TITLE I--TAXPAYER ADVOCATE
Sec. 101. Establishment of position of
Taxpayer Advocate within Internal Revenue Service.
Sec. 102. Expansion of authority to issue
Taxpayer Assistance Orders.
TITLE II--MODIFICATIONS TO INSTALLMENT AGREEMENT PROVISIONS
Sec. 201. Notification of reasons for
termination of installment agreements.
Sec. 202. Administrative review of termination
of installment agreement.
TITLE III--ABATEMENT OF INTEREST AND PENALTIES
Sec. 301. Expansion of authority to abate
interest.
Sec. 302. Review of IRS failure to abate
interest.
Sec. 303. Extension of interest-free period
for payment of tax after notice and demand.
Sec. 304. Abatement of penalty for failure
to make required deposits of payroll taxes in certain cases.
TITLE IV--JOINT RETURNS
Sec. 401. Studies of joint return-related
issues.
Sec. 402. Joint return may be made after
separate returns without full payment of tax.
Sec. 403. Disclosure of collection
activities.
TITLE V--COLLECTION ACTIVITIES
Sec. 501. Modifications to lien and levy
provisions.
Sec. 502. Modifications to certain levy
exemption amounts.
Sec. 503. Offers-in-compromise.
TITLE VI--INFORMATION RETURNS
Sec. 601. Civil damages for fraudulent
filing of information returns.
Sec. 602. Requirement to conduct reasonable
investigations of information returns.
TITLE VII--AWARDING OF COSTS AND CERTAIN FEES
Sec. 701. United States must establish
that its position in proceeding was substantially justified.
Sec. 702. Increased limit on attorney
fees.
Sec. 703. Failure to agree to extension
not taken into account.
Sec. 704. Award of litigation costs permitted
in declaratory judgment proceedings.
TITLE VIII--MODIFICATION TO RECOVERY OF CIVIL DAMAGES FOR UNAUTHORIZED COLLECTION
ACTIONS
Sec. 801. Increase in limit on recovery
of civil damages for unauthorized collection actions.
Sec. 802. Court discretion to reduce award
for litigation costs for failure to exhaust administrative remedies.
TITLE IX--MODIFICATIONS TO PENALTY FOR FAILURE TO COLLECT AND PAY OVER TAX
Sec. 901. Preliminary notice requirement.
Sec. 902. Disclosure of certain information
where more than 1 person liable for penalty for failure to collect and pay
over tax.
Sec. 903. Right of contribution where more
than 1 person liable for penalty for failure to collect and pay over tax.
Sec. 904. Volunteer board members of tax-exempt
organizations exempt from penalty for failure to collect and pay over tax.
TITLE X--MODIFICATIONS OF RULES RELATING TO SUMMONSES
Sec. 1001. Enrolled agents included as
third-party recordkeepers.
Sec. 1002. Safeguards relating to designated
summonses.
Sec. 1003. Annual report to Congress
concerning designated summonses.
TITLE XI--RELIEF FROM RETROACTIVE APPLICATION OF TREASURY DEPARTMENT REGULATIONS
Sec. 1101. Relief from retroactive
application of Treasury Department regulations.
TITLE XII--MISCELLANEOUS PROVISIONS
Sec. 1201. Phone number of person providing
payee statements required to be shown on such statement.
Sec. 1202. Required notice of certain
payments.
Sec. 1203. Unauthorized enticement of
information disclosure.
Sec. 1204. Annual reminders to taxpayers
with outstanding delinquent accounts.
Sec. 1205. 5-year extension of authority
for undercover operations.
Sec. 1206. Disclosure of Form 8300
information on cash transactions.
Sec. 1207. Disclosure of returns and
return information to designee of taxpayer.
Sec. 1208. Study of netting of interest
on overpayments and liabilities.
Sec. 1209. Expenses of detection of
underpayments and fraud, etc.
Sec. 1210. Use of private delivery services
for timely-mailing-as-timely-filing rule.
Sec. 1211. Reports on misconduct of IRS
employees.
TITLE XIII--REVENUE OFFSETS
Subtitle A--Application of Failure-to-Pay Penalty to Substitute Returns
Sec. 1301. Application of failure-to-pay
penalty to substitute returns.
Subtitle B--Excise Taxes on Amounts of Private Excess Benefits
Sec. 1311. Excise taxes for failure by
certain charitable organizations to meet certain qualification
requirements.
Sec. 1312. Reporting of certain excise
taxes and other information.
Sec. 1313. Exempt organizations required
to provide copy of return.
1314. Increase in penalties on exempt
organizations for failure to file complete and timely annual returns.
START OF COMMITTEE REPORT
I. INTRODUCTION A. PURPOSE AND SUMMARY
[1] H.R. 2337, as amended, provides amendments relating to "Taxpayer Bill
of Rights 2" (Titles I-XII) and two revenue offsets to pay for these provisions
(Title XIII). The revenue offsets are (1) apply failure-to-pay penalty to
substitute returns and (2) intermediate sanctions for certain tax-exempt
organizations.
B. BACKGROUND AND NEED FOR LEGISLATION
[2] The bill, as amended, is intended to provide for increased protections
of taxpayer rights in complying with the Internal Revenue Code and in dealing
with the Internal Revenue Service (IRS) in its administration of the tax
laws.
[3] The bill, as amended, establishes a Taxpayer Advocate within the IRS,
expands the authority to issue Taxpayer Assistance Orders, modifies installment
payment agreement provisions, revises provisions relating to abatement of
interest and penalties and joint returns, modifies lien and levy and
offers-in-compromise provisions, provides that the Government must establish
that its position in a proceeding was substantially justified, increases
the limit on recovery of civil damages for unauthorized collection actions
from $ 100,000 to $ 1,000,000, provides safeguards relating to designated
summonses, provides relief from retroactive application of Treasury Department
Regulations, requires notice to taxpayers of certain payments and annual
reminders to taxpayers with outstanding delinquent accounts, and certain
other provisions. The bill also applies the failure-to-pay penalty to substitute
returns in the same manner as the penalty applies to delinquent filers. Further,
the bill provides intermediate sanctions for certain tax-exempt organizations.
C. LEGISLATIVE HISTORY
[4] H.R. 2337 was introduced by Mrs. Johnson of Connecticut and Mr. Matsui
on September 14, 1995, and was amended by the Committee in a markup on March
21, 1996. An amendment in the nature of a substitute (offered by Mrs. Johnson
and Mr. Matsui) was adopted, as amended, by a voice vote. The bill, as amended,
was ordered favorably reported by a voice vote on March 21, 1996.
[5] Two amendments offered en banc by Mrs. Johnson to the amendment in the
nature of a substitute were adopted in one voice vote: (1) require annual
reports on misconduct by IRS employees and (2) authorize the use of "qualified
private delivery services" as meeting the "timely-mailing as timely-filing"
rule of Code section 7502.
[6] The provisions of Titles I-XII of the bill generally were included in
the Committee's 1995 reconciliation submission to the House Committee on
the Budget: Subtitle C of Title XIII of H.R. 2491 as passed by the House
of Representatives in 1995. (See H. Rept. 104- 280, October 17, 1995.) The
conference agreement on H.R. 2491 contained certain of the House-passed Taxpayer
Bill of Rights 2 provisions. The revenue-offset provisions in title XIII
of the bill also were included in H.R. 2491 as passed by the Congress. H.R.
2491 was vetoed by the President.
II. EXPLANATION OF THE BILL
A. TAXPAYER BILL OF RIGHTS 2 PROVISIONS
1. TAXPAYER ADVOCATE
a. ESTABLISHMENT OF POSITION OF TAXPAYER ADVOCATE WITHIN INTERNAL REVENUE
SERVICE (SEC. 101
OF THE BILL AND SEC. 7802 OF THE CODE)
Present Law
[7] The Office of the Taxpayer Ombudsman was created by the Internal Revenue
Service (IRS) in 1979. The Taxpayer Ombudsman's duties are to serve as the
primary advocate, within the IRS, for taxpayers. As the taxpayers' advocate,
the Taxpayer Ombudsman participates in an ongoing review of IRS policies
and procedures to determine their impact on taxpayers, receives ideas from
the public concerning tax administration, identifies areas of the tax law
that confuse or create an inequity for taxpayers, and supervises cases handled
under the Problem Resolution Program. Under current procedures, the Taxpayer
Ombudsman is selected by the Commissioner of the IRS and serves at the
Commissioner's discretion.
Reasons for Change
[8] To date, the Taxpayer Ombudsman has been a career civil servant selected
by and serving at the pleasure of the IRS Commissioner. Some may perceive
that the Taxpayer Ombudsman is not an independent advocate for taxpayers.
In order to ensure that the Taxpayer Ombudsman has the necessary stature
within the IRS to represent fully the interests of taxpayers, it is believed
to be appropriate that the position be elevated to a position comparable
to that of the Chief Counsel. In addition, in order to ensure that the Congress
is systematically made aware of recurring and unresolved problems and
difficulties taxpayers encounter in dealing with the IRS, the Taxpayer Ombudsman
should have the authority and responsibility to make independent reports
to the Congress in order to advise the tax-writing committees of those areas.
Explanation of Provision
[9] The bill establishes a new position, Taxpayer Advocate, within the IRS.
This replaces the position of Taxpayer Ombudsman. The Taxpayer Advocate is
appointed by and reports directly to the Commissioner. Compensation of the
Taxpayer Advocate is at a level equal to that of the highest level official
reporting directly to the Deputy Commissioner of the IRS.
[10] The bill also establishes the Office of Taxpayer Advocate within the
IRS. The functions of the office are (1) to assist taxpayers in resolving
problems with the IRS, (2) to identify areas in which taxpayers have problems
in dealings with the IRS, (3) to propose changes (to the extent possible)
in the administrative practices of the IRS that will mitigate those problems,
and (4) to identify potential legislative changes that may mitigate those
problems.
[11] While the Taxpayer Advocate would not have direct line authority over
the regional and local Problem Resolution Officers (PROs), the Committee
believes that all PROs should take direction from the Taxpayer Advocate and
that they should operate with sufficient independence to assure that taxpayer
rights are not being subordinated to pressure from local revenue officers,
district directors, etc. Accordingly, the Committee recommends and encourages
that regional PROs actively participate in the selection and evaluation of
local PROs.
[12] The Taxpayer Advocate is required to make two annual reports to the
tax-writing committees. The first report is to contain the objectives of
the Taxpayer Advocate for the next calendar year. This report is to contain
full and substantive analysis, in addition to statistical information, and
is due not later than June 30 of each year.
[13] The second report is on the activities of the Taxpayer Advocate during
the previous fiscal year. The report must identify the initiatives the Taxpayer
Advocate has taken to improve taxpayer services and IRS responsiveness, contain
recommendations received from individuals who have the authority to issue
a Taxpayer Assistance Order (TAO), describe in detail the progress made in
implementing these recommendations, contain a summary of at least 20 of the
most serious problems which taxpayers have in dealing with the IRS, include
recommendations for such administrative and legislative action as may be
appropriate to resolve such problems, describe the extent to which regional
problem resolution officers participate in the selection and evaluation of
local problem resolution officers, and include other such information as
the Taxpayer Advocate may deem advisable. The Commissioner is required to
establish internal procedures that will ensure a formal IRS response within
three months to all recommendations submitted to the Commissioner by the
Taxpayer Advocate. This second report is due not later than December 31 of
each year.
[14] The reports submitted to Congress by the Taxpayer Advocate are not subject
to prior review by the Commissioner, the Secretary of the Treasury, any other
officer or employee of the Department of the Treasury, or the Office of
Management and Budget. The objective is for Congress to receive an unfiltered
and candid report of the problems taxpayers are experiencing and what can
be done to address them. The reports by the Taxpayer Advocate are not official
legislative recommendations of the Administration; providing official legislative
recommendations remains the responsibility of the Department of Treasury.
Effective Date
[15] The provision is effective on the date of enactment. The first annual
reports of the Taxpayer Advocate are due in June and December, 1996.
b. EXPANSION OF AUTHORITY TO ISSUE TAXPAYER ASSISTANCE ORDERS
(SEC. 102 OF THE
BILL AND SEC. 7811 OF THE CODE)
Present Law
[16] Section 7811(a) authorizes the Taxpayer Ombudsman to issue a Taxpayer
Assistance Order (TAO). TAOs may order the release of taxpayer property levied
upon by the IRS and may require the IRS to cease any action, or refrain from
taking any action if, in the determination of the Taxpayer Ombudsman, the
taxpayer is suffering or about to suffer a significant hardship as a result
of the manner in which the internal revenue laws are being administered.
Reasons for Change
[17] The requirement that the significant hardship be as a result of the
manner in which the internal revenue laws are being administered has resulted
in confusion as to the circumstances which justify the issuance of a TAO.
The most frequent situation where a TAO may be needed, but may not be authorized
under present law, involves income tax refunds that are needed to relieve
severe hardship of taxpayers. Another example involves the re-issuance of
refund checks which have been sent by the IRS to an address at which the
taxpayer no longer resides. While the mailing of the check to the incorrect
address might in no way be due to the fault of the IRS, the normal delays
in reissuing such a check may cause great hardship for the taxpayer. Also,
the IRS Collection Division may take an enforcement action when the taxpayer
has had no actual notice of the deficiency and is not afforded any opportunity
to obtain an administrative review of the validity of the tax deficiency.
In cases like these, it may be appropriate for the Taxpayer Advocate to issue
a TAO to temporarily stay the IRS collection action in order to allow for
a review of the appropriateness of the proposed action.
Explanation of Provision
[18] The bill provides the Taxpayer Advocate with broader authority to
affirmatively take any action as permitted by law with respect to taxpayers
who would otherwise suffer a significant hardship as a result of the manner
in which the IRS is administering the tax laws. In addition, the bill provides
that a TAO may specify a time period within which the TAO must be followed.
Further, the bill provides that only the Taxpayer Advocate, the Commissioner
of the IRS, or the Deputy Commissioner, may modify or rescind a TAO. Any
official who modifies or rescinds a TAO must provide the Taxpayer Advocate
a written explanation of the reasons for the modification or rescission.
Effective Date
[19] The provision is effective on the date of enactment.
2. MODIFICATIONS TO INSTALLMENT AGREEMENT PROVISIONS
a. NOTIFICATION OF REASONS FOR TERMINATION OF INSTALLMENT AGREEMENTS
(SEC. 201 OF THE
BILL AND SEC. 6159 OF THE CODE)
Present Law
[20] Section 6159 authorizes the IRS to enter into written installment agreements
with taxpayers to facilitate the collection of tax liabilities. In general,
the IRS has the right to terminate (or in some instances, alter or modify)
such agreements if the taxpayer provided inaccurate or incomplete information
before the agreement was entered into, if the taxpayer fails to make a timely
payment of an installment or another tax liability, if the taxpayer fails
to provide the IRS with a requested update of financial condition, if the
IRS determines that the financial condition of the taxpayer has changed
significantly, or if the IRS believes collection of the tax liability is
in jeopardy. If the IRS determines that the financial condition of a taxpayer
that has entered into an installment agreement has changed significantly,
the IRS must provide the taxpayer with a written notice that explains the
IRS determination at least 30 days before altering, modifying, or terminating
the installment agreement. No notice is statutorily required if the installment
agreement is altered, modified, or terminated for other reasons.
Reasons for Change
[21] The Committee believes that the IRS generally should notify taxpayers
if an installment agreement is altered, modified, or terminated.
Explanation of Provision
[22] The bill requires the IRS to notify taxpayers 30 days before altering,
modifying, or terminating any installment agreement for any reason other
than that the collection of tax is determined to be in jeopardy. The IRS
must include in the notification an explanation of why the IRS intends to
take this action.
Effective Date
[23] The provision is effective six months after the date of enactment.
b. ADMINISTRATIVE REVIEW OF TERMINATION OF INSTALLMENT AGREEMENTS
(SEC. 202 OF THE
BILL AND SEC. 6159 OF THE CODE)
Present Law
[24] The IRS is currently testing an appeal process for various collection
actions, including installment agreements, that will permit taxpayers to
appeal these collection actions to Appeals Division personnel.
Reasons for Change
[25] The Committee believes that taxpayers should be able to obtain an
independent administrative review of terminations of installment agreements.
Explanation of Provision
[26] The bill requires the IRS to establish additional procedures for an
independent administrative review of terminations of installment agreements
for taxpayers who request a review.
Effective Date
[27] The provision is effective on January 1, 1997.
3. ABATEMENT OF INTEREST AND PENALTIES
a. EXPANSION OF AUTHORITY TO ABATE INTEREST
(SEC. 301 OF THE
BILL AND SEC. 6404 OF THE CODE)
Present Law
[28] Any assessment of interest on any deficiency attributable in whole or
in part to any error or delay by an officer or employee of the IRS (acting
in his official capacity) in performing a ministerial act may be abated.
Reasons for Change
[29] The Committee believes that it is appropriate to expand the authority
to abate interest to include delays caused by managerial acts of the IRS.
Explanation of Provision
[30] The bill permits the IRS to abate interest with respect to any unreasonable
error or delay resulting from managerial acts as well as ministerial acts.
This would include extensive delays resulting from managerial acts such as:
the loss of records by the IRS, IRS personnel transfers, extended illnesses,
extended personnel training, or extended leave. On the other hand, interest
would not be abated for delays resulting from general administrative decisions.
For example, the taxpayer could not claim that the IRS's decision on how
to organize the processing of tax returns or its delay in implementing an
improved computer system resulted in an unreasonable delay in the Service's
action on the taxpayer's tax return, and so the interest on any subsequent
deficiency should be waived.
Effective Date
[31] The provision applies to interest accruing with respect to deficiencies
or payments for taxable years beginning after the date of enactment.
b. REVIEW OF IRS FAILURE TO ABATE INTEREST
(SEC. 302 OF THE
BILL AND SEC. 6404 OF THE CODE)
Present Law
[32] Federal courts generally do not have the jurisdiction to review the
IRS's failure to abate interest.
Reasons for Change
[33] The Committee believes that it is appropriate for the Tax Court to have
jurisdiction to review IRS's failure to abate interest with respect to certain
taxpayers.
Explanation of Provision
[34] The bill grants the Tax Court jurisdiction to determine whether the
IRS's failure to abate interest for an eligible taxpayer was an abuse of
discretion. The Tax Court may order an abatement of interest. The action
must be brought within 180 days after the date of mailing of the Secretary's
final determination not to abate interest. An eligible taxpayer must meet
the net worth and size requirements imposed with respect to awards of attorney's
fees. No inference is intended as to whether under present law any court
has jurisdiction to review IRS's failure to abate interest.
Effective Date
[35] The provision applies to requests for abatement after the date of enactment.
c. EXTENSION OF INTEREST-FREE PERIOD FOR PAYMENT OF TAX AFTER NOTICE AND
DEMAND (SEC. 303 OF
THE BILL AND SEC. 6601 OF THE CODE)
Present Law
[36] In general, a taxpayer must pay interest on late payments of tax. An
interest-free period of 10 calendar days is provided to taxpayers who pay
the tax due within 10 calendar days of notice and demand.
Reasons for Change
[37] The 10-day interest-free period was designed to give taxpayers time
to receive the notice and pay the amount due. Because it may be very difficult
for some taxpayers to remit payment within the ten-day period, particularly
if the mail has delayed delivery of the notice, the IRS must recompute interest
and send another notice to taxpayers.
Explanation of Provision
[38] The bill extends the interest-free period provided to taxpayers for
the payment of the tax liability reflected in the notice from 10 calendar
days to 10 business days (21 calendar days, provided that the total tax liability
shown on the notice of deficiency is less than $ 100,000).
Effective Date
[39] The provision applies in the case of any notice and demand given after
December 31, 1996.
d. ABATEMENT OF PENALTY FOR FAILURE TO MAKE REQUIRED DEPOSITS OF PAYROLL
TAXES IN CERTAIN CASES
(SEC. 304 OF THE
BILL AND SEC. 6656 OF THE CODE)
Present Law
[40] If any person who is required to deposit taxes imposed by the Internal
Revenue Code with a government depository fails to deposit such taxes on
or before the prescribed date, a penalty may be imposed, unless it is shown
that such failure is due to reasonable cause and not willful neglect. The
penalty contains a four-tiered structure in which the amount of the penalty
varies with the length of time within which the taxpayer corrects the failure.
The amount of the underpayment for this purpose is the excess of the amount
of the tax required to be deposited over the amount of the tax, if any, deposited
on or before the prescribed date.
Reasons for Change
[41] The Committee believes that it is appropriate to enumerate additional
circumstances under which this penalty may be waived or abated.
Explanation of Provision
[42] The bill provides that the Secretary may waive this penalty with respect
to an inadvertent failure to deposit any employment tax if: (a) the depositing
entity meets the net worth requirements applicable for awards of attorney's
fees, (b) the failure to deposit occurs during the first quarter that the
depositing entity was required to deposit any employment tax, and (c) the
return for the employment tax was filed on or before the due date.
[43] The bill also provides that the Secretary may abate any penalty for
failure to make deposits for the first time a depositing entity makes a deposit
if it inadvertently sends the deposit to the Secretary instead of to the
required government depository.
Effective Date
[44] The provision is effective on the date of enactment.
4. JOINT RETURNS
a. STUDIES OF JOINT AND SEVERAL LIABILITY FOR MARRIED PERSONS FILING JOINT
TAX RETURNS AND OTHER JOINT RETURN-RELATED ISSUES
(SEC. 401 OF THE
BILL)
Present Law
[45] Spouses who file a joint tax return are each fully responsible for the
accuracy of the return and for the full tax liability. This is true even
though only one spouse may have earned the wages or income which is shown
on the return. This is "joint and several" liability. Spouses who wish to
avoid joint liability may file as a "married person filing separately."
[46] Spouses often file a joint tax return but then later are separated or
divorced. If the IRS later disputes the accuracy of the joint tax returns,
one spouse may be held liable for the entire tax deficiency stemming from
erroneous deductions or omitted income attributable to the other spouse.
Therefore, the "innocent" spouse may be held liable for the full deficiency
in a subsequent audit occurring after the separation or divorce. This has
resulted in a serious hardship being imposed on an "innocent spouse" in a
number of cases.
[47] In some cases, a couple addresses the responsibility for tax liability
as part of their divorce decree. However, these agreements are not binding
on the IRS because the IRS was not a party to the divorce proceeding. Thus,
if a former spouse violates the tax responsibilities assigned to him or her
in a divorce decree, the other spouse may not rely on the decree in dealing
with the IRS.
[48] While present law does contain provisions which give relief to certain
innocent spouses in these situations, the provisions are narrowly drawn and
strictly interpreted. Therefore, many former spouses are not able to qualify
for the protections of the current "innocent spouse" rules.
[49] In 1930, the Supreme Court ruled in Poe v. Seaborn, 282 U.S. 101 (1930),
that all the earnings of a married couple in community property states were
part of the marital property to which each spouse had an equal right. At
the time, married couples generally welcomed this decision because it allowed
couples in community property states to benefit from income "splitting" between
the husband and wife for income tax purposes. Later, the Federal tax law
was changed to allow all married taxpayers to "split" their income by means
of filing a joint tax return.
[50] While the income-splitting effect of Poe v. Seaborn is now moot, the
decision continues to affect married couples in community property states,
but in an adverse way. For example, there are cases where a divorced spouse
owes the IRS a tax liability based on his or her joint return filed during
the marital years. When this spouse remarries, the new spouse's income may
become subject to levy in order to satisfy the tax deficiency of the prior
spouse. In contrast, if the couple did not live in a community property state,
the second spouse's wages could not be levied to pay a tax liability arising
from this spouse's first marriage.
Reasons for Change
[51] The Committee believes that the traditional standard of joint and several
liability for married couples filing a joint tax return should be re-examined.
Explanation of Provision
[52] The bill directs the Treasury Department and the General Accounting
Office (GAO) to conduct separate studies analyzing the following:
(1) The effects of changing the current standard of "joint and several" liability
for married couples to a "proportionate" liability standard. That is, each
spouse would be liable only for the income tax attributable to the income
of each spouse.
(2) The effects of requiring the IRS to be bound by the terms of a divorce
decree which addresses the responsibility for the tax liability on prior
joint tax returns.
(3) Whether the current "innocent spouse" provisions provide meaningful relief
to former spouses.
(4) The effects of overturning the application of Poe v. Seaborn for income
tax purposes in community property states.
[53] The Treasury Department and the GAO must examine the tax policy
implications, the equity implications, and operational changes which would
face the IRS if the liability standard were changed. For example, the studies
must consider how a system of proportionate liability would change the way
the IRS communicates with taxpayers, conducts audits of joint returns, and
enforces tax lien and levies against married couples.
[54] The studies are due six months after the date of enactment.
b. JOINT RETURN MAY BE MADE AFTER SEPARATE RETURNS WITHOUT FULL PAYMENT OF
TAX (SEC. 402 OF THE
BILL AND SEC. 6013 OF THE CODE)
Present Law
[55] Taxpayers who file separate returns and subsequently determine that
their tax liability would have been less if they had filed a joint return
are precluded by statute from reducing their tax liability by filing jointly
if they are unable to pay the entire amount of the joint return liability
before the expiration of the three-year period for making the election to
file jointly.
Reasons for Change
[56] Not all taxpayers are able to pay the full amount owed on their returns
by the filing deadline. In such circumstances, the IRS encourages the taxpayer
to pay the tax as soon as possible or enter into an installment agreement.
However, taxpayers who file separate returns and subsequently determine that
their tax liability would have been less if they had filed a joint return
are precluded from reducing their tax liability by filing jointly if they
are unable to pay the entire amount of the joint return liability. This rule
may be unfair to taxpayers experiencing financial difficulties.
Explanation of Provision
[57] The bill repeals the requirement of full payment of tax liability as
a precondition to switching from married filing separately status to married
filing jointly status.
Effective Date
[58] The provision applies to taxable years beginning after the date of the
enactment.
c. DISCLOSURE OF COLLECTION ACTIVITIES WITH RESPECT TO JOINT RETURNS
(SEC. 403 OF THE
BILL AND SEC. 6103 OF THE CODE)
Present Law
[59] 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.
Reasons for Change
[60] The Committee believes that it is appropriate to require the IRS to
discuss with one former spouse the efforts it has made to collect the joint
return tax liability from the other spouse.
Explanation of Provision
[61] If a tax deficiency with respect to a joint return is assessed, and
the individuals filing the return are no longer married or no longer reside
in the same household, the bill requires the IRS to disclose in writing (in
response to a written request by one of the individuals) to that individual
whether the IRS has attempted to collect the deficiency from the other
individual, the general nature of the collection activities, and the amount
(if any) collected.
[62] Such requests must be made in writing. The IRS may develop procedures
to address the frequency of such requests in order to prevent taxpayers from
abusing this provision by making numerous requests without good cause. For
example, one request per quarter would be a reasonable rate unless the taxpayer
had good cause to seek more frequent information.
[63] In making these disclosures, the IRS may omit the current home address
and business location of the former spouse. This is designed to prevent the
disclosure of such personal information to persons who might be hostile towards
a former spouse.
Effective Date
[64] The provision is effective on the date of enactment.
5. COLLECTION ACTIVITIES
a. MODIFICATIONS TO LIEN AND LEVY PROVISIONS
i. WITHDRAWAL OF PUBLIC NOTICE OF LIEN (
SEC. 501(a) THE BILL AND SEC.
6323 OF THE CODE)
Present Law
[65] The IRS must file a notice of lien in the public record, in order to
protect the priority of a tax lien. A notice of tax lien provides public
notice that a taxpayer owes the Government money. The IRS has discretion
in filing such a notice, but may withdraw a filed notice only if the notice
(and the underlying lien) was erroneously filed or if the underlying lien
has been paid, bonded, or become unenforceable.
Reasons for Change
[66] The Committee believes that it is appropriate to give the IRS discretion
to withdraw a notice of lien in other situations as well.
Explanation of Provision
[67] The bill allows the IRS to withdraw a public notice of tax lien prior
to payment in full by the indebted taxpayer without prejudice, if the Secretary
determines that (1) the filing of the notice was premature or otherwise not
in accordance with the administrative procedures of the IRS, (2) the taxpayer
has entered into an installment agreement to satisfy the tax liability with
respect to which the lien was filed, (3) the withdrawal of the lien will
facilitate collection of the tax liability, or (4) the withdrawal of the
lien would be in the best interests of the taxpayer (as determined by the
Taxpayer Advocate) and of the Government. The IRS must also provide a copy
of the notice of withdrawal to the taxpayer. The bill also requires that,
at the written request of the taxpayer, the IRS make reasonable efforts to
give notice of the withdrawal of a lien to creditors, credit reporting agencies,
and financial institutions specified by the taxpayer.
Effective Date
[68] The provision is effective on the date of enactment.
ii. RETURN OF LEVIED PROPERTY (SEC. 501(b) OF THE BILL
AND SEC. 6343 OF THE CODE)
Present Law
[69] The IRS is authorized to levy on the property of a taxpayer as a means
of collecting unpaid taxes. The IRS is able to return levied property to
a taxpayer only when the taxpayer has fully paid its liability with respect
to tax, interest, and penalty for which the property was levied.
Reasons for Change
[70] There are several situations where the IRS is not authorized to return
levied-upon amounts, even when it believes doing so would be equitable and
in the best interests of the taxpayer and the Government. For example, if
the IRS enters into an installment agreement and, in contradiction to the
terms of the installment agreement, the IRS levies on the taxpayer's property,
the IRS is prohibited from returning the property to the taxpayer. The Committee
believes that it is appropriate to give the IRS authority to return levied
property in other circumstances as well.
Explanation of Provision
[71] The bill allows the IRS to return property (including money deposited
in the Treasury) that has been levied upon if the Secretary determines that
(1) the levy was premature or otherwise not in accordance with the administrative
procedures of the IRS, (2) the taxpayer has entered into an installment agreement
to satisfy the tax liability, (3) the return of the property will facilitate
collection of the tax liability, or (4) the return of the property would
be in the best interests of the taxpayer (as determined by the Taxpayer Advocate)
and the Government.
Effective Date
[72] The provision is effective on the date of enactment.
iii. MODIFICATIONS IN CERTAIN LEVY EXEMPTION AMOUNTS
(SEC. 502 OF THE
BILL AND SEC. 6334 OF THE CODE) Present Law
[73] Property exempt from levy includes personal property with a value of
up to $ 1,650 and books and tools of a trade with a value of up to $ 1,100.
Reasons for Change
[74] The Committee believes that these amounts should be increased and indexed
for inflation.
Explanation of Provision
[75] The bill increases the exemption amount to $ 2,500 for personal property
and increases the exemption amount to $ 1,250 for books and tools of a trade.
These amounts are indexed for inflation commencing January 1, 1997.
Effective Date
[76] The provision is effective with respect to levies issued after December
31, 1996.
b. OFFERS-IN-COMPROMISE
(SEC. 503 OF THE
BILL AND SEC. 7122 OF
THE CODE)
Present Law
[77] 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. Amounts over
$ 500 can only be accepted if the reasons for the acceptance are documented
in detail and supported by an opinion of the IRS Chief Counsel.
Reasons for Change
[78] The Committee believes that the $ 500 threshold amount requiring a written
opinion from the IRS Chief Counsel slows the approval process for most
offers-in-compromise and is unnecessarily low.
Explanation of Provision
[79] The bill increases from $ 500 to $ 50,000 the amount requiring a written
opinion from the Office of Chief Counsel. Compromises below the $ 50,000
threshold must be subject to continuing quality review by the IRS.
Effective Date
[80] The provision is effective on the date of enactment.
6. INFORMATION RETURNS
a. CIVIL DAMAGES FOR FRAUDULENT FILING OF INFORMATION RETURNS
(SEC. 601 OF THE
BILL AND NEW SEC. 7434 OF THE CODE)
Present Law
[81] Federal law provides no private cause of action to a taxpayer who is
injured because a fraudulent information return has been filed with the IRS
asserting that payments have been made to the taxpayer.
Reasons for Change
[82] Some taxpayers may suffer significant personal loss and inconvenience
as the result of the IRS receiving fraudulent information returns, which
have been filed by persons intent on either defrauding the IRS or harassing
taxpayers.
Explanation of Provision
[83] The bill provides that, if any person willfully files a fraudulent
information return with respect to payments purported to have been made to
another person, the other person may bring a civil action for damages against
the person filing that return. A copy of the complaint initiating the action
must be provided to the IRS. Recoverable damages are the greater of (1) $
5,000 or (2) the amount of actual damages (including the costs of the action)
and, in the court's discretion, reasonable attorney's fees. The court must
specify in any decision awarding damages the correct amount (if any) that
should have been reported on the information return. An action seeking damages
under this provision must be brought within six years after the filing of
the fraudulent information return, or one year after the fraudulent information
return would have been discovered through the exercise of reasonable care,
whichever is later.
[84] The Committee does not want to open the door to unwarranted or frivolous
actions or abusive litigation practices. The Committee is concerned, for
example, about the possibility that an unfounded or frivolous action might
be brought under this section by a current or former employee of an employer
who is not pleased with one or more items that his or her current or former
employer has included on the employee's Form W-2. Therefore, actions brought
under this section will be subject to Rule 11 of the Federal Rules of Civil
Procedure, relating to the imposition of sanctions in the case of unfounded
or frivolous claims, to the same extent as other civil actions.
Effective Date
[85] The provision applies to fraudulent information returns filed after
the date of enactment.
b. REQUIREMENT TO CONDUCT REASONABLE INVESTIGATIONS OF INFORMATION RETURNS
(SEC. 602 OF THE
BILL AND SEC. 6201 OF THE CODE)
Present Law
[86] Deficiencies determined by the IRS are generally afforded a presumption
of correctness.
Reasons for Change
[87] Taxpayers may encounter difficulties when a payor issues an erroneous
information return and refuses to correct the information and report the
change to the IRS, or when a fraudulent information return is filed.
Explanation of Provision
[88] The bill provides that, in any court proceeding, if a taxpayer asserts
a reasonable dispute with respect to any item of income reported on an
information return (Form 1099 or Form W-2) filed by a third party and the
taxpayer has fully cooperated with the IRS, the Government has the burden
of producing reasonable and probative information concerning the deficiency
(in addition to the information return itself). Fully cooperating with the
IRS includes (but is not limited to) the following: bringing the reasonable
dispute over the item of income to the attention of the IRS within a reasonable
period of time, and providing (within a reasonable period of time) access
to and inspection of all witnesses, information, and documents within the
control of the taxpayer (as reasonably requested by the Secretary).
Effective Date
[89] The provision is effective on the date of enactment.
7. AWARDING OF COSTS AND CERTAIN FEES
a. UNITED STATES MUST ESTABLISH THAT ITS POSITION IN A PROCEEDING WAS
SUBSTANTIALLY JUSTIFIED
(SEC. 701 OF THE
BILL AND SEC. 7430 OF THE CODE)
Present Law
[90] Under section 7430, a taxpayer who successfully challenges a determination
of deficiency by the IRS may recover attorney's fees and other administrative
and litigation costs if the taxpayer qualifies as a "prevailing party." A
taxpayer qualifies as a prevailing party if it: (1) establishes that the
position of the United States was not substantially justified; (2) substantially
prevails with respect to the amount in controversy or with respect to the
most significant issue or set of issues presented; and (3) meets certain
net worth and (if the taxpayer is a business) size requirements. A taxpayer
must exhaust administrative remedies to be eligible to receive an award of
attorney's fees.
Reasons for Change
[91] The Committee believes that it is appropriate for the IRS to demonstrate
that it was substantially justified in maintaining its position when the
taxpayer substantially prevails and that the IRS should be required to follow
its published guidance and private guidance provided to taxpayers.
Explanation of Provision
[92] The bill provides that, once a taxpayer substantially prevails over
the IRS in a tax dispute, the IRS has the burden of proof to establish that
it was substantially justified in maintaining its position against the taxpayer.
This will switch the current procedure which places the burden of proof on
the taxpayer to establish that the IRS was not substantially justified in
maintaining its position. Therefore, the successful taxpayer will receive
an award of attorney's fees unless the IRS satisfies its burden of proof.
The bill also establishes a rebuttable presumption that the position of the
United States was not substantially justified if the IRS did not follow in
the administrative proceeding (1) its published regulations, revenue rulings,
revenue procedures, information releases, notices, or announcements, or (2)
a private letter ruling, determination letter, or technical advice memorandum
issued to the taxpayer. This provision only applies to the version of IRS
guidance that is most current on the date the IRS's position was taken.
Effective Date
[93] The provision is effective for proceedings commenced after the date
of enactment.
b. INCREASED LIMIT ON ATTORNEY'S FEES
(SEC. 702 OF THE
BILL AND SEC. 7430 OF THE CODE)
Present Law
[94] Attorney's fees recoverable by prevailing parties as litigation or
administrative costs was originally set at $ 75 per hour.
Reasons for Change
[95] The Committee believes that these amounts should be raised and indexed
for inflation.
Explanation of Provision
[96] The bill raises the statutory rate to $ 110 per hour, indexed for inflation
beginning after 1996.
Effective Date
[97] The provision applies to proceedings commenced after the date of enactment.
c. FAILURE TO AGREE TO EXTENSION NOT TAKEN INTO ACCOUNT
(SEC. 703 OF THE
BILL AND SEC. 7430 OF THE CODE)
Present Law
[98] To qualify for an award of attorney's fees, the taxpayer must have exhausted
the administrative remedies available within the IRS.
Reasons for Change
[99] The IRS has taken the position in regulations that attorney's fees cannot
be awarded if the taxpayer has not agreed to extend the statute of limitations.
In Minahan v. Commissioner, 88 T. C. 492 (1987), the Tax Court held that
regulation invalid insofar as it provides that a taxpayer's refusal to consent
to extend the statute of limitations is to be taken into account in determining
whether the taxpayer has exhausted administrative remedies available to the
taxpayer.
Explanation of Provision
[100] The bill provides that any failure to agree to an extension of the
statute of limitations cannot be taken into account for purposes of determining
whether a taxpayer has exhausted the administrative remedies for purposes
of determining eligibility for an award of attorney's fees.
Effective Date
[101] The provision applies to proceedings commenced after the date of enactment.
d. AWARD OF LITIGATION COSTS PERMITTED IN DECLARATORY JUDGMENT PROCEEDINGS
(SEC. 704 OF THE
BILL AND SEC. 7430 OF THE CODE)
Present Law
[102] Section 7430(b)(3) denies any reimbursement for attorney's fees in
all declaratory judgment actions, except those actions related to the revocation
of an organization's qualification under section 501(c)(3) (relating to
tax-exempt status).
[103] It is appropriate to treat declaratory judgment proceedings similar
to other tax proceedings, with respect to eligibility for attorney's fees.
Explanation of Provision
[104] The bill eliminates the present-law restrictions on awarding attorney's
fees in all declaratory judgment proceedings.
Effective Date
[105] The provision applies to proceedings commenced after the date of enactment.
8. MODIFICATION TO RECOVERY OF CIVIL DAMAGES FOR UNAUTHORIZED COLLECTION
ACTIONS
a. INCREASE IN LIMIT ON RECOVERY OF CIVIL DAMAGES FOR UNAUTHORIZED COLLECTION
ACTIONS (SEC. 801
OF THE BILL AND SEC. 7433 OF THE CODE)
Present Law
[106] A taxpayer may sue the United States for up to $ 100,000 of damages
caused by an officer or employee of the IRS who recklessly or intentionally
disregards provisions of the Internal Revenue Code or the Treasury regulations
promulgated thereunder in connection with the collection of Federal tax with
respect to the taxpayer.
Reasons for Change
[107] The Committee believes that the cap for damages caused by IRS employees
should be raised.
Explanation of Provision
[108] The bill increases the cap from $ 100,000 to $ 1 million.
Effective Date
[109] The provision applies to unauthorized collection actions by IRS employees
that occur after the date of enactment.
b. COURT DISCRETION TO REDUCE AWARD FOR LITIGATION COSTS FOR FAILURE TO EXHAUST
ADMINISTRATIVE REMEDIES
(SEC. 802 OF THE
BILL AND SEC. 7433 OF THE CODE)
Present Law
[110] A taxpayer suing the United States for civil damages for unauthorized
collection activities must exhaust administrative remedies to be eligible
for an award.
Reasons for Change
[111] There may be circumstances in which it is inappropriate to require
a taxpayer to exhaust administrative remedies.
Explanation of Provision
[112] The bill permits (but does not require) a court to reduce an award
if the taxpayer has not exhausted administrative remedies.
Effective Date
[113] The provision is effective for proceedings commenced after the date
of enactment.
9. MODIFICATION TO PENALTY FOR FAILURE TO COLLECT AND PAY OVER TAX
a. PRELIMINARY NOTICE REQUIREMENT
(SEC. 901 OF THE
BILL AND SEC. 6672 OF THE CODE)
Present Law
[114] Under section 6672, a "responsible person" is subject to a penalty
equal to the amount of trust fund taxes that are not collected or paid to
the government on a timely basis. An individual the IRS has identified as
a responsible person is permitted an administrative appeal on the question
of responsibility.
Reasons for Change
[115] Some employees may not be fully aware of their personal liability under
section 6672 for the failure to pay over trust fund taxes. The Committee
believes that IRS could make additional efforts to assist the public in
understanding its responsibilities.
Explanation of Provision
[116] The bill requires the IRS to issue a notice to an individual the IRS
had determined to be a responsible person with respect to unpaid trust fund
taxes at least 60 days prior to issuing a notice and demand for the penalty.
The statute of limitations shall not expire before the date 90 days after
the date on which the notice was mailed. The provision does not apply if
the Secretary finds that the collection of the penalty is in jeopardy.
Effective Date
[117] The provision applies to assessments made after June 30, 1996.
b. DISCLOSURE OF CERTAIN INFORMATION WHERE MORE THAN ONE PERSON SUBJECT TO
PENALTY (SEC. 902
OF THE BILL AND SEC. 6103 OF THE CODE)
Present Law
[118] The IRS may not disclose to a responsible person the IRS's efforts
to collect unpaid trust fund taxes from other responsible persons, who may
also be liable for the same tax liability.
Reasons for Change
[119] The Committee believes that it is appropriate to permit the IRS to
disclose to a responsible person whether the IRS is imposing the penalty
on any other responsible person, and whether the IRS has been successful
in collecting the penalty against such a person.
Explanation of Provision
[120] The bill requires the IRS, if requested in writing by a person considered
by the IRS to be a responsible person, to disclose in writing to that person
the name of any other person the IRS has determined to be a responsible person
with respect to the tax liability. The IRS is required to disclose in writing
whether it has attempted to collect this penalty from other responsible persons,
the general nature of those collection activities, and the amount (if any)
collected. Failure by the IRS to follow this provision does not absolve any
individual for any liability for this penalty.
Effective Date
[121] The provision is effective on the date of enactment.
c. RIGHT OF CONTRIBUTION FROM MULTIPLE RESPONSIBLE PARTIES
(SEC. 903 OF THE
BILL AND SEC. 6672 OF THE CODE)
Present Law
[122] A responsible person may seek to recover part of the amount which he
has paid to the IRS from other individuals who also may have the obligations
of a responsible person but who have not yet contributed their proportionate
share of their liability under section 6672. Taxpayers must pursue such claims
for contribution under state law (to the extent state law permits such claims).
The variations in state law sometimes make it difficult or impossible to
press successful suits in state courts to force a contribution from other
responsible persons.
Reasons for Change
[123] The IRS may collect this penalty from a responsible person from whom
it can collect most easily, rather than from the person with the greatest
culpability for the failure. It would accordingly promote fairness in the
administration of the tax laws to establish a right of contribution among
multiple responsible parties.
Explanation of Provision
[124] If more than one person is liable for this penalty, each person who
paid the penalty is entitled to recover from other persons who are liable
for the penalty an amount equal to the excess of the amount paid by such
person over such person's proportionate share of the penalty. This proceeding
is a Federal cause of action and must be entirely separate from any proceeding
involving IRS's collection of the penalty from any responsible party (including
a proceeding in which the United States files a counterclaim or third-party
complaint for collection of the penalty).
Effective Date
[125] The provision applies to penalties assessed after the date of enactment.
d. BOARD MEMBERS OF TAX-EXEMPT ORGANIZATIONS
(SEC. 904 OF THE
BILL AND SEC. 6672 OF THE CODE)
Present Law
[126] Under section 6672, "responsible persons" of tax-exempt organizations
are subject to a penalty equal to the amount of trust fund taxes that are
not collected and paid to the Government on a timely basis.
Reasons for Change
[127] Individuals who serve on the boards of tax-exempt organizations, on
a voluntary or honorary basis, are often concerned that they will be held
liable for unpaid taxes of the organization as a responsible person, even
though their service may be strictly voluntary in nature, and they may not
be involved in the day-to-day operations and financial decisions of the
organization. The Committee believes that the IRS has not made adequate efforts
to clarify the rules applicable to tax-exempt organizations.
Explanation of Provision
[128] The bill clarifies that the section 6672 responsible person penalty
is not to be imposed on volunteer, unpaid members of any board of trustees
or directors of a tax-exempt organization to the extent such members are
solely serving in an honorary capacity, do not participate in the day-to-day
or financial activities of the organization, and do not have actual knowledge
of the failure. The provision cannot operate in such a way as to eliminate
all responsible persons from responsibility.
[129] The bill requires the IRS to develop materials to better inform board
members of tax-exempt organizations (including voluntary or honorary members)
that they may be treated as responsible persons. The IRS is required to make
such materials routinely available to tax-exempt organizations. The bill
also requires the IRS to clarify its instructions to IRS employees on application
of the responsible person penalty with regard to honorary or volunteer members
of boards of trustees or directors of tax-exempt organizations.
Effective Date
[130] The provision is effective on the date of enactment.
10. MODIFICATIONS OF RULES RELATING TO SUMMONSES
a. ENROLLED AGENTS INCLUDED AS THIRD-PARTY RECORDKEEPERS
(SEC. 1001 OF THE
BILL AND SEC. 7609 OF THE CODE)
Present Law
[131] Section 7609 contains special procedures that the IRS must follow before
it issues a third-party summons. A third-party summons is a summons issued
to a third-party recordkeeper compelling him to provide information with
respect to the taxpayer. An example of this would be a summons served on
a stock brokerage house to provide data on the securities trading of the
taxpayer-client.
[132] If a third-party summons is served on a third-party recordkeeper listed
in section 7609(a)(3), then the taxpayer must receive notice of the summons
and have an opportunity to challenge the summons in court. Otherwise the
taxpayer has no statutory right to receive notice of the summons and accordingly
he will not have the opportunity to challenge it in court.
[133] Section 7609(a)(3) lists attorneys and accountants as third-party
recordkeepers, but it does not list "enrolled agents", who are authorized
to practice before the IRS.
Reasons for Change
[134] Because enrolled agents are authorized to practice before the IRS in
a similar manner to attorneys and accountants, they should be accorded the
same status as third-party recordkeepers as are attorneys and accountants.
Explanation of Provision
[135] The bill includes enrolled agents as third-party recordkeepers.
Effective Date
[136] The provision applies to summonses issued after the date of enactment.
b. SAFEGUARDS RELATING TO DESIGNATED SUMMONSES; ANNUAL REPORT TO CONGRESS
ON DESIGNATED SUMMONSES (SECS. 1002
AND 1003 OF THE BILL AND SEC. 6503 OF THE CODE)
Present Law
[137] The period for assessment of additional tax with respect to most tax
returns, corporate or otherwise, is three years. The IRS and the taxpayer
can together agree to extend the period, either for a specified period of
time or indefinitely. The taxpayer may terminate an indefinite agreement
to extend the period by providing notice to the IRS.
[138] During an audit, the IRS may informally request that the taxpayer provide
additional information necessary to arrive at a fair and accurate audit
adjustment, if any adjustment is warranted. Not all taxpayers cooperate by
providing the requested information on a timely basis. In some cases the
IRS seeks information by issuing an administrative summons. Such a summons
will not be judicially enforced unless the Government (as a practical matter,
the Department of Justice) seeks and obtains an order for enforcement in
Federal court. In addition, a taxpayer may petition the court to quash an
administrative summons where this is permitted by statute. /1/
/1/ Petitions to quash are permitted, for example, in connection with the
examination of certain related party transactions under section 6038A(e)(4),
and in the case of certain third-party summonses under section 7609(b)(2).
[139] In certain cases, the running of the assessment period is suspended
during the period when the parties are in court to obtain or avoid judicial
enforcement of an administrative summons. Such a suspension is provided in
the case of litigation over a third-party summons (sec. 7609(e)) or litigation
over a summons regarding the examination of a related party transaction.
Such a suspension can also occur with respect to a corporate tax return if
a summons is issued at least 60 days before the day on which the assessment
period (as extended) is scheduled to expire. In this case, suspension is
only permitted if the summons clearly states that it is a "designated summons"
for this purpose. Only one summons may be treated as a designated summons
for purposes of any one tax return. The limitations period is suspended during
the judicial enforcement period of the designated summons and of any other
summons relating to the same tax return that is issued within 30 days after
the designated summons is issued.
[140] Under current internal procedures of the IRS, no designated summons
is issued unless first reviewed by the Office of Chief Counsel to the IRS,
including review by an IRS Deputy Regional Counsel for the Region in which
the examination of the corporation's return is being conducted.
Reasons for Change
[141] The Committee recognizes that issuance of a designated summons is a
serious step in the examination of a tax return, given the fact that litigation
over the summons would suspend the running of the period
for assessing additional tax against the taxpayer under audit. The Committee
believes that, in recognition of the seriousness of such a step, the IRS
should be required to institute additional procedures to ensure high-level
IRS review before any such summons is issued. The Committee also believes
that it is important to place some restrictions on the taxpayers to whom
IRS can issue a designated summons.
Explanation of Provision
[142] The bill requires that issuance of any designated summons with respect
to a corporation's tax return must be preceded by review of such issuance
by the Regional Counsel, Office of Chief Counsel to the IRS, for the Region
in which the examination of the corporation's return is being conducted.
[143] The bill also limits the use of a designated summons to corporations
(or to any other person to whom the corporation has transferred records)
that are being examined as part of the Coordinated Examination Program (CEP)
or its successor. CEP audits cover about 1,600 of the largest corporate
taxpayers. If a corporation moves between CEP and non-CEP audit categories
only the tax years covered by the CEP may be the subject of a designated
summons. The bill does not affect Code section 6038A(e)(1), which relates
to a U.S. reporting corporation that acts merely as the agent of the foreign
related party by receiving summonses on behalf of the foreign party.
[144] The bill also requires that the Treasury report annually to the Congress
on the number of designated summonses issued in the preceding 12 months.
Effective Date
[145] The provision applies to summonses issued after date of enactment.
11. RELIEF FROM RETROACTIVE APPLICATION OF TREASURY DEPARTMENT REGULATIONS
(SEC. 1101 OF THE
BILL AND SEC. 7805 OF THE CODE)
Present Law
[146] Under section 7805(b), Treasury may prescribe the extent (if any) to
which regulations shall be applied without retroactive effect.
Reasons for Change
[147] The Committee believes that it is generally inappropriate for Treasury
to issue retroactive regulations.
Explanation of Provision
[148] The bill provides that temporary and proposed regulations must have
an effective date no earlier than the date of publication in the Federal
Register or the date on which any notice substantially describing the expected
contents of such regulation is issued to the public. Any regulations filed
or issued within 18 months of the enactment of the statutory provision to
which the regulation relates may be issued with retroactive effect. This
general prohibition on retroactive regulations may be superseded by a legislative
grant authorizing the Treasury to prescribe the effective date with respect
to a statutory provision. The Treasury may issue retroactive temporary or
proposed regulations to prevent abuse. The Treasury also may issue retroactive
temporary, proposed, or final regulations to correct a procedural defect
in the issuance of a regulation. Treasury may provide that taxpayers may
elect to apply a temporary or proposed regulation retroactively from the
date of publication of the regulation. Final regulations may take effect
from the date of publication of the temporary or proposed regulation to which
they relate. The provision does not apply to any regulation relating to internal
Treasury Department policies, practices, or procedures. Present law with
respect to rulings is unchanged.
Effective Date
[149] The provision applies with respect to regulations that relate to statutory
provisions enacted on or after the date of enactment.
12. MISCELLANEOUS PROVISIONS
a. PHONE NUMBERS OF PERSON PROVIDING PAYEE STATEMENT REQUIRED TO BE SHOWN
ON SUCH STATEMENT
(SEC. 1201 OF THE
BILL AND SECS. 6041, 6041A, 6042, 6044, 6045, 6049, 6050B, 6050H, 6050I,
6050J, 6050K AND 6050N OF THE CODE)
Present Law
[150] Information returns must contain the name and address of the payor.
Reasons for Change
[151] Taxpayers often need to contact payors issuing information returns
in order to resolve questions about the accuracy of the information provided
to the IRS. Currently, payors are only required to provide their names and
addresses on information returns. As a result, taxpayers may have difficulty
in contacting the payor and resolving questions quickly.
Explanation of Provision
[152] The bill requires that information returns contain the name, address,
and phone number of the information contact of the person required to make
the information return. A payor may for example, provide the phone number
of the department with the relevant information. It is intended that the
telephone number provide direct access to individuals with immediate resources
to resolve a taxpayer's questions in an expeditious manner.
Effective Date
[153] The provision applies to statements required to be furnished after
December 31, 1996 (determined without regard to any extension).
b. REQUIRED NOTICE TO TAXPAYERS OF CERTAIN PAYMENTS
(SEC. 1202 OF THE
BILL)
Present Law
[154] If the IRS receives a payment without sufficient information to properly
credit it to a taxpayer's account, the IRS may attempt to contact the taxpayer.
If contact cannot be made, the IRS places the payment in an unidentified
remittance file.
Reasons for Change
[155] If the IRS cannot associate a taxpayer's payment with a balance due,
the IRS generally deposits the money and may not inform the taxpayer of the
overpayment. For example, a check that is separated from a balance-due income
tax return, which is subsequently lost, may not get credited to that taxpayer's
account.
Explanation of Provision
[156] The bill requires the IRS to make reasonable efforts to notify, within
60 days, those taxpayers who have made payments which the IRS cannot associate
with the taxpayer.
Effective Date
[157] The provision is effective on the date of enactment.
c. UNAUTHORIZED ENTICEMENT OF INFORMATION DISCLOSURE
(SEC. 1203 OF THE
BILL AND NEW SEC. 7435 OF THE CODE)
Present Law
[158] No statutory disincentive applies to IRS employees who entice a tax
professional to disclose information about clients in exchange for the favorable
treatment of the taxes of the professional.
Reasons for Change
[159] The Committee believes that it is improper for IRS employees to entice
tax professionals into breaching their fiduciary responsibilities to their
clients in exchange for favorable treatment on their own returns.
Explanation of Provision
[160] If any officer or employee of the United States intentionally compromises
the determination or collection of any tax due from an attorney, certified
public accountant, or enrolled agent representing a taxpayer in exchange
for information conveyed by the taxpayer to the attorney, certified public
accountant, or enrolled agent for purposes of obtaining advice concerning
the taxpayer's tax liability, the taxpayer may bring a civil action for damages
against the United States in a district court of the United States. Upon
a finding of liability, damages shall equal the lesser of $ 500,000 or the
sum of (1) actual economic damages sustained by the taxpayer as a proximate
result of the information disclosure and (2) the costs of the action. These
remedies shall not apply to information conveyed to an attorney, certified
public accountant, or enrolled agent for the purpose of perpetrating a fraud
or crime.
Effective Date
[161] The provision applies to actions taken after the date of enactment.
d. ANNUAL REMINDERS TO TAXPAYERS WITH OUTSTANDING DELINQUENT ACCOUNTS
(SEC. 1204 OF THE
BILL AND NEW SEC. 7524 OF THE CODE)
Present Law
[162] There is no statutory requirement in the Code that the IRS send annual
reminders to persons who have outstanding tax liabilities.
Reasons for Change
[163] Numerous taxpayers become delinquent in paying their tax liability.
The delinquencies may occur because the person did not make enough payments
through payroll withholding or quarterly estimated payments or because of
an adjustment following an audit.
[164] The IRS generally pursues larger tax deficiencies first, and then it
pursues small deficiencies. Because of the limited amount of IRS resources
to work collection cases, cases with smaller deficiencies may not be addressed
for years. In the meantime, the taxpayer may come to believe that the apparent
lack of IRS collection activity means that it has abandoned its claim against
the taxpayer. The taxpayer may be surprised when the IRS resumes collection
action years later, when the 10-year statute of limitations on collections
is close to expiring.
Explanation of Provision
[165] The bill requires the IRS to send taxpayers an annual reminder of their
outstanding tax liabilities. The fact that a taxpayer did not receive a timely,
annual reminder notice does not affect the tax liability.
Effective Date
[166] The provision requires the IRS to send annual reminder notices beginning
in 1997.
e. FIVE-YEAR EXTENSION OF AUTHORITY FOR UNDERCOVER OPERATIONS
(SEC. 1205 OF THE
BILL AND SEC. 7608 OF THE CODE)
Present Law
[167] The Anti-Drug Abuse Act of 1988 exempted IRS undercover operations
from the otherwise applicable statutory restrictions controlling the use
of Government ends (which generally provide that all receipts be deposited
in the general fund of the Treasury and all expenses be paid out of appropriated
funds). In general, the exemption permits the IRS to "churn" the income earned
by an undercover operation to pay additional expenses incurred in the undercover
operation. 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.
The exemption originally expired on December 31, 1989, and was extended by
the Comprehensive Crime Control Act of 1990 to December 31, 1991. The IRS
has not had the authority to churn funds from its undercover operations since
1991.
Reasons for Change
[168] Many other law enforcement agencies have churning authority. It is
appropriate for IRS to have this authority as well.
Explanation of Provision
[169] The bill reinstates the IRS's offset authority under section 7608(c)
from the date of enactment until January 1, 2001. The bill amends the IRS
annual reporting requirement under section 7608(c)(4)(B) to require the provision
of the following data: (1) the date the operation was initiated; (2) the
date offsetting was approved; (3) the total current expenditures and the
amount and use of proceeds of the operation; (4) a detailed description of
the undercover operation projected to generate proceeds, including the potential
violation being investigated, and whether the operation is being conducted
under grand jury auspices; and (5) the results of the operation to date,
including the results of criminal proceedings.
Effective Date
[170] The provision is would [sic] be effective on the date of enactment.
f. DISCLOSURE OF RETURNS ON CASH TRANSACTIONS
(SEC. 1206 OF THE
BILL AND SEC. 6103 OF THE CODE)
Present Law
[171] The Internal Revenue Code prohibits disclosure of tax returns and return
information, except to the extent specifically authorized by the Internal
Revenue Code (sec. 6103). Unauthorized disclosure is a felony punishable
by a fine not exceeding $ 5,000 or imprisonment of not more than five years,
or both (sec. 7213). An action for civil damages also may be brought for
unauthorized disclosure (sec. 7431). No tax information may be furnished
by the IRS to another agency unless the other agency establishes procedures
satisfactory to the IRS for safeguarding the tax information it receives
(sec. 6103(p)).
[172] Under section 6050I, any person who receives more than $ 10,000 in
cash in one transaction (or two or more related transactions) in the course
of a trade or business generally must file an information return (Form 8300)
with the IRS specifying the name, address, and taxpayer identification number
of the person from whom the cash was received and the amount of cash received.
[173] The Anti-Drug Abuse Act of 1988 provided a special rule permitting
the IRS to disclose these information returns to other Federal agencies for
the purpose of administering Federal criminal statutes. The special rule
originally was to expire after November 18, 1990, and was extended by the
Comprehensive Crime Control Act of 1990 to November 18, 1992.
Reasons for Change
[174] Information filed on Form 8300 is very similar to information filed
on Currency Transaction Reports (CTRs) under the Bank Secrecy Act. Both types
of information reports should be subject to the same disclosure rules.
Explanation of Provision
[175] The bill permanently extends the special rule for disclosing Form 8300
information. Moreover, the bill permits disclosures not only to Federal agencies
but also to State, local and foreign agencies and for civil, criminal and
regulatory purposes (i.e., generally in the same manner as Currency Transaction
Reports filed by financial institutions under the Bank Secrecy Act). Disclosure,
however, is not permitted to any such agency for purposes of tax administration.
The bill also (1) extends the dissemination policies and guidelines under
section 6103 to people having access to Form 8300 information, and (2) applies
section 6103 sanctions to persons having access to Form 8300 information
that disclose this information without proper authorization.
Effective Date
[176] The provision is effective on the date of enactment.
g. DISCLOSURE OF RETURNS AND RETURN INFORMATION TO DESIGNEE OF TAXPAYER
(SEC. 1207 OF THE
BILL AND SEC. 6103 OF THE CODE)
Present Law
[177] Under present law, the IRS is authorized to disclose the return of
any taxpayer, or return information pertaining to a taxpayer, to such person(s)
as the taxpayer has designated in a written request.
Reasons for Change
[178] The IRS's move to a paperless system depends on the ease and functionality
of electronic communication systems, e.g., telephones, facsimile machines,
computers, communications networks, etc.
Explanation of Provision
[179] The bill deletes the word "written" from the requirement that "written
consent" from the taxpayer is necessary for the disclosure of taxpayer
information to a designated third party. Allowing the IRS to adopt alternatives
to the written request requirement will expedite such changes and facilitate
the development and implementation of Tax System Modernization projects.
It is anticipated that the IRS will continue to utilize its regulatory authority
to impose reasonable restrictions on the form in which a request is made,
and that the IRS will in no event accept an unconfirmed verbal request.
Effective Date
[180] The provision is effective on the date of enactment.
H. REPORT ON NETTING OF INTEREST ON OVERPAYMENTS AND LIABILITIES
(SEC. 1208 OF THE
BILL)
Present Law
[181] If any portion of a tax is satisfied through the crediting of an
overpayment of tax, no interest is imposed on that portion of the tax for
any period during which, if the credit had not been made, interest would
have been allowable.
[182] The Tax Reform Act of 1986 first implemented an interest rate differential.
The underpayment rate was set 1 percent higher than the overpayment rate.
The Conference Report to the Tax Reform Act of 1986 stated:
[t]o the extent a portion of tax due is satisfied by a credit of
an overpayment, no interest is imposed on that portion of the
tax. Consequently, if an underpayment of $ 1,000 occurs in year
1, and an overpayment of $ 1,000 occurs in year 2, no interest
is imposed in year 2 because of the rule of section 6601(f). The
IRS can at present net many of these offsetting overpayments and
underpayments. Nevertheless, the IRS will require a transition
period during which to coordinate differential interest
rates . . . [t]he Secretary of the Treasury may prescribe
regulations providing for netting of tax underpayments and
overpayments through the period ending three years after the
date of enactment of the bill. By that date, the IRS should have
implemented the most comprehensive netting procedures that are
consistent with sound administrative practice.
[183] The Omnibus Budget Reconciliation Act of 1990 increased the underpayment
rate on certain large corporate underpayments to 3 percent higher than the
overpayment rate. The Conference Report stated:
Under present law, the Secretary has the authority to credit the
amount of any overpayment against any liability under the
Code . . . to the extent a portion of tax due is satisfied by a
credit of an overpayment, no interest is imposed on that portion
of the tax . . . The Secretary should implement the most
comprehensive crediting procedures under section 6402 that are
consistent with sound administrative practice.
[184] The General Agreement on Tariffs and Trade (GATT) reduced the overpayment
rate on certain corporate tax refunds. The legislative history of the GATT
legislation stated that:
The Secretary of the Treasury should implement the most
comprehensive crediting procedures under section 6402 that are
consistent with sound administrative practice, and should do so
as rapidly as is practicable.
Reasons for Change
[185] The Committee believes that it is important for the Committee to understand
in detail how the IRS has implemented netting procedures to date. Congress
has never adopted differential interest rates, or increased the amount of
such differential, without at the same time also encouraging the IRS to implement
comprehensive interest netting procedures. The Committee is concerned that
the IRS has failed to implement comprehensive interest netting procedures
and is interested in learning whether the delay stems from technical difficulties
or substantive questions about the scope of such interest netting procedures.
Explanation of Provision
[186] The bill requires the Secretary of the Treasury to conduct a study
of the manner in which IRS has implemented the netting of interest on
overpayments and underpayments and the policy and administrative implications
of global netting. The Treasury is required to hold a public hearing to receive
comments from any interested party prior to submitting the report of its
study to the tax writing committees.
Effective Date
[187] The report is due six months after the date of enactment. The Committee
understands that the Treasury has already announced that it will conduct
this study and will complete it by October 1, 1996. The Committee anticipates
that the Treasury will meet its own deadline.
i. EXPENSES OF DETECTION OF UNDERPAYMENTS AND FRAUD
(SEC. 1209 OF THE
BILL AND SEC. 7623 OF THE CODE)
Present Law
[188] The Secretary may, pursuant to regulations, pay rewards for information
leading to the detection and punishment of violations of the Internal Revenue
laws.
Reasons for Change
[189] The Committee believes that improvements should be made to this program.
Explanation of Provision
[190] The bill clarifies that rewards may be paid for information relating
to civil violations, as well as criminal violations. The bill also provides
that the rewards are to be paid out of the proceeds of amounts (other than
interest) collected by reason of the information provided. The bill also
requires an annual report on the rewards program.
Effective Date
[191] The provision is effective six months after the date of enactment.
j. USE OF PRIVATE DELIVERY SERVICES FOR TIMELY-MAILING-AS- TIMELY-FILING
RULE (SEC. 1210
OF THE BILL AND SEC. 7502 OF THE CODE)
Present Law
[192] The Code sets forth the rules for determining when a return, payment
of tax, or other document required to be filed with the IRS is deemed to
be filed or delivered on a timely basis (sec. 7502). In a recent case
interpreting this section (V.L. Correia, 58 F.3d 468 (1995)), the U.S. Court
of Appeals for the 9th Circuit upheld the Tax Court's ruling that the section's
so-called "timely-mailing as timely-filing" rule does not apply to private
delivery companies. Although the Appeals Court agreed that there is a legitimate
policy rationale for extending the rule to private delivery companies, it
concluded that only Congress, and not the courts, had the power to make such
a change.
Reasons for Change
[193] There are many private delivery companies operating today which meet
the U.S. Postal Service's ability to deliver documents quickly and securely.
Every year, many taxpayers needlessly run afoul of the present-law rule because
they make a reasonable assumption that using a private delivery service is
adequate to show timely filing of their tax returns.
Explanation of Provision
[194] The Secretary of the Treasury is given authority to expand the
"timely-mailing as timely-filing" rule to include a designated delivery service.
A designated delivery service must be designated as such by the Secretary.
The Secretary may designate a delivery service only if it meets the following
criteria: (1) it is available to the general public; (2) it is at least as
timely and reliable on a regular basis as the United States mail; (3) it
satisfies recordkeeping criteria; and (4) it meets any additional criteria
as the Secretary may prescribe. The provision also gives the Secretary similar
authority with respect to equivalents for United States certified or registered
mail.
Effective Date
[195] The provision is effective on the date of enactment.
k. REPORTS ON MISCONDUCT BY IRS EMPLOYEES
(SEC. 1211 OF THE
BILL)
Present Law
[196] The IRS Inspection Division investigates allegations of criminal misconduct
or serious violations of the "Standards of Ethical Conduct for Employees
of the Executive Branch" (5 CFR 2635) by IRS employees. In addition, IRS
management addresses other types of taxpayer complaints relating to inappropriate
behavior by IRS employees.
Reasons for Change
[197] Criminal actions resulting from Inspection Service investigations are
a matter of public record, and press releases are issued in conjunction with
the U.S. Attorney's office about such matters in accordance with exceptions
that exist to tax disclosure and privacy constraints. However, information
about administrative disciplinary actions are generally not available to
the public. This may lead to a public perception that allegations of misconduct
by IRS employees are not investigated or that misconduct goes unpunished.
Explanation of Provision
[198] The bill requires the IRS to make an annual report to the tax-writing
committees, beginning June 1, 1997, on all categories of instances involving
allegations of misconduct by IRS employees, arising either from internally
identified cases or from taxpayer or third-party initiated complaints. The
report must identify by IRS Region and primary activity involved (e.g.,
examination, collection, etc.), the nature of the misconduct or complaint,
the number of instances received by category, and the disposition of these
instances. This would include, but not be limited to, the following categories:
number of employees reprimanded, terminated, or prosecuted; instances dismissed
because of a finding that proper procedures were followed; and those initiated
but not yet resolved. Instances covered by this process must include both
written complaints of misconduct and those received by telephone through
management channels. Each annual report will cover instances of misconduct
that occurred during the preceding calendar year. Disposition of complaints
not resolved by the time the report is prepared must be included in the report
for the year in which resolution occurs.
Effective Date
[199] The first report is due by June 1, 1997.
B. REVENUE OFFSETS 1. APPLICATION OF FAILURE-TO-PAY PENALTY TO SUBSTITUTE
RETURNS (SEC. 1301
OF THE BILL AND SEC. 6651 OF THE CODE)
Present Law
[200] Section 6651(a)(2) provides that the IRS may assess a penalty for failure
to pay tax from the due date of the return until the tax is paid. If no return
is filed by the taxpayer and the IRS files a substitute return under section
6020, the tax on which the penalty is measured is considered a deficiency
assessable under section 6212 or 6213, and the failure to pay penalty begins
to accumulate 10 days after the IRS sends the taxpayer a notice and demand
for payment of the tax.
Reasons for Change
[201] Under the current penalty system, there is an inequity between voluntarily
filed delinquent returns and substitute returns. Taxpayers who file delinquent
returns must pay a failure to file penalty from the due date of the return,
whereas the taxpayer who forces the IRS to utilize a substitute return is
not assessed the penalty until billed by the IRS.
Explanation of Provision
[202] The bill applies the failure to pay penalty to substitute returns in
the same manner as the penalty applies to delinquent filers.
Effective Date
[203] The provision applies in the case of any return the due date for which
(determined without regard to extensions) is after the date of enactment.
2. EXCISE TAXES ON AMOUNTS OF PRIVATE EXCESS BENEFITS
(SEC. 1311 OF THE
BILL, SEC. 1312
OF THE BILL,
SEC. 1313 OF THE
BILL, SEC. 1314
OF THE BILL AND SECS. 501, 6033, 6104, 6652, 6685 AND NEW SECS. 4958,
6116, AND 6716 OF THE CODE)
Present Law Private inurement
[204] Charities. -- Section 501(c)(3) specifically conditions tax-exempt
status for all organizations described in that section on the requirement
that no part of the net earnings of the organization inures to the benefit
of any private shareholder or individual (the so-called "private inurement
test").
[205] Social welfare organizations. -- A tax-exempt social welfare organization
described in section 501(c)(4) must be organized on a non-profit basis and
must be operated exclusively for the promotion of social welfare. In contrast
to section 501(c)(3), however, there is no specific statutory rule in section
501(c)(4) prohibiting the net earnings of a social welfare organization described
in section 501(c)(4) from inuring to the benefit of a private shareholder
or individual. /2/
/2/ Even where no prohibited private inurement exists, however, more than
incidental private benefits conferred on individuals may result in the
organization not being operated "exclusively" for an exempt purpose. See,
e.g., American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989).
[206] Other organizations. -- Other tax-exempt organizations, such as labor
and agricultural organizations described in section 501(c)(5) and business
leagues described in section 501(c)(6) are subject to the private inurement
test, as a result of explicit statutory language or Treasury Department
regulations.
Sanctions for private inurement and other violations of exemption standards
[207] Organizations described in section 501(c)(3) are classified as either
public charities or private foundations. Penalty excise taxes may be imposed
under the Code when a public charity makes political expenditures (sec. 4955)
or excessive lobbying expenditures (secs. 4911 and 4912). However, the Code
generally does not provide for the imposition of penalty excise taxes in
cases where a 501(c)(3) public charity or a section 501(c)(4) social welfare
organization engages in a transaction that results in private inurement.
In such cases, the only sanction that specifically is authorized under the
Code is revocation of the organization's tax- exempt status. A transaction
engaged in by a private foundation (but not a public charity) is subject
to special penalty excise taxes under the Code if the transaction is a prohibited
"self-dealing" transaction (sec. 4941) or does not accomplish a charitable
purpose (sec. 4945).
Filing and public disclosure rules
[208] Tax-exempt organizations (other than churches and certain small
organizations) are required to file an annual information return (Form 990)
with the Internal Revenue Service ("IRS"), setting forth the organization's
items of gross income and expenses attributable to such income, disbursements
for tax-exempt purposes, plus certain other information for the taxable year.
Private foundations are required to allow public inspection at the foundation's
principal office of their current annual information return. Other tax-exempt
organizations, including public charities, are required to allow public
inspection at the organization's principal office (and certain regional or
district offices) of their annual information returns for the three most
recent taxable years (sec. 6104(e)). The Code also requires that tax-exempt
organizations allow public inspection of the organization's application to
the IRS for recognition of tax-exempt status, the IRS determination letter,
and certain related documents. In addition, upon written request to the IRS,
members of the general public are permitted to inspect annual information
returns of tax-exempt organizations and applications for recognition of
tax-exempt status (and related documents) at the National Office of the IRS
in Washington, D.C. A person making such a written request is notified by
the IRS when the material is available for inspection at the National Office,
where notes may be taken of the material open for inspection, photographs
taken with the person's own equipment, or copies of such material obtained
from the IRS for a fee (Treas. Reg. secs. 301.6104(a)-6 and 301.6104(b)-1).
[209] Section 6652(c)(1)(A) provides that a tax-exempt organization that
fails to file a complete and accurate Form 990 is subject to a penalty of
$ 10 for each day during which such failure continues (with a maximum penalty
with respect to any one return of the lesser of $ 5,000 or five percent of
the organization's gross receipts for the year). Section 6652(c)(1)(C) provides
that tax- exempt organizations that fail to make certain annual returns and
applications for exemption available for public inspection are subject to
a penalty of $ 10 for each day the failure continues (with a maximum penalty
with respect to any one return not to exceed $ 5,000, and without limitation
with respect to applications). In addition, section 6685 provides a penalty
for willfully failing to make an annual return or application available for
public inspection of $ 1,000 per return or application.
Reasons for Change
[210] To ensure that the advantages of tax-exempt status ultimately benefit
the community and not private individuals, the bill extends the present-law
section 501(c)(3) private inurement prohibition to nonprofit organizations
described in section 501(c)(4) and provides for intermediate sanctions that
may be imposed when nonprofit organizations described in section 501(c)(3)
or 501(c)(4) engage in transactions with certain insiders that result in
private inurement. The bill also enhances the oversight and public accountability
of nonprofit organizations through additional reporting of information by
nonprofit organizations to the Internal Revenue Service (IRS) and increased
public access to documents filed by such organizations with the IRS.
Explanation of Provision Extend private inurement prohibition to social welfare
organizations
[211] The bill amends section 501(c)(4) explicitly to provide that a social
welfare organization or other organization described in that section would
be eligible for tax-exempt status only if no part of its net earnings inures
to the benefit of any private shareholder or individual.
[212] In addition, the bill provides that the private inurement rule will
not be violated solely because of an allocation or return of net margins
or capital to the members of a nonprofit association or organization that
operates on a cooperative basis in accordance with its incorporating statute
and bylaws (substantially as in existence on the date of enactment) and was
determined to be exempt from Federal income tax under section 501(c)(4) prior
to the date of enactment. However, such cooperative organizations are subject
to the general private inurement proscription with respect to any other type
of transaction.
[213] Effective date. -- This provision generally is effective on September
14, 1995. However, under a special transition rule, the provision does not
apply to inurement occurring prior to January 1, 1997, if such inurement
results from a written contract that was binding on September 13, 1995, and
at all times thereafter before such inurement occurred, and the terms of
which have not materially changed.
Intermediate sanctions for excess benefit transactions
[214] The bill imposes penalty excise taxes as an intermediate sanction in
cases where organizations exempt from tax under section 501(c)(3) or 501(c)(4)
(other than private foundations, which are subject to a separate penalty
regime under current law) engage in an "excess benefit transaction." In such
cases, intermediate sanctions may be imposed on certain disqualified persons
(i.e., insiders) who improperly benefit from an excess benefit transaction
and on organization managers who participate in such a transaction knowing
that it is improper.
[215] An "excess benefit transaction" is defined as: (1) any transaction
in which an economic benefit is provided to, or for the use of, any disqualified
person if the value of the economic benefit provided directly by the organization
(or indirectly through a controlled entity /3/) to such person exceeds the
value of consideration (including performance of services) received by the
organization for providing such benefit; and (2) to the extent provided in
Treasury Department regulations, any transaction in which the amount of any
economic benefit provided to, or for the use of any disqualified person is
determined in whole or in part by the revenues of the organization, provided
that the transaction constitutes prohibited inurement under present-law section
501(c)(3) or under section 501(c)(4), as amended. Thus, "excess benefit
transactions" subject to excise taxes include transactions in which a
disqualified person engages in a non-fair-market-value transaction with an
organization or receives unreasonable compensation, as well as financial
arrangements (to the extent provided in Treasury regulations) under which
a disqualified person receives payment based on the organization's income
in a transaction that violates the present-law private inurement prohibition.
The Treasury Department is instructed to issue prompt guidance providing
examples of revenue- sharing arrangements that violate the private inurement
prohibition; such guidance shall be applicable on a prospective basis./4/
/3/ A tax-exempt organization cannot avoid the private inurement proscription
by causing a controlled entity to engage in an excess benefit transaction.
Thus, for example, if a tax-exempt organization causes its taxable subsidiary
to pay excessive compensation to an individual who is a disqualified person
with respect to the parent organization, such transaction would be an excess
benefit transaction.
/4/ Under present law, certain revenue sharing arrangements have been determined
not to constitute private inurement (see e.g., GCM 38283; GCM 38905; and
GCM 39674) and, under the proposal, it would continue to be the case that
not all revenue sharing arrangements would be improper private inurement.
However, the Committee intends no inference that Treasury or the Internal
Revenue Service are bound by any particular prior unpublished rulings in
this area.
[216] Existing tax-law standards (see sec. 162) apply in determining
reasonableness of compensation and fair market value. /5/ In applying such
standards, the Committee intends that the parties to a transaction are entitled
to rely on a rebuttable presumption of reasonableness with respect to a
compensation arrangement with a disqualified person if such arrangement was
approved by a board of directors or trustees (or committee thereof) that:
(1) was composed entirely of individuals unrelated to and not subject to
the control of the disqualified person(s) involved in the arrangement /6/;
(2) obtained and relied upon appropriate data as to comparability (e.g.,
compensation levels paid by similarly situated organizations, both taxable
and tax-exempt, for functionally comparable positions; the location of the
organization, including the availability of similar specialties in the geographic
area; independent compensation surveys by nationally recognized independent
firms; or actual written offers from similar institutions competing for the
services of the disqualified person); and (3) adequately documented the basis
for its determination (e.g., the record includes an evaluation of the individual
whose compensation was being established and the basis for determining that
the individual's compensation was reasonable in light of that evaluation
and data). /7/ If these three criteria are satisfied, penalty excise taxes
could be imposed under the proposal only if the IRS develops sufficient contrary
evidence to rebut the probative value of the evidence put forth by the parties
to the transaction (e.g., the IRS could establish that the compensation data
relied upon by the parties was not for functionally comparable positions
or that the disqualified person, in fact, did not substantially perform the
responsibilities of such position). A similar rebuttable presumption would
arise with respect to the reasonableness of the valuation of property sold
or otherwise transferred (or purchased) by an organization to (or from) a
disqualified person if the sale or transfer (or purchase) is approved by
an independent board that uses appropriate comparability data and adequately
documents its determination. The Secretary of the Treasury and IRS are instructed
to issue guidance in connection with the reasonableness standard that
incorporates this presumption.
/5/ In this regard, the Committee intends that an individual need not necessarily
accept reduced compensation merely because he or she renders services to
a tax-exempt, as opposed to a taxable, organization. Cf. Treas. Reg. sec.
53.4941(d)-3(c)(1).
/6/ A reciprocal approval arrangement whereby an individual approves compensation
of the disqualified person, and the disqualified person, in turn, approves
the individual's compensation does not satisfy the independence requirement.
/7/ The fact that a State or local legislative or agency body may have authorized
or approved of a particular compensation package paid to a disqualified person
is not determinative of the reasonableness of compensation paid for purposes
of the excise tax penalties provided for by the proposal. Similarly, such
authorization or approval is not determinative of whether a revenue sharing
arrangement violates the private inurement proscription.
[217] The bill specifically provides that the payment of personal expenses
and benefits to or for the benefit of disqualified persons, and
non-fair-market-value transactions benefiting such persons, would be treated
as compensation only if it is clear that the organization intended and made
the payments as compensation for services. In determining whether such payments
or transactions are, in fact, compensation, the relevant factors include
whether the appropriate decision-making body approved the transfer as
compensation in accordance with established procedures and whether the
organization and the recipient reported the transfer (except in the case
of non-taxable fringe benefits) as compensation on the relevant forms (i.e.,
the organization's Form 990, the Form W-2 or Form 1099 provided by the
organization to the recipient, the recipient's Form 1040, and other required
returns). /8/
/8/ With the exception of nontaxable fringe benefits described in present-law
section 132 and other types of nontaxable transfers such as employer-provided
health benefits and contributions to qualified pension plans, an organization
cannot demonstrate at the time of an IRS audit that it clearly indicated
its intent to treat economic benefits provided to a disqualified person as
compensation for services merely by claiming that such benefits may be viewed
as part of the disqualified person's total compensation package. Rather,
the organization would be required to provide substantiation that is
contemporaneous with the transfer of economic benefits at issue.
[218] Consistent with the rule that payment of personal expenses and benefits
to or for the benefit of disqualified persons and nonfair-market value
transactions benefiting such persons are treated as compensation only if
it is clear that the organization intended and made the payments as compensation
for services, any reimbursements by the organization of excise tax liability
are treated as an excess benefit unless they are included in the disqualified
person's compensation during the year the reimbursement is made. The total
compensation package, including the amount of any reimbursement, is subject
to the reasonableness requirement. Similarly, the payment by an applicable
tax-exempt organization of premiums for an insurance policy providing liability
insurance to a disqualified person for excess benefit taxes is an excess
benefit transaction unless such premiums are treated as part of the compensation
paid to such disqualified person. /9/
/9/ In addition, because individuals may be both members of, and disqualified
persons with respect to, a non-exclusive applicable tax- exempt organization
(e.g., a museum or neighborhood civic organization) and receive certain benefits
(e.g., free admission, discounted gift shop purchases) in their capacity
as members (rather than in their capacity as disqualified persons), the Committee
expects that the Treasury Department will provide guidance clarifying that
such membership benefits may be excluded from consideration under the private
inurement proscription and intermediate sanction rules.
[219] "Disqualified person" means any individual who is in a position to
exercise substantial influence over the affairs of the organization, whether
by virtue of being an organization manager or otherwise. /10/ In addition,
"disqualified persons" include certain family members and 35-percent owned
entities /11/ of a disqualified person, as well as any person who was a
disqualified person at any time during the five-year period prior to the
transaction at issue. A person having the title of "officer, director, or
trustee" does not automatically have the status of a disqualified person.
/12/ In addition, the Secretary of Treasury has authority to promulgate rules
exempting broad categories of individuals from the category of "disqualified
persons" (e.g., full- time bona fide employees who receive economic benefits
of less than a threshold amount or persons who have taken a vow of poverty).
/10/ Under the bill, a person could be in a position to exercise substantial
influence over a tax-exempt organization despite the fact that such person
is not an employee of (and receives no compensation directly from) a tax-exempt
organization, but is formally an employee of (and is directly compensated
by) a subsidiary -- even a taxable subsidiary -- controlled by the parent
tax-exempt organization.
/11/ Family members are determined under present-law section 4946(d), except
that such members also would include siblings (whether by whole or half blood)
of the individual, and spouses of such siblings. "35-percent owned entities"
mean corporations in which disqualified persons own stock possessing more
than 35 percent of the combined voting power, as well as partnerships and
trusts or estates in which disqualified persons own more than 35 percent
of the profits interest or beneficial interest. As under present-law section
4946(a), the term "combined voting power" includes voting power represented
by holdings of voting stock, actual or constructive, but does not include
voting rights held only as a director or trustee. See Treas. Reg. sec.
53.4946-1(a)(5).
/12/ The IRS has issued a general counsel memorandum indicating that all
physicians are considered "insiders" for purposes of applying the private
inurement proscription. The Committee intends that physicians will be
disqualified persons only if they are in a position to exercise substantial
influence over the affairs of an organization.
[220] A disqualified person who benefits from an excess benefit transaction
is subject to a first-tier penalty tax equal to 25 percent of the amount
of the excess benefit (i.e., the amount by which a transaction differs from
fair market value, the amount of compensation exceeding reasonable compensation,
or (under Treasury regulations) the amount of a prohibited transaction based
on the organization's gross or net income). Organization managers who participate
in an excess benefit transaction knowing that it is an improper transaction
are subject to a first-tier penalty tax of 10 percent of the amount of the
excess benefit (subject to a maximum penalty of $ 10,000). /13/
/13/ In determining who is an organization manager, the Committee intends
that principles similar to those set forth in regulations issued under sections
4946 and 4955 with respect to final authority or responsibility for an
expenditure be applied. (See Treas. Reg. secs. 53.4946-1(f)(1)(ii),
53.4946-1(f)(2), 53.4955- 1(b)(2)(ii)(B), and 53.4955-1(b)(2)(iii)).
[221] Additional, second-tier taxes may be imposed on a disqualified person
if there is no correction of the excess benefit transaction within a specified
time period. /14/ In such cases, the disqualified person is subject to a
penalty tax equal to 200 percent of the amount of excess benefit. For this
purpose, the term "correction" means undoing the excess benefit to the extent
possible and taking any additional measures necessary to place the organization
in a financial position not worse than that in which it would be if the
disqualified person were dealing under the highest fiduciary standards.
/14/ Correction must be made on or prior to the earlier of (1) the date of
mailing of a notice of deficiency under section 6212 with respect to the
first-tier penalty excise tax imposed on the disqualified person, or (2)
the date on which such tax is assessed.
[222] The intermediate sanctions for "excess benefit transactions" may be
imposed by the IRS in lieu of (or in addition to) revocation of an organization's
tax-exempt status. /15/ If more than one disqualified person or manager is
liable for a penalty excise tax, then all such persons are jointly and severally
liable for such tax. As under current law, a three-year statute of limitations
applies, except in the case of fraud (sec. 6501). Under the bill, the IRS
has authority to abate the excise tax penalty (under present-law section
4962) if it is established that the violation was due to reasonable cause
and not due to willful neglect and the transaction at issue was corrected
within the specified period.
/15/ In general, the intermediate sanctions are the sole sanction imposed
in those cases in which the excess benefit does not rise to a level where
it calls into question whether, on the whole, the organization functions
as a charitable or other tax-exempt organization. In practice, revocation
of tax-exempt status, with or without the imposition of excise taxes, would
occur only when the organization no longer operates as a charitable organization.
[223] To prevent avoidance of the penalty excise taxes in cases of private
inurement of assets of a previously tax-exempt organization, the bill provides
that an organization will be treated as an applicable tax-exempt organization
subject to the excise taxes on excess benefit transactions if at any time
during the 5-year period preceding the transaction, it was a tax-exempt
organization described in section 501(c)(3) or 501(c)(4), or a successor
to such an organization.
[224] Effective date. -- The provision generally applies to excess benefit
transactions occurring on or after September 14, 1995. The provision does
not apply, however, to any benefits arising out of a transaction pursuant
to a written contract which was binding on September 13, 1995, and at all
times thereafter before such benefits arose, and the terms of which have
not materially changed.
[225] In addition, the Committee intends that parties to transactions entered
into after September 13, 1995, and before January 1, 1997, are entitled to
rely on the rebuttable presumption of reasonableness if, within a reasonable
period (e.g., 90 days) after entering into the compensation package, the
parties satisfy the three criteria that give rise to the presumption. Alter
December 31, 1996, the rebuttable presumption should arise only if the three
criteria are satisfied PRIOR to payment of the compensation (or, to the extent
provided by the Secretary of the Treasury, within a reasonable period
thereafter).
Additional filing and public disclosure rules
[226] Reporting of information with respect to certain disqualified persons,
excise tax penalties and excess benefit transactions. -- Tax-exempt organizations
are required to disclose on their Form 990 such information with respect
to disqualified persons as the Secretary of the Treasury may prescribe. The
Committee intends that this requirement is not intended to limit the Secretary's
authority under section 6033(a)(1) to require information on annual returns
filed by exempt organizations for the purpose of carrying out the internal
revenue laws. In addition, exempt organizations are required to disclose
on their Form 990 such information as the Secretary of the Treasury may require
with respect to "excess benefit transactions" (described above) and any other
excise tax penalties paid during the year under present-law sections 4911
(excess lobbying expenditures), 4912 (disqualifying lobbying expenditures),
or 4955 (political expenditures), including the amount of the excise tax
penalties paid with respect to such transactions, the nature of the activity,
and the parties involved. /16/
/16/ The penalties applicable to failure to file a timely, complete, and
accurate return apply for failure to comply with these requirements. In addition,
the Committee intends that the IRS implement its plan to require additional
Form 990 reporting regarding (1) changes to the governing board or the certified
accounting firm, (2) such information as the Treasury Secretary may require
relating to professional fundraising fees paid by the organization, and (3)
aggregate payments (by related entities) in excess of $ 100,000 to the
highest-paid employees.
[227] Furnishing copies of documents. -- The bill also provides that a tax-exempt
organization that is subject to the public inspection rules of present-law
section 6104(e)(1) (i.e., any tax- exempt organization, other than a private
foundation, that files a Form 990) is required to comply with requests made
in writing or in person from individuals who seek a copy of the organization's
Form 990 or the organization's application for recognition of tax-exempt
status and certain related documents. Upon such a request, the organization
is required to supply copies without charge other than a reasonable fee for
reproduction and mailing costs. If so requested, copies must be supplied
of the Forms 990 for any of the organization's three most recent taxable
years. If the request for copies is made in person, then the organization
must immediately provide such copies. If the request for copies is made in
writing, then copies must be provided within 30 days. However, an organization
may be relieved of its obligation to provide copies if, in accordance with
regulations to be promulgated by the Secretary of Treasury, (1) the organization
has made the requested documents widely available or (2) the Secretary of
the Treasury determined, upon application by the organization, that the
organization was subject to a harassment campaign such that a waiver of the
obligation to provide copies would be in the public interest.
[228] Penalties for failure to file timely or complete return. -- The section
6652(c)(1)(A) penalty imposed on a tax-exempt organization that either fails
to file a Form 990 in a timely manner or fails to include all required
information on a Form 990 is increased from the present-law level of $ 10
for each day the failure continues (with a maximum penalty with respect to
any one return of the lesser of $ 5,000 or five percent of the organization's
gross receipts) to $ 20 for each day the failure continues (with a maximum
penalty with respect to any one return of the lesser of $ 10,000 or five
percent of the organization's gross receipts). Under the bill, organizations
with annual gross receipts exceeding $ 1 million are subject to a penalty
under section 6652(c)(1)(A) of $ 100 for each day the failure continues (with
a maximum penalty with respect to any one return of $ 50,000). As under present
law, no penalty may be imposed under section 6652(c)(1)(A) if it were shown
that the failure to file a complete return was due to reasonable cause (sec.
6652(c)(3)).
[229] Penalties for failure to allow public inspection or provide copies.
-- The section 6652(c)(1)(C) penalty imposed on tax- exempt organizations
that fail to allow public inspection or provide copies of certain annual
returns or applications for exemption is increased from the present-law level
of $ 10 per day (with a maximum of $ 5,000) to $ 20 per day (with a maximum
of $ 10,000). In addition, the section 6685 penalty for willful failure to
allow public inspections or provide copies is increased from the present-law
level of $ 1,000 to $ 5,000.
[230] Effective date. -- The public inspection provisions governing tax-exempt
organizations generally apply to requests made no earlier than 60 after the
date on which the Treasury Department publishes the anti-harassment regulations
required under the provisions. However, the Committee expects that organizations
will comply voluntarily with the public inspection provisions prior to the
issuance of such regulations. The provisions regarding the reporting on annual
returns of excise tax penalties and excess benefit transactions are effective
for returns with respect to taxable years beginning on or after the date
of enactment.
III. VOTES OF THE COMMITTEE
[231] In compliance with clause 2(l)(2)(B) of Rule XI of the Rules of the
House of Representatives, the following statement is made concerning the
votes of the Committee in its consideration of the bill, H.R. 2337.
Motion to Report the Bill
[232] The bill, H.R. 2337, as amended, was ordered favorably reported by
voice vote on March 21, 1996, with a quorum present.
Motion on Substitute Amendment
[233] The Committee adopted an amendment in the nature of a substitute (offered
by Mrs. Johnson of Connecticut and Mr. Matsui) by voice vote, with a quorum
present.
IV. BUDGET EFFECTS OF THE BILL A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS
[234] In compliance with clause 7(a) of Rule XIII of the Rules of the House
of Representatives, the following statement is made concerning the effects
on the budget of the bill, H.R. 2337, as reported.
[235] The bill, as amended, is estimated to have the following effects on
budget receipts for fiscal years 1996-2002:
B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAB EXPENDITURES
[236] In compliance with subdivision (B) of clause 2(l)(3) of Rule XI of
the Rules of the House of Representatives, the Committee states that the
bill, as amended, involves no new or increased budget authority or tax
expenditures.
C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET OFFICE
[237] In compliance with subdivision (C) of clause 2(l)(3) of Rule XI of
the Rules of the House of Representatives, requiring a cost estimate prepared
by the Congressional Budget Office (CBO), the following statement by CBO
is provided.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS
[238] With respect to subdivision (A) of clause 2(l)(3) of Rule XI of the
Rules of the House of Representatives (relating to oversight findings), the
Committee advises that it was a result of the Committee's oversight activities
concerning protection of taxpayer rights and needed revenue offsets (applying
failure-to-pay penalty to substitute returns and intermediate sanctions for
certain tax-exempt organizations) that the Committee concluded that it is
appropriate and timely to enact the provisions contained in the bill as amended.
B. SUMMARY OF FINDINGS AND RECOMMENDATIONS OF THE COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
[239] With respect to subdivision (D) of clause 2(l)(3) of Rule XI of the
Rules of the House of Representatives, the Committee advises that no oversight
findings or recommendations have been submitted to this Committee by the
Committee on Government Reform and Oversight with respect to the provisions
contained in the bill.
C. INFLATIONARY IMPACT STATEMENT
[240] In compliance with clause 2(l)(4) of Rule XI of the Rules of the House
of Representatives, the Committee states that the provisions of the bill
are not expected to have an overall inflationary impact on prices and costs
in the national economy. As indicated in Part IV.A of this report, the estimated
net budget effect of the bill, as amended, is projected to be a revenue reduction
of only $ 2 million over the fiscal year period, 1996-2002.
D. INFORMATION RELATING TO UNFUNDED MANDATES
[241] This information is provided in accordance with section 423 of the
Unfunded Mandates Reform Act of 1995 (Public Law 104-4).
[242] The Committee has determined that the provisions of the bill contain
one intergovernmental mandate and three unfunded private sector mandates.
[243] Section 1201 of the bill requires that information returns include
the telephone number of the information contact of the person required to
make the information return. Currently, payors are only required to provide
their names and addresses on information returns. This information would
be in addition to the information that is currently required to be provided,
but the bill would not require that any additional information returns be
filed. The Committee believes that inclusion of the telephone number of the
payor's information contact will make it easier for taxpayers to resolve
questions about the accuracy of the information provided to the IRS on the
information return. This provision would impose direct costs on the private
sector of less than $ 100 million in each year and on governmental units
of less than $ 50 million in each year 1996-2002.
[244] Section 1311 of the bill extends the private inurement prohibition
currently applicable to organizations exempt from tax under Code section
501(c)(3) to organizations exempt from tax under Code section 501(c)(4).
Section 1312 of the bill requires tax-exempt organizations to disclose on
their annual information returns certain information with respect to disqualified
persons, excise taxes on amounts of private excess benefits, and excess benefit
transactions. This information would be in addition to the information currently
required to be provided, but the bill would not require that any additional
information returns be filed. The Committee believes that inclusion of this
information will enhance the oversight and public accountability of nonprofit
organizations. These provisions would impose direct costs on the private
sector of less than $ 100 million in each year 1996-2002.
E. APPLICABILITY OF HOUSE RULE XXI5(c)
[245] Rule XXI5(c) of the Rules of the House of Representatives provides
that "No bill or joint resolution, amendment, or conference report carrying
a Federal income tax rate increase shall be considered as passed or agreed
to unless so determined by a vote of not less than three-fifths of the Members
voting." The Committee has carefully reviewed the provisions of the bill
to determine whether any of these provisions constitute a Federal income
tax rate increase within the meaning of the House rules. It is the opinion
of the Committee that there is no provision in the bill that constitutes
a Federal income tax rate increase within the meaning of House Rule 5(c)
or (d).
