[Senate Report 109-336]
[From the U.S. Government Publishing Office]





                                                       Calendar No. 614
109th Congress                                                   Report
                                 SENATE
 2d Session                                                     109-336

======================================================================



 
TELEPHONE EXCISE TAX REPEAL AND TAXPAYER PROTECTION AND ASSISTANCE ACT 
                                OF 2006

                                _______
                                

               September 15, 2006.--Ordered to be printed

                                _______
                                

  Mr. Grassley, from the Committee on Finance, submitted the following

                              R E P O R T

                         [To accompany S. 1321]

    The Committee on Finance reported S. 1321, as modified by 
the Chairman's mark and amended by the Committee, to amend the 
Internal Revenue Code of 1986 to repeal the telephone excise 
tax on telephone and other communications services, having 
considered the same, reports favorably thereon and recommends 
that the bill, as amended, do pass.

                                CONTENTS

                                                                   Page
 I. LEGISLATIVE BACKGROUND............................................5
II. EXPLANATION OF THE BILL...........................................5
    TITLE I--REPEAL OF THE TELEPHONE EXCISE TAX.......................5
        A. Repeal Excise Tax on Communications Services (sec. 101 
            of the bill and secs. 4251-54 of the Code)...........     5
    TITLE II--TAXPAYER PROTECTION AND ASSISTANCE......................7
        A. Low-Income Taxpayer Clinics (sec. 201 of the bill and 
            new sec. 7526A of the Code)..........................     7
        B. Clarification of Enrolled Agent Credentials (sec. 202 
            of the bill and new sec. 7529 of the Code)...........     8
        C. Regulation of Federal Tax Return Preparers (sec. 203 
            of the bill).........................................     9
        D. Contract Authority for Examinations of Preparers (sec. 
            204 of the bill).....................................    12
        E. Regulation of Refund Anticipation Loan Facilitators 
            (sec. 205 of the bill and new sec. 7530 of the Code).    13
        F. Taxpayer Access to Financial Institutions (sec. 206 of 
            the bill)............................................    15
        G. Expanded Use of Tax Court Practitioner Fees (sec. 7475 
            of the Code).........................................    16
    TITLE III--IMPROVEMENTS IN TAX ADMINISTRATION AND TAXPAYER 
    SAFEGUARDS.......................................................17
        A. Waiver of User Fee for Installment Agreements Using 
            Automated Withdrawals (sec. 301 of the bill and sec. 
            6159 of the Code)....................................    17
        B. Termination of Installment Agreements (sec. 302 of the 
            bill and sec. 6159 of the Code)......................    17
        C. Individuals Held Harmless on Improper Levy on 
            Individual Retirement Plan (sec. 303 of the bill and 
            sec. 6343 of the Code)...............................    18
        D. Office of Chief Counsel Review of Offers-in-Compromise 
            (sec. 304 of the bill and sec. 7122 of the Code).....    20
        E. Elimination of Restriction on Offsetting Refunds From 
            Former Residents (sec. 305 of the bill and sec. 6402 
            of the Code).........................................    21
        F. Revisions Relating to Termination of Employment of IRS 
            Employees for Misconduct (sec. 306 of the bill and 
            new sec. 7804A of the Code)..........................    22
        G. Modification of Collection Due Process Procedures for 
            Employment Tax Liabilities (sec. 307 of the bill and 
            sec. 6330 of the Code)...............................    23
        H. Extension of Time Limit for Contesting IRS Levy (sec. 
            308 of the bill and secs. 6343 and 6532 of the Code).    24
        I. Authorization for IRS To Require Increased Electronic 
            Filing of Returns Prepared by Paid Return Preparers 
            (sec. 309 of the bill and sec. 6011 and new sec. 
            6695B of the Code)...................................    25
        J. Require IRS To Develop Direct Electronic Filing (sec. 
            310 of the bill).....................................    26
        K. Modifications and Report Regarding Free File Program 
            (sec. 311 of the bill)...............................    27
        L. Study on Clarifying Recordkeeping Responsibilities 
            (sec. 312 of the bill)...............................    28
        M. Modification of Treasury Inspector General for Tax 
            Administration Reporting Requirements (sec. 313 of 
            the bill and sec. 7803 of the Code)..................    29
        N. Streamline Reporting Process for National Taxpayer 
            Advocate (sec. 314 of the bill and sec. 7803 of the 
            Code)................................................    30
        O. Whistleblower Reforms (sec. 315 of the bill and sec. 
            7623 of the Code)....................................    30
        P. Authorization for Financial Management Service 
            Retention of Transaction Fees From Levied Amounts 
            (sec. 316 of the bill)...............................    32
        Q. Clarification of Definition of Church Tax Inquiry 
            (sec. 317 of the bill and sec. 7611 of the Code).....    33
        R. Treatment of Funds From Indian Tribal Governments as 
            Public Support for Purposes of the Public Charity-
            Private Foundation Classification (sec. 318 of the 
            bill and sec. 7871 of the Code)......................    34
        S. Tax Court Review of Requests for Equitable Relief From 
            Joint and Several Liability (sec. 319 of the bill and 
            sec. 6015 of the Code)...............................    34
        T. Authorization of Appropriations for Tax Law 
            Enforcement Relating to Human Sex Trafficking (sec. 
            320 of the bill).....................................    37
        U. Regulation of Payroll Tax Deposit Agents (sec. 321 of 
            the bill and new sec. 7531 of the Code)..............    38
        V. Extension of the Statute of Limitations To File Claims 
            for Refunds Relating to Disability Determinations by 
            the Department of Veterans Affairs (sec. 322 of the 
            bill and sec. 6511 of the Code)......................    40
        W. Notification Requirement for Exempt Entities Not 
            Currently Required To File an Annual Information 
            Return (secs. 6033, 6652, and 7428 of the Code)......    41
    TITLE IV--REFORM OF PENALTIES AND INTEREST.......................43
        A. Individual Estimated Tax (sec. 401 of the bill and 
            sec. 6654 of the Code)...............................    43
        1. Increase Estimated Tax Threshold......................    43
        2. Apply one interest rate per estimated tax underpayment 
            period for individuals, estates, and trusts..........    44
        3. Provide that underpayment balances are cumulative.....    45
        4. Require 365-day year for all estimated tax interest 
            calculations for individuals, estates, and trusts....    45
        B. Corporate Estimated Tax (sec. 402 of the bill and sec. 
            6655 of the Code)....................................    46
        C. Increase in Large Corporation Threshold for Estimated 
            Tax Payments (sec. 403 of the bill and sec. 6655 of 
            the Code)............................................    47
        D. Expansion of Interest Netting (sec. 404 of the bill 
            and sec. 6621 of the Code)...........................    47
        E. Clarification of Application of Federal Tax Deposit 
            Penalty (sec. 405 of the bill and sec. 6656 of the 
            Code)................................................    48
        F. Frivolous Tax Submissions (sec. 406 of the bill and 
            sec. 6702 of the Code)...............................    49
        G. Understatement of Taxpayer's Liability by Tax Return 
            Preparers (sec. 407 of the bill and secs. 6694, 6695, 
            and 7701 of the Code)................................    50
        H. Penalty for Aiding and Abetting the Understatement of 
            Tax Liability (sec. 408 of the bill and sec. 6701 of 
            the Code)............................................    52
        I. Increase in Criminal Monetary Penalty Limitation for 
            the Underpayment or Overpayment of Tax Due to Fraud 
            (sec. 409 of the bill and secs. 7201, 7203, and 7206 
            of the Code).........................................    53
        J. Doubling of Certain Penalties, Fines, and Interest on 
            Underpayments Related to Certain Offshore Financial 
            Arrangements (sec. 410 of the bill)..................    54
        K. Increase in Penalty for Bad Checks and Money Orders 
            (sec. 411 of the bill and sec. 6657 of the Code).....    59
        L. Increase the Amounts of Excise Taxes Relating to 
            Public Charities, Social Welfare Organizations, and 
            Private Foundations (sec. 412 of the bill and secs. 
            4912, 4941, 4942, 4943, 4944, 4945, 4955, and 4958 of 
            the Code)............................................    59
        M. Penalty for Filing Erroneous Refund Claims (sec. 413 
            of the bill and sec. 6662 of the Code)...............    65
        N. Provisions Relating to Appraisers and Substantial and 
            Gross Overstatement of Valuations of Property (secs. 
            170, 6662, 6664, 6696, and new sec. 6695A of the 
            Code)................................................    67
    TITLE V--CONFIDENTIALITY AND DISCLOSURE..........................71
        A. Collection Activities With Respect to a Joint Return 
            Disclosable to Either Spouse Based on Oral Request 
            (sec. 501 of the bill and sec. 6103 of the Code).....    71
        B. Prohibition of Disclosure of Taxpayer Identification 
            Information With Respect to Disclosure of Accepted 
            Offers-in-Compromise (sec. 502 of the bill and sec. 
            6103 of the Code)....................................    72
        C. Compliance By Contractors With Confidentiality 
            Safeguards (sec. 503 of the bill and sec. 6103 of the 
            Code)................................................    73
        D. Higher Standards for Requests for and Consents to 
            Disclosure (sec. 504 of the bill and sec. 6103 of the 
            Code)................................................    75
        E. Civil Damage Remedies for Unauthorized Disclosure or 
            Inspection (sec. 505 of the bill and sec. 7431 of the 
            Code)................................................    78
        F. Expanded Disclosure in Emergency Circumstances (sec. 
            506 of the bill and sec. 6103 of the Code)...........    80
        G. Disclosure of Taxpayer Identity for Tax Refund 
            Purposes (sec. 507 of the bill and sec. 6103 of the 
            Code)................................................    80
        H. Treatment of Public Records (sec. 508 of the bill and 
            sec. 6103 of the Code)...............................    81
        I. Taxpayer Identification Number Matching (sec. 509 of 
            the bill and sec. 6103 of the Code)..................    82
        J. Form 8300 Disclosures (sec. 510 of the bill and sec. 
            6103 of the Code)....................................    83
        K. Expanded Definition of Return Preparer for Purposes of 
            Sections 6713 and 7216 (sec. 511 of the bill and 
            secs. 6713 and 7216 of the Code).....................    84
        L. Restrict the Use and Disclosure of Taxpayer 
            Information by Return Preparers for Nontax Purposes 
            and Offshore Disclosures (sec. 512 of the bill and 
            sec. 7216 of the Code)...............................    86
        M. Disclosure to State Officials of Proposed Actions 
            Related to Certain Section 501(c) Organizations 
            (secs. 6103, 6104, 7213, 7213A, and 7431 of the Code)    90
    TITLE VI--UNITED STATES TAX COURT MODERNIZATION..................93
        A. Appointment of Tax Court Employees (sec. 601 of the 
            bill and sec. 7471(a) of the Code)...................    93
        B. Consolidate Review of Collection Due Process Cases in 
            the Tax Court (sec. 6330 of the Code)................    95
        C. Confirmation of Tax Court Authority To Apply Equitable 
            Recoupment (sec. 6214 of the Code)...................    97
        D. Extend Authority for Special Trial Judges To Hear and 
            Decide Certain Employment Status Cases (sec. 7443A of 
            the Code)............................................    98
        E. Tax Court Filing Fee (sec. 7451 of the Code)..........    99
    TITLE VII--MISCELLANEOUS PROVISIONS..............................99
        A. Expensing of Broadband Internet Access Expenditures 
            (sec. 701 of the bill and sec. 191 of the Code)......    99
        B. Modification of Refunds for Kerosene Used in Aviation 
            (sec. 702 of the bill and sec. 6427 of the Code).....   102
        C. Declarations on Federal Corporate Income Tax Returns 
            (sec. 703 of the bill and sec. 6062 of the Code).....   106
        D. Treatment of Professional Employer Organizations as 
            Employers (sec. 704 of the bill and new secs. 3511 
            and 7705 of the Code)................................   106
        E. Study on Collecting Estimated Tax Payments Through the 
            Electronic Fund Transfer System (sec. 705 of the bill 
            and sec. 6302 of the Code)...........................   115
        F. Study of Use of Voluntary Withholding Agreements (sec. 
            706 of the bill).....................................   116
        G. Offset of Tax Refunds Against State Judicial Debts 
            (sec. 707 of the bill and sec. 6402 of the Code).....   117
        H. Clarification of Responsibilities of United States 
            Marshals Attending the Tax Court (sec. 708 of the 
            bill and sec. 7456 of the Code)......................   118
        I. Authorization of Appropriations To Combat the Tax Gap 
            and for Tax Law Enforcement (sec. 709 of the bill)...   118
        J. Annual Tax Gap Study (sec. 710 of the bill)...........   119
        K. Authorization of Appropriations for Tax Law 
            Enforcement Relating to the Hiring and Continued 
            Employment of Undocumented Workers (sec. 711 of the 
            bill)................................................   120
        L. Repeal of Dollar Limit on Contributions to Qualified 
            Funeral Trusts (sec. 712 of the bill and sec. 685 of 
            the Code)............................................   121
        M. Permit Administrative Relief for Certain Late 
            Qualified Terminable Interest Property Elections 
            (sec. 713 of the bill and sec. 2523 of the Code).....   121
        N. Disclosure of Written Determinations (sec. 714 of the 
            bill and sec. 6110 of the Code)......................   122
        O. Disclosure of Internet Web Site and Name Under Which 
            Organization Does Business (sec. 715 of the bill and 
            sec. 6033 of the Code)...............................   125
        P. Modification to Reporting of Capital Transactions 
            (sec. 716 of the bill and secs. 6033 and 6104 of the 
            Code)................................................   126
        Q. Disclosure That Form 990 Is Publicly Available (sec. 
            717 of the bill).....................................   127
        R. Expedited Review Process for Certain Tax-Exemption 
            Applications (sec. 718 of the bill)..................   127
        S. Extension of Declaratory Judgment Procedures to Non-
            501(c)(3) Tax-Exempt Organizations (sec. 719 of the 
            bill and sec. 7428 of the Code)......................   129
        T. Wireless Telecommunications Property Treated as 
            Qualified Technological Equipment (sec. 720 of the 
            bill and sec. 168 of the Code).......................   131
        U. Permanent Extension of Internet Tax Moratorium (sec. 
            721 of the bill).....................................   132
        V. Simplification Through Elimination of Inoperative 
            Provisions (sec. 722 of the bill)....................   133
        W. Definition of Convention or Association of Churches 
            (sec. 7701 of the Code)..............................   133
    TITLE VIII--REVENUE OFFSET PROVISIONS...........................135
        A. Economic Substance Doctrine (secs. 801 and 802 of the 
            bill)................................................   135
        1. Clarification of the economic substance doctrine (sec. 
            801 of the bill and new sec. 7701(o) of the Code)....   135
        2. Penalty for understatements attributable to 
            transactions lacking economic substance, etc. (sec. 
            802 of the bill and new sec. 6662B of the Code)......   141
        B. Tax Treatment of Certain Inverted Corporate Entities 
            (sec. 803 of the bill and sec. 7874 of the Code).....   147
III.BUDGET EFFECTS OF THE BILL......................................152

IV. VOTES OF THE COMMITTEE..........................................158
 V. REGULATORY IMPACT AND OTHER MATTERS.............................158

                       I. LEGISLATIVE BACKGROUND


Overview

    The Senate Committee on Finance marked up S. 1321 and 
reported S. 1321 as modified by the Chairman's mark and amended 
by the Committee, the ``Telephone Excise Tax Repeal and 
Taxpayer Protection and Assistance Act of 2006,'' on June 28, 
2006, and, with a quorum present, ordered the bill favorably 
reported by a voice vote on that date.

Recent legislation

    The bill as approved by the Committee contained several 
provisions that are identical or substantially similar to 
provisions in recently enacted legislation and therefore are 
not contained in the bill as reported.
    The Pension Protection Act of 2006\1\ contains provisions 
relating to:
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    \1\Pub. L. No. 109-280 (August 17, 2006).
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           Administration of the United States Tax 
        Court;
           Notification requirements for exempt 
        entities not currently required to file annual 
        information returns;
           Appraisers and substantial and gross 
        overstatement of valuations of property;
           The disclosure to State officials of 
        proposed actions related to certain section 501(c) 
        organizations;
           The definition of a convention or 
        association of churches; and
           Excise taxes imposed on public charities, 
        social welfare organizations, and private foundations.

                      II. EXPLANATION OF THE BILL


              TITLE I--REPEAL OF THE TELEPHONE EXCISE TAX


            A. Repeal Excise Tax on Communications Services


(Sec. 101 of the bill and secs. 4251-54 of the Code)

                              PRESENT LAW

    The Internal Revenue Code of 1986 (the ``Code'') imposes a 
three-percent Federal excise tax on amounts paid for 
communications services. Communications services are defined as 
``local telephone service,'' ``toll telephone service,'' and 
``teletypewriter exchange service.''\2\ The person paying for 
the service (i.e., the consumer) is liable for payment of the 
tax. Service providers are required to collect the tax; 
however, if a consumer refuses to pay, the service provider is 
not liable for the tax and is not subject to penalty for 
failure to collect if reasonable efforts to collect have been 
made. Instead, the service provider must report the delinquent 
consumer's name and address to the Internal Revenue Service 
(``IRS''), which then must attempt to collect the tax.\3\
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    \2\Sec. 4251. ``Teletypewriter exchange service'' refers to a data 
system that provides access from a teletypewriter or other data station 
to a teletypewriter exchange system and the privilege of 
intercommunication by that station with substantially all persons 
having teletypewriter or other data stations in the same exchange 
system. Sec. 4252(c). While it is understood that the system to which 
the definition was initially intended to apply is no longer in use, the 
definition may fit other services provided now or that may be provided 
in the future.
    \3\In general, the amount of tax is based on the sum of charges for 
taxable services included in the bill. If the person who renders the 
bill groups individual items for purposes of rendering the bill and 
computing the tax, then the tax base with respect to each such group is 
the sum of all items within that group. The tax on any remaining items 
not included in any such group is based on the charge for each item 
separately. Sec. 4254(a).
---------------------------------------------------------------------------
    Local telephone service is defined as the provision of 
voice-quality telephone access to a local telephone system that 
provides access to substantially all persons having telephone 
stations constituting a part of the local system.\4\
---------------------------------------------------------------------------
    \4\The access to substantially all persons having telephone 
stations constituting a part of the local system is sometimes referred 
to as access to the public switched telephone network.
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    Toll telephone service (which is essentially long distance 
telephone service) is defined as voice quality communication 
for which (1) there is a toll charge that varies with the 
distance and elapsed transmission time of each individual call 
and payment for which occurs in the United States, or (2) a 
service (such as a wide area telephone service, or ``WATS'') 
which, for a periodic charge (determined as a flat amount or 
upon the basis of total elapsed transmission time), entitles 
the subscriber to an unlimited number of telephone calls to or 
from an area outside the subscriber's local system area.
    Telephone companies have historically collected excise tax 
on a toll telephone service even if the toll charge on such 
service does not vary with both distance and elapsed 
transmission time. However, in several recent cases, the Courts 
of Appeals held that the Federal excise tax on communications 
services does not apply to long distance (i.e., toll telephone) 
services sold at flat per-minute rates for interstate, 
intrastate, and international calls. The courts concluded that 
the excise tax does not apply because a flat per-minute rate 
does not vary with both distance and transmission time as 
required by the statute.\5\ In response to these court 
decisions, the IRS issued Notice 2006-50, directing telephone 
companies to cease collecting and paying over tax on long 
distance services and bundled services that are billed after 
July 31, 2006.\6\ In Notice 2006-50, the IRS also announced a 
program to refund approximately $13 billion in excise taxes on 
long distance and bundled services. The Federal excise tax on 
local-only telephone service remains in effect.
---------------------------------------------------------------------------
    \5\See, e.g., Reese Bros. v. United States, 97 AFTR 2d 2006-2393 
(3d Cir. 2006); Fortis v. United States, 97 AFTR 2d 2006-2228 (2d Cir. 
2006); American Bankers Insurance Group v. United States, 408 F.3d 1328 
(11th Cir. 2005); Office Max, Inc. v. United States, 428 F.3d 583 (6th 
Cir. 2005); Nat'l R.R. Passenger Corp. v. United States, 431 F.3d 374 
(D.C. Cir. 2005).
    \6\Notice 2006-50, 2006-50 I.R.B. 1141 (May 26, 2006). The notice 
defines long distance services as ``telephonic quality communications 
with persons whose telephones are outside the local telephone system of 
the caller.'' Bundled services are defined as ``local and long distance 
services provided under a plan that does not separately state the 
charge for the local telephone services.'' In general, bundled services 
include cellular phone services.
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                           REASONS FOR CHANGE

    The Committee believes that the excise tax on 
communications services is regressive, and that the tax will 
become more regressive when the IRS ceases to collect taxes on 
long distance and bundled services. The Committee believes, 
therefore, that it is appropriate to repeal the tax in its 
entirety. The Committee also believes that the IRS needs 
additional resources to provide for the fast and efficient 
refunding of telephone excise taxes to taxpayers.

                        EXPLANATION OF PROVISION

    The provision repeals the excise tax on communications 
services in its entirety. The provision also includes an 
authorization to appropriate $49 million to the IRS to 
implement the telephone excise tax refund program under Notice 
2006-50. The authorization is intended to cover such costs as 
form revisions, taxpayer assistance, processing and 
enforcement.

                             EFFECTIVE DATE

    The repeal of the excise tax applies to amounts paid 
pursuant to bills rendered more than 90 days after the date of 
enactment. The funding authorization is effective on the date 
of enactment.

              TITLE II--TAXPAYER PROTECTION AND ASSISTANCE


                     A. Low-Income Taxpayer Clinics


(Sec. 201 of the bill and new sec. 7526A of the Code)

                              PRESENT LAW

    The Code provides that the Secretary is authorized to 
provide up to $6 million per year in matching grants to certain 
low-income taxpayer clinics.\7\ 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 (``controversy clinics''). No clinic can receive more 
than $100,000 per year.
---------------------------------------------------------------------------
    \7\Sec. 7526.
---------------------------------------------------------------------------
    A ``controversy clinic'' includes (1) a clinical program at 
an accredited law, business, or accounting school, in which 
students represent low-income taxpayers, or (2) an organization 
described in section 501(c) which either represents low-income 
taxpayers as described above or provides referrals to qualified 
representatives. A low-income taxpayer is an individual whose 
income does 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 (``OMB'').

                           REASONS FOR CHANGE

    The Committee believes that low-income taxpayer clinics 
contribute to compliance with the Code by providing 
representation to taxpayers who might otherwise be uncertain 
about their rights and obligations under the Code. Accordingly, 
the Committee believes that the amount authorized to be 
appropriated for matching grants to them should be increased. 
The Committee also believes that the scope of the work that 
clinics seeking grants may do should be broadened to encompass 
tax return preparation.

                        EXPLANATION OF PROVISION

    The provision authorizes the Secretary to make $10 million 
in matching grants for low-income taxpayer return preparation 
clinics (``return preparation clinics''). Return preparation 
clinics are clinics that provide routine tax return preparation 
and filing services to low-income taxpayers, including 
individuals for whom English is a second language, for not more 
than a nominal fee.
    Return preparation clinics are treated as assisting low-
income taxpayers if at least 90 percent of the taxpayers 
assisted 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 OMB. Under the 
provision, return preparation clinics eligible to receive 
grants include eligible educational institutions as defined in 
section 529(e)(5) and organizations described in section 
501(c).
    The provision prohibits the use of grants for overhead 
expenses at both controversy clinics and return preparation 
clinics. The provision also authorizes the IRS to use mass 
communications, referrals, and other means to promote the 
benefits and encourage the use of low-income controversy 
clinics and return preparation clinics.
    The authorization of $6 million for controversy clinics 
under present law is also increased to $10 million.

                             EFFECTIVE DATE

    The provision is effective for grants made after the date 
of enactment.

             B. Clarification of Enrolled Agent Credentials


(Sec. 202 of the bill and new sec. 7529 of the Code)

                              PRESENT LAW

    Treasury Department Circular No. 230 provides rules 
relating to practice before the IRS by attorneys, certified 
public accountants, enrolled agents, enrolled actuaries, and 
others.

                           REASONS FOR CHANGE

    The Committee believes that individuals who meet the 
regulatory requirements established by the Secretary should be 
able to use the specified credentials or designation in any 
State or Federal jurisdiction.

                        EXPLANATION OF PROVISION

    The provision permits the Secretary to promulgate 
regulations to regulate the conduct of enrolled agents in 
regard to their practice before the IRS, and to permit enrolled 
agents meeting the Secretary's qualifications to use the 
credentials or designation ``enrolled agent,'' ``EA,'' or 
``E.A.''

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

             C. Regulation of Federal Tax Return Preparers


(Sec. 203 of the bill)

                              PRESENT LAW

    The Secretary is authorized to regulate the practice of 
representatives of persons before the Treasury.\8\ The 
Secretary also is authorized to suspend or disbar from practice 
before the Treasury a representative who is incompetent, who is 
disreputable, who violates the rules regulating practice before 
the Treasury, or who (with intent to defraud) willfully and 
knowingly misleads or threatens the person being represented 
(or a person who may be represented). The rules promulgated by 
the Secretary pursuant to this provision are contained in 
Circular 230. In general, the preparation and filing of tax 
returns (absent further involvement) has not been considered 
within the scope of the Circular 230 provisions.
---------------------------------------------------------------------------
    \8\31 U.S.C. sec. 330.
---------------------------------------------------------------------------
    Income tax return preparers are required to sign and 
include their taxpayer identification numbers on income tax 
returns and income return-related documents prepared for 
compensation. Under the Code, penalties are imposed on any 
income tax return preparer who, in connection with the 
preparation of an income tax return, fails to (1) furnish a 
copy of a return or claim for refund to the taxpayer, (2) sign 
the return or claim for refund, (3) furnish his or her 
identifying number, (4) retain a copy of the completed return 
or a list of the taxpayers for whom a return was prepared, (5) 
file a correct information return, and (6) comply with certain 
due diligence requirements in determining a taxpayer's 
eligibility for the earned income credit.\9\ Generally, the 
penalty is $50 for each failure and the total penalties imposed 
for any single type of failure for any calendar year are 
limited to $25,000. The penalty for failing to comply with the 
due diligence requirements for determining a taxpayer's 
eligibility for the earned income credit is $100 for each 
failure. An income tax return preparer who endorses or 
negotiates a check issued to a taxpayer (other than the income 
tax return preparer) is liable for a penalty of $500 with 
respect to each such check.\10\
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    \9\Sec. 6695.
    \10\Sec. 6695(f).
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                           REASONS FOR CHANGE

    Approximately 60 percent of the 130 million U.S. individual 
taxpayers paid a return preparer to prepare their 2003 Federal 
income tax returns.\11\ The Committee understands that many tax 
return preparers are not regulated by any licensing entity or 
subject to minimum competency requirements. Moreover, according 
to the National Taxpayer Advocate, more than 32 percent of 
earned income credit claims are prepared by paid preparers and 
the error rate on those claims is over 34 percent.\12\
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    \11\Internal Revenue Service, Statistics Of Income Bulletin Winter 
2005-2006. 
    \12\Testimony of Nina Olson, National Taxpayer Advocate, Internal 
Revenue Service, before the Subcommittee on Oversight of the House 
Committee on Ways and Means, House of Representatives, July 20, 2005.
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    Tax practitioners play an important role in the tax system. 
While certain individuals authorized to practice before the IRS 
are already subject to oversight, many are not. For those 
taxpayers who use a paid tax practitioner, the Committee 
believes that compliance with the tax laws hinges on the 
practitioners competence and ethical standards. Therefore, the 
Committee believes that the IRS's failure to provide more 
oversight over such tax return preparers contributes to 
noncompliance. The Committee also believes that tax return 
preparer regulation will improve the accuracy of tax return 
preparation and, therefore, will reduce government burden and 
intrusion on taxpayers through IRS enforcement efforts (such as 
collection and examinations).
    The Committee believes that requiring regulation of 
individuals preparing Federal income tax returns and other 
documents for submission to the IRS will improve the fairness 
and administration of the tax system. Additionally, the 
Committee believes that establishing within the IRS a permanent 
Office of Professional Responsibility and the use of 
administrative law judges will provide continuity and 
accountability in the regulation of tax return preparers. The 
Committee believes that testing, education, ethical training, 
and effective oversight of enrolled preparers are critical 
elements to improving tax compliance.

                        EXPLANATION OF PROVISION

    The provision expands the Secretary's authority to regulate 
the practice of representatives before the Treasury to include 
individuals preparing Federal tax returns and other submissions 
to the IRS for compensation (``enrolled preparers''). The 
Secretary is required to issue regulations no later than one 
year after the date of enactment establishing eligibility 
requirements for enrolled preparers. Whether a preparer is 
compensated and, thus, subject to regulation as an enrolled 
preparer shall be determined by considering both indirect 
compensation, as well as direct forms of compensation. For 
example, the Committee understands there are cases where 
individuals prepare Federal tax returns for taxpayers without 
charging a direct fee, but bundle the return preparation 
services with other products or services for which the 
individual charges the taxpayer a monetary amount. The 
Committee intends for these indirect compensation arrangements 
to be covered by the enrolled preparer requirements.
    The provision requires the Secretary to develop and 
administer an examination to establish the competency of 
enrolled preparers. Under the provision, any examination shall 
be designed to test the preparer's knowledge of technical tax 
issues, including the earned income credit, and the ethical 
standards for the preparation of tax returns.
    Practitioners authorized to practice before the IRS who are 
subject to oversight under regulations in effect on the date of 
enactment are excluded from the regulations establishing 
eligibility requirements for enrolled preparers. The provision 
requires the Secretary to accept the credentials of a State 
licensing or State registration program for enrolled preparers 
in lieu of testing, to the extent that such State licensing or 
State registration program has an eligibility examination that 
is comparable to the eligibility examination established by the 
Secretary.
    Under the provision, the enrolled preparer regulations 
shall also require enrolled preparers to renew their 
eligibility every three years. As part of this renewal, 
enrolled preparers shall be required to establish completion of 
continuing education requirements in a manner set forth by the 
Secretary in regulations. Enrolled preparers failing to meet 
the eligibility requirements are subject to suspension or 
termination.
    The provision also establishes the Office of Professional 
Responsibility within the IRS under the supervision and 
direction of the Director, an official reporting directly to 
the Commissioner, IRS. The duties of the Office of Professional 
Responsibility shall be limited to matters related to section 
330 of title 31. The Director, Office of Professional 
Responsibility shall be entitled to compensation at the same 
rate as the highest rate of basic pay established for the 
Senior Executive Service, or, if higher, at a rate fixed under 
critical pay authority.
    The provision authorizes the Secretary to appoint 
administrative law judges to conduct hearings of any action 
initiated by the Office of Professional Responsibility to 
impose sanctions on enrolled preparers and other 
representatives practicing before the Treasury. Under the 
provision, hearing records shall be open to the public. In 
addition, in the case of a sanction imposed on a representative 
without initiation of an action, the Office of Professional 
Responsibility shall make public the identity of the 
representative, employer, firm, or other entity sanctioned, as 
well as information about the conduct which gave rise to the 
sanction. Information about clients of the representative, 
employer, firm, or other entity sanctioned and medical 
information with respect to the representative shall not be 
released to the public or discussed in an open hearing except 
to the extent necessary to understand the nature, scope, and 
impact of the conduct giving rise to the sanction or proposed 
sanction.
    Under the provision, the Secretary may impose fees for the 
registration and renewal of enrolled preparers. Such fees shall 
be made available to the Office of Professional Responsibility 
for the purpose of reimbursing the costs of administering and 
enforcing the rules and regulations regulating practice before 
the Treasury.
    The provision also provides that the Secretary shall 
conduct a public awareness campaign to encourage taxpayers to 
use competent professionals in the preparation of their tax 
returns and other Federal tax matters. The public awareness 
campaign shall be conducted in a manner to inform the public of 
the registration requirements imposed on enrolled preparers and 
the general requirement that preparers must sign and provide 
their registration numbers on tax returns and display notice of 
compliance with the registration requirements. The provision 
also requires the Office of Professional Responsibility to 
coordinate with State officials in order to collect information 
regarding practitioners that have been disciplined or suspended 
under State or local rules.
    The provision imposes a monetary penalty on any person 
preparing Federal tax returns and other tax submissions for 
compensation who has failed to meet the eligibility or renewal 
requirements for enrolled preparers or who has otherwise been 
suspended from practice by the Office of Professional 
Responsibility. The penalty amount is equal to $1,000 for each 
tax return or other tax submission (e.g., an application for 
offer-in-compromise) prepared during the period such person was 
not authorized to practice before the Treasury. This penalty 
shall be in addition to other penalties that may be imposed 
under the Code, such as the penalty for failure to furnish an 
identifying number on a tax return.
    The provision also increases from $50 per return to the 
greater of $500 per return or $1,000 the penalties under 
section 6695 for failing to furnish a copy of a return or claim 
for refund, sign a return or claim for refund, and furnish his 
or her identifying number. The provision also eliminates the 
$25,000 annual cap on such penalties. In addition, amounts 
collected from the imposition of penalties under sections 6694 
and 6695 or under regulations promulgated under section 330 of 
title 31 shall be directed to the Office of Professional 
Responsibility for the administration of the public awareness 
campaign. The provision also permits the Secretary to use any 
funds specifically appropriated for earned income credit 
compliance to improve compliance with the rules regulating 
practice before the Treasury.
    The provision prohibits any practitioner authorized to 
practice before the Treasury from directly or indirectly 
offering or providing insurance to cover professional fees and 
other expenses incurred in responding to or defending a tax 
audit.
    The provision also requires any form or other submission 
that can or must be submitted to the IRS separate from the 
taxpayer's signed tax return (e.g., reportable transaction 
disclosure statements and offer-in-compromise applications) to 
be signed under penalty of perjury. Paid preparer information, 
if applicable, is also required on such forms under the 
provision.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

          D. Contract Authority for Examinations of Preparers


(Sec. 204 of the bill)

                              PRESENT LAW

    The Secretary is authorized to regulate the practice of 
representatives of persons before the Treasury.\13\ The 
Secretary also is authorized to suspend or disbar from practice 
before the Treasury a representative who is incompetent, who is 
disreputable, who violates the rules regulating practice before 
the Treasury, or who (with intent to defraud) willfully and 
knowingly misleads or threatens the person being represented 
(or a person who may be represented). The rules promulgated by 
the Secretary pursuant to this provision are contained in 
Circular 230.
---------------------------------------------------------------------------
    \13\31 U.S.C. sec. 330.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes the Secretary should have the 
authority to contract for the development and administration of 
any examinations implemented to regulate persons practicing 
before the Treasury, including examinations to regulate tax 
return preparers.

                        EXPLANATION OF PROVISION

    The provision authorizes the Secretary to contract for both 
the development and administration of any examination 
implemented under the Secretary's authority to regulate the 
practice of representatives of persons before the Treasury.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

         E. Regulation of Refund Anticipation Loan Facilitators


(Sec. 205 of the bill and new sec. 7530 of the Code)

                              PRESENT LAW

    The Secretary is authorized to regulate the practice of 
representatives of persons before the Treasury.\14\ The 
Secretary is also authorized to suspend or disbar from practice 
before the Treasury a representative who is incompetent, who is 
disreputable, who violates the rules regulating practice before 
the Treasury, or who (with intent to defraud) willfully and 
knowingly misleads or threatens the person being represented 
(or a person who may be represented). The rules promulgated by 
the Secretary pursuant to this provision are contained in 
Circular 230. In general, the preparation and filing of tax 
returns (absent further involvement) has not been considered 
within the scope of these Circular 230 provisions.
---------------------------------------------------------------------------
    \14\31 U.S.C. sec. 330.
---------------------------------------------------------------------------
    Under Notice 99-58,\15\ certain tax practitioners that file 
returns electronically and financial institutions may apply to 
obtain a Debt Indicator for their customer/client taxpayers in 
exchange for screening individual income tax returns for 
potential abuse. The Debt Indicator tells whether or not a 
taxpayer has any scheduled offsets against a claimed refund.
---------------------------------------------------------------------------
    \15\1999-51 I.R.B. 693.
---------------------------------------------------------------------------
    Section 6103 generally provides that return and return 
information are confidential and cannot be disclosed unless 
authorized by title 26. The definition of return information is 
very broad, and includes, among other things, information with 
respect to the determination of the existence or possible 
existence of liability of any person for any penalty under the 
Code.

                           REASONS FOR CHANGE

    The Committee is concerned that tax refunds and the IRS's 
Debt Indicator program are being used as a means for selling 
refund anticipation loans to taxpayers, particularly low-income 
taxpayers. The Committee believes that requiring regulation of 
refund anticipation loan facilitators will increase the ability 
of the IRS to hold such facilitators accountable. The Committee 
also believes that increasing the information that must be 
disclosed, both orally and in writing, to the taxpayer in 
connection with a refund anticipation loan will increase 
taxpayer awareness of the true costs and consequences of a 
refund anticipation loan.

                        EXPLANATION OF PROVISION

    The provision requires the annual registration with the 
Secretary of refund loan facilitators. The annual registration 
shall include the name, address, and TIN of the refund loan 
facilitator applicant and the fee schedule of such facilitator 
for the year of such registration. A refund loan facilitator is 
any person who originates such electronic submission of income 
tax returns for another person and, in connection with the 
electronic submission, solicits, processes, or otherwise 
facilitates the making of a refund anticipation loan to the 
individual taxpayer onwhose behalf the tax return is submitted. 
A refund anticipation loan is any loan of money or any other thing of 
value to a taxpayer in connection with the taxpayer's anticipated 
receipt of a Federal tax refund.
    The provision requires refund loan facilitators to disclose 
to taxpayers, both orally and in writing, information with 
respect to refund anticipation loans at the time taxpayers 
apply for such loans. Specifically, refund loan facilitators 
must disclose: (1) that the taxpayer is applying for a loan 
that is based upon the taxpayer's anticipated income tax 
refund; (2) the expected time within which the loan will be 
paid to the taxpayer if such loan is approved; (3) the time 
within which income tax refunds are typically paid based on 
different filing options; (4) that there is no guarantee that a 
refund will be paid in full or received within a specified time 
period and that the taxpayer is responsible for the repayment 
of the loan even if the refund is not paid in full or has been 
delayed; (5) the existence of any arrangements between the 
refund loan facilitators and a taxpayer's creditor to offset 
the taxpayer's expected refund against an outstanding liability 
owed to the creditor and the implication of any such offset; 
(6) that the taxpayer may file an electronic tax return without 
applying for a refund anticipation loan and the fee for filing 
such an electronic return; and (7) the cost of the refund 
anticipation loan compared to alternative sources of credit.
    In addition, the provision requires refund loan 
facilitators to disclose to taxpayers all fees and interest 
charges associated with a refund anticipation loan, including 
fees and charges if the taxpayer's Federal tax refund is 
delayed or not paid. Refund loan facilitators also must 
disclose any other information required to be disclosed by the 
Secretary.
    The provision amends the Code to permit the Secretary to 
impose monetary penalties on refund loan facilitators who fail 
to meet the registration or disclosure requirements, unless 
such failure was due to reasonable cause. The penalty for 
failure to register is not to exceed the gross income derived 
from all refund anticipation loans during the period the refund 
loan facilitator was not registered. The penalty for failure to 
disclose the information required by the provision is not to 
exceed the gross income derived from all refund anticipation 
loans with respect to which the refund loan facilitator failed 
to provide the required disclosure information.
    The provision also amends the privacy rules under the Code 
to permit the Secretary to disclose the name and employer 
(including the employer's address) of any person with respect 
to whom a penalty has been imposed for failing to meet the 
registration or disclosure requirements of the provision.
    The provision provides that the Secretary or the 
Secretary's delegate shall conduct a public awareness campaign 
to educate the public on the costs associated with refund 
anticipation loans, including the costs as compared to other 
forms of credit. The public awareness campaign shall be 
conducted in a manner that educates the public on making sound 
financial decisions with respect to refund anticipation loans. 
Amounts collected from the imposition of penalties on refund 
loan facilitators shall be directed to the IRS for the 
administration of the public awareness campaign.
    The provision also requires the Secretary to terminate the 
Debt Indicator program announced in Notice 99-58 and prohibits 
the Secretary from implementing any similar program.

                             EFFECTIVE DATE

    The provisions relating to the regulation of refund loan 
facilitators generally are effective one year after the date of 
enactment. The provision terminating the Debt Indicator program 
is effective on the date of enactment.

              F. Taxpayer Access to Financial Institutions


(Sec. 206 of the bill)

                              PRESENT LAW

    A large number of individual taxpayers do not have bank 
accounts. Because of this, these taxpayers are unable to 
participate fully in electronic filing, because IRS cannot 
electronically transmit to them their tax refunds.

                           REASONS FOR CHANGE

    The Committee believes that effectiveness of tax incentives 
and assistance programs are diminished when individuals do not 
have an account at a financial institution. For example, the 
benefits received through the earned income tax credit diminish 
when taxpayers redirect their tax refund in exchange for a 
refund anticipation loan. In contrast, if such taxpayers had an 
account at an insured financial institution, such tax refund 
could be directly deposited into the taxpayer's account without 
a reduction for fees paid to a refund anticipation loan 
facilitator.
    Between 25 and 56 million adults do not have an account 
with an insured financial institution. These individuals rely 
on alternative financial service providers to cash checks, pay 
bills, send remittances, and obtain credit. Many of these 
individuals are low- and moderate-income families. The 
Committee believes that promoting the establishment of accounts 
with an insured financial institution will allow the taxpayer 
to keep more of his or her tax refund and encourage savings.

                        EXPLANATION OF PROVISION

    The provision authorizes the Secretary of the Treasury to 
award demonstration project grants (totaling up to $10 million 
or such additional amounts as deemed necessary) to eligible 
entities to provide tax preparation assistance in connection 
with establishing an account in a Federally insured depositary 
institution for individuals that do not have such an account. 
Entities eligible to receive grants are: tax-exempt 
organizations described in section 501(c)(3); Federally insured 
depositary institutions; State or local governmental agencies; 
community development financial institutions; Indian tribal 
organizations; Alaska native corporations; native Hawaiian 
organizations; labor organizations; and a partnership of one or 
more of the listed eligible entities.
    Under the provision, entities receiving grants may not use 
more than six percent of the total amount of such grant for the 
administrative costs of carrying out the program funded by such 
grant.
    The provision also requires the Secretary to conduct a 
study, in consultation with the National Taxpayer Advocate, of 
the implementation of a program to deliver tax refunds through 
debit cards or other electronic means. The provision requires 
the Secretary to submit a report to Congress on the results of 
such study no later than one year after the date of enactment.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

             G. Expanded Use of Tax Court Practitioner Fees


(Sec. 7475 of the Code)

                            PRESENT LAW\16\

    The United States Tax Court (``Tax Court'') is authorized 
to impose a fee of up to $30 per year on practitioners admitted 
to practice before the Tax Court.\17\ These fees are to be used 
to employ independent counsel to pursue disciplinary matters.
---------------------------------------------------------------------------
    \16\Present law refers to the law in effect on the date of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 
2006).
    \17\Sec. 7475.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that many pro se taxpayers are 
not familiar with Tax Court procedures and applicable legal 
requirements. The Committee believes it is beneficial for Tax 
Court fees imposed on practitioners also to be available to 
provide services to pro se taxpayers.

                        EXPLANATION OF PROVISION

    [The bill does not include the provision as approved by the 
Committee because an identical or substantially similar 
provision was enacted into law in the Pension Protection Act of 
2006 (Pub. L. No. 109-280, sec. 860) subsequent to Committee 
action on the bill. The following discussion describes the 
provision as approved by the Committee.]
    The provision provides that Tax Court fees imposed on 
practitioners also are available to provide services to pro se 
taxpayers (i.e., a taxpayer representing himself) that will 
assist such taxpayers in controversies before the Court. For 
example, fees could be used for programs to educate pro se 
taxpayers on the procedural requirements for contesting a tax 
deficiency before the Tax Court.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

 TITLE III--IMPROVEMENTS IN TAX ADMINISTRATION AND TAXPAYER SAFEGUARDS


   A. Waiver of User Fee for Installment Agreements Using Automated 
                              Withdrawals


(Sec. 301 of the bill and sec. 6159 of the Code)

                              PRESENT LAW

    The Code authorizes the IRS to enter into written 
agreements with any taxpayer under which the taxpayer is 
allowed to pay taxes owed, as well as interest and penalties, 
in installment payments if the IRS determines that doing so 
will facilitate collection of the amounts owed.\18\ An 
installment agreement does not reduce the amount of taxes, 
interest, or penalties owed. Generally, during the period 
installment payments are being made, other IRS enforcement 
actions (such as levies or seizures) with respect to the taxes 
included in that agreement are held in abeyance.
---------------------------------------------------------------------------
    \18\Sec. 6159.
---------------------------------------------------------------------------
    The IRS charges a user fee if a request for an installment 
agreement is approved.

                           REASONS FOR CHANGE

    The Committee believes that it improves collection results 
if taxpayers utilize automated installment payment mechanisms. 
Automated installment payment mechanisms provide efficiencies 
in processing and promote timely payment. The Committee 
believes that waiving this user fee for taxpayers who utilize 
automated installment payment mechanisms will encourage more 
taxpayers to utilize them.

                        EXPLANATION OF PROVISION

    The provision waives the user fee for installment 
agreements in which the parties agree to the use of automated 
installment payments (such as automated debits from a bank 
account).

                             EFFECTIVE DATE

    The provision applies to agreements entered into on or 
after the date which is 180 days after the date of enactment.

                B. Termination of Installment Agreements


(Sec. 302 of the bill and sec. 6159 of the Code)

                              PRESENT LAW

    The Code authorizes the IRS to enter into written 
agreements with any taxpayer under which the taxpayer is 
allowed to pay taxes owed, as well as interest and penalties, 
in installment payments, if the IRS determines that doing so 
will facilitate collection of the amounts owed.\19\ An 
installment agreement does not reduce the amount of taxes, 
interest, or penalties owed. Generally, during the period 
installment payments are being made, other IRS enforcement 
actions (such as levies or seizures) with respect to the taxes 
included in that agreement are held in abeyance.
---------------------------------------------------------------------------
    \19\Sec. 6159.
---------------------------------------------------------------------------
    Under present law, the IRS is permitted to terminate an 
installment agreement only if: (1) the taxpayer fails to pay an 
installment at the time the payment is due; (2) the taxpayer 
fails to pay any other tax liability at the time when such 
liability is due; (3) the taxpayer fails to provide a financial 
condition update as required by the IRS; (4) the taxpayer 
provides inadequate or incomplete information when applying for 
an installment agreement; (5) the taxpayer's financial 
condition has significantly changed; or (6) the collection of 
the tax is in jeopardy.\20\
---------------------------------------------------------------------------
    \20\Sec. 6159(b)(2), (3), and (4).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that taxpayers who are permitted to 
pay their previous tax obligations through an installment 
agreement should also be required to remain current with their 
Federal tax obligations. The Committee believes that giving the 
IRS the authority to terminate installment agreements in 
additional circumstances will improve the operation of the 
installment agreement process and enhance tax compliance.

                        EXPLANATION OF PROVISION

    The provision grants the IRS authority to terminate an 
installment agreement when a taxpayer fails to timely make a 
required Federal tax deposit or fails to timely file a tax 
return. Under the provision, the IRS may terminate an 
installment agreement even if the taxpayer remains current with 
payments under the installment agreement.

                             EFFECTIVE DATE

    The provision is effective for failures occurring on or 
after the date of enactment.

C. Individuals Held Harmless on Improper Levy on Individual Retirement 
                                  Plan


(Sec. 303 of the bill and sec. 6343 of the Code)

                              PRESENT LAW

IRAs

    There are two general types of individual retirement 
arrangements (``IRAs''): traditional IRAs, to which deductible 
or nondeductible contributions may be made depending on an 
individual's circumstances, and Roth IRAs, contributions to 
which are not deductible. An individual generally may make 
contributions to a traditional IRA up to the lesser of a dollar 
limit (generally $4,000 for 2006) or the individual's 
compensation. Individuals with adjusted gross income below 
certain levels may make contributions to a Roth IRA. The 
maximum annual contributions that can be made to all of an 
individuals IRAs (both traditional and Roth) cannot exceed the 
maximum IRA contribution limit.
    Amounts held in a traditional IRA are includible in income 
when withdrawn except to the extent the withdrawal is a return 
of nondeductible contributions (i.e., basis). Includible 
amounts withdrawn before attainment of age 59\1/2\ are subject 
to an additional 10-percent early withdrawal tax unless an 
exception applies.
    Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includible in income or subject 
to the additional 10-percent tax on early withdrawals. A 
qualified distribution is a distribution that (1) is made after 
the five-taxable year period beginning with the first taxable 
year for which the individual made a contribution to a Roth 
IRA, and (2) is made after attainment of age 59\1/2\, on 
account of death or disability, or is made for first-time 
homebuyer expenses of up to $10,000. Distributions from a Roth 
IRA that are not qualified distributions are includible in 
income to the extent attributable to earnings and are subject 
to the 10-percent early withdrawal tax unless an exception 
applies.
    Amounts distributed from a traditional or Roth IRA are not 
includible in income if they are rolled over to another IRA of 
the same type within 60 days of the distribution. In general, 
only one rollover from a traditional IRA and only one rollover 
from a Roth IRA may be made during any one-year period. 
Rollover amounts are not subject to the limits on IRA 
contributions.

IRS levy on IRA amounts

    Distributions from an individual retirement arrangement 
(``IRA'') made on account of an IRS levy are includible in the 
gross income of the individual under the rules applicable to 
the IRA subject to the levy. Thus, in the case of a traditional 
IRA, the amount distributed as a result of a levy is includible 
in gross income except to the extent such amount represents a 
return of nondeductible contributions. In the case of a Roth 
IRA, distributions that are not qualified distributions are 
includible in income to the extent attributable to earnings. 
Amounts withdrawn from an IRA due to a levy are not subject to 
the 10-percent early withdrawal tax, regardless of whether the 
amount is includible in income.
    Present law provides rules under which the IRS returns 
amounts subject to an incorrect levy. For example, amounts 
withdrawn from an IRA pursuant to a levy are returned to the 
individual owning the IRA in the case of a wrongful levy or if 
the levy was not in accordance with IRS administrative 
procedures. In the case of a wrongful levy, the IRS is required 
to pay interest on the amount returned to the individual at the 
overpayment rate. The IRS is not required to pay interest if 
the levy was not in accordance with IRS administrative 
procedures.
    Present law does not provide special rules to allow an 
individual to recontribute to an IRA amounts withdrawn from an 
IRA pursuant to a levy and later returned to the individual by 
the IRS (or interest thereon). Thus, if an individual wishes to 
contribute such returned amounts to an IRA, the contribution is 
subject to the normally applicable rules for IRA contributions.

                           REASONS FOR CHANGE

    IRA assets provide an important source of retirement income 
for many Americans. Under present law, if the IRS improperly 
levies on an IRA, the individual owning the IRA may not be made 
whole, even if the IRS returns the amount levied, with 
interest, because the individual may lose the opportunity to 
have those funds accumulate on a tax-favored basis until 
retirement. The Committee believes that improper levies should 
not reduce retirement income security for IRA owners. Thus, the 
Committee bill provides that IRA funds that are withdrawn 
pursuant to an improper IRS levy and returned by the IRS may be 
recontributed to the IRA.

                        EXPLANATION OF PROVISION

    Under the provision, an individual is able to recontribute 
to an IRA amounts withdrawn pursuant to a levy and returned by 
the IRS (and any interest thereon) within 60 days of receipt by 
the individual, without regard to the normally applicable 
limits on IRA contributions and rollovers. The provision 
applies to levied amounts returned to the individual because 
the levy (1) was wrongful or (2) is determined to be premature 
or otherwise not in accordance with administrative procedures. 
The contribution has to be made to the same type of IRA (i.e., 
traditional or Roth) to which a rollover could be made from the 
IRA from which the levied amounts were withdrawn.
    Under the provision, the IRS is required to pay interest on 
amounts returned to the individual at the overpayment rate in 
the case of a levy that is determined to be premature or 
otherwise not in accordance with administrative procedures (as 
well as in the case of a wrongful levy under present law). 
Interest paid by the IRS on the amount returned to the 
individual and contributed to the IRA is treated as part of the 
distribution made from the IRA on account of the levy and is 
not includible in gross income. In addition, any tax 
attributable to an amount distributed from an IRA by reason of 
a levy is abated if the amount is recontributed to an IRA 
pursuant to the provision.

                             EFFECTIVE DATE

    The provision is effective for levied amounts (and interest 
thereon) returned to individuals after December 31, 2005.

       D. Office of Chief Counsel Review of Offers-in-Compromise


(Sec. 304 of the bill and sec. 7122 of the Code)

                              PRESENT LAW

    The IRS has the authority to settle a tax debt pursuant to 
an offer-in-compromise. IRS regulations provide that such 
offers can be accepted if the taxpayer is unable to pay the 
full amount of the tax liability and it is doubtful that the 
tax, interest, and penalties can be collected or there is doubt 
as to the validity of the actual tax liability. Offers to 
compromise tax liabilities of $50,000 or more can only be 
accepted if the reasons for the acceptance are documented in 
detail and supported by a written opinion from the IRS Chief 
Counsel.\21\
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    \21\Sec. 7122.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Many offers-in-compromise cases do not present any 
significant legal issues, and the required legal review for 
cases meeting the statutory threshold can delay the acceptance 
process under current administrative procedures. The Committee 
believes that eliminating this threshold requiring review will 
permit the IRS to focus its review resources on the most 
important cases, regardless of dollar value.

                        EXPLANATION OF PROVISION

    The provision repeals the requirement that offers to 
compromise liabilities of $50,000 or more must be supported by 
a written opinion from the IRS Chief Counsel. Under the 
provision, written opinions must only be provided if the 
Secretary determines that an opinion is required with respect 
to a compromise.

                             EFFECTIVE DATE

    The provision applies to offers-in-compromise submitted or 
pending on or after the date of enactment.

    E. Elimination of Restriction on Offsetting Refunds From Former 
                               Residents


(Sec. 305 of the bill and sec. 6402 of the Code)

                              PRESENT LAW

    Overpayments of Federal tax may be used to pay past-due 
child support and debts owed to Federal agencies, without the 
consent of the taxpayer.\22\ Overpayments of Federal tax may 
also be used to pay specified past-due, legally enforceable 
State income tax debts, provided that the person making the 
Federal tax overpayment has shown on the Federal tax return for 
the taxable year of the overpayment an address that is within 
the State seeking the tax offset.
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    \22\Sec. 6402.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that the current refund procedure 
has proven an effective collection tool for State governments. 
The Committee believes that eliminating unnecessary 
restrictions on this program will improve the ability of States 
to collect past-due, legally enforceable State income tax 
debts.

                        EXPLANATION OF PROVISION

    The provision eliminates the requirement that a person 
making a Federal tax overpayment show on the Federal tax return 
for the taxable year of the overpayment an address that is 
within the State seeking the tax offset. Accordingly, States 
may seek to offset refunds from residents of their own State as 
well as any other State to collect specified past-due, legally 
enforceable State income tax debts.

                             EFFECTIVE DATE

    The provision applies to refunds payable for taxable years 
ending after the date of enactment.

F. Revisions Relating to Termination of Employment of IRS Employees for 
                               Misconduct


(Sec. 306 of the bill and new sec. 7804A of the Code)

                              PRESENT LAW

    Section 1203 of the IRS Restructuring and Reform Act of 
1998\23\ requires the IRS to terminate the employment of an 
employee for certain proven violations committed by the 
employee in connection with the performance of official duties. 
The violations include: (1) willful failure to obtain the 
required approval signatures on documents authorizing the 
seizure of a taxpayer's home, personal belongings, or business 
assets; (2) providing a false statement under oath material to 
a matter involving a taxpayer; (3) with respect to a taxpayer, 
taxpayer representative, or other IRS employee, the violation 
of any right under the U.S. Constitution, or any civil right 
established under Titles VI or VII of the Civil Rights Act of 
1964, Title IX of the Educational Amendments of 1972, the Age 
Discrimination in Employment Act of 1967, the Age 
Discrimination Act of 1975, sections 501 or 504 of the 
Rehabilitation Act of 1973 and Title I of the Americans with 
Disabilities Act of 1990; (4) falsifying or destroying 
documents to conceal mistakes made by any employee with respect 
to a matter involving a taxpayer or a taxpayer representative; 
(5) assault or battery on a taxpayer or other IRS employee, but 
only if there is a criminal conviction or a final judgment by a 
court in a civil case, with respect to the assault or battery; 
(6) violations of the Internal Revenue Code, Treasury 
Regulations, or policies of the IRS (including the Internal 
Revenue Manual) for the purpose of retaliating or harassing a 
taxpayer or other IRS employee; (7) willful misuse of section 
6103 for the purpose of concealing data from a Congressional 
inquiry; (8) willful failure to file any tax return required 
under the Code on or before the due date (including extensions) 
unless failure is due to reasonable cause; (9) willful 
understatement of Federal tax liability, unless such 
understatement is due to reasonable cause; and (10) threatening 
to audit a taxpayer for the purpose of extracting personal gain 
or benefit.
---------------------------------------------------------------------------
    \23\Pub. L. No. 105-206.
---------------------------------------------------------------------------
    Section 1203 also provides non-delegable authority to the 
Commissioner to determine that mitigating factors exist, that, 
in the Commissioner's sole discretion, mitigate against 
terminating the employee's employment. The Commissioner, in his 
sole discretion, may establish a procedure to determine whether 
an individual should be referred for such a determination by 
the Commissioner.

                           REASONS FOR CHANGE

    The Committee understands that two of the violations under 
present law have resulted in unintended consequences. First, 
the Committee does not believe that an IRS employee due a tax 
refund should be terminated from employment for filing that 
return late. No other taxpayer faces a comparable penalty for 
the late filing of a return due a refund. Investigating and 
resolving issues related to the late filing by IRS employees of 
refund returns expends resources that could be better spent on 
other tax administration efforts.
    Second, the Committee understands that employees are 
misusing the ``employee versus employee'' violation as 
retaliation against fellow employees. There are other 
administrative remedies that are more appropriate for resolving 
employee versus employee claims, such as Title V adverse action 
cases, as well as actions of the Merit Systems Protection 
Board.
    The Committee believes that removing from the list of 
violations these two provisions that do not directly involve an 
IRS employee's interactions with taxpayers will improve the 
focus of the provision.

                        EXPLANATION OF PROVISION

    The provision removes two items from the list of 
violations. These two items are: (1) the late filing of tax 
returns with no tax due and owing; and (2) employee versus 
employee assault or battery. The provision also adds 
unauthorized inspection of returns and return information to 
the list of violations requiring termination.
    The provision also places the provisions of section 1203 in 
the Code.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

G. Modification of Collection Due Process Procedures for Employment Tax 
                              Liabilities


(Sec. 307 of the bill and sec. 6330 of the Code)

                              PRESENT LAW

    Levy is the IRS's administrative authority to seize a 
taxpayer's property to pay the taxpayer's tax liability. The 
IRS is entitled to seize a taxpayer's property by levy if a 
Federal tax lien has attached to such property. A Federal tax 
lien arises automatically when (1) a tax assessment has been 
made, (2) the taxpayer has been given notice of the assessment 
stating the amount and demanding payment, and (3) the taxpayer 
has failed to pay the amount assessed within 10 days after the 
notice and demand.
    In general, the IRS is required to notify taxpayers that 
they have a right to a fair and impartial collection due 
process (``CDP'') hearing before levy may be made on any 
property or right to property.\24\ Similar rules apply with 
respect to notices of tax liens, although the right to a 
hearing arises only on the filing of a notice.\25\ The CDP 
hearing is held by an impartial officer from the IRS Office of 
Appeals, who is required to issue a determination with respect 
to the issues raised by the taxpayer at the hearing. The 
taxpayer is entitled to appeal that determination to a court. 
Under present law, taxpayers are not entitled to a pre-levy CDP 
hearing if a levy is issued to collect a Federal tax liability 
from a State tax refund or if collection of the Federal tax is 
in jeopardy. However, levies related to State tax refunds or 
jeopardy determinations are subject to post-levy review through 
the CDP hearing process.
---------------------------------------------------------------------------
    \24\Sec. 6330(a).
    \25\Sec. 6320.
---------------------------------------------------------------------------
    Employment taxes generally consist of the taxes under the 
Federal Insurance Contributions Act (``FICA''), the tax under 
the Federal Unemployment Tax Act (``FUTA''), and the 
requirement that employers withhold income taxes from wages 
paid to employees (``income tax withholding'').\26\ Income tax 
withholding rates vary depending on the amount of wages paid, 
the length of the payroll period, and the number of withholding 
allowances claimed by the employee.
---------------------------------------------------------------------------
    \26\Secs. 3101-3128 (FICA), 3301-3311 (FUTA), and 3401-3404 (income 
tax withholding). FICA taxes consist of an employer share and an 
employee share, which the employer withholds from employees' wages.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Congress enacted the CDP hearing procedures to afford 
taxpayers adequate notice of collection activity and a 
meaningful hearing before the IRS deprives them of their 
property. However, the Committee understands that some 
taxpayers abuse the CDP procedures by raising frivolous 
arguments simply for the purpose of delaying or evading 
collection of tax. The opportunity to delay collection of 
employment tax liabilities presents a greater risk to the 
government than delay may present in other contexts because 
employment tax liabilities continue to increase as ongoing wage 
payments are made to employees. Thus, the Committee believes it 
is appropriate to revise the CDP procedures in cases where 
taxpayers are liable for unpaid employment taxes.

                        EXPLANATION OF PROVISION

    Under the provision, levies issued to collect Federal 
employment taxes are excepted from the pre-levy CDP hearing 
requirement. Thus, under the provision, taxpayers have no right 
to a CDP hearing before a levy is issued to collect employment 
taxes. However, the taxpayer is provided an opportunity for a 
hearing within a reasonable period of time after the levy. 
Collection by levy is permitted to continue during the CDP 
proceedings.

                             EFFECTIVE DATE

    The provision is effective for levies issued after December 
31, 2006.

           H. Extension of Time Limit for Contesting IRS Levy


(Sec. 308 of the bill and secs. 6343 and 6532 of the Code)

                              PRESENT LAW

    The IRS is authorized to return property that has been 
wrongfully levied upon.\27\ In general, monetary proceeds from 
the sale of levied property may be returned within nine months 
of the date of the levy.
---------------------------------------------------------------------------
    \27\Sec. 6343.
---------------------------------------------------------------------------
    Generally, any person (other than the person against whom 
is assessed the tax out of which such levy arose) who claims an 
interest in levied property and that such property was 
wrongfully levied upon may bring a civil action for wrongful 
levy in a district court of the United States.\28\ Generally, 
an action for wrongful levy must be brought within nine months 
from the date of levy.\29\
---------------------------------------------------------------------------
    \28\Sec. 7426.
    \29\Sec. 6532.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that in many cases the time 
period for bringing an action may be insufficient for taxpayers 
or third parties to discover a wrongful or mistaken levy and 
seek to remedy it. Accordingly, the Committee believes it is 
appropriate to provide for a longer period of time within which 
a person may contest a wrongful IRS levy.

                        EXPLANATION OF PROVISION

    The provision extends from nine months to two years the 
period for returning the monetary proceeds from the sale of 
property that has been wrongfully levied upon.
    The provision also extends from nine months to two years 
the period for bringing a civil action for wrongful levy.

                             EFFECTIVE DATE

    The provision is effective with respect to: (1) levies made 
after the date of enactment; and (2) levies made on or before 
the date of enactment provided that the nine-month period has 
not expired as of the date of enactment.

  I. Authorization for IRS To Require Increased Electronic Filing of 
               Returns Prepared by Paid Return Preparers


(Sec. 309 of the bill and sec. 6011 and new sec. 6695B of the Code)

                              PRESENT LAW

    The Code authorizes the IRS to issue regulations specifying 
which returns must be filed electronically.\30\ There are 
several limitations on this authority. First, it can only apply 
to persons required to file at least 250 returns during the 
year.\31\ Second, the IRS is prohibited from requiring that 
income tax returns of individuals, estates, and trusts be 
submitted in any format other than paper (although these 
returns may be filed electronically by choice).
---------------------------------------------------------------------------
    \30\Sec. 6011(e).
    \31\Partnerships with more than 100 partners are required to file 
electronically.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that electronic filing promotes 
effective tax administration. Fewer IRS resources are required 
to process electronic returns, errors are reduced, and 
taxpayers receive their refunds more quickly. The Congress set 
a goal for the IRS to have 80 percent of tax returns filed 
electronically by 2007. The IRS and the IRS Oversight Board 
have reported this goal will not be achieved, and the Board has 
recommended extending the 80 percent deadline to 2011. 
Therefore, the Committee wants to encourage increased use of 
electronic filing. IRS statistics demonstrate that many more 
tax returns are prepared electronically than are filed 
electronically. The Committee believes that giving the IRS the 
authority to require electronic filing of individual tax 
returns will increase the number of returns that are filed 
electronically.

                        EXPLANATION OF PROVISION

    For returns prepared by paid return preparers, the 
provision permits the IRS to expand the scope of returns that 
are required to be filed electronically by removing the 
present-law restrictions relating to the types of tax returns 
required to be filed electronically and by lowering the number 
of returns that trigger the requirement to file electronically 
to five. The Committee expects the IRS to expand the types of 
forms and schedules that may be filed electronically to permit 
full implementation of this provision.
    The provision also imposes a monetary penalty on any person 
required to file a return electronically that fails to do so. 
The penalty is equal to the greater of $100 times the number of 
returns not filed electronically as required or $1,000. The 
penalty does not apply if the failure is due to reasonable 
cause.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

           J. Require IRS To Develop Direct Electronic Filing


(Sec. 310 of the bill)

                              PRESENT LAW

    The IRS has entered into cooperative relationships with 
commercial return preparation services to provide free 
electronic filing services to eligible low-income or elderly 
taxpayers. This program is called ``Free File.'' Presently, the 
IRS does not permit individual taxpayers to file their tax 
returns electronically without the use of an intermediary.

                           REASONS FOR CHANGE

    The Committee believes that electronic filing promotes 
effective tax administration and wants to encourage increased 
use of electronic filing. Fewer IRS resources are required to 
process electronic returns, errors are reduced, and taxpayers 
receive their refunds more quickly. The Congress set a goal for 
the IRS to have 80 percent of tax returns filed electronically 
by 2007. The IRS and the IRS Oversight Board have reported this 
goal will not be achieved, and the Board has recommended 
extending the 80 percent deadline to 2011.
    IRS statistics demonstrate that many more tax returns are 
prepared electronically than are filed electronically. The 
Committee understands that many taxpayers are unwilling to pay 
a fee to electronically file their tax returns even if they are 
electronically prepared. The Committee further understands that 
many taxpayers are unwilling to use an intermediary to 
electronically transmit their tax returns to the IRS because of 
privacy and security concerns. The Committee believes that the 
availability of free and direct electronic filing to the IRS 
will address those concerns and result in the increased use of 
electronic filing.
    The Committee notes that taxpayers who file paper returns 
are not required to pay for the tax forms or to file their 
returns. The Committee also notes that certain business 
taxpayers can currently file their returns directly with the 
IRS without the use of an intermediary. As a matter of equity, 
the Committee believes all taxpayers who wish to file 
electronic returns should have the ability to do so without 
cost.

                        EXPLANATION OF PROVISION

    The provision requires the Secretary to establish the 
``direct e-file program.'' The direct e-file program is a 
program that provides individual taxpayers with the ability to 
electronically file their Federal income tax returns through 
the IRS website without the use of an intermediary or with the 
use of an intermediary with which the IRS contracts to provide 
free universal access. The provision requires the Secretary to 
implement the direct e-file program for filings for taxable 
years beginning after the date which is not later than three 
year after the date of enactment. Under the provision, the IRS 
may develop its own electronic filing products in order to 
implement the direct e-file program.
    In providing for the development and operation of the 
direct e-file program, the Secretary shall consult with 
nonprofit organizations representing the interests of taxpayers 
as well as other organizations and Federal, State, and local 
agencies as the Secretary considers appropriate. The Secretary 
shall also conduct a public information and consumer education 
campaign to encourage taxpayers to use the direct e-file 
program. Further, if intermediaries are used to develop or 
operate the direct e-file program, such intermediaries may not 
advertise, market, or offer to sell any products or services.
    Under the provision, the Secretary is required to report to 
Congress every six months regarding the status of the 
implementation of the direct e-file program. In addition, the 
Secretary, in consultation with the National Taxpayer Advocate, 
is required to report to Congress annually (not later than June 
30 of each year) on taxpayer usage of the direct e-file program 
once it is implemented.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

        K. Modifications and Report Regarding Free File Program


(Sec. 311 of the bill)

                              PRESENT LAW

    The IRS has entered into cooperative relationships with 
commercial return preparation services to provide free 
electronic filing services to eligible low-income or elderly 
taxpayers. This program is called ``Free File.''

                           REASONS FOR CHANGE

    The Committee is concerned that the Free File program may 
not be free for many taxpayers because of the advertising, 
marketing and sale of products or services that are not 
directly related to the preparation of a tax return and 
believes prohibiting this practice will increase the number of 
tax returns that are filed electronically.

                        EXPLANATION OF PROVISION

    The provision instructs the IRS to ensure that Free File 
companies do not advertise, market, or offer to sell products 
or services that are not directly related to the preparation of 
a tax return to any taxpayer utilizing Free File. The provision 
also requires the IRS to establish procedures to encourage 
companies participating in the Free File Alliance to provide 
accessible services for the blind.
    No later than 270 days after the date of enactment, the 
Secretary shall report to Congress on the implementation of 
modifications to the Free File Alliance program required by 
this provision. As part of that report, the Secretary also 
shall report on the feasibility of ensuring that members of the 
Free File program that have contracted separately with a State 
be required to provide free Federal and State preparation and 
electronic filing directly through the IRS Free File website. 
Further, the Secretary shall report on the most optimal way of 
alerting taxpayers on the IRS Free File website of those 
companies that provide free services for preparing and filing 
State tax returns.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

         L. Study on Clarifying Recordkeeping Responsibilities


(Sec. 312 of the bill)

                              PRESENT LAW

    Every person liable for Federal tax must keep records, 
provide statements, make returns, and comply with rules and 
regulations, as prescribed by the Secretary.\32\ In general, 
taxpayers are required to keep records for as long as the 
statute of limitations may be open.
---------------------------------------------------------------------------
    \32\Sec. 6001.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that the present-law 
recordkeeping requirements do not reflect advances in 
technology. Specifically, the storage requirements may require 
taxpayers to maintain outdated and cumbersome technologies. The 
Committee understands that there is a balance, however, between 
minimizing taxpayer burden and ensuring that taxpayers maintain 
appropriate recordkeeping for purposes of IRS enforcement. The 
Committee believes that requiring the Secretary of the Treasury 
to conduct a study of the recordkeeping requirements will 
provide the Committee with valuable information as to whether 
it is appropriate to modify these requirements.

                        EXPLANATION OF PROVISION

    The provision requires the Secretary of the Treasury to 
study:
           The scope of the records required to be 
        maintained by taxpayers;
           The utility of requiring taxpayers to 
        maintain all records indefinitely;
           The effects of the necessity to upgrade 
        technological storage for outdated records;
           The number of negotiated records retention 
        agreements requested by taxpayers and the number 
        entered into by the IRS; and
           Proposals regarding taxpayer recordkeeping.
    The Secretary is required to submit a report of the study, 
including recommendations, to the Congress not later than one 
year after the date of enactment.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

 M. Modification of Treasury Inspector General for Tax Administration 
                         Reporting Requirements


(Sec. 313 of the bill and sec. 7803 of the Code)

                              PRESENT LAW

    The Treasury Inspector General for Tax Administration 
(``TIGTA'') conducts audits and reviews of IRS operations. 
TIGTA also is statutorily required to report to the Congress 
(both annually and semi-annually) on a number of specific 
issues.

                           REASONS FOR CHANGE

    The Committee understands that the present-law reporting 
requirements utilize significant resources and that the IRS 
does not necessarily maintain the data required for these 
reports. The Committee also understands that the current 
frequency of reporting gives the IRS a limited and, perhaps, 
insufficient amount of time to implement corrective actions 
before another review. The Committee believes that streamlining 
these TIGTA reporting requirements will yield a more meaningful 
picture of the IRS and its progress in meeting Congressional 
expectations.

                        EXPLANATION OF PROVISION

    The provision repeals the statutory requirement that TIGTA 
issue the following reports:
           IRS compliance with the restrictions\33\ on 
        directly contacting taxpayers who have indicated that 
        they prefer that their representatives be contacted.
---------------------------------------------------------------------------
    \33\Sec. 7521.
---------------------------------------------------------------------------
           IRS compliance with the requirements 
        relating to disclosure of collection information with 
        respect to joint returns.
           IRS compliance with the fair debt collection 
        provisions of the Code.
    In addition, the provision requires that all reports 
currently required to be made semiannually and annually shall 
be provided biennially (once every two years).

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

     N. Streamline Reporting Process for National Taxpayer Advocate


(Sec. 314 of the bill and sec. 7803 of the Code)

                              PRESENT LAW

    The Code requires the National Taxpayer Advocate to produce 
two reports for the Congress each year. The first, due by June 
30, reports on the objectives for the office; the second, due 
by December 31, reports on the activities of the office and 
contains detailed data and recommendations in specified areas.

                           REASONS FOR CHANGE

    The Committee believes that combining the reports required 
under present law will reduce burdens on the National Taxpayer 
Advocate. The Committee also believes that authorizing the 
National Taxpayer Advocate to report to the Congress at any 
time on any significant issues affecting taxpayer rights will 
improve the awareness of the Congress of these issues.

                        EXPLANATION OF PROVISION

    The provision combines the two reports the National 
Taxpayer Advocate must produce under present law into one, due 
by December 31. The provision also provides that the National 
Taxpayer Advocate, in his or her sole discretion, may report to 
the Congress at any time on any significant issues affecting 
taxpayer rights.

                             EFFECTIVE DATE

    The provision combining the reports is effective for 
reports in 2007 and thereafter. The provision authorizing 
reports on significant issues affecting taxpayer rights is 
effective on the date of enactment.

                        O. Whistleblower Reforms


(Sec. 315 of the bill and sec. 7623 of the Code)

                              PRESENT LAW

    The Code authorizes the IRS to pay such sums as deemed 
necessary for: ``(1) detecting underpayments of tax; and (2) 
detecting and bringing to trial and punishment persons guilty 
of violating the internal revenue laws or conniving at the 
same.''\34\ Amounts are paid based on a percentage of tax, 
fines, and penalties (but not interest) actually collected 
based on the information provided. For specific information 
that caused the investigation and resulted in recovery, the IRS 
administratively has set the reward in an amount not to exceed 
15 percent of the amounts recovered. For information, although 
not specific, that nonetheless caused the investigation and was 
of value in the determination of tax liabilities, the reward is 
not to exceed 10 percent of the amount recovered. For 
information that caused the investigation, but had no direct 
relationship to the determination of tax liabilities, the 
reward is not to exceed one percent of the amount recovered. 
The reward ceiling is $10 million (for payments made after 
November 7, 2002), and the reward floor is $100. No reward will 
be paid if the recovery was so small as to call for payment of 
less than $100 under the above formulas. Both the ceiling and 
percentages can be increased with a special agreement. The Code 
permits the IRS to disclose return information pursuant to a 
contract for tax administration services.\35\
---------------------------------------------------------------------------
    \34\Sec. 7623.
    \35\Sec. 6103(n).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    A recent report by the Treasury Inspector General for Tax 
Administration concluded that the IRS's informant reward 
program has been an effective method of identifying and 
collecting unpaid taxes.\36\ The report also made several 
recommendations for enhancing the effectiveness of the program, 
including centralizing management of the reward program and 
reducing the processing time for claims. The Committee also 
believes that an enhanced reward program would be more 
attractive to future informants wishing to report violations of 
the tax laws.
---------------------------------------------------------------------------
    \36\Treasury Inspector General for Tax Administration, The 
Informants' Rewards Program Needs More Centralized Management 
Oversight, 2006-30-092 (June 2006).
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The provision reforms the reward program for individuals 
who provide information regarding violations of the tax laws to 
the Secretary. Generally, the provision establishes a reward 
floor of 15 percent of the collected proceeds (including 
penalties, interest, additions to tax and additional amounts) 
if the IRS moves forward with an administrative or judicial 
action based on information brought to the IRS's attention by 
an individual. The provision caps the available reward at 30 
percent of the collected proceeds. The provision permits awards 
of lesser amounts (but no more than 10 percent) if the action 
was based principally on allegations (other than information 
provided by the individual) resulting from a judicial or 
administrative hearing, government report, hearing, audit, 
investigation, or from the news media. Under the provision, the 
reward amounts apply to actions in which the tax, penalties, 
interest, additions to tax, and additional amounts in dispute 
exceed $20,000, and, if the taxpayer is an individual, the 
individual's gross income exceeds $200,000 for any taxable 
year.
    The provision creates a Whistleblower Office within the IRS 
to administer the reward program. To the extent possible, it is 
expected that the office will address the recommendations of 
the Treasury Inspector General for Tax Administration regarding 
the informants' reward program, including the recommendation to 
reduce the processing time for claims.\37\ The Whistleblower 
Office may seek assistance from the individual providing 
information or from his or her legal representative, and may 
reimburse the costs incurred by any legal representative out of 
the amount of the reward. To the extent the disclosure of 
returns or return information is required to render such 
assistance, the disclosure must be pursuant to an IRS tax 
administration contract. It is expected that such disclosures 
will be infrequent and will be made only when the assigned task 
cannot be properly or timely completed without the return 
information to be disclosed.
---------------------------------------------------------------------------
    \37\Treasury Inspector General for Tax Administration, The 
Informants' Rewards Program Needs More Centralized Management 
Oversight, 2006-30-092 (June 2006).
---------------------------------------------------------------------------
    The provision also provides an above-the-line deduction for 
attorneys' fees and costs paid by, or on behalf of, the 
individual in connection with any award for providing 
information regarding violations of the tax laws. The amount 
that may be deducted above-the-line may not exceed the amount 
includible in the taxpayer's gross income for the taxable year 
on account of such award (whether by suit or agreement and 
whether as lump sum or periodic payments).
    The provision permits an individual to appeal the amount or 
a denial of an award determination to the United States Tax 
Court (the ``Tax Court'') within 30 days of such determination. 
Under the provision, Tax Court review of an award determination 
may be assigned to a special trial judge and, if assigned, 
decided by the special trial judge.
    In addition, the provision requires the Secretary to 
conduct a study and report to Congress on the effectiveness of 
the whistleblower reward program and any legislative or 
administrative recommendations regarding the administration of 
the program.

                             EFFECTIVE DATE

    The provision is effective for information provided on or 
after the date of enactment.

    P. Authorization for Financial Management Service Retention of 
                  Transaction Fees From Levied Amounts


(Sec. 316 of the bill)

                              PRESENT LAW

    To facilitate the collection of tax, the IRS can generally 
levy upon all property and rights to property of a 
taxpayer.\38\ With respect to specified types of recurring 
payments, the IRS may impose a continuous levy of up to 15 
percent of each payment, which generally continues in effect 
until the liability is paid.\39\ Continuous levies imposed by 
the IRS on specified Federal payments are administered by the 
Financial Management Service (``FMS'') of the Department of the 
Treasury. FMS is generally responsible for making most non-
defense related Federal payments. FMS is required to charge the 
IRS for the costs of developing and operating this continuous 
levy program. The IRS pays these FMS charges out of its 
appropriations.
---------------------------------------------------------------------------
    \38\Sec. 6331.
    \39\Sec. 6331(h).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that altering the bookkeeping 
structure of these costs will provide for cost savings to the 
government.

                        EXPLANATION OF PROVISION

    The provision allows FMS to retain a portion of funds 
levied under continuous levies as payment of FMS charges for 
the continuous levy program. The amount credited to the 
taxpayer's account is not, however, reduced by the amount 
retained by FMS.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

          Q. Clarification of Definition of Church Tax Inquiry


(Sec. 317 of the bill and sec. 7611 of the Code)

                              PRESENT LAW

    Under present law, the IRS may begin a church tax inquiry 
only if an appropriate high-level Treasury official reasonably 
believes, on the basis of the facts and circumstances recorded 
in writing, that an organization (1) may not qualify for tax 
exemption as a church, (2) may be carrying on an unrelated 
trade or business, or (3) otherwise may be engaged in taxable 
activities.\40\ A church tax inquiry is defined as any inquiry 
to a church (other than an examination) that serves as a basis 
for determining whether the organization qualified for tax 
exemption as a church or whether it is carrying on an unrelated 
trade or business or otherwise is engaged in taxable 
activities. An inquiry is considered to commence when the IRS 
requests information or materials from a church of a type 
contained in church records, other than routine requests for 
information or inquiries regarding matters that do not 
primarily concern the tax status or liability of the church 
itself.
---------------------------------------------------------------------------
    \40\Sec. 7611.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the present-law church tax 
inquiry procedures provide important safeguards against the IRS 
engaging in unnecessary and intrusive examinations of churches. 
However, the church tax inquiry procedures also have the effect 
of hampering IRS efforts to educate churches with respect to 
actions that are not permissible under section 501(c)(3). The 
Committee believes that a clarification of the scope of the 
church tax inquiry procedures to make it clear that the IRS may 
undertake educational outreach efforts with respect to specific 
churches (e.g., initiating meetings with representatives of a 
particular church to discuss the rules that apply to such 
church) will improve compliance with the law by churches.

                        EXPLANATION OF PROVISION

    The provision clarifies that present-law church tax inquiry 
procedures do not apply to contacts made by the IRS for the 
purpose of educating churches with respect to the federal 
income tax law governing tax-exempt organizations. For example, 
the IRS does not violate the church tax inquiry procedures when 
written materials are provided to a church or churches for the 
purpose of educating such church or churches with respect to 
the types of activities that are not permissible under section 
501(c)(3).

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

R. Treatment of Funds From Indian Tribal Governments as Public Support 
  for Purposes of the Public Charity-Private Foundation Classification


(Sec. 318 of the bill and sec. 7871 of the Code)

                              PRESENT LAW

    Organizations described in section 501(c)(3) are classified 
either as public charities or private foundations. The public 
charity classification generally is based on an organization's 
sources of support. Support from governmental entities is 
considered as public support in determining whether an 
organization is publicly or privately supported and thus is 
classified as a public charity or a private foundation. Support 
from an Indian Tribal Government is not treated as support from 
a governmental entity.

                           REASONS FOR CHANGE

    The Code treats Indian Tribal Governments as States for 
many purposes, including for purposes of the charitable 
deduction rules. The Committee believes that it is appropriate 
also to treat the funding of charitable activities by Indian 
Tribal Governments the same as funding of charitable activities 
by States for purposes of determining whether a section 
501(c)(3) organization is publicly or privately supported.

                        EXPLANATION OF PROVISION

    The provision provides that support from an Indian Tribal 
Government is treated as support from a State for purposes of 
determining whether an organization described in section 
501(c)(3) is classified as a public charity or a private 
foundation.

                             EFFECTIVE DATE

    The provision applies to support received before, on, or 
after the date of enactment and to the determination of the 
status of any organization with respect to any taxable year 
beginning after the date of enactment.

  S. Tax Court Review of Requests for Equitable Relief From Joint and 
                           Several Liability


(Sec. 319 of the bill and sec. 6015 of the Code)

                              PRESENT LAW

In general

    Generally, a husband and wife are liable jointly and 
individually for the entire tax on a joint return. Under 
certain circumstances, a spouse may be entitled to relief from 
joint and several liability, ``innocent spouse relief.''\41\ 
Generally, the spouse must elect the form of innocent spouse 
relief no later than two years after the date the IRS began 
collection activities against the electing spouse.
---------------------------------------------------------------------------
    \41\Sec. 6015.
---------------------------------------------------------------------------
    There are three types of relief, general innocent spouse 
relief, relief for spouses no longer married or legally 
separated (separation of liabilities), and equitable relief.
    For general relief, the electing spouse must
           Have filed a joint return that has an 
        understatement of tax due to the erroneous items of the 
        other spouse,
           Establish that at the time of signing the 
        return the electing spouse did not know or have reason 
        to know there was an understatement of tax, and
           Taking into account all the facts and 
        circumstances, show that it is inequitable to hold the 
        electing spouse liable for the deficiency in tax.\42\
---------------------------------------------------------------------------
    \42\Sec. 6015(b).
---------------------------------------------------------------------------
    For separation of liabilities relief, the electing spouse
           Must have filed a joint return and,
           Either (1) is no longer married to or is 
        legally separated from the spouse with whom the return 
        was filed or (2) must not have been a member of the 
        same household with the spouse for a 12-month 
        period.\43\
---------------------------------------------------------------------------
    \43\Sec. 6015(c).
---------------------------------------------------------------------------
    If an individual fails to qualify under the preceding two 
options, such individual may still be able to obtain equitable 
relief.\44\ To obtain equitable relief, the IRS must determine 
that taking into account all of the facts and circumstances, it 
is inequitable to hold the electing spouse liable for any 
unpaid tax or any deficiency in tax (or any portion of either).
---------------------------------------------------------------------------
    \44\Sec. 6015(f).
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    In the case of an individual against whom a deficiency has 
been asserted and elects to have the general relief provisions 
or the separation of liabilities relief provisions apply, such 
individual may petition the Tax Court to review the IRS's 
determinations.
    Some courts have noted the absence of an express statement 
of Tax Court jurisdiction over equitable relief claims in the 
statute.\45\ Other courts have rejected Tax court jurisdiction 
over such claims on the basis that a deficiency has not been 
asserted against the claimant.\46\ Recently, the United States 
Tax Court revisited its prior ruling that it had jurisdiction 
over nondeficiency stand-alone petitions for equitable relief. 
In light of adverse rulings in the Eighth and Ninth Circuits 
this year, the Tax Court in Billings vs. Commissioner, recently 
held that it does not have jurisdiction over such claims in the 
absence of a deficiency.\47\
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    \45\The Second Circuit has noted that the question of the Tax 
Court's jurisdiction over an appeal of an adverse determination under 
section 6015(f) is ``not free from doubt.'' Maier v. Comm'r, 360 F.3d 
361, 363 n. 1 (2d cir. 2004). The court pointed out that ``only 
petitions to review IRS determinations under subsections (b) and (c) 
are expressly enumerated in section 6015(e) and (h).'' Id.; see also 
French v. United States (In re French), 255 B.R. 1, 2 (Bankr.N.D.Ohio 
2000) (dismissing for lack of jurisdiction the debtor's claim that she 
was entitled to relief under Sec. 6015(f) because ``Congress chose to 
exclude from judicial review the issue of whether a taxpayer is 
entitled to equitable relief under Sec. 6015(f)''); Mira v. United 
States (In re Mira), 245 B.R. 788, 791-92 (Bankr.M.D.Pa.1999) 
(reasoning that sec. 6015(f) grants the Secretary of the Treasury 
discretion to grant equitable relief and, as a decision ``committed to 
agency discretion by law,'' 5 U.S.C. sec. 701, it was not reviewable by 
the court).
    \46\Comm'r v. Ewing, 439 F.3d 1009, 1012-14 (9th Cir. 2006) rev'g 
Ewing v. Comm'r. 118 T.C. 494 (2002); and Bartman v. Comm'r, 446 F.3d 
785, 787 (8th Cir. 2006).
    \47\Billings v. Commissioner, 127 T.C. No. 2 (July 25, 2006) 
(holding that the Court lacks jurisdiction to review the Commissioner's 
decisions to deny relief under section 6015(f) when there is no 
deficiency but tax went unpaid). In Billings, the IRS had accepted the 
petitioner's amended return as filed and asserted no deficiency against 
him. His request for equitable relief from the unpaid tax arising from 
his wife's embezzlement was denied by the IRS.
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Restrictions on collection and suspension of the running of the period 
        of limitations

    Unless the IRS determines that collection will be 
jeopardized by delay, no levy or proceeding in court is to be 
made, begun or prosecuted against a spouse seeking general 
innocent spouse relief or separation of liabilities relief for 
the collection of any assessment to which the election relates 
until (1) the expiration of the 90-day period following the 
date of mailing of the Service's final determination letter, or 
(2) if a petition is filed with the Tax Court, until the 
decision of the Tax Court becomes final.\48\
---------------------------------------------------------------------------
    \48\Sec. 6015(e)(1)(B) and Treas. Reg. sec. 1.6015-1(c)(1).
---------------------------------------------------------------------------
    For the spouse seeking general or separation of liabilities 
relief, the running of the period of limitations on collections 
of the assessment to which the election relates is suspended 
for the period during which the IRS is prohibited from 
collecting by levy or proceeding in court and for 60 days 
thereafter. However, the requesting spouse may waive the 
restrictions on collection and the suspension of the period of 
limitations against collection will terminate 60 days after the 
date the waiver is filed with the IRS.\49\
---------------------------------------------------------------------------
    \49\Sec. 6015(e)(2) and (5); and Treas. Reg. sec. 1.6015-1(c)(3).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee finds that it is appropriate to confer Tax 
Court jurisdiction over equitable relief claims and to also 
suspend collection activity and the running of the period of 
limitations while such claims are pending, as is the case for 
other innocent spouse claims.

                        EXPLANATION OF PROVISION

    The provision clarifies that the Tax Court has jurisdiction 
over equitable relief claims, even if the individual does not 
elect to have the general relief or separation of liabilities 
relief provisions apply and no deficiency is asserted. The 
provision also extends the present law suspension of collection 
activity and tolling of the period of limitations provisions to 
equitable relief claims. With respect to any case the dismissal 
of which results from or is based on the jurisdictional ruling 
in Billings v. Commissioner, and is final on or before the date 
of enactment, such case may be refiled in the United States Tax 
Court not later than the date which is six months after the 
date of enactment. The $60 petition filing fee for these cases 
is waived by the provision.\50\
---------------------------------------------------------------------------
    \50\Rule 20(b) of the Tax Court Rules of Practice and Procedure.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision applies to requests for equitable relief with 
respect to liability for taxes arising or remaining unpaid on 
or after the date of enactment.

T. Authorization of Appropriations for Tax Law Enforcement Relating to 
                         Human Sex Trafficking


(Sec. 320 of the bill)

                              PRESENT LAW

    IRS undercover operations are statutorily exempt from the 
generally applicable restrictions controlling the use of 
Government funds (which generally provide that all receipts 
must be deposited in the general fund of the Treasury and all 
expenses be paid out of appropriated funds). In general, the 
Code permits the IRS to use proceeds from an undercover 
operation to pay additional expenses incurred in the undercover 
operation, through 2006. The IRS is required to conduct a 
detailed financial audit of large undercover operations in 
which the IRS is churning funds and to provide an annual audit 
report to the Congress on all such large undercover operations.
    There is no explicit authorization of appropriations to the 
IRS to be used to combat tax crimes where the underlying income 
is derived from sex trafficking crimes.

                           REASONS FOR CHANGE

    The Committee believes that the IRS should pursue 
violations of the Code by those persons who are under 
investigation by Federal, State, or local law enforcement 
agencies for knowingly recruiting, enticing, harboring, 
transporting, or providing by any means a person knowing that 
force, threat, or coercion will be used to cause the person to 
engage in a commercial sex act, or that the person is a child 
and will be caused to engage in a commercial sex act. The 
Committee believes it is appropriate to provide the IRS with 
additional resources to combat Code violations related to these 
crimes.

                        EXPLANATION OF PROVISION

    The provision authorizes the IRS to use $2 million toward 
the establishment of an office in IRS Criminal Investigation 
(``CI'') to investigate tax law violations by human sex 
traffickers. For purposes of this provision, a human sex 
trafficker is any person who is under investigation by Federal, 
State, or local law enforcement agencies for knowingly 
recruiting, enticing, harboring, transporting, or providing by 
any means a person knowing that force, threat, or coercion will 
be used to cause the person to engage in a commercial sex act, 
or that the person has not attained the age of 18 and will be 
caused to engage in a commercial sex act (within the meaning of 
18 U.S.C. sec. 1591(c)(1)). The Committee does not intend for 
the office to use its limited resources to investigate persons 
who are victims of human sex traffickers. The Committee expects 
the office to work closely with other divisions within the IRS 
and understands that non-CI personnel may be assigned to the 
office. The Committee also intends that the office will 
coordinate closely with the existing task forces in the 
Department of Justice that are focused on sex trafficking 
offenders, and also may coordinate with State and local 
agencies that are conducting investigations of human sex 
traffickers. Nothing in this provision shall be construed to 
limit the IRS's broad investigatory authority.
    For fiscal years 2007 and 2008, the provision also 
authorizes and appropriates to the office for additional 
enforcement activities an amount equal to the income tax, 
interest, and civil and criminal penalties collected by the IRS 
as a result of the actions of the office. It is the Committee's 
intent that the IRS will focus on the employer/employee 
relationship in these cases and the failure of the human sex 
trafficker to file information reporting returns required under 
the existing rules applicable to employers and other payors.
    The provision requires the Secretary to report to Congress 
within one year of the date of enactment on enforcement 
activities related to tax violations of human sex traffickers.
    The provision also modifies the whistleblower reward 
provisions so that the victims of human sex traffickers will be 
eligible to participate in the program.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

              U. Regulation of Payroll Tax Deposit Agents


(Sec. 321 of the bill and new sec. 7531 of the Code)

                              PRESENT LAW

    Taxpayers may choose to fulfill their payroll tax 
obligations using payroll tax deposit agents. In general, these 
payroll tax deposit agents are not required to register or post 
bonds with the IRS. Persons required to collect and pay over 
taxes to the IRS who fail to do so are subject to penalty.

                           REASONS FOR CHANGE

    The Committee believes that payroll tax deposit agents 
should be subject to more regulation and oversight. The 
services provided by these agents are an important part of the 
employment tax system but additional regulation is necessary to 
safeguard clients of these agents and ensure that these agents 
satisfy the payroll tax deposit and other requirements which 
they have contracted with their clients to do. The Committee 
believes that this new regulatory regime provides additional 
safeguards for employers who use payroll tax deposit agents 
without imposing undue burdens on payroll tax deposit agents.

                        EXPLANATION OF PROVISION

    First, the provision requires the annual registration of 
payroll tax deposit agents with the IRS. The annual 
registration fee shall not exceed $100. A payroll tax deposit 
agent is defined as any person which provides payroll 
processing or tax filing and deposit services to one or more 
employers (other than an employer working on its own behalf) if 
such person has the contractual authority to access such 
employer's funds for the purpose of making employment tax 
deposits. A payroll tax deposit agent does not include a person 
who only transfers such funds (regardless of whether they have 
the right to determine the amount of such transfer) and does 
not have the authority to impound such funds for such purpose.
    Second, the provision also provides that payroll tax 
deposit agents must elect either to: (1) post a reasonable bond 
or (2) submit to an annual audit. If the payroll tax deposit 
agent elects to post a bond, then the amount of such bond shall 
not be less than $50,000 nor more than $500,000 and shall be 
determined with respect to each payroll tax deposit agent under 
regulations. Any bond or security shall be in such form and 
with such surety or sureties as may be prescribed by 
regulations. If the payroll tax deposit agent elects to submit 
to an annual audit, then the audit shall be performed by an 
independent third party and shall be based on such audit 
principles as the Secretary deems necessary. In all cases the 
audits shall confirm that: (1) the escrow account in which the 
payroll tax deposit agent holds the employers' taxes is 
balanced annually to the total of the quarterly reconciliation 
statements; (2) the escrow account funds are not commingled 
with the agent's operating funds; (3) no escrow account funds 
are used to pay the agent's operating expenses; and (4) there 
is receipt evidence that the agent paid the required taxes for 
the employers to the proper government employment tax 
authorities.
    Third, the provision directs the Secretary to require 
payroll tax deposit agents to disclose to each potential and 
existing client: (1) the client's continuing liability for 
payment of all Federal and State employment taxes 
notwithstanding any contractual relationship with a payroll tax 
deposit agent; (2) the mechanisms available to the client to 
verify the amount and date of payment of all tax deposits made 
by the payroll tax deposit agent on behalf of such client; and 
(3) such information that the Secretary determines necessary or 
appropriate to assist employers in the selection and use of 
payroll tax deposit agents. These disclosures are required 
prior to or at the time of contracting for payroll services.
    Fourth, the provision requires payroll tax deposit agents 
to ensure the direct notification of the employer(s) by any 
Federal or State employment tax authority regarding the 
nonpayment of such employment taxes.
    Fifth, the provision provides penalties (not to exceed 
$10,000) for unregistered agents acting as payroll tax deposit 
agents with respect to Federal tax deposits for each 90 days of 
noncompliance.
    Sixth, the provision provides that only persons registered 
as payroll tax deposit agents may: (1) make Federal tax 
deposits on behalf of an employer; (2) sign and file Federal 
employment tax returns of behalf of a taxpayer; and (3) have 
access to confidential tax information relating to such 
employer.
    Finally, the provision clarifies that the penalty for 
failure to collect and pay over tax applies to payroll agents 
and is not dischargeable in bankruptcy.
    The Secretary is directed to issue such guidance as 
necessary to carry out these provisions.

                             EFFECTIVE DATE

    Generally the provisions are effective on January 1, 2007. 
The provision relating to penalties for failure to collect and 
pay over tax is effective for failures occurring after December 
31, 2006.

 V. Extension of the Statute of Limitations To File Claims for Refunds 
  Relating to Disability Determinations by the Department of Veterans 
                                Affairs


(Sec. 322 of the bill and sec. 6511 of the Code)

                              PRESENT LAW

    In general, a taxpayer must file a claim for credit or 
refund within three years of the filing of the tax return or 
within two years of the payment of the tax, whichever expires 
later (if no tax return is filed, the two-year limit applies). 
A claim for credit or refund that is not filed within these 
time periods is rejected as untimely.
    Generally, military retirement benefits based on length of 
service are included in income, whereas veterans' benefits 
based on a service-connected disability are excluded from 
income. If an individual receives includible retirement 
benefits and is later retroactively determined to be eligible 
for service-connected disability benefits, the portion of the 
retirement benefits attributable to the disability is 
retroactively excluded from income. In that case, the 
individual may claim a refund of the tax paid on the 
retroactively excluded benefits, subject to the statute of 
limitations on filing a refund claim.

                           REASONS FOR CHANGE

    The Committee believes that disabled veterans should not 
erroneously be subjected to income tax on their service-
connected disability benefits because of delays by the 
Department of Veterans Affairs in making these disability 
determinations. The Committee believes that the applicable 
statute of limitations should be extended with regard to these 
benefits for such veterans. However, the Committee is mindful 
of the benefits to both taxpayers and the IRS in having a 
statute of limitations. The Committee believes that the 
provision strikes the correct balance between reducing the 
improper taxation of these service-connected disability 
benefits and an administrable tax system.

                        EXPLANATION OF PROVISION

    The provision extends the time period for filing claims for 
credits or refunds for retired military personnel who receive 
disability determinations from the Department of Veterans 
Affairs (e.g. determinations after the tax return is filed). 
Specifically, the provision extends the period for filing such 
a refund claim until one year after the date of the disability 
determination (if later than the time periods allowed under 
present law). The provision applies to any taxable year which 
begins 5 years before the date of the determination or 
thereafter. In the case of a determination after December 31, 
2000, and on or before the date of enactment, the period for 
filing a claim for credit or refund is extended until one year 
after the date of enactment (if later than the time periods 
allowed under present law).

                             EFFECTIVE DATE

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

W. Notification Requirement for Exempt Entities Not Currently Required 
                  To File an Annual Information Return


(Secs. 6033, 6652, and 7428 of the Code)

                            PRESENT LAW\51\

    Under present law, the requirement that an exempt 
organization file an annual information return does not apply 
to several categories of exempt organizations. Organizations 
excepted from the filing requirement include organizations 
(other than private foundations), the gross receipts of which 
in each taxable year normally are not more than $25,000.\52\ 
Also exempt from the requirement are churches, their integrated 
auxiliaries, and conventions or associations of churches; the 
exclusively religious activities of any religious order; 
section 501(c)(1) instrumentalities of the United States; 
section 501(c)(21) trusts; an interchurch organization of local 
units of a church; certain mission societies; certain church-
affiliated elementary and high schools; certain State 
institutions whose income is excluded from gross income under 
section 115; certain governmental units and affiliates of 
governmental units; and other organizations that the IRS has 
relieved from the filing requirement pursuant to its statutory 
discretionary authority.
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    \51\Present law refers to the law in effect on the date of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 
2006).
    \52\Sec. 6033(a)(2); Treas. Reg. sec. 1.6033-2(a)(2)(i); Treas. 
Reg. sec. 1.6033-2(g)(1). Sec. 6033(a)(2)(A)(ii) provides a $5,000 
annual gross receipts exception from the annual reporting requirements 
for certain exempt organizations. In Announcement 82-88, 1982-25 I.R.B. 
23, the IRS exercised its discretionary authority under section 6033 to 
increase the gross receipts exception to $25,000, and enlarge the 
category of exempt organizations that are not required to file Form 
990.
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                           REASONS FOR CHANGE

    The Committee believes that it is appropriate under present 
law that certain small exempt organizations not be required to 
file an annual information return. However, as a result, the 
Secretary of the Treasury is not able to maintain a record of 
the continuing existence of such organizations and the public 
is unable easily to obtain basic information about the 
organization, such as the organization's current address. The 
absence of a record is especially problematic for charitable 
exempt organizations. Although the Secretary publishes the 
names of organizations to which charitable contributions may be 
made, if the organization is not required to file with the 
Secretary and alert the Secretary of its termination, the 
Secretary does not know when to omit the organization from its 
list of names. Accordingly, the Committee believes that exempt 
organizations that do not have to file an annual information 
return by virtue of the amount of their gross receipts should 
file with the Secretary a simple, short annual notice. The 
Committee does not intend that the annual filing be burdensome 
and does not believe that a monetary penalty is appropriate for 
a failure to file the notice. However, if an organization is 
unable to file a notice with the Secretary for three 
consecutive years, the Committee believes that revocation of 
the organization's exempt status is an appropriate sanction 
under the circumstances. In addition, to ensure equitable 
treatment among exempt organizations, the sanction of loss of 
exempt status is extended to consecutive failures to file a 
required information return.

                        EXPLANATION OF PROVISION

    [The bill does not include the provision as approved by the 
Committee because an identical or substantially similar 
provision was enacted into law in the Pension Protection Act of 
2006 (Pub. L. No. 109-280, sec. 1223) subsequent to Committee 
action on the bill. The following discussion describes the 
provision as approved by the Committee.]
    The provision requires organizations that are excused from 
filing an information return by reason of normally having gross 
receipts below a certain specified amount (generally, under 
$25,000) to furnish to the Secretary annually, in electronic 
form, the legal name of the organization, any name under which 
the organization operates or does business, the organization's 
mailing address and Internet web site address (if any), the 
organization's taxpayer identification number, the name and 
address of a principal officer, and evidence of the 
organization's continuing basis for its exemption from the 
generally applicable information return filing requirements. 
Upon such organization's termination of existence, the 
organization is required to furnish notice of such termination.
    The provision provides that if an organization fails to 
provide the required notice for three consecutive years, the 
organization's tax-exempt status is revoked. In addition, if an 
organization that is required to file an annual information 
return under section 6033(a) (Form 990) fails to file such an 
information return for three consecutive years, the 
organization's tax-exempt status is revoked. If an organization 
fails to meet its filing obligation to the IRS for three 
consecutive years in cases where the organization is subject to 
the information return filing requirement in one or more years 
during a three-year period and also is subject to the notice 
requirement for one or more years during the same three-year 
period, the organization's tax-exempt status is revoked.
    A revocation under the provision is effective from the date 
that the Secretary determines was the last day the organization 
could have timely filed the third required information return 
or notice. To again be recognized as tax exempt, the 
organization must apply to the Secretary for recognition of tax 
exemption, irrespective of whether the organization was 
required to make an application for recognition of tax 
exemption in order to gain tax exemption originally.
    If, upon application for tax-exempt status after a 
revocation under the provision, the organization shows to the 
satisfaction of the Secretary reasonable cause for failing to 
file the required annual notices or returns, the organization's 
tax-exempt status may, in the discretion of the Secretary, be 
reinstated retroactive to the date of revocation. An 
organization may not challenge under the Code's declaratory 
judgment procedures (section 7428) a revocation of tax 
exemption made pursuant to the provision.
    There is no monetary penalty for failure to file the notice 
under the provision. The provision requires that the notices be 
made available to the public under the public disclosure and 
inspection rules generally applicable to exempt organizations. 
The provision does not affect an organization's obligation 
under present law to file required information returns or 
existing penalties for failure to file such returns.
    The Secretary is required to notify every organization that 
is subject to the notice filing requirement of the new filing 
obligation in a timely manner. Notification by the Secretary 
shall be by mail, in the case of any organization the identity 
and address of which is included in the list of exempt 
organizations maintained by the Secretary, and by Internet or 
other means of outreach, in the case of any other organization. 
In addition, the Secretary is required to publicize in a timely 
manner in appropriate forms and instructions and other means of 
outreach the new penalty imposed for consecutive failures to 
file the information return.
    The Secretary is authorized to publish a list of 
organizations whose exempt status is revoked under the 
provision.

                             EFFECTIVE DATE

    The provision is effective for notices and returns with 
respect to annual periods beginning after 2006.

               TITLE IV--REFORM OF PENALTIES AND INTEREST


                      A. Individual Estimated Tax


(Sec. 401 of the bill and sec. 6654 of the Code)

                  1. Increase Estimated Tax Threshold


                              PRESENT LAW

    The Federal income tax system is designed to ensure that 
taxpayers pay taxes throughout the year based on their income 
and deductions. To the extent that tax is not collected through 
withholding, taxpayers are required to make quarterly estimated 
payments of tax. If an individual fails to make the required 
estimated tax payments under the rules, a penalty is imposed 
under section 6654. The amount of the penalty is determined by 
applying the underpayment interest rate to the amount of the 
underpayment for the period of the underpayment. The amount of 
the underpayment is the excess of the required payment over the 
amount (if any) of the installment paid on or before the due 
date of the installment. The period of the underpayment runs 
from the due date of the installment to the earlier of (1) the 
15th day of the fourth month following the close of the taxable 
year or (2) the date on which each portion of the underpayment 
is made. The penalty for failure to pay estimated tax is the 
equivalent of interest, which is based on the time value of 
money.
    Taxpayers are not liable for a penalty for the failure to 
pay estimated tax when the tax shown on the return for the 
taxable year (or, if no return is filed, the tax), reduced by 
withholding, is less than $1,000. This safe harbor does not 
apply, however, when a taxpayer has paid tax throughout the 
year solely through estimated tax payments. For such taxpayers, 
any tax shown on the return for the taxable year, net of 
estimated tax paid, could subject the taxpayer to the penalty 
for failure to pay estimated tax (unless another safe harbor 
applies).

                           REASONS FOR CHANGE

    Some taxpayers are required to complete Form 2210 
(Underpayment of Estimated Tax by Individuals, Estates, and 
Trusts) and attach it to their tax return to show that they 
qualify for an exception that can lower or eliminate the 
penalty for underpayment of estimated tax. The computations 
required to determine the amount of the individual estimated 
tax penalty are complex and difficult to administer. The 
Committee believes that by increasing the estimated tax payment 
threshold, fewer taxpayers will be required to make estimated 
tax payments.

                        EXPLANATION OF PROVISION

    The threshold for imposing the penalty for failure to pay 
estimated tax is increased from $1,000 to $2,000.

                             EFFECTIVE DATE

    The provision is effective for estimated tax payments made 
for taxable years beginning after December 31, 2006.

2. Apply one interest rate per estimated tax underpayment period for 
        individuals, estates, and trusts

                              PRESENT LAW

    The present-law penalty for failure to pay estimated tax is 
equal to the underpayment interest rate multiplied by the 
number of days the underpayment is outstanding, which is the 
number of days between when the taxpayer should have made the 
estimated payment and the earlier of (1) the 15th day of the 
fourth month following the close of the taxable year or (2) the 
date on which each portion of the underpayment is made. The 
interest rate, which equals the Federal short-term rate plus 
three percentage points, is subject to change on the first day 
of each quarter, which is January 1, April 1, July 1, and 
October 1.
    If the applicable interest rate changes while an 
underpayment of estimated tax is outstanding, then taxpayers 
are required to make separate calculations for the periods 
before and after the interest rate change. Such calculations 
generally are needed to cover 15-day periods. For example, the 
July 1 interest rate occurs 15 days after the June 15 payment 
date (for calendar-year taxpayers). A change in interest rates, 
which occurs on the first day of each calendar quarter, would 
require the use of different interest rates during one 
estimated tax underpayment period and would increase the number 
of calculations that a taxpayer must make in calculating a 
penalty for failure to pay estimated tax.

                           REASONS FOR CHANGE

    The adjustment of the interest rate for underpayments 
greatly complicates the computation of interest. When interest 
rates change during an underpayment period, taxpayers must 
perform multiple calculations to account for the change in 
interest rate. Thus, the Committee finds that, if only one 
interest rate applied per underpayment period, complexity would 
be reduced because there generally would be only one interest 
calculation required per underpayment period.

                        EXPLANATION OF PROVISION

    The interest rates applicable to tax underpayments are 
aligned so that, for any given estimated tax underpayment 
period, only one interest rate applies. The underpayment 
interest rate in effect on the first day of the quarter in 
which the pertinent estimated payment due date arises is the 
interest rate that applies during an entire underpayment 
period.

                             EFFECTIVE DATE

    The provision is effective for estimated tax payments made 
for taxable years beginning after December 31, 2006.

3. Provide that underpayment balances are cumulative

                              PRESENT LAW

    Section 6654(b)(1) defines ``underpayment'' as the amount 
of an installment due over the amount of any installment paid 
(including withholding) on or before the due date of the 
installment. In determining an underpayment penalty for a 
calendar year taxpayer, the period of underpayment runs for 
each underpayment from the payment's due date through the 
earlier of the date on which any portion of the payment is made 
or the 15th day of the fourth month following the close of the 
taxable year. Underpayment balances are not cumulative and must 
be tracked separately for each estimated tax underpayment 
period.

                           REASONS FOR CHANGE

    Tracking underpayments separately results in additional 
complexity in calculating interest on underpayments of 
estimated tax. The Committee thus finds that the calculation of 
interest on underpayments of estimated tax would be simplified 
by providing that underpayment balances would roll into the 
next estimated tax period so that interest would be calculated 
once per cumulative underpayment, per period.

                        EXPLANATION OF PROVISION

    The definition of ``underpayment'' is modified to allow 
existing underpayment balances to be used in underpayment 
calculations for succeeding estimated payment periods. Under 
the provision, taxpayers calculate a cumulative underpayment at 
the end of each underpayment period.

                             EFFECTIVE DATE

    The provision is effective for estimated tax payments made 
for taxable years beginning after December 31, 2006.

4. Require 365-day year for all estimated tax interest calculations for 
        individuals, estates, and trusts

                              PRESENT LAW

    Under current IRS procedures, taxpayers with outstanding 
underpayment balances that extend from a leap year through a 
non-leap year are required to make separate calculations solely 
to account for the different number of days in the two 
different years. For example, if a taxpayer has an underpayment 
outstanding from September 15, 2008, through January 15, 2009, 
then the taxpayer is required to account for the period from 
September 15, 2008 through December 31, 2008, using a 366-day 
formula.\53\ The taxpayer then is required to account for the 
period from January 1, 2009, through January 15, 2009, under a 
365-day formula. This calculation is required regardless of 
whether the interest rate changes on January 1, 2009.
---------------------------------------------------------------------------
    \53\The year 2008 is a leap year, the year 2009 is not.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee finds that complexity in calculating interest 
on underpayments of estimated tax would be reduced by 
eliminating the extra calculation that is required for 
underpayment balances that extend from a leap year to a non-
leap year or from a non-leap year to a leap year.

                        EXPLANATION OF PROVISION

    A 365-day year is used for all individual, estate, and 
trust estimated tax interest calculations.

                             EFFECTIVE DATE

    The provision is effective for estimated tax payments made 
for taxable years beginning after December 31, 2006.

                       B. Corporate Estimated Tax


(Sec. 402 of the bill and sec. 6655 of the Code)

                              PRESENT LAW

    In general, corporations are required to make quarterly 
estimated tax payments of their income tax liability.\54\ An 
exception to this requirement applies if the amount of tax for 
the taxable year is less than $500.
---------------------------------------------------------------------------
    \54\Sec. 6655.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that increasing the amount of this 
exception will reduce taxpayer burden and simplify 
administration of the tax laws.

                        EXPLANATION OF PROVISION

    The provision increases the threshold amount of tax for 
requiring corporate estimated tax payments to $1,000.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2006.

 C. Increase in Large Corporation Threshold for Estimated Tax Payments


(Sec. 403 of the bill and sec. 6655 of the Code)

                              PRESENT LAW

    In general, corporations are required to make quarterly 
estimated tax payments of their income tax liability.\55\ In 
general, the total of the estimated payments must equal the 
lesser of 100 percent of the current year's tax or 100 percent 
of the previous year's tax. Large corporations, however, may 
not base their estimated payments on the previous year's tax. A 
large corporation is a corporation with taxable income of $1 
million or more for any taxable year in the preceding three 
taxable years.

                           REASONS FOR CHANGE

    The Committee believes that increasing the threshold for 
defining large corporations will reduce taxpayer burden and 
simplify administration of the tax laws.

                        EXPLANATION OF PROVISION

    The provision increases the $1 million threshold defining 
large corporations (for purposes of quarterly estimated tax) by 
$50,000 every year beginning after 2006 until it reaches $1.5 
million.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2006.

                    D. Expansion of Interest Netting


(Sec. 404 of the bill and sec. 6621 of the Code)

                              PRESENT LAW

    A special net interest rate of zero applies 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. If both the underpayment 
and overpayment are unsatisfied, the interest rate applied to 
both will be zero. If either the underpayment or overpayment 
has previously been satisfied, the interest rate applicable to 
the unsatisfied amount will be equal to the interest rate 
applicable to the satisfied amount to the extent that interest 
was allowable or payable on both the underpayment and the 
overpayment for the same period.
    Interest must be both payable and allowable for interest 
netting to apply. If interest is not payable by the taxpayer 
with respect to an underpayment of tax, or interest is not 
allowable to the taxpayer on an overpayment of tax, the 
interest netting rules will not apply.
    For example, on July 1, 2017, a deficiency of $1,500 is 
determined with respect to a taxpayer's 2014 Federal income tax 
return, which the taxpayer pays within 21 days. In the 
meantime, the taxpayer has filed returns for 2015 and 2016, 
showing a refund due to overwithholding each year of $1,000. 
The IRS issues the appropriate refund checks on May 15 of each 
year, within 45 days of the due date of the return. Thus, 
interest is not allowable to the taxpayer with respect to 
either 2015 or 2016. In this case, the taxpayer owes interest 
on the $1,500 year 2014 underpayment from the original due date 
of the return (April 15, 2015) until the underpayment is 
satisfied. Although there are offsetting periods of overpayment 
(April 15, 2016 to May 15, 2016 and April 15, 2017 to May 15, 
2017), there is no offsetting period for which interest is 
allowable on an overpayment.

                           REASONS FOR CHANGE

    Interest represents the time value of money. The Committee 
believes that allowing taxpayers to consider the period of time 
the Secretary is allowed to process a refund in determining a 
net interest rate reflects this principle by recognizing that 
the government had use of the taxpayer's overpayment even 
though such overpayment was not allowable (i.e., periods of 
mutual indebtedness).

                        EXPLANATION OF PROVISION

    In the case of any taxpayer (whether an individual or 
corporation or other), the interest netting rules with respect 
to tax underpayments and overpayments are applied without 
regard to the 45-day period in which the Secretary may refund 
an overpayment of tax without the payment of interest under 
section 6611(e). Solely for the purpose of the interest netting 
computation, the portion of the 45-day period before repayment 
of the overpayment is considered as a period for which 
overpayment interest was allowable at a zero rate. The 
provision does not modify the period for which interest is 
payable or allowable for any other purpose.
    In the example discussed under present law, above, a net 
interest rate of zero would be applied to $1,000 of the 
taxpayer's year 2014 underpayment for the periods between the 
due date of the 2015 and 2016 returns and the dates on which 
the refunds are made. The taxpayer in the example would owe 
interest at the underpayment rate for the periods from April 
16, 2015, to April 15, 2016; May 16, 2016 to April 15, 2017; 
and from May 16, 2017 to July 1, 2017. For the periods April 
15, 2016, to May 15, 2016 and April 15, 2017 to May 15, 2017, a 
zero net interest rate applies.

                             EFFECTIVE DATE

    The provision is effective for interest accrued after 
December 31, 2010.

     E. Clarification of Application of Federal Tax Deposit Penalty


(Sec. 405 of the bill and sec. 6656 of the Code)

                              PRESENT LAW

    In many instances, taxpayers are required to make deposits 
of Federal taxes.\56\ Failure to do so is subject to a 
penalty.\57\ The amount of that penalty depends on the length 
of time that the deposit was not made. The penalty is two 
percent of the underpayment if the failure to deposit is for 
not more than five days, 5 percent for six through 15 days, and 
10 percent for more than 15 days. The IRS applies the 10 
percent penalty rate automatically if a deposit is not made in 
the manner required.
---------------------------------------------------------------------------
    \56\Sec. 6302.
    \57\Sec. 6656.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the position of the IRS does 
not reflect the intent of the Congress in enacting this 
penalty, that the rate of the penalty vary depending on the 
time of the failure, whether the failure being penalized is a 
failure to make a deposit in the manner required or a failure 
to make a deposit at all. The Committee considers it anomalous 
that the IRS would interpret this penalty so that individuals 
who make the correct deposit but not in the manner required are 
penalized at a higher rate than those that do not make a 
deposit at all until several days after the due date. The 
Committee believes it is more appropriate to penalize taxpayers 
in similar situations similarly.

                        EXPLANATION OF PROVISION

    The application of the Federal tax deposit penalty is 
clarified so that the 10-percent penalty rate only applies in 
cases in which the failure to deposit extends for more than 15 
days. Thus, a taxpayer who makes a deposit on time but not in 
the manner required is subject to a penalty of two percent.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                      F. Frivolous Tax Submissions


(Sec. 406 of the bill and sec. 6702 of the Code)

                              PRESENT LAW

    The Code provides that an individual who files a frivolous 
income tax return is subject to a penalty of $500 imposed by 
the IRS.\58\ The Code also permits the Tax Court\59\ to impose 
a penalty of up to $25,000 if a taxpayer has instituted or 
maintained proceedings primarily for delay or if the taxpayer's 
position in a proceeding is frivolous or groundless.\60\
---------------------------------------------------------------------------
    \58\Sec. 6702.
    \59\Because the Tax Court is the only pre-payment forum available 
to taxpayers, it addresses most of the frivolous, groundless, or 
dilatory arguments raised in tax cases.
    \60\Sec. 6673(a).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that frivolous returns and 
submissions consume resources at the IRS and in the courts that 
can better be utilized in resolving legitimate disputes with 
taxpayers. Expanding the scope of the penalty to cover all 
taxpayers and tax returns promotes fairness in the tax system. 
The Committee believes that adopting this provision will 
improve effective tax administration.

                        EXPLANATION OF PROVISION

    The provision modifies the penalty on frivolous returns by 
increasing the amount of the penalty to up to $5,000 and by 
applying it to all taxpayers and to all types of Federal taxes.
    The provision also modifies present law with respect to 
certain submissions that raise frivolous arguments or that are 
intended to delay or impede tax administration. The submissions 
to which the provision applies are requests for a collection 
due process hearing, installment agreements, offers-in-
compromise, and taxpayer assistance orders. First, the 
provision permits the IRS to disregard such requests. Second, 
the provision permits the IRS to impose a penalty of up to 
$5,000 for such requests, unless the taxpayer withdraws the 
request after being given an opportunity to do so.
    The provision requires the IRS to publish a list of 
positions, arguments, requests, and submissions determined to 
be frivolous for purposes of these provisions.

                             EFFECTIVE DATE

    The provision applies to submissions made and issues raised 
after the date on which the Secretary first prescribes the 
required list of frivolous positions.

   G. Understatement of Taxpayer's Liability by Tax Return Preparers


(Sec. 407 of the bill and secs. 6694, 6695, and 7701 of the Code)

                              PRESENT LAW

    An income tax return preparer is defined as any person who 
prepares for compensation, or who employs other people to 
prepare for compensation, all or a substantial portion of an 
income tax return or claim for refund.\61\ Under present law, 
the definition of an income tax return preparer does not 
include a person preparing non-income tax returns, such as 
estate and gift, excise, or employment tax returns.
---------------------------------------------------------------------------
    \61\Sec. 7701(a)(36)(A).
---------------------------------------------------------------------------
    Income tax return preparers are required to sign and 
include their taxpayer identification numbers on income tax 
returns and income return-related documents prepared for 
compensation. Under the Code, penalties are imposed on any 
income tax return preparer who, in connection with the 
preparation of an income tax return, fails to (1) furnish a 
copy of a return or claim for refund to the taxpayer, (2) sign 
the return or claim for refund, (3) furnish his or her 
identifying number, (4) retain a copy of the completed return 
or a list of the taxpayers for whom a return was prepared, (5) 
file a correct information return, and (6) comply with certain 
due diligence requirements in determining a taxpayer's 
eligibility for the earned income credit.\62\ Generally, the 
penalty is $50 for each failure and the total penalties imposed 
for any single type of failure for any calendar year are 
limited to $25,000. The penalty for failing to comply with the 
due diligence requirements for determining a taxpayer's 
eligibility for the earned income credit is $100 for each 
failure. An income tax return preparer who endorses or 
negotiates a check issued to a taxpayer (other than the income 
tax return preparer) is liable for a penalty of $500 with 
respect to each such check.
---------------------------------------------------------------------------
    \62\Sec. 6695.
---------------------------------------------------------------------------
    An income tax return preparer who prepares a return with 
respect to which there is an understatement of tax that is due 
to an undisclosed position for which there was not a realistic 
possibility of being sustained on its merits, or a frivolous 
position, is liable for a first-tier penalty of $250, provided 
the preparer knew or reasonably should have known of the 
position.\63\ For purposes of the penalty, an understatement is 
generally defined as any understatement with respect to any tax 
imposed by subtitle A (i.e., income taxes). An income tax 
return preparer who prepares a return and engages in specified 
willful or reckless conduct with respect to preparing an income 
tax return is liable for a second-tier penalty of $1,000.
---------------------------------------------------------------------------
    \63\Sec. 6694.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Penalties for the failure to comply with tax laws are a 
necessary component of any tax system if broad compliance is to 
be expected. Existing preparer penalties do not adequately 
deter and prevent noncompliance with tax laws. They should be 
broadened to include returns other than income tax returns. The 
thresholds of behavior to establish preparer noncompliance 
should be raised so that scams and schemes and other abusive 
transactions are discouraged. Penalty amounts have remained 
constant for years and are considered by some preparers to be a 
cost of business instead of an economic deterrent. The amounts 
should be increased to restore their deterrent impact. Preparer 
penalties also should be broadened to apply to refund claims 
with no reasonable basis to discourage unnecessary use of IRS 
resources and delays.

                        EXPLANATION OF PROVISION

    The provision broadens the scope of the present-law 
preparer penalties to include preparers of estate and gift tax, 
employment tax, and excise tax returns, and returns of exempt 
organizations.
    The provision alters the standards of conduct that must be 
met to avoid imposition of the penalties for preparing a return 
with respect to which there is an understatement of tax. First, 
the provision replaces the realistic possibility standard for 
undisclosed positions with a requirement that there be a 
reasonable belief that the tax treatment of the position was 
more likely than not the proper treatment. The provision 
replaces the not-frivolous standard with the requirement that 
there be a reasonable basis for the tax treatment of the 
position.
    The provision also imposes a penalty on a tax return 
preparer who prepares the portion of a claim for refund or 
credit that is disallowed if there is no reasonable basis for 
the claimed tax treatment of the disallowed portion of such 
claim for refund or credit.
    The provision also increases the first-tier penalty from 
$250 to the greater of $1,000 or 50 percent of the income 
derived (or to be derived) by the tax return preparer from the 
preparation of a return or claim with respect to which the 
penalty is imposed. The provision increases the second-tier 
penalty from $1,000 to the greater of $5,000 or 50 percent of 
the income derived (or to be derived) by the tax return 
preparer.

                             EFFECTIVE DATE

    The provision is effective for tax returns prepared after 
the date of enactment.

 H. Penalty for Aiding and Abetting the Understatement of Tax Liability


(Sec. 408 of the bill and sec. 6701 of the Code)

                              PRESENT LAW

    A penalty is imposed on a person who: (1) aids or assists 
in, procures, or advises with respect to a tax return or other 
document; (2) knows (or has reason to believe) that such 
document will be used in connection with a material tax matter; 
and (3) knows that this would result in an understatement of 
tax of another person.\64\ In general, the amount of the 
penalty is $1,000. If the document relates to the tax return of 
a corporation, the amount of the penalty is $10,000.
---------------------------------------------------------------------------
    \64\Sec. 6701.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that some tax practitioners and 
professionals assist taxpayers in understating their tax 
liability. The Committee believes that allowing aiders and 
abettors to profit from their wrongdoing undermines the 
integrity of the tax system. Existing aiding and abetting 
penalties do not adequately deter and prevent noncompliance 
with tax laws. Penalty amounts should be increased so they are 
an economic deterrent and not considered merely a cost of doing 
business. In addition, such penalties should not be deductible 
for tax purposes. Moreover, to discourage illegal tax shelters, 
scams and schemes, penalties should be applicable to each 
instance of aiding and abetting and be jointly and severally 
applicable so all aiders and abettors involved are responsible.

                        EXPLANATION OF PROVISION

    The provision expands the scope of the aiding and abetting 
penalty in several ways. First, it applies the penalty to 
aiding or abetting with respect to tax liability reflected in a 
tax return. Second, it applies the penalty separately to each 
instance of aiding or abetting. Third, it increases the amount 
of the penalty to a maximum of 100 percent of the gross income 
derived (or to be derived) from the aiding or abetting. Fourth, 
if more than one person is liable for the penalty, all such 
persons are jointly and severally liable for the penalty. 
Fifth, the penalty, as well as amounts paid to settle or avoid 
the imposition of the penalty, is not deductible for tax 
purposes.

                             EFFECTIVE DATE

    The provision is effective for activities occurring after 
the date of enactment.

      I. Increase in Criminal Monetary Penalty Limitation for the 
            Underpayment or Overpayment of Tax Due to Fraud


(Sec. 409 of the bill and secs. 7201, 7203, and 7206 of the Code)

                              PRESENT LAW

Attempt to evade or defeat tax

    In general, section 7201 imposes a criminal penalty on 
persons who willfully attempt to evade or defeat any tax 
imposed by the Code. Upon conviction, the Code provides that 
the penalty is up to $100,000 or imprisonment of not more than 
five years (or both). In the case of a corporation, the Code 
increases the monetary penalty to a maximum of $500,000.

Willful failure to file return, supply information, or pay tax

    In general, section 7203 imposes a criminal penalty on 
persons required to make estimated tax payments, pay taxes, 
keep records, or supply information under the Code who 
willfully fails to do so. Upon conviction, the Code provides 
that the penalty is up to $25,000 or imprisonment of not more 
than one year (or both). In the case of a corporation, the Code 
increases the monetary penalty to a maximum of $100,000.

Fraud and false statements

    In general, section 7206 imposes a criminal penalty on 
persons who make fraudulent or false statements under the Code. 
Upon conviction, the Code provides that the penalty is up to 
$100,000 or imprisonment of not more than three years (or 
both). In the case of a corporation, the Code increases the 
monetary penalty to a maximum of $500,000.

Uniform sentencing guidelines

    Under the uniform sentencing guidelines established by 18 
U.S.C. section 3571, a defendant found guilty of a criminal 
offense is subject to a maximum fine that is the greatest of: 
(a) the amount specified in the underlying provision, (b) for a 
felony\65\ $250,000 for an individual or $500,000 for an 
organization, or (c) twice the gross gain if a person derives 
pecuniary gain from the offense. This Title 18 provision 
applies to all criminal provisions in the United States Code, 
including those in the Internal Revenue Code. For example, for 
an individual, the maximum fine under present law upon 
conviction of violating section 7206 is $250,000 or, if 
greater, twice the amount of gross gain from the offense.
---------------------------------------------------------------------------
    \65\Section 7206 provides that the making of fraudulent or false 
statements is a felony. In addition, this offense is a felony pursuant 
to the classification guidelines of 18 U.S.C. sec. 3559(a)(5).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that existing criminal tax penalties 
do not adequately deter criminal behavior resulting in 
noncompliance with tax laws and increasing the tax 
gap.Increasing monetary penalties will raise the economic risk of 
failing to comply with tax laws. In addition, classifying certain 
willful failure to file cases as felonies should discourage criminal 
tax violations by substantially increasing the monetary and sentencing 
consequences of the offense together with the long term repercussions 
associated with a felony record.

                        EXPLANATION OF PROVISION

Attempt to evade or defeat tax

    The provision increases the criminal penalty under section 
7201 for individuals to $500,000 and for corporations to 
$1,000,000. The provision increases the maximum prison sentence 
to ten years.

Willful failure to file return, supply information, or pay tax

    The provision increases the criminal penalty under section 
7203 for individuals to $50,000 and, in the case of an 
``aggravated failure to file'' (defined as a failure to file a 
return for a period of three or more consecutive taxable years 
if the aggregate tax liability for such period is at least 
$100,000 or any failure to file a return where the requirement 
to make such return is attributable to activities that are 
felonies under Federal or State criminal law), changes the 
crime from a misdemeanor to a felony and increases the maximum 
prison sentence to ten years. The provision clarifies that the 
aggravated failure to file penalty may be applied in addition 
to other criminal tax penalties.

Fraud and false statements

    The provision increases the criminal penalty for making 
fraudulent or false statements to $500,000 for individuals and 
$1,000,000 for corporations. The provision increases the 
maximum prison sentence for making fraudulent or false 
statements to five years. The provision provides that in no 
event shall the amount of the monetary penalty under the 
provision be less than the amount of the underpayment or 
overpayment attributable to fraud.

                             EFFECTIVE DATE

    The provision is effective for actions and failures to act 
occurring after the date of enactment.

J. Doubling of Certain Penalties, Fines, and Interest on Underpayments 
           Related to Certain Offshore Financial Arrangements


(Sec. 410 of the bill)

                              PRESENT LAW

In general

    The Code contains numerous civil penalties, such as the 
delinquency, accuracy-related, fraud, and assessable penalties. 
These civil penalties are in addition to any interest that may 
be due as a result of an underpayment of tax. If all or any 
part of a tax is not paid when due, the Code imposes interest 
on the underpayment, which is assessed and collected in the 
same manner as the underlying tax and is subject to the 
respective statutes of limitations for assessment and 
collection.

Delinquency penalties

            Failure to file
    Under present law, a taxpayer who fails to file a tax 
return on a timely basis is generally subject to a penalty 
equal to five percent of the net amount of tax due for each 
month that the return is not filed, up to a maximum of five 
months or 25 percent. An exception from the penalty applies if 
the failure is due to reasonable cause. In the case of 
fraudulent failure to file, the penalty is increased to 15 
percent of the net amount of tax due for each month that the 
return is not filed, up to a maximum of five months or 75 
percent. The net amount of tax due is the excess of the amount 
of the tax required to be shown on the return over the amount 
of any tax paid on or before the due date prescribed for the 
payment of tax.
            Failure to pay
    Taxpayers who fail to pay their taxes are subject to a 
penalty of 0.5 percent per month on the unpaid amount, up to a 
maximum of 25 percent. If a penalty for failure to file and a 
penalty for failure to pay tax shown on a return both apply for 
the same month, the amount of the penalty for failure to file 
for such month is reduced by the amount of the penalty for 
failure to pay tax shown on a return. If an income tax return 
is filed more than 60 days after its due date, then the penalty 
for failure to pay tax shown on a return may not reduce the 
penalty for failure to file below the lesser of $100 or 100 
percent of the amount required to be shown on the return. For 
any month in which an installment payment agreement with the 
IRS is in effect, the rate of the penalty is half the usual 
rate (0.25 percent instead of 0.5 percent), provided that the 
taxpayer filed the tax return in a timely manner (including 
extensions).
            Failure to make timely deposits of tax
    The penalty for the failure to make timely deposits of tax 
consists of a four-tiered structure in which the amount of the 
penalty varies with the length of time within which the 
taxpayer corrects the failure. A depositor is subject to a 
penalty equal to two percent of the amount of the underpayment 
if the failure is corrected on or before the date that is five 
days afterthe prescribed due date. A depositor is subject to a 
penalty equal to 10 percent of the amount of the underpayment if the 
failure is corrected after the date that is 15 days after the due date 
but on or before the date that is 10 days after the date of the first 
delinquency notice to the taxpayer (under sec. 6303). Finally, a 
depositor is subject to a penalty equal to 15 percent of the amount of 
the underpayment if the failure is not corrected on or before the 
earlier of 10 days after the date of the first delinquency notice to 
the taxpayer and the date on which notice and demand for immediate 
payment of tax is given in cases of jeopardy.
    An exception from the penalty applies if the failure is due 
to reasonable cause. In addition, the Secretary may waive the 
penalty for an inadvertent failure to deposit any tax by 
specified first-time depositors.

Accuracy-related penalties

            In general
    The accuracy-related penalties are imposed at a rate of 20 
percent of the portion of any underpayment that is 
attributable, in relevant part, to (1) negligence, (2) any 
substantial understatement of income tax, (3) any substantial 
valuation misstatement, and (4) any reportable transaction 
understatement. The penalty for a substantial valuation 
misstatement is doubled for certain gross valuation 
misstatements. In the case of a reportable transaction 
understatement for which the transaction is not disclosed, the 
penalty rate is 30 percent. These penalties are coordinated 
with the fraud penalty. This statutory structure operates to 
eliminate any stacking of the penalties.
    No penalty is to be imposed if it is shown that there was 
reasonable cause for an underpayment and the taxpayer acted in 
good faith, and in the case of a reportable transaction 
understatement the relevant facts of the transaction have been 
disclosed, there is or was substantial authority for the 
taxpayer's treatment of such transaction, and the taxpayer 
reasonably believed that such treatment was more likely than 
not the proper treatment.
            Negligence or disregard for the rules or regulations
    If an underpayment of tax is attributable to negligence, 
the negligence penalty applies only to the portion of the 
underpayment that is attributable to negligence. Negligence 
means any failure to make a reasonable attempt to comply with 
the provisions of the Code. Disregard includes any careless, 
reckless, or intentional disregard of the rules or regulations.
            Substantial understatement of income tax
    Generally, an understatement is substantial if the 
understatement exceeds the greater of (1) 10 percent of the tax 
required to be shown on the return for the tax year, or (2) 
$5,000. In determining whether a substantial understatement 
exists, the amount of the understatement is reduced by any 
portion attributable to an item if (1) the treatment of the 
item on the return is or was supported by substantial 
authority, or (2) facts relevant to the tax treatment of the 
item were adequately disclosed on the return or on a statement 
attached to the return.
            Substantial valuation misstatement
    A penalty applies to the portion of an underpayment that is 
attributable to a substantial valuation misstatement or gross 
valuation misstatement. Generally, a substantial valuation 
misstatement exists if the value or adjusted basis of any 
property claimed on a return is 200 percent or more but less 
than 400 percent of the correct value or adjusted basis. The 
amount of the penalty for a substantial valuation misstatement 
is 20 percent of the amount of the underpayment. If the value 
or adjusted basis claimed is 400 percent or more of the correct 
value or adjusted basis (a gross valuation misstatement), then 
the amount of the penalty is 40 percent of the underpayment.
            Reportable transaction understatement
    A penalty applies to any item that is attributable to any 
listed transaction, or to any reportable transaction (other 
than a listed transaction) if a significant purpose of such 
reportable transaction is tax avoidance or evasion.

Fraud penalty

    The fraud penalty is imposed at a rate of 75 percent of the 
portion of any underpayment that is attributable to fraud. The 
accuracy-related penalty does not to apply to any portion of an 
underpayment on which the fraud penalty is imposed.

Assessable penalties

    In addition to the penalties described above, the Code 
imposes a number of additional penalties, including, for 
example, penalties for failure to file (or untimely filing of) 
information returns with respect to foreign trusts, and 
penalties for failure to disclose any required information with 
respect to a reportable transaction.

Interest provisions

    Taxpayers are required to pay interest to the IRS whenever 
there is an underpayment of tax. An underpayment of tax exists 
whenever the correct amount of tax is not paid by the last date 
prescribed for the payment of the tax. The last date prescribed 
for the payment of the income tax is the original due date of 
the return.
    Different interest rates are provided for the payment of 
interest depending upon the type of taxpayer, whether the 
interest relates to an underpayment or overpayment, and the 
size of the underpayment or overpayment. Interest on 
underpayments is compounded daily.

Offshore Voluntary Compliance Initiative

    In January 2003, Treasury announced the Offshore Voluntary 
Compliance Initiative (``OVCI'') to encourage the voluntary 
disclosure of previously unreported income placed by taxpayers 
in offshore accounts and accessed through credit card or other 
financial arrangements. A taxpayer had to comply with various 
requirements in order to participate in the OVCI, including 
sending a written request to participate in the program by 
April 15, 2003. This request had to include information about 
the taxpayer, the taxpayer's introduction to the credit card or 
other financial arrangements and the names of parties that 
promoted the transaction. A taxpayer entering into a closing 
agreement under the OVCI is not liable for the civil fraud 
penalty, the fraudulent failure to file penalty, or the civil 
information return penalties. Such a taxpayer is responsible 
for back taxes, interest, and certain accuracy-related and 
delinquency penalties.\66\
---------------------------------------------------------------------------
    \66\Rev. Proc. 2003-11, 2003-4 C.B. 311.
---------------------------------------------------------------------------

Voluntary disclosure policy

    A taxpayer's timely, voluntary disclosure of a substantial 
unreported tax liability has long been an important factor in 
deciding whether the taxpayer's case should ultimately be 
referred for criminal prosecution. The voluntary disclosure 
must be truthful, timely, and complete. The taxpayer must show 
a willingness to cooperate (as well as actual cooperation) with 
the IRS in determining the correct tax liability. The taxpayer 
must make good-faith arrangements with the IRS to pay in full 
the tax, interest, and any penalties determined by the IRS to 
be applicable. A voluntary disclosure does not guarantee 
immunity from prosecution. It creates no substantive or 
procedural rights for taxpayers.\67\ The IRS treats 
participation in the OVCI as a voluntary disclosure.\68\
---------------------------------------------------------------------------
    \67\Internal Revenue News Release 2002-135, IR-2002-135 (December 
11, 2002).
    \68\Rev. Proc. 2003-11, 2003-4 C.B. 311.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is aware that individuals and corporations, 
through sophisticated transactions, are placing unreported 
income in offshore financial accounts accessed through credit 
or debit cards or other financial arrangements in order to 
avoid or evade Federal income tax. Such a phenomenon poses a 
serious threat to the efficacy of the tax system because of 
both the potential loss of revenue and the potential threat to 
the integrity of the self-assessment system. The IRS estimates 
there may be several hundred thousand taxpayers using offshore 
financial arrangements to conceal taxable income from the IRS, 
potentially costing the government billions of dollars in lost 
revenue. On February 10, 2004, the IRS announced that over 
1,300 applications to participate in the OVCI initiative were 
received, and that it had received over $175 million in taxes, 
interest, and penalties from these cases.\69\ At the start of 
the program, the clear message to taxpayers was that those who 
failed to come forward would be pursued by the IRS and would be 
subject to more significant penalties and possible criminal 
sanctions. The Committee believes that doubling the civil 
penalties, fines, and interest applicable to taxpayers who 
participate in these types of arrangements and who do not 
voluntarily disclose such arrangements (through the OVCI or 
otherwise) will provide the IRS with the significant sanctions 
needed to stem the promotion of, and participation in, these 
abusive schemes.
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    \69\Internal Revenue News Release 2004-19, IR-2002-19 (February 10, 
2004).
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                        EXPLANATION OF PROVISION

    The provision doubles the amounts of civil penalties, 
interest, and fines related to taxpayers' underpayments of U.S. 
income tax liability through the direct or indirect use of 
certain offshore financial arrangements. The provision applies 
to taxpayers who did not (or do not) voluntarily disclose such 
arrangements through the OVCI or otherwise. Under the 
provision, the determination of whether any civil penalty is to 
be applied to such underpayment is made without regard to 
whether a return has been filed, whether there was reasonable 
cause for such underpayment, and whether the taxpayer acted in 
good faith.
    The proscribed financial arrangements include, but are not 
limited to, the use of certain foreign leasing corporations for 
providing domestic employee services,\70\ certain arrangements 
whereby the taxpayer may hold securities trading accounts 
through offshore banks or other financial intermediaries, 
certain arrangements whereby the taxpayer may access funds 
through the use of offshore credit, debit, or charge cards, and 
offshore annuities or trusts.
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    \70\These arrangements were described and classified as listed 
transactions in Notice 2003-22, 2003-1 C.B. 851.
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    The Secretary of the Treasury is granted the authority to 
waive the application of the provision if the use of the 
offshore financial arrangements is incidental to the 
transaction and, in the case of a trade or business, such use 
is conducted in the ordinary course of the type of trade or 
business in which the taxpayer is engaged.

                             EFFECTIVE DATE

    The provision generally is effective with respect to a 
taxpayer's open tax years on or after the date of enactment.

         K. Increase in Penalty for Bad Checks and Money Orders


(Sec. 411 of the bill and sec. 6657 of the Code)

                              PRESENT LAW

    The Code\71\ imposes a penalty for bad checks and money 
orders on the person who tendered it. The penalty is two 
percent of the amount of the bad check or money order, with a 
minimum penalty of $15 (or, if less, the amount of the check).
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    \71\Sec. 6657.
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                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to increase 
the minimum amount of this penalty so that it is more 
consistent with amounts charged by the private sector for bad 
checks.

                        EXPLANATION OF PROVISION

    The provision increases the minimum penalty for bad checks 
and money orders to $25 (or, if less, the amount of the check).

                             EFFECTIVE DATE

    The provision applies to checks or money orders received 
after the date of enactment.

 L. Increase the Amounts of Excise Taxes Relating to Public Charities, 
         Social Welfare Organizations, and Private Foundations


(Sec. 412 of the bill and secs. 4912, 4941, 4942, 4943, 4944, 4945, 
        4955, and 4958 of the Code)

                            PRESENT LAW\72\

Public charities and social welfare organizations

    The Code imposes excise taxes on excess benefit 
transactions between disqualified persons (as defined in 
section 4958(f)) and charitable organizations (other than 
private foundations) or social welfare organizations (as 
described in section 501(c)(4)).\73\ An excess benefit 
transaction generally is a transaction in which an economic 
benefit is provided by a charitable or social welfare 
organization directly or indirectly to or for the use of a 
disqualified person, if the value of the economic benefit 
provided exceeds the value of the consideration (including the 
performance of services) received for providing such benefit.
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    \72\Present law refers to the law in effect on the date of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 
2006).
    \73\Sec. 4958. The excess benefit transaction tax is commonly 
referred to as ``intermediate sanctions,'' because it imposes penalties 
generally considered to be less punitive than revocation of the 
organization's exempt status.
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    The excess benefit transaction tax is imposed on the 
disqualified person and, in certain cases, on the organization 
manager, but is not imposed on the exempt organization. An 
initial tax of 25 percent of the excess benefit amount is 
imposed on the disqualified person that receives the excess 
benefit. An additional tax on the disqualified person of 200 
percent of the excess benefit applies if the violation is not 
corrected. A tax of 10 percent of the excess benefit (not to 
exceed $10,000 with respect to any excess benefit transaction) 
is imposed on an organization manager that knowingly 
participated in the excess benefit transaction, if the 
manager's participation was willful and not due to reasonable 
cause, and if the initial tax was imposed on the disqualified 
person.\74\ If more than one person is liable for the tax on 
disqualified persons or on management, all such persons are 
jointly and severally liable for the tax.\75\
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    \74\Sec. 4958(d)(2). Taxes imposed may be abated if certain 
conditions are met. Secs. 4961 and 4962.
    \75\Sec. 4958(d)(1).
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Private foundations

            Self-dealing by private foundations
    Excise taxes are imposed on acts of self-dealing between a 
disqualified person (as defined in section 4946) and a private 
foundation.\76\ In general, self-dealing transactions are any 
direct or indirect: (1) sale or exchange, or leasing, of 
property between a private foundation and a disqualified 
person; (2) lending of money or other extension of credit 
between a private foundation and a disqualified person; (3) the 
furnishing of goods, services, or facilities between a private 
foundation and a disqualified person; (4) the payment of 
compensation (or payment or reimbursement of expenses) by a 
private foundation to a disqualified person; (5) the transfer 
to, or use by or for the benefit of, a disqualified person of 
the income or assets of the private foundation; and (6) certain 
payments of money or property to a government official.\77\ 
Certain exceptions apply.\78\
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    \76\Sec. 4941.
    \77\Sec. 4941(d)(1).
    \78\See sec. 4941(d)(2).
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    An initial tax of five percent of the amount involved with 
respect to an act of self-dealing is imposed on any 
disqualified person (other than a foundation manager acting 
only as such) who participates in the act of self-dealing. If 
such a tax is imposed, a 2.5-percent tax of the amount involved 
is imposed on a foundation manager who participated in the act 
of self-dealing knowing it was such an act (and such 
participation was not willful and was due to reasonable cause) 
up to $10,000 per act. Such initial taxes may not be 
abated.\79\ Such initial taxes are imposed for each year in the 
taxable period, which begins on the date the act of self-
dealing occurs and ends on the earliest of the date of mailing 
of a notice of deficiency for the tax, the date on which the 
tax is assessed, or the date on which correction of the act of 
self-dealing is completed. A government official (as defined in 
section 4946(c)) is subject to such initial tax only if the 
official participates in the act of self-dealing knowing it is 
such an act. If the act of self-dealing is not corrected, a tax 
of 200 percent of the amount involved is imposed on the 
disqualified person and a tax of 50 percent of the amount 
involved (up to $10,000 per act) is imposed on a foundation 
manager who refused to agree to correcting the act of self-
dealing. Such additional taxes are subject to abatement.\80\
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    \79\Sec. 4962(b).
    \80\Sec. 4961.
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            Tax on failure to distribute income
    Private nonoperating foundations are required to pay out a 
minimum amount each year as qualifying distributions. In 
general, a qualifying distribution is an amount paid to 
accomplish one or more of the organization's exempt purposes, 
including reasonable and necessary administrative expenses.\81\ 
Failure to pay out the minimum results in an initial excise tax 
on the foundation of 15 percent of the undistributed amount. An 
additional tax of 100 percent of the undistributed amount 
applies if an initial tax is imposed and the required 
distributions have not been made by the end of the applicable 
taxable period.\82\ A foundation may include as a qualifying 
distribution the salaries, occupancy expenses, travel costs, 
and other reasonable and necessary administrative expenses that 
the foundation incurs in operating a grant program. A 
qualifying distribution also includes any amount paid to 
acquire an asset used (or held for use) directly in carrying 
out one or more of the organization's exempt purposes and 
certain amounts set-aside for exempt purposes.\83\ Private 
operating foundations are not subject to the payout 
requirements.
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    \81\Sec. 4942(g)(1)(A).
    \82\Sec. 4942(a) and (b). Taxes imposed may be abated if certain 
conditions are met. Secs. 4961 and 4962.
    \83\Secs. 4942(g)(1)(B) and 4942(g)(2). In general, an organization 
is permitted to adjust the distributable amount in those cases where 
distributions during the five preceding years have exceeded the payout 
requirements. Sec. 4942(i).
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            Tax on excess business holdings
    Private foundations are subject to tax on excess business 
holdings.\84\ In general, a private foundation is permitted to 
hold 20 percent of the voting stock in a corporation, reduced 
by the amount of voting stock held by all disqualified persons 
(as defined in section 4946). If it is established that no 
disqualified person has effective control of the corporation, a 
private foundation and disqualified persons together may own up 
to 35 percent of the voting stock of a corporation. A private 
foundation shall not be treated as having excess business 
holdings in any corporation if it owns (together with certain 
other related private foundations) not more than two percent of 
the voting stock and not more than two percent in value of all 
outstanding shares of all classes of stock in that corporation. 
Similar rules apply with respect to holdings in a partnership 
(``profits interest'' is substituted for ``voting stock'' and 
``capital interest'' for ``nonvoting stock'') and to other 
unincorporated enterprises (by substituting ``beneficial 
interest'' for ``voting stock''). Private foundations are not 
permitted to have holdings in a proprietorship. Foundations 
generally have a five-year period to dispose of excess business 
holdings (acquired other than by purchase) without being 
subject to tax.\85\ This five-year period may be extended an 
additional five years in limited circumstances.\86\
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    \84\Sec. 4943. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \85\Sec. 4943(c)(6).
    \86\Sec. 4943(c)(7).
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    The initial tax is equal to five percent of the value of 
the excess business holdings held during the foundation's 
applicable taxable year. An additional tax is imposed if an 
initial tax isimposed and at the close of the applicable 
taxable period, the foundation continues to hold excess business 
holdings. The amount of the additional tax is equal to 200 percent of 
such holdings.
            Tax on jeopardizing investments
    Private foundations and foundation managers are subject to 
tax on investments that jeopardize the foundation's charitable 
purpose.\87\ In general, an initial tax of five percent of the 
amount of the investment applies to the foundation and to 
foundation managers who participated in the making of the 
investment knowing that it jeopardized the carrying out of the 
foundation's exempt purposes. The initial tax on foundation 
managers may not exceed $5,000 per investment. If the 
investment is not removed from jeopardy (e.g., sold or 
otherwise disposed of), an additional tax of 25 percent of the 
amount of the investment is imposed on the foundation and five 
percent of the amount of the investment on a foundation manager 
who refused to agree to removing the investment from jeopardy. 
The additional tax on foundation managers may not exceed 
$10,000 per investment. An investment, the primary purpose of 
which is to accomplish a charitable purpose and no significant 
purpose of which is the production of income or the 
appreciation of property, is not considered a jeopardizing 
investment.\88\
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    \87\Sec. 4944. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \88\Sec. 4944(c).
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            Tax on taxable expenditures
    Certain expenditures of private foundations are subject to 
tax.\89\ In general, taxable expenditures are expenses: (1) for 
lobbying; (2) to influence the outcome of a public election or 
carry on a voter registration drive (unless certain 
requirements are met); (3) as a grant to an individual for 
travel, study, or similar purposes unless made pursuant to 
procedures approved by the Secretary; (4) as a grant to an 
organization that is not a public charity or exempt operating 
foundation unless the foundation exercises expenditure 
responsibility\90\ with respect to the grant; or (5) for any 
non-charitable purpose. For each taxable expenditure, a tax is 
imposed on the foundation of 10 percent of the amount of the 
expenditure, and an additional tax of 100 percent is imposed on 
the foundation if the expenditure is not corrected. A tax of 
2.5 percent of the expenditure (up to $5,000) also is imposed 
on a foundation manager who agrees to making a taxable 
expenditure knowing that it is a taxable expenditure. An 
additional tax of 50 percent of the amount of the expenditure 
(up to $10,000) is imposed on a foundation manager who refuses 
to agree to correction of such expenditure.
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    \89\Sec. 4945. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \90\In general, expenditure responsibility requires that a 
foundation make all reasonable efforts and establish reasonable 
procedures to ensure that the grant is spent solely for the purpose for 
which it was made, to obtain reports from the grantee on the 
expenditure of the grant, and to make reports to the Secretary 
regarding such expenditures. Sec. 4945(h).
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Lobbying and political activities

            Lobbying
    Under present law, an organization described in section 
501(c)(3) may not engage in more than a substantial amount of 
lobbying. Organizations may make an election to limit their 
lobbying expenditures in accordance with specific rules and 
excise taxes.\91\ Organizations not making such an election are 
subject to an excise tax if, as a result of lobbying 
expenditures during a taxable year, the organization is not 
described in section 501(c)(3).\92\ The excise tax is five 
percent of the lobbying expenditures for such taxable year. In 
addition, a tax is imposed on an organization manager if the 
manager agreed to the making of a lobbying expenditure, knowing 
that the expenditure likely would result in the organization 
not being described in section 501(c)(3), unless such agreement 
is not willful and is due to reasonable cause. The tax is five 
percent of the amount of any such expenditure.
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    \91\Secs. 501(h) and 4911.
    \92\Sec. 4912. The excise tax does not apply to churches, certain 
other religious organizations, and private foundations. Sec. 
4912(c)(2). Private foundations separately are subject to an excise tax 
for certain lobbying expenditures. Sec. 4945(d)(1).
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            Political activities
    Organizations described in section 501(c)(3) may not 
participate or intervene in any political campaign on behalf of 
(or in opposition) to any candidate for public office. This ban 
on political activities by section 501(c)(3) organizations may 
result in loss of tax exempt status. Political expenditures, 
i.e., amounts paid or incurred by a section 501(c)(3) 
organization for such participation or intervention, also are 
subject to an excise tax.\93\ An initial tax of 10 percent of 
the amount of the expenditure is imposed on the organization; 
and an initial tax of 2.5 percent of the expenditure (not to 
exceed $5,000) is imposed on an organization manager who agrees 
to the making of a political expenditure, knowing that it is a 
political expenditure if such agreement is not willful and is 
due to reasonable cause. Additional taxes apply to the 
organization and the organization manager if the political 
expenditure is not corrected. Such additional tax on the 
organization manager may not exceed $10,000.
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    \93\Sec. 4955. In the case of an organization which is formed 
primarily for purposes of promoting the candidacy (or prospective 
candidacy) of an individual for public office, political expenditures 
also include certain other amounts. Sec. 4955(d)(2).
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                           REASONS FOR CHANGE

    The Tax Reform Act of 1969 introduced the present-law 
regime of excise taxes that is applicable to certain actions of 
private foundations (self-dealing, failure to distribute 
income, excess business holdings, jeopardizing investments, and 
taxable expenditures). The amount of such taxes has not been 
changed since. The excise taxes were established to provide 
strong deterrents to foundations, and in some cases foundation 
managers, from engaging in abusive ordisapproved transactions. 
In the years following passage of the 1969 Act, the IRS closely 
monitored the conduct of private foundations, and in 1990 the Treasury 
Department concluded that foundations were largely a compliant 
sector.\94\ In subsequent years, however, audits of foundations and 
other section 501(c)(3) organizations generally has fallen 
significantly. With a decreased enforcement presence, there is an 
increased likelihood that private foundations are not as compliant as 
reported by the Treasury Department in 1990 and that the current excise 
tax rates, which have not increased in 35 years, are not providing a 
sufficient deterrent.\95\ Thus, the Committee believes that it is 
appropriate to double the initial taxes and the dollar amount 
limitations on foundation manager liability. The Committee further 
believes that for consistency, the dollar amount limitations on 
organization managers subject to tax for approving participation in an 
excess benefit transaction should be doubled. In a similar vein, the 
Committee believes that the initial excise tax rates and dollar 
limitations on the political and excess lobbying activities of section 
501(c)(3) organizations are too low to have a significant deterrent 
effect and that it is an appropriate minimum step to deter such conduct 
to double such rates and limitations.
---------------------------------------------------------------------------
    \94\Internal Revenue Service, ``Private Foundation Grant-Making 
Administrative Expenses Study'' (January 1990).
    \95\A series of reports in the Boston Globe highlight many brazen 
abuses by private foundation managers. See, e.g., Boston Globe, ``Some 
officers of charities steer assets to selves'' (October 9, 2003); 
Boston Globe, ``Foundation's sale of nonprofit hospital a windfall for 
administrator'' (October 9, 2003); Boston Globe, ``Charity money 
funding perks'' (November 9, 2003); Boston Globe, ``Costly furnishings 
come at charities' expense'' (November 9, 2003); Boston Globe, ``The 
trustees' perk that keeps on giving'' (November 9, 2003); Boston Globe, 
``Foundations veer into business'' (December 3, 2003); Boston Globe, 
``Philanthropist's millions enrich family retainers'' (December 21, 
2003); Boston Globe, ``Foundation's tax returns left unchecked'' 
(December 29, 2003).
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                        EXPLANATION OF PROVISION

    [The bill includes only the provisions relating to the 
increase in excise taxes on the lobbying and political 
activities of section 501(c)(3) organizations because 
provisions substantially similar to the provisions relating to 
the other excise taxes described below were enacted into law in 
the Pension Protection Act of 2006 (Pub. L. No. 109-280, sec. 
1212) subsequent to Committee action on the bill. The following 
discussion describes the provision as approved by the 
Committee.]

Self-dealing and excess benefit transaction initial taxes and dollar 
        limitations

    For acts of self-dealing, the provision increases the 
initial tax on the self-dealer from five percent of the amount 
involved to 10 percent of the amount involved. The provision 
increases the initial tax on foundation managers from 2.5 
percent of the amount involved to five percent of the amount 
involved and increases the dollar limitation on the amount of 
the initial and additional taxes on foundation managers per act 
of self-dealing from $10,000 per act to $20,000 per act. 
Similarly, the provision doubles the dollar limitation on 
organization managers of public charities and social welfare 
organizations for participation in excess benefit transactions 
from $10,000 per transaction to $20,000 per transaction.

Failure to distribute income, excess business holdings, jeopardizing 
        investments, and taxable expenditures

    The provision doubles the amounts of the initial taxes and 
the dollar limitations on foundation managers with respect to 
the private foundation excise taxes on the failure to 
distribute income, excess business holdings, jeopardizing 
investments, and taxable expenditures.
    Specifically, for the failure to distribute income, the 
initial tax on the foundation is increased from 15 percent of 
the undistributed amount to 30 percent of the undistributed 
amount.
    For excess business holdings, the initial tax on excess 
business holdings is increased from five percent of the value 
of such holdings to 10 percent of such value.
    For jeopardizing investments, the initial tax of five 
percent of the amount of the investment that is imposed on the 
foundation and on foundation managers is increased to 10 
percent of the amount of the investment. The dollar limitation 
on the initial tax on foundation managers of $5,000 per 
investment is increased to $10,000 and the dollar limitation on 
the additional tax on foundation managers of $10,000 per 
investment is increased to $20,000.
    For taxable expenditures, the initial tax on the foundation 
is increased from 10 percent of the amount of the expenditure 
to 20 percent, the initial tax on the foundation manager is 
increased from 2.5 percent of the amount of the expenditure to 
five percent, the dollar limitation of the initial tax on 
foundation managers is increased from $5,000 to $10,000, and 
the dollar limitation of the additional tax on foundation 
managers is increased from $10,000 to $20,000.

Lobbying and political activities

    The provision increases the rate of tax on lobbying 
expenditures imposed under section 4912 on the organization and 
on the organization manager from five percent to 10 percent of 
the amount of the expenditure.
    For political expenditures, the provision increases the 
rate of the initial tax on the organization from ten percent of 
the amount of the expenditure to 20 percent. The provision 
increases the rate of the initial tax on the organization 
manager from 2.5 percent to five percent. In addition, the 
dollar limitation on the initial tax on organization mangers is 
increased from $5,000 to $10,000, and the dollar limitation on 
the additional tax on foundation managers is increased from 
$10,000 to $20,000.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after the date of enactment.

             M. Penalty for Filing Erroneous Refund Claims


(Sec. 413 of the bill and sec. 6662 of the Code)

                              PRESENT LAW

    Present law imposes accuracy-related penalties on a 
taxpayer in cases involving a substantial valuation 
misstatement or gross valuation misstatement relating to an 
underpayment of income tax.\96\ For this purpose, a substantial 
valuation misstatement generally means a value claimed that is 
at least twice (200 percent or more) the amount determined to 
be the correct value, and a gross valuation misstatement 
generally means a value claimed that is at least four times 
(400 percent or more) the amount determined to be the correct 
value.
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    \96\Sec. 6662(b)(3) and (h).
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    The penalty is 20 percent of the underpayment of tax 
resulting from a substantial valuation misstatement and rises 
to 40 percent for a gross valuation misstatement. No penalty is 
imposed unless the portion of the underpayment attributable to 
the valuation misstatement exceeds $5,000 ($10,000 in the case 
of a corporation other than an S corporation or a personal 
holding company). Under present law, no penalty is imposed with 
respect to any portion of the understatement attributable to 
any item if (1) the treatment of the item on the return is or 
was supported by substantial authority, or (2) facts relevant 
to the tax treatment of the item were adequately disclosed on 
the return or on a statement attached to the return and there 
is a reasonable basis for the tax treatment. Special rules 
apply to tax shelters.

                           REASONS FOR CHANGE

    Existing penalties are calculated on tax underpayments and 
not on claims for refund amounts. The Committee understands 
that the filing of erroneous refund claims is being used by 
some taxpayers to put a strain on IRS resources and to delay 
the resolution of tax matters. The Committee believes a 
meaningful penalty on a refund claim with no reasonable basis 
for the claimed treatment will deter the use of such claims for 
the purpose of impeding effective tax administration.

                        EXPLANATION OF PROVISION

    The provision imposes a penalty on any taxpayer filing an 
erroneous claim for refund or credit. The penalty is equal to 
20 percent of the disallowed portion of the claim for refund or 
credit for which there is no reasonable basis for the claimed 
tax treatment. The penalty does not apply to any portion of the 
disallowed portion of the claim for refund or credit for which 
the accuracy-related or fraud penalty is imposed.

                             EFFECTIVE DATE

    The provision is effective for claims for refund or credit 
filed after the date of enactment or for claims for refund or 
credit filed prior to the date of enactment that are not 
withdrawn within 30 days after the date of enactment.

    N. Provisions Relating to Appraisers and Substantial and Gross 
                Overstatement of Valuations of Property


(Secs. 170, 6662, 6664, 6696, and new sec. 6695A of the Code)

                            PRESENT LAW\97\
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    \97\Present law refers to the law in effect on the date of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 
2006).
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Taxpayer penalties

    Present law imposes accuracy-related penalties on a 
taxpayer in cases involving a substantial valuation 
misstatement or gross valuation misstatement relating to an 
underpayment of income tax.\98\ For this purpose, a substantial 
valuation misstatement generally means a value claimed that is 
at least twice (200 percent or more) the amount determined to 
be the correct value, and a gross valuation misstatement 
generally means a value claimed that is at least four times 
(400 percent or more) the amount determined to be the correct 
value.
---------------------------------------------------------------------------
    \98\Sec. 6662(b)(3) and (h).
---------------------------------------------------------------------------
    The penalty is 20 percent of the underpayment of tax 
resulting from a substantial valuation misstatement and rises 
to 40 percent for a gross valuation misstatement. No penalty is 
imposed unless the portion of the underpayment attributable to 
the valuation misstatement exceeds $5,000 ($10,000 in the case 
of a corporation other than an S corporation or a personal 
holding company). Under present law, no penalty is imposed with 
respect to any portion of the understatement attributable to 
any item if (1) the treatment of the item on the return is or 
was supported by substantial authority, or (2) facts relevant 
to the tax treatment of the item were adequately disclosed on 
the return or on a statement attached to the return and there 
is a reasonable basis for the tax treatment. Special rules 
apply to tax shelters.
    Present law also imposes an accuracy-related penalty on 
substantial or gross estate or gift tax valuation 
understatements.\99\ In general, there is a substantial estate 
or gift tax understatement if the value of any property claimed 
on any return is 50 percent or less of the amount determined to 
be the correct amount, and a gross estate or gift tax 
understatement if such value is 25 percent or less of the 
amount determined to be the correct amount.
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    \99\Sec. 6662(g) and (h).
---------------------------------------------------------------------------
    In addition, the accuracy-related penalties do not apply if 
a taxpayer shows there was reasonable cause for an underpayment 
and the taxpayer acted in good faith.\100\
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    \100\Sec. 6664(c).
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Penalty for aiding and abetting understatement of tax

    A penalty is imposed on a person who: (1) aids or assists 
in or advises with respect to a tax return or other document; 
(2) knows (or has reason to believe) that such document will be 
used in connection with a material tax matter; and (3) knows 
that this would result in an understatement of tax of another 
person. In general, the amount of the penalty is $1,000. If the 
document relates to the tax return of a corporation, the amount 
of the penalty is $10,000.

Qualified appraisals

    Present law requires a taxpayer to obtain a qualified 
appraisal for donated property with a value of more than 
$5,000, and to attach an appraisal summary to the tax 
return.\101\ Treasury Regulations state that a qualified 
appraisal means an appraisal document that, among other things: 
(1) relates to an appraisal that is made not earlier than 60 
days prior to the date of contribution of the appraised 
property and not later than the due date (including extensions) 
of the return on which a deduction is first claimed under 
section 170; (2) is prepared, signed, and dated by a qualified 
appraiser; (3) includes (a) a description of the property 
appraised; (b) the fair market value of such property on the 
date of contribution and the specific basis for the valuation; 
(c) a statement that such appraisal was prepared for income tax 
purposes; (d) the qualifications of the qualified appraiser; 
and (e) the signature and taxpayer identification number of 
such appraiser; and (4) does not involve an appraisal fee that 
violates certain prescribed rules.\102\
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    \101\Sec. 170(f)(11).
    \102\Treas. Reg. sec. 1.170A-13(c)(3).
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Qualified appraisers

    Treasury Regulations define a qualified appraiser as a 
person who holds himself or herself out to the public as an 
appraiser or performs appraisals on a regular basis, is 
qualified to make appraisals of the type of property being 
valued (as determined by the appraiser's background, 
experience, education and membership, if any, in professional 
appraisal associations), is independent, and understands that 
an intentionally false or fraudulent overstatement of the value 
of the appraised property may subject the appraiser to civil 
penalties.\103\
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    \103\Treas. Reg. sec. 1.170A-13(c)(5)(i).
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Appraiser oversight

    The Secretary is authorized to regulate the practice of 
representatives of persons before the Department of the 
Treasury (``Department'').\104\ After notice and hearing, the 
Secretary is authorized to suspend or disbar from practice 
before the Department or the Internal Revenue Service (``IRS'') 
a representative who is incompetent, who is disreputable, who 
violates the rules regulating practice before the Department or 
the IRS, or who (with intent to defraud) willfully and 
knowingly misleads or threatens the person being represented 
(or a person who may be represented).
---------------------------------------------------------------------------
    \104\31 U.S.C. sec. 330.
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    The Secretary also is authorized to bar from appearing 
before the Department or the IRS, for the purpose of offering 
opinion evidence on the value of property or other assets, any 
individual against whom a civil penalty for aiding and abetting 
the understatement of tax has been assessed. Thus, an appraiser 
who aids or assists in the preparation or presentation of an 
appraisal will be subject to disciplinary action if the 
appraiser knows that the appraisal will be used in connection 
with the tax laws and will result in an understatement of the 
tax liability of another person. The Secretary has authority to 
provide that the appraisals of an appraiser who has been 
disciplined have no probative effect in any administrative 
proceeding before the Department or the IRS.

                           REASONS FOR CHANGE

    Determining the correct value of property for tax purposes 
is essential to ensure that a taxpayer's return accurately 
states the amount of tax required to be shown on a return. 
Accordingly, present law imposes penalties if the value of 
property claimed by a taxpayer for income, estate, or gift tax 
purposes results in a substantial or gross valuation 
misstatement or understatement. The Committee believes, 
however, that the present-law definitions of a substantial and 
a gross valuation misstatement or understatement allow 
taxpayers, and those who prepare appraisals of property for 
taxpayers, too much leeway to misstate value without regard to 
penalty. Thus, the Committee believes that it is appropriate to 
revise the definitions of a substantial and a gross valuation 
misstatement or understatement for income, gift, and estate tax 
purposes in order to reduce the amount of misstatement or 
understatement that may be made without penalty. The Committee 
also believes that it is appropriate to impose a penalty on 
appraisers who prepare appraisals of property in connection 
with a tax return (whether for income, estate, or gift tax 
purposes) if, as a result of the appraisal, a penalty for 
substantial or gross misstatement or understatement of property 
results. In addition, because of the importance of ensuring 
that property is valued correctly, the Committee believes it is 
appropriate to impose new standards for appraisers and 
appraisals, and to improve the process for instituting 
disciplinary proceedings against appraisers.

                        EXPLANATION OF PROVISION

    [The bill does not include the provision as approved by the 
Committee because an identical or substantially similar 
provision was enacted into law in the Pension Protection Act of 
2006 (Pub. L. No. 109-280, sec. 1219) subsequent to Committee 
action on the bill. The following discussion describes the 
provision as approved by the Committee.]

Taxpayer penalties

    The provision lowers the thresholds for imposing accuracy-
related penalties on a taxpayer. Under the provision, a 
substantial valuation misstatement exists when the claimed 
value of any property is 150 percent or more of the amount 
determined to be the correct value. Agross valuation 
misstatement occurs when the claimed value of any property is 200 
percent or more of the amount determined to be the correct value.
    The provision tightens the thresholds for imposing 
accuracy-related penalties with respect to the estate or gift 
tax. Under the provision, a substantial estate or gift tax 
valuation misstatement exists when the claimed value of any 
property is 65 percent or less of the amount determined to be 
the correct value. A gross estate or gift tax valuation 
misstatement exists when the claimed value of any property is 
40 percent or less of the amount determined to be the correct 
value.
    Under the provision, the reasonable cause exception to the 
accuracy-related penalty does not apply in the case of gross 
valuation misstatements.

Appraiser oversight

            Appraiser penalties
    The provision establishes a civil penalty on any person who 
prepares an appraisal that is to be used to support a tax 
position if such appraisal results in a substantial or gross 
valuation misstatement. The penalty is equal to the greater of 
$1,000 or 10 percent of the understatement of tax resulting 
from a substantial or gross valuation misstatement, up to a 
maximum of 125 percent of the gross income derived from the 
appraisal. Under the provision, the penalty does not apply if 
the appraiser establishes that it was ``more likely than not'' 
that the appraisal was correct.
            Disciplinary proceeding
    The provision eliminates the requirement that the Secretary 
assess against an appraiser the civil penalty for aiding and 
abetting the understatement of tax before such appraiser may be 
subject to disciplinary action. Thus, the Secretary is 
authorized to discipline appraisers after notice and hearing. 
Disciplinary action may include, but is not limited to, 
suspending or barring an appraiser from: preparing or 
presenting appraisals on the value of property or other assets 
to the Department or the IRS; appearing before the Department 
or the IRS for the purpose of offering opinion evidence on the 
value of property or other assets; and providing that the 
appraisals of an appraiser who has been disciplined have no 
probative effect in any administrative proceeding before the 
Department or the IRS.
            Qualified appraisers
    The provision defines a qualified appraiser as an 
individual who (1) has earned an appraisal designation from a 
recognized professional appraiser organization or has otherwise 
met minimum education and experience requirements to be 
determined by the IRS in regulations; (2) regularly performs 
appraisals for which he or she receives compensation; (3) can 
demonstrate verifiable education and experience in valuing the 
type of property for which the appraisal is being performed; 
(4) has not been prohibited from practicing before the IRS by 
the Secretary at any time during the three years preceding the 
conduct of the appraisal; and (5) is not excluded from being a 
qualified appraiser under applicable Treasury regulations.
            Qualified appraisals
    The provision defines a qualified appraisal as an appraisal 
of property prepared by a qualified appraiser (as defined by 
the provision) in accordance with generally accepted appraisal 
standards and any regulations or other guidance prescribed by 
the Secretary.

                             EFFECTIVE DATE

    The provision amending the accuracy-related penalty applies 
to returns filed after the date of enactment. The provision 
establishing a civil penalty that may be imposed on any person 
who prepares an appraisal that is to be used to support a tax 
position if such appraisal results in a substantial or gross 
valuation misstatement applies to appraisals prepared with 
respect to returns or submissions filed after the date of 
enactment. The provisions relating to appraiser oversight apply 
to appraisals prepared with respect to returns or submissions 
filed after the date of enactment.

                TITLE V--CONFIDENTIALITY AND DISCLOSURE


A. Collection Activities With Respect to a Joint Return Disclosable to 
                  Either Spouse Based on Oral Request


(Sec. 501 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Section 6103(e) concerns disclosures to persons with a 
material interest. Section 6103(e)(1)(B) requires, upon written 
request, the IRS to allow the inspection or disclosure of a 
joint return to either of the individuals with respect to whom 
the return is filed. Section 6103(e)(7) permits the IRS to 
disclose return information to the same persons who may have 
access to a return under the other proposals of section 
6103(e). Requests for information pursuant to section 
6103(e)(7) do not have to be in writing. Pursuant to section 
6103(e)(7) and section 6103(e)(1)(B), either spouse may obtain 
return information regarding a joint return, including 
collection information without making a written request.
    In response to concerns that former spouses were not able 
to obtain information regarding collection activities relating 
to a joint return, the Taxpayer Bill of Rights 2 added section 
6103(e)(8).\105\ When a deficiency is assessed with respect to 
a joint return and the individuals are no longer married or no 
longer reside in the same household, upon request in writing by 
either of such individuals, the IRS is required to disclose: 
(1) whether the IRS has attempted to collect such deficiency 
from the other individual; (2) the general nature of such 
collection activities; and (3) the amount collected.\106\
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    \105\``The IRS does not routinely disclose collection information 
to a former spouse that relates to tax liabilities attributable to a 
joint return that was filed when married.'' Joint Committee on 
Taxation, General Explanation of Taxation Legislation Enacted in the 
104th Congress (JCS-12-96), December 18, 1996 at 29.
    \106\Sec. 6103(e)(8).
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    The Treasury Inspector General for Tax Administration 
conducts semiannual reports involving a review and 
certification of whether the Secretary is complying with the 
requirements of disclosing information to an individual filing 
a joint return on collection activity involving the other 
individual filing the return.\107\
---------------------------------------------------------------------------
    \107\Sec. 7803(d)(1)(B).
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                           REASONS FOR CHANGE

    The Committee believes that former spouses should be able 
to receive collection information with respect to a joint 
return in the same manner as if they were current spouses. 
Thus, a former spouse should not be required to make a written 
request, when in cases in which the spouses were still married, 
a written request would not be required.

                        EXPLANATION OF PROVISION

    The provision eliminates the requirement for former spouses 
to make a written request for disclosure of collection 
activities with respect to a joint return. Section 312 of this 
bill eliminates the Inspector General for Tax Administration's 
reporting requirement associated with the disclosure of 
collection activities with respect to a joint return.

                             EFFECTIVE DATE

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

  B. Prohibition of Disclosure of Taxpayer Identification Information 
      With Respect to Disclosure of Accepted Offers-in-Compromise


(Sec. 502 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Section 6103 permits the IRS to disclose return information 
to members of the general public to permit inspection of 
accepted offers in compromise.\108\ For one year after the date 
of execution, a copy of the Form 7249 (Offer Acceptance Report) 
for each accepted offer in compromise with respect to any 
liability for a tax imposed by Title 26 is made available for 
inspection and copying in the location designated by the 
Compliance Area Director or Compliance Services Field Director 
within the Small Business and Self-Employed Division of the 
taxpayer's geographic area of residence.\109\ Currently, this 
form contains the taxpayer identification number of the 
taxpayer, e.g., the social security number in the case of an 
individual taxpayer, along with the taxpayer's name and full 
address.
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    \108\Sec. 6103(k)(l).
    \109\Treas. Reg. sec. 601.702(d)(8).
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                           REASONS FOR CHANGE

    The IRS's determination to accept an offer-in-compromise is 
based on decisions relating to analysis of the individual 
taxpayer's facts and circumstances and financial situation. 
Summaries of accepted offers-in-compromise, Form 7249 (Offer 
Acceptance Report), are available for public inspection in the 
IRS district offices. Currently, this form contains the 
taxpayer identification number of the taxpayer, e.g., the 
social security number in the case of an individual taxpayer, 
along with the taxpayer's name and full address. The Committee 
believes that if disclosure is warranted, such disclosure 
should be limited to the least amount of information necessary. 
The Committee believes that the disclosure of a taxpayer's 
taxpayer identification number is unnecessary and an 
unwarranted invasion of privacy. In addition, the Committee 
believes such disclosure provides an opportunity for identity 
fraud and abuse.

                        EXPLANATION OF PROVISION

    The provision prohibits the disclosure of the taxpayer's 
taxpayer identification number as part of the publicly 
available summaries of accepted offers-in-compromise.

                             EFFECTIVE DATE

    The provision applies to disclosures made after the date of 
enactment.

      C. Compliance by Contractors With Confidentiality Safeguards


(Sec. 503 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Section 6103 permits the disclosure of returns and return 
information to State agencies, as well as to other Federal 
agencies for specified purposes. Section 6103(p)(4) requires, 
as conditions of receiving returns and return information, that 
State agencies (and others) provide safeguards as prescribed by 
the Secretary of the Treasury by regulation to be necessary or 
appropriate to protect the confidentiality of returns or return 
information.\110\ It also requires that a report be furnished 
to the Secretary at such time and containing such information 
as prescribed by the Secretary regarding the procedures 
established and utilized for ensuring the confidentiality of 
returns and return information.\111\ After an administrative 
review, the Secretary may take such actions as are necessary to 
ensure these requirements are met, including the refusal to 
disclose returns and return information.\112\
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    \110\Sec. 6103(p)(4)(D).
    \111\Sec. 6103(p)(4)(E).
    \112\Sec. 6103(p)(4) (flush language) and (7); Treas. Reg. sec. 
301.6103(p)(7)-1.
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    Under present law, employees of a State tax agency may 
disclose returns and return information to contractors for tax 
administration purposes.\113\ These disclosures can be made 
only to the extent necessary to procure contractually 
equipment, other property, or the providing of services, 
related to tax administration.\114\
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    \113\Sec. 6103(n) and Treas. Reg. sec. 301.6103(n)-1(a). ``Tax 
administration'' includes ``the administration, management, conduct, 
direction, and supervision of the execution and application of internal 
revenue laws or related statutes (or equivalent laws and statutes of a 
State) . . .'' Sec. 6103(b)(4).
    \114\Treas. Reg. sec. 301.6013(n)-1(a). Such services include the 
processing, storage, transmission or reproduction of such returns or 
return information, the programming, maintenance, repair, or testing of 
equipment or other property, or the providing of other services for 
purposes of tax administration.
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    The contractors can make redisclosures of returns and 
return information to their employees as necessary to 
accomplish the tax administration purposes of the contract, but 
only to contractor personnel whose duties require 
disclosure.\115\ Treasury regulations prohibit redisclosure to 
anyone other than contractor personnel without the written 
approval of the IRS.\116\
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    \115\Treas. Reg. sec. 301.6103(n)-1(a) and (b). A disclosure is 
necessary if such procurement or the performance of such services 
cannot otherwise be reasonably, properly, or economically accomplished 
without such disclosure. Treas. Reg. sec. 301.6103(n)-1(b). The 
regulations limit the quantity of information to that needed to perform 
the contract.
    \116\Treas. Reg. sec. 301.6103(n)-1(a).
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    By regulation, all contracts must provide that the 
contractor will comply with all applicable restrictions and 
conditions for protecting confidentiality prescribed by 
regulation, published rules or procedures, or written 
communication to the contractor.\117\ Failure to comply with 
such restrictions or conditions may cause the IRS to terminate 
or suspend the duties under the contract or the disclosures of 
returns and return information to the contractor.\118\ In 
addition, the IRS can suspend disclosures to the State tax 
agency until the IRS determines that the conditions are or will 
be satisfied.\119\ The IRS may take such other actions as 
deemed necessary to ensure that such conditions or requirements 
are or will be satisfied.\120\
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    \117\Treas. Reg. sec. 301.6103(n)-1(d).
    \118\Treas. Reg. sec. 301.6103(n)-1(d)(1).
    \119\Treas. Reg. sec. 301.6103(n)-1(d)(2).
    \120\Treas. Reg. sec. 301.6103(n)-1(d).
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                           REASONS FOR CHANGE

    The Committee notes the increasing use of contractors by 
government agencies to perform the work of the government. In 
the Committee's view, the IRS has insufficient resources to 
monitor the compliance of every contractor in addition to its 
other duties. Further, the Committee finds that it is 
appropriate to require that Federal, State and local agency 
recipients of tax information monitor and certify that their 
contractors and other agents have in place adequate safeguards 
to protect this information.

                        EXPLANATION OF PROVISION

    The provision requires that a State, local, or Federal 
agency conduct on-site reviews every three years of all of its 
contractors or other agents receiving Federal returns and 
return information. If the duration of the contract or 
agreement is less than one year, a review is required at the 
mid-point of the contract. The purpose of the review is to 
assess the contractor's efforts to safeguard Federal returns 
and return information. This review is intended to cover secure 
storage, restricting access, computer security, and other 
safeguards deemed appropriate by the Secretary. Under the 
provision, the State, local or Federal agency is required to 
submit a report of its findings to the IRS and certify annually 
that such contractors and other agents are in compliance with 
the requirements to safeguard the confidentiality of Federal 
returns and return information. The certification is required 
to include the name and address of each contractor or other 
agent with the agency, the duration of the contract, and a 
description of the contract or agreement with the State, local, 
or Federal agency.
    The provision does not apply to contracts for purposes of 
Federal tax administration.
    This provision does not alter or affect in any way the 
right of the IRS to conduct safeguard reviews of State, local, 
or Federal agency contractors or other agents. It also does not 
affect the right of the IRS to initially approve the safeguard 
language in the contract or agreement and the safeguards in 
place prior to any disclosures made in connection with such 
contracts or agreements.

                             EFFECTIVE DATE

    The provision is effective for disclosures made after the 
date of enactment. The first certification is required to be 
made with respect to the portion of calendar year 2006 
following the date of enactment.

    D. Higher Standards for Requests for and Consents to Disclosure


(Sec. 504 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

In general

    As a general rule, returns and return information are 
confidential and cannot be disclosed unless authorized by Title 
26.\121\ Under section 6103(c), a taxpayer may designate in a 
request or consent to the disclosure by the IRS of his or her 
return or return information to a third party. Treasury 
regulations set forth the requirements for such consent.\122\ 
The request or consent may be written or nonwritten form. The 
Treasury regulations require that the taxpayer sign and date a 
written consent. At the time the consent is signed and dated by 
the taxpayer, the written document must indicate (1) the 
taxpayer's taxpayer identity information; (2) the identity of 
the person to whom disclosure is to be made; (3) the type of 
return (or specified portion of the return) or return 
information (and the particular data) that is to be disclosed; 
and (4) the taxable year covered by the return or return 
information. The regulations also require that the consent be 
submitted within 60 days of the date signed and dated, however, 
at the time of submission, the IRS generally is unaware of 
whether a consent form was completed or dated after the 
taxpayer signs it. Present law does not require that a 
recipient receiving returns or return information by consent 
maintain the confidentiality of the information received. Under 
present law, the recipient is also free to use the information 
for purposes other than for which the information was solicited 
from the taxpayer.
---------------------------------------------------------------------------
    \121\Sec. 6103(a).
    \122\Treas. Reg. sec. 301.6103(c)-1.
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    Section 6103(c) consents are often used in connection with 
mortgage loan applications. Mortgage originators qualify loan 
applicants as meeting or not meeting the requirements for loan 
approval. This process involves the verification and 
investigation of information and conditions. If the loan is 
granted, the mortgage originator may use its own money to fund 
the loan. Alternatively, another entity, an ``investor,'' may 
buy the loan and provide the money. Investors typically perform 
a re-investigation of loans received for funding. Such re-
investigations may include verification through the IRS of the 
tax return provided by the taxpayer to the mortgage originator.
    Usually the mortgage originator does not know which 
investor will ultimately fund the loan. Thus, at the time of 
application, the originator asks the borrower/taxpayer to sign 
a consent (Form 4506) designating the originator as the third 
party to receive the taxpayer's returns. Subsequently, at 
closing, the investor may request that the originator obtain 
another Form 4506 naming the investor as the third party to 
receive the taxpayer's return.
    Ostensibly to avoid confusion over why the taxpayer would 
be authorizing a party other than the originator to receive his 
tax return, the taxpayer may be asked to sign a blank Form 4506 
at closing. In some cases, mortgage originators ask taxpayers 
not to date the Form 4506. This allows the form to be submitted 
to the IRS at a later date, often months or years later, for 
purposes of mortgage resale.

Criminal penalties

    Under section 7206, it is a felony to willfully make and 
subscribe any document that contains or is verified by a 
written declaration that it is made under penalties of perjury 
and which such person does not believe to be true and correct 
as to every material matter.\123\ Upon conviction, such person 
may be fined up to $100,000 ($500,000 in the case of a 
corporation) or imprisoned up to 3 years, or both, together 
with the costs of prosecution.
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    \123\Sec. 7206(1).
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    Under section 7213, criminal penalties apply to: (1) 
willful unauthorized disclosures of returns and return 
information by Federal and State employees and other persons; 
(2) the offering of any item of material value in exchange for 
a return or return information and the receipt of such 
information pursuant to such an offer; and (3) the unauthorized 
disclosure of return information received by certain 
shareholders under the material interest proposal of section 
6103. Under section 7213, a court can impose a fine up to 
$5,000, up to five years imprisonment, or both, together with 
the costs of prosecution. If the offense is committed by a 
Federal employee or officer, the employee or officer will be 
discharged from office upon conviction.
    The willful and unauthorized inspection of returns and 
return information can subject Federal and State employees and 
others to a maximum fine of $1,000, up to a year in prison, or 
both, in addition to the costs of prosecution. If the offense 
is committed by a Federal employee or officer, the employee or 
officer will be discharged from office upon conviction.

Civil damage remedies for unauthorized disclosure or inspection

    If a Federal employee makes an unauthorized disclosure or 
inspection, a taxpayer can bring suit against the United States 
in Federal district court. If a person other than a Federal 
employee makes an unauthorized disclosure or inspection, suit 
may be brought directly against such person. No liability 
results from a disclosure based on a good faith, but erroneous, 
interpretation of section 6103. A disclosure or inspection made 
at the request of the taxpayer will also relieve liability.
    Upon a finding of liability, a taxpayer can recover the 
greater of $1,000 per act of unauthorized disclosure (or 
inspection), or the sum of actual damages plus, in the case of 
an inspection or disclosure that was willful or the result of 
gross negligence, punitive damages. The taxpayer may also 
recover the costs of the action and, if found to be a 
prevailing party, reasonable attorney fees.
    The taxpayer has two years from the date of the discovery 
of the unauthorized inspection or disclosure to bring suit. The 
IRS is required to notify a taxpayer of an unauthorized 
inspectionor disclosure as soon as practicable after any person 
is criminally charged by indictment or information for unlawful 
inspection or disclosure.

                           REASONS FOR CHANGE

    The Committee does not believe that the practice of asking 
taxpayers to sign blank or undated consent forms is 
appropriate. While recognizing that investors may want to 
minimize their risks in buying a loan, the Committee finds that 
these practices can abuse the taxpayer consent process. It is 
doubtful that a taxpayer is aware that by not dating the form, 
it could be used months or years after the date it is executed. 
Taxpayers may be unaware that a blank consent form which does 
not designate a recipient can be used for purposes other than 
those related to the transaction under which the request for 
consent arose.
    In addition, the IRS does not have the resources to verify 
that the return information was used solely for the stated 
purpose. The IRS estimates that it receives annually more than 
800,000 requests from taxpayers directing that their returns or 
return information be sent to a third party. Examples of third 
party entities to which the IRS provides information include 
financial institutions (including the mortgage banking 
industry), colleges and universities, and Federal, State, and 
local governmental entities.
    The Committee believes that to preserve the integrity of 
the consent process, a penalty must be placed on the third 
party soliciting a taxpayer to sign an undated or otherwise 
incomplete consent. Consistent with a taxpayer's reasonable 
expectation of privacy, the Committee believes that limitations 
should be placed on the use of returns and return information 
obtained by consent.

                        EXPLANATION OF PROVISION

    The provision requires the consent form prescribed by the 
IRS to contain a warning, prominently displayed, informing the 
taxpayer that he or she should not sign the form unless it is 
complete. The provision requires the consent form to state that 
if the taxpayer believes there is an attempt to coerce him to 
sign an incomplete or blank form, the taxpayer should report 
the matter to the Treasury Inspector General for Tax 
Administration. The telephone number and address for the 
Treasury Inspector General for Tax Administration must be 
included on the form. The returns and return information of any 
taxpayer disclosed to a designee of the taxpayer for a purpose 
specified in writing, electronically, or orally may be 
disclosed or used by such persons only for the purpose of, and 
to the extent necessary in, accomplishing the purpose for the 
disclosure specified and cannot be disclosed or used for any 
other purpose. The provision makes a violation of these 
requirements, or use or disclosure of information obtained by 
consent for purposes not permitted by section 6103, punishable 
by a civil penalty.
    The Secretary of the Treasury is required to submit a 
report to Congress on compliance with the designation and 
certification requirements no later than 18 months after the 
date of enactment. Such report must evaluate (on the basis of 
random sampling) whether the provision is achieving its 
purpose, whether requesters and submitters are continuing to 
evade the purpose of the provision, whether the sanctions are 
adequate, and whether additional provisions are necessary or 
appropriate to better achieve the purposes of the provision.
    Any request for or consent to disclose any return or return 
information under section 6103(c) made before the date of 
enactment of the provision remains in effect until the earlier 
of the date such request or consent is otherwise terminated or 
the date three years after the date of enactment.

                             EFFECTIVE DATE

    The provision applies to requests and consents made three 
months after the date of enactment.

   E. Civil Damage Remedies for Unauthorized Disclosure or Inspection


(Sec. 505 of the bill and sec. 7431 of the Code)

                              PRESENT LAW

    If a Federal employee makes an unauthorized disclosure or 
inspection, a taxpayer can bring suit against the United States 
in Federal district court. If a person other than a Federal 
employee makes an unauthorized disclosure or inspection, suit 
may be brought directly against such person. No liability 
results from a disclosure based on a good faith, but erroneous, 
interpretation of section 6103. A disclosure or inspection made 
at the request of the taxpayer will also relieve liability.
    Upon a finding of liability, a taxpayer can recover the 
greater of $1,000 per act of unauthorized disclosure (or 
inspection), or the sum of actual damages plus, in the case of 
an inspection or disclosure that was willful or the result of 
gross negligence, punitive damages. The taxpayer may also 
recover the costs of the action and, if found to be a 
prevailing party, reasonable attorney fees.
    The taxpayer has two years from the date of the discovery 
of the unauthorized inspection or disclosure to bring suit. The 
IRS is required to notify a taxpayer of an unauthorized 
inspection or disclosure as soon as practicable after any 
person is criminally charged by indictment or information for 
unlawful inspection or disclosure.

                           REASONS FOR CHANGE

    Currently, the IRS is not required to notify a taxpayer 
that an unlawful disclosure or inspection of the taxpayer's 
return or return information has occurred until the offender 
has been charged by criminal indictment or information. 
Accordingly, the Committee believes that the IRS should provide 
notice to taxpayers if an administrative determination is made 
as to any disciplinary or adverse action against an IRS 
employee when returns or return information have been 
unlawfully accessed or disclosed. The Committee also believes 
that it is important that such notice include the date of 
inspection or disclosure and the rights of the affected 
taxpayer.
    The Committee believes that a taxpayer should exhaust all 
administrative remedies within the IRS prior to receiving an 
award of damages.
    The Committee believes that the Secretary of Treasury 
should report annually to the Committee on Finance of the 
Senate and the Committee on Ways and Means of the House of 
Representatives when damage claim payments are made from the 
United States Judgment Fund.
    The Committee also believes that the IRS should provide as 
part of its public annual report information on unauthorized 
disclosures or inspections of return and return information. 
The Committee believes such information will allow review of 
the enforcement efforts in this area and the extent to which 
taxpayer privacy is being protected.

                        EXPLANATION OF PROVISION

    The provision requires the Secretary to notify a taxpayer 
if the IRS or, upon notice to the Secretary by a Federal or 
State agency, if such Federal or State agency, proposes an 
administrative determination as to disciplinary or adverse 
action against an employee arising from the employee's 
unauthorized inspection or disclosure of the taxpayer's return 
or return information. The provision requires the notice to 
include the date of the inspection or disclosure and the rights 
of the taxpayer as a result of such administrative 
determination.
    Under the provision, in action for civil damages for 
unauthorized disclosure or inspection, any person who made the 
inspection or disclosure bears the burden of proving the 
existence of a good faith interpretation of section 6103 to 
avoid liability.
    The provision adds a new exhaustion of administrative 
remedies requirement. A judgment for damages will not be 
awarded unless the court determines that the plaintiff has 
exhausted the administrative remedies available. The provision 
also clarifies that unauthorized disclosure or inspection 
damage claims are payable out of funds appropriated under 
section 1304 of title 31 of the United States Code (relating to 
the United States Judgment Fund). Both administrative 
settlements and settlements of judicial proceedings are paid 
out of this fund. The Secretary of the Treasury will report 
annually to the Committee on Finance of the Senate and the 
Committee on Ways and Means of the House of Representatives 
regarding damage claim payments made from the United States 
Judgment Fund.
    As part of its public report on disclosures, the provision 
requires the Secretary to furnish information regarding the 
willful unauthorized disclosure and inspection of returns and 
return information. Such information includes the number, 
status, and results of: (1) administrative investigations, (2) 
civil lawsuits brought under section 7431 (including the 
amounts for which such lawsuits were settled and the amounts of 
damages awarded), and (3) criminal prosecutions.

                             EFFECTIVE DATE

    The provision is effective: (1) for determinations made 
after 180 days after the date of enactment with respect to the 
taxpayer notice requirement; (2) for inspections and 
disclosures occurring on and after 180 days after the date of 
enactment with respect to the provisions relating to the 
exhaustion of administrative remedies and burden of proof; (3) 
180 days after the date of enactment with respect to the 
payment authority; and (4) for calendar years ending after 180 
days after the date of enactment with respect to the reporting 
requirements.

           F. Expanded Disclosure in Emergency Circumstances


(Sec. 506 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Section 6103(i)(3)(B) permits the IRS to disclose return 
information to the extent necessary to apprise Federal or State 
law enforcement officials of circumstances involving an 
imminent danger of death or physical injury to an individual. 
Recipients of such information are required to adhere to 
certain recordkeeping, reporting, and safeguard requirements as 
a condition of receiving such information (sec. 6103(p)(4)). 
Upon completion of use of such information, the Code requires 
the recipient to return the information to the IRS or make the 
information undisclosable and furnish a report to the IRS as to 
the manner in which the information was made undisclosable 
(``destruction requirements'') (sec. 6103(p)(4)(F)(i)).

                           REASONS FOR CHANGE

    Local law enforcement officials need to receive information 
regarding exigent circumstances in the same manner that Federal 
and State law enforcement officials receive such information. 
The Committee believes that expanding this provision to permit 
disclosure to local law enforcement authorities will permit 
more rapid response to these situations.

                        EXPLANATION OF PROVISION

    The provision expands present law to permit disclosure of 
return information to local law enforcement authorities to 
apprise them of circumstances involving imminent danger of 
death or physical injury to an individual. The provision 
eliminates the recordkeeping, safeguard and destruction 
requirements for all such disclosures to Federal, State or 
local law enforcement officials.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

       G. Disclosure of Taxpayer Identity for Tax Refund Purposes


(Sec. 507 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    When the IRS is unable to find a taxpayer due a refund, 
present law provides that the IRS may use ``the press or other 
media'' to notify the taxpayer of the refund.\124\ Section 
6103(m) allows the IRS to give the press taxpayer identity 
information for this purpose.\125\ Taxpayer identity includes 
name, mailing address, taxpayer identification number or 
combination thereof.
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    \124\Sec. 6103(m)(1). This section provides:
    ``The Secretary may disclose taxpayer identity information to the 
press or other media for purposes of notifying persons entitled to tax 
refunds when the Secretary, after reasonable effort and lapse of time, 
has been unable to locate such persons.''
    \125\Sec. 6103(m)(1), and (b)(6) (definition of ``taxpayer 
identity'').
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    The IRS believes that the current statutory framework of 
``press and other media'' does not permit disclosures via the 
Internet. The legislative history of the present-law proposal 
does not address the meaning of ``press and other media.'' At 
the time of the statute's enactment in 1976, the press 
(newspapers and periodicals) and other traditional media were 
the only means available for the IRS to distribute undelivered 
refund information to the public. Thus, the IRS interprets the 
term ``other media'' to exclude the Internet.

                           REASONS FOR CHANGE

    In October 2005, the IRS announced that the IRS is seeking 
84,290 taxpayers whose income tax refund checks could not be 
delivered in 2005. These checks totaled approximately $73 
million. It is the understanding of the Committee that the 
current method of notifications, by newspaper, is ineffective. 
The Committee believes that the IRS should be able to use any 
method of mass communication, including the Internet, to reach 
a taxpayer who is due a refund.

                        EXPLANATION OF PROVISION

    The provision allows the IRS to use any means of ``mass 
communication,'' including the Internet, to notify the taxpayer 
of an undelivered refund. It limits the amount of return 
information that may be disclosed to a taxpayer's name, and the 
city, State, and zip code of the taxpayer's mailing address.

                             EFFECTIVE DATE

    The provision is effective upon date of enactment.

                     H. Treatment of Public Records


(Sec. 508 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Section 6103 provides that ``returns and return information 
shall be confidential and except as authorized by this title . 
. . [none of the identified persons] shall disclose any return 
or return information obtained by him . . .''\126\ A taxpayer 
can sue the United States government for the unauthorized 
disclosure and/or inspection of returns and return 
information.\127\ Section 6103 does not expressly address the 
disclosure of returns and return information made a part of the 
public record.
---------------------------------------------------------------------------
    \126\Sec. 6103(a).
    \127\Sec. 7431.
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    Returns and return information become part of the public 
record in many ways. For example, returns and return 
information introduced in judicial proceedings constitutes 
publicly available court records.\128\ As another example, 
notices of Federal tax lien filed with the county recorder 
alert the public of the IRS's interest in a taxpayer's 
property.\129\
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    \128\See, e.g., sec. 7461 regarding the publicity of U.S. Tax Court 
proceedings.
    \129\See sec. 6323(f) regarding where to file notices of Federal 
tax lien.
---------------------------------------------------------------------------
    The courts are divided on whether section 6103 applies to 
publicly disclosed returns and return information. Some courts 
have strictly interpreted section 6103, applying it despite the 
information's public availability. Other courts have found that 
returns and return information found in the public record loses 
its confidential status so that a person disclosing it does not 
violate section 6103. Still other courts have looked to the 
source of the information being disclosed. These courts find 
that section 6103 does not protect returns and return 
information taken directly from a public source, while 
information taken directly from IRS records remains protected.

                           REASONS FOR CHANGE

    The Committee believes that Congress sought to prohibit 
only the disclosure of confidential tax return information. 
Once tax return information is made a part of the public 
domain, the taxpayer may no longer claim a right of privacy in 
that information. The Committee believes that, in general, it 
is inappropriate to treat information that has properly been 
made part of the public record as continuing to be subject to 
the general rules of confidentiality contained in the Code.

                        EXPLANATION OF PROVISION

    Under the provision, the general confidentiality 
restrictions do not apply to returns and return information 
disclosed: (1) in the course of any judicial or administrative 
proceeding or pursuant to tax administration activities, and 
(2) properly made part of the public record. In a situation in 
which a third party is seeking to have the IRS divulge 
information that would otherwise be protected by section 6103, 
it is expected that the third party seeking the information 
will be required to point to specific information in the public 
record that appears to duplicate that being withheld. For 
example, if a third party makes a Freedom of Information Act 
request for a record that is contained both in a publicly 
available court file and also in an IRS administrative file, 
the requester would need to provide to the IRS evidence that 
the information sought from the IRS is also in the court file.

                             EFFECTIVE DATE

    The provision is effective before, on, and after the date 
of enactment.

               I. Taxpayer Identification Number Matching


(Sec. 509 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    A taxpayer identification number (TIN) is an identification 
number used by the IRS for purposes of tax administration. A 
TIN must be furnished on all returns, statements, or other tax 
related documents.\130\ The Code imposes information reporting 
requirements upon payors of income. The Code provides that a 
person (the payor) required to make a return with respect to 
another person (the payee) must ask the payee for the 
identifying number prescribed for securing the proper 
identification of the payee and include that number in the 
return.\131\ Typically, if there is an error with the name/TIN 
combination furnished by the payee, the disclosure of such 
error to the payor is permitted when the reportable payment is 
already subject to backup withholding.\132\
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    \130\Sec. 6109(a)(1).
    \131\Sec. 6109(a)(1).
    \132\Sec. 3406.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is concerned with the number of information 
returns that the IRS receives each year containing missing or 
incorrect name and TIN information. Therefore, the Committee 
believes that compliance will be greatly enhanced if payors 
have the ability to verify with the IRS payee TINs prior to 
filing information returns for reportable payments on behalf of 
such payees.

                        EXPLANATION OF PROVISION

    The provision permits the IRS to disclose to any person 
required to provide a taxpayer identifying number to the IRS 
whether such information matches records maintained by the IRS. 
This will allow a payor to verify the TIN furnished by a payee 
prior to filing information returns for reportable payments on 
behalf of the payee. Under the provision, the IRS informs the 
payor whether there is an error with the name/TIN combination 
furnished by the payee. The verification is limited to whether 
the information provided by the payor matches the records of 
the IRS. The IRS will not disclose correct TINs if an error 
arises, as it will be the responsibility of the payor to obtain 
the correct TIN from the payee.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                        J. Form 8300 Disclosures


(Sec. 510 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Under the Code, any person engaged in a trade or business 
who receives more than $10,000 in cash in one transaction (or 
in two or more related transactions) is required to report the 
receipt of cash to the IRS and the Financial Crimes Enforcement 
Network (FinCEN) on Form 8300 (Report of Cash Payments Over 
$10,000 Received in a Trade or Business).\133\ Any Federal 
agency, State or local government agency, or foreign government 
agency may have access, upon written request, to the 
information contained in returns filed under section 6050I. The 
Code provides that disclosures of information from Form 8300 be 
made on the same basis and subject to the same conditions as 
apply to disclosures of information filed on Currency 
Transaction Reports under the Bank Secrecy Act.\134\ This 
proposal however, cannot be used to obtain disclosures for tax 
administration purposes. The general safeguard requirements of 
the Code apply to such disclosures.\135\ For example, as a 
condition of disclosure, requesting agencies must file with the 
IRS a report describing the procedures established and utilized 
by the agency for ensuring the confidentiality of return 
information.
---------------------------------------------------------------------------
    \133\Sec. 6050I and 31 U.S.C. sec. 5331.
    \134\31 U.S.C. sec. 5313.
    \135\Sec. 6103(p)(4).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Form 8300 is similar to a Currency Transaction Report, 
which is required to be filed by financial institutions in 
connection with currency transactions of more than $10,000. 
Both Form 8300 and Currency Transaction Reports are filed with 
the IRS; however, Title 31 governs Currency Transaction 
Reports. The USA Patriot Act (Pub. L. No. 107-56) imposed a 
duplicate reporting requirement for Form 8300 information under 
Title 31 of the U.S. Code, in part to facilitate law 
enforcement's access to such information. The Code's safeguard 
requirements for return information were perceived to be 
cumbersome in comparison to the disclosure rules imposed on 
similar information governed by Title 31, such as Currency 
Transaction Reports. Because the Code envisions that Form 8300 
information will be disclosed on the same basis and subject to 
the same conditions as Currency Transaction Reports, and a 
duplicate report of the same information is required under 
Title 31, the Committee believes it is appropriate to conform 
treatment and remove the specific Title 26 safeguards with 
respect to these information reports.

                        EXPLANATION OF PROVISION

    The provision repeals the safeguard requirements applicable 
to the disclosure of returns filed reflecting cash receipts of 
more than $10,000 received in a trade or business.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

K. Expanded Definition of Return Preparer for Purposes of Sections 6713 
                                and 7216


(Sec. 511 of the bill and secs. 6713 and 7216 of the Code)

                              PRESENT LAW

    Section 7216 imposes criminal penalties on return preparers 
of income tax returns who knowingly or recklessly make 
unauthorized disclosures or use information furnished to them 
in connection with the preparation of an income tax return. A 
violation of section 7216 is punishable by a fine of not more 
than $1,000, one year of imprisonment, or both, together with 
the costs of prosecution. The penalties do not apply to 
disclosures authorized by the Code or made pursuant to an order 
of a court. The penalties also do not apply to the use of 
information in the preparation of State and local tax returns 
and declarations of estimated tax of the person to whom the 
information relates. Finally, the penalties do not apply to any 
disclosure or use permitted under the applicable Treasury 
regulations.
    In addition, tax return preparers are subject to civil 
penalties under section 6713 for disclosure or use of tax 
return information unless an exception under the rules of 
section 7216 applies to the disclosure or use. The civil 
penalty is $250 for each unauthorized disclosure or use, but 
the total amount imposed on a person for any calendar year 
cannot exceed $10,000.
    Under present law Treasury regulations, ``tax return 
preparer'' means any person:
           Who is engaged in the business of preparing 
        tax returns,
           Who is engaged in the business of providing 
        auxiliary services in connection with the preparation 
        of tax returns,
           Who is remunerated for preparing, or 
        assisting in preparing, a tax return for any other 
        person, or
           Who, as part of his duties or employment 
        with any person described in (1), (2) or (3) above, 
        performs services which assist in the preparation of, 
        or assist in providing auxiliary services in connection 
        with the preparation of, a tax return.\136\
---------------------------------------------------------------------------
    \136\Treas. Reg. 301.7216-1(b)(2).
---------------------------------------------------------------------------
    A person is engaged in the business of preparing tax 
returns if, in the course of his business, he holds himself out 
to taxpayers as a person who prepares tax returns, whether or 
not tax return preparation is his sole business activity and 
whether or not he charges a fee for such services. A person is 
engaged in the business of providing auxiliary services in 
connection with the preparation of tax returns if, in the 
course of his business, he holds himself out to tax return 
preparers or taxpayers as a person who performs such auxiliary 
services, whether or not providing auxiliary services is his 
sole business activity and whether or not he charges a fee for 
such services. For example, a person part or all of whose 
business is to provide a computerized tax return processing 
service based on tax return information furnished by another 
person is a tax return preparer.
    A person is not a tax return preparer merely because he 
leases office space to a tax return preparer, furnishes credit 
to a taxpayer whose tax return is prepared by a tax return 
preparer, or otherwise performs some service which only 
incidentally relates to the preparation of tax returns.

                           REASONS FOR CHANGE

    The privacy, security and accuracy of tax return 
information is a cornerstone of our nation's system of 
voluntary tax compliance. Laws governing the use or disclosure 
of tax return information and preparer penalties rely on the 
definition of a return preparer for their application. Changes 
in technology and business practices have made existing 
definitions of a return preparer outdated. Computer hardware 
and software, and electronic filing technology, were not 
commonly used when the existing definition of a tax return 
preparer was developed. Innovative sales and marketing 
techniques, including the preparation of a tax return in 
exchange for use of the tax refund as a down payment for a 
product or service, recently have become more commonplace.
    The Committee believes that the definition of a return 
preparer should be updated to reflect current technology and 
business practices so that the confidentiality of taxpayer 
information is secure and to promote voluntary tax compliance. 
The definition of a return preparer should include preparers of 
returns other than income tax returns, those who do not charge 
a fee, and those for whom tax return preparation is not a sole 
business activity. Those who develop software, electronic 
return originators/authorized IRS e-file providers, and 
contractors performing services in connection with tax return 
preparation, also should be included in the definition of a tax 
return preparer.

                        EXPLANATION OF PROVISION

    The provision expands the return preparer penalties beyond 
income tax returns to other tax returns, including estate and 
gift tax returns, employment tax, and excise tax returns.
    The provision modifies the regulatory definition of tax 
return preparer to include any person who assists in preparing 
tax returns for compensation or holds himself out to tax return 
preparers or taxpayers as a person who prepares or assists in 
preparing tax returns, regardless of whether tax return 
preparation is the person's sole business activity and 
regardless of whether the person charges a fee for tax return 
preparation services. The provision also specifically includes 
as a tax return preparer, a person who develops software that 
is used to prepare or file a tax return, electronic return 
originators/authorized IRS e-file providers, as well as 
contractors of the tax return preparer performing services in 
connection with tax return preparation.

                             EFFECTIVE DATE

    The provision is effective on returns prepared after the 
date of enactment.

 L. Restrict the Use and Disclosure of Taxpayer Information by Return 
         Preparers for Nontax Purposes and Offshore Disclosures


(Sec. 512 of the bill and sec. 7216 of the Code)

                              PRESENT LAW

    Section 7216 imposes criminal penalties on return preparers 
of income tax returns who knowingly or recklessly make 
unauthorized disclosures or use information furnished to them 
in connection with the preparation of an income tax return. The 
criminal penalties do not apply to disclosures authorized by 
the Code or made pursuant to an order of a court. The penalties 
also do not apply to the use of information in the preparation 
of State and local tax returns and declarations of estimated 
tax of the person to whom the information relates. Finally, the 
penalties do not apply to any disclosure or use permitted under 
the applicable Treasury regulations.
    The Treasury regulations set forth circumstances under 
which a tax return preparer may disclose or use a taxpayer's 
tax return information without first obtaining the taxpayer's 
consent and those circumstances for which the formal consent of 
the taxpayer is required.

Disclosure or use without formal consent of taxpayer

            Disclosure or use of information in the case of related 
                    taxpayers
    Taxpayer consent is not required for the disclosure or use 
of information in the case of related taxpayers. A tax return 
preparer may use, in preparing a tax return of a second 
taxpayer, and may disclose to such second taxpayer in the form 
in which it appears on such return, any tax return information 
which the preparer obtained from a first taxpayer if
           The second taxpayer is related to the first 
        taxpayer,
           The first taxpayer's tax interest in such 
        information is not adverse to the second taxpayer's tax 
        interest in such information, and
           The first taxpayer has not expressly 
        prohibited such disclosure or use.
    One taxpayer is related to another taxpayer if they have 
any one of the following relationships: husband and wife, child 
and parent, grandchild and grandparent, partner and 
partnership, trust or estate and fiduciary, corporation and 
shareholder, or members of a controlled group of corporations.
            Other permissible disclosures without consent
    Consent of the taxpayer also is not required for the 
following disclosures:
     Disclosures pursuant to an order of a court or a 
Federal or State agency.
     Disclosures for use in revenue investigations or 
court proceedings. Disclosure for use in revenue investigations 
or court proceedings in connection with investigations of the 
return preparer by the IRS or for use in connection with 
proceedings involving such return preparer before a court or 
grand jury.
     Certain disclosures by lawyers and accountants to 
other members or employees of the firm.\137\
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    \137\Tax return preparers who are lawyers or accountants may 
disclose such information to another member or employee of the 
preparer's firm who may use it to render other legal or accounting 
services to the taxpayer; and may (1) take such return information into 
account and may act upon it in the course of performing legal or 
accounting services for a client other than the taxpayer or (2) 
disclose such information to another employee or member of the 
preparer's law or accounting firm to enable that other employee or 
member to take information into account and act upon it in the course 
of performing legal or accounting services for a client other than the 
taxpayer when such information is or may be relevant to the subject 
matter of such legal or accounting services for the other client and 
its consideration by those performing the services is necessary for the 
proper performance by them of such services. However, such information 
may not be disclosed to a person who is not a member or employee of the 
law or accounting firm unless such disclosure is authorized by another 
provision.
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     Corporate fiduciaries. A trust company, trust 
department of a bank or other corporate fiduciary which 
prepares a tax return for a taxpayer to or for who it renders 
fiduciary, investment, or other custodial or management 
services may (1) disclose or use the tax return information in 
the ordinary course of rendering services to or for the 
taxpayer or (2) with the express or implied consent of the 
taxpayer, make such information available to the taxpayer's 
attorney, accountant, or investment advisor.
     Disclosure to the taxpayer's fiduciary. If the 
taxpayer dies, becomes incompetent, insolvent or bankrupt, or 
his assets are placed in conservatorship or receivership after 
furnishing tax return information to a tax return preparer, the 
tax return preparer may disclose such information to the duly 
appointed fiduciary of the taxpayer or his estate, or to the 
duly authorized agent of such fiduciary.
     Disclosure by tax return preparer to tax return 
processor. A tax return preparer may disclose tax return 
information to another tax return preparer for the purpose of 
having the second tax return preparer transfer that information 
to and compute the tax liability on, a tax return of such 
taxpayer by means of electronic, mechanical, or other form of 
tax return processing service.
     Disclosure by one officer, employee or member to 
another. Transfers of tax return information between officers, 
employees and members of the same firm for the purpose of 
performing services which assist in the preparation of, or 
assist in providing auxiliary services in connection with the 
preparation of, the tax return of a taxpayer by or for whom the 
information was furnished.
     Identical information obtained from other sources. 
No restrictions are placed on identical tax return information 
if obtained other than in connection with the preparation of, 
or providing auxiliary services in connection with the 
preparation of, a tax return.
     Disclosure or use of information in the 
preparation or audit of State returns.
     Retention of records. A tax return preparer may 
retain tax return information of the taxpayer and may use such 
information in connection with the preparation of other returns 
of the taxpayer or in connection with an audit by the IRS of 
any tax return.
     Lists for solicitation of tax return business. A 
tax return preparer may compile and maintain a list of client 
taxpayer names and addresses for the sole purpose of contacting 
the taxpayers on the list for the purpose of offering tax 
information or additional tax return preparation services to 
such taxpayers. The compiler of the list may not transfer such 
list except in conjunction with the sale or other disposition 
of the tax return preparation business of such compiler.
     Disclosures to report a crime. Disclosures to 
report a commission of a crime to the proper Federal, State or 
local official does not require consent.
     Disclosure or use of information for quality or 
peer reviews. Tax return information may be disclosed for the 
purpose of a quality or peer review to the extent necessary to 
accomplish the review.
     Disclosure of tax return information due to a tax 
return preparer's incapacity or death. In the event of 
incapacity or death of a tax return preparer, disclosure of tax 
return information may be made for the purpose of assisting the 
tax return preparer or his legal representative (or the 
representative of a deceased preparer's estate) in operating 
the business.

Disclosure or use requiring the consent of the taxpayer

            Use of tax return information by an affiliated group
    Present law Treasury regulations allow a tax return 
preparer to solicit a taxpayer's consent to use tax return 
information for services or facilities (unrelated to tax 
preparation) currently offered by the tax return preparer or 
member of the tax return preparer's affiliated group. The 
consent may not be made later than the time the taxpayer 
receives his completed tax return from the tax return preparer. 
A tax return preparer may not request a consent again after a 
taxpayer has once before refused to provide such consent.
    The form of the consent is prescribed in the regulations. A 
separate written consent, signed by the taxpayer or his duly 
authorized agent or fiduciary, must be obtained for each 
separate use or disclosure and must contain:
           The name of the tax return preparer,
           The name of the taxpayer,
           The purpose for which the consent is being 
        furnished,
           The date on which such consent is signed,
           A statement that the tax return information 
        may not be disclosed or used by the tax return preparer 
        for any purpose other than that stated in the consent, 
        and
           A statement by the taxpayer, or his agent or 
        fiduciary that he consents to the disclosure or use of 
        such information.
            Consent to disclose tax return information to any third 
                    party
    Under the Treasury regulations, if a tax return preparer 
has obtained from a taxpayer a consent in the form described 
above, the tax return preparer may disclose the tax return 
information of such taxpayer to such third persons as the 
taxpayer may direct.
    Present law does not require a tax return preparer to 
obtain the written consent of the taxpayer before disclosing 
such information to another tax return preparer located outside 
of the United States.

                           REASONS FOR CHANGE

    The use of tax return information as a source of clients or 
data for use in non-tax preparation lines of business is 
troubling to the Committee. The Committee is concerned that tax 
return preparers are exploiting their position of trust to 
market products and services unrelated to the preparation of a 
tax return. There has been considerable publicity regarding 
sales of refund anticipation loans and other financial products 
purchased from tax preparers, largely by low-income taxpayers, 
for excessive fees or low rates of return. Taxpayers may not 
understand how the products work, or even that they are giving 
consent to these products or services as part of the stack of 
forms they sign during the tax preparation process. As a 
result, the Committee believes it is appropriate to prohibit 
the use or disclosure of tax return information for a non-tax 
preparation purpose.
    The Committee also is concerned with the transmission of 
tax return information to tax return prepares located overseas. 
The Committee believes it is important for a taxpayer to 
knowingly consent to such disclosures as the IRS may have 
limited ability to enforce the restrictions on the disclosure 
and use of tax return information should a tax return preparer 
located outside of the United States violate those rules. The 
Committee recognizes that some taxpayers with multi-national 
dealings may require the use of tax return preparers located in 
multiple countries, nevertheless, obtaining the taxpayer's 
consent should not be an obstacle to the performance of those 
services.

                        EXPLANATION OF PROVISION

    The provision permits disclosure by consent only for tax 
preparation purposes (regardless of whether the disclosure or 
use is by an affiliate of the tax return preparer or a third 
party). Under the provision, taxpayer consents to use or 
disclose tax return information other than for tax purposes are 
not permitted. For this purpose, ``use'' of tax return 
information includes any circumstance in which a tax return 
preparer refers to, or relies upon, tax return information as 
the basis to take or permit an action. For example, if upon 
preparing the return, the return preparer determines that the 
taxpayer is due a refund and asks if the taxpayer desires a 
refund anticipation loan, the tax return preparer is using that 
taxpayer's tax return information.
    The provision also prohibits the sale of taxpayer return 
information except in conjunction with the sale of the 
taxpayer's business. The renting of client taxpayer lists also 
is prohibited under the provision. The provision does not alter 
the circumstances under which a taxpayer's return information 
may be disclosed or used without consent.
    The provision also requires that a tax return preparer 
notify a taxpayer and obtain the taxpayer's consent before 
providing the taxpayer's tax return information to a person 
located outside of the United States. The provision directs the 
Secretary to prescribe a consent form that provides, among 
other information deemed appropriate by the Secretary, a clear 
statement that the taxpayer's tax return information will be 
disclosed to a tax return preparer located outside of the 
United States and that Federal tax law may not protect the 
taxpayer from unauthorized use or disclosure by such persons.

                             EFFECTIVE DATE

    The provision is effective for disclosures and uses made 
after the date of enactment.

M. Disclosure to State Officials of Proposed Actions Related to Certain 
                      Section 501(c) Organizations


(Secs. 6103, 6104, 7213, 7213A, and 7431 of the Code)

                            PRESENT LAW\138\

    In the case of organizations that are described in section 
501(c)(3) and exempt from tax under section 501(a) or that have 
applied for exemption as an organization so described, present 
law (sec. 6104(c)) requires the Secretary to notify the 
appropriate State officer of (1) a refusal to recognize such 
organization as an organization described in section 501(c)(3), 
(2) a revocation of a section 501(c)(3) organization's tax-
exempt status, and (3) the mailing of a notice of deficiency 
for any tax imposed under section 507, chapter 41, or chapter 
42.\139\ In addition, at the request of such appropriate State 
officer, the Secretary is required to make available for 
inspection and copying, such returns, filed statements, 
records, reports, and other information relating to the above-
described disclosures, as are relevant to any State law 
determination. An appropriate State officer is the State 
attorney general, State tax officer, or any State official 
charged with overseeing organizations of the type described in 
section 501(c)(3).
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    \138\Present law refers to the law in effect on the date of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 
2006).
    \139\The applicable taxes include the termination tax on private 
foundations; taxes on public charities for certain excess lobbying 
expenses; taxes on a private foundation's net investment income, self-
dealing activities, undistributed income, excess business holdings, 
investments that jeopardize charitable purposes, and taxable 
expenditures (some of these taxes also apply to certain non-exempt 
trusts); taxes on the political expenditures and excess benefit 
transactions of section 501(c)(3) organizations; and certain taxes on 
black lung benefit trusts and foreign organizations.
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    In general, returns and return information (as such terms 
are defined in section 6103(b)) are confidential and may not be 
disclosed or inspected unless expressly provided by law.\140\ 
Present law requires the Secretary to keep records of 
disclosures and requests for inspection\141\ and requires that 
persons authorized to receive returns and return information 
maintain various safeguards to protect such information against 
unauthorized disclosure.\142\ Willful unauthorized disclosure 
or inspection of returns or return information is subject to a 
fine and/or imprisonment.\143\ The knowing or negligent 
unauthorized inspection or disclosure of returns or return 
information gives the taxpayer a right to bring a civil 
suit.\144\ Such present-law protections against unauthorized 
disclosure or inspection of returns and return information do 
not apply to the disclosures or inspections, described above, 
that are authorized by section 6104(c).
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    \140\Sec. 6103(a).
    \141\Sec. 6103(p)(3).
    \142\Sec. 6103(p)(4).
    \143\Secs. 7213 and 7213A.
    \144\Sec. 7431.
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                           REASONS FOR CHANGE

    The Committee believes that State officials that are 
charged with oversight of certain organizations described in 
section 501(c) have an important and legitimate interest in 
receiving certain information about such organizations' tax-
exempt status and tax filings, in some cases before the IRS has 
made a final determination with respect to an organization's 
tax-exempt status or liability for tax. By providing 
appropriate State officials with earlier access to information 
about the activities of certain section 501(c) organizations, 
State officials will be able to monitor such organizations more 
effectively and better protect the public's interest in 
assuring that organizations that have been given the benefit of 
tax-exemption operate consistently with their exempt purposes.
    The Committee stresses the importance of maintaining the 
confidentiality of taxpayer return and return information and 
believes it is important to extend existing protections against 
unauthorized disclosure or inspection of return and return 
information to disclosures made or inspections allowed by the 
Secretary of return and return information regarding such 
section 501(c) organizations.

                        EXPLANATION OF PROVISION

    [The bill does not include the provision as approved by the 
Committee because an identical or substantially similar 
provision was enacted into law in the Pension Protection Act of 
2006 (Pub. L. No. 109-280, sec. 1224) subsequent to Committee 
action on the bill. The following discussion describes the 
provision as approved by the Committee.]
    The provision provides that upon written request by an 
appropriate State officer, the Secretary may disclose: (1) a 
notice of proposed refusal to recognize an organization as a 
section 501(c)(3) organization; (2) a notice of proposed 
revocation of tax-exemption of a section 501(c)(3) 
organization; (3) the issuance of a proposed deficiency of tax 
imposed under section 507, chapter 41, or chapter 42; (4) the 
names, addresses, and taxpayer identification numbers of 
organizations that have applied for recognition as section 
501(c)(3) organizations; and (5) returns and return information 
of organizations with respect to which information has been 
disclosed under (1) through (4) above.\145\ Disclosure or 
inspection is permitted for the purpose of, and only to the 
extent necessary in, the administration of State laws 
regulating section 501(c)(3) organizations, such as laws 
regulating tax-exempt status, charitable trusts, charitable 
solicitation, and fraud. Such disclosure or inspection may be 
made only to or by an appropriate State officer or to an 
officer or employee of the State who is designated by the 
appropriate State officer, and may not be made by or to a 
contractor or agent. The Secretary also is permitted to 
disclose or open to inspection the returns and return 
information of an organization that is recognized as tax-exempt 
under section 501(c)(3), or that has applied for such 
recognition, to an appropriate State officer if the Secretary 
determines that disclosure or inspection may facilitate the 
resolution of Federal or State issues relating to the tax-
exempt status of the organization. For this purpose, 
appropriate State officer means the State attorney general, the 
State tax officer, and any other State official charged with 
overseeing organizations of the type described in section 
501(c)(3).
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    \145\Such returns and return information also may be open to 
inspection by an appropriate State officer.
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    In addition, the provision provides that upon the written 
request by an appropriate State officer, the Secretary may make 
available for inspection or disclosure returns and return 
information of an organization described in section 501(c)(2) 
(certain title holding companies), 501(c)(4) (certain social 
welfare organizations), 501(c)(6) (certain business leagues and 
similar organizations), 501(c)(7) (certain recreational clubs), 
501(c)(8) (certain fraternal organizations), 501(c)(10) 
(certain domestic fraternal organizations operating under the 
lodge system), and 501(c)(13) (certain cemetery companies). 
Such returns and return information are available for 
inspection or disclosure only for the purpose of, and to the 
extent necessary in, the administration of State laws 
regulating the solicitation or administration of the charitable 
funds or charitable assets of such organizations. Such 
disclosure or inspection may be made only to or by an 
appropriate State officer or to an officer or employee of the 
State who is designated by the appropriate State officer, and 
may not be made by or to a contractor or agent. For this 
purpose, appropriate State officer means the State attorney 
general, the State tax officer, and the head of an agency 
designated by the State attorney general as having primary 
responsibility for overseeing the solicitation of funds for 
charitable purposes of such organizations.
    In addition, the provision provides that any returns and 
return information disclosed under section 6104(c) may be 
disclosed in civil administrative and civil judicial 
proceedings pertaining to the enforcement of State laws 
regulating the applicable tax-exempt organization in a manner 
prescribed by the Secretary. Returns and return information are 
not to be disclosed under section 6104(c), or in such an 
administrative or judicial proceeding, to the extent that the 
Secretary determines that such disclosure would seriously 
impair Federal tax administration. The provision makes 
disclosures of returns and return information under section 
6104(c) subject to the disclosure, recordkeeping, and safeguard 
provisions of section 6103, including the requirements that the 
Secretary maintain a permanent system of records of requests 
for disclosure,\146\ and that the appropriate State officer 
maintain various safeguards that protect against unauthorized 
disclosure.\147\ The provision provides that the willful 
unauthorized disclosure of returns or return information 
described in section 6104(c) is a felony subject to a fine of 
up to $5,000 and/or imprisonment of up to five years,\148\ the 
willful unauthorized inspection of returns or return 
information described in section 6104(c) is subject to a fine 
of up to $1,000 and/or imprisonment of up to one year,\149\ and 
provides the taxpayer the right to bring a civil action for 
damages in the case of knowing or negligent unauthorized 
disclosure or inspection of such information.\150\
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    \146\Sec. 6103(p)(3).
    \147\Sec. 6103(p)(4).
    \148\Sec. 7213(a)(2).
    \149\Sec. 7213A.
    \150\Sec. 7431(a)(2).
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                             EFFECTIVE DATE

    The provision is effective on the date of enactment but 
does not apply to requests made before such date.

            TITLE VI--UNITED STATES TAX COURT MODERNIZATION


                 A. Appointment of Tax Court Employees


(Sec. 601 of the bill and sec. 7471(a) of the Code)

                              PRESENT LAW

    The Tax Court is a legislative court established by the 
Congress pursuant to Article I of the U.S. Constitution (an 
``Article I'' court).\151\ The Tax Court is authorized to 
appoint employees, subject to the rules applicable to 
employment with the Executive Branch of the Federal Government 
(generally referred to as ``competitive service''), as 
administered by the Office of Personnel Management.\152\
---------------------------------------------------------------------------
    \151\Sec. 7441.
    \152\Sec. 7471.
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    Employment with the Federal Executive Branch is governed by 
certain general statutory principles, such as recruitment of 
qualified individuals, fair and equitable treatment of 
employees and applicants, maintenance of high standards of 
employee conduct, and protection of employees against arbitrary 
action. The rules for employment in the Federal Executive 
Branch address various aspects of such employment, including: 
(1) procedures for the appointment of employees in the 
competitive service, including preferences for certain 
individuals (e.g., veterans); (2) compensation, benefits, and 
leave programs for employees; (3) appraisals of employee 
performance; (4) disciplinary actions; and (5) employee rights, 
including appeal rights. In addition, employees are protected 
from certain personnel practices (referred to as ``prohibited 
personnel practices''), such as discrimination on the basis of 
race, color, religion, age, sex, national origin, political 
affiliation, marital status, or handicapping condition.

                           REASONS FOR CHANGE

    The Tax Court was established as an Article I court in part 
because of its need for independence from the Executive Branch 
and its responsibility for reviewing determinations of a 
Federal Executive Branch agency (i.e., the Internal Revenue 
Service).\153\ Accordingly, the Committee believes that the Tax 
Court should have the authority to establish its own personnel 
system, rather than being subject to the rules administered by 
the Federal Executive Branch. Similar authority has previously 
been provided to other Article I courts and to courts 
established under Article III of the U.S. Constitution 
(``Article III'' courts). Currently, the Tax Court is the only 
Federal court (Article I or III) that does not have its own 
personnel system. Authority to establish its own personnel 
system will also provide the Tax Court with greater flexibility 
in meeting its staffing needs, thus enabling the court to 
operate more effectively. The Committee also believes that a 
personnel system established by the Tax Court should be 
consistent with the general principles that govern other 
employment with the Federal Government and should provide 
certain protections to employees.
---------------------------------------------------------------------------
    \153\See, e.g., S. Rep. No. 91-552, at 302 (1969).
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The provision extends to the Tax Court authority to 
establish its own personnel management system. Any personnel 
management system adopted by the Tax Court must: (1) include 
the merit system principles that govern employment with the 
Federal Executive Branch; (2) prohibit personnel practices that 
are prohibited in the Federal Executive Branch; and (3) in the 
case of an individual eligible for preference for employment in 
the Federal Executive Branch, provide preference for that 
individual in a manner and to an extent consistent with 
preference in the Federal Executive Branch.
    The provision requires the Tax Court to prohibit 
discrimination on the basis of race, color, religion, age, sex, 
national origin, political affiliation, marital status, or 
handicapping condition. The Tax Court is also required to 
promulgate procedures for resolving complaints of 
discrimination by employees and applicants for employment.
    The provision allows the Tax Court to appoint a clerk 
without regard to the Federal Executive Branch rules regarding 
appointments in the competitive service. Under the provision, 
the clerk serves at the pleasure of the Tax Court.
    The provision also allows the Tax Court to appoint other 
necessary employees without regard to the Federal Executive 
Branch rules regarding appointments in the competitive service. 
Under the provision, these employees are subject to removal by 
the Tax Court.
    The provision allows judges and special trial judges of the 
Tax Court to appoint law clerks and secretaries, in such 
numbers as the Tax Court may approve, without regard to the 
Federal Executive Branch rules regarding appointments in the 
competitive service. Under the provision, a law clerk or 
secretary serves at the pleasure of the appointing judge.
    The provision exempts law clerks from the sick leave and 
annual leave provisions applicable to employees of the Federal 
Executive Branch. Any unused sick or annual leave to the credit 
of a law clerk as of the effective date of the provision 
remains credited to the individual and is available to the 
individual upon separation from the Federal Government, or upon 
transfer to a position subject to such sick leave and annual 
leave provisions.
    The provision allows the Tax Court to fix and adjust the 
compensation of the clerk and other employees without regard to 
the Federal Executive Branch rules regarding employee 
classifications and pay rates. To the maximum extent feasible, 
Tax Court employees are to be compensated at rates consistent 
with those of employees holding comparable positions in the 
Federal Judicial Branch. The Tax Court may also establish 
programs for employee evaluations, incentive awards, flexible 
work schedules, premium pay, and resolution of employee 
grievances.
    In the case of an individual who is an employee of the Tax 
Court on the day before the effective date of the provision, 
the provision preserves certain rights that the employee is 
entitled to as of that day. The provision preserves the right 
to: (1) appeal a reduction in grade or removal; (2) appeal an 
adverse action; (3) appeal a prohibited personnel practice; (4) 
make an allegation of a prohibited personnel practice; or (5) 
file an employment discrimination appeal. These rights are 
preserved for as long as the individual remains an employee of 
the Tax Court.
    Under the provision, a Tax Court employee who completes at 
least one year of continuous service under a nontemporary 
appointment with the Tax Court acquires competitive service 
status for appointment to any position in the Federal Executive 
Branch competitive service for which the employee possesses the 
required qualifications.
    The provision also allows the Tax Court to procure the 
services of experts and consultants in accordance with Federal 
Executive Branch rules.

                             EFFECTIVE DATE

    The provision is effective on the date the Tax Court adopts 
a personnel management system after the date of enactment of 
the provision.

 B. Consolidate Review of Collection Due Process Cases in the Tax Court


(Sec. 6330 of the Code)

                            PRESENT LAW\154\
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    \154\Present law refers to the law in effect on the date of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 
2006).
---------------------------------------------------------------------------
    In general, the Internal Revenue Service (``IRS'') is 
required to notify taxpayers that they have a right to a fair 
and impartial hearing before levy may be made on any property 
or right to property.\155\ Similar rules apply with respect to 
liens.\156\ The hearing is held by an impartial officer from 
the IRS Office of Appeals, who is required to issue a 
determination with respect to the issues raised by the taxpayer 
at the hearing. The taxpayer is entitled to appeal that 
determination to a court. The appeal must be brought to the 
United States Tax Court (the ``Tax Court''), unless the Tax 
Court does not have jurisdiction over the underlying tax 
liability. If that is the case, then the appeal must be brought 
in the district court of the United States.\157\ If a court 
determines that an appeal was not made to the correct court, 
the taxpayer has 30 days after such determination to file with 
the correct court.
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    \155\Sec. 6330(a).
    \156\Sec. 6320.
    \157\Sec. 6330(d).
---------------------------------------------------------------------------
    The Tax Court is established under Article I of the United 
States Constitution\158\ and is a court of limited 
jurisdiction.\159\ The Tax Court only has the jurisdiction that 
is expressly conferred on it by statute.\160\ For example, the 
jurisdiction of the Tax Court includes the authority to hear 
disputes concerning notices of income tax deficiency, certain 
types of declaratory judgment, and worker classification 
status, among others, but does not include jurisdiction over 
most excise taxes imposed by the Internal Revenue Code. Thus, 
the Tax Court may not have jurisdiction over the underlying tax 
liability with respect to an appeal of a due process hearing 
relating to a collections matter. As a practical matter, many 
cases involving appeals of a due process hearing (whether 
within the jurisdiction of the Tax Court or a district court) 
do not involve the underlying tax liability.
---------------------------------------------------------------------------
    \158\Sec. 7441.
    \159\Sec. 7442.
    \160\Sec. 7442.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Tax Court does not have jurisdiction over all of the 
tax issues underlying collection due process cases (such as 
issues involving most excise taxes). The judicial appeals 
structure of present law was designed in recognition of these 
jurisdictional limitations; however, in many cases the 
underlying taxes are not involved in determining the due 
process issue. The present-law structure can lead to confusion 
over which court is the proper court in which to file an 
appeal. Some believe that this confusion may also be used by 
some taxpayers seeking to delay the collection process. 
Accordingly, the Committee believes that the Tax Court should 
have jurisdiction over all appeals of collection due process 
determinations. The simplification provided will both benefit 
the taxpayers involved and the IRS by eliminating confusion 
over which court is the proper venue for appeal and will reduce 
the period of time before judicial review. This provision will 
also eliminate the opportunity to use the present-law rules in 
unintended ways to delay or defeat the collection process.

                        EXPLANATION OF PROVISION

    [The bill does not include the provision as approved by the 
Committee because an identical or substantially similar 
provision was enacted into law in the Pension Protection Act of 
2006 (Pub. L. No. 109-280, sec. 855) subsequent to Committee 
action on the bill. The following discussion describes the 
provision as approved by the Committee.]
    The provision modifies the jurisdiction of the Tax Court by 
providing that all appeals of collection due process 
determinations are to be made to the United States Tax Court.

                             EFFECTIVE DATE

    The provision applies to determinations made after the date 
which is 60 days after the date of enactment.

  C. Confirmation of Tax Court Authority To Apply Equitable Recoupment


(Sec. 6214 of the Code)

                            PRESENT LAW\161\

    Equitable recoupment is a common-law equitable principle 
that permits the defensive use of an otherwise time-barred 
claim to reduce or defeat an opponent's claim if both claims 
arise from the same transaction. U.S. District Courts and the 
U.S. Court of Federal Claims, the two Federal tax refund 
forums, may apply equitable recoupment in deciding tax refund 
cases.\162\ In Estate of Mueller v. Commissioner,\163\ the 
Court of Appeals for the Sixth Circuit held that the United 
States Tax Court (the ``Tax Court'') may not apply the doctrine 
of equitable recoupment. More recently, the Court of Appeals 
for the Ninth Circuit, in Branson v. Commissioner,\164\ held 
that the Tax Court may apply the doctrine of equitable 
recoupment.
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    \161\Present law refers to the law in effect on the date of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 
2006).
    \162\See Stone v. White, 301 U.S. 532 (1937); Bull v. United 
States, 295 U.S. 247 (1935).
    \163\153 F.3d 302 (6th Cir.), cert. den., 525 U.S. 1140 (1999).
    \164\264 F.3d 904 (9th Cir.), cert. den., 2002 U.S. LEXIS 1545 
(U.S. Mar. 18, 2002).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is important to resolve the 
conflict among the circuit courts by eliminating the 
uncertainty or confusion of differing results in differing 
circuits. The Committee also believes that the provision will 
provide simplification benefits to both taxpayers and the IRS.

                        EXPLANATION OF PROVISION

    [The bill does not include the provision as approved by the 
Committee because an identical or substantially similar 
provision was enacted into law in the Pension Protection Act of 
2006 (Pub. L. No. 109-280, sec. 858) subsequent to Committee 
action on the bill. The following discussion describes the 
provision as approved by the Committee.]
    The provision confirms that the Tax Court may apply the 
principle of equitable recoupment to the same extent that it 
may be applied in Federal civil tax cases by the U.S. District 
Courts or the U.S. Court of Claims. No implication is intended 
as to whether the Tax Court has the authority to continue to 
apply other equitable principles in deciding matters over which 
it has jurisdiction.

                             EFFECTIVE DATE

    The provision is effective for any action or proceeding in 
the Tax Court with respect to which a decision has not become 
final as of the date of enactment.

D. Extend Authority for Special Trial Judges To Hear and Decide Certain 
                        Employment Status Cases


(Sec. 7443A of the Code)

                            PRESENT LAW\165\

    In connection with the audit of any person, if there is an 
actual controversy involving a determination by the IRS as part 
of an examination that (1) one or more individuals performing 
services for that person are employees of that person or (2) 
that person is not entitled to relief under section 530 of the 
Revenue Act of 1978, the Tax Court has jurisdiction to 
determine whether the IRS is correct and the proper amount of 
employment tax under such determination.\166\ Any 
redetermination by the Tax Court has the force and effect of a 
decision of the Tax Court and is reviewable.
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    \165\Present law refers to the law in effect on the date of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 
2006).
    \166\Sec. 7436.
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    An election may be made by the taxpayer for small case 
procedures if the amount of the employment taxes in dispute is 
$50,000 or less for each calendar quarter involved.\167\ The 
decision entered under the small case procedure is not 
reviewable in any other court and should not be cited as 
authority.
---------------------------------------------------------------------------
    \167\Sec. 7436(c).
---------------------------------------------------------------------------
    The chief judge of the Tax Court may assign proceedings to 
special trial judges. The Code enumerates certain types of 
proceedings that may be so assigned and may be decided by a 
special trial judge. In addition, the chief judge may designate 
any other proceeding to be heard by a special trial judge.\168\
---------------------------------------------------------------------------
    \168\Sec. 7443A.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that clarifying that special trial 
judges may decide proceedings involving a determination of 
employment status in which the amount of employment taxes in 
dispute is $50,000 or less for each calendar quarter involved 
will improve the operations and internal functioning of the Tax 
Court.

                        EXPLANATION OF PROVISION

    [The bill does not include the provision as approved by the 
Committee because an identical or substantially similar 
provision was enacted into law in the Pension Protection Act of 
2006 (Pub. L. No. 109-280, sec. 857) subsequent to Committee 
action on the bill. The following discussion describes the 
provision as approved by the Committee.]
    The provision clarifies that the chief judge of the Tax 
Court may assign to special trial judges any employment tax 
cases that are subject to the small case procedure and may 
authorize special trial judges to decide such small tax cases.

                             EFFECTIVE DATE

    The provision is effective for any action or proceeding in 
the Tax Court with respect to which a decision has not become 
final as of the date of enactment.

                        E. Tax Court Filing Fee


(Sec. 7451 of the Code)

                            PRESENT LAW\169\

    The Tax Court is authorized to impose a fee of up to $60 
for the filing of any petition for the redetermination of a 
deficiency or for declaratory judgments relating to the status 
and classification of 501(c)(3) organizations, the judicial 
review of final partnership administrative adjustments, and the 
judicial review of partnership items if an administrative 
adjustment request is not allowed in full.\170\ The statute 
does not specifically authorize the Tax Court to impose a 
filing fee for the filing of a petition for review of the IRS's 
failure to abate interest or for failure to award 
administrative costs and other areas of jurisdiction for which 
a petition may be filed. The practice of the Tax Court is to 
impose a $60 filing fee in all cases commenced by 
petition.\171\
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    \169\Present law refers to the law in effect on the date of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 
2006).
    \170\Sec. 7451.
    \171\See Rule 20(b) of the Tax Court Rules of Practice and 
Procedure.
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                           REASONS FOR CHANGE

    The Committee believes it is appropriate to clarify that 
the Tax Court filing fee applies to any case commenced by the 
filing of a petition.

                        EXPLANATION OF PROVISION

    [The bill does not include the provision as approved by the 
Committee because an identical or substantially similar 
provision was enacted into law in the Pension Protection Act of 
2006 (Pub. L. No. 109-280, sec. 859) subsequent to Committee 
action on the bill. The following discussion describes the 
provision as approved by the Committee.]
    The provision provides that the Tax Court is authorized to 
charge a filing fee of up to $60 in all cases commenced by the 
filing of a petition. No negative inference should be drawn as 
to whether the Tax Court has the authority under present law to 
impose a filing fee for any case commenced by the filing of a 
petition.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                  TITLE VII--MISCELLANEOUS PROVISIONS


         A. Expensing of Broadband Internet Access Expenditures


(Sec. 701 of the bill and sec. 191 of the Code)

                              PRESENT LAW

    A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS'').\172\ Under MACRS, 
different types of property generally are assigned applicable 
recovery periods and depreciation methods. The recovery periods 
applicable to most tangible personal property (generally 
tangible property other than residential rental property and 
nonresidential real property) range from 3 to 25 years. The 
depreciation methods generally applicable to tangible personal 
property are the 200-percent and 150-percent declining balance 
methods, switching to the straight-line method for the taxable 
year in which the depreciation deduction would be maximized.
---------------------------------------------------------------------------
    \172\Sec. 168.
---------------------------------------------------------------------------
    In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment may elect to deduct (or 
``expense'') such costs.\173\ Present law provides that the 
maximum amount a taxpayer may expense, for taxable years 
beginning in 2003 through 2009, is $100,000 of the cost of 
qualifying property placed in service for the taxable year. The 
$100,000 amount is reduced (but not below zero) by the amount 
by which the cost of qualifying property placed in service 
during the taxable year exceeds $400,000. The $100,000 and 
$400,000 amounts are indexed for inflation for taxable years 
beginning after 2003 and before 2010. In general, under section 
179, qualifying property is defined as depreciable tangible 
personal property that is purchased for use in the active 
conduct of a trade or business. Additional section 179 
incentives are provided with respect to a qualified property 
used by a business in the New York Liberty Zone,\174\ an 
empowerment zone,\175\ a renewal community,\176\ or the Gulf 
Opportunity Zone.\177\ Recapture rules generally apply with 
respect to property that ceases to be qualified property.
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    \173\Sec. 179.
    \174\Sec. 1400L(f).
    \175\Sec. 1397A.
    \176\Sec. 1400J.
    \177\Sec. 1400N.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to provide 
the tax incentive of expensing to encourage the provision of 
broadband services through new or upgraded equipment. In 
particular, the Committee believes that the provision of such 
services should be encouraged in rural areas and areas in which 
residents tend to have incomes significantly lower than the 
median. Because some such areas may be served by current-
generation broadband services, the tax incentive is provided 
with respect to current generation broadband services for 
residential subscribers if the area is not a saturated market. 
The expensing incentive is provided without regard to whether 
the local market is saturated, in the case of next generation 
broadband service, because of the Committee's desire to 
encourage wider availability of faster broadband service.

                        EXPLANATION OF PROVISION

    The provision provides an election to treat any qualified 
broadband expenditure paid or incurred by the taxpayer as not 
chargeable to capital account, but rather, as a deduction. The 
deduction is allowed in the first taxable year in which either 
current generation, or next generation, broadband services are 
provided through qualified equipment to qualified 
subscribers.\178\ Expenditures are eligible for this election 
only for qualified equipment, the original use of which 
commences with the taxpayer. The provision applies for 
qualified broadband expenditures incurred after June 30, 2006, 
and before January 1, 2011.
---------------------------------------------------------------------------
    \178\An allocation rule is provided in the event that such services 
could be provided both to qualified subscribers and to others by means 
of the equipment.
---------------------------------------------------------------------------
    ``Current generation broadband services'' are defined as 
the transmission of signals at a rate of at least 5 million 
bits per second to the subscriber and at a rate of at least 1 
million bits per second from the subscriber. Next generation 
broadband services are defined as the transmission of signals 
at a rate of at least 50 million bits per second to the 
subscriber and at a rate of at least 10 million bits per second 
from the subscriber.
    ``Qualified broadband expenditures'' means the direct or 
indirect costs properly taken into account for the taxable year 
for the purchase or installation of qualified equipment 
(including upgrades) and the connection of the equipment to a 
qualified subscriber. The term does not include costs of 
launching satellite equipment.
    Qualified broadband expenditures include only the portion 
of the purchase price paid by the lessor, in the case of leased 
equipment, that is attributable to otherwise qualified 
broadband expenditures by the lessee. In the case of property 
that is originally placed in service by a person and that is 
sold to the taxpayer and leased back to such person by the 
taxpayer within three months after the date that the property 
was originally placed in service, the property is treated as 
originally placed in service by the taxpayer not earlier than 
the date that the property is used under the leaseback.
    A qualified subscriber, with respect to current generation 
broadband services, means any nonresidential subscriber 
maintaining a permanent place of business in a rural area or 
underserved area, or any residential subscriber residing in a 
rural area or underserved area that is not a saturated market. 
A qualified subscriber, with respect to next generation 
broadband services, means any nonresidential subscriber 
maintaining a permanent place of business in a rural area or 
underserved area, or any residential subscriber.
    For this purpose, a rural area means any census tract not 
within 10 miles of an incorporated or census-designated place 
with more than 25,000 people and not within a county or county 
equivalent with overall population density of more than 500 
people per square mile. An underserved area means a census 
tract located in an empowerment zone or enterprise community 
designated under section 1391 or the District of Columbia 
Enterprise Zone, or any census tract the poverty level of which 
is at least 30 percent and the median family income of which 
does not exceed (1) for a tract in a metropolitan statistical 
area, 70 percent of the greater of the metropolitan area median 
family income or the statewide median family income, and (2) 
for a tract that is not in a metropolitan statistical area, 70 
percent of the nonmetropolitan statewide median family income.
    A saturated market, for this purpose, means any census 
tract in which, as of the date of enactment, current generation 
broadband services have been provided by a single provider to 
85 percent or more of the total potential residential 
subscribers. The services must be usable at least a majority of 
the time during periods of maximum demand, and usable in a 
manner substantially the same as services provided through 
equipment not eligible for the deduction under this provision.
    If current, or next, generation broadband services can be 
provided through qualified equipment to both qualified 
subscribers and to other subscribers, the provision provides 
that the expenditures with respect to the equipment are 
allocated among subscribers to determine the amount of 
qualified broad broadband expenditures that may be deducted 
under the provision.
    Qualified equipment means equipment that provides current, 
or next, generation broadband services at least a majority of 
the time during periods of maximum demand to each subscriber, 
and in a manner substantially the same as such services are 
provided by the provider to subscribers through equipment with 
respect to which no deduction is allowed under the provision. 
Limitations are imposed under the provision on equipment 
depending on where it extends, and on certain packet switching 
equipment, and on certain multiplexing and demultiplexing 
equipment.
    Expenditures generally are not taken into account for 
purposes of the deduction under the provision with respect to 
property used predominantly outside the United States, used 
predominantly to furnish lodging, used by a tax-exempt 
organization (other than in a business whose income is subject 
to unrelated business income tax), or used by the United States 
or a political subdivision or by a possession, agency or 
instrumentality thereof or by a foreign person or entity. The 
basis of property is reduced by the cost of the property that 
is taken into account as a deduction under the provision. 
Recapture rules are provided. No business credit under section 
38 is allowed with respect to any amount allowed as a deduction 
under the provision.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment and 
applies to expenditures incurred after June 30, 2006, and 
before January 1, 2011.

        B. Modification of Refunds for Kerosene Used in Aviation


(Sec. 702 of the bill and sec. 6427 of the Code)

                              PRESENT LAW

Nontaxable uses of kerosene

    In general, if kerosene on which tax has been imposed is 
used by any person for a nontaxable use, a refund in an amount 
equal to the amount of tax imposed may be obtained either by 
the purchaser, or in specific cases, the registered ultimate 
vendor of the kerosene.\179\ However, the 0.1 cent per gallon 
representing the Leaking Underground Storage Tank Trust Fund 
financing rate generally is not refundable, except for 
exports.\180\
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    \179\Sec. 6427(l).
    \180\Sec. 6430.
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    A nontaxable use is any use which is exempt from the tax 
imposed by section 4041(a)(1) other than by reason of a prior 
imposition of tax.\181\ Nontaxable uses of kerosene include:
---------------------------------------------------------------------------
    \181\Sec. 6427(l)(2).
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           Use on a farm for farming purposes;\182\
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    \182\Sec. 4041(f).
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           Use in foreign trade or trade between the 
        United States and any of its possessions;\183\
---------------------------------------------------------------------------
    \183\Sec. 4041(g)(1).
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           Use as a fuel in vessels and aircraft owned 
        by the United States or any foreign nation and 
        constituting equipment of the armed forces 
        thereof;\184\
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    \184\Id.
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           Exclusive use of a state or local 
        government;\185\
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    \185\Sec. 4041(g)(2).
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           Export or shipment to a possession of the 
        United States;\186\
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    \186\Sec. 4041(g)(3).
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           Exclusive use of a nonprofit educational 
        organization;\187\
---------------------------------------------------------------------------
    \187\Sec. 4041(g)(4).
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           Use as a fuel in an aircraft museum for the 
        procurement, care, or exhibition of aircraft of the 
        type used for combat or transport in World War II;\188\ 
        and
---------------------------------------------------------------------------
    \188\Sec. 4041(h).
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           Use as a fuel in (a) helicopters engaged in 
        the exploration for or the development or removal of 
        hard minerals, oil, or gas and in timber (including 
        logging) operations if the helicopters neither take off 
        from nor land at a facility eligible for Airport Trust 
        Fund assistance or otherwise use federal aviation 
        services during flights or (b) any air transportation 
        for the purpose of providing emergency medical services 
        (1) by helicopter or (2) by a fixed-wing aircraft 
        equipped for and exclusively dedicated on that flight 
        to acute care emergency medical services.\189\
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    \189\Secs. 4041(l), 4261(f) and (g).
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           Off-highway business use.
    Since 4041(a) is limited to the delivery into the fuel 
supply tank of a diesel-powered highway vehicle or train, 
kerosene delivered into the fuel supply tank of aircraft is a 
nontaxable use for purposes of section 4041(a).

Claims for refund of kerosene used in aviation

    ``Commercial aviation'' is the use of an aircraft in a 
business of transporting persons or property for compensation 
or hire by air, with certain exceptions.\190\ All other 
aviation is noncommercial aviation.
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    \190\``Commercial aviation'' does not include aircraft used for 
skydiving, small aircraft on nonestablished lines or transportation for 
affiliated group members.
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    For fuel not removed directly into the wing of an airplane, 
the Safe, Accountable, Flexible, Efficient, Transportation 
Equity Act: A Legacy for Users (``SAFETEA'') changed the rate 
of taxation for aviation-grade kerosene from 21.8 cents per 
gallon to the general kerosene and diesel rate of 24.3 cents 
per gallon.\191\ In order to preserve the aviation rate for 
fuel actually used in aviation, the 21.8 cent rate of taxation 
(or as the case may be, the 4.3 cent commercial aviation rate, 
or the nontaxable use rate) is achieved through a refund when 
the fuel is used in aviation (a refund of 2.5 cents for taxable 
noncommercial aviation, 20 cents in the case of commercial 
aviation, and 24.3 cents for nontaxable uses).\192\ These 
changes became effective on October 1, 2005.
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    \191\Sec. 11161 of Pub. L. No. 109-59 (2005).
    \192\Sec. 6427(l)(1), (4) and (5).
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    Prior to October 1, 2005, if fuel that was previously taxed 
was used in noncommercial aviation for a nontaxable use, 
generally, the ultimate purchaser of such fuel (other than for 
theexclusive use of a State or local government, or for use on 
a farm for farming purposes) could claim a refund for the tax that was 
paid. SAFETEA eliminated the ability of a purchaser to file for a 
refund with respect to fuel used in noncommercial aviation. Instead, 
the registered ultimate vendor is the exclusive party entitled to a 
refund with respect to kerosene used in noncommercial aviation.\193\ An 
ultimate vendor is the person who sells the kerosene to an ultimate 
purchaser for use in noncommercial aviation. If the fuel was used for a 
nontaxable use, the vendor may make a claim for 24.3 cents per gallon, 
otherwise, the vendor is permitted to claim 2.5 cents per gallon for 
kerosene sold for use in noncommercial aviation.\194\
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    \193\Sec. 6427(l)(5)(B).
    \194\Sec. 6427(l)(5)(A). Under this provision, of the 24.4 cents of 
tax imposed on kerosene used in taxable noncommercial aviation, the 0.1 
cent for the Leaking Underground Storage Tank Trust Fund financing rate 
and 21.8 cents of the tax imposed on kerosene cannot be refunded. The 
limitations of sec. 6427(l)(5)(A) on the amount that cannot be refunded 
do not apply to uses exempt from tax. However, sec. 6430 prevents a 
refund of the Leaking Underground Storage Tank Trust Fund financing 
rate in all cases except export. Sec. 6427(l)(5)(B) requires that all 
amounts that would have been paid to the ultimate purchaser pursuant to 
sec. 6427(l)(1) are to be paid to the ultimate registered vendor, 
therefore the ultimate registered vendor is the only claimant for both 
nontaxable and taxable use of kerosene in noncommercial aviation.
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    For commercial aviation, the ultimate purchaser has the 
option of filing a claim itself, or waiving the right to refund 
to its ultimate vendor, if the vendor agrees to file on behalf 
of the purchaser.\195\
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    \195\Sec. 6427(l)(4)(B).
---------------------------------------------------------------------------
    A separate special rule also applies to kerosene sold to a 
State or local government, regardless of whether the kerosene 
was sold for aviation or other purposes.\196\ In general, this 
rule makes the registered ultimate vendor the appropriate party 
for filing refund claims on behalf of a State or local 
government. Special rules apply for credit card sales.\197\
---------------------------------------------------------------------------
    \196\Sec. 6427(l)(6).
    \197\If certain conditions are met, a registered credit card issuer 
may make the claim for refund in place of the ultimate vendor. If the 
diesel fuel or kerosene is purchased with a credit card issued to a 
State but the credit card issuer is not registered with the IRS (or 
does not meet certain other conditions) the credit card issuer must 
collect the amount of the tax and the State is the proper claimant.
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                           REASONS FOR CHANGE

    It has come to the Committee's attention that some ultimate 
vendors are refusing to register with the IRS and to file for 
refunds on behalf of their customers that would be entitled to 
a full refund of the tax imposed on the fuel (excluding the 
Leaking Underground Storage Tank Trust Fund tax). Instead, the 
vendors are passing along the full amount of the tax to these 
purchasers. Because the registered ultimate vendor is the only 
person allowed to file a claim with the IRS, these purchasers 
are left without a method for obtaining the refund of tax to 
which they are entitled. This causes significant hardship for 
smaller entities, who may not have a significant relationship 
with the vendor, or purchase sufficient quantities to influence 
the vendor to file on their behalf. The Committee believes it 
is appropriate to give these exempt purchasers the option of 
filing the claim themselves or having a vendor file on their 
behalf.

                        EXPLANATION OF PROVISION

In general

    The provision allows purchasers that use kerosene for an 
exempt aviation purpose (other than in the case of a State or 
local government) to make a claim for refund of the tax that 
was paid on such fuel or waive their right to claim a refund to 
their registered ultimate vendors. As a result, under the 
provision, crop-dusters, air ambulances, aircraft engaged in 
foreign trade and other exempt users may either make the claim 
for refund of the 24.3 cents per gallon themselves or waive the 
right to their vendors.
    General noncommercial aviation use (which is entitled to a 
refund of 2.5-cents per gallon) remains an exclusive ultimate 
vendor rule. The rules for State and local governments also are 
unchanged.

Special rule for purchases of kerosene used in aviation on a farm for 
        farming purposes

    For kerosene used in aviation on a farm for farming 
purposes that was purchased after December 31, 2004, and before 
October 1, 2005, the Secretary is to pay to the ultimate 
purchaser (without interest) an amount equal to the aggregate 
amount of tax imposed on such fuel, reduced by any payments 
made to the ultimate vendor of such fuel. Such claims must be 
filed within three months of the date of enactment and may not 
duplicate claims filed under section 6427(l).

                             EFFECTIVE DATE

In general

    The provision is effective for kerosene sold after 
September 30, 2005. For kerosene used for an exempt aviation 
purpose eligible for the waiver rule created by the provision, 
the ultimate purchaser is treated as having waived the right to 
payment and as having assigned such right to the ultimate 
vendor if the vendor meets the requirements of subparagraph 
(A), (B) or (D) of section 6416(a)(1). The rule of the 
preceding sentence applies to kerosene sold after September 30, 
2005, and before the date of enactment.

Special rule for kerosene used in aviation on a farm for farming 
        purposes

    The special rule for kerosene used in aviation on a farm 
for farming purposes is effective on the date of enactment.

        C. Declarations on Federal Corporate Income Tax Returns


(Sec. 703 of the bill and sec. 6062 of the Code)

                              PRESENT LAW

    The Code requires\198\ that the income tax return of a 
corporation must be signed by either the president, the vice-
president, the treasurer, the assistant treasurer, the chief 
accounting officer, or any other officer of the corporation 
authorized by the corporation to sign the return.
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    \198\Sec. 6062.
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    The Code also imposes\199\ a criminal penalty on any person 
who willfully signs any tax return under penalties of perjury 
that that person does not believe to be true and correct with 
respect to every material matter at the time of filing. If 
convicted, the person is guilty of a felony; the Code imposes a 
fine of not more than $100,000\200\ ($500,000 in the case of a 
corporation) or imprisonment of not more than three years, or 
both, together with the costs of prosecution.
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    \199\Sec. 7206.
    \200\Pursuant to 18 U.S.C. sec. 3571, the maximum fine for an 
individual convicted of a felony is $250,000.
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                           REASONS FOR CHANGE

    The Committee believes that the filing of accurate tax 
returns is essential to the proper functioning of the tax 
system. The Committee believes that requiring a corporation to 
have processes and procedures to ensure the corporate income 
tax return complies with the Internal Revenue Code will elevate 
both the level of care given to the preparation of those 
returns and the level of compliance with the Code's 
requirements, which will in turn help ensure that the proper 
amount of tax is being paid.

                        EXPLANATION OF PROVISION

    The provision requires that a corporation's Federal income 
tax return include a declaration signed under penalties of 
perjury that the corporation has in place processes and 
procedures to ensure that the return complies with the Internal 
Revenue Code and that the chief executive officer was provided 
reasonable assurance of the accuracy of all material aspects of 
the return.

                             EFFECTIVE DATE

    The provision is effective for Federal tax returns for 
taxable years ending after the date of enactment.

    D. Treatment of Professional Employer Organizations as Employers


(Sec. 704 of the bill and new secs. 3511 and 7705 of the Code)

                              PRESENT LAW

In general

    Employment taxes generally consist of the taxes under the 
Federal Insurance Contributions Act (``FICA''), the taxes under 
the Railroad Retirement Tax Act (``RRTA''), the tax under the 
Federal Unemployment Tax Act (``FUTA''), and income taxes 
required to be withheld by employers from wages paid to 
employees (``income tax withholding'').\201\
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    \201\Secs. 3101-3128 (FICA), 3201-3241 (RRTA), 3301-3311 (FUTA), 
and 3401-3404 (income tax withholding). Sections 3501-3510 provide 
additional rules.
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    FICA tax consists of two parts: (1) old age, survivor, and 
disability insurance (``OASDI''), which correlates to the 
Social Security program that provides monthly benefits after 
retirement, disability, or death; and (2) Medicare hospital 
insurance (``HI''). The OASDI tax rate is 6.2 percent on both 
the employee and employer (for a total rate of 12.4 percent). 
The OASDI tax rate applies to wages up to the OASDI wage base 
for the calendar year ($94,200 for 2006). The HI tax rate is 
1.45 percent on both the employee and the employer (for a total 
rate of 2.9 percent). Unlike the OASDI tax, the HI tax is not 
limited to a specific amount of wages, but applies to all 
wages.
    RRTA taxes consist of tier 1 taxes and tier 2 taxes. Tier 1 
taxes parallel the OASDI and HI taxes applicable to employers 
and employees. Tier 2 taxes consist of employer and employee 
taxes on railroad compensation up to the tier 2 wage base for 
the calendar year. For 2006, the tier 2 employer rate is 12.6 
percent, the employee rate is 4.4 percent, and the tier 2 wage 
base is $69,900.
    Under FUTA, employers must pay a tax of 6.2 percent of 
wages up to the FUTA wage base of $7,000. An employer may take 
a credit against its FUTA tax liability for its contributions 
to a State unemployment fund and, in certain cases, an 
additional credit for contributions that would have been 
required if the employer had been subject to a higher 
contribution rate under State law. For purposes of the credit, 
contributions means payments required by State law to be made 
by an employer into an unemployment fund, to the extent the 
payments are made by the employer without being deducted or 
deductible from employees' remuneration.
    Employers are required to withhold income taxes from wages 
paid to employees. Withholding rates vary depending on the 
amount of wages paid, the length of the payroll period, and the 
number of withholding allowances claimed by the employee.
    Wages paid to employees, and FICA, RRTA, and income taxes 
withheld from the wages, are required to be reported on 
employment tax returns and on Forms W-2.\202\
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    \202\Secs. 6011 and 6051.
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    Employment taxes generally apply to all remuneration paid 
by an employer to an employee. However, various exclusions 
apply to certain types of remuneration or certain types of 
services, which may depend on the type of employer for whom an 
employee performs services.\203\ For example, remuneration 
(subject to a dollar limit) paid to an employee by a tax-exempt 
organization is excluded from wages for FICA purposes, and 
services performed in the employ of certain tax-exempt 
organizations are excluded from employment for FUTA 
purposes.\204\ In addition, various definitions and special 
rules apply to certain types of employers.\205\
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    \203\See, e.g., secs. 3121(a) and (b), 3231(e), 3306(b) and (c), 
and 3401(a).
    \204\Secs. 3121(a)(16) and 3306(c)(8).
    \205\See, e.g., secs. 3121, 3122, 3125, 3126, 3127, 3231, 3306, 
3308, 3309, 3401(a), 3404, 3506, and 3510.
---------------------------------------------------------------------------
    As discussed above, certain employment taxes apply only on 
amounts up to a specified wage base. If an employee works for 
multiple employers during a year, separate wage bases generally 
apply to each employer. However, a single OASDI, RRTA tier 1 or 
tier 2, or FUTA wage base applies in certain cases in which an 
employer (a ``successor'' employer) takes over the business of 
another employer (the ``predecessor'' employer) and employs the 
employees of the predecessor employer.

Responsibility for employment tax compliance

    Employment tax responsibility generally rests with the 
person who is the employer of an employee under a common-law 
test that has been incorporated into Treasury regulations.\206\ 
Under the regulations, an employer-employee relationship 
generally exists if the person for whom services are performed 
has the right to control and direct the individual who performs 
the services, not only as to the result to be accomplished by 
the work, but also as to the details and means by which that 
result is accomplished. That is, an employee is subject to the 
will and control of the employer, not only as to what is to be 
done, but also as to how it is to be done. It is not necessary 
that the employer actually control the manner in which the 
services are performed, rather it is sufficient that the 
employer have a right to control. Whether the requisite control 
exists is determined on the basis of all the relevant facts and 
circumstances. The test of whether an employer-employee 
relationship exists often arises in determining whether a 
worker is an employee or an independent contractor. However, 
the same test applies in determining whether a worker is an 
employee of one person or another.\207\
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    \206\Treas. Reg. secs. 31.3121(d)-1(c)(1), 31.3306(i)-1(a), and 
31.3401(c)-1.
    \207\Issues relating to the classification of workers as employees 
or independent contractors are discussed in Joint Committee on 
Taxation, Study of the Overall State of the Federal Tax System and 
Recommendations for Simplification, Pursuant to Section 8022(3)(B) of 
the Internal Revenue Code of 1986 (JCS-3-01), April 2001, at Vol. II, 
Part XV.A, at 539-550.
---------------------------------------------------------------------------
    In some cases, a person other than the common-law employer 
(a ``third party'') may be liable for employment taxes. For 
example, if wages are paid to an employee by a third party and 
the third party, rather than the employer, has control of the 
payment of the wages, the third party is the statutory employer 
responsible for complying with applicable employment tax 
requirements.\208\ In addition, an employer may designate a 
reporting agent to be responsible for FICA tax and income tax 
withholding compliance,\209\ including filing employment tax 
returns and issuing Forms W-2 to employees.\210\ In that case, 
the reporting agent and the employer are jointly and severally 
liable for compliance.\211\
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    \208\Sec. 3401(d)(1) (for purposes of income tax withholding, if 
the employer does not have control of the payment of wages, the person 
having control of the payment of such wages is treated as the 
employer); Otte v. United States, 419 U.S. 43 (1974) (the person who 
has the control of the payment of wages is treated as the employer for 
purposes of withholding the employee's share of FICA from wages); In re 
Armadillo Corporation, 561 F.2d 1382 (10th Cir. 1977), and In re The 
Laub Baking Company v. United States, 642 F.2d 196 (6th Cir. 1981) (the 
person who has control of the payment of wages is the employer for 
purposes of the employer's share of FICA and FUTA). The mere fact that 
wages are paid by a person other than the employer does not necessarily 
mean that the payor has control of the payment of the wages. Rather, 
control depends on the facts and circumstances. See, e.g., Consolidated 
Flooring Services v. United States, 38 Fed. Cl. 450 (1997), and 
Winstead v. United States, 109 F. 2d 989 (4th Cir. 1997).
    \209\The designated reporting agent rules do not apply for purposes 
of FUTA compliance.
    \210\Sec. 3504. Form 2678 is used to designate a reporting agent.
    \211\For administrative convenience, an employer may also use a 
payroll service to handle payroll and employment tax filings on its 
behalf, but the employer, not the payroll service, continues to be 
responsible for employment tax compliance.
---------------------------------------------------------------------------

Professional employer organizations

    A professional employer organization (sometimes called an 
employee leasing company) provides employees to perform 
services in the businesses of the professional employer 
organization's customers, generally small and medium-sized 
businesses. In many cases, before the professional employer 
organization arrangement is entered into, the employees already 
work in the customer's business as employees of the customer. 
The terms of a typical professional employer organization 
arrangement provide that the professional employer organization 
is the employer of the employees and is responsible for paying 
the employees and for the related employment tax compliance. 
The customer typically pays the professional employer 
organization a fee based on payroll costs plus an additional 
amount.\212\
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    \212\A professional employer organization may also provide 
employees with employee benefit coverage, such as under a pension plan 
or a health plan, even if the customer does not maintain such a plan. 
In such a case, the fee paid by the customer also covers employee 
benefit costs.
---------------------------------------------------------------------------
    In some cases, the employees provided to work in the 
customer's business are legally the employees of the customer, 
and the customer is legally responsible for employment tax 
compliance. Nonetheless, customers generally rely on the 
professional employer organization for employment tax 
compliance (without designating the professional employer 
organization as a reporting agent) and treat the employees as 
employees of the professional employer organization.

Income tax credits based on wages for employment tax purposes

    The Code provides various income tax credits to employers 
under which the amount of the credit is determined by reference 
to the amount of wages for employment tax purposes.\213\ For 
example, the amount of an employer's work opportunity credit is 
based on a portion of FUTA wages paid by the employer to 
employees who are members of certain targeted groups.\214\ In 
addition, the credit for employer FICA tax paid on tips is 
based on the employer share of FICA tax paid by the employer 
with respect to certain tips treated as wages for FICA 
purposes.\215\
---------------------------------------------------------------------------
    \213\See, e.g., secs. 41 (credit for research expenses), 45A 
(Indian employment credit), 45B (credit for employer FICA tax paid on 
tips), 45C (credit for clinical drug testing expenses), 51 (work 
opportunity credit), 51A (welfare-to-work credit), 1396 (empowerment 
zone employment credit), 1400(d) (DC Zone employment credit), and 1400H 
(renewal community employment credit). Some of these credits are 
temporary credits that expired at the end of 2005.
    \214\Sec. 51(c)(1).
    \215\Sec. 45B(b)(1).
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Reporting by large food and beverage establishments

    Certain reporting requirements relating to tips apply to 
large food or beverage establishments.\216\ In the case of such 
an establishment, an employer is generally required to report 
the following information to the IRS each calendar year: (1) 
the gross receipts of the establishment from the provision of 
food and beverages (other than certain receipts); (2) the 
aggregate amount of charge receipts (other than certain 
receipts); (3) the aggregate amount of charged tips on the 
charge receipts; (4) the sum of the aggregate amount of tips 
reported to the employer by employees and certain amounts 
required to be reported by the employer on employees' Form W-
2s; and (5) with respect to each employee, the amount of tips 
allocated to the employee based on the receipts of the 
establishment. The employer must also provide employees with 
written statements showing certain information each calendar 
year, including the amount of tips allocated to the employee 
for the year.
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    \216\Sec. 6053(c).
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User fees

    User fees apply to requests to the IRS for ruling letters, 
opinion letters, determination letters, and similar 
requests.\217\ The user fees that apply are determined by the 
IRS and are generally required to be determined after taking 
into account the average time and difficulty involved in a 
request.
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    \217\Sec. 7528.
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                           REASONS FOR CHANGE

    The IRS estimates that the portion of the 2001 tax gap 
attributable to FICA and FUTA taxes is $15 billion.\218\ An 
additional portion of the tax gap is attributable to income 
taxes due on unreported wages.
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    \218\Internal Revenue Service, IRS Updates Tax Gap Estimates, IR-
2006-28, and attachment (Feb. 14, 2006). The tax gap is the amount of 
tax that is imposed by law for a given tax year but is not paid 
voluntarily and timely.
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    Professional employer organizations specialize in providing 
employees and employment-related services, including employment 
tax compliance, to their customers, which are generally small 
and medium-sized businesses. In addition, a professional 
employer organization can obtain economies of scale not 
available to its individual customers. As a result, 
professional employer organizations may improve employment tax 
compliance.
    Under present law, responsibility for employment tax 
compliance generally rests with the employer. Uncertainty may 
exist as to whether a professional employer organization or its 
customer is the employer of the employees provided to the 
customer, making it unclear which party bears employment tax 
responsibility. In the case of noncompliance, the IRS may have 
difficulty establishing either party's liability for unpaid 
employment taxes. The Committee believes that improved 
employment tax compliance can be achieved by providing rules 
under which a professional employer organization that meets 
certain standards and follows certain procedures is treated for 
employment tax purposes as the employer of employees provided 
to customers, and thus is responsible for employment tax 
compliance, rather than the customers.

                        EXPLANATION OF PROVISION

Treatment of certified professional employer organization as employer 
        for employment tax purposes

    Under the provision, if certain requirements are met, for 
purposes of employment taxes and other obligations under the 
employment tax rules, a certified professional employer 
organization is treated as the employer of any work site 
employee performing services for any customer of the certified 
professional employer organization, but only with respect to 
remuneration remitted to the work site employee by the 
certified professional employer organization. In addition, no 
other person is treated as the employer for employment tax 
purposes with respect to remuneration remitted by the certified 
professional employer organization to a work site employee.
    Under the provision, exclusions, definitions, and special 
rules that are based on the type of employer and that would 
apply if the certified professional employer organization were 
not treated as the employer under the provision continue to 
apply. Thus, for example, if services performed in the employ 
of a customer that is a tax-exempt organization would be 
excluded from employment for FUTA purposes, the fact that a 
certified professional employer organization is treated as the 
employer for employment tax purposes does not affect the 
application of the exclusion.
    The provision provides rules under which, on entering into 
a service contract with a customer with respect to a work site 
employee, a certified professional employer organization is 
treated as a successor employer and the customer is treated as 
the predecessor employer. Similarly, on termination of a 
service contract with respect to a worksite employee, the 
customer is treated as a successor employer and the certified 
professional employer organization is treated as a predecessor 
employer. Thus, wages paid by the customer and the certified 
professional employer organization to a work site employee 
during a calendar year are subject to a single OASDI, RRTA tier 
1 or tier 2, or FUTA wage base.
    The provision does not apply in the case of a customer who 
is related to the certified professional employer 
organization.\219\ In addition, an individual with net earnings 
from self-employment derived from a customer's trade or 
business (i.e., a self-employed individual), including a 
customer who is a sole proprietor or a partner of a customer 
that is a partnership, is not a work site employee for 
employment tax purposes with respect to remuneration paid by a 
certified professional employer organization.
---------------------------------------------------------------------------
    \219\Whether a customer and a certified professional employer 
organization are related is determined under the rules of section 
267(b) (relating to transactions between related taxpayers) or 707(b) 
(relating to transactions between a partner and partnership). However, 
rules based on more than 50 percent ownership are applied by 
substituting 10 percent for 50 percent.
---------------------------------------------------------------------------
    As discussed more fully below, a work site employee is an 
individual who performs services (1) for a customer pursuant to 
a contract between the customer and the certified professional 
employer organization that meets certain requirements and (2) 
at a work site that meets certain requirements. Thus, if the 
contract or work site fails to meet these requirements, the 
individual is not a work site employee. The provision applies 
also in the case of an individual (other than a self-employed 
individual) who is not a work site employee, but who performs 
services under a contract that meets the specified 
requirements. In this case, solely for purposes of a certified 
professional employer organization's liability for employment 
taxes and other obligations under the employment tax rules, a 
certified professional employer organization is treated as the 
employer of the individual, but only with respect to 
remuneration remitted to theindividual by the certified 
professional employer organization. Exclusions, definitions, and 
special rules that are based on the type of employer and that would 
apply if the certified professional employer organization were not 
treated as the employer under the provision continue to apply.
    A certified professional employer organization is eligible 
for the FUTA credit with respect to contributions made to a 
State unemployment fund with respect to a work site employee by 
the certified professional employer organization or a customer. 
An additional FUTA credit may be claimed by a certified 
professional employer organization if, under State law, a 
certified professional employer organization is permitted to 
collect and remit contributions with respect to a work site 
employee to the State unemployment fund.
    Except to the extent necessary for purposes of the 
provision treating a certified professional employer 
organization as the employer for employment tax purposes, 
nothing in the provision is to be construed to affect the 
determination of who is an employee or employer for purposes of 
the Code.

Certified professional employer organization

    A certified professional employer organization is a person 
who has been certified by the Secretary, for purposes of being 
treated as the employer for employment tax purposes under the 
provision, as meeting certain requirements. These requirements 
are met if the person--
           Demonstrates that the person (and any owner, 
        officer, and such other persons as may be specified in 
        regulations) meets requirements established by the 
        Secretary with respect to tax status, background, 
        experience, business location, and annual financial 
        audits;
           Computes its taxable income using an accrual 
        method of accounting unless the Secretary approves 
        another method;
           Agrees to satisfy the bond and independent 
        financial review requirements (described below) on an 
        ongoing basis;
           Agrees to satisfy any reporting obligations 
        imposed by the Secretary;
           Agrees to verify on such periodic basis as 
        prescribed by the Secretary that it continues to meet 
        the requirements for certification; and
           Agrees to notify the Secretary in writing 
        within such time as prescribed by the Secretary of any 
        change that materially affects whether it continues to 
        meet the requirements for certification.
    Under the bond requirement, a certified professional 
employer organization must post a bond for the payment of 
employment taxes in a minimum amount and in a form acceptable 
to the Secretary. The minimum amount is determined for the 
period April 1 of any calendar year through March 31 of the 
following calendar year and is the greater of (1) five percent 
of the employment taxes for which the certified professional 
employer organization is liable under the provision during the 
preceding calendar year (but not to exceed $1,000,000), or (2) 
$50,000.
    Under the independent financial review requirements, a 
certified professional employer organization must: (1) have, as 
of the most recent review date (i.e., six months after the 
completion of the certified professional employer 
organization's fiscal year), caused to be prepared and provided 
to the Secretary an opinion of an independent certified public 
accountant that the certified professional employer 
organization's financial statements are presented fairly in 
accordance with generally accepted accounting principles; and 
(2) provide to the Secretary, not later than the last day of 
the second month beginning after the end of each calendar 
quarter, from an independent certified public accountant an 
assertion regarding Federal employment tax payments and an 
examination level attestation on the assertion. The assertion 
must state that the certified professional employer 
organization has withheld and made deposits of all required 
FICA, RRTA, and withheld income taxes for the calendar quarter, 
and the attestation must state that the assertion is fairly 
stated in all material respects. If a certified professional 
employer organization fails to file the required assertion and 
attestation with respect to any calendar quarter, the 
independent financial review requirements are treated as not 
satisfied for the period beginning on the due date for the 
attestation.
    For purposes of the bond and independent financial review 
requirements, all professional employer organizations that are 
members of a controlled group of corporations or under common 
control are treated as a single organization.\220\ The 
Secretary may suspend or revoke the certification of a person's 
certified professional employer organization status if the 
Secretary determines that the person does not satisfy the 
representations or other requirements for certification or 
fails to satisfy the applicable accounting, reporting, payment, 
or deposit requirements.
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    \220\Whether entities are members of a controlled group of 
corporations or under common control is determined under the rules of 
section 414(b) and (c).
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Work site employee

    A work site employee is an individual who: (1) performs 
services for a customer of a certified professional employer 
organization pursuant to a contract between the customer and 
the certified professional employer organization that meets 
certain requirements (described below); and (2) performs 
services at a work site meeting certain requirements (described 
below).\221\
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    \221\As discussed above, a self-employed individual is not a work 
site employee.
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    The contract between the customer and the certified 
professional employer organization must be in writing and, with 
respect to an individual performing services for the customer, 
must provide that the certified professional employer 
organization will--
           Assume responsibility for payment of wages 
        to the individual, without regard to the receipt or 
        adequacy of payment from the customer;
           Assume responsibility for reporting, 
        withholding, and paying any employment taxes with 
        respect to the individual's wages, without regard to 
        the receipt or adequacy of payment from the customer;
           Assume responsibility for any employee 
        benefits that the contract may require the certified 
        professional employer organization to provide, without 
        regard to the receipt or adequacy of payment from the 
        customer;
           Assume responsibility for hiring, firing, 
        and recruiting workers in addition to the customer's 
        responsibility for hiring, firing and recruiting 
        workers;
           Maintain employee records relating to the 
        individual; and
           Agree to be treated as a certified 
        professional employer organization for employment tax 
        purposes with respect to such individual.
    For purposes of whether an individual is a work site 
employee, the work site where the individual performs services 
meets the applicable requirements if at least 85 percent of the 
individuals performing services for the customer at the work 
site are subject to one or more contracts with the certified 
professional employer organization that meet the above 
requirements.\222\
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    \222\For this purpose, excluded employees under section 414(q)(5), 
such as employees who are under age 21 or have not completed six months 
of service, are not taken into account.
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Regulations

    The Secretary of Treasury (``Secretary'') is directed to 
prescribe such regulations as may be necessary or appropriate 
to carry out the purposes of the provision. The Secretary is 
also directed to develop reporting and recordkeeping rules, 
regulations, and procedures to ensure compliance with the 
provision with respect to entities applying for and receiving 
certification as certified professional employer organizations. 
These are to be designed in a manner to streamline, to the 
extent possible, the application of the requirements of the 
provision, the exchange of information between a certified 
professional employer organization and its customers, and the 
reporting and recordkeeping obligations of a certified 
professional employer organization.

Other rules

            Income tax credits based on wages for employment tax 
                    purposes
    Under the provision, for purposes of various income tax 
credits\223\ under which the amount of the credit is determined 
by reference to the amount of employment tax wages or 
employment taxes: (1) the credit with respect to a work site 
employee performing services for a customer applies to the 
customer (not to the certified professional employer 
organization); (2) the customer (and not the certified 
professional employer organization) is to take into account 
wages and employment taxes paid by the certified professional 
employer organization with respect to the worksite employee and 
for which the certified professional employer organization 
receives payment from the customer; and (3) the certified 
professional employer organization is required to furnish the 
customer with any information necessary for the customer to 
claim the credit.\224\
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    \223\Secs. 41 (credit for research expenses), 45A (Indian 
employment credit), 45B (credit for employer FICA tax paid on tips), 
45C (credit for clinical drug testing expenses), 51 (work opportunity 
credit), 51A (welfare-to-work credit), 1396 (empowerment zone 
employment credit), 1400(d) (DC Zone employment credit), 1400H (renewal 
community employment credit), and any other provision as provided by 
the Secretary. Some of these credits are temporary credits that expired 
at the end of 2005.
    \224\Present law provides a deduction from taxable income (or, in 
the case of an individual, adjusted gross income) that is equal to a 
portion of the taxpayer's qualified production activities income (sec. 
199). The deduction for a taxable year is limited to 50 percent of the 
wages deducted in arriving at qualified production activities income. 
To be taken into account, wages must be paid by the taxpayer to its 
employees and reported on Form W-2. For this purpose, wages means wages 
subject to income tax withholding, as well as elective deferrals and 
certain other amounts. Under regulations dealing with wages paid by an 
entity other than the common-law employer, a taxpayer may take into 
account wages paid by another entity and reported by the other entity 
on Form W-2 (with the other entity listed as the employer on the Form 
W-2), provided that the wages were paid to employees of the taxpayer 
for employment by the taxpayer. Treas. Reg. sec. 1.199-2(a)(2). The 
provision does not affect the application of these rules.
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            Reporting by large food and beverage establishments
    Under the provision, if a certified professional employer 
organization is treated for employment tax purposes as the 
employer of a work site employee, the customer for whom the 
work site employee performs services is the employer for 
purposes of the reporting required with respect to a large food 
or beverage establishment. The certified professional employer 
organization is required to furnish the customer with any 
information necessary to complete the required reporting.
            User fees
    Under the provision, the user fee charged under the program 
for certifying a professional employer organization may not 
exceed $500.
            No inference as to effect of provision
    Nothing contained in the provision or the amendments made 
by the provision is to be construed to create any inference 
with respect to the determination of who is an employee or 
employer (1) for Federal tax purposes (other than the purposes 
set forth in the provision), or (2) for purposes of any other 
provision of law.

                             EFFECTIVE DATE

    The provision is effective with respect to wages paid for 
services performed on or after January 1 of the first calendar 
year beginning more than 12 months after the date of enactment 
of the provision. The Secretary is directed to establish the 
certification program for professional employer organizations 
not later than six months before the provision becomes 
effective.

 E. Study on Collecting Estimated Tax Payments Through the Electronic 
                      Fund Transfer Payment System


(Sec. 705 of the bill and sec. 6302 of the Code)

                              PRESENT LAW

    To the extent that tax is not collected through 
withholding, taxpayers are required to make quarterly estimated 
payments of tax. If an individual fails to make the required 
estimated tax payments under the rules, a penalty is imposed 
under section 6654. The amount of the penalty is determined by 
applying the underpayment interest rate to the amount of the 
underpayment for the period of the underpayment.
    The Code imposes a penalty on employers who fail to deposit 
employment taxes within the required time and in the proper 
manner. The Code also requires the IRS to collect at least 94 
percent of these taxes through the Electronic Funds Transfer 
Payment System (EFTPS).\225\ The Code does not require the IRS 
to collect estimated tax payments through EFTPS.
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    \225\Sec. 6302(h).
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                           REASONS FOR CHANGE

    In 2004, the IRS received 61 percent of all employment tax 
payments (and 95 percent of all employment tax dollars) through 
EFTPS. In contrast, the IRS received less than one percent of 
all estimated tax payments (and less than one percent of all 
estimated tax dollars) through EFTPS in 2004.
    Making estimated tax payments can be cumbersome, 
particularly for self-employed taxpayers who are juggling many 
different duties. The Committee believes it is important to 
simplify the process for making estimated tax payments. The 
Committee believes EFTPS has the potential to alleviate some of 
these estimated tax payment problems because it is convenient 
and relatively easy to use. One feature to EFTPS that is 
beneficial to taxpayers is the ability to schedule automatic 
payments from a taxpayer's bank account. A taxpayer can use 
this feature to make more frequent automatic estimated 
payments. Using EFTPS in this way could make estimated tax 
payments almost as automatic as one's monthly automobile or 
mortgage payment. The Committee believes that increased use of 
EFTPS for estimated tax payments will reduce the administrative 
burdens associated with making such payments.

                        EXPLANATION OF PROVISION

    The provision requires the Secretary to study increased 
collection of estimated tax payments through the EFTPS. The 
provision requires the Secretary to report the results of such 
study within one year of the date of enactment.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

          F. Study of Use of Voluntary Withholding Agreements


(Sec. 706 of the bill)

                              PRESENT LAW

    Employment taxes generally consist of the taxes under the 
Federal Insurance Contributions Act (``FICA''), the tax under 
the Federal Unemployment Tax Act (``FUTA''), and the 
requirement that employers withhold income taxes from wages 
paid to employees (``income tax withholding'').\226\ Income tax 
withholding rates vary depending on the amount of wages paid, 
the length of the payroll period, and the number of withholding 
allowances claimed by the employee.
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    \226\Secs. 3101-3128 (FICA), 3301-3311 (FUTA), and 3401-3404 
(income tax withholding). FICA taxes consist of an employer share and 
an employee share, which the employer withholds from employees' wages.
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                           REASONS FOR CHANGE

    The Committee believes that independent contractors may 
benefit by entering into voluntary withholding agreements with 
their payors. The Committee believes that voluntary withholding 
agreements may be less burdensome than making estimated tax 
payments. Even though withholding is not required on payments 
to independent contractors, some independent contractors may 
wish to enter into withholding agreements with their payors to 
avoid the burdens of saving and making quarterly estimated tax 
payments. Payors may be willing to do this as a convenience to 
their independent contractors, particularly where such payors 
already withhold and remit employment taxes on their own 
employees.
    The Committee believes that increased use of voluntary 
withholding agreements between independent contractors and 
their payors would facilitate tax compliance. Moreover, 
independent contractors entering into such agreements with 
their payors would be relieved of the burden of making 
quarterly estimated tax payments.

                        EXPLANATION OF PROVISION

    The provision requires the Secretary to study the use of 
voluntary withholding agreements between independent 
contractors and service recipients. The provision requires the 
Secretary to report the results of such study, including any 
necessary statutory changes, within one year of the date of 
enactment.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

         G. Offset of Tax Refunds Against State Judicial Debts


(Sec. 707 of the bill and sec. 6402 of the Code)

                              PRESENT LAW

    Overpayments of Federal tax may be used to pay past-due 
child support and debts owed to Federal agencies, without the 
consent of the taxpayer.\227\ Overpayments of Federal tax may 
also be used to pay specified past-due, legally enforceable 
State income tax debts, provided that the person making the 
Federal tax overpayment has shown on the Federal tax return for 
the taxable year of the overpayment an address that is within 
the State seeking the tax offset.
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    \227\Sec. 6402.
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                           REASONS FOR CHANGE

    The Committee understands that the current refund procedure 
has proven an effective collection tool for State governments. 
The Committee believes that States will benefit by expanding 
the refund offset procedures to outstanding court-ordered 
debts.

                        EXPLANATION OF PROVISION

    The provision permits State courts to use overpayments of 
Federal tax to pay past-due court-ordered debts. The State 
court debts would have lower priority than other debts that may 
be offset under present law.

                             EFFECTIVE DATE

    The provision applies to refunds payable for taxable years 
ending after the date of enactment.

    H. Clarification of Responsibilities of United States Marshals 
                        Attending the Tax Court


(Sec. 708 of the bill and sec. 7456 of the Code)

                              PRESENT LAW

    The Tax Court is established under Article I of the United 
States Constitution\228\ and is a court of limited 
jurisdiction.\229\
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    \228\Sec. 7441.
    \229\Sec. 7442.
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    The primary role and mission of the U.S. Marshals Service 
is to provide for the security and to obey, execute, and 
enforce orders of the U.S. District Courts, the U.S. Courts of 
Appeals, and the Court of International Trade.\230\ The United 
States marshal for a district in which the Tax Court is sitting 
is required, when requested by the Chief Judge, to attend any 
session of the Court in such district.\231\
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    \230\28 U.S.C. sec. 566(a).
    \231\Sec. 7456(c).
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                           REASONS FOR CHANGE

    The Committee believes that the security needs of the Tax 
Court, including protective services, are the same as those of 
other Federal courts and wishes to clarify the U.S. Marshal's 
Service responsibility to provide security to the Tax Court.

                        EXPLANATION OF PROVISION

    The provision requires the U.S. Marshals Service to provide 
protective services to the Tax Court, including protective 
services for the security of judges and other threatened 
persons beyond courthouse premises, similar to those provided 
to other Federal courts.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

 I. Authorization of Appropriations To Combat the Tax Gap and for Tax 
                            Law Enforcement


(Sec. 709 of the bill)

                              PRESENT LAW

    There is no explicit authorization of appropriations to the 
IRS to be used to combat the tax gap.

                           REASONS FOR CHANGE

    The IRS estimates that the gross annual tax gap, the 
difference between the taxes legally owed and the taxes timely 
paid, is $345 billion. With a voluntary compliance rate of 83.7 
percent, 16.3 percent of American taxpayers do not fully comply 
with our nation's tax laws. The Committee believes that the 
sizable tax gap has the potential to undermine our voluntary 
tax compliance system. Moreover, it is unfair to honest 
taxpayers to allow tax cheats to ignore our nation's tax laws. 
The Committee believes that this authorization provides a good 
first step in renewed IRS efforts to combat the tax gap.

                        EXPLANATION OF PROVISION

    The bill includes an authorization of $732 million dollars 
to the IRS to be used to combat the tax gap, $300 million of 
which is to be used to combat tax avoidance transactions, 
including the use of offshore accounts to conceal taxable 
income. Amounts appropriated shall remain available until 
expended.

                             EFFECTIVE DATE

    The provisions are effective on the date of enactment.

                        J. Annual Tax Gap Study


(Sec. 710 of the bill)

                              PRESENT LAW

    There is no requirement that the Department of the Treasury 
produce a study for the tax-writing committees on its 
activities to close the tax gap.

                           REASONS FOR CHANGE

    The IRS estimates that the gross annual tax gap, the 
difference between the taxes legally owed and the taxes timely 
paid, is $345 billion. With a voluntary compliance rate of 83.7 
percent, 16.3 percent of American taxpayers do not comply with 
our nation's tax laws. The Committee believes that the sizable 
tax gap has the potential to undermine our voluntary tax 
compliance system. Moreover, it is unfair to honest taxpayers 
to allow tax cheats to ignore our nation's tax laws. The 
Committee believes that a comprehensive and credible plan, 
submitted annually, is an important part of an effective 
strategy to close the tax gap.

                        DESCRIPTION OF PROPOSAL

    The provision requires the Department of the Treasury to 
submit an annual report to the tax-writing committees not later 
than September 30 of each year on activities the Treasury 
Department is undertaking to close the tax gap. The report 
should include a comprehensive set of strategies to: simplify 
the administration of the tax Code, including ways that 
resources can be used more efficiently; achieve more complete 
income reporting; improve tax-law enforcement; and improve 
customer service. The report should also include a detailed 
analysis of the elements of the tax gap, a list of measures 
designed to reduce the tax gap, goals for reducing the tax gap, 
and timelines to achieve those goals. Finally, the report 
should include specific administrative actions taken to reduce 
the tax gap and the results of such actions, and proposed 
legislative recommendations to improve voluntary compliance.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

K. Authorization of Appropriations for Tax Law Enforcement Relating to 
      the Hiring and Continued Employment of Undocumented Workers


(Sec. 711 of the bill)

                              PRESENT LAW

    IRS undercover operations are statutorily exempt from the 
generally applicable restrictions controlling the use of 
Government funds (which generally provide that all receipts 
must be deposited in the general fund of the Treasury and all 
expenses be paid out of appropriated funds). In general, the 
Code permits the IRS to use proceeds from an undercover 
operation to pay additional expenses incurred in the undercover 
operation, through 2006. The IRS is required to conduct a 
detailed financial audit of large undercover operations in 
which the IRS is churning funds and to provide an annual audit 
report to the Congress on all such large undercover operations.
    There is no explicit authorization of appropriations to the 
IRS to be used to prosecute employers for the violations of tax 
laws relating to the hiring and continued employment of 
undocumented workers.

                           REASONS FOR CHANGE

    The Committee believes that additional resources are 
necessary to combat noncompliance by employers of undocumented 
workers. The Committee believes that this is a serious 
compliance issue and warrants the creation of an office in IRS 
Criminal Investigation.

                        EXPLANATION OF PROVISION

    The bill authorizes the IRS to use $2 million toward the 
establishment of an office in IRS Criminal Investigation to 
prosecute employers for the violations of tax laws relating to 
the hiring and continued employment of persons not authorized 
to work in the United States. The Committee expects the office 
to work closely with other divisions within the IRS and 
understands that non-CI personnel may be assigned to the 
office.
    For fiscal years 2007 and 2008, the provision also 
authorizes and appropriates to the office for the 
administration of such office an amount equal to the income 
tax, interest, and civil and criminal penalties collected by 
the IRS as a result of the actions of the office.
    The provision requires the Secretary to report to Congress 
within one year of the date of enactment on enforcement 
activities of the office.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

 L. Repeal of Dollar Limit on Contributions to Qualified Funeral Trusts


(Sec. 712 of the bill and sec. 685 of the Code)

                              PRESENT LAW

    A qualified funeral trust is a taxable trust that arises as 
a result of a contract with a person engaged in the trade or 
business of providing funeral or burial services or property 
necessary to provide such services, and which meets certain 
other requirements.\232\ A qualified funeral trust must have as 
its sole purpose holding, investing, and reinvesting funds in 
the trust, and using such funds solely to make payments for the 
above-described services or property for the benefit of the 
beneficiaries of the trust. A qualified funeral trust may have 
as beneficiaries only individuals with respect to whom the 
above-described services or property are to be provided at 
death, and the trust may only accept contributions by or for 
the benefit of such beneficiaries. In addition, to qualify, the 
trust must be one that, but for the making of a required 
election, would be treated under the grantor trust rules as 
owned by the purchaser of the funeral or burial contract. 
Because a qualified funeral trust is not treated as a grantor 
trust, the trust (rather than the purchaser of the contract) is 
taxed on income from the trust at the tax rates applicable to 
non-grantor trusts.
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    \232\Sec. 685(b).
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    A trust is not a qualified funeral trust if it accepts 
aggregate contributions by or for the benefit of an individual 
in excess of a statutory dollar limit, which is $8,500 for 2006 
(and which periodically is adjusted for inflation).

                           REASONS FOR CHANGE

    The Committee believes that the current statutory dollar 
limit, in certain cases, is insufficient to cover the cost of a 
funeral and burial.

                        DESCRIPTION OF PROVISION

    The provision repeals the dollar limit on contributions to 
qualified funeral trusts.

                             EFFECTIVE DATE

    The provision is effective for contributions made after 
December 31, 2006.

 M. Permit Administrative Relief for Certain Late Qualified Terminable 
                      Interest Property Elections


(Sec. 713 of the bill and sec. 2523 of the Code)

                              PRESENT LAW

    A 100-percent marital deduction generally is permitted for 
the value of property transferred between spouses. Transfers of 
``qualified terminable interest property'' also are eligible 
for the marital deduction. ``Qualified terminable interest 
property'' (or ``QTIP'') is property: (1) that passes from the 
decedent, (2) in which the surviving spouse has a ``qualifying 
income interest for life,'' and (3) with respect to which a 
timely election has been made. A ``qualifying income interest 
for life'' exists if: (1) the surviving spouse is entitled to 
all the income from the property (payable annually or at more 
frequent intervals) or has the right to use the property during 
the spouse's life, and (2) no person has the power to appoint 
any part of the property to any person other than the surviving 
spouse.
    A QTIP transfer may occur by way of a lifetime gift (i.e., 
an inter vivos QTIP transfer) or at death. In the event of a 
QTIP transfer made at a decedent's death, the QTIP election 
must be made by the decedent's executor on the estate tax 
return. In the event of an inter vivos QTIP transfer, the QTIP 
election generally must be made on the gift tax return for the 
calendar year in which the interest is transferred, and the 
election must be made within the time prescribed for filing 
such return. A QTIP election, once made, is irrevocable.

                           REASONS FOR CHANGE

    The IRS, under certain circumstances, has granted relief 
for late QTIP elections for estate tax purposes by granting an 
extension of time to make such an election. In the event a 
taxpayer fails to make a QTIP election for an inter vivos QTIP 
transfer within the prescribed timeframe, the extent of the 
IRS's authority to grant similar relief is unclear.

                        EXPLANATION OF PROVISION

    The provision directs the Secretary to issue regulations 
prescribing the circumstances and procedures under which 
extensions of time will be granted to make a QTIP election for 
an inter vivos QTIP transfer, including elections with respect 
to transfers that occurred prior to the effective date of the 
provision. For this purpose, the due date of the election is 
treated as if not prescribed by statute. In determining whether 
to grant an extension of time, it is intended that the 
Secretary shall take into account all circumstances the 
Secretary deems relevant.

                             EFFECTIVE DATE

    The provision applies to requests for relief pending on or 
after the date of enactment with respect to transfers made 
before, on, or after such date.

                N. Disclosure of Written Determinations


(Sec. 714 of the bill and sec. 6110 of the Code)

                              PRESENT LAW

In general

    Three provisions of present law govern the disclosure of 
information relating to tax-exempt organizations. First, 
section 6103 provides a general rule that tax returns and 
return information generally are not subject to disclosure 
unless authorized by the Code.\233\ Second, in order to allow 
the public to scrutinize the activities of tax-exempt 
organizations, section 6104 grants an exception to the 
confidentiality rule of section 6103 for certain categories of 
tax-exempt organization documents and information. Third, 
section 6110 provides that written determinations by the IRS 
and related background file documents generally are open to 
public inspection in redacted form. Section 6110 does not apply 
to any matter to which section 6104 applies.\234\
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    \233\Sec. 6103(a).
    \234\Sec. 6110(l)(1).
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Disclosure of applications for recognition of tax exemption and annual 
        information returns

    Under present law, the IRS is required to make approved 
applications for recognition of tax-exempt status (and certain 
related documents)\235\ and annual information returns (Form 
990 or Form 990-PF) available for public inspection, except 
that the IRS is not authorized to disclose the names and 
addresses of contributors (other than contributors to a private 
foundation).
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    \235\Section 6104(a)(1)(A) provides that ``any papers submitted in 
support of'' an application for tax-exempt status must be available for 
inspection. Treasury regulations limit the definition of supporting 
documents to papers submitted by the organization. Treas. Reg. sec. 
301.6104(a)-1(e).
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    The Secretary may withhold disclosure of certain 
information described in an organization's application for tax-
exempt status if disclosure would: (1) divulge a trade secret, 
patent, process, style of work, or apparatus of the 
organization, and the Secretary determines that such disclosure 
would harm the organization; or (2) that the Secretary 
determines would harm the national defense.\236\ The 
organization must apply to the Commissioner for a determination 
that the disclosure would violate one of these criteria. The 
organization will be given 15 days to contest an adverse 
determination before the information is made available for 
public inspection.\237\
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    \236\Sec. 6104(a)(1)(D).
    \237\Treas. Reg. sec. 301.6104(a)-5(a)(1).
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Disclosure of written determinations

    Section 6110 provides that the text of any written 
determination by the IRS and related background file document 
is open to public inspection.\238\ The term ``written 
determination'' means a ruling, determination letter, technical 
advice memorandum, or Chief Counsel advice. Closing agreements, 
which are final and conclusive written agreements entered into 
by the IRS and a taxpayer in order to settle the taxpayer's tax 
liability with respect to a taxable year, do not constitute 
written determinations.\239\
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    \238\Sec. 6110(a). A background file document includes the request 
for a written determination, any written material submitted by the 
taxpayer in support of the request, and any communications between the 
IRS and other persons in connection with the written determination 
received before issuance of the written determination. Sec. 6110(b)(2).
    \239\Sec. 6103(b)(2)(D); sec. 6110(b)(1)(B).
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    Before releasing any written determination or background 
file document, the IRS must delete identifying details of the 
person about whom the written determination pertains and 
certain other private information.\240\
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    \240\Sec. 6110(c).
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    The application of section 6110 to guidance relating to 
tax-exempt organizations is limited to written determinations 
unrelated to an organization's tax-exempt status. Section 
6110(l)(1) provides, ``this section shall not apply to any 
matter to which section 6104 applies.'' The regulations under 
section 6110 clarify which matters are within the ambit of 
section 6104 and, therefore, are not subject to disclosure 
under section 6110:

        [a]ny application filed with the Internal Revenue 
        Service with respect to the qualification or exempt 
        status of an organization . . .; any document issued by 
        the Internal Revenue Service in which the qualification 
        or exempt status of an organization is . . . granted, 
        denied or revoked or the portion of any document in 
        which technical advice with respect thereto is given to 
        a district director; . . . the portion of any document 
        issued by the Internal Revenue Service in which is 
        discussed the effect on the qualification or exempt 
        status of an organization . . . of proposed 
        transactions by such organization . . .; and any 
        document issued by the Internal Revenue Service in 
        which is discussed the qualification or status of a 
        [private foundation or private operating 
        foundation].\241\

    \241\Treas. Reg. sec. 301.6110-1(a).
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    In addition, the regulations under section 6104 provide 
that some documents relating to tax exemption that are not open 
to public inspection under section 6104(a)(1)(A) are 
nevertheless ``within the ambit'' of section 6104 for purposes 
of the disclosure provisions of section 6110.\242\
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    \242\Treas. Reg. sec. 301.6104(a)-1(i).
---------------------------------------------------------------------------
    The regulation explains that the following documents are, 
therefore, not available for public inspection under either 
section 6104 or 6110:
           Unfavorable rulings or determination letters 
        issued in response to applications for tax exemption;
           Rulings or determination letters revoking or 
        modifying a favorable determination letter;
           Technical advice memoranda relating to a 
        disapproved application for tax exemption or the 
        revocation or modification of a favorable determination 
        letter;
           Any letter or document filed with or issued 
        by the IRS relating to whether a proposed or 
        accomplished transaction is a prohibited transaction 
        under section 503;
           Any letter or document filed with or issued 
        by the IRS relating to an organization's status as a 
        private foundation or private operating foundation, 
        unless the letter or document relates to the 
        organization's application for tax exemption; and
           Any other letter or document filed with or 
        issued by the IRS which, although it relates to an 
        organization's tax exempt status as an organization 
        described in section 501(c), does not relate to that 
        organization's application for tax exemption.\243\
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    \243\Id.
---------------------------------------------------------------------------
    Under the regulations, such written determinations relating 
to exempt status issues are not released, even in redacted 
form. Pursuant to a decision of the D.C. Circuit Court of 
Appeals, however, the IRS is required to disclose written 
determinations relating to denials and revocations of exempt 
status--a decision in which the IRS acquiesced.\244\
---------------------------------------------------------------------------
    \244\Tax Analysis v. Internal Revenue Service, 350 F.3d 100 (D.C. 
Cir. 2003); A.O.D. 2004-02.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that written determinations and 
background file documents that ordinarily would be disclosed 
under section 6110 but for the nondisclosure provided by 
section 6104 should be disclosed in redacted form, and that 
such disclosure will provide additional guidance to taxpayers 
as to the views of the IRS on certain issues.

                        EXPLANATION OF PROVISION

    The provision provides that the provisions of section 6110 
apply to written determinations and related background file 
documents relating to an organization described in section 
501(c) or (d) (including any written determination denying an 
organization exempt status under such subsection), or to a 
political organization described in section 527, that are not 
required to be disclosed by section 6104(a)(1)(A).

                             EFFECTIVE DATE

    The provision is effective for written determinations 
issued after the date of enactment.

 O. Disclosure of Internet Web Site and Name Under Which Organization 
                             Does Business


(Sec. 715 of the bill and sec. 6033 of the Code)

                              PRESENT LAW

    Most types of tax-exempt organizations are required to file 
annually an information return.\245\ The Internal Revenue Code 
does not specifically require an exempt organization to furnish 
on the applicable information return any name under which the 
organization operates or does business, if such name differs 
from the legal name of the organization, or the organization's 
Internet Web site address, if any.\246\
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    \245\Sec. 6033(a).
    \246\The IRS requires disclosure of an organization's Internet Web 
site address and business name on Forms 990 and 990-EZ but not on Form 
990-PF.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Some tax-exempt organizations do business and solicit 
contributions under a name that is different from the 
organization's legal name. This can cause confusion to 
individuals and others seeking information about the 
organization. Further, although much information regarding the 
operations and activities of tax-exempt organizations is 
available on the Internet Web sites of such organizations, some 
members of the public might experience difficulties obtaining 
access to an organization's Web site if they do not know the 
organization's Web site address. The Committee believes that 
reducing confusion and increasing public access to relevant 
information regarding a tax-exempt organization would be 
achieved by requiring a tax-exempt organization to report on 
its annual return any name under which such organization 
operates or does business, and the Internet Web site address 
(if any) of such organization.

                        EXPLANATION OF PROVISION

    The provision requires a tax-exempt organization subject to 
reporting requirements under section 6033(a) to include on its 
annual return any name under which such organization operates 
or does business, and the Internet Web site address (if any) of 
such organization.

                             EFFECTIVE DATE

    The provision applies to returns filed after December 31, 
2006.

          P. Modification to Reporting of Capital Transactions


(Sec. 716 of the bill and secs. 6033 and 6104 of the Code)

                              PRESENT LAW

    Private foundations are required to file an annual 
information return (Form 990-PF).\247\ Part IV of the Form 990-
PF requires that private foundations report detailed 
information regarding the gain or loss from the sale or other 
disposition of property, including a description of the 
property sold, how it was acquired (purchase or donation), the 
date acquired, the date sold, the gross sales price, the amount 
of depreciation allowed or allowable, and the cost or other 
basis plus expenses of the sale. Such information generally is 
required for the IRS to calculate the tax on the private 
foundation's net investment income. The Form 990-PF is required 
to be made available to the public.
---------------------------------------------------------------------------
    \247\Sec. 6033(a).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Under present law, private foundations that engage in 
capital transactions must report detailed information about 
each transaction on Form 990-PF, which is filed with the IRS 
and available to the public. For some foundations, listing 
these transactions involves hundreds of pages. The Committee 
believes that automatic disclosure of such voluminous 
information does not necessarily benefit the public, and may in 
fact reduce the level of meaningful disclosure by obscuring 
other important information. The Committee believes that 
meaningful disclosure to the public will be increased if the 
version of the Form 990-PF that automatically is available to 
the public summarizes rather than lists the securities 
transactions that affect the calculation of the organization's 
net investment income. In order to preserve the public's access 
to more specific information regarding such securities 
transactions, the Committee believes that the more detailed 
information provided to the IRS on the Form 990-PF should be 
made available to those members of the public that explicitly 
request such information.

                        EXPLANATION OF PROVISION

    The provision requires that any information regarding 
capital gains and losses from the sale or disposition of stock 
or securities that are listed on an established securities 
market that is required to be furnished by private foundations 
in order to calculate the tax on net investment income be 
furnished also in summary form.
    In addition, information regarding capital gains and losses 
from the sale or disposition of stock or securities that are 
listed on an established securities market that is required to 
be filed with the IRS but that is not in summary form is not 
required to be made available to the public by the IRS or by 
the private foundation except by the explicit request of a 
member of the public to the IRS or to the foundation. A member 
of the public may request disclosure of such information from 
the Secretary, who shall prescribe the manner of making such 
request and the manner of disclosure. A member of the public 
also may request disclosure of the private foundation, which 
must be made in person or in writing. If the request is made in 
person, the foundation shall provide a copy of the information 
immediately and, if the request is made in writing, the 
foundation shall provide the information within 30 days.
    The provision also provides that private foundations are 
required to state on the furnished summary that the more 
detailed description is available upon request.

                             EFFECTIVE DATE

    The provision applies to returns filed after December 31, 
2006.

           Q. Disclosure That Form 990 Is Publicly Available


(Sec. 717 of the bill)

                              PRESENT LAW

    Under present law, there is no requirement that the IRS 
notify the public that the Form 990 is publicly available.

                           REASONS FOR CHANGE

    The information provided on Forms 990 is useful to the 
public only to the extent that the public is aware that the 
forms are publicly available. The Committee believes that the 
availability of Forms 990 that have been filed by exempt 
organizations will be increased by requiring the IRS to inform 
the public regarding the availability of such forms.

                        EXPLANATION OF PROVISION

    The provision requires the IRS to notify the public in 
appropriate publications and other materials of the extent to 
which Form 990, Form 990-EZ, or Form 990-PF are publicly 
available.

                             EFFECTIVE DATE

    The provision applies to publications or other materials 
issued or revised after the date of enactment.

   R. Expedited Review Process for Certain Tax-Exemption Applications


(Sec. 718 of the bill)

                              PRESENT LAW

    Most organizations that seek tax-exempt status as a 
charitable organization are required to file an Application for 
Recognition of Exemption (Form 1023) with the IRS.\248\ 
Organizations that are not required to file Form 1023 include 
churches, their integrated auxiliaries, and conventions or 
associations of churches, and any organization (other than a 
private foundation) that normally has gross receipts of $5,000 
or less in a taxable year. Organizations that file Form 1023 
within 15 months of the end of the month of the organization's 
formation will, if the application is approved, be recognized 
as tax-exempt from the date of formation. The IRS will 
automatically grant an organization's request for an additional 
12-month extension of the 15-month period. Otherwise, exemption 
normally will be recognized as of the date the application was 
received by the IRS. In appropriate circumstances, upon written 
request, the IRS will expedite consideration of applications 
for tax-exemption. For example, organizations formed to provide 
relief to victims of disasters or other emergencies often 
receive expedited consideration.
---------------------------------------------------------------------------
    \248\Sec. 508(a).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Many social service organizations that want to apply for 
government funding through grants or contracts are required as 
a condition of application to have been recognized as an exempt 
charitable organization. The Committee wishes to facilitate the 
formation of charitable organizations that intend to work with 
Federal, State and local governments to provide vital social 
services to many of the neediest members of society by 
implementing an expedited review procedure for exempt status 
applications, and by waiving IRS user fees pertaining to such 
applications filed by smaller social service organizations.

                        EXPLANATION OF PROVISION

    The provision provides that the Secretary or his delegate 
shall adopt procedures to expedite consideration of 
applications for exempt status by organizations that are 
organized and operated for the primary purpose of providing 
social services. To be eligible, the organization must: (1) be 
seeking a contract or grant under a Federal, State, or local 
program that provides funding for social service programs; (2) 
establish that tax-exempt status is a condition of applying for 
such contract or grant; (3) include a completed copy of the 
contract or grant application with the application for 
exemption; and (4) meet such other criteria as the Secretary 
may provide. Organizations that meet the eligibility 
requirements described above (except for the requirement that 
tax-exempt status is a condition of the contract or grant 
application), and that certify that the organization's average 
annual gross receipts over the four-year period preceding the 
application was not more than $50,000 (or, in the case of an 
organization in existence less than four years, is not expected 
to be more than $50,000 during the organization's first four 
years) are entitled to a waiver of any fee for application of 
tax-exempt status.
    For this purpose, social services is defined as services 
directed at helping people in need, reducing poverty, improving 
outcomes of low-income children, revitalizing low-income 
communities, and empowering low-income families and low-income 
individuals to become self-sufficient, including: (1) child 
care services, protective services for children and adults, 
services for children and adults in foster care, adoption 
services, services related to the management and maintenance of 
the home, day care services for adults, and services to meet 
the special needs of children, older individuals, and 
individuals with disabilities (including physical, mental, or 
emotional disabilities); (2) transportation services; (3) job 
training and related services, and employment services; (4) 
information, referral, and counseling services; (5) the 
preparation and delivery of meals, and services related to soup 
kitchens or food banks; (6) health support services; (7) 
literacy and mentoring programs; (8) services for the 
prevention and treatment of juvenile delinquency and substance 
abuse, services for the prevention of crime and the provision 
of assistance to the victims and the families of criminal 
offenders, and services related to the intervention in, and 
prevention of, domestic violence; and (9) services related to 
the provision of assistance for housing under Federal law. 
Social services does not include a program having the purpose 
of delivering educational assistance under the Elementary and 
Secondary Education Act of 1965 or under the Higher Education 
Act of 1965.

                             EFFECTIVE DATE

    The provision applies to applications for tax-exempt status 
filed after December 31, 2006.

 S. Extension of Declaratory Judgment Procedures to Non-501(c)(3) Tax-
                          Exempt Organizations


(Sec. 719 of the bill and sec. 7428 of the Code)

                              PRESENT LAW

    In order for an organization to be granted tax exemption as 
a charitable entity described in section 501(c)(3), it 
generally must file an application for recognition of exemption 
with the IRS and receive a favorable determination of its 
status. Similarly, for most organizations, a charitable 
organization's eligibility to receive tax-deductible 
contributions is dependent upon its receipt of a favorable 
determination from the IRS. In general, a section 501(c)(3) 
organization can rely on a determination letter or ruling from 
the IRS regarding its tax-exempt status, unless there is a 
material change in its character, purposes, or methods of 
operation. In cases in which an organization violates one or 
more of the requirements for tax exemption under section 
501(c)(3), the IRS is authorized to revoke an organization's 
tax exemption, notwithstanding an earlier favorable 
determination.
    In situations in which the IRS denies an organization's 
application for recognition of exemption under section 
501(c)(3) or fails to act on such application, or in which the 
IRS informs a section 501(c)(3) organization that it is 
considering revoking or adversely modifying its tax-exempt 
status, present law authorizes the organization to seek a 
declaratory judgment regarding its tax status.\249\ Section 
7428 provides a remedy in the case of a dispute involving a 
determination by the IRS with respect to: (1) the initial 
qualification or continuing qualification of an organization as 
a charitable organization for tax exemption purposes or for 
charitable contribution deduction purposes; (2) the initial 
classification or continuing classification of an organization 
as a private foundation; (3) the initial classification or 
continuing classification of an organization as a private 
operating foundation; or (4) the failure of the IRS to make a 
determination with respect to (1), (2), or (3). A 
``determination'' in this context generally means a final 
decision by the IRS affecting the tax qualification of a 
charitable organization, although it also can include a 
proposed revocation of an organization's tax-exempt status or 
public charity classification. Section 7428 vests jurisdiction 
over controversies involving such a determination in the U.S. 
District Court for the District of Columbia, the U.S. Court of 
Federal Claims, and the U.S. Tax Court.
---------------------------------------------------------------------------
    \249\Sec. 7428.
---------------------------------------------------------------------------
    Prior to utilizing the declaratory judgment procedure, an 
organization must have exhausted all administrative remedies 
available to it within the IRS. An organization is deemed to 
have exhausted its administrative remedies at the expiration of 
270 days after the date on which the request for a 
determination was made if the organization has taken, in a 
timely manner, all reasonable steps to secure such 
determination.
    If an organization (other than a section 501(c)(3) 
organization) files an application for recognition of exemption 
and receives a favorable determination from the IRS, the 
determination of tax-exempt status is usually effective as of 
the date of formation of the organization if its purposes and 
activities during the period prior to the date of the 
determination letter were consistent with the requirements for 
exemption. However, if the organization files an application 
for recognition of exemption and later receives an adverse 
determination from the IRS, the IRS may assert that the 
organization is subject to tax on some or all of its income for 
open taxable years. In addition, as with charitable 
organizations, the IRS may revoke or modify an earlier 
favorable determination regarding an organization's tax-exempt 
status.
    Under present law, a non-charity (i.e., an organization not 
described in section 501(c)(3)) may not seek a declaratory 
judgment with respect to an IRS determination regarding its 
tax-exempt status. The only remedies available to such an 
organization are to petition the U.S. Tax Court for relief 
following the issuance of a notice of deficiency or to pay any 
tax owed and sue for refund in Federal district court or the 
U.S. Court of Federal Claims.

                           REASONS FOR CHANGE

    The Committee believes that it is important to provide 
certainty for organizations that have sought a determination of 
their tax-exempt status. Thus, the Committee finds it 
appropriate to extend the present-law declaratory judgment 
procedures to all organizations that apply for tax-exempt 
status as organizations described in section 501(c) or 501(d).

                        EXPLANATION OF PROVISION

    The provision extends declaratory judgment procedures 
similar to those currently available only to charities under 
section 7428 to other section 501(c) and 501(d) determinations. 
The provision limits jurisdiction over controversies involving 
such other determinations to the United States Tax Court.\250\
---------------------------------------------------------------------------
    \250\This limitation currently applies to declaratory judgments 
relating to tax qualification for certain employee retirement plans 
(sec. 7476).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The extension of the declaratory judgment procedures to 
organizations other than section 501(c)(3) organizations is 
effective for pleadings filed with respect to determinations 
(or requests for determinations) made after December 31, 2006.

     T. Wireless Telecommunications Property Treated as Qualified 
                        Technological Equipment


(Sec. 720 of the bill and sec. 168 of the Code)

                              PRESENT LAW

    A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS'') (sec. 168). Under 
MACRS, different types of property generally are assigned 
applicable recovery periods and depreciation methods. The 
recovery periods applicable to most tangible personal property 
(generally tangible property other than residential rental 
property and nonresidential real property) range from 3 to 25 
years. The depreciation methods generally applicable to 
tangible personal property are the 200-percent and 150-percent 
declining balance methods, switching to the straight-line 
method for the taxable year in which the depreciation deduction 
would be maximized.
    Under MACRS, qualified technological equipment is 
depreciated over a five-year recovery period using the 200-
percent declining balance method. Qualified technological 
equipment includes any computer or peripheral equipment, any 
technology station equipment installed on a customer's 
premises, and any high technology equipment.
    The recovery periods under MACRS for various asset classes 
are prescribed by Revenue Procedure 87-56.\251\ Under IRS 
guidance, assets used to provide cellular telephone service 
fall within asset classes 48.12 (Telephone Central Office 
Equipment, 10-year recovery period), 48.121 (Computer-based 
Telephone Central Office Switching Equipment, 5-year recovery 
period), 48.13 (Telephone Station Equipment, 7-year recovery 
period), and 48.14 (Telephone Distribution Plants, 15-year 
recovery period).\252\ Switching, transmission, and reception 
equipment located at either the mobile telephone switching 
office (MTSO) or cell sites are described in asset class 48.12. 
Computer-based switching equipment located at either the MTSO 
or cell sites is described in asset class 48.121. Transmission 
and reception assets are qualified technology equipment with a 
5-year recovery period if they qualify as computer or 
peripheral equipment.
---------------------------------------------------------------------------
    \251\1987-2 C.B. 674.
    \252\Technical Advice Memorandum 9825003 (Jan. 30, 1998).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the application of the asset 
classes originally developed for wireline telecommunications to 
wireless telecommunications equipment has resulted in 
uncertainty and increased administrative costs for wireless 
telecommunication service providers and the IRS. In addition, 
the Committee is aware the wireless telecommunication equipment 
may rapidly depreciate and become obsolete as a result of 
technological advances in the industry.Accordingly, the 
provision provides a statutory depreciable life for wireless equipment 
and eliminates the need for wireless telecommunication service 
providers to attempt to apply the wireline asset classes to their 
wireless equipment.

                        EXPLANATION OF PROVISION

    Under the provision, wireless telecommunications equipment 
placed in service before January 1, 2011, is treated as 
qualified technological equipment and therefore is eligible for 
the five-year recovery period applicable to such property. 
Wireless telecommunications equipment is defined as equipment 
used in the transmission, reception, coordination, or switching 
of wireless telecommunications service. Wireless 
telecommunications equipment does not include towers, 
buildings, T-1 lines, or other cabling that connects cell sites 
to mobile switching centers.
    For this purpose, wireless telecommunications service 
includes any commercial mobile radio service as defined in 
title 47 of the Code of Federal Regulations (``CFR'').\253\
---------------------------------------------------------------------------
    \253\Under the CFR, a commercial mobile radio service is ``a mobile 
service that is: (a)(1) provided for profit, i.e., with the intent of 
receiving compensation or monetary gain; (2) an interconnected service; 
and (3) available to the public, or to such classes of eligible users 
as to be effectively available to a substantial portion of the public; 
or (b) the functional equivalent of such a mobile service described in 
paragraph (a) of this section.'' (47 CFR sec. 20.3.)
    Under the CFR, a mobile service is ``a radio communication service 
carried on between mobile stations or receivers and land stations, and 
by mobile stations communicating among themselves, and includes: (a) 
Both one-way and two-way radio communications services; (b) A mobile 
service which provides a regularly interacting group of base, mobile, 
portable, and associated control and relay stations (whether licensed 
on an individual, cooperative, or multiple basis) for private one-way 
or two-way land mobile radio communications by eligible users over 
designated areas of operation; and (c) Any service for which a license 
is required in a personal communications service under part 24 of this 
chapter.'' (47 CFR sec. 20.3.)
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                             EFFECTIVE DATE

    The provision applies to property placed in service after 
the date of enactment and before January 1, 2011.

           U. Permanent Extension of Internet Tax Moratorium


(Sec. 721 of the bill)

                              PRESENT LAW

    The Internet Tax Freedom Act of 1998\254\ imposed a three-
year moratorium on State and local government taxes on Internet 
access, as well as on any multiple or discriminatory State and 
local taxes on Internet-based transactions. In 2001, the tax 
moratorium was extended through November 1, 2003.\255\ The 
Internet Tax Nondiscrimination Act of 2004\256\ extended the 
moratorium through November 1, 2007.
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    \254\Pub. L. No. 105-277.
    \255\Pub. L. No. 107-75 (2001).
    \256\Pub. L. No. 108-435 (2004).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the Internet Tax Freedom Act 
has successfully protected Internet users and online businesses 
from unfair and discriminatory taxation. The Committee believes 
that the moratorium on Internet access taxes and multiple and 
discriminatory taxes on electronic commerce should be 
permanent.

                        EXPLANATION OF PROVISION

    The provision makes permanent the Internet Tax Freedom 
Act's moratorium on certain taxes.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

    V. Simplification Through Elimination of Inoperative Provisions


(Sec. 722 of the bill)

                              PRESENT LAW

    The Internal Revenue Code of 1986 contains provisions that 
are no longer used in computing current taxes or are little 
used or of minor importance. These provisions are popularly 
referred to as ``deadwood''.

                           REASONS FOR CHANGE

    The provision simplifies the Code by deleting ``deadwood'' 
without making substantive changes in the tax law.

                        EXPLANATION OF PROVISION

    The provision contains numerous amendments to the Code 
repealing obsolete provisions to the Internal Revenue Code of 
1986. No substantive changes are intended by the amendments.

                             EFFECTIVE DATE

    The provision takes effect on the date of enactment.

         W. Definition of Convention or Association of Churches


(Sec. 7701 of the Code)

                            PRESENT LAW\257\

    Under present law, an organization that qualifies as a 
``convention or association of churches'' (within the meaning 
of sec. 170(b)(1)(A)(i)) is not required to file an annual 
return,\258\ is subject to the church tax inquiry and church 
tax examination provisions applicable to organizations claiming 
to be a church,\259\ and is subject to certain other provisions 
generally applicable to churches.\260\ The Internal Revenue 
Code does not define the term ``convention or association of 
churches.''
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    \257\Present law refers to the law in effect on the date of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 
2006).
    \258\Sec. 6033(a)(2)(A)(i).
    \259\Sec. 7611(h)(1)(B).
    \260\See, e.g., Sec. 402(g)(8)(B) (limitation on elective 
deferrals); sec. 403(b)(9)(B) (definition of retirement income 
account); sec. 410(d) (election to have participation, vesting, 
funding, and certain other provisions apply to church plans); sec. 
414(e) (definition of church plan); sec. 415(c)(7) (certain 
contributions by church plans); sec. 501(h)(5) (disqualification of 
certain organizations from making the sec. 501(h) election regarding 
lobbying expenditure limits); sec. 501(m)(3) (definition of commercial-
type insurance); sec. 508(c)(1)(A) (exception from requirement to file 
application seeking recognition of exempt status); sec. 512(b)(12) 
(allowance of up to $1,000 deduction for purposes of determining 
unrelated business taxable income); sec. 514(b)(3)(E) (definition of 
debt-financed property); sec. 3121(w)(3)(A) (election regarding 
exemption from social security taxes); sec. 3309(b)(1) (application of 
federal unemployment tax provisions to services performed in the employ 
of certain organizations); sec. 6043(b)(1) (requirement to file a 
return upon liquidation or dissolution of the organization); and sec. 
7702(j)(3)(A) (treatment of certain death benefit plans as life 
insurance).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The term ``convention or association of churches'' was 
added to the Code to ensure that hierarchical churches and 
congregational churches would not be treated dissimilarly for 
Federal income tax purposes merely because of their 
organizational and governance structures. The Committee 
understands that some congregational church organizations have 
only churches as members, and that others have both churches 
and individuals as members. The Committee is concerned that an 
organization with the characteristics of a convention or 
association of churches, including having a substantial number 
of churches as members, might fail to be regarded as a 
convention or association of churches merely because it 
includes individuals in its membership. The Committee intends 
that a congregational church organization that otherwise 
constitutes a convention or association of churches not be 
denied recognition as such merely because its membership 
includes individuals as well as churches.

                        EXPLANATION OF PROVISION

    [The bill does not include the provision as approved by the 
Committee because an identical or substantially similar 
provision was enacted into law in the Pension Protection Act of 
2006 (Pub. L. No. 109-280, sec. 1222) subsequent to Committee 
action on the bill. The following discussion describes the 
provision as approved by the Committee.]
    The provision provides that an organization that otherwise 
is a convention or association of churches does not fail to so 
qualify merely because the membership of the organization 
includes individuals as well as churches, or because 
individuals have voting rights in the organization.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                 TITLE VIII--REVENUE OFFSET PROVISIONS


                     A. Economic Substance Doctrine


(Secs. 801 and 802 of the bill)

1. Clarification of the economic substance doctrine (Sec. 801 of the 
        bill and new sec. 7701(o) of the Code)

                              PRESENT LAW

In general

    The Code provides specific rules regarding the computation 
of taxable income, including the amount, timing, source, and 
character of items of income, gain, loss and deduction. These 
rules are designed to provide for the computation of taxable 
income in a manner that provides for a degree of specificity to 
both taxpayers and the government. Taxpayers generally may plan 
their transactions in reliance on these rules to determine the 
federal income tax consequences arising from the transactions.
    In addition to the statutory provisions, courts have 
developed several doctrines that can be applied to deny the tax 
benefits of tax motivated transactions, notwithstanding that 
the transaction may satisfy the literal requirements of a 
specific tax provision. The common-law doctrines are not 
entirely distinguishable, and their application to a given set 
of facts is often blurred by the courts and the IRS. Although 
these doctrines serve an important role in the administration 
of the tax system, invocation of these doctrines can be seen as 
at odds with an objective, ``rule-based'' system of taxation. 
Nonetheless, courts have applied the doctrines to deny tax 
benefits arising from certain transactions.\261\
---------------------------------------------------------------------------
    \261\See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d 
Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. denied 526 U.S. 
1017 (1999).
---------------------------------------------------------------------------
    A common-law doctrine applied with increasing frequency is 
the ``economic substance'' doctrine. In general, this doctrine 
denies tax benefits arising from transactions that do not 
result in a meaningful change to the taxpayer's economic 
position other than a purported reduction in federal income 
tax.\262\
---------------------------------------------------------------------------
    \262\Closely related doctrines also applied by the courts 
(sometimes interchangeable with the economic substance doctrine) 
include the ``sham transaction doctrine'' and the ``business purpose 
doctrine''. See, e.g., Knetsch v. United States, 364 U.S. 361 (1960) 
(denying interest deductions on a ``sham transaction'' whose only 
purpose was to create the deductions).
---------------------------------------------------------------------------
            Economic substance doctrine
    Courts generally deny claimed tax benefits if the 
transaction that gives rise to those benefits lacks economic 
substance independent of tax considerations--notwithstanding 
that the purported activity actually occurred. The Tax Court 
has described the doctrine as follows:

        The tax law . . . requires that the intended 
        transactions have economic substance separate and 
        distinct from economic benefit achieved solely by tax 
        reduction. The doctrine of economic substance becomes 
        applicable, and a judicial remedy is warranted, where a 
        taxpayer seeks to claim tax benefits, unintended by 
        Congress, by means of transactions that serve no 
        economic purpose other than tax savings.\263\
---------------------------------------------------------------------------
    \263\ACM Partnership v. Commissioner, 73 T.C.M. at 2215.
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            Business purpose doctrine
    Another common law doctrine that overlays and is often 
considered together with (if not part and parcel of) the 
economic substance doctrine is the business purpose doctrine. 
The business purpose test is a subjective inquiry into the 
motives of the taxpayer--that is, whether the taxpayer intended 
the transaction to serve some useful non-tax purpose. In making 
this determination, some courts have bifurcated a transaction 
in which independent activities with non-tax objectives have 
been combined with an unrelated item having only tax-avoidance 
objectives in order to disallow the tax benefits of the overall 
transaction.\264\
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    \264\ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.
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Application by the courts

            Elements of the doctrine
    There is a lack of uniformity regarding the proper 
application of the economic substance doctrine.\265\ Some 
courts apply a conjunctive test that requires a taxpayer to 
establish the presence of both economic substance (i.e., the 
objective component) and business purpose (i.e., the subjective 
component) in order for the transaction to survive judicial 
scrutiny.\266\ A narrower approach used by some courts is to 
conclude that either a business purpose or economic substance 
is sufficient to respect the transaction).\267\ A third 
approach regards economic substance and business purpose as 
``simply more precise factors to consider'' in determining 
whether a transaction has any practical economic effects other 
than the creation of tax benefits.\268\
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    \265\``The casebooks are glutted with [economic substance] tests. 
Many such tests proliferate because they give the comforting illusion 
of consistency and precision. They often obscure rather than clarify.'' 
Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988).
    \266\See, e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 (6th 
Cir. 1993) (``The threshold question is whether the transaction has 
economic substance. If the answer is yes, the question becomes whether 
the taxpayer was motivated by profit to participate in the 
transaction.'').
    \267\See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 89, 
91-92 (4th Cir. 1985) (``To treat a transaction as a sham, the court 
must find that the taxpayer was motivated by no business purposes other 
than obtaining tax benefits in entering the transaction, and, second, 
that the transaction has no economic substance because no reasonable 
possibility of a profit exists.''); IES Industries v. United States, 
253 F.3d 350, 358 (8th Cir. 2001) (``In determining whether a 
transaction is a sham for tax purposes [under the Eighth Circuit test], 
a transaction will be characterized as a sham if it is not motivated by 
any economic purpose out of tax considerations (the business purpose 
test), and if it is without economic substance because no real 
potential for profit exists (the economic substance test).''). As noted 
earlier, the economic substance doctrine and the sham transaction 
doctrine are similar and sometimes are applied interchangeably. For a 
more detailed discussion of the sham transaction doctrine, see, e.g., 
Joint Committee on Taxation, Study of Present-Law Penalty and Interest 
Provisions as Required by Section 3801 of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (including Provisions Relating to 
Corporate Tax Shelters) (JCS-3-99) at 182.
    \268\See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 247; 
James v. Commissioner, 899 F.2d 905, 908 (10th Cir. 1995); Sacks v. 
Commissioner, 69 F.3d 982, 985 (9th Cir. 1995) (``Instead, the 
consideration of business purpose and economic substance are simply 
more precise factors to consider . . . We have repeatedly and carefully 
noted that this formulation cannot be used as a 'rigid two-step 
analysis'.'').
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    Recently, the Court of Federal Claims questioned the 
continuing viability of the doctrine That court also stated 
that ``the use of the `economic substance' doctrine to trump 
`mere compliance with the Code' would violate the separation of 
powers'' though that court also found that the particular case 
did not lack economic substance. The Court of Appeals for the 
Federal Circuit (``Federal Circuit Court'') overruled the Court 
of Federal Claims decision, reiterating the viability of the 
economic substance doctrine and concluding that the transaction 
in questions violated that doctrine.\269\ The Federal Circuit 
Court stated that ``[w]hile the doctrine may well also apply if 
the taxpayer's sole subjective motivation is tax avoidance even 
if the transaction has economic substance, [footnote omitted], 
a lack of economic substance is sufficient to disqualify the 
transaction without proof that the taxpayer's sole motive is 
tax avoidance.''\270\
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    \269\Coltec Industries, Inc. v. United States, 62 Fed. Cl. 716 
(2004) (slip opinion at 123-124, 128); vacated and remanded, 454 F.3d 
1340 (Fed. Cir. 2006).
    \270\The Federal Circuit Court stated that ``when the taxpayer 
claims a deduction, it is the taxpayer who bears the burden of proving 
that the transaction has economic substance.'' The Federal Circuit 
Court quoted a decision of its predecessor court, stating that 
``Gregory v. Helvering requires that a taxpayer carry an unusually 
heavy burden when he attempts to demonstrate that Congress intended to 
give favorable tax treatment to the kind of transaction that would 
never occur absent the motive of tax avoidance.'' The Court also stated 
that ``while the taxpayer's subjective motivation may be pertinent to 
the existence of a tax avoidance purpose, all courts have looked to the 
objective reality of a transaction in assessing its economic 
substance.'' Coltec Industries, Inc. v. United States, 454 F.3d 1340, 
at 1355,1356 (Fed. Cir. 2006).
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            Nontax economic benefits
    There also is a lack of uniformity regarding the type of 
non-tax economic benefit a taxpayer must establish in order to 
satisfy economic substance. Some courts have denied tax 
benefits on the grounds that a stated business benefit of a 
particular structure was not in fact obtained by that 
structure.\271\ Several courts have denied tax benefits on the 
grounds that the subject transactions lacked profit 
potential.\272\ In addition, some courts have applied the 
economic substance doctrine to disallow tax benefits in 
transactions in which a taxpayer was exposed to risk and the 
transaction had a profit potential, but the court concluded 
that the economic risks and profit potential were insignificant 
when compared to the tax benefits.\273\ Under this analysis, 
the taxpayer's profit potential must be more than nominal. 
Conversely, other courts view the application of the economic 
substance doctrine as requiring an objective determination of 
whether a ``reasonable possibility of profit'' from the 
transaction existed apart from the tax benefits.\274\ In these 
cases, in assessing whether a reasonable possibility of profit 
exists, it is sufficient if there is a nominal amount of pre-
tax profit as measured against expected net tax benefits.
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    \271\See, e.g., Coltec Industries v. United States, 454 F.3d 1340 
(Fed. Cir. 2006). The court analyzed the transfer to a subsidiary of a 
note purporting to provide high stock basis in exchange for a purported 
assumption of liabilities, and held these transactions unnecessary to 
accomplish any business purpose of using a subsidiary to manage 
asbestos liabilities. The court also held that the purported business 
purpose of adding a barrier to veil-piercing claims by third parties 
was not accomplished by the transaction. 454 F.3d 1340 at pp 358-1360 
(Fed. Cir. 2006).
    \272\See, e.g., Knetsch, 364 U.S. at 361; Goldstein v. 
Commissioner, 364 F.2d 734 (2d Cir. 1966) (holding that an 
unprofitable, leveraged acquisition of Treasury bills, and accompanying 
prepaid interest deduction, lacked economic substance).
    \273\See, e.g., Goldstein v. Commissioner, 364 F.2d at 739-40 
(disallowing deduction even though taxpayer had a possibility of small 
gain or loss by owning Treasury bills); Sheldon v. Commissioner, 94 
T.C. 738, 768 (1990) (stating that ``potential for gain . . . is 
infinitesimally nominal and vastly insignificant when considered in 
comparison with the claimed deductions'').
    \274\See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d at 94 
(the economic substance inquiry requires an objective determination of 
whether a reasonable possibility of profit from the transaction existed 
apart from tax benefits); Compaq Computer Corp. v. Commissioner, 277 
F.3d at 781 (applied the same test, citing Rice's Toyota World); IES 
Industries v. United States, 253 F.3d 350, 354 (8th Cir. 2001).
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            Financial accounting benefits
    In determining whether a taxpayer had a valid business 
purpose for entering into a transaction, at least one court has 
concluded that financial accounting benefits arising from tax 
savings do not qualify as a non-tax business purpose.\275\ 
However, based on court decisions that recognize the importance 
of financial accounting treatment, taxpayers have asserted that 
financial accounting benefits arising from tax savings can 
satisfy the business purpose test.\276\
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    \275\See, American Electric Power, Inc. v. U.S., 136 F. Supp. 2d 
762, 791-92 (S.D. Ohio 2001); aff'd 326 F.3d.737 (6th Cir. 2003).
    \276\See, e.g., Joint Committee on Taxation, Report of 
Investigation of Enron Corporation and Related Entities Regarding 
Federal Tax and Compensation Issues, and Policy Recommendations (JSC-3-
03) February, 2003 (``Enron Report''), Volume III at C-93, 289. Enron 
Corporation relied on Frank Lyon Co. v. United States, 435 U.S. 561, 
577-78 (1978), and Newman v. Commissioner, 902 F.2d 159, 163 (2d Cir. 
1990) to argue that financial accounting benefits arising from tax 
savings constitutes a good business purpose.
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                           REASONS FOR CHANGE

    Recent tax avoidance transactions have relied upon the 
interaction of highly technical tax law provisions to produce 
tax consequences not contemplated by the Congress. When 
successful, taxpayers who engage in these transactions enlarge 
the tax gap by gaining unintended tax relief and by undermining 
overall respect for the tax system. Even in cases when 
taxpayers do not prevail, substantial resources are expended 
and resolutions of issues frequently are delayed for several 
years.
    A strictly rule-based tax system cannot efficiently 
prescribe the appropriate outcome of every conceivable 
transaction that might be devised and is, as a result, 
incapable of preventing all unintended consequences. Thus, many 
courts have long recognized the need to supplement tax rules 
with anti-tax avoidance standards, such as the economic 
substance doctrine, in order to assure the Congressional 
purpose is achieved. The Committee believes it is desirable to 
provide greater clarity and uniformity in the application of 
the economic substance doctrine in order to improve its 
effectiveness at deterring unintended consequences and to 
promote more effective utilization of resources.

                        EXPLANATION OF PROVISION

    The provision clarifies and enhances the application of the 
economic substance doctrine. Under the provision, in a case in 
which a court determines that the economic substance doctrine 
is relevant to a transaction (or a series of transactions), 
such transaction (or series of transactions) has economic 
substance (and thus satisfies the economic substance doctrine) 
only if the taxpayer establishes that (1) the transaction 
changes in a meaningful way (apart from Federal income tax 
consequences) the taxpayer's economic position, and (2) the 
taxpayer has a substantial non-tax purpose for entering into 
such transaction and the transaction is a reasonable means of 
accomplishing such purpose.\277\
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    \277\If the tax benefits are clearly contemplated and expected by 
the language and purpose of the relevant authority, it is not intended 
that such tax benefits be disallowed if the only reason for such 
disallowance is that the transaction fails the economic substance 
doctrine as defined in this provision.
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    The provision does not change current law standards used by 
courts in determining when to utilize an economic substance 
analysis.\278\ Also, the provision does not alter the court's 
ability to aggregate, disaggregate or otherwise recharacterize 
a transaction when applying the doctrine.\279\ The provision 
provides a uniform definition of economic substance, but does 
not alter the flexibility of the courts in other respects.
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    \278\See, e.g., Treas. Reg. sec. 1.269-2, stating that 
characteristic of circumstances in which a deduction otherwise allowed 
will be disallowed are those in which the effect of the deduction, 
credit, or other allowance would be to distort the liability of the 
particular taxpayer when the essential nature of the transaction or 
situation is examined in the light of the purpose or plan which the 
deduction, credit, or other allowance was designed by the Congress to 
effectuate.
    \279\See, e.g., Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613 
(1938) (``A given result at the end of a straight path is not made a 
different result because reached by following a devious path.'').
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Conjunctive analysis

    The provision clarifies that the economic substance 
doctrine involves a conjunctive analysis--there must be an 
objective inquiry regarding the effects of the transaction on 
the taxpayer's economic position, as well as a subjective 
inquiry regarding the taxpayer's motives for engaging in the 
transaction. Under the provision, a transaction must satisfy 
both tests--i.e., it must change in a meaningful way (apart 
from Federal income tax consequences) the taxpayer's economic 
position, and the taxpayer must have a substantial non-tax 
purpose for entering into such transaction (and the transaction 
is a reasonable means of accomplishing such purpose)--in order 
to satisfy the economic substance doctrine. This clarification 
eliminates the disparity that exists among the circuits 
regarding the application of the doctrine, and modifies its 
application in those circuits in which either a change in 
economic position or a non-tax business purpose (without having 
both) is sufficient to satisfy the economic substance doctrine.

Non-tax business purpose

    Under the provision, a taxpayer's non-tax purpose for 
entering into a transaction (the second prong in the analysis) 
must be ``substantial,'' and the transaction must be ``a 
reasonable means'' of accomplishing such purpose. Under this 
formulation, the non-tax purpose for the transaction must bear 
a reasonable relationship to the taxpayer's normal business 
operations or investment activities.\280\
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    \280\See, e.g., Treas. Reg. sec. 1.269-2(b), (stating that a 
distortion of tax liability indicating the principal purpose of tax 
evasion or avoidance might be evidenced by the fact that ``the 
transaction was not undertaken for reasons germane to the conduct of 
the business of the taxpayer''). Similarly, in ACM Partnership v. 
Commissioner, 73 T.C.M. (CCH) 2189 (1997), the court stated:
    ``Key to [the determination of whether a transaction has economic 
substance] is that the transaction must be rationally related to a 
useful nontax purpose that is plausible in light of the taxpayer's 
conduct and useful in light of the taxpayer's economic situation and 
intentions. Both the utility of the stated purpose and the rationality 
of the means chosen to effectuate it must be evaluated in accordance 
with commercial practices in the relevant industry. A rational 
relationship between purpose and means ordinarily will not be found 
unless there was a reasonable expectation that the nontax benefits 
would be at least commensurate with the transaction costs. [citations 
omitted]''
    See also Martin McMahon Jr. Economic Substance, Purposive Activity, 
and Corporate Tax Shelters, 94 Tax Notes 1017, 1023 (Feb. 25 2002) 
(advocates ``confining the most rigorous application of business 
purpose, economic substance, and purposive activity tests to 
transactions outside the ordinary course of the taxpayer's business--
those transactions that do not appear to contribute to any business 
activity or objective that the taxpayer may have had apart from tax 
planning but are merely loss generators.''); Mark P. Gergen, The Common 
Knowledge of Tax Abuse, 54 SMU L. Rev. 131, 140 (Winter 2001) (``The 
message is that you can pick up tax gold if you find it in the street 
while going about your business, but you cannot go hunting for it'').
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    In determining whether a taxpayer has a substantial non-tax 
business purpose, an objective of achieving a favorable 
accounting treatment for financial reporting purposes will not 
be treated as having a substantial non-tax purpose.\281\ 
Furthermore, a transaction that is expected to increase 
financial accounting income as a result of generating tax 
deductions or losses without a corresponding financial 
accounting charge (i.e., a permanent book-tax difference)\282\ 
should not be considered to have a substantial non-tax purpose 
unless a substantial non-tax purpose exists apart from the 
financial accounting benefits.\283\
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    \281\However, if the tax benefits are clearly contemplated and 
expeccted by the language and purpose of the relevant authority, such 
tax benefits should not be disallowed solely because the transaction 
results in a favorable accounting treatment. An example is the repealed 
foreign sales corporation rules.
    \282\This includes tax deductions or losses that are anticipated to 
be recognized in a period subsequent to the period the financial 
accounting benefit is recognized. For example, FAS 109 in some cases 
permits the recognition of financial accounting benefits prior to the 
period in which the tax benefits are recognized for income tax 
purposes.
    \283\Claiming that a financial accounting benefit constitutes a 
substantial non-tax purpose fails to consider the origin of the 
accounting benefit (i.e., reduction of taxes) and significantly 
diminishes the purpose for having a substantial non-tax purpose 
requirement. See, e.g, American Electric Power, Inc. v. U.S., 136 F. 
Supp. 2d 762, 791-92 (S.D. Ohio, 2001) (``AEP's intended use of the 
cash flows generated by the [corporate-owned life insurance] plan is 
irrelevant to the subjective prong of the economic substance analysis. 
If a legitimate business purpose for the use of the tax savings `were 
sufficient to breathe substance into a transaction whose only purpose 
was to reduce taxes, [then] every sham tax-shelter device might 
succeed,''') (citing Winn-Dixie v. Commissioner, 113 T.C. 254, 287 
(1999)); aff'd 326 F3d 737 (6th Cir. 2003).
---------------------------------------------------------------------------
    By requiring that a transaction be a ``reasonable means'' 
of accomplishing its non-tax purpose, the provision reiterates 
the present-law ability of the courts to bifurcate a 
transaction in which independent activities with non-tax 
objectives are combined with an unrelated item having only tax-
avoidance objectives in order to disallow the tax benefits of 
the overall transaction.\284\
---------------------------------------------------------------------------
    \284\See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 256 
n.48; see also Coltec Industries, Inc. United Staets, 454 F.3d 1340 
(Fed. Cir. 2006) ``the first asserted business purpose focuses on the 
wrong transaction--the creation of Garrison as a separate subsidiary to 
manage asbestos liabilities. * * * [W]e must focus on the transaction 
that gave the taxpayer a high basis in the stock and thus gave rise to 
the alleged benefit upon sale * * *'' 454 F.3d 1340, 1358 (Fed. Cir. 
2006).
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Profit potential

    Under the provision, a taxpayer may rely on factors other 
than profit potential to demonstrate that a transaction results 
in a meaningful change in the taxpayer's economic position; the 
provision merely sets forth a minimum threshold of profit 
potential if that test is relied on to demonstrate a meaningful 
change in economic position. If a taxpayer relies on a profit 
potential, however, the present value of the reasonably 
expected pre-tax profit must be substantial in relation to the 
present value of the expected net tax benefits that would be 
allowed if the transaction were respected.\285\ Moreover, the 
profit potential must exceed a risk-free rate of return. In 
addition, in determining pre-tax profit, fees and other 
transaction expenses and foreign taxes are treated as expenses.
---------------------------------------------------------------------------
    \285\Thus, a ``reasonable possibility of profit'' will not be 
sufficient to establish that a transaction has economic substance.
---------------------------------------------------------------------------
    In applying the profit potential test to a lessor of 
tangible property, depreciation, applicable tax credits (such 
as the rehabilitation tax credit and the low income housing tax 
credit), and any other deduction as provided in guidance by the 
Secretary are not taken into account in measuring tax benefits.

Transactions with tax-indifferent parties

    The provision also provides special rules for transactions 
with tax-indifferent parties. For this purpose, a tax-
indifferent party means any person or entity not subject to 
Federal income tax, or any person to whom an item would have no 
substantial impact on its income tax liability. Under these 
rules, the form of a financing transaction will not be 
respected if the present value of the tax deductions to be 
claimed is substantially in excess of the present value of the 
anticipated economic returns to the lender. Also, the form of a 
transaction with a tax-indifferent party will not be respected 
if it results in an allocation of income or gain to the tax-
indifferent party in excess of the tax-indifferent party's 
economic gain or income or if the transaction results in the 
shifting of basis on account of overstating the income or gain 
of the tax-indifferent party.

Other rules

    The Secretary may prescribe regulations which provide (1) 
exemptions from the application of the provision, and (2) other 
rules as may be necessary or appropriate to carry out the 
purposes of the provision.
    No inference is intended as to the proper application of 
the economic substance doctrine under present law. In addition, 
except with respect to the economic substance doctrine, the 
provision shall not be construed as altering or supplanting any 
other common law doctrine (including the sham transaction 
doctrine), and the provision shall be construed as being 
additive to any such other doctrine.

                             EFFECTIVE DATE

    The provision applies to transactions entered into after 
the date of enactment.

2. Penalty for understatements attributable to transactions lacking 
        economic substance, etc. (Sec. 802 of the bill and new sec. 
        6662B of the Code)

                              PRESENT LAW

General accuracy-related penalty

    An accuracy-related penalty under section 6662 applies to 
the portion of any underpayment that is attributable to (1) 
negligence, (2) any substantial understatement of income tax, 
(3) any substantial valuation misstatement, (4) any substantial 
overstatement of pension liabilities, or (5) any substantial 
estate or gift tax valuation understatement. If the correct 
income tax liability exceeds that reported by the taxpayer by 
the greater of 10 percent of the correct tax or $5,000 (or, in 
the case of corporations, by the lesser of (a) 10 percent of 
the correct tax (or $10,000 if greater) or (b) $10 million), 
then a substantial understatement exists and a penalty may be 
imposed equal to 20 percent of the underpayment of tax 
attributable to the understatement.\286\ Except in the case of 
tax shelters,\287\ the amount of any understatement is reduced 
by any portion attributable to an item if (1) the treatment of 
the item is supported by substantial authority, or (2) facts 
relevant to the tax treatment of the item were adequately 
disclosed and there was a reasonable basis for its tax 
treatment. The Treasury Secretary may prescribe a list of 
positions which the Secretary believes do not meet the 
requirements for substantial authority under this provision.
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    \286\Sec. 6662.
    \287\A tax shelter is defined for this purpose as a partnership or 
other entity, an investment plan or arrangement, or any other plan or 
arrangement if a significant purpose of such partnership, other entity, 
plan, or arrangement is the avodiance or evasion of Federal income tax. 
Sec. 6662(d)(2)(C).
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    The section 6662 penalty generally is abated (even with 
respect to tax shelters) in cases in which the taxpayer can 
demonstrate that there was ``reasonable cause'' for the 
underpayment and that the taxpayer acted in good faith.\288\ 
The relevant regulations provide that reasonable cause exists 
where the taxpayer ``reasonably relies in good faith on an 
opinion based on a professional tax advisor's analysis of the 
pertinent facts and authorities [that] * * * unambiguously 
concludes that there is a greater than 50 percent likelihood 
that the tax treatment of the item will be upheld if 
challenged'' by the IRS.\289\
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    \288\Sec. 6664(c).
    \289\Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 
1.6664-4(c).
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Listed transactions and reportable avoidance transactions

            In general
    A separate accuracy-related penalty under section 6662A 
applies to ``listed transactions'' and to other ``reportable 
transactions'' with a significant tax avoidance purpose 
(hereinafter referred to as a ``reportable avoidance 
transaction''). The penalty rate and defenses available to 
avoid the penalty vary depending on whether the transaction was 
adequately disclosed.
    Both listed transactions and reportable transactions are 
allowed to be described by the Treasury department under 
section 6707A(c), which imposes a penalty for failure 
adequately to report such transactions under section 6011. A 
reportable transaction is defined as one that the Treasury 
Secretary determines is required to be disclosed because it is 
determined to have a potential for tax avoidance or 
evasion.\290\ A listed transaction is defined as a reportable 
transaction which is the same as, or substantially similar to, 
a transaction specifically identified by the Secretary as a tax 
avoidance transaction for purposes of the reporting disclosure 
requirements.\291\
---------------------------------------------------------------------------
    \290\Sec. 6707A(c)(1).
    \291\Sec. 6707A(c)(2).
---------------------------------------------------------------------------
            Disclosed transactions
    In general, a 20 percent accuracy-related penalty is 
imposed on any understatement attributable to an adequately 
disclosed listed transaction or reportable avoidance 
transaction.\292\ The only exception to the penalty is if the 
taxpayer satisfies a more stringent reasonable cause and good 
faith exception (hereinafter referred to as the ``strengthened 
reasonable cause exception''), which is described below. The 
strengthened reasonable cause exception is available only if 
the relevant facts affecting the tax treatment are adequately 
disclosed, there is or was substantial authority for the 
claimed tax treatment, and the taxpayer reasonably believed 
that the claimed tax treatment was more likely than not the 
proper treatment.
---------------------------------------------------------------------------
    \292\Sec. 6662A(a).
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            Undisclosed transactions
    If the taxpayer does not adequately disclose the 
transaction, the strengthened reasonable cause exception is not 
available (i.e., a strict-liability penalty generally applies), 
and the taxpayer is subject to an increased penalty equal to 30 
percent of the understatement.\293\ However, a taxpayer will be 
treated as having adequately disclosed a transaction for this 
purpose if the IRS Commissioner has separately rescinded the 
separate penalty under section 6707A for failure to disclose a 
reportable transaction.\294\ The IRS Commissioner is authorized 
to do this only if the failure does not relate to a listed 
transaction and only if rescinding the penalty would promote 
compliance and effective tax administration.\295\
---------------------------------------------------------------------------
    \293\Sec. 6662A(c).
    \294\Sec. 6664(d).
    \295\Sec. 6707A(d).
---------------------------------------------------------------------------
    A public entity that is required to pay a penalty for an 
undisclosed listed or reportable transaction must disclose the 
imposition of the penalty in reports to the SEC for such 
periods as the Secretary shall specify. The disclosure to the 
SEC applies without regard to whether the taxpayer determines 
the amount of the penalty to be material to the reports in 
which the penalty must appear; and any failure to disclose such 
penalty in the reports is treated as a failure to disclose a 
listed transaction. A taxpayer must disclose a penalty in 
reports to the SEC once the taxpayer has exhausted its 
administrative and judicial remedies with respect to the 
penalty (or if earlier, when paid).\296\
---------------------------------------------------------------------------
    \296\Sec. 6707A(e).
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            Determination of the understatement amount
    The penalty is applied to the amount of any understatement 
attributable to the listed or reportable avoidance transaction 
without regard to other items on the tax return. For purposes 
of this provision, the amount of the understatement is 
determined as the sum of: (1) the product of the highest 
corporate or individual tax rate (as appropriate) and the 
increase in taxable income resulting from the difference 
between the taxpayer's treatment of the item and the proper 
treatment of the item (without regard to other items on the tax 
return);\297\ and (2) the amount of any decrease in the 
aggregate amount of credits which results from a difference 
between the taxpayer's treatment of an item and the proper tax 
treatment of such item.
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    \297\For this purpose, any reduction in the excess of deductions 
allowed for the taxable year over gross income for such year, and any 
reduction in the amount of capital losses which would (without regard 
to section 1211) be allowed for such year, shall be treated as an 
increase in taxable income. Sec. 6662A(b).
---------------------------------------------------------------------------
    Except as provided in regulations, a taxpayer's treatment 
of an item shall not take into account any amendment or 
supplement to a return if the amendment or supplement is filed 
after the earlier of when the taxpayer is first contacted 
regarding an examination of the return or such other date as 
specified by the Secretary.\298\
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    \298\Sec. 6662A(e)(3).
---------------------------------------------------------------------------
            Strengthened reasonable cause exception
    A penalty is not imposed under the provision with respect 
to any portion of an understatement if it is shown that there 
was reasonable cause for such portion and the taxpayer acted in 
good faith. Such a showing requires: (1) adequate disclosure of 
the facts affecting the transaction in accordance with the 
regulations under section 6011;\299\ (2) that there is or was 
substantial authority for such treatment; and (3) that the 
taxpayer reasonably believed that such treatment was more 
likely than not the proper treatment. For this purpose, a 
taxpayer will be treated as having a reasonable belief with 
respect to the tax treatment of an item only if such belief: 
(1) is based on the facts and law that exist at the time the 
tax return (that includes the item) is filed; and (2) relates 
solely to the taxpayer's chances of success on the merits and 
does not take into account the possibility that (a) a return 
will not be audited, (b) the treatment will not be raised on 
audit, or (c) the treatment will be resolved through settlement 
if raised.\300\
---------------------------------------------------------------------------
    \299\See the previous discussion regarding the penalty for failing 
to disclose a reportable transaction.
    \300\Sec. 6664(d).
---------------------------------------------------------------------------
    A taxpayer may (but is not required to) rely on an opinion 
of a tax advisor in establishing its reasonable belief with 
respect to the tax treatment of the item. However, a taxpayer 
may not rely on an opinion of a tax advisor for this purpose if 
the opinion (1) is provided by a ``disqualified tax advisor'' 
or (2) is a ``disqualified opinion.''
            Disqualified tax advisor
    A disqualified tax advisor is any advisor who: (1) is a 
material advisor\301\ and who participates in the organization, 
management, promotion or sale of the transaction or is related 
(within the meaning of section 267(b) or 707(b)(1)) to any 
person who so participates; (2) is compensated directly or 
indirectly\302\ by a material advisor with respect to the 
transaction; (3) has a fee arrangement with respect to the 
transaction that is contingent on all or part of the intended 
tax benefits from the transaction being sustained; or (4) as 
determined under regulations prescribed by the Secretary, has a 
disqualifying financial interest with respect to the 
transaction.
---------------------------------------------------------------------------
    \301\The term ``material advisor'' means any person who provides 
any material aid, assistance, or advice with respect to organizing, 
managing, promoting, selling, implementing, or carrying out any 
reportable transaction, and who derives gross income in exces of 
$50,000 in the case of a reportable transaction substantially all of 
the tax benefits from which are provided to natural persons ($250,000 
in any other case). Sec. 6111(b)(1).
    \302\This situation could arise, for example, when an advisor has 
an arrangement or understanding (oral or written) with an organizer, 
manager, or promoter of a reportable transaction that such party will 
recommend or refer potential particiants to the advisor for an opinion 
regarding the tax treatment of the transaction.
---------------------------------------------------------------------------
    A material advisor is considered as participating in the 
``organization'' of a transaction if the advisor performs acts 
relating to the development of the transaction. This may 
include, for example, preparing documents: (1) establishing a 
structure used in connection with the transaction (such as a 
partnership agreement); (2) describing the transaction (such as 
an offering memorandum or other statement describing the 
transaction); or (3) relating to the registration of the 
transaction with any federal, state or local government 
body.\303\ Participation in the ``management'' of a transaction 
means involvement in the decision-making process regarding any 
business activity with respect to the transaction. 
Participation in the ``promotion or sale'' of a transaction 
means involvement in the marketing or solicitation of the 
transaction to others. Thus, an advisor who provides 
information about the transaction to a potential participant is 
involved in the promotion or sale of a transaction, as is any 
advisor who recommends the transaction to a potential 
participant.
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    \303\An advisor should not be treated as participating in the 
organization of a transaction if the advisor's only involvement with 
respect to the organization of the transaction is the rendering of an 
opinion regarding the tax consequences of such transaction. However, 
such an advisor may be a ``disqualified tax advisor'' with respect to 
the transaction if the advisor participates in the management, 
promotion or sale of the transaction (or if the advisor is compensated 
by a material advisor, has a fee arrangement that is contingent on the 
tax benefits of the transaction, or as determined by the Secretary, has 
a continuing financial interest with respect to the transaction).
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            Disqualified opinion
    An opinion may not be relied upon if the opinion: (1) is 
based on unreasonable factual or legal assumptions (including 
assumptions as to future events); (2) unreasonably relies upon 
representations, statements, finding or agreements of the 
taxpayer or any other person; (3) does not identify and 
consider all relevant facts; or (4) fails to meet any other 
requirement prescribed by the Secretary.
            Coordination with other penalties
    To the extent a penalty on an understatement is imposed 
under section 6662A, that same amount of understatement is not 
also subject to the accuracy-related penalty under section 
6662(a) or to the valuation misstatement penalties under 
section 6662(e) or 6662(h). However, such amount of 
understatement is included for purposes of determining whether 
any understatement (as defined in sec. 6662(d)(2)) is a 
substantial understatement as defined under section 6662(d)(1) 
and for purposes of identifying an underpayment under the 
section 6663 fraud penalty.
    The penalty imposed under section 6662A does not apply to 
any portion of an understatement to which a fraud penalty is 
applied under section 6663.

                           REASONS FOR CHANGE

    The committee believes that a stronger penalty imposed on 
understatements attributable to non-economic substance 
transactions is desirable to improve compliance.

                        EXPLANATION OF PROVISION

    The provision imposes a new, stronger penalty for an 
understatement attributable to any transaction that lacks 
economic substance (referred to in the statute as a ``non-
economic substance transaction understatement'').\304\ The 
penalty rate is 40 percent (reduced to 20 percent if the 
taxpayer adequately discloses the relevant facts in accordance 
with regulations prescribed under section 6011). No exceptions 
(including the reasonable cause or rescission rules) to the 
penalty are available (i.e., the penalty is a strict-liability 
penalty).
---------------------------------------------------------------------------
    \304\Thus, unlike the present-law accuracy-related penalty under 
section 6662A (which applies only to listed and reportable avoidance 
transactions), the new penalty under the provision applies to any 
transaction that lacks economic substance.
---------------------------------------------------------------------------
    A ``non-economic substance transaction'' means any 
transaction if (1) the transaction lacks economic substance (as 
defined in the Senate amendment provision regarding the 
clarification of the economic substance doctrine),\305\ (2) the 
transaction was not respected under the rules relating to 
transactions with tax-indifferent parties (as described in the 
Senate amendment provision regarding the clarification of the 
economic substance doctrine),\306\ or (3) any similar rule of 
law. For this purpose, a similar rule of law would include, for 
example, an understatement attributable to a transaction that 
is determined to be a sham transaction.
---------------------------------------------------------------------------
    \305\That Senate amendment provision generally provides that in any 
case in which a court determines that the economic substance doctrine 
is relevant, a transaction has economic substance only if: (1) the 
transaction changes in a meaningful way (apart from Federal income tax 
effects) the taxpayer's economic position, and (2) the taxpayer has a 
substantial non-tax purpose for entering into such transaction and the 
transaction is a reasonable means of accomplishing such purpose. 
Specific other rules also apply. See ``Explanation of Provision'' for 
the immediately preceding Senate amendment provision, ``Clarification 
of the economic substance doctrine.''
    \306\That Senate amendment provision provides that the form of a 
transaction that involves a tax-indifferent party will not be respected 
in certain circumstances. See ``Explanation of Provision'' for the 
immediately preceding Senate amendment provision, ``Clarification of 
the economic substance doctrine.''
---------------------------------------------------------------------------
    For purposes of the bill, the calculation of an 
``understatement'' is made in the same manner as in the present 
law provision relating to accuracy-related penalties for listed 
and reportable avoidance transactions (sec. 6662A). Thus, the 
amount of the understatement under the provision would be 
determined as the sum of (1) the product of the highest 
corporate or individual tax rate (as appropriate) and the 
increase in taxable income resulting from the difference 
between the taxpayer's treatment of the item and the proper 
treatment of the item (without regard to other items on the tax 
return),\307\ and (2) the amount of any decrease in the 
aggregate amount of credits which results from a difference 
between the taxpayer's treatment of an item and the proper tax 
treatment of such item. In essence, the penalty will apply to 
the amount of any understatement attributable solely to a non-
economic substance transaction.
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    \307\For this purpose, any reduction in the excess of deductions 
allowed for the taxable year over gross income for such year, and any 
reduction in the amount of capital losses that would (without regard to 
section 1211) be allowed for such year, would be treated as an increase 
in taxable income.
---------------------------------------------------------------------------
    As in the case of the understatement penalty for reportable 
and listed transactions under present law section 6662A(e)(3), 
except as provided in regulations, the taxpayer's treatment of 
an item will not take into account any amendment or supplement 
to a return if the amendment or supplement is filed after the 
earlier of the date the taxpayer is first contacted regarding 
an examination of such return or such other date as specified 
by the Secretary.
    As in the case of the understatement penalty for 
undisclosed reportable transactions under present law section 
6707A, a public entity that is required to pay a penalty under 
the provision (but in this case, regardless of whether the 
transaction was disclosed) must disclose the imposition of the 
penalty in reports to the SEC for such periods as the Secretary 
shall specify. The disclosure to the SEC applies without regard 
to whether the taxpayer determines the amount of the penalty to 
be material to the reports in which the penalty must appear, 
and any failure to disclose such penalty in the reports is 
treated as a failure to disclose a listed transaction. A 
taxpayer must disclose a penalty in reports to the SEC once the 
taxpayer has exhausted its administrative and judicial remedies 
with respect to the penalty (or if earlier, when paid).
    Regardless of whether the transaction was disclosed, once a 
penalty under the provision has been included in the first 
letter of proposed deficiency which allows the taxpayer an 
opportunity for administrative review in the IRS Office of 
Appeals, the penalty cannot be compromised for purposes of a 
settlement without approval of the Commissioner personally. 
Furthermore, the IRS is required to keep records summarizing 
the application of this penalty and providing a description of 
each penalty compromised under the provision and the reasons 
for the compromise.
    Any understatement on which a penalty is imposed under the 
provision will not be subject to the accuracy-related penalty 
under section 6662 or under 6662A (accuracy-related penalties 
for listed and reportable avoidance transactions). However, an 
understatement under the provision is taken into account for 
purposes of determining whether any understatement (as defined 
in sec. 6662(d)(2)) is a substantial understatement as defined 
under section 6662(d)(1). The penalty imposed under the 
provision will not apply to any portion of an understatement to 
which a fraud penalty is applied under section 6663.

                             EFFECTIVE DATE

    The provision applies to transactions entered into after 
the date of enactment.

        B. Tax Treatment of Certain Inverted Corporate Entities


(Sec. 803 of the bill and sec. 7874 of the Code)

                              PRESENT LAW

Determination of corporate residence

    The U.S. tax treatment of a multinational corporate group 
depends significantly on whether the parent corporation of the 
group is domestic or foreign. For purposes of U.S. tax law, a 
corporation is treated as domestic if it is incorporated under 
the law of the United States or of any State. Other 
corporations (i.e., those incorporated under the laws of 
foreign countries or U.S. possessions) generally are treated as 
foreign.

U.S. taxation of domestic corporations

    The United States employs a ``worldwide'' tax system, under 
which domestic corporations generally are taxed on all income, 
whether derived in the United States or abroad. In order to 
mitigate the double taxation that may arise from taxing the 
foreign-source income of a domestic corporation, a foreign tax 
credit for income taxes paid to foreign countries is provided 
to reduce or eliminate the U.S. tax owed on such income, 
subject to certain limitations.
    Income earned by a domestic parent corporation from foreign 
operations conducted by foreign corporate subsidiaries 
generally is subject to U.S. tax when the income is distributed 
as a dividend to the domestic corporation. Until such 
repatriation, the U.S. tax on such income generally is 
deferred, and U.S. tax is imposed on such income when 
repatriated. However, certain anti-deferral regimes may cause 
the domestic parent corporation to be taxed on a current basis 
in the United States with respect to certain categories of 
passive or highly mobile income earned by its foreign 
subsidiaries, regardless of whether the income has been 
distributed as a dividend to the domestic parent corporation. 
The main anti-deferral regimes in this context are the 
controlled foreign corporation rules of subpart F (secs. 951-
964) and the passive foreign investment company rules (secs. 
1291-1298). A foreign tax credit is generally available to 
offset, in whole or in part, the U.S. tax owed on this foreign-
source income, whether such income is repatriated as an actual 
dividend or included under one of the anti-deferral regimes.

U.S. taxation of foreign corporations

    The United States taxes foreign corporations only on income 
that has a sufficient nexus to the United States. Thus, a 
foreign corporation is generally subject to U.S. tax only on 
income that is ``effectively connected'' with the conduct of a 
trade or business in the United States. Such ``effectively 
connected income'' generally is taxed in the same manner and at 
the same rates as the income of a U.S. corporation. An 
applicable tax treaty may limit the imposition of U.S. tax on 
business operations of a foreign corporation to cases in which 
the business is conducted through a ``permanent establishment'' 
in the United States.
    In addition, foreign corporations generally are subject to 
a gross-basis U.S. tax at a flat 30-percent rate on the receipt 
of interest, dividends, rents, royalties, and certain similar 
types of income derived from U.S. sources, subject to certain 
exceptions. The tax generally is collected by means of 
withholding by the person making the payment. This tax may be 
reduced or eliminated under an applicable tax treaty.

U.S. tax treatment of inversion transactions prior to the American Jobs 
        Creation Act of 2004

    Prior to the American Jobs Creation Act of 2004 (``AJCA''), 
a U.S. corporation could reincorporate in a foreign 
jurisdiction and thereby replace the U.S. parent corporation of 
a multinational corporate group with a foreign parent 
corporation. These transactions were commonly referred to as 
inversion transactions. Inversion transactions could take many 
different forms, including stock inversions, asset inversions, 
and various combinations of and variations on the two. Most of 
the known transactions were stock inversions. In one example of 
a stock inversion, a U.S. corporation forms a foreign 
corporation, which in turn forms a domestic merger subsidiary. 
The domestic merger subsidiary then merges into the U.S. 
corporation, with the U.S. corporation surviving, now as a 
subsidiary of the new foreign corporation. The U.S. 
corporation's shareholders receive shares of the foreign 
corporation and are treated as having exchanged their U.S. 
corporation shares for the foreign corporation shares. An asset 
inversion could be used to reach a similar result, but through 
a direct merger of the top-tier U.S. corporation into a new 
foreign corporation, among other possible forms. An inversion 
transaction could be accompanied or followed by further 
restructuring of the corporate group. For example, in the case 
of a stock inversion, in order to remove income from foreign 
operations from the U.S. taxing jurisdiction, the U.S. 
corporation could transfer some or all of its foreign 
subsidiaries directly to the new foreign parent corporation or 
other related foreign corporations.
    In addition to removing foreign operations from U.S. taxing 
jurisdiction, the corporate group could seek to derive further 
advantage from the inverted structure by reducing U.S. tax on 
U.S.-source income through various earnings stripping or other 
transactions. This could include earnings stripping through 
payment by a U.S. corporation of deductible amounts such as 
interest, royalties, rents, or management service fees to the 
new foreign parent or other foreign affiliates. In this 
respect, the post-inversion structure could enable the group to 
employ the same tax-reduction strategies that are available to 
other multinational corporate groups with foreign parents and 
U.S. subsidiaries, subject to the same limitations (e.g., secs. 
163(j) and 482).
    Inversion transactions could give rise to immediate U.S. 
tax consequences at the shareholder and/or the corporate level, 
depending on the type of inversion. In stock inversions, the 
U.S. shareholders generally recognized gain (but not loss) 
under section 367(a), based on the difference between the fair 
market value of the foreign corporation shares received and the 
adjusted basis of the domestic corporation stock exchanged. To 
the extent that a corporation's share value had declined, and/
or it had many foreign or tax-exempt shareholders, the impact 
of this section 367(a) ``toll charge'' was reduced. The 
transfer of foreign subsidiaries or other assets to the foreign 
parent corporation also could give rise to U.S. tax 
consequences at the corporate level (e.g., gain recognition and 
earnings and profits inclusions under secs. 1001, 311(b), 304, 
367, 1248 or other provisions). The tax on any income 
recognized as a result of these restructurings could be reduced 
or eliminated through the use of net operating losses, foreign 
tax credits, and other tax attributes.
    In asset inversions, the U.S. corporation generally 
recognized gain (but not loss) under section 367(a) as though 
it had sold all of its assets, but the shareholders generally 
did not recognize gain or loss, assuming the transaction met 
the requirements of a reorganization under section 368.

U.S. tax treatment of inversion transactions under AJCA

            In general
    AJCA added new section 7874 to the Code, which defines two 
different types of corporate inversion transactions and 
establishes a different set of consequences for each type. 
Certain partnership transactions also are covered.
            Transactions involving at least 80 percent identity of 
                    stock ownership
    The first type of inversion is a transaction in which, 
pursuant to a plan\308\ or a series of related transactions: 
(1) a U.S. corporation becomes a subsidiary of a foreign-
incorporated entity or otherwise transfers substantially all of 
its properties to such an entity in a transaction completed 
after March 4, 2003; (2) the former shareholders of the U.S. 
corporation hold (by reason of holding stock in the U.S. 
corporation) 80 percent or more (by vote or value) of the stock 
of the foreign-incorporated entity after the transaction; and 
(3) the foreign-incorporated entity, considered together with 
all companies connected to it by a chain of greater than 50 
percent ownership (i.e., the ``expanded affiliated group''), 
does not have substantial business activities in the entity's 
country of incorporation, compared to the total worldwide 
business activities of the expanded affiliated group. The 
provision denies the intended tax benefits of this type of 
inversion (``80-percent inversion'') by deeming the top-tier 
foreign corporation to be a domestic corporation for all 
purposes of the Code.\309\
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    \308\Acquisitions with respect to a domestic corporation or 
partnership are deemed to be ``pursuant to a plan'' if they occur 
within the four-year period beginning on the date which is two years 
before the ownership threshold under the provision is met with respect 
to such corporation or partnership.
    \309\Since the top-tier foreign corporation is treated for all 
purposes of the Code as domestic, the shareholder-level ``toll charge'' 
of sec. 367(a) does not apply to these inversion transactions.
---------------------------------------------------------------------------
    In determining whether a transaction meets the definition 
of an inversion under the provision, stock held by members of 
the expanded affiliated group that includes the foreign 
incorporated entity is disregarded. For example, if the former 
top-tier U.S. corporation receives stock of the foreign 
incorporated entity (e.g., so-called ``hook'' stock), the stock 
would not be considered in determining whether the transaction 
meets the definition. Similarly, if a U.S. parent corporation 
converts an existing wholly owned U.S. subsidiary into a new 
wholly owned controlled foreign corporation, the stock of the 
new foreign corporation would be disregarded, with the result 
that the transaction would not meet the definition of an 
inversion under the provision. Stock sold in a public offering 
related to the transaction also is disregarded for these 
purposes.
    Transfers of properties or liabilities as part of a plan a 
principal purpose of which is to avoid the purposes of the 
provision are disregarded. In addition, the Treasury Secretary 
is to provide regulations to carry out the provision, including 
regulations to prevent the avoidance of the purposes of the 
provision, including avoidance through the use of related 
persons, pass-through or other noncorporate entities, or other 
intermediaries, and through transactions designed to qualify or 
disqualify a person as a related person or a member of an 
expanded affiliated group. Similarly, the Treasury Secretary 
has the authority to treat certain non-stock instruments as 
stock, and certain stock as not stock, where necessary to carry 
out the purposes of the provision.
            Transactions involving at least 60 percent but less than 80 
                    percent identity of stock ownership
    The second type of inversion is a transaction that would 
meet the definition of an inversion transaction described 
above, except that the 80-percent ownership threshold is not 
met. In such a case, if at least a 60-percent ownership 
threshold is met, then a second set of rules applies to the 
inversion. Under these rules, the inversion transaction is 
respected (i.e., the foreign corporation is treated as 
foreign), but any applicable corporate-level ``toll charges'' 
for establishing the inverted structure are not offset by tax 
attributes such as net operating losses or foreign tax credits. 
Specifically, any applicable corporate-level income or gain 
required to be recognized under sections 304, 311(b), 367, 
1001, 1248, or any other provision with respect to the transfer 
of controlled foreign corporation stock or the transfer or 
license of other assets by a U.S. corporation as part of the 
inversion transaction or after such transaction to a related 
foreign person is taxable, without offset by any tax attributes 
(e.g., net operating losses or foreign tax credits). This rule 
does not apply to certain transfers of inventory and similar 
property. These measures generally apply for a 10-year period 
following the inversion transaction.
            Other rules
    Under section 7874, inversion transactions include certain 
partnership transactions. Specifically, the provision applies 
to transactions in which a foreign-incorporated entity acquires 
substantially all of the properties constituting a trade or 
business of a domestic partnership, if after the acquisition at 
least 60 percent (or 80 percent, as the case may be) of the 
stock of the entity is held by former partners of the 
partnership (by reason of holding their partnership interests), 
provided that the other terms of the basic definition are met. 
For purposes of applying this test, all partnerships that are 
under common control within the meaning of section 482 are 
treated as one partnership, except as provided otherwise in 
regulations. In addition, the modified ``toll charge'' rules 
apply at the partner level.
    A transaction otherwise meeting the definition of an 
inversion transaction is not treated as an inversion 
transaction if, on or before March 4, 2003, the foreign-
incorporated entity had acquired directly or indirectly more 
than half of the properties held directly or indirectly by the 
domestic corporation, or more than half of the properties 
constituting the partnership trade or business, as the case may 
be.

                           REASONS FOR CHANGE

    The Committee believes that the inversions regime should 
generally apply to companies that completed 80-percent 
inversion transactions after public notice was given that 
eventual legislation on this issue could be effective after 
March 20, 2002.

                        EXPLANATION OF PROVISION

    The provision generally extends the 80-percent inversion 
regime of section 7874 to 80-percent inversions completed after 
March 20, 2002 but on or before March 4, 2003, with certain 
modifications as described below. A transaction otherwise 
meeting the definition of an 80-percent inversion under the 
provision (i.e., one completed after March 20, 2002 but on or 
before March 4, 2003) is not treated as an 80-percent inversion 
if, on or before March 20, 2002, the foreign-incorporated 
entity had acquired directly or indirectly more than half the 
properties held directly or indirectly by the domestic 
corporation, or more than half the properties constituting the 
partnership trade or business, as the case may be.
    Under the provision, an 80-percent inversion that is 
completed after March 20, 2002 but on or before March 4, 2003 
is respected until the end of the last day of the foreign-
incorporated entity's taxable year that began in 2005. At the 
end of that day, the inverted foreign-incorporated entity that 
completed the 80-percent inversion (or if relevant, any 
successor entity) is deemed to have transferred all of its 
assets and liabilities to a domestic corporation in a 
transaction that is generally treated as a nontaxable inbound 
reorganization (``repatriation''). The basis of the assets of 
the foreign-incorporated entity generally remains the same in 
the hands of the domestic corporation, subject to any special 
adjustments for importing built-in losses (e.g., sec. 362(e)). 
Shareholders of the domestic corporation inherit the respective 
bases of their shares of the foreign-incorporated entity.
    On the day of the repatriation, the earnings and profits of 
the inverted foreign-incorporated entity transfer over to the 
domestic corporation. The transfer of such earnings and profits 
is not a deemed dividend and does not result in a tax upon the 
domestic corporation or its shareholders. In addition, any 
foreign taxes attributable to such earnings and profits are not 
creditable. However, shareholders may be subject to tax on 
distributions of such earnings and profits.
    Beginning on the day after the repatriation, the inverted 
foreign-incorporated entity is treated for all tax purposes as 
a domestic corporation. Thus, any income earned by the inverted 
foreign-incorporated entity after the date of repatriation is 
deemed to be earned by a domestic corporation, and therefore, 
is fully taxable at U.S. corporate income tax rates. As a 
further consequence of the repatriation of the inverted 
foreign-incorporated entity, foreign subsidiaries become 
controlled foreign corporations, subject to the rules of 
subpart F.
    It is intended that the Secretary will prescribe 
regulations that are necessary or appropriate to carry out the 
provision, including, but not limited to, regulations to 
prevent the avoidance of the purposes of the provision.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2005.

                    III. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the provisions of 
the bill as reported.


                B. Budget Authority and Tax Expenditures


Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the provisions of the bill as reported 
involve new or increased budget authority with respect to the 
following sections of the bill: section 320, relating to 
authorization of appropriations for tax law enforcement 
relating to human sex trafficking, section 709, relating to the 
authorization of appropriations to combat the tax gap and for 
tax law enforcement, and section 711, relating to authorization 
of appropriations for tax law enforcement relating to the 
hiring and continued employment of undocumented workers.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the revenue-reducing provisions of the 
bill involve increased tax expenditures (see revenue table in 
Part III.A., above). The revenue increasing provisions of the 
bill generally involve reduced tax expenditures (see revenue 
table in Part III.A., above).

            C. Consultation With Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office has not 
submitted a statement on the bill. The letter from the 
Congressional Budget Office has not been received, and 
therefore will be provided separately.

                       IV. VOTES OF THE COMMITTEE


Motion to report the bill

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee states that, with a 
quorum present, S. 1321 as modified by the Chairman's mark and 
amended by the Committee, the ``Telephone Excise Tax Repeal and 
Taxpayer Protection Act of 2006,'' was ordered favorably 
reported by a voice vote on June 28, 2006.

Votes on other amendments

    The Committee accepted an amendment by Senator Wyden to 
make permanent the moratorium on State and local government 
taxes on Internet access and certain other Internet-based 
transactions imposed by the Internet Tax Freedom Act (Pub. L. 
No. 105-277).

                 V. REGULATORY IMPACT AND OTHER MATTERS


                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill as amended.

Impact on individuals and businesses

    The bill includes provisions to repeal the telephone excise 
tax, to provide improvements in tax administration and taxpayer 
safeguards, to reform the penalty and interest provisions of 
the Internal Revenue Code, to modernize the procedures and 
operation of the United States Tax Court, to improve the 
confidentiality of tax information, to simplify the tax laws, 
to curtail tax shelters, and to improve corporate governance.
    The bill includes various other provisions that are not 
expected to impose additional administrative requirements or 
regulatory burdens on individuals or businesses.

Impact on personal privacy and paperwork

    The provisions of the bill do not reduce personal privacy. 
Several provisions of the bill may improve personal privacy 
protections, such as the provision ensuring compliance by 
contractors with confidentiality safeguards (section 503) and 
the provision imposing higher standards for requests for and 
consents to disclosure (section 504).

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the tax provisions of the 
bill contain two private sector mandates: (1) codification of 
economic substance; and (2) corporate inversions. The cost 
required to comply with each Federal private sector mandate 
generally are no greater than the aggregate estimated budget 
effects of the provision. Benefits from the provisions include 
improved administration of the tax laws and a more accurate 
measurement of income for Federal income tax purposes.
    The Committee has determined that the tax provisions of the 
reported bill contain no intergovernmental mandates within the 
meaning of Pub. L. No. 104-4, the Unfunded Mandates Reform Act 
of 1995.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the Senate Committee on 
Finance, the House Committee on Ways and Means, or any 
committee of conference if the legislation includes a provision 
that directly or indirectly amends the Code and has widespread 
applicability to individuals or small businesses.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that amend the Code and that have ``widespread 
applicability'' to individuals or small businesses.

                                  
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