[Congressional Record Volume 144, Number 14 (Tuesday, February 24, 1998)]
[Senate]
[Pages S920-S929]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BOND (for himself, Mr. Cochran, Ms. Snowe, and Mr. 
        Shelby):
  S. 1669. A bill to restructure the Internal Revenue Service and 
improve taxpayer rights, and for other purposes; to the Committee on 
Finance.


               the putting the taxpayer first act of 1998

  Mr. BOND. Mr. President, I rise today to introduce a bill --Putting 
Taxpayers First. In the next few weeks the Senate will have a historic 
opportunity to make far-reaching changes to the operation of the 
Internal Revenue Service and to strengthen taxpayers' rights. For too 
long, taxpayers have had to put up with poor service when dealing with 
the IRS--often to the tune of larger tax bills because of interest and 
penalties that accrue during the lengthy delays in resolving disputes. 
While our ultimate goal must be a simpler and less burdensome tax law, 
taxpayers need help today when dealing with the IRS. We must put 
taxpayers first.
  For my part, I have asked the people of Missouri for their 
suggestions on how to fix the IRS and better protect taxpayers' rights. 
In addition, as chairman of the Committee on Small Business, I have 
asked small businesses across the country for their recommendations on 
this issue. I am pleased to say that a great many people have taken the 
time to call or write with their suggestions for improving this 
country's tax administration system.
  Over the last several months, the Finance Committee has focused 
extensively on abuse of taxpayers and the need to reform our tax 
administration system. In addition, my committee has held hearings on 
this issue and the importance of reform for entrepreneurs and small 
business owners throughout the country. The House has also completed 
its package of reform measures. That legislation provides a good start, 
but I believe we can make it even stronger.
  With the input and recommendations from all these sources in mind, 
today I am introducing the Putting Taxpayers First Act. This bill will 
provide critical relief for a broad spectrum of taxpayers from single 
moms and married couples to small business owners and farmers. It is 
based on two fundamental principles. We must create an IRS and a tax 
system that are based on top-quality service for all taxpayers, and we 
must act swiftly to restore citizen confidence in that system.
  My bill tackles these goals in three ways: by improving taxpayer 
rights and protections, restructuring the management and operation of 
the IRS, and using electronic filing technology to help taxpayers, not 
complicate their lives.
  For more than 200 years, Americans have had the right, guaranteed by 
the fourth amendment, ``to be secure in their persons, houses, papers, 
and effects, against unreasonable searches and seizures,'' and have 
enjoyed the constitutional protections against being ``deprived of * * 
* property, without due process of law'' under the fifth amendment.
  My bill will make the IRS fully respect these rights by requiring, as 
part of the Tax Code, that the IRS must obtain the approval by a judge 
or magistrate with notice and a hearing for the taxpayer before seizing 
a taxpayer's property. The Government ought to be required to treat 
ordinary taxpayers at least as well as they treat common criminals. It 
is way past time to level the playing field and preserve the 
constitutional rights of all taxpayers.
  My bill also stops the runaway freight train of excessive penalties 
and interest in two ways. First, the interest on a penalty will only 
begin after the taxpayer fails to pay his tax bill. Today, interest on 
most penalties is applied retroactively to the date that the tax return 
was due, which may be as much as 2 to 3 years back. That is just not 
fair. Second, my bill eliminates multiple penalties that apply to the 
same error. Penalties should punish bad behavior, not honest errors 
that even well-intentioned people are bound to make now and then.
  Next, with respect to restructuring the IRS, the second part of my 
bill addresses the need for structural changes within the IRS. I 
believe that the operations and staffing of the IRS should be based 
along customer lines, an idea supported by the National Commission on 
Restructuring the IRS. The IRS' current one-size-fits-all approach no 
longer meets the needs of taxpayers and is inefficient for the IRS as 
well.
  By restructuring the IRS along customer lines, the agency could 
provide one-stop service for taxpayers with similar characteristics and 
needs, such as individuals, small businesses and large companies. As a 
result of these changes, a married couple could go to an IRS service 
center designed for individuals and get help on the issues they care 
about, like the new child tax credit and the Roth IRA. Similarly, a 
small business owner could resolve questions about the depreciation 
deductions for her business equipment with IRS employees specifically 
trained in these areas.
  I was extremely pleased to hear IRS Commissioner Rossotti embrace 
this one-stop-service proposal early this month. While the Commissioner 
has signaled his interest in a customer-based IRS, I want to make sure 
that it does not become one of the many reorganization ideas that lose 
favor after a few short years.
  To protect against this risk, my bill that I introduce today will 
make this structure a permanent part of the Tax Code. But reorganizing 
the IRS front lines, however, is only part of the task. The top-level 
management of the IRS here in Washington must make taxpayer service a 
reality throughout the agency. My bill takes that step by creating a 
full-time board of governors, which will have full responsibility, 
authority and accountability for IRS operations.

  This board composed of four individuals drawn from the private sector 
plus the IRS Commissioner will have the authority and information 
necessary to ensure that the agency's examinations and enforcement 
activities are conducted in a manner that treats taxpayers fairly and 
with respect.
  The board will also oversee the service provided by the taxpayer 
advocate and will ensure that the IRS appeals process is handled in an 
impartial manner.
  An independent, full-time board of governors will protect the IRS 
from being used for political purposes. Any efforts to instill 
confidence in our tax administration system are severely undercut when 
there are allegations that the IRS is being used for politically 
motivated audits. Regrettably, there have been recent reports 
suggesting the IRS has undertaken these types of audits with regard to 
certain individuals and nonprofit organizations like the Christian 
Coalition and the Heritage Foundation. An IRS board of governors with 
representatives of both political parties will help ensure that the 
agency is used for one purpose and one purpose alone: helping taxpayers 
to comply with the tax laws in the least burdensome manner possible.
  Mr. President, in addition to redesigning the agency, my bill also 
creates a commonsense approach for redesigning IRS communications. Too 
often we have heard from constituents, especially small business 
owners, that the notice they receive from the IRS is incomprehensible. 
As a result, one of two things usually happens: The taxpayer pays the 
bill without question just to make the IRS go away, even if they are 
not sure they owe taxes; or the taxpayer has to hire a professional to 
tell

[[Page S921]]

him or her what the notice means and then spend vast amounts of time 
and money getting the matter straightened out. This no-win situation 
has to end now.
  My bill creates a panel of individual taxpayers, small entrepreneurs, 
large business managers and other types of taxpayers who will review 
all standardized IRS documents to make sure they are clear and 
understandable to the taxpayers who must read them. Any notice, letter 
or form that does not meet this minimum standard will be sent back to 
the IRS with a recommendation that it be rewritten before it is sent to 
the taxpayer. And clear communications, I believe, are essential for 
good customer service. America's taxpayers deserve no less.
  Mr. President, as I said, in the next few weeks the Senate will have 
an historic opportunity to make far-reaching changes to the operation 
of the Internal Revenue Service and to strengthen taxpayers' rights. 
For too long, taxpayers have had to put up with poor service when 
dealing with the IRS--often to the tune of larger tax bills because of 
interest and penalties that accrue during the lengthy delays in 
resolving disputes. While our ultimate goal must be a simpler and less 
burdensome tax law, taxpayers need help today when dealing with the 
IRS. We must put taxpayers first.
  For my part, I have asked people across Missouri for their 
suggestions on how to fix the IRS and better protect taxpayers' rights. 
In addition, as the Chairman of the Committee on Small Business, I have 
asked small businesses across the country for their recommendations on 
this issue. And I am pleased to say that a great many people have taken 
the time to call or write with their suggestions for improving this 
country's tax-administration system.
  Over the last several months, the Finance Committee has focused 
extensively on abuse of taxpayers and the need to reform our tax-
administration system. In addition, my Committee has held hearings on 
this issue and the importance of reform for entrepreneurs and small 
business owners throughout the country. The House has also completed 
its package of reform measures. That legislation provides a good start, 
but I believe we can make it even stronger.
  With the input and recommendations from all of these sources in mind, 
today I am introducing the Putting the Taxpayer First Act. This bill 
will provide critical relief for a broad spectrum of taxpayers, from 
single moms and married couples to small business owners and farmers. 
And it is based on two fundamental principles. We must create an IRS 
and a tax system that are based on top quality service for all 
taxpayers, and we must act swiftly to restore citizen confidence in 
that system. My bill tackles these goals in three ways: by improving 
taxpayer rights and protections, restructuring the management and 
operation of the IRS, and using electronic filing technology to help 
taxpayers, not complicate their lives.


                       Improving Taxpayer Rights

  While our ultimate goal should be the wholesale reform or substantial 
replacement of the tax laws, much additional progress can be made now 
by strengthening taxpayers' rights in order to restore faith in the 
fairness of our tax system. My bill includes several improvements to 
taxpayers' rights, and I will stress just a few of them today.
  Recent reports of excessive seizures by the IRS have alarmed all of 
us. These inexcusable practices were highlighted by Senator Nickles in 
a hearing he held last December in Oklahoma City. Imagine the 
devastation to an individual who finds himself in trouble with the IRS 
over back taxes, and the next thing he knows, the IRS has seized his 
bank account or his car--or worse yet, his home. In the case of an 
unfortunate small business, an abrupt seizure can mean shutting the 
business down, ending the livelihoods of all the employees and their 
families.
  While some will say that seizures are a last resort and do not happen 
that often, the IRS has disclosed that during Fiscal Year 1996, the 
agency made about 10,000 seizures of taxpayers' property. That is still 
a sizeable number, and what is truly alarming is that these seizures 
can be done on the IRS' own initiative, without judicial approval.
  For more than 200 years, Americans have had the right, guaranteed by 
the Fourth Amendment, ``to be secure in their persons, houses, papers, 
and effects, against unreasonable searches and seizures,'' and have 
enjoyed the Constitutional protections against being ``deprived of . . 
. property, without due process of law'' under the Fifth Amendment. My 
bill will make the IRS more fully respect these rights by requiring, as 
part of the tax code, that the IRS must obtain the approval by a judge 
or magistrate, with notice and a hearing for the taxpayer, before 
seizing a taxpayer's property. The government ought to be required to 
treat ordinary taxpayers at least as well as they treat common 
criminals. It is way past time to level the playing field and preserve 
the Constitutional rights of all taxpayers.
  Mr. President, taxpayers, and especially small enterprises, often 
need help when it comes to tax planning and examining alternatives to 
minimize their tax liability within the law. With the enormous 
complexity of the tax code today, taxpayers frequently have to make 
good faith judgment calls about whether a particular deduction or 
credit applies.
  Today, there is an inequity in the law that results in unequal 
treatment of taxpayers based on their choice of tax professional or 
financial ability to afford a lawyer. Under the current law, a taxpayer 
who goes to an accountant to obtain advice for tax planning or 
assistance in a controversy to make sure he is not paying more tax than 
the law requires, does so at his peril. In fact, he may as well invite 
the IRS to that meeting because there is no privilege of 
confidentiality between a taxpayer and his accountant.
  For a taxpayer to gain the confidentiality protection that is 
available, he must engage an attorney. Oddly enough, in many cases, the 
attorney may hire an accountant to gain accounting expertise, and then 
the work of the accountant would be protected from disclosure to the 
IRS. Now the taxpayer has assumed enormous additional costs, and for 
what? Just to prevent the IRS from having an even greater upper hand 
against taxpayers who already have to prove their innocence?
  My bill ends this disparity. It permits a taxpayer, in non-criminal 
matters, to hire any individual authorized to practice before the IRS, 
such as an accountant, an enrolled agent, or an attorney, and be able 
to have conversations with that tax professional, which can remain 
private from the IRS. This taxpayer confidentiality provision will 
ensure that all taxpayers receive equal treatment from the IRS in a way 
that can save them money. In addition, it gives all taxpayers a wider 
choice of tax advisors without giving up their right to 
confidentiality. This is a common-sense protection for the millions of 
individuals and businesses that seek professional tax advice each year.

  Penalties, too, have become an enormous burden for taxpayers who make 
mistakes, which is not uncommon with today's complex tax laws. Far too 
often, a minor tax bill grows into an unmanageable liability because of 
the interest on the tax owed, the penalties for negligence and late 
payment, and the interest on the penalties. Frequently, these penalties 
can prevent a taxpayer from settling his account and getting back into 
good standing.
  Penalties were included in the tax code to encourage taxpayers to 
comply with our voluntary assessment system. But the multiplicity of 
penalties and hidden punishments disguised as interest on those 
penalties seriously undermines Americans' confidence that our system is 
fair.
  My bill stops the runaway freight train of excessive penalties and 
interest in two ways. First, interest on a penalty will only begin 
after the taxpayer has failed to pay his tax bill. Today, interest on 
most penalties is applied retroactively to the date that the tax return 
was due, which may be as much as two to three years back. That's just 
not fair. Second, my bill eliminates multiple penalties that apply to 
the same error. Penalties should punish bad behavior, not honest errors 
that even well-intentioned people are bound to make now and then.
  Mr. President, another issue of enormous importance to many 
entrepreneurs in this country is the status

[[Page S922]]

of independent contractors. Over the past several years, I have worked 
hard for the adoption of a clear legislative safe-harbor for the 
classification of workers and protections against retroactive 
reclassification of independent contractors. I included these 
provisions as part of the Home-Based Business Fairness Act, S. 460, 
which I introduced last March. And I intend to pursue these important 
changes to the tax code through that bill as the Senate debates 
legislation to restructure the IRS and improve taxpayers' rights.


                         Restructuring the IRS

  The second part of my bill addresses the need for structural changes 
within the IRS. Over the past century, the IRS has evolved into a 
bureaucratic web of functions, regions, and district offices, all aimed 
at making the collection of taxes easy for the government. What has 
been overlooked is that those tax dollars come from citizens whom the 
government is supposed to serve and represent. With roughly 140 million 
individuals, alone, filing tax returns every year, the system must be 
made convenient for the taxpayer, not just for the government.
  I believe that the operations and staffing of the IRS should be based 
along customer lines, an idea supported by the National Commission on 
Restructuring the IRS. The IRS' current ``one size fits all'' approach 
no longer meets the needs of taxpayers and is inefficient for the IRS 
as well. By restructuring the IRS along customer lines, the agency 
could provide one-stop service for taxpayers with similar 
characteristics and needs, such as individuals, small businesses, and 
large companies. As a result, a married couple could go to an IRS 
service center designed for individuals and get help on the issues that 
they care about like the new child tax credit and the Roth IRA. 
Similarly, a small business owner could resolve questions about the 
depreciation deductions for her business equipment with IRS employees 
specifically trained in these areas.
  I was extremely pleased to hear IRS Commissioner Rossotti embrace 
this one-stop-service proposal earlier this month. And I look forward 
to working with the agency to make it a reality for taxpayers at the 
earliest possible date. While the Commissioner has signaled his 
interest in a customer-based IRS, I want to make sure that it does not 
become one of the many reorganization ideas that lose favor after a few 
short years. To protect against that risk, my bill will make this 
structure a permanent part of the tax code.
  Reorganizing the IRS at the front-lines, however, is only part of the 
task. The top-level management of the IRS here in Washington must make 
taxpayer service a reality throughout the agency. My bill takes that 
step by creating a full-time Board of Governors, which will have full 
responsibility, authority, and accountability for IRS operations. This 
Board, composed of four individuals drawn from the private sector plus 
the IRS Commissioner, will have the authority and information necessary 
to ensure that the agency's examination and enforcement activities are 
conducted in a manner that treats taxpayers fairly and with respect. 
The Board will also oversee the service provided by the Taxpayer 
Advocate and will ensure that the IRS' appeals process is handled in an 
impartial manner.
  An independent, full-time Board of Governors will also protect the 
IRS from being used for political purposes. Any efforts to instill 
confidence in our tax-administration system are severely undercut by 
allegations that the IRS is being used for politically-motivated 
audits. Regrettably, there have been recent reports suggesting that the 
IRS has undertaken these types of audits with regard to certain 
individuals and non-profit organizations like the Christian Coalition 
and the Heritage Foundation. An IRS Board of Governors with 
representatives of both political parties will help ensure that the 
agency is used for one purpose, and one purpose alone: helping 
taxpayers to comply with the tax laws in the least burdensome manner 
possible.
  Mr. President, in addition to redesigning the agency, my bill also 
creates a common sense approach for redesigning IRS communications. Too 
often I have heard from constituents, especially small business owners, 
that a notice they received from the IRS is incomprehensible. As a 
result, one of two things usually happens. The taxpayer pays the bill 
without question just to make the IRS go away, even if they are not 
sure they owe any taxes. Or the taxpayer has to hire a professional to 
tell him what the notice means and then spend vast amounts of time and 
money getting the matter straightened out. This no-win situation has to 
end now.
  My bill creates a panel of individual taxpayers, small entrepreneurs, 
large business managers, and other types of taxpayers, who will review 
all standardized IRS documents to make sure they are clear and 
understandable to the taxpayers who must read them. Any notice, letter 
or form that does not meet this minimum standard, will be sent back to 
the IRS with a recommendation that it be rewritten before it is sent to 
any taxpayer. Clear communications are essential for good customer 
service, and America's taxpayers deserve no less.


                  Fair and Efficient Use of Technology

  The third part of my bill concerns the fair and efficient use of 
technology in our tax-administration system. With the continuing 
advances in technology, we have an enormous opportunity to make all 
taxpayers' lives easier. In fact, the IRS has already made good 
progress in this area with programs like TeleFile, which enables many 
taxpayers to file their tax returns through a brief telephone call.
  But with technological advances comes the risk of imposing even more 
burdens on taxpayers, and Congress must make sure that these 
improvements are not implemented at the expense of the taxpayers, and 
especially the small businesses, who are expected to comply with them. 
To prevent that result, my bill makes clear that expanded electronic 
filing of tax and information returns should be a goal, not a mandate 
imposed on American taxpayers.
  In addition, my bill ensures that in making electronic filing a 
reality, the IRS will involve representatives of all taxpayer groups--
individuals, small business, large companies, and the tax-preparation 
community--to ensure that electronic filing does not complicate 
everyone's lives in the name of modernization and simplification.
  Mr. President, the provisions of the Putting the Taxpayer First Act 
will make the IRS a better public servant and help restore confidence 
in our tax system. Taxpayers face enormous difficulties today just to 
comply with the tax law, and they have waited far too long for good 
service and fair treatment in a timely manner. I urge my colleagues on 
the Finance Committee to include the provisions of this bill when they 
markup IRS-reform legislation next month. Our efforts must focus on 
putting the taxpayer first if we are to make positive and lasting 
changes to the IRS and not keep America's taxpayers waiting any longer.
  Mr. President, I ask unanimous consent that Senators Cochran, Snowe 
and Shelby be shown as original cosponsors. And I ask unanimous consent 
that a copy of the bill and a description of its provisions be printed 
in the Record.
  The PRESIDENT pro tempore. Without objection, it is so ordered.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 1669

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF 
                   CONTENTS.

       (a) Short Title.--This Act may be cited as the ``Putting 
     the Taxpayer First Act of 1998''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
       (c) Table of Contents.--

Sec. 1. Short title; amendment of 1986 Code; table of contents.

                        TITLE I--TAXPAYER RIGHTS

Sec. 101. Court approval for seizure of taxpayer's property.
Sec. 102. Improved offers-in-compromise procedure.
Sec. 103. Clarification that attorney's fees are available in 
              unauthorized-disclosure and browsing cases.
Sec. 104. Uniform application of confidentiality privilege for taxpayer 
              communications with federally authorized practitioners.

[[Page S923]]

Sec. 105. Taxpayer's right to have an IRS examination take place at 
              another site.
Sec. 106. Prohibition on IRS contact of third parties without taxpayer 
              pre-notification.
Sec. 107. Expansion of taxpayer's rights in administrative appeal.

                        TITLE II--PENALTY REFORM

Sec. 201. Imposition of interest on penalties only after a taxpayer's 
              failure to pay.
Sec. 202. Repeal of the penalty for substantial understatement of 
              income tax.
Sec. 203. Repeal of the failure-to-pay penalty.

           TITLE III--INTERNAL REVENUE SERVICE RESTRUCTURING

Sec. 301. Internal Revenue Service Board of Governors; Commissioner of 
              Internal Revenue.
Sec. 302. Restructuring of IRS operations along customer lines.
Sec. 303. Greater independence of the Taxpayer Advocate.
Sec. 304. Greater independence of the Office of Appeals.
Sec. 305. Improved IRS written communications to taxpayers and tax 
              forms.

                      TITLE IV--ELECTRONIC FILING

Sec. 401. Goals for electronic filing; electronic-filing advisory 
              group.
Sec. 402. Report on electronic filing and its effect on small 
              businesses.

                       TITLE V--REGULATORY REFORM

Sec. 501. Congressional review of Internal Revenue Service rules that 
              increase revenue.
Sec. 502. Small business advocacy panels for the IRS.
Sec. 503. Taxpayer's election with respect to recovery of costs and 
              certain fees.
                        TITLE I--TAXPAYER RIGHTS

     SEC. 101. COURT APPROVAL FOR SEIZURE OF TAXPAYER'S PROPERTY.

       (a) In General.--Section 6331(a) is amended by adding at 
     the end the following new paragraph:
       ``(2) Limitation on authority of secretary.--
     Notwithstanding paragraph (1)--
       ``(A) General rule.--The Secretary shall not levy upon any 
     property or rights to property until--
       ``(i) the taxpayer has received the notice described in 
     subsection (a) which notifies the taxpayer of the opportunity 
     for judicial review under this subparagraph and advises the 
     taxpayer that criminal penalties may be imposed if the 
     property is transferred or otherwise made unavailable for 
     collection while such review is pending, and
       ``(ii) a court of competent jurisdiction has determined, 
     after the taxpayer has received notice and an opportunity for 
     a hearing, that such levy is reasonable under the 
     circumstances.
       ``(B) Exception.--A court may waive the right to notice and 
     hearing under subparagraph (A) if the Secretary demonstrates 
     to the court's satisfaction that--
       ``(i) irreparable harm will occur with respect to the 
     Secretary's ability to collect the tax if relief is not 
     granted,
       ``(ii) the Secretary has provided the taxpayer with notice 
     and demand pursuant to section 6303(a),
       ``(iii) the taxpayer has neglected or refused to pay the 
     tax within 10 days after notice and demand, and
       ``(iv) the Secretary has a reasonable probability of 
     success on the merits with regard to the taxpayer's liability 
     for the tax.''
       (b) Conforming Amendment.--Section 6331(a) is amended by 
     striking ``If any person'' and inserting:
       ``(1) In general.--If any person''.
       (c) Effective Date.--The amendments made by this section 
     shall be effective for levies occurring on or after the date 
     of the enactment of this Act.

     SEC. 102. IMPROVED OFFERS-IN-COMPROMISE PROCEDURE.

       (a) In General.--Section 7122 (relating to compromises) is 
     amended by adding at the end the following new subsection:
       ``(c) Offers in Compromise.--
       ``(1) In general.--If the Secretary receives an offer in 
     compromise which is based on the taxpayer's inability to pay 
     the taxpayer's tax liability in full, the Secretary shall 
     accept such offer in compromise if it reasonably reflects the 
     taxpayer's ability to pay.
       ``(2) Timely response.--
       ``(A) General rule.--The Secretary shall accept, reject, or 
     make a counteroffer to an offer in compromise described in 
     paragraph (1) within 120 days from the date that the offer is 
     filed and reasonable documentation is submitted regarding the 
     taxpayer's ability to pay.
       ``(B) Failure to respond.--If the Secretary fails to 
     respond within such time, interest on the underpayment under 
     section 6601(a) shall be suspended until such date as the 
     Secretary responds. This subparagraph shall not apply if the 
     Secretary reasonably determines that the taxpayer's offer in 
     compromise is frivolous.
       ``(C) Unacceptable offers.--If the Secretary does not 
     accept an offer in compromise from a taxpayer--
       ``(i) the Secretary shall provide a detailed description of 
     the reasons that the offer was not accepted, and
       ``(ii) the taxpayer may appeal the Secretary's 
     determination to the Office of Appeals.
       ``(3) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this subsection, including regulations--
       ``(A) establishing standards for acceptable offers in 
     compromise based on the economic reality of the taxpayer's 
     ability to pay, and
       ``(B) providing for the application of this subsection to 
     offers in compromise made by small businesses and the self-
     employed.''
       (b) Effective Date.--The amendments made by this section 
     shall be effective for offers in compromise filed after the 
     date of the enactment of this Act.

     SEC. 103. CLARIFICATION THAT ATTORNEY'S FEES ARE AVAILABLE IN 
                   UNAUTHORIZED-DISCLOSURE AND BROWSING CASES.

       (a) In General.--Subsection (a) of section 7430 (relating 
     to awarding of costs and certain fees) is amended to read as 
     follows:
       ``(a) In General.--In any administrative or court 
     proceeding which is brought by or against the United States 
     in connection with the determination, collection, or refund 
     of any tax, interest, or penalty under this title (including 
     any civil action under section 7431), the prevailing party 
     may be awarded a judgment or settlement for--
       ``(1) reasonable administrative costs incurred in 
     connection with such administrative proceeding within the 
     Internal Revenue Service, and
       ``(2) reasonable litigation costs incurred in connection 
     with such court proceeding.''
       (b) Effective Date.--The amendments made by this section 
     shall be effective for any proceeding which--
       (1) arises after the date of the enactment of this Act, or
       (2) arises on or before such date and which does not become 
     final before the 30th day after such date.

     SEC. 104. UNIFORM APPLICATION OF CONFIDENTIALITY PRIVILEGE 
                   FOR TAXPAYER COMMUNICATIONS WITH FEDERALLY 
                   AUTHORIZED PRACTITIONERS.

       (a) In General.--Chapter 77 (relating to miscellaneous 
     provisions) is amended by adding at the end the following new 
     section:

     ``SEC. 7525. UNIFORM APPLICATION OF CONFIDENTIALITY PRIVILEGE 
                   FOR TAXPAYER COMMUNICATIONS WITH FEDERALLY 
                   AUTHORIZED PRACTITIONERS.

       ``(a) General Rule.--With respect to tax advice, the same 
     common law protections of confidentiality which apply to a 
     communication between a taxpayer and an attorney shall also 
     apply to a communication between a taxpayer and any federally 
     authorized tax practitioner if the communication would be 
     considered a privileged communication if it were between a 
     taxpayer and an attorney.
       ``(b) Limitations.--Subsection (a) may only be asserted 
     in--
       ``(1) noncriminal tax matters before the Internal Revenue 
     Service, and
       ``(2) proceedings in Federal courts with respect to such 
     matters.
       ``(c) Federally Authorized Tax Practitioner.--For purposes 
     of this section, the term `federally authorized tax 
     practitioner' means any individual who is authorized under 
     Federal law to practice before the Internal Revenue Service 
     but only if such practice is subject to Federal regulation 
     under section 330 of title 31, United States Code.''
       (b) Conforming Amendment.--The table of sections for 
     chapter 77 is amended by adding at the end the following new 
     item:

``Sec. 7525. Uniform application of confidentiality privilege for 
              taxpayer communications with federally authorized 
              practitioners.''

     SEC. 105. TAXPAYER'S RIGHT TO HAVE AN IRS EXAMINATION TAKE 
                   PLACE AT ANOTHER SITE.

       (a) In General.--Subsection (a) of section 7605 (relating 
     to time and place of examination) is amended to read as 
     follows:
       ``(a) Time and Place.--
       ``(1) In general.--The time and place of examination 
     pursuant to the provisions of section 6420(e)(2), 6421(g)(2), 
     6427(j)(2), or 7602 shall be such time and place as may be 
     fixed by the Secretary and as are reasonable under the 
     circumstances. In the case of a summons under authority of 
     paragraph (2) of section 7602, or under the corresponding 
     authority of section 6420(e)(2), 6421(g)(2), or 6427(j)(2), 
     the date fixed for appearance before the Secretary shall not 
     be less than 10 days from the date of the summons.
       ``(2) Limitation.--Upon request of a taxpayer, the 
     Secretary shall conduct any examination described in 
     paragraph (1) at a location other than the taxpayer's 
     residence or place of business, if such location is 
     reasonably accessible to the Secretary and the taxpayer's 
     original books and records pertinent to the examination are 
     available at such location.''
       (b) Effective Date.--The amendments made by this section 
     shall be effective for examinations occurring after the date 
     of the enactment of this Act.

     SEC. 106. PROHIBITION ON IRS CONTACT OF THIRD PARTIES WITHOUT 
                   TAXPAYER PRE-NOTIFICATION.

       (a) In General.--Section 7602 (relating to examination of 
     books and witnesses) is amended by redesignating subsection 
     (c) as subsection (d) and by inserting after subsection (b) 
     the following new subsection:
       ``(c) Limitation of Authority To Summon.--In the case of a 
     taxpayer engaged in a trade or business, no summons 
     concerning such trade or business may be issued under this 
     title with respect to any person other than such taxpayer 
     without providing reasonable notice to the taxpayer that such

[[Page S924]]

     summons will be issued. This subsection shall not apply if 
     the Secretary determines for good cause shown that such 
     notice would jeopardize collection of any tax or any pending 
     criminal investigation.''
       (b) Effective Date.--The amendments made by this section 
     shall be effective for summons issued after the date of the 
     enactment of this Act.

     SEC. 107. EXPANSION OF TAXPAYER'S RIGHTS IN ADMINISTRATIVE 
                   APPEAL.

       (a) In General.--Subchapter B of chapter 63 (relating to 
     assessment) is amended by adding before section 6212 the 
     following new section:

     ``SEC. 6211A. NOTICE OF PROPOSED ADJUSTMENT.

       ``(a) Income Taxes.--At least 60 days prior to issuing a 
     notice of deficiency under section 6212, the Secretary shall 
     send a notice explaining the adjustments that the Secretary 
     believes should be made to the amount shown as tax by the 
     taxpayer on his return that would result in a deficiency. If 
     the taxpayer does not agree with the Secretary's proposed 
     adjustments, the taxpayer may appeal such proposed 
     adjustments to the Office of Appeals.
       ``(b) Address for Notice of Proposed Adjustment.--The 
     provisions of section 6212(b) shall apply with respect to 
     mailing of the notice of proposed adjustment described in 
     subsection (a).''
       (b) Employment Taxes.--Section 6205(b) is amended--
       (1) by adding at the end the following new paragraph:
       ``(2) Notice of proposed assessment.--At least 60 days 
     prior to making any assessment with respect to paragraph (1), 
     the Secretary shall send a notice of proposed assessment 
     (mailed to the taxpayer at its last known address) explaining 
     the adjustments that the Secretary believes should be made to 
     the amount paid or deducted with respect to any payment of 
     wages or compensation which would result in an underpayment. 
     If the taxpayer disagrees with the Secretary's adjustments, 
     the taxpayer may appeal such adjustments to the Office of 
     Appeals.'', and
       (2) by striking ``If less than'' and inserting:
       ``(1) In general.--If less than''.
       (b) Conforming Amendments.--The table of sections for 
     subchapter B of chapter 63 is amended by inserting the 
     following new item:

``Sec. 6211A. Notice of proposed adjustment.''

       (c) Effective Date.--The amendments made by this section 
     shall be effective 60 days after the date of the enactment of 
     this Act.
                        TITLE II--PENALTY REFORM

     SEC. 201. IMPOSITION OF INTEREST ON PENALTIES ONLY AFTER A 
                   TAXPAYER'S FAILURE TO PAY.

       (a) In General.--Section 6601(e)(2) is amended to read as 
     follows:
       ``(2) Interest on penalties, additional amounts, or 
     additions to the tax.--Interest shall be imposed under 
     subsection (a) in respect of any assessable penalty, 
     additional amount, or addition to the tax only if such 
     assessable penalty, additional amount, or addition to the tax 
     is not paid within 21 calendar days from the date of notice 
     and demand therefor (10 business days if the amount for which 
     such notice and demand is made equals or exceeds $100,000), 
     and in such case interest shall be imposed only for the 
     period from the date of the notice and demand to the date of 
     payment.''
       (b) Effective Date.--The amendments made by this section 
     shall be effective for penalties assessed after the date of 
     the enactment of this Act.

     SEC. 202. REPEAL OF THE PENALTY FOR SUBSTANTIAL 
                   UNDERSTATEMENT OF INCOME TAX.

       (a) In General.--Subsection (d) of section 6662 is 
     repealed.
       (b) Conforming Amendments.--
       (1) Section 6662(b) is amended by striking paragraph (2) 
     and redesignating paragraphs (3), (4), and (5) as paragraphs 
     (2), (3), and (4), respectively.
       (2) Section 6662 is amended by redesignating subsections 
     (e), (f), (g), and (h) as subsections (d), (e), (f), and (g), 
     respectively.
       (3) Section 461(i)(3)(C) is amended to read as follows:
       ``(C) any partnership or other entity, any investment plan 
     or arrangement, or any other plan or arrangement if a 
     significant purpose of such partnership, entity, plan, or 
     arrangement is the avoidance or evasion of Federal income 
     tax.''
       (4) Section 1274(b)(3)(B)(i) is amended by striking 
     ``section 6662(d)(2)(C)(iii)'' and inserting ``section 
     461(i)(3)(C)''.
       (5) Section 6013(e)(3) is amended to read as follows:
       ``(3) Substantial understatement.--
       ``(A) In general.--For purposes of this subsection, the 
     term `substantial understatement' means any understatement 
     which exceeds $500.
       ``(B) Understatement.--For purposes of subparagraph (A), 
     the term ``understatement'' means the excess of--
       ``(i) the amount of the tax required to be shown on the 
     return for the taxable year, over
       ``(ii) the amount of the tax imposed which is shown on the 
     return, reduced by any rebate (within the meaning of section 
     6211(b)(2)).
       ``(C) Reduction for understatement due to position of 
     taxpayer or disclosed item.--The amount of the understatement 
     under subparagraph (B) shall be reduced by that portion of 
     the understatement which is attributable to--
       ``(i) the tax treatment of any item by the taxpayer if 
     there is or was substantial authority for such treatment, or
       ``(ii) any item if--

       ``(I) the relevant facts affecting the item's tax treatment 
     are adequately disclosed in the return or in a statement 
     attached to the return, and
       ``(II) there is a reasonable basis for the tax treatment of 
     such item by the taxpayer.

       ``(D) Special rules in cases involving tax shelters.--
       ``(i) In general.--In the case of any item of a taxpayer 
     which is attributable to a tax shelter--

       ``(I) subparagraph (C)(ii) shall not apply, and
       ``(II) subparagraph (C)(i) shall not apply unless (in 
     addition to meeting the requirements of such subparagraph) 
     the taxpayer reasonably believed that the tax treatment of 
     such item by the taxpayer was more likely than not the proper 
     treatment.

       ``(ii) Tax shelter.--For purposes of this subparagraph, the 
     term `tax shelter' has the meaning given such term by section 
     461(i)(3)(C).
       ``(E) Secretarial list.--The Secretary shall prescribe (and 
     revise not less frequently than annually) a list of 
     positions--
       ``(i) for which the Secretary believes there is not 
     substantial authority, and
       ``(ii) which affect a significant number of taxpayers.

     Such list (and any revision thereof) shall be published in 
     the Federal Register.''
       (6) Section 6694(a) is amended--
       (A) by striking ``section 6662(d)(2)(B)(ii)'' and inserting 
     ``section 6013(e)(3)(C)(ii)'' in paragraph (3), and
       (B) by adding at the end the following: ``For purposes of 
     paragraph (3), in applying section 6013(e)(3)(C)(ii)(II), in 
     no event shall a corporation be treated as having a 
     reasonable basis for its tax treatment of an item 
     attributable to a multiple-party financing transaction if 
     such treatment does not clearly reflect the income of the 
     corporation.''
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 203. REPEAL OF THE FAILURE-TO-PAY PENALTY.

       (a) In General.--Section 6651(a) is amended by striking 
     paragraphs (2) and (3).
       (b) Conforming Amendments to Section 6651.--
       (1) Section 6651(a) is amended--
       (A) by striking ``In the case of failure--
       ``(1) to'' and inserting ``In the case of failure to'', and
       (B) by striking the semicolon at the end of paragraph (1) 
     and inserting a period.
       (2) Section 6651(b) is amended--
       (A) by striking ``For purposes of--
       ``(1) subsection (a)(1)'' and inserting ``For purposes of 
     subsection (a)'',
       (B) by striking the comma at the end of paragraph (1) and 
     inserting a period, and
       (C) by striking paragraphs (2) and (3).
       (3) Section 6651 is amended by striking subsections (c), 
     (d), and (e).
       (4) Section 6651(f) is amended by striking ``paragraph (1) 
     of''.
       (5) Section 6651(g) is amended to read as follows:
       ``(g) Treatment of Returns Prepared by Secretary Under 
     Section 6020(b).--In the case of any return made by the 
     Secretary under section 6020(b), such return shall be 
     disregarded for purposes of determining the amount of the 
     addition under subsection (a).''
       (6) Section 6651, as amended by paragraphs (3) and (4), is 
     amended by redesignating subsections (f) and (g) as 
     subsections (c) and (d), respectively.
       (7) The heading of section 6651 is amended to read as 
     follows:

     ``SEC. 6651. FAILURE TO FILE TAX RETURN.''

       (8) The table of sections for subchapter A of chapter 68 is 
     amended by striking the item relating to section 6651 and 
     inserting the following new item:

``Sec. 6651. Failure to file tax return.''

       (9) Section 5684(c)(2) is amended by striking ``or pay 
     tax''.
       (c) Effective Date.--The amendments made by this section 
     shall be effective for failures to pay occurring after the 
     date of the enactment of this Act.
           TITLE III--INTERNAL REVENUE SERVICE RESTRUCTURING

     SEC. 301. INTERNAL REVENUE SERVICE BOARD OF GOVERNORS; 
                   COMMISSIONER OF INTERNAL REVENUE.

       (a) In General.--Chapter 80 (relating to general rules) is 
     amended by adding after section 7801 the following new 
     section:

     ``SEC. 7801A. INTERNAL REVENUE SERVICE BOARD OF GOVERNORS; 
                   COMMISSIONER OF INTERNAL REVENUE.

       ``(a) Internal Revenue Service Board of Governors.--
       ``(1) Establishment.--There is established within the 
     Department of the Treasury the Internal Revenue Service Board 
     of Governors (in this title referred to as the `Board').
       ``(2) Membership.--
       ``(A) Composition.--The Board shall be composed of 5 
     members, of whom--
       ``(i) 4 shall be individuals who are appointed by the 
     President, by and with the advice and consent of the Senate, 
     and
       ``(ii) 1 shall be the Commissioner of Internal Revenue.


[[Page S925]]


     Not more than 2 members of the Board appointed under clause 
     (i) may be affiliated with the same political party.
       ``(B) Qualifications.--Members of the Board described in 
     subparagraph (A)(i) shall be appointed solely on the basis of 
     their professional experience and expertise in the following 
     areas:
       ``(i) The needs and concerns of taxpayers.
       ``(ii) Organization development.
       ``(iii) Customer service.
       ``(iv) Operation of small businesses.
       ``(v) Management of large businesses.
       ``(vi) Information technology.
       ``(vii) Compliance.

     In the aggregate, the members of the Board described in 
     subparagraph (A)(i) should collectively bring to bear 
     expertise in these enumerated areas.
       ``(C) Terms.--Each member who is described in subparagraph 
     (A)(i) shall be appointed for a term of 5 years, except that 
     of the members first appointed--
       ``(i) 1 member who is affiliated with the same political 
     party as the President shall be appointed for a term of 1 
     year,
       ``(ii) 1 member who is not affiliated with the same 
     political party as the President shall be appointed for a 
     term of 2 years,
       ``(iii) 1 member who is affiliated with the same political 
     party as the President shall be appointed for a term of 3 
     years, and
       ``(iv) 1 member who is not affiliated with the same 
     political party as the President shall be appointed for a 
     term of 4 years.

     A member of the Board may serve on the Board after the 
     expiration of the member's term until a successor has taken 
     office as a member of the Board.
       ``(D) Reappointment.--An individual who is described in 
     subparagraph (A)(i) may be appointed to no more than two 5-
     year terms on the Board.
       ``(E) Vacancy.--Any vacancy on the Board--
       ``(i) shall not affect the powers of the Board, and
       ``(ii) shall be filled in the same manner as the original 
     appointment.

     Any member appointed to fill a vacancy occurring before the 
     expiration of the term for which the member's predecessor was 
     appointed shall be appointed for the remainder of that term.
       ``(F) Removal.--
       ``(i) In general.--A member of the Board may be removed at 
     the will of the President.
       ``(ii) Commissioner of internal revenue.--An individual 
     described in subparagraph (A)(ii) shall be removed upon 
     termination of employment.
       ``(3) General responsibilities.--
       ``(A) In general.--The Board shall oversee the Internal 
     Revenue Service 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.
       ``(B) Consultation on tax policy.--The Board shall be 
     responsible for consulting with the Secretary of the Treasury 
     with respect to the development and formulation of Federal 
     tax policy relating to existing or proposed internal revenue 
     laws, related statutes, and tax conventions.
       ``(4) Specific responsibilities.--The Board shall have the 
     following specific responsibilities:
       ``(A) Strategic plans.--To review and approve strategic 
     plans of the Internal Revenue Service, including the 
     establishment of--
       ``(i) mission and objectives, and standards of performance 
     relative to either, and
       ``(ii) annual and long-range strategic plans.
       ``(B) Operational plans.--To review and approve the 
     operational functions of the Internal Revenue Service, 
     including--
       ``(i) plans for modernization of the tax system,
       ``(ii) plans for outsourcing or managed competition, and
       ``(iii) plans for training and education.
       ``(C) Management.--To--
       ``(i) review and approve the Commissioner's selection, 
     evaluation, and compensation of senior managers,
       ``(ii) oversee the operation of the Office of the Taxpayer 
     Advocate and the Office of Appeals, and
       ``(iii) review and approve the Commissioner's plans for 
     reorganization of the Internal Revenue Service.
       ``(D) Budget.--To--
       ``(i) review and approve the budget request of the Internal 
     Revenue Service prepared by the Commissioner,
       ``(ii) submit such budget request to the Secretary of the 
     Treasury,
       ``(iii) ensure that the budget request supports the annual 
     and long-range strategic plans of the Internal Revenue 
     Service, and
       ``(iv) ensure appropriate financial audits of the Internal 
     Revenue Service.

     The Secretary shall submit, without revision, the budget 
     request referred to in subparagraph (D) for any fiscal year 
     to the President who shall submit, without revision, such 
     request to Congress together with the President's annual 
     budget request for the Internal Revenue Service for such 
     fiscal year.
       ``(5) Board personnel matters.--
       ``(A) Compensation of members.--Each member of the Board 
     who is described in subsection (b)(1)(A)(i) shall be 
     compensated at an annual rate equal to the rate for Executive 
     Schedule IV under title 5 of the United States Code. The 
     Commissioner shall receive no additional compensation for 
     service on the Board.
       ``(B) Staff.--The Chairperson of the Board shall have the 
     authority to hire such personnel as may be necessary to 
     enable the Board to perform its duties.
       ``(6) Administrative matters.--
       ``(A) Chair.--The Commissioner of Internal Revenue shall 
     serve as the chairperson of the Board.
       ``(B) Committees.--The Board may establish such committees 
     as the Board determines appropriate.
       ``(C) Meetings.--The Board shall meet at least once each 
     month and at such other times as the Board determines 
     appropriate.
       ``(D) Quorum; voting requirements; delegation of 
     authorities.--3 members of the Board shall constitute a 
     quorum. All decisions of the Board with respect to the 
     exercise of its duties and powers under this section shall be 
     made by a majority vote of the members present and voting. A 
     member of the Board may not delegate to any person the 
     member's vote or any decisionmaking authority or duty vested 
     in the Board by the provisions of this section.
       ``(E) Reports.--The Board shall each year report to the 
     President and the Congress with respect to the conduct of its 
     responsibilities under this title.
       ``(b) Commissioner of Internal Revenue.--
       ``(1) Appointment.--There shall be in the Department of the 
     Treasury a Commissioner of Internal Revenue who shall be 
     appointed by the President, by and with the advice and 
     consent of the Senate, to a 5-year term. The appointment 
     shall be made without regard to political affiliation or 
     activity.
       ``(2) Vacancy.--Any individual appointed to fill a vacancy 
     in the position of Commissioner occurring before the 
     expiration of the term for which such individual's 
     predecessor was appointed shall be appointed for the 
     remainder of that term.
       ``(3) Removal.--The Commissioner may be removed at the will 
     of the President.
       ``(4) Duties.--Subject to the powers of the Board, the 
     Commissioner shall have such duties and powers as the 
     Secretary may prescribe, including the power to--
       ``(A) 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
       ``(B) recommend to the President (after consultation with 
     the Board) a candidate for appointment as Chief Counsel for 
     the Internal Revenue Service when a vacancy occurs, and 
     recommend to the President (after consultation with the 
     Board) the removal of such Chief Counsel.

     If the Secretary determines not to delegate a power specified 
     in subparagraph (A) or (B), such determination may not take 
     effect until 30 days after the Secretary notifies the 
     Committees on Finance, Appropriations, and Governmental 
     Affairs of the Senate, the Committees on Ways and Means, 
     Appropriations, and Government Reform and Oversight of the 
     House of Representatives, and the Joint Committee on 
     Taxation.
       ``(5) Consultation with board.--The Commissioner shall 
     consult with the Board on all matters set forth in subsection 
     (a)(4).''
       (b) Conforming Amendments.--
       (1) Section 5315 of title 5, United States Code, is amended 
     by adding at the end the following new item:

``Members, Internal Revenue Service Board of Governors.''

       (2) Section 7701(a) (relating to definitions) is amended by 
     inserting after paragraph (46) the following new paragraph:
       ``(47) Board.--The term `Board' means the Board of 
     Governors of the Internal Revenue Service.''
       (3) The table of sections for subchapter A of chapter 80 is 
     amended by inserting after the item relating to section 7801 
     the following new item:

``Sec. 7801A. Internal Revenue Service Board of Governors; Commissioner 
              of Internal Revenue.''

       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     take effect on the date of the enactment of this Act.
       (2) Nominations to internal revenue service board of 
     governors.--The President shall submit nominations under 
     section 7801A(a) of the Internal Revenue Code of 1986, as 
     added by this section, to the Senate not later than 6 months 
     after the date of the enactment of this Act.
       (3) Current commissioner.--In the case of an individual 
     serving as Commissioner of Internal Revenue on the date of 
     the enactment of this Act who was appointed to such position 
     before such date, the 5-year term required by section 
     7801A(b)(1) of the Internal Revenue Code of 1986, as added by 
     this section, shall begin as of the date of such appointment.

     SEC. 302. RESTRUCTURING OF IRS OPERATIONS ALONG CUSTOMER 
                   LINES.

       (a) In General.--Subsection (a) of section 7802 (relating 
     to the Commissioner of Internal Revenue) is amended to read 
     as follows:
       ``(a) Organization of the Internal Revenue Service.--
       ``(1) In general.--The Internal Revenue Service shall be 
     organized into divisions representing the following types of 
     taxpayers:
       ``(A) Individual taxpayers subject to wage withholding.

[[Page S926]]

       ``(B) Small businesses and self-employed individuals.
       ``(C) Large businesses.
       ``(D) Employee plans and exempt organizations.
       ``(E) Trusts and estates.
       ``(F) Such other divisions as the Board deems necessary and 
     appropriate.
       ``(2) Supervision and direction of divisions.--Each 
     division established by paragraph (1) shall be under the 
     supervision and direction of an Assistant Commissioner of 
     Internal Revenue. As the head of a division, each Assistant 
     Commissioner shall be responsible for carrying out the 
     functions of taxpayer services, examinations, collections, 
     counsel operations, and such other functions as the Board may 
     designate with respect to the taxpayers covered by the 
     division.''
       (b) Conforming Amendments.--
       (1) The section heading for section 7802 is amended to read 
     as follows:

     ``SEC. 7802. ORGANIZATION OF THE INTERNAL REVENUE SERVICE; 
                   TAXPAYER ADVOCATE; OFFICE OF APPEALS.''

       (2) The table of sections for subchapter A of chapter 80 is 
     amended by striking the item relating to section 7802 and 
     inserting the following new item:

``Sec. 7802. Organization of the Internal Revenue Service; Taxpayer 
              Advocate; Office of Appeals.''

       (3) Subsection (b) of section 5109 of title 5, United 
     States Code, is amended by striking ``the employee appointed 
     under section 7802(b)'' and inserting ``an employee appointed 
     under section 7802(a)(2)''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 303. GREATER INDEPENDENCE OF THE TAXPAYER ADVOCATE.

       (a) In General.--Section 7802(d)(1) is amended to read as 
     follows:
       ``(1) In general.--There is established in the Internal 
     Revenue Service an office to be known as the `Office of the 
     Taxpayer Advocate'. Such office shall be independent of all 
     other functions of the Internal Revenue Service and shall be 
     under the supervision and direction of an official to be 
     known as the `Taxpayer Advocate' who shall be appointed by, 
     and report directly to, the Board. The Taxpayer Advocate 
     shall be entitled to compensation at the same rate as the 
     highest level official reporting directly to the Commissioner 
     of the Internal Revenue.''
       (b) Conforming Amendments.--
       (1) Section 7802, as amended by subsection (a), is amended 
     by striking subsection (b) and by redesignating subsection 
     (d) as subsection (b).
       (2) Section 7802(b)(3), as so redesignated, is amended--
       (A) by striking ``Commissioner of Internal Revenue'' and 
     inserting ``Board'', and
       (B) by striking ``Commissioner'' each place it appears in 
     the text and heading and inserting ``Board''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 304. GREATER INDEPENDENCE OF THE OFFICE OF APPEALS.

       (a) In General.--Section 7802(c) is amended to read as 
     follows:
       ``(c) Office of Appeals.--
       ``(1) In general.--There is established in the Internal 
     Revenue Service an office to be known as the `Office of 
     Appeals'. Such office shall be independent of all other 
     functions of the Internal Revenue Service and shall be under 
     the supervision and direction of an officer to be known as 
     the `National Appeals Officer' who shall be appointed by, and 
     report directly to, the Board. The National Appeals Officer 
     shall be entitled to compensation at the same rate as the 
     highest level official reporting directly to the Commissioner 
     of the Internal Revenue.
       ``(2) Functions of office.--
       ``(A) In general.--It shall be the function of the Office 
     of Appeals to resolve tax controversies, without litigation, 
     on a basis that is fair and impartial to both the Government 
     and the taxpayer and in a manner that encourages voluntary 
     compliance and public confidence in the integrity and 
     efficiency of the Internal Revenue Service.
       ``(B) Restrictions.--In carrying out its functions, the 
     Office of Appeals--
       ``(i) shall consider only those issues concerning the 
     taxpayer's return raised by the division established under 
     subsection (a) prior to its referral to the Office, and
       ``(ii) shall not have any communications with any officer 
     or employee of the division with respect to such issues 
     unless the taxpayer, or the taxpayer's representative, has 
     the opportunity to be present for such communications.''
       (b) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 305. IMPROVED IRS WRITTEN COMMUNICATIONS TO TAXPAYERS 
                   AND TAX FORMS.

       (a) Taxpayer-Communications Advisory Group.--
       (1) In general.--In order to ensure that the Internal 
     Revenue Service Board of Governors receives input from the 
     taxpayers who must comply with written communications from 
     the Internal Revenue Service, the Board shall, not later than 
     180 days after the date of the enactment of this Act, convene 
     a taxpayer-communications advisory group to review all--
       (A) standardized letters, notices, bills, and other written 
     communications sent to taxpayers by the Internal Revenue 
     Service, and
       (B) tax forms and instructions.

     The advisory group shall recommend to the Board the rewriting 
     of any standardized written document, form, or instruction 
     which it finds is not clear to, or easily understood by, the 
     taxpayers to whom it is directed.
       (2) Membership.--
       (A) In general.--Members of the taxpayer-communications 
     advisory group shall be appointed by the Board and shall 
     include at least one representative of the following: 
     individual taxpayers subject to withholding; small businesses 
     and the self-employed; large businesses; trusts and estates; 
     tax-exempt organizations; tax practitioners, preparers, and 
     other tax professionals; and such other types of taxpayers 
     that the Board deems appropriate.
       (B) Term.--A member of the advisory group shall be 
     appointed for a term of one year and may be reappointed for 
     one additional term.
       (b) Personnel and Other Matters.--
       (1) Members' compensation.--Each member of the advisory 
     group shall serve without compensation, but shall be allowed 
     travel expenses, including per diem in lieu of subsistence, 
     at rates authorized for employees of agencies under 
     subchapter I of chapter 57 of title 5, United States Code, 
     while away from their homes or regular places of business in 
     performance of services for the advisory group.
       (2) Details.--Any Federal Government employee may be 
     detailed to the advisory group without reimbursement, and 
     such detail shall be without interruption or loss of civil 
     service status or privilege.
                      TITLE IV--ELECTRONIC FILING

     SEC. 401. GOALS FOR ELECTRONIC FILING; ELECTRONIC-FILING 
                   ADVISORY GROUP.

       (a) In General.--It is the policy of Congress that--
       (1) paperless filing should be the preferred and most 
     convenient means of filing Federal tax and information 
     returns,
       (2) electronic filing should be a voluntary option for 
     taxpayers, and
       (3) there be a goal that no more than 20 percent of all 
     such returns should be filed on paper by the year 2007.
       (b) Strategic Plan.--
       (1) In general.--Not later than 180 days after the date of 
     the enactment of this Act, the Secretary of the Treasury or 
     the Secretary's delegate (hereafter in this section referred 
     to as the ``Secretary''), in consultation with the Board of 
     Governors of the Internal Revenue Service and the electronic-
     filing advisory group described in paragraph (4), shall 
     establish a plan to eliminate barriers, provide incentives, 
     and use competitive market forces to increase electronic 
     filing gradually over the next 10 years while maintaining 
     processing times for paper returns at 40 days.
       (2) Publication of plan.--The plan described in paragraph 
     (1) shall be published in the Federal Register and shall be 
     subject to public comment for 60 days from the date of 
     publication. Not later than 180 days after publication of 
     such plan, the Secretary shall publish a final plan in the 
     Federal Register.
       (3) Implementation of plan.--The Secretary shall prescribe 
     rules and regulations to implement the plan developed under 
     paragraph (1). Notwithstanding any other provision of law, 
     the Secretary shall--
       (A) prescribe such rules and regulations in accordance with 
     section 553 (b), (c), (d), and (e) of title 5, United States 
     Code, and
       (B) in connection with such rules and regulations, perform 
     an initial and final regulatory flexibility analysis pursuant 
     to sections 603 and 604 of title 5, United States Code, and 
     outreach pursuant to section 609 of title 5, United States 
     Code.
       (4) Electronic-filing advisory group.--
       (A) In general.--To ensure that the Secretary receives 
     input from the private sector in the development and 
     implementation of the plan required by paragraph (1), not 
     later than 60 days after the date of enactment of this Act, 
     the Secretary shall convene an electronic-filing advisory 
     group to include at least one representative of individual 
     taxpayers subject to withholding, small businesses and the 
     self-employed, large businesses, trusts and estates, tax-
     exempt organizations, tax practitioners, preparers, and other 
     tax professionals, computerized tax processors, and the 
     electronic-filing industry.
       (B) Personnel and other matters.--The provisions of section 
     305(b) of this Act shall apply to the advisory group.
       (5) Termination.--The advisory group shall terminate on 
     December 31, 2008.
       (c) Promotion of Electronic Filing and Incentives.--Section 
     6011 is amended by redesignating subsection (f) as subsection 
     (g) and by inserting after subsection (e) the following new 
     subsection:
       ``(f) Promotion of Electronic Filing.--
       ``(1) In general.--The Secretary is authorized to promote 
     the benefits of and encourage the use of electronic tax 
     administration programs, as they become available, through 
     the use of mass communications and other means.
       ``(2) Incentives.--The Secretary may implement procedures 
     to provide for the payment of appropriate incentives for 
     electronically filed returns.''

     SEC. 402. REPORT ON ELECTRONIC FILING AND ITS EFFECT ON SMALL 
                   BUSINESSES.

       Not later than June 30 of each calendar year after 1997 and 
     before 2009, the Chairperson of the Internal Revenue Service 
     Board of Governors, the Secretary of the

[[Page S927]]

     Treasury, and the Chairperson of the electronic-filing 
     advisory group established under section 401(b)(4) of this 
     Act shall report to the Committees on Finance, 
     Appropriations, Governmental Affairs, and Small Business of 
     the Senate, the Committees on Ways and Means, Appropriations, 
     Government Reform and Oversight, and Small Business of the 
     House of Representatives, and the Joint Committee on 
     Taxation, on--
       (1) the progress of the Internal Revenue Service in meeting 
     the goal of receiving 80 percent of tax and information 
     returns electronically by 2007,
       (2) the status of the plan required by section 401(b) of 
     this Act,
       (3) the legislative changes necessary to assist the 
     Internal Revenue Service in meeting such goal, and
       (4) the effects on small businesses and the self-employed 
     of electronically filing tax and information returns, 
     including a detailed description of the forms to be filed 
     electronically, the equipment and technology required for 
     compliance, the cost to a small business and self-employed 
     individual of filing electronically, implementation plans, 
     and action to coordinate Federal, State, and local electronic 
     filing requirements.
                       TITLE V--REGULATORY REFORM

     SEC. 501. CONGRESSIONAL REVIEW OF INTERNAL REVENUE SERVICE 
                   RULES THAT INCREASE REVENUE.

       (a) In General.--Section 804(2) of title 5, United States 
     Code, is amended to read as follows:
       ``(2) The term `major rule'--
       ``(A) means any rule that--
       ``(i) the Administrator of the Office of Information and 
     Regulatory Affairs of the Office of Management and Budget 
     finds has resulted in or is likely to result in--

       ``(I) an annual effect on the economy of $100,000,000 or 
     more;
       ``(II) a major increase in costs or prices for consumers, 
     individual industries, Federal, State, or local government 
     agencies, or geographic regions; or
       ``(III) significant adverse effects on competition, 
     employment, investment, productivity, innovation, or on the 
     ability of United States-based enterprises to compete with 
     foreign-based enterprises in domestic and export markets; or

       ``(ii)(I) is promulgated by the Internal Revenue Service; 
     and
       ``(II) the Administrator of the Office of Information and 
     Regulatory Affairs of the Office of Management and Budget 
     finds that the implementation and enforcement of the rule has 
     resulted in or is likely to result in any net increase in 
     Federal revenues over current practices in tax collection or 
     revenues anticipated from the rule on the date of the 
     enactment of the statute under which the rule is promulgated; 
     and
       ``(B) does not include any rule promulgated under the 
     Telecommunications Act of 1996 and the amendments made by 
     that Act.''
       (b) Effective Date.--The amendments made by this section 
     shall be effective 90 days after the date of the enactment of 
     this Act.

     SEC. 502. SMALL BUSINESS ADVOCACY PANELS FOR THE IRS.

       (a) In General.--Section 609(d) of title 5, United States 
     Code, is amended to read as follows:
       ``(d) For purposes of this section, the term `covered 
     agency' means the Internal Revenue Service, the Environmental 
     Protection Agency, and the Occupational Safety and Health 
     Administration of the Department of Labor.''
       (b) Effective Date.--The amendments made by this section 
     shall be effective 90 days after the date of the enactment of 
     this Act.

     SEC. 503. TAXPAYER'S ELECTION WITH RESPECT TO RECOVERY OF 
                   COSTS AND CERTAIN FEES.

       (a) In General.--
       (1) Section 504(f) of title 5, United States Code, is 
     amended to read as follows:
       ``(f) A party may elect to recover costs, fees, or other 
     expenses under this section or under section 7430 of the 
     Internal Revenue Code of 1986.''
       (2) Section 2412(e) of title 28, United States Code, is 
     amended to read as follows:
       ``(e) A party may elect to recover costs, fees, or other 
     expenses under this section or under section 7430 of the 
     Internal Revenue Code of 1986.''
       (b) Coordination.--Section 7430 (relating to awarding of 
     costs and certain fees) is amended by adding at the end the 
     following new subsection:
       ``(g) Coordination With Equal Access to Justice Act.--This 
     section shall not apply to any administrative or judicial 
     proceeding with respect to which a taxpayer elects to recover 
     costs, fees, or other expenses under section 504 of title 5, 
     United States Code, or section 2412 of title 28, United 
     States Code.''
       (c) Effective Date.--The amendments made by this section 
     shall be effective for proceedings initiated after the date 
     of the enactment of this Act.
                                  ____


                     Putting the Taxpayer First Act


                       Explanation of Provisions

                        Title I--Taxpayer Rights

     Section 101. Court approval for seizure of taxpayer's property

       In response to recent concerns raised about the IRS' 
     unchecked authority to seize a taxpayer's property, the bill 
     requires that before the IRS may seize property the agency 
     must obtain court approval with notice to the taxpayer and an 
     opportunity for a hearing. This requirement will protect a 
     taxpayer's right against unreasonable search and seizure 
     under the Fourth Amendment of the Constitution and ensure the 
     taxpayer's right to due process under the Fifth Amendment.
       The bill includes an exception when a taxpayer tries to 
     hide, damage, or destroy property to evade paying his or her 
     taxes. In such a case, if the IRS demonstrates that the 
     property is likely to be lost or damaged, the court may 
     provide immediate relief, without involving the taxpayer, to 
     protect the property. To obtain such relief, the IRS must 
     demonstrate to the court's satisfaction that without relief, 
     the government's ultimate ability to collect the tax due from 
     the property will be lost. The IRS must also demonstrate that 
     the taxpayer has been given notice that tax is due, the 
     taxpayer has failed to pay, and the IRS has a reasonable 
     probability of success on the merits of the case.

          Section 102. Improved offers-in-compromise procedure

       The bill strengthens the IRS' current administrative 
     program for taxpayers who have no chance of paying their tax 
     liability in full. The program is intended to be a last 
     resort, and the bill requires the IRS to accept offers in 
     compromise when it is unlikely that the tax can be collected 
     in full and the offer represents the taxpayer's ability to 
     pay. The bill requires the IRS to accept, reject, or make a 
     counteroffer to a taxpayer's offer-in-compromise within 120 
     days from the date that the taxpayer filed the offer and 
     submitted reasonable documentation concerning his or her 
     ability to pay. The bill suspends interest on the taxpayer's 
     tax liability if the IRS fails to meet the 120-day deadline 
     (with exceptions for frivolous offers made by taxpayers 
     merely to buy time). In addition, if the IRS does not accept 
     an offer (e.g., rejects it or returns it as unprocessable), 
     the IRS will be required to provide a complete explanation to 
     the taxpayer as to the reasons that the offer was not 
     accepted, and the taxpayer may appeal the rejection to the 
     Office of Appeals.
       This section also requires the Treasury Department to issue 
     regulations that establish the standard for an acceptable 
     offer. The regulations will require that an acceptable offer 
     be based on the economic reality of the taxpayer's ability to 
     pay, and establish specific provisions addressing cases 
     involving small businesses and the self-employed.

    Section 103. Expansion of attorney's fees to cover unauthorized-
                     disclosure and browsing cases

       The bill clarifies that a court may award attorney's fees 
     in cases involving unauthorized disclosure of taxpayer 
     information and browsing of taxpayer records by IRS 
     employees. This provision is intended to overrule McLarty v. 
     United States, 6 F.3d 545 (8th Cir. 1993), which denied 
     attorney's fees in a case involving unauthorized disclosure, 
     and adopt the ruling in Huckaby v. United States Department 
     of Treasury, 804 F.2d 297 (5th Cir. 1986), which permitted 
     such fees. The bill is also intended to prevent the 
     interpretation in McLarty from being applied to browsing 
     cases.

   Section 104. Uniform application of confidentiality privilege for 
    taxpayer communications with Federally authorized practitioners

       The bill expands the privilege of confidentiality that 
     exists currently between a taxpayer and an attorney with 
     respect to tax advice to any tax practitioner who is 
     currently authorized to practice before the IRS, such as 
     accountants and enrolled agents. Such confidentiality may be 
     asserted only in non-criminal tax cases before the IRS and 
     Federal courts, including Tax Court.

Section 105. Taxpayer's right to have an IRS examination take place at 
                              another site

       The bill provides that the IRS must accept a taxpayer's 
     request that an audit be moved away from his or her home or 
     business premises if the off-site location is accessible to 
     the auditor and the taxpayer's books and records are 
     available at such a location. This provision will enable the 
     IRS to conduct an audit but without the fear and disruption 
     resulting from the auditor being present in a family home and 
     among a business' employees and customers for days or weeks.

   Section 106. Prohibition on IRS contact of third parties without 
                       taxpayer pre-notification

       In many audit cases, especially employment tax audits, the 
     IRS uses its summons authority to verify information from a 
     business' customers, employees, suppliers, and others who do 
     business with the taxpayer, but without notifying the 
     taxpayer. Such inquiries often chill business relationships 
     and can lead a third party to cease doing business with the 
     taxpayer for fear of becoming ``involved'' in the audit 
     themselves. To reduce the economic harm of such contacts, the 
     bill requires pre-notification to a business taxpayer in 
     advance of the IRS issuing a summons to the business' 
     customers, employees, suppliers, and other third parties. An 
     exception is provided for cases in which the IRS can 
     demonstrate a specific bona fide reason that such notice 
     would jeopardize the collection of tax (e.g., the business 
     has threatened to fire any employee who talks to the IRS) or 
     a criminal investigation.

  Section 107. Expansion of taxpayer's rights in administrative appeal

       In some cases, when an audit is completed, the IRS does not 
     issue a notice of proposed

[[Page S928]]

     deficiency (i.e., 30-day letter) to the taxpayer, and instead 
     the taxpayer receives a notice of deficiency (i.e., 90-day 
     letter). As a result, the taxpayer loses the opportunity 
     to resolve his or her tax dispute through an 
     administrative appeal, and the taxpayer's only recourse is 
     to pay the tax or file suit in the Tax Court. To prevent 
     this situation, the bill requires the IRS to issue a 
     notice of proposed deficiency and permits the taxpayer to 
     appeal any proposed adjustments to the Office of Appeals. 
     This section is intended to encourage disputes to be 
     resolved at the agency level without the enormous costs to 
     the taxpayer of litigation.


                        Title II--Penalty Reform

     Section 201. Imposition of interest on penalties only after a 
                       taxpayer's failure to pay

       Currently, interest on most penalties imposed by the IRS is 
     retroactively applied back to the due date for the taxpayer's 
     return. As a result, such interest amounts to an additional 
     hidden penalty, which can increase a taxpayer's tax bill 
     enormously. The bill provides that interest on a penalty 
     begins to run only after the time has expired for the 
     taxpayer to pay the bill.

 Section 202. Repeal of the penalty for substantial understatement of 
                               income tax

       To simplify the penalty rules, the bill repeals the penalty 
     for substantial understatement of income tax. In most cases 
     involving a substantial understatement, the existing 
     negligence penalty will also apply. As a result, there will 
     still be a deterrent against taxpayers who attempt to cheat 
     on their taxes. However, with the growing complexity of the 
     tax code, it is possible for an innocent mistake to lead to a 
     substantial understatement, and the bill will protect 
     taxpayers in such cases.

           Section 203. Repeal of the failure-to-pay penalty

       The failure-to-pay penalties were originally enacted in the 
     1960s to compensate for the low rate of interest applied to 
     an individual's tax liability, and for the fact that such 
     interest was not compounded. Today, with interest compounded 
     daily and adjusted for changes in the interest rate, these 
     penalties are no longer needed and serve only as another 
     hidden, second penalty. In addition, these penalties are 
     often applied on top of accuracy-related penalties, resulting 
     in total punishment of as much as 45 percent in non-criminal 
     cases. To reduce the multiplicity of punishment on taxpayers 
     who make mistakes, the bill repeals the failure-to-pay 
     penalties.


           Title III--Internal Revenue Service Restructuring

     Section 301. Internal Revenue Service Board of Governors and 
                    Commissioner of Internal Revenue

       The bill creates an independent, full-time Board of 
     Governors for the Internal Revenue Service (IRS), which will 
     exercise top-level administrative management over the agency. 
     The Board of Governors will have full responsibility, 
     authority, and accountability for the IRS' enforcement 
     activities, such as examinations and collections, which are 
     often at the heart of taxpayer complaints about the IRS. In 
     addition, the Board will oversee the Office of the Taxpayer 
     Advocate and the Office of Appeals. While the bill keeps the 
     formulation of tax policy within the purview of the Treasury 
     Department, the Board of Governors will have a significant 
     consultative role in such policy decisions.
       The Board will consist of five members appointed by the 
     President and confirmed by the Senate, and the members will 
     have staggered five-year terms (i.e., one member will be 
     appointed each year). Two of the members will be affiliated 
     with the Republican party and two with the Democratic party. 
     The fifth member will be the Commissioner of Internal 
     Revenue, who will continue to be appointed by the President 
     with Senate confirmation, subject to a 5-year term. The 
     Commissioner will also serve as the Chairperson of the Board. 
     Collectively, the members of the Board will represent 
     experience and expertise in the needs and concerns of 
     taxpayers, organization development, customer service, the 
     operation of small businesses, the management of large 
     businesses, information technology, and compliance.

   Section 302. Restructuring of IRS operations along customer lines

       The bill reorganizes the IRS' operations according to 
     customer groups to provide ``one stop service'' for taxpayers 
     with similar characteristics and needs. This structure will 
     replace the current functional or ``one size fits all'' 
     approach under which an IRS function, such as taxpayer 
     services, examinations, or collections, handles all 
     taxpayers. The new IRS under this section of the bill will 
     have the following customer groups:
       Individual taxpayers (subject to wage withholding).
       Small business and self-employed individuals.
       Large business.
       Exempt organizations and pension plans.
       Trusts and estates.
       Other division deemed necessary by the Board of Governors.
       Each customer group will be headed by an Assistant 
     Commissioner and will have existing IRS functions such as 
     taxpayer service, examinations, collections, and counsel 
     operations dedicated to the specific needs of the individuals 
     or businesses within the division. This structure will be 
     required by law in order to make it permanent and prevent it 
     from becoming just one of the many reorganization plans that 
     the IRS has undertaken over the past several decades.

       Section 303. Greater independence of the Taxpayer Advocate

       The bill requires that the Taxpayer Advocate be appointed 
     by and report directly to the Board of Governors. The Office 
     of the Taxpayer Advocate will also be independent of all 
     other functions of the IRS. Currently, the Taxpayer Advocate 
     is appointed by and reports only to the Commissioner of 
     Internal Revenue.

       Section 304. Greater independence of the Office of Appeals

       The section establishes a statutory Office of Appeals 
     within the IRS, which will be independent of all other IRS 
     functions. The Office of Appeals will be managed by a 
     National Appeals Officer, who will be appointed by and report 
     to the Board of Governors.
       In order to ensure that the Office of Appeals is an 
     impartial arbiter, the bill prohibits two practices that 
     currently occur in the IRS' appeals process. Under the bill, 
     an appeals officer will be precluded from addressing issues 
     and arguments outside of those identified by the auditor. In 
     addition, this section prohibits communications between an 
     appeals officer and the auditor handling the case without the 
     presence of the taxpayer or his or her representative.

 Section 305. Improved IRS written communications to taxpayers and tax 
                                 forms

       The bill directs the Board of Governors to create a 
     taxpayer-communications advisory group to provide a common-
     sense review process for all new and existing IRS written 
     communications to taxpayers, such as standardized letters, 
     notices and bills as well as forms and instructions. The 
     advisory group's goal will be to ensure that all written 
     communications are clear and easy to understand by the 
     taxpayer to whom it is directed. If a document does not meet 
     this minimum standard, the advisory group will recommend to 
     the Board of Governors that the letter, notice, etc. be 
     rewritten before it is used.
       The members of the advisory group will be volunteers with 
     at least one representative of individual taxpayers, small 
     businesses and the self-employed, large businesses, trusts 
     and estates, tax-exempt organizations, tax compliance 
     professionals and other constituencies deemed necessary by 
     the Board of Governors.


                      Title IV--Electronic Filing

  Section 401. Goals for electronic filing and the electronic-filing 
                             advisory group

       This section establishes a goal, but not a mandate, that 
     paperless filing should be the preferred and most convenient 
     means of filing tax and information returns in 80 percent of 
     cases by the year 2007. In addition, this section calls on 
     the Treasury Secretary to create an electronic-filing 
     advisory group to ensure that the private sector has a role 
     in the implementation of that goal. The advisory group will 
     include representatives of individual taxpayers, small 
     businesses and the self-employed, large businesses, trusts 
     and estates, tax-exempt organizations, and the tax 
     preparation and filing industries.
       This section requires the Treasury Secretary, in 
     consultation with the Board of Governors and the advisory 
     group, to develop a strategic plan for implementing the 
     electronic-filing goal. The plan will be subject to public 
     notice and comment and to the requirements of the Regulatory 
     Flexibility Act to ensure that the costs and burdens on 
     taxpayers who decide to file electronically are minimized.
       This section also provides authority for the IRS to promote 
     the benefits of electronic filing and to provide appropriate 
     incentives to encourage taxpayers to file electronically.

   Section 402. Report on electronic filing and its effect on small 
                               businesses

       The bill requires the IRS Board of Governors, the Treasury 
     Secretary, and the electronic-filing advisory group to issue 
     an annual report to Congress through 2008 that specifically 
     addresses the effects of electronic filing on small business 
     and its feasibility. In particular, the report will include a 
     detailed description of the forms to be filed electronically, 
     the equipment and technology required for compliance, cost of 
     filing electronically, implementation plans, and efforts 
     undertaken to coordinate Federal, state and local filing 
     requirements including the possibility of one-stop filing.


                       Title V--Regulatory Reform

  Section 501. Congressional review of Internal Revenue Service rules 
                         that increase revenue

       The bill includes the provisions of the Stealth Tax 
     Prevention Act of 1997 (S. 831), which will provide Congress 
     with a 60-day window to review any final IRS rule that raises 
     revenue.
       Under the bill, Congress will have expedited procedures to 
     enact a joint resolution of disapproval to overrule the IRS 
     rule before it takes effect. The primary example of this 
     situation is the IRS' 1997 proposed regulations defining who 
     is a limited partner for self-employment tax purposes (now 
     known as the ``stealth tax regulations''), which is currently 
     subject to a Congressionally imposed moratorium.

        Section 502. Small Business Advocacy Panels for the IRS

       The bill requires the IRS to increase small business 
     participation in agency rulemaking

[[Page S929]]

     activities by convening a Small Business Advocacy Review 
     Panel for a proposed rule with a significant economic impact 
     on small entities. For such rules, the IRS will have to 
     notify SBA's Chief Counsel of Advocacy that the rule is under 
     development and provide sufficient information so that the 
     Chief Counsel can identify affected small entities and gather 
     advice and comments on the effects of the proposed rule. A 
     Small Business Advocacy Review Panel, comprising Federal 
     government employees from the IRS, the Office of Advocacy, 
     and OMB, must be convened to review the proposed rule and to 
     collect comments from small businesses. Within 60 days, the 
     panel will have to issue a report of the comments received 
     from small entities and the panel's findings, which will 
     become part of the public record. As appropriate, the IRS may 
     modify the rule or the initial Reg Flex analysis (or its 
     decision on whether a Reg Flex analysis is required) based on 
     the panel's report.
       Currently, the requirement for Small Business Advisory 
     Panels applies to the Occupational Safety and Health 
     Administration (OSHA) and the Environmental Protection Agency 
     (EPA). By expanding it to the IRS, the bill will ensure that 
     the views of small businesses are taken into account early in 
     the process of developing new rules and regulations and that 
     the IRS will take action to reduce the burdens of such rules 
     on these small enterprises.

Section 503. Taxpayer's election with respect to recovery of costs and 
                              certain fees

       Under the Internal Revenue Code, a taxpayer may recover 
     costs and fees, including attorney's fees, against the IRS if 
     he or she prevails and the IRS' litigation position was not 
     substantially justified. The Equal Access to Justice Act 
     (EAJA) permits a small business to recover such costs when an 
     unreasonable agency demand for fines or civil penalties is 
     not sustained in court or in an administrative proceeding. In 
     addition, a small business may also recover such costs and 
     fees under the EAJA when it is the prevailing party and the 
     agency enforcement action is not substantially justified. 
     Currently, the EAJA prohibits a taxpayer seeking to recover 
     costs and fees in an IRS enforcement action from doing so 
     under the EAJA if the fees and costs can be recovered under 
     the Internal Revenue Code.
       The bill permits taxpayers to elect whether to pursue 
     recovery of attorney's fees and expenses under the Equal 
     Access to Justice Act (``EAJA'') or the Internal Revenue 
     Code.
                                 ______