(Report 105th Congress) SENATE (105-2d Session)

Mr. Roth, from the Committee on Finance submitted the following Report [To accompany H.R. 2676]

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

CONTENTS

I. Legislative Background

II. Explanation of the Bill

Title I. Executive Branch Governance and Management of the IRS

A. IRS Restructuring and Creation of IRS Oversight Board

1. IRS restructuring and mission (Secs. 1001-1002)

2. Establishment and duties of IRS Oversight Board (Sec. 1101)

B. Appointment and Duties of IRS Commissioner and Chief Counsel and Other Personnel

1. IRS Commissioner and other personnel (Secs. 1102(a) and 1104)

2. IRS Chief Counsel (Sec. 1102(a))

C. Structure and Funding of the Employee Plans and Exempt Organizations Division ("EP/EO") (Sec. 1101)

D. Taxpayer Advocate (Secs. 1102(a), (c), and (d))

E. Treasury Office of Inspector General; IRS Office of the Chief Inspector (Secs. 1102(a) and 1103)

F. Prohibition on Executive Branch Influence Over Taxpayer Audits (Sec. 1105)

G. IRS Personnel Flexibilities (Secs. 1201-1205)

Title II. Electronic Filing

A. Electronic Filing of Tax and Information Returns (Sec. 2001)

B. Due Date for Certain Information Returns (Sec. 2002)

C. Paperless Electronic Filing (Sec. 2003)

D. Return-Free Tax System (Sec. 2004)

E. Access to Account Information (Sec. 2005)

Title III. Taxpayer Protection and Rights

A. Burden of Proof (Sec. 3001)

B. Proceedings by Taxpayers

1. Expansion of authority to award costs and certain fees (Sec. 3101)

2. Civil damages for collection actions (Sec. 3102)

3. Increase in size of cases permitted on small case calendar (Sec. 3103)

4. Expansion of Tax Court jurisdiction to responsible person penalties (Sec. 3104)

5. Actions for refund with respect to certain estates which have elected the installment method of payment (Sec. 3105)

6. Tax Court jurisdiction to review an adverse IRS determination of a bond issue's tax-exempt status (Sec. 3106)

7. Civil action for release of erroneous lien (Sec. 3107)

C. Relief for Innocent Spouses and for Taxpayers Unable to Manage Their Financial Affairs Due to Disabilities

1. Spousal election to limit joint and several liability on joint return (Sec. 3201)

2. Suspension of statute of limitations on filing refund claims during periods of disability (Sec. 3202)

D. Provisions Relating to Interest and Penalties

1. Elimination of interest differential on overlapping periods of interest on income tax overpayments and underpayments (Sec. 3301)

2. Increase in overpayment rate payable to taxpayers other than corporations (Sec. 3302)

3. Elimination of penalty on individual's failure to pay during period of installment agreement (Sec. 3303)

4. Mitigation of failure to deposit penalty (Sec. 3304)

5. Suspension of interest and penalties where Secretary fails to contact individual taxpayer (Sec. 3305)

6. Procedural requirements for imposition of penalties and additions to tax (Sec. 3306)

7. Personal delivery of notice of penalty under section 6672 (Sec. 3307)

8. Notice of interest charges (Sec. 3308)

E. Protections for Taxpayers Subject to Audit or Collection Activities

a. Due Process

i. Due process in IRS collection actions (Sec. 3401)

b. Examination Activities

i. Uniform application of confidentiality to taxpayer communications with federally authorized practitioners (Sec. 3411)

ii. Limitation on financial status audit techniques (Sec. 3412)

iii. Software trade secrets protection (Sec. 3413)

iv. Threat of audit prohibited to coerce tip report alternative commitment agreements (Sec. 3414)

v. Taxpayers allowed motion to quash all third-party summonses (Sec. 3415)

vi. Service of summonses to third-party recordkeepers permitted by mail (Sec. 3416)

vii. Prohibition on IRS contact of third parties without taxpayer pre-notification (Sec. 3417)

c. Collection Activities

i. Approval process for liens, levies, or seizures (Sec. 3421)

ii. Modification to certain levy exemption amounts (Sec. 3431)

iii. Release of levy upon agreement that amount is uncollectible (Sec. 3432)

iv. Levy prohibited during pendency of refund proceedings (Sec. 3433)

v. Approval required for jeopardy and termination assessments and jeopardy levies (Sec. 3434)

vi. Increase in amount of certain property on which lien not valid (Sec. 3435)

vii. Waiver of early withdrawal tax for IRS levies on employer- sponsored retirement plans or IRAs (Sec. 3436)

viii. Prohibition of sales of seized property at less than minimum bid (Sec. 3441)

ix. Accounting of sales of seized property (Sec. 3442)

x. Uniform asset disposal mechanism (Sec. 3443)

xi. Codification of IRS administrative procedures for seizure of taxpayer's property (Sec. 3444)

xii. Procedures for seizure of residences and businesses (Sec. 3445)

d . Provisions Relating to Examination and Collection Activities

i. Procedures relating to extensions of statute of limitations by agreement (Sec. 3461)

ii. Offers-in-compromise (Sec. 3462)

iii. Notice of deficiency to specify deadlines for filing Tax Court petition (Sec. 3463)

iv. Refund or credit of overpayments before final determination (Sec. 3464)

v. IRS procedures relating to appeal of examinations and collections (Sec. 3465)

vi. Application of certain fair debt collection practices (Sec. 3466)

vii. Guaranteed availability of installment agreements (Sec. 3467)

F. Disclosures to Taxpayers

1. Explanation of joint and several liability (Sec. 3501)

2. Explanation of taxpayers' rights in interviews with the IRS (Sec. 3502)

3. Disclosure of criteria for examination selection (Sec. 3503)

4. Explanation of appeals and collection process (Sec. 3504)

5. Explanation of reason for refund denial (Sec. 3505)

6. Statements to taxpayers with installment agreements (Sec. 3506)

7. Notification of change in tax matters partner (Sec. 3507)

G. Low-Income Taxpayer Clinics (Sec. 3601)

H. Other Provisions

1. Cataloging complaints (Sec. 3701)

2. Archive of records of Internal Revenue Service (Sec. 3702)

3. Payment of taxes (Sec. 3703)

4. Clarification of authority of Secretary relating to the making of elections (Sec. 3704)

5. IRS employee contacts (Sec. 3705)

6. Use of pseudonyms by IRS employees (Sec. 3706)

7. Conference of right in the National Office of IRS (Sec. 3707)

8. Illegal tax protestor designations (Sec. 3708)

9. Provision of confidential information to Congress by whistleblowers (Sec. 3709)

10. Listing of local IRS telephone numbers and addresses (Sec. 3710)

11. Identification of return preparers (Sec. 3711)

12. Offset of past-due, legally enforceable State income tax obligations against overpayments (Sec. 3712)

13. Moratorium regarding regulations under Notice 98-11 (Sec. 3713(a)(1))

14.Sense of the Senate regarding Notices 98-5 and 98-11 (Sec. 371(a)(2) and (b))

I. Studies

1. Administration of penalties and interest (Sec. 3801)

2. Confidentiality of tax return information (Sec. 3802)

Title IV. Congressional Accountability for the IRS

A. Century Date Change (Sec. 4001)

B. Tax Law Complexity Analysis (Sec. 4002)

Title V. Revenue Offsets

A. Employer Deduction for Vacation and Severance Pay (Sec. 5001)

B. Modify Foreign Tax Credit Carryover Rules (Sec. 5002)

C. Clarification and Expansion of Mathematical Error Procedures (Sec. 5003)

D. Freeze Grandfathered Status of Stapled REITs (Sec. 5004)

E. Make Certain Trade Receivables Ineligible for Mark-to-Market Treatment (Sec. 5005)

F. Add Vaccines Against Rotavirus Gastroenteritis to List of Taxable Vaccines (Sec. 5006)

Title VI. Tax Technical Corrections

Technical Corrections to the Taxpayer Relief Act of 1997

A. Amendments to Title I of the 1997 Act Relating to the Child Credit

1. Stacking rules for the child credit under the limitations based on tax liability (Sec. 6003(a))

2. Treatment of a portion of the child credit as a supplemental child credit (Sec. 6003(b))

B. Amendments to Title II of the 1997 Act Relating to Education Incentives

1. Clarifications to HOPE and Lifetime Learning tax credits (Sec. 6004(a))

2. Education's IRAs (Sec. 6004(d))

3. Treatment of cancellation of certain student loans (Sec. 6004(f))

4. Deduction on student loan interest (Sec. 6004(b))

5. Enhanced deduction for corporate contributions of computer technology and equipment (Sec. 6004(e))

6. Qualified State tuition programs (Sec. 6004(e))

7. Qualified zone academy bonds (Sec. 6004(g))

C. Amendments to Title III of the 1997 Act Relating to Savings Incentives

1. Conversions of IRAs into Roth IRAs (Sec. 6005(b))

2. Penalty-free distributions from IRAs for education expenses and purchase of first homes (Sec. 6005(c))

3. Limits based on modified adjusted gross income (Sec. 6005(b))

4. Contribution limit to Roth IRAs (Sec. 6005(b))

5. Contribution limitations for active participation in an IRA (Sec. 6005(a))

D. Amendments to Title III of the 1997 Act Relating to Capital Gains

1. Individual capital gain rate reductions (Sec. 6005(d))

2. Rollover of gain from sale of qualified stock (Sec. 6005(f))

3. Exclusion of gain on the sale of a principal residence owned and used less than two years (Sec. 6005(e)(1) and (2))

4. Effective date of the exclusion of gain on the sale of a principal residence (Sec. 6005(e)(3))

E. Amendments to Title IV of the 1997 Act Relating to Alternative Minimum Tax

1. Election to use AMT depreciation for regular tax purposes (Sec. 6006(b))

2. Clarification of small business exemption (Sec. 6006(a))

F. Amendments to Title V of the 1997 Act Relating to Estate and Gift Taxes

1. Clarification of phaseout range for 5-percent surtax to phase out benefits of the unified credit and graduated rates (Sec. 6007(a)(1))

2. Clarification of effective date for indexing of generation-skipping exemption (Sec. 6007(a)(2))

3. Conversion of qualified family-owned business exclusion into a deduction (Sec. 6007(b)(1)(A)

4. Coordination between unified credit and family-owned business provision (Sec. 6007(b)(1)(B) and 6007(b)(4))

5. Clarification of businesses eligible for family-owned business provision (Sec. 6007(b)(2))

6. Clarification of "trade or business" requirement for family-owned business provision (Sec. 6007(b)(5))

7. Clarification that interests eligible for family-owned business provision must be passed to a qualified heir (Sec. 6007(b)(1)(B))

8. Other modifications to the qualified family-owned business provision (Secs. 6007(b)(3), 6007(b)(6), and 6007(b)(7))

9. Clarification of interest on installment payment of estate tax on holding companies (Sec. 6007(c))

10. Clarification on declaratory judgment jurisdiction of U.S. Tax Court regarding installment payment of estate tax (Sec. 6007(d))

11. Clarification of rules governing revaluation of gifts (Sec. 6007(e))

12. Clarification with respect to post-mortem conservation easements (Sec. 6007(g))

G. Amendments to Title VII of the 1997 Act Relating to Incentives for the District of Columbia (Sec. 6008)

H. Amendments to Title IX of the 1997 Act Relating to Miscellaneous Provisions

1. Clarification of effect on certain transfers to Highway Trust Fund (Sec. 6009(a))

2. Clarification of Mass Transit Account portions of highway motor fuels taxes (Sec. 6009(b))

3. Clarification of qualification for reduced rate of tax on certain hard ciders (Sec. 6009(c))

4. Combined employment tax reporting demonstration project (Sec. 6009(f))

5. Election for 1987 partnerships to continue exception from treatment of publicly traded partnerships as corporations (Sec. 6009(d))

6. Depreciation limitations for electric vehicles (Sec. 6009(e))

7. Modification of operation of elective carryback of existing net operating losses of the National Railroad Passenger Corporation ("Amtrak") (Sec. 6009(g))

I. Amendments to Title X of the 1997 Act Relating to Revenue-Raising Provisions

1. Exemption from constructive sales rules for certain debt positions (Sec. 6010(a)(1))

2. Definition of forward contract under constructive sales rules (Sec. 6010(a)(2))

3. Treatment of mark-to-market gains of electing traders (Sec. 6010(a)(3))

4. Special effective date for constructive sale rules (Sec. 6010(a)(4))

5. Gain recognition for certain extraordinary dividends (Sec. 6010(b))

6. Treatment of certain corporate distributions (Sec. 6010(c))

7. Certain preferred stock treated as "boot"--statute of limitations (Sec. 6010(e)(2))

8. Certain preferred stock treated as "boot"--treatment of transferor (Sec. 6010(e)(1))

9. Application of section 304 to certain international transactions (Sec. 6010(d))

10. Establish IRS continuous levy and improve debt collection (Sec. 6010(f))

11. Clarification regarding aviation gasoline excise tax (Sec. 6010(g))

12. Clarification of requirement that registered fuel terminals offer dyed fuel (Sec. 6010(h))

13. Clarification of treatment of prepaid telephone cards (Sec. 6010(i))

14. Modify UBIT rules applicable to second-tier subsidiaries (Sec. 6010(j))

15. Application of foreign tax credit holding period rule to RICs (Sec. 6010(k))

16. Clarification of provision expanding the limitations on deductibility of premiums and interest with respect to life insurance, endowment and annuity contracts (Sec. 6010(o))

17.Clarification of allocation of basis of properties distributed by a partnership (Sec. 6010(m))

18. Clarification to the definition of modified adjusted gross income for purposes of the earned income credit phaseout (Sec. 6010(p))

J. Amendments to Title XI of the 1997 Act Relating to Foreign Provisions

1. Application of attribution rules under PFIC provisions (Sec. 6011(b)(2)

2. Treatment of PFIC option holders (Sec. 6011(b)(1))

3. Application of PFIC mark-to-market rules to RICs (Sec. 6011(c)(3))

4. Interaction between the PFIC provisions and other mark-to-market rules (Sec. 6011(c)(2))

K. Amendments to Title XII of the 1997 Act Relating to Simplification Provisions

1. Travel expenses of Federal employees participating in a Federal criminal investigation (Sec. 6012(a))

2. Effective date for provisions relating to electing large partnerships, partnership returns required on magnetic media, and treatment of partnership items of individual retirement arrangements (Sec. 6012(d))

3. Modification of distribution rule for REITS (Sec. 6012(f))

L. Amendments to Title XIII of the 1997 Act Relating to Estate, Gift and Trust Simplification

1. Clarification of treatment of revocable trusts for purposes of the generation-skipping transfer tax (Sec. 6013(a))

2. Provision of regulatory authority for simplified reporting of funeral trusts terminated during taxable year (Sec. 6013(b))

M. Amendment to Title XIV of the 1997 Act Relating to Excise Tax Simplification

1. Clarification of provision allowing wine imported in bulk to be transferred to a U.S. winery without payment of tax (Sec. 6014)

N. Amendments to Title XV of the 1997 Act Relating to Pensions and Employee Benefits

1. Treatment of certain disability payments to public safety employees (Sec. 6015(c))

O. Amendments to Title XVI of the 1997 Act Relating to Technical Corrections

1. Application of requirements for SIMPLE IRAs in the case of mergers and acquisitions (Sec. 6016(a))

2. Treatment of Indian tribal governments under section 403(b) (Sec. 6016(a))

Technical Corrections to other Tax Legislation

A. Treatment of Adoption Tax Credit Carryovers (Sec. 6017)

B. Disclosure Requirements for Apostolic Organizations (Sec. 6018)

C. Allow Deduction for Unused Employer Social Security Credit (Sec. 6019)

D. Earned Income Credit Qualification Rules (Sec. 6020)

III. Budget Effects of the Bill

A. Committee Estimates

B. Budget Authority and Tax Expenditures

C. Consultation with Congressional Budget Office

IV. Votes of the Committee

V. Regulatory Impact and other Matters

A. Regulatory Impact

B. Unfunded Mandates Statement

VI. Changes in Existing Law Made by The Bill, as Reported