€that€for€direct€acquisitions).€ÌÌÓ  Óà @¸ àà @ àà @h àòòò òExplanation€of€Provisionó óóóÐ È € ÐÓ¡vÓÌò òòòOverviewóóó óÐ ¨ `  ÐÌà  àUnder€the€provision,€rules€similar€to€the€rules€of€present€law€treating€a€REIT€and€allÏstapled€entities€as€a€single€entity€for€purposes€of€determining€REIT€status€(sec.€269B)€apply€toÏreal€property€interests€acquired€after€March€26,€1998,€by€an€existing€stapled€REIT,€a€stapledÏentity,€or€a€subsidiary€or€partnership€in€which€a€10„percent€or€greater€interest€is€owned€by€anÏexisting€stapled€REIT€or€stapled€entity€(together€referred€to€as€the€"stapled€REIT€group"),€unlessÏthe€real€property€interest€is€grandfathered€as€described€below.€€Special€rules€apply€to€certainÏmortgages€acquired€by€the€stapled€REIT€group€after€March€26,€1998,€where€a€member€of€theÏstapled€REIT€group€performs€services€with€respect€to€the€property€secured€by€the€mortgage.€ÌÌò òòòRules€for€real€property€interestsóóó óÐ ø° ÐÌà  àÔ_ÔòòÔ_ÔÔ_ÔÔ_ÔÔ_ÔInÔ_Ô€generalóó€Ð Ø ÐÌà  àThe€provision€generally€applies€to€real€property€interests€acquired€by€a€member€of€theÏstapled€REIT€group€after€March€26,€1998.€€Real€property€interests€that€are€acquired€by€a€memberÏof€the€REIT€group€after€such€date,€and€which€are€not€grandfathered€under€the€rules€describedÏbelow,€are€referred€to€as€"nonqualified€real€property€interests".€€Ìà  àÌà  àThe€provision€treats€activities€and€gross€income€of€a€stapled€REIT€group€with€respect€toÏnonqualified€real€property€interests€held€by€any€member€of€the€stapled€REIT€group€as€activitiesÏand€income€of€the€REIT€for€certain€purposes€in€the€same€manner€as€if€the€stapled€REIT€groupÏwere€a€single€entity.€€This€treatment€applies€for€purposes€of€the€following€provisions€that€dependÏon€a€REIT's€gross€income:€(1)€the€95„percent€test€(sec.€856(c)(2));€(2)€the€75„percent€test€(sec.Ï856(c)(3));€(3)€the€"reasonable€cause"€exception€for€failure€to€meet€either€test€(sec.€856(c)(6));Ïand€(4)€the€special€tax€on€excess€gross€income€for€REITs€with€net€income€from€prohibitedÏtransactions€(sec.€857(b)(5)).€€ÌÌà  àThus,€for€example,€where€a€stapled€entity€leases€nonqualified€real€property€from€the€REITÏand€earns€gross€income€from€operating€the€property,€such€gross€income€will€be€subject€to€theÏprovision.€€The€REIT€and€the€stapled€entity€will€be€treated€as€a€single€entity,€with€the€result€thatÏthe€lease€payments€from€the€stapled€entity€to€the€REIT€would€be€ignored.€€The€gross€incomeÏearned€by€the€stapled€entity€from€operating€the€property€will€be€treated€as€gross€income€of€theÏREIT,€with€the€result€that€either€the€75„percent€or€95„percent€test€might€not€be€met€and€REITÏstatus€might€be€lost.€€Similarly,€where€a€stapled€entity€leases€property€from€a€third€party€afterÐ x-0*- ÐMarch€26,€1998,€and€uses€that€property€in€a€business,€the€gross€income€it€derives€will€be€treatedÏas€income€of€the€REIT€because€the€lease€would€be€a€nonqualified€real€property€interest.€€ÌÌà  àòòGrandfathered€real€property€interestsóóÐ Ð ÐÌà  àUnder€the€provision,€all€real€property€interests€acquired€by€a€member€of€the€stapled€REITÏgroup€after€March€26,€1998,€are€treated€as€nonqualified€real€property€interests€subject€to€theÏgeneral€rules€described€above,€unless€they€qualify€under€one€of€the€grandfather€rules.€€An€optionÏto€acquire€real€property€is€generally€treated€as€a€real€property€interest€for€purposes€of€theÏprovision.€€However,€a€real€property€interest€acquired€by€exercise€of€an€option€after€March€26,Ï1998,€is€treated€as€a€nonqualified€real€property€interest,€even€though€the€option€was€acquiredÏbefore€such€date.ÌÌà  àUnder€the€provision,€grandfathered€real€property€interests€include€properties€acquired€byÏa€member€of€the€stapled€REIT€group€after€March€26,€1998,€pursuant€to€a€written€agreementÏwhich€was€binding€on€March€26,€1998,€and€all€times€thereafter.€€Grandfathered€properties€alsoÏinclude€certain€properties,€the€acquisition€of€which€were€described€in€a€public€announcement€orÏin€a€filing€with€the€Securities€and€Exchange€Commission€on€or€before€March€26,€1998.ÌÌà  àA€real€property€interest€does€not€generally€lose€its€status€as€a€grandfathered€interest€byÏreason€of€a€repair€to,€an€improvement€of,€or€a€lease€of,€the€real€property.€€Thus,€if€a€REIT€leases€aÏgrandfathered€real€property€to€a€stapled€entity,€a€renewal€of€the€lease€does€not€cause€the€propertyÏto€lose€its€grandfathered€status,€whether€the€renewal€is€pursuant€to€the€terms€of€the€lease€orÏotherwise.€€Similarly,€if€a€REIT€owns€a€grandfathered€real€property€interest€that€is€leased€to€aÏthird€party€and,€at€the€expiration€of€that€lease,€the€REIT€leases€the€property€to€a€stapled€entity,€theÏinterest€would€remain€a€grandfathered€interest.€€Finally,€if€a€stapled€entity€leases€a€grandfatheredÏproperty€interest€from€a€third€party€and€the€property€is€repaired€or€improved,€the€interest€wouldÏremain€a€grandfathered€interest€except€as€described€below.ÌÌà  àAn€improvement€of€a€grandfathered€real€property€interest€will€cause€loss€of€grandfatheredÏstatus€and€become€a€nonqualified€real€property€interest€in€certain€circumstances.€€Any€expansionÏbeyond€the€boundaries€of€the€land€of€the€otherwise€grandfathered€interest€occurring€after€MarchÏ26,€1998,€will€be€treated€as€a€non„qualified€real€property€interest€to€the€extent€of€such€expansion.€ÏMoreover,€any€improvement€of€an€otherwise€grandfathered€real€property€interest€(within€its€landÏboundaries)€that€is€placed€in€service€after€December€31,€1999,€is€treated€as€a€separateÏnonqualified€real€property€interest€in€certain€circumstances.€€Such€treatment€applies€where€(1)€theÏimprovement€changes€the€use€of€the€property€and€(2)€its€cost€is€greater€than€(a)€200€percent€of€theÏundepreciated€cost€of€the€property€(prior€to€the€improvement)€or€(b)€in€the€case€of€propertyÏacquired€where€there€is€a€substituted€basis,€the€fair€market€value€of€the€property€on€the€date€thatÏthe€property€was€acquired€by€the€stapled€entity€or€the€REIT.€€There€is€an€exception€forÏimprovements€placed€in€service€before€January€1,€2004,€pursuant€to€a€binding€contract€in€effectÏon€December€31,€1999,€and€at€all€times€thereafter.€€The€rule€treating€improvements€asÏnonqualified€real€property€interests€could€apply,€for€example,€if€a€member€of€the€stapled€REITÏgroup€constructs€a€building€after€December€31,€1999,€on€previously€undeveloped€raw€land€thatÏhad€been€acquired€on€or€before€March€26,€1998.€Ì€Ð x-0*- Ðà  àòòOwnership€through€entitiesóóÐ H ÐÌà  àIf€a€REIT€or€stapled€entity€owns,€directly€or€indirectly,€a€10„percent„or„greater€interest€inÏa€corporate€subsidiary€or€partnership€(or€other€entity€described€below)€that€owns€a€real€propertyÏinterest,€the€above€rules€apply€with€respect€to€a€proportionate€part€of€the€entity's€real€propertyÏinterest,€activities€and€gross€income.€€Thus,€any€real€property€interest€acquired€by€such€aÏsubsidiary€or€partnership€that€is€not€grandfathered€under€the€rules€described€above€is€treated€as€aÏnonqualified€real€property€interest€held€by€the€REIT€or€stapled€entity€in€the€same€proportion€asÏits€ownership€interest€in€the€entity.€€The€same€proportion€of€the€subsidiary's€or€partnership's€grossÏincome€from€any€nonqualified€real€property€interest€owned€by€it€or€another€member€of€theÏstapled€REIT€group€will€be€treated€as€income€of€the€REIT€under€the€rules€described€above.€ÏHowever,€an€interest€in€real€property€acquired€by€a€grandfathered€10„percent„or„greaterÏpartnership€or€subsidiary€is€treated€as€grandfathered€if€such€interest€would€be€a€grandfatheredÏinterest€if€held€directly€by€the€REIT€or€stapled€entity.€€Thus,€for€example,€if€a€REIT€contributes€aÏgrandfathered€real€property€interest€to€a€partnership€10€percent€or€more€of€which€is€owned€onÏMarch€26,€1998,€the€interest€will€not€cease€to€be€a€grandfathered€interest.׃›×Ý ƒ #ÃÝòòÚ  Ú52Ú  ÚóóÝ  Ý×  ׀РX ÐÌà  àSimilar€rules€attributing€the€proportionate€part€of€the€subsidiary's€or€partnership's€realÏproperty€interests€and€gross€income€will€apply€when€a€REIT€or€stapled€entity€acquires€a€10„¼percent„or„greater€interest€(or€in€the€case€of€a€previously„owned€entity,€acquires€an€additionalÏinterest)€after€March€26,€1998,€with€exceptions€for€interests€acquired€pursuant€to€binding€writtenÏagreements€or€public€announcements€described€above.€€Transition€relief€can€apply€to€both€anÏentity's€assets€and€the€interest€in€the€entity€under€the€above€rules.€€Thus,€if€on€March€26,€1998,Ïand€at€all€times€thereafter,€a€stapled€entity€has€a€binding€written€contract€to€buy€10„percent€orÏmore€of€the€stock€of€a€corporation€and€the€corporation€also€has€a€binding€written€contract€to€buyÏreal€property,€no€portion€of€the€property€will€be€treated€as€a€nonqualified€real€property€interest€asÏa€result€of€the€transaction.ÌÌà  àUnder€the€above€rules,€gross€income€of€a€REIT€or€stapled€entity€with€respect€to€aÏnonqualified€real€property€interest€held€by€a€10„percent„or„greater€partnership€or€subsidiary€isÏsubject€to€the€rules€for€nonqualified€real€property€interests€only€in€proportion€to€the€interest€heldÏin€the€partnership€or€subsidiary.€€For€example,€assume€that€a€stapled€entity€has€a€contract€toÏmanage€a€nonqualified€real€property€interest€held€by€a€partnership€in€which€the€stapled€entityÏowns€an€85„percent€interest.€€Under€the€above€rules,€for€purposes€of€applying€the€gross€incomeÏtests,€85€percent€of€the€partnership's€activities€and€gross€income€from€the€property€are€attributedÏto€the€REIT.€€As€a€result,€85€percent€of€the€stapled€entity's€€income€from€the€managementÏcontract€is€ignored€under€the€single„entity€analysis€described€above.€€The€remaining€15€percent€ofÏthe€management€fee€is€not€treated€as€gross€income€of€the€REIT€because€it€is€not€income€from€aÏnonqualified€real€property€interest€held€or€deemed€held€by€the€REIT€or€a€stapled€entity.€€ÌÐ Ø'$' Ðà  àGrandfathered€real€property€interests€that€are€deemed€owned€by€a€REIT€or€a€stapled€entityÏunder€the€rules€for€10„percent„or„greater€interests€will€not€be€treated€as€acquired€after€March€26,Ï1998,€if€the€REIT€or€a€stapled€entity€subsequently€becomes€the€actual€owner.€€For€example,Ïassume€a€REIT€has€a€50„percent€interest€in€a€partnership€that€distributes€a€grandfathered€realÏproperty€interest€to€the€REIT€in€complete€liquidation€of€its€interest.€€The€50„percent€interest€thatÏwas€previously€deemed€owned€by€the€REIT€will€continue€to€be€grandfathered;€the€remaining€50„¼percent€interest€will€be€a€nonqualified€real€property€interest€because€it€was€acquired€by€the€REITÏafter€March€26,€1998.ÌÌò òòòMortgage€rulesóóó óÐ ¸ p  ÐÌà  àUnder€the€provision,€special€rules€apply€where€a€member€of€the€stapled€REIT€group€holdsÏa€mortgage€(that€is€not€an€existing€obligation€under€the€rules€described€below)€that€is€secured€byÏan€interest€in€real€property,€and€a€member€of€the€stapled€REIT€group€engages€in€certain€activitiesÏwith€respect€to€that€property.€€The€activities€that€have€this€effect€under€the€provision€are€activitiesÏthat€would€result€in€impermissible€tenant€service€income€(as€defined€in€sec.856(d)(7))€ifÏperformed€by€the€REIT€with€respect€to€property€it€held.€€In€such€a€case,€all€interest€on€theÏmortgage€that€is€allocable€to€that€property€and€all€gross€income€received€by€a€member€of€theÏstapled€REIT€group€from€the€activity€will€be€treated€as€impermissible€tenant€service€income€ofÏthe€REIT,€which€is€not€qualifying€income€under€either€the€75„percent€or€95„percent€tests.€€ForÏexample,€assume€that€the€REIT€makes€a€mortgage€loan€on€a€hotel€owned€by€a€third€party€whichÏis€operated€by€a€stapled€entity€under€a€management€contract.€€Unless€an€exception€applies,€bothÏthe€management€fees€earned€by€the€stapled€entity€and€the€interest€earned€by€the€REIT€will€beÏtreated€as€impermissible€tenant€services€income€of€the€REIT.ÌÌà  àAn€exception€to€the€above€rules€is€provided€for€mortgages€the€interest€on€which€does€notÏexceed€an€arm's„length€rate€and€which€would€be€treated€as€interest€for€purposes€of€the€REITÏrules.€€An€exception€also€is€available€for€mortgages€that€are€held€by€a€member€of€the€stapledÏREIT€group€on€March€26,€1998,€and€at€all€times€thereafter,€and€which€are€secured€by€an€interestÏin€real€property€on€that€date,€and€at€all€times€thereafter€(the€"existing€mortgage€exception").€€TheÏexisting€mortgage€exception€ceases€to€apply€if€the€mortgage€is€refinanced€and€the€principalÏamount€is€increased€in€such€refinancing.€ÌÌà  à€€In€the€case€of€a€partnership€or€subsidiary€in€which€the€REIT€or€a€stapled€entity€owns€aÏ10„percent„or„greater€interest,€a€proportionate€part€of€the€entity's€mortgages,€interest€and€grossÏincome€from€activities€would€be€attributed€to€the€REIT€or€the€stapled€entity,€subject€to€rulesÏsimilar€to€those€for€nonqualified€real€property€interests.€€Thus,€if€a€REIT€or€a€stapled€entityÏacquires€a€10„percent„or„greater€interest€in€a€partnership€or€corporation€after€March€26,€1998,€noÏmortgage€held€by€the€partnership€or€subsidiary€at€such€time€would€qualify€for€the€existingÏmortgage€exception.€€Similarly,€if€a€REIT€or€stapled€entity€owns€a€10„percent„or„greater€interestÏin€a€partnership€or€subsidiary€on€March€26,€1998,€and€the€REIT€or€the€stapled€entityÏsubsequently€acquires€a€greater€interest,€a€portion€of€each€of€the€partnership's€or€subsidiary'sÏmortgages€that€is€the€same€as€the€proportionate€increase€in€the€ownership€interest€would€fail€toÏqualify€for€the€existing€mortgage€exception.Ìâ âÐ ˆ,@), Ðà  àUnder€the€provision's€priority€rules,€the€mortgage€rules€do€not€apply€to€any€part€of€a€realÏâ âproperty€interest€that€is€owned€or€deemed€owned€by€the€REIT€or€a€stapled€entity€under€the€rulesÏfor€real€property€interests€described€above.€€Thus,€for€example,€if€the€REIT€makes€a€mortgageÏloan€on€real€property€owned€by€a€stapled€entity,€the€mortgage€rules€would€not€apply.€€If€theÏproperty€is€a€nonqualified€real€property€interest,€the€interest€on€the€mortgage€would€be€ignoredÏunder€the€single„entity€analysis€described€above,€and€the€gross€income€of€the€stapled€entity€fromÏthe€property€would€be€treated€as€income€of€the€REIT.€€Similarly,€assume€that€a€stapled€entityÏowns€75€percent€of€the€stock€of€a€subsidiary€and€has€a€management€contract€to€operate€a€hotelÏowned€by€the€subsidiary.€€Assume€also€that€the€REIT€makes€a€mortgage€loan€for€the€hotel.€ÏUnder€the€real€property€interest€rules,€75€percent€of€the€hotel€is€treated€as€owned€by€the€stapledÏentity.€€Thus,€if€the€hotel€is€a€nonqualified€real€property€interest,€75€percent€of€the€subsidiary'sÏgross€income€from€the€hotel€is€treated€as€income€of€the€REIT€and€75€percent€of€the€income€on€theÏmanagement€contract€is€ignored€under€the€single„entity€analysis.€€With€respect€to€the€remainingÏ25„percent€interest€in€the€subsidiary,€the€real€property€interest€rules€do€not€apply,€but€theÏmortgage€rules€would€treat€25€percent€of€the€mortgage€interest€and€25€percent€of€managementÏcontract€income€as€impermissible€tenant€services€income€of€the€REIT.Ìò òòòÌOther€rulesóóó óÐ 8ð ÐÌà  àFor€purposes€of€both€the€real€property€interest€and€mortgage€rules,€if€a€stapled€REIT€isÏnot€stapled€as€of€March€26,€1998,€and€at€all€times€thereafter,€or€if€it€fails€to€qualify€as€a€REIT€asÏof€such€date€or€any€time€thereafter,€no€assets€of€any€member€of€the€stapled€REIT€group€wouldÏqualify€under€the€grandfather€rules.€€Thus,€all€of€the€real€property€interests€held€by€the€groupÏwould€be€nonqualified€real€property€interests€and€none€of€the€mortgages€held€by€the€group€wouldÏqualify€for€the€existing€mortgage€exception.ÌÌà  à€For€a€corporate€subsidiary€owned€by€a€stapled€entity,€the€10„percent€ownership€testÏwould€be€met€if€a€stapled€entity€owns,€directly€or€indirectly,€10€percentor€more€of€theÏcorporation's€stock,€by€either€vote€or€value.׃œ×Ý ƒ #ÃÝòòÚ  Ú53Ú  ÚóóÝ  Ý×  ×€€For€this€purpose,€any€change€in€proportionateÐ ˆ@ Ðownership€that€is€attributable€solely€to€fluctuations€in€the€relative€fair€market€values€of€differentÏclasses€of€stock€is€not€taken€into€account.€€For€interests€in€partnerships,€the€ownership€test€wouldÏbe€met€if€either€the€REIT€or€a€stapled€entity€owns,€directly€or€indirectly,€a€10„percent€or€greaterÏinterest€in€the€partnership's€assets€or€net€profits.€€Interests€in€other€entities,€such€as€trusts,€areÏtreated€in€the€same€manner€as€10„percent„or„greater€interests€in€partnerships€or€corporations€if€theÏREIT€or€a€stapled€entity€owns,€directly€or€indirectly,€10€percent€or€more€of€the€beneficialÏinterests€in€the€entity.€€€€€€ÌÌà  àUnder€the€provision,€terms€used€that€are€also€used€in€the€stapled€stock€rules€(sec.€269B)€orÏthe€REIT€rules€(sec.€856)€have€the€same€meanings€as€under€those€rules.Ìâ  €€€Ð Ø'$' Ðà  àThe€Secretary€of€the€Treasury€is€given€authority€to€prescribe€such€guidance€as€may€beÏâ ânecessary€or€appropriate€to€carry€out€the€purposes€of€the€provision,€including€guidance€to€preventÏthe€double€counting€of€income€and€to€prevent€transactions€that€would€avoid€thepurposes€of€theÏprovision.ÌÌÓ  Óà @ àà @` àà @¸ àà @ àòòò òEffective€Dateó óóóÐ ø° ÐÓdºÓ€Ìà  àThe€provision€is€effective€for€taxable€years€ending€after€March€26,€1998.ÌÌò òÓ  ÓE.€€Make€Certain€Trade€Receivables€Ineligible€for€Mark„to„Market€TreatmentÐ ¸ p  Ð(sec.€5005€of€the€bill€and€sec.€475€of€the€Code)ó óÐ ¨ `  ÐÓ;»ÓÌò òòòÓ  ÓPresent€Lawóóó óÐ ˆ@  ÐÓ¼ÓÌà  à€In€general,€dealers€in€securities€are€required€to€use€a€mark„to„market€method€ofÏaccounting€for€securities€(sec.€475).€€Exceptions€to€the€mark„to„market€rule€are€provided€forÏsecurities€held€for€investment,€certain€debt€instruments€and€obligations€to€acquire€debtÏinstruments€and€certain€securities€that€hedge€securities.€€A€dealer€in€securities€is€a€taxpayer€whoÏregularly€purchases€securities€from€or€sells€securities€to€customers€in€the€ordinary€course€of€aÏtrade€or€business,€or€who€regularly€offers€to€enter€into,€assume,€offset,€assign,€or€otherwiseÏterminate€positions€in€certain€types€of€securities€with€customers€in€the€ordinary€course€of€a€tradeÏor€business.€€A€security€includes€(1)€a€share€of€stock,€(2)€an€interest€in€a€widely€held€or€publiclyÏtraded€partnership€or€trust,€(3)€an€evidence€of€indebtedness,€(4)€an€interest€rate,€currency,€orÏequity€notional€principal€contract,€(5)€an€evidence€of€an€interest€in,€or€derivative€financialÏinstrument€in,€any€of€the€foregoing€securities,€or€any€currency,€including€any€option,€forwardÏcontract,€short€position,€or€similar€financial€instrument€in€such€a€security€or€currency,€or€(6)€aÏposition€that€is€an€identified€hedge€with€respect€to€any€of€the€foregoing€securities.ÌÌà  àTreasury€regulations€provide€that€if€a€taxpayer€would€be€a€dealer€in€securities€onlyÏbecause€of€its€purchases€and€sales€of€debt€instruments€that,€at€the€time€of€purchase€or€sale,€areÏcustomer€paper€with€respect€to€either€the€taxpayer€or€a€corporation€that€is€a€member€of€the€sameÏconsolidated€group,€the€taxpayer€will€not€normally€be€treated€as€a€dealer€in€securities.€€However,Ïthe€regulations€allow€such€a€taxpayer€to€elect€out€of€this€exception€to€dealer€status.׃¡×Ý ƒ #ÃÝòòÚ  Ú54Ú  ÚóóÝ  Ý×  ×€€For€thisÐ H!  Ðpurpose,€a€debt€instrument€is€customer€paper€with€respect€to€a€person€if:€(1)€the€personððsÏprincipal€activity€is€selling€nonfinancial€goods€or€providing€nonfinancial€services;€(2)€the€debtÏinstrument€was€issued€by€the€purchaser€of€the€goods€or€services€at€the€time€of€the€purchase€ofÏthose€goods€and€services€in€order€to€finance€the€purchase;€and€(3)€at€all€times€since€the€debtÏinstrument€was€issued,€it€has€been€held€either€by€the€person€selling€those€goods€or€services€or€byÏa€corporation€that€is€a€member€of€the€same€consolidated€group€as€that€person.ÌÌÓ  Óòòò òReasons€for€Changeó óóóÐ È(€%( ÐÓ£ÅÓÐ ¸)p&) Ðà  àCongress€enacted€the€mark„to„market€rules€of€section€475€to€provide€a€more€accurateÏreflection€of€the€income€of€securities€dealers.€€The€Committee€does€not€believe€that€theseÏprovisions€were€intended€to€be€used€by€taxpayers€whose€principal€activity€is€selling€goods€andÏservices€to€obtain€a€deduction€for€loss€in€value€of€their€receivables€at€a€time€earlier€than€otherwiseÏwould€be€permitted.ÌÌÓ  Óò òòòExplanation€of€Provisionó óóóÐ è  ÐÓÇÓÌà  àThe€provision€provides€that€certain€trade€receivables€are€not€eligible€for€mark„to„marketÏtreatment.€€A€trade€receivable€is€covered€by€the€provision€if€it€is€a€note,€bond€or€debenture€arisingÏout€of€the€sale€of€goods€by€a€person€the€principal€activity€of€which€is€selling€or€providing€non„¼financial€goods€and€services€and€it€is€held€by€such€person€or€a€related€person€at€all€times€since€itÏwas€issued.€ÌÌà  àUnder€the€provision,€a€receivable€meeting€the€above€definition€is€not€treated€as€a€securityÏfor€purposes€of€the€mark„to„market€rules€(sec.€475).€€Thus,€such€receivables€are€not€marked„to„¼market,€even€if€the€taxpayer€qualifies€as€a€dealer€in€other€securities.€€Because€trade€receivablesÏcease€to€meet€the€above€definition€when€they€are€disposed€of€(other€than€to€a€related€person),€aÏtaxpayer€who€regularly€sells€trade€receivables€is€treated€as€a€dealer€in€securities€as€under€presentÏlaw,€with€the€result€that€the€taxpayer's€other€securities€would€be€subject€to€mark„to„marketÏtreatment€unless€an€exception€to€section€475€applies€(such€as€that€for€securities€identified€as€heldÏfor€investment).€€ÌÌÓ  Óòòò òEffective€Dateó óóóÐ Ø ÐÓ[ÌÓÌà  àThe€provision€generally€is€effective€for€taxable€years€ending€after€the€date€of€enactment.€ÏAdjustments€required€under€section€481€as€a€result€of€the€change€in€method€of€accountingÏgenerally€are€required€to€be€taken€into€account€ratably€over€the€four„year€period€beginning€in€theÏfirst€taxable€year€for€which€the€provision€is€in€effect.€€However,€where€the€taxpayer€terminates€itsÏexistence€or€ceases€to€engage€in€the€trade€or€business€that€generated€the€receivables€(except€as€aÏresult€of€a€tax„free€transfer),€any€remaining€balance€of€the€section€481€adjustment€is€taken€intoÏaccount€entirely€in€the€year€of€such€cessation€or€termination€(see€sec.€5.04(c)€of€Rev.€Proc.€97„37,Ï1997„33€I.R.B.€18).ò òÐ H!  ÐÓ  ÓÐ  8"ð! ÐF.€€Add€Vaccines€Against€Rotavirus€Gastroenteritis€to€the€List€of€Taxable€VaccinesÌ(sec.€5006€of€the€bill€and€sec.€4132€of€the€Code)ÌÓ…ÏÓó óÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ Ð ÐÌà  àA€manufacturerððs€excise€tax€is€imposed€at€the€rate€of€75€cents€per€dose€(sec.€4131)€on€theÏfollowing€vaccines€routinely€recommended€for€administration€to€children:€€diphtheria,€pertussis,Ïtetanus,€measles,€mumps,€rubella,€polio,€HIB€(haemophilus€influenza€type€B),€€hepatitis€B,€andÏvaricella€(chicken€pox).€€The€tax€applied€to€any€vaccine€that€is€a€combination€of€vaccineÏcomponents€equals€75€cents€times€the€number€of€components€in€the€combined€vaccine.ÌÌà  àAmounts€equal€to€net€revenues€from€this€excise€tax€are€deposited€in€the€Vaccine€InjuryÏCompensation€Trust€Fund€to€finance€compensation€awards€under€the€Federal€Vaccine€InjuryÏCompensation€Program€for€individuals€who€suffer€certain€injuries€following€administration€ofÏthe€taxable€vaccines.€€This€program€provides€a€substitute€Federal,€ð ðno€faultðð€insurance€system€forÏthe€State„law€tort€and€private€liability€insurance€systems€otherwise€applicable€to€vaccineÏmanufacturers.€€All€persons€immunized€after€September€30,€1988,€with€covered€vaccines€mustÏpursue€compensation€under€this€Federal€program€before€bringing€civil€tort€actions€under€StateÏlaw.ÌÌò òòòÓ  ÓReasons€for€Changeóóó óÐ À ÐÓøÔÓÌà  àRotavirus€gastroenteritis€is€a€highly€contagious€disease€among€young€children€that€canÏlead€to€life„threatening€diarrhea,€cramps,€vomiting,€and€can€result€in€death.€€In€the€United€States,Ïmore€than€50,000€children€are€hospitalized€and€more€than€100€die€annually€from€rotavirusÏgastroenteritis.€€The€Food€and€Drug€Administrationððs€(ð ðFDAðð)€advisory€committee€has€favorablyÏreviewed€a€vaccine€against€the€disease€and€the€Centers€for€Disease€Control€have€voted€toÏrecommend€the€vaccine€for€inoculation€of€children,€subject€to€final€FDA€approval.€€TheÏCommittee€believes€American€children€will€benefit€from€wide€use€of€this€new€vaccine.€€TheÏCommittee€believes€that,€by€including€the€new€vaccine€with€those€presently€covered€by€theÏVaccine€Injury€Compensation€Trust€Fund,€greater€application€of€the€vaccine€will€be€promoted.€ÏThe€Committee,€therefore,€believes€it€is€appropriate€to€add€the€vaccine€against€rotavirusÏgastroenteritis€to€the€list€of€taxable€vaccines.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ (#à" ÐÌà  àThe€bill€adds€any€vaccine€against€rotavirus€gastroenteritis€to€the€list€of€taxable€vaccines.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ è& #& ÐÌà  àThe€provision€is€effective€for€vaccines€sold€by€a€manufacturer€or€importer€after€the€dateÏof€enactment.€€For€sales€on€or€before€the€date€of€enactment€for€which€delivery€is€made€after€theÏdate€of€enactment,€the€delivery€date€is€deemed€to€be€the€sale€date.Ô#†XùXXwX«”#ÔÐ  ¨*`'* ÐѰHÑѰHÑò òÓ  ÓTITLE€VI.€€TAX€TECHNICAL€CORRECTIONSÐ ° ÐÌòòTECHNICAL€CORRECTIONS€TO€THE€TAXPAYER€RELIEF€ACT€OF€1997óóó óÐ à ÐÓsÛÓÓ  ÓÌò òA.€€à @ àAmendments€to€Title€I€of€the€1997€Act€Relating€to€the€Child€CreditÐ pÀ ÐÓÜÓÌ1.€€Stacking€rules€for€the€child€credit€under€the€limitations€based€on€tax€liabilityÌ(sec.€6003(a)€of€the€bill,€sec.€101(a)€of€the€1997€Act,€and€sec.€24€of€the€Code)ó óÐ @  ÐÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ  p  ÐÌà  àPresent€law€provides€a€$500€($400€for€taxable€year€1998)€tax€credit€for€each€qualifyingÏchild€under€the€age€of€17.€€A€qualifying€child€is€defined€as€an€individual€for€whom€the€taxpayerÏcan€claim€a€dependency€exemption€and€who€is€a€son€or€daughter€of€the€taxpayer€(or€a€descendentÏof€either),€a€stepson€or€stepdaughter€of€the€taxpayer€or€an€eligible€foster€child€of€the€taxpayer.€ForÏtaxpayers€with€modified€adjusted€gross€income€in€excess€of€certain€thresholds,€the€allowableÏchild€credit€is€phased€out.€€The€length€of€the€phase„out€range€is€affected€by€the€number€of€theÏtaxpayerððs€qualifying€children.ÌÌà  àGenerally,€the€maximum€amount€of€a€taxpayerððs€child€credit€for€each€taxable€year€isÏlimited€to€the€excess€of€the€taxpayerððs€regular€tax€liability€over€the€taxpayerððs€tentative€minimumÏtax€liability€(determined€without€regard€to€the€alternative€minimum€foreign€tax€credit).€€In€theÏcase€of€a€taxpayer€with€three€or€more€qualifying€children,€the€maximum€amount€of€the€taxpayerððsÏchild€credit€for€each€taxable€year€is€limited€to€the€greater€of:€(1)€the€amount€computed€under€theÏrule€described€above,€or€(2)€an€amount€equal€to€the€excess€of€the€sum€of€the€taxpayerððs€regularÏincome€tax€liability€and€the€employee€share€of€FICA€taxes€(and€one„half€of€the€taxpayerððs€SECAÏtax€liability,€if€applicable)€reduced€by€the€earned€income€credit.€€In€the€case€of€a€taxpayer€withÏthree€or€more€qualifying€children,€the€excess€of€the€amount€allowed€in€(2)€over€the€amountÏcomputed€in€(1)€is€a€refundable€credit.€€€ÌÌà  àNonrefundable€credits€may€not€be€used€to€reduce€tax€liability€below€a€taxpayerððs€tentativeÏminimum€tax.€€Certain€credits€not€used€as€result€of€this€rule€may€be€carried€over€to€other€taxableÏyears,€while€others€may€not.€€Special€stacking€rules€apply€in€determining€which€nonrefundableÏcredits€are€used€in€the€current€year.€€Generally,€the€stacking€rules€require€that€nonrefundableÏpersonal€credits€be€considered€first׃®×Ý ƒ #ÃÝòòÚ  Ú55Ú  ÚóóÝ  Ý×  ×,€followed€by€other€credits,€business€credits,€and€theÐ $à" Ðinvestment€tax€credit.€€Refundable€credits,€which€are€not€limited€by€the€minimum€tax,€are€notÏstacked€until€after€the€nonrefundable€credits.€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ €Ð ÐÌà  àThe€bill€clarifies€the€application€of€the€income€tax€liability€limitation€to€the€refundableÏportion€of€the€child€credit€by€treating€the€refundable€portion€of€the€child€credit€in€the€same€way€asÏthe€other€refundable€credits.€€Specifically,€after€all€the€other€credits€are€applied€according€to€theÏstacking€rules€of€the€income€tax€limitation€then€the€refundable€credits€are€applied€first€to€reduceÏthe€taxpayerððs€tax€liability€for€the€year€and€then€to€provide€a€credit€in€excess€of€income€taxÏliability€for€the€year.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ ð@  ÐÌà  àThe€provision€is€effective€for€taxable€years€beginning€after€December€31,€1997.ÌÌò ò2.€€Treatment€of€a€portion€of€the€child€credit€as€a€supplemental€child€credit€(sec.€6003(b)€ofÐ ° Ðthe€bill,€sec.€101(b)€of€the€1997€Act,€and€sec.€32(n)€of€the€Code)ó óÐ  ð ÐÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ €Ð ÐÌà  àA€portion€of€€the€child€credit€may€be€treated€as€a€supplemental€child€credit.€€TheÏsupplemental€child€credit€is€treated€as€provided€under€the€earned€income€credit€and€the€childÏcredit€amount€is€reduced€by€the€amount€of€the€supplemental€child€credit.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ  p ÐÌà  àThe€bill€clarifies€that€the€treatment€of€a€portion€of€the€child€credit€as€a€supplemental€childÏcredit€under€the€earned€income€credit€(sec.€32)€and€the€offsetting€reduction€of€the€child€creditÏ(sec.€24)€does€not€affect€the€total€tax€credits€allowed€to€the€taxpayer€or€any€other€tax€creditÏavailable€to€the€taxpayer.€€Rather,€it€simply€reduces€the€otherwise€allowable€nonrefundable€childÏcredit€dollar„for„dollar€by€the€amount€treated€as€a€supplemental€child€credit.€€The€bill€alsoÏclarifies€that€the€amount€of€the€supplemental€child€credit€under€section€32(n)€is€the€lesser€of€(1)Ïthe€amount€by€which€the€taxpayerððs€total€nonrefundable€personal€credits€(as€limited€by€the€taxÏliability€limitation€of€section€26(a))€are€increased€by€reason€of€the€child€credit,€or€(2)€theÐ $à" Ðð ðnegativeðð€tax€liability€of€the€taxpayer,€defined€as€the€excess€of€€taxpayerððs€total€tax€credits,Ïincluding€the€earned€income€credit€over€the€sum€of€the€taxpayerððs€regular€income€taxes€andÏsocial€security€taxes.€€For€purposes€of€this€calculation,€subsection€32(n)€is€not€taken€into€account.€ÏThe€bill€also€clarifies€that€the€earned€income€credit€rules€(e.g.,€the€phaseout€of€the€earned€incomeÏcredit)€generally€do€not€apply€to€the€supplemental€child€credit.ÌÌà@””#ìàò òòòÔ& Ð ÔEffective€Dateó óóóˆÐ P   ÐÌà  àThe€provision€is€effective€for€taxable€years€beginning€after€December€31,€1997.€Ô'ÐP ñÔÐ  0 € ÐÔ_Ôò òÓ  ÓB.€€Amendments€to€Title€II€of€the€1997€Act€Relating€to€Education€IncentivesÐ ° ÐÓØñÓÌ1.€€Clarifications€to€HOPE€and€Lifetime€Learning€tax€credits€(sec.€6004(a)€of€the€bill,€sec.Ï201€of€the€1997€Act,€and€secs.€25A€and€6050S€of€the€Code)ó óÐ €Ð ÐÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ ` ° ÐÌà  àIndividual€taxpayers€are€allowed€to€claim€a€nonrefundable€HOPE€credit€against€FederalÏincome€taxes€up€to€$1,500€per€student€for€qualified€tuition€and€fees€paid€during€the€year€onÏbehalf€of€a€student€(i.e.,€the€taxpayer,€the€taxpayerððs€spouse,€or€a€dependent€of€the€taxpayer)€whoÏis€enrolled€in€a€post„secondary€degree€or€certificate€program€at€an€eligible€post„secondaryÏinstitution€on€at€least€a€half„time€basis.€€The€HOPE€credit€is€available€only€for€the€first€two€yearsÏof€a€studentððs€post„secondary€education.€€The€credit€rate€is€100€percent€of€the€first€$1,000€ofÏqualified€tuition€and€fees€and€50€percent€on€the€next€$1,000€of€qualified€tuition€and€fees.€€TheÏHOPE€credit€amount€that€a€taxpayer€may€otherwise€claim€is€phased€out€for€taxpayers€withÏmodified€adjusted€gross€income€(AGI)€between€$40,000€and€$50,000€($80,000€and€$100,000€forÏjoint€returns).€€For€taxable€years€beginning€after€2001,€the€$1,500€maximum€HOPE€creditÏamount€and€the€AGI€phase„out€range€will€be€indexed€for€inflation.€€The€HOPE€credit€is€availableÏfor€expenses€paid€after€December€31,€1997,€for€education€furnished€in€academic€periodsÏbeginning€after€such€date.ÌÌà  àIf€a€student€is€not€eligible€for€the€HOPE€credit€(or€in€lieu€of€claiming€a€HOPE€credit€withÏrespect€to€a€student),€individual€taxpayers€are€allowed€to€claim€a€nonrefundable€LifetimeÏLearning€credit€against€Federal€income€taxes€equal€to€20€percent€of€qualified€tuition€and€feesÏpaid€during€the€taxable€year€on€behalf€of€the€taxpayer,€the€taxpayerððs€spouse,€or€a€dependent.€€InÏcontrast€to€the€HOPE€credit,€the€student€need€not€be€enrolled€on€at€least€a€half„time€basis€in€orderÏto€be€eligible€for€the€Lifetime€Learning€credit,€which€is€available€for€an€unlimited€number€ofÏyears€of€post„secondary€training.€€For€expenses€paid€before€January€1,€2003,€up€to€$5,000€ofÏqualified€tuition€and€fees€per€taxpayer€return€will€be€eligible€for€the€Lifetime€Learning€creditÏ(i.e.,€the€maximum€credit€per€taxpayer€return€will€be€$1,000).€€For€expenses€paid€after€DecemberÏ31,€2002,€up€to€$10,000€of€qualified€tuition€and€fees€per€taxpayer€return€will€be€eligible€for€theÏLifetime€Learning€credit€(i.e.,€the€maximum€credit€per€taxpayer€return€will€be€$2,000).€€TheÏLifetime€Learning€credit€amount€that€a€taxpayer€may€otherwise€claim€is€phased€out€over€theÏsame€modified€AGI€phase„out€range€as€applies€for€purposes€of€the€HOPE€credit.€€The€LifetimeÏLearning€credit€is€available€for€expenses€paid€after€June€30,€1998,€for€education€furnished€inÏacademic€periods€beginning€after€such€date.ÌÌà  àSection€6050S€provides€that€certain€educational€institutions€and€other€taxpayers€engagedÏin€a€trade€or€business€must€file€information€returns€with€the€IRS€and€certain€individual€taxpayers,Ïas€required€by€regulations€prescribed€by€the€Secretary€of€the€Treasury,€containing€information€onÏindividuals€who€made€payments€for€qualified€tuition€and€related€expenses€or€to€whomÏreimbursements€or€refunds€were€made€of€such€expenses.ÌÐ ,`'* Їà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ ° ÐÌà  àThe€bill€clarifies€that,€under€section€6050S,€information€returns€containing€informationÏwith€respect€to€qualified€tuition€and€fees€must€be€filed€by€a€person€that€is€not€an€eligibleÏeducational€institution€only€if€such€person€is€engaged€in€a€trade€or€business€of€making€paymentsÏto€any€individual€under€an€insurance€arrangement€as€reimbursements€or€refunds€(or€similarÏpayments)€of€qualified€tuition€and€related€expenses.€€As€under€present€law,€section€6050S€willÏcontinue€to€require€the€filing€of€information€returns€by€persons€engaged€in€a€trade€or€business€if,Ïin€the€course€of€such€trade€or€business,€the€person€receives€from€any€individual€interestÏaggregating€$600€or€more€for€any€calendar€year€on€one€or€more€qualified€education€loans.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ P  ÐÌà  àThe€provision€is€effective€as€if€included€in€the€1997€Act„„i.e.,€for€expenses€paid€afterÏDecember€31,€1997,€for€education€furnished€in€academic€periods€beginning€after€such€date.ÌÌÔ_Ôò ò2.€€Education€IRAs€(sec.€6004(d)€of€the€bill,€sec.€213€of€the€1997€Act,€and€sec.€530€of€theÐ ° ÐCode)ó óÐ  ð ÐÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ €Ð ÐÌà  àSection€530€provides€that€taxpayers€may€establish€ð ðeducation€IRAs,ðð€meaning€certainÏtrusts€or€custodial€accounts€created€exclusively€for€the€purpose€of€paying€qualified€higherÏeducation€expenses€of€a€named€beneficiary.€€Annual€contributions€to€education€IRAs€may€notÏexceed€$500€per€designated€beneficiary,€and€may€not€be€made€after€the€designated€beneficiaryÏreaches€age€18.€€Contributions€to€an€education€IRA€may€not€be€made€by€certain€high„incomeÏtaxpayers„„i.e.,€the€contribution€limit€is€phased€out€for€taxpayers€with€modified€adjusted€grossÏincome€between€$95,000€and€$110,000€($150,000€and€$160,000€for€taxpayers€filing€jointÏreturns).€€No€contribution€may€be€made€to€an€education€IRA€during€any€year€in€which€anyÏcontributions€are€made€by€anyone€to€a€qualified€State€tuition€program€on€behalf€of€the€sameÏbeneficiary.ÌÌà  àUntil€a€distribution€is€made€from€an€education€IRA,€earnings€on€contributions€to€theÏaccount€generally€are€not€subject€to€tax.׃³×Ý ƒ #ÃÝòòÚ  Ú56Ú  ÚóóÝ  Ý×  ×€€In€addition,€distributions€from€an€education€IRA€areÐ  #ð! Ðexcludable€from€gross€income€to€the€extent€that€the€distribution€does€not€exceed€qualified€higherÏeducation€expenses€incurred€by€the€beneficiary€during€the€year€the€distribution€is€made€(providedÏthat€a€HOPE€credit€or€Lifetime€Learning€credit€is€not€claimed€with€respect€to€the€beneficiary€forÏthe€same€taxable€year).€€The€earnings€portion€of€an€education€IRA€distribution€not€used€to€payÏqualified€higher€education€expenses€is€includible€in€the€gross€income€of€the€distributee€andÐ P( #& Ðgenerally€is€subject€to€an€additional€10„percent€tax.׃´×Ý ƒ #ÃÝòòÚ  Ú57Ú  ÚóóÝ  Ý×  ×€€However,€the€additional€10„percent€taxÐ ° Ðdoes€not€apply€if€a€distribution€is€made€of€excess€contributions€above€the€$500€limit€(and€anyÏearnings€attributable€to€such€excess€contributions)€if€the€distribution€is€made€on€or€before€theÏdate€that€a€return€is€required€to€be€filed€(including€extensions€of€time)€by€the€contributor€for€theÏyear€in€which€the€excess€contribution€was€made.€€In€addition,€section€530€allows€tax„freeÏrollovers€of€account€balances€from€an€education€IRA€benefiting€one€family€member€to€anÏeducation€IRA€benefiting€another€family€member.€€Section€530€is€effective€for€taxable€yearsÏbeginning€after€December€31,€1997.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ  p  ÐÌà  àConsistent€with€the€legislative€history€to€the€1997€Act,€the€bill€provides€that€any€balanceÏremaining€in€an€education€IRA€will€be€deemed€to€be€distributed€within€30€days€after€the€date€thatÏthe€designated€beneficiary€reaches€age€30€(or,€if€earlier,€within€30€days€of€the€date€that€theÏbeneficiary€dies).€€The€bill€further€clarifies€that,€in€the€event€of€the€death€of€the€designatedÏbeneficiary,€the€balance€remaining€in€an€education€IRA€may€be€distributed€(without€impositionÏof€the€additional€10„percent€tax)€to€any€other€(i.e.,€contingent)€beneficiary€or€to€the€estate€of€theÏdeceased€designated€beneficiary.€€If€any€member€of€the€family€of€the€deceased€beneficiaryÏbecomes€the€new€designated€beneficiary€of€an€education€IRA,€then€no€tax€will€be€imposed€onÏsuch€redesignation€and€the€account€will€continue€to€be€treated€as€an€education€IRA.ÌÌà  àUnder€the€bill,€the€additional€10„percent€tax€provided€for€by€section€530(d)(4)€will€notÏapply€to€a€distribution€from€an€education€IRA,€which€(although€used€to€pay€for€qualified€higherÏeducation€expenses)€is€includible€in€the€beneficiaryððs€gross€income€solely€because€the€taxpayerÏelects€to€claim€a€HOPE€or€Lifetime€Learning€credit€with€respect€to€the€beneficiary.€€The€billÏfurther€provides€that€the€additional€10„percent€tax€will€not€apply€to€the€distribution€of€anyÏcontribution€to€an€education€IRA€made€during€a€taxable€year€if€such€distribution€is€made€on€orÏbefore€the€date€that€a€return€is€required€to€be€filed€(including€extensions€of€time)€by€theÏòòbeneficiaryóó€for€the€taxable€year€during€which€the€contribution€was€made€(or,€if€the€beneficiary€isÐ ð@ Ðnot€required€to€file€such€a€return,€April€15th€of€the€year€following€the€taxable€year€during€whichÏthe€contribution€was€made).€€In€addition,€the€bill€amends€section€4973(e)€to€provide€that€theÏexcise€tax€penalty€applies€under€that€section€for€each€year€that€an€excess€contribution€remains€inÏan€education€IRA€(and€not€merely€the€year€that€the€excess€contribution€is€made).ÌÌà  àThe€bill€clarifies€that,€in€order€for€taxpayers€to€establish€an€education€IRA,€the€designatedÏâ âbeneficiary€must€be€a€life„in„being.€€The€bill€also€clarifies€that,€under€rules€contained€in€present„Ð €%Ð # Ðlaw€section€72,€distributions€from€education€IRAs€are€treated€as€representing€a€pro„rata€share€ofÏthe€principal€(i.e.,€contributions)€and€accumulated€earnings€in€the€account.׃µ×Ý ƒ #ÃÝòòÚ  Ú58Ú  ÚóóÝ  Ý×  ×Ð  ð Ðâ âÌà  àThe€bill€also€provides€that,€if€any€qualified€higher€education€expenses€are€taken€intoÏaccount€in€determining€the€amount€of€the€exclusion€under€section€530€for€a€distribution€from€anÏeducation€IRA,€then€no€deduction€(under€section€162€or€any€other€section),€or€exclusion€(underÏsection€135)€or€credit€will€be€allowed€under€the€Internal€Revenue€Code€with€respect€to€suchÏqualified€higher€education€expenses.ÌÌà  àIn€addition,€because€the€1997€Act€allows€taxpayers€to€redeem€U.S.€Savings€Bonds€and€beÏeligible€for€the€exclusion€under€present„law€section€135€(as€if€the€proceeds€were€used€to€payÏqualified€higher€education€expenses)€provided€the€proceeds€from€the€redemption€are€contributedÏto€an€education€IRA€(or€to€a€qualified€State€tuition€program€defined€under€section€529)€on€behalfÏof€the€taxpayer,€the€taxpayerððs€spouse,€or€a€dependent,€the€bill€conforms€the€definition€ofÏð ðeligible€educational€institutionðð€under€section€135€to€the€broader€definition€of€that€term€underÏpresent„law€section€530€(and€section€529).€€Thus,€for€purposes€of€section€135,€as€under€present„¼law€sections€529€and€530,€the€term€ð ðeligible€educational€institutionðð€is€defined€as€an€institutionÏwhich€(1)€is€described€in€section€481€of€the€Higher€Education€Act€of€1965€(20€U.S.C.€1088)€andÏ(2)€is€eligible€to€participate€in€Department€of€Education€student€aid€programs.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ pÀ Ðâ âÐ `° Ðà  àThe€provisions€are€effective€as€if€included€in€the€1997€Act„„i.e.,€for€taxable€yearsÏâ âbeginning€after€December€31,€1997.ÌÌÔ_Ôò ò3.€€Treatment€of€cancellation€of€certain€student€loans€(6004(f)€of€the€bill,€sec.€225€of€theÐ €Ð Ð1997€Act,€and€sec.€108(f)€of€the€Code)ó óÐ pÀ ÐÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ P   ÐÌà  àUnder€present€law,€an€individual's€gross€income€does€not€include€forgiveness€of€loansÏmade€by€tax„exempt€educational€organizations€if€the€proceeds€of€such€loans€are€used€to€pay€costsÏof€attendance€at€an€educational€institution€or€to€refinance€outstanding€student€loans€and€theÏstudent€is€not€employed€by€the€lender€organization.€€The€exclusion€applies€only€if€the€forgivenessÏis€contingent€on€the€student's€working€for€a€certain€period€of€time€in€certain€professions€for€anyÏof€a€broad€class€of€employers.€In€addition,€the€studentððs€work€must€fulfill€a€public€serviceÏrequirement.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ ° ÐÌà  àThe€bill€clarifies€that€gross€income€does€not€include€amounts€from€the€forgiveness€ofÏloans€made€by€educational€organizations€and€certain€tax„exempt€organizations€to€refinance€òòanyóóÐ €Ð Ðexisting€student€loan€(and€not€just€loans€made€by€educational€organizations).€€In€addition,€the€billÏclarifies€that€refinancing€loans€made€by€educational€organizations€and€certain€tax„exemptÏorganizations€must€be€made€pursuant€to€a€program€of€the€refinancing€organization€(e.g.,€schoolÏor€private€foundation)€that€requires€the€student€to€fulfill€a€public€service€work€requirement.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ  p ÐÌà  àThe€provision€is€effective€as€of€August€5,€1997,€the€date€of€enactment€of€the€1997€Act.ÌÌÔ_Ôò ò4.€€Deduction€for€student€loan€interest€(sec.€6004(b)€of€the€bill,€sec.€202€of€the€1997€Act,€andÐ à0 Ðsec.€221€of€the€Code)ó óÐ Ð  ÐÌà@ÕÕ%ìàòòò òPresent€Lawóóó óˆÐ °"  ÐÌà  àCertain€individuals€who€have€paid€interest€on€qualified€education€loans€may€claim€anÏabove„the„line€deduction€for€such€interest€expenses,€up€to€a€maximum€deduction€of€$2,500€perÏyear.€€The€deduction€is€allowed€only€with€respect€to€interest€paid€on€a€qualified€education€loanÏduring€the€first€60€months€in€which€interest€payments€are€required.€€In€this€regard,€requiredÏpayments€of€interest€do€not€include€nonmandatory€payments,€such€as€interest€payments€madeÏduring€a€period€of€loan€forbearance.€€Months€during€which€the€qualified€education€loan€is€inÏdeferral€or€forbearance€do€not€count€against€the€60„month€period.€€No€deduction€is€allowed€to€anÏindividual€if€that€individual€is€claimed€as€a€dependent€on€another€taxpayer's€return€for€the€taxableÏyear.Ð ,`'* Їà  àA€qualified€education€loan€generally€is€defined€as€any€indebtedness€incurred€to€pay€forÏthe€qualified€higher€education€expenses€of€the€taxpayer,€the€taxpayer's€spouse,€or€any€dependentÏof€the€taxpayer€as€of€the€time€the€indebtedness€was€incurred€in€attending€(1)€post„secondaryÏeducational€institutions€and€certain€vocational€schools€defined€by€reference€to€section€481€of€theÏHigher€Education€Act€of€1965,€or€(2)€institutions€conducting€internship€or€residency€programsÏleading€to€a€degree€or€certificate€from€an€institution€of€higher€education,€a€hospital,€or€a€healthÏcare€facility€conducting€postgraduate€training.€ÌÌà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ 0 € ÐÌà  àThe€bill€clarifies€that€the€student€loan€interest€deduction€may€be€claimed€only€by€aÏtaxpayer€who€is€legally€obligated€to€make€the€interest€payments€pursuant€to€the€terms€of€the€loan.€ÏÌà@””#ìàò òòòEffective€Dateó óóóˆÐ à0  Ðà  àÌà  àThe€provision€is€effective€for€interest€payments€due€and€paid€after€December€31,€1997,€onÏany€qualified€education€loan.ÌÌÔ_Ôò ò5.€€Enhanced€deduction€for€corporate€contributions€of€computer€technology€and€equipmentÐ à Ð(sec.€6004(e)€of€the€bill,€sec.€224€of€the€1997€Act,€and€sec.€170(e)(6)€of€the€Code)ó óÐ €Ð ÐÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ `° ÐÌà  à€In€computing€taxable€income,€a€taxpayer€who€itemizes€deductions€generally€is€allowed€toÏdeduct€the€fair€market€value€of€property€contributed€to€a€charitable€organization.€€However,€in€theÏcase€of€a€charitable€contribution€of€inventory€or€other€ordinary„income€property,€short„termÏcapital€gain€property,€or€certain€gifts€to€private€foundations,€the€amount€of€the€deduction€isÏlimited€to€the€taxpayer's€basis€in€the€property.€€In€the€case€of€a€charitable€contribution€of€tangibleÏpersonal€property,€a€taxpayer's€deduction€is€limited€to€the€adjusted€basis€in€such€property€if€theÏuse€by€the€recipient€charitable€organization€is€unrelated€to€the€organization's€tax„exempt€purpose.Ì€Ìà  àThe€Taxpayer€Relief€Act€of€1997€provided€that€certain€contributions€of€computer€andÏother€equipment€to€eligible€donees€to€be€used€for€the€benefit€of€elementary€and€secondary€schoolÏchildren€qualify€for€an€augmented€deduction.€€€Under€this€special€rule,€the€amount€of€theÏaugmented€deduction€available€to€a€corporation€making€a€qualified€contribution€generally€isÏequal€to€its€basis€in€the€donated€property€plus€one„half€of€the€amount€of€ordinary€income€thatÏwould€have€been€realized€if€the€property€had€been€sold.€€However,€the€augmented€deductionÏcannot€exceed€twice€the€basis€of€the€donated€property.€€To€qualify€for€the€augmented€deduction,Ïthe€contribution€must€satisfy€various€requirements.ÌÌà  àThe€legislative€history€of€the€provision€states€that€the€special€tax€treatment€forÏcontributions€of€computer€and€other€equipment€was€to€be€effective€for€contributions€made€duringÏa€three„year€period€in€taxable€years€beginning€after€December€31,€1997,€and€before€January€1,Ð ,`'* Ð2001.׃¼×Ý ƒ #ÃÝòòÚ  Ú59Ú  ÚóóÝ  Ý×  ×€€However,€as€a€result€of€a€drafting€error,€the€statutory€provision€does€not€apply€toÐ ° Ðcontributions€made€during€taxable€years€beginning€after€December€31,€1999.ÌÌò òòòà@ÅÅìàó óóóà@@ÆÆìàò òòòExplanation€of€Provisionó óóóˆÐ €Ð ÐÌà  àThe€bill€corrects€the€termination€date€of€the€provision€to€provide€that€the€special€ruleÏapplies€to€contributions€made€during€taxable€years€beginning€after€December€31,€1997,€andÏbefore€December€31,€2000.€€ÌÌà  àIn€addition,€the€bill€clarifies€that€the€requirements€set€forth€in€section€170(e)(6)(B)(ii)„¼(vii)€apply€regardless€of€whether€the€donee€is€an€educational€organization€or€a€tax„exemptÏcharitable€entity.€€Similarly,€the€rule€in€section€170(e)(6)(ii)(I)€regarding€subsequentÏcontributions€by€private€foundations€is€clarified€to€permit€contributions€to€either€educationalÏorganizations€or€tax„exempt€charitable€entities€described€in€section€170(e)(6)(B)(i).ÌÌÔ& Ð Ôà@””#ìàò òòòEffective€Dateóóó óˆÐ À ÐÌà  àThe€provision€is€effective€as€of€August€5,€1997,€the€date€of€enactment€of€the€1997€Act.Ô'Ð@b9ÔÌÌÔ_Ôò ò6.€€Qualified€State€tuition€programs€(sec.€6004(c)€of€the€bill,€sec.€211€of€the€1997€Act,€andÐ €Ð Ðsec.€529€of€the€Code)ÌÌà@ÕÕ%ìàòòPresent€LawˆÐ P  ÐÌó óóóà  àSection€529€provides€tax„exempt€status€to€"qualified€State€tuition€programs,"€meaningÐ 0€ Ðcertain€programs€established€and€maintained€by€a€State€(or€agency€or€instrumentality€thereof)Ïunder€which€persons€may€(1)€purchase€tuition€credits€or€certificates€on€behalf€of€a€designatedÏbeneficiary€that€entitle€the€beneficiary€to€a€waiver€or€payment€of€qualified€higher€educationÏexpenses€of€the€beneficiary,€or€(2)€make€contributions€to€an€account€that€is€established€for€theÏpurpose€of€meeting€qualified€higher€education€expenses€of€the€designated€beneficiary€of€theÏaccount.€€The€term€"qualified€higher€education€expenses"€means€expenses€for€tuition,€fees,Ïbooks,€supplies,€and€equipment€required€for€the€enrollment€or€attendance€at€an€eligible€post„¼secondary€educational€institution,€as€well€as€room€and€board€expenses€(meaning€the€minimumÏroom€and€board€allowance€applicable€to€the€student€as€determined€by€the€institution€inÏcalculating€costs€of€attendance€for€Federal€financial€aid€programs€under€sec.€472€of€the€HigherÏEducation€Act€of€1965)€for€any€period€during€which€the€student€is€at€least€a€half„time€student.€ÌÌà  àSection€529€also€provides€that€no€amount€shall€be€included€in€the€gross€income€of€aÏcontributor€to,€or€beneficiary€of,€a€qualified€State€tuition€program€with€respect€to€any€distributionÏfrom,€or€earnings€under,€such€program,€except€that€(1)€amounts€distributed€or€educationalÐ @)$' Ðbenefits€provided€to€a€beneficiary€(e.g.,€when€the€beneficiary€attends€college)€will€be€included€inÏthe€beneficiary's€gross€income€(unless€excludable€under€another€Code€section)€to€the€extent€suchÏamounts€or€the€value€of€the€educational€benefits€exceed€contributions€made€on€behalf€of€theÏbeneficiary,€and€(2)€amounts€distributed€to€a€contributor€or€another€distributee€(e.g.,€when€aÏparent€receives€a€refund)€will€be€included€in€the€contributor's/distributeeððs€gross€income€to€theÏextent€such€amounts€exceed€contributions€made€on€behalf€of€the€beneficiary.€€Earnings€on€anÏaccount€may€be€refunded€to€a€contributor€or€beneficiary,€but€the€State€or€instrumentality€mustÏimpose€a€more€than€de€minimis€monetary€penalty€unless€the€refund€is€(1)€used€for€qualifiedÏhigher€education€expenses€of€the€beneficiary,€(2)€made€on€account€of€the€death€or€disability€ofÏthe€beneficiary,€or€(3)€made€on€account€of€a€scholarship€received€by€the€designated€beneficiary€toÏthe€extent€the€amount€refunded€does€not€exceed€the€amount€of€the€scholarship€used€for€higherÏeducation€expenses.ÌÌà  àA€transfer€of€credits€(or€other€amounts)€from€one€account€benefiting€one€designatedÏbeneficiary€to€another€account€benefiting€a€different€beneficiary€will€be€considered€a€distributionÏ(as€will€a€change€in€the€designated€beneficiary€of€an€interest€in€a€qualified€State€tuition€program),Ïunless€the€beneficiaries€are€members€of€the€same€family.€€For€this€purpose,€the€term€"member€ofÏthe€family"€means€persons€described€in€paragraphs€(1)€through€(8)€of€section€152(a)„„e.g.,€sons,Ïdaughters,€brothers,€sisters,€nephews€and€nieces,€certain€in„laws,€etc„„and€any€spouse€of€suchÏpersons.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ `° ÐÌà  àThe€bill€clarifies€that,€under€rules€contained€in€present„law€section€72,€distributions€fromÏqualified€State€tuition€programs€are€treated€as€representing€a€pro„rata€share€of€the€principal€(i.e.,Ïcontributions)€and€accumulated€earnings€in€the€account.ÌÌà  àIn€addition,€the€bill€modifies€section€529(e)(2)€to€clarify€that„„for€purposes€of€tax„freeÏrollovers€and€changes€of€designated€beneficiaries„„a€ð ðmember€of€the€familyðð€includes€the€spouseÏof€the€original€beneficiary.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ À! ÐÌà  àThe€provisions€are€effective€for€distributions€made€after€December€31,€1997.ÌÌÔ_ Ôò ò7.€€Qualified€zone€academy€bonds€(sec.€6004(g)€of€the€bill,€sec.€226€of€the€1997€Act,€and€sec.Ð €%Ð # Ð1397E€of€the€Code)ó óÐ p&À!$ ÐÌà@ÕÕ%ìàò òòòPresent€Lawó óóóˆÐ P( #& ÐÌà  àCertain€financial€institutions€(i.e.,€banks,€insurance€companies,€and€corporations€activelyÏengaged€in€the€business€of€lending€money)€that€hold€ð ðqualified€zone€academy€bondsðð€are€entitledÏto€a€nonrefundable€tax€credit€in€an€amount€equal€to€a€credit€rate€(set€monthly€by€the€TreasuryÐ ,`'* ÐDepartment׃Á×Ý ƒ #ÃÝòòÚ  Ú60Ú  ÚóóÝ  Ý×  ×)€multiplied€by€the€face€amount€of€the€bond€(sec.€1397E).€€The€credit€rate€applies€toÐ ° Ðall€such€bonds€issued€in€each€month.€€A€taxpayer€holding€a€qualified€zone€academy€bond€on€theÏcredit€allowance€date€(i.e.,€each€one„year€anniversary€of€the€issuance€of€the€bond)€is€entitled€to€aÏcredit.€€The€credit€is€includible€in€gross€income€(as€if€it€were€an€interest€payment€on€the€bond),Ïand€may€be€claimed€against€regular€income€tax€and€AMT€liability.ÌÌ€à  àð ðQualified€zone€academy€bondsðð€are€defined€as€any€bond€issued€by€a€State€or€localÐ P   Ðgovernment,€provided€that€(1)€at€least€95€percent€of€the€proceeds€are€used€for€the€purpose€ofÏrenovating,€€providing€equipment€to,€developing€course€materials€for€use€at,€or€training€teachersÏand€other€school€personnel€in€a€ð ðqualified€zone€academyðð„„meaning€certain€public€schoolsÏlocated€in€empowerment€zones€or€enterprise€communities€or€with€a€certain€percentage€of€studentsÏfrom€low„income€families„„and€(2)€private€entities€have€promised€to€make€contributions€to€theÏqualified€zone€academy€with€a€value€equal€to€at€least€10€percent€of€the€bond€proceeds.ÌÌà  àA€total€of€$400€million€of€ð ðqualified€zone€academy€bondsðð€may€be€issued€in€each€of€1998Ïand€1999.€€The€$400€million€aggregate€bond€cap€will€be€allocated€each€year€to€the€StatesÏaccording€to€their€respective€populations€of€individuals€below€the€poverty€line.׃Â`×Ý ƒ #ÃÝòòÚ  Ú61Ú  ÚóóÝ  Ý×  ×€€Each€State,€inÐ ° Ðturn,€will€allocate€the€credit€to€qualified€zone€academies€within€such€State.€€A€State€may€carryÏover€any€unused€allocation€into€subsequent€years.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionó óóóˆÐ pÀ ÐÌà  àThe€bill€clarifies€that,€for€purposes€of€section€6655(g)(1)(B),€the€credit€for€certain€holdersÏof€qualified€zone€academy€bonds€may€be€claimed€for€estimated€tax€purposes.€€Similarly,€the€billÏclarifies€for€purposes€of€section€6401(b)(1)€the€manner€in€which€the€credit€is€taken€into€accountÏwhen€determining€whether€a€taxpayer€has€made€an€overpayment€of€tax.ÌÌà@””#ìàò òòòEffective€Dateó óóóˆÐ P ÐÌà  àThe€provisions€are€effective€for€obligations€issued€after€December€31,€1997.Ð  à0 ÐÔ_ Ôò òà@••ìàC.€€Amendments€to€Title€III€of€the€1997€Act€Relating€to€Savings€IncentivesˆÐ ° ÐÌ1.€€Conversions€of€IRAs€into€Roth€IRAs€(sec.€6005(b)€of€the€bill,€sec.€302€of€the€1997€Act,Ïand€secs.€408A€and€72(t)€of€the€Code)Ìó óÌà@ÕÕ%ìàò òòòPresent€Lawóóó óˆÐ ` ° ÐÌà  àA€taxpayer€with€adjusted€gross€income€of€less€than€$100,000€may€convert€a€present„lawÏdeductible€or€nondeductible€IRA€into€a€Roth€IRA€at€any€time.€€The€amount€converted€isÏincludible€in€income€in€the€year€of€the€conversion,€except€that€if€the€conversion€occurs€in€1998,Ïthe€amount€converted€is€includible€in€income€ratably€over€the€4„year€period€beginning€with€theÏyear€in€which€the€conversion€occurs.׃Ä×Ý ƒ #ÃÝòòÚ  Ú62Ú  ÚóóÝ  Ý×  ×€€Amounts€includible€in€income€as€a€result€of€theÐ P  Ðconversion€are€not€taken€into€account€in€determining€whether€the€$100,000€threshold€isÏexceeded.€€The€10„percent€tax€on€early€withdrawals€does€not€apply€to€conversions€of€IRAs€intoÏRoth€IRAs.€ÌÌà  àIn€general,€distributions€of€earnings€from€a€Roth€IRA€are€excludable€from€income€if€theÏindividual€has€had€a€Roth€IRA€for€at€least€5€years€and€certain€other€requirements€are€satisfied.€ÏThe€5„year€holding€period€with€respect€to€conversion€Roth€IRAs€begins€from€the€year€of€theÏconversion.€€(Distributions€that€are€excludable€from€income€are€referred€to€as€qualifiedÏdistributions.)ÌÌà  àPresent€law€does€not€contain€a€specific€rule€addressing€what€happens€if€an€individual€diesÏduring€the€4„year€spread€period€for€1998€conversions.ÌÌà@ÅÅìàò òòòExplanation€of€Provisionóóó óˆÐ  p Ðòòò òÌDistributions€of€converted€amountsÌÓ-°X‚X4¸ —X°X›X-ÓÌà  àà 4 àó óDistributions€before€the€end€of€the€4„year€spreadóóÐ à0 ÐÌà  àThe€bill€modifies€the€rules€relating€to€conversions€of€IRAs€into€Roth€IRAs€in€order€toÏprevent€taxpayers€from€receiving€premature€distributions€from€a€Roth€conversion€IRA€whileÏretaining€the€benefits€of€4„year€income€averaging.ò ò€€ó óIn€the€case€of€conversions€to€which€the€4„yearÐ  #ð! Ðincome€inclusion€rule€applies,€income€inclusion€will€be€accelerated€with€respect€to€any€amountsÏwithdrawn€before€the€final€year€of€inclusion.€€Under€this€rule,€a€taxpayer€that€withdrawsÐ €%Ð # Ðconverted€amounts€prior€to€the€last€year€of€the€4„year€spread€will€be€required€to€include€inÏincome€the€amount€otherwise€includible€under€the€4„year€rule,€plus€the€lesser€of€(1)€the€taxableÏamount€of€the€withdrawal,€or€(2)€the€remaining€taxable€amount€of€the€conversion€(i.e.,€theÏtaxable€amount€of€the€conversion€not€included€in€income€under€the€4„year€rule€in€the€current€or€aÏprior€taxable€year).€€In€subsequent€years€(assuming€no€such€further€withdrawals),€the€amountÏincludible€in€income€under€the€4„year€will€be€the€lesser€of€(1)€the€amount€otherwise€requiredÏunder€the€4„year€rule€(determined€without€regard€to€the€withdrawal)€or€(2)€the€remaining€taxableÏamount€of€the€conversion.ÌÌà  àUnder€the€bill,€application€of€the€4„year€spread€will€be€elective.€€The€election€will€beÏmade€in€the€time€and€manner€prescribed€by€the€Secretary.€€If€no€election€is€made,€the€4„year€ruleÏwill€be€deemed€to€be€elected.ò ò€ó óAn€election,€or€deemed€election,ò ò€ó ówith€respect€to€the€4„year€spreadÐ P  Ðcannot€be€changed€after€the€due€date€for€the€return€for€the€first€year€of€the€income€inclusionÏ(including€extensions).€ÌÌà  àThe€following€example€illustrates€the€application€of€these€rules.ÌÌà0  àòòExample:óó€€€Taxpayer€A€has€a€nondeductible€IRA€with€a€value€of€$100€(and€no€otherÐ  ð ÐIRAs).€€The€$100€consists€of€$75€of€contributions€and€$25€of€earnings.€€A€converts€theÏIRA€into€a€Roth€IRA€in€1998€and€elects€the€4„year€spread.€€As€a€result€of€the€conversion,Ï$25€is€includible€in€income€ratably€over€4€years€($6.25€per€year).€€The€10„percent€earlyÏwithdrawal€tax€does€not€apply€to€the€conversion.€€At€the€beginning€of€1999,€the€value€ofÏthe€account€is€$110,€and€A€makes€a€withdrawal€of€$10.€€Under€the€proposal,€theÏwithdrawal€would€be€treated€as€attributable€entirely€to€amounts€that€were€includible€inÏincome€due€to€the€conversion.€€In€the€year€of€withdrawal,€$16.25€would€be€includible€inÏincome€(the€$6.25€includible€in€the€year€of€withdrawal€under€the€4„year€rule,€plus€$10Ï($10€is€less€than€the€remaining€taxable€amount€of€$12.50€($25„$12.50)).€€In€the€next€year,Ï$2.50€would€be€includible€in€income€under€the€4„year€rule.€€No€amount€would€beÏincludible€in€income€in€year€4€due€to€the€conversion.Ð (#(# ÐÌà  àòòà 4 àApplication€of€early€withdrawal€tax€to€converted€amountsóóÐ Ð  ÐÌà  àThe€bill€modifies€the€rules€relating€to€conversions€to€prevent€taxpayers€from€receivingÏpremature€distributions€(i.e.,€within€5€years)€while€retaining€the€benefit€of€the€nonpayment€of€theÏearly€withdrawal€tax.€€Under€the€bill,€if€converted€amounts€are€withdrawn€within€the€5„yearÏperiod€beginning€with€the€year€of€the€conversion,€then,€to€the€extent€attributable€to€amounts€thatÏwere€includible€in€income€due€to€the€conversion,€the€amount€withdrawn€will€be€subject€to€the€10„¼percent€early€withdrawal€tax.׃Å×Ý ƒ #ÃÝòòÚ  Ú63Ú  ÚóóÝ  Ý×  ×Ð `'°"% ÐÐ P( #& Ðà  àApplying€this€rule€to€the€example€above,€the€$10€withdrawal€would€be€subject€to€the€10„¼percent€early€withdrawal€tax€(unless€as€exception€applies).ÌÌà  àà 4 àòòApplication€of€5„year€holding€periodóóÐ €Ð ÐÌà  àThe€bill€will€also€eliminate€the€special€rule€