[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
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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
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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.
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\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.
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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\
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\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.
---------------------------------------------------------------------------
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\
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\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.
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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\
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\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'').
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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\
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\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).
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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.
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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).
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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.
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\71\ Section 8.24(a)(1) of the Model Business Corporation Act
(``MBCA'').
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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.
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\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).
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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.
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\79\ 5 U.S.C. sec. 552(b)(5).
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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.
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\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).
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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.
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\86\ See Nader v. Dunlop, 370 F. Supp. 177 (D.D.C. 1973).
\87\ 997 F.2d 898 (D.D.C. 1993).
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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.
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\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.
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\102\ Section 1205 of Public Law 105-34 (August 5, 1997). This
provision is effective nine months after enactment (May 5, 1998).
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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).
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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\
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\104\ 44 U.S.C. sec. 2904.
\105\ 5 U.S.C. sec. 552a(b)(6).
\106\ 44 U.S.C. sec. 3105.
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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\
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\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).
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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\
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\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).
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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.
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\115\ S. Rept. 94-938, p. 317 (1976).
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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\
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\116\ FOIA does not require disclosure of records or information
that would frustrate law enforcement efforts. 5 U.S.C. 552(b)(7).
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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.
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\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.
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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.
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\118\ 5 U.S.C. sec. 552.
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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\
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\119\ 26 C.F.R. sec. 601.702(c).
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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.
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\120\ 26 C.F.R. sec. 601.702(c)(3).
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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.
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\121\ Public Law 104-231; October 2, 1996.
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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.
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\122\ 5 U.S.C. 552(a)(6)(E).
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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.
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\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.
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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).
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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.
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\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\
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\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).
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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.
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\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.
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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\
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\131\ Subtitle G of Title 7 of the Omnibus Budget Reconciliation
act of 1989 (Public Law 101-239).
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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\
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\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\
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\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\
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\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.
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\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\
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\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.
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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.
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\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)).
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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.
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\146\ 90 F.3d 1459 (9th Cir. 1997).
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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.
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\147\ 117 S. Ct. 849 (1997), reversing 67 F. 3d 260 and 70 F. 3d
120.
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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\
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\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.
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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.
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\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.
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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.
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\151\ Sec. 7609.
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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.
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\152\ For this purpose, a return filed before the due date is
considered to be filed on the due date.
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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.
=======================================================================
APPENDICES
=======================================================================
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.