House Report 105-364 - INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1997

[House Report 105-364]
[From the U.S. Government Publishing Office]

105th Congress Rept. 105-364
HOUSE OF REPRESENTATIVES

1st Session Part 1
_______________________________________________________________________

INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1997

_______

October 31, 1997.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed

_______________________________________________________________________

Mr. Archer, from the Committee on Ways and Means, submitted the
following

R E P O R T

[To accompany H.R. 2676]

[Including cost estimate of the Congressional Budget Office]

together with

ADDITIONAL AND DISSENTING VIEWS

The Committee on Ways and Means, to whom was referred the
bill (H.R. 2676) to amend the Internal Revenue Code of 1986 to
restructure and reform the Internal Revenue Service, and for
other purposes, having considered the same, report favorably
thereon with an amendment and recommend that the bill as
amended do pass.

CONTENTS
Page
I. Summary and Background..........................................30
A. Purpose and Summary................................. 30
B. Background and Need for Legislation................. 32
C. Legislative History................................. 32
II. Explanation of the Bill.........................................33
Title I. Executive Branch Government..................... 33
A. Creation of IRS Oversight Board (sec. 101).......... 33
B. Appointment and Duties of IRS Commissioner (secs.
102 and 103)....................................... 38
C. Structure and Funding of the Employee Plans and
Exempt Organizations Division (sec. 102)........... 40
D. Taxpayer Advocate (sec. 102)........................ 42
E. Prohibition on Executive Branch Influence Over
Taxpayer Audits (sec. 104)......................... 44
F. IRS Personnel Flexibilities (sec. 111).............. 45
Title II. Electronic Filing.............................. 50
A. Electronic Filing of Tax and Information Returns
(sec. 201)......................................... 50
B. Time for Filing Certain Information Returns With the
IRS (sec. 202)..................................... 51
C. Paperless Electronic Filing (sec. 203).............. 52
D. Return-Free Tax System (sec. 204)................... 53
E. Access to Account Information (sec. 205)............ 54
Title III. Taxpayer Bill of Rights 3..................... 54
A. Burden of Proof (sec. 301).......................... 54
B. Proceedings by Taxpayers............................ 57
1. Expansion of authority to award costs and
certain fees (sec. 311)........................ 57
2. Civil damages for negligence in collection
actions (sec. 312)............................. 59
3. Increase in size of cases permitted on small
case calendar (sec. 313)....................... 60
C. Relief for Innocent Spouses and Persons With
Disabilities....................................... 60
1. Innocent spouse relief (sec. 321)............... 60
2. Suspension of statute of limitations on filing
claims during periods of disability (sec. 322). 62
D. Provisions Relating to Interest..................... 63
1. Elimination of interest differential on
overlapping periods of interest on income tax
overpayments and underpayments (sec. 331)...... 63
2. Increase in overpayment rate payable to
taxpayers other than corporations (sec. 332)... 65
E. Protections for Taxpayers Subject to Audit or
Collection......................................... 65
1. Privilege of confidentiality extended to
taxpayer's dealings with non-attorneys
authorized to practice before the IRS (sec.
341)........................................... 65
2. Expansion of authority to issue taxpayer
assistance orders (sec. 342)................... 67
3. Limitation on financial status audits (sec. 343) 67
4. Limitation on authority to require production of
computer source code (sec. 344)................ 68
5. Procedures relating to extensions of statute of
limitations by agreement (sec. 345)............ 69
6. Offers-in-compromise (sec. 346)................. 70
7. Notice of deficiency to specify deadlines for
filing Tax Court petition (sec. 347)........... 71
8. Refund or credit of overpayments before final
determination (sec. 348)....................... 72
9. Threat of audit prohibited to coerce tip report
alternative committment agreements (sec. 349).. 73
F. Disclosures to Taxpayers............................ 73
1. Explanation of joint and several liability (sec.
351)........................................... 73
2. Explanation of taxpayers' rights in interviews
with the IRS (sec. 352)........................ 74
3. Disclosure of criteria for examination selection
(sec. 353)..................................... 74
4. Explanation of appeals and collection process
(sec. 354)..................................... 75
G. Low-Income Taxpayer Clinics (sec. 361).............. 75
H. Other Taxpayer Rights Provisions.................... 76
1. Actions for refund with respect to certain
estates which have elected the installment
method of payment (sec. 371)................... 76
2. Cataloging complaints (sec. 372)................ 77
3. Archive of records of the IRS (sec. 373)........ 78
4. Payment of taxes (sec. 374)..................... 80
5. Clarification of authority of Secretary relating
to the making of elections (sec. 375).......... 81
6. Limitation on penalty on individual's failure to
pay for months during period of installment
agreement (sec. 376)........................... 81
I. Studies............................................. 82
1. Study of penalty administration (sec. 381)...... 82
2. Study of confidentiality of tax return
information (sec. 382)......................... 82
Title IV. Congressional Accountability for the IRS....... 83
A. Review of Requests for GAO Investigations of the IRS
(sec. 401)......................................... 83
B. Joint Congressional Hearings and Coordinated
Oversight Reports (secs. 401 and 402).............. 84
C. Budget Matters...................................... 85
1. Funding for century date change (sec. 411)...... 85
2. Financial management advisory group (sec. 412).. 85
D. Tax Law Complexity Analysis (sec. 422).............. 86
Title V. Revenue Offset: Employer Deduction for Vacation
Pay (sec. 501)....................................... 87
III. Votes of the Committee..........................................91
IV. Budget Effects of the Bill......................................92
A. Committee Estimates of Budgetary Effects............ 92
B. Budget Authority and Tax Expenditures............... 96
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 96
V. Other Matters to Be Discussed Under the Rules of the House.....102
A. Committee Oversight Findings and Recommendations.... 102
B. Summary of Findings and Recommendations of the
Committee on Government Reform and Oversight....... 102
C. Constitutional Authority Statement.................. 103
D. Information Relating to Unfunded Mandates........... 103
E. Applicability of House Rule XXI5(c)................. 103
VI. Changes in Existing Law Made by the Bill, as Reported..........103
VII. Correspondence From Other Committees...........................148
A. Correspondence from Committee on Government Reform
and Oversight...................................... 148
B. Correspondence from Committee on Rules.............. 149
VIII.Additional Views...............................................150

IX. Dissenting Views...............................................161

The amendment is as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:

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

(a) Short Title.--This Act may be cited as the ``Internal Revenue
Service Restructuring and Reform Act of 1997''.
(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--EXECUTIVE BRANCH GOVERNANCE AND SENIOR MANAGEMENT OF THE
INTERNAL REVENUE SERVICE

Subtitle A--Executive Branch Governance and Senior Management

Sec. 101. Internal Revenue Service Oversight Board.
Sec. 102. Commissioner of Internal Revenue; other officials.
Sec. 103. Other personnel.
Sec. 104. Prohibition on executive branch influence over taxpayer
audits and other investigations.

Subtitle B--Personnel Flexibilities

Sec. 111. Personnel flexibilities.

TITLE II--ELECTRONIC FILING

Sec. 201. Electronic filing of tax and information returns.
Sec. 202. Due date for certain information returns filed
electronically.
Sec. 203. Paperless electronic filing.
Sec. 204. Return-free tax system.
Sec. 205. Access to account information.

TITLE III--TAXPAYER PROTECTION AND RIGHTS

Sec. 300. Short title.

Subtitle A--Burden of Proof

Sec. 301. Burden of proof.

Subtitle B--Proceedings by Taxpayers

Sec. 311. Expansion of authority to award costs and certain fees.
Sec. 312. Civil damages for negligence in collection actions.
Sec. 313. Increase in size of cases permitted on small case calendar.

Subtitle C--Relief for Innocent Spouses and for Taxpayers Unable To
Manage Their Financial Affairs Due to Disabilities

Sec. 321. Spouse relieved in whole or in part of liability in certain
cases.
Sec. 322. Suspension of statute of limitations on filing refund claims
during periods of disability.

Subtitle D--Provisions Relating to Interest

Sec. 331. Elimination of interest rate differential on overlapping
periods of interest on income tax overpayments and underpayments.
Sec. 332. Increase in overpayment rate payable to taxpayers other than
corporations.

Subtitle E--Protections for Taxpayers Subject to Audit or Collection
Activities

Sec. 341. Privilege of confidentiality extended to taxpayer's dealings
with non-attorneys authorized to practice before Internal Revenue
Service.
Sec. 342. Expansion of authority to issue taxpayer assistance orders.
Sec. 343. Limitation on financial status audit techniques.
Sec. 344. Limitation on authority to require production of computer
source code.
Sec. 345. Procedures relating to extensions of statute of limitations
by agreement.
Sec. 346. Offers-in-compromise.
Sec. 347. Notice of deficiency to specify deadlines for filing Tax
Court petition.
Sec. 348. Refund or credit of overpayments before final determination.
Sec. 349. Threat of audit prohibited to coerce Tip Reporting
Alternative Commitment Agreements.

Subtitle F--Disclosures to Taxpayers

Sec. 351. Explanation of joint and several liability.
Sec. 352. Explanation of taxpayers' rights in interviews with the
Internal Revenue Service.
Sec. 353. Disclosure of criteria for examination selection.
Sec. 354. Explanations of appeals and collection process.

Subtitle G--Low Income Taxpayer Clinics

Sec. 361. Low income taxpayer clinics.

Subtitle H--Other Matters

Sec. 371. Actions for refund with respect to certain estates which have
elected the installment method of payment.
Sec. 372. Cataloging complaints.
Sec. 373. Archive of records of Internal Revenue Service.
Sec. 374. Payment of taxes.
Sec. 375. Clarification of authority of Secretary relating to the
making of elections.
Sec. 376. Limitation on penalty on individual's failure to pay for
months during period of installment agreement.

Subtitle I--Studies

Sec. 381. Penalty administration.
Sec. 382. Confidentiality of tax return information.

TITLE IV--CONGRESSIONAL ACCOUNTABILITY FOR THE INTERNAL REVENUE SERVICE

Subtitle A--Oversight

Sec. 401. Expansion of duties of the Joint Committee on Taxation.
Sec. 402. Coordinated oversight reports.

Subtitle B--Budget

Sec. 411. Funding for century date change.
Sec. 412. Financial Management Advisory Group.

Subtitle C--Tax Law Complexity

Sec. 421. Role of the Internal Revenue Service.
Sec. 422. Tax complexity analysis.

TITLE V--CLARIFICATION OF DEDUCTION FOR DEFERRED COMPENSATION

Sec. 501. Clarification of deduction for deferred compensation.

TITLE I--EXECUTIVE BRANCH GOVERNANCE AND SENIOR MANAGEMENT OF THE
INTERNAL REVENUE SERVICE

Subtitle A--Executive Branch Governance and Senior Management

SEC. 101. INTERNAL REVENUE SERVICE OVERSIGHT BOARD.

(a) In General.--Section 7802 (relating to the Commissioner of
Internal Revenue) is amended to read as follows:

``SEC. 7802. INTERNAL REVENUE SERVICE OVERSIGHT BOARD.

``(a) Establishment.--There is established within the Department of
the Treasury the Internal Revenue Service Oversight Board (hereafter in
this subchapter referred to as the `Oversight Board').
``(b) Membership.--
``(1) Composition.--The Oversight Board shall be composed of
11 members, as follows:
``(A) 8 members shall be individuals who are not
Federal officers or employees and who are appointed by
the President, by and with the advice and consent of
the Senate.
``(B) 1 member shall be the Secretary of the Treasury
or, if the Secretary so designates, the Deputy
Secretary of the Treasury.
``(C) 1 member shall be the Commissioner of Internal
Revenue.
``(D) 1 member shall be an individual who is a
representative of an organization that represents a
substantial number of Internal Revenue Service
employees and who is appointed by the President, by and
with the advice and consent of the Senate.
``(2) Qualifications and terms.--
``(A) Qualifications.--Members of the Oversight Board
described in paragraph (1) (A) shall be appointed
solely on the basis of their professional experience
and expertise in 1 or more of the following areas:
``(i) Management of large service
organizations.
``(ii) Customer service.
``(iii) Federal tax laws, including tax
administration and compliance.
``(iv) Information technology.
``(v) Organization development.
``(vi) The needs and concerns of taxpayers.
In the aggregate, the members of the Oversight Board
described in paragraph (1) (A) should collectively
bring to bear expertise in all of the areas described
in the preceding sentence.
``(B) Terms.--Each member who is described in
paragraph (1) (A) or (D) shall be appointed for a term
of 5 years, except that of the members first appointed
under paragraph (1) (A)--
``(i) 1 member shall be appointed for a term
of 1 year,
``(ii) 1 member shall be appointed for a term
of 2 years,
``(iii) 2 members shall be appointed for a
term of 3 years, and
``(iv) 2 members shall be appointed for a
term of 4 years.
Such terms shall begin on the date of appointment.
``(C) Reappointment.--An individual who is described
in paragraph (1) (A) may be appointed to no more than
two 5-year terms on the Oversight Board.
``(D) Vacancy.--Any vacancy on the Oversight Board
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.
``(E) Special government employees.--During the
entire period that an individual appointed under
paragraph (1) (A) is a member of the Oversight Board,
such individual shall be treated as--
``(i) serving as a special government
employee (as defined in section 202 of title
18, United States Code) and as described in
section 207(c)(2) of such title 18, and
``(ii) serving as an officer or employee
referred to in section 101(f) of the Ethics in
Government Act of 1978 for purposes of title I
of such Act.
``(3) Quorum.--6 members of the Oversight Board shall
constitute a quorum. A majority of members present and voting
shall be required for the Oversight Board to take action.
``(4) Removal.--
``(A) In general.--Any member of the Oversight Board
may be removed at the will of the President.
``(B) Secretary and commissioner.--An individual
described in subparagraph (B) or (C) of paragraph (1)
shall be removed upon termination of employment.
``(C) Representative of internal revenue service
employees.--The member described in paragraph (1)(D)
shall be removed upon termination of employment,
membership, or other affiliation with the organization
described in such paragraph.
``(5) Claims.--
``(A) In general.--Members of the Oversight Board who
are described in paragraph (1) (A) or (D) shall have no
personal liability under Federal law with respect to
any claim arising out of or resulting from an act or
omission by such member within the scope of service as
a member. The preceding sentence shall not be construed
to limit personal liability for criminal acts or
omissions, willful or malicious conduct, acts or
omissions for private gain, or any other act or
omission outside the scope of the service of such
member on the Oversight Board.
``(B) Effect on other law.--This paragraph shall not
be construed--
``(i) to affect any other immunities and
protections that may be available to such
member under applicable law with respect to
such transactions,
``(ii) to affect any other right or remedy
against the United States under applicable law,
or
``(iii) to limit or alter in any way the
immunities that are available under applicable
law for Federal officers and employees.
``(c) General Responsibilities.--
``(1) In general.--The Oversight Board shall oversee the
Internal Revenue Service in its 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.
``(2) Exceptions.--The Oversight Board shall have no
responsibilities or authority with respect to--
``(A) the development and formulation of Federal tax
policy relating to existing or proposed internal
revenue laws, related statutes, and tax conventions,
``(B) law enforcement activities of the Internal
Revenue Service, including compliance activities such
as criminal investigations, examinations, and
collection activities, or
``(C) specific procurement activities of the Internal
Revenue Service.
``(3) Restriction on disclosure of return information to
oversight board members.--No return, return information, or
taxpayer return information (as defined in section 6103(b)) may
be disclosed to any member of the Oversight Board described in
subsection (b)(1) (A) or (D). Any request for information not
permitted to be disclosed under the preceding sentence, and any
contact relating to a specific taxpayer, made by a member of
the Oversight Board so described to an officer or employee of
the Internal Revenue Service shall be reported by such officer
or employee to the Secretary and the Joint Committee on
Taxation.
``(d) Specific Responsibilities.--The Oversight Board shall have the
following specific responsibilities:
``(1) Strategic plans.--To review and approve strategic plans
of the Internal Revenue Service, including the establishment
of--
``(A) mission and objectives, and standards of
performance relative to either, and
``(B) annual and long-range strategic plans.
``(2) Operational plans.--To review the operational functions
of the Internal Revenue Service, including--
``(A) plans for modernization of the tax system,
``(B) plans for outsourcing or managed competition,
and
``(C) plans for training and education.
``(3) Management.--To--
``(A) recommend to the President candidates for
appointment as the Commissioner of Internal Revenue and
recommend to the President the removal of the
Commissioner,
``(B) review the Commissioner's selection,
evaluation, and compensation of senior managers, and
``(C) review and approve the Commissioner's plans for
any major reorganization of the Internal Revenue
Service.
``(4) Budget.--To--
``(A) review and approve the budget request of the
Internal Revenue Service prepared by the Commissioner,
``(B) submit such budget request to the Secretary of
the Treasury, and
``(C) ensure that the budget request supports the
annual and long-range strategic plans.
The Secretary shall submit the budget request referred to in paragraph
(4)(B) for any fiscal year to the President who shall submit such
request, without revision, to Congress together with the President's
annual budget request for the Internal Revenue Service for such fiscal
year.
``(e) Board Personnel Matters.--
``(1) Compensation of members.--
``(A) In general.--Each member of the Oversight Board
who is described in subsection (b)(1)(A) shall be
compensated at a rate of $30,000 per year. All other
members of the Oversight Board shall serve without
compensation for such service.
``(B) Chairperson.--In lieu of the amount specified
in subparagraph (A), the Chairperson of the Oversight
Board shall be compensated at a rate of $50,000.
``(2) Travel expenses.--The members of the Oversight Board
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
for purposes of attending meetings of the Oversight Board.
``(3) Staff.--At the request of the Chairperson of the
Oversight Board, the Commissioner shall detail to the Oversight
Board such personnel as may be necessary to enable the
Oversight Board to perform its duties. Such detail shall be
without interruption or loss of civil service status or
privilege.
``(4) Procurement of temporary and intermittent services.--
The Chairperson of the Oversight Board may procure temporary
and intermittent services under section 3109(b) of title 5,
United States Code.
``(f) Administrative Matters.--
``(1) Chair.--The members of the Oversight Board shall elect
for a 2-year term a chairperson from among the members
appointed under subsection (b)(1)(A).
``(2) Committees.--The Oversight Board may establish such
committees as the Oversight Board determines appropriate.
``(3) Meetings.--The Oversight Board shall meet at least once
each month and at such other times as the Oversight Board
determines appropriate.
``(4) Reports.--The Oversight Board shall each year report to
the President and the Congress with respect to the conduct of
its responsibilities under this title.''.
(b) Conforming Amendments.--
(1) Section 4946(c) (relating to definitions and special
rules for chapter 42) is amended--
(A) by striking ``or'' at the end of paragraph (5),
(B) by striking the period at the end of paragraph
(6) and inserting ``, or'', and
(C) by adding at the end the following new paragraph:
``(7) a member of the Internal Revenue Service Oversight
Board.''.
(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. Internal Revenue Service
Oversight Board.''

(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 oversight
board.--The President shall submit nominations under section
7802 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.

SEC. 102. COMMISSIONER OF INTERNAL REVENUE; OTHER OFFICIALS.

(a) In General.--Section 7803 (relating to other personnel) is
amended to read as follows:

``SEC. 7803. COMMISSIONER OF INTERNAL REVENUE; OTHER OFFICIALS.

``(a) Commissioner of Internal Revenue.--
``(1) Appointment.--
``(A) In general.--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.
``(B) 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 only for the remainder of that term.
``(C) Removal.--The Commissioner may be removed at
the will of the President.
``(2) Duties.--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 a candidate for
appointment as Chief Counsel for the Internal Revenue
Service when a vacancy occurs, and recommend to the
President 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 Ways and Means, Government Reform and Oversight,
and Appropriations of the House of Representatives, the
Committees on Finance, Government Operations, and
Appropriations of the Senate, and the Joint Committee on
Taxation.
``(3) Consultation with board.--The Commissioner shall
consult with the Oversight Board on all matters set forth in
paragraphs (2) and (3) (other than paragraph (3)(A)) of section
7802(d).
``(b) Assistant Commissioner for Employee Plans and Exempt
Organizations.--There is established within the Internal Revenue
Service an office to be known as the `Office of Employee Plans and
Exempt Organizations' to be under the supervision and direction of an
Assistant Commissioner of Internal Revenue. As head of the Office, the
Assistant Commissioner shall be responsible for carrying out such
functions as the Secretary may prescribe with respect to organizations
exempt from tax under section 501(a) and with respect to plans to which
part I of subchapter D of chapter 1 applies (and with respect to
organizations designed to be exempt under such section and plans
designed to be plans to which such part applies) and other nonqualified
deferred compensation arrangements. The Assistant Commissioner shall
report annually to the Commissioner with respect to the Assistant
Commissioner's responsibilities under this section.
``(c) Office of Taxpayer Advocate.--
``(1) In general.--
``(A) Establishment.--There is established in the
Internal Revenue Service an office to be known as the
`Office of the Taxpayer Advocate'. Such office shall be
under the supervision and direction of an official to
be known as the `Taxpayer Advocate' who shall be
appointed with the approval of the Oversight Board by
the Commissioner of Internal Revenue and shall report
directly to the Commissioner. The Taxpayer Advocate
shall be entitled to compensation at the same rate as
the highest level official reporting directly to the
Commissioner of Internal Revenue.
``(B) Restriction on subsequent employment.--An
individual who is an officer or employee of the
Internal Revenue Service may be appointed as Taxpayer
Advocate only if such individual agrees not to accept
any employment with the Internal Revenue Service for at
least 5 years after ceasing to be the Taxpayer
Advocate.
``(2) Functions of office.--
``(A) In general.--It shall be the function of the
Office of Taxpayer Advocate to--
``(i) assist taxpayers in resolving problems
with the Internal Revenue Service,
``(ii) identify areas in which taxpayers have
problems in dealings with the Internal Revenue
Service,
``(iii) to the extent possible, propose
changes in the administrative practices of the
Internal Revenue Service to mitigate problems
identified under clause (ii), and
``(iv) identify potential legislative changes
which may be appropriate to mitigate such
problems.
``(B) Annual reports.--
``(i) Objectives.--Not later than June 30 of
each calendar year, the Taxpayer Advocate shall
report to the Committee on Ways and Means of
the House of Representatives and the Committee
on Finance of the Senate on the objectives of
the Taxpayer Advocate for the fiscal year
beginning in such calendar year. Any such
report shall contain full and substantive
analysis, in addition to statistical
information.
``(ii) Activities.--Not later than December
31 of each calendar year, the Taxpayer Advocate
shall report to the Committee on Ways and Means
of the House of Representatives and the
Committee on Finance of the Senate on the
activities of the Taxpayer Advocate during the
fiscal year ending during such calendar year.
Any such report shall contain full and
substantive analysis, in addition to
statistical information, and shall--
``(I) identify the initiatives the
Taxpayer Advocate has taken on
improving taxpayer services and
Internal Revenue Service
responsiveness,
``(II) contain recommendations
received from individuals with the
authority to issue Taxpayer Assistance
Orders under section 7811,
``(III) contain a summary of at least
20 of the most serious problems
encountered by taxpayers, including a
description of the nature of such
problems,
``(IV) contain an inventory of the
items described in subclauses (I),
(II), and (III) for which action has
been taken and the result of such
action,
``(V) contain an inventory of the
items described in subclauses (I),
(II), and (III) for which action
remains to be completed and the period
during which each item has remained on
such inventory,
``(VI) contain an inventory of the
items described in subclauses (I),
(II), and (III) for which no action has
been taken, the period during which
each item has remained on such
inventory, the reasons for the
inaction, and identify any Internal
Revenue Service official who is
responsible for such inaction,
``(VII) identify any Taxpayer
Assistance Order which was not honored
by the Internal Revenue Service in a
timely manner, as specified under
section 7811(b),
``(VIII) contain recommendations for
such administrative and legislative
action as may be appropriate to resolve
problems encountered by taxpayers,
``(IX) identify areas of the tax law
that impose significant compliance
burdens on taxpayers or the Internal
Revenue Service, including specific
recommendations for remedying these
problems,
``(X) in conjunction with the
National Director of Appeals, identify
the 10 most litigated issues for each
category of taxpayers, including
recommendations for mitigating such
disputes, and
``(XI) include such other information
as the Taxpayer Advocate may deem
advisable.
``(iii) Report to be submitted directly.--
Each report required under this subparagraph
shall be provided directly to the committees
described in clauses (i) and (ii) without any
prior review or comment from the Oversight
Board, the Secretary of the Treasury, any other
officer or employee of the Department of the
Treasury, or the Office of Management and
Budget.
``(C) Other responsibilities.--The Taxpayer Advocate
shall--
``(i) monitor the coverage and geographic
allocation of problem resolution officers, and
``(ii) develop guidance to be distributed to
all Internal Revenue Service officers and
employees outlining the criteria for referral
of taxpayer inquiries to problem resolution
officers.
``(3) Responsibilities of commissioner.--The Commissioner
shall establish procedures requiring a formal response to all
recommendations submitted to the Commissioner by the Taxpayer
Advocate within 3 months after submission to the
Commissioner.''.
(b) Conforming Amendments.--
(1) The table of sections for subchapter A of chapter 80 is
amended by striking the item relating to section 7803 and
inserting the following new item:

``Sec. 7803. Commissioner of Internal
Revenue; other officials.''

(2) Subsection (b) of section 5109 of title 5, United States
Code, is amended by striking ``7802(b)'' and inserting
``7803(b)''.
(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) Current officers.--
(A) 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 7803(a)(1) of the Internal Revenue Code of
1986, as added by this section, shall begin as of the
date of such appointment.
(B) Section 7803(c)(1)(B) of such Code, as added by
this section, shall not apply to the individual serving
as Taxpayer Advocate on the date of the enactment of
this Act.

SEC. 103. OTHER PERSONNEL.

(a) In General.--Section 7804 (relating to the effect of
reorganization plans) is amended to read as follows:

``SEC. 7804. OTHER PERSONNEL.

``(a) Appointment and Supervision.--Unless otherwise prescribed by
the Secretary, the Commissioner of Internal Revenue is authorized to
employ such number of persons as the Commissioner deems proper for the
administration and enforcement of the internal revenue laws, and the
Commissioner shall issue all necessary directions, instructions,
orders, and rules applicable to such persons.
``(b) Posts of Duty of Employees in Field Service or Traveling.--
Unless otherwise prescribed by the Secretary--
``(1) Designation of post of duty.--The Commissioner shall
determine and designate the posts of duty of all such persons
engaged in field work or traveling on official business outside
of the District of Columbia.
``(2) Detail of personnel from field service.--The
Commissioner may order any such person engaged in field work to
duty in the District of Columbia, for such periods as the
Commissioner may prescribe, and to any designated post of duty
outside the District of Columbia upon the completion of such
duty.
``(c) Delinquent Internal Revenue Officers and Employees.--If any
officer or employee of the Treasury Department acting in connection
with the internal revenue laws fails to account for and pay over any
amount of money or property collected or received by him in connection
with the internal revenue laws, the Secretary shall issue notice and
demand to such officer or employee for payment of the amount which he
failed to account for and pay over, and, upon failure to pay the amount
demanded within the time specified in such notice, the amount so
demanded shall be deemed imposed upon such officer or employee and
assessed upon the date of such notice and demand, and the provisions of
chapter 64 and all other provisions of law relating to the collection
of assessed taxes shall be applicable in respect of such amount.''.
(b) Conforming Amendments.--
(1) Subsection (b) of section 6344 is amended by striking
``section 7803(d)'' and inserting ``section 7804(c)''.
(2) The table of sections for subchapter A of chapter 80 is
amended by striking the item relating to section 7804 and
inserting the following new item:

``Sec. 7804. Other personnel.''

SEC. 104. PROHIBITION ON EXECUTIVE BRANCH INFLUENCE OVER TAXPAYER
AUDITS AND OTHER INVESTIGATIONS.

(a) In General.--Part I of subchapter A of chapter 75 (relating to
crimes, other offenses, and forfeitures) is amended by adding after
section 7216 the following new section:

``SEC. 7217. PROHIBITION ON EXECUTIVE BRANCH INFLUENCE OVER TAXPAYER
AUDITS AND OTHER INVESTIGATIONS.

``(a) Prohibition.--It shall be unlawful for any applicable person to
request any officer or employee of the Internal Revenue Service to
conduct or terminate an audit or other investigation of any particular
taxpayer with respect to the tax liability of such taxpayer.
``(b) Reporting Requirement.--Any officer or employee of the Internal
Revenue Service receiving any request prohibited by subsection (a)
shall report the receipt of such request to the Chief Inspector of the
Internal Revenue Service.
``(c) Exceptions.--Subsection (a) shall not apply to--
``(1) any request made to an applicable person by the
taxpayer or a representative of the taxpayer and forwarded by
such applicable person to the Internal Revenue Service,
``(2) any request by an applicable person for disclosure of
return or return information under section 6103 if such request
is made in accordance with the requirements of such section, or
``(3) any request by the Secretary of the Treasury as a
consequence of the implementation of a change in tax policy.
``(d) Penalty.--Any person who willfully violates subsection (a) or
fails to report under subsection (b) shall be punished upon conviction
by a fine in any amount not exceeding $5,000, or imprisonment of not
more than 5 years, or both, together with the costs of prosecution.
``(e) Applicable Person.--For purposes of this section, the term
`applicable person' means--
``(1) the President, the Vice President, any employee of the
executive office of the President, and any employee of the
executive office of the Vice President, and
``(2) any individual (other than the Attorney General of the
United States) serving in a position specified in section 5312
of title 5, United States Code.''
(b) Clerical Amendment.--The table of sections for part I of
subchapter A of chapter 75 is amended by adding after the item relating
to section 7216 the following new item:

``Sec. 7217. Prohibition on executive
branch influence over taxpayer
audits and other
investigations.''

(c) Effective Date.--The amendments made by this section shall apply
to requests made after the date of the enactment of this Act.

Subtitle B--Personnel Flexibilities

SEC. 111. PERSONNEL FLEXIBILITIES.

(a) In General.--Part III of title 5, United States Code, is amended
by adding at the end the following new subpart:

``Subpart I--Miscellaneous

``CHAPTER 93--PERSONNEL FLEXIBILITIES RELATING TO THE INTERNAL REVENUE
SERVICE

``Sec.
``9301. General requirements.
``9302. Flexibilities relating to performance management.
``9303. Staffing flexibilities.
``9304. Flexibilities relating to demonstration projects.

``Sec. 9301. General requirements

``(a) Conformance With Merit System Principles, Etc.--Any
flexibilities under this chapter shall be exercised in a manner
consistent with--
``(1) chapter 23, relating to merit system principles and
prohibited personnel practices; and
``(2) provisions of this title (outside of this subpart)
relating to preference eligibles.
``(b) Requirement Relating to Units Represented by Labor
Organizations.--
``(1) Written agreement required.--Employees within a unit
with respect to which a labor organization is accorded
exclusive recognition under chapter 71 shall not be subject to
the exercise of any flexibility under section 9302, 9303, or
9304, unless there is a written agreement between the Internal
Revenue Service and the organization permitting such exercise.
``(2) Definition of a written agreement.--In order to satisfy
paragraph (1), a written agreement--
``(A) need not be a collective bargaining agreement
within the meaning of section 7103(8); and
``(B) may not be an agreement imposed by the Federal
Service Impasses Panel under section 7119.

``Sec. 9302. Flexibilities relating to performance management

``(a) In General.--The Commissioner of Internal Revenue shall, within
a year after the date of the enactment of this chapter, establish a
performance management system which--
``(1) subject to section 9301(b), shall cover all employees
of the Internal Revenue Service other than--
``(A) the members of the Internal Revenue Service
Oversight Board;
``(B) the Commissioner of Internal Revenue; and
``(C) the Chief Counsel for the Internal Revenue
Service;
``(2) shall maintain individual accountability by--
``(A) establishing standards of performance which--
``(i) shall permit the accurate evaluation of
each employee's performance on the basis of the
individual and organizational performance
requirements applicable with respect to the
evaluation period involved, taking into account
individual contributions toward the attainment
of any goals or objectives under paragraph (3);
``(ii) shall be communicated to an employee
before the start of any period with respect to
which the performance of such employee is to be
evaluated using such standards; and
``(iii) shall include at least 2 standards of
performance, the lowest of which shall denote
the retention standard and shall be equivalent
to fully successful performance;
``(B) providing for periodic performance evaluations
to determine whether employees are meeting all
applicable retention standards; and
``(C) using the results of such employee's
performance evaluation as a basis for adjustments in
pay and other appropriate personnel actions; and
``(3) shall provide for (A) establishing goals or objectives
for individual, group, or organizational performance (or any
combination thereof), consistent with Internal Revenue Service
performance planning procedures, including those established
under the Government Performance and Results Act of 1993, the
Information Technology Management Reform Act of 1996, Revenue
Procedure 64-22 (as in effect on July 30, 1997), and taxpayer
service surveys, (B) communicating such goals or objectives to
employees, and (C) using such goals or objectives to make
performance distinctions among employees or groups of
employees.
For purposes of this title, performance of an employee during any
period in which such employee is subject to standards of performance
under paragraph (2) shall be considered to be `unacceptable' if the
performance of such employee during such period fails to meet any
retention standard.
``(b) Awards.--
``(1) For superior accomplishments.--In the case of a
proposed award based on the efforts of an employee or former
employee of the Internal Revenue Service, any approval required
under the provisions of section 4502(b) shall be considered to
have been granted if the Office of Personnel Management does
not disapprove the proposed award within 60 days after
receiving the appropriate certification described in such
provisions.
``(2) For employees who report directly to the
commissioner.--
``(A) In general.--In the case of an employee of the
Internal Revenue Service who reports directly to the
Commissioner of Internal Revenue, a cash award in an
amount up to 50 percent of such employee's annual rate
of basic pay may be made if the Commissioner finds such
an award to be warranted based on such employee's
performance.
``(B) Nature of an award.--A cash award under this
paragraph shall not be considered to be part of basic
pay.
``(C) Tax enforcement results.--A cash award under
this paragraph may not be based solely on tax
enforcement results.
``(D) Eligible employees.--Whether or not an employee
is an employee who reports directly to the Commissioner
of Internal Revenue shall, for purposes of this
paragraph, be determined under regulations which the
Commissioner shall prescribe, except that in no event
shall more than 8 employees be eligible for a cash
award under this paragraph in any calendar year.
``(E) Limitation on compensation.--For purposes of
applying section 5307 to an employee in connection with
any calendar year to which an award made under this
paragraph to such employee is attributable, subsection
(a)(1) of such section shall be applied by substituting
`to equal or exceed the annual rate of compensation for
the Vice President for such calendar year' for `to
exceed the annual rate of basic pay payable for level I
of the Executive Schedule, as of the end of such
calendar year'.
``(F) Approval required.--An award under this
paragraph may not be made unless--
``(i) the Commissioner of Internal Revenue
certifies to the Office of Personnel Management
that such award is warranted; and
``(ii) the Office approves, or does not
disapprove, the proposed award within 60 days
after the date on which it is so certified.
``(3) Based on savings.--
``(A) In general.--The Commissioner of Internal
Revenue may authorize the payment of cash awards to
employees based on documented financial savings
achieved by a group or organization which such
employees comprise, if such payments are made pursuant
to a plan which--
``(i) specifies minimum levels of service and
quality to be maintained while achieving such
financial savings; and
``(ii) is in conformance with criteria
prescribed by the Office of Personnel
Management.
``(B) Funding.--A cash award under this paragraph may
be paid from the fund or appropriation available to the
activity primarily benefiting or the various activities
benefiting.
``(C) Tax enforcement results.--A cash award under
this paragraph may not be based solely on tax
enforcement results.
``(c) Other Provisions.--
``(1) Notice provisions.--In applying sections 4303(b)(1)(A)
and 7513(b)(1) to employees of the Internal Revenue Service,
`15 days' shall be substituted for `30 days'.
``(2) Appeals.--Notwithstanding the second sentence of
section 5335(c), an employee of the Internal Revenue Service
shall not have a right to appeal the denial of a periodic step
increase under section 5335 to the Merit Systems Protection
Board.

``Sec. 9303. Staffing flexibilities

``(a) Eligibility to Compete for A Permanent Appointment in the
Competitive Service.--
``(1) Eligibility of qualified veterans.--
``(A) In general.--No veteran described in
subparagraph (B) shall be denied the opportunity to
compete for an announced vacant competitive service
position within the Internal Revenue Service by reason
of--
``(i) not having acquired competitive status;
or
``(ii) not being an employee of that agency.
``(B) Description.--An individual shall, for purposes
of a position for which such individual is applying, be
considered a veteran described in this subparagraph if
such individual--
``(i) is either a preference eligible, or an
individual (other than a preference eligible)
who has been separated from the armed forces
under honorable conditions after at least 3
years of active service; and
``(ii) meets the minimum qualification
requirements for the position sought.
``(2) Eligibility of certain temporary employees.--
``(A) In general.--No temporary employee described in
subparagraph (B) shall be denied the opportunity to
compete for an announced vacant competitive service
position within the Internal Revenue Service by reason
of not having acquired competitive status.
``(B) Description.--An individual shall, for purposes
of a position for which such individual is applying, be
considered a temporary employee described in this
subparagraph if--
``(i) such individual is then currently
serving as a temporary employee in the Internal
Revenue Service;
``(ii) such individual has completed at least
2 years of current continuous service in the
competitive service under 1 or more term
appointments, each of which was made under
competitive procedures prescribed for permanent
appointments;
``(iii) such individual's performance under
each term appointment referred to in clause
(ii) met all applicable retention standards;
and
``(iv) such individual meets the minimum
qualification requirements for the position
sought.
``(b) Rating Systems.--
``(1) In general.--Notwithstanding subchapter I of chapter
33, the Commissioner of Internal Revenue may establish category
rating systems for evaluating job applicants for positions in
the competitive service, under which qualified candidates are
divided into 2 or more quality categories on the basis of
relative degrees of merit, rather than assigned individual
numerical ratings. Each applicant who meets the minimum
qualification requirements for the position to be filled shall
be assigned to an appropriate category based on an evaluation
of the applicant's knowledge, skills, and abilities relative to
those needed for successful performance in the job to be
filled.
``(2) Treatment of preference eligibles.--Within each quality
category established under paragraph (1), preference eligibles
shall be listed ahead of individuals who are not preference
eligibles. For other than scientific and professional positions
at or higher than GS-9 (or equivalent), preference eligibles
who have a compensable service-connected disability of 10
percent or more, and who meet the minimum qualification
standards, shall be listed in the highest quality category.
``(3) Selection process.--An appointing authority may select
any applicant from the highest quality category or, if fewer
than 3 candidates have been assigned to the highest quality
category, from a merged category consisting of the highest and
second highest quality categories. Notwithstanding the
preceding sentence, the appointing authority may not pass over
a preference eligible in the same or a higher category from
which selection is made, unless the requirements of section
3317(b) or 3318(b), as applicable, are satisfied, except that
in no event may certification of a preference eligible under
this subsection be discontinued by the Internal Revenue Service
under section 3317(b) before the end of the 6-month period
beginning on the date of such employee's first certification.
``(c) Involuntary Reassignments and Removals of Career Appointees in
the Senior Executive Service.--Neither section 3395(e)(1) nor section
3592(b)(1) shall apply with respect to the Internal Revenue Service.
``(d) Probationary Periods.--Notwithstanding any other provision of
law or regulation, the Commissioner of Internal Revenue may establish a
period of probation under section 3321 of up to 3 years for any
position if, as determined by the Commissioner, a shorter period would
be insufficient for the incumbent to demonstrate complete proficiency
in such position.
``(e) Provisions That Remain Applicable.--No provision of this
section exempts the Internal Revenue Service from--
``(1) any employment priorities established under direction
of the President for the placement of surplus or displaced
employees; or
``(2) its obligations under any court order or decree
relating to the employment practices of the Internal Revenue
Service.

``Sec. 9304. Flexibilities relating to demonstration projects

``(a) Authority To Conduct.--The Commissioner of Internal Revenue
may, in accordance with this section, conduct 1 or more demonstration
projects to improve personnel management; provide increased individual
accountability; eliminate obstacles to the removal of or imposing any
disciplinary action with respect to poor performers, subject to the
requirements of due process; expedite appeals from adverse actions or
performance-based actions; and promote pay based on performance.
``(b) General Requirements.--Except as provided in subsection (c),
each demonstration project under this section shall comply with the
provisions of section 4703.
``(c) Special Rules.--For purposes of any demonstration project under
this section--
``(1) Authority of commissioner.--The Commissioner of
Internal Revenue shall exercise the authority provided to the
Office of Personnel Management under section 4703.
``(2) Provisions not applicable.--The following provisions of
section 4703 shall not apply:
``(A) Paragraphs (3) through (6) of subsection (b).
``(B) Paragraphs (1), (2)(B)(ii), and (4) of
subsection (c).
``(C) Subsections (d) through (g).
``(d) Notification Required To Be Given.--
``(1) To employees.--The Commissioner of Internal Revenue
shall notify employees likely to be affected by a project
proposed under this section at least 90 days in advance of the
date such project is to take effect.
``(2) To congress and opm.--The Commissioner of Internal
Revenue shall, with respect to each demonstration project under
this section, provide each House of Congress and the Office of
Personnel Management with a report, at least 30 days in advance
of the date such project is to take effect, setting forth the
final version of the plan for such project. Such report shall,
with respect to the project to which it relates, include the
information specified in section 4703(b)(1).
``(e) Limitations.--No demonstration project under this section
may--
``(1) provide for a waiver of any regulation prescribed under
any provision of law referred to in paragraph (2)(B)(i) or (3)
of section 4703(c);
``(2) provide for a waiver of subchapter V of chapter 63 or
subpart G of part III (or any regulations prescribed under such
subchapter or subpart);
``(3) provide for a waiver of any law or regulation relating
to preference eligibles as defined in section 2108 or
subchapter II or III of chapter 73 (or any regulations
prescribed thereunder);
``(4) permit collective bargaining over pay or benefits, or
require collective bargaining over any matter which would not
be required under section 7106; or
``(5) include a system for measuring performance that
provides for only 1 level of performance at or above the level
of fully successful or better.
``(f) Permissible Projects.--Notwithstanding any other provision of
law, a demonstration project under this section--
``(1) may establish alternative means of resolving any
dispute within the jurisdiction of the Equal Employment
Opportunity Commission, the Merit Systems Protection Board, the
Federal Labor Relations Authority, or the Federal Service
Impasses Panel; and
``(2) may permit the Internal Revenue Service to adopt any
alternative dispute resolution procedure that a private entity
may lawfully adopt.
``(g) Consultation and Coordination.--The Commissioner of Internal
Revenue shall consult with the Director of the Office of Personnel
Management in the development and implementation of each demonstration
project under this section and shall submit such reports to the
Director as the Director may require. The Director or the Commissioner
of Internal Revenue may terminate a demonstration project under this
section if either of them determines that the project creates a
substantial hardship on, or is not in the best interests of, the
public, the Federal Government, employees, or qualified applicants for
employment with the Internal Revenue Service.
``(h) Termination.--Each demonstration project under this section
shall terminate before the end of the 5-year period beginning on the
date on which the project takes effect, except that any such project
may continue beyond the end of such period, for not to exceed 2 years,
if the Commissioner of Internal Revenue, with the concurrence of the
Director, determines such extension is necessary to validate the
results of the project. Not later than 6 months before the end of the
5-year period and any extension under the preceding sentence, the
Commissioner of Internal Revenue shall, with respect to the
demonstration project involved, submit a legislative proposal to the
Congress if the Commissioner determines that such project should be
made permanent, in whole or in part.''
(b) Clerical Amendment.--The analysis for part III of title 5, United
States Code, is amended by adding at the end the following:

``Subpart I--Miscellaneous

``93. Personnel Flexibilities Relating to the Internal 9301''.
Revenue Service.

TITLE II--ELECTRONIC FILING

SEC. 201. ELECTRONIC FILING OF TAX AND INFORMATION RETURNS.

(a) In General.--It is the policy of the Congress that paperless
filing should be the preferred and most convenient means of filing tax
and information returns, and that by the year 2007, no more than 20
percent of all such returns should be filed on paper.
(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'') 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. To the extent practicable, such plan shall provide that
all returns prepared electronically for taxable years beginning
after 2001 shall be filed electronically.
(2) Electronic commerce advisory group.--To ensure that the
Secretary receives input from the private sector in the
development and implementation of the plan required by
paragraph (1), the Secretary shall convene an electronic
commerce advisory group to include representatives from the
small business community and from the tax practitioner,
preparer, and computerized tax processor communities and other
representatives from the electronic filing industry.
(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.''
(d) Annual Reports.--Not later than June 30 of each calendar year
after 1997, the Chairperson of the Internal Revenue Service Oversight
Board, the Secretary, and the Chairperson of the electronic commerce
advisory group established under subsection (b)(2) shall report to the
Committees on Ways and Means, Appropriations, and Government Reform and
Oversight of the House of Representatives, the Committees on Finance,
Appropriations, and Government Affairs of the Senate, and the Joint
Committee on Taxation, on--
(1) the progress of the Internal Revenue Service in meeting
the goal of receiving electronically 80 percent of tax and
information returns by 2007;
(2) the status of the plan required by subsection (b); and
(3) the legislative changes necessary to assist the Internal
Revenue Service in meeting such goal.

SEC. 202. DUE DATE FOR CERTAIN INFORMATION RETURNS FILED
ELECTRONICALLY.

(a) In General.--Section 6071 (relating to time for filing returns
and other documents) is amended by redesignating subsection (b) as
subsection (c) and by inserting after subsection (a) the following new
subsection:
``(b) Electronically Filed Information Returns.--Returns made under
subparts B and C of part III of this subchapter which are filed
electronically shall be filed on or before March 31 of the year
following the calendar year to which such returns relate.''
(b) Effective Date.--The amendment made by this section shall apply
to returns required to be filed after December 31, 1999.

SEC. 203. PAPERLESS ELECTRONIC FILING.

(a) In General.--Section 6061 (relating to signing of returns and
other documents) is amended--
(1) by striking ``Except as otherwise provided by'' and
inserting the following:
``(a) General Rule.--Except as otherwise provided by subsection (b)
and'', and
(2) by adding at the end the following new subsection:
``(b) Electronic Signatures.--
``(1) In general.--The Secretary shall develop procedures for
the acceptance of signatures in digital or other electronic
form. Until such time as such procedures are in place, the
Secretary may waive the requirement of a signature for all
returns or classes of returns, or may provide for alternative
methods of subscribing all returns, declarations, statements,
or other documents required or permitted to be made or written
under internal revenue laws and regulations.
``(2) Treatment of alternative methods.--Notwithstanding any
other provision of law, any return, declaration, statement or
other document filed without signature under the authority of
this subsection or verified, signed or subscribed under any
method adopted under paragraph (1) shall be treated for all
purposes (both civil and criminal, including penalties for
perjury) in the same manner as though signed and subscribed.
Any such return, declaration, statement or other document shall
be presumed to have been actually submitted and subscribed by
the person on whose behalf it was submitted.
``(3) Published guidance.--The Secretary shall publish
guidance as appropriate to define and implement any waiver of
the signature requirements.''
(b) Acknowledgment of Electronic Filing.--Section 7502(c) is amended
to read as follows:
``(c) Registered and Certified Mailing; Electronic Filing.--
``(1) Registered mail.--For purposes of this section, if any
return, claim, statement, or other document, or payment, is
sent by United States registered mail--
``(A) such registration shall be prima facie evidence
that the return, claim, statement, or other document
was delivered to the agency, officer, or office to
which addressed, and
``(B) the date of registration shall be deemed the
postmark date.
``(2) Certified mail; electronic filing.--The Secretary is
authorized to provide by regulations the extent to which the
provisions of paragraph (1) with respect to prima facie
evidence of delivery and the postmark date shall apply to
certified mail and electronic filing.''.
(c) Establishment of Procedures for Other Information.--In the case
of taxable periods beginning after December 31, 1998, the Secretary of
the Treasury or the Secretary's delegate shall, to the extent
practicable, establish procedures to accept, in electronic form, any
other information, statements, elections, or schedules, from taxpayers
filing returns electronically, so that such taxpayers will not be
required to file any paper.
(d) Procedures for Communications Between IRS and Preparer of
Electronically-Filed Returns.--The Secretary shall establish procedures
for taxpayers to authorize, on electronically filed returns, the
preparer of such returns to communicate with the Internal Revenue
Service on matters included on such returns.
(e) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.

SEC. 204. RETURN-FREE TAX SYSTEM.

(a) In General.--The Secretary of the Treasury or the Secretary's
delegate shall develop procedures for the implementation of a return-
free tax system under which appropriate individuals would be permitted
to comply with the Internal Revenue Code of 1986 without making the
return required under section 6012 of such Code for taxable years
beginning after 2007.
(b) Report.--Not later than June 30 of each calendar year after 1999,
such Secretary shall report to the Committee on Ways and Means of the
House of Representatives, the Committee on Finance of the Senate, and
the Joint Committee on Taxation on--
(1) what additional resources the Internal Revenue Service
would need to implement such a system,
(2) the changes to the Internal Revenue Code of 1986 that
could enhance the use of such a system,
(3) the procedures developed pursuant to subsection (a), and
(4) the number and classes of taxpayers that would be
permitted to use the procedures developed pursuant to
subsection (a).

SEC. 205. ACCESS TO ACCOUNT INFORMATION.

Not later than December 31, 2006, the Secretary of the Treasury or
the Secretary's delegate shall develop procedures under which a
taxpayer filing returns electronically would be able to review the
taxpayer's account electronically, but only if all necessary safeguards
to ensure the privacy of such account information are in place.

TITLE III--TAXPAYER PROTECTION AND RIGHTS

SEC. 300. SHORT TITLE.

This title may be cited as the ``Taxpayer Bill of Rights 3''.

Subtitle A--Burden of Proof

SEC. 301. BURDEN OF PROOF.

(a) In General.--Chapter 76 (relating to judicial proceedings) is
amended by adding at the end the following new subchapter:

``Subchapter E--Burden of Proof

``Sec. 7491. Burden of proof.

``SEC. 7491. BURDEN OF PROOF.

``(a) General Rule.--The Secretary shall have the burden of proof in
any court proceeding with respect to any factual issue relevant to
ascertaining the income tax liability of a taxpayer.
``(b) Limitations.--Subsection (a) shall only apply with respect to
an issue if--
``(1) the taxpayer asserts a reasonable dispute with respect
to such issue,
``(2) the taxpayer has fully cooperated with the Secretary
with respect to such issue, including providing, within a
reasonable period of time, access to and inspection of all
witnesses, information, and documents within the control of the
taxpayer, as reasonably requested by the Secretary, and
``(3) in the case of a partnership, corporation, or trust,
the taxpayer is described in section 7430(c)(4)(A)(ii).
``(c) Substantiation.--Nothing in this section shall be construed to
override any requirement of this title to substantiate any item.''
(b) Conforming Amendments.--
(1) Section 6201 is amended by striking subsection (d) and
redesignating subsection (e) as subsection (d).
(2) The table of subchapters for chapter 76 is amended by
adding at the end the following new item:

``Subchapter E. Burden of proof.''

(c) Effective Date.--The amendments made by this section shall apply
to court proceedings arising in connection with examinations commencing
after the date of the enactment of this Act.

Subtitle B--Proceedings by Taxpayers

SEC. 311. EXPANSION OF AUTHORITY TO AWARD COSTS AND CERTAIN FEES.

(a) Award of Higher Attorney's Fees Based on Complexity of Issues.--
Clause (iii) of section 7430(c)(1)(B) (relating to the award of costs
and certain fees) is amended by inserting ``the difficulty of the
issues presented in the case, or the local availability of tax
expertise,'' before ``justifies a higher rate''.
(b) Award of Administrative Costs Incurred After 30-Day Letter.--
Paragraph (2) of section 7430(c) is amended by striking the last
sentence and inserting the following:
``Such term shall only include costs incurred on or after
whichever of the following is the earliest: (i) the date of the
receipt by the taxpayer of the notice of the decision of the
Internal Revenue Service Office of Appeals, (ii) the date of
the notice of deficiency, or (iii) the date on which the 1st
letter of proposed deficiency which allows the taxpayer an
opportunity for administrative review in the Internal Revenue
Service Office of Appeals is sent.''.
(c) Award of Fees for Certain Additional Services.--Paragraph (3) of
section 7430(c) is amended to read as follows:
``(3) Attorney's fees.--
``(A) In general.--For purposes of paragraphs (1) and
(2), fees for the services of an individual (whether or
not an attorney) who is authorized to practice before
the Tax Court or before the Internal Revenue Service
shall be treated as fees for the services of an
attorney.
``(B) Pro bono services.--In any case in which the
court could have awarded attorney's fees under
subsection (a) but for the fact that an individual is
representing the prevailing party for no fee or for a
fee which (taking into account all the facts and
circumstances) is no more than a nominal fee, the court
may also award a judgment or settlement for such
amounts as the court determines to be appropriate
(based on hours worked and costs expended) for services
of such individual but only if such award is paid to
such individual or such individual's employer.''
(d) Determination of Whether Position of United States is
Substantially Justified.--Subparagraph (B) of section 7430(c)(4) is
amended by redesignating clause (iii) as clause (iv) and by inserting
after clause (ii) the following new clause:
``(iii) Effect of losing on substantially
similar issues.--In determining for purposes of
clause (i) whether the position of the United
States was substantially justified, the court
shall take into account whether the United
States has lost in courts of appeal for other
circuits on substantially similar issues.''
(e) Effective Date.--The amendments made by this section shall apply
to costs incurred (and, in the case of the amendment made by subsection
(c), services performed) more than 180 days after the date of the
enactment of this Act.

SEC. 312. CIVIL DAMAGES FOR NEGLIGENCE IN COLLECTION ACTIONS.

(a) In General.--Section 7433 (relating to civil damages for certain
unauthorized collection actions) is amended--
(1) in subsection (a), by inserting ``, or by reason of
negligence,'' after ``recklessly or intentionally'', and
(2) in subsection (b)--
(A) in the matter preceding paragraph (1), by
inserting ``($100,000, in the case of negligence)''
after ``$1,000,000'', and
(B) in paragraph (1), by inserting ``or negligent''
after ``reckless or intentional''.
(b) Requirement That Administrative Remedies Be Exhausted.--Paragraph
(1) of section 7433(d) is amended to read as follows:
``(1) Requirement that administrative remedies be
exhausted.--A judgment for damages shall not be awarded under
subsection (b) unless the court determines that the plaintiff
has exhausted the administrative remedies available to such
plaintiff within the Internal Revenue Service.''
(c) Effective Date.--The amendments made by this section shall apply
to actions of officers or employees of the Internal Revenue Service
after the date of the enactment of this Act.

SEC. 313. INCREASE IN SIZE OF CASES PERMITTED ON SMALL CASE CALENDAR.

(a) In General.--Subsection (a) of section 7463 (relating to disputes
involving $10,000 or less) is amended by striking ``$10,000'' each
place it appears and inserting ``$25,000''.
(b) Conforming Amendments.--
(1) The section heading for section 7463 is amended by
striking ``$10,000'' and inserting ``$25,000''.
(2) The item relating to section 7463 in the table of
sections for part II of subchapter C of chapter 76 is amended
by striking ``$10,000'' and inserting ``$25,000''.
(c) Effective Date.--The amendments made by this section shall apply
to proceedings commencing after the date of the enactment of this Act.

Subtitle C--Relief for Innocent Spouses and for Taxpayers Unable To
Manage Their Financial Affairs Due to Disabilities

SEC. 321. SPOUSE RELIEVED IN WHOLE OR IN PART OF LIABILITY IN CERTAIN
CASES.

(a) In General.--Subpart B of part II of subchapter A of chapter 61
is amended by inserting after section 6014 the following new section:

``SEC. 6015. INNOCENT SPOUSE RELIEF; PETITION TO TAX COURT.

``(a) Spouse Relieved of Liability in Certain Cases.--
``(1) In general.--Under procedures prescribed by the
Secretary, if--
``(A) a joint return has been made under section 6013
for a taxable year,
``(B) on such return there is an understatement of
tax attributable to erroneous items of 1 spouse,
``(C) the other spouse establishes that in signing
the return he or she did not know, and had no reason to
know, that there was such understatement,
``(D) taking into account all the facts and
circumstances, it is inequitable to hold the other
spouse liable for the deficiency in tax for such
taxable year attributable to such understatement, and
``(E) the other spouse claims (in such form as the
Secretary may prescribe) the benefits of this
subsection not later than the date which is 2 years
after the date of the assessment of such deficiency,
then the other spouse shall be relieved of liability for tax
(including interest, penalties, and other amounts) for such
taxable year to the extent such liability is attributable to
such understatement.
``(2) Apportionment of relief.--If a spouse who, but for
paragraph (1)(C), would be relieved of liability under
paragraph (1), establishes that in signing the return such
spouse did not know, and had no reason to know, the extent of
such understatement, then such spouse shall be relieved of
liability for tax (including interest, penalties, and other
amounts) for such taxable year to the extent that such
liability is attributable to the portion of such understatement
of which such spouse did not know and had no reason to know.
``(3) Understatement.--For purposes of this subsection, the
term `understatement' has the meaning given to such term by
section 6662(d)(2)(A).
``(4) Special rule for community property income.--For
purposes of this subsection, the determination of the spouse to
whom items of gross income (other than gross income from
property) are attributable shall be made without regard to
community property laws.
``(b) Petition for Review By Tax Court.--In the case of an individual
who has filed a claim under subsection (a) within the period specified
in subsection (a)(1)(E)--
``(1) In general.--Such individual may petition the Tax Court
(and the Tax Court shall have jurisdiction) to determine such
claim if such petition is filed during the 90-day period
beginning on the earlier of--
``(A) the date which is 6 months after the date such
claim is filed with the Secretary, or
``(B) the date on which the Secretary mails by
certified or registered mail a notice to such
individual denying such claim.
Such 90-day period shall be determined by not counting
Saturday, Sunday, or a legal holiday in the District of
Columbia as the last day of such period.
``(2) Restrictions applicable to collection of assessment.--
``(A) In general.--Except as otherwise provided in
section 6851 or 6861, no levy or proceeding in court
for collection of any assessment to which such claim
relates shall be made, begun, or prosecuted, until the
expiration of the 90-day period described in paragraph
(1), nor, if a petition has been filed with the Tax
Court, until the decision of the Tax Court has become
final. Rules similar to the rules of section 7485 shall
apply with respect to the collection of such
assessment.
``(B) Authority to enjoin collection actions.--
Notwithstanding the provisions of section 7421(a), the
beginning of such proceeding or levy during the time
the prohibition under subparagraph (A) is in force may
be enjoined by a proceeding in the proper court,
including the Tax Court. The Tax Court shall have no
jurisdiction under this paragraph to enjoin any action
or proceeding unless a timely petition for a
determination of such claim has been filed and then
only in respect of the amount of the assessment to
which such claim relates.
``(C) Jeopardy collection.--If the Secretary makes a
finding that the collection of the tax is in jeopardy,
nothing in this subsection shall prevent the immediate
collection of such tax.
``(c) Suspension of Running of Period of Limitations.--The running of
the period of limitations in section 6502 on the collection of the
assessment to which the petition under subsection (b) relates shall be
suspended for the period during which the Secretary is prohibited by
subsection (b) from collecting by levy or a proceeding in court and for
60 days thereafter.
``(d) Applicable Rules.--
``(1) Allowance of application.--Except as provided in
paragraph (2), notwithstanding any other law or rule of law
(other than section 6512(b), 7121, or 7122), credit or refund
shall be allowed or made to the extent attributable to the
application of this section.
``(2) Res judicata.--In the case of any claim under
subsection (a), the determination of the Tax Court in any prior
proceeding for the same taxable periods in which the decision
has become final, shall be conclusive except with respect to
the qualification of the spouse for relief which was not an
issue in such proceeding. The preceding sentence shall not
apply if the Tax Court determines that the spouse participated
meaningfully in such prior proceeding.
``(3) Limitation on tax court jurisdiction.--If a suit for
refund is begun by either spouse pursuant to section 6532, the
Tax Court shall lose jurisdiction of the spouse's action under
this section to whatever extent jurisdiction is acquired by the
district court or the United States Court of Federal Claims
over the taxable years that are the subject of the suit for
refund.''
(b) Separate Form For Applying For Spousal Relief.--Not later than
180 days after the date of the enactment of this Act, the Secretary of
the Treasury shall develop a separate form with instructions for use by
taxpayers in applying for relief under section 6015(a) of the Internal
Revenue Code of 1986, as added by this section.
(c) Conforming Amendments.--
(1) Section 6013 is amended by striking subsection (e).
(2) Subparagraph (A) of section 6230(c)(5) is amended by
striking ``section 6013(e)'' and inserting ``section 6015''.
(d) Clerical Amendment.--The table of sections for subpart B of part
II of subchapter A of chapter 61 is amended by inserting after the item
relating to section 6014 the following new item:

``Sec. 6015. Innocent spouse relief;
petition to Tax Court.''

(e) Effective Date.--The amendments made by this section shall apply
to understatements for taxable years beginning after the date of the
enactment of this Act.

SEC. 322. SUSPENSION OF STATUTE OF LIMITATIONS ON FILING REFUND CLAIMS
DURING PERIODS OF DISABILITY.

(a) In General.--Section 6511 (relating to limitations on credit or
refund) is amended by redesignating subsection (h) as subsection (i)
and by inserting after subsection (g) the following new subsection:
``(h) Running of Periods of Limitation Suspended While Taxpayer Is
Unable To Manage Financial Affairs Due to Disability.--
``(1) In general.--In the case of an individual, the running
of the periods specified in subsections (a), (b), and (c) shall
be suspended during any period of such individual's life that
such individual is financially disabled.
``(2) Financially disabled.--
``(A) In general.--For purposes of paragraph (1), an
individual is financially disabled if such individual
is unable to manage his financial affairs by reason of
his medically determinable physical or mental
impairment which can be expected to result in death or
which has lasted or can be expected to last for a
continuous period of not less than 12 months. An
individual shall not be considered to have such an
impairment unless proof of the existence thereof is
furnished in such form and manner as the Secretary may
require.
``(B) Exception where individual has guardian, etc.--
An individual shall not be treated as financially
disabled during any period that such individual's
spouse or any other person is authorized to act on
behalf of such individual in financial matters.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to periods of disability before, on, or after the date of the enactment
of this Act but shall not apply to any claim for credit or refund which
(without regard to such amendment) is barred by the operation of any
law or rule of law (including res judicata) as of January 1, 1998.

Subtitle D--Provisions Relating to Interest

SEC. 331. ELIMINATION OF INTEREST RATE DIFFERENTIAL ON OVERLAPPING
PERIODS OF INTEREST ON INCOME TAX OVERPAYMENTS AND
UNDERPAYMENTS.

(a) In General.--Section 6621 (relating to determination of rate of
interest) is amended by adding at the end the following new subsection:
``(d) Elimination of Interest on Overlapping Periods of Income Tax
Overpayments and Underpayments.--To the extent that, for any period,
interest is payable under subchapter A and allowable under subchapter B
on equivalent underpayments and overpayments by the same taxpayer of
tax imposed by chapters 1 and 2, the net rate of interest under this
section on such amounts shall be zero for such period.''
(b) Conforming Amendment.--Subsection (f) of section 6601 (relating
to satisfaction by credits) is amended by adding at the end the
following new sentence: ``The preceding sentence shall not apply to the
extent that section 6621(d) applies.''
(c) Effective Date.--The amendments made by this section shall apply
to interest for calendar quarters beginning after the date of the
enactment of this Act.

SEC. 332. INCREASE IN OVERPAYMENT RATE PAYABLE TO TAXPAYERS OTHER THAN
CORPORATIONS.

(a) In General.--Subparagraph (B) of section 6621(a)(1) (defining
overpayment rate) is amended to read as follows:
``(B) 3 percentage points (2 percentage points in the
case of a corporation).''
(b) Effective Date.--The amendment made by this section shall apply
to interest for calendar quarters beginning after the date of the
enactment of this Act.

Subtitle E--Protections for Taxpayers Subject to Audit or Collection
Activities

SEC. 341. PRIVILEGE OF CONFIDENTIALITY EXTENDED TO TAXPAYER'S DEALINGS
WITH NON-ATTORNEYS AUTHORIZED TO PRACTICE BEFORE
INTERNAL REVENUE SERVICE.

Section 7602 (relating to examination of books and witnesses) is
amended by adding at the end the following new subsection:
``(d) Privilege of Confidentiality Extended to Taxpayer's Dealings
with Non-Attorneys Authorized to Practice Before Internal Revenue
Service.--
``(1) In general.--In any noncriminal proceeding before the
Internal Revenue Service, the taxpayer shall be entitled to the
same common law protections of confidentiality with respect to
tax advice furnished by any qualified individual (in a manner
consistent with State law for such individual's profession) as
the taxpayer would have if such individual were an attorney.
``(2) Qualified individual.--For purposes of paragraph (1),
the term `qualified individual' means any individual (other
than an attorney) who is authorized to practice before the
Internal Revenue Service.''

SEC. 342. EXPANSION OF AUTHORITY TO ISSUE TAXPAYER ASSISTANCE ORDERS.

Section 7811(a) (relating to taxpayer assistance orders) is amended--
(1) by striking ``Upon application'' and inserting the
following:
``(1) In general.--Upon application'',
(2) by moving the text 2 ems to the right, and
(3) by adding at the end the following new paragraphs:
``(2) Issuance of taxpayer assistance orders.--For purposes
of determining whether to issue a taxpayer assistance order,
the Taxpayer Advocate shall consider the following factors,
among others:
``(A) Whether there is an immediate threat of adverse
action.
``(B) Whether there has been an unreasonable delay in
resolving taxpayer account problems.
``(C) Whether the taxpayer will have to pay
significant costs (including fees for professional
representation) if relief is not granted.
``(D) Whether the taxpayer will suffer irreparable
injury, or a long-term adverse impact, if relief is not
granted.
``(3) Standard where administrative guidance not followed.--
In cases where any Internal Revenue Service employee is not
following applicable published administrative guidance
(including the Internal Revenue Manual), the Taxpayer Advocate
shall construe the factors taken into account in determining
whether to issue a taxpayer assistance order in the manner most
favorable to the taxpayer.''

SEC. 343. LIMITATION ON FINANCIAL STATUS AUDIT TECHNIQUES.

Section 7602 is amended by adding at the end the following new
subsection:
``(e) Limitation on Examination on Unreported Income.--The Secretary
shall not use financial status or economic reality examination
techniques to determine the existence of unreported income of any
taxpayer unless the Secretary has a reasonable indication that there is
a likelihood of such unreported income.''

SEC. 344. LIMITATION ON AUTHORITY TO REQUIRE PRODUCTION OF COMPUTER
SOURCE CODE.

(a) In General.--Section 7602 is amended by adding at the end the
following new subsection:
``(f) Limitation on Authority To Require Production of Computer
Source Code.--
``(1) In general.--No summons may be issued under this title,
and the Secretary may not begin any action under section 7604
to enforce any summons, to produce or examine any tax-related
computer source code.
``(2) Exception where information not otherwise available to
verify correctness of item on return.--Paragraph (1) shall not
apply to any portion of a tax-related computer source code if--
``(A) the Secretary is unable to otherwise reasonably
ascertain the correctness of any item on a return
from--
``(i) the taxpayer's books, papers, records,
or other data, or
``(ii) the computer software program and the
associated data which, when executed, produces
the output to prepare the return for the period
involved, and
``(B) the Secretary identifies with reasonable
specificity such portion as to be used to verify the
correctness of such item.
The Secretary shall be treated as meeting the requirements of
subparagraphs (A) and (B) after the 90th day after the
Secretary makes a formal request to the taxpayer and the owner
or developer of the computer software program for the material
described in subparagraph (A)(ii) if such material is not
provided before the close of such 90th day.
``(3) Other exceptions.--Paragraph (1) shall not apply to--
``(A) any inquiry into any offense connected with the
administration or enforcement of the internal revenue
laws, and
``(B) any tax-related computer source code developed
by (or primarily for the benefit of) the taxpayer or a
related person (within the meaning of section 267 or
707(b)) for internal use by the taxpayer or such person
and not for commercial distribution.
``(4) Tax-related computer source code.--For purposes of this
subsection, the term `tax-related computer source code' means--
``(A) the computer source code for any computer
software program for accounting, tax return preparation
or compliance, or tax planning, or
``(B) design and development materials related to
such a software program (including program notes and
memoranda).
``(5) Right to contest summons.--The determination of whether
the requirements of subparagraphs (A) and (B) of paragraph (2)
are met or whether any exception under paragraph (3) applies
may be contested in any proceeding under section 7604.
``(6) Protection of trade secrets and other confidential
information.--In any court proceeding to enforce a summons for
any portion of a tax-related computer source code, the court
may issue any order necessary to prevent the disclosure of
trade secrets or other confidential information with respect to
such source code, including providing that any information be
placed under seal to be opened only as directed by the court.''
(b) Application of Special Procedures for Third-Party Summonses.--
Paragraph (3) of section 7609(a) (defining third-party recordkeeper) is
amended by striking ``and'' at the end of subparagraph (H), by striking
a period at the end of subparagraph (I) and inserting ``, and'', and by
adding at the end the following:
``(J) any owner or developer of a tax-related
computer source code (as defined in section
7602(f)(4)).
Subparagraph (J) shall apply only with respect to a summons
requiring the production of the source code referred to in
subparagraph (J) or the program and data described in section
7602(f)(2)(A)(ii) to which such source code relates.''
(c) Effective Date.--The amendments made by this section shall apply
to summonses issued more than 90 days after the date of the enactment
of this Act.

SEC. 345. PROCEDURES RELATING TO EXTENSIONS OF STATUTE OF LIMITATIONS
BY AGREEMENT.

(a) In General.--Paragraph (4) of section 6501(c) (relating to the
period for limitations on assessment and collection) is amended--
(1) by striking ``Where'' and inserting the following:
``(A) In general.--Where'',
(2) by moving the text 2 ems to the right, and
(3) by adding at the end the following new subparagraph:
``(B) Notice to taxpayer of right to refuse or limit
extension.--The Secretary shall notify the taxpayer of
the taxpayer's right to refuse to extend the period of
limitations, or to limit such extension to particular
issues, on each occasion when the taxpayer is requested
to provide such consent.''
(b) Effective Date.--The amendments made by this section shall apply
to requests to extend the period of limitations made after the date of
the enactment of this Act.

SEC. 346. OFFERS-IN-COMPROMISE.

(a) Allowances For Basic Living Expenses.--Section 7122 (relating to
offers-in-compromise) is amended by adding at the end the following new
subsection:
``(c) Allowances For Basic Living Expenses.--The Secretary shall
develop and publish schedules of national and local allowances designed
to provide that taxpayers entering into a compromise have an adequate
means to provide for basic living expenses.''
(b) Preparation of Statement Relating to Offers-in-Compromise.--The
Secretary of the Treasury shall prepare a statement which sets forth in
simple, nontechnical terms the rights of a taxpayer and the obligations
of the Internal Revenue Service relating to offers-in-compromise. Such
statement shall--
(1) advise taxpayers who have entered into a compromise
agreement of the advantages of promptly notifying the Internal
Revenue Service of any change of address or marital status, and
(2) provide notice to taxpayers that in the case of a
compromise agreement terminated due to the actions of 1 spouse
or former spouse, the Internal Revenue Service will, upon
application, reinstate such agreement with the spouse or former
spouse who remains in compliance with such agreement.

SEC. 347. NOTICE OF DEFICIENCY TO SPECIFY DEADLINES FOR FILING TAX
COURT PETITION.

(a) In General.--The Secretary of the Treasury or the Secretary's
delegate shall include on each notice of deficiency under section 6212
of the Internal Revenue Code of 1986 the date determined by such
Secretary (or delegate) as the last day on which the taxpayer may file
a petition with the Tax Court.
(b) Later Filing Deadlines Specified on Notice of Deficiency To Be
Binding.--Subsection (a) of section 6213 (relating to restrictions
applicable to deficiencies; petition to Tax Court) is amended by adding
at the end the following new sentence: ``Any petition filed with the
Tax Court on or before the last date specified for filing such petition
by the Secretary in the notice of deficiency shall be treated as timely
filed.''
(c) Effective Date.--Subsection (a) and the amendment made by
subsection (b) shall apply to notices mailed after December 31, 1998.

SEC. 348. REFUND OR CREDIT OF OVERPAYMENTS BEFORE FINAL DETERMINATION.

(a) Tax Court Proceedings.--Subsection (a) of section 6213 is
amended--
(1) by striking ``, including the Tax Court.'' and inserting
``, including the Tax Court, and a refund may be ordered by
such court of any amount collected within the period during
which the Secretary is prohibited from collecting by levy or
through a proceeding in court under the provisions of this
subsection.'', and
(2) by striking ``to enjoin any action or proceeding'' and
inserting ``to enjoin any action or proceeding or order any
refund''.
(b) Other Proceedings.--Subsection (a) of section 6512 is amended by
striking the period at the end of paragraph (4) and inserting ``,
and'', and by inserting after paragraph (4) the following new
paragraphs:
``(5) As to any amount collected within the period during
which the Secretary is prohibited from making the assessment or
from collecting by levy or through a proceeding in court under
the provisions of section 6213(a), and
``(6) As to overpayments the Secretary is authorized to
refund or credit pending appeal as provided in subsection
(b).''
(c) Refund or Credit Pending Appeal.--Paragraph (1) of section
6512(b) is amended by adding at the end the following new sentence:
``If a notice of appeal in respect of the decision of the Tax Court is
filed under section 7483, the Secretary is authorized to refund or
credit the overpayment determined by the Tax Court to the extent the
overpayment is not contested on appeal.''
(d) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.

SEC. 349. THREAT OF AUDIT PROHIBITED TO COERCE TIP REPORTING
ALTERNATIVE COMMITMENT AGREEMENTS.

The Secretary of the Treasury or the Secretary's delegate shall
instruct employees of the Internal Revenue Service that they may not
threaten to audit any taxpayer in an attempt to coerce the taxpayer
into entering into a Tip Reporting Alternative Commitment Agreement.

Subtitle F--Disclosures to Taxpayers

SEC. 351. EXPLANATION OF JOINT AND SEVERAL LIABILITY.

The Secretary of the Treasury or the Secretary's delegate shall, as
soon as practicable, but not later than 180 days after the date of the
enactment of this Act, establish procedures to clearly alert married
taxpayers of their joint and several liabilities on all appropriate
publications and instructions.

SEC. 352. EXPLANATION OF TAXPAYERS' RIGHTS IN INTERVIEWS WITH THE
INTERNAL REVENUE SERVICE.

The Secretary of the Treasury or the Secretary's delegate shall, as
soon as practicable, but not later than 180 days after the date of the
enactment of this Act, revise the statement required by section 6227 of
the Omnibus Taxpayer Bill of Rights (Internal Revenue Service
Publication No. 1) to more clearly inform taxpayers of their rights--
(1) to be represented at interviews with the Internal Revenue
Service by any person authorized to practice before the
Internal Revenue Service, and
(2) to suspend an interview pursuant to section 7521(b)(2) of
the Internal Revenue Code of 1986.

SEC. 353. DISCLOSURE OF CRITERIA FOR EXAMINATION SELECTION.

(a) In General.--The Secretary of the Treasury or the Secretary's
delegate shall, as soon as practicable, but not later than 180 days
after the date of the enactment of this Act, incorporate into the
statement required by section 6227 of the Omnibus Taxpayer Bill of
Rights (Internal Revenue Service Publication No. 1) a statement which
sets forth in simple and nontechnical terms the criteria and procedures
for selecting taxpayers for examination. Such statement shall not
include any information the disclosure of which would be detrimental to
law enforcement, but shall specify the general procedures used by the
Internal Revenue Service, including whether taxpayers are selected for
examination on the basis of information available in the media or on
the basis of information provided to the Internal Revenue Service by
informants.
(b) Transmission to Committees of Congress.--The Secretary shall
transmit drafts of the statement required under subsection (a) (or
proposed revisions to any such statement) to the Committee on Ways and
Means of the House of Representatives, the Committee on Finance of the
Senate, and the Joint Committee on Taxation on the same day.

SEC. 354. EXPLANATIONS OF APPEALS AND COLLECTION PROCESS.

The Secretary of the Treasury or the Secretary's delegate shall, as
soon as practicable but not later than 180 days after the date of the
enactment of this Act, include with any 1st letter of proposed
deficiency which allows the taxpayer an opportunity for administrative
review in the Internal Revenue Service Office of Appeals an explanation
of the appeals process and the collection process with respect to such
proposed deficiency.

Subtitle G--Low Income Taxpayer Clinics

SEC. 361. LOW INCOME TAXPAYER CLINICS.

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

``SEC. 7525. LOW INCOME TAXPAYER CLINICS.

``(a) In General.--The Secretary shall make grants to provide
matching funds for the development, expansion, or continuation of
qualified low income taxpayer clinics.
``(b) Definitions.--For purposes of this section--
``(1) Qualified low income taxpayer clinic.--
``(A) In general.--The term `qualified low income
taxpayer clinic' means a clinic that--
``(i) does not charge more than a nominal fee
for its services (except for reimbursement of
actual costs incurred), and
``(ii)(I) represents low income taxpayers in
controversies with the Internal Revenue
Service, or
``(II) operates programs to inform
individuals for whom English is a second
language about their rights and
responsibilities under this title.
``(B) Representation of low income taxpayers.--A
clinic meets the requirements of subparagraph
(A)(ii)(I) if--
``(i) at least 90 percent of the taxpayers
represented by the clinic have incomes which do
not exceed 250 percent of the poverty level, as
determined in accordance with criteria
established by the Director of the Office of
Management and Budget, and
``(ii) the amount in controversy for any
taxable year generally does not exceed the
amount specified in section 7463.
``(2) Clinic.--The term `clinic' includes--
``(A) a clinical program at an accredited law school
in which students represent low income taxpayers in
controversies arising under this title, and
``(B) an organization described in section 501(c) and
exempt from tax under section 501(a) which satisfies
the requirements of paragraph (1) through
representation of taxpayers or referral of taxpayers to
qualified representatives.
``(3) Qualified representative.--The term `qualified
representative' means any individual (whether or not an
attorney) who is authorized to practice before the Internal
Revenue Service or the applicable court.
``(c) Special Rules and Limitations.--
``(1) Aggregate limitation.--Unless otherwise provided by
specific appropriation, the Secretary shall not allocate more
than $3,000,000 per year (exclusive of costs of administering
the program) to grants under this section.
``(2) Limitation on annual grants to a clinic.--The aggregate
amount of grants which may be made under this section to a
clinic for a year shall not exceed $100,000.
``(3) Multi-year grants.--Upon application of a qualified low
income taxpayer clinic, the Secretary is authorized to award a
multi-year grant not to exceed 3 years.
``(4) Criteria for awards.--In determining whether to make a
grant under this section, the Secretary shall consider--
``(A) the numbers of taxpayers who will be served by
the clinic, including the number of taxpayers in the
geographical area for whom English is a second
language,
``(B) the existence of other low income taxpayer
clinics serving the same population,
``(C) the quality of the program offered by the low
income taxpayer clinic, including the qualifications of
its administrators and qualified representatives, and
its record, if any, in providing service to low income
taxpayers, and
``(D) alternative funding sources available to the
clinic, including amounts received from other grants
and contributions, and the endowment and resources of
the institution sponsoring the clinic.
``(5) Requirement of matching funds.--A low income taxpayer
clinic must provide matching funds on a dollar for dollar basis
for all grants provided under this section. Matching funds may
include--
``(A) the salary (including fringe benefits) of
individuals performing services for the clinic, and
``(B) the cost of equipment used in the clinic.
Indirect expenses, including general overhead of the
institution sponsoring the clinic, shall not be counted as
matching funds.''
(b) Clerical Amendment.--The table of sections for chapter 77 is
amended by adding at the end the following new section:

``Sec. 7525. Low income taxpayer
clinics.''

Subtitle H--Other Matters

SEC. 371. ACTIONS FOR REFUND WITH RESPECT TO CERTAIN ESTATES WHICH HAVE
ELECTED THE INSTALLMENT METHOD OF PAYMENT.

(a) In General.--Section 7422 is amended by redesignating subsection
(j) as subsection (k) and by inserting after subsection (i) the
following new subsection:
``(j) Special Rule for Actions With Respect to Estates for Which An
Election Under Section 6166 Is Made.--
``(1) In general.--The district courts of the United States
and the United States Court of Federal Claims shall have
jurisdiction over any action brought by the representative of
an estate to which this subsection applies to determine the
correct amount of the estate tax liability of such estate (or
for any refund with respect thereto) even if the full amount of
such liability has not been paid.
``(2) Estates to which subsection applies.--This subsection
shall apply to any estate if, as of the date the action is
filed--
``(A) an election under section 6166 is in effect
with respect to such estate,
``(B) no portion of the installments payable under
such section have been accelerated, and
``(C) all installments the due date for which is on
or before the date the action is filed have been paid.
``(3) Prohibition on collection of disallowed liability.--If
the court redetermines under paragraph (1) the estate tax
liability of an estate, no part of such liability which is
disallowed by a decision of such court which has become final
may be collected by the Secretary, and amounts paid in excess
of the installments determined by the court as currently due
and payable shall be refunded.''
(b) Extension of Time To File Refund Suit.--Section 7479 (relating to
declaratory judgments relating to eligibility of estate with respect to
installment payments under section 6166) is amended by adding at the
end the following new subsection:
``(c) Extension of Time To File Refund Suit.--The 2-year period in
section 6532(a)(1) for filing suit for refund after disallowance of a
claim shall be suspended during the 90-day period after the mailing of
the notice referred to in subsection (b)(3) and, if a pleading has been
filed with the Tax Court under this section, until the decision of the
Tax Court has become final.''
(c) Effective Date.--The amendments made by this section shall apply
to any claim for refund filed after the date of the enactment of this
Act.

SEC. 372. CATALOGING COMPLAINTS.

In collecting data for the report required under section 1211 of
Taxpayer Bill of Rights 2 (Public Law 104-168), the Secretary of the
Treasury or the Secretary's delegate shall maintain records of taxpayer
complaints of misconduct by Internal Revenue Service employees on an
individual employee basis.

SEC. 373. ARCHIVE OF RECORDS OF INTERNAL REVENUE SERVICE.

(a) In General.--Subsection (l) of section 6103 (relating to
confidentiality and disclosure of returns and return information) is
amended by adding at the end the following new paragraph:
``(17) Disclosure to national archives and records
administration.--The Secretary shall, upon written request from
the Archivist of the United States, disclose or authorize the
disclosure of returns and return information to officers and
employees of the National Archives and Records Administration
for purposes of, and only to the extent necessary in, the
appraisal of records for destruction or retention. No such
officer or employee shall, except to the extent authorized by
subsections (f), (i)(7), or (p), disclose any return or return
information disclosed under the preceding sentence to any
person other than to the Secretary, or to another officer or
employee of the National Archives and Records Administration
whose official duties require such disclosure for purposes of
such appraisal.''
(b) Conforming Amendments.--Section 6103(p) is amended--
(1) in paragraph (3)(A), by striking ``or (16)'' and
inserting ``(16), or (17)'',
(2) in paragraph (4), by striking ``or (14)'' and inserting
``, (14), or (17)'' in the matter preceding subparagraph (A),
and
(3) in paragraph (4)(F)(ii), by striking ``or (15)'' and
inserting ``, (15), or (17)''.
(c) Effective Date.--The amendments made by this section shall apply
to requests made by the Archivist of the United States after the date
of the enactment of this Act.

SEC. 374. PAYMENT OF TAXES.

The Secretary of the Treasury or the Secretary's delegate shall
establish such rules, regulations, and procedures as are necessary to
allow payment of taxes by check or money order made payable to the
United States Treasury.

SEC. 375. CLARIFICATION OF AUTHORITY OF SECRETARY RELATING TO THE
MAKING OF ELECTIONS.

Subsection (d) of section 7805 is amended by striking ``by
regulations or forms''.

SEC. 376. LIMITATION ON PENALTY ON INDIVIDUAL'S FAILURE TO PAY FOR
MONTHS DURING PERIOD OF INSTALLMENT AGREEMENT.

(a) In General.--Section 6651 (relating to failure to file tax return
or to pay tax) is amended by adding at the end the following new
subsection:
``(h) Limitation on Penalty on Individual's Failure To Pay for Months
During Period of Installment Agreement.--No addition to the tax shall
be imposed under paragraph (2) or (3) of subsection (a) with respect to
the tax liability of an individual for any month during which an
installment agreement under section 6159 is in effect for the payment
of such tax to the extent that imposing an addition to the tax under
such paragraph for such month would result in the aggregate number of
percentage points of such addition to the tax exceeding 9.5.''
(b) Effective Date.--The amendment made by this section shall apply
for purposes of determining additions to the tax for months beginning
after the date of the enactment of this Act.

Subtitle I--Studies

SEC. 381. PENALTY ADMINISTRATION.

The Joint Committee on Taxation shall conduct a study--
(1) reviewing the administration and implementation by the
Internal Revenue Service of the penalty reform provisions of
the Omnibus Budget Reconciliation Act of 1989, and
(2) making any legislative and administrative recommendations
it deems appropriate to simplify penalty administration and
reduce taxpayer burden.
Such study shall be submitted to the Committee on Ways and Means of the
House of Representatives and the Committee on Finance of the Senate not
later than 9 months after the date of enactment of this Act.

SEC. 382. CONFIDENTIALITY OF TAX RETURN INFORMATION.

The Joint Committee on Taxation shall conduct a study of the scope
and use of provisions regarding taxpayer confidentiality, and shall
report the findings of such study, together with such recommendations
as it deems appropriate, to the Congress not later than one year after
the date of the enactment of this Act. Such study shall examine the
present protections for taxpayer privacy, the need for third parties to
use tax return information, and the ability to achieve greater levels
of voluntary compliance by allowing the public to know who is legally
required to file tax returns, but does not file tax returns.

TITLE IV--CONGRESSIONAL ACCOUNTABILITY FOR THE INTERNAL REVENUE SERVICE

Subtitle A--Oversight

SEC. 401. EXPANSION OF DUTIES OF THE JOINT COMMITTEE ON TAXATION.

(a) In General.--Section 8021 (relating to the powers of the Joint
Committee on Taxation) is amended by adding at the end the following
new subsections:
``(e) Investigations.--The Joint Committee shall review all requests
(other than requests by the chairman or ranking member of a Committee
or Subcommittee) for investigations of the Internal Revenue Service by
the General Accounting Office, and approve such requests when
appropriate, with a view towards eliminating overlapping
investigations, ensuring that the General Accounting Office has the
capacity to handle the investigation, and ensuring that investigations
focus on areas of primary importance to tax administration.
``(f) Relating to Joint Hearings.--
``(1) In general.--The Chief of Staff, and such other staff
as are appointed pursuant to section 8004, shall provide such
assistance as is required for joint hearings described in
paragraph (2).
``(2) Joint hearings.--On or before April 1 of each calendar
year after 1997, there shall be a joint hearing of two members
of the majority and one member of the minority from each of the
Committees on Finance, Appropriations, and Government Affairs
of the Senate, and the Committees on Ways and Means,
Appropriations, and Government Reform and Oversight of the
House of Representatives, to review the strategic plans and
budget for the Internal Revenue Service. After the conclusion
of the annual filing season, there shall be a second annual
joint hearing to review the other matters outlined in section
8022(3)(C).''
(b) Effective Dates.--
(1) Subsection (e) of section 8021 of the Internal Revenue
Code of 1986, as added by subsection (a) of this section, shall
apply to requests made after the date of enactment of this Act.
(2) Subsection (f) of section 8021 of the Internal Revenue
Code of 1986, as added by subsection (a) of this section, shall
take effect on the date of the enactment of this Act.

SEC. 402. COORDINATED OVERSIGHT REPORTS.

(a) In General.--Paragraph (3) of section 8022 (relating to the
duties of the Joint Committee on Taxation) is amended to read as
follows:
``(3) Reports.--
``(A) To report, from time to time, to the Committee
on Finance and the Committee on Ways and Means, and, in
its discretion, to the Senate or House of
Representatives, or both, the results of its
investigations, together with such recommendations as
it may deem advisable.
``(B) To report, annually, to the Committee on
Finance and the Committee on Ways and Means on the
overall state of the Federal tax system, together with
recommendations with respect to possible simplification
proposals and other matters relating to the
administration of the Federal tax system as it may deem
advisable.
``(C) To report, annually, to the Committees on
Finance, Appropriations, and Government Affairs of the
Senate, and to the Committees on Ways and Means,
Appropriations, and Government Reform and Oversight of
the House of Representatives, with respect to--
``(i) strategic and business plans for the
Internal Revenue Service;
``(ii) progress of the Internal Revenue
Service in meeting its objectives;
``(iii) the budget for the Internal Revenue
Service and whether it supports its objectives;
``(iv) progress of the Internal Revenue
Service in improving taxpayer service and
compliance;
``(v) progress of the Internal Revenue
Service on technology modernization; and
``(vi) the annual filing season.''
(b) Effective Date.--The amendment made by this section shall take
effect on the date of the enactment of this Act.

Subtitle B--Budget

SEC. 411. FUNDING FOR CENTURY DATE CHANGE.

It is the sense of Congress that the Internal Revenue Service efforts
to resolve the century date change computing problems should be funded
fully to provide for certain resolution of such problems.

SEC. 412. FINANCIAL MANAGEMENT ADVISORY GROUP.

The Commissioner shall convene a financial management advisory group
consisting of individuals with expertise in governmental accounting and
auditing from both the private sector and the Government to advise the
Commissioner on financial management issues, including--
(1) the continued partnership between the Internal Revenue
Service and the General Accounting Office;
(2) the financial accounting aspects of the Internal Revenue
Service's system modernization;
(3) the necessity and utility of year-round auditing; and
(4) the Commissioner's plans for improving its financial
management system.

Subtitle C--Tax Law Complexity

SEC. 421. ROLE OF THE INTERNAL REVENUE SERVICE.

It is the sense of Congress that the Internal Revenue Service should
provide the Congress with an independent view of tax administration,
and that during the legislative process, the tax writing committees of
the Congress should hear from front-line technical experts at the
Internal Revenue Service with respect to the administrability of
pending amendments to the Internal Revenue Code of 1986.

SEC. 422. TAX COMPLEXITY ANALYSIS.

(a) In General.--Chapter 92 (relating to powers and duties of the
Joint Committee on Taxation) is amended by adding at the end the
following new section:

``SEC. 8024. TAX COMPLEXITY ANALYSIS.

``(a) In General.--If--
``(1) legislation is reported by the Committee on Finance of
the Senate, the Committee on Ways and Means of the House of
Representatives, or any committee of conference, and
``(2) such legislation includes any provision amending the
Internal Revenue Code of 1986,
the report or statement accompanying such legislation shall contain a
Tax Complexity Analysis prepared by the staff of the Joint Committee on
Taxation.
``(b) Content of Complexity Analysis.--Each Tax Complexity Analysis
shall identify the provisions, if any, adding significant complexity or
providing significant simplification, as determined by the staff of the
Joint Committee on Taxation, and shall include the basis for such
determination.
``(c) Legislation Subject to Point of Order.--It shall not be in
order in the Senate or the House of Representatives to consider any
legislation described in subsection (a) required to be accompanied by a
Tax Complexity Analysis that does not contain a Tax Complexity
Analysis.
``(d) Responsibilities of the Commissioner.--The Commissioner shall
provide the Joint Committee on Taxation with such information as is
necessary to prepare Tax Complexity Analyses.''
(b) Clerical Amendment.--The table of sections for chapter 92 is
amended by adding at the end the following new item:

``Sec. 8024. Tax complexity analysis.''

(c) Effective Date.--The amendments made by this section shall apply
to legislation considered on or after January 1, 1998.

TITLE V--CLARIFICATION OF DEDUCTION FOR DEFERRED COMPENSATION

SEC. 501. CLARIFICATION OF DEDUCTION FOR DEFERRED COMPENSATION.

(a) In General.--Subsection (a) of section 404 is amended by adding
at the end the following new paragraph:
``(11) Determinations relating to deferred compensation.--
``(A) In general.--For purposes of determining under
this section--
``(i) whether compensation of an employee is
deferred compensation, and
``(ii) when deferred compensation is paid,
no amount shall be treated as received by the employee,
or paid, until it is actually received by the employee.
``(B) Exception.--Subparagraph (A) shall not apply to
severance pay.''
(b) Sick Leave Pay Treated Like Vacation Pay.--Paragraph (5) of
section 404(a) is amended by inserting ``or sick leave pay'' after
``vacation pay''.
(c) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to taxable years ending after October 8, 1997.
(2) Change in method of accounting.--In the case of any
taxpayer required by this section to change its method of
accounting for its first taxable year ending after October 8,
1997--
(A) such change shall be treated as initiated by the
taxpayer,
(B) such change shall be treated as made with the
consent of the Secretary of the Treasury, and
(C) the net amount of the adjustments required to be
taken into account by the taxpayer under section 481 of
the Internal Revenue Code of 1986 shall be taken into
account in such first taxable year.

I. SUMMARY AND BACKGROUND

A. Purpose and Summary

H.R. 2676, as amended, modifies the structure and
procedures of the Internal Revenue Service (``IRS''), provides
IRS personnel flexibilities, encourages electronic filing,
provides additional taxpayer rights and protections, modifies
Congressional oversight of the IRS, and provides a revenue
offset relating to the treatment of the employer deduction for
vacation pay.

Title I--Executive branch governance

The bill establishes within the Treasury Department the
Internal Revenue Service Oversight Board (the ``Board''). The
general responsibility of the Board is to oversee the IRS in
the administration, management, conduct, direction, and
supervision of the execution and application of the internal
revenue laws. The Board is to have the following specific
responsibilities: to review and approve strategic plans of the
IRS; to review the operational functions of the IRS; to provide
for the review of the Commissioner's selection, evaluation and
compensation of senior managers; to review and approve plans
for major reorganizations; and to review and approve the budget
of the IRS prepared by the Commissioner. The Board is to be
composed of 8 private-life members appointed by the President
with the advice and consent of the Senate, plus the Secretary
of the Treasury (or the Deputy Secretary), the IRS
Commissioner, and a representative of a union representing a
significant number of IRS employees (who would be appointed by
the President, with the advice and consent of the Senate).
The bill provides that the IRS Commissioner is appointed as
under present law by the President, with the advice and consent
of the Senate. However, the Board has the authority to
recommend candidates for Commissioner to the President, and to
recommend removal of the Commissioner. The Commissioner has
such duties and powers as prescribed by the Secretary. Unless
otherwise prescribed by the Secretary, such duties include
certain statutorily enumerated duties. The Secretary must
notify the Congress of any changes in the duties delegated to
the Commissioner.
The bill deletes the present-law funding mechanism for the
employee plans and exempt organizations division of the IRS in
Code section 7802(b)(2). Such funding mechanism has never been
utilized under present law.
The bill makes changes relating to the Taxpayer Advocate
designed to strengthen the office, and prohibits Executive
Branch influence over taxpayer audits and collection activity.
The bill also makes certain changes to facilitate IRS
personnel flexibilities.

Title II. Electronic filing

The bill provides rules designed to facilitate and
encourage electronic filing of tax returns, whenever feasible.
Under the bill, electronic filing is encouraged by the use of
advertising, development of incentives, and setting a goal of
80 percent of returns to be electronically filed by the year
2007. With respect to information returns, submitters are
encouraged to use electronic filing by extending the due date
for filing from February 28 to March 31. The bill requires
development of procedures to facilitate electronic filing,
including those that would permit the Secretary to accept
returns without a manual signature. The bill also requires the
IRS to study and develop procedures to implement a return free
system. The IRS also must develop procedures that would permit,
to the extent feasible, taxpayers who use electronic filing to
review their account information electronically.

Title III. Taxpayer bill of rights 3

The bill contains a number of provisions designed to
strengthen the rights of taxpayers in their dealings with the
Internal Revenue Service. Among the more significant of these
provisions are modifying the burden of proof, providing more
generous innocent spouse relief, protecting the confidentiality
of tax advice, expanding the conditions under which taxpayers
can receive awards of attorney's fees in disputes with the IRS,
permitting taxpayers to receive civil damages for negligence by
the IRS in collection actions, and suspending the statute of
limitations on filing refund claims during periods of
disability.

Title IV. Congressional accountability for the Internal Revenue Service

The bill provides that all requests for studies of the IRS
by the General Accounting Office (other than requests by the
Chair or ranking member of a committee or subcommittee) must be
approved by the Joint Committee on Taxation. The bill provides
for two joint hearings a year of the 6 Congressional Committees
with oversight jurisdiction over the IRS. The Joint Committee
on Taxation is required to report annually to the tax-writing
committees on the state of the Federal tax system, and at the
joint hearings.
The bill provides that a committee report or conference
report on tax legislation is to include a Tax Complexity
Analysis prepared by the staff of the Joint Committee on
Taxation.

Title V. Clarification of deduction for vacation pay

The bill overrules a Tax Court decision by providing that
vacation pay that is actually received by employees more than
2\1/2\ months after the end of the year is not deductible until
paid by the employer. Under the bill, amounts are not
considered received by employees or paid unless they are
actually received. Letters of credit, trusts, and similar
mechanisms will not constitute payment or receipt.

B. Background and Need for Legislation

The National Commission on Restructuring the Internal
Revenue Service (the ``Commission'') was established to review
the present practices of the Internal Revenue Service (``IRS'')
and to make recommendations for modernizing and improving its
efficiency and taxpayer services. The Commission's report,
issued June 25, 1997 \1\ contains recommendations relating to
executive branch governance and management of the IRS,
Congressional oversight of the IRS, personnel flexibilities,
customer service and compliance, technology modernization,
electronic filing, tax law simplification, taxpayer rights, and
financial accountability. H.R. 2292, introduced on July 30,
1997, by Mr. Portman and Mr. Cardin, generally mirrors the
recommendations of the Commission.
---------------------------------------------------------------------------
\1\ Report of the National Commission on Restructuring the Internal
Revenue Service, ``A Vision For a New IRS,'' June 25, 1997.
---------------------------------------------------------------------------
H.R. 2676 builds on the Commission's report and
recommendations and the provisions of H.R. 2292 to provide for
a more effective IRS in its administration of the tax laws and
in improving the IRS's service and responsiveness to taxpayers.

C. Legislative History

Committee bill

H.R. 2676 \2\ was introduced by Chairman Archer and Messrs.
Portman and Cardin on October 21, 1997, and was amended by the
Committee in a markup on October 22, 1997. An amendment in the
nature of a substitute (offered by Chairman Archer) was adopted
by a voice vote, with a quorum present. The bill, as amended,
was ordered favorably reported by a roll call of 33 yeas and 4
nays on October 22, 1997, with a quorum present.
---------------------------------------------------------------------------
\2\ An earlier, related proposal was introduced by Messrs. Portman
and Cardin on July 30, 1997, as H.R. 2292.
---------------------------------------------------------------------------

Committee hearings

Full Committee.--The Committee held public hearings on
September 16-17, 1997, on the recommendations of the National
Commission on Restructuring the Internal Revenue Service.
Subcommittee on Oversight.--The Subcommittee on Oversight
held public hearings on IRS-related topics in 1997 as follows:
Annual Report of the Internal Revenue Service
Taxpayer Advocate (February 25, 1997).
``High-Risk'' Programs Within the Jurisdiction of the
Committee on Ways and Means (March 4, 1997).
IRS Budget for Fiscal Year 1998 and the 1997 Tax
Return Filing Season (March 18, 1997).
Electronic Federal Tax Payment System (April 16,
1997).
Report of the National Commission on Restructuring
the Internal Revenue Service (July 24, 1997).
Recommendations of the National Commission on
Restructuring the Internal Revenue Service to Expand
Electronic Filing of Tax Returns (September 9, 1997).
Recommendations of the National Commission on
Restructuring the Internal Revenue Service on Taxpayer
Protections and Rights (September 26, 1997).
In addition, the Subcommittee on Oversight submitted
recommendations on October 20, 1997, to the Full Committee
relating to (1) electronic filing and (2) taxpayer rights and
protections. These Subcommittee recommendations are the basis
for the provisions in Title II and Title III, respectively, of
the Committee bill. Chairman Archer had directed the
Subcommittee on Oversight to review these two areas of the
Commission's report and to make recommendations to the Full
Committee.

II. EXPLANATION OF THE BILL

TITLE I. EXECUTIVE BRANCH GOVERNANCE

A. Creation of IRS Oversight Board

(sec. 101 of the bill and sec. 7802 of the Code)

Present Law

Under present law, the administration and enforcement of
the internal revenue laws are performed by or under the
supervision of the Secretary of the Treasury.\3\
---------------------------------------------------------------------------
\3\ Code sec. 780(a).
---------------------------------------------------------------------------
Present law imposes standards of ethical conduct on Federal
employees in order to avoid conflicts of interest. Criminal
penalties are imposed on violations of these standards. In some
cases, less strict standards apply to special government
employees than to regular, full-time Federal government
employees. In general, a special government employee is an
individual who is expected to serve no more than 130 days
during any 365-day period.
In general, the ethical conduct rules (1) prohibit a
Federal employee from accepting compensation for representing
clients before the agency in which the employee serves or
against the United States; \4\ (2) prohibit a Federal employee
from acting as agent or attorney for anyone in a claim against
the United States; \5\ (3) impose post-employment restrictions
on senior employees in order to prohibit the unfair use of
prior Government employment; \6\ and (4) prohibit a Federal
employee from participating personally and substantially in
matters that affect his or her own financial interest or that
of persons with certain relationships to the employee.\7\
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\4\ 18 U.S.C. sec. 203.
\5\ 18 U.S.C. sec. 205.
\6\ 18 U.S.C. sec. 207.
\7\ 18 U.S.C. sec. 208.
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In the case of a special government employee who serves
less than 60 days in the preceding 365 days, the restrictions
in (1) and (2) above only apply with respect to matters in
which the special government employee personally and
substantially participated in his or her official capacity.
One of the post-employment restrictions prohibits senior
government employees from representing parties other than the
United States before their former department or agency for one
year after employment. This restriction does not apply to
special government employees who serve less than 60 days in the
final 1-year period of service.
Federal government employees compensated at certain pay
grades are subject to public financial disclosure requirements.
Special government employees who serve less than 60 days in a
year are not subject to the public financial disclosure
requirements, but are subject to confidential financial
disclosure requirements.

Reasons for Change

The Committee believes that a well-run IRS is critical to
the operation of our tax system. Public confidence in the IRS
must be restored so that our system of voluntary compliance
will not be compromised. The Committee believes that most
Americans are willing to pay their fair share of taxes, and
that public faith in the IRS is key to maintaining that
willingness.
The National Commission on Restructuring the IRS (the
``Restructuring Commission''), which conducted a year-long
study of the IRS, found that a number of factors contribute to
current IRS management problems, including the following. While
the Treasury is responsible for IRS oversight, it has generally
provided little consistent strategic oversight or guidance to
the IRS. The Secretary and Deputy Secretary have many other
broad responsibilities, and generally leave the IRS largely
independent. The average tenure of an IRS Commissioner is under
3 years, as is the average tenure of senior Treasury officials
responsible for IRS oversight. Many of the issues that need to
be addressed by the IRS will require expertise in various
areas, particularly management and technology.
The Restructuring Commission concluded that ``problems
throughout the IRS cannot be solved without focus, consistency
and direction from the top. The current structure, which
includes Congress, the President, the Department of the
Treasury, and the IRS itself, does not allow the IRS to set and
maintain consistent long-term strategy and priorities, nor to
develop and execute focused plans for improvement.
Additionally, the structure does not ensure that the IRS
budget, staffing and technology are targeted toward achieving
organizational success.''
The Committee shares the concerns of the Commission, and
agrees that fundamental change in IRS management and oversight
is essential. The Committee believes that a new management
structure that will bring greater expertise in more areas,
focus, and continuity will help the IRS on the path toward
becoming an efficient, responsive, and respected agency that
always acts appropriately in carrying out its functions.
The Committee believes that private sector input is a
necessary part of any new management structure. The Committee
believes that the ethics rules applicable to special government
employees (without regard to exceptions for length of service
or pay grade) should be applied to the private sector members
of the new IRS management. These rules will enhance the ability
of such members to demonstrate impartiality in the performance
of their duties, while not unduly restricting the available
pool of potential candidates.
The Committee is aware that the taxpaying public may never
relish contacts with the agency responsible for collecting
taxes. Nevertheless, by establishing a new managementstructure
that will better enable the IRS to develop and fulfill long-term goals,
the Committee believes that the IRS will be able to gain public
support, and will make contacts with the IRS as infrequent and as
pleasant as possible. The Committee is also aware that changes being
made to IRS management structure are not the final step, and that
continued oversight of the IRS, by Congress as well as the
Administration, is necessary in order to ensure long-term progress.

explanation of provision

Duties, responsibilities, and powers of the IRS Oversight Board

The bill provides for the establishment within the Treasury
Department of the Internal Revenue Service Oversight Board
(referred to as the ``Board''). The general responsibilities of
the Board are to oversee the Internal Revenue Service (the
``IRS'') in its administration, management, conduct, direction,
and supervision of the execution and application of the
internal revenue laws. The Board has no responsibilities or
authority with respect to (1) the development and formulation
of Federal tax policy relating to existing or proposed internal
revenue laws, (2) law enforcement activities of the IRS,
including compliance activities such as criminal
investigations, examinations, and collection activities,\8\ and
(3) specific procurement activities of the IRS (e.g., selecting
vendors or awarding contracts). As discussed more fully in Part
B., below, the Board also has the authority to recommend
candidates for IRS Commissioner to the President, and to
recommend removal of the Commissioner. The members of the Board
do not have authority to receive confidential taxpayer return
information.\9\
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\8\ This provision is not intended to limit the Board's authority
with respect to the review and approval of strategic plans and the
budget of the Commissioner or to preclude the Board from review of IRS
operations generally.
\9\ The bill does not affect the extent to which the Secretary of
the Treasury (or the Deputy Secretary) and the IRS Commissioner have
authority to receive confidential taxpayer return information under
present law by virtue of such positions. Any request for information
that cannot be disclosed to Board members and any contact relating to a
specific tax payer made by a private-life Board member or the union
representative to an employee of the IRS must be reported by such
employee to the Secretary and Joint Committee on Taxation.
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The Board has the following specific responsibilities: (1)
to review and approve strategic plans of the IRS, including the
establishment of mission and objectives (and standards of
performance) and annual and long-range strategic plans; (2) to
review the operational functions of the IRS, including plans
for modernization of the tax system, out sourcing or managed
competition, and training and education; (3) to provide for the
review of the Commissioner's selection, evaluation and
compensation of senior managers; and (4) to review and approve
the Commissioner's plans for major reorganization of the IRS.
It is intended that major reorganizations subject to the
Board's review and approval are limited to major changes in
organizational structure, such as the 1995 IRS reorganization
that combined 7 regions into 4 and 63 districts into 33. In
addition, the Board will review and approve the budget request
of the IRS prepared by the Commissioner, submit such budget
request to the Secretary, and ensure that the budget request
supports the annual and long-range strategic plans of the IRS.
The Secretary is required to submit the budget request approved
by the Board to the President, who is required to submit such
request, without revision, to the Congress together with the
President's annual budget request for the IRS. The bill does
not affect the ability of the President to include, in
addition, his own budget request relating to the IRS.
It is intended that the Board will reach a formal decision
on all matters subject to its review. With respect to those
matters over which the Board has approval authority, the
Board's decisions are determinative. It is fully expected that,
with respect to those matters over which the Board has approval
authority (other than as relates to the development of the
budget), the Secretary will exert his or her oversight
responsibility over the IRS by working through and with the
Board.\10\
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\10\ The budget is excepted from this expectation because the bill
provides a separate mechanism through which the Secretary may act. The
procedures relating to the Board permit the President to submit his own
budget in addition to that approved by the Board.
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The Board is required to report each year to the President
and the Congress regarding the conduct of its responsibilities.
It is expected that the Treasury Department will no longer
utilize the IRS Management Board once the new Board created by
the bill is in place, as the functions of the IRS Management
Board would be taken over by the new Board.

Composition of the Board

The Board is composed of 11 members. Eight of the members
are so-called ``private-life'' members who are not Federal
officers or employees. These private-life members will be
appointed by the President, with the advice and consent of the
Senate. The remaining members are (1) the Secretary of the
Treasury (or, if the Secretary so designates, the Deputy
Secretary of the Treasury), (2) a representative from a union
representing a substantial number of IRS employees, who will be
appointed by the President with the advice and consent of the
Senate, and \11\ (3) the Commissioner of the IRS.
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\11\ In appointing the union representative, the President is not
constrained to choose an individual recommended by a union covering IRS
employees, but may choose whoever the President determines to be an
appropriate representative of the union.
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The private-life members of the Board are to be appointed
based on their expertise in the following areas: management of
large service organizations; customer service; the Federal tax
laws, including administration and compliance; information
technology; organizationdevelopment; and the needs and concerns
of taxpayers. In the aggregate, the members of the Board should
collectively bring to bear expertise in all these enumerated areas.
The private-life members are considered special government
employees during the entire period of their appointment. That
is, they will be considered to be performing services as a
special government employee on each day during their
appointment, not just on those days on which they actually
perform services. Thus, they will be subject to the ethical
conduct rules applicable to special government employees who
serve more than 60 days during any 365-day period. Thus, for
example, private-life Board members would not be able to
represent clients before the IRS on matters during their term
as a Board member. Private-life Board members would also be
subject to the 1-year post-employment restriction applicable to
senior-level employees. Finally, private-life members would be
subject to the public financial disclosure rules generally
applicable to special government employees above certain pay
grades.

Compensation of Board members

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

Administrative matters

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

Claims against Board members

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

effective date

The provisions of the bill relating to the Board are
effective on the date of enactment. The President is directed
to submit nominations for Board members to the Senate within 6
months of the date of enactment.

B. Appointment and Duties of IRS Commissioner

(secs. 102 and 103 of the bill and secs. 7803 and 7804 of the Code)

present law

Within the Department of the Treasury is a Commissioner of
Internal Revenue, who is appointed by the President, with the
advice and consent of the Senate. The Commissioner has such
duties and powers as may be prescribed by the Secretary.\12\
The Secretary has delegated to the Commissioner the
administration and enforcement of the internal revenue
laws.\13\ The Commissioner generally does not have authority
with respect to policy matters.\14\
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\12\ Code sec. 7802(a).
\13\ Treasury Order 150-10 (April 22, 1982).
\14\ See, e.g., Treasury Order 111-2 (March 16, 1981), which
delegates to the Assistant Secretary (Tax Policy) the exclusive
authority to make the final determination of the Treasury Department's
position with respect to issues of tax policy arising in connection
with regulations, published Revenue Rulings and Revenue Procedures, and
tax return forms and to determine the time, form and manner for the
public communication of such position.
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The Secretary is authorized to employ such persons as the
Secretary deems appropriate for the administration and
enforcement of the internal revenue laws and to assign posts of
duty.

reasons for change

The Committee believes that the duties and responsibilities
of the Commissioner are of such significance that the
Commissioner should continue to be appointed by the
President.\15\ However, the frequency with which the
Commissioner changes--the average tenure in office is under 3
years--is one of the factors contributing to lack of IRS
management continuity. The Committee believes (as did the
National Commission on Restructuring the IRS) that providing a
statutory term for the Commissioner to serve would help ensure
greater continuity of IRS management.
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\15\ Retaining present law also eliminates any constitutional
issues that may arise if the Commissioner is appointed by someone other
than the President, such as by the Board, as suggested by the National
Commission on Restructuring the IRS.
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The Committee believes that it is appropriate to preserve
the present-law structure under which the duties of the
Commissioner are delegated by the Secretary of the Treasury.
Modifying this structure may unnecessarily interfere with the
operations of the IRS and other agencies withing the Treasury.
In order to enable the Congress to properly fulfill its
oversight responsibilities with respect to the IRS, the
Committee believes that the Congress should be notified of
changes in the delegation of authority to the Commissioner.

explanation of provision

As under present law, the Commissioner will be appointed by
the President, with the advice and consent of the Senate, and
can be removed at will by the President. The Commissioner will
be appointed to a 5-year term, beginning with the date of
appointment. The Board has the power to recommend candidates to
the President for Commissioner. The Board has the authority to
recommend the removal of the Commissioner. Although the
President is not required to nominate for Commissioner a
candidate recommended by the Board (or to remove a Commissioner
when the Board so recommends), it is expected that the
President will generally give deference to the Board's
expertise and familiarity with the needs and functions of the
IRS and will act in accordance with the Board's
recommendations.
The Commissioner has such duties and powers as prescribed
by the Secretary. Unless otherwise specified by the Secretary,
such duties and powers include the power to administer, manage,
conduct, direct, and supervise the execution and application of
the internal revenue laws or related statutes and tax
conventions to which the United States is a party and to
recommend to the President a candidate for Chief Counsel (and
recommend the removal of the Chief Counsel). It is intended
that the listed duties codify present delegations. However, if
the Secretary changes such orders, they may be subject to the
notice requirement of the bill, described below.
If the Secretary determines not to delegate the specified
duties to the Commissioner, such determination will not take
effect until 30 days after the Secretary notifies the House
Committees on Ways and Means, Government Reform and Oversight,
and Appropriations, the Senate Committees on Finance,
Government Operations, and Appropriations, and the Joint
Committee on Taxation.
This provision is not intended to alter the Secretary's
existing authority to delegate to agencies other than the IRS
the authority to administer and enforce certain portions of the
internal revenue laws. For example, the Secretary currently has
delegated to the Bureau of Alcohol, Tobacco and Firearms the
authority to administer and enforce the taxes under section
4181 and chapters 51, 52, and 53 of the Internal Revenue Code
(regarding excise and other taxes on alcohol, tobacco,
firearms, and destructive devices).
The Commissioner is to consult with the Board on all
matters within the Board's authority (other than the
recommendation of candidates for Commissioner and the
recommendation to remove the Commissioner). With respect to
those matters within the Board's approval authority (other than
with respect to the development of the budget), it is fully
expected that the Secretary will exert his or her oversight
responsibility over the IRS by working through and with the
Board.\16\
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\16\ The budget is excepted from this expectation because the bill
provides a separate mechanism through which the Secretary may act.
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Unless otherwise specified by the Secretary, the
Commissioner is authorized to employ such persons as the
Commissioner deems proper for the administration and
enforcement of the internal revenue laws and would be required
to issue all necessary directions, instructions, orders, and
rules applicable to such persons. Unless otherwise provided by
the Secretary, the Commissioner will determine and designate
the posts of duty.
The Commissioner is compensated as under present law.

effective date

The provisions of the bill relating to the Commissioner
generally are effective on the date of enactment. The provision
relating to the 5-year term of office applies to the
Commissioner in office on the date of enactment. This 5-year
term runs from the date of appointment.

C. Structure and Funding of the Employee Plans and Exempt Organizations
(``EP/EO'') Division

(sec. 102 of the bill and sec. 7802(b) of the Code)

Present Law

Prior to 1974, no one specific office in the IRS had
primary responsibility for employee plans and tax-exempt
organizations. As part of the reforms contained in the Employee
Retirement Income Security Act of 1974 (``ERISA''), Congress
statutorily created the Office of Employee Plans and Exempt
Organizations (``EP/EO'') under the direction of an Assistant
Commissioner.\17\ EP/EO was created to oversee deferred
compensation plans governed by sections 401-414 of the Code and
organizations exempt from tax under Code section 501(a).
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\17\ Code section 7802(b).
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In general, EP/EO was established in response to concern
about the level of IRS resources devoted to oversight of
employee plans and exempt organizations. The legislative
history of Code section 7802(b) states that, with respect to
administration of laws relating to employee plans and exempt
organizations, ``the natural tendency is for the Service to
emphasize those areas that produce revenue rather than those
areas primarily concerned with maintaining the integrity and
carrying out the purposes of exemption provisions.'' \18\
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\18\ S. Rept. 93-383, 108 (1973). See also H. Rept. 93-807, 104
(1974).
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To provide funding for the new EP/EO office, ERISA
authorized the appropriation of an amount equal to the sum of
the section 4940 excise tax on investment income of private
foundations (assuming a rate of 2 percent) as would have been
collected during the second preceding year plus the greater of
the same amount or $30 million.\19\ However, amounts raised by
the section 4940 excise tax have never been dedicated to the
administration of EP/EO, but are transferred instead to general
revenues. Thus, the level of EP/EO funding, like that of the
rest of the IRS, is dependent on annual Congressional
appropriations to the Treasury Department.
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\19\ Code section 7802(b)(2).
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Reasons for Change

The Committee believes that it is important to retain the
Office of Employee Plans and Exempt Organizations under the
supervision and direction of an Assistant Commissioner of the
Internal Revenue. Because of EP/EO's expertise in the area of
retirement benefits, the Committee believes that its
responsibilities should be expanded to include nonqualified
deferred compensation arrangements. In addition, the inclusion
of an annual reporting mechanism in the bill is designed to
ensure that the Commissioner is adequately informed regarding
the activities of EP/EO.
The funding formula for EP/EO set forth in section
7802(b)(2) would, if utilized, result in an unstable level of
funding that may bear little or no relation to the amount of
financial resources actually required by the EP/EO division. In
repealing the funding mechanism, however, the Committee notes
that, given the magnitude of the sectors EP/EO is charged with
regulating, as well as the unique nature of its mandate, an
adequately funded EP/EO is extremely important to the efficient
and fair administration of the Federal tax system. Accordingly,
financial resources for EP/EO should not be constrained on the
basis that EP/EO is a ``non-core'' IRS function; rather, EP/EO,
like all functions of the IRS, should be funded so as to
promote the efficient and fair administration of the Federal
tax system.

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

D. Taxpayer Advocate

(sec. 102 of the bill and sec. 7803 of the Code)

Present Law

In 1996, the Taxpayer Bill of Rights 2 (``TBOR 2'') \20\
established the position of Taxpayer Advocate, which replaced
the position of Taxpayer Ombudsman, created in 1979 by the IRS.
Before the creation of the Taxpayer Advocate, the Taxpayer
Ombudsman was a career civil servant selected by and serving at
the pleasure of the IRS Commissioner. The Taxpayer Advocate is
appointed by and reports directly to the IRS Commissioner.
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\20\ Public Law 104-168 (July 30, 1996).
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TBOR 2 also created the office of the Taxpayer Advocate.
The functions of the office are (1) to assist taxpayers in
resolving problems with the IRS, (2) to identify areas in which
taxpayers have problems in dealings with the IRS, (3) to
propose changes (to the extent possible) in the administrative
practices of the IRS that will mitigate those problems, and (4)
to identify potential legislative changes that may mitigate
those problems.
The Taxpayer Advocate is required to submit two annual
reports to the tax-writing committees, one, due by June 30,
that describes the objectives of the Taxpayer Advocate for the
next fiscal year and another, due by December 31, that
describes the activities of the Taxpayer Advocate for the
previous fiscal year. The December 31 report must identify what
the Taxpayer Advocate has done to improve taxpayer services and
IRS responsiveness, contain recommendations received from
individuals who have the authority to issue a Taxpayer
Assistance Order, describe in detail the progress made in
implementing those recommendations, contain a summary of at
least 20 of the most serious problems encountered by taxpayers
in dealing with the IRS, include recommendations for such
administrative and legislative action as may be appropriate to
resolve such problems, describe the extent to which regional
problem resolution officers participate in the selection and
evaluation of local problem resolution officers, and include
other such information as the Taxpayer Advocate may deem
advisable. The reports are submitted without review by the
Commissioner, the Secretary of the Treasury, or any other
officer or employee of the Department of Treasury or the Office
of Management and Budget.

Reasons for Change

The Committee believes that the Taxpayer Advocate serves an
important role within the IRS in terms of preserving taxpayer
rights and solving problems that taxpayers encounter in their
dealings with the IRS. To that end, it is appropriate that the
IRS Oversight Board have input in the selection of the Taxpayer
Advocate. In addition, the Committee believes that the Taxpayer
Advocate should have experience appropriate to the position and
that the Taxpayer Advocate's objectivity would be best
preserved by limiting future employment with the IRS. The
Committee also believes that the reporting requirements of the
Taxpayer Advocate should be targeted not only towards solving
problems with the IRS but also towards preventing problems
before they arise.

Explanation of Provision

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

Effective Date

This provision is effective on the date of enactment,
except that the post-employment restrictions on the Taxpayer
Advocate do not apply to an individual holding that position on
the date of enactment.

E. Prohibition on Executive Branch Influence Over Taxpayer Audits

(sec. 104 of the bill and new sec. 7217 of the Code)

Present Law

There is no explicit prohibition in the Code on high-level
Executive Branch influence over taxpayer audits and collection
activity.
The Internal Revenue Code prohibits disclosure of tax
returns and return information, except to the extent
specifically authorized by the Internal Revenue Code (sec.
6103). Unauthorized disclosure is a felony punishable by a fine
not exceeding $5,000 or imprisonment of not more than five
years, or both (sec. 7213). An action for civil damages also
may be brought for unauthorized disclosure (sec. 7431).

Reasons for Change

The Committee believes that the perception that it is
possible that high-level Executive Branch influence over
taxpayer audits and collection activity could occur has a
negative influence on taxpayers' views of the tax system.
Accordingly, the Committee believes that it is appropriate to
prohibit such influence.

Explanation of Provision

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

Effective Date

The provision applies to violations occurring after the
date of enactment.

F. IRS Personnel Flexibilities

(sec. 111 of the bill and new secs. 9301-9304 of title 5, U.S.C.)

Present Law

The Internal Revenue Service, like almost all other federal
agencies, is subject to the personnel rules and procedures set
forth in title 5, United States Code. As such, its employees
generally are classified under the General Schedule or the
Senior Executive Service.

Reasons for Change

Under the existing personnel rules and procedures set forth
in title 5, hiring, evaluating, promoting, and firing employees
is subject to extensive regulation. Given the role of the IRS
in the federal government, its unique needs in terms of skilled
tax, technology, and service personnel, and its present needs
to motivate its managers and employees to embrace continuous
improvements and cost savings while maintaining adequate levels
of service for taxpayers, the Committee finds that certain
flexibilities are appropriate and will facilitate the efforts
of the IRS to better manage its workforce.
The Committee finds that the vast majority of IRS employees
are competent professionals who perform their jobs as well as
can be expected under existing organizational constraints.
However, over the past decade, the quality of IRS interaction
with taxpayers and the public has deteriorated, in part due to
lower personnel qualifications, pay levels, and training
quality. In addition, the stovepipe nature of IRS operations,
in which functional units such as taxpayer services, exam,
collection, and appeals set and implement their own priorities
and objectives, which often are disconnected from the other
functions and the organization as a whole, adds to the problem
of decreased taxpayer service. Moreover, the risk averse nature
of the IRS, which provides minimal incentive for managers or
front-line employees for achieving mission, stifles creativity,
innovation, and quick problem resolution.
Consistent with the rest of this bill, the Committee
intends section 111 to lead to increased accountability on the
part of IRS managers and employees and increased focus on the
IRS mission, goals, and objectives. At the core of this
accountability and focus lies increased attention on providing
adequate levels of service to taxpayers. The Committee believes
that taxpayers should deal only with IRS employees who are
trained adequately and possess the skills and tools necessary
to do their jobs well. To provide such service to taxpayers,
the Committee expects the IRS to use the flexibilities provided
by this section to hire and promote qualified professionals, to
provide incentives for employees to treat taxpayers with the
service and respect that they deserve, and to discipline
employees who cannot or will not treat taxpayers fairly. In
short, the Committee expects the IRS to hold all workers--from
senior managers to front-line employees--accountable for
carrying out the IRS mission.

Explanation of Provision

In general

Section 111 of the bill would amend title 5, United States
Code, by inserting a new chapter 93 providing certain personnel
flexibilities to the IRS. By providing these flexibilities in
this manner, the Committee intends for the IRS to remain
subject to all of the rules and procedures of title 5, except
to the extent that the exercise of flexibilities provided under
this new chapter 93 is inconsistent with prior law.
The bill clarifies that the personnel flexibilities for the
IRS are intended to be exercised consistently with existing
rules relating to merit system principles, prohibited personnel
practices, and preference eligibles. Moreover, the Committee
believes that the employees of the IRS should be involved in
the reinvention of the bureaucracies in which they work.
Accordingly, the bill provides that the flexibilities provided
to the IRS must be negotiated between the IRS and the
employees' union. Such negotiations need not address all of the
flexibilities provided under this provision. The written
agreement should be a consensus document, but is not a contract
that can be appealed to the federal services impasse panel, or
otherwise create additional appeal rights. To the extent that
the exercise of any flexibility, such as that provided by new
section 9303(c), would not affect members of the employees'
union, then no written agreement is required.

Performance management

The bill would require the IRS to establish a new
performance management system within one year from the date of
enactment. The Committee expects that this system will refocus
the IRS's personnel system on the overall mission of the IRS
and how each employee's performance relates to that mission.
The new performance standards are premised on the notion of
retention--performance at the retention standard indicates that
an employee has performed fully successfully, no better or
worse. Failure to meet this standard indicates that the
employee has not performed adequately, and managers should use
the tools available to encourage the employee to improve
performance, or if such efforts do not lead to improved
performance, to remove the employee. The performance standard
above the retention standard is intended to encourage employees
to perform at a higher level, and to allow managers to make
performance distinctions among employees.
The Committee encourages the IRS to redesign its
performance measures to more appropriately align employee
behavior with organizational goals. One of the most significant
efforts that the IRS must undertake in this regard is to design
internal measures that will encourage behavior which makes it
easier for taxpayers to interact with the IRS. While this will
involve significant effort, the Committee expects that these
measures will bring the organizational goals and objectives,
including those established under the Government Performance
and Results Act of 1993 and Revenue Procedure 64-22, down to
the individual employee level. In addition, the Committee
expects the IRS to develop taxpayer service surveys that will
gauge the level of service that taxpayers actually receive, for
use in evaluating organizational and group performance. In no
case should measures be used which rank employees or groups of
employees based solely on enforcement results, establish dollar
goals for assessments or collections, or otherwise undermine
fair treatment of taxpayers. While any system of measures must
reflect the efficiency and productivity of employees, the
Committee expects that the IRS will establish a balanced system
of measures that will ensure that taxpayer satisfaction is
paramount throughout all IRS functions.

Awards

There are three types of awards specifically referenced in
the bill. First, certain awards for superior accomplishments
will continue to require certification to the Office of
Personnel Management (OPM), but absent objection from OPM
within 60 days, the Commissioner's recommendations for such
awards will take effect. As with all awards, these awards
should be made based on performance under the new performance
management system, and in no case should awards be made (or
performance measured) based solely or principally on tax
enforcement results.
The second category of awards relates to the most senior
managers in the IRS. The Commissioner will have discretion,
upon consultation with the IRS Oversight Board established
under section 101 of this bill, to make awards of up to 50
percent of salary to such managers, so long as the total
compensation for an employee as a result of such an award does
not equal or exceed the annual rate of compensation for the
Vice President for such calendar year. As with awards for
superior accomplishments, OPM will have 60 days to object. The
Commissioner will be required to prescribe regulations defining
how determinations will be made as to whether an employee is
eligible for such awards. In no case, however, will more than 8
employees be eligible to receive such awards in any calendar
year. Moreover, it is not expected that all of the eligible
pool will receive such awards each year, or that the full 50
percent would be appropriate, except in cases of extraordinary
performance.
Finally, the third category of awards--based on savings--is
intended to encourage the practice of rewarding employees for
developing more efficient methods of administration. The
Committee encourages the IRS to establish programs that
encourage employee input into reorganizing business processes
leading to efficiency gains, and sharing resultant savings with
employees. Provided that taxpayers receive adequate levels of
service, the Committee expects that such gainsharing awards
will help to improve the efficiency of the IRS.

Streamlined procedures

The bill provides two tools to streamline the process of
taking certain adverse actions for poor performance. First, the
notice period for taking adverse actions is reduced from 30
days to 15 days. At the discretion of the IRS, and in
accordance with regulations issued by OPM, this period can be
extended.
Second, the bill prohibits appeals of the denial of a step
increase to the Merit Systems Protections Board. Aggrieved
employees nonetheless can appeal such actions pursuant to
internal agency procedures, including any procedures agreed to
pursuant to collective bargaining agreements or pursuant to the
written agreement under section 9301(b) authorizing the use of
this flexibility.

Staffing flexibilities

The bill provides the IRS with flexibility in filling
certain permanent appointments in the competitive service by
authorizing the IRS to fill such vacancies with either
qualified veterans or qualified temporary employees. For
purposes of this provision, a qualified veteran is an
individual who is either a preference eligible or has been
separated from the armed forces under honorable conditions
after at least three years of active service, and who meets the
minimum qualifications for the vacant position. A qualified
temporary employee is defined under the bill as a temporary
employee of the IRS with at least two years of continuous
service, who has met all applicable retention standards and who
meets the minimum qualifications for the vacant position.
The bill also authorizes the IRS to establish category
rating systems for evaluating job applicants, under which
qualified candidates are divided into two or more quality
categories on the basis of relative degrees of merit, rather
than assigned individual numerical ratings. Managers would be
authorized to select any candidate from the highest quality
category, and would not be limited to the three highest ranked
candidates, as is the case under existing law. In administering
these category rating systems, the IRS generally will be
required to list preference eligibles ahead of other
individuals within each quality category. Nonetheless, the
appointing authority can select any candidate from the highest
quality category, as long as existing requirements relating to
passing over preference eligibles are satisfied.
The bill authorizes the Commissioner to reassign or remove
career appointees in the Senior Executive Service immediately
upon taking office. While the Committee does not intend for any
Commissioner to make wholesale management changes without
thorough evaluations, the Committee believes that if the
Commissioner is to be held accountable, then the Commissioner
must have the flexibility to recruit his own management team.
The bill authorizes the Commissioner to establish probation
periods for IRS employees of up to 3 years, when the
Commissioner determines that a shorter period is not sufficient
for an employee to demonstrate proficiency in a position.

Demonstration projects

The bill makes it easier for the IRS to establish
demonstration projects under title 5. The Committee expects
that the IRS will use this flexibility to establish
demonstration projects to improve personnel management,
particularly to the extent that such projects lead to increased
individual accountability. For example, the IRS might use this
flexibility to establish demonstration projects involving
broad-banded pay systems or alternative classification systems,
to provide for variations in the existing rules regarding grade
and pay retention, or to provide for variations from existing
provisions relating to payment of recruitment, relocation, and
retention bonuses. In addition, the Committee expects that the
IRS will use this flexibility to develop more efficient means
of handling employee appeals of personnel actions. No
flexibility can be exercised under this provision that does not
preserve due process for employees, however.
To allow the IRS the flexibility to establish these and
other demonstration projects, as appropriate, the bill
authorizes any number of projects, and exempts the IRS from
many of the requirements applicable to demonstration projects
under section 4703 of title 5, United States Code.
Specifically, the bill eliminates the requirement that the IRS
submit plans to establish demonstration projects to a public
hearing, and streamlines the advance notice requirements of
section 4703. In addition, the bill allows the IRS to establish
demonstration projects for any number of its employees, and
gives the Commissioner greater latitude in working with OPM to
develop and implement demonstration projects. The bill
maintains a number of the existing prohibitions on
demonstration projects, including the prohibition on using
demonstration projects to waive any requirement of title 5
relating to family and medical leave. As with the other
personnel flexibilities provided under this section, the bill
requires the IRS to negotiate a written agreement with the
employees' union to the extent that the implementation of a
demonstration project affects such employees.
The bill establishes a general time limitation of 5 years
on the duration of any demonstration project established under
this section. However, if the Commissioner and the Director of
OPM concur, a demonstration project may be extended for an
additional 2 years if necessary to validate the results of the
project. Not later than 6 months prior to the termination of a
project, the bill requires the Commissioner to submit a
legislative proposal to the Congress if the Commissioner
determines that such project should be made permanent.

Effective Date

The provisions shall take effect on the date of the
enactment of this Act.

TITLE II. ELECTRONIC FILING

A. Electronic Filing of Tax and Information Returns

(sec. 201 of the bill and sec. 6011 of the Code)

Present Law

Treas. Reg. section 1.6012-5 provides that the Commissioner
may authorize, at the option of a person required to make a
return, the use of a composite return in lieu of a paper
return. An electronically filed return is a composite return
consisting of electronically transmitted data and certain paper
documents that cannot be electronically transmitted. Form 8453
is a paper form that must be received by the IRS before any
electronically filed return is complete. Form 8453 provides
signature information to the IRS.
The IRS conducted the first test of electronic filing in
1986, for a limited number of tax year 1985 returns.\21\ In
1990, the IRS permitted nationwide electronic filing of returns
that had refunds owing.\22\ In 1991, the IRS accepted
electronically filed returns that had balances due.\23\ In
1993, the IRS established an electronic filing goal of 80
million tax returns by 2001. During the 1997 tax filing season,
the IRS received approximately 20 million individual tax
returns electronically.
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\21\ Rev. Proc. 86-4, 1986-1 C.B. 423.
\22\ Rev. Proc. 90-62, 1990-2 C.B. 659.
\23\ Rev. Proc. 91-69, 1991-2 C.B. 893.
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Reasons for Change

The Committee believes that the implementation of a
comprehensive strategy to encourage electronic filing of tax
and information returns holds significant potential to benefit
taxpayers and make the IRS returns processing function more
efficient. For excample, the error rate associated with
processing paper tax returns is approximately 20 percent, half
of which is attributable to the IRS and half to error in
taxpayer data. Because electronically-filed returns usually are
prepared using computer software programs with built-in
accuracy checks, undergo pre-screening by the IRS, and
experience no key punch errors, electronic returns have an
error rate of less than one percent. Thus, the Committee
believes that an expansion of electronic filing will
significantly reduce errors (and the resulting notices that are
triggered by such errors). In addition, taxpayers who file
their returns electronically receive confirmation from the IRS
that their return was received.

Explanation of Provision

The bill states that the policy of Congress is to promote
paperless filing, with a long-range goal of providing for the
filing of at least 80 percent of all tax returns in electronic
form by the year 2007. The bill requires the Secretary of the
Treasury to establish a strategic plan to eliminate barriers,
provide incentives, and use competitive market forces to
increase taxpayer use of electronic filing. The strategic plan
initially targets returns prepared in electronic form but filed
in paper form, such as a return prepared by the taxpayer using
return preparation software, which the taxpayer then printed
and filed in paper form. The bill requires all such returns to
be filed electronically, to the extent feasible, by the year
2002.
The bill requires the Secretary to create an electronic
commerce advisory group comprised of representatives from the
small business, tax practitioner, preparer, and computerized
tax processor communities and other representatives from the
electronic filing industry. Under the bill, the Chair of the
IRS Oversight Board, together with the Secretary and the Chair
of the electronic commerce advisory group, are required to
report annually to the tax-writing committees on the IRS's
progress in implementing its plan to meet the goal of 80
percent electronic filing by 2007.
To promote electronic filing, the bill authorizes the
Secretary to publicize the benefits of electronic filing by
using mass communications and other means. In addition, the
bill authorizes the Secretary to implement procedures for
paying appropriate incentives for electronically filed returns.
This provision is not intended to override section 1205 of the
Taxpayer Relief Act of 1997,\24\ which prohibits the IRS from
paying fees to credit card companies in connection with
receiving tax payments by credit card.
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\24\ Public Law 105-34 (August 5, 1997).
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Effective Date

The provision is effective on the date of enactment.

B. Time for Filing Certain Information Returns With the IRS

(sec. 202 of the bill and sec. 6071 of the Code)

Present Law

Information such as the amount of dividends, partnership
distributions, and interest paid during the tax year must be
supplied to taxpayers by the payors by January 31 of the year
following the calendar year for which the return must be filed.
The payors must file an information return with the IRS with
the information by February 28 of the year following the
calendar year for which the return must be filed. Under present
law, the due date for information returns is the same whether
such returns are filed on paper, on magnetic media, or
electronically. Most information returns are filed on magnetic
media (such as computer tapes) which must be physically shipped
to the IRS.

Reasons for Change

The Committee believes that encouraging information return
filers to file electronically will substantially increase the
efficiency of the tax system by avoiding the need to convert
the information from magnetic media or paper to electronic form
before return matching.

Explanation of Provision

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

Effective Date

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

C. Paperless Electronic Filing

(sec. 203 of the bill and sec. 6061 of the Code)

Present Law

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

Reasons for Change

Electronically filed returns cannot provide the maximum
efficiency for taxpayers and the IRS under current rules that
require signature information to be filed on paper. Also,
taxpayers need to know how the IRS will determine the filing
date of a return filed electronically. The Committee believes
that more types of returns could be filed electronically if
proper procedures were in place.

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

D. Return-Free Tax System

(sec. 204 of the bill)

Present Law

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

Reasons for Change

The Committee believes that it would benefit taxpayers to
be relieved, to the extent feasible, from the burden of
determining tax liability and filing returns.

Explanation of Provision

The bill requires the Secretary or his delegate to study
the feasibility of and develop procedures for the
implementation of a return-free tax system for taxable years
beginning after 2007. The Secretary is required annually to
report to the tax-writing committees on the progress of the
development of such system, including what additional resources
the IRS would need to implement the system, the changes to the
Internal Revenue Code that would facilitate the system, the
procedures developed to date, and the number and classes of
taxpayers who would be permitted to use such a system. The
Secretary is required to make the first report on the
development of the return-free filing system to the tax-writing
committees on June 30, 1999. It is contemplated that the
return-free filing system would initially be targeted at
taxpayers who had taxable income from wages, interest,
dividends, pensions, and unemployment compensation; did not
itemize deductions; and did not take any tax credits other than
the earned income tax credit.\25\
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\25\ See ``The President's Tax Proposals to Congress for Fairness,
Growth, and Simplicity,'' at 115 (May 1985) and The GAO Report on Tax
Administration Alternative Filing Systems (October 1996).
---------------------------------------------------------------------------

Effective Date

The provision is effective on the date of enactment.

E. Access to Account Information

(sec. 205 of the bill)

Present Law

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

Reasons for Change

The Committee believes, to the extent feasible, that
taxpayers should have access to their account information held
by the IRS. If taxpayers file electronically, they should be
able to review the information electronically, to the extent
feasible.

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

TITLE III. TAXPAYER BILL OF RIGHTS 3

A. Burden of Proof

(sec. 301 of the bill and new sec. 7491 of the Code)

Present Law

Under present law, a rebuttable presumption exists that the
Commissioner's determination of tax liability is correct.\26\
``This presumption in favor of the Commissioner is a procedural
device that requires the plaintiff to go forward with prima
facie evidence to support a finding contrary to the
Commissioner's determination. Once this procedural burden is
satisfied, the taxpayer must still carry the ultimate burden of
proof or persuasion on the merits. Thus, the plaintiff not only
has the burden of proof of establishing that the Commissioner's
determination was incorrect, but also of establishing the merit
of its claims by a preponderance of the evidence''.\27\
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\26\ Welch v. Helvering, 290 U.S. 111, 115 (1933).
\27\ Danville Plywood Corp. v. U.S., U.S. Cl. Ct., 63 AFTR 2d 89-
1036, 1043 (1989); citations omitted.
---------------------------------------------------------------------------
The general rebuttable presumption that the Commissioner's
determination of tax liability is correct is a fundamental
element of the structure of the Internal Revenue Code. Although
this presumption is judicially based, rather than legislatively
based, there is considerable evidence that the presumption has
been repeatedly considered and approved by the Congress. This
is the case because the Internal Revenue Code contains a number
of civil provisions that explicitly place the burden of proof
on the Commissioner in specifically designated circumstances.
The Congress would have enacted these provisions only if it
recognized and approved of the general rule of presumptive
correctness of the Commissioner's determination. A list of
these civil provisions follows.
(1) Fraud.--Any proceeding involving the issue of whether
the taxpayer has been guilty of fraud with intent to evade tax
(secs. 7454(a) and 7422(e)).
(2) Required reasonable verification of information
returns.--In any court proceeding, if a taxpayer asserts a
reasonable dispute with respect to any item of income reported
on an information returned filed with the Secretary by a third
party and the taxpayer has fully cooperated with the Secretary
(including providing, within a reasonable period of time,
access to and inspection of all witnesses, information, and
documents within the control of the taxpayer as reasonably
requested by the Secretary), the Secretary has the burden of
producing reasonable and probative information concerning such
deficiency in addition to such information return (sec.
6201(d)).
(3) Foundation managers.--Any proceeding involving the
issue of whether a foundation manager has knowingly
participated in prohibited transactions (sec. 7454(b)).
(4) Transferee liability.--Any proceeding in the Tax Court
to show that a petitioner is liable as a transferee of property
of a taxpayer (sec. 6902(a)).
(5) Review of jeopardy levy or assessment procedures.--Any
proceeding to review the reasonableness of a jeopardy levy or
jeopardy assessment (sec. 7429(g)(1)).
(6) Property transferred in connection with performance of
services.--In the case of property subject to a restriction
that by its terms will never lapse and that allows the
transferee to sell only at a price determined under a formula,
the price is deemed to be fair market value unless established
to the contrary by the Secretary (sec. 83(d)(1)).
(7) Illegal bribes, kickbacks, and other payments.--As to
whether a payment constitutes an illegal bribe, illegal
kickback, or other illegal payment (sec. 162(c)(1) and (2)).
(8) Golden parachute payments.--As to whether a payment is
a parachute payment on account of a violation of any generally
enforced securities laws or regulations (sec. 280G(b)(2)(B)).
(9) Unreasonable accumulation of earnings and profits.--In
any Tax Court proceeding as to whether earnings and profits
have been permitted to accumulate beyond the reasonable needs
of the business, provided that the Commissioner has not
fulfilled specified procedural requirements (sec. 534).
(10) Expatriation.--As to whether it is reasonable to
believe that an individual's loss of citizenship would result
in a substantial reduction in the individual's income taxes or
transfer taxes (secs. 877(e), 2107(e), 2501(a)(4)).
(11) Public inspection of written determinations.--In any
proceeding seeking additional disclosure of information (sec.
6110(f)(4)(A)).
(12) Penalties for promoting abusive tax shelters, aiding
and abetting the understatement of tax liability, and filing a
frivolous income return.--As to whether the person is liable
for the penalty (sec. 6703(a)).
(13) Income tax return preparers' penalty.--As to whether a
preparer has willfully attempted to understate tax liability
(sec. 7427).
(14) Status as employees.--As to whether individuals are
employees for purposes of employment taxes (pursuant to the
safe harbor provisions of section 530 of the Revenue Act of
1978).\28\
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\28\ Public Law 95-600 (November 6, 1978), as amended by section
1122 of the Small Business Job Protection Act of 1996 (Public Law 104-
188; August 20, 1996).
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Reasons for Change

The Committee is concerned that individual and small
business taxpayers frequently are at a disadvantage when forced
to litigate with the Internal Revenue Service. The Committee
believes that the present burden of proof rules contribute to
that disadvantage. The Committee believes that, all other
things being equal, facts asserted by individual and small
business taxpayers who fully cooperate with the IRS and satisfy
all relevant substantiation requirements should be accepted.
The Committee believes that shifting the burden of proof to the
Secretary in such circumstances will create a better balance
between the IRS and such taxpayers, without encouraging tax
avoidance.

Explanation of Provision

The bill provides that the Secretary shall have the burden
of proof in any court proceeding with respect to a factual
issue if the taxpayer asserts a reasonable dispute with respect
to any such issue relevant to ascertaining the taxpayer's
income tax liability. Two conditions apply. First, the taxpayer
must fully cooperate at all times with the Secretary (including
providing, within a reasonable period of time, access to and
inspection of all witnesses, information, and documents within
the control of the taxpayer, as reasonably requested by the
Secretary).\29\ Full cooperation also includes providing
reasonable assistance to the Secretary in obtaining access to
and inspection of witnesses, information, or documents not
within the control of the taxpayer (including any witnesses,
information, or documents located in foreign countries \30\). A
necessary element of fully cooperating with the Secretary is
that the taxpayer must exhaust his or her administrative
remedies (including any appeal rights provided by the IRS). The
taxpayer is not required to agree to extend the statute of
limitations to be considered to have fully cooperated with the
Secretary. Second, certain taxpayers must meet the net worth
limitations that apply for awarding attorney's fees. In
general, corporations, trusts, and partnerships whose net worth
exceeds $7 million are not eligible for the benefits of the
provision. The taxpayer has the burden of proving that it meets
each of these conditions, because they are necessary
prerequisites to establishing that the burden of proof is on
the Secretary.
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\29\ This requirement parallels the present-law provision relating
to reasonable verification of information returns (sec. 6201(d)).
\30\ Full cooperation also includes providing English translations,
as reasonably requested by the Secretary.
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The provision explicitly states that nothing in the
provision shall be construed to override any requirement under
the Code or regulations to substantiate any item. Accordingly,
taxpayers must meet all applicable substantiation requirements,
whether generally imposed \31\ or imposed with respect to
specific items, such as charitable contributions \32\ or meals,
entertainment, travel, and certain other expenses.\33\
Substantiation requirements include any requirement of the Code
or regulations that the taxpayer establish an item to the
satisfaction of the Secretary.\34\ Taxpayers who fail to
substantiate any item in accordance with the legal requirement
of substantiation will not have satisfied all of the legal
conditions that are prerequisite to claiming the item on the
taxpayer's tax return and will accordingly be unable to avail
themselves of this provision regarding the burden of proof.
Thus, if a taxpayer required to substantiate an item fails to
do so in the manner required (or destroys the substantiation),
this burden of proof provision is inapplicable.\35\
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\31\ See e.g., Sec. 6001 and Treas. Reg. sec. 1.6001-1 requiring
every person liable for any tax imposed by this Title to keep such
records as the Secretary may from time to time prescribe, and secs.
6038 and 6038A requiring United States persons to furnish certain
information the Secretary may prescribe with respect to foreign
businesses controlled by the U.S. person.
\32\ Sec. 170(a)(1) and (f)(8) and Treas. Reg. sec. 1.170A-13.
\33\ Sec. 274(d) and Treas. Reg. sec. 1.274(d)-1, 1.274-5T, and
1.274-5A.
\34\ For example, sec. 905(b) of the Code provides that foreign tax
credits shall be allowed only if the taxpayer establishes to the
satisfaction of the Secretary all information necessary for the
verification and computation of the credit. Instructions for meeting
that requirement are set forth in Treas. Reg. sec. 1.905-2.
\35\ If, however, the taxpayer can demonstrate that he had
maintained the required substantiation but that it was destroyed or
lost through no fault of the taxpayer, such as by fire or flood,
existing tax rules regarding reconstruction of those records would
continue to apply.
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Effective Date

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

B. Proceedings by Taxpayers

1. Expansion of Authority to Award Costs and Certain Fees (sec. 311 of
the bill and sec. 7430 of the Code)

Present Law

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

Reasons for Change

The Committee believes that taxpayers should be allowed to
recover the reasonable administrative costs they incur where
the IRS takes a position against the taxpayer that is not
substantially justified, beginning at the time that the IRS
establishes its initial position by issuing a letter of
proposed deficiency which allows the taxpayer an opportunity
for administrative review in the IRS Office of Appeals. In
determining what constitutes reasonable costs, the Committee
believes that either the difficulty of issues or the limited
local availability of tax expertise may justify the payment of
higher hourly rates.
The Committee believes that the pro bono publicum
representation of taxpayers should be encouraged and the value
of the legal services rendered in these situations should be
recognized. Where the IRS takes positions that are not
substantially justified, it should not be relieved of its
obligation to bear reasonable administrative and litigation
costs because representation was provided the taxpayer on a pro
bono basis.
The Committee is concerned that the IRS may continue to
litigate issues that have previously been decided in favor of
taxpayers in other circuits. The Committee believes that this
places an undue burden on taxpayers that are required to
litigate such issues. Accordingly, the Committee believes it is
important that the court take into account whether the IRS has
lost in the courts of appeals of other circuits on similar
issues in determining whether the IRS has taken a position that
is not substantially justified and thus liable for reasonable
administrative and litigation costs.

Explanation of Provision

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

Effective Date

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

2. Civil Damages for Negligence in Collection Actions (sec. 312 of the
bill and sec. 7433 of the Code)

Present Law

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

Reasons for Change

The Committee believes that taxpayers should also be able
to recover economic damages they incur as a result of the
negligent disregard of the Code or regulations by an officer or
employee of the IRS in connection with a collection matter.

Explanation of Provision

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

Effective Date

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

3. Increase in Size of Cases Permitted on Small Case Calendar (sec. 313
of the bill and sec. 7463 of the Code)

Present Law

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

Reasons for Change

The Committee believes that use of the small case
procedures should be expanded.

Explanation of Provision

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

Effective Date

The provision applies to proceedings commenced after the
date of enactment.

C. Relief for Innocent Spouses and Persons With Disabilities

1. Innocent Spouse Relief (sec. 321 of the bill and new sec. 6015 of
the Code)

Present law

Spouses who file a joint tax return are each fully
responsible for the accuracy of the return and for the full tax
liability. This is true even though only one spouse may have
earned the wages or income which is shown on the return. This
is ``joint and several'' liability. A spouse who wishes to
avoid joint liability may file as a ``married person filing
separately.''
Relief from liability for tax, interest and penalties is
available for ``innocent spouses'' in certain limited
circumstances. To qualify for such relief, the innocent spouse
must establish: (1) that a joint return was made; (2) that an
understatement of tax, which exceeds the greater of $500 or a
specified percentage of the innocent spouse's adjusted gross
income for the preadjustment (most recent) year, is
attributable to a grossly erroneous item \36\ of the other
spouse; (3) that in signing the return, the innocent spouse did
not know, and had no reason to know, that there was an
understatement of tax; and (4) that taking into account all the
facts and circumstances, it is inequitable to hold the innocent
spouse liable for the deficiency in tax. The specified
percentage of adjusted gross income is 10 percent if adjusted
gross income is $20,000 or less. Otherwise, the specified
percentage is 25 percent.
---------------------------------------------------------------------------
\36\ Grossly erroneous items include items of gross income that are
omitted from reported income and claims of deductions, credits, or
basis in an amount for which there is no basis in fact of law (code
sec. 6013(e)(2)).
---------------------------------------------------------------------------
It is unclear under present law whether a court may grant
partial innocent spouse relief. The Ninth Circuit Court of
Appeals in Wiksell v. Commissioner \37\ has allowed partial
innocent spouse relief where the spouse did not know, and had
no reason to know, the magnitude of the understatement of tax,
even though the spouse knew that the return may have included
some understatement.
---------------------------------------------------------------------------
\37\ 90 F.3d 1459 (9th Cir. 1997).
---------------------------------------------------------------------------
The proper forum for contesting a denial by the Secretary
of innocent spouse relief is determined by whether an
underpayment is asserted or the taxpayer is seeking a refund of
overpaid taxes. Accordingly, the Tax Court may not have
jurisdiction to review all denials of innocent spouse relief.
No form is currently provided to assist taxpayers in
applying for innocent spouse relief.

Reasons for Change

The Committee is concerned that the innocent spouse
provisions of present law are inadequate. The Committee
believes it is inappropriate to limit innocent spouse relief
only to the most egregious cases where the understatement is
large and the tax position taken is grossly erroneous. The
Committee also believes that partial innocent spouse relief
should be considered in appropriate circumstances, and that all
taxpayers should have access to the Tax Court in resolving
disputes concerning their status as an innocent spouse.
Finally, the Committee believes that taxpayers need to be
better informed of their right to apply for innocent spouse
relief in appropriate cases and that the IRS is the best source
of that information.

Explanation of Provision

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

Effective Date

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

2. Suspension of Statute of Limitations on Filing Refund Claims During
Periods of Disability (sec. 322 of the bill and sec. 6511 of
the Code)

Present Law

In general, a taxpayer must file a refund claim within
three years of the filing of the return or within two years of
the payment of the tax, whichever period expires later (if no
return is filed, the two-year limit applies) (sec. 6511(a)). A
refund claim that is not filed within these time periods is
rejected as untimely.
There is no explicit statutory rule providing for equitable
tolling of the statute of limitations. Several courts have
considered whether equitable tolling implicitly exists. The
First, Third, Fourth, and Eleventh Circuits have rejected
equitable tolling with respect to tax refund claims. The Ninth
Circuit has permitted equitable tolling. However, the U.S.
Supreme Court has reversed the Ninth Circuit in U.S. v.
Brockamp,\38\ holding that Congress did not intend the
equitable tolling doctrine to apply to the statutory
limitations of section 6511 on the filing of tax refund claims.

reasons for change
---------------------------------------------------------------------------

\38\ 117 S. Ct. 849 (1997), reversing 67 F. 3d 260 and 70 F. 3d
120.
---------------------------------------------------------------------------
The Committee believes that, in cases of severe disability,
equitable tolling should be considered in the application of
the statutory limitations on the filing of tax refund claims.

Explanation of Provision

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

Effective Date

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

D. Provisions Relating to Interest

1. Elimination of Interest Differential on Overlapping Periods of
Interest on Income Tax Overpayments and Underpayments (sec. 331
of the bill and sec. 6621 of the Code)

Present Law

A taxpayer that underpays its taxes is required to pay
interest on the underpayment at a rate equal to the Federal
short term interest rate plus three percentage points. A
special ``hot interest'' rate equal to the Federal short term
interest rate plus five percentage points applies in the case
of certain large corporate underpayments.
A taxpayer that overpays its taxes receives interest on the
overpayment at a rate equal to the Federal short term interest
rate plus two percentage points. In the case of corporate
overpayments in excess of $10,000, this is reduced to the
Federal short term interest rate plus one-half of a percentage
point.
If a taxpayer has an underpayment of tax from one year and
an overpayment of tax from a different year that are
outstanding at the same time, the IRS will typically offset the
overpayment against the underpayment and apply the appropriate
interest to the resulting net underpayment or overpayment.
However, if either the underpayment or overpayment have been
satisfied, the IRS will not typically offset the two amounts,
but rather will assess or credit interest on the full
underpayment or overpayment at the underpayment or overpayment
rate. This has the effect of assessing the underpayment at the
higher underpayment rate and crediting the overpayment at the
lower overpayment rate. This results in the taxpayer being
assessed a net interest charge, even if the amounts of the
overpayment and underpayment are the same.
The Secretary has the authority to credit the amount of any
overpayment against any liability under the Code.\39\ Congress
has previously directed the Internal Revenue Service to
consider procedures for ``netting'' overpayments and
underpayments and, to the extent a portion of tax due is
satisfied by a credit of an overpayment, not impose
interest.\40\
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\39\ Code sec. 6402
\40\ Pursuant to TBOR2 (1996), the Secretary conducted a study of
the manner in which the IRS has implemented the netting of interest on
overpayments and underpayments and the policy and administrative
implications of global netting. The legislative history to the General
Agreement on Trade and Tariffs (GATT) (1994) stated that the Secretary
should implement the most comprehensive crediting procedures that are
consistent with sound administrative practice, and should do so as
rapidly as is practicable. A similar statement was included in the
Conference Report to the Omnibus Budget Reconciliation Act of 1990.
---------------------------------------------------------------------------

Reasons for Change

The Committee believes that taxpayers should be charged
interest only on the amount they actually owe, taking into
account overpayments and underpayments from all open years. The
Committee does not believe that the different interest rates
provided for overpayments and underpayments were ever intended
to result in the charging of the differential on periods of
mutual indebtedness.
The Committee is also concerned that current practices
provide an incentive to taxpayers to delay the payment of
underpayments they do not contest, so that the underpayments
will be available to offset any overpayments that are later
determined. The Committee believes that this is contrary to
sound tax administrative practice and that taxpayers should not
be disadvantaged solely because they promptly pay their tax
bills.

Explanation of Provision

The bill establishes a net interest rate of zero on
equivalent amounts of overpayment and underpayment that exist
for any period. Each overpayment and underpayment is to be
considered only once in determining whether equivalent amounts
of overpayment and underpayment exist. The special rules that
increase the interest rate paid on large corporate
underpayments and decrease the interest rate received on
corporate underpayments in excess of $10,000 do not prevent the
application of the net zero rate. The bill applies to income
taxes and self-employment taxes.
For example, following an examination of his 1998 return, a
corporate taxpayer is determined to have overpaid its 1998
taxes by $5,000. Previously, the taxpayer established by an
amended return that it had underpaid its 1999 taxes by $7,000.
The taxpayer has paid the 1999 underpayment, plus interest
determined at the underpayment rate. The statute of limitations
has not run with respect to either 1998 or 1999. In determining
the amount of the refund owed the taxpayer with regard to the
1998 overpayment, the period for which the 1999 underpayment
was outstanding must be taken into account. For all periods in
which the underpayment and overpayment run concurrently (i.e.,
from the due date of the 1999 return until the underpayment was
paid), the interest rate on the $5,000 overpayment and $5,000
of the underpayment must be the same so that the net interest
rate of zero applies.\41\ The interest rate on the remaining
$2,000 of the underpayment that was originally calculated at
the short term Federal rate plus three percent would not be
affected.
---------------------------------------------------------------------------
\41\ In this case, it is assumed that the interest rate on $5,000
of overpayment will be set equal to the underpayment rate for the
period that both the underpayment and overpayment are outstanding in
order to achieve the required net interest rate of zero. However, the
Secretary may use other procedures or methodologies that he deems
appropriate, so long as a zero net interest rate is achieved.
---------------------------------------------------------------------------

Effective Date

The provision applies to interest for calendar quarters
beginning after the date of enactment. Until such time as
procedures are implemented that allow for the automatic
application of this provision by the IRS, the Committee expects
that the Secretary will promptly and carefully consider any
taxpayer's request to have interest charges recalculated in
accordance with this provision. It is expected that the
Secretary will extend the statute of limitations where
necessary to allow for the consideration of such requests.
In light of past Congressional statements urging the
Secretary to eliminate interest rate differentials in these
circumstances, and taking into consideration Congress' belief
that the Secretary may do so, the Committee continues to expect
that the Secretary will implement the most comprehensive
crediting procedures that are consistent with sound
administrative practice, and not only those affected by this
provision.

2. Increase in Overpayment Rate Payable to Taxpayers Other than
Corporations (sec. 332 of the bill and sec. 6621 of the Code)

Present Law

A taxpayer that underpays its taxes is required to pay
interest on the underpayment at a rate equal to the Federal
short-term interest rate (AFR) plus three percentage points. A
taxpayer that overpays its taxes receives interest on the
overpayment at a rate equal to the Federal short-term interest
rate (AFR) plus two percentage points.

Reasons for Change

The Committee believes that the interest differential for
noncorporate taxpayers should be eliminated.

Explanation of Provision

The bill provides that the overpayment interest rate will
be AFR plus three percentage points, except that for
corporations, the rate will remain at AFR plus two percentage
points.

Effective Date

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

E. Protections for Taxpayers Subject to Audit or Collection

1. Privilege of Confidentiality Extended to Taxpayer's Dealings with
Non-attorneys Authorized to Practice Before IRS (sec. 341 of
the bill and sec. 7602 of the Code)

Present Law

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

Reasons for Change

The Committee believes that a right to privileged
communications between a taxpayer and his or her advisor should
be available in noncriminal proceedings before the Internal
Revenue Service, so long as the advisor is authorized to
practice before the Internal Revenue Service. A right to
privileged communications in such situations should not depend
upon whether the advisor is also licensed to practice law. The
Committee believes that it is appropriate to provide for this
right within the Committee's jurisdiction, by applying it to
noncriminal proceedings before the IRS.

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

2. Expansion of Authority to Issue Taxpayer Assistance Orders (sec. 342
of the bill and sec. 7811 of the Code)

Present Law

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

Reasons for Change

The Committee believes that certain factors should
generally be considered by the Taxpayer Advocate in determining
whether a taxpayer assistance order should be issued.

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

3. Limitation on Financial Status Audit Techniques (sec. 343 of the
bill and sec. 7602 of the Code)

Present Law

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

Reasons for Change

The Committee believes that financial status audit
techniques are intrusive, and that their use should be limited
to situations where the IRS already has indications of
unreported income.

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

4. Limitation on Authority to Require Production of Computer Source
Code (sec. 344 of the bill and sec. 7602 of the Code)

Present Law

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

Reasons for Change

The Committee believes that the intellectual property
rights of the developers and owners of computer programs should
be respected and is concerned that the examination of third-
party tax-related computer source code by the IRS could lead to
the diminution of those rights through the inadvertent
disclosure of trade secrets. The Committee also believes that
the indiscriminate examination of computer source code by the
IRS to identify issues on a taxpayer's return would be
inappropriate. Accordingly, the Committee believes that a
summons for the production of third-party tax-related computer
source code should only be issued where the IRS has not
otherwise been able to ascertain through reasonable efforts the
manner in which a taxpayer has arrived at the entry on a return
and has identified with specificity the portion of the computer
source code it seeks to examine.

Explanation of Provision

The Secretary is generally prohibited from issuing (or
beginning an action to enforce) a summons in a civil action for
any portion of any third-party tax-related computer source code
unless (1) the Secretary is unable to otherwise reasonably
ascertain the correctness of an item on a return from the
taxpayer's other books, papers, records, other data, or the
computer software program and associated data itself and (2)
the Secretary first identifies with reasonable specificity the
portion of the computer source code to be used to verify the
correctness of the item.
The Secretary would be considered to have satisfied these
requirements with regard to the identified portion of the
source code if the Secretary makes a formal request for such
materials to both the taxpayer and the owner or developer of
the software that is not satisfied within 90 days. Such formal
request must clearly state that one of the consequences of
failure to respond to the request will be the waiver of any
prohibition on the summons of tax-related computer source code
that might otherwise apply.
The Secretary's determination that the identified portion
of the third-party tax-related computer source code may be
summoned may be contested in any proceeding to enforce the
summons, by any person to whom the summons is addressed. For
this purpose, the special procedures for third-party summonses
\42\ will apply. In any such proceeding, the court may issue
any order that is necessary to prevent the disclosure of trade
secrets or other confidential information.
---------------------------------------------------------------------------
\42\ Sec. 7609
---------------------------------------------------------------------------
For these purposes, tax-related computer source code
includes the human readable instructions for any computer
software program that is used for accounting, tax return
preparation, tax compliance or tax planning, along with the
design and development materials related to such software
program, including any relevant program notes and memoranda.
The prohibition on issuing summons for tax-related computer
source code does not apply in connection with any inquiry into
any offense connected with the administration or enforcement of
the internal revenue laws. A computer software program will not
be treated as tax advice for the purpose of the professional-
client privilege contained in section 341 of this bill.
The prohibition applies only in the case of tax-related
computer software that is intended for commercial distribution.
Source code related to computer software that was developed by,
or primarily for the benefit of, the taxpayer or a related
person (within the meaning of section 267 or 707(b)) for the
internal use of the taxpayer or such related person may
continue to be summonsed by the Secretary to the extent allowed
under present law.

Effective Date

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

5. Procedures Relating to Extensions of Statute of Limitations by
Agreement (sec. 345 of the bill and sec. 6501 of the Code)

Present Law

The statute of limitations within which the IRS may assess
additional taxes is generally three years from the date a
return is filed (sec. 6501).\43\ Prior to the expiration of the
statute of limitations, both the taxpayer and the IRS may agree
in writing to extend the statute, using Form 872 or 872-A. An
extension may be for either a specified period or an indefinite
period. The statute of limitations within which a tax may be
collected after assessment is 10 years after assessment (sec.
6502). Prior to the expiration of the statute of limitations,
both the taxpayer and the IRS may agree in writing to extend
the statute, using Form 900.
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\43\ For this purpose, a return filed before the due date is
considered to be filed on the due date.
---------------------------------------------------------------------------

Reasons for Change

The Committee believes that taxpayers should be fully
informed of their rights with respect to the statute of
limitations.

Explanation of Provision

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

Effective Date

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

6. Offers-in-Compromise (sec. 346 of the bill and sec. 7122 of the
Code)

Present Law

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

Reasons for Change

The Committee believes that taxpayers should be fully
informed of the offer-in-compromise procedures, including the
responsibilities created by those procedures. In determining
whether there is doubt as to the taxpayer's ability fully to
pay the amount owed, the Committee believes that the Secretary
should take into consideration a taxpayer's need to provide for
the basic living expenses of his or her family, based on the
cost of living in the taxpayer's locality.

Explanation of Provision

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

Effective Date

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

7. Notice of Deficiency to Specify Deadlines for Filing Tax Court
Petition (sec. 347 of the bill and sec. 6213 of the Code)

Present Law

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

Reasons for Change

The Committee believes that taxpayers should receive
assistance in determining the time period within which they
must file a petition in the Tax Court and that taxpayers should
be able to rely on the computation of that period by the IRS.

Explanation of Provision

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

Effective Date

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

8. Refund or Credit of Overpayments Before Final Determination (sec.
348 of the bill and sec. 6213 of the Code)

Present Law

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

Reasons for Change

The Committee believes that the Secretary should be allowed
to refund the uncontested portion of an overpayment of taxes,
without regard to whether other portions of the overpayment are
contested.

Explanation of Provision

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

Effective Date

The provision applies on the date of enactment.

9. Threat of Audit Prohibited to Coerce Tip Reporting Alternative
Commitment Agreements (sec. 349 of the bill)

Present Law

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

Reasons for Change

The Committee believes that it is inappropriate for the
Secretary to use the threat of an Internal Revenue Service
audit to induce participation in voluntary programs.

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

F. Disclosures to Taxpayers

1. Explanation of Joint and Several Liability (sec. 351 of the bill)

Present Law

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

Reasons for Change

The Committee believes that married taxpayers need to
clearly understand the legal implications of signing a joint
return and that it is appropriate for the IRS to provide the
information necessary for that understanding.

Explanation of Provision

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

Effective Date

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

2. Explanation of Taxpayers' Rights in Interviews With the IRS (sec.
352 of the bill)

Present Law

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

Reasons for Change

The Committee believes that taxpayers should be more fully
informed of their rights to representation in dealings with the
IRS and that those rights should be respected.

Explanation of Provision

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

Effective Date

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

3. Disclosure of Criteria for Examination Selection (sec. 353 of the
bill)

Present Law

Reasons for Change

The Committee believes it is important that taxpayers
understand the reasons they may be selected for examination.

Explanation of Provision

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

Effective Date

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

4. Explanations of Appeals and Collection Process (sec. 354 of the
bill)

Present Law

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

Reasons for Change

The Committee believes it is important that taxpayers
understand they have a right to have any assessment reviewed by
the IRS Office of Appeals, as well as be informed of the steps
they must take to obtain that review.

Explanation of Provision

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

Effective Date

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

G. Low-Income Taxpayer Clinics

(sec. 361 of the bill and new sec. 7525 of the Code)

Present Law

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

Reasons for Change

The Committee believes that the provision of tax services
by accredited nominal fee clinics to low-income individuals and
those for whom English is a second language will improve
compliance with the Federal tax laws and should be encouraged.

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

H. Other Taxpayer Rights Provisions

1. Actions for Refund with respect to Certain Estates which have
Elected the Installment Method of Payment (sec. 371 of the bill
and sec. 7422 of the Code)

Present Law

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

Reasons for Change

The Committee believes that the refund jurisdiction of the
U.S. Court of Federal Claims and the U.S. district courts
should apply without regard to whether the taxpayer has
elected, and the Secretary accepted, the payment of that tax in
installments.

Explanation of Provision

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

Effective Date

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

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

Present Law

The IRS is required to make an annual report to the
Congress, beginning in 1997, on all categories of instances
involving allegations of misconduct by IRS employees, arising
either from internally identified cases or from taxpayer or
third-party initiated complaints.\44\ The report must identify
the nature of the misconduct or complaint, the number of
instances received by category, and the disposition of the
complaints.
---------------------------------------------------------------------------
\44\ Section 1211 of the Taxpayer Bill of Rights 2 (Public Law 104-
168; July 30, 1996).
---------------------------------------------------------------------------

Reasons for Change

The Committee believes that all allegations of misconduct
by IRS employees must be carefully investigated. The Committee
also believes that the annual report to Congress will help
develop a public perception that the IRS takes such allegations
of misconduct seriously. The Committee is concerned that, in
the absence of records detailing taxpayer complaints of
misconduct on an individual employee basis, the IRS will not be
able to adequately investigate such allegations or properly
prepare the required report.

Explanation of Provision

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

Effective Date

The requirement is effective on the date of enactment.

3. Archive of Records of the IRS (sec. 373 of the bill and sec. 6103 of
the Code)

Present Law

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

IRS obligation to archive records

The IRS, like all other Federal agencies, must create,
maintain, and preserve agency records in accordance with
section 3101 of title 44 of the United States Code. NARA is the
Government agency responsible for overseeing the management of
the records of the Federal government.\45\ Federal agencies are
required to deposit significant and historical records with
NARA.\46\ The head of each Federal agency must also establish
safeguards against the removal or loss of records.\47\
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\45\ 44 U.S.C. sec. 2904.
\46\ 5 U.S.C. sec. 552a(b)(6).
\47\ 44 U.S.C. sec. 3105.
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Authority of NARA

NARA is authorized, under the Federal Records Act, to
establish standards for the selective retention of records of
continuing value.\48\ NARA has the statutory authority to
inspect records management practices of Federal agencies and to
make recommendations for improvement.\49\ The head of each
Federal agency must submit to NARA a list of records to be
destroyed and a schedule for such destruction.\50\ NARA
examines the list to determine if any of the records on the
list have sufficient administrative, legal research, or other
value to warrant their continued preservation. In many cases,
the description of the record on the list is sufficient for
NARA to make the determination. For example, NARA does not need
to inspect Presidential tax returns to determine that they have
historical value and should be retained. In some cases, NARA
may find it helpful to examine a particular record. NARA has
general authority to inspect records solely for the purpose of
making recommendations for the improvement of records
management practices.\51\ However, tax returns and return
information can only be disclosed under the authority provided
in section 6103 of the Internal Revenue Code. There is no
exception to the disclosure prohibition for records management
inspection by NARA.\52\
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\48\ 44 U.S.C. sec. 2905.
\49\ 44 U.S.C. sec. 2904(c)(7).
\50\ 44 U.S.C. sec. 3303.
\51\ 44 U.S.C. sec. 2906.
\52\ American Friends Service Committee v. Webster, 720 F.2d 29
(D.C. Cir. 1983).
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In connection with its evaluation of the records management
system of the IRS, NARA noted several instances where the
disclosure prohibitions of Code section 6103 complicated their
review of many IRS records.
NARA is also responsible for the custody, use and
withdrawal of records transferred to it.\53\ Statutory
provisions that restrict public access to the records in the
hands of the agency from which the records were transferred
also apply to NARA. Thus, if a confidential record, such as a
Presidential tax return, is transferred to NARA for archival
storage, NARA is not permitted to disclose it. In general, the
application of such restrictions to records in the hands of
NARA expire after the records have been in existence for 30
years.\54\ The issue of whether the specific disclosure
prohibition of section 6103 takes precedence over the general
30-year expiration of restrictions generally applicable to
records in the hands of NARA has not been addressed by a court,
but an informal advisory opinion from the Office of Legal
Counsel of the Attorney General concluded that the 30-year
expiration provision would not reach records subject to section
6103.\55\
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\53\ 44 U.S.C. sec. 2108.
\54\ 44 U.S.C. sec. 2108.
\55\ Department of Justice, Office of Legal Counsel, Memorandum to
Richard K. Willard, Assistant Attorney General (Civil Division)
(February 27, 1986).
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Confidentiality requirements

The IRS must preserve the confidentiality of taxpayer
information contained in Federal income tax returns. Such
information may not be disclosed except as authorized under
Code section 6103. Section 6103 was substantially revised in
1976 to address Congress' concern that tax information was
being used by Federal agencies in pursuit of objectives
unrelated to administration and enforcement of the tax laws.
Congress believed that the wide-spread use of tax information
by agencies other than the IRS could adversely affect the
willingness of taxpayers to comply voluntarily with the tax
laws and could undermine the country's self-assessment tax
system.\56\ Section 6103 does not authorize the disclosure of
confidential return information to NARA.
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\56\ S. Rept. 94-938, p. 317 (1976).
---------------------------------------------------------------------------
Section 6103 restricts the disclosure of returns and return
information only. Return means any tax or information return,
declaration of estimated tax, or claim for refund, including
schedules and attachments thereto, filed with the IRS. Return
information includes the taxpayer's name; nature and source or
amount of income; and whether the taxpayer's return is under
investigation. Section 6103(b)(2) provides that ``nothing in
any other provision of law shall be construed to require the
disclosure of standards used or to be used for the selection of
returns for examination, or data used or to be used for
determining such standards, if the Secretary determines that
such disclosure will seriously impair assessment, collection,
or enforcement under the internal revenue laws.'' Section 6103
does not restrict the disclosure of other records required to
be maintained by the IRS, such as records documenting agency
policy, programs and activities, and agency histories. Such
records are required to be made available to the public under
the Freedom of Information Act (``FOIA'').\57\
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\57\ FOIA does not require disclosure of records or information
that would frustrate law enforcement efforts. 5 U.S.C. sec. 552(b)(7).
---------------------------------------------------------------------------
The Internal Revenue Code prohibits disclosure of tax
returns and return information, except to the extent
specifically authorized by the Internal Revenue Code (sec.
6103). Unauthorized disclosure is a felony punishable by a fine
not exceeding $5,000 or imprisonment of not more than five
years, or both (sec. 7213). An action for civil damages also
may be brought for unauthorized disclosure (sec. 7431).

Reasons for Change

The Committee believes that it is appropriate to permit
disclosure to NARA for purposes of scheduling records for
destruction or retention, while at the same time preserving the
confidentiality of taxpayer information in those documents.

Explanation of Provision

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

Effective Date

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

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

Present Law

The Code provides that it is lawful for the Secretary to
accept checks or money orders as payment for taxes, to the
extent and under the conditions provided in regulations
prescribed by the Secretary (sec. 6311). Those regulations \58\
state that checks or money orders should be made payable to the
Internal Revenue Service.
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\58\ Treas. Reg. Sec. 301.6311-1(a)(1).
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Reasons for Change

The Committee believes that it more appropriate that checks
be made payable to the United States Treasury.

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

5. Clarification of Authority of Secretary Relating to the Making of
Elections (sec. 375 of the bill and sec. 7805 of the Code)

Present Law

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

Reasons for Change

The Committee wishes to eliminate any confusion over the
type of guidance in which the Secretary may prescribe the
manner of making any election.

Explanation of Provision

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

Effective Date

The provision is effective as of the date of enactment.

6. Limitation on Penalty on Individual's Failure to Pay for Months
During Period of Installment Agreement (sec. 376 of the bill
and sec. 6651 of the Code)

Present Law

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

Reasons for Change

The Committee believes that it is inappropriate to apply
the full penalty for failure to pay taxes to taxpayers who are
in fact paying their taxes through an installment agreement.

Explanation of Provision

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

Effective Date

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

I. Studies

1. Study of Penalty Administration (sec. 381 of the bill)

Present Law

The last major revision of the overall penalty structure in
the Internal Revenue Code was the Improved Penalty
Administration and Compliance Tax Act, part of the Omnibus
Budget Reconciliation Act of 1989.\59\
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\59\ Subtitle G of Title 7 of the Omnibus Budget Reconciliation Act
of 1989 (Public Law 101-239).
---------------------------------------------------------------------------

Reasons for Change

The Committee believes that it is appropriate to undertake
a study of penalty administration, which will permit the
Committee whether the current penalty structure could be
improved.

Explanation of Provision

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

Effective Date

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

2. Study of Confidentiality of Tax Return Information (sec. 382 of the
bill)

Present Law

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

Reasons for Change

The Committee believes that a study of the confidentiality
provisions will be useful in assisting the Committee in
determining whether improvements can be made to these
provisions.

Explanation of Provision

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

Effective Date

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

TITLE IV. CONGRESSIONAL ACCOUNTABILITY FOR THE IRS

A. Review of Requests for GAO Investigations of the IRS

(sec. 401 of the bill and sec. 8021(e) of the Code)

There is presently no specific statutory requirement that
requests for investigations by the General Accounting Office
(``GAO'') relating to the IRS be reviewed by the Joint
Committee on Taxation (the ``Joint Committee''). However, some
of the studies that GAO conducts relating to taxation and
oversight of the IRS require access under section 6103 of the
Code to confidential tax returns and return information. Under
section 6103, the GAO may inform the Joint Committee of its
initiation of an audit of the IRS and obtain access to
confidential taxpayer information unless, within 30 days,
three-fifths of the Members of the Joint Committee disapprove
of the audit. This provision has not been utilized; the GAO
generally seeks advance access to confidential taxpayer return
information from the Joint Committee.

Reasons for Change

The Restructuring Commission recommended changes to the
approval process for GAO reports based on its findings that the
GAO conducts myriad audits of the IRS, many of which relate to
lesser matters and which are not integrated into a
constructive, focused package. The Committee believes that GAO
audits and reports can be helpful as an oversight tool, but
that they should be coordinated so as to ensure appropriate
allocation of resources, both of the IRS and the GAO.

Explanation of Provision

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

Effective Date

The provision is effective with respect to requests for GAO
investigations made after the date of enactment.

B. Joint Congressional Hearings and Coordinated Oversight Reports

(secs. 401 and 402 of the bill and secs. 8021(f) and 8022 of the Code)

Present Law

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

Reasons for Change

The Restructuring Commission found that the Congressional
committees responsible for IRS oversight ``focus on different
issues that change from year to year. While these issues are
important, there is a lack of coordinated focus on high level
and strategic matters. Because the IRS tries to satisfy
requests from Congress, this nonintegrated approach to
oversight further blurs the ability to set strategic direction
and focus on priorities.''
The committee believes that Congressional oversight of the
IRS should be more coordinated, and should include long-term
objectives.

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

C. Budget Matters

1. Funding for century date change (sec. 411 of the bill)

Present Law

No specific provision.

Reasons for Change

The Committee believes that adequate funding of efforts to
resolve this problem is essential.

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

2. Financial management advisory group (sec. 412 of the bill)

Present Law

No provision.

Reasons for Change

The Committee believes that the IRS Commissioner could
benefit from input from experts in governmental accounting and
auditing.

Explanation of Provision

The bill directs the Commissioner to convene a financial
management advisory group consisting of individuals with
expertise in governmental accounting and auditing from both the
private sector and the Government to advise the Commissioner on
financial management issues.

Effective Date

The provision is effective on the date of enactment.

D. Tax Law Complexity Analysis

(sec. 421 and 422 of the bill and sec. 8024 of the Code)

Present Law

Present law does not require a formal complexity analysis
with respect to changes to the tax laws.

Reasons for Change

The Restructuring Commission found a clear connection
between the complexity of the Internal Revenue Code and the
difficulty of tax law administration and taxpayer frustration.
The Committee shares the concern that complexity is a serious
problem with the Federal tax system. Complexity and frequent
changes in the tax laws create burdens for both the IRS and
taxpayers. Failure to address complexity may ultimately reduce
voluntary compliance.
The Committee is aware that it may not be possible or
desirable to eliminate all complexity in the tax system. There
are many objectives of a tax system and particular tax
provisions, and simplicity is only one. In some cases other
policies, such as fairness, may outweigh concerns about
complexity.
Nevertheless, the Committee believes it essential to try to
reduce the complexity of the tax system whenever possible.
Accordingly, the Committee believes it appropriate to introduce
new procedural rules that will help to focus attention on
complexity as an issue. Such rules are an important step, but
do not take the place of the most effective way to address
complexity--that is for the Congress and the Administration to
make reducing complexity a priority when drafting tax
legislation.
The Committee also believes that encouraging the
participation of IRS personnel in drafting legislation will
help to highlight administrative and complexity issues while
legislation is being developed.

Explanation of Provision

IRS participation in drafting legislation

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

Complexity analysis

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

Effective Date

The requirement for a Tax Complexity Analysis is effective
with respect to legislation considered on or after January 1,
1998.

TITLE V. REVENUE OFFSET: EMPLOYER DEDUCTION FOR VACATION PAY

(sec. 501 of the bill and sec. 404 of the Code)

Present Law

For deduction purposes, any method or arrangement that has
the effect of a plan deferring the receipt of compensation or
other benefits for employees is treated as a deferred
compensation plan (sec. 404(b)). In general, contributions
under a deferred compensation plan (other than certain pension,
profit-sharing and similar plans) are deductible in the taxable
year in which an amount attributable to the contribution is
includible in income. However, vacation pay which is treated as
deferred compensation is deductible for the taxable year of the
employer in which the vacation pay is paid to the employee
(sec. 404(a)(5)).
Temporary Treasury regulations provide that a plan, method,
or arrangement defers the receipt of compensation or benefits
to the extent it is one under which an employee receives
compensation or benefits more than a brief period of time after
the end of the employer's taxable year in which the services
creating the right to such compensation or benefits are
performed. A plan, method or arrangement is presumed to defer
the receipt of compensation for more than a brief period of
time after the end of an employer's taxable year to the extent
that compensation is received after the 15th day of the 3rd
calendar month after the end of the employer's taxable year in
which the related services are rendered (the ``2\1/2\ month''
period). A plan, method or arrangement is not considered to
defer the receipt of compensation or benefits for more than a
brief period of time after the end of the employer's taxable
year to the extent that compensation or benefits are received
by the employee on or before the end of the applicable 2\1/2\
month period. (Temp. Treas. Reg. Sec. 1.404(b)-1T A-2.)
The Tax Court recently addressed the issue of when vacation
pay and severance pay are considered deferred compensation in
Schmidt Baking Co., Inc., 107 T.C. 271 (1996). In Schmidt
Baking, the taxpayer was an accrual basis taxpayer with a
fiscal year that ended December 28, 1991. The taxpayer funded
its accrued vacation and severance pay liabilities for 1991 by
purchasing an irrevocable letter of credit on March 13, 1992.
The parties stipulated that the letter of credit represented a
transfer of substantially vested interest in property to
employees for purposes of section 83, and that the fair market
value of such interest was includible in the employees' gross
incomes for 1992 as a result of the transfer.\60\ The Tax Court
held that the purchase of the letter of credit, and the
resulting income inclusion, constituted payment of the vacation
and severance pay within the 2\1/2\ month period. Thus, the
vacation and severance pay were treated as received by the
employees within the 2\1/2\ month period and were not treated
as deferred compensation. The vacation pay and severance pay
were deductible by the taxpayer for its 1991 fiscal year
pursuant to its normal accrual method of accounting.
---------------------------------------------------------------------------
\60\ While the rules of section 83 may govern the income inclusion,
section 404 governs the deduction if the amount involved is deferred
compensation.
---------------------------------------------------------------------------

Reasons for Change

Prior to the Tax Reform Act of 1986, an employer could make
an election to deduct an amount representing a reasonable
addition to a reserve account for vacation pay earned by
employees before the close of the current year and expected to
be paid by the close of that year or within 12 months
thereafter. As a result of concerns that this rule provided
more favorable tax treatment for vacation pay than other types
of compensation or deductible items, the Tax Reform Act of 1986
limited this special rule to vacation pay that is paid during
the current taxable year or within 8\1/2\ months after the
close of the taxable year of the employer with respect to which
the vacation pay was earned by employees.
The tax treatment of vacation pay was again changed in the
Omnibus Budget Reconciliation Act of 1987 (``OBRA 1987''). At
that time, the Congress was concerned that then-present law
provided more favorable tax treatment for vacation pay that was
deferred by employees beyond the end of the year than was
provided for other deferred benefits. The House and Senate
bills would have repealed the reserve for accrued vacation pay
and would have provided that deductions for vacation pay
generally would be allowed in any taxable year for amounts paid
during the year, plus vested vacation amounts paid or funded
within 2\1/2\ months after the end of the year. The conference
agreement followed a different approach, and provided that
``vacation pay earned during any taxable year, but not paid to
employees on or before the date that is 2\1/2\ months after the
end of the taxable year, is deductible for the taxable year of
the employer in which it is paid to employees.'' \61\ The key
difference between the House and Senate provisions and the
conference agreement to OBRA 1987 is that the conference
agreement does not allow a deduction for amounts merely because
they are vested and funded (i.e., are includible in income)
within 2\1/2\ months after the end of the employer's taxable
year.
---------------------------------------------------------------------------
\61\ H. Rept. 100-495, at 921 (December 21, 1987).
---------------------------------------------------------------------------
The Committee believes that the decision in Schmidt Baking
reaches an inappropriate result and represents an incorrect
interpretation of the intent of the Congress in adopting the
vacation pay provision in OBRA 1987. The Committee believes
that the intent of that provision was clearly to provide that a
deduction for vacation pay is not available for the current
taxable year unless the vacation pay is actually paid to
employees within 2\1/2\ months after the end of the year.
Moreover, OBRA 1987 reflects Congressional intent and
understanding that compensation actually paid beyond the 2\1/2\
month period is deferred compensation.
Further, the Committee is concerned that taxpayers may
inappropriately extend the rationale of Schmidt Baking to other
situations in which a deduction or other tax consequences are
contingent upon an item being paid. The Committee does not
believe that, as a general rule, letters of credit and similar
mechanisms should be considered payment for any purposes of the
Code.

Explanation of Provision

The bill provides that, for purposes of determining whether
an item of compensation (other than severance pay),\62\ is
deferred compensation (under Code sec. 404), the compensation
is not considered to be paid or received until actually
received by the employee. In addition, an item of deferred
compensation is not considered paid to an employee until
actually received by the employee. The bill is intended to
overrule the result in Schmidt Baking. For example, with
respect to the determination of whether vacation pay is
deferred compensation, the fact that the value of the vacation
pay is includible in the income of employees within the
applicable 2\1/2\ month period is not relevant. Rather, the
vacation pay must have been actually received by employees
within the 2\1/2\ month period in order for the compensation
not to be treated as deferred compensation.
---------------------------------------------------------------------------
\62\ This provision is also included in H.R. 2646, the ``Education
Savings Act for Public and Private Schools Act'' as passed by the House
on October 23, 1997 (See H. Rept. 105-332, October 21, 1997). A
provision that overrules Schmidt Baking with respect to severance pay
was included in H.R. 2644, the ``United States-Caribbean Trade
Partnership Act,'' as ordered reported by the Committee on Ways and
Means on October 9, 1997.
---------------------------------------------------------------------------
It is intended that similar arrangements, in addition to
the letter of credit approach used in Schmidt Baking, do not
constitute actual receipt by the employee, even if there is an
income inclusion. Thus, for example, actual receipt does not
include the furnishing of a note or letter or other evidence of
indebtedness of the taxpayer, whether or not the evidence is
guaranteed by any other instrument or by any third party. As a
further example, actual receipt does not include a promise of
the taxpayer to provide service or property in the future
(whether or not the promise is evidenced by a contract or other
written agreement). In addition, actual receipt does not
include an amount transferred as a loan, refundable deposit, or
contingent payment. Amounts set aside in a trust for employees
generally are not considered to be actually received by the
employee.
Under the bill, sick pay that is deferred compensation is
treated the same as vacation pay that is deferred compensation,
and is not deductible until paid to employees. The bill does
not change the rule under which deferred compensation (other
than vacation pay and sick pay and deferred compensation under
qualified plans) is deductible in the year includible in the
gross income of employees participating in the plan if separate
accounts are maintained for each employee.
While Schmidt Baking involved only vacation pay and
severance pay, there is concern that this type of arrangement
may be tried to circumvent other provisions of the Code where
payment is required in order for a deduction to occur. Thus, it
is intended that the Secretary will prevent the use of similar
arrangements. No inference is intended that the result in
Schmidt Baking is present law beyond its immediate facts or
that the use of similar arrangements is permitted under present
law.
The bill does not affect the determination of whether an
item is includible in income. Thus, for example, using the
mechanism in Schmidt Baking for vacation pay would still result
in income inclusion to the employees, but the employer would
not be entitled to a deduction for the vacation pay until
actually paid to and received by the employees.

Effective Date

The provision is effective for taxable years ending after
October 8, 1997. Any change in method of accounting required by
the proposal will be treated as initiated by the taxpayer with
the consent of the Secretary of the Treasury. Any adjustment
required by section 481 as a result of the change will be taken
into account in the year of the change.

III. VOTES OF THE COMMITTEE

In compliance with clause 2(l)(2)(B) of rule XI of the
Rules of the House of Representatives, the following statements
are made concerning the votes of the Committee in its
consideration of the bill, H.R. 2676.

Motion to report the bill

The bill, H.R. 2676, as amended, was ordered favorably
reported by a roll call vote of 33 yeas to 4 nays (with a
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Representatives Yea Nay
----------------------------------------------------------------------------------------------------------------
Mr. Archer.............................. X ....... Mr. Rangel..................... X ........
Mr. Crane............................... X ....... Mr. Stark...................... ........ X
Mr. Thomas.............................. X ....... Mr. Matsui..................... ........ X
Mr. Shaw................................ X ....... Mrs. Kennelly.................. X ........
Mrs. Johnson............................ X ....... Mr. Coyne...................... X ........
Mr. Bunning............................. X ....... Mr. Levin...................... X ........
Mr. Houghton............................ X ....... Mr. Cardin..................... X ........
Mr. Herger.............................. X ....... Mr. McDermott.................. ........ X
Mr. McCrery............................. X ....... Mr. Kleczka.................... X ........
Mr. Camp................................ X ....... Mr. Lewis...................... ........ X
Mr. Ramstad............................. X ....... Mr. Neal....................... X ........
Mr. Nussle.............................. X ....... Mr. McNulty.................... ........ ........
Mr. Johnson............................. X ....... Mr. Jefferson.................. X ........
Ms. Dunn................................ X ....... Mr. Tanner..................... X ........
Mr. Collins............................. X ....... Mr. Becerra \1\................ ........ ........
Mr. Portman............................. X ....... Mrs. Thurman................... X ........
Mr. English............................. X .......
Mr. Ensign.............................. X .......
Mr. Christensen......................... X .......
Mr. Watkins............................. X .......
Mr. Hayworth............................ X .......
Mr. Weller.............................. X .......
Mr. Hulshof............................. X .......
----------------------------------------------------------------------------------------------------------------
\1\ Mr. Becerra passed.

Vote on amendment

A roll call vote was conducted on the following amendment
to the Chairman's amendment in the nature of a substitute.
An amendment by Mr. Stark that would impose conflict of
interest requirements on the Board members from the private
sector was defeated by a roll call vote of 14 yeas to 23 nays.
The vote was as follows:

----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Representatives Yea Nay
----------------------------------------------------------------------------------------------------------------
Mr. Archer.............................. ........ X Mr. Rangel..................... X ........
Mr. Crane............................... ........ X Mr. Stark...................... X ........
Mr. Thomas.............................. ........ X Mr. Matsui..................... ........ ........
Mr. Shaw................................ ........ X Mrs. Kennelly.................. X ........
Mrs. Johnson............................ ........ X Mr. Coyne...................... X ........
Mr. Bunning............................. ........ X Mr. Levin...................... X ........
Mr. Houghton............................ ........ X Mr. Cardin..................... ........ X
Mr. Herger.............................. ........ X Mr. McDermott.................. X ........
Mr. McCrery............................. ........ X Mr. Kleczka.................... X ........
Mr. Camp................................ ........ X Mr. Lewis...................... X ........
Mr. Ramstad............................. ........ X Mr. Neal....................... X ........
Mr. Nussle.............................. ........ X Mr. McNulty.................... ........ ........
Mr. Johnson............................. ........ X Mr. Jefferson.................. X ........
Ms. Dunn................................ ........ X Mr. Tanner..................... ........ X
Mr. Collins............................. ........ X Mr. Becerra.................... X ........
Mr. Portman............................. ........ X Mrs. Thurman................... X ........
Mr. English............................. ........ X
Mr. Ensign.............................. X .......
Mr. Christensen......................... ........ X
Mr. Watkins............................. ........ X
Mr. Hayworth............................ ........ X
Mr. Weller.............................. X .......
Mr. Hulshof............................. ........ X
----------------------------------------------------------------------------------------------------------------

IV. BUDGET EFFECTS OF THE BILL

A. Committee Estimates

In compliance with clause 7(a) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the estimated budget effects of H.R. 2676 as
reported.
The bill, as reported, is estimated to have the following
effect on the budget:

B. Budget Authority and Tax Expenditures

Budget authority

With respect to subdivision (B) of clause 2(l)(3) of rule
XI of the Rules of the House of Representatives (relating to
budget authority), see the statement of the Congressional
Budget Office.

Tax expenditures

In compliance with subdivision (B) of clause 2(l)(3) of
rule XI of the Rules of the House of Representatives, the
Committee states that the provisions of the bill as reported
involve a reduction in tax expenditures for the amounts for the
vacation pay provision shown in the revenue table in IV.A.,
above.

C. Cost Estimate Prepared by the Congressional Budget Office

In compliance with subdivision (C) of clause 2(l)(3) of
rule XI of the Rules of the House of Representatives, requiring
cost estimate prepared by the Congressional Budget Office, the
Committee advises that the Congressional Budget Office has
submitted the following statement on this bill.

U.S. Congress,
Congressional Budget Office,
Washington, DC, October 31, 1997.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2676, the Internal
Revenue Service Restructuring and Reform Act of 1997.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are John R.
Righter and Mary Maginniss (for federal costs), Marc Nicole
(for the impact on state and local governments), and Matthew
Eyles (for the impact on the private sector).
Sincerely,
James L. Blum
(For June E. O'Neill, Director).
Enclosure.

H.R. 2676--Internal Revenue Service Restructuring and Reform Act of
1997

Summary: H.R. 2676 would make a number of changes to the
management and oversight of the Internal Revenue Service (IRS),
add or amend 28 taxpayer rights, and require the IRS to
implement several changes designed to increase the amount of
forms filed electronically by taxpayers. The Joint Committee on
Taxation (JCT) estimates that this bill would increase
governmental receipts (revenues) by $327 million in fiscal year
1998 but would have no net effect on such receipts over the
1998-2002 period. Over the 1998-2007 period, JCT estimates that
enacting this bill would decrease governmental receipts by $2.9
billion.
In addition, CBO estimates that enacting H.R. 2676 would
increase direct spending by $5 million in fiscal year 1998, $25
million over the 1998-2002 period, and $50 million over the
1998-2007 period. Because enacting the bill would increase both
direct spending and receipts, pay-as-you-go procedures would
apply. H.R. 2676 also would affect discretionary spending,
subject to the availability of funds. Because of the
uncertainty of efforts by the Treasury and the IRS under
current law to increase the availability and use of electronic
filing by taxpayers, CBO cannot estimate the bill's total
effect on discretionary spending at this time.
JCT has determined that H.R. 2676 contains one new private-
sector mandate, as defined in the Unfunded Mandates Reform Act
of 1995 (UMRA). JCT estimates that the provision clarifying
employer deductions for vacation pay would increase tax revenue
by $2.65 billion over the 1998-2002 period, which is the
estimated cost to the private sector to comply with the
mandate. The bill contains no intergovernmental mandates as
defined in UMRA and would impose no costs on state, local, or
tribal governments.
Description of major provisions: H.R. 2676 would make a
number of changes to the management oversights of the IRS and
to the rights of taxpayers. Specifically, the bill would:
Establish an 11-member Internal Revenue Service
Oversight board within the Department of the Treasury
to oversee the service's planning, budgeting, and
operations;
Require the IRS to begin developing a paperless tax
return system and authorize it to offer certain
incentives to encourage taxpayers to file tax returns
electronically;
Require the IRS, subject to the proper safeguards, to
create a system under which taxpayers could review
their own IRS files electronically by fiscal year 2007;
Add or amend 28 provisions affecting taxpayer rights,
including shifting the burden from the taxpayer to the
IRS in certain court cases, making it easier for
taxpayers to recover court costs and to sue the IRS for
civil damages, eliminating the threshold and allowing
for partial relief from the tax bills owed by innocent
spouses, suspending the time limit for disabled
individuals to file for a refund, and requiring that
the IRS provide additional notification to taxpayers of
certain rights and deadlines;
Make several congressional reforms to discourage the
Congress from adding further complexity to the tax code
and to coordinate the oversight functions of the
various committees that have jurisdiction over the IRS;
and
Clarify employer deductions for vacation pay to raise
governmental receipts and offset the cost of other
provisions.
Estimated cost to the Federal Government: The estimated
budgetary impact of H.R. 2676 is shown in Table 1. The costs of
this bill fall within budget function 800 (general government).
The legislation would also affect revenues.

TABLE 1. ESTIMATED COST TO THE FEDERAL GOVERNMENT
[By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
----------------------------------------------------------------------------------------------------------------
CHANGES IN DIRECT SPENDING AND REVENUES \1\

Direct spending:
Estimated Budget authority................................ 3 3 5 5 6
Estimated outlays......................................... 3 3 5 5 6
Revenues:
Estimated revenues........................................ 327 602 43 -480 -493
----------------------------------------------------------------------------------------------------------------
\1\ Implementing the bill would also require increases in spending subject to appropriation, but CBO cannot
estimate these costs at this time.

Basis of estimate

H.R. 2676 would affect both revenues and direct spending.
JCT estimates the bill would increase revenues by nearly $1
billion over the fiscal year 1998-2000 period, but decrease
such receipts by an equal amount over fiscal years 2001 and
2002. For the 1998-2007 period, JCT estimates that enacting
H.R. 2676 would decrease governmental receipts by about $2.9
billion. CBO estimates that enacting the bill would increase
direct spending, on average, by about $5 million in each of
fiscal years 1998 through 2002, for a total of about $25
million. For fiscal years 1998 through 2007, CBO estimates the
bill would increase direct spending by a total of about $50
million.
Subject to the availability of funds, the bill also would
increase costs at the IRS and JCT to perform various
requirements of the bill and those increases would probably be
significant. But, because of the Treasury's plans for
increasing the availability and use of electronic filing by
taxpayers are uncertain, CBO cannot estimate the bill's likely
effect on discretionary spending at this time. The bill's major
provisions that could affect discretionary spending are
discussed in detail below.
This estimates assumes the bill would be enacted by the
middle of fiscal year 1998.
Revenues
H.R. 2676 would make several changes to the Internal
Revenue code. The major provisions affecting receipts are
summarized in Table 2.

TABLE 2. ESTIMATED CHANGES IN REVENUES
[By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
----------------------------------------------------------------------------------------------------------------
Clarify deduction for accrued vacation pay.................... 705 1,111 584 120 126
Failure to pay penalty capped at 9.5 percent for individuals.. -176 -196 -209 -220 -231
Burden of proof............................................... -80 -166 -174 -183 -192
Increase refund interest rate to AFR plus 3 percent for
individuals.................................................. -49 -51 -54 -56 -59

Suspension of statute of limitations on filing refund claims
during periods of disability................................. -40 -50 -25 -15 -16
Elimination of interest rate differential on overlapping
periods of interest on income tax overpayments and
underpayments................................................ -1 -9 -28 -42 -54
All Other Provisions Affecting Revenues....................... -32 -35 -51 -84 -67
-------------------------------------------------
Total Estimated Revenues................................ 327 602 43 -480 -493
----------------------------------------------------------------------------------------------------------------

Direct spending
Low-Income Taxpayer Clinics.--H.R. 2676 would require the
Secretary of the Treasury to make grants on a matching basis to
clinics that provide services to low-income taxpayers. The bill
would limit the total amount of such grants in any one year to
$3 million. Thus, CBO estimates that enacting this provision
would increase direct spending by $3 million in each of fiscal
years 1998 through 2002, or by a total of $15 million.
Taxpayer Bill of Rights.--The bill also would increase the
amount of penalties--attorney's fees and administrative costs--
and civil damages that courts could award to taxpayers in
certain cases brought against the federal government. In
particular, the bill would provide for up to $100,000 in civil
damages to taxpayers in cases where a court finds that officers
or employees of the IRS negligently disregarded provisions of
the Internal Revenue Code.Courts could award damages only after
the taxpayer had exhausted all administrative remedies at the IRS.
Under current law, taxpayers may receive damages only for cases where a
court finds that an IRS officer or employee has recklessly or
internationally disregarded provisions of the Internal Revenue Code.
The government would pay the additional amounts from the permanent,
indefinite appropriation for claims and judgments.
Although considerable uncertainty exists as to how the
courts would determine and award damages based on negligent
behavior CBO estimates that the provisions would increase
direct spending, on average, by $10 million over the 1998-2007
period and by $28 million over the 1998-2007 period. That
estimate assumes that lowering the standard for civil damages
would result in courts awarding additional damages to
taxpayers. Because the provision would apply only to actions
that occur after enactment and would require taxpayers to first
exhaust administrative remedies. CBO expects the provision
initially would have no significant impact on direct spending,
but would result in a steady increase in damages awarded after
1999. On average, we estimate that the provision would increase
direct spending annually by $2 million over the 1998-2002
period and by $3 million over the 1998-2007 period.
Spending subject to appropriation
Electronic Filing.--The bill's biggest potential impact on
discretionary spending involves its requirements to increase
the availability and use of electronic filing. H.R. 2676 would
generally require the IRS to study and implement several major
changes to the way taxpayers file their returns each year.
Specifically, the bill would: (1) require the Secretary of the
Treasury to develop a strategic plan to eliminate barriers and
provide incentives to increase the number of returns filed
electronically, (2) beginning in fiscal year 2000, extend the
due date for electronic filers of information returns from
February 28 to March 31, (3) require the Treasury to develop
procedures for accepting signature information from electronic
filers in a digital or other electronic form, (4) require the
Treasury to develop procedures for implementing a return-free
tax system beginning with tax years that begin after 2007, and
(5) provided the necessary safeguard are in place, require the
Treasury to develop procedures to enable taxpayers to review
their account information electronically by 2007.
The Treasury is already developing or studying most of
these proposals. For instance, according to the Department of
the Treasury, the IRS currently is using some signature
alternatives and studying others. The Treasury also has already
awarded a contract to design and develop a large educational
campaign to encourage taxpayers to file electronically. The IRS
is also implementing new payment methods and preparing its
systems to accept new forms that should reduce the amount of
paper filed by taxpayers each year. Finally, the Treasury is
studying alternatives for allowing taxpayers to eventually
review account information electronically. Thus, even though
CBO expects that implementing the bill's procedures would
increase costs for the Treasury, subject to the availability of
funds, we cannot estimate the amount that such costs would
increase. The amount of the costs would depend, in part, on the
overall effort at the IRS to modernize its information systems,
for which the Congress has appropriated about $4 billion over
the last decade.
In general, receiving and processing forms electronically
should reduce costs at the IRS in the long run. The IRS is
currently analyzing the per-unit costs of processing tax forms
electronically. In the past, the IRS has estimated that it
costs at least two and one-half times more to process such
forms by paper, since the data must be input manually into
IRS's systems, the error rate in processing such forms is
significantly higher, and the papers require handing and
storage. Thus, if enacting the bill results in an increase in
the number of taxpayers that file electronically with the IRS
each year--in fiscal year 1997, 19.1 million of the estimated
120 million individual income tax returns were filed with the
IRS by computer or phone--then the bill should eventually
reduce the government's annual costs to process tax
information.
IRS Oversight Board.--H.R. 2676 would establish an 11-
member management board within the Department of the Treasury
to oversee the management and operations of the IRS, including
reviewing and approving the agency's strategic plans and annual
budget request. The board would consist of eight members from
outside the federal government, the Secretary of the Treasury,
a union representative, and the IRS Commissioner. The bill
would compensate the nonfederal members at a rate of $30,000
per year, except for the chair, who would receive an annual
salary of $50,000. The members also could receive reimbursement
for any travel expenses incurred in attending official board
meetings. The bill would not provide the board with its own
permanent staff. The bill would require that the board meet at
least once a month. Upon enactment, the President would have
six months to submit nominations to the Senate.
Based on the bill's requirements and compensation, CBO
estimates that the board would cost about $400,000 in each of
fiscal years 1999 through 2002. That estimate assumes the board
would not meet until the beginning of fiscal year 1999.
Taxpayer Bill of Rights.--H.R. 2676 would add or amend 28
taxpayers rights. In general, the new rights would result in
minimal additional costs for the IRS to write regulations,
provide additional training to employees, and create or amend
tax forms and other tax-related documents. CBO estimates that
these provisions would increase costs at the IRS over fiscal
years 1998 and 1999 by between $5 million and $10 million. In
later years, we expect such costs would not be significant.
Congressional Accountability.--H.R. 2676 would expand the
responsibilities of the Joint Committee on Taxation (JCT) and
streamline Congressional procedures for overseeing the IRS. It
would require JCT to coordinate joint Congressional oversight
hearings and various reports related to IRS matters, report
annually on the overall state of the federal tax system,
prepare a detailed ``Tax Complexity Analysis'' for proposed
legislation amending tax laws, and conduct two studies within
one year from the date of enactment. The bill also would
require JCT to review all Congressional requests (other than
requests by the chairman or ranking member of a Congressional
committee or subcommittee) for General Accounting Office (GAO)
investigations that access confidential information under
section 6103 of the U.S. Code.
Under the current structure, several committees have
jurisdiction over the IRS. Assuming enactment of H.R. 2676, the
Congress, with the assistance of JCT, would hold two joint
hearings each year on the IRS. The first would review the
strategic plans and budget for the IRS; the second would focus
on the status of the IRS in meeting its budgetary and policy
goals. The bill would require the JCT to prepare annual reports
on the overall state of the federal tax system, along with
recommendations for simplification and other matters. The JCT
also would be responsible for providing a tax complexity
analysis for legislation resulting in changes in tax law. This
review would identify and analyze proposals in a bill or
conference report that would add or reduce complexity in the
tax laws.
CBO estimates that enacting H.R. 2676 would cost JCT
approximately $200,000 in 1998 and $400,000 beginning in 1999
and each year thereafter, assuming appropriation of the
necessary amounts. Depending upon the amount and nature of tax
legislation considered by the Congress, analyzing the
complexity of legislative initiatives could increase this cost
somewhat. According to the GAO, securing JCT approval for
certain tax investigations would affect perhaps one study
annually, and thus would have no significant budgetary effect.
Streamlining the legislative process for overseeing the IRS
could result in some savings to Congressional committees, but
any such savings is not expected to be significant.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act of 1985 specifies procedures for
legislation affecting direct spending and receipts. The
projected changes in direct spending and receipts are shown in
the following table for fiscal years 1998 through 2007. For
purposes of enforcing pay-as-you-go procedures, however, only
the effects in the budget year and the succeeding four years
are counted.

SUMMARY OF EFFECTS ON DIRECT SPENDING AND RECEIPTS
[By fiscal year, in millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays............................................ 3 3 5 5 6 6 7 7 8 8
Changes in receipts........................................... 327 602 43 -480 -493 -517 -542 -570 -597 -627
--------------------------------------------------------------------------------------------------------------------------------------------------------

Estimated impact on State, Local, and Tribal Governments:
H.R. 2676 contains no intergovernmental mandates as defined in
UMRA and would impose no costs on state, local, or tribal
governments. The bill would provide $3 million a year for low-
income taxpayer clinics that could be operated by accredited
law schools (public or private) or certain tax-exempt
organizations.
Estimated impact on the private sector: JCT has determined
that H.R. 2676 contains one new private-sector mandate as
defined in UMRA. The provision relating to clarification of
deduction for accrued vacation pay is estimated to increase tax
revenue by $2.65 billion over fiscal years 1998 through 2002,
which is the estimated amount that the private sector would be
required to spend in order to comply with this mandate. The
revenue provision would offset the budgetary cost of the
Internal Revenue Service restructuring provisions of the bill.
The revenue provision would not impose a federal
intergovernmental mandate on state, local, or tribal
governments, as such governmental entities are generally exempt
from the federal income tax.
Estimate prepared by: Federal costs: John R. Righter and
Mary Maginniss; Impact on State, local, and tribal governments:
Marc Nicole; Impact on the private sector: Matthew Eyles.
Estimate approved by: Paul N. Van de Water, Assistant
Director for Budget Analysis.

V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

A. Committee Oversight Findings and Recommendations

With respect to subdivision (A) of clause 2(l)(3) of Rule
XI of the Rules of the House of Representatives (relating to
oversight findings), the Committee advises that it was the
result of the Committee's oversight activities concerning the
need to restructure and reform the IRS, additional taxpayer
rights and protections, greater Congressional oversight of the
IRS, and a revenue offset provision relating to the tax
treatment of employer deduction for vacation pay that the
Committee concluded that it is appropriate to enact the
provisions contained in the bill as reported.
For a listing of the Committee and Subcommittee hearings
relating to the provisions of the bill, see Part I.C of this
report.

B. Summary of Findings and Recommendations of the Committee on
Government Reform and Oversight

With respect to subdivision (D) of clause 2(l)(3) of Rule
XI of the Rules of the House of Representatives, the Committee
advises that no specific oversight findings or recommendations
have been submitted to this Committee by the Committee on
Government Reform and Oversight with respect to the provisions
contained in the bill. (However, see correspondence received
from the Chairman, Committee on Government Reform and
Oversight, regarding the bill in Part VII of this report.)

C. Constitutional Authority Statement

With respect to clause 2(l)(4) of Rule XI of the Rules of
the House of Representatives (relating to Constitutional
Authority), the Committee states that the Committee's action in
reporting this bill is derived from Article I of the
Constitution, Section 7 (``All bills for raising revenue shall
originate in the House of Representatives'') and Section 8
(``The Congress shall have power to lay and collect taxes,
duties, imposts and excises, to pay the debts . . . of the
United States''), and from the 16th Amendment to the
Constitution.

D. Information Relating to Unfunded Mandates

This information is provided in accordance with section 423
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
The Committee has determined that the provision of the bill
relating to the tax treatment of employer deduction for
vacation pay will impose a Federal mandate on the private
sector in the amount shown in the revenue table in IV.A.,
above. This revenue is needed to offset the budget cost of the
IRS restructuring and reform provisions. This provision of the
bill will not impose a Federal intergovernmental mandate on
State, local, or tribal governments.

E. Applicability of House Rule XXI5(c)

Rule XXI5(c) of the Rules of the House of Representatives
provides, in part, that ``No bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase shall be considered as passed or agreed to unless
so determined by a vote of not less than three-fifths of the
Members.'' The Committee has carefully reviewed the provisions
of the bill, and states that the provisions of the bill do not
involve any Federal income tax rate increase within the meaning
of the rule.

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3 of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman).

INTERNAL REVENUE CODE OF 1986

Subtitle A--Income Taxes

* * * * * * *

CHAPTER 1--NORMAL TAXES AND SURTAXES

* * * * * * *

Subchapter D--Deferred Compensation, Etc.

* * * * * * *

PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC.

* * * * * * *

Subpart A--General Rule

* * * * * * *

SEC. 404. DEDUCTION FOR CONTRIBUTIONS OF AN EMPLOYER TO AN EMPLOYEES'
TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A
DEFERRED-PAYMENT PLAN.

(a) General Rule.--If contributions are paid by an employer
to or under a stock bonus, pension, profit-sharing, or annuity
plan, or if compensation is paid or accrued on account of any
employee under a plan deferring the receipt of such
compensation, such contributions or compensation shall not be
deductible under this chapter; but, if they would otherwise be
deductible, they shall be deductible under this section,
subject, however, to the following limitations as to the
amounts deductible in any year:
(1) * * *
* * * * * * *
(5) Other plans.--If the plan is not one included in
paragraph (1), (2), or (3), in the taxable year in
which an amount attributable to the contribution is
includible in the gross income of employees
participating in the plan, but, in the case of a plan
in which more than one employee participates only if
separate accounts are maintained for each employee. For
purposes of this section, any vacation pay or sick
leave pay which is treated as deferred compensation
shall be deductible for the taxable year of the
employer in which paid to the employee.
* * * * * * *
(11) Determinations relating to deferred
compensation.--
(A) In general.--For purposes of determining
under this section--
(i) whether compensation of an
employee is deferred compensation, and
(ii) when deferred compensation is
paid,
no amount shall be treated as received by the
employee, or paid, until it is actually
received by the employee.
(B) Exception.--Subparagraph (A) shall not
apply to severance pay.
* * * * * * *

Subtitle D--Miscellaneous Excise Taxes

* * * * * * *

CHAPTER 42--PRIVATE FOUNDATIONS AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS

* * * * * * *

Subchapter A--Private Foundations

* * * * * * *

SEC. 4946. DEFINITIONS AND SPECIAL RULES.

(a) * * *
(c) Government Official.--For purposes of subsection
(a)(1)(I) and section 4941, the term ``government official''
means, with respect to an act of self-dealing described in
section 4941, an individual who, at the time of such act, holds
any of the following offices or positions (other than as a
``special Government employee'', as defined in section 202(a)
of title 18, United States Code):
(1) * * *
* * * * * * *
(5) an elective or appointive public office in the
executive, legislative, or judicial branch of the
government of a State, possession of the United States,
or political subdivision or other area of any of the
foregoing, or of the District of Columbia, held by an
individual receiving gross compensation at an annual
rate of $20,000 or more, [or]
(6) a position as personal or executive assistant or
secretary to any of the foregoing[.], or
(7) a member of the Internal Revenue Service
Oversight Board.
* * * * * * *

Subtitle F--Procedure and Administration

* * * * * * *

CHAPTER 61--INFORMATION AND RETURNS

* * * * * * *

Subchapter A--Returns and Records

* * * * * * *

PART II--TAX RETURNS OR STATEMENTS

* * * * * * *

Subpart B--Income Tax Returns

Sec. 6012. Persons required to make returns of income.
* * * * * * *
Sec. 6015. Innocent spouse relief; petition to Tax Court.
* * * * * * *

SEC. 6011. GENERAL REQUIREMENT OF RETURN, STATEMENT, OR LIST.

(a) * * *
* * * * * * *
(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.
[(f)] (g) Income, Estate, and Gift Taxes.--For requirement
that returns of income, estate, and gift taxes be made whether
or not there is tax liability, see subparts B and C.
* * * * * * *

SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE.

(a) * * *
* * * * * * *
[(e) Spouse Relieved of Liability in Certain Cases.--
[(1) In general.--Under regulations prescribed by the
Secretary, if--
[(A) a joint return has been made under this
section for a taxable year,
[(B) on such return there is a substantial
understatement of tax attributable to grossly
erroneous items of one spouse,
[(C) the other spouse establishes that in
signing the return he or she did not know, and
had no reason to know, that there was such
substantial understatement, and
[(D) taking into account all the facts and
circumstances, it is inequitable to hold the
other spouse liable for the deficiency in tax
for such taxable year attributable to such
substantial understatement, then the other
spouse shall be relieved of liability for tax
(including interest, penalties, and other
amounts) for such taxable year to the extent
such liability is attributable to such
substantial understatement.
[(2) Grossly erroneous items.--For purposes of this
subsection, the term ``grossly erroneous items'' means,
with respect to any spouse--
[(A) any item of gross income attributable to
such spouse which is omitted from gross income,
and
[(B) any claim of a deduction, credit, or
basis by such spouse in an amount for which
there is no basis in fact or law.
[(3) Substantial understatement.--For purposes of
this subsection, the term ``substantial
understatement'' means any understatement (as defined
in section 6662(d)(2)(A)) which exceeds $500.
[(4) Understatement must exceed specified percentage
of spouse's income.--
[(A) Adjusted gross income of $20,000 or
less.--If the spouse's adjusted gross income
for the preadjustment year is $20,000 or less,
this subsection shall apply only if the
liability described in paragraph (1) is greater
than 10 percent of such adjusted gross income.
[(B) Adjusted gross income of more than
$20,000.--If the spouse's adjusted gross income
for the preadjustment year is more than
$20,000, subparagraph (A) shall be applied by
substituting ``25 percent'' for ``10 percent''.
[(C) Preadjustment year.--For purposes of
this paragraph, the term ``preadjustment year''
means the most recent taxable year of the
spouse ending before the date the deficiency
notice is mailed.
[(D) Computation of spouse's adjusted gross
income.--If the spouse is married to another
spouse at the close of the preadjustment year,
the spouse's adjusted gross income shall
include the income of the new spouse (whether
or not they file a joint return).
[(E) Exception for omissions from gross
income.--This paragraph shall not apply to any
liability attributable to the omission of an
item from gross income.
[(5) Special rule for community property income.--For
purposes of this subsection, the determination of the
spouse to whom items of gross income (other than gross
income from property) are attributable shall be made
without regard to community property laws.]
* * * * * * *

SEC. 6015. INNOCENT SPOUSE RELIEF; PETITION TO TAX COURT.

(a) Spouse Relieved of Liability in Certain Cases.--
(1) In general.--Under procedures prescribed by the
Secretary, if--
(A) a joint return has been made under
section 6013 for a taxable year,
(B) on such return there is an understatement
of tax attributable to erroneous items of 1
spouse,
(C) the other spouse establishes that in
signing the return he or she did not know, and
had no reason to know, that there was such
understatement,
(D) taking into account all the facts and
circumstances, it is inequitable to hold the
other spouse liable for the deficiency in tax
for such taxable year attributable to such
understatement, and
(E) the other spouse claims (in such form as
the Secretary may prescribe) the benefits of
this subsection not later than the date which
is 2 years after the date of the assessment of
such deficiency,
then the other spouse shall be relieved of liability
for tax (including interest, penalties, and other
amounts) for such taxable year to the extent such
liability is attributable to such understatement.
(2) Apportionment of relief.--If a spouse who, but
for paragraph (1)(C), would be relieved of liability
under paragraph (1), establishes that in signing the
return such spouse did not know, and had no reason to
know, the extent of such understatement, then such
spouse shall be relieved of liability for tax
(including interest, penalties, and other amounts) for
such taxable year to the extent that such liability is
attributable to the portion of such understatement of
which such spouse did not know and had no reason to
know.
(3) Understatement.--For purposes of this subsection,
the term ``understatement'' has the meaning given to
such term by section 6662(d)(2)(A).
(4) Special rule for community property income.--For
purposes of this subsection, the determination of the
spouse to whom items of gross income (other than gross
income from property) are attributable shall be made
without regard to community property laws.
(b) Petition for Review By Tax Court.--In the case of an
individual who has filed a claim under subsection (a) within
the period specified in subsection (a)(1)(E)--
(1) In general.--Such individual may petition the Tax
Court (and the Tax Court shall have jurisdiction) to
determine such claim if such petition is filed during
the 90-day period beginning on the earlier of--
(A) the date which is 6 months after the date
such claim is filed with the Secretary, or
(B) the date on which the Secretary mails by
certified or registered mail a notice to such
individual denying such claim.
Such 90-day period shall be determined by not counting
Saturday, Sunday, or a legal holiday in the District of
Columbia as the last day of such period.
(2) Restrictions applicable to collection of
assessment.--
(A) In general.--Except as otherwise provided
in section 6851 or 6861, no levy or proceeding
in court for collection of any assessment to
which such claim relates shall be made, begun,
or prosecuted, until the expiration of the 90-
day period described in paragraph (1), nor, if
a petition has been filed with the Tax Court,
until the decision of the Tax Court has become
final. Rules similar to the rules of section
7485 shall apply with respect to the collection
of such assessment.
(B) Authority to enjoin collection actions.--
Notwithstanding the provisions of section
7421(a), the beginning of such proceeding or
levy during the time the prohibition under
subparagraph (A) is in force may be enjoined by
a proceeding in the proper court, including the
Tax Court. The Tax Court shall have no
jurisdiction to enjoin any action or proceeding
under this paragraph unless a timely petition
for a determination of such claim has been
filed and then only in respect of the amount of
the assessment to which such claim relates.
(C) Jeopardy collection.--If the Secretary
makes a finding that the collection of the tax
is in jeopardy, nothing in this subsection
shall prevent the immediate collection of such
tax.
(c) Suspension of Running of Period of Limitations.--The
running of the period of limitations in section 6502 on the
collection of the assessment to which the petition under
subsection (b) relates shall be suspended for the period during
which the Secretary is prohibited by subsection (b) from
collecting by levy or a proceeding in court and for 60 days
thereafter.
(d) Applicable Rules.--
(1) Allowance of application.--Except as provided in
paragraph (2), notwithstanding any other law or rule of
law (other than section 6512(b), 7121, or 7122), credit
or refund shall be allowed or made to the extent
attributable to the application of this section.
(2) Res judicata.--In the case of any claim under
subsection (a), the determination of the Tax Court in
any prior proceeding for the same taxable periods in
which the decision has become final, shall be
conclusive except with respect to the qualification of
the spouse for relief which was not an issue in such
proceeding. The preceding sentence shall not apply if
the Tax Court determines that the spouse participated
meaningfully in such prior proceeding.
(3) Limitation on tax court jurisdiction.--If a suit
for refund is begun by either spouse pursuant to
section 6532, the Tax Court shall lose jurisdiction of
the spouse's action under this section to whatever
extent jurisdiction is acquired by the district court
or the United States Court of Federal Claims over the
taxable years that are the subject of the suit for
refund.

SEC. 6061. SIGNING OF RETURNS AND OTHER DOCUMENTS.

[Except as otherwise provided by]
(a) General Rule.--Except as otherwise provided by subsection
(b) and sections 6062 and 6063, any return, statement, or other
document required to be made under any provision of the
internal revenue laws or regulations shall be signed in
accordance with forms or regulations prescribed by the
Secretary.
(b) Electronic Signatures.--
(1) In general.--The Secretary shall develop
procedures for the acceptance of signatures in digital
or other electronic form. Until such time as such
procedures are in place, the Secretary may waive the
requirement of a signature for all returns or classes
of returns, or may provide for alternative methods of
subscribing all returns, declarations, statements, or
other documents required or permitted to be made or
written under internal revenue laws and regulations.
(2) Treatment of alternative methods.--
Notwithstanding any other provision of law, any return,
declaration, statement or other document filed without
signature under the authority of this subsection or
verified, signed or subscribed under any method adopted
under paragraph (1) shall be treated for all purposes
(both civil and criminal, including penalties for
perjury) in the same manner as though signed and
subscribed. Any such return, declaration, statement or
other document shall be presumed to have been actually
submitted and subscribed by the person on whose behalf
it was submitted.
(3) Published guidance.--The Secretary shall publish
guidance as appropriate to define and implement any
waiver of the signature requirements.
* * * * * * *

PART V--TIME FOR FILING RETURNS AND OTHER DOCUMENTS

* * * * * * *

SEC. 6071. TIME FOR FILING RETURNS AND OTHER DOCUMENTS.

(a) General Rule.--When not otherwise provided for by this
title, the Secretary shall by regulations prescribe the time
for filing any return, statement, or other document required by
this title or by regulations.
(b) Electronically Filed Information Returns.--Returns made
under subparts B and C of part III of this subchapter which are
filed electronically shall be filed on or before March 31 of
the year following the calendar year to which such returns
relate.
[(b)] (c) Special Taxes.--For payment of special taxes before
engaging in certain trades and businesses, see section 4901 and
section 5142.
* * * * * * *

Subchapter B--Miscellaneous Provisions

* * * * * * *

SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN
INFORMATION.

(a) * * *
* * * * * * *
(l) Disclosure of Returns and Return Information for Purposes
Other Than Tax Administration.--
(1) * * *
* * * * * * *
(17) Disclosure to national archives and records
administration.--The Secretary shall, upon written
request from the Archivist of the United States,
disclose or authorize the disclosure of returns and
return information to officers and employees of the
National Archives and Records Administration for
purposes of, and only to the extent necessary in, the
appraisal of records for destruction or retention. No
such officer or employee shall, except to the extent
authorized by subsections (f), (i)(7), or (p), disclose
any return or return information disclosed under the
preceding sentence to any person other than to the
Secretary, or to another officer or employee of the
National Archives and Records Administration whose
official duties require such disclosure for purposes of
such appraisal.
* * * * * * *
(p) Procedure and Recordkeeping.--
(1) * * *
* * * * * * *
(3) Records of inspection and disclosure.--
(A) System of recordkeeping.--Except as
otherwise provided by this paragraph, the
Secretary shall maintain a permanent system of
standardized records or accountings of all
requests for inspection or disclosure of
returns and return information (including the
reasons for and dates of such requests) and of
returns and return information inspected or
disclosed under this section. Notwithstanding
the provisions of section 552a(c) of title 5,
United States Code, the Secretary shall not be
required to maintain a record or accounting of
requests for inspection or disclosure of
returns and return information, or of returns
and return information inspected or disclosed,
under the authority of subsections (c), (e),
(h)(1), (3)(A), or (4), (i)(4), or (7)(A)(ii),
(k)(1), (2), (6), or (8), (l)(1), (4)(B), (5),
(7), (8), (9), (10), (11), (12), (13), (14),
(15), [or (16)] (16), or (17), (m) or (n). The
records or accountings required to be
maintained under this paragraph shall be
available for examination by the Joint
Committee on Taxation or the Chief of Staff of
such joint committee. Such record or accounting
shall also be available for examination by such
person or persons as may be, but only to the
extent, authorized to make such examination
under section 552a(c)(3) of title 5, United
States Code.
* * * * * * *
(4) Safeguards.--Any Federal agency described in
subsection (h)(2), (h)(6), (i)(1), (2), (3), or (5),
(j)(1) or (2), (k)(8), (l)(1), (2), (3), (5), (11),
(13), [or (14)], (14), or (17) or (o)(1), the General
Accounting Office, or any agency, body, or commission
described in subsection (d), (i)(3)(B)(i) or (l)(6),
(7), (8), (9), (10), (12) or (15) shall, as a condition
for receiving returns or return information--
(A) * * *
* * * * * * *
(F) upon completion of use of such returns or
return information--
(i) * * *
(ii) in the case of an agency
described in subsections (h)(2),
(h)(6), (i)(1), (2), (3), or (5),
(j)(1) or (2), (k)(8), (l)(1), (2),
(3), (5), (10), (11), (12), (13), (14),
[or (15)], (15), or (17) or (o)(1), or
the General Accounting Office, either--
(I) * * *
* * * * * * *

CHAPTER 63--ASSESSMENT

* * * * * * *

Subchapter A--In General

* * * * * * *

SEC. 6201. ASSESSMENT AUTHORITY.

(a) * * *
* * * * * * *
[(d) Required Reasonable Verification of Information
Returns.--In any court proceeding, if a taxpayer asserts a
reasonable dispute with respect to any item of income reported
on an information return filed with the Secretary under subpart
B or C of part III of subchapter A of chapter 61 by a third
party and the taxpayer has fully cooperated with the Secretary
(including providing, within a reasonable period of time,
access to and inspection of all witnesses, information, and
documents within the control of the taxpayer as reasonably
requested by the Secretary), the Secretary shall have the
burden of producing reasonable and probative information
concerning such deficiency in addition to such information
return.]
[(e)] (d) Deficiency Proceedings.--For special rules
applicable to deficiencies of income, estate, gift, and certain
excise taxes, see subchapter B.
* * * * * * *

Subchapter B--Deficiency Procedures in the Case of Income, Estate,
Gift, and Certain Excise Taxes

SEC. 6213. RESTRICTIONS APPLICABLE TO DEFICIENCIES; PETITION TO TAX
COURT.

(a) Time for Filing Petition and Restriction on Assessment.--
Within 90 days, or 150 days if the notice is addressed to a
person outside the United States, after the notice of
deficiency authorized in section 6212 is mailed (not counting
Saturday, Sunday, or a legal holiday in the District of
Columbia as the last day), the taxpayer may file a petition
with the Tax Court for a redetermination of the deficiency.
Except as otherwise provided in section 6851, 6852, or 6861 no
assessment of a deficiency in respect of any tax imposed by
subtitle A, or B, chapter 41, 42, 43, or 44 and no levy or
proceeding in court for its collection shall be made, begun, or
prosecuted until such notice has been mailed to the taxpayer,
nor until the expiration of such 90-day or 150-day period, as
the case may be, nor, if a petition has been filed with the Tax
Court, until the decision of the Tax Court has become final.
Notwithstanding the provisions of section 7421(a), the making
of such assessment or the beginning of such proceeding or levy
during the time such prohibition is in force may be enjoined by
a proceeding in the proper court[, including the Tax Court.],
including the Tax Court, and a refund may be ordered by such
court of any amount collected within the period during which
the Secretary is prohibited from collecting by levy or through
a proceeding in court under the provisions of this subsection.
The Tax Court shall have no jurisdiction [to enjoin any action
or proceeding] to enjoin any action or proceeding or order any
refund under this subsection unless a timely petition for a
redetermination of the deficiency has been filed and then only
in respect of the deficiency that is the subject of such
petition. Any petition filed with the Tax Court on or before
the last date specified for filing such petition by the
Secretary in the notice of deficiency shall be treated as
timely filed.
* * * * * * *

Subchapter C--Tax Treatment of Partnership Items

* * * * * * *

SEC. 6230. ADDITIONAL ADMINISTRATIVE PROVISIONS.

(a) * * *
* * * * * * *
(c) Claims arising out of erroneous computations, etc..--
(1) * * *
* * * * * * *
(5) Rules for seeking innocent spouse relief.--
(A) In general.--The spouse of a partner may
file a claim for refund on the ground that the
Secretary failed to relieve the spouse under
section [6013(e)] 6015 from a liability that is
attributable to an adjustment to a partnership
item.
* * * * * * *

CHAPTER 64--COLLECTION

* * * * * * *

Subchapter D--Seizure of Property for Collection of Taxes

* * * * * * *

SEC. 6344. CROSS REFERENCES.

(a) * * *
(b) Delinquent Collection Officers.--
For distraint proceedings against delinquent internal revenue
officers, see [section 7803(d)] section 7804(c).
* * * * * * *

CHAPTER 66--LIMITATIONS

* * * * * * *

Subchapter A--Limitations on Assessment and Collection

* * * * * * *

SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.

(a) * * *
* * * * * * *
(c) Exceptions.--
(1) * * *
* * * * * * *
(4) Extension by agreement.--[Where]
(A) In general.--Where, before the expiration
of the time prescribed in this section for the
assessment of any tax imposed by this title,
except the estate tax provided in chapter 11,
both the Secretary and the taxpayer have
consented in writing to its assessment after
such time, the tax may be assessed at any time
prior to the expiration of the period agreed
upon. The period so agreed upon may be extended
by subsequent agreements in writing made before
the expiration of the period previously agreed
upon.
(B) Notice to taxpayer of right to refuse or
limit extension.--The Secretary shall notify
the taxpayer of the taxpayer's right to refuse
to extend the period of limitations, or to
limit such extension to particular issues, on
each occasion when the taxpayer is requested to
provide such consent.
* * * * * * *

Subchapter B--Limitations on Credit or Refund

* * * * * * *

SEC. 6511. LIMITATIONS ON CREDIT OR REFUND.

(a) * * *
* * * * * * *
(h) Running of Periods of Limitation Suspended While Taxpayer
Is Unable To Manage Financial Affairs Due to Disability.--
(1) In general.--In the case of an individual, the
running of the periods specified in subsections (a),
(b), and (c) shall be suspended during any period of
such individual's life that such individual is
financially disabled.
(2) Financially disabled.--
(A) In general.--For purposes of paragraph
(1), an individual is financially disabled if
such individual is unable to manage his
financial affairs by reason of his medically
determinable physical or mental impairment
which can be expected to result in death or
which has lasted or can be expected to last for
a continuous period of not less than 12 months.
An individual shall not be considered to have
such an impairment unless proof of the
existence thereof is furnished in such form and
manner as the Secretary may require.
(B) Exception where individual has guardian,
etc.--An individual shall not be treated as
financially disabled during any period that
such individual's spouse or any other person is
authorized to act on behalf of such individual
in financial matters.
[(h)] (i) Cross References.--
(1) * * *
* * * * * * *

SEC. 6512. LIMITATIONS IN CASE OF PETITION TO TAX COURT.

(a) Effect of Petition to Tax Court.--If the Secretary has
mailed to the taxpayer a notice of deficiency under section
6212(a) (relating to deficiencies of income, estate, gift, and
certain excise taxes) and if the taxpayer files a petition with
the Tax Court within the time prescribed in section 6213(a) (or
7481(c) with respect to a determination of statutory interest
or section 7481(d) solely with respect to a determination of
estate tax by the Tax Court), no credit or refund of income tax
for the same taxable year, of gift tax for the same calendar
year or calendar quarter, of estate tax in respect of the
taxable estate of the same decedent, or of tax imposed by
chapter 41, 42, 43, or 44 with respect to any act (or failure
to act) to which such petition relates, in respect of which the
Secretary has determined the deficiency shall be allowed or
made and no suit by the taxpayer for the recovery of any part
of the tax shall be instituted in any court except--
(1) * * *
* * * * * * *
(4) As to overpayments attributable to partnership
items, in accordance with subchapter C of chapter
63[.], and
(5) As to any amount collected within the period
during which the Secretary is prohibited from making
the assessment or from collecting by levy or through a
proceeding in court under the provisions of section
6213(a), and
(6) As to overpayments the Secretary is authorized to
refund or credit pending appeal as provided in
subsection (b).
(b) Overpayment Determined by Tax Court.--
(1) Jurisdiction to determine.--Except as provided by
paragraph (3) and by section 7463, if the Tax Court
finds that there is no deficiency and further finds
that the taxpayer has made an overpayment of income tax
for the same taxable year, of gift tax for the same
calendar year, or calendar quarter, of estate tax in
respect of the taxable estate of the same decedent, or
of tax imposed by chapter 41, 42, 43, or 44 with
respect to any act (or failure to act) to which such
petition relates, in respect of which the Secretary
determined the deficiency, or finds that there is a
deficiency but that the taxpayer has made an
overpayment of such tax, the Tax Court shall have
jurisdiction to determine the amount of such
overpayment, and such amount shall, when the decision
of the Tax Court has become final, be credited or
refunded to the taxpayer. If a notice of appeal in
respect of the decision of the Tax Court is filed under
section 7483, the Secretary is authorized to refund or
credit the overpayment determined by the Tax Court to
the extent the overpayment is not contested on appeal.
* * * * * * *

CHAPTER 67--INTEREST

* * * * * * *

Subchapter A--Interest on Overpayments

* * * * * * *

SEC. 6601. INTEREST ON UNDERPAYMENT, NONPAYMENT, OR EXTENSIONS OF TIME
FOR PAYMENT, OF TAX.

(a) * * *
* * * * * * *
(f) Satisfaction by Credits.--If any portion of a tax is
satisfied by credit of an overpayment, then no interest shall
be imposed under this section on the portion of the tax so
satisfied for any period during which, if the credit had not
been made, interest would have been allowable with respect to
such overpayment. The preceding sentence shall not apply to the
extent that section 6621(d) applies.
* * * * * * *

Subchapter C--Determination on Interest Rate, Compounding of Interest

* * * * * * *

SEC. 6621. DETERMINATION OF RATE OF INTEREST.

(a) General Rule.--
(1) Overpayment rate.--The overpayment rate
established under this section shall be the sum of--
(A) the Federal short-term rate determined
under subsection (b), plus
[(B) 2 percentage points.]
(B) 3 percentage points (2 percentage points
in the case of a corporation).
To the extent that an overpayment of tax by a
corporation for any taxable period (as defined in
subsection (c)(3), applied by substitiuting
``overpayment'' for ``underpayment'') exceeds $10,000,
subparagraph (B) shall be applied by substituting ``0.5
percentage point'' for ``2 percentage points''.
* * * * * * *
(d) Elimination of Interest on Overlapping Periods of Income
Tax Overpayments and Underpayments.--To the extent that, for
any period, interest is payable under subchapter A and
allowable under subchapter B on equivalent underpayments and
overpayments by the same taxpayer of tax imposed by chapters 1
and 2, the net rate of interest under this section on such
amounts shall be zero for such period.
* * * * * * *

CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNT, AND ASSESSABLE
PENALTIES

* * * * * * *

Subchapter A--Additions to the Tax and Additional Amounts

* * * * * * *

PART I--GENERAL PROVISIONS

* * * * * * *

SEC. 6651. FAILURE TO FILE TAX RETURN OR TO PAY TAX.

(a) * * *
* * * * * * *
(h) Limitation on Penalty on Individual's Failure To Pay for
Months During Period of Installment Agreement.--No addition to
the tax shall be imposed under paragraph (2) or (3) of
subsection (a) with respect to the tax liability of an
individual for any month during which an installment agreement
under section 6159 is in effect for the payment of such tax to
the extent that imposing an addition to the tax under such
paragraph for such month would result in the aggregate number
of percentage points of such addition to the tax exceeding 9.5.
* * * * * * *

CHAPTER 74--CLOSING AGREEMENTS AND COMPROMISES

* * * * * * *

SEC. 7122. COMPROMISES.

(a) * * *
* * * * * * *
(c) Allowances For Basic Living Expenses.--The Secretary
shall develop and publish schedules of national and local
allowances designed to provide that taxpayers entering into a
compromise have an adequate means to provide for basic living
expenses.
* * * * * * *

CHAPTER 75--CRIMES, OTHER OFFENSES, ABD FORFEITURES

* * * * * * *

Subchapter A--Crimes

* * * * * * *

PART I--GENERAL PROVISIONS

Sec. 7201. Attempt to evade or defeat tax.
* * * * * * *
Sec. 7217. Prohibition on executive branch influence over
taxpayer audits and other investigations.
* * * * * * *

SEC. 7217. PROHIBITION ON EXECUTIVE BRANCH INFLUENCE OVER TAXPAYER
AUDITS AND OTHER INVESTIGATIONS.

(a) Prohibition.--It shall be unlawful for any applicable
person to request any officer or employee of the Internal
Revenue Service to conduct or terminate an audit or other
investigation of any particular taxpayer with respect to the
tax liability of such taxpayer.
(b) Reporting Requirement.--Any officer or employee of the
Internal Revenue Service receiving any request prohibited by
subsection (a) shall report the receipt of such request to the
Chief Inspector of the Internal Revenue Service.
(c) Exceptions.--Subsection (a) shall not apply to--
(1) any request made to an applicable person by the
taxpayer or a representative of the taxpayer and
forwarded by such applicable person to the Internal
Revenue Service,
(2) any request by an applicable person for
disclosure of return or return information under
section 6103 if such request is made in accordance with
the requirements of such section, or
(3) any request by the Secretary of the Treasury as a
consequence of the implementation of a change in tax
policy.
(d) Penalty.--Any person who willfully violates subsection
(a) or fails to report under subsection (b) shall be punished
upon conviction by a fine in any amount not exceeding $5,000,
or imprisonment of not more than 5 years, or both, together
with the costs of prosecution.
(e) Applicable Person.--For purposes of this section, the
term ``applicable person'' means--
(1) the President, the Vice President, any employee
of the executive office of the President, and any
employee of the executive office of the Vice President,
and
(2) any individual (other than the Attorney General
of the United States) serving in a position specified
in section 5312 of title 5, United States Code.
* * * * * * *

CHAPTER 76--JUDICIAL PROCEEDINGS

Subchapter A. Crimes.
* * * * * * *
Subchapter E. Burden of proof.
* * * * * * *

Subchapter B--Proceedings by Taxpayers and Third Parties

* * * * * * *

SEC. 7422. CIVIL ACTIONS FOR REFUND.

(a) * * *
* * * * * * *
(j) Special Rule for Actions With Respect to Estates for
Which An Election Under Section 6166 Is Made.--
(1) In general.--The district courts of the United
States and the United States Court of Federal Claims
shall have jurisdiction over any action brought by the
representative of an estate to which this subsection
applies to determine the correct amount of the estate
tax liability of such estate (or for any refund with
respect thereto) even if the full amount of such
liability has not been paid.
(2) Estates to which subsection applies.--This
subsection shall apply to any estate if, as of the date
the action is filed--
(A) an election under section 6166 is in
effect with respect to such estate,
(B) no portion of the installments payable
under such section have been accelerated, and
(C) all installments the due date for which
is on or before the date the action is filed
have been paid.
(3) Prohibition on collection of disallowed
liability.--If the court redetermines under paragraph
(1) the estate tax liability of an estate, no part of
such liability which is disallowed by a decision of
such court which has become final may be collected by
the Secretary, and amounts paid in excess of the
installments determined by the court as currently due
and payable shall be refunded.
[(j)] (k) Cross References.--
(1) * * *
* * * * * * *

SEC. 7430. AWARDING OF COSTS AND CERTAIN FEES.

(a) * * *
* * * * * * *
(c) Definitions.--For purposes of this section--
(1) Reasonable litigation costs.--The term
``reasonable litigation costs'' includes--
(A) reasonable court costs, and
(B) based upon prevailing market rates for
the kind or quality of services furnished--
(i) * * *
* * * * * * *
(iii) reasonable fees paid or
incurred for the services of attorneys
in connection with the court
proceeding, except that such fees shall
not be in excess of $110 per hour
unless the court determines that a
special factor, such as the limited
availability of qualified attorneys for
such proceeding, the difficulty of the
issues presented in the case, or the
local availability of tax expertise,
justifies a higher rate.
In the case of any calendar year beginning after 1996,
the dollar amount referred to in clause (iii) shall be
increased by an amount equal to such dollar amount
multiplied by the cost-of- living adjustment determined
under section 1(f)(3) for such calendar year, by
substituting ``calendar year 1995'' for ``calendar year
1992'' in subparagraph (B) thereof. If any dollar
amount after being increased under the preceding
sentence is not a multiple of $10, such dollar amount
shall be rounded to the nearest multiple of $10.
(2) Reasonable administrative costs.--The term
``reasonable administrative costs'' means--
(A) any administrative fees or similar
charges imposed by the Internal Revenue
Service, and
(B) expenses, costs, and fees described in
paragraph (1)(B), except that any determination
made by the court under clause (ii) or (iii)
thereof shall be made by the Internal Revenue
Service in cases where the determination under
paragraph (4)(C) of the awarding of reasonable
administrative costs is made by the Internal
Revenue Service.
[Such term shall only include costs incurred on or
after the earlier of (i) the date of the receipt by the
taxpayer of the notice of the decision of the Internal
Revenue Service Office of Appeals, or (ii) the date of
the notice of deficiency.] Such term shall only include
costs incurred on or after whichever of the following
is the earliest: (i) the date of the receipt by the
taxpayer of the notice of the decision of the Internal
Revenue Service Office of Appeals, (ii) the date of the
notice of deficiency, or (iii) the date on which the
1st letter of proposed deficiency which allows the
taxpayer an opportunity for administrative review in
the Internal Revenue Service Office of Appeals is sent.
[(3) Attorney's fees.--For purposes of paragraphs (1)
and (2), fees for the services of an individual
(whether or not an attorney) who is authorized to
practice before the Tax Court or before the Internal
Revenue Service shall be treated as fees for the
services of an attorney.]
(3) Attorney's fees.--
(A) In general.--For purposes of paragraphs
(1) and (2), fees for the services of an
individual (whether or not an attorney) who is
authorized to practice before the Tax Court or
before the Internal Revenue Service shall be
treated as fees for the services of an
attorney.
(B) Pro bono services.--In any case in which
the court could have awarded attorney's fees
under subsection (a) but for the fact that an
individual is representing the prevailing party
for no fee or for a fee which (taking into
account all the facts and circumstances) is no
more than a nominal fee, the court may also
award a judgment or settlement for such amounts
as the court determines to be appropriate
(based on hours worked and costs expended) for
services of such individual but only if such
award is paid to such individual or such
individual's employer.
(4) Prevailing party.--
(A) * * *
(B) Exception if United States establishes
that its position was substantially
justified.--
(i) * * *
* * * * * * *
(iii) Effect of losing on
substantially similar issues.--In
determining for purposes of clause (i)
whether the position of the United
States was substantially justified, the
court shall take into account whether
the United States has lost in courts of
appeal for other circuits on
substantially similar issues.
[(iii)] (iv) Applicable published
guidance.--For purposes of clause (ii),
the term ``applicable published
guidance'' means--
(I) regulations, revenue
rulings, revenue procedures,
information releases, notices,
and announcements, and
(II) any of the following
which are issued to the
taxpayer: private letter
rulings, technical advice
memoranda, and determination
letters.
* * * * * * *

SEC. 7433. CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED COLLECTION ACTIONS.

(a) In General.--If, in connection with any collection of
Federal tax with respect to a taxpayer, any officer or employee
of the Internal Revenue Service recklessly or intentionally, or
by reason of negligence, disregards any provision of this
title, or any regulation promulgated under this title, such
taxpayer may bring a civil action for damages against the
United States in a district court ofthe United States. Except
as provided in section 7432, such civil action shall be the exclusive
remedy for recovering damages resulting from such actions.
(b) Damages.--In any action brought under subsection (a),
upon a finding of liability on the part of the defendant, the
defendant shall be liable to the plaintiff in an amount equal
to the lesser of $1,000,000 ($100,000, in the case of
negligence) or the sum of--
(1) actual, direct economic damages sustained by the
plaintiff as a proximate result of the reckless or
intentional or negligent actions of the officer or
employee, and
* * * * * * *
(d) Limitations.--
[(1) Award for damages may be reduced if
administrative remedies not exhausted.--The amount of
damages awarded under subsection (b) may be reduced if
the court determines that the plaintiff has not
exhausted the administrative remedies available to such
plaintiff within the Internal Revenue Service.]
(1) Requirement that administrative remedies be
exhausted.--A judgment for damages shall not be awarded
under subsection (b) unless the court determines that
the plaintiff has exhausted the administrative remedies
available to such plaintiff within the Internal Revenue
Service.
* * * * * * *

Subchapter C--The Tax Court

* * * * * * *

PART II--PROCEDURE

Sec. 7451. Fee for filing petition.
* * * * * * *
Sec. 7463. Disputes involving [$10,000] $25,000 or less.
* * * * * * *

SEC. 7463. DISPUTES INVOLVING [$10,000] $25,000 OR LESS.

(a) In General.--In the case of any petition filed with the
Tax Court for a redetermination of a deficiency where neither
the amount of the deficiency placed in dispute, nor the amount
of any claimed overpayment, exceeds--
(1) [$10,000] $25,000 for any one taxable year, in
the case of the taxes imposed by subtitle A,
(2) [$10,000] $25,000, in the case of the tax imposed
by chapter 11,
(3) [$10,000] $25,000 for any one calendar year, in
the case of the tax imposed by chapter 12, or
(4) [$10,000] $25,000 for any 1 taxable period (or,
if there is no taxable period, taxable event) in the
case of any tax imposed by subtitle D which is
described in section 6212(a) (relating to a notice of
deficiency), at the option of the taxpayer concurred in
by the Tax Court or a division thereof before the
hearing of the case, proceedings in the case shall be
conducted under this section. Notwithstanding the
provisions of section 7453, such proceedings shall be
conducted in accordance with such rules of evidence,
practice, and procedure as the Tax Court may prescribe.
A decision, together with a brief summary of the
reasons therefor, in any such case shall satisfy the
requirements of sections 7459(b) and 7460.
* * * * * * *

PART IV--DECLARATORY JUDGMENTS

* * * * * * *

SEC. 7479. DECLARATORY JUDGMENTS RELATING TO ELIGIBILITY OF ESTATE WITH
RESPECT TO INSTALLMENT PAYMENTS UNDER SECTION 6166.

(a) * * *
* * * * * * *
(c) Extension of Time To File Refund Suit.--The 2-year period
in section 6532(a)(1) for filing suit for refund after
disallowance of a claim shall be suspended during the 90-day
period after the mailing of the notice referred to in
subsection (b)(3) and, if a pleading has been filed with the
Tax Court under this section, until the decision of the Tax
Court has become final.
* * * * * * *

Subchapter E--Burden of Proof

Sec. 7491. Burden of proof.

SEC. 7491. BURDEN OF PROOF.

(a) General Rule.--The Secretary shall have the burden of
proof in any court proceeding with respect to any factual issue
relevant to ascertaining the income tax liability of a
taxpayer.
(b) Limitations.--Subsection (a) shall only apply with
respect to an issue if--
(1) the taxpayer asserts a reasonable dispute with
respect to such issue,
(2) the taxpayer has fully cooperated with the
Secretary with respect to such issue, including
providing, within a reasonable period of time, access
to and inspection of all witnesses, information, and
documents within the control of the taxpayer, as
reasonably requested by the Secretary, and
(3) in the case of a partnership, corporation, or
trust, the taxpayer is described in section
7430(c)(4)(A)(ii).
(c) Substantiation.--Nothing in this section shall be
construed to override any requirement of this title to
substantiate any item.

CHAPTER 77--MISCELLANEOUS PROVISIONS

Sec. 7501. Liability for texes withheld or collected.
* * * * * * *
Sec. 7525. Low income taxpayer clinics.
* * * * * * *

SEC. 7502. TIMELY MAILING TREATED AS TIMELY FILING AND PAYING.

(a) * * *
* * * * * * *
[(c) Registered and Certified Mailing.--
[(1) Registered mail.--For purposes of this section,
if any such return, claim, statement, or other
document, or payment, is sent by United States
registered mail--
[(A) such registration shall be prima facie
evidence that the return, claim, statement, or
other document was delivered to the agency,
officer, or office to which addressed, and
[(B) the date of registration shall be deemed
the postmark date.
[(2) Certified mail.--The Secretary is authorized to
provide by regulations the extent to which the
provisions of paragraph (1) of this subsection with
respect to prima facie evidence of delivery and the
postmark date shall apply to certified mail.]
(c) Registered and Certified Mailing; Electronic Filing.--
(1) Registered mail.--For purposes of this section,
if any return, claim, statement, or other document, or
payment, is sent by United States registered mail--
(A) such registration shall be prima facie
evidence that the return, claim, statement, or
other document was delivered to the agency,
officer, or office to which addressed, and
(B) the date of registration shall be deemed
the postmark date.
(2) Certified mail; electronic filing.--The Secretary
is authorized to provide by regulations the extent to
which the provisions of paragraph (1) with respect to
prima facie evidence of delivery and the postmark date
shall apply to certified mail and electronic filing.
* * * * * * *

SEC. 7525. LOW INCOME TAXPAYER CLINICS.

(a) In General.--The Secretary shall make grants to provide
matching funds for the development, expansion, or continuation
of qualified low income taxpayer clinics.
(b) Definitions.--For purposes of this section--
(1) Qualified low income taxpayer clinic.--
(A) In general.--The term ``qualified low
income taxpayer clinic'' means a clinic that--
(i) does not charge more than a
nominal fee for its services (except
for reimbursement of actual costs
incurred), and
(ii)(I) represents low income
taxpayers in controversies with the
Internal Revenue Service, or
(II) operates programs to inform
individuals for whom English is a
second language about their rights and
responsibilities under this title.
(B) Representation of low income taxpayers.--
A clinic meets the requirements of subparagraph
(A)(ii)(I) if--
(i) at least 90 percent of the
taxpayers represented by the clinic
have incomes which do not exceed 250
percent of the poverty level, as
determined in accordance with criteria
established by the Director of the
Office of Management and Budget, and
(ii) the amount in controversy for
any taxable year generally does not
exceed the amount specified in section
7463.
(2) Clinic.--The term ``clinic'' includes--
(A) a clinical program at an accredited law
school in which students represent low income
taxpayers in controversies arising under this
title, and
(B) an organization described in section
501(c) and exempt from tax under section 501(a)
which satisfies the requirements of paragraph
(1) through representation of taxpayers or
referral of taxpayers to qualified
representatives.
(3) Qualified representative.--The term ``qualified
representative'' means any individual (whether or not
an attorney) who is authorized to practice before the
Internal Revenue Service or the applicable court.
(c) Special Rules and Limitations.--
(1) Aggregate limitation.--Unless otherwise provided
by specific appropriation, the Secretary shall not
allocate more than $3,000,000 per year (exclusive of
costs of administering the program) to grants under
this section.
(2) Limitation on annual grants to a clinic.--The
aggregate amount of grants which may be made under this
section to a clinic for a year shall not exceed
$100,000.
(3) Multi-year grants.--Upon application of a
qualified low income taxpayer clinic, the Secretary is
authorized to award a multi-year grant not to exceed 3
years.
(4) Criteria for awards.--In determining whether to
make a grant under this section, the Secretary shall
consider--
(A) the numbers of taxpayers who will be
served by the clinic, including the number of
taxpayers in the geographical area for whom
English is a second language,
(B) the existence of other low income
taxpayer clinics serving the same population,
(C) the quality of the program offered by the
low income taxpayer clinic, including the
qualifications of its administrators and
qualified representatives, and its record, if
any, in providing service to low income
taxpayers, and
(D) alternative funding sources available to
the clinic, including amounts received from
other grants and contributions, and the
endowment and resources of the institution
sponsoring the clinic.
(5) Requirement of matching funds.--A low income
taxpayer clinic must provide matching funds on a dollar
for dollar basis for all grants provided under this
section. Matching funds may include--
(A) the salary (including fringe benefits) of
individuals performing services for the clinic,
and
(B) the cost of equipment used in the clinic.
Indirect expenses, including general overhead of the
institution sponsoring the clinic, shall not be counted
as matching funds.

CHAPTER 78--DISCOVERY OF LIABILITY AND ENFORCEMENT OF TITLE

* * * * * * *

Subchapter A--Examination and Inspection

* * * * * * *

SEC. 7602. EXAMINATION OF BOOKS AND WITNESSES.

(a) * * *
* * * * * * *
(d) Privilege of Confidentiality Extended to Taxpayer's
Dealings with Non-Attorneys Authorized to Practice Before
Internal Revenue Service.--
(1) In general.--In any noncriminal proceeding before
the Internal Revenue Service, the taxpayer shall be
entitled to the same common law protections of
confidentiality with respect to tax advice furnished by
any qualified individual (in a manner consistent with
State law for such individual's profession) as the
taxpayer would have if such individual were an
attorney.
(2) Qualified individual.--For purposes of paragraph
(1), the term ``qualified individual'' means any
individual (other than an attorney) who is authorized
to practice before the Internal Revenue Service.
(e) Limitation on Examination on Unreported Income.--The
Secretary shall not use financial status or economic reality
examination techniques to determine the existence of unreported
income of any taxpayer unless the Secretary has a reasonable
indication that there is a likelihood of such unreported
income.
(f) Limitation on Authority To Require Production of Computer
Source Code.--
(1) In general.--No summons may be issued under this
title, and the Secretary may not begin any action under
section 7604 to enforce any summons, to produce or
examine any tax-related computer source code.
(2) Exception where information not otherwise
available to verify correctness of item on return.--
Paragraph (1) shall not apply to any portion of a tax-
related computer source code if--
(A) the Secretary is unable to otherwise
reasonably ascertain the correctness of any
item on a return from--
(i) the taxpayer's books, papers,
records, or other data, or
(ii) the computer software program
and the associated data which, when
executed, produces the output to
prepare the return for the period
involved, and
(B) the Secretary identifies with reasonable
specificity such portion as to be used to
verify the correctness of such item.
The Secretary shall be treated as meeting the
requirements of subparagraphs (A) and (B) after the
90th day after the Secretary makes a formal request to
the taxpayer and the owner or developer of the computer
software program for the material described in
subparagraph (A)(ii) if such material is not provided
before the close of such 90th day.
(3) Other exceptions.--Paragraph (1) shall not apply
to--
(A) any inquiry into any offense connected
with the administration or enforcement of the
internal revenue laws, and
(B) any tax-related computer source code
developed by (or primarily for the benefit of)
the taxpayer or a related person (within the
meaning of section 267 or 707(b)) for internal
use by the taxpayer or such person and not for
commercial distribution.
(4) Tax-related computer source code.--For purposes
of this subsection, the term ``tax-related computer
source code'' means--
(A) the computer source code for any computer
software program for accounting, tax return
preparation or compliance, or tax planning, or
(B) design and development materials related
to such a software program (including program
notes and memoranda).
(5) Right to contest summons.--The determination of
whether the requirements of subparagraphs (A) and (B)
of paragraph (2) are met or whether any exception under
paragraph (3) applies may be contested in any
proceeding under section 7604.
(6) Protection of trade secrets and other
confidential information.--In any court proceeding to
enforce a summons for any portion of a tax-related
computer source code, the court may issue any order
necessary to prevent the disclosure of trade secrets or
other confidential information with respect to such
source code, including providing that any information
be placed under seal to be opened only as directed by
the court.
* * * * * * *

SEC. 7609. SPECIAL PROCEDURES FOR THIRD-PARTY SUMMONSES.

(a) Notice.--
(1) * * *
* * * * * * *
(3) Third-party recordkeeper defined.--For purposes
of this subsection, the term ``third-party
recordkeeper'' means--
(A) * * *
* * * * * * *
(H) any regulated investment company (as
defined in section 851) and any agent of such
regulated investment company when acting as an
agent thereof, [and]
(I) any enrolled agent[.], and
(J) any owner or developer of a tax-related
computer source code (as defined in section
7602(f)(4)).
Subparagraph (J) shall apply only with respect to a
summons requiring the production of the source code
referred to in subparagraph (J) or the program and data
described in section 7602(f)(2)(A)(ii) to which such
source code relates.
* * * * * * *

CHAPTER 80--GENERAL RULES

* * * * * * *

Subchapter A--Application of Internal Revenue Laws

Sec. 7801. Authority of Department of the Treasury.
[Sec. 7802. Commissioner of Internal Revenue; Assistant
Commissioners; Taxpayer Advocate.
[Sec. 7803. Effect of reorganization plans.
[Sec. 7804. Rules and regulations.]
Sec. 7802. Internal Revenue Service Oversight Board.
Sec. 7803. Commissioner of Internal Revenue; other officials.
Sec. 7804. Other personnel.
* * * * * * *

[SEC. 7802. COMMISSIONER OF INTERNAL REVENUE; ASSISTANT.

[(a) Commissioner of Internal Revenue.--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. The Commissioner of Internal Revenue
shall have such duties and powers as may be prescribed by the
Secretary of the Treasury.
[(b) Assistant Commissioner for Employee Plans and Exempt
Organizations.--
[(1) Establishment of Office.--There is established
within the Internal Revenue Service an office to be
known as the ``Office of Employee Plans and Exempt
Organizations'' to be under the supervision and
direction of an Assistant Commissioner of Internal
Revenue. As head of the Office, the Assistant
Commissioner shall be responsible for carrying out such
functions as the Secretary may prescribe with respect
to organizations exempt from tax under section 501(a)
and with respect to plans to which part I of subchapter
D of chapter 1 applies (and with respect to
organizations designed to be exempt under such section
and plans designed to be plans to which such part
applies).
[(2) Authorization of appropriations.--There is
authorized to be appropriated to the Department of the
Treasury to carry out the functions of the Office an
amount equal to the sum of--
[(A) so much of the collections from taxes
imposed under section 4940 (relating to excise
tax based on investment income) as would have
been collected if the rate of tax under such
section was 2 percent during the second
preceding fiscal year; and
[(B) the greater of--
[(i) an amount equal to the amount
described in paragraph (A); or
[(ii) $30,000,000.
[(c) Assistant Commissioner (Taxpayer Services).--There is
established within the Internal Revenue Service an office to be
known as the ``Office for Taxpayer Services'' to be under the
supervision and direction of an Assistant Commissioner of the
Internal Revenue. The Assistant Commissioner shall be
responsible for taxpayer services such as telephone, walk-in,
and taxpayer educational services, and the design and
production of tax and informational forms.
[(d) Office of Taxpayer Advocate.--
[(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 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 Commissioner of
Internal Revenue. The Taxpayer Advocate shall be
entitled to compensation at the same rate as the
highest level official reporting directly to the Deputy
Commissioner of the Internal Revenue Service.
[(2) Functions of office.--
[(A) In general.--It shall be the function of
the Office of Taxpayer Advocate to--
[(i) assist taxpayers in resolving
problems with the Internal Revenue
Service,
[(ii) identify areas in which
taxpayers have problems in dealings
with the Internal Revenue Service,
[(iii) to the extent possible,
propose changes in the administrative
practices of the Internal Revenue
Service to mitigate problems identified
under clause (ii), and
[(iv) identify potential legislative
changes which may be appropriate to
mitigate such problems.
[(B) Annual reports.--
[(i) Objectives.--Not later than June
30 of each calendar year after 1995,
the Taxpayer Advocate shall report to
the Committee on Ways and Means of the
House of Representatives and the
Committee on Finance of the Senate on
the objectives of the Taxpayer Advocate
for the fiscal year beginning in such
calendar year. Any such report shall
contain full and substantive analysis,
in addition to statistical information.
[(ii) Activities.--Not later than
December 31 of each calendar year after
1995, the Taxpayer Advocate shall
report to the Committee on Ways and
Means of the House of Representatives
and the Committee on Finance of the
Senate on the activities of the
Taxpayer Advocate during the fiscal
year ending during such calendar year.
Any such report shall contain full and
substantive analysis, in addition to
statistical information, and shall--
[(I) identify the initiatives
the Taxpayer Advocate has taken
on improving taxpayer services
and Internal Revenue Service
responsiveness,
[(II) contain recommendations
received from individuals with
the authority to issue Taxpayer
Assistance Orders under section
7811,
[(III) contain a summary of
at least 20 of the most serious
problems encountered by
taxpayers, including a
description of the nature of
such problems,
[(IV) contain an inventory of
the items described in
subclauses (I), (II), and (III)
for which action has been taken
and the result of such action,
[(V) contain an inventory of
the items described in
subclauses (I), (II), and (III)
for which action remains to be
completed and the period during
which each item has remained on
such inventory,
[(VI) contain an inventory of
the items described in
subclauses (II) and (III) for
which no action has been taken,
the period during which each
item has remained on such
inventory, the reasons for the
inaction, and identify any
Internal Revenue Service
official who is responsible for
such inaction,
[(VII) identify any Taxpayer
Assistance Order which was not
honored by the Internal Revenue
Service in a timely manner, as
specified under section
7811(b),
[(VIII) contain
recommendations for such
administrative and legislative
action as may be appropriate to
resolve problems encountered by
taxpayers,
[(IX) describe the extent to
which regional problem
resolution officers participate
in the selection and evaluation
of local problem resolution
officers, and
[(X) include such other
information as the Taxpayer
Advocate may deem advisable.
[(iii) Report to be submitted
directly.--Each report required under
this subparagraph shall be provided
directly to the Committees referred to
in clauses (i) and (ii) without any
prior review or comment from the
Commissioner, the Secretary of the
Treasury, any other officer or employee
of the Department of the Treasury, or
the Office of Management and Budget.
[(3) Responsibilities of Commissioner.--The
Commissioner of Internal Revenue shall establish
procedures requiring a formal response to all
recommendations submitted to the Commissioner by the
Taxpayer Advocate within 3 months after submission to
the Commissioner.

[SEC. 7803. OTHER PERSONNEL.

[(a) Appointment and Supervision.--The Secretary is
authorized to employ such number of persons as the Secretary
deems proper for the administration and enforcement of the
internal revenue laws, and the Secretary shall issue all
necessary directions, instructions, orders, and rules
applicable to such persons.
[(b) Posts of Duty of Employees in Field Service or
Traveling.--
[(1) Designation of post of duty.--The Secretary
shall determine and designate the posts of duty of all
such persons engaged in field work or traveling on
official business outside of the District of Columbia.
[(2) Detail of personnel from field service.--The
Secretary may order any such person engaged in field
work to duty in the District of Columbia, for such
periods as the Secretary may prescribe, and to any
designated post of duty outside the District of
Columbia upon the completion of such duty.
[(c) Delinquent Internal Revenue Officers and Employees.--If
any officer or employee of the Treasury Department acting in
connection with the internal revenue laws fails to account for
and pay over any amount of money or property collected or
received by him in connection with the internal revenue laws,
the Secretary shall issue notice and demand to such officer or
employee for payment of the amount which he failed to account
for and pay over, and, upon failure to pay the amount demanded
within the time specified in such notice, the amount so
demanded shall be deemed imposed upon such officer or employee
and assessed upon the date of such notice and demand, and the
provisions of chapter 64 and all other provisions of law
relating to the collection of assessed taxes shall be
applicable in respect of such amount.

[SEC. 7804. EFFECT OF REORGANIZATION PLANS

[(a) Application.--The provisions of Reorganization Plan
Numbered 26 of 1950 and Reorganization Plan Numbered 1 of 1952
shall be applicable to all functions vested by this title, or
by any act amending this title (except as otherwise expressly
provided in such amending act), in any officer, employee, or
agency, of the Department of the Treasury.
[(b) Preservation of existing rights and remedies.--Nothing
in Reorganization Plan Numbered 26 of 1950 or Reorganization
Plan Numbered 1 of 1952 shall be considered to impair any right
or remedy, including trial by jury, to recover any internal
revenue tax alleged to have been erroneously or illegally
assessed or collected, or any penalty claimed to have been
collected without authority, or any sum alleged to have been
excessive or in any manner wrongfully collected under the
internal revenue laws. For the purpose of any action to recover
any such tax, penalty, or sum, all statutes, rules, and
regulations referring to the collector of internal revenue, the
principal officer for the internal revenue district, or the
Secretary, shall be deemed to refer to the officer whose act or
acts referred to in the preceding sentence gave rise to such
action. The venue of any such action shall be the same as under
existing law.]

SEC. 7802. INTERNAL REVENUE SERVICE OVERSIGHT BOARD.

(a) Establishment.--There is established within the
Department of the Treasury the Internal Revenue Service
Oversight Board (hereafter in this subchapter referred to as
the ``Oversight Board'').
(b) Membership.--
(1) Composition.--The Oversight Board shall be
composed of 11 members, as follows:
(A) 8 members shall be individuals who are
not Federal officers or employees and who are
appointed by the President, by and with the
advice and consent of the Senate.
(B) 1 member shall be the Secretary of the
Treasury or, if the Secretary so designates,
the Deputy Secretary of the Treasury.
(C) 1 member shall be the Commissioner of
Internal Revenue.
(D) 1 member shall be an individual who is a
representative of an organization that
represents a substantial number of Internal
Revenue Service employees and who is appointed
by the President, by and with the advice and
consent of the Senate.
(2) Qualifications and terms.--
(A) Qualifications.--Members of the Oversight
Board described in paragraph (1)(A) shall be
appointed solely on the basis of their
professional experience and expertise in 1 or
more of the following areas:
(i) Management of large service
organizations.
(ii) Customer service.
(iii) Federal tax laws, including tax
administration and compliance.
(iv) Information technology.
(v) Organization development.
(vi) The needs and concerns of
taxpayers.
In the aggregate, the members of the Oversight
Board described in paragraph (1)(A) should
collectively bring to bear expertise in all of
the areas described in the preceding sentence.
(B) Terms.--Each member who is described in
paragraph (1)(A) or (D) shall be appointed for
a term of 5 years, except that of the members
first appointed under paragraph (1)(A)--
(i) 1 member shall be appointed for a
term of 1 year,
(ii) 1 member shall be appointed for
a term of 2 years,
(iii) 2 members shall be appointed
for a term of 3 years, and
(iv) 2 members shall be appointed for
a term of 4 years.
Such terms shall begin on the date of
appointment.
(C) Reappointment.--An individual who is
described in paragraph (1)(A) may be appointed
to no more than two 5-year terms on the
Oversight Board.
(D) Vacancy.--Any vacancy on the Oversight
Board 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.
(E) Special government employees.--During the
entire period that an individual appointed
under paragraph (1)(A) is a member of the
Oversight Board, such individual shall be
treated as--
(i) serving as a special government
employee (as defined in section 202 of
title 18, United States Code) and as
described in section 207(c)(2) of such
title 18, and
(ii) serving as an officer or
employee referred to in section 101(f)
of the Ethics in Government Act of 1978
for purposes of title I of such Act.
(3) Quorum.--6 members of the Oversight Board shall
constitute a quorum. A majority of members present and
voting shall be required for the Oversight Board to
take action.
(4) Removal.--
(A) In general.--Any member of the Oversight
Board may be removed at the will of the
President.
(B) Secretary and commissioner.--An
individual described in subparagraph (B) or (C)
of paragraph (1) shall be removed upon
termination of employment.
(C) Representative of internal revenue
service employees.--The member described in
paragraph (1)(D) shall be removed upon
termination of employment, membership, or other
affiliation with the organization described in
such paragraph.
(5) Claims.--
(A) In general.--Members of the Oversight
Board who are described in paragraph (1)(A) or
(D) shall have no personal liability under
Federal law with respect to any claim arising
out of or resulting from an act or omission by
such member within the scope of service as a
member. The preceding sentence shall not be
construed to limit personal liability for
criminal acts or omissions, willful or
malicious conduct, acts or omissions for
private gain, or any other act or omission
outside the scope of the service of such member
on the Oversight Board.
(B) Effect on other law.--This paragraph
shall not be construed--
(i) to affect any other immunities
and protections that may be available
to such member under applicable law
with respect to such transactions,
(ii) to affect any other right or
remedy against the United States under
applicable law, or
(iii) to limit or alter in any way
the immunities that are available under
applicable law for Federal officers and
employees.
(c) General Responsibilities.--
(1) In general.--The Oversight Board shall oversee
the Internal Revenue Service in its 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.
(2) Exceptions.--The Oversight Board shall have no
responsibilities or authority with respect to--
(A) the development and formulation of
Federal tax policy relating to existing or
proposed internal revenue laws, related
statutes, and tax conventions,
(B) law enforcement activities of the
Internal Revenue Service, including compliance
activities such as criminal investigations,
examinations, and collection activities, or
(C) specific procurement activities of the
Internal Revenue Service.
(3) Restriction on disclosure of return information
to oversight board members.--No return, return
information, or taxpayer return information (as defined
in section 6103(b)) may be disclosed to any member of
the Oversight Board described in subsection (b)(1)(A)
or (D). Any request for information not permitted to be
disclosed under the preceding sentence, and any contact
relating to a specific taxpayer, made by a member of
the Oversight Board so described to an officer or
employee of the Internal Revenue Service shall be
reported by such officer or employee to the Secretary
and the Joint Committee on Taxation.
(d) Specific Responsibilities.--The Oversight Board shall
have the following specific responsibilities:
(1) Strategic plans.--To review and approve strategic
plans of the Internal Revenue Service, including the
establishment of--
(A) mission and objectives, and standards of
performance relative to either, and
(B) annual and long-range strategic plans.
(2) Operational plans.--To review the operational
functions of the Internal Revenue Service, including--
(A) plans for modernization of the tax
system,
(B) plans for outsourcing or managed
competition, and
(C) plans for training and education.
(3) Management.--To--
(A) recommend to the President candidates for
appointment as the Commissioner of Internal
Revenue and recommend to the President the
removal of the Commissioner,
(B) review the Commissioner's selection,
evaluation, and compensation of senior
managers, and
(C) review and approve the Commissioner's
plans for any major reorganization of the
Internal Revenue Service.
(4) Budget.--To--
(A) review and approve the budget request of
the Internal Revenue Service prepared by the
Commissioner,
(B) submit such budget request to the
Secretary of the Treasury, and
(C) ensure that the budget request supports
the annual and long-range strategic plans.
The Secretary shall submit the budget request referred to in
paragraph (4)(B) for any fiscal year to the President who shall
submit such request, without revision, to Congress together
with the President's annual budget request for the Internal
Revenue Service for such fiscal year.
(e) Board Personnel Matters.--
(1) Compensation of members.--
(A) In general.--Each member of the Oversight
Board who is described in subsection (b)(1)(A)
shall be compensated at a rate of $30,000 per
year. All other members of the Oversight Board
shall serve without compensation for such
service.
(B) Chairperson.--In lieu of the amount
specified in subparagraph (A), the Chairperson
of the Oversight Board shall be compensated at
a rate of $50,000.
(2) Travel expenses.--The members of the Oversight
Board 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 for purposes of
attending meetings of the Oversight Board.
(3) Staff.--At the request of the Chairperson of the
Oversight Board, the Commissioner shall detail to the
Oversight Board such personnel as may be necessary to
enable the Oversight Board to perform its duties. Such
detail shall be without interruption or loss of civil
service status or privilege.
(4) Procurement of temporary and intermittent
services.--The Chairperson of the Oversight Board may
procure temporary and intermittent services under
section 3109(b) of title 5, United States Code.
(f) Administrative Matters.--
(1) Chair.--The members of the Oversight Board shall
elect for a 2-year term a chairperson from among the
members appointed under subsection (b)(1)(A).
(2) Committees.--The Oversight Board may establish
such committees as the Oversight Board determines
appropriate.
(3) Meetings.--The Oversight Board shall meet at
least once each month and at such other times as the
Oversight Board determines appropriate.
(4) Reports.--The Oversight Board shall each year
report to the President and the Congress with respect
to the conduct of its responsibilities under this
title.

SEC. 7803. COMMISSIONER OF INTERNAL REVENUE; OTHER OFFICIALS.

(a) Commissioner of Internal Revenue.--
(1) Appointment.--
(A) In general.--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.
(B) 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 only for the
remainder of that term.
(C) Removal.--The Commissioner may be removed
at the will of the President.
(2) Duties.--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 a candidate
for appointment as Chief Counsel for the
Internal Revenue Service when a vacancy occurs,
and recommend to the President 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 Ways and
Means, Government Reform and Oversight, and
Appropriations of the House of Representatives, the
Committees on Finance, Government Operations, and
Appropriations of the Senate, and the Joint Committee
on Taxation.
(3) Consultation with board.--The Commissioner shall
consult with the Oversight Board on all matters set
forth in paragraphs (2) and (3) (other than paragraph
(3)(A)) of section 7802(d).
(b) Assistant Commissioner for Employee Plans and Exempt
Organizations.--There is established within the Internal
Revenue Service an office to be known as the ``Office of
Employee Plans and Exempt Organizations'' to be under the
supervision and direction of an Assistant Commissioner of
Internal Revenue. As head of the Office, the Assistant
Commissioner shall be responsible for carrying out such
functions as the Secretary may prescribe with respect to
organizations exempt from tax under section 501(a) and with
respect to plans to which part I of subchapter D of chapter 1
applies (and with respect to organizations designed to be
exempt under such section and plans designed to be plans to
which such part applies) and other nonqualified deferred
compensation arrangements. The Assistant Commissioner shall
report annually to the Commissioner with respect to the
Assistant Commissioner's responsibilities under this section.
(c) Office of Taxpayer Advocate.--
(1) In general.--
(A) Establishment.--There is established in
the Internal Revenue Service an office to be
known as the ``Office of the Taxpayer
Advocate''. Such office shall be under the
supervision and direction of an official to be
known as the ``Taxpayer Advocate'' who shall be
appointed with the approval of the Oversight
Board by the Commissioner of Internal Revenue
and shall report directly to the Commissioner.
The Taxpayer Advocate shall be entitled to
compensation at the same rate as the highest
level official reporting directly to the
Commissioner of Internal Revenue.
(B) Restriction on subsequent employment.--An
individual who is an officer or employee of the
Internal Revenue Service may be appointed as
Taxpayer Advocate only if such individual
agrees not to accept any employment with the
Internal Revenue Service for at least 5 years
after ceasing to be the Taxpayer Advocate.
(2) Functions of office.--
(A) In general.--It shall be the function of
the Office of Taxpayer Advocate to--
(i) assist taxpayers in resolving
problems with the Internal Revenue
Service,
(ii) identify areas in which
taxpayers have problems in dealings
with the Internal Revenue Service,
(iii) to the extent possible, propose
changes in the administrative practices
of the Internal Revenue Service to
mitigate problems identified under
clause (ii), and
(iv) identify potential legislative
changes which may be appropriate to
mitigate such problems.
(B) Annual reports.--
(i) Objectives.--Not later than June
30 of each calendar year, the Taxpayer
Advocate shall report to the Committee
on Ways and Means of the House of
Representatives and the Committee on
Finance of the Senate on the objectives
of the Taxpayer Advocate for the fiscal
year beginning in such calendar year.
Any such report shall contain full and
substantive analysis, in addition to
statistical information.
(ii) Activities.--Not later than
December 31 of each calendar year, the
Taxpayer Advocate shall report to the
Committee on Ways and Means of the
House of Representatives and the
Committee on Finance of the Senate on
the activities of the Taxpayer Advocate
during the fiscal year ending during
such calendar year. Any such report
shall contain full and substantive
analysis, in addition to statistical
information, and shall--
(I) identify the initiatives
the Taxpayer Advocate has taken
on improving taxpayer services
and Internal Revenue Service
responsiveness,
(II) contain recommendations
received from individuals with
the authority to issue Taxpayer
Assistance Orders under section
7811,
(III) contain a summary of at
least 20 of the most serious
problems encountered by
taxpayers, including a
description of the nature of
such problems,
(IV) contain an inventory of
the items described in
subclauses (I), (II), and (III)
for which action has been taken
and the result of such action,
(V) contain an inventory of
the items described in
subclauses (I), (II), and (III)
for which action remains to be
completed and the period during
which each item has remained on
such inventory,
(VI) contain an inventory of
the items described in
subclauses (I), (II), and (III)
for which no action has been
taken, the period during which
each item has remained on such
inventory, the reasons for the
inaction, and identify any
Internal Revenue Service
official who is responsible for
such inaction,
(VII) identify any Taxpayer
Assistance Order which was not
honored by the Internal Revenue
Service in a timely manner, as
specified under section
7811(b),
(VIII) contain
recommendations for such
administrative and legislative
action as may be appropriate to
resolve problems encountered by
taxpayers,
(IX) identify areas of the
tax law that impose significant
compliance burdens on taxpayers
or the Internal Revenue
Service, including specific
recommendations for remedying
these problems,
(X) in conjunction with the
National Director of Appeals,
identify the 10 most litigated
issues for each category of
taxpayers, including
recommendations for mitigating
such disputes, and
(XI) include such other
information as the Taxpayer
Advocate may deem advisable.
(iii) Report to be submitted
directly.--Each report required under
this subparagraph shall be provided
directly to the committees described in
clauses (i) and (ii) without any prior
review or comment from the Oversight
Board, the Secretary of the Treasury,
any other officer or employee of the
Department of the Treasury, or the
Office of Management and Budget.
(C) Other responsibilities.--The Taxpayer
Advocate shall--
(i) monitor the coverage and
geographic allocation of problem
resolution officers, and
(ii) develop guidance to be
distributed to all Internal Revenue
Service officers and employees
outlining the criteria for referral of
taxpayer inquiries to problem
resolution officers.
(3) Responsibilities of commissioner.--The
Commissioner shall establish procedures requiring a
formal response to all recommendations submitted to the
Commissioner by the Taxpayer Advocate within 3 months
after submission to the Commissioner.

SEC. 7804. OTHER PERSONNEL.

(a) Appointment and Supervision.--Unless otherwise prescribed
by the Secretary, the Commissioner of Internal Revenue is
authorized to employ such number of persons as the Commissioner
deems proper for the administration and enforcement of the
internal revenue laws, and the Commissioner shall issue all
necessary directions, instructions, orders, and rules
applicable to such persons.
(b) Posts of Duty of Employees in Field Service or
Traveling.--Unless otherwise prescribed by the Secretary--
(1) Designation of post of duty.--The Commissioner
shall determine and designate the posts of duty of all
such persons engaged in field work or traveling on
official business outside of the District of Columbia.
(2) Detail of personnel from field service.--The
Commissioner may order any such person engaged in field
work to duty in the District of Columbia, for such
periods as the Commissioner may prescribe, and to any
designated post of duty outside the District of
Columbia upon the completion of such duty.
(c) Delinquent Internal Revenue Officers and Employees.--If
any officer or employee of the Treasury Department acting in
connection with the internal revenue laws fails to account for
and pay over any amount of money or property collected or
received by him in connection with the internal revenue laws,
the Secretary shall issue notice and demand to such officer or
employee for payment of the amount which he failed to account
for and pay over, and, upon failure to pay the amount demanded
within the time specified in such notice, the amount so
demanded shall be deemed imposed upon such officer or employee
and assessed upon the date of such notice and demand, and the
provisions of chapter 64 and all other provisions of law
relating to the collection of assessed taxes shall be
applicable in respect of such amount.

SEC. 7805. RULES AND REGULATIONS.

(a) * * *
* * * * * * *
(d) Manner of Making Elections Prescribed by Secretary.--
Except to the extent otherwise provided by this title, any
election under this title shall be made at such time and in
such manner as the Secretary shall [by regulations or forms]
prescribe.
* * * * * * *

SEC. 7811. TAXPAYER ASSISTANCE ORDERS.

(a) Authority to Issue.--[Upon application]
(1) In general.--Upon application filed by a taxpayer
with the Office of the Taxpayer Advocate (in such form,
manner, and at such time as the Secretary shall by
regulations prescribe), the Taxpayer Advocate may issue
a Taxpayer Assistance Order if, in the determination of
the Taxpayer Advocate, the taxpayer is suffering or
about to suffer a significant hardship as a result of
the manner in which the internal revenue laws are being
administered by the Secretary.
(2) Issuance of taxpayer assistance orders.--For
purposes of determining whether to issue a taxpayer
assistance order, the Taxpayer Advocate shall consider
the following factors, among others:
(A) Whether there is an immediate threat of
adverse action.
(B) Whether there has been an unreasonable
delay in resolving taxpayer account problems.
(C) Whether the taxpayer will have to pay
significant costs (including fees for
professional representation) if relief is not
granted.
(D) Whether the taxpayer will suffer
irreparable injury, or a long-term adverse
impact, if relief is not granted.
(3) Standard where administrative guidance not
followed.--In cases where any Internal Revenue Service
employee is not following applicable published
administrative guidance (including the Internal Revenue
Manual), the Taxpayer Advocate shall construe the
factors taken into account in determining whether to
issue a taxpayer assistance order in the manner most
favorable to the taxpayer.
* * * * * * *

CHAPTER 92--POWERS AND DUTIES OF JOINT COMMITTEE

Sec. 8021. Powers.
* * * * * * *
Sec. 8024. Tax complexity analysis.
* * * * * * *

SEC. 8021. POWERS.

(a) * * *
* * * * * * *
(e) Investigations.--The Joint Committee shall review all
requests (other than requests by the chairman or ranking member
of a Committee or Subcommittee) for investigations of the
Internal Revenue Service by the General Accounting Office, and
approve such requests when appropriate, with a view towards
eliminating overlapping investigations, ensuring that the
General Accounting Office has the capacity to handle the
investigation, and ensuring that investigations focus on areas
of primary importance to tax administration.
(f) Relating to Joint Hearings.--
(1) In general.--The Chief of Staff, and such other
staff as are appointed pursuant to section 8004, shall
provide such assistance as is required for joint
hearings described in paragraph (2).
(2) Joint hearings.--On or before April 1 of each
calendar year after 1997, there shall be a joint
hearing of two members of the majority and one member
of the minority from each of the Committees on Finance,
Appropriations, and Government Affairs of the Senate,
and the Committees on Ways and Means, Appropriations,
and Government Reform and Oversight of the House of
Representatives, to review the strategic plans and
budget for the Internal Revenue Service. After the
conclusion of the annual filing season, there shall be
a second annual joint hearing to review the other
matters outlined in section 8022(3)(C).

SEC. 8022. DUTIES.

It shall be the duty of the Joint Committee--
(1) * * *
* * * * * * *
[(3) Reports.--To report, from time to time, to the
Committee on Finance and the Committee on Ways and
Means, and, in its discretion, to the Senate or the
House of Representatives, or both, the results of its
investigations, together with such recommendations as
it may deem advisable.]
(3) Reports.--
(A) To report, from time to time, to the
Committee on Finance and the Committee on Ways
and Means, and, in its discretion, to the
Senate or House of Representatives, or both,
the results of its investigations, together
with such recommendations as it may deem
advisable.
(B) To report, annually, to the Committee on
Finance and the Committee on Ways and Means on
the overall state of the Federal tax system,
together with recommendations with respect to
possible simplification proposals and other
matters relating to the administration of the
Federal tax system as it may deem advisable.
(C) To report, annually, to the Committees on
Finance, Appropriations, and Government Affairs
of the Senate, and to the Committees on Ways
and Means, Appropriations, and Government
Reform and Oversight of the House of
Representatives, with respect to--
(i) strategic and business plans for
the Internal Revenue Service;
(ii) progress of the Internal Revenue
Service in meeting its objectives;
(iii) the budget for the Internal
Revenue Service and whether it supports
its objectives;
(iv) progress of the Internal Revenue
Service in improving taxpayer service
and compliance;
(v) progress of the Internal Revenue
Service on technology modernization;
and
(vi) the annual filing season.
* * * * * * *

SEC. 8024. TAX COMPLEXITY ANALYSIS.

(a) In General.--If--
(1) legislation is reported by the Committee on
Finance of the Senate, the Committee on Ways and Means
of the House of Representatives, or any committee of
conference, and
(2) such legislation includes any provision amending
the Internal Revenue Code of 1986,
the report or statement accompanying such legislation shall
contain a Tax Complexity Analysis prepared by the staff of the
Joint Committee on Taxation.
(b) Content of Complexity Analysis.--Each Tax Complexity
Analysis shall identify the provisions, if any, adding
significant complexity or providing significant simplification,
as determined by the staff of the Joint Committee on Taxation,
and shall include the basis for such determination.
(c) Legislation Subject to Point of Order.--It shall not be
in order in the Senate or the House of Representatives to
consider any legislation described in subsection (a) required
to be accompanied by a Tax Complexity Analysis that does not
contain a Tax Complexity Analysis.
(d) Responsibilities of the Commissioner.--The Commissioner
shall provide the Joint Committee on Taxation with such
information as is necessary to prepare Tax Complexity Analyses.
* * * * * * *
----------

TITLE 5, UNITED STATES CODE

* * * * * * *

PART III--EMPLOYEES

* * * * * * *

Subpart D--Pay and Allowances

CHAPTER 51--CLASSIFICATION

* * * * * * *

Sec. 5109. Positions classified by statute

(a) * * *
(b) The position held by the employee appointed under section
[7802(b)] 7803(b) of the Internal Revenue Code of 1954 shall be
considered a position classified above GS-15 pursuant to
section 5108.
* * * * * * *

PART III--EMPLOYEES

Subpart A--General Provisions

Chap. Sec.
Definitions...................................................2101
* * * * * * *

Subpart I--Miscellaneous

Personnel Flexibilities Relating to the Internal Revenue Servi9301
* * * * * * *

Subpart I--Miscellaneous

CHAPTER 93--PERSONNEL FLEXIBILITIES RELATING TO THE INTERNAL REVENUE
SERVICE

Sec.
9301. General requirements.
9302. Flexibilities relating to performance management.
9303. Staffing flexibilities.
9304. Flexibilities relating to demonstration projects.

Sec. 9301. General requirements

(a) Conformance With Merit System Principles, Etc.--Any
flexibilities under this chapter shall be exercised in a manner
consistent with--
(1) chapter 23, relating to merit system principles
and prohibited personnel practices; and
(2) provisions of this title (outside of this
subpart) relating to preference eligibles.
(b) Requirement Relating to Units Represented by Labor
Organizations.--
(1) Written agreement required.--Employees within a
unit with respect to which a labor organization is
accorded exclusive recognition under chapter 71 shall
not be subject to the exercise of any flexibility under
section 9302, 9303, or 9304, unless there is a written
agreement between the Internal Revenue Service and the
organization permitting such exercise.
(2) Definition of a written agreement.--In order to
satisfy paragraph (1), a written agreement--
(A) need not be a collective bargaining
agreement within the meaning of section
7103(8); and
(B) may not be an agreement imposed by the
Federal Service Impasses Panel under section
7119.

Sec. 9302. Flexibilities relating to performance management

(a) In General.--The Commissioner of Internal Revenue shall,
within a year after the date of the enactment of this chapter,
establish a performance management system which--
(1) subject to section 9301(b), shall cover all
employees of the Internal Revenue Service other than--
(A) the members of the Internal Revenue
Service Oversight Board;
(B) the Commissioner of Internal Revenue; and
(C) the Chief Counsel for the Internal
Revenue Service;
(2) shall maintain individual accountability by--
(A) establishing standards of performance
which--
(i) shall permit the accurate
evaluation of each employee's
performance on the basis of the
individual and organizational
performance requirements applicable
with respect to the evaluation period
involved, taking into account
individual contributions toward the
attainment of any goals or objectives
under paragraph (3);
(ii) shall be communicated to an
employee before the start of any period
with respect to which the performance
of such employee is to be evaluated
using such standards; and
(iii) shall include at least 2
standards of performance, the lowest of
which shall denote the retention
standard and shall be equivalent to
fully successful performance;
(B) providing for periodic performance
evaluations to determine whether employees are
meeting all applicable retention standards; and
(C) using the results of such employee's
performance evaluation as a basis for
adjustments in pay and other appropriate
personnel actions; and
(3) shall provide for (A) establishing goals or
objectives for individual, group, or organizational
performance (or any combination thereof), consistent
with Internal Revenue Service performance planning
procedures, including those established under the
Government Performance and Results Act of 1993, the
Information Technology Management Reform Act of 1996,
Revenue Procedure 64-22 (as in effect on July 30,
1997), and taxpayer service surveys, (B) communicating
such goals or objectives to employees, and (C) using
such goals or objectives to make performance
distinctions among employees or groups of employees.
For purposes of this title, performance of an employee during
any period in which such employee is subject to standards of
performance under paragraph (2) shall be considered to be
``unacceptable'' if the performance of such employee during
such period fails to meet any retention standard.
(b) Awards.--
(1) For superior accomplishments.--In the case of a
proposed award based on the efforts of an employee or
former employee of the Internal Revenue Service, any
approval required under the provisions of section
4502(b) shall be considered to have been granted if the
Office of Personnel Management does not disapprove the
proposed award within 60 days after receiving the
appropriate certification described in such provisions.
(2) For employees who report directly to the
commissioner.--
(A) In general.--In the case of an employee
of the Internal Revenue Service who reports
directly to the Commissioner of Internal
Revenue, a cash award in an amount up to 50
percent of such employee's annual rate of basic
pay may be made if the Commissioner finds such
an award to be warranted based on such
employee's performance.
(B) Nature of an award.--A cash award under
this paragraph shall not be considered to be
part of basic pay.
(C) Tax enforcement results.--A cash award
under this paragraph may not be based solely on
tax enforcement results.
(D) Eligible employees.--Whether or not an
employee is an employee who reports directly to
the Commissioner of Internal Revenue shall, for
purposes of this paragraph, be determined under
regulations which the Commissioner shall
prescribe, except that in no event shall more
than 8 employees be eligible for a cash award
under this paragraph in any calendar year.
(E) Limitation on compensation.--For purposes
of applying section 5307 to an employee in
connection with any calendar year to which an
award made under this paragraph to such
employee is attributable, subsection (a)(1) of
such section shall be applied by substituting
``to equal or exceed the annual rate of
compensation for the Vice President for such
calendar year'' for ``to exceed the annual rate
of basic pay payable for level I of the
Executive Schedule, as of the end of such
calendar year''.
(F) Approval required.--An award under this
paragraph may not be made unless--
(i) the Commissioner of Internal
Revenue certifies to the Office of
Personnel Management that such award is
warranted; and
(ii) the Office approves, or does not
disapprove, the proposed award within
60 days after the date on which it is
so certified.
(3) Based on savings.--
(A) In general.--The Commissioner of Internal
Revenue may authorize the payment of cash
awards to employees based on documented
financial savings achieved by a group or
organization which such employees comprise, if
such payments are made pursuant to a plan
which--
(i) specifies minimum levels of
service and quality to be maintained
while achieving such financial savings;
and
(ii) is in conformance with criteria
prescribed by the Office of Personnel
Management.
(B) Funding.--A cash award under this
paragraph may be paid from the fund or
appropriation available to the activity
primarily benefiting or the various activities
benefiting.
(C) Tax enforcement results.--A cash award
under this paragraph may not be based solely on
tax enforcement results.
(c) Other Provisions.--
(1) Notice provisions.--In applying sections
4303(b)(1)(A) and 7513(b)(1) to employees of the
Internal Revenue Service, ``15 days'' shall be
substituted for ``30 days''.
(2) Appeals.--Notwithstanding the second sentence of
section 5335(c), an employee of the Internal Revenue
Service shall not have a right to appeal the denial of
a periodic step increase under section 5335 to the
Merit Systems Protection Board.

Sec. 9303. Staffing flexibilities

(a) Eligibility to Compete for A Permanent Appointment in the
Competitive Service.--
(1) Eligibility of qualified veterans.--
(A) In general.--No veteran described in
subparagraph (B) shall be denied the
opportunity to compete for an announced vacant
competitive service position within the
Internal Revenue Service by reason of--
(i) not having acquired competitive
status; or
(ii) not being an employee of that
agency.
(B) Description.--An individual shall, for
purposes of a position for which such
individual is applying, be considered a veteran
described in this subparagraph if such
individual--
(i) is either a preference eligible,
or an individual (other than a
preference eligible) who has been
separated from the armed forces under
honorable conditions after at least 3
years of active service; and
(ii) meets the minimum qualification
requirements for the position sought.
(2) Eligibility of certain temporary employees.--
(A) In general.--No temporary employee
described in subparagraph (B) shall be denied
the opportunity to compete for an announced
vacant competitive service position within the
Internal Revenue Service by reason of not
having acquired competitive status.
(B) Description.--An individual shall, for
purposes of a position for which such
individual is applying, be considered a
temporary employee described in this
subparagraph if--
(i) such individual is then currently
serving as a temporary employee in the
Internal Revenue Service;
(ii) such individual has completed at
least 2 years of current continuous
service in the competitive service
under 1 or more term appointments, each
of which was made under competitive
procedures prescribed for permanent
appointments;
(iii) such individual's performance
under each term appointment referred to
in clause (ii) met all applicable
retention standards; and
(iv) such individual meets the
minimum qualification requirements for
the position sought.
(b) Rating Systems.--
(1) In general.--Notwithstanding subchapter I of
chapter 33, the Commissioner of Internal Revenue may
establish category rating systems for evaluating job
applicants for positions in the competitive service,
under which qualified candidates are divided into 2 or
more quality categories on the basis of relative
degrees of merit, rather than assigned individual
numerical ratings. Each applicant who meets the minimum
qualification requirements for the position to be
filled shall be assigned to an appropriate category
based on an evaluation of the applicant's knowledge,
skills, and abilities relative to those needed for
successful performance in the job to be filled.
(2) Treatment of preference eligibles.--Within each
quality category established under paragraph (1),
preference eligibles shall be listed ahead of
individuals who are not preference eligibles. For other
than scientific and professional positions at or higher
than GS-9 (or equivalent), preference eligibles who
have a compensable service-connected disability of 10
percent or more, and who meet the minimum qualification
standards, shall be listed in the highest quality
category.
(3) Selection process.--An appointing authority may
select any applicant from the highest quality category
or, if fewer than 3 candidates have been assigned to
the highest quality category, from a merged category
consisting of the highest and second highest quality
categories. Notwithstanding the preceding sentence, the
appointing authority may not pass over a preference
eligible in the same or a higher category from which
selection is made, unless the requirements of section
3317(b) or3318(b), as applicable, are satisfied, except
that in no event may certification of a preference eligible under this
subsection be discontinued by the Internal Revenue Service under
section 3317(b) before the end of the 6-month period beginning on the
date of such employee's first certification.
(c) Involuntary Reassignments and Removals of Career
Appointees in the Senior Executive Service.--Neither section
3395(e)(1) nor section 3592(b)(1) shall apply with respect to
the Internal Revenue Service.
(d) Probationary Periods.--Notwithstanding any other
provision of law or regulation, the Commissioner of Internal
Revenue may establish a period of probation under section 3321
of up to 3 years for any position if, as determined by the
Commissioner, a shorter period would be insufficient for the
incumbent to demonstrate complete proficiency in such position.
(e) Provisions That Remain Applicable.--No provision of this
section exempts the Internal Revenue Service from--
(1) any employment priorities established under
direction of the President for the placement of surplus
or displaced employees; or
(2) its obligations under any court order or decree
relating to the employment practices of the Internal
Revenue Service.

Sec. 9304. Flexibilities relating to demonstration projects

(a) Authority To Conduct.--The Commissioner of Internal
Revenue may, in accordance with this section, conduct 1 or more
demonstration projects to improve personnel management; provide
increased individual accountability; eliminate obstacles to the
removal of or imposing any disciplinary action with respect to
poor performers, subject to the requirements of due process;
expedite appeals from adverse actions or performance-based
actions; and promote pay based on performance.
(b) General Requirements.--Except as provided in subsection
(c), each demonstration project under this section shall comply
with the provisions of section 4703.
(c) Special Rules.--For purposes of any demonstration project
under this section--
(1) Authority of commissioner.--The Commissioner of
Internal Revenue shall exercise the authority provided
to the Office of Personnel Management under section
4703.
(2) Provisions not applicable.--The following
provisions of section 4703 shall not apply:
(A) Paragraphs (3) through (6) of subsection
(b).
(B) Paragraphs (1), (2)(B)(ii), and (4) of
subsection (c).
(C) Subsections (d) through (g).
(d) Notification Required To Be Given.--
(1) To employees.--The Commissioner of Internal
Revenue shall notify employees likely to be affected by
a project proposed under this section at least 90 days
in advance of the date such project is to take effect.
(2) To congress and opm.--The Commissioner of
Internal Revenue shall, with respect to each
demonstration project under this section, provide each
House of Congress and the Office of Personnel
Management with a report, at least 30 days in advance
of the date such project is to take effect, setting
forth the final version of the plan for such project.
Such report shall, with respect to the project to which
it relates, include the information specified in
section 4703(b)(1).
(e) Limitations.--No demonstration project under this
section may--
(1) provide for a waiver of any regulation
prescribed under any provision of law referred
to in paragraph (2)(B)(i) or (3) of section
4703(c);
(2) provide for a waiver of subchapter V of
chapter 63 or subpart G of part III (or any
regulations prescribed under such subchapter or
subpart);
(3) provide for a waiver of any law or
regulation relating to preference eligibles as
defined in section 2108 or subchapter II or III
of chapter 73 (or any regulations prescribed
thereunder);
(4) permit collective bargaining over pay or
benefits, or require collective bargaining over
any matter which would not be required under
section 7106; or
(5) include a system for measuring
performance that provides for only 1 level of
performance at or above the level of fully
successful or better.
(f) Permissible Projects.--Notwithstanding any other
provision of law, a demonstration project under this section--
(1) may establish alternative means of resolving any
dispute within the jurisdiction of the Equal Employment
Opportunity Commission, the Merit Systems Protection
Board, the Federal Labor Relations Authority, or the
Federal Service Impasses Panel; and
(2) may permit the Internal Revenue Service to adopt
any alternative dispute resolution procedure that a
private entity may lawfully adopt.
(g) Consultation and Coordination.--The Commissioner of
Internal Revenue shall consult with the Director of the Office
of Personnel Management in the development and implementation
of each demonstration project under this section and shall
submit such reports to the Director as the Director may
require. The Director or the Commissioner of Internal Revenue
may terminate a demonstration project under this section if
either of them determines that the project creates a
substantial hardship on, or is not in the best interests of,
the public, the Federal Government, employees, or qualified
applicants for employment with the Internal Revenue Service.
(h) Termination.--Each demonstration project under this
section shall terminate before the end of the 5-year period
beginning on the date on which the project takes effect, except
that any such project may continue beyond the end of such
period, for not to exceed 2 years, if the Commissioner of
Internal Revenue, with the concurrence of the Director,
determines such extension is necessary to validate the results
of the project. Not later than 6 months before the end of the
5-year period and any extension under the preceding sentence,
the Commissioner of Internal Revenue shall, with respect to the
demonstration project involved, submit a legislative proposal
to the Congress if the Commissioner determines that such
project should be made permanent, in whole or in part.
* * * * * * *

VII. CORRESPONDENCE FROM OTHER COMMITTEES

A. Correspondence From Committee on Government Reform and Oversight

The following correspondence was received from
Representative Dan Burton, Chairman, Committee on Government
Reform and Oversight, regarding the bill, H.R. 2676:

House of Representatives,
Committee on Government Reform and Oversight,
Washington, DC, October 31, 1997.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
Washington, DC.
Dear Mr. Chairman: After several months of negotiation with
the interested parties, the Committee on Government Reform and
Oversight agrees to the provisions of H.R. 2676, a bill to
restructure and reform the Internal Revenue Service. The
Government Reform and Oversight Committee does not object to
the current legislation, and therefore does not intend to
exercise its jurisdiction over H.R. 2676.
The Committee initially had concerns about the Freedom of
Information Act and civil service related provisions included
within the original text. Through negotiation, we were able to
draft language in these areas that protects the interests of
taxpayers and institutes employee performance measures that
provide the IRS Commissioner with the tools necessary to make
it easier to fire poor performers and people who engage in
misconduct. I would particularly like to thank Rep. Rob
Portman, the sponsor of H.R. 2292, and the National Commission
on Restructuring the Internal Revenue Service in helping with
our efforts.
As you know, House Rule X, ``Establishment and Jurisdiction
of Standing Committees'', grants the Government Reform and
Oversight Committee jurisdiction over legislation related to
government information management and the civil service.
Although the Committee will not mark up H.R. 2676, this does
not in any way waive this Committee's jurisdiction over the
bill or related legislation, nor over the general subject
matters contained in the bill which fall within this
Committee's jurisdiction. Further, I request that members of
the Government Reform and Oversight Committee be appointed to
serve on any conference committee appointed with respect to
this legislation.
I look forward to working with you on this and other issues
throughout the 105th Congress.
Sincerely,
Dan Burton, Chairman.

B. Correspondence From Committee on Rules

The following correspondence was received from
Representative Gerald B. Solomon, Chairman, Committee on Rules,
regarding the bill, H.R. 2676:

House of Representatives,
Committee on Rules,
Washington, DC, October 28, 1997.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
Washington, DC.
Dear Mr. Chairman: I am writing concerning H.R. 2676, The
Internal Revenue Service Restructuring and Reform Act of 1997,
which your committee ordered reported on October 22 by a vote
of 33-4.
This legislation contains provisions in Title IV,
Congressional Accountability for the Internal Revenue Service,
which fall within the jurisdiction of the Committee on Rules.
The Committee on Rules does not intend to consider this
bill as a matter of original jurisdiction. It is the intention
of the Committee to address several concerns with the proposed
language in Title IV during the Rules Committee's consideration
of an appropriate rule for this legislation.
I reserve jurisdiction of the Committee on Rules over all
bills relating to the rules, joint rules, and the order of
business of the House. It would also be my intention to be
represented on the conference committee on this bill. Thank you
for your consideration.
Sincerely,
Gerald B. Solomon, Chairman.

VIII. ADDITIONAL VIEWS

We provide the following additional views and comments
regarding H.R. 2676, the Internal Revenue Service Restructuring
and Reform Act of 1997. Importantly, this legislation would
restructure the Internal Revenue Service to provide better
oversight, greater continuity of leadership, improved access to
expert advice from the private sector, additional management
flexibility, incentives for expansion of electronic tax filing,
taxpayer of safeguards in dealing with the IRS, and increased
Congressional accountability.
We support the important goals of this legislation and have
worked on several of its components over the last several
years. In addition, we are pleased to have participated, on a
bipartisan basis, in incorporating significant improvements to
this bill from its original form.
Over the past year, there has been much heated debate over
the provisions of various IRS reform bills. We believe that the
debate was necessary and resulted in many IRS reforms which we
support. Importantly, expressing our differences in opinion
confirms our belief that the legislative process can work
effectively, to the benefit of the public, where there is a
true commitment to bipartisanship and cooperation.
There has long been agreement on the need for fundamental
reform of the IRS. In fact, even back when the Members of the
National Commission on Restructuring the Internal Revenue
Service were discussing which recommendations to make to the
Congress, there was uniform agreement that fundamental reform
of the IRS was in order, and a consensus on the dozens of
specific reform measures the Congress should be asked to adopt.
The Democratic Members of the Committee on Ways and Means have
continued to support wholeheartedly the vast majority of
recommendations put forward by the National Commission, which
were reflected in both H.R. 2428, to improve the operations and
governance of the Internal Revenue Service, introduced on
September 8, 1997, and H.R. 2292, the Internal Revenue Service
Restructuring and Reform Act, introduced on July 30, 1997.
H.R. 2292, as introduced on governance
There were several aspects of H.R. 2292, legislation
introduced originally by Rep. Rob Portman and others in
response to the National Commission's report, which caused us
great concern and to which we strongly objected. That bill,
which was the subject of numerous Committee and Subcommittee
hearings while it was pending before the Committee for over
three months, remained unchanged by its sponsors before the
Committee markup. After much bipartisan discussion and debate,
a clean new version of the bill, H.R. 2676, which reflected
responses to many of our concerns, was introduced and became
the focus of the Committee's action. (During this period, many
of us sponsored an alternative bill, H.R. 2428, which was
supported by the Administration, to improve the structure of
IRS management, operations, and oversight).
Our major concern with the original IRS reform bill was
that it failed to insure (1) effective and constitutional
governance of the IRS, and (2) full accountability of the IRS
to the public (directly and through their elected officials.)
The original bill would have established an IRS Board of
Directors, consisting primarily of private-sector appointees,
with significant powers and authority to run the IRS. For
example, the bill would have the private-sector Board members
the authority to hire and fire the IRS Commissioner and would
have eliminated the current Internal Revenue Code rules that
place the IRS Commissioner under the control of the Secretary
of the Treasury (and ultimately the President). Such an
approach would not have solved any problem that has been
enumerated by the National Commission or any abuse highlighted
by recent Senate Committee on Finance hearings. Rather, such
proposals would have made it more difficult for the IRS to
function effectively in its efforts to collect Federal revenues
and provide taxpayer services.
We believe that handing overall control of the IRS to a
board composed primarily of private citizens (taxpayers
themselves) would have reduced significantly the accountability
of the IRS to the taxpaying public. In our view, the
Constitution requires that the IRS Commissioner be appointed,
hired, and, if necessary, fired by the President. The public
expects the IRS Commissioner to be accountable to them through
their elected representatives. Further, we believe that efforts
to increase the IRS's accountability should not blur or
eliminate the existing chain of command that runs from the IRS
Commissioner, through the Secretary of the Treasury, and
ultimately to the President.
Moreover, we believe that turning effective control of the
IRS over to a part-time board, dominated by private sector
individuals, raises significant conflict-of-interest problems.
Such conflict of interest, whether real or perceived,
undoubtedly would undermine further the public's support for
our voluntary Federal income tax system. Accordingly, we
believe that it would be inappropriate to grant--to a
relatively small groups of private interests--autonomy and
broad powers to run the IRS, while they serve as part-time
public servants with full-time obligations to private sector
employers or private interest clients.
Bipartisan negotiations and agreement on governance
Because of our strong commitment to an IRS that works
fairly for taxpayers and effectively in collecting the
country's tax revenues, we entered into intense bipartisan
negotiations with numerous Members of this Committee, the House
Leadership, and the Administration to improve the original
legislation. As a result, several critically important
improvements were made to H.R. 2292. While each of us would
have made additional modifications, an acceptable compromise
was reached.
Under the revised bill adopted by the Committee, the
President--not a Board of private-sector individuals--would
have the authority to appoint, hire, and fire the IRS
Commissioner. As under current law, this Nation's highest-
elected official would remain ultimately responsible for the
actions of the IRS and the decisions of its commissioner.
Also, under the revised bill, the lines of authority from
the Secretary of the Treasury to the IRS Commissioner have been
defined clearly. Overall management of the IRS, including tax
policy, tax administration, and tax law enforcement activities,
would continue to be coordinated through Treasury, as would
overall responsibility for oversight and management of the IRS.
Once these two fundamental concerns of ours were addressed,
we joined our colleagues in supporting H.R. 2676.
As H.R. 2676 moves forward in the House, we note that the
bill grants the newly-create IRS Oversight Board members
authority to review and approve the strategic plans of the IRS,
authority to review and approve the Commissioner's annual
budget, and authority to reveiw and approve the Commissioner's
plans for major reorganization of the IRS. While many of us are
not in favor of transferring even this much power to an
independent body, we believe that, on the whole, it constitutes
an acceptable compromise. Unfortunately, the bill is not clear
about what happens to our tax administration system under these
new Board authorities if a consensus is not reached among the
Board members of the the IRS Commissioner and Treasury
Secretary disagree with the views of the private-sector
individuals. We intend to continue to work on resolution of
these issues in the coming months before a final IRS reform
bill is enacted into law.

Electronic filing of tax returns

H.R. 2676 contains important provisions to enhance the
electronic filing of tax returns and other documents with the
IRS. These provisions were developed by the Subcommittee on
Oversight, on a bipartisan basis, for inclusion in the revised
IRS reform bill. The two underlying IRS reform bills, H.R. 2428
and H.R. 2292 contained provisions to improve electronic tax
filing and served as the basis for the Subcommittee's
recommendations. We believe that these statutory changes are
critical to bringing the IRS into the modern age of technology
and strongly support the goal of having 80 percent of all tax
returns filed electronically within the next ten years.

Taxpayer rights 3

Of great significance to taxpayers nationwide are the
provisions in the bill, as approved by the Committee, to
provide taxpayers with new statutory protections and other
assistance to millions of Americans in their dealings with the
IRS. Again, these provisions were developed by the Subcommittee
on Oversight, on a bipartisan basis, for inclusion in the
revised IRS reform bill. The Subcommittee's recommendations
reflect a combination of proposals from H.R. 2292, proposals
advanced by the Department of the Treasury, and new initiatives
identified during the Subcommittee's hearings on taxpayer
rights.
Of particular importance are the provisions to expand
``innocent spouse'' tax relief and provide tax refund relief to
taxpayers during periods of disability. Also, contained in the
bill are provisions to expand relief for taxpayers through
issuance of ``taxpayer assistance orders'' by the Taxpayer
Advocate, grants for low-income tax clinics, and penalty relief
for taxpayers in installment agreements with the IRS.
However, we continue to have serious concerns about the
provision in the bill that shifts the burden of proof from
taxpayers to the IRS in certain court proceedings with respect
to factual issues. This provision was not considered by the
Subcommittee on Oversight, nor was it a recommendation of the
National Commission.
We are concerned that the provision may have unintended
negative consequences for both taxpayers and the tax
administrative system. Currently, as a result of long-standing
judicial decisions, a taxpayer in civil tax matters is
generally required to maintain records substantiating the
calculation of his or her income tax liability. The courts
created this rule to facilitate the finding of fact, and thus
the burden of proof is placed on the taxpayer simply because
the taxpayer controls the underlying facts and the records. We
are concerned that at least 15 percent of the revenue loss (and
we believe more) attributable to the provision is due to
anticipated additional taxpayer noncompliance. Further, we are
not persuaded by the view of the Chief of Staff of the Joint
Committee on Taxation, as stated at the markup, that, while the
proposal will not do anything for most taxpayers, the public
will find great comfort in knowing that the burden shifts to
the IRS for some taxpayers in litigation. We similarly are
concerned that shifting the burden of proof could result in the
necessity of more intrusive and aggressive IRS examinations,
more third-party summonses, and more thorough discovery. Also,
this provision could assist aggressive taxpayers avoid
taxation, or induce some taxpayers not to keep records at all.
We believe that the tax laws should make it easier for
taxpayers to deal with the IRS. However, we do not think the
laws should make it easier for someone to evade taxes. The vast
majority of citizens who obey the law deserve more. We intend
to work toward improving the burden-of-proof provision in this
bill in order to insure that it does not increase noncompliance
and does not serve as an incentive for taxpayers to cease
retention of appropriate records.
Finally, it would be wrong not to point out the Internal
Revenue Service's many substantial accomplishments. As we work
to reform the IRS, it is understandable that we focus on the
agency's failings. However, it is easy in such circumstances to
lose our sense of perspective about this much-disparaged but
indispensable government agency. In such times, we must
recognize the difficulty of the mission that the IRS
undertakes--and the success that it has had in carrying out
that mission. The IRS processes roughly 200 million forms each
year and collects nearly one and a half trillion dollars
annually from over 100 million Americans--all with relatively
few complaints. That is by no means a small accomplishment. We
are proud that this Nation has a very high voluntary compliance
rate--one that is the envy of the world. We must not forget
that the vast majority of IRS employees are dedicated, hard-
working civil servants who want to do a good job.

Charles B. Rangel,
Barbara B. Kennelly,
Sander Levin,
Richard E. Neal,
William J. Jefferson,
William J. Coyne,
Xavier Becerra,
Michael R. McNulty,
Karen L. Thurman.

ADDITIONAL VIEWS OF HON. BENJAMIN CARDIN AND HON. JOHN TANNER

H.R. 2676, the Internal Revenue Service Restructuring Act
of 1997, represents strong, bipartisan legislation to reform
the Internal Revenue Service. The bill builds on the
recommendations of the National Commission on Restructuring the
IRS. Under the leadership of our colleague Rob Portman and Sen.
Bob Kerrey, the National Commission undertook a year-long study
of the IRS, and has made a tremendous difference already in
raising the level of concern and awareness of the problems that
plague the agency.
We are very proud to have joined Rep. Portman in
cosponsoring H.R. 2292, which has had strong bipartisan support
in this House. H.R. 2676 takes that very good bill and makes it
even better. We are especially pleased with two changes in the
bill. First, it restores the appointment of the Commissioner to
the President, and second, it clarifies the lines of authority
from the Secretary of the Treasury to the Commissioner. With
the support of the Clinton Administration, this bill is poised
to move very quickly through the House.
The problems in the management and culture of the IRS are
not a new revelation to anyone on this committee. While recent
publicity has brought new media attention to these issues,
those of us on this committee know that the problems are of
long duration.
While these problems are stubborn and deeply-rooted, they
are not beyond our reach. The legislation before us marks the
first fundamental reform of the IRS in nearly half a century.
It will bring a new structure to the IRS, a structure that is
designed to change the way the IRS treats its customers, the
American taxpayers.
The litany of problems at the IRS is familiar to all of
us--billions of dollars squandered on a bungled computer
modernization effort, telephones unanswered, taxpayers too
often treated with disrespect or suspicion, an agency that is
unable to balance its own books. These problems have not
emerged recently--they are not the legacy of one
administration, but of decades.
In fact, this administration, and particularly this
Treasury Secretary, have been more attentive to the problems of
the IRS and more dedicated in seeking solutions than any in
recent years. Secretary Rubin has made important changes in the
management of the IRS, and those efforts have begun to show
results.
But much more remains to be done, and it is not realistic
to expect that IRS reform can be accomplished without
legislation and without bringing new expertise to the
management of the Service. The solution proposed in this bill
is the creation of an Oversight Board that will bring private
sector expertise in the areas where the IRS needs it most. The
creation of this Board, with real authority to approve the
strategic plans, major reorganizations, and the budgets of the
IRS, is the crucial element in bringing real reform to this
troubled agency.
The Board members, appointed by the President and confirmed
by the Senate, will work with the Secretary and the
Commissioner to help reform the IRS in the areas of customer
service, information technology, organizational development,
and meeting the needs and concerns of taxpayers. The Oversight
Board will bring the expertise the IRS lacks, and it will have
the authority to help turn this agency around.
Under this bill, the Commissioner's budget, as approved by
the Board, will be forwarded to the Congress along with the
president's budget for the entire government. The Board-
approved budget will not have legal force--Congress will still
control the purse strings. But the Board's budget will give us
a clear view of the needs and requirements of the IRS, and will
be tremendously helpful as we implement the reforms of the
agency.
Just as it is not realistic to expect that IRS reform can
be accomplished without a new management structure, it is not
realistic to expect the Oversight Board to do this work along.
IRS reform will require a committed partnership between the
Board, the Secretary, and the Commissioner, as well as the more
constructive involvement from those of us here in Congress.
Legislative oversight of the IRS is too unfocused, too
scattered, with too many masters and not enough coordination
among committees. The bill masters and not enough coordination
among committees. The bill attempts to bring some order and
structure to the current system.
In addition to the governance and oversight provisions, the
bill contains a new set of provisions to be added to the
Taxpayer Bill of Rights. These provisions, when they are
enacted, will mark the third TBOR. The provisions address many
problems that taxpayers have encountered in dealing with the
IRS, and their enactment will help solve those problems.
We would add, however, that the broader objective of this
bill must be to change the culture of the IRS to make it a
taxpayer-friendly organization to that future Taxpayer Bills of
Rights will not be necessary.
The Internal Revenue Service is charged with the vital task
of collecting the revenue needed to fund the basic and
essential operations of government. When the IRS is mismanaged
in ways that create fear and anxiety among taxpayers, the
result is to undermine the confidence of the American people in
their government. The purpose of this legislation is to reform
the IRS so that we can begin to restore that badly damaged
confidence.

Ben Cardin.
John Tanner.

ADDITIONAL VIEWS OF HON. XAVIER BECERRA

The Pharisee stood and prayed thus with himself,
``God, I thank thee that I am not like other men,
extortioners, unjust, adulterers, or even like this tax
collector.''
--Luke, Ch. 8, v. 11

Taxes are what we pay for civilized society.
--Justice Oliver Wendell Holmes

No one likes paying taxes; however, an effective tax system
is fundamental to the health and stability of our nation.
Reconciling these competing principles is a difficult balancing
act that necessitates respect for both individual taxpayers and
the Treasury (i.e. taxpayers collectively). In many respects,
the Internal Revenue Service Restructuring and Reform Act of
1997 achieves the goal of transforming the IRS into a world
class service agency. Unfortunately, it contains several
troublesome provisions.
It is encouraging that both Republican and Democratic tax
writers, in conjunction with the Administration, have committed
themselves to reforming and improving the IRS. It would have
been all too simple for either side to not engage in the
difficult policy deliberations, and score political points by
bashing the IRS. In today's world of sound-bite politics, that
party would have scored easy points at the expense of America's
taxpayers.
I remain vitally committed to the process of bringing many
of these overdue reforms to the IRS. The Internal Revenue
Service Restructuring and Reform Act is a workable bill, but
several important changes can and should be made to it before
it is signed into law by the President. I am hopeful that these
changes will be made.
Shifting of the burden of proof
Section 301 of the Committee-passed bill contains a
provision that, on a superficial reading, seems rather
innocuous: shifting the burden of proof in civil tax cases from
the taxpayer to the Internal Revenue Service. While this makes
for good bumper sticker politics, it is bad tax policy, and
poses the specter of a more, not less, intrusive tax collection
agency.
Taxpayers have the burden of proof under current law in
civil tax cases because they possess the relevant records and
documents. It is a relatively simple matter for them to come
forward with those records and disprove IRS's position in a tax
dispute. Section 301 may provide an incentive for aggressive
taxpayers, seeking the benefit of the burden shift, not to
settle their disputes at the administrative level and litigate
their disputes in court. Some taxpayers might be tempted not to
keep records at all, effectively making it impossible for the
IRS to verify whether a taxpayer's position is justified. In
fact, the Joint Committee on Taxation has estimated that
shifting the burden of proof will lead to a significant amount
of reduced taxpayer compliance.
The overwhelming majority of tax experts reject this
provision as unwise and unworkable. To quote at length from a
former Republican Commissioner of the Internal Revenue Service,
Fred Goldberg:

Most of us believe that the IRS is far too intrusive
today, and that tax administration is far too
cumbersome, contentious, and burdensome. Well, as the
saying goes, ``you ain't seen nothing yet.'' Change the
burden of proof and IRS tactics of today will seem like
child's play. Of necessity, the IRS would be forced to
resort to far more aggressive techniques in auditing
taxpayers and developing cases. Summonses, including
third party summonses, would become routine. Expanded
record-keeping requirements and increased litigation
over discovery issues would be standard fare. In
addition, the number of revenue agents and audits of
taxpayers would likely increase dramatically. In the
world of tax administration, it's hard to imagine a
more well-intentioned idea that would have more
undesirable consequences.

This is a frightening vision of the future of the IRS which
runs counter to the spirit behind the Internal Revenue
Restructuring and Reform Act. For that simple reason, it is
imperative that the burden of proof provision be removed from
the bill.

Board member's conflicts of interest

Another important area in which the Internal Revenue
Restructuring and Reform Act should be improved is in its
conflict of interest rules for the private-sector members of
the newly minted IRS Oversight Board. The American people
deserve a tax collection agency with the highest ethical
standards; even the mere appearance of impropriety cannot be
tolerated. In that vein, section 104 of this legislation
contains a prohibition on executive branch interference in the
collection and audit practices of the IRS. Quite simply,
politics should not play a role in the important business of
collecting the revenue necessary to fund the functions of
government. I would note as an aside that there has been no
credible allegations that this has been a problem at the IRS
since the early 1970s; nevertheless, this is a meritorious
provision which I support.
Unfortunately, similar rigorous standards of conduct were
not imposed for the IRS Oversight Board members. The Ways and
Means Committee failed to adopt an amendment offered by my
fellow Californian, Rep. Stark. The Stark amendment would have
prohibited Board members from representing clients in tax
matters before the IRS or in court while a member of the Board
and for a limited time thereafter. This proposal simply
recognizes the impropriety--or, more importantly, the
appearance of impropriety--of those charged with governing the
IRS having an interest, or representing a party in a tax
controversy, before the IRS. As most working Americans probably
can attest (or guess), it would be difficult to be an impartial
judge in a case involving your boss. While I have every
confidence in the honesty and integrity of future Board
members, the defeat of the Stark amendment opens the
possibility for improper dealing, threatening to erode the
public's confidence in the integrity of our nation's tax
collection system and, by extension, our high voluntary
taxpayer compliance rate.

Disclosure of audit selection criteria

I am troubled by section 353 of the Internal Revenue
Service Restructuring and Reform Act, which calls upon the
Treasury Secretary to reveal the procedures by which returns
are selected for audit by the IRS. Audits are an unfortunate--
but necessary--element of our tax collection system; an element
that recognizes that a not inconsequential minority of
taxpayers do not fully comply with our nation's tax laws, and
thereby force the vast majority of honest taxpayers to shoulder
a greater load.
Section 353 contains a caveat that ``[s]uch statement shall
not include any information the disclosure of which would be
detrimental to law enforcement.'' The provision would have been
strengthened by the further recognition that such disclosure by
the Treasury should not lead to a reduction involuntary tax
compliance.

Joint committee on taxation approval of GAO studies

The Internal Revenue Service Restructuring and Reform Act
contains many worthy provisions designed to streamline
Congressional oversight of the IRS. All too often in the past,
the IRS has had to answer to too many parties, draining
valuable agency resources from the important business of
collecting the proper amount of revenues while treating
taxpayers with the respect and courtesy they deserve. The more
that Congress speaks with one voice, the more the Service will
be able to better prioritize its mission.
At the same time, oversight of the Executive branch is one
of Congress's most important Constitutional functions. Great
care must be taken in retooling these procedures. Accordingly,
I believe that one of these oversight provisions in the IRS
restructuring bill should be modified. Section 401 of the
legislation requires the Joint Committee on Taxation (JCT) to
approve all Congressional requests of the General Accounting
Office (GAO) to conduct investigations into the IRS, except in
the case of Chairman and Ranking Members of all Congressional
Committees and Subcommittees. I would note that if this
provision were law today, neither of the principal House
sponsors of the instant legislation--Reps. Portman and Cardin--
would be able to secure a GAO report on the IRS without JCT
approval. Quite simply, I do not believe that members of
Congressional committees with substantive jurisdiction over the
nation's tax laws should be denied access to GAO's resources.

Conclusion

American taxpayers deserve a world class tax agency. There
is no dispute on that point. The dispute arises in how to
achieve that laudatory goal. In many respects, the Internal
Revenue Service Restructuring and Reform Act accomplishes its
purpose. However, the bill has a few serious defects--most
notably, the provision shifting the burden of proof--that may
lead to a more intrusive IRS, which is exactly the wrong
direction to take our nation's tax collection agency. I trust
that these problems can be worked out in the bill as it makes
its way through the legislative process.

Xavier Becerra.

IX. DISSENTING VIEWS

We submit our dissenting views on H.R. 2676, the Internal
Revenue Service Restructuring and Reform Act of 1997, with the
goal of improving the bill in several critical areas as it
proceeds through the Congress this year and next. We refuse to
join in the Republican stampede to use this legislation as the
forerunner to their efforts to ``tear the IRS out by its
roots'' or as a political step in their year-long efforts to
attack the IRS for the purpose of pursuing a campaign issue for
the 1998 elections.
We should be clear that the examples of taxpayer abuse
highlighted by the recent Senate Committee on Finance hearings
are unacceptable and must be addressed. However, the IRS
restructuring bill before the Committee had nothing to do with
these cases. In fact, the IRS Oversight Board created by the
bill would be specifically precluded from involving itself, in
any manner, in the ``law enforcement activities of the IRS,
including criminal investigations, examinations, and collection
activities.'' The issue debated by the Committee focused on
overall governance of the IRS, not abuses of the system in
individual cases. In fact, administrative actions already have
begun to be taken by the IRS and Treasury to provide relief to
the taxpayers appearing before the Congress and to hundreds of
other taxpayers, nationwide, which will resolve the problem
cases--long before H.R. 2676 is enacted into law.
Nonetheless, there is much about which we all agree. The
IRS needs to improve its customer service, training of
employees, and development and application of technology;
oversight of the IRS needs to be enhanced, with significant
input from the Department of the Treasury and the advice of the
private sector; the IRS Commissioner needs to have flexibility
in hiring a topnotch team, and to remain as head of the IRS for
at least 5 years; electronic tax filings need to be enhanced
and encouraged; protections for taxpayers, in their efforts to
comply with the tax laws, need to be expanded; and, the
Congress needs to better coordinate and focus its oversight and
funding responsibilities with regard to the IRS. To the extent
the bill addresses these issues, it has our support.
However, there are several fundamental problems with the
focus and direction of H.R. 2676 which should not go unnoted.
These serve as the basis for our dissent.
Executive branch governance
We believe that mechanisms should be established to provide
for consistent direction of a long-term strategy at the IRS and
for holding IRS management accountable for its decisions and
operations. Similarly, it is important that the IRS have
systematic input from the Department of the Treasury and the
private sector on critical aspects of IRS management,
operations, and taxpayer services.
However, we do not believe that individual taxpayers from
the private sector should have final decision-making authority
over any fundamental aspect of the IRS's administration of the
tax laws. Allowing eight private-sector individuals to make
final decisions about the IRS's strategic plans, reorganization
plans, and annual budget, raises basic and fundamental
questions of accountability.
Under the bill, it is clear that the new private-sector
Board would be integrally involved in the most ``taxpayer
sensitive'' aspects of IRS's administration of the tax laws.
Specifically, the Board would be given ``decisive approval''
authority over the agency-wide strategic plan, budget, and
organizational structure. These key management tools define the
priorities and goals of the IRS--particularly the IRS's
priorities in the area of compliance, examinations and
collections. We think that the result of H.R. 2676 is
unacceptable, and that the bill's governance plans would result
in an unprecedented transfer of governmental authority to
individual taxpayers.
The bill also is flawed fundamentally in its failure to
address the fact that the Oversight Board largely will be
comprised of private-sector individuals. These Board members
will be private-citizen taxpayers for 353 days a year and
quasi-government employees 12 days a year. The potential for
conflict of interest (both real and perceived) is guaranteed,
since the Board members will be given real authorities and
powers, not just expert advisory responsibilities.
In fact, during the Committee debate on the bill,
clarification was requested concerning whether a Board member
would be able to represent a client or employer in a tax
dispute with the IRS during his or her tenure on the Board.
There was agreement that the bill language was not intended to
allow such conflict of interest. However, an amendment offered
by Rep. Pete Stark--to insure that the statutory language would
be changed to reflect the Committee's intent--was defeated by
the Republicans. Included in this amendment was clarification
that Board members would be subject to post-employment rules
similar to those applicable to an IRS Commissioner.
The conflict-of-interest problems in the bill go even
deeper--and have been conveniently ignored. What are the Board
members' ethical obligations with regard to disclosure of
financial interests, such as stock holdings? Under the bill,
Board members would not be required to file annual reports
under the Ethics in Government Act. Also, the Republicans have
gone to great lengths to publicize that the present nominee for
IRS Commissioner appropriately will divest his holdings in
interests which may conflict with his duties to administer
properly the tax laws. What are the Board members' ethical
obligations to divest conflicting assets? Under the bill, there
is no requirement that any of the eight private-sector Board
members divest conflicting holdings, yet they would have
fundamental approval authority over the IRS's direction,
mission, and accountability to the public.

Tax simplification

We all agree that the tax laws are too complex and must be
simplified. However, simplifying the tax laws takes more than
political rhetoric and blaming those merely trying to
administer the tax laws. Many of those arguing that the IRS
cannot effectively administer the tax rules are the same people
responsible for making the tax system worse. An easy example is
the myriad of miscellaneous credits, phase-outs, phase-ins,
floors, and income limits contained in the Taxpayer Relief Act
of 1997.
Ironically, the Republicans could not even pass their prize
accomplishment in simple form--capital gains tax relief. The
IRS estimates that claiming capital gains tax relief now will
take over four hours to calculate and that the IRS will not
even be able to process the required capital gains forms for
tax year 1997 until February 1998.
It is clear to us that much of the current debate is no
more than hollow political rhetoric. For example, during the
Committee's debate on the Taxpayer Relief Act, Rep. Jim
McDermott offered an amendment which would have reduced the
marriage penalty of prior law (where some married couples who
both have relatively equal incomes pay more income tax than
they would as two single taxpayers filing individual returns).
The amendment was defeated by Republicans on a party-line vote.
The bill, as enacted, worsened the marriage penalty. Now, a
number of the same Members of Congress who helped develop the
many new inequities and complexities of the 1997 Act decry the
IRS's inability to easily administer the law. In the case of
the marriage penalty, some of those same Members now have
announced that solving the marriage penalty is their highest
priority. Unfortunately, it is all too easy to understand
taxpayers' cynicism as they see the games played by many of
their elected officials.

Burden of proof

We continue to have serious concerns about the provision in
the bill that shifts the burden of proof from taxpayers to the
IRS. We believe that the provision will have unintended
negative consequences for both taxpayers and the tax
administration system. The burden of proof is the result of
long-standing judicial decisions to facilitate the finding of
fact. Taxpayers in civil tax matters are required to justify
their income tax liabilities because the taxpayers control the
underlying facts and the records. We believe that most of the
revenue loss attributable to the provision is due to additional
taxpayer noncompliance. We believe that shifting the burden of
proof will require the IRS to conduct more intrusive and
aggressive examinations, and that the provision will assist
aggressive taxpayers avoid taxation and induce some taxpayers
not to keep records at all. We intend to work toward improving
the burden of proof provision to insure that it does not
increase noncompliance and that it does not serve as an
incentive for taxpayers to cease retention of appropriate
records.

Influencing IRS audits

We find it intriguing that the bill imposes criminal
sanctions on the President, Vice President, and Cabinet
officials (with limited exceptions) for requesting that the IRS
conduct or terminate an audit of a specific taxpayer. While the
Republican Committee Members went to great lengths to clarify
that they knew of no such abuse by the Executive Branch, they
seem to have intentionally excluded those individuals in a
clear position to influence taxpayer audits and collection
activity--Members of Congress--particularly those in positions
of great power.

Conclusion

The Republicans are in the process of perfecting the
political ``perpetual motion'' machine, and are going through
their political consultant's dance steps with unusual skill. We
have not been fooled. The public will not be fooled, either.

Pete Stark,
Robert T. Matsui,
Jim McDermott,
John Lewis.