[Federal Register Volume 62, Number 140 (Tuesday, July 22, 1997)]
[Rules and Regulations]
[Pages 39115-39119]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19052]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 8725]
RIN 1545-AU64


Miscellaneous Sections Affected by the Taxpayer Bill of Rights 2 
and the Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to joint 
returns, property exempt from levy, interest, penalties, offers in 
compromise, and the awarding of costs and certain fees. The regulations 
reflect changes to the law made by the Taxpayer Bill of Rights 2 and a 
conforming amendment made by the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996. The regulations affect 
taxpayers with respect to filing of returns, interest, penalties, court 
costs, and payment, deposit, and collection of taxes.

DATES: These regulations are effective July 22, 1997.

[[Page 39116]]

    For dates of applicability of these regulations, see 
Secs. 301.6334-1 (e) and (f), 301.6601-1(f) (3) and (4), 301.6651-1 
(a)(3) and (g)(2), 301.6656-3(c), 301.7122-1(e)(2), 301.7430-
2(c)(3)(i)(B), 301.7430-4(b)(3)(ii), 301.7430-5(a) and (c)(3), and 
301.7430-6.

FOR FURTHER INFORMATION CONTACT: Beverly A. Baughman, (202) 622-4940 
regarding joint returns and penalties; Robert A. Miller, (202) 622-3640 
regarding levy; Donna J. Welch, (202) 622-4910 regarding interest; 
Thomas D. Moffitt, (202) 622-7900 regarding court costs; and Kevin B. 
Connelly, (202) 622-3640 regarding compromises (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under 
control number 1545-1356. Responses to this collection of information 
are required to obtain an award of reasonable administrative costs.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    The estimated annual burden per respondent varies from 10 minutes 
to 30 minutes, depending on individual circumstances, with an estimated 
average of 15 minutes.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to the Income Tax Regulations and 
the Regulations on Procedure and Administration (26 CFR parts 1 and 
301, respectively) relating to joint returns under section 6013, levy 
under section 6334, interest under section 6601, the failure to file 
penalty under section 6651, the failure to deposit penalty under 
section 6656, compromise under section 7122, and awards of costs and 
certain fees under section 7430. These sections were amended by the 
Taxpayer Bill of Rights 2 (TBOR2) (Pub. L. 104-168, 110 Stat. 1452 
(1996)) and section 110(l)(6) of the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996 (Pub. L. 104-193, 110 Stat. 
2105, 2173 (1996)). The changes made by TBOR2 and the Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996 are 
reflected in the final regulations.
    A notice of proposed rulemaking was published in the Federal 
Register for January 2, 1997 (62 FR 77). One written comment was 
received in response to the notice of proposed rulemaking. No public 
hearing was requested or held. The proposed regulations under sections 
6013, 6334, 6601, 6651, 6656, 7122, and 7430 are adopted by this 
Treasury decision with minor revisions, which are discussed below.

Explanation of Revisions and Summary of Comments

    The IRS received one comment regarding the proposed regulations. 
The commentator remarked that Sec. 301.6601-1(f)(3) of the proposed 
regulations is unclear because, as drafted, the regulation implies that 
interest on all additions to tax, including those covered by section 
6601(e)(2)(B), runs from the date of the notice and demand. Therefore, 
the final regulations clarify that interest on any addition to tax, 
except additions to tax described in section 6601(e)(2)(B), begins to 
run from the date of the notice and demand.
    The commentator also requested clarification for purposes of 
computing the $100,000 threshold in Secs. 301.6601-1(f)(3) and (4) and 
301.6651-1(a)(3). Sections 303(a) and (b) of TBOR2 extend the interest-
free period to 21 calendar days or 10 business days if the amount for 
which the notice and demand is made equals or exceeds $100,000. The 
commentator suggested that the $100,000 threshold should include tax, 
interest, and penalties. The language in the statute supports this 
interpretation. Under section 303(b)(1) of TBOR2, the 10 day period 
specifically applies to a notice and demand for interest and penalties. 
Therefore, the final regulations clarify that 10 business days is the 
applicable interest-free period if the total amount assessed, including 
tax, penalties, and interest, and shown on the notice and demand equals 
or exceeds $100,000.
    In addition, Sec. 301.6651-1(a)(3), regarding the failure to pay 
penalty, has been clarified by cross-referencing the definitions of 
calendar day and business day in Sec. 301.6601-1(f)(5).

Effective Dates

    These regulations are applicable on July 31, 1996, except that 
Sec. 301.7122-1(e) is applicable on July 30, 1996, and Sec. 301.6334-
1(a)(2), (a)(3), (a)(11)(i), and (e), Sec. 301.6601-1(f)(3), (f)(4), 
and (f)(5), Sec. 301.6651-1(a)(3), and Sec. 301.7430-4(b)(3)(ii) are 
applicable on January 1, 1997.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations. Moreover, it is hereby certified 
that the regulations in this document will not have a significant 
economic impact on a substantial number of small entities. This 
certification is based on a determination that in the past only an 
average of 38 taxpayers per year, the majority of whom were 
individuals, have filed a request to recover administrative costs. 
Accordingly, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required.
    Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking preceding these regulations was submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on the impact of the proposed regulations on small 
business.
    Drafting Information: The principal authors of these regulations 
are Beverly A. Baughman and Donna J. Welch, Office of Assistant Chief 
Counsel (Income Tax and Accounting), Robert A. Miller and Kevin B. 
Connelly, Office of Assistant Chief Counsel (General Litigation), and 
Thomas D. Moffitt, Office of Assistant Chief Counsel (Field Service). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes,

[[Page 39117]]

Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.6013-2(b)(1) is amended by removing the language 
``Unless'' and adding ``Beginning on or before July 30, 1996, unless'' 
in its place.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 3. The authority citation for part 301 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 4. Section 301.6334-1 is amended by:
    1. Revising paragraph (a)(2).
    2. Removing the language ``$1,100 ($1,050 for levies issued prior 
to January 1, 1990)'' from paragraph (a)(3) and adding ``$1,250'' in 
its place.
    3. Removing the language ``(relating to aid to families with 
dependent children)'' from paragraph (a)(11)(i).
    4. Revising paragraph (e).
    5. Adding paragraph (f).
    The additions and revisions read as follows:


Sec. 301.6334-1  Property exempt from levy.

    (a) * * *
    (2) Fuel, provisions, furniture, and personal effects. So much of 
the fuel, provisions, furniture, and personal effects in the taxpayer's 
household, and of the arms for personal use, livestock, and poultry of 
the taxpayer, that does not exceed $2,500 in value.
* * * * *
    (e) Inflation adjustment. For any calendar year beginning after 
December 31, 1997, each dollar amount referred to in paragraphs (a)(2) 
and (3) of this section will be increased by an amount equal to the 
dollar amount multiplied by the cost-of-living adjustment determined 
under section 1(f)(3) for the calendar year (substituting ``calendar 
year 1996'' for ``calendar year 1992'' in section 1(f)(3)(B)). If any 
dollar amount as adjusted is not a multiple of $10, the dollar amount 
will be rounded to the nearest multiple of $10 (rounding up if the 
amount is a multiple of $5).
    (f) Effective date. Generally, these provisions are applicable with 
respect to levies made on or after July 1, 1989. However, any 
reasonable attempt by a taxpayer to comply with the statutory 
amendments addressed by the regulations in this section prior to 
February 21, 1995, will be considered as meeting the requirements of 
the regulations in this section. In addition, paragraphs (a)(2), (3), 
(11)(i) and (e) of this section are applicable with respect to levies 
issued after December 31, 1996.
    Par. 5. Section 301.6601-1 is amended by:
    1. Revising paragraphs (f)(3) and (f)(4).
    2. Redesignating paragraph (f)(5) as paragraph (f)(6) and adding 
new paragraph (f)(5).
    The additions and revisions read as follows:


Sec. 301.6601-1  Interest on underpayments.

* * * * *
    (f) * * *
    (3) Interest will not be imposed on any assessable penalty, 
addition to the tax (other than an addition to tax described in section 
6601(e)(2)(B)), or additional amount if the amount is paid within 21 
calendar days (10 business days if the amount assessed and shown on the 
notice and demand equals or exceeds $100,000) from the date of the 
notice and demand. If interest is imposed, it will be imposed only for 
the period from the date of the notice and demand to the date on which 
payment is received. This paragraph (f)(3) is applicable with respect 
to any notice and demand made after December 31, 1996.
    (4) If notice and demand is made after December 31, 1996, for any 
amount and the amount is paid within 21 calendar days (10 business days 
if the amount assessed and shown on the notice and demand equals or 
exceeds $100,000) from the date of the notice and demand, interest will 
not be imposed for the period after the date of the notice and demand.
    (5) For purposes of paragraphs (f)(3) and (4) of this section--
    (i) The term business day means any day other than a Saturday, 
Sunday, legal holiday in the District of Columbia, or a statewide legal 
holiday in the state where the taxpayer resides or where the taxpayer's 
principal place of business is located. With respect to the tenth 
business day (after taking into account the first sentence of this 
paragraph (f)(5)(i)), see section 7503 relating to time for performance 
of acts where the last day falls on a statewide legal holiday in the 
state where the act is required to be performed.
    (ii) The term calendar day means any day. With respect to the 
twenty-first calendar day, see section 7503 relating to time for 
performance of acts where the last day falls on a Saturday, Sunday, or 
legal holiday.
* * * * *
    Par. 6. Section 301.6651-1 is amended by:
    1. Revising paragraph (a)(3).
    2. Adding paragraph (g).
    The addition and revision read as follows:


Sec. 301.6651-1  Failure to file tax return or to pay tax.

    (a) * * *
    (3) Failure to pay tax not shown on return. In the case of failure 
to pay any amount of any tax required to be shown on a return specified 
in paragraph (a)(1) of this section that is not so shown (including an 
assessment made pursuant to section 6213(b)) within 21 calendar days 
from the date of the notice and demand (10 business days if the amount 
assessed and shown on the notice and demand equals or exceeds $100,000) 
with respect to any notice and demand made after December 31, 1996, 
there will be added to the amount stated in the notice and demand the 
amount specified below unless the failure to pay the tax within the 
prescribed time is shown to the satisfaction of the district director 
or the director of the service center to be due to reasonable cause and 
not to willful neglect. The amount added to the tax is 0.5 percent of 
the amount stated in the notice and demand if the failure is for not 
more than 1 month, with an additional 0.5 percent for each additional 
month or fraction thereof during which the failure continues, but not 
to exceed 25 percent in the aggregate. For purposes of this paragraph 
(a)(3), see Sec. 301.6601-1(f)(5) for the definition of calendar day 
and business day.
* * * * *
    (g) Treatment of returns prepared by the Secretary--(1) In general. 
A return prepared by the Secretary under section 6020(b) will be 
disregarded for purposes of determining the amount of the addition to 
tax for failure to file any return pursuant to paragraph (a)(1) of this 
section. However, the return prepared by the Secretary will be treated 
as a return filed by the taxpayer for purposes of determining the 
amount of the addition to tax for failure to pay the tax shown on any 
return and for failure to pay the tax required to be shown on a return 
that is not so shown pursuant to paragraphs (a)(2) and (3) of this 
section, respectively.
    (2) Effective date. This paragraph (g) applies to returns the due 
date for which (determined without regard to extensions) is after July 
30, 1996.
    Par. 7. Section 301.6656-3 is added to read as follows:

[[Page 39118]]

Sec. 301.6656-3  Abatement of penalty.

    (a) Exception for first time depositors of employment taxes--(1) 
Waiver. The Secretary will generally waive the penalty imposed by 
section 6656(a) on a person's failure to deposit any employment tax 
under subtitle C of the Internal Revenue Code if--
    (i) The failure is inadvertent;
    (ii) The person meets the requirements referred to in section 
7430(c)(4)(A)(ii) (relating to the net worth requirements applicable 
for awards of attorney's fees);
    (iii) The failure occurs during the first quarter that the person 
is required to deposit any employment tax; and
    (iv) The return of the tax is filed on or before the due date.
    (2) Inadvertent failure. For purposes of paragraph (a)(1)(i) of 
this section, the Secretary will determine if a failure to deposit is 
inadvertent based on all the facts and circumstances.
    (b) Deposit sent to Secretary. The Secretary may abate the penalty 
imposed by section 6656(a) if the first time a depositor is required to 
make a deposit, the amount required to be deposited is inadvertently 
sent to the Secretary instead of to the appropriate government 
depository.
    (c) Effective date. This section applies to deposits required to be 
made after July 30, 1996.
    Par. 8. In Sec. 301.7122-1, paragraph (e) is revised to read as 
follows:


Sec. 301.7122-1  Compromises.

* * * * *
    (e) Record--(1) In general. If an offer in compromise is accepted, 
there will be placed on file the opinion of the Chief Counsel of the 
IRS with respect to the compromise, with the reasons for the opinion, 
and including a statement of--
    (i) The amount of tax assessed;
    (ii) The amount of interest, additional amount, addition to the 
tax, or assessable penalty, imposed by law on the person against whom 
the tax is assessed; and
    (iii) The amount actually paid in accordance with the terms of the 
compromise.
    (2) Exception. For compromises accepted on or after July 30, 1996, 
no opinion will be required with respect to the compromise of any civil 
case in which the unpaid amount of tax assessed (including any 
interest, additional amount, addition to the tax, or assessable 
penalty) is less than $50,000. However, the compromise will be subject 
to continuing quality review by the Secretary.
* * * * *
    Par 9. Section 301.7430-0 is amended by adding entries for 
Sec. 301.7430-1(b)(4) and 301.7430-5(c)(3) to read as follows:


Sec. 301.7430-0  Table of contents.

* * * * *


Sec. 301.7430-1  Exhaustion of administrative remedies.

* * * * *
    (b) * * *
    (4) Failure to agree to extension of time for assessments.
* * * * *


Sec. 301.7430-5  Prevailing party.

* * * * *
    (c) * * *
    (3) Presumption.
* * * * *
    Par. 10. Section 301.7430-1 is amended by adding paragraph (b)(4) 
to read as follows:


Sec. 301.7430-1  Exhaustion of administrative remedies.

* * * * *
    (b) * * *
    (4) Failure to agree to extension of time for assessments. Any 
failure by the prevailing party to agree to an extension of the time 
for the assessment of any tax will not be taken into account for 
purposes of determining whether the prevailing party has exhausted the 
administrative remedies available to the party within the Internal 
Revenue Service.
* * * * *
    Par. 11. Section 301.7430-2 is amended by:
    1. Removing the language ``7430(c)(4)(B)(ii)'' from the third 
sentence of paragraph (b)(2) and adding ``7430(c)(4)(C)(ii)'' in its 
place.
    2. Removing the colon from the introductory text of paragraph 
(c)(3) and adding a dash in its place.
    3. Revising paragraph (c)(3)(i)(B).
    4. Removing the language ``If more than $75'' from paragraph 
(c)(3)(ii)(C) and adding ``In the case of administrative proceedings 
commenced after July 30, 1996, if more than $110'' in its place.
    The revision reads as follows:


Sec. 301.7430-2  Requirements and procedures for recovery of reasonable 
administrative costs.

* * * * *
    (c) * * *
    (3) * * *
    (i) * * *
    (B) A clear and concise statement of the reasons why the taxpayer 
alleges that the position of the Internal Revenue Service in the 
administrative proceeding was not substantially justified. For 
administrative proceedings commenced after July 30, 1996, if the 
taxpayer alleges that the Internal Revenue Service did not follow any 
applicable published guidance, the statement must identify all 
applicable published guidance that the taxpayer alleges that the 
Internal Revenue Service did not follow. For purposes of this paragraph 
(c)(3)(i)(B), the term applicable published guidance means final or 
temporary regulations, revenue rulings, revenue procedures, information 
releases, notices, announcements, and, if issued to the taxpayer, 
private letter rulings, technical advice memoranda, and determination 
letters. Also, for purposes of this paragraph (c)(3)(i)(B), the term 
administrative proceeding includes only those administrative 
proceedings or portions of administrative proceedings occurring on or 
after the administrative proceeding date as defined in Sec. 301.7430-
3(c);
* * * * *
    Par. 12. Section 301.7430-4 is amended by:
    1. Removing the language ``$75'' from paragraph (b)(3)(i) and 
adding ``, in the case of proceedings commenced after July 30, 1996, 
$110'' in its place.
    2. Revising paragraph (b)(3)(ii).
    3. Removing the language ``$75'' from the first, second, and third 
sentences of paragraph (b)(3)(iii)(B) and adding ``$110'' in its place.
    4. Removing the language ``$75'' from the first sentence of 
paragraph (b)(3)(iii)(C) and adding ``$110'' in its place.
    5. Removing the language ``$75'' from the third sentence of the 
example in paragraph (b)(3)(iii)(D) and adding ``$110'' in its place.
    6. Removing the language ``$75'' from the second and third 
sentences of paragraph (c)(2)(ii) and adding ``$110'' in its place.
    The revision reads as follows:


Sec. 301.7430-4  Reasonable administrative costs.

* * * * *
    (b) * * *
    (3) * * *
    (ii) Cost of living adjustment. The Internal Revenue Service will 
make a cost of living adjustment to the $110 per hour limitation for 
fees incurred in any calendar year beginning after December 31, 1996. 
The cost of living adjustment will be an amount equal to $110 
multiplied by the cost of living adjustment determined under section 
1(f)(3) for the calendar year (substituting ``calendar year 1995'' for 
``calendar year 1992'' in section 1(f)(3)(B)). If the dollar limitation 
as adjusted by this cost of living increase is not a multiple of $10, 
the dollar amount will be rounded to

[[Page 39119]]

the nearest multiple of $10 (rounding up if the amount is a multiple of 
$5).
* * * * *
    Par. 13. Section 301.7430-5 is amended by:
    1. Revising paragraph (a).
    2. Adding paragraph (c)(3).
    The addition and revision read as follows:


Sec. 301.7430-5  Prevailing party.

    (a) In general. For purposes of an award of reasonable 
administrative costs under section 7430 in the case of administrative 
proceedings commenced after July 30, 1996, a taxpayer is a prevailing 
party only if--
    (1) The position of the Internal Revenue Service was not 
substantially justified;
    (2) The taxpayer substantially prevails as to the amount in 
controversy or with respect to the most significant issue or set of 
issues presented; and
    (3) The taxpayer satisfies the net worth and size limitations 
referenced in paragraph (f) of this section.
* * * * *
    (c) * * *
    (3) Presumption. If the Internal Revenue Service did not follow any 
applicable published guidance in an administrative proceeding commenced 
after July 30, 1996, the position of the Internal Revenue Service, on 
those issues to which the guidance applies and for all periods during 
which the guidance was not followed, will be presumed not to be 
substantially justified. This presumption may be rebutted. For purposes 
of this paragraph (c)(3), the term applicable published guidance means 
final or temporary regulations, revenue rulings, revenue procedures, 
information releases, notices, announcements, and, if issued to the 
taxpayer, private letter rulings, technical advice memoranda, and 
determination letters (see Sec. 601.601(d)(2) of this chapter). Also, 
for purposes of this paragraph (c)(3), the term administrative 
proceeding includes only those administrative proceedings or portions 
of administrative proceedings occurring on or after the administrative 
proceeding date as defined in Sec. 301.7430-3(c).
* * * * *
    Par. 14. Section 301.7430-6 is revised to read as follows:


Sec. 301.7430-6  Effective dates.

    Sections 301.7430-2 through 301.7430-6, other than Secs. 301.7430-
2(b)(2), (c)(3)(i)(B), (c)(3)(ii)(C), and (c)(5); Secs. 301.7430-
4(b)(3)(i), (b)(3)(ii), (b)(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)(D), 
and (c)(2)(ii); and Secs. 301.7430-5(a) and (c)(3), apply to claims for 
reasonable administrative costs filed with the Internal Revenue Service 
after December 23, 1992, with respect to costs incurred in 
administrative proceedings commenced after November 10, 1988. Section 
301.7430-2(c)(5) is applicable March 23, 1993. Sections 301.7430-
2(b)(2), (c)(3)(i)(B), and (c)(3)(ii)(C); 301.7430-4(b)(3)(i), 
(b)(3)(ii), (b)(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)(D), and 
(c)(2)(ii); and 301.7430-5(a) and (c)(3) are applicable for 
administrative proceedings commenced after July 30, 1996.

    Dated: June 27, 1997.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved:
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-19052 Filed 7-21-97; 8:45 am]
BILLING CODE 4830-01-P