[JPRT 105-1-98]
[From the U.S. Government Publishing Office]




                                                               JCS-1-98

                                     

                        [JOINT COMMITTEE PRINT]


 
DESCRIPTION AND ANALYSIS OF PROPOSALS RELATING TO THE RECOMMENDATIONS OF 
   THE NATIONAL COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE 
   SERVICE, S. 1096, AND H.R. 2676 AS PASSED BY THE HOUSE

                     Scheduled for Public Hearings

                               before the

                      SENATE COMMITTEE ON FINANCE

                     BEGINNING ON JANUARY 28, 1998

                               __________

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION





                            JANUARY 23, 1998


                      JOINT COMMITTEE ON TAXATION

                      105th Congress, 2nd Session
                                 ------                                
               SENATE                               HOUSE
WILLIAM V. ROTH, Jr., Delaware,      BILL ARCHER, Texas,
  Chairman                             Vice Chairman
JOHN H. CHAFEE, Rhode Island         PHILIP M. CRANE, Illinois
CHARLES GRASSLEY, Iowa               WILLIAM M. THOMAS, California
DANIEL PATRICK MOYNIHAN, New York    CHARLES B. RANGEL, New York
MAX BAUCUS, Montana                  FORTNEY PETE STARK, California

                    Kenneth J. Kies, Chief of Staff
              Mary M. Schmitt, Deputy Chief of Staff (Law)
      Bernard A. Schmitt, Deputy Chief of Staff (Revenue Analysis)



                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1

Part One: Executive Branch Governance and Congressional Oversight     3

 I. Present Law and Practices.........................................3

        A. Organization of the Internal Revenue Service..........     3

        B. Appointment of the Commissioner and Chief Counsel.....     5

        C. Formation and Structure of the Office of Employee 
            Plans and Exempt Organizations.......................     6

        D. Congressional Oversight of the IRS and Duties of the 
            Joint Committee on Taxation..........................    14

II. Description of S. 1096 and Commission Report.....................18

        A. IRS Oversight Board and Appointment of the 
            Commissioner and Chief Counsel.......................    18

        B. Employee Plans and Exempt Organizations...............    20

        C. Taxpayers Advocate....................................    21

        D. Congressional Accountability for the IRS..............    22

III.Description of H.R. 2676.........................................25


        A. IRS Oversight Board...................................    25

        B. Appointment and Duties of IRS Commissioner............    28

        C. Structure and Funding of the Employee Plans and Exempt 
            Organizations Division...............................    29

        D. Taxpayer Advocate.....................................    29

        E. Prohibition on Executive Branch Influence Over 
            Taxpayer Audits......................................    31

        F. Congressional Accountability for the IRS..............    32

IV. Issues Relating to Executive Branch Governance of the IRS........35

        A. Constitutional Issues.................................    35

            1. Constitutional framework..........................    35
            2. Appointment of IRS Commissioner by the Oversight 
                Board............................................    37
            3. Additional Constitutional issues..................    44

        B. Issues Relating to the Ability of the Changes in 
            Management Structure to Improve Performance of the 
            IRS..................................................    46

            1. Problems associated with the present IRS 
                governance and management........................    46

            2. Functions of the IRS and measures of performance..    49
            3. Duties of the Oversight Board.....................    50
            4. Qualifications of Board members and composition of 
                the Board........................................    54
            5. Conflicts of interest of Board members............    55
            6. Ability to affect all levels of IRS activities....    56
            7. Effect of the Board on public perception of the 
                IRS..............................................    57
            8. Resources available to the Board and the IRS......    57
            9. Qualifications of IRS Commissioner................    58
            10. Issues relating to the Office of the Chief 
                Counsel..........................................    59
            11. Tax simplification...............................    60

        C. Issues Relating to the Conduct of Business by the 
            Oversight Board......................................    60

            1. Rules for the conduct of business.................    61
            2. Application of Freedom of Information Act, 
                Sunshine Act, and Federal Advisory Committee Act.    62

        D. Issues Relating to the Structure and Funding of the 
            Employee Plans and Exempt Organizations Divisions....    64

 V. Issues Relating to Congressional Accountability for the IRS......70

        A. Congressional Oversight...............................    70

        B. Tax Law Complexity....................................    71

Part Two: Electronic Filing......................................    76

        A. Electronic Filing of Tax and Return Information.......    76

        B. Extension of Time to File for Electronic Filers.......    77

        C. Paperless Electronic Filing...........................    78

        D. Regulation of Preparers...............................    80

        E. Paperless Payment.....................................    80

        F. Return-Free Tax System................................    81

        G. Access to Account Information.........................    81

Part Three: Taxpayer Protections and Rights......................    83

 I. Provisions of S. 1096............................................83

        A. Expansion of Authority to Issue Taxpayer Assistance 
            Orders...............................................    83

        B. Expansion of Authority to Award Costs and Certain Fees    83

        C. Civil Damages for Negligence in Collection Actions....    84

        D. Disclosure of Criteria for Examination Selection......    85

        E. Archive of Records of the IRS.........................    85

        F. Study of Confidentiality of Tax Reform Information....    88

        G. Freedom of Information................................    88

        H. Offers-in-Compromise..................................    90

        I. Elimination of Interest Differential on Overlapping 
            Periods of Interest on Income Tax Overpayments and 
            Underpayments........................................    91

        J. Elimination of Application of Failure to Pay Penalty 
            During Period of Installment Agreement...............    92

        K. Safe Harbor for Qualification for Installment 
            Agreement............................................    93

        L. Payment of Taxes......................................    93

        M. Low-Income Taxpayer Clinics...........................    94

        N. Jurisdiction of the Tax Court.........................    95

        O. Cataloging Complaints.................................    95

        P. Procedures Involving Taxpayer Interviews..............    95

        Q. Explanation of Joint and Several Liability............    96

        R. Procedures Relating to Extensions of Statute of 
            Limitations by Agreement.............................    97

        S. Studies...............................................    97

            1. Study of penalty administration...................    97
            2. Study of treatment of all taxpayers as separate 
                filing units.....................................    98
            3. Study of burden of proof..........................    98

II. Provisions of H.R. 2676.........................................101

        A. Burden of Proof.......................................   101

        B. Proceedings by Taxpayers..............................   104

            1. Expansion of authority to award costs and certain 
                fees.............................................   104
            2. Civil damages for negligence in collection action.   105
            3. Increase in size of cases permitted on small case 
                calendar.........................................   105

        C. Relief for Innocent Spouses and Persons With 
            Disabilities.........................................   106

            1. Innocent spouse relief............................   106
            2. Suspension of statute of limitations on filing 
                refund claims during periods of disability.......   107

        D. Provisions Relating to Interest.......................   108

            1. Elimination of interest differential on 
                overlapping periods of interest on income tax 
                overpayments and underpayments...................   108
            2. Increase in overpayment rate payable to taxpayers 
                other than corporations..........................   110

        E. Protections for Taxpayers Subject to Audit or 
            Collection...........................................   110

            1. Privilege of confidentiality extended to 
                taxpayer's dealings with non-attorneys authorized 
                to practice before the IRS.......................   110
            2. Expansion of authority to issue Taxpayer 
                Assistance Orders................................   111
            3. Limitation on financial audit techniques..........   112
            4. Limitation on authority to require production of 
                computer source code.............................   112
            5. Procedures relating to extensions of statute of 
                limitations by agreement.........................   114
            6. Offers-in-compromise..............................   114
            7. Notice of deficiency to specify deadlines for 
                filing Tax Court petition........................   115
            8. Refund or credit of overpayments before final 
                determination....................................   116
            9. Threat of audit prohibited to coerce tip reporting 
                alternative commitment agreements................   116

        F. Disclosures to Taxpayers..............................   117

            1. Explanation of joint and several liability........   117
            2. Explanation of taxpayers' rights in interviews 
                with the IRS.....................................   117
            3. Disclosure of criteria for examination selection..   118
            4. Explanations of appeals and collection process....   118

        G. Low-Income Taxpayer Clinics...........................   119

        H. Other Taxpayer Rights Provisions......................   120

            1. Actions for refund with respect to certain estates 
                which have elected the installment method of 
                payment..........................................   120
            2. Cataloging complaints.............................   120
            3. Archive of records of the IRS.....................   121
            4. Payment of taxes..................................   123
            5. Clarification of authority of Secretary relating 
                to the making of elections.......................   124
            6. Limitation on penalty on individuals's failure to 
                pay for months during period of installment 
                agreement........................................   124

        I. Studies...............................................   124

            1. Study of penalty administration...................   124
            2. Studies of confidentiality of tax return 
                information......................................   125

Part Four: Estimated Budget Effects of H.R. 2676, the ``Internal 
  Revenue Service Restructuring and Reform Act of 1997,'' as 
  Passed by the House of Representatives.........................   126

Appendices.......................................................   129

        Appendix A: Meetings Held with IRS Restructuring 
            Commissioners and Other Interested Parties...........   131
        Appendix B: Memorandum from the Congressional Research 
            Service to the National Commission on Restructuring 
            the Internal Revenue Service, June 4, 1997...........   132



                              INTRODUCTION

    The National Commission on Restructuring the Internal 
Revenue Service (the ``Commission'') was established to review 
the present practices of the Internal Revenue Service (``IRS'') 
and to make recommendations for modernizing and improving its 
efficiency and taxpayer services. The Commission's report, 
issued June 25, 1997,\1\ contains recommendations relating to 
executive branch governance and management of the IRS, 
Congressional oversight of the IRS, personnel flexibilities, 
customer service and compliance, technology modernization, 
electronic filing, tax law simplification, taxpayer rights, and 
financial accountability. S. 1096, the ``Internal Revenue 
Service Restructuring and Reform Act of 1997,'' introduced on 
July 30, 1997, by Senators Kerrey and Grassley, generally 
mirrors the recommendations of the Commission. H.R. 2676, the 
``Internal Revenue Service Restructuring and Reform Act of 
1997,'' was passed by the House on November 5, 1997.\2\ H.R. 
2676 is similar in many respects to S. 1096, but contains 
certain differences which are described in this pamphlet.
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    \1\ Report of the National Commission on Restructuring the Internal 
Revenue Service, A Vision for a New IRS, June 25, 1997 (the 
``Commission Report'').
    \2\ The House Committee on Ways and Means ordered reported H.R. 
2676 on October 22, 1997 (H. Rept. 105-364, October 31, 1997). H.R. 
2676 was amended by the House to include (as new Title VI) the 
provisions of H.R. 2645 (``Tax Technical Corrections Act of 1997'') as 
reported by the House Committee on Ways and Means (H. Rept. 105-356, 
October 29, 1997). Title VI of H.R. 2676 is not described in this 
pamphlet.
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    The Senate Committee on Finance (``Finance Committee'') has 
scheduled public hearings on the IRS restructuring proposals 
beginning on January 28, 1998. Finance Committee investigative 
hearings on IRS practices and procedures were held on September 
23-25, 1997. These hearings followed a six-month long 
investigation under the direction of Chairman Roth, and 
examined both the internal and public conduct of the IRS.\3\ 
The Finance Committee's Subcommittee on Taxation and IRS 
Oversight held a field hearing in Oklahoma City, Oklahoma on 
December 3, 1997, to hear testimony on improving IRS management 
and operations and to investigate allegations of taxpayer 
rights abuses in the Oklahoma-Arkansas District. The Finance 
Committee hearings addressed issues relating to the environment 
and culture at the IRS, treatment of taxpayers and IRS 
employees, effectiveness of the Inspections Division and the 
Taxpayer Advocate, and the ability of the National Office to 
ensure that National Office policies are consistently followed 
in the various districts. Two recent IRS internal audit reports 
(issued after the 1997 Finance Committee hearings), entitled 
Review of the Use of Statistics and the Protection of Taxpayer 
Rights in the Arkansas-Oklahoma District Collection Field 
Function (December 5, 1997), and Use of Enforcement Statistics 
in the Collection Field Function (January 12, 1998) addressed 
similar issues. The December 5, 1997 IRS report concluded that 
the emphasis on productivity and statistics is an integral part 
of managing the Arkansas-Oklahoma District, and that formal and 
informal communication of these goals with employees has 
resulted in the perception among some revenue officers that 
they are evaluated, at least in part, on whether the individual 
meets these targets. The IRS audit report did not find direct 
reference to enforcement statistics or quotas in the official 
evaluations of revenue officers, but did find the use of some 
enforcement statistic in the evaluations of some group managers 
and some groups had established group goals. Further, in the 67 
seizure cases reviewed, the IRS audit report did not find any 
illegal seizures, but did find that actions taken in 23 cases 
did not meet the IRS procedural requirements or could be viewed 
as inappropriate treatment of the taxpayer. The January 13, 
1998 IRS report concluded that the IRS has created an 
environment driven by statistical accomplishments that places 
taxpayer rights and a fair employee valuation system at risk, 
and that changes in IRS culture should be made to reduce the 
risk of future lapses in the critical areas of taxpayer rights 
and performance measures.
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    \3\ See Senate Committee on Finance, Practices and Procedures of 
the Internal Revenue Service, S. Hrg. 105-190 (Government Printing 
Office), for a transcript of the hearings and witness testimony.
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    This pamphlet,\4\ prepared by the staff of the Joint 
Committee on Taxation (``Joint Committee staff''), contains a 
description and analysis of the Commission's recommendations 
and of S. 1096 and H.R. 2676 relating to executive branch 
governance and Congressional oversight of the IRS (Part One), 
and a description of the provisions of S. 1096 and H.R. 2676 
relating to electronic filing (Part Two) and taxpayer 
protections and rights (Part Three).\5\ Part Four presents the 
estimated budget effects of the provisions of H.R. 2676 as 
passed by the House. Appendix A lists the meetings held by the 
Joint Committee staff with IRS Restructuring Commissioners and 
others regarding the Commission's study. Appendix B contains a 
memorandum from the Congressional Research Service to the 
Commission (June 4, 1997).
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    \4\ This pamphlet may be cited as follows: Joint Committee on 
Taxation, Description and Analysis of Proposals Relating to the 
Recommendations of the National Commission on Restructuring the 
Internal Revenue Service, S. 1096, and H.R. 2676 as Passed by the House 
JCS-1-98), January 23, 1998.
    \5\ The provisions of S. 1096 and H.R. 2676 relating to personal 
flexibilities and budget law changes are beyond the scope of this 
pamphlet. The revenue offset provision contained in H.R. 2676 is also 
beyond the scope of this pamphlet.

   PART ONE: EXECUTIVE BRANCH GOVERNANCE AND CONGRESSIONAL OVERSIGHT

                      I. PRESENT LAW AND PRACTICES

            A. Organization of the Internal Revenue Service

History
    Before the establishment of the Office of Commissioner of 
Internal Revenue, taxes were collected by ``supervisors'' of 
collection districts who were appointed by the President, 
subject to Senate confirmation. These supervisors worked under 
the direct control of the Department of the Treasury. The 
Office of the Commissioner of Internal Revenue was established 
by an act of Congress (12 Stat. 432) on July 1, 1862, and the 
first Commissioner of Internal Revenue (the ``Commissioner'') 
took office on July 17, 1862.
    In 1953, the Bureau of Internal Revenue was renamed the 
Internal Revenue Service (``IRS''), following a major 1952 
reorganization into a three-tier structure with a multi-
functional National Office, nine regional offices headed by 
Regional Commissioners, and a number of district offices within 
each region, headed by District Directors who reported to the 
Regional Commissioner. An independent inspection function was 
established to report directly to the Commissioner. An 
appellate program was instituted in the offices of the Regional 
Commissioners. Regional Counsel were appointed as the chief 
legal advisors to each of the Regional Commissioners.
    In 1955, the first service center was established as a 
pilot program in Kansas City, Missouri. The service center 
provides a central location for mass returns processing and 
mathematical verification of returns. In 1956, the second 
service center was established in Andover, Massachusetts. From 
1953 until 1980, the IRS was reorganized almost every year, but 
no major changes resulted to the three-tier structure. The 
names of positions changed, certain positions were abolished 
and re-established, districts were combined and separated, and 
functions were combined and separated.\6\ In 1980, the IRS 
agreed to develop a multi-year budget and program plan. In 
1982, the appeals function was assigned to the Regional 
Counsels. In 1995, the appeals function was reassigned to the 
Regional Commissioners. Currently, as the result of the 1995 
reorganization, there is a regional commissioner, a regional 
counsel and a regional director of Appeals for each of the 
following four regions: (1) the Northeast Region in New York, 
New York; (2) the Southeast Region in Atlanta, Georgia; (3) the 
Midstates Region in Dallas, Texas; and (4) the Western Region 
in San Francisco, California. There are 33 district offices, 10 
service centers, and three computing centers.
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    \6\ For example, in 1964, the position of Associate Chief Counsel 
(Technical) was abolished. In 1965, the position of Associate Chief 
Counsel (Technical) was re-established, and the Deputy Chief Counsel 
position was abolished. In 1971, the Deputy Chief Counsel position was 
re-established. The same type of restructuring occurred within the 
office of the Commissioner: in 1955, the Assistant Commissioner 
(Planning) was abolished and became the Assistant to the Commissioner. 
In 1958, the position of the Assistant Commissioner (Planning and 
Research) was established, replacing the Assistant to the Commissioner.
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Functional organization
    The IRS is organized by function. The functions of the IRS 
include customer service, forms processing, examination, 
collection, and criminal investigation. Operations are 
conducted on a decentralized basis in each region and each 
district, that is, each district generally has its own 
Examination Division, Collection Division, Criminal 
Investigation Division, and Taxpayer Service Division. The IRS 
structure also contains offices related to two specific areas 
of tax law: International and Employee Plans & Exempt 
Organizations.\7\ The National Office integrates the 
specialized functions carried out by each region to provide 
consistency. For example, the Assistant Commissioner 
(Collection) provides and supervises nationwide programs for 
collection of unpaid accounts. The mission of the National 
Office is to develop broad nationwide policies and programs for 
the administration of the internal revenue laws and related 
statutes, and to direct, guide, coordinate, and control the 
endeavors of the Internal Revenue Service.\8\
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    \7\ See discussion relating to Employee Plans & Exempt 
Organizations in Part One. I. C., infra.
    \8\ Internal Revenue Manual (``IRM'') 1112.21.
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    The Commissioner is the head of the National Office. The 
Office of the Commissioner includes: the Commissioner; the 
Deputy Commissioner; the Chief Inspector; the Taxpayer 
Advocate; \9\ the Chief of Headquarters Operations; the Chief 
Information Officer; the Chief of Management & Administration; 
the Chief Operations Officer; and the Chief Financial Officer. 
The Chief Operations Officer is the official responsible for 
administering the most public functions of the IRS including 
Customer Service, Forms Processing, Examination, Collection, 
Criminal Investigations, Employee Plans & Exempt Organizations, 
and International. The Chief, Management & Administration, the 
Chief Information Officer, and the Chief Financial Officer are 
responsible for administering the support functions of the IRS 
including human resources, systems development, and the budget.
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    \9\ It has long been recognized that taxpayers need assistance in 
dealing with the IRS. In 1979, the Problem Resolution Officer (later 
Taxpayer Ombudsman) became as assistant commissioner. The Taxpayer 
Ombudsman identified areas of the tax law that confuse or create 
inequity for taxpayers and supervised cases handled under the Problem 
Resolution Program. In 1996, P.L. 104-168 added section 7802(d) to the 
Code, establishing the Office of the Taxpayer Advocate, whose function 
is to assist taxpayers in resolving problems with the IRS and propose 
legislative and administrative changes as appropriate to mitigate such 
problems.
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    The Executive Committee is the principal decision and 
policy making body of the IRS.\10\ It generally meets monthly 
and focuses on high level policy and operational issues.\11\ 
Other internal governing bodies of the IRS include the IRS 
Investment view Board and the Senior Council for Management 
Controls.
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    \10\ IRM 1112.231.
    \11\ The Executive Committee consists of the Commissioner; the 
Deputy Commissioner; the Chief of Staff; the Chief of Taxpayer Service; 
the Chief Compliance Officer; the Chief of Management & Administration; 
the Chief Financial Officer; the Chief Information Officer; the 
Taxpayer Advocate; the Chief Inspector; the Chief Counsel; the National 
Director of Appeals; the Executive Officer for Service Center 
Operations; the four Regional Counsels; and the National President of 
the National Treasury Employees Union.
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    The Commissioner receives private sector advice from the 
Advisory Group to the Commissioner of the Internal Revenue 
(``CAG''). This group provides an organized public forum for 
discussions of tax administration issues between IRS officials 
and representatives of the public. The group has been comprised 
of tax professionals, members of academia, heads of state 
departments of revenue and taxation, and corporate executives. 
The members serve without compensation, and offer constructive 
observations about broad tax administration and organizational 
issues. The CAG holds two public meetings each year.

Treasury Office of Inspector General; IRS Office of the Chief Inspector

    The Treasury Office of Inspector General is charged with 
conducting independent audits, investigations and reviews with 
the objectives of helping the Department of Treasury accomplish 
its mission, improve its programs and operations, promote 
economy, efficiency, and effectiveness, and prevent and detect 
fraud and abuse. Under the provisions of the Inspector General 
Act of 1978, as amended, Treasury's OIG reports to the Congress 
semiannually on its activities. Among other duties, the 
Treasury Inspector General is responsible for oversight of 
internal audits and investigations by the IRS Office of the 
Chief Inspector.
    The IRS Office of the Chief Inspector (Inspection Service) 
generally is responsible for carrying out internal audits and 
investigations that: (1) promote the economic, efficient, and 
effective administration of the nation's tax laws; (2) detect 
and deter fraud and abuse in IRS programs and operations; and 
(3) protect the IRS against external attempts to corrupt or 
threaten its employees. Since its establishment in 1952, the 
IRS Inspection Service has functioned as an independent 
organization. The Chief Inspector reports directly to the 
Commissioner and Deputy Commissioner of the IRS. The IRS 
Inspection Service is divided into two functions: Internal 
Security and Internal Audit. The Internal Security Division is 
responsible for investigating, among other things, allegations 
of criminal and serious administrative misconduct by IRS 
employees (e.g., bribery, embezzlement, unauthorized use or 
disclosure of taxpayer information, and conflicts of interest). 
The Internal Audit Division is responsible for providing IRS 
management with independent reviews and appraisals of all IRS 
activities and operations. In addition, Internal Audit makes 
recommendations to improve the efficiency and effectiveness of 
programs and to assist IRS officials in carrying out their 
program and operational responsibilities.

          B. Appointment of the Commissioner and Chief Counsel

    The Commissioner is appointed by the President, with the 
advice and consent of the Senate.\12\ The Commissioner's duties 
and powers are prescribed by the Secretary of the Treasury. The 
Secretary has delegated the responsibility to administer and 
enforce the Internal Revenue laws to the Commissioner.\13\ The 
Commissioner has the final authority of the IRS concerning the 
substantive interpretation of the tax laws as reflected in 
legislative and regulatory proposals, revenue rulings, letter 
rulings and technical advice memoranda.\14\
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    \12\ Internal Revenue Code (``Code'') section 7802(a).
    \13\ Treasury Department Order (``T.D.O.'') No. 150-10 (April 22, 
1982). See also Rev. Proc. 64-22, 1964-1 C.B. 689.
    \14\ T.D.O. No. 150-02, 1994-1 C.B. 721; General Counsel Order 
(``G.C.O.'') No. 4 (July 1, 1997).
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    The President appoints the Chief Counsel for the IRS, who 
is the chief law officer for the Internal Revenue Service. The 
Chief Counsel's duties are prescribed by the Secretary of the 
Treasury.\15\ The Secretary of the Treasury has delegated 
authority over the Chief Counsel to General Counsel of the 
Treasury.\16\ The General Counsel has delegated the authority 
to serve as the legal adviser to the Commissioner to the Chief 
Counsel.\17\
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    \15\ Code section 7801(b)(2).
    \16\ T.D.O. 107-04 (July 25, 1989).
    \17\ G.C.O. No. 4.
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    The duties of the Chief Counsel include the duty to: 
furnish legal opinions as necessary; to prepare and review 
rulings and technical advice memoranda; prepare, review or 
assist in the preparation of proposed legislation, treaties, 
regulations, and Executive Orders relating to laws affecting 
the IRS; handle the legal aspects of all matters pertaining to 
the assessment and collection of federal taxes; review certain 
claims for refund; make recommendations concerning offers in 
compromise and closing agreements; and supervise collection of 
taxes from taxpayers involved in bankruptcy, insolvency, 
liquidation, receivership or reorganization proceedings. The 
Office of Chief Counsel conducts tax litigation in Tax Court, 
and makes recommendations concerning prosecutions and appeals 
to the Tax Division of the Department of Justice, which 
conducts Federal tax litigation in all courts other than the 
Tax Court.

 C. Formation and Structure of the Office of Employee Plans and Exempt 
                             Organizations

Establishment of EP/EO

    Prior to 1974, no one specific office in the IRS had 
primary responsibility for employee plans and tax-exempt 
organizations. As part of the reforms contained in the Employee 
Retirement Income Security Act of 1974 (``ERISA''), Congress 
statutorily created the Office of Employee Plans and Exempt 
Organizations (``EP/EO'') under the direction of an Assistant 
Commissioner.\18\ EP/EO was created to oversee deferred 
compensation plans governed by sections 401-414 of the Code and 
organizations exempt from tax under Code section 501(a).\19\
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    \18\ Code section 7802(b).
    \19\ For a summary of the circumstances surrounding the creation of 
EP/EO), see Jim McGovern and Phil Brand, ``EP/EO--One of the Most 
Innovative and Efficient Functions Within the IRS,'' Tax Notes, August 
25, 1997, pp. 1099-1104.
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    In general, EP/EO was established in response to concern 
about the level of IRS resources devoted to oversight of 
employee plans and exempt organizations. In creating the 
office, Congress explicitly acknowledged that the regulatory 
oversight responsibilities delegated to EP/EO differ from the 
core revenue collection and enforcement functions of the IRS. 
Both the House and Senate reports on the legislation conclude 
that, with respect to administration of laws relating to 
employee plans and exempt organizations, ``the natural tendency 
is for the Service to emphasize those areas that produce 
revenue rather than those areas primarily concerned with 
maintaining the integrity and carrying out the purposes of 
exemption provisions.'' \20\ The Senate report noted:
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    \20\ S. Rept. 93-383, 108 (1973). See also H. Rept. 93-807, 104 
(1974).

          Concern has been expressed in the case of the 
        administration of employee benefit plans (and also tax-
        exempt organizations) as to whether the Internal 
        Revenue Service with its primary concern with the 
        collection of revenues is giving sufficient 
        consideration to the purposes for which these 
        organizations are exempt. Many believe that the present 
        organization of the Service causes it to subordinate 
        concern for the protection of the interest of plan 
        participants (or the educational, charitable, etc., 
        purposes for which the exemptions are provided).\21\
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    \21\ S. Rept. 93-383, 107-108 (1973). See also H. Rept. 93-807, 103 
(1974).

    To provide funding for the new EP/EO office, ERISA 
authorized the appropriation of an amount equal to the sum of 
the excise tax on investment income of private foundations 
(assuming a rate of 2 percent \22\) as would have been 
collected during the second preceding year plus the greater of 
the same amount or $30 million.\23\ The Senate-passed version 
of ERISA specified that the funds provided by the taxes ``are 
to be used only for activities delegated to this new office and 
may not be transferred or used by the Internal Revenue Service 
in any other manner.'' \24\ Despite this expression of 
legislative intent, amounts raised by the section 4940 excise 
tax have never been dedicated to the administration of EP/EO, 
but are transferred instead to general revenues. Table 1 sets 
forth revenues raised by the section 4940 excise tax for fiscal 
years 1971 to 1995. Thus, the level of EP/EO funding, like that 
of the rest of the IRS, is dependent on the amount requested by 
and granted to the IRS and the Treasury Department through the 
annual Congressional appropriations process.\25\
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    \22\ The Tax Reform Act of 1969 generally imposed a 4-percent 
excise tax on the net investment income of private foundations. The 
stated rationale for imposition of the tax was that foundations should 
share some of the costs of government, particularly the costs of 
administering the tax law relating to exempt organizations. As part of 
the Revenue Act of 1978, Congress reduced the section 4940 tax rate to 
2 percent, on the grounds that ``the tax has produced more than twice 
the revenue needed to finance the operation of the Internal Revenue 
Service with respect to tax-exempt organizations.'' S. Rept. 95-1263, 
6981 (1978). In 1984, Congress found that collections from the section 
4940 excise tax continued to exceed the costs of administering the 
employee plan and exempt organizations programs. Joint Committee on 
Taxation, General Explanation of the Revenue Provisions of the Deficit 
Reduction Act of 1984 (H.R. 4170), 98th Cong., P.L. 98-369 (JCS-41-84), 
672, December 31, 1984. Consequently, Congress further reduced the 
section 4940 excise tax from 2 percent to 1 percent in cases where 
there is an equivalent increase in the foundation's qualifying 
distributions for charitable purposes. No amendment was made to section 
7802(b)(2); accordingly, the authorized funding for EP/EO is calculated 
on the basis of a 2-percent excise tax rate. Thus, amounts of section 
4940 excise tax actually collected since 1984 are somewhat lower than 
the amounts that would actually be used in calculating EP/EO funding 
under section 7802(b)(2).
    \23\ Code section 7802(b)(2). As passed by the Senate, the 
legislation authorized the appropriation of revenues from a proposed 
annual $1 audit-fee tax to be imposed on employers for each plan 
participant under section 4974, as well as one-half of the revenue from 
the 4-percent excise tax on private foundation investment income under 
section 4940. At that time, the investment income tax on foundations 
was yielding $56 million and the audit-fee tax was anticipated to raise 
approximately $30 million. Thus, total funding for EP/EO would have 
been approximately $58 million. S. Rept. No. 93-383, 109-110 (1973). 
The $1-per-participant audit fee tax was dropped in conference, 
however, and the funding calculation changed to its present 
formulation. H. Rept. No. 93-1280, 333 (1974).
    \24\ S. Rept. No. 93-383, 110 (1973).
    \25\ Funding for EP/EO is a separate line item in the President's 
budget for the IRS under the general category of ``Tax Law 
Enforcement.'' Other line items in this category are criminal 
investigations, examination, collection, statistics of income, chief 
counsel, tax fraud and financial investigations, international, SOI/
compliance research, document matching, and resources management 
(compliance). Budget of the United States Government, Fiscal Year 1998, 
Appendix, H. Doc. 105-003, Vol. 1., pp. 874-875.

         Table 1. Section 4940 Excise Tax Collections, 1971-1995        
------------------------------------------------------------------------
                                                             Collections
                        Fiscal year                               ($    
                                                              millions) 
------------------------------------------------------------------------
1971.......................................................         24.6
1972.......................................................         56.1
1973.......................................................         76.6
1974.......................................................         60.9
1975.......................................................         63.8
1976.......................................................         59.9
1977.......................................................         78.6
1978.......................................................         84.0
1979.......................................................         63.2
1980.......................................................         65.3
1981.......................................................         84.1
1982.......................................................         93.2
1983.......................................................        112.4
1984.......................................................        146.8
1985.......................................................        136.2
1986.......................................................        217.2
1987.......................................................        218.1
1988.......................................................        229.4
1989.......................................................        168.8
1990.......................................................        204.3
1991.......................................................        173.8
1992.......................................................        204.7
1993.......................................................        223.1
1994.......................................................        235.4
1995.......................................................       213.7 
------------------------------------------------------------------------
Source: Internal Revenue Service.                                       

Responsibilities of EP/EO

    EP/EO is responsible for overseeing the administration and 
enforcement of Federal tax laws relating to employee benefit 
plans and tax-exempt organizations. EP/EO's mandate includes 
not only enforcing applicable Federal tax laws and collecting 
the proper amount of tax revenue, but also protecting the 
rights of benefit plan participants and contributors to and 
beneficiaries of tax-exempt organizations.
    The two primary programs through which EP/EO seeks to 
ensure compliance with the requirements for tax exemption of 
nonprofit organizations and plan trusts and qualification of 
employee benefit plans are the determination letter program and 
the examination process. The determination letter program is 
one in which the taxpayer applies for a ruling from the IRS as 
to its qualification for tax-exempt status. In 1996, the IRS 
received 80,763 applications for exemption from plan trusts and 
approximately 70,000 applications for recognition of tax-exempt 
status from nonprofit organizations. In that same year, EP 
issued approximately 115,000 determination letters for employee 
plans and EO issued approximately 70,000 determination letters 
for tax-exempt organizations. Currently, approximately 200 IRS 
technical specialists process EO determination letters and 
approximately 140 technical specialists process EP 
determination letters. Through its examination process, the IRS 
seeks to ensure that employee benefit plans and exempt 
organizations continue to meet Federal tax requirements. In 
calendar year 1993, there were 561,773 returns filed by tax-
exempt organizations \26\ and 1,156,901 returns filed by 
employee benefit plans.
---------------------------------------------------------------------------
    \26\ Not all tax-exempt organizations are required to file annual 
information returns (Form 990). For example, churches and certain small 
organizations are not required to file Form 990. Thus, as set forth 
below, the total number of tax-exempt organizations far exceeds the 
number of returns filed annually.
---------------------------------------------------------------------------
    EP has primary responsibility relating to the Federal tax 
qualification of employee plans and related trusts, the tax 
treatment of employees participating in such plans and their 
beneficiaries, and deductions for employer contributions to 
plans. EP National Office provides policy guidance to the EP/EO 
Key District Offices (``KDOs'') (described further below), 
including examination and training materials and technical 
advice. In addition, the actuarial branches of EP process 
funding waiver requests and perform other actuarial analyses. 
EP administers a number of programs designed to assist employee 
plans in complying with Federal tax rules, including the Master 
and Prototype Program (a compliance program created to allow 
advance approval of model retirement plans), the Administrative 
Policy Regarding Self-Correction, the Walk-in Closing Agreement 
Program, the Voluntary Compliance Resolution Program, and the 
Tax Sheltered Annuity Voluntary Compliance Program.
    EO has primary responsibility relating to tax-exempt 
organizations, including unrelated business income tax rules. 
EO also oversees Code section 527, which governs the taxation 
of political organizations. In 1993, EO assumed responsibility 
for the administration of IRS activities with respect to tax-
exempt bonds. EO National Office provides policy guidance to 
the KDOs, processes rulings on exemption issues referred by 
KDOs, issues rulings on prospective transactions, and issues 
technical advice and assistance. EO is developing the Voluntary 
Compliance Nonresident Alien Withholding Program, a program 
similar to those administered by EP, in an effort to promote 
voluntary compliance and self-correction on the part of exempt 
organizations.
    The Field Systems Branch supports the information and data 
management needs of EP/EO in the field, as well as at the 
National Office headquarters.

Structure of EP/EO

    EP/EO is comprised of National Office headquarters and five 
key district offices (KDOs). As set forth in the diagram below, 
the headquarters EP/EO function includes the Employee Plans 
Division, the Exempt Organizations Division, and the Field 
Systems Branch.





    The KDO located in Cincinnati, Ohio, recently has become 
the centralized determination letter processing site. 
Examination jurisdiction is vested in four KDOs: Northeast 
(Brooklyn), Southeast (Baltimore), Midstates (Dallas), and 
Western (Los Angeles). Although the EP/EO Assistant 
Commissioner has general programmatic authority over the field 
offices, there is no direct line authority. Thus, the National 
Office cannot initiate or oversee the day-to-day conduct of 
examinations. Rather, such authority is exercised by the 
District Directors of the respective KDOs.

EP/EO resources

    In addition to establishing the Office of Employee Plans 
and Exempt Organizations, ERISA also statutorily authorized the 
creation of a number of high-level executive positions for 
purposes of staffing the new office.\27\ Most significantly, 
the bill authorized an additional 20 so-called ``supergrade'' 
positions in EP/EO at the levels of GS-17 and 16.\28\ This 
unprecedented concentration of high level positions attracted a 
pool of talented people from both within and outside of the IRS 
to staff the new EP/EO function. Since 1974, as a result of a 
various internal reorganizations and redefinition of staffing 
priorities, all but four of these EP/EO ``supergrade'' 
positions have been reallocated elsewhere within the IRS and 
Treasury.
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    \27\ Section 1051(a) of the Employee Retirement Security Act of 
1974 (amending secs. 5108 and 5109 of Title 5 of the United States 
Code).
    \28\ As part of a general reorganization of the Federal government 
civil service personnel structure that took place in 1979, the 
``supergrade'' system was replaced by the Senior Executive Service 
system.
---------------------------------------------------------------------------
    For 1997, EP/EO has 2,117 funded positions. Approximately 
250 of these positions are assigned to National Office 
headquarters and the remainder are assigned to the five KDOs. 
As set forth on Table 2, the aggregate staffing level remains 
essentially what it was when EP/EO was formed in 1974. In fact, 
the 1997 staffing level is approximately 20 percent below the 
1989 peak staffing level.

         Table 2. EP/EO Staffing and Budget Authority, 1975-1997        
------------------------------------------------------------------------
                                                            President's 
                                                 Funded        budget   
                 Fiscal year                   positions   authority \1\
                                                            ($ millions)
------------------------------------------------------------------------
1975........................................        2,075  .............
1976........................................        2,175  .............
1977........................................        2,202  .............
1978........................................        2,292          62.2 
1979........................................        1,945          64.1 
1980........................................        1,870          66.9 
1981........................................        1,738          68.9 
1982........................................        1,640          55.0 
1983........................................        1,770          80.8 
1984........................................        1,906          90.4 
1985........................................        1,902          94.3 
1986........................................        2,099          99.0 
1987........................................        2,311         104.9 
1988........................................        2,562         120.9 
1989........................................        2,573         125.8 
1990........................................        2,423         132.8 
1991........................................        2,336         132.3 
1992........................................        2,461         140.9 
1993........................................        2,331         143.1 
1994........................................        2,305         129.8 
1995........................................        2,304         132.5 
1996........................................        2,197         128.8 
1997 (est.).................................        2,117        129.6  
------------------------------------------------------------------------
\1\ Pre-1995 totals include funding for support positions from other    
  divisions of the IRS.                                                 
                                                                        
Source: Internal Revenue Service.                                       

Growth of the EP/EO sector

    As of 1990, there were approximately 900,000 private 
retirement plans with nearly 77 million participants, 
controlling nearly $3 trillion in assets. This compares with 
approximately 30 million plan participants in 1974, when EP/EO 
was created. The Federal income tax expenditure (i.e., foregone 
tax revenues) associated with the net exclusion from income for 
pension contributions and earnings is estimated to be $87.3 
billion for 1998 and $470.7 billion for the five-year period 
1998-2002.\29\
---------------------------------------------------------------------------
    \29\ Joint Committee on Taxation, Estimates of Federal Tax 
Expenditures for Fiscal Years 1998-2002 (JCS-22-97), December 15, 1997.
---------------------------------------------------------------------------
    Similarly, the number of tax-exempt organizations has 
nearly doubled since 1974. At the end of 1996, there were 
approximately 1,280,000 tax-exempt organizations and an 
estimated 340,000 churches, controlling assets in excess of 
$1.1 trillion. In contrast, in 1974, there were 690,000 tax-
exempt organizations (excluding churches). The Federal income 
tax expenditure related solely to the deduction allowed for 
contributions to charities (a subset of all tax-exempt 
organizations) is estimated to be $23.3 billion in 1998, and 
$129.0 billion for 1998-2002.\30\
---------------------------------------------------------------------------
    \30\ Ibid.
---------------------------------------------------------------------------
    The total volume of all outstanding tax-exempt bonds in 
1996 was approximately $1.3 trillion. The total volume of such 
bonds issued in 1993 was $336 billion. The Federal income tax 
expenditure related to the exclusion of interest on tax-exempt 
bonds is estimated to be $25.3 billion for 1998, and $143.7 
billion over the five-year period 1998-2002.\31\
---------------------------------------------------------------------------
    \31\ Ibid.
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D. Congressional Oversight of the IRS and Duties of the Joint Committee 
                              on Taxation

Congressional oversight of the IRS

    Under the present Congressional committee structure, a 
number of committees have jurisdiction with respect to IRS 
oversight. The committees most responsible for IRS oversight 
are the House Committees on Ways and Means, Appropriations, 
Government Reform and Oversight, the corresponding Senate 
Committees on Finance, Appropriations, and Governmental 
Affairs, and the Joint Committee on Taxation (the ``Joint 
Committee''). While these Committees have a shared interest in 
IRS matters, they typically act independently, and have 
separate hearings and make separate investigations into IRS 
matters. Each committee also has exclusive jurisdiction over 
certain issues. For example, the House Ways and Means Committee 
and the Senate Finance Committee have exclusive jurisdiction 
over changes to the tax laws. Similarly, the House and Senate 
Appropriations Committees have exclusive jurisdiction over IRS 
appropriations. The Joint Committee does not have legislative 
jurisdiction, but, as discussed more fully below, has 
significant responsibilities with respect to tax matters and 
IRS oversight.

Joint Committee on Taxation

            Creation and history of the Joint Committee on Taxation
    In 1924, Senator James Couzens (Michigan) introduced a 
resolution in the Senate for the creation of a Select Committee 
to investigate the Bureau of Internal Revenue. At the time, 
there were reports of inefficiency and waste in the Bureau and 
allegations that the method of making refunds created the 
opportunity for fraud. One of the issues investigated by the 
Select Committee was the valuation of oil properties. The 
Committee found that there appeared to be no system, no 
adherence to principle, and a total absence of competent 
supervision in the determination of oil property values.
    In 1925, after making public charges that millions of tax 
dollars were being lost through the favorable treatment of 
large corporations by the Bureau, Senator Couzens was notified 
by the Bureau that he owed more than $10 million in back 
taxes.\32\ Then Treasury Secretary Andrew Mellon was believed 
to be personally responsible for the retaliation against 
Senator Couzens. At the time, Treasury Secretary Mellon was the 
principal owner of Gulf Oil, which had benefited from rulings 
specifically criticized by Senator Couzens.
---------------------------------------------------------------------------
    \32\ According to Esquire magazine, the Internal Revenue 
Commissioner personally handed to Senator Couzens a bill for $10 
million. Berendt, John, ``The Tax Audit,'' Esquire, February 1994, p. 
18.
---------------------------------------------------------------------------
    The investigations by the Senate Select Committee led, in 
the Revenue Act of 1926, to the creation of the Joint Committee 
on Internal Revenue Taxation.\33\ The first Chief of Staff of 
the Joint Committee on Internal Revenue Taxation was L.H. 
Parker, who had been the chief investigator on Senator Couzens' 
Select Senate Committee. The Revenue Act of 1926 empowered the 
Joint Committee on Internal Revenue Taxation to investigate the 
administration of the Federal tax laws and directed the 
Committee to publish from time to time for public examination 
and analysis proposed measures and methods for the 
simplification of internal revenue taxes and required the Joint 
Committee to provide a written report to the House and Senate 
by December 31, 1927, with such recommendations as it deemed 
advisable. The Joint Committee published its initial report on 
November 15, 1927, and made various recommendations to simplify 
the Federal tax system, including a recommendation for the 
restructuring of the Federal income tax title.
---------------------------------------------------------------------------
    \33\ The name of the Joint Committee on Internal Revenue Taxation 
was changed to the Joint Committee on Taxation in the Tax Reform Act of 
1976.
---------------------------------------------------------------------------
    In the Revenue Act of 1928, the Joint Committee's authority 
was extended to the review of all refunds or credits of any 
income, war-profits, excess-profits, or estate or gift tax in 
excess of $75,000. In addition, the Act required the Joint 
Committee to make an annual report to the Congress with respect 
to such refunds and credits, including the names of all persons 
and corporations to whom amounts are credited or payments are 
made, together with the amounts credited or paid to each.
    Since 1928, the threshold for review of large tax refunds 
has been increased from $75,000 to $1 million in various steps 
and the taxes to which such review applies has been expanded. 
Other than that, the Joint Committee's responsibilities under 
the Internal Revenue Code have remained essentially unchanged 
since 1928.
    The Joint Committee is composed of 10 Members, 5 from the 
Senate Finance Committee (3 majority and 2 minority Members) 
and 5 from the House Committee on Ways and Means (3 majority 
and 2 minority).
            General duties and powers of the Joint Committee on 
                    Taxation
    The statutory duties of the Joint Committee include the 
duty (under sec. 8022 of the Code):
           to investigate the operation and effects of 
        the Federal tax system;
           to investigate the administration of Federal 
        taxes by the IRS or any executive agency charged with 
        their collection;
           to make such other investigations in respect 
        to such system as the Joint Committee deems necessary;
           to investigate measures and methods for the 
        simplification of such taxes, particularly the income 
        tax;
           to publish for public examination and 
        analysis proposed methods and measures for such 
        simplification; and
           to report to the Committee on Finance and 
        the Committee on Ways and Means and, in its discretion, 
        the Senate or the House or both, the results of its 
        investigations and any recommendations.
    In order to fulfill its statutory obligations, the Joint 
Committee is authorized to hold hearings, require the 
attendance of witnesses and the production of documents, 
procure printing and binding, and make necessary expenditures. 
The Joint Committee (or the Chief of Staff) is authorized to 
secure tax returns, tax return information or data directly 
from the IRS or any other executive agency for the purpose of 
making investigations, reports, and studies relating to 
internal revenue tax matters, including investigations of the 
IRS' administration of the tax laws (Code secs. 8021 and 8023). 
The IRS, Office of the Chief Counsel of the IRS, and other 
executive bureaus and agencies are authorized and directed 
under section 8022 of the Code to furnish information, 
suggestions, rulings, data, estimates, and statistics directly 
to the Joint Committee (or the Chief of Staff) upon request.
    The Joint Committee (or the Chief of Staff of the Joint 
Committee) is also authorized to receive confidential taxpayer 
return information pursuant to section 6103 of the Code. \34\ 
The Chief of Staff of the Joint Committee is authorized to 
appoint agents for the receipt of confidential tax return 
information.
---------------------------------------------------------------------------
    \34\ Section 6103 provides that tax returns and return information 
are confidential and cannot be disclosed unless one of several 
exceptions permitting disclosure applies.
---------------------------------------------------------------------------
    The Joint Committee is closely involved in every aspect of 
the tax legislative process. Among other things, the Joint 
Committee staff does the following: (1) prepares hearing 
pamphlets, committee reports, and conference reports 
(statements of managers); (2) assists the Offices of 
Legislative Counsel in the drafting of statutory language; (3) 
assists Members of Congress with the development and analysis 
of legislative proposals; (4) prepares revenue estimates of all 
revenue legislation and estimates requested by Members; and (5) 
initiates investigations of, and publishes studies on, various 
aspects of the Federal tax system.
            Review of requests for GAO studies
    There is presently no specific statutory requirement that 
requests for investigations by the General Accounting Office 
(``GAO'') relating to the IRS be reviewed by the Joint 
Committee. However, many (but not all) of the studies that GAO 
conducts relating to taxation and oversight of the IRS require 
access under section 6103 of the Code to confidential tax 
returns and return information. There are two general reasons 
that they may need section 6103 access. One is that they are 
gathering information directly from a statistical sample of 
returns to determine the extent of a particular problem. The 
second general reason they need section 6103 access is for 
purposes incidental to the issue they are studying. For 
example, they are required by statute to perform an annual 
audit of IRS financial statements. In examining IRS internal 
financial reporting and management processes, they may 
incidentally encounter confidential tax returns or return 
information. They must have section 6103 access to conduct this 
type of study even though the direct examination of returns or 
return information is not a central part of their study. GAO 
cannot disclose confidential returns or return information in 
its published reports or in testimony.
    There are three types of GAO studies for which GAO seeks 
access to tax returns under section 6103 of the Code. One type 
is studies GAO initiates on its own. Their annual audit of 
IRS's financial statements is an example of a self-initiated 
study. The second type is studies that GAO is requested to do 
by a Member. The third type is studies that the Joint Committee 
asks the GAO to undertake on its behalf. For example, the Joint 
Committee has in the past asked the GAO to tabulate information 
from TCMP audit workpapers that was useful in performing 
compliance revenue estimates.
    Under section 6103, the GAO may inform the Joint Committee 
of its initiation of an audit of the IRS or other Federal 
agencies and obtain access to confidential taxpayer information 
unless, within 30 days, \3/5\ths of the Members of the Joint 
Committee disapprove of the audit. This provision has not been 
utilized; the GAO generally seeks advance access to 
confidential taxpayer information from the Joint Committee.

            II. DESCRIPTION OF S. 1096 AND COMMISSION REPORT

   A. IRS Oversight Board and Appointment of Commissioner and Chief 
                                Counsel

IRS Oversight Board
    S. 1096 provides for the establishment within the Treasury 
Department of an Internal Revenue Service Oversight Board 
(referred to as the ``Board''). S. 1096 provides that the Board 
would ``oversee the Internal Revenue Service in the 
administration, management, conduct, direction, and supervision 
of the execution and application of the internal revenue laws'' 
but would have no responsibilities or authority with respect to 
``the development and formulation of Federal tax policy 
relating to existing or proposed internal revenue laws'' or 
``specific law enforcement activities of the Internal Revenue 
Service, including compliance activities such as criminal 
investigations, examinations, and collection activities.'' \35\ 
Similarly, the Report of the National Commission on 
Restructuring the IRS (``Commission Report'') proposed that a 
Board of Directors be responsible for overall governance of the 
IRS--in order to guide the direction of long-term strategy at 
the IRS, appoint and remove its senior leadership, and hold IRS 
management accountable--but the Board would have ``no 
involvement in specific matters in the areas of interpretation 
or enforcement of the tax laws.''
---------------------------------------------------------------------------
    \35\ S. 1096 also provides that the Board shall have no 
responsibilities or authority with respect to ``specific activities of 
the Internal Revenue Service delegated to employees of the Internal 
Revenue Service pursuant to delegation orders in effect as of the date 
of the enactment of this subsection, including delegation order 106 
relating to procurement authority, except to the extent that such 
delegation orders are modified subsequently by the Secretary.''
---------------------------------------------------------------------------
    Under S. 1096, the Board would be composed of 9 members, 7 
of whom would be so-called ``private-life'' members who are not 
full-time Federal officers or employees. These 7 private-life 
members would be appointed by the President, with the advice 
and consent of the Senate (and would be considered ``special 
governmental employees'' under Title 18 U.S. Code sec. 202). 
The remaining 2 members of the Board would be (1) a 
representative from an organization representing a substantial 
number of IRS employees, who would be appointed by the 
President with the advice and consent of the Senate, and (2) 
the Secretary of the Treasury (or the Secretary could designate 
the Deputy Secretary of the Treasury). Board members generally 
would be appointed for 5-year terms; and the 7 private-life 
members could serve no more than two 5-year terms. Board member 
terms would be staggered, as a result of a special rule 
providing that some members first appointed to the Board would 
serve terms of less than 5 years. The members of the Board 
would elect a chairperson for a 2-year term. S. 1096 provides 
that the members of the Board could be removed at the will of 
the President. S. 1096 further provides that the Secretary of 
the Treasury (or, if so delegated, the Deputy Secretary) would 
be removed from the Board upon termination of employment, and 
the representative of IRS employees would be removed from the 
Board upon termination of employment, membership, or other 
affiliation with the organization representing IRS 
employees.\36\ S. 1096 provides that the 7 private-life members 
of the Board would receive $30,000 compensation per year 
($50,000 per year for a private-life member who is elected 
chairperson of the Board). The remaining 2 members of the Board 
would not be compensated for their services as Board members.
---------------------------------------------------------------------------
    \36\ Under S. 1096, it appears that all members of the Board could 
be removed at the will of the President, and that the termination of 
employment of the Secretary or Deputy Secretary of the Treasury, or 
termination of employment, membership, or affiliation of the IRS 
employee union representative with the union, would constitute an 
additional basis for removal of such members from the Board.
---------------------------------------------------------------------------
    The Commission Report proposes a Board with a similar 
structure, but the Board would be composed of 7 members 
appointed by the President, with the advice and consent of the 
Senate. Five members of the Board would be from private life, 
and the remaining 2 members would be the Secretary or Deputy 
Secretary of the Treasury and a representative from the 
National Treasury Employees Union. Members of the Board would 
be removable at will by the President. As under S. 1096, the 
members of the Board of Directors generally would be appointed 
for 5-year terms and would elect a chairperson for a 2-year 
term. The Commission Report further states that the Board 
should hire a small, permanent staff and have a budget to 
contract with outside experts and consultants to review matters 
under its jurisdiction.\37\
---------------------------------------------------------------------------
    \37\ In contrast, S. 1096 does not specifically provide that the 
Board shall hire a permanent staff. Instead, on request of the 
chairperson of the Board, the IRS Commissioner shall detail to the 
Board such personnel as may be necessary to enable the Board to perform 
its duties, and the Board may procure temporary and intermittent 
services under Title 5 U.S.C., section 3109(b).
---------------------------------------------------------------------------
Appointment of IRS Commissioner
    S. 1096 provides that, among the Board's oversight 
responsibilities, the Board would have the specific 
responsibility ``[t]o provide for . . . the selection and 
appointment, evaluation, and removal of the Commissioner of 
Internal Revenue, [and] the review of the Commissioner's 
selection, evaluation, and compensation of senior managers.'' 
The IRS Commissioner would be appointed by the Board--
presumably by majority vote--to a 5-year term, and could be 
reappointed by the Board to subsequent terms. S. 1096 further 
provides that the IRS Commissioner, in turn, would be 
``authorized to employ such number of persons as the 
Commissioner deems proper for the administration and 
enforcement of the internal revenue laws, and the Commissioner 
shall issue all necessary directions, instructions, orders, and 
rules applicable to such persons.'' In contrast, present-law 
Code section 7803(a) grants such hiring authority to the 
Secretary of the Treasury.
    The Commission Report proposes, as does S. 1096, that the 
Board should be vested with the authority to appoint the IRS 
Commissioner to a 5-year term. Specifically, the 
CommissionReport states that the Board would ``[appoint and compensate 
the Commissioner and review and approve the Commissioner's 
recommendations regarding the appointment, evaluation, and compensation 
of senior IRS executives.'' Although S. 1096 is somewhat vague when it 
provides that the Board will have the responsibility to ``review'' the 
Commissioner's ``selection, evaluation, and compensation'' of senior 
IRS managers, the Commission Report proposes that the Board ``review 
and approve'' the Commissioner's recommendations regarding the 
appointment, evaluation, and compensation of senior IRS managers. The 
Commission Report states that, with respect to the hiring of senior IRS 
officials and other management decisions made by the IRS Commissioner, 
the Board should ``retain final authority regarding all such matters.''
    Under S. 1096, the IRS Commissioner would be granted 
specific statutory authority to ``administer, manage, conduct, 
direct, and supervise the execution and application of the 
internal revenue laws or related statutes and tax conventions 
to which the United States is a party.

Appointment of IRS Chief Counsel

    Under S. 1096, the IRS Chief Counsel would continue to be 
appointed as under present law--that is, the appointment would 
be made by the President, with the advice and consent of the 
Senate. The bill provides, however, that when a vacancy occurs, 
the IRS Commissioner shall recommend a candidate for 
appointment as IRS Chief Counsel to the President, and the 
Commissioner may recommend the removal of the Chief Counsel to 
the President. The IRS Chief Counsel would be described as the 
chief law officer for the IRS and would perform such duties as 
may be prescribed by the Secretary of the Treasury. S. 1096 
provides that, to the extent that the IRS Chief Counsel 
performs duties relating to the development of rules and 
regulations promulgated under the Internal Revenue Code, final 
decision making authority shall remain with the Secretary of 
the Treasury.
    In contrast to the mode of appointment of the IRS Chief 
Counsel provided for by S. 1096, the Commission Report proposed 
that the IRS Commissioner should recommend the nomination of a 
Chief Counsel to the Board, but the Board would make the final 
appointment of the IRS Chief Counsel. This recommendation 
contained in the Commission Report was designed to ``maintain 
the current parity in which the Commissioner and Chief Counsel 
are appointed independently.'' In this regard, the Commission 
Report states that if, during the course of IRS business, the 
Commissioner and Chief Counsel cannot reach agreement on an 
issue, the Commissioner would have decision-making authority.

               B. Employee Plans and Exempt Organizations

    In general, the Commission recommends that Congress 
simplify tax administration by limiting the assignment of non-
core functions to the IRS. However, the Commission Report 
acknowledges that, in certain circumstances, the IRS may be 
uniquely qualified to administer a non tax-collection function, 
citing the regulation of employee plans and exempt 
organizations as an example of such a function. The Commission 
Report indicates that if Congress delegates such a 
responsibility to the IRS, it should also provide sufficient 
autonomy and resources to ensure that the non-core function can 
be adequately carried out without detracting from traditional 
tax enforcement.
    For example, the Commission Report provides that ``[t]he 
EP/EO operation is recognized as one of the most innovative and 
efficient functions within the IRS'' and cites with approval 
EP/EO voluntary compliance efforts.\38\ The Commission Report 
also notes that, in 1974, Congress elevated supervision of EP/
EO to an Assistant Commission and authorized an annual 
appropriation for EP/EO in recognition of the unique function 
and responsibilities of EP/EO within the IRS. However, because 
the designated funding mechanism has never been used, the 
Commission Report states that ``EP/EO constantly struggles with 
the IRS core tax collection functions for resources to regulate 
more than $1.2 trillion in tax-exempt assets and $1.7 trillion 
in retirement plan assets.'' \39\
---------------------------------------------------------------------------
    \38\ Commission Report, p. 38.
    \39\ Ibid. The Commission heard testimony focusing on the EP/EO 
function within the IRS from James J. McGovern, former Assistant 
Commissioner for EP/EO, and from the Exempt Organizations Committee of 
the D.C. Bar Section of Taxation. See ``Regulation of EP/EO in the 
Twenty-First Century,'' testimony of James J. McGovern before the 
National Commission on Restructuring the IRS, The Exempt Organization 
Tax Review, February 1997, p. 209; and ``Comments Concerning the Future 
Regulations of Employee Plans and Exempt Organizations Matter,'' 
submission of the Exempt Organizations Committee, Section of Taxation, 
District of Columbia Bar, to the National Commission on Restructuring 
the IRS, The Exempt Organization Tax Review, June 1997, p. 1075.
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    S. 1096 would retain the Office of Employee Plans and 
Exempt Organizations under the supervision and direction of an 
Assistant Commissioner of the Internal Revenue. As under 
present law, EP/EO would be responsible for carrying out 
functions and duties associated with organizations designed to 
be exempt from tax under section 501(a) of the Code and with 
respect to plans designed to be qualified under section 401(a). 
In addition, however, EP/EO's responsibilities would be 
expanded to include nonqualified deferred compensation 
arrangements. The bill also would provide that the Assistant 
Commissioner shall report annually to the Commissioner on EP/EO 
operations.
    As under present law, S. 1096 would provide for an 
authorization of appropriations equal to the section 4940 
excise tax on investment income (assuming a 2-percent excise 
tax rate) plus the greater of the same amount or $30 million. 
However, the bill specifies that this authorized appropriation 
would be used solely to carry out the functions of EP/EO. The 
bill also would provide that all user fees collected by EP/EO 
would be dedicated to carry out EP/EO functions.

                          C. Taxpayer Advocate

    S. 1096 would require the Commissioner to obtain the 
approval of the IRS Oversight Board on the selection of the 
Taxpayer Advocate. A candidate for the Taxpayer Advocate must 
have either substantial experience representing taxpayers 
before the IRS or have substantial experience within the IRS. 
If the prospective Taxpayer Advocate was an officer or an 
employee of the IRS before being appointed as the Taxpayer 
Advocate, the individual would be required to agree not to 
accept any employment with the IRS for at least 5 years after 
ceasing to be the Taxpayer Advocate.
    The bill would modify the information to be included in the 
December 31 report to the tax-writing committees. The report 
identifies areas of the tax law that impose significant 
compliance burdens on taxpayers or the IRS, including specific 
recommendations for solving these problems. The Taxpayer 
Advocate also would be required to work in conjunction with the 
National Director of Appeals to identify the 10 most litigated 
issues for each category of taxpayers, and include the list of 
issues and recommendations for mitigating such disputes in the 
report. Categories of taxpayers include, for example, 
individuals, self-employed individuals, small businesses, etc.
    Under present law, the Taxpayer Advocate reports are 
submitted directly to the tax-writing committees, without 
review by the Commissioner, the Secretary of the Treasury, or 
any other officer or employee of the Department of the Treasury 
or the Office of Management and Budget. Under the bill, the 
Taxpayer Advocate reports would still be submitted directly to 
the tax-writing committees, without review by the Oversight 
Board or any of the other persons mentioned above.
    In addition, the bill would impose new responsibilities on 
the Taxpayer Advocate. The Taxpayer Advocate would be required 
to monitor the coverage and geographical allocation of problem 
resolution officers and develop guidance that outlines criteria 
to be used by IRS employees in referring taxpayer inquiries to 
problem resolution officers. In connection with these 
responsibilities, the Taxpayer Advocate would be required to 
work with the IRS District Offices to ensure convenient 
taxpayer access to the local problem resolution officer. The 
Taxpayer Advocate would be required to ensure that the local 
telephone number for the problem resolution officer in each 
district is published and available to taxpayers.
    The Taxpayer Advocate would be required to work with the 
Commissioner in developing career paths for local problem 
resolution officers, so that individuals can progress through 
the General Schedule in the same manner as examination 
employees, without having to leave the problem resolution 
system. In that regard, it is contemplated that the 
compensation levels of local and regional problem resolution 
officers should be the same as those of IRS personnel operating 
in other functional units. Under the current system, local 
problem resolution officers generally must return to an audit 
or collection function to achieve promotion. This lack of a 
career path within the problem resolution system reduces the 
independence of the system.
    Effective date.--The provision would be effective on the 
date of enactment, except that the post-employment restrictions 
on the Taxpayer Advocate do not apply to an individual holding 
that position on the date of enactment.

              D. Congressional Accountability for the IRS

Congressional oversight

    S. 1096 would provide that the Joint Committee on Taxation 
(``Joint Committee'') is to review all requests (other than 
requests by a Committee or Subcommittee of the Congress) for 
investigations of the IRS by the General Accounting Office 
(``GAO'') and approve such requests when appropriate. In 
reviewing such requests, the Joint Committee is to attempt to 
eliminate overlapping investigations, ensure that the GAO has 
the capacity to handle the investigation, and ensure that 
investigations focus on areas of primary importance to tax 
administration.
    The bill would provide that there shall be two annual joint 
hearings of members of the Senate Committees on Finance, 
Appropriations, and Governmental Affairs and the House 
Committees on Ways and Means, Appropriations, and Government 
Reform and Oversight. The first annual hearing is to take place 
before April 1 of each calendar year and is to review the 
strategic plans and budget for the IRS. The second annual 
hearing is to be held after the conclusion of the annual tax 
filing season, and is to review the strategic and business 
plans for the IRS, the progress of the IRS in meeting its 
objectives, the budget for the IRS and whether it supports its 
objectives, the progress of the IRS in improving taxpayer 
service and compliance, progress of the IRS on technology 
modernization, and the annual filing season.
    The bill would provide that the Joint Committee is to make 
annual reports to the Committee on Finance and the Committee on 
Ways and Means on the overall state of the Federal tax system, 
together with recommendations with respect to possible 
simplification proposals and other matters relating to the 
administration of the Federal tax system as it may deem 
advisable. The Joint Committee is also to report annually to 
the Senate Committees on Finance, Appropriations, and 
Governmental Affairs and the House Committees on Ways and 
Means, Appropriations, and Government Reform and Oversight with 
respect to the matters that are the subject of the second 
annual joint hearing of members of such committees.
    The Commission's recommendations are substantially similar 
to the provisions of S. 1096. However, the Commission 
recommended that, rather than simply expanding the role of the 
Joint Committee, a new entity, consisting of members of each of 
the 6 committees of jurisdiction and staffed by the staff of 
such committees and the staff of the Joint Committee, be 
created to coordinate oversight of the IRS, hold joint 
hearings, and approve all requests to the GAO for 
investigations of the IRS. The Commission also recommended that 
the Joint Committee reassume its statutory role as the focal 
point for IRS oversight, that the Joint Committee should have 
authority to contract with the private sector for oversight 
reports, and that the staff of the Joint Committee be expanded 
to meet its new responsibilities.

Tax law complexity

    S. 1096 provides that it is the sense of the Congress that 
the IRS should provide the Congress with an independent view of 
tax administration and that the tax-writing committees should 
hear from front-line technical experts at the IRS with respect 
to the administrability of pending amendments to the Internal 
Revenue Code.
    The bill would provide that the Joint Committee is to 
provide a ``Tax Complexity Analysis'' with respect to each 
bill, amendment, joint resolution, or conference agreement 
amending the tax laws. Legislation not containing the required 
Tax Complexity Analysis would be subject to a point of order.
    A Tax Complexity Analysis must be prepared for each 
provision of a tax bill, amendment, joint resolution, or 
conference agreement and must address:
           whether the provision is new, modifies or 
        replaces existing law, and whether hearings were held 
        to discuss the proposal and whether the IRS provided 
        input as to its administrability;
           when the provision becomes effective and 
        corresponding compliance requirements on taxpayers;
           whether new IRS forms or worksheets are 
        needed, whether existing forms or worksheets must be 
        modified, and whether the effective date allows 
        sufficient time for the IRS to prepare such forms and 
        educate taxpayers;
           necessity of additional interpretive 
        guidance (e.g., regulations, rulings, notices);
           the extent to which the proposal relies on 
        concepts contained in existing law, including 
        definitions;
           effect on existing record keeping 
        requirements and the activities of taxpayers, 
        complexity of calculations and likely behavioral 
        response, and standard business practices and resource 
        requirements;
           number, type, and sophistication of affected 
        taxpayers; and
           whether the proposal requires the IRS to 
        assume responsibilities not directly related to raising 
        revenue which could be handled through another Federal 
        agency.
    The bill would require the Commissioner to provide the 
Joint Committee with such information as is necessary to 
prepare each required Tax Complexity Analysis.
    The requirement for a Tax Complexity Analysis would be 
effective with respect to legislation considered on or after 
the earlier of January 1, 1998, or the 90th day after the date 
of enactment of an additional appropriation to enable the Joint 
Committee to perform the Tax Complexity Analysis.
    The bill directs the Joint Committee to prepare a study of 
the feasibility of developing a baseline estimate of taxpayer's 
compliance burdens against which future legislative proposals 
could be measured.
    S. 1096 substantially mirrors the recommendations of the 
Commission. However, the Commission recommended that the Tax 
Complexity Analysis, in addition to the 8 factors that must be 
addressed under S. 1096, should also identify the kinds of 
complexity, the extent of that complexity, and whether the 
provisions could be recast to reduce complexity while still 
achieving its tax policy goals.

                     III. DESCRIPTION OF H.R. 2676

                         A. IRS Oversight Board

Duties, responsibilities, and powers of the IRS Oversight Board
    The bill would provide for the establishment within the 
Treasury Department of the Internal Revenue Service Oversight 
Board (referred to as the ``Board''). The general 
responsibilities of the Board are to oversee the Internal 
Revenue Service (the ``IRS'') in its administration, 
management, conduct, direction, and supervision of the 
execution and application of the internal revenue laws. The 
Board has no responsibilities or authority with respect to (1) 
the development and formulation of Federal tax policy relating 
to existing or proposed internal revenue laws, (2) law 
enforcement activities of the IRS, including compliance 
activities such as criminal investigations, examinations, and 
collection activities,\40\ and (3) specific procurement 
activities of the IRS (e.g., selecting vendors or awarding 
contracts). As discussed more fully in Part B., below, the 
Board also has the authority to recommend candidates for IRS 
Commissioner to the President, and to recommend removal of the 
Commissioner. The members of the Board do not have authority to 
receive confidential taxpayer return information.\41\
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    \40\ This provision is not intended to limit the Board's authority 
with respect to the review and approval of strategic plans and the 
budget of the Commission or to preclude the Board from review of IRS 
operations generally.
    \41\ The bill does not affect the extent to which the Secretary of 
the Treasury (or the Deputy Secretary) and the IRS Commission have 
authority to receive confidential taxpayer return information under 
present law by virtue of such positions. Any request for information 
that cannot be disclosed to Board members and any contact relating to a 
specific taxpayer made by a private-life Board member or the union 
representative to an employee of the IRS must be reported by such 
employee to the Secretary and the Joint Committee on Taxation.
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    The Board would have the following specific 
responsibilities: (1) to review and approve strategic plans of 
the IRS, including the establishment of mission and objectives 
(and standards of performance) and annual and long-range 
strategic plans; (2) to review the operational functions of the 
IRS, including plans for modernization of the tax system, 
outsourcing or managed competition, and training and education; 
(3) to provide for the review of the Commissioner's selection, 
evaluation and compensation of senior managers; and (4) to 
review and approve the Commissioner's plans for major 
reorganization of the IRS. It is intended that major 
reorganizations subject to the Board's review and approval are 
limited to major changes in organizational structure, such as 
the 1995 IRS reorganization that combined 7 regions into 4 and 
63 districts into 33. In addition, the Board will review and 
approve the budget request of the IRS prepared by the 
Commissioner, submit such budget request to the Secretary, and 
ensure that the budget request supports the annual and long-
range strategic plans of the IRS. The Secretary is required to 
submit the budget request approved by the Board to the 
President, who is required to submit such request, without 
revision, to the Congress together with the President's annual 
budget request for the IRS. The bill does not affect the 
ability of the President to include, in addition, his own 
budget request relating to the IRS.
    It is intended that the Board will reach a formal decision 
on all matters subject to its review. With respect to those 
matters over which the Board has approval authority, the 
Board's decisions are determinative. It is fully expected that, 
with respect to those matters over which the Board has approval 
authority (other than as relates to the development of the 
budget), the Secretary will exert his or her oversight 
responsibility over the IRS by working through and with the 
Board.\42\
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    \42\ The budget is excepted from this expectation because the bill 
provides a separate mechanism through which the Secretary may act. The 
procedures relating to the Board permit the President to submit his own 
budget in addition to that approved by the Board.
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    The Board is required to report each year to the President 
and the Congress regarding the conduct of its responsibilities.
    It is expected that the Treasury Department will no longer 
utilize the IRS Management Board once the new Board created by 
the bill is in place, as the functions of the IRS Management 
Board would be taken over by the new Board.\43\
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    \43\ As noted in Part I.A., supra, the Commissioner receives 
private sector advice from the CAG. It is possible that the functions 
of the CAG would also be taken over by the new Board.
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Composition of the Board
    The Board would be composed of 11 members. Eight of the 
members are so-called ``private-life'' members who are not 
Federal officers or employees. These private-life members would 
be appointed by the President, with the advice and consent of 
the Senate. The remaining members are (1) the Secretary of the 
Treasury (or, if the Secretary so designates, the Deputy 
Secretary of the Treasury), (2) a representative from a union 
representing a substantial number of IRS employees, who will be 
appointed by the President with the advice and consent of the 
Senate, and \44\ (3) the Commissioner of the IRS.
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    \44\ In appointing the union representative, the President is not 
constrained to choose an individual recommendation by a union covering 
IRS employees, but may choose whoever the President determines to be an 
appropriate representative of the union.
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    The private-life members of the Board are to be appointed 
based on their expertise in the following areas: management of 
large service organizations; customer service; the Federal tax 
laws, including administration and compliance; information 
technology; organizationdevelopment; and the needs and concerns 
of taxpayers. In the aggregate, the members of the Board should 
collectively bring to bear expertise in all these enumerated areas.
    The private-life members are considered special government 
employees during the entire period of their appointment. That 
is, they will be considered to be performing services as a 
special government employee on each day during their 
appointment, not just on those days on which they actually 
perform services. Thus, they will be subject to the ethical 
conduct rules applicable to special government employees who 
serve more than 60 days during any 365-day period. Thus, for 
example, private-life Board members would not be able to 
represent clients before the IRS on matters during their term 
as a Board member. Private-life Board members would also be 
subject to the 1-year post-employment restriction applicable to 
senior-level employees. Finally, private-life members would be 
subject to the public financial disclosure rules generally 
applicable to special government employees above certain pay 
grades.\45\
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    \45\ The Secretary of the Treasury (or the Deputy Secretary) and 
the IRS Commissioner are subject to the ethical conduct rules 
applicable to regular, full-time Federal employees by virtue of their 
status as such. These rules are generally more stringent than the rules 
applicable to special government employees. H.R. 2676 does not impose 
any special ethical conduct or financial disclosure rules on the Board 
member that is an IRS employee representative. Thus, the rules such 
individual would be subject to depends on whether such individual was 
otherwise a Federal employee--either a special government employee by 
virtue of his or her membership on the Board or a regular Federal 
employee. If such individual is not a regular Federal employee, then 
the rules applicable to private-life Board members may not apply to 
this individual because the bill does not provide an exception for the 
pay grade and 60-day rules applicable to special government employees 
for the IRS employee representative.
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Compensation of Board members

    The private-life members of the Board are to be compensated 
at a rate of $30,000 per year, except that the Chair is to be 
compensated at a rate of $50,000 a year. Other members of the 
Board would receive no compensation for their services as Board 
members. The members of the Board would be entitled to travel 
expenses for purposes of attending meetings of the Board.

Administrative matters

    The 8 private-life Board members and the union 
representative generally will be appointed for 5-year terms. 
The private-life members may serve no more than two 5-year 
terms. Each 5-year term begins upon appointment. Board member 
terms are staggered, as a result of a special rule providing 
that some private-life members first appointed to the Board 
will serve initial terms of less than 5 years. The members of 
the Board are to elect a chairperson from among the private-
life Board members for a 2-year term. Any member of the Board 
can be removed at the will of the President. In addition, the 
Secretary of the Treasury (or, if so delegated, the Deputy 
Secretary) and the IRS Commissioner are removed from the Board 
upon termination of employment in such positions and the 
representative of IRS employees is removed from the Board upon 
termination of their employment, membership, or other 
affiliation with the organization representing IRS employees.
    The Board would be required to meet at least once a month, 
and would meet at such other times as the Board determines 
appropriate.
    A quorum of 6 members is required in order for the Board to 
conduct business. Actions of the Board are taken by a majority 
vote of those members present and voting.
    The Board would not have its own permanent staff, but would 
have such staff as detailed by the Commissioner at the request 
of the Chair of the Board. The Chair could procure temporary 
and intermittent services under section 3109(b) of title 5 of 
the U.S. Code.

Claims against Board members

    The private-life members of the Board and the union 
representative have no personal liability under Federal law 
with respect to any claim arising out of or resulting from an 
act or omission by such Board member within the scope of 
service as a Board member. The bill does not limit personal 
liability for criminal acts or omissions, wilful or malicious 
conduct, acts or omissions for private gain, or any other act 
or omission outside the scope of service of the Board member.
    The bill does not affect any other immunities and 
protections that may be available under applicable law or any 
other right or remedy against the United States under 
applicable law, or limit or alter the immunities that are 
available under applicable law for Federal officers and 
employees.
    Effective date.--The provisions of the bill relating to the 
Board would be effective on the date of enactment. The 
President is directed to submit nominations for Board members 
to the Senate within 6 months of the date of enactment.

             B. Appointment and Duties of IRS Commissioner

    As under present law, under the bill the Commissioner would 
be appointed by the President, with the advice and consent of 
the Senate, and can be removed at will by the President. The 
Commissioner would be appointed to a 5-year term, beginning 
with the date of appointment. The Board has the power to 
recommend candidates to the President for Commissioner. The 
Board has the authority to recommend the removal of the 
Commissioner. Although the President is not required to 
nominate for Commissioner a candidate recommended by the Board 
(or to remove a Commissioner when the Board so recommends), it 
is expected that the President will generally give deference to 
the Board's expertise and familiarity with the needs and 
functions of the IRS and will act in accordance with the 
Board's recommendations.
    The Commissioner has such duties and powers as prescribed 
by the Secretary. Unless otherwise specified by the Secretary, 
such duties and powers include the power to administer, manage, 
conduct, direct, and supervise the execution and application of 
the internal revenue laws or related statutes and tax 
conventions to which the United States is a party and to 
recommend to the President a candidate for Chief Counsel (and 
recommend the removal of the Chief Counsel). It is intended 
that the listed duties codify present delegations. However, if 
the Secretary changes such orders, they may be subject to the 
notice requirement of the bill, described below.
    If the Secretary determines not to delegate the specified 
duties to the Commissioner, such determination will not take 
effect until 30 days after the Secretary notifies the House 
Committees on Ways and Means, Government Reform and Oversight, 
and Appropriations, the Senate Committees on Finance, 
Governmental Affairs, and Appropriations, and the Joint 
Committee on Taxation.
    This provision is not intended to alter the Secretary's 
existing authority to delegate to agencies other than the IRS 
the authority to administer and enforce certain portions of the 
internal revenue laws. For example, the Secretary currently has 
delegated to the Bureau of Alcohol, Tobacco and Firearms the 
authority to administer and enforce the taxes under section 
4181 and chapters 51, 52, and 53 of the Internal Revenue Code 
(regarding excise and other taxes on alcohol, tobacco, 
firearms, and destructive devices).
    The Commissioner is to consult with the Board on all 
matters within the Board's authority (other than the 
recommendation of candidates for Commissioner and the 
recommendation to remove the Commissioner). With respect to 
those matters within the Board's approval authority (other than 
with respect to the development of the budget), it is fully 
expected that the Secretary will exert his or her oversight 
responsibility over the IRS by working through and with the 
Board.\46\
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    \46\ The budget is excepted from this expectation because the bill 
provides a separate mechanism through which the Secretary may act.
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    Unless otherwise specified by the Secretary, the 
Commissioner is authorized to employ such persons as the 
Commissioner deems proper for the administration and 
enforcement of the internal revenue laws and would be required 
to issue all necessary directions, instructions, orders, and 
rules applicable to such persons. Unless otherwise provided by 
the Secretary, the Commissioner will determine and designate 
the posts of duty.
    The Commissioner is to be compensated as under present law.
    Effective date.--The provisions of the bill relating to the 
Commissioner generally would be effective on the date of 
enactment. The provision relating to the 5-year term of office 
applies to the Commissioner in office on the date of enactment. 
This 5-year term runs from the date of appointment.

C. Structure and Funding of the Employee Plans and Exempt Organizations 
                                Division

    The bill would retain the Office of Employee Plans and 
Exempt Organizations under the supervision and direction of an 
Assistant Commissioner of the Internal Revenue. As underpresent 
law, EP/EO is responsible for carrying out functions and duties 
associated with organizations designed to be exempt from tax under 
section 501(a) of the Code and with respect to plans designed to be 
qualified under section 401(a). In addition, however, EP/EO's 
responsibilities are expanded to include nonqualified deferred 
compensation arrangements. The bill also provides that the Assistant 
Commissioner shall report annually to the Commissioner on EP/EO 
operations.
    In addition, the bill repeals the funding mechanism for EP/
EO set forth in section 7802(b). Thus, the appropriate level of 
funding for EP/EO is, consistent with current practice, subject 
to annual Congressional appropriations, as are other functions 
within the IRS.
    Effective date.--The provision would be effective on the 
date of enactment.

                          D. Taxpayer Advocate

    The bill would require the Commissioner to obtain the 
approval of the IRS Oversight Board on the selection of the 
Taxpayer Advocate. A candidate for the Taxpayer Advocate must 
have either substantial experience representing taxpayers 
before the IRS or have substantial experience within the IRS. 
If the prospective Taxpayer Advocate was an officer or an 
employee of the IRS before being appointed as the Taxpayer 
Advocate, the individual is required to agree not to accept any 
employment with the IRS for at least 5 years after ceasing to 
be the Taxpayer Advocate.
    The bill would modify the information to be included in the 
December 31 report to the tax-writing committees. The report no 
longer needs to include information about the extent to which 
regional problem resolution officers participate in the 
selection and evaluation of local problem resolution officers. 
The report identifies areas of the tax law that impose 
significant compliance burdens on taxpayers or the IRS, 
including specific recommendations for solving these problems. 
The Taxpayer Advocate also is required to work in conjunction 
with the National Director of Appeals to identify the 10 most 
litigated issues for each category of taxpayers, and include 
the list of issues and recommendations for mitigating such 
disputes in the report. Categories of taxpayers include, for 
example, individuals, self-employed individuals, small 
businesses, etc.
    Under present law, the Taxpayer Advocate reports are 
submitted directly to the tax-writing committees, without 
review by the Commissioner, the Secretary of the Treasury, or 
any other officer or employee of the Department of the Treasury 
or the Office of Management and Budget. Under the bill, the 
Taxpayer Advocate reports would still be submitted directly to 
the tax-writing committees, without review by the Oversight 
Board or any of the other persons mentioned above.
    In addition, the bill imposes new responsibilities on the 
Taxpayer Advocate. The Taxpayer Advocate is required to monitor 
the coverage and geographical allocation of problem resolution 
officers and develop guidance that outlines criteria to be used 
by IRS employees in referring taxpayer inquiries to problem 
resolution officers. In connection with these responsibilities, 
it is anticipated that the Taxpayer Advocate will work with the 
IRS District Offices to ensure convenient taxpayer access to 
the local problem resolution officer. For example, the local 
telephone number for the problem resolution officer in each 
district should be published and available to taxpayers.
    It is intended that the Taxpayer Advocate will work with 
the Commissioner in developing career paths for local problem 
resolution officers, so that individuals can progress through 
the General Schedule in the same manner as examination 
employees, without having to leave the problem resolution 
system. In that regard, it is contemplated that the 
compensation levels of local and regional problem resolution 
officers should be the same as those of IRS personnel operating 
in other functional units. Under the current system, local 
problem resolution officers generally must return to an audit 
or collection function to achieve promotion. This lack of a 
career path within the problem resolution system reduces the 
independence of the system. It is contemplated that, to the 
extent feasible, regional problem resolution officers should be 
selected from the available pool of local problem resolution 
officers.
    Effective date.--The provision would be effective on the 
date of enactment, except that the post-employment restrictions 
on the Taxpayer Advocate do not apply to an individual holding 
that position on the date of enactment.

   E. Prohibition on Executive Branch Influence Over Taxpayer Audits

    The bill would make it unlawful for a specified person to 
request that any officer or employee of the IRS conduct or 
terminate an audit or otherwise investigate or terminate the 
investigation of any particular taxpayer with respect to the 
tax liability of that taxpayer. The prohibition applies to the 
President, the Vice President, and employees of the executive 
offices of either the President or Vice President, as well as 
any individual (except the Attorney General) serving in a 
position specified in section 5312 of Title 5 of the United 
States Code (these are generally Cabinet-level positions). The 
prohibition applies to both direct requests and requests made 
through an intermediary.
    Any request made in violation of this rule must be 
reported, by the IRS employee to whom the request was made, to 
the Chief Inspector of the IRS. The Chief Inspector has the 
authority to investigate such violations and to refer any 
violations to the Department of Justice for possible 
prosecution, as appropriate. Anyone convicted of violating this 
provision will be punished by imprisonment of not more than 5 
years or a fine not exceeding $5,000 (or both).
    Three exceptions to the general prohibition apply. First, 
the prohibition does not apply to a request made to a specified 
person by a taxpayer or a taxpayer's representative that is 
forwarded by the specified person to the IRS. This exception is 
intended to cover two types of situations. The first situation 
is where a taxpayer (or a taxpayer's representative) writes to 
a specified person seeking assistance in resolving a difficulty 
with the IRS. This exceptionpermits the specified person who 
receives such a request to forward it to the IRS for resolution without 
violating the general prohibition. The second situation that this first 
exception is intended to cover is an audit or investigation by the IRS 
of a Presidential nominee. Under present law (sec. 6103(c)), nominees 
for Presidentially appointed positions consent to disclosure of their 
tax returns and return information so that background checks may be 
conducted. Sometimes an audit or other investigation is initiated as 
part of that background check. The House bill anticipates that any such 
audit or investigation that is part of such a background check will be 
encompassed within this first exception.
    The second exception to the general prohibition applies to 
requests for disclosure of returns or return information under 
section 6103 if the request is made in accordance with the 
requirements of section 6103.
    The third exception to the general prohibition applies to 
requests made by the Secretary of the Treasury as a consequence 
of the implementation of a change in tax policy.
    Effective date.--The provision would apply to violations 
occurring after the date of enactment.

              F. Congressional Accountability for the IRS

Review of Requests for GAO Investigations of the IRS

    Under the bill, the Joint Committee on Taxation would 
review all requests (other than requests by the chair or 
ranking member of a Committee or Subcommittee of the Congress) 
for investigations of the IRS by the GAO and approves such 
requests when appropriate. In reviewing such requests, the 
Joint Committee is to eliminate overlapping investigations, 
ensure that the GAO has the capacity to handle the 
investigation, and ensure that investigations focus on areas of 
primary importance to tax administration.
    The provision does not change the present-law rules under 
section 6103.
    Effective date.--The provision would be effective with 
respect to requests for GAO investigations made after the date 
of enactment.

Joint Congressional hearings and coordinated oversight reports

    Under the bill, there are to be two annual joint hearings 
of two majority and one minority members of each of the Senate 
Committees on Finance, Appropriations, and Governmental Affairs 
and the House Committees on Ways and Means, Appropriations, and 
Government Reform and Oversight. The first annual hearing is to 
take place before April 1 of each calendar year and is to 
review the strategic plans and budget for the IRS (including 
whether the budget supports IRS objectives). The second annual 
hearing is to be held after the conclusion of the annual tax 
filing season, and is to review the progress of the IRS in 
meeting its objectives under the strategic and business plans, 
the progress of the IRS in improving taxpayer service and 
compliance, progress of the IRS on technology modernization, 
and the annual filing season. The bill does not modify the 
existing jurisdiction of the Committees involved in the joint 
hearings.
    The bill would provide that the Joint Committee is to make 
annual reports to the Committee on Finance and the Committee on 
Ways and Means on the overall state of the Federal tax system, 
together with recommendations with respect to possible 
simplification proposals and other matters relating to the 
administration of the Federal tax system as it may deem 
advisable. The Joint Committee also is to report annually to 
the Senate Committees on Finance, Appropriations, and 
Governmental Affairs and the House Committees on Ways and 
Means, Appropriations, and Government Reform and Oversight with 
respect to the matters that are the subject of the annual joint 
hearings of members of such Committees.
    Effective date.--The provision would be effective on the 
date of enactment.

Funding for century date change

    The bill would provide that it is the sense of the Congress 
that the IRS efforts to resolve the century date change 
computing problems should be fully funded to provide for 
certain resolution of such problems.

Financial management advisory group

    The bill would direct the Commissioner to convene a 
financial management advisory group consisting of individuals 
with expertise in governmental accounting and auditing from 
both the private sector and the Government to advise the 
Commissioner on financial management issues.
    Effective date.--The provision would be effective on the 
date of enactment.

IRS participation in drafting legislation

    The bill would provide that it is the sense of the Congress 
that the IRS should provide the Congress with an independent 
view of tax administration and that the tax-writing committees 
should hear from front-line technical experts at the IRS during 
the legislative process with respect to the administrability of 
pending amendments to the Internal Revenue Code.

Tax complexity analysis

    The bill would require the staff of the Joint Committee on 
Taxation to provide a ``Tax Complexity Analysis'' for 
legislation reported by the Senate Committee on Finance and the 
House Committee on Ways and Means and conference reports 
amending the tax laws. The Tax Complexity Analysis is to 
identify those provisions in the bill or conference report 
that, as determined by the staff of the Joint Committee, add 
significant complexity to the tax laws, or provide significant 
simplification. The Tax Complexity Analysis is required to 
include a discussion of the basis for the determination by the 
staff of the Joint Committee. It is expected that, in general, 
the Tax Complexity Analysis will be limited to no more than 20 
provisions. If the staff of the Joint Committee determines that 
a bill or conference report does not contain any provisions 
that add significant complexity or simplification to the tax 
laws, then the Tax Complexity Analysis is to contain a 
statement to that effect.
    Factors that may be taken into account by the staff of the 
Joint Committee in preparing the Tax Complexity Analysis 
include the following: (1) whether the provision is new, 
modifies or replaces existing law, and whether hearings were 
held to discuss the proposal and whether the IRS provided input 
as to its administrability; (2) when the provision becomes 
effective and corresponding compliance requirements on 
taxpayers; (3) whether new IRS forms or worksheets are needed, 
whether existing forms or worksheets must be modified, and 
whether the effective date allows sufficient time for the IRS 
to prepare such forms and educate taxpayers; (4) necessity of 
additional interpretive guidance (e.g., regulations, rulings, 
notices); (5) the extent to which the proposal relies on 
concepts contained in existing law, including definitions; (6) 
effect on existing record keeping requirements and the 
activities of taxpayers, complexity of calculations and likely 
behavioral response, and standard business practices and 
resource requirements; (7) number, type, and sophistication of 
affected taxpayers; and (8) whether the proposal requires the 
IRS to assume responsibilities not directly related to raising 
revenue which could be handled through another Federal agency.
    The bill would require the Commissioner to provide the 
Joint Committee with such information as is necessary to 
prepare each required Tax Complexity Analysis.
    A point of order would arise with respect to the floor 
consideration of a bill or conference report that does not 
contain the required Tax Complexity Analysis. The point of 
order may be waived by a majority vote.
    The House bill legislative report states that it is hoped 
that the Administration will include a similar complexity 
analysis when submitting proposed legislation.
    Effective date.--The requirement for a Tax Complexity 
Analysis would be effective with respect to legislation 
considered on or after January 1, 1998.

           IV. ISSUES RELATING TO EXECUTIVE BRANCH GOVERNANCE

                        A. Constitutional Issues

    Both S. 1096 and the Commission Report provide that the IRS 
Commissioner would be appointed by the Board--presumably by a 
majority vote by the members of the Board--rather than such 
appointment being made by the President, with the advice and 
consent of the Senate (as under present-law). As discussed more 
fully below, this proposal raises a number of constitutional 
issues.\47\
---------------------------------------------------------------------------
    \47\ H.R. 2676, as passed by the House, does not raise the same 
constitutional issues, because it provides that the Commissioner is 
appointed by the President, with the advice and consent of the Senate.
---------------------------------------------------------------------------
1. Constitutional framework
    The appointment process for all Federal officers is 
governed by Article II, section 2, clause 2 of the 
Constitution--the so-called ``Appointments Clause''--which 
provides that:

        ``[The President] . . . shall nominate, and by and with 
        the Advice and Consent of the Senate, shall appoint 
        Ambassadors, other public Ministers and Consuls, Judges 
        of the Supreme Court, and all other Officers of the 
        United States, whose Appointments are not herein 
        otherwise provided for, and which shall be established 
        by Law: but the Congress may by Law vest the 
        Appointment of such inferior Officers, as they think 
        proper, in the President alone, in the Courts of Law, 
        or in the Heads of Departments.''

    Numerous Supreme Court decisions interpreting the 
Appointments Clause demonstrate that so-called ``principal'' 
officers must be appointed by the President, with the advice 
and consent of the Senate.\48\ Congress is prohibited from 
providing for any other method of appointment of ``principal'' 
officers. In the case of ``inferior'' officers, the 
Appointments Clause allows some flexibility in the appointments 
process, but there are specific constitutional constraints. 
Inferior officers must be appointed by one of the following 
three methods: (1) by the President alone (or by the President 
with the advice and consent of the Senate); (2) by a court of 
law; or (3) by a head of a Federal department. See Buckley v. 
Valeo, 424 U.S. 1, 109-143 (1976) (holding that the 
Appointments Clause was violated by statutory scheme providing 
that two of six Commissioners of the Federal Election 
Commission would be appointed by the President and the 
remaining four Commissioners appointed by congressional 
leaders, with confirmation of all six Commissioners vested in 
both the House and the Senate); Morrison v. Olson, 487 U.S. 654 
(1988) (upholding independent counsel provisions of the Ethics 
in Government Act, under which the Attorney General may request 
that a special panel of Federal judges appoint an independent 
counsel to investigate and prosecute certain high-ranking 
officials); Freytag v. Commissioner, 111 S.Ct. 2631 
(1991)(upholding appointment of special trial judges by Chief 
Judge of the United States Tax Court); Ryder v. United States, 
115 S.Ct. 2031 (1995)(composition of three-judge panel that 
court-martialed member of the Coast Guard violated Appointments 
Clause; actions of those judges were not valid under the de 
facto officer doctrine). Any appointee exercising ``significant 
authority pursuant to the laws of the United States'' is an 
``officer'' who must be appointed in the manner prescribed by 
the Appointments Clause, and no class or type of officer is 
excluded because of its special functions. See Edmond v. United 
States, 117 S.Ct. 1573 (1997); Weiss v. United States, 114 
S.Ct. 752 (1994).\49\
---------------------------------------------------------------------------
    \48\ The term ``principal officer'' is not expressly included in 
the text of the Constitution, but has been adopted by the Supreme Court 
in its Appointments Clause jurisprudence.
    \49\ In contrast to the appointment of Federal officers--generally 
meaning all individuals ``excising significant authority pursuant of 
the laws of the United States''--there are no constitutional 
limitations on the process for appointing ordinary Federal 
``employees.'' See, e.g., Buckley v. Valeo, 424 U.S. at 126, n. 162 
(describing employees as ``lesser functionaries subordinate to officers 
of the United States''); Freytag v. Commissioner, 111 S.Ct. at 
2640092641. See also Rotunda and Nowak, Treaties on Constitutional Law: 
Substance and Procedure vol. 1, at 660 (2nd ed. 1992) (appointment of 
employees not subject to constitutional constraints as a ``pragmatic 
concession to the needs of the government bureaucracy'').
---------------------------------------------------------------------------
    The Appointments Clause reflects the constitutional 
distinction between the creation of offices and appointments to 
such offices--the former being a function of the legislature 
and the latter generally being an executive branch function 
that is part of executing the laws passed by Congress. The 
appointing power generally resides with the President, as one 
of the principles of the Constitution's separation of powers, 
with certain exceptions provided for ``inferior'' officers. 
Congress has, incident to the creation of an office, the power 
to determine qualifications of the officer (and thus, to some 
extent, may limit the range of choice of the appointing power 
\50\) and to regulate the conduct in office of officers and 
employees of the United States. However, the selection of the 
individual to occupy a Federal office generally is an Executive 
branch function. In short, Congress may create an office, but 
it cannot appoint the officer. As stated by Professors Rotunda 
and Nowak in their Treatise on Constitutional Law: Substance 
and Procedure: ``This appointment process is a practical 
outworking of the doctrine of separation of powers, with 
Congress establishing the federal offices and the President, 
subject to Senate confirmation, choosing the officers. The 
framers believed such a separation necessary because the same 
persons should not both legislate and administer the laws.'' 
See Rotunda and Nowak, supra, vol. 1, at 669 (quoting from 
Buckley v. Valeo). Thus, Congress itself may not appoint 
executive or judicial branch officers, and the manner in which 
the President (or others in the case of ``inferior'' officers) 
may appoint an officer also is specifically prescribed by the 
Appointments Clause.\51\
---------------------------------------------------------------------------
    \50\ See Fisher, Louis, Constitutional Conflicts between Congress 
and the President, at 27-28, 32 (3rd ed. 1991). Congressionally imposed 
qualifications must have a reasonable relation to the office; 
otherwise, Congress could, in effect, be exercising appointment 
authority, rather than leaving this to the Executive branch. Rotunda 
and Nowak, supra, vol. 1 at 672.
    \51\ Congress may, however, appoint its own Members or other 
individuals to serve on advisory commissions--such as the National 
Commission on Restructuring the IRS--or other organizations that 
perform functions of an essentially investigative and informative 
nature, falling into the same category as those powers which Congress 
might delegate to one of its town committees. See Buckley v. Valeo, 424 
U.S. at 137. But such functions cannot include enforcement powers, 
because such power cannot be regarded as merely in aid of the 
legislative function of Congress; it is the Executive branch that is 
entrusted the power to take care that the laws are executed. Ibid. 
Citing its earlier decision in Humphrey's Executor v. United States, 
295 U.S. 602, 624 (1935), the Supreme Court noted in Buckley that it is 
not disputed that the Appointments Clause controls the appointment of 
members of a typical administrative agency even though its functions 
may be predominantly ``quasi-judicial'' and ``quasi-legislative'' 
rather than executive. 424 U.S. at 139 (Congress may appoint members to 
commissions that ``perform duties only in aid of those functions that 
Congress may carry out by itself, or in an area sufficiently removed 
from the administration and enforcement of the public law as to permit 
their being performed by person not `Officers of the United States') 
See also Metropolitan Washington Airports Authority v. Citizens for the 
Abatement of Aircraft Noise, Inc., 111 S.Ct. 2298 (1991) (holding that 
separation-of-powers doctrine of Constitution was violated by 
appointment of Members of Congress to serve on Congressionally created 
review board with veto power over local airport authority, even though 
Members supposedly served in their individual capacities).
---------------------------------------------------------------------------

2. Appointment of IRS Commissioner by the Oversight Board

In general

    Undoubtedly, the IRS Commissioner is, and will continue to 
be, a Federal ``officer'' for purposes of the Appointments 
Clause, despite the Board having general authority to oversee 
management decisions made by the IRS Commissioner. Although 
some decisions made by the IRS Commissioner would be subject to 
oversight by the Board under S. 1096 and the Commission Report, 
the IRS Commissioner will continue to exercise ``significant 
authority''--particularly with respect to tax policy and 
specific law enforcement activities--such that the Commissioner 
could not be characterized as a mere ``employee'' or ``lesser 
functionary'' of the Federal Government. See Buckley v. Valeo, 
supra; Edmond v. United States, supra.
    Because the IRS Commissioner historically has been 
appointed by the President, with the advice and consent of the 
Senate, there has been (to date) no need to determine whether 
the Commissioner is a ``principal'' or ``inferior'' officer. 
This mode of appointment is constitutionally valid for either 
type of officer. The proposed appointment of the IRS 
Commissioner by the Board, however, raises the following 
questions under the Appointments Clause: (1) would the IRS 
Commissioner be a ``principal'' or ``inferior'' officer, taking 
into account the other statutory changes proposed for the 
management of the IRS and enforcement of the tax laws; and (2) 
if the IRS Commissioner were an ``inferior officer,'' could the 
Board collectively be characterized as a ``Head of a 
Department'' for purposes of Appointments Clause? Because 
neither the President nor a court of law would be appointing 
the IRS Commissioner, the appointment method provided for by S. 
1096 and the Commission Report would be constitutionally valid 
only if both the Commissioner were an ``inferior'' officer and 
the Board collectively constituted a ``Head of a Department.'' 
If either of these conditions were not satisfied, then 
appointment of the IRS Commissioner by the Board would not be 
constitutional.
    Supreme Court decisions to date do not definitively resolve 
the questions regarding the status of the IRS Commissioner and 
the Board for purposes of the Appointments Clause. Moreover, 
resolution of the constitutional questions presented would 
depend on the specific statutory rules (and the precise 
interpretation of such rules) governing the Board's 
relationship to the IRS and the extent to which the Board were 
viewed as having not merely ``oversight'' responsibilities but 
final legal authority over actions taken by the Commissioner. 
In this regard, S. 1096 is somewhat ambiguous. The introduced 
bill provides that the Board will have the general 
responsibility to ``oversee'' the IRS's administration and 
management of the execution of the internal revenue laws, and 
the specific responsibilities to ``review and approve'' 
strategic plans of the IRS and to ``review'' operational 
functions and plans for reorganization of the IRS. However, the 
conditions under which the Board might have final authority 
regarding such matters is not clear in view of the fact that, 
as introduced, the bill would not alter the general power of 
the Secretary of the Treasury under present-law Code section 
7801(a) to administer and enforce the internal revenue laws, 
except as otherwise expressly provided by law.\52\ If the 
provisions establishing the Board were construed as granting 
the Board final authority only with respect to the hiring and 
firing of the Commissioner, but actions taken by the 
Commissioner could not be reversed or revoked by the Board, 
then it is questionable whether the Commissioner could be 
characterized as an ``inferior'' officer. On the other hand, if 
the Board were viewed as having final legal authority to direct 
and supervise the management decisions of the IRS Commissioner, 
and if the Secretary of the Treasury were to retain authority 
(as under present-law sec. 7802(a)) to prescribe the duties and 
powers of the Commissioner in all other (non-management) 
actions taken by the Commissioner, it appears more likely that 
the Commissioner could be viewed as an ``inferior'' officer 
whose ``superior'' officers (below the President) are the Board 
and the Secretary of the Treasury. See Edmond v. United States, 
117 S.Ct. at 1581 (discussing divided supervision of officer at 
issue).
---------------------------------------------------------------------------
    \52\ The Commission's Report suggested that the Board would have 
``final authority'' regarding any management matter where the Board 
reviews the decisions of the Commissioner and cannot reach a compromise 
agreement (Commission Report at 6).
---------------------------------------------------------------------------
    However, S. 1096 provides that the IRS Commissioner, for 
the first time, would have specific statutory authority to 
``administer, manage, conduct, direct, and supervise the 
execution and application of the internal revenue laws'' 
(proposed new sec. 7803(a)(2)). In the case of specific law 
enforcement actions taken by the IRS Commissioner, this new 
statutory authority granted to the IRS Commissioner could be 
interpreted to trump the general authority of the Secretary of 
Treasury under section 7801(a) with respect to the internal 
revenue laws.\53\ If S. 1096 is so construed, the IRS 
Commissioner would by statute be authorized to take final 
actions on behalf of the United States that could not be 
reversed by other executive branch officers, which would 
support the argument that the IRS Commissioner was a 
``principal,'' rather than an ``inferior,'' officer. See Edmond 
v. United States, 117 S.Ct. at 1582.
---------------------------------------------------------------------------
    \53\ Under present law, the IRS Commissioner is not statutorily 
granted authority to enforce the tax laws. Rather, the Commissioner's 
authority is derived from delegation orders issued by the Secretary of 
the Treasury under present-law section 7802(a), which provides that 
``[t]he Commissioner of Internal Revenue shall have such duties and 
powers as may be prescribed by the Secretary of the Treasury.'' The 
Secretary has delegated to the Commissioner responsibility for the 
enforcement of the internal revenue laws and the collection of most 
Federal taxes, but has expressly withheld from the Commissioner 
authority to issue regulations. See Treasury Department Order 150-10 
(April 22, 1982) (superseding Treasury Department Order 150-36 (March 
17, 1955)). Therefore, because the IRS Commissioner currently is not 
vested by statute with authority to take actions to enforce the tax 
laws, but such authority is derived from delegation orders that 
presumably may be revoked at any time by the Secretary of the Treasury, 
one could argue that the IRS Commissioner is an ``inferior'' officer 
under present law but would more likely become a ``principal'' officer 
under S. 1096, which would repeal the Secretary's delegation authority 
under present-law section 7802(a) and would grant specific statutory 
authority to the Commissioner to administer the execution of the tax 
laws (proposed new sec. 7803(a)(2)).
---------------------------------------------------------------------------
    If the IRS Commissioner were found to be an ``inferior'' 
officer under a statutory regime restructuring the IRS, then 
the second question arises whether the Board (which includes 
the Secretary of the Treasury) collectively could be viewed as 
a ``Head of a Department.'' In this regard, it is relevant that 
the Board itself would have no authority with respect to tax 
policy matters and specific law enforcement activities of the 
IRS, and only the Secretary of the Treasury apparently would 
have final authority with respect to tax policy matters (and, 
perhaps, the IRS Commissioner would have final authority with 
respect to law enforcement matters under the proposed grant of 
specific statutory power to the IRS Commissioner). As with the 
first question above, resolution of this Appointments Clause 
issue construing ``Head of a Department'' would depend on the 
location of ultimate control over a ``distinct province'' or 
``separate organization'' of the government. See Freytag v. 
Commissioner, 111 S.Ct. at 2660 (Scalia, J., concurring) 
(concluding that ``Head of a Department'' is not limited to 
Cabinet-level officials). Thus, even if a reviewing court were 
to take a flexible view of the modes of appointment allowed for 
``inferior'' officers under the Appointments Clause, the 
determination whether an appointment at issue had been made by 
a ``Head of a Department'' ultimately would turn on thecourt's 
view of which person (or possible group of persons) holds the ``reins 
of power'' for the department. See Silver v. United States Postal 
Service, 951 F.2d 1033 (9th Cir. 1991).\54\
---------------------------------------------------------------------------
    \54\ In Silver, the two-judge majority on the Ninth Circuit panel 
rejected the argument that the Postmaster General's appointment by the 
nine ``Governors'' of the Postal Service violated the Appointments 
Clause. These two judges held that the nine Governors constituted the 
``Head of a Department'' on grounds that ``the reins of power reside 
exclusively with the Governors'' who hold the statutory ``trump cards'' 
of the power to appoint and remove the Postmaster General, the 
unilateral power to revoke any authority delegated by the ``Board'' 
(which includes all nine Governors, plus the Postmaster General and 
Deputy Postmaster General), and the authority to designate mail 
classifications and to set postal rates. 951 F.2d at 1038. In dissent, 
however, the remaining judge on the Ninth Circuit panel concluded that 
the full 11-member Board was the ``Head of a Department'' for purposes 
of the Appointments Clause, on grounds that all functions and power of 
the Postal Service, other than votes on rate increases and new classes 
of mail, are exercised by the Board. 951 F.2d at 1044. Therefore, the 
dissent argued that the nine Governors acting collectively violated the 
Appointments Clause when they appointed the Postmaster General to this 
office. In sum, the different conclusions reached by the majority and 
dissenting judge on the Appointments Clause question resulted from the 
judges' different views on which body statutorily was granted authority 
for most of the functions and powers of the Postal Service.
---------------------------------------------------------------------------

Characterization of IRS Commissioner as ``principal'' or ``inferior'' 
        officer

    The question whether the IRS Commissioner would be a 
``principal'' or ``inferior'' officer for purposes of the 
Appointments Clause is addressed in a memorandum from the 
Congressional Research Service (CRS), which was prepared upon 
request by the National Commission on Restructuring the 
Internal Revenue Service. \55\ This CRS memorandum (``CRS 
Memo'') is included in Appendix B. Reviewing Supreme Court 
decisions (and other case law), the CRS Memo concludes that, 
although ``it is not yet clearly a settled matter'' whether the 
Board could be vested with the authority to appoint the IRS 
Commissioner, it is ``likely'' that a reviewing court would 
conclude that the Commissioner was an ``inferior'' officer (CRS 
Memo at 2). In particular, the CRS Memo cites the recent 
Supreme Court decision in Edmond v. United States, supra, where 
the Court held that civilian members of the Coast Guard Court 
of Criminal Appeals were ``inferior'' officers who could 
properly be appointed by the Secretary of Transportation. 
Justice Scalia, writing for the Court in Edmond, stated:

    \55\ Congressional Research Service, Memorandum to the National 
Commission on Restructuring the Internal Revenue Service, 
``Constitutionality of Vesting the Appointment of a Commissioner of the 
Internal Revenue Service in an Independent Board of Directors Located 
in the Treasury Department,'' June 4, 1997. This memorandum was 
prepared prior to the publication of the Commission Report and the 
introduction of S. 1096. (See Appendix B.)

          Generally speaking, the term ``inferior officer'' 
        connotes a relationship with some higher ranking 
        officer or officers below the President: whether one is 
        an ``inferior'' officer depends on whether one has a 
        superior. It is not enough that other officers may be 
        identified who formally maintain a higher rank, or 
        possess responsibilities of greater magnitude. If that 
        were the intention, the Constitution might have used 
        the phrase ``lesser officer.'' Rather, in the context 
        of a clause designed to preserve political 
        accountability relative to important government 
        assignments, we think it evident that ``inferior 
        officers'' are officers whose work is directed and 
        supervised at some level by others who were appointed 
        by presidential nomination with the advice and consent 
        of the Senate. 117 S.Ct. at 1580-81.\56\
---------------------------------------------------------------------------
    \56\ Historically, the Supreme Court took the approach that there 
was no exclusive criterion for distinguishing ``inferior'' from 
``principal'' officers and that a weighing of all factors was required. 
Morrison v. Olson, 487 U.S. at 671-72; Weiss v. United States, 114 S. 
Ct. at 768-69 (Souter, J. concurring).

    Citing this language from Edmond, the CRS Memo concludes 
that, under the restructuring proposals, the IRS Commissioner 
would likely be viewed to be an ``inferior'' officer because 
``[t]he new scheme would relegate the Commissioner to inferior 
officer status since he would be appointed and overseen by the 
Oversight Board, the members of which are presidentially 
appointed with Senate advice and consent, and is removable by 
that body at its pleasure.'' (CRS Memo at 8). The precise 
nature of the proposed ``oversight'' of the Board, however, 
could be critical. It is doubtful that the mere fact that an 
officer is appointed by another officer below the level of the 
President is sufficient to establish that the appointed officer 
is an ``inferior'' officer for purposes of the 
Constitution.\57\ Otherwise, there would never be a violation 
of the Appointments Clause when an officer was appointed by a 
``Head of a Department,'' because the mode of such appointment 
(and the power to remove, which generally is incident to the 
power to appoint\58\) could be relied upon in a form of 
circular reasoning to prove the ``inferior'' status of the 
appointed officer.
---------------------------------------------------------------------------
    \57\ See Morrison v. Olson, 487 U.S. at 722 (Scalia, J., 
dissenting) (``Even an officer who is subordinate to a department head 
can be principal officer'').
    \58\ See Myers v. United States, 272 U.S. 52, at 161 (``The power 
to remove . . . is an incident of the power to appoint''). Some 
statutory restrictions may be placed on the Executive's general power 
to remove officers. See, e.g., United States v. Perkins, 116 U.S. 483 
(1886) (Congress may place restrictions on the power of head of 
departments to remove inferior officers appointed by such head); 
Humphrey's Executor v. United States, 295 U.S. 602, 624 (1935) 
(upholding provisions under which President could remove commissioners 
of Federal Trade Commission only for ``inefficiency, neglect of duty, 
or malfeasance in office,'' on grounds that the Commission's ``duties 
are neither political nor executive, but predominantly quasi-judicial 
and quasi-legislative''); Morrison v. Olson, 487 U.S. at 690-94 
(upholding removal provisions with respect to independent counsel, and 
finding that removal power--which is part of the President's general 
power to ensure a faithful executive of the laws--had not been 
``completely stripped'' from the President). See, generally, Rotunda 
and Nowak, supra, vol. 1, at 691-702.
---------------------------------------------------------------------------
    Vesting the power to remove one official in another 
official below the President, by itself, is probably not enough 
to establish that the official subject to removal is 
``inferior.'' Justice Scalia concluded in Edmond that judges on 
the Coast Guard Court of Criminal Appeals were not subject to 
the ``complete'' control of the Judge Advocate General, even 
though the Judge Advocate General both exercised administrative 
oversight over the Court of Criminal Appeals and had the 
``powerful tool for control'' of being able to remove Court of 
Criminal Appeals judges from their judicial assignments without 
cause. Even so, Justice Scalia noted that the Judge Advocate 
General had no power to reverse decisions of the judges on the 
Court of Criminal Appeals, but this power did reside in another 
executive branch entity, the Court of Appeals for the Armed 
Forces. Therefore, Justice Scalia wrote with respect to this 
divided supervision: ``What is significant is that the judges 
of the Court of Criminal Appeals [who were held to be 
``inferior'' officers] have no power to render a final decision 
on behalf of the United States unless permitted to do so by 
other executive officers.'' 117 S.C. at 1582. In a similar 
fashion, the proposed split supervision of the IRS between the 
Board and (presumably) the Secretary of the Treasury may 
establish significant control over the totality of activities 
carried out at the IRS, but a critical factor in determining 
whether the IRS Commissioner is an ``inferior'' officer under 
the restructuring proposals would be whether, and to what 
extent, the Commissioner would have authority to render 
decisions on behalf of the United States without being subject 
to reversal by other executive branch officers. As previously 
noted, the proposed repeal of the delegation power of the 
Secretary of the Treasury under present-law section 7802(a), 
coupled with the proposed grant of specific statutory authority 
to the IRS Commissioner to enforce the internal revenue laws, 
could be construed so that the Commissioner would have 
significant authority to enforce the internal revenue laws 
without being ``permitted to do so'' by other executive branch 
officers. Under such an interpretation, the IRS Commissioner 
could be characterized as a ``principal'' officer.

Characterization of Board for purposes of the Appointments Clause

    The CRS Memo also addresses the issue whether the proposed 
Board could be characterized for purposes of the Appointments 
Clause as a ``Head of a Department'' capable of appointing an 
``inferior officer.'' With respect to this issue, the CRS Memo 
concludes that it is likely that a reviewing court would find 
that the Board is a ``Head of a Department.'' The author of the 
CRS Memo reaches this conclusion by reading the recent Supreme 
Court decision in Edmond as reflecting an abandonment of the 
so-called ``diffusion rationale.'' The concern that a broad 
construction of the term ``Department'' would lead to a 
``diffusion'' of the appointment power generally vested in the 
Executive was one of the arguments relied upon by five Justices 
in Freytag to conclude that the appointment of special trial 
judges by the Chief Judge of the Tax Court did not constitute 
appointment by a ``Head of a Department.'' Nonetheless, such 
appointment of special trial judges was upheld by the Supreme 
Court in Freytag, with Justice Blackmun, delivering the opinion 
of the Court, concluding that the special trial judges were 
``inferior'' officers who were appointed by a ``Court of Law.'' 
In contrast, four Justices reached the same result in Freytag, 
but took a different approach (in a separate concurring opinion 
written by Justice Scalia), concluding that the appointment of 
special trial judges by the Chief Judge of the Tax Court did 
not constitute appointment by a ``Court of Law'' (which, 
according to Justice Scalia, should be limited to Article III 
courts) but was constitutional as appointment by a ``Head of a 
Department.''
    The prediction of the CRS Memo that, in the future, 
reviewing courts are likely to place less emphasis on the 
``diffusion rationale'' and, thus, broadly construe the term 
``Head of a Department'' under the Appointments Clause may 
prove to be accurate. It is possible to read some of the 
language in Edmond in this manner, but the issue of construing 
the term ``Head of a Department'' was not presented in Edmond, 
because the appointments at issue had been made by the 
Secretary of Transportation. At most, the reduced emphasis on 
the ``diffusion'' rationale in Edmond is implicit in the 
Court's limiting the Freytag holding to its facts and 
questioning whether all Tax Court judges are ``principal'' 
officers.\59\ But even if the Supreme Court in the future is 
inclined to allow a greater number of potential executive 
branch officials beyond those who sit in the President's 
Cabinet to have the constitutional ability to appoint 
``inferior officers,'' it is an open question whether the Court 
also will expand the definition of ``Head of a Department'' to 
include collective bodies, such as the proposed Board to 
oversee the IRS. The Ninth Circuit decision in Silver 
(discussed above) apparently is the only reported decision by a 
court where a collective group was held to be a ``Head of a 
Department'' for purposes of the Appointments Clause. The 
Silver court did not cite any case law in support of this 
particular conclusion, but merely stated that ``[w]ithin the 
corporate framework explicitly established by Congress, the 
[nine] Governors are the head of the [Postal Service] 
department.'' 951 F.2d at 1038. It may be, however, that even 
if the Supreme Court will be less concerned about the 
``diffusion'' of the appointment power among numerous so-called 
``department heads'' below the constitutional level of the 
President, a slightly different concern may arise in a case 
where appointments are made on a group basis, without any one 
individual officer being accountable. Supreme Court Justices 
have repeatedly noted that multiple concerns underlie the 
Appointments Clause, particularly the objective that the public 
be able to identify the individual who made a particular 
appointment. See, e.g., Weiss v. United States, 114 S.Ct. at 
766 (Souter, J., concurring)(noting that the ``Appointments 
Clause forbids both aggrandizement and abdication''). As 
recently as Ryder v. United States, 115 S.Ct. 2031 (1995), 
Chief Justice Rehnquist wrote for a unanimous Supreme Court: 
``The Clause is a bulwark against one branch aggrandizing its 
power at the expense of another branch, but it is more: it 
preserves another aspect of the Constitution's structural 
integrity by preventing the diffusion of the appointment 
power.'' 115 S.Ct. at 2035. The possibility of diffusion of the 
appointment power among a collective body (i.e., appointments 
being made by committee) may be viewed differently from 
allowing numerous individual agency heads to make appointments 
of their ``inferior'' officers. With respect to the 
Constitution's assignment of appointment responsibility to the 
Executive branch, Justice Scalia himself in Edmond referred to 
the underlying purpose of the appointments clause to assure a 
higher quality of appointments: ``[T]he Framers anticipated 
that the President would be less vulnerable to interest-group 
pressure and personal favoritism than would a collective body. 
The sole and undivided responsibility of one man will naturally 
beget a livelier sense of duty, and a more exact regard to 
reputation.'' 117 S.Ct. at 1579 (citing A. Hamilton, The 
Federalist No. 76, at 387). See also Pennsylvania v. United 
States, 80 F.3d 796 (1996)(``Accountability is ensured and 
governmental power checked by Congress's assignment of 
appointing power to the highly accountable head of a federal 
department like the HHS.'')
---------------------------------------------------------------------------
    \59\ The CRS Memo also notes that the composition of the Supreme 
Court has changed since Justice Blackmun wrote his opinion for the 
Court in Freytag (CRS Memo at 15).
---------------------------------------------------------------------------
    In any event, even if a separate governmental organization 
with a corporate framework, as in Silver, has a collective body 
that potentially may qualify as a ``Head of a Department'' 
(such that appointments of officers formally may be made ``by 
committee''), the question of whether a particular group with 
oversight responsibilities, in fact, is such a ``Head'' for 
Appointments Clause purposes could depend on whether sufficient 
``reins of power'' over a separate governmental organization 
reside in the group. Thus, the specific statutory powers of the 
IRS Commissioner, the Board, and the Secretary of the Treasury, 
relative to each other's actions, could be critical to the 
determination whether the Board collectively should be viewed 
as the ``Head'' of the IRS. A court may well conclude that, 
despite the proposed Board's power to hire and fire the IRS 
Commissioner and its oversight responsibilities with respect to 
IRS management decisions, the Board cannot be the ``Head'' of 
the department that is the IRS in view of the Board's lack of 
any authority with respect to the development of tax policy, 
specific law enforcement activities, and certain procurement 
matters. See Buckley v. Valeo, 424 U.S. at 120 (``The 
Appointments Clause prevents Congress from dispensing power to 
freely''); Burnap v. United States, 252 U.S. 512, 515(1920)(the 
term ``Head of a Department'' means person ``in charge of a 
great division of the executive branch'').\60\
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    \60\ It seems doubtful that a reviewing court would accept a 
tautological argument that the proposed Board is not the ``Head'' of 
the IRS in its entirety but is ``Head'' of a ``Department'' which 
oversees the IRS (i.e., the Board is the ``Head'' of itself). Under 
such an argument, the constitutional limitations on the appointment 
process for ``inferior'' officers could effectively be nullified, as 
various ``appointment officers'' could be created, each of whom would 
be the ``Head'' of their own appointment department, and they could 
then attempt to appoint ``inferior'' officers to serve in one or more 
other departments. Such a scheme clearly would undermine the 
Appointments Clause. See Freytag v. Commissioner, 111 S. Ct. at 2642 
(the Constitution limits ``possible repositories'' of appointment 
power). But see ibid, 111 S. Ct. at 2660 (Scalia, J., concurring) 
(briefly discussing, but not resolving, whether cross-department 
appointments are permitted). Thus, it would seem that the ``independent 
establishments'' and ``separate organizations'' referred to by Justice 
Scalia that may constitute a ``Department'' within the meaning of the 
Appointments Clause should carry out executive branch activities 
largely independent of other departments. See ibid, 111 S. Ct at 2657-
2660 (Scalia, J., concurring) (noting that if the Tax Court were a 
subdivision of the Treasury Department--as the Board of Tax Appeals 
used to be--it would not qualify as a ``Department'' within the meaning 
of the Appointments Clause, but, for example, the Central Intelligence 
Agency should qualify as a ``Department''). See also Weiss v. United 
States, 114 S. Ct at 770 (Scalia, J., concurring) (the Judge Advocate 
General for each military branch is not one of the ``few potential 
recipients of the appointment power'').
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3. Additional Constitutional issues

    In addition to the above issues raised under the 
Appointments Clause with respect to the proposed appointment of 
the IRS Commissioner by the Board, S. 1096 and the Commission 
Report raise several other questions of constitutional 
dimension. The answers to these additional questions will 
depend (at least in part) on the analysis ultimately adopted by 
a reviewing court in addressing whether the IRS Commissioner is 
an ``inferior'' officer and whether the Board is a ``Head of a 
Department.'' Additional constitutional questions raised by the 
proposals include the following.
    (a) Would the Board alone have the power to remove the IRS 
Commissioner, or would the Board's removal power supplement the 
President's power to remove the IRS Commissioner, which 
arguably can be derived under the President's authority granted 
in Article II, section 3 of the Constitution to ``take care'' 
that the laws are faithfully executed? See Myers v. United 
States, 272 U.S. 52, 164 (1926). If the IRS Commissioner is 
viewed as conducting ``pure'' or ``core'' executive functions 
(as opposed to ``quasi-judicial'' or ``quasi-legislative'' 
functions), then restrictions on the President's removal power 
would be suspect. See Morrison v. Olson, 487 U.S. at 691-92 
(``the real question is whether the removal restrictions are of 
such a nature that they impede the President's ability to 
perform his constitutional duty, and the functions of the 
officials in question must be analyzed in that light''). See, 
generally, Rotunda and Nowak, supra, vol. 1, at 691-92, 
702.\61\
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    \61\ Although S. 1096 and the Commission Report provide that the 
President would have authority to remove Board members at will, the 
President's ability to exercise such authority with respect to Board 
members may not ensure that the IRS Commissioner also is effectively 
subject to removal by the President. Even if the President were to 
remove all Board members, the IRS Commissioner presumably could 
continue to serve until the earlier of (1) such time that as new Board 
members are appointed and confirmed by the Senate, and the new Board 
then exercises its authority to remove the Commissioner, or (2) the 
expiration of the Commissioner's five-year term.
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    (b) The Commission Report proposes that the IRS Chief 
Counsel be appointed, and subject to removal, by the Board. 
This proposal raises the same constitutional issues as would 
the proposed appointment, and removal, by the Board of the IRS 
Commissioner. In contrast, S. 1096 would not alter the present-
law rules under which the IRS Chief Counsel is appointed by the 
President, with the advice and consent of the Senate, thus, 
obviating the need to determine whether the Chief Counsel is an 
``inferior'' officer.
    (c) S. 1096 provides for appointment of senior IRS 
officials by the IRS Commissioner. If, however, the Board could 
not formally adopt (or overrule) the IRS Commissioner in this 
regard, then the Commissioner would himself be appointing 
``inferior'' officers (in contrast to present law, where the 
Secretary has final authority to appoint all IRS officials). If 
the Board were found to be the ``Head of a Department'' and, 
thus, had the constitutional power to appoint theCommissioner, 
then could one argue at the same time that the IRS Commissioner also is 
the ``Head of a Department'' for appointment purposes? In this regard, 
Justice Scalia's opinions in Freytag and Edmond can be read to imply 
that all ``Heads of Departments'' are ``principal'' officers who are 
required to be appointed by the President, with the advice and consent 
of the Senate. If so, then either the proposed Board's appointment of 
the IRS Commissioner would be improper (because the Commissioner is a 
``principal'' officer), or, if the Commissioner is an ``inferior'' 
officer subject to appointment by the Board, then the Commissioner him- 
or herself cannot be a ``Head of a Department'' under the Appointments 
Clause. The Commission Report proposals would avoid the issue of the 
constitutionality of the Commissioner's appointment power by vesting 
final authority with the Board with respect to the hiring of all IRS 
officials.
    (d) The proposed set-aside of one seat on the Board for a 
representative of an organization representing a substantial 
number of IRS employees raises the question whether the office 
has been defined with too much specificity--i.e., has Congress 
so narrowed the President's field of choice that, in effect, 
Congress is attempting to appoint the officer? See, generally, 
Rotunda and Nowak, supra, vol. 1, at 672; Fisher, supra, at 28. 
In the past, Congress has provided that certain commission or 
board positions must be filled by a representative of a 
particular industry, or even a political party. It could be 
argued, however, that specifying that a particular position be 
filled by representative of one particular organization 
constitutes an undue constraint upon the President's 
constitutional appointment authority.\62\ Moreover, if the term 
``representative'' is construed to mean someone who is 
designated by the union itself (and not any union member who 
the President determines to be representative of the union 
membership as a whole), then a more significant constraint on 
the President's authority would be involved. See Weiss v. 
United States, 114 S.Ct. at 770 (Scalia, J. concurring) 
(violation of the Appointments Clause occurs not only when 
Congress may be aggrandizing itself but also when Congress 
effectively lodges appointment power in any person other than 
those whom the Constitution specifies).
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    \62\ Apparently there is currently only one union that represents a 
substantial number of IRS employees.
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    (e) If a person involved in a court proceeding were to 
raise a timely objection to the constitutionality of the 
appointment of the IRS Commissioner, then that person would be 
able to challenge the validity of the Commissioner's actions to 
enforce the internal revenue laws. See Ryder v. United States, 
115 S.Ct. at 2034-35) (holding that so-called de facto officer 
doctrine confers validity upon acts performed by a person 
acting under the color of official title even though it is 
later discovered that the legality of that person's appointment 
is deficient, but that doctrine is no defense to the Government 
in a case where a timely Appointments Clause objection was made 
during the proceedings). In Freytag, the Supreme Court went so 
far as to exercise its discretion to hear the petitioners' 
Appointments Clause challenge, even though the petitioners had 
specifically consented to assignment of their case to a special 
trial judge. The majority of Justices in Freytag were willing 
to consider the petitioners' Appointments Clause challenge in 
view of the ``strong interest of the federal judiciary in 
maintaining the constitutional plan of separation of powers.'' 
111 S.Ct. at 2639. The four remaining Justices in Freytag 
concluded that the petitioners had waived their Appointments 
Clause challenge by not making a timely objection. But the ease 
with which Appointments Clause challenges could be raised--and 
the potential proliferation of such challenges among taxpayers 
involved in disputes with the IRS--is shown by Justice Scalia's 
remark in Freytag that ``[a]ny party who objects to such 
assignment [to the special trial judge whose appointment was at 
issue], if so inclined, can easily raise the constitutional 
issue.'' 111 S.Ct. at 2650.

B. Issues Relating to the Ability of Changes in Management Structure to 
                     Improve Performance of the IRS

    The recommendations of the National Commission on 
Restructuring the Internal Revenue Service (``the 
Commission''), S. 1096 and H.R. 2676 are designed to increase 
the performance and public perception of the IRS through 
various modifications in the management structure of the IRS. 
The extent to which these proposals are likely to transform the 
IRS depends on a variety of factors. The following discussion 
addresses issues that arise in determining whether any of the 
proposed changes, particularly the creation of the Oversight 
Board, are likely to have the desired effect.

1. Problems associated with present IRS governance and management

    The Commission identified a lack of sufficient continuity 
and accountability as the primary problems associated with the 
present system of IRS governance and management. The proposals 
for an Oversight Board contained in the Commission's Report, S. 
1096, and H.R. 2676 are intended to address these problems, as 
well as to facilitate the accomplishment of the restructuring 
goals discussed below.

Perceived lack of continuity and accountability in IRS governance and 
        management

    A lack of sufficient continuity in IRS governance and 
management is perceived by many to limit the ability of the IRS 
to succeed in a number of essential areas. In particular, the 
ability of the IRS to create and execute effective long-term 
strategies for the administration of the tax system, to design 
and implement necessary technological modernization, to 
properly train its workforce, and to accomplish needed reforms 
of its culture may be impaired by this lack of continuity.
    The most frequent reason suggested for the lack of 
continuity in IRS governance and management is the relatively 
high turn-over rate of senior executive officials, including 
the Commissioner, who are charged with supervision of the IRS. 
While the position of Deputy Secretary of the Treasury, to whom 
the Commissioner reports, would not necessarily turn over at 
the same time as the Commissioner, the breadth of the Deputy 
Secretary's other, nontax responsibilities is such that he may 
not be able to provide sufficient continuity from one 
Commissioner to another. Frequently, a change in the identity 
of the Commissioner is accompanied by new programs and 
initiatives, which are themselves superseded by later programs 
and initiatives with the appointment of the next Commissioner.
    A lack of sufficient accountability was identified by the 
Commission Report as the other primary problem with IRS 
governance and management. If senior management is not held 
accountable for the design and successful implementation of the 
policies and programs necessary to achieve an organization's 
goals, the chances those goals will be achieved are 
substantially reduced. Implementation of sufficient 
accountability includes not only the establishment of proper 
lines of authority and review, but also making sure that 
appropriate officers of the organization are held accountable 
for each of the organization's goals.
    Many of the factors identified as contributing to a lack of 
continuity, as well as the lack of continuity itself, 
contribute to the perceived lack of accountability. While the 
Commissioner reports and is accountable to the Deputy Secretary 
of the Treasury, ten other senior government officials are as 
well. Some have questioned whether the Deputy Secretary has the 
necessary time and resources to devote to the review of the 
Commissioner and the IRS.

Need for greater continuity

    The turnover in officials, programs and initiatives is an 
impediment to the creation and implementation of effective 
long-term strategies. Given the lack of continuity, an IRS 
Commissioner will likely focus on those short- and mid-term 
strategies that are more likely to be implemented successfully 
during his or her tenure, rather than longer term initiatives 
that would necessarily rely on the active participation of one 
or more successor Commissioners for successful implementation. 
Even if the successor Commissioners accept their predecessor's 
strategy, progress may be disrupted during the transition or 
newer initiatives given precedence, making successful 
implementation of the original long-term strategy less likely.
    The lack of continuity is also perceived as an impediment 
to the ability of the IRS to design and implement necessary 
technological modernization. Continuity must be present during 
the period of time needed to design and implement new 
information technology systems. Where such continuity is 
lacking, frequent changes in focus and direction may prevent a 
project from ever reaching a successful conclusion. Further, a 
lack of continuity can allow failures of essential elements of 
the modernization project to remain undetected for significant 
periods of time, wasting resources and preventing the 
successful completion of other elements of the project which 
may be dependent on the failed element. Some have suggested 
that such a lack of continuity in the management and governance 
of the IRS was a contributing factor in the failure of the Tax 
System Modernization project.
    It is also suggested that the lack of sufficient continuity 
in IRS governance and management may lead to inadequate 
training of IRS personnel and to the establishment and 
continuation of a culture that prevents the IRS from 
accomplishing its strategic objectives. The Commission Report 
describes the IRS as a ``stovepipe operation,'' one in which 
each functional unit is allowed to set and implement its own 
priorities and objectives, with minimal regard for how they fit 
withthe priorities and objectives of the organization as a 
whole. Although the Commission recognized that the IRS had made 
progress in breaking down barriers between the stovepipe functions, it 
did not feel that the IRS had eliminated them to the degree necessary. 
The inability of the IRS to fully eliminate its stovepipe barriers may 
in large part be a reflection of the lack of continuity that exists at 
the highest supervisory level, the only level able to see over the 
individual stovepipes.
    The establishment of an independent Oversight Board is 
proposed as a part of the solution to the perceived problem of 
insufficient continuity and accountability in IRS governance 
and management.
    Under the proposals, the private sector members of the 
Oversight Board would serve staggered 5-year terms, so that a 
majority of the Board would not be expected to turn over in any 
year. Each private sector member of the Oversight Board would 
be eligible to serve two 5-year terms. This suggests the 
likelihood that there would be significant continuity in the 
membership of the Oversight Board, providing a continuity of 
governance and management that does not exist under present 
law. Whether such continuity in fact would result from would 
depend in part on whether qualified individuals are willing to 
serve on the Board for a full 5-year term.

Accountability and problems of conflicting authority

    Many commentators believe that the present system of IRS 
governance and management results in the IRS being pulled in 
too many different directions, answerable to too many different 
authorities with contradictory agendas. In this view, because 
the IRS is accountable to and tries to satisfy all of these 
different authorities, it ends up satisfying and being 
accountable to none of them. As discussed above, the lack of a 
single direction from the Congress is a factor contributing to 
this problem. The IRS is subject to the jurisdiction of 6 
Congressional committees, each of which has different 
objectives and concerns that change from year to year. This 
structure has been cited as impeding the formation of long-term 
objectives because it pulls the IRS in several different 
directions at once and requires the IRS to prepare for a number 
of possible outcomes. It also may impede progress toward 
fulfilling goals, because those goals may be changed in the 
near future.
    Some commentators believe that an Oversight Board will 
ameliorate the IRS's problem of needing to answer to different 
authorities with contradictory agendas. These commentators see 
an Oversight Board as providing a single authority to which the 
IRS would be accountable, as well as creating a buffer between 
the IRS and the Congressional and Administration authorities to 
which it is otherwise answerable. In this view, actions taken 
by the IRS under the supervision of the Oversight Board, in 
conformity with Oversight Board reviewed plans and programs, 
would not be subject to challenge and influence by other 
authorities.
    Supporters of this view point to the expertise the private 
sector members of the Oversight Board will bring to their 
positions. They suggest that Congress and the Administration 
ultimately will be more willing to defer to the judgment of a 
board composed of experts on such issues as information 
technology and service organization management.
    Other commentators believe that an Oversight Board will 
only add one voice (or potentially more voices, one for each 
member of the Board) to the cacophony of authority to which the 
IRS is presently answerable. They doubt that Congressional and 
Administration authorities will willingly cede any of their 
influence over the IRS, regardless of the perceived or actual 
expertise of the Oversight Board. Even if the authority of the 
Oversight Board is respected by Congressional and 
Administration authorities, the Commissioner will be directly 
responsible to many individuals with potentially differing 
objectives.
    Whether an Oversight Board will ameliorate or worsen the 
perceived problem of too many sources of conflicting authority 
may depend on the strength of the Oversight Board and its 
members, as well as the credibility of the Oversight Board with 
Congress and the Administration. If Congress and the 
Administration are unwilling to accept the role of the 
Oversight Board and insist on continuing their current level of 
the involvement with the IRS, it may be difficult for the 
Oversight Board to contribute effectively to the resolution of 
this problem.

2. Functions of the IRS and measures of performance

    A primary function of the IRS is to collect the proper 
amount of taxes.\63\ In order to successfully accomplish this 
purpose it must be able to accurately determine the amount of 
taxes owed and insure that collection takes place. As most 
taxes are paid voluntarily, it must also be able to assist 
taxpayers in accurately determining the amount of taxes they 
owe, understand where and how those taxes are to be paid, and 
encourage them to make the necessary payments. In cases where 
taxpayers fail to make the payments required by the tax laws, 
the IRS must identify the failure and require its correction.
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    \63\ The mission statement of the IRS provides that:

      The purpose of the Internal Revenue Service is to collect 
      the proper amount of tax revenue at the least cost; serve 
      the public by continually improving the quality of our 
      products and services; and perform in a manner warranting 
      the highest degree of public confidence in our integrity, 
      and fairness.
    As noted above, the Commission Report found that the 
organization of the IRS along functional lines has led to the 
creation of a ``stovepipe operation''. Under this view, the 
degree of independence granted the various functions of the IRS 
may also be seen as a problem. It is not sufficient that a 
function be held accountable for the successful completion of 
its activities if it is not also held accountable for its 
contribution to the overall goals of the organization.
    Some commentators believe that the Oversight Board proposed 
in the Commission Report, S. 1096, and H.R. 2696 will improve 
the IRS ability to fulfill its functions. They view the 
Oversight Board as uniquely qualified to judge the 
contributions each separate function makes to the primary goal 
of the collection of the proper amount of tax. These judgments 
can then be used to develop, implement and adjust as needed the 
integrated long-term strategies that are necessary to achieve 
the IRS' goals. These commentators see the Oversight Board as 
providing the continuity needed to carry out this function. The 
Board members' experience in the management of large service 
organizations, information technology, organization 
development, and other areas is seen as providing the expertise 
needed to design and implement necessary measures of 
performance.
    Other commentators have expressed concerns with the ability 
of the Oversight Board to provide integrated governance and 
management of the IRS, as well as the level of expertise of its 
potential members. The authority of the Oversight Board is 
limited to issues of tax administration; issues of tax policy 
and specific law enforcement (under H.R. 2676, law enforcement) 
are not within its sphere of responsibility. Although a degree 
of separation between these functions exists today, the 
formalization of that separation through the creation of the 
Oversight Board is seen by these commentators as more likely to 
reinforce the negative aspects of the functional division of 
responsibility in the tax area rather than integrating them.
    These commentators have also expressed concern with the 
stated qualifications required to be the sole basis for the 
appointment of Oversight Board members from the private 
sector.\64\ In particular, they have expressed their concern 
that knowledge of the Federal income tax law and its rules of 
accounting are excluded from the list of qualifications under 
S. 1096 and the Commission Report. While recognizing the 
desirability of providing private sector input on disciplines 
such as service organization management, information 
technology, and organization development; these commentators 
believe that such skills cannot effectively be brought to bear 
in the absence of a knowledge of the rules of the Federal 
income tax. In their view, an Oversight Board whose private 
sector members will not be expert in the rules of the Federal 
income tax will either be dominated by the public sector member 
of the Board with the greatest tax expertise (probably the 
designate of the Secretary of the Treasury) or, if they resist 
the input of the public sector members, susceptible of pursuing 
programs that may be naive or ineffective. These concerns may 
be ameliorated somewhat under H.R. 2676, which clarifies that 
knowledge of the Federal tax laws is also a qualification. Of 
greater concern may be the view that the Oversight Board could 
focus exclusively or primarily on a bottom line view that 
measures taxes collected against the costs incurred to collect 
them, leading to tax administrative initiatives that do not 
respect the rights and needs of the taxpaying public.
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    \64\ Proposed section 7802(b)(2) would require that private members 
of the Oversight Board be appointed solely on the basis of their 
professional experience and expertise in the areas of:
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          (i) management of large service organizations;
          (ii) customer service;
          (iii) compliance (under H.R. 2676, Federal tax laws, 
        including tax administration and compliance);
          (iv) information technology;
          (v) organization development; and
          (vi) the needs and concerns of taxpayers.

3. Duties of the Oversight Board

In general

    Under S. 1096, the Board would oversee the IRS in the 
administration, management, conduct, direction and supervision 
of the execution and application of the internal revenue laws 
or related statutes and tax conventions to which the United 
States is a party. In addition, the Board would have specific 
responsibilities for approving strategic and operational plans, 
selecting the Commissioner, reviewing the appointment of senior 
managers and approving the appointment of the taxpayer 
advocate, reviewing IRS reorganization plans,\65\ and reviewing 
and approving the budget request prepared by the IRS 
Commissioner.
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    \65\ H.R. 2676, as passed by the House, provides that the Board has 
the authority to approve major reorganization plans.
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    However, the Board would be specifically denied any 
responsibility or authority with respect to (1) the development 
and formulation of Federal tax policy; (2) specific law 
enforcement activities of the Internal Revenue Service; \66\ or 
(3) specific activities delegated to employees of the IRS 
pursuant to delegation orders in effect as of the date of 
enactment. The Board also would not have access to confidential 
taxpayer return information under section 6103 of the Code.
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    \66\ H.R. 2676, as passed by the House, clarifies that the Board 
does not have authority over law enforcement activities of the IRS.
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    A principal issue that has been raised is the extent to 
which a Board should have appointment and budget authority, as 
opposed to functioning as a source of oversight and advisory 
input. Some contend that the Board should not have appointment 
and budget authority, particularly in a situation where many of 
the actual functions of the IRS--including the development and 
formulation of Federal tax policy through directions for its 
implementation--are not within the scope of the Board's 
authority. Others contend that absent direct line authority, 
the Board's potential impact would be too limited.

Appointment of the IRS Commissioner \67\

    Some contend that the Board's authority to appoint and 
remove the IRS Commissioner under S. 1096 would be 
inappropriate, and that this authority should remain with the 
President. First, it is argued that the IRS Commissioner will 
have responsibility for all aspects of IRS activity, while the 
Board is specifically not authorized to affect either tax 
policy or various aspects of particularized tax administration. 
Making the Commissioner accountable to a Board that has no 
authority over major aspects of IRS activity arguably may 
create less rather than greater accountability, by diffusing 
lines of authority and providing no mechanism to resolve 
differences of opinion. A related concern is that there may be 
areas where it is difficult to distinguish clearly between 
``tax policy'' and other aspects of tax administration.
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    \67\ These issues do not arise under H.R. 2676, as passed by the 
House, because it provides that the Commissioner is appointed by the 
President, with the advice and consent of the Senate. Under H.R. 2676, 
the Board recommends candidates to the President, but the President is 
not required to choose as Commissioner a candidate recommended by the 
Board.
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    It is also argued that the IRS Commissioner heads one of 
the most pervasive functions of government, and should not be 
removed from the accountability of and to the President. Some 
view the removal of the Commissioner from the President's 
appointment authority as a down-grading of the importance of 
the Commissioner's position, and are concerned that so doing 
could make it more difficult for the Commissioner to perform 
the functions of the office. In addition, the appointment of 
the IRS Commissioner by one authority and the IRS Chief Counsel 
by a separate authority might affect the interaction of those 
officers, whose agreement may be desirable for effective IRS 
administration.
    Others argue that the power of the President to appoint and 
remove Board members should satisfy any concerns about lack of 
accountability. Without direct accountability to the Board, it 
is argued that recommendations of the Board would less likely 
be implemented. Further, it is argued that accomplished persons 
might be less likely to serve on a Board that did not have 
authority other than a power of oversight and recommendation.
    Some contend that the additional structures under this 
proposal would add little and might be cumbersome or perceived 
as downgrading the position of the IRS Commissioner even if the 
Commissioner is appointed by the President. Others contend that 
the proposal could contribute to continuity and to additional 
input useful to IRS.

Budget authority

    Under S. 1096 and H.R. 2676, the Board is expected to 
review and approve the budget request of the IRS prepared by 
the Commissioner, submit such budget request to the Secretary 
of the Treasury, ensure that the budget request supports the 
IRS annual and long range strategic plans (which the Board must 
also review and approve), and ensure appropriate financial 
audits of the IRS. The Secretary of the Treasury shall submit 
the Board-approved IRS budget to the President, who shall 
submit such request, without revision, to Congress together 
with the President's annual budget request for the IRS.
    Some have expressed concern that the power to ``approve'' 
the IRS Commissioner's budget is in effect the power to direct 
tax policy, notwithstanding the apparent denial of authority to 
the Board in that area. It is argued that the Board, by setting 
overall budget levels, as well as through particular budget 
directions, may effectively prevent the IRS from directing 
resources to enforce tax policy in one or more areas, or may 
require application of resources to another area, thus 
effectively determining the actual implementation of any tax 
policy. There is concern that the Board should not be involved 
in tax policy in this way, because the Board is not expected to 
be composed principally of individuals with tax expertise, and 
because the private sector members of the Board may have real 
or perceived conflicts of interest. Also, some have expressed 
concern that the Board-approved budget might conflict with the 
tax policy goals of the Treasury Department and the President.
    Others contend that the budget procedure envisioned in the 
proposals merely requires the direct submission of a Board-
approved IRS budget to the President and Congress, leaving the 
Secretary of the Treasury arguably free to submit a different 
request. The Board-approved budget could thus be viewed as an 
avenue for IRS views to be presented more directly to those 
making the budget decisions. However, some argue that the 
Board's power to approve a budget does not assure that the 
independent recommendations of the IRS Commissioner would 
become available to the Congress for use in its budgetary 
decision making. Further, it is argued that it is unclear to 
what extent the IRS Commissioner would as a practical matter be 
considered able to work with the Secretary of the Treasury to 
advocate or develop a budget requesting different resources in 
a particular area if the Board had not approved an IRS budget 
including that particular allocation of resources.
    Some contend that the Board's role in the budget process 
could add insight and continuity. Others have expressed concern 
that any potential for separate Treasury and Board-approved 
budget requests would make the budget process more difficult.

Interpretation of ``tax policy''

    Under S. 1096 and H.R. 2676, the Board does not have 
authority with respect to tax policy. Some are concerned that 
the practicable impossibility of distinguishing what is tax 
policy and what is tax administration may further diffuse IRS 
management and lines of decision making--since the Commissioner 
may be responsible to the Board with respect to some issues and 
to the Secretary of the Treasury for others.
    For example, as discussed above, it is arguable that 
budgetary decisions, including overall budget levels as well as 
any budget decisions directing resources to particular areas or 
methods of enforcement or compliance, in effect direct the 
development and implementation of tax policy. Similarly, the 
Board's authority to review and approve strategic plans of the 
IRS, including the establishment of mission and objectives, and 
standards of performance relative to either, arguably may 
overlap with the power to develop tax policy.
    The IRS traditionally devotes resources to issuing guidance 
to its field personnel regarding the types of issues to be 
examined, as well as procedures regarding the nature and scope 
of information that will be required from taxpayers. Some 
examples of these types of guidance are Revenue Procedures, 
industry specialization papers, or audit manual instructions. 
The proposal does not make clear to what extent any of these 
types of activities might fall under the realm of 
administration and management over which the Board may exercise 
authority, or alternatively under the realm of tax policy, over 
which the Board has no authority. Also, the IRS traditionally 
develops regulations interpreting or implementing tax laws, 
issues Revenue Rulings stating the litigating position of the 
IRS, and makes decisions regarding the types of cases that 
should be litigated. IRS also makes decisions regarding the 
extent and application of audit resources and other enforcement 
and compliance activities. IRS attempts to answer certain 
taxpayer inquiries by telephone. IRS also issues to taxpayers 
private letter rulings in numerous areas. In the context of 
mission and objectives of the IRS, issues could arguably arise 
that could affect some or all of these areas and activities.
    S. 1096 and H.R. 2676 also reflect an intention that the 
IRS be more involved in the drafting of legislation; and in 
particular that the IRS be available to comment on 
administrative issues raised by proposed legislation. Some have 
argued that the proposed Board structure makes it less likely 
that the IRS will be involved in this way, because commenting 
on legislation--even with respect to administrative issues--
likely would involve and affect issues of tax policy.
    In the event that disagreements arise regarding the scope 
of the Board's authority, or the accountability of the IRS 
Commissioner to the Board on the one hand or to Treasury on the 
other, the proposal does not contain an explicit mechanism for 
resolution of any such disputes. The President would retain the 
power to remove and replace any or all members of the Board at 
will. However, removal of one or more Board members (or of an 
IRS Commissioner by the Board under S. 1096, or the President 
under H.R. 2696), with replacements subject to the advice and 
consent of the Senate, is a relatively extreme step. Thus, it 
is arguably an unlikely method to resolve most ordinary 
disagreements that may arise over IRS management or direction. 
Some argue, however, that in practice most such issues would 
reach a resolution without such extreme measures, just as under 
the present system a balance between the tax policy and tax 
administration functions of Treasury and the IRS has developed.

4. Qualifications of Board members and composition of the Board

Treasury Secretary (or Deputy Secretary)

    Some have questioned the inclusion of the Treasury 
Secretary (or Deputy) on the Board under S. 1096 and H.R. 2696, 
which gives the Board certain separate decision-making 
authority. It has been suggested that the Treasury Secretary 
(or Deputy) might exercise undue influence upon the other 
members by virtue of his or her position. Others, however, 
contend that the presence of this position is important to 
assure adequate presentation of any Treasury Department view or 
input to assist the Board in its decision making. Furthermore, 
the Treasury representative is only a single member, who cannot 
control the decisions of the other eight members. Further, it 
is contended that the presence of the Treasury position can 
effectively act as a check to defuse possible concerns about 
potential conflicts of interest (or the appearance of such 
conflict) with respect to the private sector board members.

IRS employee representative

    Some contend that it is inappropriate for an IRS employee 
representative to be on the Board. Some who share this view 
argue that it is inappropriate to have any one specific 
individual or position designated for the Board that represents 
particular interests, and that such a designation may lead to 
appointment of Board members who represent special interests, 
rather than members who have appropriate expertise. Others 
argue that it is inappropriate to have an employee 
representative oversee management.
    On the other hand, some argue that having an employee 
representative on the Board may make more palatable and 
effective any change to the IRS personnel and compensation 
structure. Some argue that while many corporate boards do not 
have employee representatives, it is not unusual.
    Some also suggest that if an employee representative is on 
the Board, a management representative also should be--although 
it may not be clear who the management representative would be 
(e.g., whether the IRS Commissioner would be viewed as being a 
management representative).
    Under S. 1096, it is also argued that it is inappropriate 
for the IRS Commissioner to be appointed by a Board that 
includes a representative of IRS employees. Others, contend, 
however, that the employee representative is but one of many 
Board members, and thus cannot control decisions of the Board.

Other members of the Board

    Some contend that the particular enumerated areas of 
expertise under S. 1096 and H.R. 2676, and the intent that the 
private life members collectively bring to bear expertise in 
the enumerated areas, may limit the number of points of view 
from persons with similar expertise, thus potentially granting 
too much influence to each Board member in the area of his or 
her expertise. Some are further concerned that knowledge of 
Federal income tax law is not required under S. 1096. Also, 
some contend that the Board has the potential to become a 
vehicle for appointment of representatives of different 
interest groups or types of industries, rather than of persons 
with significant hands-on expertise in management review. An 
additional view is that requiring expertise in particular areas 
affecting IRS operations could increase the potential for 
perceived or actual conflicts of interest.
    Others argue that each of the areas of expertise enumerated 
is important to IRS administration. Furthermore, it is 
contended that the Board selection process can function to 
provide actual management expertise and input that would 
contribute to IRS operations. Thus, it is argued that a Board 
providing expertise in each of the enumerated areas can best 
contribute to the improvement of IRS management.
    Some view the part-time nature of the private sector Board 
members as a potential detriment to their involvement and 
commitment to their Board responsibilities. On the other hand, 
others contend that the demands on the Secretary and Deputy 
Secretary of the Treasury, who have direct authority over the 
IRS, make full-time attention to the IRS impossible. In 
addition, it is argued that the part-time nature of the 
activity would encourage participation of experienced private 
sector members who can provide desirable input with respect to 
IRS management.

5. Conflicts of interest of Board members \68\

    Under S. 1096, the Board would consist of 9 members, 7 
serving on a part-time basis from the private sector (H.R. 2676 
would have a Board of 11 members, 8 of which would serve on a 
part-time basis from the private sector). Some view this 
structure as raising difficult issues of actual or perceived 
conflicts of interest, which could undermine the goal of 
improving public perceptions and interactions with the IRS. It 
is argued that the very factors contributing to an individuals' 
required expertise may also contribute to an actual or 
perceived conflict. For example, a person with expertise in 
information technology may be or have been an officer or 
employee of an organization that might potentially contract 
with the IRS to provide such technology. Similarly, a person 
familiar with ``the needs and concerns of taxpayers'' might be 
or have been a taxpayer advocate, with personal clients (or 
affiliated with a firm that has clients) that could be affected 
by IRS actions. A Board member could be a current or former 
executive of a company that might pay less in taxes if certain 
generic types of administrative or compliance activities are 
not undertaken. It is also argued that every private individual 
or organization is potentially affected by the actions of the 
IRS; thus, the greater the number of persons on the Board, the 
greater the numerical chance of a conflict or appearance of a 
conflict involving a Board member or an organization with which 
such person is or was affiliated. Some contend these concerns 
could be reduced by limiting private sector Board membership to 
persons retired from other employment.
---------------------------------------------------------------------------
    \68\ See also Part One. III.C., infra, for additional discussion of 
certain issues regarding conflicts of interest.
---------------------------------------------------------------------------
    Some argue that the Board has no authority to become 
involved in specific cases and thus the likelihood of actual 
conflicts of interest is remote. However, others contend that 
even if actual conflicts of interest are unlikely or can be 
dealt with through recusals if necessary, and even if Board 
members act with perfect propriety, the likelihood of perceived 
conflicts of interest is inherent in the Board structure and 
could further erode the confidence of taxpayers in the IRS. For 
example, if the Board is composed of members (or former 
members) of business entities, and if the business audit rate 
were reduced for any reason, the general public may view this 
as Board members benefitting themselves, even if there were in 
fact no actual conflict on a particular matter or otherwise. As 
another example, if any taxpayer with which a Board member is 
or was directly or indirectly connected experiences a favorable 
outcome in an IRS matter, or is otherwise arguably favorably 
affected by any IRS action, there could be a perception of 
influence even if it had not occurred. Those who hold this view 
argue that it would be impossible to overcome such perceived 
conflicts.
    Others argue that the appointment and removal process would 
address conflicts concerns. Also, it is argued that most 
existing government appointments (including the present 
structure of the Treasury Department) involve the appointment 
of persons who come from and may return to private employment, 
often in the areas directly affected by the department in which 
they are employed. In addition, traditional ethical practices 
applicable to boards of directors could beapplied to the IRS 
Board, including practices of recusal and disclosure. H.R. 2676 
clarifies that the conflict of interest rules that apply to special 
government employees generally would apply to the private-life members 
of the Board. Further, it is argued that the benefits to be derived 
from the input of the various members would outweigh the potential for 
additional conflicts or perceptions of conflicts. Thus, it is argued 
that the Board structure could improve overall performance of the IRS, 
enhancing public confidence.

6. Ability to affect all levels of IRS activity

    Whether or not any proposal to improve the performance and 
perception of the IRS will be effective depends in part on the 
ability to transform all levels of the IRS. For example, hiring 
new, better trained, and more capable managers will not affect 
IRS performance if personnel policies prevent the carrying out 
of management objectives. Some commentators have suggested that 
the Oversight Board would not be able to affect all levels of 
IRS activity even if future IRS personnel policies otherwise 
allow for the effective implementation of management 
objectives, because the Board does not directly review all 
personnel.
    Other commentators have rejected this concern. They point 
out that a path of accountability can be traced from every IRS 
employee to someone whose performance will be reviewed either 
directly or indirectly by the Oversight Board. Boards of 
Directors in the private sector do not typically involve 
themselves in personnel matters below the senior officer level. 
However, since the performance of those officers depends at 
least in part on the performance of those who report to them, 
the Board is able to impact activity at all levels of the 
organization.

7. Effect of the Board on the public perception of the IRS

    The Commission Report found that the public perception of 
the IRS had been damaged in a number of ways, many of which 
reflect a view that the IRS is unable to efficiently manage its 
affairs. The perceived inability of the IRS to consistently 
provide correct answers to those taxpayers seeking its 
guidance, to apply the tax laws in a consistent manner, to 
resolve administrative disputes in a timely manner, to treat 
taxpayers with courtesy, and to manage its affairs in an 
efficient manner have all led to an unnecessarily negative 
public perception of the IRS.
    It should be understood that the IRS, as the collector of 
taxes, may always have a negative perception from a public that 
desires to limit the amount of taxes that it pays. Some 
commentators have criticized the Commission Report as 
unrealistic in suggesting that restructuring IRS management 
could change that.
    On the other hand, the Commission found that management 
failures had contributed to an unnecessary and excessively 
negative perception of the IRS. To the extent that the 
Oversight Board can improve the management of the IRS and help 
it better focus on the performance of its duties, it may be 
expected to improve the public perception of the IRS. On the 
other hand, should decisions of the Oversight Board result in 
more aggressive collection practices or cost saving steps that 
reduce taxpayer service, the public perception of the IRS could 
be further eroded.
    The contribution of the Oversight Board to the improvement 
of the public perception of the IRS may also turn on the public 
perception of the Oversight Board. If the Oversight Board is 
perceived as improving the management of the IRS, that positive 
perception is likely to be transferred to some degree to the 
IRS. On the other hand if the Oversight Board is perceived 
negatively, whether because of perceived conflicts of interest 
or for other reasons, the public perception of the IRS could be 
further damaged.

8. Resources available to the Board and the IRS

    Whether the Oversight Board is ultimately able to improve 
the performance of the IRS may in part be determined by the 
Board's role in insuring adequate access to resources by the 
IRS. Many contend that the IRS needs to be able to obtain 
assurances of adequate funding over a period of years. The 
Commission saw stable funding as necessary in order to 
undertake the proper planning necessary to rebuild the 
foundation of the IRS and recommended stable funding of the IRS 
over the next three years. The Commission Report also noted 
that a stable budget would allow the IRS to plan and implement 
operations that will improve taxpayer service and compliance, 
such as technological modernization and employee training.
    The Oversight Board would not control the proposed budget 
for the IRS that is submitted to Congress by the 
Administration. However, it would review, approve and 
separately submit the budget proposal developed by the IRS 
Commissioner. Some feel that this process will provide 
additional legitimacy to IRS budget requests and increase the 
likelihood that adequate resources will be made available to 
the IRS. Others suggest that the revised process may make it 
less likely the IRS will obtain adequate resources, since there 
is less incentive for Treasury to obtain sufficient resources 
for the IRS in the Administration budget proposal, and Congress 
may be adverse to increasing the budget of the IRS.

9. Qualifications of IRS Commissioner

    Under S. 1096, the Board would appoint an IRS Commissioner 
for a five-year term. The appointment is to be made on the 
basis of demonstrated ability in management. Under H.R. 2696, 
the Board recommends a candidate to the President, who is not 
required to nominate the candidate selected by the Board.
    Some have observed that many of the individuals who have 
held the post of Commissioner in the past have been tax 
professionals, often with principal managerial responsibility 
for a relatively small legal staff. It is argued that a 
background in the tax law and awareness of its complexities is 
important to understanding administrative and operational 
issues the IRS faces--including, for example, the difficulties 
of training IRS employees to apply the tax law either in the 
course of audits or in the case of taxpayer inquiries during 
the filing season, and the difficulties of developing systems 
that can most efficiently select tax returns for audit or other 
compliance measures. It is also argued that the absence of a 
tax background could affect the relationship of the IRS 
Commissioner and the IRS Chief Counsel with respect to matters 
that affect tax policy as well as tax administration. However, 
it is also recognized that selection of a person with 
demonstrated ability in management would not preclude the 
selection of a person with a tax background, if considered 
desirable.
    Others observe that the traditional background of many IRS 
Commissioners may limit the scope of their ability to deal with 
important operational and technological issues facing the IRS 
today. It is argued that other areas of expertise may be even 
more essential to IRS concerns. Also, it is argued that the 
Chief Counsel of the IRS, appointed by the President and 
dealing with issues of tax policy, would continue to provide 
the opportunity for the IRS to obtain the input and direction 
of experienced tax professionals.

10. Issues relating to the Office of Chief Counsel 68a

    The Chief Counsel is the chief law officer for the Internal 
Revenue Service. The Office of Chief Counsel plays a tax policy 
role by providing tax guidance for its client, in the form of 
private letter rulings, technical advice memoranda, revenue 
rulings, and regulations. All regulations are signed by the 
Commissioner, and constitute statements of Federal tax policy. 
The Office of Chief Counsel plays an enforcement role, as well 
as a tax policy role, when acting as a litigator. As the 
client, the Internal Revenue Service has final decision 
authority on whether to litigate a case or not, and may veto a 
litigation strategy proposed by the Chief Counsel. However, the 
delegation order which grants authority to the Chief Counsel 
provides that ``any legal matter involving Treasury policy 
about which the Commissioner disagrees with the advice given to 
him/her by the Chief Counsel will be submitted by the 
Commissioner to the Secretary or the Deputy Secretary for 
resolution.'' \69\
---------------------------------------------------------------------------
    \68a\ These issues do not arise under H.R. 2676, as passed by the 
House, because it retains present law with respect to the Office of the 
Chief Counsel.
    \69\ G.C.O. No. 4 (July 1, 1997).
---------------------------------------------------------------------------
    S. 1096 would not change the way that the Chief Counsel is 
appointed. The President would continue to appoint the Chief 
Counsel, with the advice and consent of the Senate. Under 
current law, the Chief Counsel is an Assistant General Counsel 
of the Treasury Department, reporting to the General Counsel of 
the Treasury Department. Under S. 1096, the Chief Counsel would 
report directly to the Secretary. The proposal raises issues 
relating to the relationship between the Chief Counsel and the 
Commissioner. Under current law, both the Chief Counsel and the 
Commissioner are appointed by the President and can be removed 
by the President. Under the Commission's proposal, the 
Commissioner would be appointed by the Board and may be removed 
by the Board. This difference in appointment method may cause 
tensions between the two officials.
    As the responsibilities of the Chief Counsel are focused on 
tax policy and enforcement, which are specifically excluded 
from the Board's supervisory authority, some argue that it is 
unlikely that the Commissioner and the Chief Counsel will have 
disagreements as a result of the Board's oversight. Others 
contend that tax policy and tax administration may not be 
readily separable. However, if the Commissioner, under the 
direction of the Board, did disagree with the Chief Counsel, 
under the direction of the President, the proposal does not 
address a means of solving such disagreement. The Commissioner 
would not have authority to fire the Chief Counsel, and the 
President would be unlikely to do so if the Chief Counsel is 
acting consistently with the President's will, albeit in 
conflict with the will of the Board. Similarly, the President 
could not fire the Commissioner under the proposal, but could 
only remove the Board members.
    The creation of the Board may serve to increase further the 
importance of the Chief Counsel with respect to tax policy and 
procedure. The Commission Report provides that the Board would 
not address issues of tax policy, and also contemplates that 
the IRS Commissioner need not be a tax law expert, but should 
be someone with management expertise. This represents a 
significant departure from past practice, under which IRS 
Commissioners in recent decades have generally been respected 
practitioners in the field of tax law and accounting. If the 
IRS Commissioner's duties are largely executive, the tax policy 
and tax procedural responsibilities currently carried out by 
the IRS Commissioner could fall upon the Chief Counsel's 
office, including the responsibility to grant final approval 
over the issuance of regulations and other tax guidance 
publications. Arguably this could increase the workload and the 
number of decisions that would need to be made by that office. 
Some argue that this might merely change the locus of the 
decision-making process, without providing any increase in 
efficiency or improving the ``user-friendliness'' of the IRS 
for taxpayers. In fact, delays could be exacerbated without 
added staff to absorb any workload increase. On the other hand, 
some might argue that the Board, together with a more 
managerial type of IRS Commissioner, could anticipate and 
address these types of problems, with resulting increases in 
efficiency of operation.

11. Tax simplification

    The Commission Report observed a ``clear connection'' 
between the complexity of the Internal Revenue Code and the 
difficulty of tax law administration and taxpayer frustration. 
The Commission strongly recommended that the Congress and the 
President work toward simplifying the tax law wherever 
possible.
    The Commission observed that uncertainty adds to complexity 
and to the cost of compliance; and that uncertain 
interpretation of the tax law results in compliance problems. 
Various steps were recommended to reduce complexity, including 
increased involvement of IRS personnel in the development and 
drafting of legislation, and consideration of various other 
ways to identify complexity in legislation.\70\ Others have 
also commented that tax law complexity makes training extremely 
difficult for the IRS, potentially increasing the likelihood 
that taxpayers may experience additional difficulties with both 
compliance and customer service IRS functions.
---------------------------------------------------------------------------
    \70\ See discussion in Part One. IV.B., infra.
---------------------------------------------------------------------------
    The Board would not have any direct authority over tax 
simplification. The simplification of tax statutes would remain 
within the domain of the Congress (subject to the veto power of 
the President). Tax policy issues within the IRS, including tax 
policy decisions affecting the complexity of tax law 
interpretation of administration, also would not be within the 
Board's domain.

  C. Issues Relating to the Conduct of Business by the Oversight Board

    The Commission's proposal provides only general outlines 
for the conduct of business by the Board. The Board would elect 
a chairperson for a two-year term. The Board is to meet at 
least once each month. The Board is to make a report on the 
conduct of its responsibilities each year to the President and 
Congress. The lack of specificity regarding the operations of 
the Board raises technical issues that should be clarified in 
any final legislation. Some of these issues are discussed 
below.

1. Rules for the conduct of business

    In general, a board of directors for a corporation will 
adopt bylaws for such corporation that contain provisions for 
managing the business and regulating the affairs of the 
corporation. Bylaws may be general or specific, depending on 
the needs of the business. However, bylaws for any business 
generally provide procedures for calling a meeting of the board 
and quorum requirements for holding such meeting. The bill does 
not say whether the Board has the ability to address such 
issues. That authority should be clarified.
    The proposal provides that any vacancy on the Board shall 
not affect the powers of the Board. This provision raises the 
concern that the Board could take action even if it had only 
one member (which, for example, could be the employee 
representative). A quorum requirement would ease this concern. 
The Model Business Corporation Act provides that a majority of 
the fixed number of directors constitutes a quorum.\71\ In 
addition, it may be appropriate to provide rules requiring a 
larger quorum or more than a majority vote for certain actions 
of the Board, such as the removal of the Commissioner.
---------------------------------------------------------------------------
    \71\ Section 8.24(a)(1) of the Model Business Corporation Act 
(``MBCA'').
---------------------------------------------------------------------------
    Corporate bylaws also generally provide for the 
qualifications of directors. The proposal describes the 
qualifications of the Board in terms of their expertise. In 
light of perceived concerns about potential conflicts of 
interest,\72\ it may be appropriate to further restrict 
eligibility to serve on the Board. As an example, it may not be 
appropriate for the chief executive officer of a corporation 
which has a large procurement contract with the IRS to serve on 
the Board. Other rules to avoid the appearance of a conflict of 
interest could also be adopted, such as recusal requirements. 
The proposal contains safeguards against actual and perceived 
conflicts of interest by reference to the rules for ethical 
conduct of government employees. Under the proposal, the Board 
members would be special government employees. As special 
government employees within the meaning of 18 U.S.C. sec. 
202(a), the Board members are subject to criminal sanctions for 
acts affecting a personal financial interest.\73\ Government 
employees are prohibited from participating personally and 
substantially in an official capacity in any particular matter 
in which, to their knowledge, they or any person whose 
interests are imputed to them has a financial interest, if the 
particular matter will have a direct and predictable effect on 
that interest.\74\ Unless the employee receives a waiver, the 
employee must refrain from participation in the matter.\75\ A 
government employee must also demonstrate impartiality in the 
performance of official duties, and should not participate in a 
matter where the circumstances would cause a reasonable person 
with knowledge of the relevant facts to question his 
impartiality in the matter, unless the employee has informed 
the agency of the appearance problem and received authorization 
to participate.\76\ Other than the President, it is unclear who 
would have the authority to grant a Board member a waiver for 
an actual or perceived conflict of interest. Accordingly, a 
reference to the rules for ethical conduct of government 
employees may not be sufficient to resolve the perception of 
conflicts of interest by the private sector members of the 
Board. On the other hand, the application of the criminal 
sanctions of the governmental ethics rules could have a 
chilling effect on the recruitment of Board members with the 
necessary expertise. Final legislation should clarify the 
application of governmental ethics rules to the Board members. 
It should be considered whether special conflict of interest 
rules applicable to the Board members should be included.
---------------------------------------------------------------------------
    \72\ See discussion relating to conflicts of interest in Part One. 
III.B.5., supra.
    \73\ 18 U.S.C. sec. 208(a).
    \74\ 5 C.F.R. sec. 2635.402(a).
    \75\ 5 C.F.R. sec. 2635.402(c).
    \76\ 5 C.F.R. sec. 2635.502(a).
---------------------------------------------------------------------------

2. Application of Freedom of Information Act, Sunshine Act, and Federal 
        Advisory Committee Act

Freedom of Information Act

    The IRS is an administrative agency. The IRS's status as an 
administrative agency means that administrative law, statutory 
and decisional, which limits the exercise of power and controls 
the processes of all administrative agencies, applies to its 
actions. The Administrative ProcedureAct (``APA''),\77\ 
including the provisions of the Freedom of Information Act 
(``FOIA''),\78\ currently apply to the IRS.
---------------------------------------------------------------------------
    \77\ 5 U.S.C. secs. 551 et seq.
    \78\ 5 U.S.C. sec. 552.
---------------------------------------------------------------------------
    FOIA requires most written material produced by agencies to 
be made public. The purpose of FOIA is to ensure that citizens 
are informed about actions taken by their government, so that 
citizens can operate as a check against corruption by holding 
their government accountable. Unless agency information is 
exempt from FOIA, it must be made available to the public. The 
proposal does not address FOIA, so current law would govern the 
application of FOIA to the Board's written work product. As the 
Board would be the governing body of the IRS, FOIA would apply 
to written material produced by the Board. However, much of the 
material produced by the Board would probably be exempt from 
FOIA under the exemption for intra-agency memoranda.\79\ This 
exemption protects intra-agency memoranda that are part of an 
agency's deliberative or policy-making processes, which would 
generally not be discoverable in a court case on a claim of 
governmental or deliberative process privilege. The purpose of 
the exemption is to encourage and protect a free and candid 
exchange of ideas during the decision-making process. As the 
proposal does not discuss FOIA, it may be appropriate to 
clarify whether it is intended that FOIA apply to the Board's 
work product, either in the statute or the legislative history.
---------------------------------------------------------------------------
    \79\ 5 U.S.C. sec. 552(b)(5).
---------------------------------------------------------------------------

Sunshine Act

    Meetings of the heads of agencies with a multimember 
decision-making body were made public by the Government in the 
Sunshine Act (``Sunshine Act'').\80\ The purpose of the 
Sunshine Act, like FOIA, is to provide citizens an opportunity 
to witness the decision-making processes of their government. 
The proposal does not address the Sunshine Act, so current law 
would govern the application of the Sunshine Act to the Board's 
oral communications. As the Board would be a multi-member 
decision-making body, its meetings with the Commissioner would 
be covered by the Sunshine Act.
---------------------------------------------------------------------------
    \80\ 5 U.S.C. secs. 552b.
---------------------------------------------------------------------------
    The concept of meetings covered by the Sunshine Act is 
extremely broad and may include not only sessions at which 
formal action is taken but also those at which a quorum of 
members deliberates regarding the conduct or disposition of 
agency business. For those meetings covered by the Act, an 
agency must announce, at least one week prior to a meeting, the 
meeting's date, location and other information. Although an 
agency can close a particular meeting to the public, on the 
grounds that the meeting may have an adverse impact on the 
rights of individuals or on the ability of the government to 
function properly, an agency cannot by rule or internal 
procedure close groups or categories of meetings.\81\ Meetings 
which relate solely to the internal personnel rules and 
practices of the agency \82\ or would be likely to 
significantly frustrate implementation of a proposed agency 
action \83\ are exempt from the Sunshine Act.
---------------------------------------------------------------------------
    \81\ See Pacific Legal Foundation v. CEQ, 636 F.2d 1259 (D.C. Cir. 
1980).
    \82\ 5 U.S.C. sec. 552b(c)(2).
    \83\ 5 U.S.C. sec. 552b(c)(9)(B).
---------------------------------------------------------------------------
    Some have commented that the goals of the Board could not 
be accomplished if open meetings were required, as open 
meetings might discourage the Commissioner and the Board from 
expressing frank views about progress towards goals of tax 
administration. On the other hand, one purpose of the Board is 
to foster public confidence in the IRS, and it could be argued 
that closing meetings to the public would be inconsistent with 
that purpose. As the proposal does not discuss the Sunshine 
Act, it may be appropriate to clarify whether it is intended 
that the Sunshine Act apply to the Board's oral communications, 
either in the statute or the legislative history.

Federal Advisory Committee Act

    The Federal Advisory Committee Act (``FACA'') \84\ was 
designed to improve public access to the decision-making 
processes of advisory committees, which are constituted of 
private individuals who gather to advise the government. Under 
the proposal, the FACA probably would not apply to the Board, 
as it would be a decision-making body rather than an advisory 
committee.\85\
---------------------------------------------------------------------------
    \84\ 5 U.S.C. App. 1.
    \85\ An advisory committee is established ``in the interest of 
obtaining advice or recommendations.'' Id. at section 3(a).
---------------------------------------------------------------------------
    Under FACA, advisory committees are broken down into two 
types: groups ``established by'' the agency and groups that are 
``utilized by'' the agency. An ``established'' committee must 
be rechartered every two years, and is subject to Congressional 
and administrative review. There is no exclusion for 
frustration of agency action or for ``intra-agency'' memoranda 
under FACA. Judicial decisions have concluded that requiring 
meetings between outside groups and the agency to be public 
neither inhibits candid exchanges with the agency nor decreases 
the information available to the agency.\86\ As noted above, 
some have argued that one of the goals of oversight would be 
frustrated if meetings and work product of the body providing 
oversight were required to be public. One way to exempt the 
activities of an oversight body from FACA is to designate all 
members as special government employees. In Association of 
American Physicians and Surgeons, Inc. v. Hillary Clinton,\87\ 
which involved a challenge to the President's Task Force on 
National Health Care Reform, the court agreed with Mrs. Clinton 
that the FACA did not apply because all members of the Task 
Force were officers or employees of the government (including 
Mrs. Clinton). Any proposal involving an advisory committee 
should clarify whether it is intended that FACA apply.
---------------------------------------------------------------------------
    \86\ See Nader v. Dunlop, 370 F. Supp. 177 (D.D.C. 1973).
    \87\ 997 F.2d 898 (D.D.C. 1993).
---------------------------------------------------------------------------

 D. Issues Relating to the Structure and Funding of the Employee Plans 
                   and Exempt Organizations Division

Nature of EP/EO mandate

    As the Commission Report notes, Congress frequently directs 
the IRS to perform functions not directly related to its core 
purpose of collecting the proper amount of Federal tax revenues 
at the least cost. While EP/EO is not the only example of such 
a non-core function, it is one of the most visible, with 
responsibility for regulating sectors of the national economy 
estimated to represent approximately $135.9 billion in annual 
Federal income tax expenditures in fiscal year 1998--an amount 
equal to approximately 25 percent of total estimated Federal 
income tax expenditures for that fiscal year.
    EP/EO was formed primarily to exercise regulatory 
supervision over employee benefit plans and exempt 
organizations with the goal of protecting the interests of 
employee benefit plan participants and of contributors to and 
beneficiaries of tax-exempt organizations. However, the office 
is also charged with the more traditional IRS function of 
revenue collection and tax law enforcement. These two functions 
can lead to conflicting results. For example, in the pension 
context, a plan sponsor or employer may be responsible for 
violations that disqualify the plan from Federal tax benefits. 
However, the plan participants would suffer the primary 
unfavorable consequences of plan disqualification. Similarly, 
revocation of exemption of a tax-exempt organization may 
primarily harm the charitable class that relies on the 
organization for goods or services (or contributors to the 
organization) rather than the individuals who may have diverted 
the organization's funds for private benefit. These potentially 
conflicting mandates have led EP/EO to develop innovative and 
effective voluntary compliance programs that seek to encourage 
retirement plans and tax-exempt organizations to comply with 
Federal tax obligations and limit the necessity for traditional 
enforcement actions. The Commission cites the EP/EO operation, 
and particularly its voluntary enforcement efforts, as ``one of 
the most innovative and efficient functions within the IRS.''

Need for additional EP/EO resources

    Because the IRS does not have infinite financial resources, 
it must constantly determine how best to allocate its available 
resources among its myriad functions. Inevitably, such an 
allocation process will favor the IRS' core tax collection 
function at the expense of non-core functions. Congress 
acknowledged this tension at the time it established EP/EO by 
elevating supervision of the office to an Assistant 
Commissioner and by dedicating a source of funding for the 
office. However, the designated funding mechanism has never 
been utilized and EP/EO, along with the rest of IRS, is funded 
out of Treasury Department general appropriations.
    As set forth in Table 2 (in Part One.I.C., above), the 
level of EP/EO staffing in 1997 is essentially the same as it 
was upon formation of the office in 1974, and is, in fact, 
approximately 20 percent lower than it was at its peak in 1989. 
Given the tremendous increase in the number of organizations 
and plans--and the value of assets--within EP/EO's 
jurisdiction, as well as an expansion of EP/EO's 
responsibilities to include tax-exempt bonds, the EP/EO 
staffing level has been a source of Congressional concern in 
recent years. Twenty years after creation of EP/EO, the 
Subcommittee on Oversight of the House Committee on Ways and 
Means concluded that ``the IRS does not have sufficient 
resources allocated to ensure compliance by public charities 
with applicable tax rules,'' \88\ and recommended that ``the 
staffing and funding levels allocated for IRS's exempt 
organization examination and compliance activities be increased 
to a level consistent with the number, size, and diverse 
activities of tax-exempt organizations.'' \89\ Similarly, in 
its 1994 review of IRS program areas within the jurisdiction of 
the House Committee on Ways and Means, the General Accounting 
Office testified that limited resources at the IRS have 
influenced the level of oversight of ERISA.\90\
---------------------------------------------------------------------------
    \88\ Subcommittee on Oversight of the Committee on Ways and Means, 
Report on Reforms to Improve the Tax Rules Governing Public Charities 
(WMCP 103-26), iv (1994).
    \89\ Ibid, pp. 18-19.
    \90\ 1993 Comprehensive Oversight Initiative of the Committee on 
Ways and Means, H.Rept. 103-450, 3 (1994).
---------------------------------------------------------------------------
    EP/EO is not unique within the IRS in its need for 
additional financial resources. However, the magnitude of the 
sectors EP/EO is charged with regulating as well as the nature 
of its mandate support the Commission's conclusion that 
Congress should provide sufficient resources for EP/EO to carry 
out its functions.

Source of funding

    The Commission recommends the reinstatement of the funding 
mechanism in Code section 7802(b)(2) (described in Part II.C. 
above), modified to provide that such funds can only be used to 
fund EP/EO.\91\ In addition, S. 1096 includes an additional 
funding source, dedicating all user fees collected by EP/EO to 
carry out the functions of that office.
---------------------------------------------------------------------------
    \91\ H.R. 2676, as passed by the House, eliminates the EP/EO 
funding mechanism set forth in Code section 7802(b)(2).
---------------------------------------------------------------------------
    Although the bill attempts to tighten the connection 
between the excise taxes collected on investment income of 
private foundations under Code section 4940 and the funding of 
EP/EO, the office's funding would, as under present law, be 
subject to the appropriations process and there is no guarantee 
that the designated amounts actually would be appropriated. 
Initial legislative intent has been ignored for over 20 years 
in spite of periodic revisiting of the issue by Congress. 
Further, the section 4940 excise tax is not without its flaws 
as a funding source. Because the tax is based on investment 
income, the amount collected under the tax is very much subject 
to the vissicitudes of the financial markets. Such uncertainty 
makes short- and long-range organizational planning difficult. 
In addition, if the dedication of the section 4940 excise tax 
to the EP/EO function is deemed appropriate, it may be equally 
appropriate for other areas of the IRS to retain excise taxes 
collected from taxpayers under their jurisdiction.
    The dedication of user fees collected by EP/EO to carry out 
its functions raises a number of similar issues. In general, 
Federal user fees are charges for a specific service, requested 
by and beneficial to identifiable persons. A user fee must 
satisfy three characteristics: (1) it must be voluntary; (2) 
the user must benefit from the fee; and (3) the fee must be 
based on the actual cost of providing the service (e.g., 
providing a copy of a tax return). Prior to 1988, the IRS did 
not charge user fees. However, as part of the Revenue Act of 
1987, Congress directed the Secretary of Treasury to establish 
a program requiring the payment of user fees for requests to 
the IRS for letter ruling, opinion letter, determination 
letter, and other similar requests.\92\ Absent specific 
statutory authority, user fees are paid directly into the 
Treasury general fund as miscellaneous receipts. However, IRS's 
1995 appropriation permitted the IRS to retain up to $119 
million per fiscal year in fee revenue derived from new fees 
and increases in existing fees, in addition to its regular 
appropriation.\93\ Table 3 contains total EP/EO user and 
compliance \94\ fees since inception of the IRS user fee 
program. Table 4 sets forth EP/EO user and compliance fees for 
fiscal years 1994 through 1996, broken out between EP and EO, 
and National Office and field offices.
---------------------------------------------------------------------------
    \92\ Section 10511 of PL. 100-203, 101 Stat. 1330-382, 1330-446, 
enacted December 22, 1987. The fees applied to requests made on or 
after February 1, 1988, and before September 30, 1990. Subsequent 
legislation extended the fee authority through September 20, 2003. Sec. 
2 of P.L. 104-117, 1996-34 I.R.B. 19.
    \93\ The IRS publishes revised user fee schedules annually. For 
example, Revenue Procedure 97-8, 1997-1 I.R.B. 187 sets forth current 
user fees applicable to matters within the jurisdiction of EP/EO.
    \94\ Compliance fees may be imposed as part of one of the voluntary 
self-correction programs administered by EP/EO. Such fees do not 
qualify as ``user fees'' and, thus, would not be includible for 
purposes of calculating EP/EO funding under the bill. Compliance fees 
represented approximately $1.4 million of total fees collected by the 
National Office in 1994, $1.6 million of 1995 fees, and $2.1 million of 
1996 fees.

           Table 3.--EP/EO User and Compliance Fees, 1988-1996          
------------------------------------------------------------------------
                                                          Fees collected
                       Fiscal year                         ($ millions) 
------------------------------------------------------------------------
1988....................................................            18.2
1989....................................................            33.7
1990....................................................            29.4
1991....................................................            36.9
1992....................................................            34.8
1993....................................................            36.0
1994....................................................            39.7
1995....................................................            76.1
1996....................................................           40.3 
------------------------------------------------------------------------
Source: Internal Revenue Service.                                       


                               Table 4.--EP/EO User and Compliance Fees, 1994-1996                              
----------------------------------------------------------------------------------------------------------------
                                             FY 1994                   FY 1995                   FY 1996        
                                   -----------------------------------------------------------------------------
                                         EP           EO           EP           EO           EP           EO    
----------------------------------------------------------------------------------------------------------------
National Office...................   $3,029,000     $618,000   $2,882,000     $638,000   $3,384,000     $622,000
Field Offices.....................  $20,857,000  $15,173,000  $56,938,000  $15,599,000  $20,885,000  $15,386,000
                                   -----------------------------------------------------------------------------
Total Receipts....................                                                                              
(1)$39,677,000                                                                                                  
(1)$76,057,000                                                                                                  
(1)$40,277,000                                                                                                  
----------------------------------------------------------------------------------------------------------------
Source: Internal Revenue Service.                                                                               

    As Tables 3 and 4 illustrate, user fees are not necessarily 
a consistently stable source of revenue. The level of total 
receipts may be influenced significantly by factors beyond the 
IRS' control. For example, collections in fiscal year 1995 were 
almost double those in fiscal years 1994 and 1996; this 
increase is attributable largely to the effects of reforms in 
the tax law governing employee benefit plans contained in the 
Tax Reform Act of 1986 and subsequent legislation that 
necessitated plan amendments and caused employee benefit plans 
to seek requalification with the IRS as qualified employee 
benefit plans. In addition, if the dedication of EP/EO user 
fees to the EP/EO function is deemed appropriate, it may be 
equally appropriate for other areas of the IRS to retain user 
fees collected from taxpayers under their jurisdiction. Because 
the level of user fees collected does not always correlate to 
financial resources required, such an approach could result in 
a misallocation of resources within the IRS.
    Finally, it is not clear that the formula set forth in the 
bill would result in the correct level of funding for EP/EO. 
There appears to be widespread agreement that the current level 
is too low. Based on current collections, the formula set forth 
in the bill would result in a funding level of approximately 
$465.6 million for EP/EO in 1997.\95\ This amount is 
approximately three and one-half times the level of EP/EO 
proposed funding ($129.6 million). Such a funding level may be 
too high, or it may still be inadequate. Dedicating certain 
revenue sources to the funding of EP/EO would mean that EP/EO 
does not have to compete for scarce resources within the IRS. 
However, it does not necessarily result in the correct level of 
funding. This task requires an ongoing assessment by Congress 
as to the appropriate funding level, rather than a formula that 
may or may not approximate current--or future--needs. As the 
Commission concluded, Congress must provide sufficient 
resources when asking IRS to assume non-core functions such as 
those carried out by EP/EO. To preserve the ability of the IRS 
to carry out its core functions, however, such resources must 
be in addition to, and not in lieu of, resources appropriated 
to carry out such core functions.
---------------------------------------------------------------------------
    \95\ The funding level would be calculated as follows: $213.7 
million (sec. 4940 excise tax collections for second preceding year 
(1995)) + $213.7 million (greater of $213.7 million or $30 million) + 
$38.2 million (1996 user fees) = $465.6 million. In fact, the actual 
amount would be somewhat different because, as discussed above, the 
section 7802(b) formula assumes a 2-percent excise tax rate; actual 
collections reflect the fact that certain foundations pay at a 1-
percent rate.

     V. ISSUES RELATING TO CONGRESSIONAL ACCOUNTABILITY FOR THE IRS

                       A. Congressional Oversight

Coordinated hearings
    As discussed above, there are currently 6 Congressional 
committees with legislative jurisdiction over the IRS. In 
addition, part of the statutory duties of the Joint Committee 
is IRS oversight. The Commission Report points out that one of 
the factors contributing to lack of a long-term strategic plan 
for the IRS is that it receives differing views from each of 
the Congressional committees. Each committee has its own 
concerns and agenda, and the result may not be a cohesive plan 
for IRS activities. In addition, the need for the IRS (and the 
Treasury Department) to respond to each committee may result in 
duplicative efforts and the wasting of resources that could be 
put to other uses.
    In order to address this issue, S. 1096 provides for at 
least two coordinated hearings a year with the 6 legislative 
committees and for reports to such committees on the IRS and 
the state of the Federal tax system by the Joint Committee. The 
Commission recommended a similar approach, but would have 
created a new joint committee to hold the hearings and provide 
the reports.
    The bill may serve to provide some coordinated oversight 
between the various committees; it will at least ensure that 
the same information is available to all relevant committees at 
the same time. In addition, to the extent that issues are 
addressed by the IRS at the joint hearings, it may reduce the 
need for duplicative hearings or IRS responses to the various 
committees. The extent to which the coordinated hearings 
actually help to streamline and coordinate the oversight 
process depends in part on whether the coordinated hearings do 
in fact reduce the number of hearings to which the IRS must 
respond or simply add additional hearings and the extent to 
which the coordinated hearings foster discussions that result 
in a more coordinated oversight effort and a more cohesive 
direction from the Congress.
    The bill's approach may be preferable to that of the 
Commission Report because it utilizes existing resources. The 
Commission approach may have added additional complexity by 
creating a new entity which would largely duplicate the current 
duties of the Joint Committee.
    Some argue that it may be difficult to provide truly 
coordinated Congressional oversight of the IRS as long as more 
than one committee has jurisdiction over the IRS. On the other 
hand, some point out that many Federal agencies are subject to 
Congressional oversight by multiple committees and that this 
form of oversight does not necessarily impede the development 
of appropriate goals and achievement of such goals.
Requests for GAO investigations of the IRS
    According to the Commission Report, requiring a single 
place for coordination of GAO reports relating to the IRS is 
intended to eliminate overlapping reports, ensure that the GAO 
has the capacity to handle the report, and ensure that 
investigations focus on areas of primary importance to tax 
administration. The Commission Report would require 
coordination with respect to all GAO reports. S. 1096 is 
similar, but would not require Joint Committee approval of 
requests from Congressional Committees or Subcommittees. As 
discussed above, the Joint Committee already reviews requests 
for GAO investigations that involve access to confidential 
taxpayer information. However, the GAO does perform 
investigations that do not require access to such information, 
and requests for such investigations are not necessarily 
reviewed by the Joint Committee.
    Requiring Joint Committee approval of GAO investigations 
relating to the IRS may not necessarily reduce the number of 
requests. One reason is that the requirement does not apply to 
requests from House or Senate committees or subcommittees, even 
if the committee or subcommittee does not have jurisdiction 
over IRS matters. In addition, it may be difficult for the 
Joint Committee to deny a request for an investigation from a 
Member of Congress.
    On the other hand, requiring Joint Committee approval may 
have the desired effect. The Joint Committee may be able to 
combine several similar requests into a single request (to the 
extent the GAO does not now do so). In addition, the Joint 
Committee may be able to address the issue without a study or 
may be able to direct the inquiry to a source better able to 
deal with it, thus reducing the number of investigations.

                         B. Tax Law Complexity

Complexity analysis
    The requirement for a Tax Complexity Analysis highlights 
complexity as an issue in developing tax legislation. 
Complexity is only one of many factors that are involved in the 
consideration in tax legislation, and there is disagreement as 
to whether it is appropriate to elevate complexity over other 
factors. Even those who agree that complexity is a critical 
issue do not all agree that the proposed Tax Complexity 
Analysis is necessary to focus attention on complexity or that 
the Analysis will be effective. Assuming the proposal for a Tax 
Complexity Analysis is adopted, there are issues relating to 
the content of the analysis that should be addressed.
    Those who support the proposal for a Tax Complexity 
Analysis argue that requiring such an analysis appropriately 
recognizes that complexity is an important factor to consider 
in developing tax legislation. Many would argue that complexity 
is the critical issue facing the current tax system and that, 
despite frequent statements supporting simplification by the 
Administration and Members of Congress, recent tax bills, 
including the Tax Relief Act of 1997, have made some areas of 
the tax law significantly more complex. They argue that 
complexity of the income tax laws is a key reason for taxpayer 
dissatisfaction with the tax system in general and with the IRS 
and that taxpayer approval of the IRS cannot substantially 
increase unless the tax laws are simplified.
    Certainly, complexity can lead to more involvement of 
taxpayers with the IRS. Taxpayers desiring clarification from 
the IRS may attempt to contact the IRS through telephone calls, 
letters, or more formal means such as requests for private 
letter rulings. In addition, complexity may result in more 
mistakes by taxpayers in preparing their tax returns, and may 
also lead to more disputes with the IRS. Particularly in areas 
where there is lack of certainty in the law, taxpayers and the 
IRS may come to different conclusions about tax liability given 
the same set of facts. The need for such interactions and 
involvement with the IRS may increase taxpayer dissatisfaction 
with the IRS and the tax system.
    On the other hand, some argue that the Tax Complexity 
Analysis places undue emphasis on complexity as an issue. They 
argue that simplicity is only one objective of a tax system, 
and that other factors are at least as important and, in some 
cases, more important. Issues in addition to complexity that 
are generally considered in evaluating tax legislation include 
the effect of the proposal on the fairness of the tax system, 
economic efficiency, and the Federal budget. Nontax policy 
issues also arise, as the tax laws are frequently used to 
encourage or discourage certain types of behavior. Those who 
share this view are concerned that identifying a provision as 
complex would stigmatize the provision, even though the 
provision may be favorable to taxpayers or otherwise supported 
by sound policy.
    Some complexity may benefit taxpayers. For example, 
complexity often gives taxpayers greater flexibility in 
structuring transactions and choosing behavior that results in 
the desired tax consequences. Some complexity mirrors the 
complicated economic system and complicated transactions that 
occur in the market place. Some complexity may lead to a fairer 
tax system.
    Taxpayers are generally willing to accept complexity when 
it benefits them. For example, the home mortgage interest 
deduction adds to complexity and additional calculations that 
would not have to be made if the deduction were not available. 
However, taxpayers who are eligible for deduction are probably 
more than willing to deal with the additional complexity and 
record keeping because it reduces their tax liability.
    While recognizing that reducing complexity is a key goal, 
some argue that the Tax Complexity Analysis merely adds 
additional procedural requirements without any real benefit. 
They argue that the fact that a provision adding to complexity 
is adopted does not mean that the Congress and the President 
were not aware of the complexity, but an indication that they 
believed other factors outweighed concerns about complexity.
    Some point out that there are many formal and informal 
means by which the Congress learns of complexity regarding 
proposed legislation. Hearings are held relating to legislation 
at which interested groups testify and questions about 
complexity are generally raised in the hearing process. In 
addition, Members and their staffs speak frequently with 
interested groupsregarding legislative proposals, including 
groups representing taxpayers, tax practitioners, and others concerned 
with complexity. The staffs of the House and Senate Offices of the 
Legislative Counsel, the Ways and Means and Senate Finance Committees, 
the Joint Committee, and the Administration advise Members regarding 
the complexity of proposed legislation. This input often results in 
changes to proposals throughout the legislative process.
    Some also argue that, even if the Tax Complexity Analysis 
added new information, it comes too late in the legislative 
process to provide useful input to Members. Those who do not 
support the complexity analysis argue that at best it will 
result in additional boiler plate language in committee and 
conference reports, and at worst will result in legislative 
delays due to procedural battles or distract resources from the 
task of trying to draft legislation in the simplest possible 
way.
    Supporters of the Tax Complexity Analysis argue that the 
Analysis may provide additional information to Members and 
that, even if it does not, it will make Congress, the 
Administration, and taxpayers more aware of complexity and may 
result in changes in legislation.
    Members of Congress and the President generally focus on 
the major issues and policy objectives of legislation, but 
often will not be familiar with all the details which may give 
rise to complexity. This may be especially true with respect to 
Members who are not on the tax writing committees and who were 
not or did not have staff who were directly involved in the 
development of proposals. Supports of the Tax Complexity 
Analysis argue that it serves to make Members aware of the fact 
that they are adopting complex provisions. Moreover, the fact 
that the complexity analysis has to be included may cause 
Members to focus more on complexity while considering 
legislation and may cause them to change proposals in the hope 
that a provision will not be discussed in the complexity 
analysis. Thus, even if the analysis merely formalizes the 
advice given to Members during the legislative process, the 
analysis may in fact change the debate over legislation at all 
stages of the legislative process.
    Assuming that a tax complexity analysis is required to be 
included in tax legislation, it may be appropriate to consider 
revising the content of the analysis in order to provide a more 
meaningful discussion of complexity. Issues that may need to be 
addressed include the following.
    First, the proposed analysis does not actually appear to 
require a determination that a provision is complex--but merely 
to address the 8 specified factors. Many of these factors do 
not have a direct relationship with complexity. For example, 
whether or not a provision is new or amends existing provision 
in the tax law is not an indication of complexity. A new 
provision may reduce complexity, where an amendment to an 
existing provision could increase it. Similarly, whether or not 
a provision requires a change to IRS forms does not indicate 
whether complexity is increased. A provision that greatly 
increases simplification, such as reducing the number of people 
who have to file tax returns, may require a change to IRS 
forms.
    Second, the complexity analysis also does not require an 
identification of provisions that reduce complexity or result 
in significant simplification. It may be useful for Members to 
know of such provisions. If proponents of the analysis are 
correct that members will not want to see a provision on a list 
of complex items, including a discussion of items that simplify 
the tax code might spur members to try to develop such 
provisions.
    Third, the requirement that an analysis be made with 
respect to each provision of a bill may be unduly burdensome 
and unrealistic given the numerous tax provisions in some 
bills. The legislative process may not provide the time 
necessary to provide such an analysis, and waiting for the 
analysis may unduly interfere with the legislative process.

Feasibility study of compliance burden estimates \96\

    S. 1096 requires the Joint Committee to study the 
feasibility of developing a numerical standard for determining 
compliance burdens of proposed tax legislation. Some have shown 
interest in such a proposal because they feel it would provide 
an easy shorthand method of determining complexity. It would 
also allow a shorthand way of comparing the complexity of 
completely unrelated proposals. However, any sort of complexity 
index is likely to be controversial and subjective. It is 
likely to be difficult to develop any sort of consensus among 
interested parties as to what factors should be taken into 
account, how the factors should be weighed, or how the results 
of any complexity analysis should be presented. Any simplistic 
numerical analysis is likely to be more misleading than 
helpful, and may mask issues.
---------------------------------------------------------------------------
    \96\ These issues do not arise under H.R. 2676, as passed by the 
House, because it does not contain the proposal relating to compliance 
burden estimates.
---------------------------------------------------------------------------
    If there is continuing concern about complexity, it may be 
more appropriate to provide for a more flexible Tax Complexity 
Analysis such as that in the bill that allows for a 
qualitative, as well as quantitative analysis where appropriate 
(e.g., the estimated number of taxpayers affected). Such an 
approach is likely to provide the Congress with more insight 
and useful information. For example, such an approach could 
include the reasons for the complexity, which would provide an 
indication of how a proposal could be modified to reduce 
complexity.

Role of the Internal Revenue Service

    In analyzing proposed legislation, it is useful to obtain 
the views of IRS personnel responsible for administering the 
provisions affected by the legislation. IRS personnel are in a 
unique position to evaluate the measures that will be needed to 
ensure compliance (e.g., information reporting), whether it is 
reasonable to expect a reasonable level of compliance under the 
proposal, and what changes in IRS forms or procedures would be 
necessary. Because IRS personnel deal with enforcement and 
compliance issues on a day-to-day basis, they can advise 
Congress with respect to burdens proposed legislation may 
impose on taxpayers as well as the IRS.
    The Commission determined that in some cases the Congress 
may not have adequate access to IRS personnel. Others also have 
voiced the concern that, while the Treasury Department may be 
involved in legislative proposals, IRS representatives often 
are not.
    The bill addresses concerns about access to the IRS by 
providing that it is the sense of the Congress that IRS 
personnel should be available to the Congress during the 
consideration of legislative proposals. The bill is an 
indication that the Congress wants to hear more, and more 
directly, from the IRS during the consideration of legislation. 
The extent to which there is more IRS involvement in developing 
legislation will depend, in part, on the extent to which 
Congress chooses to involve the IRS. Such involvement could 
take various forms. For example, IRS representatives could be 
asked to testify regarding administrative issues involved in 
particular legislative proposals. In addition, IRS 
representatives could be involved in the drafting of proposals. 
In the past, the IRS has often been involved in drafting, but 
not in all cases.
    Some point out that legislation should not be necessary to 
obtain more input from the IRS regarding legislative proposals, 
and that lines of communication can and should be reestablished 
in the absence of legislation.
    Whether receiving more input from the IRS will reduce 
complexity in tax legislation is unclear; it depends in part on 
the extent to which the Congress and the Administration focus 
on complexity as an issue, and whether other competing concerns 
cause additional complexity to be unavoidable.

                      PART TWO: ELECTRONIC FILING

          A. Electronic Filing of Tax and Information Returns

                              Present Law

    Treas. Reg. section 1.6012-5 provides that the Commissioner 
may authorize, at the option of a person required to make a 
return, the use of a composite return in lieu of a paper 
return. An electronically filed return is a composite return 
consisting of electronically transmitted data and certain paper 
documents that cannot be electronically transmitted. Form 8453 
is a paper form that must be received by the IRS before any 
electronically filed return is complete. Form 8453 provides 
signature information to the IRS.
    The IRS conducted the first test of electronic filing in 
1986, for a limited number of tax year 1985 returns.\97\ In 
1990, the IRS permitted nationwide electronic filing of returns 
that had refunds owing.\98\ In 1991, the IRS accepted 
electronically filed returns that had balances due.\99\ In 
1993, the IRS established an electronic filing goal of 80 
million tax returns by 2001. During the 1997 tax filing season, 
the IRS received approximately 20 million individual tax 
returns electronically.
---------------------------------------------------------------------------
    \97\ Rev. Proc. 86-4, 1986-1 C.B. 423.
    \98\ Rev. Proc. 90-62, 1990-2, C.B. 659.
    \99\ Rev. Proc. 91-69, 1991-2, C.B. 893.
---------------------------------------------------------------------------

                     S. 1096 (sec. 201 of the bill)

                        Description of Proposal

    S. 1096 states that the policy of Congress is to promote 
paperless filing, with a long-range goal of limiting paper 
returns to 20 percent of all tax returns by the year 2007. The 
bill would require the Secretary of the Treasury to establish a 
strategic plan to eliminate barriers, provide incentives, and 
use competitive market forces to increase taxpayer use of 
electronic filing.
    The Secretary would be required to create an electronic 
commerce advisory group comprised of representatives from the 
tax practitioner, preparer, and computerized tax processor 
communities and other representatives from the electronic 
filing industry. Under the bill, the Chairperson of the IRS 
Oversight Board, together with the Secretary and the 
Chairperson of the electronic commerce advisory group, would be 
required to report annually to the tax-writing committees on 
the IRS's progress in implementing its plan to meet the goal of 
80 percent electronic filing by 2007.
    To promote electronic filing, the bill would require the 
Secretary to implement procedures providing for the payment of 
incentives to transmitters of qualified electronically filed 
returns. A qualified electronically filed return excludes those 
for which the taxpayer is charged the cost of transmission. The 
bill also would exclude transmitters that file paper returns 
after the end of 2004 from the incentive program. This bill 
would not be intended to override section 1205 of the Taxpayer 
Relief Act of 1997,\100\ which prohibits the IRS from paying 
fees to credit card companies in connection with receiving tax 
payments by credit card.
---------------------------------------------------------------------------
    \100\ Public Law 105-34 (August 5, 1997).
---------------------------------------------------------------------------

                             Effective Date

    The provision would be effective on the date of enactment.

                    H.R. 2676 (sec. 201 of the bill)

                        Description of Proposal

    The H.R. 2676 provision is identical to that in S. 1096.

           B. Extension of Time to File for Electronic Filers

                              Present Law

    In general, individual federal income tax returns must be 
filed by April 15 of the year following the close of the 
calendar year to which the return pertains, regardless of 
whether the returns are filed on paper or electronically. 
Corporate income tax returns must be filed by the 15th day of 
the third month following the close of the taxable year to 
which the return pertains, regardless of whether the returns 
are filed on paper or electronically.
    Information such as the amount of dividends, partnership 
distributions, and interest paid during the tax year must be 
supplied to taxpayers by the payors by January 31 of the year 
following the calendar year for which the return must be filed. 
The payors must file an information return with the IRS with 
the information by February 28 of the year following the 
calendar year for which the return must be filed. Under present 
law, the due date for information returns is the same whether 
such returns are filed on paper, on magnetic media, or 
electronically. Most information returns are filed on magnetic 
media (such as computer tapes) which must be physically shipped 
to the IRS.
    Under regulations, a partnership must file its income tax 
return on or before the 15th day of the fourth month following 
the end of the partnership's taxable year (on or before April 
15th, for calendar year taxpayers). The Taxpayer Relief Act of 
1997 adds a requirement that partnerships with more than 100 
partners must file partnership income tax returns on magnetic 
media.\101\
---------------------------------------------------------------------------
    \101\ Ibid (Act sec. 1224).
---------------------------------------------------------------------------

                     S. 1096 (sec. 202 of the bill)

                        Description of Proposal

    S. 1096 would provide an incentive to electronic filers by 
extending the due date for filing such returns. In the case of 
individual income tax returns, the time for filing would be 
extended to the fifth month of the year following the taxable 
year to which the return relates. For most individuals, this 
would push the filing date back to May 15th. In the case of 
corporate income tax returns, the time for filing would be 
extended to the 15th day of the fourth month following the 
close of the taxable year. With respect to information returns, 
the time for filing would be extended from February 28 under 
present law to March 31 of the year following the calendar year 
to which the return relates. The bill would not change the 
requirement that payors must supply taxpayers with the 
applicable information by January 31. The bill generally would 
require partnership income tax returns to be filed on or before 
the 15th day of the third month following the close of the 
taxable year of the partnership, except for electronically 
filed partnership income tax returns, which would be required 
to be filed on the 15th day of the fourth month following the 
close of the taxable year of the partnership. The bill also 
would permit the return of a partnership consisting entirely of 
nonresident aliens to be filed on or before the 15th day of the 
sixth month following the close of the taxable year of the 
partnership.

                             Effective Date

    The provision would apply to individual, corporate, and 
information returns required to be filed after December 31, 
1999. The provision would apply to partnership returns for 
taxable years beginning after December 31, 1998.

                    H.R. 2676 (sec. 202 of the bill)

                        Description of Proposal

    H.R. 2676 would provide an incentive to filers of 
information returns to use electronic filing by extending the 
due date for filing such returns from February 28 (under 
present law) to March 31 of the year following the calendar 
year to which the return relates. The bill does not change the 
requirement that payors must supply taxpayers with the 
applicable information by January 31. The House bill 
contemplates that the IRS would cooperate with interested 
private sector filers of information returns in facilitating to 
the maximum extent feasible the utilization of electronic 
filing for such forms.

                             Effective Date

    The provision would apply to information returns required 
to be filed after December 31, 1999.

                     C. Paperless Electronic Filing

                              Present Law

    Code section 6061 requires that tax forms be signed as 
required by the Secretary. The IRS will not accept an 
electronically filed return unless it has received a Form 8453 
providing signature information on the filer.
    Generally, a return is considered timely filed when it is 
received by the IRS on or before the due date of the return. If 
the requirements of Code section 7502 are met, timely mailing 
is treated as timely filing. If the return if mailed by 
registered mail, the dated registration statement is prima 
facie evidence of delivery. As an electronically filed return 
is not mailed, section 7502 does not apply.
    The IRS periodically publishes a list of the forms and 
schedules that may be electronically transmitted, as well as a 
list of forms, schedules, and other information that cannot be 
electronically filed.

                     S. 1096 (sec. 203 of the bill)

                        Description of Proposal

    S. 1096 would require the Secretary to develop procedures 
that would eliminate the need to file a paper form relating to 
signature information. The Secretary would be required to 
develop procedures for the acceptance of signatures in digital 
or other electronic form. Until the procedures are in place, 
the bill would require the Secretary to accept electronic 
returns with typewritten signatures, but the filers would be 
required to retain a signed paper original of all such filings.
    The bill would provide authorization for return preparers 
to communicate with the IRS on matters included on 
electronically filed returns.
    The bill would require that the Secretary establish 
procedures to receive all forms electronically by December 31, 
1998.

                             Effective Date

    The provision would be effective on the date of enactment.

                    H.R. 2676 (sec. 203 of the bill)

                        Description of Proposal

    H.R. 2676 would require the Secretary to develop procedures 
that would eliminate the need to file a paper form relating to 
signature information and to develop procedures for the 
acceptance of signatures in digital or other electronic form. 
Until the procedures are in place, the bill authorizes the 
Secretary to waive the requirement of a signature or to provide 
for alternative methods of subscribing all returns, 
declarations, statements, or other documents. The bill treats 
documents subscribed under such alternative methods as signed 
for all purposes, both civil and criminal, and provides a 
rebuttable presumption that any such return, declaration, 
statement or other document was actually submitted and 
subscribed by the person on whose behalf it was submitted. The 
House bill contemplates that the IRS will establish procedures 
for rebuttal of the presumption.
    The bill would provide rules for determining when 
electronic returns are deemed filed, and for authorization for 
return preparers to communicate with the IRS on matters 
included on electronically filed returns.
    The bill would require that the Secretary establish 
procedures, to the extent practicable, to receive all tax forms 
electronically by December 31, 1998.

                             Effective Date

    The provision would be effective on the date of enactment.

                       D. Regulation of Preparers

                              Present Law

    Present law does not provide for the regulation of return 
preparers.

                     S. 1096 (sec. 204 of the bill)

                        Description of Proposal

    S. 1096 would provide that the Secretary may establish 
uniform procedures to regulate the practice of return 
preparers. The bill would provide that the Secretary shall not 
require persons that are solely engaged in return preparation 
to demonstrate character, reputation, qualifications, or 
competency. The bill also would create a ``Director of 
Practice'' within the Treasury Department.

                             Effective Date

    The provision would be effective on the date of enactment.

                               H.R. 2676

                        Description of Proposal

    H.R. 2676 does not contain a proposal relating to return 
preparers.

                          E. Paperless Payment

                              Present Law

    Under the Taxpayer Relief Act of 1997,\102\ the IRS is 
authorized to accept payment by any commercially acceptable 
means that the Secretary deems appropriate, to the extent and 
under the conditions provided in regulations. This includes, 
for example, electronic funds transfers, including those 
arising from credit cards, debit cards, and charge card.
---------------------------------------------------------------------------
    \102\ Section 1205 of Public Law 105-34 (August 5, 1997). This 
provision is effective nine months after enactment (May 5, 1998).
---------------------------------------------------------------------------

                     S. 1096 (sec. 205 of the bill)

                        Description of Proposal

    S. 1096 would provide rules that are essentially similar to 
those enacted in the Taxpayer Relief Act of 1997.

                             Effective Date

    The provision would be effective on the date that is nine 
months after the date of enactment.

                               H.R. 2676

                        Description of Proposal

    H.R. 2676 does not contain a proposal relating to paperless 
payment.

                       F. Return-Free Tax System

                              Present Law

    Under present law, taxpayers are required to calculate 
their own tax liabilities and submit returns showing their 
calculations.

                     S. 1096 (sec. 206 of the bill)

                        Description of Proposal

    S. 1096 would require the Secretary or his delegate to 
study the feasibility of and develop procedures for the 
implementation of a return-free tax system for taxable years 
beginning after 2007. The Secretary would be required annually 
to report to the tax-writing committees on the progress of the 
development of such system, including what additional resources 
the IRS needs to implement the system, the changes to the 
Internal Revenue Code necessary to facilitate the system, the 
procedures developed to date, and the number and classes of 
taxpayers who are permitted to use such a system. The Secretary 
would be required to make the first report on the development 
of the return-free filing system to the tax-writing committees 
by June 30, 1999. The Senate bill contemplates that the return-
free filing system will be initially targeted at taxpayers who 
had taxable income from wages, interest, dividends, pensions, 
and unemployment compensation; did not itemize deductions; and 
did not take any tax credits other than the earned income tax 
credit.\103\
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    \103\ See The President's Tax Proposals to Congress for Fairness, 
Growth, and Simplicity, at 115 (May 1985) and U.S. General Accounting 
Office, Report on Tax Administration Alternative Filing Systems 
(October 1996).
---------------------------------------------------------------------------

                             Effective Date

    The provision would be effective on the date of enactment.

                    H.R. 2676 (sec. 204 of the bill)

                        Description of Proposal

    The H.R. 2676 provision is identical to that in section 206 
of S. 1096.

                    G. Access to Account Information

                              Present Law

    Taxpayers who file their returns electronically cannot 
review their accounts electronically.

                     S. 1096 (sec. 207 of the bill)

                        Description of Proposal

    S. 1096 would require the Secretary to develop procedures 
under which a taxpayer filing returns electronically could 
review the taxpayer's account electronically not later than 
December 31, 2006. The bill contemplates that all necessary 
privacy safeguards are in place by that date.

                             Effective Date

    The provision would be effective on the date of enactment.

                    H.R. 2676 (sec. 205 of the bill)

                        Description of Proposal

    The H.R. 2676 provision is identical to that in section 207 
of S. 1096, except that the provision in H.R. 2676 would be 
effective only if all necessary privacy safeguards are in 
effect as of December 31, 2006.

              PART THREE: TAXPAYER PROTECTIONS AND RIGHTS

                        I. PROVISIONS OF S. 1096

     A. Expansion of Authority to Issue Taxpayer Assistance Orders

                         (sec. 301 of the bill)

                              Present Law

    Taxpayers can request that the Taxpayer Advocate in the 
Internal Revenue Service (``IRS'') issue a taxpayer assistance 
order (``TAO'') if they are suffering or about to suffer a 
significant hardship as a result of the manner in which the 
internal revenue laws are being administered (sec. 7811). A TAO 
may require the IRS to release property of the taxpayer that 
has been levied upon, or to cease any action, take any action 
as permitted by law, or refrain from taking any action with 
respect to the taxpayer.

                        Description of Proposal

    The bill would provide that in making the hardship 
determination, the Taxpayer Advocate should consider the 
following four factors: (1) whether the IRS employee to whom 
the order would be issued is following applicable published 
administrative guidance, including the Internal Revenue Manual 
(``IRM''); (2) whether there is an immediate threat of adverse 
action; (3) whether there has been a delay of more than 30 days 
in resolving the taxpayer's account problems; and (4) the 
prospect that the taxpayer will have to pay significant 
professional fees for representation.

                             Effective Date

    The provision would be effective on the date of enactment.

       B. Expansion of Authority to Award Costs and Certain Fees

                         (sec. 302 of the bill)

                              Present Law

    Any person who substantially prevails in any action by or 
against the United States in connection with the determination, 
collection, or refund of any tax, interest, or penalty may be 
awarded reasonable administrative costs incurred before the IRS 
and reasonable litigation costs incurred in connection with any 
court proceeding. In general, only an individual whose net 
worth does not exceed $2 million is eligible for an award, and 
only a corporation or partnership whose net worth does not 
exceed $7 million is eligible for an award.
    Reasonable litigation costs include reasonable fees paid or 
incurred for the services of attorneys, except that the 
attorney's fees will not be reimbursed at a rate in excess of 
$110 per hour (indexed for inflation) unless the court 
determines that a special factor, such as the limited 
availability of qualified attorneys for the proceeding, 
justifies a higher rate. Awards of reasonable litigation costs 
and reasonable administrative costs cannot exceed amounts paid 
or incurred.
    Once a taxpayer has substantially prevailed over the IRS in 
a tax dispute, the IRS has the burden of proof to establish 
that it was substantially justified in maintaining its position 
against the taxpayer. A rebuttable presumption exists that 
provides that the position of the United States is not 
considered to be substantially justified if the IRS did not 
follow in the administrative proceeding (1) its published 
regulations, revenue rulings, revenue procedures, information 
releases, notices, or announcements, or (2) a private letter 
ruling, determination letter, or technical advice memorandum 
issued to the taxpayer.

                        Description of Proposal

    The bill would: (1) provide that the difficulty of the 
issues presented or the local availability of tax expertise can 
be used to justify an award of attorney's fees of more than the 
statutory limit of $110 per hour; (2) move the point in time at 
which both the position of the United States is determined and 
after which reasonable administrative costs can be awarded to 
also encompass the date on which the first letter of proposed 
deficiency which allows the taxpayer an opportunity for 
administrative review in the IRS Office of Appeals is sent; (3) 
permit the award of attorney's fees (in amounts determined by 
the court to be appropriate) to specified persons who represent 
the taxpayer for no more than a nominal fee; (4) raise the net 
worth limitation above which attorney's fees may not be awarded 
to $5 million (from $2 million) for individuals and $35 million 
(from $7 million) for corporations and partnerships; and (5) 
provide that ``the position of the United States was not 
substantially justified if the United States has not prevailed 
on the same issue in at least 3 United States Courts of 
Appeal.''

                             Effective Date

    The provision would apply to proceedings beginning after 
the date of enactment.

         C. Civil Damages for Negligence in Collection Actions

                         (sec. 303 of the bill)

                              Present Law

    A taxpayer may sue the United States for up to $1 million 
of civil damages caused by an officer or employee of the IRS 
who recklessly or intentionally disregards provisions of the 
Internal Revenue Code or Treasury regulations in connection 
with the collection of Federal tax with respect to the 
taxpayer.

                        Description of Proposal

    The bill would provide for up to $100,000 in civil damages 
caused by an officer or employee of the IRS who negligently 
disregards provisions of the Internal Revenue Code or Treasury 
regulations in connection with the collection of Federal tax 
with respect to the taxpayer.

                             Effective Date

    The provision would be effective with respect to actions of 
officers or employees of the IRS occurring after the date of 
enactment.

          D. Disclosure of Criteria for Examination Selection

                         (sec. 304 of the bill)

                              Present Law

    The IRS examines Federal tax returns to determine the 
correct liability of taxpayers. The IRS selects returns to be 
audited in a number of ways, such as through a computerized 
classification system (the discriminant function (``DIF'') 
system).

                        Description of Proposal

    The bill would require that IRS add to Publication 1 
(``Your Rights as a Taxpayer'') ``a statement which sets forth 
in simple and nontechnical terms the criteria and procedures 
for selecting taxpayers for examination.'' The statement must 
not include any information the disclosure of which is 
detrimental to law enforcement. The statement must specify the 
general procedures used by the IRS, including the extent to 
which taxpayers are selected for examination on the basis of 
information in the media or from informants. Drafts of the 
statements are required to be submitted to the House Committee 
on Ways and Means, the Senate Committee on Finance, and the 
Joint Committee on Taxation.

                             Effective Date

    The addition to Publication 1 would have to be made not 
later than 180 days after the date of enactment.

        E. Archive of Records of the IRS (sec. 305 of the bill)

                              Present Law

In general
    The IRS is obligated to transfer agency records to the 
National Archives and Records Administration (``NARA'') for 
retention or disposal. The IRS is also obligated to protect 
confidential taxpayer records from disclosure. These two 
obligations have created conflict between NARA and the IRS. 
Under present law, the IRS is the sole determiner of 
whetherrecords contain taxpayer information. Once the IRS has made that 
determination, NARA is not permitted to examine those records. NARA has 
expressed concern that the IRS may be using the disclosure prohibition 
to improperly conceal agency records with historical significance.

IRS obligation to archive records

    The IRS, like all other Federal agencies, must create, 
maintain, and preserve agency records in accordance with 
section 3101 of title 44 of the United States Code. NARA is the 
Government agency responsible for overseeing the management of 
the records of the Federal government.\104\ Federal agencies 
are required to deposit significant and historical records with 
NARA.\105\ The head of each Federal agency must also establish 
safeguards against the removal or loss of records.\106\
---------------------------------------------------------------------------
    \104\ 44 U.S.C. sec. 2904.
    \105\ 5 U.S.C. sec. 552a(b)(6).
    \106\ 44 U.S.C. sec. 3105.
---------------------------------------------------------------------------

Authority of NARA

    NARA is authorized, under the Federal Records Act, to 
establish standards for the selective retention of records of 
continuing value.\107\ NARA has the statutory authority to 
inspect records management practices of Federal agencies and to 
make recommendations for improvement.\108\ The head of each 
Federal agency must submit to NARA a list of records to be 
destroyed and a schedule for such destruction.\109\ NARA 
examines the list to determine if any of the records on the 
list have sufficient administrative, legal research, or other 
value to warrant their continued preservation. In many cases, 
the description of the record on the list is sufficient for 
NARA to make the determination. For example, NARA does not need 
to inspect Presidential tax returns to determine that they have 
historical value and should be retained. In some cases, NARA 
may find it helpful to examine a particular record. NARA has 
general authority to inspect records solely for the purpose of 
making recommendations for the improvement of record management 
practices.\110\ However, tax returns and return information can 
only be disclosed under the authority provided in section 6103 
of the Internal Revenue Code. There is no exception to the 
disclosure prohibition for records management inspection by 
NARA.\111\
---------------------------------------------------------------------------
    \107\ 44 U.S.C. sec. 2905.
    \108\ 44 U.S.C. sec. 2904(c)(7).
    \109\ 44 U.S.C. sec. 3303.
    \110\ 44 U.S.C. sec. 2906.
    \111\ American Friends Service Committee v. Webster. 720 F.2d 29 
(D.C. Cir. 1983).
---------------------------------------------------------------------------
    In connection with its evaluation of the record management 
system of the IRS, NARA noted several instances where the 
disclosure prohibitions of Code section 6103 complicated their 
review of many IRS records.
    NARA is also responsible for the custody, use and 
withdrawal of records transferred to it.\112\ Statutory 
provisions that restrict public access to the records in the 
hands of the agency from which the records were transferred 
also apply to NARA. Thus, if a confidential record, such as a 
Presidential tax return, is transferred to NARA for archival 
storage, NARA is not permitted to disclose it. In general, the 
application of such restrictions to records in the hands of 
NARA expire after the records have been in existence for 30 
years.\113\ The issue of whether the specific disclosure 
prohibition of section 6103 takes precedence over the general 
30-year expiration of restrictions generally applicable to 
records in the hands of NARA has not been addressed by a court, 
but an informal advisory opinion from the Office of Legal 
Counsel of the Attorney General concluded that the 30-year 
expiration provision would not reach records subject to section 
6103.\114\
---------------------------------------------------------------------------
    \112\ 44 U.S.C. sec. 2108.
    \113\ 44 U.S.C. sec. 2108.
    \114\ Department of Justice, Office of Legal Counsel, Memorandum to 
Richard K. Willard, Assistant Attorney General (Civil Division) 
(February 27, 1986).
---------------------------------------------------------------------------

Confidentiality requirements

    The IRS must preserve the confidentiality of taxpayer 
information contained in Federal income tax returns. Such 
information may not be disclosed except as authorized under 
Code section 6103. Section 6103 was substantially revised in 
1976 to address Congress' concern that tax information was 
being used by Federal agencies in pursuit of objectives 
unrelated to administration and enforcement of the tax laws. 
Congress believed that the wide-spread use of tax information 
by agencies other than the IRS could adversely affect the 
willingness of taxpayers to comply voluntarily with the tax 
laws and could undermine the country's self-assessment tax 
system.\115\ Section 6103 does not authorize the disclosure of 
confidential return information to NARA. Section 6103(n) does 
permit disclosure of return information to any person to the 
extent necessary in connection with the storage or reproduction 
of such information. The interagency agreement between IRS and 
NARA contemplates NARA's photocopying of return information 
pursuant to requests by the IRS.
---------------------------------------------------------------------------
    \115\ S. Rept. 94-938, p. 317 (1976).
---------------------------------------------------------------------------
    Section 6103 restricts the disclosure of returns and return 
information only. Return means any tax or information return, 
declaration of estimated tax, or claim for refund, including 
schedules and attachments thereto, filed with the IRS. Return 
information includes the taxpayer's name; nature and source or 
amount of income; and whether the taxpayer's return is under 
investigation. Section 6103(b)(2) provides that ``nothing in 
any other provision of law shall be construed to require the 
disclosure of standards used or to be used for the selection of 
returns for examination, or data used or to be used for 
determining such standards, if the Secretary determines that 
such disclosure will seriously impair assessment, collection, 
or enforcement under the internal revenue laws.'' Section 6103 
does not restrict the disclosure of other records required to 
be maintained by the IRS, such as records documenting agency 
policy, programs and activities, and agency histories. Such 
records are required to be made available to the public under 
the Freedom of Information Act (``FOIA'').\116\
---------------------------------------------------------------------------
    \116\ FOIA does not require disclosure of records or information 
that would frustrate law enforcement efforts. 5 U.S.C. 552(b)(7).
---------------------------------------------------------------------------
    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431).

                        Description of Proposal

    The bill would provide an exception to the disclosure rules 
to require IRS to disclose IRS records to NARA, upon written 
request from the Archivist,\117\ for purposes of scheduling 
such records for destruction or retention in the National 
Archives. The present-law prohibitions on and penalties for 
disclosure of tax information would generally apply to NARA.
---------------------------------------------------------------------------
    \117\ It is not intended that such a request be required to provide 
a detailed description of the item to be excluded from the disclosure 
rules. Such a requirement could frustrate the intent of the provision, 
as NARA would not be able to describe the item in detail if it were 
protected from disclosure.
---------------------------------------------------------------------------

                             Effective Date

    The provision would be effective for requests made by the 
Archivist after the date of enactment.

         F. Study of Confidentiality of Tax Return Information

                         (sec. 306 of the bill)

                              Present Law

    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431). No tax 
information may be furnished by the IRS to another agency 
unless the other agency establishes procedures satisfactory to 
the IRS for safeguarding the tax information it receives (sec. 
6103(p)).

                        Description of Proposal

    The bill would require the Joint Committee on Taxation to 
conduct a study on provisions regarding taxpayer 
confidentiality. The study would examine present-law 
protections of taxpayer privacy, the need for third parties to 
use tax return information, and the ability to achieve greater 
levels of voluntary compliance by allowing the public to know 
who is legally required to file tax returns but does not do so.

                             Effective Date

    The findings of the study, along with any recommendations, 
would be required to be reported to the Congress no later than 
one year after the date of enactment.

            G. Freedom of Information (sec. 307 of the bill)

                              Present Law

    The Freedom of Information Act (``FOIA'') requires most 
written material produced by Federal agencies to be made 
public.\118\ The purpose of FOIA is to ensure that citizens are 
informed about actions taken by their government, so that 
citizens can operate as a check against corruption by holding 
their government accountable. Unless agency information is 
exempt from FOIA, it must be made available to the public. The 
IRS is required to make records specifically described and 
requested by any person promptly available, unless the records 
are published in the Federal Register or are available in one 
of the IRS public reading rooms for inspection and copying.
---------------------------------------------------------------------------
    \118\ 5 U.S.C. sec. 552.
---------------------------------------------------------------------------
    The IRS publishes the following types of information: (1) 
descriptions of its central and field organization; (2) 
statements of functions; (3) rules of procedure and 
descriptions of forms and where forms may be obtained; (4) 
substantive rules of general applicability and statements of 
general policy; and (5) amendments to the matters described in 
(1) through (4). The IRS makes available for inspection and 
copying the following types of information: (1) final opinions, 
including concurring and dissenting opinions, and orders; (2) 
statements of policy and interpretations that have not been 
published in the Federal Register; and (3) administrative staff 
manuals and instructions to staff that affect a member of the 
public. The IRS makes available on request all other records 
that are under the control of the IRS and are not subject to an 
exception to FOIA.\119\
---------------------------------------------------------------------------
    \119\ 26 C.F.R. sec. 601.702(c).
---------------------------------------------------------------------------
    Requests must be made in writing, signed by the requester, 
and must reasonably describe the records requested.\120\ The 
reasonable description requirement is generally met if the 
request gives the name, subject matter, location, and years in 
issue for the requested records. The initial determination of 
whether a request for records will be granted is to be made 
within 10 working days of the date of receipt of the request. 
The IRS may have a 10-day extension of this time only if the 
requester agrees. The requester is entitled to file an 
administrative appeal within 35 days after the denial of the 
request or the expiration of the 10-day initial determination 
period (with extensions). The requester is entitled to judicial 
review of the initial determination if the administrative 
appeal has not been granted within 20 working days.
---------------------------------------------------------------------------
    \120\ 26 C.F.R. sec. 601.702(c)(3).
---------------------------------------------------------------------------
    In 1996, Congress amended the applicable statute to provide 
new procedures, applicable to all Federal agencies, for 
processing FOIA requests.\121\ The amendments, known as the 
Electronic Freedom of Information Act (``EFOIA'') became 
effective 180 days after October 2, 1996. Recognizing that many 
Federal agencies had a significant backlog of FOIA requests 
that prevented processing in a timely fashion, EFOIA provides 
that the initial determination of whether a request will be 
granted is to be made within 20 working days of the date of 
receipt of the request. If the agency anticipates that it 
cannot make the initial determination within the specified time 
period, it must notify the requester and give the requester an 
opportunity to limit the scope of the request so that the 
determination may be made within the time period or to arrange 
an alternative time frame with the agency.
---------------------------------------------------------------------------
    \121\ Public Law 104-231; October 2, 1996.
---------------------------------------------------------------------------
    EFOIA requires each agency to promulgate regulations 
providing for expedited processing of requests for records if 
the requester demonstrates a compelling need.\122\ A 
``compelling need'' includes, with respect to a request made by 
the media, urgency to inform the public concerning actual or 
alleged Federal Government activity. The determination of 
whether expedited processing will be granted shall be made 
within 10 working days of the request.
---------------------------------------------------------------------------
    \122\ 5 U.S.C. 552(a)(6)(E).
---------------------------------------------------------------------------
    EFOIA also requires agencies to make an annual report to 
the Attorney General about the number of FOIA requests received 
and processed, the status of pending requests and appeals, and 
the time and resources used to respond to FOIA requests.

                        Description of Proposal

    The bill would require the Secretary of the Treasury to 
develop procedures for expedited processing of FOIA requests 
when (1) there exists widespread and exceptional media interest 
in the requested information, and (2) expedited processing 
\123\ is warranted because the information sought involves 
possible questions about the government's integrity which 
affect public confidence.
---------------------------------------------------------------------------
    \123\ The bill does not appear to provide any coordination with the 
provisions of EFOIA, which, as described above, also provide for 
expedited processing of FOIA requests.
---------------------------------------------------------------------------
    Under the bill, the IRS would be required to provide an 
explanation to the requester if the request is not satisfied 
within 30 days. If the request for information is not granted 
within 60 days, the requester would be eligible to seek 
judicial review.
    The Secretary of the Treasury would be required to submit 
drafts of the procedures for expedited processing to the House 
Committee on Ways and Means, the Senate Committee on Finance, 
and the Joint Committee on Taxation.

                             Effective Date

    The procedures required by the bill would be developed not 
later than 180 days after the date of enactment.

             H. Offers-in-Compromise (sec. 308 of the bill)

                              Present Law

    Section 7122 of the Code permits the IRS to compromise a 
taxpayer's tax liability. In general, this occurs when a 
taxpayer submits an offer-in-compromise to the IRS. An offer-
in-compromise is a bill to settle unpaid tax accounts for less 
than the full amount of the assessed balance due. An offer-in-
compromise may be submitted for all types of taxes, as well as 
interest and penalties, arising under the Internal Revenue 
Code.
    Taxpayers submit an offer-in-compromise on Form 656. There 
are two bases on which an offer can be made. The first is doubt 
as to the liability for the amount owed. The second is doubt as 
to the taxpayer's ability fully to pay the amount owed. An 
application can be made on either or both of these grounds. 
Taxpayers are required to submit background information to the 
IRS substantiating their application. If they are applying on 
the basis of doubt as to the taxpayer'sability fully to pay the 
amount owed, the taxpayer must complete a financial disclosure form 
enumerating assets and liabilities.
    As part of an offer-in-compromise made on the basis of 
doubt as to ability fully to pay, taxpayers must agree to 
comply with all provisions of the Internal Revenue Code 
relating to filing returns and paying taxes for five years from 
the date the IRS accepts the offer. Failure to observe this 
requirement permits the IRS to begin immediate collection 
actions for the original amount of the liability.

                        Description of Proposal

    The bill would require the IRS to develop and publish 
schedules of national and local allowances to ensure that 
taxpayers entering into an offer-in-compromise have an adequate 
means to provide for basic living expenses. The bill would also 
require the IRS to prepare a statement on the rights of 
taxpayers and the obligations of the IRS relating to offers in 
compromise.

                             Effective Date

    The provision would be effective on the date of enactment.

         I. Elimination of Interest Differential on Overlapping

           Periods of Interest on Income Tax Overpayments and

                  Underpayments (sec. 309 of the bill)

                              Present Law

    A taxpayer that underpays its taxes is required to pay 
interest on the underpayment at a rate equal to the Federal 
short term interest rate plus three percentage points. A 
special ``hot interest'' rate equal to the Federal short term 
interest rate plus five percentage points applies in the case 
of certain large corporate underpayments.
    A taxpayer that overpays its taxes receives interest on the 
overpayment at a rate equal to the Federal short term interest 
rate plus two percentage points. In the case of corporate 
overpayments in excess of $10,000, this is reduced to the 
Federal short term interest rate plus one-half of a percentage 
point.
    If a taxpayer has an underpayment of tax from one year and 
an overpayment of tax from a different year that are 
outstanding at the same time, the IRS will typically offset the 
overpayment against the underpayment and apply the appropriate 
interest to the resulting net underpayment or overpayment. 
However, if either the underpayment or overpayment has been 
satisfied, the IRS will not typically offset the two amounts, 
but rather will assess or credit interest on the full 
underpayment or overpayment at the underpayment or overpayment 
rate. This has the effect of assessing the underpayment at the 
higher underpayment rate and crediting the overpayment at the 
lower overpayment rate. This results in the taxpayer being 
assessed a net interest charge, even if the amounts of the 
overpayment and underpayment are the same.
    The Secretary has the authority to credit the amount of any 
overpayment against any liability under the Code.\124\ Congress 
has previously directed the Internal Revenue Service to 
consider procedures for ``netting'' overpayments and 
underpayments.\125\
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    \124\ Code sec. 6402.
    \125\ Pursuant to TBOR2 (1996), the Secretary conducted a study of 
the manner in which the IRS has implemented the netting of interest on 
overpayments and underpayments and the policy and administrative 
implications of global netting. A Report to the Congress on Netting of 
Interest on Tax Overpayments and Underpayments was issued by the Office 
of Tax Policy, U.S. Treasury, in April, 1997. The legislative history 
to the General Agreement on Tariffs and Trade (GATT) (1994) stated that 
the Secretary should implement the most comprehensive crediting 
procedures that are consistent with sound administrative practice, and 
should do so as rapidly as is practicable. A similar statement was 
included in the Conference Report to the Omnibus Budget Reconciliation 
Act of 1990.
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                        Description of Proposal

    The bill would provide that the rate of interest would be 
the same for both overpayments and underpayments of tax. The 
rate would be determined by the Secretary and would be the rate 
that would result in the same net revenue to the Government as 
would have resulted without regard to this provision.

                             Effective Date

    The provision would be effective for purposes of 
determining interest for periods after the date of enactment.

 J. Elimination of Application of Failure to Pay Penalty During Period 
            of Installment Agreement (sec. 310 of the bill)

                              Present Law

    Section 6159 of the Code authorizes the IRS to enter into 
written agreements with any taxpayer under which the taxpayer 
is allowed to pay taxes owed, as well as interest and 
penalties, in installment payments if the IRS determines that 
doing so will facilitate collection of the amounts owed. An 
installment agreement does not reduce the amount of taxes, 
interest, or penalties owed; it does, however, provide for a 
longer period during which payments may be made during which 
other IRS enforcement actions (such a levies or seizures) are 
held in abeyance. Many taxpayers can request an installment 
agreement by filing Form 9465. This form is relatively simple 
and does not require the submission of detailed financial 
statements. The IRS in most instances readily approves these 
requests if the amounts involved are not large and if the 
taxpayer has filed tax returns on time in the past. Some 
taxpayers are required to submit background information to the 
IRS substantiating their application. If the request for an 
installment agreement is approved by the IRS, a user fee of $43 
is charged.\126\ This user fee is in addition to the tax, 
interest, and penalties that are owed.
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    \126\ This user fee is imposed pursuant to 31 U.S.C. sec. 9701. See 
T.D. 8589 (February 14, 1995).
---------------------------------------------------------------------------
    One penalty that may continue to apply during the period of 
an installment agreement is the penalty for failure to pay 
taxes (sec. 6651(a)). This penalty is a half percent per month 
of the amount owed, up to a maximum of 25 percent. If the 
failure to pay is fraudulent, the maximum penalty is 75 
percent.

                        Description of Proposal

    The bill would provide that the penalty for failure to pay 
taxes would not apply for the period that an installment 
agreement is in effect.

                             Effective Date

    The provision would apply to installment agreements entered 
into after the date of enactment.

K. Safe Harbor for Qualification for Installment Agreement (sec. 311 of 
                               the bill)

                              Present Law

    Section 6159 of the Code authorizes the IRS to enter into 
written agreements with any taxpayer under which the taxpayer 
is allowed to pay taxes owed, as well as interest and 
penalties, in installment payments if the IRS determines that 
doing so will facilitate collection of the amounts owed. An 
installment agreement does not reduce the amount of taxes, 
interest, or penalties owed; it does, however, provide for a 
longer period during which payments may be made during which 
other IRS enforcement actions (such a levies or seizures) are 
held in abeyance. Many taxpayers can request an installment 
agreement by filing Form 9465. This form is relatively simple 
and does not require the submission of detailed financial 
statements. The IRS in most instances readily approves these 
requests if the amounts involved are not large and if the 
taxpayer has filed tax returns on time in the past. Some 
taxpayers are required to submit background information to the 
IRS substantiating their application.

                        Description of Proposal

    The bill would require the IRS to enter into an installment 
agreement with a taxpayer provided that: (1) the amount of the 
tax liability is $10,000 or less; (2) the taxpayer has not 
failed to file any tax return or pay any tax during the 
preceding five years; and (3) the taxpayer has not previously 
entered into an automatic installment agreement as provided for 
in the bill.

                             Effective Date

    The provision would apply to installment agreements entered 
into after the date of enactment.

               L. Payment of Taxes (sec. 312 of the bill)

                              Present Law

    The Code provides that it is lawful for the Secretary to 
accept checks or money orders as payment for taxes, to the 
extent and under the conditions provided in regulations 
prescribed by the Secretary (sec. 6311). Those regulations 
\127\ state that checks or money orders should be made payable 
to the Internal Revenue Service.
---------------------------------------------------------------------------
    \127\ Treas. Reg. Sec. 301.6311-1(a)(1).
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would require the Secretary or his delegate to 
establish such rules, regulations, and procedures as are 
necessary to allow payment of taxes by check or money order to 
be made payable to the United States Treasury.

                             Effective Date

    The provision would be effective on the date of enactment.

         M. Low-Income Taxpayer Clinics (sec. 313 of the bill)

                              Present Law

    There are no provisions in present law providing for 
assistance to clinics that assist low-income taxpayers.

                        Description of Proposal

    The bill would require the Secretary to make matching 
grants for the development, expansion, or continuation of 
certain low-income taxpayer clinics. Eligible clinics are those 
that charge no more than a nominal fee to either represent low-
income taxpayers in controversies with the IRS or provide tax 
information to individuals for whom English is a second 
language. The term``clinic'' would include (1) a clinical 
program at an accredited law school in which students represent low-
income taxpayers, and (2) an organization exempt from tax under Code 
section 501(c) which either represents low-income taxpayers or provides 
referral to qualified representatives.
    A clinic would be treated as representing low-income 
taxpayers if at least 90 percent of the taxpayers represented 
by the clinic have incomes which do not exceed 250 percent of 
the poverty level and amounts in controversy of $25,000 or 
less.
    The aggregate amount of grants to be awarded each year are 
limited to $3,000,000. No one taxpayer clinic would receive 
more than $100,000 per year. The clinic must provide matching 
funds on a dollar-for-dollar basis. Matching funds may include 
faculty and clinic administration salaries and clinic equipment 
costs, but not general institutional overhead.
    The following criteria are to be considered in making 
awards: (1) number of taxpayers served by the clinic, including 
the number of taxpayers in the geographical area for whom 
English is a second language; (2) the existence of other 
taxpayer clinics serving the same population; (3) the quality 
of the program; and (4) alternative funding sources available 
to the clinic.

                             Effective Date

    The provision would be effective on the date of enactment.

        N. Jurisdiction of the Tax Court (sec. 314 of the bill)

                              Present Law

    Taxpayers may choose to contest many tax disputes in the 
Tax Court. Special small case procedures apply to disputes 
involving $10,000 or less, if the taxpayer chooses to utilize 
these procedures (and the Tax Court concurs) (sec. 7463).

                        Description of Proposal

    The bill would increase the cap for small case treatment 
from $10,000 to $25,000.\128\
---------------------------------------------------------------------------
    \128\ This section of the bill also contains two proposals the 
substance of which became present law after the date of introduction of 
S. 1096. See sections 505 and 1452 of the Taxpayer Relief Act of 1997 
(Public Law 105-34; August 5, 1997).
---------------------------------------------------------------------------

                             Effective Date

    The provision would apply to proceedings commenced after 
the date of enactment.

            O. Cataloging Complaints (sec. 315 of the bill)

                              Present Law

    The IRS is required to make an annual report to the 
Congress, beginning in 1997, on all categories of instances 
involving allegations of misconduct by IRS employees, arising 
either from internally identified cases or from taxpayer or 
third-party initiated complaints.\129\ The report must identify 
the nature of the misconduct or complaint, the number of 
instances received by category, and the disposition of the 
complaint.
---------------------------------------------------------------------------
    \129\ Section 1211 of the Taxpayer Bill of Rights 2 (Public Law 
104-168; July 30, 1996).
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would require that, in collecting data for this 
report, records of taxpayer complaints of misconduct by IRS 
employees shall be maintained on an individual employee basis.

                             Effective Date

    The provision would be effective on the date of enactment.

              P. Procedures Involving Taxpayer Interviews

                         (sec. 316 of the bill)

                              Present Law

    Prior to or at initial in-person audit interviews, the IRS 
must explain to taxpayers the audit process and taxpayers' 
rights under that process (sec. 7521). In addition, prior to or 
at initial in-person collection interviews, the IRS must 
explain the collection process and taxpayers' rights under that 
process. If a taxpayer clearly states that during an interview 
with the IRS that the taxpayer wishes to consult with the 
taxpayer's representative, the interview must be suspended to 
afford the taxpayer a reasonable opportunity to consult with 
the representative.

                        Description of Proposal

    The bill would require that, prior to initial in-person 
audit interviews, the IRS must do four additional things. 
First, the IRS must ask whether the taxpayer is represented by 
a representative. If the taxpayer is so represented, the 
interview may not proceed without the presence of the 
representative unless the taxpayer consents. Second, the IRS 
must also explain that the taxpayer has the right to have the 
interview take place in a reasonable place and that it does not 
have to take place in the taxpayer's home. Third, the IRS must 
explain to the taxpayer the reasons for the selection of the 
taxpayer's return for examination. Fourth, the IRS must provide 
to the taxpayer a written explanation of the applicable burdens 
of proof on taxpayers and on the IRS.

                             Effective Date

    The provision would apply to interviews and examinations 
taking place after the date of enactment.

             Q. Explanation of Joint and Several Liability

                         (sec. 317 of the bill)

                              Present Law

    In general, spouses who file a joint tax return are each 
fully responsible for the accuracy of the tax return and for 
the full liability. This is true even though only one spouse 
may have earned the wages or income which is shown on the 
return. This is ``joint and several'' liability. Spouses who 
wish to avoid joint and several liability may file as a married 
person filing separately. Special rules apply in the case of 
innocent spouses pursuant to section 6013(e).

                        Description of Proposal

    The bill would require that, no later than 180 days after 
the date of enactment, the IRS must establish procedures 
clearly to alert married taxpayers of their joint and several 
liability on all appropriate tax publications and instructions. 
It is anticipated that the IRS will make an appropriate cross-
reference to these statements near the signature line on 
appropriate tax forms. Drafts of the statements would be 
required to be submitted to the House Committee on Ways and 
Means, the Senate Committee on Finance, and the Joint Committee 
on Taxation.

                             Effective Date

    The bill would require that the procedures be established 
as soon as practicable, but no later than 180 days after the 
date of enactment.

   R. Procedures Relating to Extensions of Statute of Limitations by 
                    Agreement (sec. 318 of the bill)

                              Present Law

    The statute of limitations within which the IRS may assess 
additional taxes is generally three years from the date a 
return is filed (sec. 6501).\130\ Prior to the expiration of 
the statute of limitations, both the taxpayer and the IRS may 
agree in writing to extend the statute, using Form 872 or 872-
A. An extension may be for either a specified period or an 
indefinite period. The statute of limitations within which a 
tax may be collected after assessment is 10 years after 
assessment (sec. 6502). Prior to the expiration of the statute 
of limitations, both the taxpayer and the IRS may agree in 
writing to extend the statute, using Form 900.
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    \130\ For this purpose, a return filed before the due date is 
considered to be filed on the due date.
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would require that, on each occasion on which the 
taxpayer is requested by the IRS to extend the statute of 
limitations, the IRS must notify the taxpayer of the taxpayer's 
right to refuse to extend the statute of limitations or to 
limit the extension to particular issues.

                             Effective Date

    The provision would apply to requests to extend the statute 
of limitations made after the date of enactment.

                               S. Studies

1. Study of penalty administration (sec. 319 of the bill)

                              Present Law

    The last major revision of the overall penalty structure in 
the Internal Revenue Code was the Improved Penalty 
Administration and Compliance Tax Act, part of the Omnibus 
Budget Reconciliation Act of 1989.\131\
---------------------------------------------------------------------------
    \131\ Subtitle G of Title 7 of the Omnibus Budget Reconciliation 
act of 1989 (Public Law 101-239).
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would require the Taxpayer Advocate to prepare a 
study and to provide an independent report to the Congress 
reviewing the administration and implementation of the 
``penalty reform recommendations'' made in the Omnibus Budget 
Reconciliation Act of 1989, including legislative and 
administrative recommendations to simplify penalty 
administration and reduce taxpayer burden.

                             Effective Date

    The report must be provided not later than nine months 
after the date of enactment.

2. Study of treatment of all taxpayers as separate filing units (sec. 
        320 of the bill)

                              Present Law

    The Code enumerates four filing statuses for individuals: 
(1) married individuals filing joint returns and surviving 
spouses; (2) heads of households; (3) unmarried individuals; 
and (4) married individuals filing separate returns (sec. 1).

                        Description of Proposal

    The bill would require the Secretary or his delegate and, 
in addition, the General Accounting Office (``GAO''), to 
conduct separate studies on the feasibility of treating each 
individual separately for all purposes of the Code. The studies 
would be required to include recommendations for eliminating 
the marriage penalty, addressing community property issues, and 
reducing the burden for divorced and separated taxpayers.

                             Effective Date

    The studies would be required to be provided to the 
Congress no later than 180 days after the date of enactment.

3. Study of burden of proof (sec. 321 of the bill)

                              Present Law

    Under present law, a rebuttable presumption exists that the 
Commissioner's determination of tax liability is correct.'' 
\132\ This presumption in favor of the Commissioner is a 
procedural device that requires the plaintiff to go forward 
with prima facie evidence to support a finding contrary to the 
Commissioner's determination. Once this procedural burden is 
satisfied, the taxpayer must still carry the ultimate burden of 
proof or persuasion on the merits. Thus, the plaintiff not only 
has the burden of proof of establishing that the Commissioner's 
determination was incorrect, but also of establishing the merit 
of its claims by a preponderance of the evidence''.\133\
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    \132\ Welch v. Helvering, 290 U.S. 111, 115 (1933).
    \133\ Danville Plywood Corp v. U.S., U.S. Cl. Ct., 63 AFTR 2d 89-
1036, 1043 (1989); citations omitted.
---------------------------------------------------------------------------
    The general rebuttable presumption that the Commissioner's 
determination of tax liability is correct is a fundamental 
element of the structure of the Federal income tax system. 
Although this presumption is judicially based, rather than 
legislatively based, there is considerable evidence that the 
presumption has been repeatedly considered and approved by the 
Congress. This is the case because the Internal Revenue Code 
contains a number of civil provisions that explicitly place the 
burden of proof on the Commissioner in specifically designated 
circumstances. The Congress would have enacted these provisions 
only if it recognized and approved of the general rule of 
presumptive correctness of the Commissioner's determination. A 
list of these civil provisions follows.
    (1) Fraud.--Any proceeding involving the issue of whether 
the taxpayer has been guilty of fraud with intent to evade tax 
(secs. 7454(a) and 7422(e)).
    (2) Required reasonable verification of information 
returns.--In any court proceeding, if a taxpayer asserts a 
reasonable dispute with respect to any item of income reported 
on an information returned filed with the Secretary by a third 
party and the taxpayer has fully cooperated with the Secretary 
(including providing, within a reasonable period of time, 
access to and inspection of all witnesses, information, and 
documents within the control of the taxpayer as reasonably 
requested by the Secretary), the Secretary has the burden of 
producing reasonable and probative information concerning such 
deficiency in addition to such information return (sec. 
6201(d)).
    (3) Foundation managers.--Any proceeding involving the 
issue of whether a foundation manager has knowingly 
participated in a prohibited transaction (sec. 7454(b)).
    (4) Transferee liability.--Any proceeding in the Tax Court 
to show that a petitioner is liable as a transferee of property 
of a taxpayer (sec. 6902(a)).
    (5) Review of jeopardy levy or assessment procedures.--Any 
proceeding to review the reasonableness of a jeopardy levy or 
jeopardy assessment (sec. 7429(g)(1)).
    (6) Property transferred in connection with performance of 
services.--In the case of property subject to a restriction 
that by its terms will never lapse and that allows the 
transferee to sell only at a price determined under a formula, 
the price is deemed to be fair market value unless established 
to the contrary by the Secretary (sec. 83(d)(1)).
    (7) Illegal bribes, kickbacks, and other payments.--As to 
whether a payment constitutes an illegal bribe, illegal 
kickback, or other illegal payment (sec. 162(c)(1) and (2)).
    (8) Golden parachute payments.--As to whether a payment is 
a parachute payment on account of a violation of any generally 
enforced securities laws or regulations (sec. 280G(b)(2)(B)).
    (9) Unreasonable accumulation of earnings and profits.--In 
any Tax Court proceeding as to whether earnings and profits 
have been permitted to accumulate beyond the reasonable needs 
of the business, provided that the Commissioner has not 
fulfilled specified procedural requirements (sec. 534).
    (10) Expatriation.--As to whether it is reasonable to 
believe that an individual's loss of citizenship would result 
in a substantial reduction in the individual's income taxes or 
transfer taxes (secs. 877(e), 2107(e), 2501(a)(4)).
    (11) Public inspection of written determinations.--In any 
proceeding seeking additional disclosure of information (sec. 
6110(f)(4)(A)).
    (12) Penalties for promoting abusive tax shelters, aiding 
and abetting the understatement of tax liability, and filing a 
frivolous income return.--As to whether the person is liable 
for the penalty (sec. 6703(a)).
    (13) Income tax return preparers' penalty.--As to whether a 
preparer has willfully attempted to understate tax liability 
(sec. 7427).
    (14) Status as employees.--As to whether individuals are 
employees for purposes of employment taxes (pursuant to the 
safe harbor provisions of section 530 of the Revenue Act of 
1978).\134\
---------------------------------------------------------------------------
    \134\ Public Law 95-600; November 6, 1978, as amended by section 
1122 of the Small Business Job Protection Act of 1996 (Public Law 104-
188; August 20, 1996).
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would require GAO to prepare a report on the 
burdens of proof for taxpayers and the IRS in tax 
controversies. The report would be required to highlight the 
differences between these burdens and the burdens imposed in 
other disputes with the Federal Government. The report would 
also be required to comment on the impact of changing these 
burdens on tax administration and taxpayer rights.

                             Effective Date

    The report would be required to be provided to the Congress 
no later than 180 days after the date of enactment.

                      II. PROVISIONS OF H.R. 2676

               A. Burden of Proof (sec. 301 of the bill)

                              Present Law

    Under present law, a rebuttable presumption exists that the 
Commissioner's determination of tax liability is correct.\135\ 
``This presumption in favor of the Commissioner is a procedural 
device that requires the plaintiff to go forward with prima 
facie evidence to support a finding contrary to the 
Commissioner's determination. Once this procedural burden is 
satisfied, the taxpayer must still carry the ultimate burden of 
proof or persuasion on the merits. Thus, the plaintiff not only 
has the burden of proof of establishing that the Commissioner's 
determination was incorrect, but also of establishing the merit 
of its claims by a preponderance of the evidence''.\136\
---------------------------------------------------------------------------
    \135\ Welch v. Helvering, 290 U.S. 111, 115 (1933).
    \136\ Danville Plywood Corp. v. U.S., U.S. Cl. Ct., 63 AFTR 2d 89-
1036, 1043 (1989); citations omitted.
---------------------------------------------------------------------------
    The general rebuttable presumption that the Commissioner's 
determination of tax liability is correct is a fundamental 
element of the structure of the Federal income tax system. 
Although this presumption is judicially based, rather than 
legislatively based, there is considerable evidence that the 
presumption has been repeatedly considered and approved by the 
Congress. This is the case because the Internal Revenue Code 
contains a number of civil provisions that explicitly place the 
burden of proof on the Commissioner in specifically designated 
circumstances. The Congress would have enacted these provisions 
only if it recognized and approved of the general rule of 
presumptive correctness of the Commissioner's determination. A 
list of these civil provisions follows.
    (1) Fraud.--Any proceeding involving the issue of whether 
the taxpayer has been guilty of fraud with intent to evade tax 
(secs. 7454(a) and 7422(e)).
    (2) Required reasonable verification of information 
returns.--In any court proceeding, if a taxpayer asserts a 
reasonable dispute with respect to any item of income reported 
on an information returned filed with the Secretary by a third 
party and the taxpayer has fully cooperated with the Secretary 
(including providing, within a reasonable period of time, 
access to and inspection of all witnesses, information, and 
documents within the control of the taxpayer as reasonably 
requested by the Secretary), the Secretary has the burden of 
producing reasonable and probative information concerning such 
deficiency in addition to such information return (sec. 
6201(d)).
    (3) Foundation managers.--Any proceeding involving the 
issue of whether a foundation manager has knowingly 
participated in a prohibited transaction (sec. 7454(b)).
    (4) Transferee liability.--Any proceeding in the Tax Court 
to show that a petitioner is liable as a transferee of property 
of a taxpayer (sec. 6902(a)).
    (5) Review of jeopardy levy or assessment procedures.--Any 
proceeding to review the reasonableness of a jeopardy levy or 
jeopardy assessment (sec. 7429(g)(1)).
    (6) Property transferred in connection with performance of 
services.--In the case of property subject to a restriction 
that by its terms will never lapse and that allows the 
transferee to sell only at a price determined under a formula, 
the price is deemed to be fair market value unless established 
to the contrary by the Secretary (sec. 83(d)(1)).
    (7) Illegal bribes, kickbacks, and other payments.--As to 
whether a payment constitutes an illegal bribe, illegal 
kickback, or other illegal payment (sec. 162(c)(1) and (2)).
    (8) Golden parachute payments.--As to whether a payment is 
a parachute payment on account of a violation of any generally 
enforced securities laws or regulations (sec. 280G(b)(2)(B)).
    (9) Unreasonable accumulation of earnings and profits.--In 
any Tax Court proceeding as to whether earnings and profits 
have been permitted to accumulate beyond the reasonable needs 
of the business, provided that the Commissioner has not 
fulfilled specified procedural requirements (sec. 534).
    (10) Expatriation.--As to whether it is reasonable to 
believe that an individual's loss of citizenship would result 
in a substantial reduction in the individual's income taxes or 
transfer taxes (secs. 877(e), 2107(e), 2501(a)(4)).
    (11) Public inspection of written determinations.--In any 
proceeding seeking additional disclosure of information (sec. 
6110(f)(4)(A)).
    (12) Penalties for promoting abusive tax shelters, aiding 
and abetting the understatement of tax liability, and filing a 
frivolous income return.--As to whether the person is liable 
for the penalty (sec. 6703(a)).
    (13) Income tax return preparers' penalty.--As to whether a 
preparer has willfully attempted to understate tax liability 
(sec. 7427).
    (14) Status as employees.--As to whether individuals are 
employees for purposes of employment taxes (pursuant to the 
safe harbor provisions of section 530 of the Revenue Act of 
1978).\137\
---------------------------------------------------------------------------
    \137\ Public Law 95-600 (November 6, 1978), as amended by section 
1122 of the Small Business Job Protection Act of 1996 (Public Law 104-
188; August 20, 1996).
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would provide that the Secretary shall have the 
burden of proof in any court proceeding with respect to a 
factual issue if the taxpayer asserts a reasonable dispute with 
respect to any such issue relevant to ascertaining the 
taxpayer's income tax liability. Two conditions apply. First, 
the taxpayer must fully cooperate at all times with the 
Secretary (including providing, within a reasonable period of 
time, access to and inspection of all witnesses, information, 
and documents within the control of the taxpayer, as reasonably 
requested by the Secretary).\138\ Full cooperation also 
includes providing reasonable assistance to the Secretary in 
obtaining access to and inspection of witnesses, information, 
or documents not within the control of the taxpayer (including 
any witnesses, information, or documents located in foreign 
countries).\139\ A necessary element of fully cooperating with 
the Secretary is that the taxpayer must exhaust his or her 
administrative remedies (including any appeal rights provided 
by the IRS). The taxpayer is not required to agree to extend 
the statute of limitations to be considered to have fully 
cooperated with the Secretary. Second, certain taxpayers must 
meet the net worth limitations that apply for awarding 
attorney's fees. In general, corporations, trusts, and 
partnerships whose net worth exceeds $7 million are not 
eligible for the benefits of the provision. The taxpayer has 
the burden of proving that it meets each of these conditions, 
because they are necessary prerequisites to establishing that 
the burden of proof is on the Secretary.
---------------------------------------------------------------------------
    \138\ This requirement parallels the present-law provision relating 
to reasonable verification of information returns (sec. 6201(d)).
    \139\ Full cooperation also includes providing English 
translations, as reasonably requested by the Secretary.
---------------------------------------------------------------------------
    The provision explicitly states that nothing in the 
provision shall be construed to override any requirement under 
the Code or regulations to substantiate any item. Accordingly, 
taxpayers must meet all applicable substantiation requirements, 
whether generally imposed \140\ or imposed with respect to 
specific items, such as charitable contributions \141\ or 
meals, entertainment, travel, and certain other expenses.\142\ 
Substantiation requirements include any requirement of the Code 
or regulations that the taxpayer establish an item to the 
satisfaction of the Secretary.\143\ Taxpayers who fail to 
substantiate any item in accordance with the legal requirement 
of substantiation will not have satisfied all of the legal 
conditions that are prerequisite to claiming the item on the 
taxpayer's tax return and will accordingly be unable to avail 
themselves of this provision regarding the burden of proof. 
Thus, if a taxpayer required to substantiate an item fails to 
do so in the manner required (or destroys the substantiation), 
this burden of proof provision is inapplicable.\144\
---------------------------------------------------------------------------
    \140\ See e.g., Sec. 6001 and Treas. Reg. sec. 1.6001-1 requiring 
every person liable for any tax imposed by this Title to keep such 
records as the Secretary may from time to time prescribe, and secs. 
6038 and 6038A requiring United States persons to furnish certain 
information the Secretary may prescribe with respect to foreign 
businesses controlled by the U.S. person.
    \141\ Sec. 170(a)(1) and (f)(8) and Treas. Reg. sec. 1.170A-13.
    \142\ Sec. 274(d) and Treas. Reg. sec. 1.274(d)-1, 1.274-5T, and 
1.274-5A.
    \143\ For example, sec. 905(b) of the Code provides that foreign 
tax credits shall be allowed only if the taxpayer establishes to the 
satisfaction of the Secretary all information necessary for the 
verification and computation of the credit. Instructions for meeting 
that requirement are set forth in Treas. Reg. sec. 1.905-2.
    \144\ If, however, the taxpayer can demonstrate that he had 
maintained the required substantiation but that it was destroyed or 
lost through no fault of the taxpayer, such as by fire or flood, 
existing tax rules regarding reconstruction of those records would 
continue to apply.
---------------------------------------------------------------------------

                             Effective Date

    The provision would apply to court proceedings arising in 
connection with examinations commencing after the date of 
enactment.

                      B. Proceedings by Taxpayers

1. Expansion of authority to award costs and certain fees (sec. 311 of 
        the bill)

                              Present Law

    Any person who substantially prevails in any action by or 
against the United States in connection with the determination, 
collection, or refund of any tax, interest, or penalty may be 
awarded reasonable administrative costs incurred before the IRS 
and reasonable litigation costs incurred in connection with any 
court proceeding. In general, only an individual whose net 
worth does not exceed $2 million is eligible for an award, and 
only a corporation or partnership whose net worth does not 
exceed $7 million is eligible for an award.
    Reasonable litigation costs include reasonable fees paid or 
incurred for the services of attorneys, except that the 
attorney's fees will not be reimbursed at a rate in excess of 
$110 per hour (indexed for inflation) unless the court 
determines that a special factor, such as the limited 
availability of qualified attorneys for the proceeding, 
justifies a higher rate. Awards of reasonable litigation costs 
and reasonable administrative costs cannot exceed amounts paid 
or incurred.
    Once a taxpayer has substantially prevailed over the IRS in 
a tax dispute, the IRS has the burden of proof to establish 
that it was substantially justified in maintaining its position 
against the taxpayer. A rebuttable presumption exists that 
provides that the position of the United States is not 
considered to be substantially justified if the IRS did not 
follow in the administrative proceeding (1) its published 
regulations, revenue rulings, revenue procedures, information 
releases, notices, or announcements, or (2) a private letter 
ruling, determination letter, or technical advice memorandum 
issued to the taxpayer.

                        Description of Proposal

    The bill would: (1) provide that the difficulty of the 
issues presented or the unavailability of local tax expertise 
can be used to justify an award of attorney's fees of more than 
the statutory limit of $110 per hour; (2) move the point in 
time after which reasonable administrative costs can be awarded 
to the date on which the first letter of proposed deficiency 
which allows the taxpayer an opportunity for administrative 
review in the IRS Office of Appeals is sent; (3) permit the 
award of attorney's fees (in amounts up to the statutory limit 
determined to be appropriate) to specified persons who 
represent for no more than a nominal fee a taxpayer who is a 
prevailing party; and (4) provide that in determining whether 
the position of the United States was substantially justified, 
the court shall take into account whether the United States has 
lost in courts of appeal for other circuits on substantially 
similar issues. The court may also take into account whether 
the United States has won in courts of appeal for other 
circuits on substantially similar issues.

                             Effective Date

    The provision would apply to costs incurred and services 
performed more than 180 days after the date of enactment.

2. Civil damages for negligence in collection actions (sec. 312 of the 
        bill)

                              Present Law

    A taxpayer may sue the United States for up to $1 million 
of civil damages caused by an officer or employee of the IRS 
who recklessly or intentionally disregards provisions of the 
Internal Revenue Code or Treasury regulations in connection 
with the collection of Federal tax with respect to the 
taxpayer.

                        Description of Proposal

    The bill would provide for up to $100,000 in civil damages 
caused by an officer or employee of the IRS who negligently 
disregards provisions of the Internal Revenue Code or Treasury 
regulations in connection with the collection of Federal tax 
with respect to the taxpayer. Inadvertent errors in IRS 
functions, such as in computer programming, do not trigger the 
application of this provision. No person is entitled to seek 
civil damages for negligent, reckless, or intentional disregard 
of the Code or regulations in a court of law unless he first 
exhausts his administrative remedies.

                             Effective Date

    The provision would be effective with respect to actions of 
officers or employees of the IRS occurring after the date of 
enactment.

3. Increase in size of cases permitted on small case calendar (sec. 313 
        of the bill)

                              Present Law

    Taxpayers may choose to contest many tax disputes in the 
Tax Court. Special small case procedures apply to disputes 
involving $10,000 or less, if the taxpayer chooses to utilize 
these procedures (and the Tax Court concurs).

                        Description of Proposal

    The bill would increase the cap for small case treatment 
from $10,000 to $25,000.

                             Effective Date

    The provision would apply to proceedings commenced after 
the date of enactment.

      C. Relief for Innocent Spouses and Persons With Disabilities

1. Innocent spouse relief (sec. 321 of the bill)

                              Present law

    Spouses who file a joint tax return are each fully 
responsible for the accuracy of the return and for the full tax 
liability. This is true even though only one spouse may have 
earned the wages or income which is shown on the return. This 
is ``joint and several'' liability. A spouse who wishes to 
avoid joint liability may file as a ``married person filing 
separately.''
    Relief from liability for tax, interest and penalties is 
available for ``innocent spouses'' in certain limited 
circumstances. To qualify for such relief, the innocent spouse 
must establish: (1) that a joint return was made; (2) that an 
understatement of tax, which exceeds the greater of $500 or a 
specified percentage of the innocent spouse's adjusted gross 
income for the preadjustment (most recent) year, is 
attributable to a grossly erroneous item \145\ of the other 
spouse; (3) that in signing the return, the innocent spouse did 
not know, and had no reason to know, that there was an 
understatement of tax; and (4) that taking into account all the 
facts and circumstances, it is inequitable to hold the innocent 
spouse liable for the deficiency in tax. The specified 
percentage of adjusted gross income is 10 percent if adjusted 
gross income is $20,000 or less. Otherwise, the specified 
percentage is 25 percent.
---------------------------------------------------------------------------
    \145\ Grossly erroneous items include items of gross income that 
are omitted from reported and claims of deductions, credits, or basis 
in an amount for which there is no basis in fact or law (Code sec. 
6013(e)(2)).
---------------------------------------------------------------------------
    It is unclear under present law whether a court may grant 
partial innocent spouse relief. The Ninth Circuit Court of 
Appeals in Wiksell v. Commissioner\146\ has allowed partial 
innocent spouse relief where the spouse did not know, and had 
no reason to know, the magnitude of the understatement of tax, 
even though the spouse knew that the return may have included 
some understatement.
---------------------------------------------------------------------------
    \146\ 90 F.3d 1459 (9th Cir. 1997).
---------------------------------------------------------------------------
    The proper forum for contesting a denial by the Secretary 
of innocent spouse relief is determined by whether an 
underpayment is asserted or the taxpayer is seeking a refund of 
overpaid taxes. Accordingly, the Tax Court may not have 
jurisdiction to review all denials of innocent spouse relief.
    No form is currently provided to assist taxpayers in 
applying for innocent spouse relief.

                        Description of Proposal

    The bill would generally make innocent spouse status easier 
to obtain. The bill eliminates all of the understatement 
thresholds and requires only that the understatement of tax be 
attributable to an erroneous (and not just a grossly erroneous) 
item of the other spouse.
    The bill would provide that innocent spouse relief may be 
provided on an apportioned basis. That is, the spouse may be 
relieved of liability as an innocent spouse to the extent the 
liability is attributable to the portion of an understatement 
of tax which such spouse did not know of and had no reason to 
know of.
    The bill would specifically provide that the Tax Court has 
jurisdiction to review any denial (or failure to rule) by the 
Secretary regarding an application for innocent spouse relief. 
The Tax Court may order refunds as appropriate where it 
determines the spouse qualifies for relief and an overpayment 
exists as a result of the innocent spouse qualifying for such 
relief. The taxpayer must file his or her petition for review 
with the Tax Court during the 90-day period that begins on the 
earlier of (1) 6 months after the date the taxpayer filed his 
or her claim for innocent spouse relief with the Secretary or 
(2) the date a notice denying innocent spouse relief was mailed 
by the Secretary. Except for termination and jeopardy 
assessments (secs. 6851, 6861), the Secretary may not levy or 
proceed in court to collect any tax from a taxpayer claiming 
innocent spouse status with regard to such tax until the 
expiration of the 90-day period in which such taxpayer may 
petition the Tax Court or, if the Tax Court considers such 
petition, before the decision of the Tax Court has become 
final. The running of the statute of limitations is suspended 
in such situations with respect to the spouse claiming innocent 
spouse status.
    The bill would also require the Secretary of the Treasury 
to develop a separate form with instructions for taxpayers to 
use in applying for innocent spouse relief within 180 days from 
the date of enactment. An innocent spouse seeking relief under 
this provision must claim innocent spouse status with regard to 
any assessment not later than two years after the date of such 
assessment.

                             Effective Date

    The provision would be effective for understatements with 
respect to taxable years beginning after the date of enactment.

2. Suspension of statute of limitations on filing refund claims during 
        periods of disability (sec. 322 of the bill)

                              Present Law

    In general, a taxpayer must file a refund claim within 
three years of the filing of the return or within two years of 
the payment of the tax, whichever period expires later (if no 
return is filed, the two-year limit applies) (sec. 6511(a)). A 
refund claim that is not filed within these time periods is 
rejected as untimely.
    There is no explicit statutory rule providing for equitable 
tolling of the statute of limitations. Several courts have 
considered whether equitable tolling implicitly exists. The 
First, Third, Fourth, and Eleventh Circuits have rejected 
equitable tolling with respect to tax refund claims. The Ninth 
Circuit has permitted equitable tolling. However, the U.S. 
Supreme Court has reversed the Ninth Circuit in U.S. v. 
Brockamp,\147\ holding that Congress did not intend the 
equitable tolling doctrine to apply to the statutory 
limitations of section 6511 on the filing of tax refund claims.
---------------------------------------------------------------------------
    \147\ 117 S. Ct. 849 (1997), reversing 67 F. 3d 260 and 70 F. 3d 
120.
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would permit equitable tolling of the statute of 
limitations for refund claims of an individual taxpayer during 
any period of the individual's life in which he or she is 
unable to manage his or her financial affairs by reason of a 
medically determinable physical or mental impairment that can 
be expected to result in death or to last for a continuous 
period of not less than 12 months. Proof of the existence of 
the impairment must be furnished in the form and manner 
required by the Secretary. It is anticipated that, in applying 
the medically determinable test, the Secretary will evaluate 
whether a medical opinion that a physical or mental impairment 
exists has been offered by a person qualified to do so with 
respect to that particular type of impairment. Tolling does not 
apply during periods in which the taxpayer's spouse or another 
person is authorized to act on the taxpayer's behalf in 
financial matters.

                             Effective Date

    The provision would apply to periods of disability before, 
on, or after the date of enactment but would not apply to any 
claim for refund or credit which (without regard to the 
provision) is barred by the statute of limitations as of 
January 1, 1998.

                   D. Provisions Relating to Interest

1. Elimination of interest differential on overlapping periods of 
        interest on income tax overpayments and underpayments (sec. 331 
        of the bill)

                              Present Law

    A taxpayer that underpays its taxes is required to pay 
interest on the underpayment at a rate equal to the Federal 
short term interest rate plus three percentage points. A 
special ``hot interest'' rate equal to the Federal short term 
interest rate plus five percentage points applies in the case 
of certain large corporate underpayments.
    A taxpayer that overpays its taxes receives interest on the 
overpayment at a rate equal to the Federal short term interest 
rate plus two percentage points. In the case of corporate 
overpayments in excess of $10,000, this is reduced to the 
Federal short term interest rate plus one-half of a percentage 
point.
    If a taxpayer has an underpayment of tax from one year and 
an overpayment of tax from a different year that are 
outstanding at the same time, the IRS will typically offset the 
overpayment against the underpayment and apply the appropriate 
interest to the resulting net underpayment or overpayment. 
However, if either the underpayment or overpayment has been 
satisfied, the IRS will not typically offset the two amounts, 
but rather will assess or credit interest on the full 
underpayment or overpayment at the underpayment or overpayment 
rate. This has the effect of assessing the underpayment at the 
higher underpayment rate and crediting the overpayment at the 
lower overpayment rate. This results in the taxpayer being 
assessed a net interest charge, even if the amounts of the 
overpayment and underpayment are the same.
    The Secretary has the authority to credit the amount of any 
overpayment against any liability under the Code.\148\ Congress 
has previously directed the Internal Revenue Service to 
consider procedures for ``netting'' overpayments and 
underpayments.\149\
---------------------------------------------------------------------------
    \148\ Code sec. 6402.
    \149\ Pursuant to TBOR2 (1996), the Secretary conducted a study of 
the manner in which the IRS has implemented the netting on overpayments 
and underpayments and the policy and administrative implications of 
global netting. A Report to the Congress on Netting of Interest on Tax 
Overpayments and Underpayments was issued by the Office of Tax Policy, 
U.S. Treasury, in April, 1997. The legislative history to the General 
Agreement on Tariffs and Trade (GATT) (1994) stated that the Secretary 
should implement the most comprehensive crediting procedures that are 
consistent with sound administrative practice, and should do so as 
rapidly as is practicable. A similar statement was included in the 
Conference Report to the Omnibus Budget Reconciliation Act of 1990.
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would establish a net interest rate of zero on 
equivalent amounts of overpayment and underpayment that exist 
for any period. Each overpayment and underpayment would be 
considered only once in determining whether equivalent amounts 
of overpayment and underpayment exist. The special rules that 
increase the interest rate paid on large corporate 
underpayments and decrease the interest rate received on 
corporate underpayments in excess of $10,000 would not prevent 
the application of the net zero rate. The bill would apply to 
income taxes and self-employment taxes.
    For example, following an examination of its 1998 return, a 
corporate taxpayer is determined to have overpaid its 1998 
taxes by $5,000. Previously, the taxpayer established by an 
amended return that it had underpaid its 1999 taxes by $7,000. 
The taxpayer has paid the 1999 underpayment, plus interest 
determined at the underpayment rate. The statute of limitations 
has not run with respect to either 1998 or 1999. In determining 
the amount of the refund owed the taxpayer with regard to the 
1998 overpayment, the period for which the 1999 underpayment 
was outstanding must be taken into account. For all periods in 
which the underpayment and overpayment run concurrently (i.e., 
from the due date of the 1999 return until the underpayment was 
paid), the interest rate on the $5,000 overpayment and $5,000 
of the underpayment must be the same so that the net interest 
rate of zero applies.\150\ The interest rate on the remaining 
$2,000 of the underpayment that was originally calculated at 
the short term Federal rate plus three percent would not be 
affected.
---------------------------------------------------------------------------
    \150\ In this case, it is assumed that the interest rate on $5,000 
of overpayment will be set equal to the underpayment rate for the 
period that both the underpayment and overpayment are outstanding in 
order to achieve the required net interest rate of zero. However, the 
Secretary may use other procedures or methodologies that he deems 
appropriate, so long as a zero net interest rate is achieved.
---------------------------------------------------------------------------

                             Effective Date

    The provision would apply to interest for calendar quarters 
beginning after the date of enactment. Until such time as 
procedures are implemented that allow for the automatic 
application of this provision by the IRS, the House bill 
intends that the Secretary will promptly and carefully consider 
any taxpayer's request to have interest charges recalculated in 
accordance with this provision and that the Secretary will 
extend the statute of limitations where necessary to allow for 
the consideration of such requests.

2. Increase in overpayment rate payable to taxpayers other than 
        corporations (sec. 332 of the bill)

                              Present Law

    A taxpayer that underpays its taxes is required to pay 
interest on the underpayment at a rate equal to the Federal 
short-term interest rate (AFR) plus three percentage points. A 
special ``hot interest'' rate equal to the Federal short term 
interest rate plus five percentage points applies in the case 
of certain large corporate underpayments.
    A taxpayer that overpays its taxes receives interest on the 
overpayment at a rate equal to the Federal short-term interest 
rate (AFR) plus two percentage points. In the case of corporate 
overpayments in excess of $10,000, this is reduced to the 
Federal short term interest rate plus one-half of a percentage 
point.

                        Description of Proposal

    The bill would provide that the overpayment interest rate 
is the AFR plus three percentage points, except that for 
corporations, the rate is to remain at AFR plus two percentage 
points. The special ``hot interest'' rate (AFR plus five 
points) on certain large corporate underpayments and the 
reduced rate (AFR plus one-half point) on corporate 
underpayments in excess of $10,000 would continue to apply.

                             Effective Date

    The provision would apply to interest for calendar quarters 
beginning after the date of enactment.

      E. Protections for Taxpayers Subject to Audit or Collection

1. Privilege of confidentiality extended to taxpayer's dealings with 
        non-attorneys authorized to practice before the IRS (sec. 341 
        of the bill)

                              Present Law

    A common law privilege of confidentiality exists for 
communications between an attorney and client with respect to 
the legal advice the attorney gives the client. Communications 
protected by the attorney-client privilege must be based on 
facts of which the attorney is informed by the taxpayer, 
without the presence of strangers, for the purpose of securing 
the advice of the attorney. The privilege may not be claimed 
where the purpose of the communication is the commission of a 
crime or tort. The taxpayer must be, or be seeking to become, a 
client of the attorney.
    The privilege of confidentiality applies only where the 
attorney is advising the client on legal matters. It does not 
apply in situations where the attorney is acting in other 
capacities. Thus, a taxpayer may not claim the benefits of the 
attorney-client privilege simply by hiring an attorney to 
perform some other function. For example, if an attorney is 
retained to prepare a tax return, the attorney-client privilege 
will not automatically apply to communications and documents 
generated in the course of preparing the return. The privilege 
of confidentiality also does not apply where an attorney that 
is licensed to practice another profession is performing such 
other profession. For example, if a taxpayer retains an 
attorney who is also licensed as a certified public accountant 
(CPA), the taxpayer may not assert the attorney-client 
privilege with regard to communications made and documents 
prepared by the attorney in his role as a CPA.
    The attorney-client privilege is limited to communications 
between taxpayers and attorneys. No equivalent privilege is 
provided for communications between taxpayers and other 
professionals authorized to practice before the Internal 
Revenue Service, such as accountants or enrolled agents.

                        Description of Proposal

    The bill would provide that, in any noncriminal proceeding 
before the Internal Revenue Service, a taxpayer would be 
entitled to the same common law protections of confidentiality 
with respect to tax advice furnished by a qualified individual 
as the taxpayer would have if the tax advice were furnished by 
an attorney. For this purpose, a qualified individual is any 
individual other than an attorney who is authorized to practice 
before the Internal Revenue Service and who is acting in a 
manner consistent with State law for such individual's 
profession.
    The bill would allow taxpayers to consult with other 
qualified tax advisors in the same manner they currently may 
consult with tax advisors that are licensed to practice law. 
The provision does not modify the attorney-client privilege. 
Accordingly, except for criminal proceedings, the privilege of 
confidentiality under this provision applies in the same manner 
and with the same limitations as the attorney-client privilege 
of present law. The provision does not extend the privilege of 
confidentiality to communications that would not be eligible 
for the privilege if prepared by an attorney.
    The bill would apply to individuals authorized to practice 
before the Internal Revenue Service, regardless of the method 
pursuant to which they are so authorized. Some, such as 
accountants, are authorized to practice by fulfilling State 
licensing requirements. Others, such as enrolled agents and 
enrolled actuaries, are authorized to practice by passing a 
Treasury Department examination.

                             Effective Date

    The provision would be effective on the date of enactment.

2. Expansion of authority to issue Taxpayer Assistance Orders (sec. 342 
        of the bill)

                              Present Law

    Taxpayers can request that the Taxpayer Advocate in the 
Internal Revenue Service (``IRS'') issue a taxpayer assistance 
order (``TAO'') if they are suffering or about to suffer a 
significant hardship as a result of the manner in which the 
internal revenue laws are being administered (sec. 7811). A TAO 
may require the IRS to release property of the taxpayer that 
has been levied upon, or to cease any action, take any action 
as permitted by law, or refrain from taking any action with 
respect to the taxpayer.

                        Description of Proposal

    The bill would provide that in determining whether to issue 
a TAO, the Taxpayer Advocate shall consider, among others, the 
following four factors: (1) whether there is an immediate 
threat of adverse action; (2) whether there has been an 
unreasonable delay in resolving the taxpayer's account 
problems; (3) whether the taxpayer will have to pay significant 
costs (including fees for professional representation) if 
relief is not granted; and (4) whether the taxpayer will suffer 
irreparable injury, or a long-term adverse impact, if relief is 
not granted. In addition, in cases where an IRS employee to 
whom the order would be issued is not following applicable 
published administrative guidance, including the Internal 
Revenue Manual (``IRM''), the Taxpayer Advocate shall construe 
the factors taken into account in determining whether to issue 
a TAO in the manner most favorable to the taxpayer.

                             Effective Date

    The provision would be effective on the date of enactment.

3. Limitation on financial status audit techniques (sec. 343 of the 
        bill)

                              Present Law

    The IRS examines Federal tax returns to determine the 
correct liability of taxpayers. The IRS selects returns to be 
audited in a number of ways, such as through a computerized 
classification system (the discriminant function (``DIF'') 
system).

                        Description of Proposal

    The bill would prohibit the IRS from using financial status 
or economic reality examination techniques to determine the 
existence of unreported income of any taxpayer unless the IRS 
has a reasonable indication that there is a likelihood of 
unreported income.

                             Effective Date

    The provision would be effective on the date of enactment.

4. Limitation on authority to require production of computer source 
        code (sec. 344 of the bill)

                              Present Law

    The Secretary of the Treasury is authorized to examine any 
books, papers, records, or other data that may be relevant or 
material to an inquiry into the correctness of any Federal tax 
return. The Secretary may issue and serve summonses necessary 
to obtain such data, including summonses on certain third-party 
record keepers. There are no specific statutory restrictions on 
the ability of the Secretary to demand the production of 
computer records, programs, code or similar materials.

                        Description of Proposal

    Under the bill, the Secretary would be generally prohibited 
from issuing (or beginning an action to enforce) a summons in a 
civil action for any portion of any third-party tax-related 
computer source code unless (1) the Secretary is unable to 
otherwise reasonably ascertain the correctness of an item on a 
return from the taxpayer's other books, papers, records, other 
data, or the computer software program and associated data 
itself and (2) the Secretary first identifies with reasonable 
specificity the portion of the computer source code to be used 
to verify the correctness of the item.
    The Secretary would be considered to have satisfied these 
requirements with regard to the identified portion of the 
source code if the Secretary makes a formal request for such 
materials to both the taxpayer and the owner or developer of 
the software that is not satisfied within 90 days. Such formal 
request must clearly state that one of the consequences of 
failure to respond to the request will be the waiver of any 
prohibition on the summons of tax-related computer source code 
that might otherwise apply.
    The Secretary's determination that the identified portion 
of the third-party tax-related computer source code may be 
summoned may be contested in any proceeding to enforce the 
summons, by any person to whom the summons is addressed. For 
this purpose, the special procedures for third-party summonses 
\151\ will apply. In any such proceeding, the court may issue 
any order that is necessary to prevent the disclosure of trade 
secrets or other confidential information.
---------------------------------------------------------------------------
    \151\ Sec. 7609.
---------------------------------------------------------------------------
    For these purposes, tax-related computer source code 
includes the human readable instructions for any computer 
software program that is used for accounting, tax return 
preparation, tax compliance or tax planning, along with the 
design and development materials related to such software 
program, including any relevant program notes and memoranda.
    The prohibition on issuing summons for tax-related computer 
source code does not apply in connection with any inquiry into 
any offense connected with the administration or enforcement of 
the internal revenue laws. A computer software program will not 
be treated as tax advice for the purpose of the professional-
client privilege contained in section 341 of this bill.
    The prohibition applies only in the case of tax-related 
computer software that is intended for commercial distribution. 
Source code related to computer software that was developed by, 
or primarily for the benefit of, the taxpayer or a related 
person (within the meaning of section 267 or 707(b)) for the 
internal use of the taxpayer or such related person may 
continue to be summoned by the Secretary to the extent allowed 
under present law.

                             Effective Date

    The provision would be effective for summonses issued more 
than 90 days after the date of enactment. The House bill 
intends that the Secretary will not use the 90 day period 
between the date of enactment and the effective date in a 
manner that would circumvent the intent of the provision.

5. Procedures relating to extensions of statute of limitations by 
        agreement (sec. 345 of the bill)

                              Present Law

    The statute of limitations within which the IRS may assess 
additional taxes is generally three years from the date a 
return is filed (sec. 6501).\152\ Prior to the expiration of 
the statute of limitations, both the taxpayer and the IRS may 
agree in writing to extend the statute, using Form 872 or 872-
A. An extension may be for either a specified period or an 
indefinite period. The statute of limitations within which a 
tax may be collected after assessment is 10 years after 
assessment (sec. 6502). Prior to the expiration of the statute 
of limitations, both the taxpayer and the IRS may agree in 
writing to extend the statute, using Form 900.
---------------------------------------------------------------------------
    \152\ For this purpose, a return filed before the due date is 
considered to be filed on the due date.
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would require that, on each occasion on which the 
taxpayer is requested by the IRS to extend the statute of 
limitations, the IRS must notify the taxpayer of the taxpayer's 
right to refuse to extend the statute of limitations or to 
limit the extension to particular issues.

                             Effective Date

    The provision would apply to requests to extend the statute 
of limitations made after the date of enactment.

6. Offers-in-compromise (sec. 346 of the bill)

                              Present Law

    Section 7122 of the Code permits the IRS to compromise a 
taxpayer's tax liability. In general, this occurs when a 
taxpayer submits an offer-in-compromise to the IRS. An offer-
in-compromise is a proposal to settle unpaid tax accounts for 
less than the full amount of the assessed balance due. An 
offer-in-compromise may be submitted for all types of taxes, as 
well as interest and penalties, arising under the Internal 
Revenue Code.
    Taxpayers submit an offer-in-compromise on Form 656. There 
are two bases on which an offer can be made. The first is doubt 
as to the liability for the amount owed. The second is doubt as 
to the taxpayer's ability fully to pay the amount owed. An 
application can be made on either or both of these grounds. 
Taxpayers are required to submit background information to the 
IRS substantiating their application. If they are applying on 
the basis of doubt as to the taxpayer's ability fully to pay 
the amount owed, the taxpayer must complete a financial 
disclosure form enumerating assets and liabilities.
    As part of an offer-in-compromise made on the basis of 
doubt as to ability fully to pay, taxpayers must agree to 
comply with all provisions of the Internal Revenue Code 
relating to filing returns and paying taxes for five years from 
the date the IRS accepts the offer. Failure to observe this 
requirement permits the IRS to begin immediate collection 
actions for the original amount of the liability.

                        Description of Proposal

    The bill would require the IRS to develop and publish 
schedules of national and local allowances designed to provide 
taxpayers entering into an offer-in-compromise with adequate 
means to provide for basic living expenses. The bill also would 
provide that, in the case of a compromise agreement that is 
terminated due to the actions of one spouse or former spouse, 
the spouse or former spouse remaining in compliance with the 
agreement may obtain reinstatement of such agreement on 
application. All payments required under the offer-in-
compromise must be current for either spouse or former spouse 
to be in compliance with the agreement. Further, the bill would 
require the IRS to prepare a publication or statement providing 
guidance to taxpayers on the rights and obligations of 
taxpayers and the IRS relating to offers in compromise. This 
statement is intended to include materials explaining to 
married taxpayers their responsibilities should their marital 
status change and instructions for applying to have an offer-
in-compromise reinstated under the circumstances discussed 
above. The House bill intends that this publication or 
statement will be provided to taxpayers considering an offer in 
compromise at appropriate times.

                             Effective Date

    The provision would be effective on the date of enactment. 
The House bill intends that the materials required by this 
provision will be published as soon as practicable, but no 
later than 180 days after the date of enactment. Further, the 
House bill intends that offers-in-compromise based on this 
provision will be available as of the date of enactment.

7. Notice of deficiency to specify deadlines for filing Tax Court 
        petition (sec. 347 of the bill)

                              Present Law

    Taxpayers must file a petition with the Tax Court within 90 
days after the deficiency notice is mailed (150 days if the 
person is outside the United States) (sec. 6213). If the 
petition is not filed within that time period, the Tax Court 
does not have jurisdiction to consider the petition.

                        Description of Proposal

    The bill would require that the IRS include on each 
deficiency notice the date determined by the IRS as the last 
day on which the taxpayer may file a petition with the Tax 
Court. The House bill intends that the last day on which a 
taxpayer who is outside the United States may file a petition 
with the Tax Court will be shown as an alternative. The bill 
provides that a petition filed with the Tax Court by this date 
shall be treated as timely filed.

                             Effective Date

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

8. Refund or credit of overpayments before final determination (sec. 
        348 of the bill)

                              Present Law

    A taxpayer may petition the Tax Court for a redetermination 
of a deficiency within 90 days (150 days if the notice is 
addressed to a person outside the United States) from the date 
the notice of deficiency is mailed by the IRS. Generally, the 
Secretary may not make any assessment or commence any levy or 
other proceeding to collect the deficiency during such period 
or, if the taxpayer petitions the Tax Court, until the decision 
of the Tax Court has become final. The making of any such 
assessment, or the commencing of any proceeding or levy, during 
the prohibited period may be enjoined by a proceeding in the 
proper court (including the Tax Court). However, no authority 
is provided for ordering the refund of any amount collected 
within the prohibited period.
    If a taxpayer contests a deficiency in the Tax Court, no 
credit or refund of income tax for the contested taxable year 
generally may be made, except in accordance with a decision of 
the Tax Court that has become final. Where the Tax Court 
determines that an overpayment has been made and a refund is 
due the taxpayer, and a party appeals a portion of the decision 
of the Tax Court, no provision exists for the refund of any 
portion of any overpayment that is not contested in the appeal.

                        Description of Proposal

    The bill would provide that where a timely petition in 
respect of a deficiency is filed in the Tax Court, the proper 
court (including the Tax Court) may order a refund of any 
amount that was collected within the period during which the 
Secretary is prohibited from collecting the deficiency by levy 
or other proceeding.
    The bill also would allow the refund of that portion of any 
overpayment determined by the Tax Court to the extent the 
overpayment is not contested on appeal.

                             Effective Date

    The provision would apply on the date of enactment.

9. Threat of audit prohibited to coerce tip reporting alternative 
        commitment agreements (sec. 349 of the bill)

                              Present Law

    Restaurants may enter into Tip Reporting Alternative 
Commitment (TRAC) agreements. A restaurant entering into a TRAC 
agreement is obligated to educate its employees on their tip 
reporting obligations, to institute formal tip reporting 
procedures, to fulfill all filing and record keeping 
requirements, and to pay and deposit taxes. In return, the IRS 
agrees to base the restaurant's liability for employment taxes 
solely on reported tips and any unreported tips discovered 
during an IRS audit of an employee.

                        Description of Proposal

    The bill would require the IRS to instruct its employees 
that they may not threaten to audit any taxpayer in an attempt 
to coerce the taxpayer to enter into a TRAC agreement.

                             Effective Date

    The provision would be effective on the date of enactment.

                      F. Disclosures to Taxpayers

1. Explanation of joint and several liability (sec. 351 of the bill)

                              Present Law

    In general, spouses who file a joint tax return are each 
fully responsible for the accuracy of the tax return and for 
the full liability. This is true even though only one spouse 
may have earned the wages or income which is shown on the 
return. This is ``joint and several'' liability. Spouses who 
wish to avoid joint and several liability may file as a married 
person filing separately. Special rules apply in the case of 
innocent spouses pursuant to section 6013(e).

                        Description of Proposal

    The bill would require that, no later than 180 days after 
the date of enactment, the IRS must establish procedures 
clearly to alert married taxpayers of their joint and several 
liability on all appropriate tax publications and instructions. 
The House bill intends that the IRS will make an appropriate 
cross-reference to these statements near the signature line on 
appropriate tax forms.

                             Effective Date

    The bill requires that the procedures be established as 
soon as practicable, but no later than 180 days after the date 
of enactment.

2. Explanation of taxpayers' rights in interviews with the IRS (sec. 
        352 of the bill)

                              Present Law

    Prior to or at initial in-person audit interviews, the IRS 
must explain to taxpayers the audit process and taxpayers' 
rights under that process (sec. 7521). In addition, prior to or 
at initial in-person collection interviews, the IRS must 
explain the collection process and taxpayers' rights under that 
process. If a taxpayer clearly states during an interview with 
the IRS that the taxpayer wishes to consult with the taxpayer's 
representative, the interview must be suspended to afford the 
taxpayer a reasonable opportunity to consult with the 
representative.

                        Description of Proposal

    The bill would require that the IRS rewrite Publication 1 
(``Your Rights as a Taxpayer'') to more clearly inform 
taxpayers of their rights (1) to be represented by a 
representative and (2) if the taxpayer is so represented, that 
the interview may not proceed without the presence of the 
representative unless the taxpayer consents.

                             Effective Date

    The addition to Publication 1 must be made not later than 
180 days after the date of enactment.

3. Disclosure of criteria for examination selection (sec. 353 of the 
        bill)

                              Present Law

    The IRS examines Federal tax returns to determine the 
correct liability of taxpayers. The IRS selects returns to be 
audited in a number of ways, such as through a computerized 
classification system (the discriminant function (``DIF'') 
system).

                        Description of Proposal

    The bill would require that the IRS add to Publication 1 
(``Your Rights as a Taxpayer'') a statement which sets forth in 
simple and nontechnical terms the criteria and procedures for 
selecting taxpayers for examination. The statement must not 
include any information the disclosure of which would be 
detrimental to law enforcement. The statement must specify the 
general procedures used by the IRS, including whether taxpayers 
are selected for examination on the basis of information in the 
media or from informants. Drafts of the statement or proposed 
revisions to the statement are required to be submitted to the 
House Committee on Ways and Means, the Senate Committee on 
Finance, and the Joint Committee on Taxation.

                             Effective Date

    The addition to Publication 1 must be made not later than 
180 days after the date of enactment.

4. Explanations of appeals and collection process (sec. 354 of the 
        bill)

                              Present Law

    There is no statutory requirement that specific notices be 
given to taxpayers along with the first letter of proposed 
deficiency that allows the taxpayer an opportunity for 
administrative review in the IRS Office of Appeals.

                        Description of Proposal

    The bill would require that, no later than 180 days after 
the date of enactment, an explanation of the appeals process 
and the collection process be provided with the first letter of 
proposed deficiency that allows the taxpayer an opportunity for 
administrative review in the IRS Office of Appeals.

                             Effective Date

    The bill would require that the explanation be included as 
soon as practicable, but no later than 180 days after the date 
of enactment.

         G. Low-Income Taxpayer Clinics (sec. 361 of the bill)

                              Present Law

    There are no provisions in present law providing for 
assistance to clinics that assist low-income taxpayers.

                        Description of Proposal

    Under the bill, the Secretary would be required to make 
matching grants for the development, expansion, or continuation 
of certain low-income taxpayer clinics. Eligible clinics are 
those that charge no more than a nominal fee to either 
represent low-income taxpayers in controversies with the IRS or 
provide tax information to individuals for whom English is a 
second language. The term ``clinic'' includes (1) a clinical 
program at an accredited law school in which students represent 
low-income taxpayers, and (2) an organization exempt from tax 
under Code section 501(c) which either represents low-income 
taxpayers or provides referral to qualified representatives.
    A clinic is treated as representing low-income taxpayers if 
at least 90 percent of the taxpayers represented by the clinic 
have incomes which do not exceed 250 percent of the poverty 
level and amounts in controversy of $25,000 or less.
    The aggregate amount of grants to be awarded each year is 
limited to $3,000,000. No taxpayer clinic could receive more 
than $100,000 per year. The clinic must provide matching funds 
on a dollar-for-dollar basis. Matching funds may include the 
allocable portion of both the salary (including fringe 
benefits) of individuals performing services for the clinic and 
clinic equipment costs, but not general institutional overhead.
    The following criteria are to be considered in making 
awards: (1) number of taxpayers served by the clinic, including 
the number of taxpayers in the geographical area for whom 
English is a second language; (2) the existence of other 
taxpayer clinics serving the same population; (3) the quality 
of the program; and (4) alternative funding sources available 
to the clinic.

                             Effective Date

    The provision would be effective on the date of enactment.

                  H. Other Taxpayer Rights Provisions

1. Actions for refund with respect to certain estates which have 
        elected the installment method of payment (sec. 371 of the 
        bill)

                              Present Law

    In general, the U.S. Court of Federal Claims and the U.S. 
district courts have jurisdiction over suits for the refund of 
taxes, as long as full payment of the assessed tax liability 
has been made. Flora v. United States, 357 U.S. 63 (1958), 
aff'd on reh'g, 362 U.S. 145 (1960). Under Code section 6166, 
if certain conditions are met, the executor of a decedent's 
estate may elect to pay the estate tax attributable to certain 
closely-held businesses over a 14-year period. Courts have held 
that U.S. district courts and the U.S. Court of Federal Claims 
do not have jurisdiction over claims for refunds by taxpayers 
deferring estate tax payments pursuant to section 6166 unless 
the entire estate tax liability has been paid (i.e., timely 
payment of the installments due prior to the bringing of an 
action is not sufficient to invoke jurisdiction). See, e.g., 
Rocovich v. United States, 933 F.2d 991 (Fed. Cir. 1991), 
Abruzzo v. United States, 24 Ct. Cl. 668 (1991).

                        Description of Proposal

    The bill would grant the U.S. Court of Federal Claims and 
the U.S. district courts jurisdiction to determine the correct 
amount of estate tax liability (or for any refund) in actions 
brought by taxpayers deferring estate tax payments under 
section 6166, as long certain conditions are met. In order to 
qualify for the provision, the estate must have made an 
election pursuant to section 6166, fully paid each installment 
of principal and/or interest due before the date the suit is 
filed (as long as one or more installments are not yet due), 
and no portion of the payments due may have been accelerated. 
The bill further provides that once a final judgment has been 
entered by a district court or the U.S. Court of Federal 
Claims, the IRS would not be permitted to collect any amount 
disallowed by the court, and any amounts paid by the taxpayer 
in excess of the amount the court finds to be currently due and 
payable would be refunded to the taxpayer. In addition, the 
bill would provide that the 2-year statute of limitations for 
filing a refund action would be suspended during the pendency 
of any action brought by a taxpayer pursuant to section 7479 
for a declaratory judgment as to an estate's eligibility for 
section 6166.

                             Effective Date

    The provision would be effective for claims for refunds 
filed after the date of enactment.

2. Cataloging complaints (sec. 372 of the bill)

                              Present Law

    The IRS is required to make an annual report to the 
Congress, beginning in 1997, on all categories of instances 
involving allegations of misconduct by IRS employees, arising 
eitherfrom internally identified cases or from taxpayer or 
third-party initiated complaints.\153\ The report must identify the 
nature of the misconduct or complaint, the number of instances received 
by category, and the disposition of the complaints.
---------------------------------------------------------------------------
    \153\ Section 1211 of the Taxpayer Bill of Rights 2 (Public Law 
104-168; July 30, 1996).
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would require that, in collecting data for this 
report, records of taxpayer complaints of misconduct by IRS 
employees shall be maintained on an individual employee basis. 
These individual records are not to be listed in the report, 
but they will be useful in preparing the report. The House bill 
intends that these records be used in evaluating individual 
employees.

                             Effective Date

    The requirement would be effective on the date of 
enactment.

3. Archive of records of the IRS (sec. 373 of the bill)

                              Present Law

    The IRS is obligated to transfer agency records to the 
National Archives and Records Administration (``NARA'') for 
retention or disposal. The IRS is also obligated to protect 
confidential taxpayer records from disclosure. These two 
obligations have created conflict between NARA and the IRS. 
Under present law, the IRS determines whether records contain 
taxpayer information. Once the IRS has made that determination, 
NARA is not permitted to examine those records. NARA has 
expressed concern that the IRS may be using the disclosure 
prohibition to improperly conceal agency records with 
historical significance.

IRS obligation to archive records

    The IRS, like all other Federal agencies, must create, 
maintain, and preserve agency records in accordance with 
section 3101 of title 44 of the United States Code. NARA is the 
Government agency responsible for overseeing the management of 
the records of the Federal government.\154\ Federal agencies 
are required to deposit significant and historical records with 
NARA.\155\ The head of each Federal agency must also establish 
safeguards against the removal or loss of records.\156\
---------------------------------------------------------------------------
    \154\ 44 U.S.C. sec. 2904.
    \155\ 5 U.S.C. sec. 552a(b)(6).
    \156\ 44 U.S.C. sec. 3105.
---------------------------------------------------------------------------

Authority of NARA

    NARA is authorized, under the Federal Records Act, to 
establish standards for the selective retention of records of 
continuing value.\157\ NARA has the statutory authority to 
inspect records management practices of Federal agencies and to 
make recommendations for improvement.\158\ The head of each 
Federal agency must submit to NARA a list of records to be 
destroyed and a schedule for such destruction.\159\ NARA 
examines the list to determine if any of the records on the 
list have sufficient administrative, legal research, or other 
value to warrant their continued preservation. In many cases, 
the description of the record on the list is sufficient for 
NARA to make the determination. For example, NARA does not need 
to inspect Presidential tax returns to determine that they have 
historical value and should be retained. In some cases, NARA 
may find it helpful to examine a particular record. NARA has 
general authority to inspect records solely for the purpose of 
making recommendations for the improvement of records 
management practices.\160\ However, tax returns and return 
information can only be disclosed under the authority provided 
in section 6103 of the Internal Revenue Code. There is no 
exception to the disclosure prohibition for records management 
inspection by NARA.\161\
---------------------------------------------------------------------------
    \157\ 44 U.S.C. sec. 2905.
    \158\ 44 U.S.C. sec. 2904(c)(7).
    \159\ 44 U.S.C. sec. 3303.
    \160\ 44 U.S.C. sec. 2906.
    \161\ American Friends Service Committee v. Webster, 720 F.2d 29 
(D.C. Cir. 1983).
---------------------------------------------------------------------------
    In connection with its evaluation of the records management 
system of the IRS, NARA noted several instances where the 
disclosure prohibitions of Code section 6103 complicated their 
review of many IRS records.
    NARA is also responsible for the custody, use and 
withdrawal of records transferred to it.\162\ Statutory 
provisions that restrict public access to the records in the 
hands of the agency from which the records were transferred 
also apply to NARA. Thus, if a confidential record, such as a 
Presidential tax return, is transferred to NARA for archival 
storage, NARA is not permitted to disclose it. In general, the 
application of such restrictions to records in the hands of 
NARA expire after the records have been in existence for 30 
years.\163\ The issue of whether the specific disclosure 
prohibition of section 6103 takes precedence over the general 
30-year expiration of restrictions generally applicable to 
records in the hands of NARA has not been addressed by a court, 
but an informal advisory opinion from the Office of Legal 
Counsel of the Attorney General concluded that the 30-year 
expiration provision would not reach records subject to section 
6103.\164\
---------------------------------------------------------------------------
    \162\ 44 U.S.C. sec. 2108.
    \163\ 44 U.S.C. sec. 2108.
    \164\ Department of Justice, Office of Legal Counsel, Memorandum to 
Richard K. Willard, Assistant Attorney General (Civil Division) 
(February 27, 1986).
---------------------------------------------------------------------------

Confidentiality requirements

    The IRS must preserve the confidentiality of taxpayer 
information contained in Federal income tax returns. Such 
information may not be disclosed except as authorized under 
Code section 6103. Section 6103 was substantially revised in 
1976 to address Congress' concern that tax information was 
being used by Federal agencies in pursuit of objectives 
unrelated to administration and enforcement of the tax laws. 
Congress believed that the wide-spread use of tax information 
by agencies other than the IRS could adversely affect the 
willingness of taxpayers to comply voluntarily with the tax 
laws and could undermine the country's self-assessment tax 
system.\165\ Section 6103 does not authorize the disclosure of 
confidential return information to NARA.
---------------------------------------------------------------------------
    \165\ S. Rept. 94-938, p. 317 (1976).
---------------------------------------------------------------------------
    Section 6103 restricts the disclosure of returns and return 
information only. Return means any tax or information return, 
declaration of estimated tax, or claim for refund, including 
schedules and attachments thereto, filed with the IRS. Return 
information includes the taxpayer's name; nature and source or 
amount of income; and whether the taxpayer's return is under 
investigation. Section 6103(b)(2) provides that ``nothing in 
any other provision of law shall be construed to require the 
disclosure of standards used or to be used for the selection of 
returns for examination, or data used or to be used for 
determining such standards, if the Secretary determines that 
such disclosure will seriously impair assessment, collection, 
or enforcement under the internal revenue laws.'' Section 6103 
does not restrict the disclosure of other records required to 
be maintained by the IRS, such as records documenting agency 
policy, programs and activities, and agency histories. Such 
records are required to be made available to the public under 
the Freedom of Information Act (``FOIA'').\166\
---------------------------------------------------------------------------
    \166\ FOIA does not require disclosure of records or information 
that would frustrate law enforcement efforts. 5 U.S.C. sec. 552(b)(7).
---------------------------------------------------------------------------
    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431).

                        Description of Proposal

    The bill would provide an exception to the disclosure rules 
to require IRS to disclose IRS records to officers or employees 
of NARA, upon written request from the Archivist, for purposes 
of the appraisal of such records for destruction or retention. 
The present-law prohibitions on and penalties for disclosure of 
tax information would generally apply to NARA.

                             Effective Date

    The provision would be effective for requests made by the 
Archivist after the date of enactment.

4. Payment of taxes (sec. 374 of the bill)

                              Present Law

    The Code provides that it is lawful for the Secretary to 
accept checks or money orders as payment for taxes, to the 
extent and under the conditions provided in regulations 
prescribed by the Secretary (sec. 6311). Those regulations 
\167\ state that checks or money orders should be made payable 
to the Internal Revenue Service.
---------------------------------------------------------------------------
    \167\ Treas. Reg. Sec. 301.6311-1(a)(1).
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would require the Secretary or his delegate to 
establish such rules, regulations, and procedures as are 
necessary to allow payment of taxes by check or money order to 
be made payable to the United States Treasury.

                             Effective Date

    The provision would be effective on the date of enactment.

5. Clarification of authority of secretary relating to the making of 
        elections (sec. 375 of the bill)

                              Present Law

    Except as otherwise provided, elections provided by the 
Code are to be made in such manner as the Secretary shall by 
regulations or forms prescribe.

                        Description of Proposal

    The bill would clarify that, except as otherwise provided, 
the Secretary may prescribe the manner of making of any 
election by any reasonable means.

                             Effective Date

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

6. Limitation on penalty on individual's failure to pay for months 
        during period of installment agreement (sec. 376 of the bill)

                              Present Law

    Taxpayers who fail to pay their taxes are subject to a 
penalty of one-half percent per month on the unpaid amount, up 
to a maximum of 25 percent (sec. 6651(a)). Taxpayers who make 
installment payments pursuant to an agreement with the IRS 
(under sec. 6159) are also subject to this penalty.

                        Description of Proposal

    The bill would provide that the penalty for failure to pay 
taxes is not imposed with respect to the tax liability of an 
individual with respect to any month in which an installment 
payment agreement with the IRS (under sec. 6159) is in effect 
to the extent that doing so would result in the cumulative 
penalty percentage exceeding 9.5 percent (instead of 25 
percent).

                             Effective Date

    The provision would be effective for installment agreement 
payments made after the date of enactment.

                               I. Studies

1. Study of penalty administration (sec. 381 of the bill)

                              Present Law

    The last major revision of the overall penalty structure in 
the Internal Revenue Code was the Improved Penalty 
Administration and Compliance Tax Act, part of the Omnibus 
Budget Reconciliation Act of 1989.\168\
---------------------------------------------------------------------------
    \168\ Subtitle G of Title 7 of the Omnibus Budget Reconciliation 
Act of 1989 (Public Law 101-239).
---------------------------------------------------------------------------

                        Description of Proposal

    The bill would require the Joint Committee on Taxation to 
conduct a study reviewing the administration and implementation 
of the penalty reform provisions of the Omnibus Budget 
Reconciliation Act of 1989, and to make any legislative and 
administrative recommendations it deems appropriate to simplify 
penalty administration and reduce taxpayer burden.

                             Effective Date

    The report must be provided not later than nine months 
after the date of enactment.

2. Study of confidentiality of tax return information (sec. 382 of the 
        bill)

                              Present Law

    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431). No tax 
information may be furnished by the IRS to another agency 
unless the other agency establishes procedures satisfactory to 
the IRS for safeguarding the tax information it receives (sec. 
6103(p)).

                        Description of Proposal

    The bill would require the Joint Committee on Taxation to 
conduct a study on provisions regarding taxpayer 
confidentiality. The study is to examine present-law 
protections of taxpayer privacy, the need for third parties to 
use tax return information, and the ability to achieve greater 
levels of voluntary compliance by allowing the public to know 
who is legally required to file tax returns but does not do so.

                             Effective Date

    The findings of the study, along with any recommendations, 
are required to be reported to the Congress no later than one 
year after the date of enactment.

    PART IV: ESTIMATED BUDGET EFFECTS OF H.R. 2676, THE ``INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1997,'' AS PASSED BY THE HOUSE OF    
                                                                     REPRESENTATIVES                                                                    
                                                                 Fiscal Years 1998-2007                                                                 
                                                                  [Millions of dollars]                                                                 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Provision                             Effective        1998       1999       2000       2001       2002     1998-2002   1998-2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
Title I. Executive Branch Governance...................  ................  .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
                                                                                                                                                        
Title II. Electronic Filing............................  ................  .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
                                                                                                                                                        
Title III. Taxpayer Bill of Rights 3:                                                                                                                   
                                                                                                                                                        
     1. Burden of proof................................          aca DOE         -80       -166       -174       -183       -192        -795      -1,912
     2. Expansion of authority to award costs and                                                                                                       
     certain fees......................................        180da DOE          -8        -10        -11        -12        -13         -54        -134
     3. Civil damages for negligence in collection                                                                                                      
     actions...........................................              DOE          -2        -15        -25        -50        -30        -122        -247
     4. Increase in size of cases permitted on small                                                                                                    
     case calendar.....................................          pca DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     5. Innocent spouse relief.........................         tyba DOE   .........  .........         -5        -12        -14         -31        -131
     6. Suspension of statute of limitations on filing                                                                                                  
     refund claims during periods of disability........     tyoea 1/1/98         -40        -50        -25        -15        -16        -146        -241
     7. Elimination of interest rate differential on                                                                                                    
     overlapping periods of interest on income tax                                                                                                      
     overpayments and underpayments....................         cqba DOE          -1         -9        -28        -42        -54        -134        -449
     8. Increase refund interest rate to Applicable                                                                                                     
     Federal Rate (``AFR'') + 3 for individual                                                                                                          
     taxpayers.........................................         cqba DOE         -49        -51        -54        -56        -59        -269        -613
     9. Privilege of confidentiality extended to                                                                                                        
     taxpayer's dealings with non-attorneys authorized                                                                                                  
     to practice before Internal Revenue Service.......              DOE       (\1\)      (\1\)      (\1\)      (\1\)      (\1\)       (\2\)       (\3\)
     10. Expansion of authority to issue taxpayer                                                                                                       
     assistance orders.................................              DOE       (\1\)      (\1\)      (\1\)      (\1\)      (\1\)       (\2\)       (\3\)
     11. Limitation on financial status audits.........              DOE   .........  .........                                                         
(2)Negligible Revenue Effect                             ................  .........                                                                    
     12. Limitation on authority to require production                                                                                                  
     of computer source code...........................      si 90da DOE       (\1\)      (\1\)      (\1\)      (\1\)      (\1\)       (\2\)       (\3\)
     13. Procedures relating to extensions of statute                                                                                                   
     of limitations by agreement.......................              DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     14. Offers-in-compromise..........................              DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     15. Notice of deficiency to specify deadlines for                                                                                                  
     filing Tax Court petition.........................         12/31/98   .........  .........                                                         
(2)Negligible Revenue Effect                             ................  .........                                                                    
     16. Refund or credit of overpayments before final                                                                                                  
     determination.....................................              DOE   .........  .........                                                         
(2)Negligible Revenue Effect                             ................  .........                                                                    
     17. Prohibition on improper threat of audit                                                                                                        
     activity..........................................              DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     18. Explanation of joint and several liability....        180da DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     19. Explanation of taxpayers' rights in interviews                                                                                                 
     with the Internal Revenue Service.................        180da DOE         -13      (\4\)      (\4\)      (\4\)      (\4\)         -16         -20
     20. Disclosure of criteria for examination                                                                                                         
     selection.........................................        180da DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     21. Explanations of appeals and collection process        180da DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     22. Low-income taxpayer clinics...................              DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     23. Estates holding closely-held businesses.......              DOE   .........  .........                                                         
(2)Negligible Revenue Effect                             ................  .........                                                                    
     24. Cataloging complaints.........................              DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     25. Archive of records of Internal Revenue Service              DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     26. Payment of taxes \5\..........................              DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     27. Clarification of authority of Secretary                                                                                                        
     relating to the making of elections...............              DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     28. Failure to pay penalty capped at 9.5% for                                                                                                      
     individuals (installment agreements only).........              DOE        -176       -198       -209       -220       -231      -1,034      -2,392
     29. Study of penalty administration...............          9ma DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
     30. Study of confidentiality of tax return                                                                                                         
     information.......................................          1ya DOE   .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
                                                        ------------------------------------------------------------------------------------------------
      Subtotal of Title III............................  ................       -378       -509       -541       -600       -619      -2,646      -6,229
                                                                                                                                                        
Title IV. Congressional Accountability for the Internal                                                                                                 
 Revenue Service.......................................  ................  .........  .........                                                         
(2)No Revenue Effect                                     ................  .........                                                                    
                                                                                                                                                        
Title V. Revenue Offset:                                                                                                                                
     1. Clarify deduction for accrued vacation pay.....     tyea 10/8/97         705      1,111        584        120        126       2,646       3,377
                                                        ------------------------------------------------------------------------------------------------
      Net Total........................................  ................        327        602         43       -480       -493  ..........      -2,852
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $5 million.                                                                                                                       
\2\ Loss of less than $25 million.                                                                                                                      
\3\ Loss of less than $50 million.                                                                                                                      
\4\ Loss of less than $1 million.                                                                                                                       
\5\ Estimate provided by the Congressional Budget Office.                                                                                               
                                                                                                                                                        
Legend for ``Effective'' column: aca = audits commencing after; cqba = calendar quarters beginning after; DOE = date of enactment; pca = proceedings    
  commencing after; si = summaries issued; tyba = taxable years beginning after; tyea = taxable years ending after; tyoea = taxable years open or ending
  on or after; 1ya = 1 year after; 9ma = 9 months after; 90da = 90 days after; 180da = 180 days after.                                                  
                                                                                                                                                        
Note.--Details may not add to totals due to rounding. Estimates prepared at time of Committee on Ways and Means action on H.R. 2676.                    
                                                                                                                                                        
Source: Joint Committee on Taxation.                                                                                                                    

      

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                               APPENDICES

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                               APPENDIX A

Meetings Held With IRS Restructuring Commissioners and Other Interested 
                                Parties

    To assist the Joint Committee staff in analyzing the 
Commission Report and related proposals, the Joint Committee 
staff invited the Commissioners and other interested parties to 
discuss significant issues raised by the Report and related 
proposals. The staffs of the House Ways and Means and Senate 
Finance Committees were also invited to attend. Following is a 
list of meetings that the Joint Committee staff held (or 
scheduled) with interested parties prior to the publication of 
this pamphlet. It is expected that additional meetings and 
discussions will occur as the legislative process on the 
restructuring proposals progresses.

Commissioners of the National Commission on Restructuring the Internal 
                            Revenue Service

Fred T. Goldberg, Jr.--Skadden, Arps, Slate, Meagher & Flom
Gerry Harkins--Southern Pan Services Company
David Keating, National Taxpayers Union
Edward S. Knight--General Counsel, U.S. Department of Treasury
J. Fred Kubik, Baird, Kurtz & Dobson
Mark McConaghy--Price Waterhouse
Robert Tobias--President, National Treasury Employees Union
Josh S. Weston--Automated Data Processing
James W. Wetzler--Deloitte & Touche

                        Other Interested Parties

Michael Dolan--Acting Commissioner, Internal Revenue Service
Donald C. Alexander--Akin, Gump, Strauss, Hauer & Feld, LLP 
            (former IRS Commissioner)
Sheldon S. Cohen--Morgan, Lewis & Bockius (former IRS 
            Commissioner)
Lawrence B. Gibbs--Miller & Chevalier (former IRS Commissioner)
Dr. Jay Lorsch, Harvard Business School
Dr. Robert Stubaugh, Harvard Business School
American Institute of Certified Public Accountants
National Association of Manufacturers
National Federation of Independent Businesses
Tax Section of the American Bar Association
Tax Section of the New York State Bar Association
                               APPENDIX B

  Memorandum From the Congressional Research Service to the National 
        Commission on Restructuring the Internal Revenue Service

Congressional Research Service,
The Library of Congress,
Washington, DC, June 4, 1997.

To: National Commission on Restructuring the Internal Revenue Service. 
        Attention: Armando Gomez.
From: American Law Division.
Subject: Constitutionality of Vesting the Appointment of a Commissioner 
        of the Internal Revenue Service in an Independent Board of 
        Directors Located in the Treasury Department.

    You have asked that we review the constitutional propriety 
of a proposed restructuring of the Internal Revenue Service 
(IRS). Under the proposal, Congress would establish as an 
independent entity within the Department of Treasury, a seven 
member Oversight Board of Directors whose mission would be to 
oversee the operational management of the IRS and provide 
guidance and direction with respect to the development and 
implementation of long-term strategic and business plans. The 
Board would be composed of five persons nominated by the 
President and confirmed by the Senate from the private sector 
who would serve for five year staggered terms; and two 
officials from the Executive Branch designated by the 
President. A chairman would be elected from among the Board 
members by the members for a two year term. The Board would 
have the authority to appoint, and remove at its will, a 
Commissioner who would serve as chief executive officer of IRS 
for a five year term and be responsible for the day-to-day 
management of IRS operations.
    More particularly, it is conceived that the Board of 
Directors would have authority to:
    1. Review and approve the Commissioner's recommendations 
regarding IRS strategic and business plans, and the IRS goals 
and measurements relative to those plans.
    2. Review and approve the Commissioner's recommendations 
regarding major operational and organizational plans (e.g., 
plans for modernizing technology systems; training; 
outsourcing; managed competition; reorganization of the 
Commissioner's office; reorganization of IRS business units).
    3. Appoint and compensate the Commissioner and review and 
approve the Commissioner's recommendations regarding the 
appointment, performance, and compensation of senior IRS 
executives.
    4. Review and approve the Commissioner's recommendations 
regarding the IRS Budget, with particular emphasis on the 
alignment of that budget with the IRS strategic and business 
plans. The board will send the budget to Treasury to 
incorporate with Treasury's budget, and send a copy of the 
board's budget request directly to Congress.
    5. Review the IRS annual financial audits.
    6. Provide annual stewardship reports to the President, the 
Congress and the American public regarding the matters under 
its jurisdiction.
    Finally, the Treasury Department would continue to maintain 
full control of the establishment of tax policy. It is not 
clear from the proposal what other authority arrangements that 
now exist between Treasury and IRS (e.g., litigation authority) 
will remain, be modified, or be abolished. It appears that IRS 
will determine its own annual budget request which would be 
transmitted through Treasury to Congress unchanged.
    The proposal raises a substantial constitutional question 
with respect to the Board's power to appoint the Commissioner. 
While it is beyond a doubt that Congress can establish a 
presidentially appointed Oversight Board within Treasury, it is 
not yet a clearly settled matter whether such a Board can be 
vested with the authority to appoint such an official. The 
issue turns on the answer to two questions: Will the 
Commissioner be an ``inferior officer''? If so, is the 
Oversight Board a ``Head of Department'' within the meaning of 
the Appointments Clause? We conclude that a reviewing court is 
like to answer both questions in the affirmative.

1. Congress' Power Over Offices and Officers

    While the infrastructure of the Executive Branch and other 
entities charged with the execution of the law is not specified 
by the Constitution, it is clear that the Framers intended to 
vest the task of creating the governmental structure in the 
Congress alone. See, e.g., Article II, sec. 2, cl. 2 (the 
President ``shall nominate, and by and with the advice and 
consent of the Senate, shall appoint ambassadors, other public 
ministers and counsels, judges of the Supreme Court, and all 
other officers of the United States, whose appointments are not 
herein otherwise provided for and which shall be established by 
law.'')(emphasis added). Thus it is well established that 
Congress, in exercising its powers to legislate under Article 
I, sec. 8, and other provisions of the Constitution, is 
empowered to provide for the execution of those laws by 
officers appointed pursuant to the Appointments Clause, and 
under the Necessary and Proper Clause, Art., sec. 8, cl. 18, it 
has authority to create and locate offices, determine the 
qualifications of officeholders, prescribe their appointments, 
and generally promulgate the standards for the conduct of the 
offices. Myers v. United States, 272 U.S. 52, 129 (1926) (``To 
Congress under its legislative power is given the establishment 
of offices, the determination of their functions and 
jurisdiction, the prescribing of reasonable and relevant 
qualifications and rules of eligibility of appointees, and the 
fixing of the term for which they are to be appointed, and 
their compensation--all except as otherwise provided by the 
Constitution.''); Buckley v. Valeo, 424 U.S. 1, 134-35 (1976); 
Morrison v. Olson, 487 U.S. 654, 685-93 (1988); Mistretta v. 
United States, 488 U.S. 361 (1989).
    Only where the object of the exercise of legislative power 
is clearly seen in the particular situation as an attempt at 
aggrandizement or encroachment have the court's felt 
constrained to intervene. See, e.g., Buckley v. Valeo, supra 
(Congress may not appoint executive officials performing 
substantial functions under the Law); Bowsher v. Synar, 478 
U.S. 714, 732 (1986) (Congress may not retain removal power 
over an officer performing executive functions); INS v. Chadha, 
462 U.S. 919 (1983) (Congress may not exercise legislative 
power without conforming to the constitutionally prescribed 
lawmaking power); Metropolitan Washington Airports Authority v. 
CAAN, 501 U.S. 252 (1991) (Board of Review composed of Members 
of Congress could not exercise veto power over operational 
decisions of Airports Authority); Hechinger v. Metropolitan 
Washington Airport Authority Board of Review, 36 F.3d 97 (D.C. 
Cir. 1994), cert. denied, 115 S.Ct. 934 (1995) (Board of Review 
which could only recommend and delay, but not veto, the 
operational decisions of the Airports Authority held to be an 
unconstitutional direct exercise of congressional influence); 
Federal Election Commission v. NRA Political Victory Fund, 6 
F.3d 821 (D.C. Cir. 1993), cert. denied for want of 
jurisdiction, 115 S.Ct. 537 (1994) (congressional appointment 
of two of its agents as non-voting members of the Commission 
who could attend all business meetings of the agency held 
unconstitutional).
    But beyond such direct congressional intrusions on agency 
decisionmaking, the Supreme Court has been generous in broadly 
defining the legislative authority to structure the 
administrative bureaucracy. It has upheld congressional actions 
lengthening and shortening terms of office and abolishing 
offices altogether, Crenshaw v. United States, 134 U.S. 99, 
105-6 (1890); Lewis v. United States, 244 U.S. 1345 (1917); 
limiting the removal power of the President, Morrison v. Olson, 
487 U.S. 854 (1988); locating an independent agency performing 
executive functions in the judicial branch, Mistretta v. United 
States, supra; allowing an agency to assume jurisdiction over 
state-law counterclaims, Commodity Futures Trading Commission 
v. Schor, 473 U.S. 833 (1986); empowering the Attorney General 
to determine what substances would be criminal and to prosecute 
violations, Touby v. United States, 500 U.S. 160 (1991); and 
establishing the qualifications for holding office, Myers v. 
United States, 272 U.S. 52, 128, 129 (1926). In sum, the 
breadth of the congressional power is captured in the Mistretta 
court's admonishment that ``our constitutional principles of 
separated powers are not violated . . . by mere anomally or 
innovation'', 488 U.S. at 385, and an appeals court's more 
recent observation that the fact that Congress has not 
structured a governmental entity ``like a traditional 
government agency need not imply that its structure is not 
constitutionally permissible. There is no one way to structure 
an agency nor one means to comply with the constitutional 
appointments process''. Silver v. U.S. Postal Service, 951 F. 
2d 1033, 1037 (9th Cir. 1991).
    There can be little doubt that the proposal to establish a 
presidentially appointed Overnight Board as an independent 
establishment within the Treasury Department to oversee and 
guide the operational management of the IRS falls well within 
administrative structuring powers of the Congress. Nor is the 
placement of such multi-member, presidentially appointed 
independent entity within a cabinet department of either 
anomalous or unique. See, e.g., 18 U.S.C. 4201-4218 (1994) 
(Parole Commission established an independent agency within 
Department of Justice); 42 U.S.C. 7101 et seq. (1994) (Federal 
Energy Regulatory Commission established as an independent 
regulatory agency within the Department of Energy).
    Moreover, as proposed, there appear to be no issues of 
legislative aggrandizement or encroachment: Congress retains no 
power of appointment or removal over a agency officials nor 
does it maintain any direct or indirect control over its 
decision making processes. The requirement that IRS's annual 
budget requests be transmitted unchanged to Congress through 
Treasury's submission is well supported in law and practice. 
The Supreme Court has long, and uniformly recognized Congress' 
virtually plenary power to inform itself and the public as to 
the operations of the agencies it creates and oversees. The 
informing power has been deemed so essential to the legislative 
function as to be implied from the general vesting of 
legislative power in Congress, Eastland v. United States 
Servicemen's Fund, 421 U.S. 491, 505 (1975); Barenblatt v. 
United States, 360 U.S. 109, 116-23 (1959); Watkins v. United 
States, 354 U.S. 178, 187 (1957); McGrain v. Daugherty, 273 
U.S. 135, 137 (1927).
    With particular regard to the Congress' informing 
functions, the Supreme Court in Nixon v. Administrator of 
General Services, 433 U.S. 425 (1977), had occasion to note 
that ``there is abundant statutory precedent for the regulation 
and mandatory disclosure of documents in the possession of the 
Executive Branch'' and that ``[s]uch regulation of material 
generated in the Executive Branch has never been considered 
invalid as an invasion of its autonomy.'' 433 U.S. at 447. 
There the Court cited with approval the Freedom of Information 
Act, the Privacy Act, the Government in the Sunshine Act, the 
Federal Records Management Act, and provisions concerned with 
census data and tax returns as appropriate instances of such 
regulations.
    In Nixon, the Court upheld the Presidential Recordings and 
Materials Preservation Act, which protects, among other things, 
public access to former President Nixon's presidential papers 
from presidential claims of violation of the doctrine of 
separation of powers and executive privilege. In INS v. Chadha, 
supra, Court reaffirmed Congress's authority to legislate 
``report and wait'' provisions, distinguishing them from 
otherwise unconstitutional legislative veto provisions there 
under review. 461 U.S. at 935 n.9;955 n. 19. More recently, the 
Court in Morrison v. Olson, supra, reaffirmed Congress's 
authority to require the submission of reports and other 
information to it from executive branch officials, as an 
exercise of oversight over agencies ``that we have recognized 
generally as being incidental to the legislative function of 
Congress''. 487 U.S. at 694.
    Moreover, Congress has selectively required simultaneous or 
unaltered submission of budget requests and legislative 
proposals and comments that limit review by OMB of budget 
requests, legislative proposals, review of proposed agency 
rules, and other required reports and documents. Thus, since 
1973, Congress has mandated that the budget requests of the 
U.S. Postal Service, see Act of June 30, 1974, Pub. Law No. 93-
328, 23 88 Stat. 28 (codified at 39 U.S.C. 2009 (1994), and the 
U.S. International Trade Commission, see Trade Act of 1974, 
Pub. L. No. 93-618, 175(a)(1), 88 Stat. 1978 (1975)(codified at 
19 U.S.C. 2232 (1994), be submitted to Congress without 
revision, and that the budget requests and legislative 
proposals of other agencies be submitted concurrently to OMB 
and the Congress. See, e.g., 7 U.S.C. 4a(h)(1)(2)(1994) 
(Commodity Futures Trading Commission); 31 U.S.C. 1107(b)(1994) 
(Interstate Commerce Commission).
    Also, Congress has exempted the Securities and Exchange 
Commission, Board of Governors of the Federal Reserve System, 
Federal Deposit Insurance Corporation, Federal Home Loan Bank 
Board, and the National Credit Union Administration from OMB 
clearance of their legislative proposals and comments. Act of 
Oct. 28, 1974, Pub. L. No. 93-111, 88 Stat. 1500 (codified at 
12 U.S.C. 250 (1994).
    Since there is no direct prohibition on the President from 
presenting his views with respect to any recommendation or plan 
submitted by the IRS directly to the Congress, no 
constitutional difficulty could be raised with respect to his 
recommendatory duty under Article II, section 3. Indeed, the 
Article II duty to recommend, as with the duty to ``take care'' 
that the laws be faithfully executed, which appears in the same 
clause, is not a source of substantive presidential power and 
claims to that effect have consistently been rejected by the 
courts. See, e.g., Kendall ex rel Stokes v. United States, 37 
U.S. (12 Pat.) 522, 612-13 (1838) (``To contend that the 
obligation imposed on the President to see the laws faithfully 
executed, implies a power to forbid execution, is a novel 
construction of the Constitution, and entirely inadmissible.); 
Youngstown Sheet and Tube Co. v. Sawyer, 343 U.S. 579, 587 
(1952) (``. . . '' [T]he President's power to see that the laws 
are faithfully executed refutes the idea he is to be a 
lawmaker. The Constitution limits his functions in the 
lawmaking process to the recommending of laws he thinks wise 
and the vetoing of laws he thinks bad''.); National Treasury 
Employee Union v. Nixon, 492 F.2d 587, 604 (D.C. Cir. 1974) 
(``That constitutional duty does not permit the President to 
refrain from executing laws duly enacted by the Congress as 
those laws are construed by the judiciary'').
    Thus, the sole questions that remain are whether the 
proposed Commissioner of IRS is an ``inferior officer'' and, if 
so, whether he can be lawfully appointed by the Oversight 
Board.

2. Whether The Proposed Commissioner of IRS Is An Inferior Officer

    In developing its separation of powers jurisprudence, the 
Supreme Court has acknowledged that it has been animated by its 
concern with ``encroachment and aggrandizement'' by one branch 
against the other, and that in adopting its ``flexible 
understanding of separation of powers'' it is recognizing 
``Madison's teaching that the greatest security against tyranny 
is the accumulation of excessive authority in a single Branch--
lies not in a hermetic division among the Branches, but in a 
carefully crafted system of checked and balanced power within 
each Branch.'' Mistretta v. United States, supra, 488 U.S. at 
380-81. The application of this teaching is abundantly evident 
in the appointments process established by Article II, sec. 2, 
cl. 2. The Court has made clear that ``The principle of 
separation of powers is embedded in the Appointments Clause''. 
Freytag v. Commissioner of Internal Revenue, 501 U.S. 868, 882 
(1991). The Appointments Clause directs that all superior 
officers, such as ambassadors, judges and heads of departments, 
must be appointed by the President with the advice and consent 
of the Senate. Congress may also subject any other officer of 
the United States (``inferior officers'') to Senate 
confirmation but may, ``as they think proper,'' vest the 
appointment of inferior officers in the President alone, in the 
courts or in the department heads. Thus the choice Congress 
makes with respect to mode of appointment of necessity reflects 
a decision to impose either a heightened or lesser degree of 
congressional scrutiny on a nominee, or perhaps to provide a 
degree of insulation of the officer from the President by 
having him appointed (and removable) by a department head. See 
United States v. Perkins, 116 U.S. 483 (1886). It also advances 
the concerns sought to be avoided by the Framers. The Freytag 
Court observed:

          The ``manipulation of official appointments'' had 
        long been one of the American revolutionary 
        generation's greatest grievances against executive 
        power, see G. Wood, The Creation of the American 
        Republic 1776-1787, p. 79 (1969) (Wood), because ``the 
        power of appointment to offices'' was deemed ``the most 
        insidious and powerful weapon of eighteenth century 
        despotism''. Id, at 143. Those who framed our 
        Constitution addressed these concerns by carefully 
        husbanding the appointment power to limit its 
        diffusion. Although the debate on the Appointments 
        Clause was brief, the sparse record indicates the 
        Framers' determination to limit the distribution of the 
        power of appointment. The Constitutional Convention 
        rejected Madison's complaint that the Appointments 
        Clause did ``not go far enough if it be necessary at 
        all'': Madison urged that ``Superior Officers below 
        Heads of Departments ought in some cases to have the 
        appointment of the lesser offices.'' Records of the 
        Federal Convention of 1787, pp. 627-628 (M. Farrand 
        rev. 1966). The Framers understood, however, that by 
        limiting the appointment power, they could ensure that 
        those who wielded it were accountable to political 
        force and the will of the people. Thus, the Clause 
        bespeaks a principle of limitation by dividing the 
        power to appoint the principal federal officers--
        ambassadors, ministers, heads of departments, and 
        judges--between the Executive and Legislative Branches. 
        See Buckley, 424 U.S., at 129-131. Even with respect to 
        ``inferior Officers,'' the Clause allows Congress only 
        limited authority to devolve appointment power on the 
        President, his heads of departments, and the courts of 
        law.

501 U.S. 883-84. See also Edmond v. United States, 65 U.S.L.W. 
4362, 4365 (S. Ct., May 19, 1997) (``[T]he Appointment Clause 
of Article II is more than a matter of `etiquette or protocol'; 
it is among the significant structural safeguards of the 
constitutional scheme.) See also Confederated Tribes of Siletz 
Indians of Oregon v. United States, 110 F.3d 688, 696 (9th Cir. 
1997) ``Appointments Clause serves as a guard against one 
branch aggrandizing its power at the expense of another.'').
    Congress has a choice of requiring appointment with Senate 
advice and consent or by the President alone, by a department 
head or by a court of law only with respect to inferior 
officers. Until very recently, Supreme Court decisions did 
``not set forth an exclusive criterion for distinguishing 
between principal and inferior officers for Appointment Clause 
purposes'', Edmond v. United States, supra, 65 U.S.L.W. at 
4865, preferring to deal with each officer on an ad hoc basis. 
In Morrison v. Olson, supra, the Court found the independent 
counsel created by the Ethics in Government Act to be an 
inferior officer because she met four criteria: she was subject 
to removal by a higher officer (the Attorney General), she 
performed only limited duties, her jurisdiction was narrow, and 
her tenure was limited. Morrison, 487 U.S. at 671-672. 
InEdmonds v. United States, supra, however, the Court revisited the 
principal/inferior officer distinction, establishing a test relying on 
the single criterion whether the officer has a superior:

          Generally speaking, the term ``inferior officer'' 
        connotes a relationship with some higher ranking 
        officer or officers below the President: whether one is 
        an ``inferior'' officer depends on whether one has a 
        superior. It is not enough that other officers may be 
        identified who formally maintain a higher rank, or 
        possess responsibilities of a greater magnitude. If 
        that were the intention, the Constitution might have 
        used the phrase ``lesser officer.'' Rather, in the 
        context of a clause designed to preserve political 
        accountability relative to important government 
        assignments, we think it evident that ``inferior 
        officers'' are officers whose work is directed and 
        supervised at some level by others who were appointed 
        by presidential nomination with the advice and consent 
        of the Senate.

65 U.S.L.W. at 4366. Moreover, the Court held that the fact 
that a person exercises ``'significant authority pursuant to 
the laws of the United States'' marks, not the line between 
principal and inferior officer for Appointments Clause 
purposes, but rather, as we said in Buckley, the line between 
officer and non-officer, 424 U.S., at 126''. Id.
    The Edmond ruling appears to answer the question whether 
the Commissioner in the proposed new scheme for IRS is an 
inferior officer. That the Commissioner has been a presidential 
appointee subject to Senate confirmation and only removable by 
the President for many years would be irrelevant. The new 
scheme would relegate the Commissioner to inferior officer 
status since he would be appointed and overseen by the 
Oversight Board, the members of which are presidentially 
appointed with Senate advice and consent, and is removable by 
that body at its pleasure. The only question, then, is whether 
the Board can lawfully appoint the Commissioner at all.

3. Whether The Oversight Board Is a ``Head of Department'' Capable of 
        Appointing Inferior Officers

    In order to vest appointment authority in the Oversight 
Board it must qualify as a ``Head of Department'' under the 
Appointments Clause. Our review of the pertinent case law, and 
in particular the Supreme Court's recent ruling in Edmond v. 
United States, persuades us that it is likely that a reviewing 
court will find that the Board is a ``Head of Department'' 
capable of being vested with authority to appoint inferior 
officers.
    Three judicial decisions need to be considered. In the 
first, Freytag v. CIR, 501 U.S. 868 (1991), the Supreme Court 
unanimously upheld the authority of the Chief Judge of the Tax 
Court to appoint ``special trial judges'' to hear certain 
classes of cases when its workload was heavy. The entire court 
agreed that the Tax Court had to be either a ``department'' or 
a ``court of law'' in order for the Chief Judge to exercise the 
appointing authority. Five of the Justices found it to be a 
court of law, four voted to sustain the authority on the ground 
that it was a department. The majority opinion appeared to take 
a rigid view of the nature of the term ``department'', seeking 
to limit it to those governmental entities specifically 
identified as cabinet departments, relying on statements in 
late 19th and early 20th century Appointments Clause rulings by 
the Court:

          Confining the term ``Heads of Departments'' in the 
        Appointments Clause to executive divisions like the 
        Cabinet-level departments constrains the distribution 
        of the appointment power just as the Commissioner's 
        interpretation, in contrast, would diffuse it. The 
        Cabinet-level departments are limited in number and 
        easily identified. Their heads are subject to the 
        exercise of political oversight and share the 
        President's accountability to the people.
          Such a limiting construction also ensures that we 
        interpret that term in the Appointments Clause 
        consistently with its interpretation in other 
        constitutional provisions. In Germaine, see 99 U.S., at 
        511, this Court noted that the phrase ``Heads of 
        Departments'' in the Appointments Clause must be read 
        in conjunction with the Opinion Clause of Art. II, sec. 
        2, cl. 1. The Opinion Clause provides that the 
        President ``may require the Opinion, in writing, of the 
        principal Officer in each of the Executive 
        Departments,'' and Germaine limited the meaning of 
        ``Executive Departmen[t]'' to the Cabinet members.

501 U.S. at 886. But at the same time the majority 
significantly qualified its broad holding by noting that: ``We 
do not address here any question involving the appointment of 
an inferior officer by the head of one of the principal 
agencies, such as the Federal Trade Commission, the Securities 
and Exchange Commission, the Federal Energy Regulatory 
Commission, the Central Intelligence Agency, and the Federal 
Reserve Bank of St. Louis,'' Id. at 887 note 4.
    The majority's qualification is likely a reaction to the 
strong opinion of the four concurring justices written by 
Justice Scalia, and is arguably meant to limit the court's 
decision to the rather unique circumstances of the Article 1 
Tax Court situation. Justice Scalia contested the majority's 
view that the constitutional term department could be equated 
with ``cabinet-level agency''.

          There is no basis in text or precedent for this 
        position. The term ``Cabinet'' does not appear in the 
        Constitution, the Founders having rejected proposals to 
        create a Cabinet-like entity. See H. Learned, The 
        President's Cabinet 74-94 (1912); E. Corwin, The 
        President 97, 238-240 (5th rev. ed. 1984). The 
        existence of a Cabinet, its membership, and its 
        prerogatives (except to the extent the Twenty-fifth 
        Amendment speaks to them), are entirely matters of 
        Presidential discretion. Nor does any of our cases hold 
        that ``the Heads of Departments'' are Cabinet members. 
        In United States v. Germaine, 99 U.S. 508 (1879), we 
        merely held that the Commissioner of Pensions, an 
        official within the Interior Department, was not the 
        head of a department. And, in Burnap, supra, we held 
        that the Bureau of Public Buildings and Grounds, a 
        bureau within the War Department, was not a department.
          The Court's reliance on the Twenty-fifth Amendment is 
        misplaced. I accept that the phrase ``the principal 
        officers of the executive departments'' is limited to 
        members of the Cabinet. It is the structural 
        composition of the phrase, however, and not the single 
        word ``departments'' which gives it that narrow 
        meaning--''the principal officers'' of the ``executive 
        departments'' in gross, rather than (as in the Opinions 
        Clause) ``the principal Officer in each of the 
        executive Departments'' or (in the Appointments Clause) 
        simply ``the Heads'' (not ``principal Heads'') ``of 
        Departments.''

Id. at 916-917 (emphasis in original).
    Scalia goes on to note that so confining the scope of the 
term department ignores the reality of the current structure of 
the federal administrative bureaucracy:

          Modern practice as well as original practice refutes 
        the distinction between Cabinet and non-Cabinet 
        agencies. Congress has empowered non-Cabinet agencies 
        to appoint inferior officers for quite some time. See, 
        e.g., 47 U.S.C. Sec. 155(f) (FCC--managing director); 
        15 U.S.C. Sec. 78d(b) (Securities and Exchange 
        Commission--''such officers . . . as may be 
        necessary''); 15 U.S.C. Sec. 42 (Federal Trade 
        Commission--secretary); 7 U.S.C. Sec. 4a(c) (Commodity 
        Futures Trading Commission--general counsel). In fact, 
        I know of very few inferior officers in the independent 
        agencies who are appointed by the President, and of 
        none who is appointed by the head of a Cabinet 
        department. The Court's interpretation of ``Heads of 
        Departments'' casts into doubt the validity of many 
        appointments and a number of explicit statutory 
        authorizations to appoint.
          A number of factors support the proposition that 
        ``Heads of Departments'' includes the heads of all 
        agencies immediately below the President in the 
        organizational structure of the Executive Branch. It is 
        quite likely that the ``Departments'' referred to in 
        the Opinions Clause (``The President . . . may require 
        the Opinion, in writing, of the principal Officer in 
        each of the executive Departments,'' Art. II, Sec. 2) 
        are the same as the ``Departments'' in the Appointments 
        Clause. See Germaine, supra, at 511. In the former 
        context, it seems to me, the word must reasonably be 
        thought to include all independent establishments. The 
        purpose of the Opinions Clause, presumably, was to 
        assure the President's ability to get a written opinion 
        on all important matters. But if the ``Departments'' it 
        referred to were only Cabinet departments, it would not 
        assure the current President the ability to receive a 
        written opinion concerning the operations of the 
        Central Intelligence Agency, an agency that is not 
        within any department, and whose Director is not a 
        member of the Cabinet.
          This evident meaning--that the term ``Departments'' 
        means all independent executive establishments--is also 
        the only construction that makes sense of Article II, 
        Sec. 2's sharp distinction between principal officers 
        and inferior officers. The letter, as we have seen, can 
        by statute be made appointable by ``the President 
        alone, . . . the Courts of Law, or . . . the Heads of 
        Departments.'' Officers that are not ``inferior 
        officers,'' however, must be appointed (unless the 
        Constitution itself specifies otherwise, as it does, 
        for example, with respect to officers of Congress) by 
        the President, ``by and with the Advice and Consent of 
        the Senate.'' The obvious purposes of this scheme is to 
        make sure that all the business of the Executive will 
        be conducted under the supervision of officers 
        appointed by the President with Senate approval; only 
        officers ``inferior,'' i.e., subordinate, to those can 
        be appointed in some other fashion. If the Appointments 
        Clause is read as I read it, all inferior officers can 
        be made appointable by their ultimate (sub-
        Presidential) supporters; as petitioners would read it, 
        only those inferior officers whose ultimate superiors 
        happen to be Cabinet members can be. All the other 
        inferior officers, if they are to be appointed by an 
        Executive official at all, must be appointed by the 
        President himself or (assuming cross-department 
        appointments are permissible) by a Cabinet officer who 
        has no authority over the appointees. This seems to me 
        a most implausible disposition, particularly since the 
        makeup of the Cabinet is not specified in the 
        Constitution, or indeed the concept even mentioned. It 
        makes no sense to create a system in which the inferior 
        officers of the Environmental Protection Agency, for 
        example--which may include, inter alias, bureau chiefs, 
        the general counsel, and administrative law judges--
        must be appointed by the President, the courts of law, 
        or the ``Secretary of Something Else.''
          In short, there is no reason, in text, judicial 
        decision, history, or policy, to limit the phrase ``the 
        Heads of Departments'' in the Appointments Clause to 
        those officials who are members of the President's 
        Cabinet. I would give the term its ordinary meaning, 
        something which Congress has apparently been doing for 
        decades without complaint. As an American dictionary 
        roughly contemporaneous with adoption of the 
        Appointments Clause provided, and as remains the case, 
        a department is ``[a] separate allotment or part of 
        business, a distinct province, in which a class of 
        duties are allotted to a particular person . . .'' IN. 
        Webster American Dictionary 58 (1828). I readily 
        acknowledge that applying this word to an entity such 
        as the Tax Court would have seemed strange to the 
        Founders, as it continued to seem strange to modern 
        ears. But that is only because the Founders did not 
        envision that an independent establishment of such 
        small size and specialized function would be created. 
        The Constitution is clear, I think about the chain of 
        appointment and supervision that it envisions: 
        Principal officers could be permitted by law to appoint 
        their subordinates. That should subsist, however much 
        the nature of federal business or of federal 
        organizational structure may alter.

Id. at 918-920.
    This lengthy quotation from Justice Scalia's opinion is 
justified in light of its apparent impact on two subsequent 
decisions. In Silver v. U.S. Postal Service, 951 F.2d 1033 (9th 
Cir. 1991), the appeals court dealt with a challenge to the 
validity of the appointment of the Postmaster General by the 
Governors of the Postal Service. The nine Governors are 
appointed by the President, with Senate advice and consent, and 
are vested with the power to appoint (and remove) the 
Postmaster General and the Deputy Postmaster General who serve 
with the Governors on the Board of Governors. It was argued by 
the appellant that a collegial body cannot be a department 
capable of exercising appointment authority. The court 
disagreed. Finding that the Postal Service was an Executive 
Branch entity, it utilized the Freytag court's inexact 
suggestion that departments are ``executive divisions like the 
Cabinet-level departments'' to hold that since the Post Office 
prior to its reorganization in 1970 was in fact a cabinet 
department and the reorganization did not ``fundamentally 
change the nature and purpose of the postal Service,'' 
Congress's action ``did not render what was once a Cabinet 
level department into an entity that was not ``like a Cabinet-
level department'.'' 951 F.2d at 1038. The appeals court 
concluded that the nine Governors constitutes the ``head of 
department'' since they are appointed by the President, can 
appoint and remove the Postmaster General, can revoke any 
authority delegated by the Board to the Postmaster General, and 
have the authority to designate mail classifications and to set 
postal rates. In view of the subordination of the Postmaster 
General to the Governors, and his statutory role as their 
managing agent, the court found him to be an inferior officer 
capable of being appointed by the Governor.
    The Silver court appeared to reach a satisfactory and 
proper result but only by stretching Freytag's uncertain 
limitation on the scope of the definition of department. This 
uncertainty, however, appears to have been essentially 
dissipated by the Court's decision in Edmond v. United States.
    Edmond involved the questions whether Congress authorized 
the Secretary of Transportation to appoint civilian members of 
the Coast Guard Court of Criminal Appeals and, if so, whether 
those judges are inferior officers. As previously detailed, 
Justice Scalia, for a unanimous court, effectively adopted his 
concurrence in Freytag with respect to the test for determining 
when an officer is ``inferior'' for constitutional purposes. 
``We think it evident that `inferior officers'' are officers 
whose work is directed and supervised at some level by others 
who were appointed with the advice and consent of the Senate,'' 
Edmond, supra at 65 U.S.L.W. at 4366. Finding that the judges 
in question were supervised by the General Counsel of the 
Department of Transportation in his capacity as Judge Advocate 
General and by the Court of Appeals for the Armed Forces, and 
that the Secretary of Transportation was authorized by Congress 
to appoint the judges, the Court concluded that the 
appointments were valid.
    But Justice Scalia's opinion also pointedly diminished the 
majority opinion in Freytag in two ways: First, it limited 
Freytag to its facts: ``Petitioners contend that Court of 
Criminal Appeals judges more closely resemble Tax Court 
judges--who we implied (according to petitioners) were 
principal officers--than they do special trial judges. We note 
initially that Freytag does not hold that Tax Court Judges are 
principal officers; only the appointment of special trial 
judges was at issue in that case.'' Second, and more 
importantly, Scalia's opinion significantly altered the Freytag 
majority's statement of the rationale for the Appointments 
Clause. That opinion made it evident that it was their view 
that at the heart of the Framers' intent was the desire to 
limit abuse of the appointment power by limiting its diffusion: 
``Those who framed our Constitution addressed those concerns by 
carefully husbanding the appointment power to limit its 
diffusion.'' 501 U.S. at 883. And again, more clearly, the 
Freytag court stated:

          We cannot accept the Commissioner's assumption that 
        every part of the Executive Branch is a department, the 
        head of which is eligible to receive the appointment 
        power. The Appointments Clause prevents Congress from 
        distributing power too widely by limiting the actors in 
        whom Congress may vest the power to appoint. The Clause 
        reflects our Framers' conclusion that widely 
        distributed appointment power subverts democratic 
        government. Given the inexorable presence of the 
        administrative state, a holding that every organ in the 
        Executive Branch is a department would multiply 
        indefinitely the number of actors eligible to appoint. 
        The Framers recognized the dangers posed by an 
        excessively diffuse appointment power and rejected 
        efforts to expand that power. See Wood 79-80. So do we.

501 U.S. at 885. The Freytag Court closely linked the danger of 
diffusion to its limitation of the scope of term ``department'' 
to cabinet-level like entities.
    The Edmond opinion abandons the notion of diffusion as a 
rationale for the Appointments Clause. Justice Scalia wrote:

          As we recognized in Buckley v. Valeo, 424 U.S. 1, 125 
        (1976), the Appointments Clause of Article II is more 
        than a matter of ``etiquette or protocol''; it is among 
        the significant structural safeguards of the 
        constitutional scheme. By vesting the President with 
        the exclusive power to select the principal 
        (noninferior) officers of the United States, the 
        Appointments Clause prevents congressional encroachment 
        upon the Executive and Judicial Branches. See id., at 
        128-131; Weiss, supra, at 183-185 (Souter, J. 
        concurring). This disposition was also designed to 
        assure a higher quality of appointments: the Framers 
        anticipated that the President would be less vulnerable 
        to interest-group pressure and personal favoritism than 
        would a collective body. ``The sole and undivided 
        responsibility of one man will naturally beget a 
        livelier sense of duty, and a more exact regard to 
        reputation.'' The Federalist No. 76, p. 387 (M. Beloff 
        ed. 1987) (A. Hamilton); accord, 2 J. Story, 
        Commentaries on the Constitution of the United States 
        374-375 (1888). The President's power to select 
        principal officers of the United States was not left 
        unguarded, however, as Article II further requires the 
        ``Advice and Consent of the Senate.'' This serves both 
        to curb executive abuses of the appointment power, see 
        3 Story, at 376-377, and ``to promote a judicious 
        choice of [persons] for filing the offices of the 
        union,'' The Federalist No. 76, at 386-387. By 
        requiring the joint participation of the President and 
        the Senate, the Appointments Clause was designed to 
        ensure public accountability for both the making of a 
        bad appointment and the rejection of a good one. 
        Hamilton observed: ``The blame of a bad nomination 
        would fall upon the president singly and absolutely. 
        The censure of rejecting a good one would lie entirely 
        at the door of the senate; aggravated by the 
        consideration of their having counteracted the good 
        intentions of the executive. If an ill appointment 
        should be made, the executive for nominating, and the 
        senate for approving, would participate, though in 
        different degrees, in the opprobrium and disgrace.'' 
        Id., No. 77, at 392.

See also 3 Story, supra, at 375 (``If [the President] should . 
. . surrender the public patronage into the hands of profligate 
men, or low adventurers, it will be impossible for him long to 
retain public favor.'' 65 U.S.L.W. at 4355.
    While we normally eschew predictions of changes in 
direction of the Supreme Court, two strong indications that 
Justice Scalia's encompassing view of the term ``department'' 
in his Freytag concurrence has been adopted by the Court cannot 
be readily ignored. The first is the apparent abandonment of 
the diffusion rationale of Freytag as a basis for the 
Appointment Clause. The second is the substantial change in the 
composition of the Court since Freytag was decided. Three of 
the five justices making up the Freytag majority, Justice 
Blackmun, the author of the opinion, and Justices Marshall and 
White, have left the Court. Chief Justice Rehnquist and Justice 
Stevens remain, and they joined in Justice Scalia's Edmond 
opinion.
    With due regard for the uncertainty of forecasting the 
outcome of Supreme Court rulings in separation of powers cases, 
and recognizing that the issue is not free from doubt, we 
believe, based upon the significant alteration in the Court's 
rationale for the basis of the Appointment Clause in Edmond 
from that of Freytag, and the changed composition of the Court 
since the Freytag ruling, that a reviewing court may well find 
that the IRS Oversight Board is a ``head of a department'' 
capable of appointing an inferior officer, and that the 
proposed commissioner is an inferior officer.
                                          Morton Rosenberg,
                                 Specialist In American Public Law.