Present Law

The IRS must sell property seized by levy either by public auction or by public sale under sealed bids (Sec. 6335(e)(2)(A)). These are often conducted by the revenue officer charged with collecting the tax liability.

Reasons for Change

The Committee believes that it is important for fairness and the appearance of propriety that revenue officers charged with collecting unpaid tax liability are not personally involved with the sale of seized property.

Explanation of Provision

The provision requires the IRS to implement a uniform asset disposal mechanism for sales of seized property. The disposal mechanism should be designed to remove any participation in the sale of seized assets by revenue officers. The provision authorizes the consideration of outsourcing of the disposal mechanism.

Effective Date

The provision requires a uniform asset disposal system to be implemented within two years from the date of enactment.

xi. Codification of IRS administrative procedures for seizure of taxpayer's property (Sec. 3444 of the bill and Sec. 6331 of the Code)

Present Law

The IRS provides guidelines for revenue officers engaged in the collection of unpaid tax liabilities. The Internal Revenue Manual (IRM) 56(12)5.1 provides general guidelines for seizure actions: (1) the revenue officer must first verify the taxpayer's liability; (2) no levy may be made if the estimated expenses of levy and sale will exceed the fair market value of the property to be sized (Sec. 6331(f)); (3) no levy may be made on the date of an appearance in response to an administrative summons, unless jeopardy exists (Sec. 6331(g)); (4) the taxpayer should have an opportunity to read the levy form; (5) the revenue officer must attach a sufficient number of warning notices on the property to clearly identify the property to be seized; (6) the revenue officer must inventory the property to be seized; and (7) a revenue officer may not use force in the seizure of property.

Prior to the levy action, the revenue officer must determine that there is sufficient equity in the property to be seized to yield net proceeds from the sale to apply to unpaid tax liabilities. If it is determined after seizure that the taxpayer's equity is insufficient to yield net proceeds from sale to apply to the unpaid tax, the revenue officer will immediately release the seized property. See IRM 56(12)2.1.

IRS Policy Statement P-5-34 states that the facts of a case and alternative collection methods must be thoroughly considered before deciding to seize the assets of a going business. IRS Policy Statement P-5-16 advises reasonable forbearance on collection activity when the taxpayer's business has been affected by a major disaster such as flood, hurricane, drought, fire, etc., and whose ability to pay has been impaired by such disaster.

Reasons for Change

The Committee believes that the IRS procedures on collections provide important protections to taxpayers. Accordingly, the Committee believes that it is appropriate to codify those procedures to ensure that they are uniformly followed by the IRS.

Explanation of Provision

The provision codifies the IRS administrative procedures which require the IRS to investigate the status of property prior to levy. The Treasury Inspector General for Tax Administration would be required to review IRS compliance with seizure procedures and report annually to Congress.

Effective Date

The provision is effective on the date of enactment.

xii. Procedures for seizure of residences and businesses (Sec. 3445 of the bill and Sec. 6334(a)(13) of the Code)

Present Law

Subject to certain procedural rules and limitations, the Secretary may seize the property of the taxpayer who neglects or refuses to pay any tax within 10 days after notice and demand. The IRS may not levy on the personal residence of the taxpayer unless the District Director (or the assistant District Director) personally approves in writing or in cases of jeopardy. There are no special rules for property that is used as a residence by parties other than the taxpayer.

IRS Policy Statement P-5-34 states that the facts of a case and alternative collection methods must be thoroughly considered before deciding to seize the assets of a going business.

Reasons for Change

The Committee is concerned that seizure of the taxpayer's principal residence is particularly disruptive for the taxpayer as well as the taxpayer's family. The seizure of any residence is disruptive to the occupants, and is not justified in the case of a small deficiency. In the case of seizure of a business, the seizure not only disrupts the taxpayer's life but also may adversely impact the taxpayer's ability to enter into an installment agreement or otherwise to continue to pay off the tax liability. Accordingly, the Committee believes that the taxpayer's principal residence or business should only be seized to satisfy tax liability as a last resort, and that any property used by any person as a residence should not be seized for a small deficiency.

Explanation of Provision

The provision prohibits the IRS from seizing real property that is used as a residence (by the taxpayer or another person) to satisfy an unpaid liability of $5,000 or less, including penalties and interest.

The provision requires the IRS to exhaust all other payment options before seizing the taxpayer's business or principal residence. The provision does not prohibit the seizure of a business or a principal residence, but would treat such seizure as a payment option of last resort. The provision does not apply in cases of jeopardy. It is anticipated that the IRS would consider installment agreements, offer-in-compromise, and seizure of other assets of the taxpayer before taking collection action against the taxpayer's business or principal residence.

Effective Date

The provision is effective on the date of enactment.

d. Provisions Relating to Examination and Collection Activities

i. Procedures relating to extensions of statute of limitations by agreement (Sec. 3461 of the bill and Sec. 6502(a) of the Code)

Present Law

The statute of limitations within which the IRS may assess additional taxes is generally three years from the date a return is filed (Sec. 6501). Prior to the expiration of the statute of limitations, both the taxpayer and the IRS may agree in writing to extend the statute, using Form 872 or 872-A. An extension may be for either a specified period or an indefinite period. The statute of limitations within which a tax may be collected after assessment is 10 years after assessment (Sec. 6502). Prior to the expiration of the statute of limitations, both the taxpayer and the IRS may agree in writing to extend the statute, using Form 900.

Reasons for Change

The Committee believes that taxpayers should be fully informed of their rights with respect to the statute of limitations on assessment. The Committee is concerned that in some cases taxpayer have not been fully aware of their rights to refuse to extend the statute of limitations, and have felt that they had no choice but to agree to extend the statute of limitations upon the request of the IRS.

Moreover, the Committee believes that the IRS should collect all taxes within 10 years, and that such statute of limitation should not be extended.

Explanation of Provision

The provision eliminates the provision of present law that allows the statute of limitations on collections to be extended by agreement between the taxpayer and the IRS.

The provision also requires that, on each occasion on which the taxpayer is requested by the IRS to extend the statute of limitations on assessment, the IRS must notify the taxpayer of the taxpayer's right to refuse to extend the statute of limitations or to limit the extension to particular issues.

Effective Date

The provision applies to requests to extend the statute of limitations made after the date of enactment and to all extensions of the statute of limitations on collection that are open 180 days after the date of enactment.

ii. Offers-in-compromise (Sec. 3462 of the bill and Sec. 7122 of the Code)

Present Law

Section 7122 of the Code permits the IRS to compromise a taxpayer's tax liability. An offer-in-compromise is a provision by the taxpayer to settle unpaid tax accounts for less than the full amount of the assessed balance due. An offer-in-compromise may be submitted for all types of taxes, as well as interest and penalties, arising under the Internal Revenue Code.

There are two bases on which an offer can be made: doubt as to liability for the amount owed and doubt as to ability to pay the amount owed.

A compromise agreement based on doubt as to ability to pay requires the taxpayer to file returns and pay taxes for five years from the date the IRS accepts the offer. Failure to do so permits the IRS to begin immediate collection actions for the original amount of the liability. The Internal Revenue Manual provides guidelines for revenue officers to determine whether an offer in-compromise is adequate. An offer is adequate if it reasonably reflects collection potential. Although the revenue officer is instructed to consider the taxpayer's assets and future and present income, the IRM advises that rejection of an offer solely based on narrow asset and income evaluations should be avoided.

Pursuant to the IRM, collection normally is withheld during the period an offer-in compromise is pending, unless it is determined that the offer is a delaying tactic and collection is in jeopardy.

Reasons for Change

The Committee believes that the ability to compromise tax liability and to make payments of tax liability by installment enhances taxpayer compliance. In addition, the Committee believes that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations and remain in the tax system. Accordingly, the Committee believes that the IRS should make it easier for taxpayers to enter into offer-in-compromise agreements, and should do more to educate the taxpaying public about the availability of such agreements.

Explanation of Provision

Rights of taxpayers entering into offers-in-compromise

The provision requires the IRS to develop and publish schedules of national and local allowances that will provide taxpayers entering into an offer-in-compromise with adequate means to provide for basic living expenses. The IRS also will be required to consider the facts and circumstances of a particular taxpayer's case in determining whether the national and local schedules are adequate for that particular taxpayer. If the facts indicate that use of scheduled allowances would be inadequate under the circumstances, the taxpayer would not be limited by the national or local allowances.

The provision prohibits the IRS from rejecting an offer-in-compromise from a low- income taxpayer solely on the basis of the amount of the offer. The provision provides that, in the case of an offer-in-compromise submitted solely on the basis of doubt as to liability, the IRS may not reject the offer merely because the IRS cannot locate the taxpayer's file. The provision prohibits the IRS from requesting a financial statement if the taxpayer makes an offer-in-compromise based solely on doubt as to liability.

Suspend collection by levy while offer-in-compromise is pending

The provision prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer's offer-in-compromise for that liability is being processed, (2) during the 30 days following rejection of an offer, and (3) during any period in which an appeal of the rejection of an offer is being considered. Taxpayers whose offers are rejected and who made good faith revisions of their offers and resubmitted them within 30 days of the rejection or return would be eligible for a continuous period of relief from collection by levy. This prohibition on collection by levy would not apply if the IRS determines that collection is in jeopardy or that the offer was submitted solely to delay collection. The provision provides that the statute of limitations on collection would be tolled for the period during which collection by levy is barred.

Procedures for reviews of rejections of offers-in-compromise and installment agreements

The provision requires that the IRS implement procedures to review all proposed IRS rejections of taxpayer offers-in-compromise and requests for installment agreements prior to the rejection being communicated to the taxpayer. The provision requires the IRS to allow the taxpayer to appeal any rejection of such offer or agreement to the IRS Office of Appeals. The IRS must notify taxpayers of their right to have an appeals officer review a rejected offer-in compromise on the application form for an offer-in-compromise.

Publication of taxpayer's rights with respect to offers-in-compromise

The provision requires the IRS to publish guidance on the rights and obligations of taxpayers and the IRS relating to offers in compromise, including a compliant spouse's right to apply to reinstate an agreement that would otherwise be revoked due to the nonfiling or nonpayment of the other spouse, providing all payments required under the compromise agreement are current.

Liberal acceptance policy

It is anticipated that the IRS will adopt a liberal acceptance policy for offers-in-compromise to provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes.

Effective Date

The provision is generally effective for offers-in-compromise submitted after the date of enactment. The provision suspending levy is effective with respect to offers-in-compromise pending on or made after the 60th day after the date of enactment.

iii. Notice of deficiency to specify deadlines for filing Tax Court petition (Sec. 3463 of the bill and Sec. 6213(a) of the Code)

Present Law

Taxpayers must file a petition with the Tax Court within 90 days after the deficiency notice is mailed (150 days if the person is outside the United States) (Sec. 6213). If the petition is not filed within that time period, the Tax Court does not have jurisdiction to consider the petition.

Reasons for Change

The Committee believes that taxpayers should receive assistance in determining the time period within which they must file a petition in the Tax Court and that taxpayers should be able to rely on the computation of that period by the IRS.

Explanation of Provision

The provision requires the IRS to include on each deficiency notice the date determined by the IRS as the last day on which the taxpayer may file a petition with the Tax Court. The provision provides that a petition filed with the Tax Court by this date is treated as timely filed.

Effective Date

The provision applies to notices mailed after December 31, 1998.

iv. Refund or credit of overpayments before final determination (Sec. 3464 of the bill and Sec. 6213(a) of the Code)

Present Law

Generally, the IRS may not take action to collect a deficiency during the period a taxpayer may petition the Tax Court, or if the taxpayer petitions the Tax Court, until the decision of the Tax Court becomes final. Actions to collect a deficiency attempted during this period may be enjoined, but there is no authority for ordering the refund of any amount collected by the IRS during the prohibited period.

If a taxpayer contests a deficiency in the Tax Court, no credit or refund of income tax for the contested taxable year generally may be made, except in accordance with a decision of the Tax Court that has become final. Where the Tax Court determines that an overpayment has been made and a refund is due the taxpayer, and a party appeals a portion of the decision of the Tax Court, no provision exists for the refund of any portion of any overpayment that is not contested in the appeal.

Reasons for Change

The Committee believes that the Secretary should be allowed to refund the uncontested portion of an overpayment of taxes, without regard to whether other portions of the overpayment are contested, as well as amounts that were collected during a period in which collection is prohibited.

Explanation of Provision

The provision provides that a proper court (including the Tax Court) may order a refund of any amount that was collected within the period during which the Secretary is prohibited from collecting the deficiency by levy or other proceeding.

The provision also allows the refund of that portion of any overpayment determined by the Tax Court to the extent the overpayment is not contested on appeal.

Effective Date

The provision is effective on the date of enactment.

v. IRS procedures relating to appeal of examinations and collections (Sec. 3465 of the bill and new Sec. 7123 of the Code)

Present Law

IRS Appeals operates through regional Appeals offices which are independent of the local District Director and Regional Commissioner's offices. The regional Directors of Appeals report to the National Director of Appeals of the IRS, who reports directly to the Commissioner and Deputy Commissioner. In general, IRS Appeals offices have jurisdiction over both pre-assessment and post-assessment cases. The taxpayer generally has an opportunity to seek Appeals jurisdiction after failing to reach agreement with the Examination function and before filing a petition in Tax Court, after filing a petition in Tax Court (but before litigation), after assessment of certain penalties, after a claim for refund has been rejected by the District Director's office, and after a proposed rejection of an offer-in-compromise in a collection case (Treas. Reg. Sec. 601.106(a)(1)).

In certain cases under Coordinated Examination Program procedures, the taxpayer has an opportunity to seek early Appeals jurisdiction over some issues while an examination is still pending on other issues (Rev. Proc. 96-9, 1996-1 C.B. 575). The early referral procedures also apply to employment tax issues on a limited basis (Announcement 97-52).

A mediation or alternative dispute resolution (ADR) process is also available in certain cases. ADR is used at the end of the administrative process as a final attempt to resolve a dispute before litigation. ADR is currently only available for cases with more than $10 million in dispute. ADR processes are also available in bankruptcy cases and cases involving a competent authority determination.

In April 1996, the IRS implemented a Collections Appeals Program within the Appeals function, which allows taxpayers to appeal lien, levy, or seizure actions proposed by the IRS. In January 1997, appeals for installment agreements proposed for termination were added to the program.

The local IRS Offices of Appeals are generally located in the same area as the District Director's Offices. The IRS has videoconferencing capability. The IRS does not have any program to provide for Appeals conferences by videoconferencing techniques.

Reasons for Change

The Committee believes that the IRS should be statutorily bound to follow the procedures that the IRS has developed to facilitate settlement in the IRS Office of Appeals. The Committee also believes that mediation, binding arbitration, early referral to Appeals, and other procedures would foster more timely resolution of taxpayers' problems with the IRS.

In addition, the Committee believes that the ADR process is valuable to the IRS and taxpayers and should be extended to all taxpayers.

The Committee believes that all taxpayers should enjoy convenient access to Appeals, regardless of their locality.

Explanation of Provision

The provision codifies existing IRS procedures with respect to early referrals to Appeals and the Collections Appeals Process. The provision also codifies the existing ADR procedures, as modified by eliminating the dollar threshold.

In addition, the IRS is required to establish a pilot program of binding arbitration for disputes of all sizes. Under the pilot program, binding arbitration must be agreed to by both the taxpayer and the IRS.

The provision requires the IRS to make Appeals officers available on a regular basis in each State, and consider videoconferencing of Appeals conferences for taxpayers seeking appeals in rural or remote areas.

Effective Date

The provision is effective as of the date of enactment.

vi. Application of certain fair debt collection practices (Sec. 3466 of the bill and new Sec. 6304 of the Code)

Present Law

The Fair Debt Collection Practices Act provides a number of rules relating to debt collection practices. Among these are restrictions on communication with the consumer, such as a general prohibition on telephone calls outside the hours of 8:00 a.m. to 9:00 p.m. local time, and prohibitions on harassing or abusing the consumer. In general, these provisions do not apply to the Federal Government.

Reasons for Change

The Committee believes that the IRS should be at least as considerate to taxpayers as private creditors are required to be with their customers. Accordingly, the Committee believes that it is appropriate to require the IRS to comply with applicable portions of the Fair Debt Collection Practices Act, so that both taxpayers and the IRS are fully aware of these requirements.

Explanation of Provision

The provision makes the restrictions relating to communication with the taxpayer/debtor and the prohibitions on harassing or abusing the debtor applicable to the IRS by incorporating these provisions into the Internal Revenue Code. The restrictions relating to communication with the taxpayer/debtor are not intended to hinder the ability of the IRS to respond to taxpayer inquiries (such as answering telephone calls from taxpayers).

Effective Date

The provision is effective on the date of enactment.

vii. Guaranteed availability of installment agreements (Sec. 3467 of the bill and Sec. 6159 of the Code)

Present Law

Section 6159 of the Code authorizes the IRS to enter into written agreements with any taxpayer under which the taxpayer is allowed to pay taxes owed, as well as interest and penalties, in installment payments if the IRS determines that doing so will facilitate collection of the amounts owed. An installment agreement does not reduce the amount of taxes, interest, or penalties owed. However, it does provide for a longer period during which payments may be made during which other IRS enforcement actions (such as levies or seizures) are held in abeyance. Many taxpayers can request an installment agreement by filing form 9465. This form is relatively simple and does not require the submission of detailed financial statements. The IRS in most instances readily approves these requests if the amounts involved are not large (in general, below $10,000) and if the taxpayer has filed tax returns on time in the past. Some taxpayers are required to submit background information to the IRS substantiating their application. If the request for an installment agreement is approved by the IRS, a user fee of $43 is charged. This user fee is in addition to the tax, interest, and penalties that are owed.

Reasons for Change

The Committee believes that the ability to make payments of tax liability by installment enhances taxpayer compliance. In addition, the Committee believes that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations. Accordingly, the Committee believes that the IRS should make it easier for taxpayers to enter into installment agreements.

Explanation of Provision

The provision requires the Secretary to enter an installment agreement, at the taxpayer's option, if:

(1) the liability is $10,000, or less (excluding penalties and interest);

(2) within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an installment agreement under this provision;

(3) if requested by the Secretary, the taxpayer submits financial statements, and the Secretary determines that the taxpayer is unable to pay the tax due in full;

(4) the installment agreement provides for full payment of the liability within 3 years; and

(5) the taxpayer agrees to continue to comply with the tax laws and the terms of the agreement for the period (up to 3 years) that the agreement is in place.

Effective Date

The provision is effective on the date of enactment.