Scheduled for Markup By the
SENATE COMMITTEE ON FINANCE
on March 31, 1998
Prepared by the Staff of the
JOINT COMMITTEE ON TAXATION
March 31, 1998
The Senate Finance Committee has scheduled a markup relating to Internal Revenue
Service ("IRS") reform and restructuring proposals (including taxpayer protections), as well as tax
technical correction provisions, on March 31, 1998. On March 26, 1998, the Chairman of the
Finance Committee released his mark of these proposals.
This document prepared by the staff of the Joint Committee on Taxation, contains a
description of certain modifications to the Finance Committee Chairman's Mark. Parts I-V of this
document relate to the proposals described in JCX-17-98 and Part VI of this document relates to
the proposals described in JCX-18-98. The section numbers and headings of the modifications
refer to the corresponding provisions in the Chairman's Mark.
I. Executive Branch Governance
A. IRS Restructuring and Creation of IRS Oversight Board
The modification would (1) provide that one of the duties of the IRS Oversight Board is to
review procedures of the IRS relating to financial audits; and (2) provide that the Board can be
reimbursed for travel expenses for visits to IRS offices and districts (as well as for Board
B. Appointment and Duties of IRS Commissioner
The modification would clarify that the IRS Commissioner can be reappointed for more
than one 5-year term, and would provide that one of the qualifications for the IRS Commissioner is
demonstrated ability in management.
C. Structure and Funding of the Employee Plans and Exempt Organizations Division ("EP/EO")
The modification would eliminate the statutory requirement contained in section 7802(b)
that there be an "Office of Employee Plans and Exempt Organizations" under the supervision and
direction of an Assistant Commissioner. It is intended that a comparable structure be created
administratively to ensure that adequate resources within the IRS are devoted to oversight of the
For example, it is important to allocate sufficient funds for EP/EO staffing adequately to
monitor and assist businesses in establishing and maintaining retirement plans. Recently, in
Revenue Procedure 98-22, the IRS announced the expansion of the self-correction programs it
offers employers to encourage companies to identify and correct errors without incurring
significant penalties. These changes are welcomed, and it is not intended that the elimination of the
statutory requirement contained in section 7802(b)(1) or the self-funding mechanism described in
section 7802(b)(2) impede the implementation of these and EP/EO's other programs and activities.
Rather, it is intended that there be adequate funding for EP/EO, including these self-correction
programs that will encourage the establishment and continuation of retirement plans to increase
coverage of American workers while protecting the rights of employees to benefits under these
plans and maintaining the integrity and purposes of the exemption provisions.
D. Taxpayer Advocate
The modification would provide that, during the period prior to the appointment of the IRS
Oversight Board, the Commissioner will submit names to the Secretary of the Treasury, who will
appoint the Taxpayer Advocate. As under the Chairman's Mark, after appointment of the Board,
the Taxpayer Advocate would be selected by the Secretary from names submitted by the Board.
Under the modification, the Commissioner could recommend candidates for the Taxpayer
Advocate to the Board.
F. Treasury Office of Inspector General; IRS Office of the Chief Inspector
The Description of Proposal set forth in the Chairman's Mark would be deleted and
replaced with the following:
Description of Proposal
The proposal would establish a new, independent, Office of Treasury Inspector General for
Tax Administration ("Treasury IG for Tax Administration") within the Department of Treasury.
The IRS Office of the Chief Inspector would be eliminated, and all of its powers and
responsibilities would be transferred to the Treasury IG for Tax Administration. The Treasury IG
for Tax Administration would have the powers and responsibilities generally granted to Inspectors
General under the IG Act of 1978, without the limitations that currently apply to the Treasury IG
under section D of the Act. The role of the existing Treasury IG would be redefined to exclude
responsibility for the IRS. The Treasury IG for Tax Administration would be under the
supervision of the Secretary of Treasury, with certain additional reporting to the Board and the
Appointment and Qualifications of Treasury IG for Tax Administration
The Treasury IG for Tax Administration would be selected by the President, with the
advice and consent of the Senate. The Treasury IG for Tax Administration could be removed from
office by the President. The President would communicate the reasons for such removal to both
Houses of Congress.
The Treasury IG for Tax Administration would be selected without regard to political
affiliation and solely on the basis of integrity and demonstrated ability in accounting, auditing,
financial analysis, law, management analysis, public administration, or investigations. In addition,
however, the Treasury IG for Tax Administration should have experience in tax administration and
demonstrated ability to lead a large and complex organization. The Treasury IG for Tax
Administration could not be employed by the IRS within the two years preceding and the five years
following his or her appointment.
The Treasury IG for Tax Administration would be required to appoint an Assistant
Inspector General for Auditing and an Assistant Inspector for Inspections. Under the proposal,
such appointees, as well as any Deputy Inspector General(s) appointed by the Treasury IG for Tax
Administration, could not be employed by the IRS within the two years preceding and the five
years following their appointments.
Duties and Responsibilities of Treasury IG for Tax Administration
The Treasury IG for Tax Administration would have the present-law duties and
responsibilities currently delegated to the Treasury IG with respect to the IRS. In addition, the
Treasury IG for Tax Administration would assume all of the duties and responsibilities currently
delegated to the IRS Office of the Chief Inspector. The Treasury IG for Tax Administration would
have jurisdiction over IRS matters, as well as matters involving the Board.
Accordingly, the Treasury IG for Tax Administration would be charged with conducting
audits, investigations, and evaluations of IRS programs and operations (including the Board) to
promote the economic, efficient and effective administration of the nation's tax laws and to detect
and deter fraud and abuse in IRS programs and operations. In this regard, the Treasury IG for Tax
Administration specifically would be directed to evaluate the adequacy and security of IRS
technology on an ongoing basis. In addition, the Treasury IG for Tax Administration would be
responsible for protecting the IRS against external attempts to corrupt or threaten its employees.
The Treasury IG for Tax Administration would be charged with investigating allegations of
criminal misconduct (e.g., Code sections 7212 , 7213, 7214, 7216 and new section 7217), as well
as administrative misconduct (e.g., violations of the Taxpayer Bill of Rights and the Taxpayer Bill
of Rights 2, the Office of Government Ethics Standards of Ethical Conduct and the IRS
Supplemental Standards of Ethical Conduct).
In addition, the proposal would direct the Treasury IG for Tax Administration to implement
a program periodically to audit at least one percent of all determinations (identified through a
random selection process) where the IRS has asserted either section 6103 (directly or in connection
with the Freedom of Information Act or the Privacy Act) or law enforcement considerations (i.e.,
executive privilege) as a rationale for refusing to disclose requested information. The program
would be implemented within 6 months after establishment of the Treasury IG for Tax
Administration. The Treasury IG for Tax Administration would be directed to report any findings
of improper assertion of section 6103 or law enforcement considerations to the Board.
Further, the Treasury IG for Tax Administration would be directed to establish a toll-free
confidential telephone number for taxpayers to register complaints of misconduct by IRS
employees and to publish the telephone number in IRS Publication 1.
There would be no restrictions on the Treasury IG for Tax Administration's ability to refer
matters to the Department of Justice. Thus, the Treasury IG for Tax Administration would be
required to report to the Attorney General whenever the Treasury IG for Tax Administration has
reasonable grounds to believe that there has been a violation of Federal criminal law.
Authority of Treasury IG for Tax Administration
The Treasury IG for Tax Administration would report to and be under the general
supervision of the Secretary of Treasury. Under the proposal, the Secretary could not prevent or
prohibit the Treasury IG for Tax Administration from initiating, carrying out, or completing any
audit or investigation or from issuing any subpoena during the course of any audit or investigation.
Under the proposal, the Treasury IG for Tax Administration would provide to the Board all
reports regarding IRS matters on a timely basis and would conduct audits or investigations
requested by the Board. The Treasury IG for Tax Administration also would, in a timely manner,
conduct such audits or investigations and provide such reports as may be requested by the
In carrying out the duties and responsibilities described above, the Treasury IG for Tax
Administration would have the present-law authority generally granted to Inspectors General under
the IG Act of 1978. The limitations on the authority of the Treasury IG under such Act would not
apply to the Treasury IG for Tax Administration. In addition, the Treasury IG for Tax
Administration would have the authority granted to the IRS Office of the Chief Inspector under
present-law Code section 7608, including the right to execute and serve search and arrest warrants,
to serve subpoenas and summonses, to make arrests without warrant, to carry firearms, and to
seize property subject to forfeiture under the Code.
To ensure that the Treasury IG for Tax Administration has sufficient resources to carry out
his or her duties and responsibilities under the proposal, all but 300 FTEs from the IRS Office of
the Chief Inspector would be transferred to the Treasury IG for Tax Administration. Such FTEs
would include all of the FTEs performing investigative functions in the Office of the Chief
Inspector Internal Security and Integrity Investigations and Activities. In addition, the 21 FTEs
previously transferred from Inspection to Treasury IG pursuant to the 1990 MOU to perform
oversight of the IRS would be transferred to Treasury IG for Tax Administration.
The Commissioner would be permitted to retain approximately 300 FTEs from the Office
of Inspection to staff an audit function (including support staff) for internal IRS management
purposes. Like other IRS functions, however, this audit function would be subject to oversight
and review by the Treasury IG for Tax Administration.
Access to Taxpayer Returns and Return Information
Taxpayer returns and return information would be available for inspection by the Treasury
IG for Tax Administration pursuant to section 6103(h)(1). Thus, the Treasury IG for Tax
Administration would have the same access to taxpayer returns and return information as does the
Chief Inspector under present law.
The Treasury IG for Tax Administration would be subject to the semiannual reporting
requirements set forth in section 5 of the IG Act of 1978. As under present law, reports would be
made to the Committees on Government Reform and Oversight and Ways and Means of the House
and the Committees on Governmental Affairs and Finance of the Senate. The reports would be
required to contain the information that is required to be reported by the Treasury IG with respect
to the IRS under present law, as well certain additional information (e.g., regarding the source,
nature and status of allegations received by the Treasury IG for Tax Administration, the
implementation of various taxpayer rights protections, and IRS employee terminations and
mitigations) required by this proposal.
The Treasury IG generally would continue to have its present-law responsibilities and
authority with respect to all Treasury functions other than the IRS and the Board. However, the
Treasury IG generally would not have access to taxpayer returns and return information under
section 6103 (unless the Secretary specifically authorizes such access).
The Treasury IG for Tax Administration would operate independently of the Treasury IG.
In the event that investigations or audits undertaken by either the Treasury IG for Tax
Administration or the Treasury IG necessitate access to information within the other's area of
responsibility, the two Inspectors General shall notify the Secretary and shall formulate a plan
(which must be approved by the Secretary) for proceeding with such investigation or audit.
The Treasury IG would continue to have responsibility for providing an opinion on the
Department of Treasury's consolidated financial statement as required under the Chief Financial
Officer Act. The Treasury IG for Tax Administration would be responsible for rendering an
opinion on the IRS custodial and administrative accounts (to the extent the Government Accounting
Office does not exercise its option to preempt under the CFO Act).
The proposal would be effective 180 days after the date of enactment.
G. IRS Personnel Flexibilities
The modification would clarify two of the grounds for termination of an IRS employee.
Under the modification, the provision in the Chairman's Mark regarding termination for perjury
would be amended to provide that termination would occur for providing a false statement under
oath material to a matter involving a taxpayer. The provision in the Chairman's Mark regarding
termination for falsifying or destroying documents to cover up employee mistakes would be
amended to provide that termination would occur for falsifying or destroying documents to avoid
uncovering mistakes made by the employee with respect to a matter involving a taxpayer.
III. Taxpayer Bill of Rights 3
B. Proceedings by Taxpayers
1. Expansion of authority to award costs and certain fees
The modification would clarify that attorneys' fees may also be recovered in an action for
civil damages for unauthorized inspection or disclosure of taxpayer returns and return information.
C. Relief for Innocent Spouses and Persons with Disabilities
The modification would require the IRS to notify all taxpayers who have filed joint returns
of their rights to elect to limit joint and several liability by requiring information to be included in
(1) appropriate IRS publications (including IRS Publication 1) and (2) in every collection-related
notice sent to the taxpayers.
E. Protections for Taxpayers Subject to Audit or Collection
3. Expansion of authority to issue taxpayer assistance orders
The modification would expand the authority of the Taxpayer Advocate to issue taxpayer
assistance orders when there are circumstances that the Taxpayer Advocate believes are appropriate
for the issuance of an assistance order.
12. Require IRS to notify taxpayer before contacting third parties regarding IRS
examination or collection activities with respect to the taxpayer.
The modification would clarify that the provision in the Chairman's Mark requiring the IRS
to notify taxpayers before the IRS contacts third parties regarding the examination of the taxpayer's
tax return also applies to summonses of third parties.
F. Disclosures to Taxpayers
The Chairman's Mark would include the following new item 6:
6. Statement to
Taxpayers with Installment Agreements
The modification would require that the IRS send every taxpayer in an installment
agreement an annual statement of the initial balance owed, the payments made during the year, and
the remaining balance.
The Chairman's Mark would include the following new item 8:
8. Appeals Review of Rejected Offers-in-Compromise
The amendment would codify the IRS practice of having an appeals officer review all
rejected offers-in-compromise. The IRS would be required to notify taxpayers of this right on the
application form for an offer-in-compromise.
L. Additional Items
The Chairman's Mark would include the following new items 7, 8, 9, and 10:
7. IRS Telephone Numbers
The modification would require the IRS to publish addresses and local telephone numbers
of local IRS offices in appropriate local telephone directories.
8. Notice of Interest Charges
The modification would require that every IRS notice that imposes interest that is sent to an
individual taxpayer will include a detailed computation of the interest charged and a citation to the
Code section under which such interest is imposed.
9. Alternatives to Social Security Numbers for Return Preparers
The modification would authorize the IRS to approve alternatives to Social Security
numbers to identify tax return preparers.
10. Expand Alternative Dispute Resolution
The modification would expand the Alternative Dispute Resolution provision to require the
IRS to establish a pilot program of binding arbitration (subject to election by both parties)
regardless of the amount in dispute.
IV. Congressional Accountability for the IRS
A. Funding for Century Date Change
The modification would require the IRS to report to the Committee within 14 days after the
bill is reported by the Committee with respect to (1) the overall impact the Committee bill will have
on the ability of the IRS to address the Year 2000 computer conversion, and (2) provisions in the
Committee bill that require significant computer reprogramming prior to December 31, 1999.
B. Tax Law Complexity Analysis
The modification would require the Joint Committee on Taxation (in consultation with the
IRS and Treasury) to provide an analysis of complexity or administrability concerns raised by tax
provisions of widespread applicability to individuals or small businesses. The analysis would be
included in any Committee Report or Conference Report containing tax provisions and would
appear in the report after the explanation of provision, or would be provided to the Members of the
relevant Committee or Committees as soon as practicable after the report is filed. The analysis
would include (1) an estimate of the number of taxpayers affected, and (2) if applicable, the income
level of affected individual taxpayers. In addition, the analysis could discuss the following factors:
(1) the extent to which existing tax forms would require revision and whether a new form or forms
would be required; (2) whether and to what extent taxpayers would be required to keep additional
records; (3) the extent to which enactment of the provision would require the IRS to develop or
modify regulatory guidance; (4) whether and to what extent the provision can be expected to lead to
disputes between taxpayers and the IRS; and (5) how the IRS can be expected to respond to the
provision (including the impact on internal training, whether the Internal Revenue Manual would
require revision, whether the change would require reprogramming of computers, and the extent to
which the IRS would be required to divert or redirect resources in response to the provision). The
provision would be effective with respect to legislation considered on or after January 1, 1999.
V. Revenue Offsets
The Chairman's Mark would include the following new item F:
F. Add Vaccines Against Rotavirus Gastroenteritis to the List of Taxable
A manufacturer's excise tax is imposed at the rate of 75 cents per dose (Sec. 4131) on the
following vaccines routinely recommended for administration to children: diphtheria, pertussis,
tetanus, measles, mumps, rubella, polio, HIB (haemophilus influenza type B), hepatitis B, and
varicella (chicken pox). The tax applied to any vaccine that is a combination of vaccine
components equals 75 cents times the number of components in the combined vaccine.
Amounts equal to net revenues from this excise tax are deposited in the Vaccine Injury
Compensation Trust Fund to finance compensation awards under the Federal Vaccine Injury
Compensation Program for individuals who suffer certain injuries following administration of the
taxable vaccines. This program provides a substitute Federal, "no fault" insurance system for the
State-law tort and private liability insurance systems otherwise applicable to vaccine manufacturers.
All persons immunized after September 30, 1998, with covered vaccines must pursue
compensation under this Federal program before bringing civil tort actions under State law.
Description of Proposal
The proposal would add vaccines against rotavirus gastroenteritis to the list of taxable
The proposal would be effective for vaccine purchases the day after the date of enactment.
No floor stocks tax would be collected for amounts held for sale on that date.
VI. Technical Corrections
The Chairman's Mark would include the following additional technical correction
1. Treatment of amounts received under the work requirements of the Personal
Responsibility and Work Opportunity Act of 1996 (Sec. 1085(c) of the 1997 Act
and Sec. 32(c)(2)(B)(v) of the Code)
The Taxpayer Relief Act of 1997 (the "1997 Act") provided that, to the extent subsidized
under the relevant State program, workfare payments under the Personal Responsibility and Work
Opportunity Act of 1996 are not wages for purposes of the earned income credit. The technical
correction would make a clerical amendment to the provision.
2. Clarification of provision expanding the limitations on deductibility of
premiums and interest with respect to life insurance, endowment and annuity
contracts (Sec. 1084 of the 1997 Act and Sec. 264 of the Code)
The 1997 Act provision limiting the deductibility of certain interest and premiums is
effective generally with respect to contracts issued after June 8, 1997. To the extent of additional
covered lives under a contract after June 8, 1997, the contract is treated as a new contract.
The technical correction would clarify that this treatment of additional covered lives applies
only with respect to coverage provided under a master contract, provided that coverage for each
insured individual is treated as a separate contract for purposes of Code sections 817(h), 7702 and
7702A, and the master contract or any coverage provided thereunder is not a group life insurance
contract within the meaning of Code section 848(e)(2).
This clarification would conform the language of the effective date to the definition of a
master contract contained in section 609(i)(3) of H.R. 2676, the Tax Technical Corrections Act of
1997, as passed by the House on November 5, 1997.
3. Clarify that the 1997 provision allowing wine imported in bulk to be
transferred to a U.S. winery without payment of tax applies only to wine that would be
treated as a "natural wine" if produced in the United States (Sec. 1422 of the 1997
Act and Sec. 5364 of the Code)
Under present law, wine is subject to an excise tax ranging from $1.07 per gallon to $3.40
per gallon, depending on its alcohol content. Distilled spirits are subject to excise tax at a rate of
$13.50 per proof gallon. A tax credit equal to the difference between the distilled spirits tax rate
and the wine tax rate is allowed for wine that is blended into distilled spirits products (Sec. 5010).
The wine excise tax is imposed on removal of the beverage from a winery, or on importation. The
1997 Act included a provision allowing wine to be imported in bulk and transferred to a U.S.
winery without payment of tax (generally until the wine is removed from the winery).
U. S. law defines wine generally as alcohol that is derived from fruit or fruit residues.
Wine may not be fortified with grain alcohol if produced in the U.S. Certain other countries allow
wine to be fortified with alcohol from other sources. U.S. law follows the laws of the country of
origin in classifying imported wine.
The provision would clarify that the 1997 Act's provision liberalizing rules for bulk
importation of wine applies only to alcohol that would qualify as a natural wine if produced in the
United States. The provision would be effective as if included in the 1997 Act.