Present Law

Restaurants may enter into Tip Reporting Alternative Commitment (TRAC) agreements. A restaurant entering into a TRAC agreement is obligated to educate its employees on their tip reporting obligations, to institute formal tip reporting procedures, to fulfill all filing and record keeping requirements, and to pay and deposit taxes. In return, the IRS agrees to base the restaurant's liability for employment taxes solely on reported tips and any unreported tips discovered during an IRS audit of an employee.

Reasons for Change

The Committee believes that it is inappropriate for the Secretary to use the threat of an IRS audit to induce participation in voluntary programs.

Explanation of Provision

The provision requires the IRS to instruct its employees that they may not threaten to audit any taxpayer in an attempt to coerce the taxpayer to enter into a TRAC agreement.

Effective Date

The provision is effective on the date of enactment.

v. Taxpayers allowed motion to quash all third-party summonses (Sec. 3415 of the bill and Sec. 7609(a) of the Code)

Present Law

When the IRS issues a summons to a "third-party recordkeeper" relating to the business transactions or affairs of a taxpayer, Code section 7609 requires that notice of the summons be given to the taxpayer within three days by certified or registered mail. The taxpayer is thereafter given up to 23 days to begin a court proceeding to quash the summons. If the taxpayer does so, third-party recordkeepers are prohibited from complying with the summons until the court rules on the taxpayer's petition or motion to quash, but the statute of limitations for assessment and collection with respect to the taxpayer is stayed during the pendency of such a proceeding. Third-party recordkeepers are generally persons who hold financial information about the taxpayer, such as banks, brokers, attorneys, and accountants.

Reasons for Change

The Committee believes that a taxpayer should have notice when the IRS uses its summons power to gather information in an effort to determine the taxpayer's liability. Expanding notice requirement to cover all third party summonses will ensure that taxpayer will receive notice and an opportunity to contest any summons issued to a third party in connection with the determination of their liability.

Explanation of Provision

The provision generally expands the current "third-party recordkeeper" procedures to apply to summonses issued to persons other than the taxpayer. Thus, the taxpayer whose liability is being investigated receives notice of the summons and is entitled to bring an action in the appropriate U.S. District Court to quash the summons. As under the current third-party recordkeeper provision, the statute of limitations on assessment and collection is stayed during the litigation, and certain kinds of summonses specified under current law are not subject to these requirements. No inference is intended with respect to the applicability of present law to summonses to the taxpayer or the scope of the authority to summons testimony, books, papers, or other records.

Effective Date

The provision is effective for summonses served after the date of enactment.

vi. Service of summonses to third-party recordkeepers permitted by mail (Sec. 3416 of the Bill and Sec. 7603 of the Code)

Present Law

Code section 7603 requires that a summons shall be served "by an attested copy delivered in hand to the person to whom it is directed or left at his last and usual place of abode." By contrast, if a third-party recordkeeper summons is served, section 7609 permits the IRS to give the taxpayer notice of the summons via certified or registered mail. Moreover, Rule 4 of the Federal Rules of Civil Procedure permits service of process by mail even in summons enforcement proceedings.

Reasons for Change

The Committee is concerned that, in certain cases, the personal appearance of an IRS official at a place of business for the purpose of serving a summons may be unnecessarily disruptive. The Committee believes that it is appropriate to permit service of summons, as well as notice of summons, by mail.

Explanation of Provision

The provision allows the IRS the option of serving any summons either in person or by mail.

Effective Date

The provision is effective for summonses served after the date of enactment.

vii. Prohibition on IRS contact of third parties without taxpayer pre-notification (Sec. 3417 of the Bill and Sec. 7602 of the Code)

Present Law

Third parties may be contacted by the IRS in connection with the examination of a taxpayer or the collection of the tax liability of the taxpayer. The IRS has the right to summon third-party recordkeepers under Code section 7609. In general, the taxpayer must be notified of the service of summons on a third party within three days of the date of service (Sec. 7609(a)). The IRS also has the right to seize property of the taxpayer that is held in the hands of third parties (Sec. 6331(a)). Except in jeopardy situations, the Internal Revenue Manual provides that IRS will personally contact the taxpayer and inform the taxpayer that seizure of the asset is planned.

Reasons for Change

The Committee believes that taxpayers should be notified before the IRS contacts third parties regarding examination or collection activities with respect to the taxpayer. Such contacts may have a chilling effect on the taxpayer's business and could damage the taxpayer's reputation in the community. Accordingly, the Committee believes that taxpayers should have the opportunity to resolve issues and volunteer information before the IRS contacts third parties.

Explanation of Provision

The provision requires the IRS to notify the taxpayer before contacting third parties regarding examination or collection activities (including summonses) with respect to the taxpayer. Contacts with government officials relating to matters such as the location of assets or the taxpayer's current address are not restricted by this provision. The provision does not apply to criminal tax matters, if the collection of the tax liability is in jeopardy, or if the taxpayer authorized the contact.

Effective Date

The provision is effective for contacts made after 180 days after the date of enactment.

c. Collection Activities

i. Approval process for liens, levies, and seizures (Sec. 3421 of the Bill)

Present Law

Supervisory approval of liens, levies or seizures is only required under certain circumstances. For example, a levy on a taxpayer's principal residence is only permitted upon the written approval of the District Director or Assistant District Director (Sec. 6334(e)).

Reasons for Change

The Committee believes that the imposition of liens, levies, and seizures may impose significant hardships on taxpayers. Accordingly, the Committee believes that extra protection in the form of an administrative approval process is appropriate.

Explanation of Provision

The provision requires the IRS to implement an approval process under which any lien, levy or seizure would be approved by a supervisor, who would review the taxpayer's information, verify that a balance is due, and affirm that a lien, levy or seizure is appropriate under the circumstances. Circumstances to be considered include the amount due and the value of the asset. Failure to follow such procedures should result in disciplinary action against the supervisor and/or revenue officer.

In addition, the Treasury Inspector General for Tax Administration is required to collect information on the approval process and annually report to the tax-writing committees.

Effective Date

The provision is effective for collection actions commenced after date of enactment.

ii. Modifications to certain levy exemption amounts (Sec. 3431 of the Bill and Sec. 6334 of the Code)

Present Law

The Code authorizes the IRS to levy on all non-exempt property of the taxpayer. Property exempt from levy is described in section 6334. Section 6334(a)(2) exempts from levy up to $2,500 in value of fuel, provisions, furniture, and personal effects in the taxpayer's household. Section 6334(a)(3) exempts from levy up to $1,250 in value of books and tools necessary for the trade, business or profession of the taxpayer.

Reasons for Change

The Committee believes that a minimum amount of household items and equipment for taxpayer's business should be exempt from levy. To ensure that such exemption is meaningful, the amounts should be indexed for inflation.

Explanation of Provision

The provision increases the value of personal effects exempt from levy to $10,000 and the value of books and tools exempt from levy to $5,000. These amounts are indexed for inflation.

Effective Date

The provision is effective for collection actions taken after the date of enactment.

iii. Release of levy upon agreement that amount is uncollectible (Sec. 3432 of the bill and Sec. 6343 of the Code)

Present Law

Some have contended that the IRS does not release a wage levy immediately upon receipt of proof that the taxpayer is unable to pay the tax, but instead, the IRS levies on one period's wage payment before releasing the levy.

Reasons for Change

Congress believes that taxpayers should not have collection activity taken against them once the IRS has determined that the amounts are uncollectible.

Explanation of Provision

The IRS is required to immediately release a wage levy upon agreement with the taxpayer that the tax is not collectible.

Effective Date

The provision is effective for levies imposed after date of enactment.