49-010

Calendar No. 614

109TH CONGRESS

Report

SENATE

2d Session

109-336

--TELEPHONE EXCISE TAX REPEAL AND TAXPAYER PROTECTION AND ASSISTANCE ACT OF 2006

September 15, 2006- Ordered to be printed

Mr. GRASSLEY, from the Committee on Finance, submitted the following

R E P O R T

[To accompany S. 1321]

The Committee on Finance reported S. 1321, as modified by the Chairman's mark and amended by the Committee, to amend the Internal Revenue Code of 1986 to repeal the telephone excise tax on telephone and other communications services, having considered the same, reports favorably thereon and recommends that the bill, as amended, do pass.

	CONTENTS	Page
I.	LEGISLATIVE BACKGROUND	5
II.	EXPLANATION OF THE BILL	5
	TITLE I--REPEAL OF THE TELEPHONE EXCISE TAX	5
	A. Repeal Excise Tax on Communications Services (sec. 101 of the bill and secs. 4251-54 of the Code)	5
	TITLE II--TAXPAYER PROTECTION AND ASSISTANCE	7
	A. Low-Income Taxpayer Clinics (sec. 201 of the bill and new sec. 7526A of the Code)	7
	B. Clarification of Enrolled Agent Credentials (sec. 202 of the bill and new sec. 7529 of the Code)	8
	C. Regulation of Federal Tax Return Preparers (sec. 203 of the bill)	9
	D. Contract Authority for Examinations of Preparers (sec. 204 of the bill)	12
	E. Regulation of Refund Anticipation Loan Facilitators (sec. 205 of the bill and new sec. 7530 of the Code)	13
	F. Taxpayer Access to Financial Institutions (sec. 206 of the bill)	15
	G. Expanded Use of Tax Court Practitioner Fees (sec. 7475 of the Code)	16
	TITLE III--IMPROVEMENTS IN TAX ADMINISTRATION AND TAXPAYER SAFEGUARDS	17
	A. Waiver of User Fee for Installment Agreements Using Automated Withdrawals (sec. 301 of the bill and sec. 6159 of the Code)	17
	B. Termination of Installment Agreements (sec. 302 of the bill and sec. 6159 of the Code)	17
	C. Individuals Held Harmless on Improper Levy on Individual Retirement Plan (sec. 303 of the bill and sec. 6343 of the Code)	18
	D. Office of Chief Counsel Review of Offers-in-Compromise (sec. 304 of the bill and sec. 7122 of the Code)	20
	E. Elimination of Restriction on Offsetting Refunds From Former Residents (sec. 305 of the bill and sec. 6402 of the Code)	21
	F. Revisions Relating to Termination of Employment of IRS Employees for Misconduct (sec. 306 of the bill and new sec. 7804A of the Code)	22
	G. Modification of Collection Due Process Procedures for Employment Tax Liabilities (sec. 307 of the bill and sec. 6330 of the Code)	23
	H. Extension of Time Limit for Contesting IRS Levy (sec. 308 of the bill and secs. 6343 and 6532 of the Code)	24
	I. Authorization for IRS To Require Increased Electronic Filing of Returns Prepared by Paid Return Preparers (sec. 309 of the bill and sec. 6011 and new sec. 6695B of the Code)	25
	J. Require IRS To Develop Direct Electronic Filing (sec. 310 of the bill)	26
	K. Modifications and Report Regarding Free File Program (sec. 311 of the bill)	27
	L. Study on Clarifying Recordkeeping Responsibilities (sec. 312 of the bill)	28
	M. Modification of Treasury Inspector General for Tax Administration Reporting Requirements (sec. 313 of the bill and sec. 7803 of the Code)	29
	N. Streamline Reporting Process for National Taxpayer Advocate (sec. 314 of the bill and sec. 7803 of the Code)	30
	O. Whistleblower Reforms (sec. 315 of the bill and sec. 7623 of the Code)	30
	P. Authorization for Financial Management Service Retention of Transaction Fees From Levied Amounts (sec. 316 of the bill)	32
	Q. Clarification of Definition of Church Tax Inquiry (sec. 317 of the bill and sec. 7611 of the Code)	33
	R. Treatment of Funds From Indian Tribal Governments as Public Support for Purposes of the Public Charity-Private Foundation Classification (sec. 318 of the bill and sec. 7871 of the Code)	34
	S. Tax Court Review of Requests for Equitable Relief From Joint and Several Liability (sec. 319 of the bill and sec. 6015 of the Code)	34
	T. Authorization of Appropriations for Tax Law Enforcement Relating to Human Sex Trafficking (sec. 320 of the bill)	37
	U. Regulation of Payroll Tax Deposit Agents (sec. 321 of the bill and new sec. 7531 of the Code)	38
	V. Extension of the Statute of Limitations To File Claims for Refunds Relating to Disability Determinations by the Department of Veterans Affairs (sec. 322 of the bill and sec. 6511 of the Code)	40
	W. Notification Requirement for Exempt Entities Not Currently Required To File an Annual Information Return (secs. 6033, 6652, and 7428 of the Code)	41
	TITLE IV--REFORM OF PENALTIES AND INTEREST	43
	A. Individual Estimated Tax (sec. 401 of the bill and sec. 6654 of the Code)	43
	1. Increase Estimated Tax Threshold	43
	2. Apply one interest rate per estimated tax underpayment period for individuals, estates, and trusts	44
	3. Provide that underpayment balances are cumulative	45
	4. Require 365-day year for all estimated tax interest calculations for individuals, estates, and trusts	45
	B. Corporate Estimated Tax (sec. 402 of the bill and sec. 6655 of the Code)	46
	C. Increase in Large Corporation Threshold for Estimated Tax Payments (sec. 403 of the bill and sec. 6655 of the Code)	47
	D. Expansion of Interest Netting (sec. 404 of the bill and sec. 6621 of the Code)	47
	E. Clarification of Application of Federal Tax Deposit Penalty (sec. 405 of the bill and sec. 6656 of the Code)	48
	F. Frivolous Tax Submissions (sec. 406 of the bill and sec. 6702 of the Code)	49
	G. Understatement of Taxpayer's Liability by Tax Return Preparers (sec. 407 of the bill and secs. 6694, 6695, and 7701 of the Code)	50
	H. Penalty for Aiding and Abetting the Understatement of Tax Liability (sec. 408 of the bill and sec. 6701 of the Code)	52
	I. Increase in Criminal Monetary Penalty Limitation for the Underpayment or Overpayment of Tax Due to Fraud (sec. 409 of the bill and secs. 7201, 7203, and 7206 of the Code)	53
	J. Doubling of Certain Penalties, Fines, and Interest on Underpayments Related to Certain Offshore Financial Arrangements (sec. 410 of the bill)	54
	K. Increase in Penalty for Bad Checks and Money Orders (sec. 411 of the bill and sec. 6657 of the Code)	59
	L. Increase the Amounts of Excise Taxes Relating to Public Charities, Social Welfare Organizations, and Private Foundations (sec. 412 of the bill and secs. 4912, 4941, 4942, 4943, 4944, 4945, 4955, and 4958 of the Code)	59
	M. Penalty for Filing Erroneous Refund Claims (sec. 413 of the bill and sec. 6662 of the Code)	65
	N. Provisions Relating to Appraisers and Substantial and Gross Overstatement of Valuations of Property (secs. 170, 6662, 6664, 6696, and new sec. 6695A of the Code)	67
	TITLE V--CONFIDENTIALITY AND DISCLOSURE	71
	A. Collection Activities With Respect to a Joint Return Disclosable to Either Spouse Based on Oral Request (sec. 501 of the bill and sec. 6103 of the Code)	71
	B. Prohibition of Disclosure of Taxpayer Identification Information With Respect to Disclosure of Accepted Offers-in-Compromise (sec. 502 of the bill and sec. 6103 of the Code)	72
	C. Compliance By Contractors With Confidentiality Safeguards (sec. 503 of the bill and sec. 6103 of the Code)	73
	D. Higher Standards for Requests for and Consents to Disclosure (sec. 504 of the bill and sec. 6103 of the Code)	75
	E. Civil Damage Remedies for Unauthorized Disclosure or Inspection (sec. 505 of the bill and sec. 7431 of the Code)	78
	F. Expanded Disclosure in Emergency Circumstances (sec. 506 of the bill and sec. 6103 of the Code)	80
	G. Disclosure of Taxpayer Identity for Tax Refund Purposes (sec. 507 of the bill and sec. 6103 of the Code)	80
	H. Treatment of Public Records (sec. 508 of the bill and sec. 6103 of the Code)	81
	I. Taxpayer Identification Number Matching (sec. 509 of the bill and sec. 6103 of the Code)	82
	J. Form 8300 Disclosures (sec. 510 of the bill and sec. 6103 of the Code)	83
	K. Expanded Definition of Return Preparer for Purposes of Sections 6713 and 7216 (sec. 511 of the bill and secs. 6713 and 7216 of the Code)	84
	L. Restrict the Use and Disclosure of Taxpayer Information by Return Preparers for Nontax Purposes and Offshore Disclosures (sec. 512 of the bill and sec. 7216 of the Code)	86
	M. Disclosure to State Officials of Proposed Actions Related to Certain Section 501(c) Organizations (secs. 6103, 6104, 7213, 7213A, and 7431 of the Code)	90
	TITLE VI--UNITED STATES TAX COURT MODERNIZATION	93
	A. Appointment of Tax Court Employees (sec. 601 of the bill and sec. 7471(a) of the Code)	93
	B. Consolidate Review of Collection Due Process Cases in the Tax Court (sec. 6330 of the Code)	95
	C. Confirmation of Tax Court Authority To Apply Equitable Recoupment (sec. 6214 of the Code)	97
	D. Extend Authority for Special Trial Judges To Hear and Decide Certain Employment Status Cases (sec. 7443A of the Code)	98
	E. Tax Court Filing Fee (sec. 7451 of the Code)	99
	TITLE VII--MISCELLANEOUS PROVISIONS	99
	A. Expensing of Broadband Internet Access Expenditures (sec. 701 of the bill and sec. 191 of the Code)	99
	B. Modification of Refunds for Kerosene Used in Aviation (sec. 702 of the bill and sec. 6427 of the Code)	102
	C. Declarations on Federal Corporate Income Tax Returns (sec. 703 of the bill and sec. 6062 of the Code)	106
	D. Treatment of Professional Employer Organizations as Employers (sec. 704 of the bill and new secs. 3511 and 7705 of the Code)	106
	E. Study on Collecting Estimated Tax Payments Through the Electronic Fund Transfer System (sec. 705 of the bill and sec. 6302 of the Code)	115
	F. Study of Use of Voluntary Withholding Agreements (sec. 706 of the bill)	116
	G. Offset of Tax Refunds Against State Judicial Debts (sec. 707 of the bill and sec. 6402 of the Code)	117
	H. Clarification of Responsibilities of United States Marshals Attending the Tax Court (sec. 708 of the bill and sec. 7456 of the Code)	118
	I. Authorization of Appropriations To Combat the Tax Gap and for Tax Law Enforcement (sec. 709 of the bill)	118
	J. Annual Tax Gap Study (sec. 710 of the bill)	119
	K. Authorization of Appropriations for Tax Law Enforcement Relating to the Hiring and Continued Employment of Undocumented Workers (sec. 711 of the bill)	120
	L. Repeal of Dollar Limit on Contributions to Qualified Funeral Trusts (sec. 712 of the bill and sec. 685 of the Code)	121
	M. Permit Administrative Relief for Certain Late Qualified Terminable Interest Property Elections (sec. 713 of the bill and sec. 2523 of the Code)	121
	N. Disclosure of Written Determinations (sec. 714 of the bill and sec. 6110 of the Code)	122
	O. Disclosure of Internet Web Site and Name Under Which Organization Does Business (sec. 715 of the bill and sec. 6033 of the Code)	125
	P. Modification to Reporting of Capital Transactions (sec. 716 of the bill and secs. 6033 and 6104 of the Code)	126
	Q. Disclosure That Form 990 Is Publicly Available (sec. 717 of the bill)	127
	R. Expedited Review Process for Certain Tax-Exemption Applications (sec. 718 of the bill)	127
	S. Extension of Declaratory Judgment Procedures to Non-501(c)(3) Tax-Exempt Organizations (sec. 719 of the bill and sec. 7428 of the Code)	129
	T. Wireless Telecommunications Property Treated as Qualified Technological Equipment (sec. 720 of the bill and sec. 168 of the Code)	131
	U. Permanent Extension of Internet Tax Moratorium (sec. 721 of the bill)	132
	V. Simplification Through Elimination of Inoperative Provisions (sec. 722 of the bill)	133
	W. Definition of Convention or Association of Churches (sec. 7701 of the Code)	133
	TITLE VIII--REVENUE OFFSET PROVISIONS	135
	A. Economic Substance Doctrine (secs. 801 and 802 of the bill)	135
	1. Clarification of the economic substance doctrine (sec. 801 of the bill and new sec. 7701(o) of the Code)	135
	2. Penalty for understatements attributable to transactions lacking economic substance, etc. (sec. 802 of the bill and new sec. 6662B of the Code)	141
	B. Tax Treatment of Certain Inverted Corporate Entities (sec. 803 of the bill and sec. 7874 of the Code)	147
III.	BUDGET EFFECTS OF THE BILL	152
IV.	VOTES OF THE COMMITTEE	158
V.	REGULATORY IMPACT AND OTHER MATTERS	158

I. LEGISLATIVE BACKGROUND

Overview

The Senate Committee on Finance marked up S. 1321 and reported S. 1321 as modified by the Chairman's mark and amended by the Committee, the `Telephone Excise Tax Repeal and Taxpayer Protection and Assistance Act of 2006,' on June 28, 2006, and, with a quorum present, ordered the bill favorably reported by a voice vote on that date.

Recent legislation

The bill as approved by the Committee contained several provisions that are identical or substantially similar to provisions in recently enacted legislation and therefore are not contained in the bill as reported.

The Pension Protection Act of 2006 1

[Footnote] contains provisions relating to:

[Footnote 1: Pub. L. No. 109-280 (August 17, 2006).]

Administration of the United States Tax Court;

Notification requirements for exempt entities not currently required to file annual information returns;

Appraisers and substantial and gross overstatement of valuations of property;

The disclosure to State officials of proposed actions related to certain section 501(c) organizations;

The definition of a convention or association of churches; and

Excise taxes imposed on public charities, social welfare organizations, and private foundations.

II. EXPLANATION OF THE BILL

TITLE I--REPEAL OF THE TELEPHONE EXCISE TAX

A. REPEAL EXCISE TAX ON COMMUNICATIONS SERVICES

(Sec. 101 of the bill and secs. 4251-54 of the Code)

PRESENT LAW

The Internal Revenue Code of 1986 (the `Code') imposes a three-percent Federal excise tax on amounts paid for communications services. Communications services are defined as `local telephone service,' `toll telephone service,' and `teletypewriter exchange service.' 2

[Footnote] The person paying for the service (i.e., the consumer) is liable for payment of the tax. Service providers are required to collect the tax; however, if a consumer refuses to pay, the service provider is not liable for the tax and is not subject to penalty for failure to collect if reasonable efforts to collect have been made. Instead, the service provider must report the delinquent consumer's name and address to the Internal Revenue Service (`IRS'), which then must attempt to collect the tax. 3

[Footnote]

[Footnote 2: Sec. 4251. `Teletypewriter exchange service' refers to a data system that provides access from a teletypewriter or other data station to a teletypewriter exchange system and the privilege of intercommunication by that station with substantially all persons having teletypewriter or other data stations in the same exchange system. Sec. 4252(c). While it is understood that the system to which the definition was initially intended to apply is no longer in use, the definition may fit other services provided now or that may be provided in the future.]

[Footnote 3: In general, the amount of tax is based on the sum of charges for taxable services included in the bill. If the person who renders the bill groups individual items for purposes of rendering the bill and computing the tax, then the tax base with respect to each such group is the sum of all items within that group. The tax on any remaining items not included in any such group is based on the charge for each item separately. Sec. 4254(a).]

Local telephone service is defined as the provision of voice-quality telephone access to a local telephone system that provides access to substantially all persons having telephone stations constituting a part of the local system. 4

[Footnote]

[Footnote 4: The access to substantially all persons having telephone stations constituting a part of the local system is sometimes referred to as access to the public switched telephone network.]

Toll telephone service (which is essentially long distance telephone service) is defined as voice quality communication for which (1) there is a toll charge that varies with the distance and elapsed transmission time of each individual call and payment for which occurs in the United States, or (2) a service (such as a wide area telephone service, or `WATS') which, for a periodic charge (determined as a flat amount or upon the basis of total elapsed transmission time), entitles the subscriber to an unlimited number of telephone calls to or from an area outside the subscriber's local system area.

Telephone companies have historically collected excise tax on a toll telephone service even if the toll charge on such service does not vary with both distance and elapsed transmission time. However, in several recent cases, the Courts of Appeals held that the Federal excise tax on communications services does not apply to long distance (i.e., toll telephone) services sold at flat per-minute rates for interstate, intrastate, and international calls. The courts concluded that the excise tax does not apply because a flat per-minute rate does not vary with both distance and transmission time as required by the statute. 5

[Footnote] In response to these court decisions, the IRS issued Notice 2006-50, directing telephone companies to cease collecting and paying over tax on long distance services and bundled services that are billed after July 31, 2006. 6

[Footnote] In Notice 2006-50, the IRS also announced a program to refund approximately $13 billion in excise taxes on long distance and bundled services. The Federal excise tax on local-only telephone service remains in effect.

[Footnote 5: See, e.g., Reese Bros. v. United States, 97 AFTR 2d 2006-2393 (3d Cir. 2006); Fortis v. United States, 97 AFTR 2d 2006-2228 (2d Cir. 2006); American Bankers Insurance Group v. United States, 408 F.3d 1328 (11th Cir. 2005); Office Max, Inc. v. United States, 428 F.3d 583 (6th Cir. 2005); Nat'l R.R. Passenger Corp. v. United States, 431 F.3d 374 (D.C. Cir. 2005).]

[Footnote 6: Notice 2006-50, 2006-50 I.R.B. 1141 (May 26, 2006). The notice defines long distance services as `telephonic quality communications with persons whose telephones are outside the local telephone system of the caller.' Bundled services are defined as `local and long distance services provided under a plan that does not separately state the charge for the local telephone services.' In general, bundled services include cellular phone services.]

REASONS FOR CHANGE

The Committee believes that the excise tax on communications services is regressive, and that the tax will become more regressive when the IRS ceases to collect taxes on long distance and bundled services. The Committee believes, therefore, that it is appropriate to repeal the tax in its entirety. The Committee also believes that the IRS needs additional resources to provide for the fast and efficient refunding of telephone excise taxes to taxpayers.

EXPLANATION OF PROVISION

The provision repeals the excise tax on communications services in its entirety. The provision also includes an authorization to appropriate $49 million to the IRS to implement the telephone excise tax refund program under Notice 2006-50. The authorization is intended to cover such costs as form revisions, taxpayer assistance, processing and enforcement.

EFFECTIVE DATE

The repeal of the excise tax applies to amounts paid pursuant to bills rendered more than 90 days after the date of enactment. The funding authorization is effective on the date of enactment.

TITLE II--TAXPAYER PROTECTION AND ASSISTANCE

A. LOW-INCOME TAXPAYER CLINICS

(Sec. 201 of the bill and new sec. 7526A of the Code)

PRESENT LAW

The Code provides that the Secretary is authorized to provide up to $6 million per year in matching grants to certain low-income taxpayer clinics. 7

[Footnote] Eligible clinics are those that charge no more than a nominal fee to either represent low-income taxpayers in controversies with the IRS or provide tax information to individuals for whom English is a second language (`controversy clinics'). No clinic can receive more than $100,000 per year.

[Footnote 7: Sec. 7526.]

A `controversy clinic' includes (1) a clinical program at an accredited law, business, or accounting school, in which students represent low-income taxpayers, or (2) an organization described in section 501(c) which either represents low-income taxpayers as described above or provides referrals to qualified representatives. A low-income taxpayer is an individual whose income does not exceed 250 percent of the poverty level, as determined in accordance with criteria established by the Director of the Office of Management and Budget (`OMB').

REASONS FOR CHANGE

The Committee believes that low-income taxpayer clinics contribute to compliance with the Code by providing representation to taxpayers who might otherwise be uncertain about their rights and obligations under the Code. Accordingly, the Committee believes that the amount authorized to be appropriated for matching grants to them should be increased. The Committee also believes that the scope of the work that clinics seeking grants may do should be broadened to encompass tax return preparation.

EXPLANATION OF PROVISION

The provision authorizes the Secretary to make $10 million in matching grants for low-income taxpayer return preparation clinics (`return preparation clinics'). Return preparation clinics are clinics that provide routine tax return preparation and filing services to low-income taxpayers, including individuals for whom English is a second language, for not more than a nominal fee.

Return preparation clinics are treated as assisting low-income taxpayers if at least 90 percent of the taxpayers assisted by the clinic have incomes which do not exceed 250 percent of the poverty level, as determined in accordance with criteria established by the Director of OMB. Under the provision, return preparation clinics eligible to receive grants include eligible educational institutions as defined in section 529(e)(5) and organizations described in section 501(c).

The provision prohibits the use of grants for overhead expenses at both controversy clinics and return preparation clinics. The provision also authorizes the IRS to use mass communications, referrals, and other means to promote the benefits and encourage the use of low-income controversy clinics and return preparation clinics.

The authorization of $6 million for controversy clinics under present law is also increased to $10 million.

EFFECTIVE DATE

The provision is effective for grants made after the date of enactment.

B. CLARIFICATION OF ENROLLED AGENT CREDENTIALS

(Sec. 202 of the bill and new sec. 7529 of the Code)

PRESENT LAW

Treasury Department Circular No. 230 provides rules relating to practice before the IRS by attorneys, certified public accountants, enrolled agents, enrolled actuaries, and others.

REASONS FOR CHANGE

The Committee believes that individuals who meet the regulatory requirements established by the Secretary should be able to use the specified credentials or designation in any State or Federal jurisdiction.

EXPLANATION OF PROVISION

The provision permits the Secretary to promulgate regulations to regulate the conduct of enrolled agents in regard to their practice before the IRS, and to permit enrolled agents meeting the Secretary's qualifications to use the credentials or designation `enrolled agent,' `EA,' or `E.A.'

EFFECTIVE DATE

The provision is effective on the date of enactment.

C. REGULATION OF FEDERAL TAX RETURN PREPARERS

(Sec. 203 of the bill)

PRESENT LAW

The Secretary is authorized to regulate the practice of representatives of persons before the Treasury. 8

[Footnote] The Secretary also is authorized to suspend or disbar from practice before the Treasury a representative who is incompetent, who is disreputable, who violates the rules regulating practice before the Treasury, or who (with intent to defraud) willfully and knowingly misleads or threatens the person being represented (or a person who may be represented). The rules promulgated by the Secretary pursuant to this provision are contained in Circular 230. In general, the preparation and filing of tax returns (absent further involvement) has not been considered within the scope of the Circular 230 provisions.

[Footnote 8: 31 U.S.C. sec. 330.]

Income tax return preparers are required to sign and include their taxpayer identification numbers on income tax returns and income return-related documents prepared for compensation. Under the Code, penalties are imposed on any income tax return preparer who, in connection with the preparation of an income tax return, fails to (1) furnish a copy of a return or claim for refund to the taxpayer, (2) sign the return or claim for refund, (3) furnish his or her identifying number, (4) retain a copy of the completed return or a list of the taxpayers for whom a return was prepared, (5) file a correct information return, and (6) comply with certain due diligence requirements in determining a taxpayer's eligibility for the earned income credit. 9

[Footnote] Generally, the penalty is $50 for each failure and the total penalties imposed for any single type of failure for any calendar year are limited to $25,000. The penalty for failing to comply with the due diligence requirements for determining a taxpayer's eligibility for the earned income credit is $100 for each failure. An income tax return preparer who endorses or negotiates a check issued to a taxpayer (other than the income tax return preparer) is liable for a penalty of $500 with respect to each such check. 10

[Footnote]

[Footnote 9: Sec. 6695.]

[Footnote 10: Sec. 6695(f).]

REASONS FOR CHANGE

Approximately 60 percent of the 130 million U.S. individual taxpayers paid a return preparer to prepare their 2003 Federal income tax returns. 11

[Footnote] The Committee understands that many tax return preparers are not regulated by any licensing entity or subject to minimum competency requirements. Moreover, according to the National Taxpayer Advocate, more than 32 percent of earned income credit claims are prepared by paid preparers and the error rate on those claims is over 34 percent. 12

[Footnote]

[Footnote 11: Internal Revenue Service, Statistics Of Income Bulletin Winter 2005-2006. ]

[Footnote 12: Testimony of Nina Olson, National Taxpayer Advocate, Internal Revenue Service, before the Subcommittee on Oversight of the House Committee on Ways and Means, House of Representatives, July 20, 2005.]

Tax practitioners play an important role in the tax system. While certain individuals authorized to practice before the IRS are already subject to oversight, many are not. For those taxpayers who use a paid tax practitioner, the Committee believes that compliance with the tax laws hinges on the practitioners competence and ethical standards. Therefore, the Committee believes that the IRS's failure to provide more oversight over such tax return preparers contributes to noncompliance. The Committee also believes that tax return preparer regulation will improve the accuracy of tax return preparation and, therefore, will reduce government burden and intrusion on taxpayers through IRS enforcement efforts (such as collection and examinations).

The Committee believes that requiring regulation of individuals preparing Federal income tax returns and other documents for submission to the IRS will improve the fairness and administration of the tax system. Additionally, the Committee believes that establishing within the IRS a permanent Office of Professional Responsibility and the use of administrative law judges will provide continuity and accountability in the regulation of tax return preparers. The Committee believes that testing, education, ethical training, and effective oversight of enrolled preparers are critical elements to improving tax compliance.

EXPLANATION OF PROVISION

The provision expands the Secretary's authority to regulate the practice of representatives before the Treasury to include individuals preparing Federal tax returns and other submissions to the IRS for compensation (`enrolled preparers'). The Secretary is required to issue regulations no later than one year after the date of enactment establishing eligibility requirements for enrolled preparers. Whether a preparer is compensated and, thus, subject to regulation as an enrolled preparer shall be determined by considering both indirect compensation, as well as direct forms of compensation. For example, the Committee understands there are cases where individuals prepare Federal tax returns for taxpayers without charging a direct fee, but bundle the return preparation services with other products or services for which the individual charges the taxpayer a monetary amount. The Committee intends for these indirect compensation arrangements to be covered by the enrolled preparer requirements.

The provision requires the Secretary to develop and administer an examination to establish the competency of enrolled preparers. Under the provision, any examination shall be designed to test the preparer's knowledge of technical tax issues, including the earned income credit, and the ethical standards for the preparation of tax returns.

Practitioners authorized to practice before the IRS who are subject to oversight under regulations in effect on the date of enactment are excluded from the regulations establishing eligibility requirements for enrolled preparers. The provision requires the Secretary to accept the credentials of a State licensing or State registration program for enrolled preparers in lieu of testing, to the extent that such State licensing or State registration program has an eligibility examination that is comparable to the eligibility examination established by the Secretary.

Under the provision, the enrolled preparer regulations shall also require enrolled preparers to renew their eligibility every three years. As part of this renewal, enrolled preparers shall be required to establish completion of continuing education requirements in a manner set forth by the Secretary in regulations. Enrolled preparers failing to meet the eligibility requirements are subject to suspension or termination.

The provision also establishes the Office of Professional Responsibility within the IRS under the supervision and direction of the Director, an official reporting directly to the Commissioner, IRS. The duties of the Office of Professional Responsibility shall be limited to matters related to section 330 of title 31. The Director, Office of Professional Responsibility shall be entitled to compensation at the same rate as the highest rate of basic pay established for the Senior Executive Service, or, if higher, at a rate fixed under critical pay authority.

The provision authorizes the Secretary to appoint administrative law judges to conduct hearings of any action initiated by the Office of Professional Responsibility to impose sanctions on enrolled preparers and other representatives practicing before the Treasury. Under the provision, hearing records shall be open to the public. In addition, in the case of a sanction imposed on a representative without initiation of an action, the Office of Professional Responsibility shall make public the identity of the representative, employer, firm, or other entity sanctioned, as well as information about the conduct which gave rise to the sanction. Information about clients of the representative, employer, firm, or other entity sanctioned and medical information with respect to the representative shall not be released to the public or discussed in an open hearing except to the extent necessary to understand the nature, scope, and impact of the conduct giving rise to the sanction or proposed sanction.

Under the provision, the Secretary may impose fees for the registration and renewal of enrolled preparers. Such fees shall be made available to the Office of Professional Responsibility for the purpose of reimbursing the costs of administering and enforcing the rules and regulations regulating practice before the Treasury.

The provision also provides that the Secretary shall conduct a public awareness campaign to encourage taxpayers to use competent professionals in the preparation of their tax returns and other Federal tax matters. The public awareness campaign shall be conducted in a manner to inform the public of the registration requirements imposed on enrolled preparers and the general requirement that preparers must sign and provide their registration numbers on tax returns and display notice of compliance with the registration requirements. The provision also requires the Office of Professional Responsibility to coordinate with State officials in order to collect information regarding practitioners that have been disciplined or suspended under State or local rules.

The provision imposes a monetary penalty on any person preparing Federal tax returns and other tax submissions for compensation who has failed to meet the eligibility or renewal requirements for enrolled preparers or who has otherwise been suspended from practice by the Office of Professional Responsibility. The penalty amount is equal to $1,000 for each tax return or other tax submission (e.g., an application for offer-in-compromise) prepared during the period such person was not authorized to practice before the Treasury. This penalty shall be in addition to other penalties that may be imposed under the Code, such as the penalty for failure to furnish an identifying number on a tax return.

The provision also increases from $50 per return to the greater of $500 per return or $1,000 the penalties under section 6695 for failing to furnish a copy of a return or claim for refund, sign a return or claim for refund, and furnish his or her identifying number. The provision also eliminates the $25,000 annual cap on such penalties. In addition, amounts collected from the imposition of penalties under sections 6694 and 6695 or under regulations promulgated under section 330 of title 31 shall be directed to the Office of Professional Responsibility for the administration of the public awareness campaign. The provision also permits the Secretary to use any funds specifically appropriated for earned income credit compliance to improve compliance with the rules regulating practice before the Treasury.

The provision prohibits any practitioner authorized to practice before the Treasury from directly or indirectly offering or providing insurance to cover professional fees and other expenses incurred in responding to or defending a tax audit.

The provision also requires any form or other submission that can or must be submitted to the IRS separate from the taxpayer's signed tax return (e.g., reportable transaction disclosure statements and offer-in-compromise applications) to be signed under penalty of perjury. Paid preparer information, if applicable, is also required on such forms under the provision.

EFFECTIVE DATE

The provision is effective on the date of enactment.

D. CONTRACT AUTHORITY FOR EXAMINATIONS OF PREPARERS

(Sec. 204 of the bill)

PRESENT LAW

The Secretary is authorized to regulate the practice of representatives of persons before the Treasury. 13

[Footnote] The Secretary also is authorized to suspend or disbar from practice before the Treasury a representative who is incompetent, who is disreputable, who violates the rules regulating practice before the Treasury, or who (with intent to defraud) willfully and knowingly misleads or threatens the person being represented (or a person who may be represented). The rules promulgated by the Secretary pursuant to this provision are contained in Circular 230.

[Footnote 13: 31 U.S.C. sec. 330.]

REASONS FOR CHANGE

The Committee believes the Secretary should have the authority to contract for the development and administration of any examinations implemented to regulate persons practicing before the Treasury, including examinations to regulate tax return preparers.

EXPLANATION OF PROVISION

The provision authorizes the Secretary to contract for both the development and administration of any examination implemented under the Secretary's authority to regulate the practice of representatives of persons before the Treasury.

EFFECTIVE DATE

The provision is effective on the date of enactment.

E. REGULATION OF REFUND ANTICIPATION LOAN FACILITATORS

(Sec. 205 of the bill and new sec. 7530 of the Code)

PRESENT LAW

The Secretary is authorized to regulate the practice of representatives of persons before the Treasury. 14

[Footnote] The Secretary is also authorized to suspend or disbar from practice before the Treasury a representative who is incompetent, who is disreputable, who violates the rules regulating practice before the Treasury, or who (with intent to defraud) willfully and knowingly misleads or threatens the person being represented (or a person who may be represented). The rules promulgated by the Secretary pursuant to this provision are contained in Circular 230. In general, the preparation and filing of tax returns (absent further involvement) has not been considered within the scope of these Circular 230 provisions.

[Footnote 14: 31 U.S.C. sec. 330.]

Under Notice 99-58, 15

[Footnote] certain tax practitioners that file returns electronically and financial institutions may apply to obtain a Debt Indicator for their customer/client taxpayers in exchange for screening individual income tax returns for potential abuse. The Debt Indicator tells whether or not a taxpayer has any scheduled offsets against a claimed refund.

[Footnote 15: 1999-51 I.R.B. 693.]

Section 6103 generally provides that return and return information are confidential and cannot be disclosed unless authorized by title 26. The definition of return information is very broad, and includes, among other things, information with respect to the determination of the existence or possible existence of liability of any person for any penalty under the Code.

REASONS FOR CHANGE

The Committee is concerned that tax refunds and the IRS's Debt Indicator program are being used as a means for selling refund anticipation loans to taxpayers, particularly low-income taxpayers. The Committee believes that requiring regulation of refund anticipation loan facilitators will increase the ability of the IRS to hold such facilitators accountable. The Committee also believes that increasing the information that must be disclosed, both orally and in writing, to the taxpayer in connection with a refund anticipation loan will increase taxpayer awareness of the true costs and consequences of a refund anticipation loan.

EXPLANATION OF PROVISION

The provision requires the annual registration with the Secretary of refund loan facilitators. The annual registration shall include the name, address, and TIN of the refund loan facilitator applicant and the fee schedule of such facilitator for the year of such registration. A refund loan facilitator is any person who originates such electronic submission of income tax returns for another person and, in connection with the electronic submission, solicits, processes, or otherwise facilitates the making of a refund anticipation loan to the individual taxpayer on

whose behalf the tax return is submitted. A refund anticipation loan is any loan of money or any other thing of value to a taxpayer in connection with the taxpayer's anticipated receipt of a Federal tax refund.

The provision requires refund loan facilitators to disclose to taxpayers, both orally and in writing, information with respect to refund anticipation loans at the time taxpayers apply for such loans. Specifically, refund loan facilitators must disclose: (1) that the taxpayer is applying for a loan that is based upon the taxpayer's anticipated income tax refund; (2) the expected time within which the loan will be paid to the taxpayer if such loan is approved; (3) the time within which income tax refunds are typically paid based on different filing options; (4) that there is no guarantee that a refund will be paid in full or received within a specified time period and that the taxpayer is responsible for the repayment of the loan even if the refund is not paid in full or has been delayed; (5) the existence of any arrangements between the refund loan facilitators and a taxpayer's creditor to offset the taxpayer's expected refund against an outstanding liability owed to the creditor and the implication of any such offset; (6) that the taxpayer may file an electronic tax return without applying for a refund anticipation loan and the fee for filing such an electronic return; and (7) the cost of the refund anticipation loan compared to alternative sources of credit.

In addition, the provision requires refund loan facilitators to disclose to taxpayers all fees and interest charges associated with a refund anticipation loan, including fees and charges if the taxpayer's Federal tax refund is delayed or not paid. Refund loan facilitators also must disclose any other information required to be disclosed by the Secretary.

The provision amends the Code to permit the Secretary to impose monetary penalties on refund loan facilitators who fail to meet the registration or disclosure requirements, unless such failure was due to reasonable cause. The penalty for failure to register is not to exceed the gross income derived from all refund anticipation loans during the period the refund loan facilitator was not registered. The penalty for failure to disclose the information required by the provision is not to exceed the gross income derived from all refund anticipation loans with respect to which the refund loan facilitator failed to provide the required disclosure information.

The provision also amends the privacy rules under the Code to permit the Secretary to disclose the name and employer (including the employer's address) of any person with respect to whom a penalty has been imposed for failing to meet the registration or disclosure requirements of the provision.

The provision provides that the Secretary or the Secretary's delegate shall conduct a public awareness campaign to educate the public on the costs associated with refund anticipation loans, including the costs as compared to other forms of credit. The public awareness campaign shall be conducted in a manner that educates the public on making sound financial decisions with respect to refund anticipation loans. Amounts collected from the imposition of penalties on refund loan facilitators shall be directed to the IRS for the administration of the public awareness campaign.

The provision also requires the Secretary to terminate the Debt Indicator program announced in Notice 99-58 and prohibits the Secretary from implementing any similar program.

EFFECTIVE DATE

The provisions relating to the regulation of refund loan facilitators generally are effective one year after the date of enactment. The provision terminating the Debt Indicator program is effective on the date of enactment.

F. TAXPAYER ACCESS TO FINANCIAL INSTITUTIONS

(Sec. 206 of the bill)

PRESENT LAW

A large number of individual taxpayers do not have bank accounts. Because of this, these taxpayers are unable to participate fully in electronic filing, because IRS cannot electronically transmit to them their tax refunds.

REASONS FOR CHANGE

The Committee believes that effectiveness of tax incentives and assistance programs are diminished when individuals do not have an account at a financial institution. For example, the benefits received through the earned income tax credit diminish when taxpayers redirect their tax refund in exchange for a refund anticipation loan. In contrast, if such taxpayers had an account at an insured financial institution, such tax refund could be directly deposited into the taxpayer's account without a reduction for fees paid to a refund anticipation loan facilitator.

Between 25 and 56 million adults do not have an account with an insured financial institution. These individuals rely on alternative financial service providers to cash checks, pay bills, send remittances, and obtain credit. Many of these individuals are low- and moderate-income families. The Committee believes that promoting the establishment of accounts with an insured financial institution will allow the taxpayer to keep more of his or her tax refund and encourage savings.

EXPLANATION OF PROVISION

The provision authorizes the Secretary of the Treasury to award demonstration project grants (totaling up to $10 million or such additional amounts as deemed necessary) to eligible entities to provide tax preparation assistance in connection with establishing an account in a Federally insured depositary institution for individuals that do not have such an account. Entities eligible to receive grants are: tax-exempt organizations described in section 501(c)(3); Federally insured depositary institutions; State or local governmental agencies; community development financial institutions; Indian tribal organizations; Alaska native corporations; native Hawaiian organizations; labor organizations; and a partnership of one or more of the listed eligible entities.

Under the provision, entities receiving grants may not use more than six percent of the total amount of such grant for the administrative costs of carrying out the program funded by such grant.

The provision also requires the Secretary to conduct a study, in consultation with the National Taxpayer Advocate, of the implementation of a program to deliver tax refunds through debit cards or other electronic means. The provision requires the Secretary to submit a report to Congress on the results of such study no later than one year after the date of enactment.

EFFECTIVE DATE

The provision is effective on the date of enactment.

G. EXPANDED USE OF TAX COURT PRACTITIONER FEES

(Sec. 7475 of the Code)

PRESENT LAW 16

The

[Footnote] United States Tax Court (`Tax Court') is authorized to impose a fee of up to $30 per year on practitioners admitted to practice before the Tax Court. 17

[Footnote] These fees are to be used to employ independent counsel to pursue disciplinary matters.

[Footnote 16: Present law refers to the law in effect on the date of Committee action on the bill. It does not reflect the changes made by the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 2006).]

[Footnote 17: Sec. 7475.]

REASONS FOR CHANGE

The Committee understands that many pro se taxpayers are not familiar with Tax Court procedures and applicable legal requirements. The Committee believes it is beneficial for Tax Court fees imposed on practitioners also to be available to provide services to pro se taxpayers.

EXPLANATION OF PROVISION

[The bill does not include the provision as approved by the Committee because an identical or substantially similar provision was enacted into law in the Pension Protection Act of 2006 (Pub. L. No. 109-280, sec. 860) subsequent to Committee action on the bill. The following discussion describes the provision as approved by the Committee.]

The provision provides that Tax Court fees imposed on practitioners also are available to provide services to pro se taxpayers (i.e., a taxpayer representing himself) that will assist such taxpayers in controversies before the Court. For example, fees could be used for programs to educate pro se taxpayers on the procedural requirements for contesting a tax deficiency before the Tax Court.

EFFECTIVE DATE

The provision is effective on the date of enactment.

TITLE III--IMPROVEMENTS IN TAX ADMINISTRATION AND TAXPAYER SAFEGUARDS

A. WAIVER OF USER FEE FOR INSTALLMENT AGREEMENTS USING AUTOMATED WITHDRAWALS

(Sec. 301 of the bill and sec. 6159 of the Code)

PRESENT LAW

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. 18

[Footnote] An installment agreement does not reduce the amount of taxes, interest, or penalties owed. Generally, during the period installment payments are being made, other IRS enforcement actions (such as levies or seizures) with respect to the taxes included in that agreement are held in abeyance.

[Footnote 18: Sec. 6159.]

The IRS charges a user fee if a request for an installment agreement is approved.

REASONS FOR CHANGE

The Committee believes that it improves collection results if taxpayers utilize automated installment payment mechanisms. Automated installment payment mechanisms provide efficiencies in processing and promote timely payment. The Committee believes that waiving this user fee for taxpayers who utilize automated installment payment mechanisms will encourage more taxpayers to utilize them.

EXPLANATION OF PROVISION

The provision waives the user fee for installment agreements in which the parties agree to the use of automated installment payments (such as automated debits from a bank account).

EFFECTIVE DATE

The provision applies to agreements entered into on or after the date which is 180 days after the date of enactment.

B. TERMINATION OF INSTALLMENT AGREEMENTS

(Sec. 302 of the bill and sec. 6159 of the Code)

PRESENT LAW

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. 19

[Footnote] An installment agreement does not reduce the amount of taxes, interest, or penalties owed. Generally, during the period installment payments are being made, other IRS enforcement actions (such as levies or seizures) with respect to the taxes included in that agreement are held in abeyance.

[Footnote 19: Sec. 6159.]

Under present law, the IRS is permitted to terminate an installment agreement only if: (1) the taxpayer fails to pay an installment at the time the payment is due; (2) the taxpayer fails to pay any other tax liability at the time when such liability is due; (3) the taxpayer fails to provide a financial condition update as required by the IRS; (4) the taxpayer provides inadequate or incomplete information when applying for an installment agreement; (5) the taxpayer's financial condition has significantly changed; or (6) the collection of the tax is in jeopardy. 20

[Footnote]

[Footnote 20: Sec. 6159(b)(2), (3), and (4).]

REASONS FOR CHANGE

The Committee believes that taxpayers who are permitted to pay their previous tax obligations through an installment agreement should also be required to remain current with their Federal tax obligations. The Committee believes that giving the IRS the authority to terminate installment agreements in additional circumstances will improve the operation of the installment agreement process and enhance tax compliance.

EXPLANATION OF PROVISION

The provision grants the IRS authority to terminate an installment agreement when a taxpayer fails to timely make a required Federal tax deposit or fails to timely file a tax return. Under the provision, the IRS may terminate an installment agreement even if the taxpayer remains current with payments under the installment agreement.

EFFECTIVE DATE

The provision is effective for failures occurring on or after the date of enactment.

C. INDIVIDUALS HELD HARMLESS ON IMPROPER LEVY ON INDIVIDUAL RETIREMENT PLAN

(Sec. 303 of the bill and sec. 6343 of the Code)

PRESENT LAW

IRAs

There are two general types of individual retirement arrangements (`IRAs'): traditional IRAs, to which deductible or nondeductible contributions may be made depending on an individual's circumstances, and Roth IRAs, contributions to which are not deductible. An individual generally may make contributions to a traditional IRA up to the lesser of a dollar limit (generally $4,000 for 2006) or the individual's compensation. Individuals with adjusted gross income below certain levels may make contributions to a Roth IRA. The maximum annual contributions that can be made to all of an individuals IRAs (both traditional and Roth) cannot exceed the maximum IRA contribution limit.

Amounts held in a traditional IRA are includible in income when withdrawn except to the extent the withdrawal is a return of nondeductible contributions (i.e., basis). Includible amounts withdrawn before attainment of age 59 1/2 are subject to an additional 10-percent early withdrawal tax unless an exception applies.

Amounts held in a Roth IRA that are withdrawn as a qualified distribution are not includible in income or subject to the additional 10-percent tax on early withdrawals. A qualified distribution is a distribution that (1) is made after the five-taxable year period beginning with the first taxable year for which the individual made a contribution to a Roth IRA, and (2) is made after attainment of age 59 1/2 , on account of death or disability, or is made for first-time homebuyer expenses of up to $10,000. Distributions from a Roth IRA that are not qualified distributions are includible in income to the extent attributable to earnings and are subject to the 10-percent early withdrawal tax unless an exception applies.

Amounts distributed from a traditional or Roth IRA are not includible in income if they are rolled over to another IRA of the same type within 60 days of the distribution. In general, only one rollover from a traditional IRA and only one rollover from a Roth IRA may be made during any one-year period. Rollover amounts are not subject to the limits on IRA contributions.

IRS levy on IRA amounts

Distributions from an individual retirement arrangement (`IRA') made on account of an IRS levy are includible in the gross income of the individual under the rules applicable to the IRA subject to the levy. Thus, in the case of a traditional IRA, the amount distributed as a result of a levy is includible in gross income except to the extent such amount represents a return of nondeductible contributions. In the case of a Roth IRA, distributions that are not qualified distributions are includible in income to the extent attributable to earnings. Amounts withdrawn from an IRA due to a levy are not subject to the 10-percent early withdrawal tax, regardless of whether the amount is includible in income.

Present law provides rules under which the IRS returns amounts subject to an incorrect levy. For example, amounts withdrawn from an IRA pursuant to a levy are returned to the individual owning the IRA in the case of a wrongful levy or if the levy was not in accordance with IRS administrative procedures. In the case of a wrongful levy, the IRS is required to pay interest on the amount returned to the individual at the overpayment rate. The IRS is not required to pay interest if the levy was not in accordance with IRS administrative procedures.

Present law does not provide special rules to allow an individual to recontribute to an IRA amounts withdrawn from an IRA pursuant to a levy and later returned to the individual by the IRS (or interest thereon). Thus, if an individual wishes to contribute such returned amounts to an IRA, the contribution is subject to the normally applicable rules for IRA contributions.

REASONS FOR CHANGE

IRA assets provide an important source of retirement income for many Americans. Under present law, if the IRS improperly levies on an IRA, the individual owning the IRA may not be made whole, even if the IRS returns the amount levied, with interest, because the individual may lose the opportunity to have those funds accumulate on a tax-favored basis until retirement. The Committee believes that improper levies should not reduce retirement income security for IRA owners. Thus, the Committee bill provides that IRA funds that are withdrawn pursuant to an improper IRS levy and returned by the IRS may be recontributed to the IRA.

EXPLANATION OF PROVISION

Under the provision, an individual is able to recontribute to an IRA amounts withdrawn pursuant to a levy and returned by the IRS (and any interest thereon) within 60 days of receipt by the individual, without regard to the normally applicable limits on IRA contributions and rollovers. The provision applies to levied amounts returned to the individual because the levy (1) was wrongful or (2) is determined to be premature or otherwise not in accordance with administrative procedures. The contribution has to be made to the same type of IRA (i.e., traditional or Roth) to which a rollover could be made from the IRA from which the levied amounts were withdrawn.

Under the provision, the IRS is required to pay interest on amounts returned to the individual at the overpayment rate in the case of a levy that is determined to be premature or otherwise not in accordance with administrative procedures (as well as in the case of a wrongful levy under present law). Interest paid by the IRS on the amount returned to the individual and contributed to the IRA is treated as part of the distribution made from the IRA on account of the levy and is not includible in gross income. In addition, any tax attributable to an amount distributed from an IRA by reason of a levy is abated if the amount is recontributed to an IRA pursuant to the provision.

EFFECTIVE DATE

The provision is effective for levied amounts (and interest thereon) returned to individuals after December 31, 2005.

D. OFFICE OF CHIEF COUNSEL REVIEW OF OFFERS-IN-COMPROMISE

(Sec. 304 of the bill and sec. 7122 of the Code)

PRESENT LAW

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. Offers to compromise tax liabilities of $50,000 or more can only be accepted if the reasons for the acceptance are documented in detail and supported by a written opinion from the IRS Chief Counsel. 21

[Footnote]

[Footnote 21: Sec. 7122.]

REASONS FOR CHANGE

Many offers-in-compromise cases do not present any significant legal issues, and the required legal review for cases meeting the statutory threshold can delay the acceptance process under current administrative procedures. The Committee believes that eliminating this threshold requiring review will permit the IRS to focus its review resources on the most important cases, regardless of dollar value.

EXPLANATION OF PROVISION

The provision repeals the requirement that offers to compromise liabilities of $50,000 or more must be supported by a written opinion from the IRS Chief Counsel. Under the provision, written opinions must only be provided if the Secretary determines that an opinion is required with respect to a compromise.

EFFECTIVE DATE

The provision applies to offers-in-compromise submitted or pending on or after the date of enactment.

E. ELIMINATION OF RESTRICTION ON OFFSETTING REFUNDS FROM FORMER RESIDENTS

(Sec. 305 of the bill and sec. 6402 of the Code)

PRESENT LAW

Overpayments of Federal tax may be used to pay past-due child support and debts owed to Federal agencies, without the consent of the taxpayer. 22

[Footnote] Overpayments of Federal tax may also be used to pay specified past-due, legally enforceable State income tax debts, provided that the person making the Federal tax overpayment has shown on the Federal tax return for the taxable year of the overpayment an address that is within the State seeking the tax offset.

[Footnote 22: Sec. 6402.]

REASONS FOR CHANGE

The Committee understands that the current refund procedure has proven an effective collection tool for State governments. The Committee believes that eliminating unnecessary restrictions on this program will improve the ability of States to collect past-due, legally enforceable State income tax debts.

EXPLANATION OF PROVISION

The provision eliminates the requirement that a person making a Federal tax overpayment show on the Federal tax return for the taxable year of the overpayment an address that is within the State seeking the tax offset. Accordingly, States may seek to offset refunds from residents of their own State as well as any other State to collect specified past-due, legally enforceable State income tax debts.

EFFECTIVE DATE

The provision applies to refunds payable for taxable years ending after the date of enactment.

F. REVISIONS RELATING TO TERMINATION OF EMPLOYMENT OF IRS EMPLOYEES FOR MISCONDUCT

(Sec. 306 of the bill and new sec. 7804A of the Code)

PRESENT LAW

Section 1203 of the IRS Restructuring and Reform Act of 1998 23

[Footnote] requires the IRS to terminate the employment of an employee for certain proven violations committed by the employee in connection with the performance of official duties. The violations include: (1) willful failure to obtain the required approval signatures on documents authorizing the seizure of a taxpayer's home, personal belongings, or business assets; (2) providing a false statement under oath material to a matter involving a taxpayer; (3) with respect to a taxpayer, taxpayer representative, or other IRS employee, the violation of any right under the U.S. Constitution, or any civil right established under Titles VI or VII of the Civil Rights Act of 1964, Title IX of the Educational Amendments of 1972, the Age Discrimination in Employment Act of 1967, the Age Discrimination Act of 1975, sections 501 or 504 of the Rehabilitation Act of 1973 and Title I of the Americans with Disabilities Act of 1990; (4) falsifying or destroying documents to conceal mistakes made by any employee with respect to a matter involving a taxpayer or a taxpayer representative; (5) assault or battery on a taxpayer or other IRS employee, but only if there is a criminal conviction or a final judgment by a court in a civil case, with respect to the assault or battery; (6) violations of the Internal Revenue Code, Treasury Regulations, or policies of the IRS (including the Internal Revenue Manual) for the purpose of retaliating or harassing a taxpayer or other IRS employee; (7) willful misuse of section 6103 for the purpose of concealing data from a Congressional inquiry; (8) willful failure to file any tax return required under the Code on or before the due date (including extensions) unless failure is due to reasonable cause; (9) willful understatement of Federal tax liability, unless such understatement is due to reasonable cause; and (10) threatening to audit a taxpayer for the purpose of extracting personal gain or benefit.

[Footnote 23: Pub. L. No. 105-206.]

Section 1203 also provides non-delegable authority to the Commissioner to determine that mitigating factors exist, that, in the Commissioner's sole discretion, mitigate against terminating the employee's employment. The Commissioner, in his sole discretion, may establish a procedure to determine whether an individual should be referred for such a determination by the Commissioner.

REASONS FOR CHANGE

The Committee understands that two of the violations under present law have resulted in unintended consequences. First, the Committee does not believe that an IRS employee due a tax refund should be terminated from employment for filing that return late. No other taxpayer faces a comparable penalty for the late filing of a return due a refund. Investigating and resolving issues related to the late filing by IRS employees of refund returns expends resources that could be better spent on other tax administration efforts.

Second, the Committee understands that employees are misusing the `employee versus employee' violation as retaliation against fellow employees. There are other administrative remedies that are more appropriate for resolving employee versus employee claims, such as Title V adverse action cases, as well as actions of the Merit Systems Protection Board.

The Committee believes that removing from the list of violations these two provisions that do not directly involve an IRS employee's interactions with taxpayers will improve the focus of the provision.

EXPLANATION OF PROVISION

The provision removes two items from the list of violations. These two items are: (1) the late filing of tax returns with no tax due and owing; and (2) employee versus employee assault or battery. The provision also adds unauthorized inspection of returns and return information to the list of violations requiring termination.

The provision also places the provisions of section 1203 in the Code.

EFFECTIVE DATE

The provision is effective on the date of enactment.

G. MODIFICATION OF COLLECTION DUE PROCESS PROCEDURES FOR EMPLOYMENT TAX LIABILITIES

(Sec. 307 of the bill and sec. 6330 of the Code)

PRESENT LAW

Levy is the IRS's administrative authority to seize a taxpayer's property to pay the taxpayer's tax liability. The IRS is entitled to seize a taxpayer's property by levy if a Federal tax lien has attached to such property. A Federal tax lien arises automatically when (1) a tax assessment has been made, (2) the taxpayer has been given notice of the assessment stating the amount and demanding payment, and (3) the taxpayer has failed to pay the amount assessed within 10 days after the notice and demand.

In general, the IRS is required to notify taxpayers that they have a right to a fair and impartial collection due process (`CDP') hearing before levy may be made on any property or right to property. 24

[Footnote] Similar rules apply with respect to notices of tax liens, although the right to a hearing arises only on the filing of a notice. 25

[Footnote] The CDP hearing is held by an impartial officer from the IRS Office of Appeals, who is required to issue a determination with respect to the issues raised by the taxpayer at the hearing. The taxpayer is entitled to appeal that determination to a court. Under present law, taxpayers are not entitled to a pre-levy CDP hearing if a levy is issued to collect a Federal tax liability from a State tax refund or if collection of the Federal tax is in jeopardy. However, levies related to State tax refunds or jeopardy determinations are subject to post-levy review through the CDP hearing process.

[Footnote 24: Sec. 6330(a).]

[Footnote 25: Sec. 6320.]

Employment taxes generally consist of the taxes under the Federal Insurance Contributions Act (`FICA'), the tax under the Federal Unemployment Tax Act (`FUTA'), and the requirement that employers withhold income taxes from wages paid to employees (`income tax withholding'). 26

[Footnote] Income tax withholding rates vary depending on the amount of wages paid, the length of the payroll period, and the number of withholding allowances claimed by the employee.

[Footnote 26: Secs. 3101-3128 (FICA), 3301-3311 (FUTA), and 3401-3404 (income tax withholding). FICA taxes consist of an employer share and an employee share, which the employer withholds from employees' wages.]

REASONS FOR CHANGE

Congress enacted the CDP hearing procedures to afford taxpayers adequate notice of collection activity and a meaningful hearing before the IRS deprives them of their property. However, the Committee understands that some taxpayers abuse the CDP procedures by raising frivolous arguments simply for the purpose of delaying or evading collection of tax. The opportunity to delay collection of employment tax liabilities presents a greater risk to the government than delay may present in other contexts because employment tax liabilities continue to increase as ongoing wage payments are made to employees. Thus, the Committee believes it is appropriate to revise the CDP procedures in cases where taxpayers are liable for unpaid employment taxes.

EXPLANATION OF PROVISION

Under the provision, levies issued to collect Federal employment taxes are excepted from the pre-levy CDP hearing requirement. Thus, under the provision, taxpayers have no right to a CDP hearing before a levy is issued to collect employment taxes. However, the taxpayer is provided an opportunity for a hearing within a reasonable period of time after the levy. Collection by levy is permitted to continue during the CDP proceedings.

EFFECTIVE DATE

The provision is effective for levies issued after December 31, 2006.

H. EXTENSION OF TIME LIMIT FOR CONTESTING IRS LEVY

(Sec. 308 of the bill and secs. 6343 and 6532 of the Code)

PRESENT LAW

The IRS is authorized to return property that has been wrongfully levied upon. 27

[Footnote] In general, monetary proceeds from the sale of levied property may be returned within nine months of the date of the levy.

[Footnote 27: Sec. 6343.]

Generally, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in levied property and that such property was wrongfully levied upon may bring a civil action for wrongful levy in a district court of the United States. 28

[Footnote] Generally, an action for wrongful levy must be brought within nine months from the date of levy. 29

[Footnote]

[Footnote 28: Sec. 7426.]

[Footnote 29: Sec. 6532.]

REASONS FOR CHANGE

The Committee understands that in many cases the time period for bringing an action may be insufficient for taxpayers or third parties to discover a wrongful or mistaken levy and seek to remedy it. Accordingly, the Committee believes it is appropriate to provide for a longer period of time within which a person may contest a wrongful IRS levy.

EXPLANATION OF PROVISION

The provision extends from nine months to two years the period for returning the monetary proceeds from the sale of property that has been wrongfully levied upon.

The provision also extends from nine months to two years the period for bringing a civil action for wrongful levy.

EFFECTIVE DATE

The provision is effective with respect to: (1) levies made after the date of enactment; and (2) levies made on or before the date of enactment provided that the nine-month period has not expired as of the date of enactment.

I. AUTHORIZATION FOR IRS TO REQUIRE INCREASED ELECTRONIC FILING OF RETURNS PREPARED BY PAID RETURN PREPARERS

(Sec. 309 of the bill and sec. 6011 and new sec. 6695B of the Code)

PRESENT LAW

The Code authorizes the IRS to issue regulations specifying which returns must be filed electronically. 30

[Footnote] There are several limitations on this authority. First, it can only apply to persons required to file at least 250 returns during the year. 31

[Footnote] Second, the IRS is prohibited from requiring that income tax returns of individuals, estates, and trusts be submitted in any format other than paper (although these returns may be filed electronically by choice).

[Footnote 30: Sec. 6011(e).]

[Footnote 31: Partnerships with more than 100 partners are required to file electronically.]

REASONS FOR CHANGE

The Committee believes that electronic filing promotes effective tax administration. Fewer IRS resources are required to process electronic returns, errors are reduced, and taxpayers receive their refunds more quickly. The Congress set a goal for the IRS to have 80 percent of tax returns filed electronically by 2007. The IRS and the IRS Oversight Board have reported this goal will not be achieved, and the Board has recommended extending the 80 percent deadline to 2011. Therefore, the Committee wants to encourage increased use of electronic filing. IRS statistics demonstrate that many more tax returns are prepared electronically than are filed electronically. The Committee believes that giving the IRS the authority to require electronic filing of individual tax returns will increase the number of returns that are filed electronically.

EXPLANATION OF PROVISION

For returns prepared by paid return preparers, the provision permits the IRS to expand the scope of returns that are required to be filed electronically by removing the present-law restrictions relating to the types of tax returns required to be filed electronically and by lowering the number of returns that trigger the requirement to file electronically to five. The Committee expects the IRS to expand the types of forms and schedules that may be filed electronically to permit full implementation of this provision.

The provision also imposes a monetary penalty on any person required to file a return electronically that fails to do so. The penalty is equal to the greater of $100 times the number of returns not filed electronically as required or $1,000. The penalty does not apply if the failure is due to reasonable cause.

EFFECTIVE DATE

The provision is effective on the date of enactment.

J. REQUIRE IRS TO DEVELOP DIRECT ELECTRONIC FILING

(Sec. 310 of the bill)

PRESENT LAW

The IRS has entered into cooperative relationships with commercial return preparation services to provide free electronic filing services to eligible low-income or elderly taxpayers. This program is called `Free File.' Presently, the IRS does not permit individual taxpayers to file their tax returns electronically without the use of an intermediary.

REASONS FOR CHANGE

The Committee believes that electronic filing promotes effective tax administration and wants to encourage increased use of electronic filing. Fewer IRS resources are required to process electronic returns, errors are reduced, and taxpayers receive their refunds more quickly. The Congress set a goal for the IRS to have 80 percent of tax returns filed electronically by 2007. The IRS and the IRS Oversight Board have reported this goal will not be achieved, and the Board has recommended extending the 80 percent deadline to 2011.

IRS statistics demonstrate that many more tax returns are prepared electronically than are filed electronically. The Committee understands that many taxpayers are unwilling to pay a fee to electronically file their tax returns even if they are electronically prepared. The Committee further understands that many taxpayers are unwilling to use an intermediary to electronically transmit their tax returns to the IRS because of privacy and security concerns. The Committee believes that the availability of free and direct electronic filing to the IRS will address those concerns and result in the increased use of electronic filing.

The Committee notes that taxpayers who file paper returns are not required to pay for the tax forms or to file their returns. The Committee also notes that certain business taxpayers can currently file their returns directly with the IRS without the use of an intermediary. As a matter of equity, the Committee believes all taxpayers who wish to file electronic returns should have the ability to do so without cost.

EXPLANATION OF PROVISION

The provision requires the Secretary to establish the `direct e-file program.' The direct e-file program is a program that provides individual taxpayers with the ability to electronically file their Federal income tax returns through the IRS website without the use of an intermediary or with the use of an intermediary with which the IRS contracts to provide free universal access. The provision requires the Secretary to implement the direct e-file program for filings for taxable years beginning after the date which is not later than three year after the date of enactment. Under the provision, the IRS may develop its own electronic filing products in order to implement the direct e-file program.

In providing for the development and operation of the direct e-file program, the Secretary shall consult with nonprofit organizations representing the interests of taxpayers as well as other organizations and Federal, State, and local agencies as the Secretary considers appropriate. The Secretary shall also conduct a public information and consumer education campaign to encourage taxpayers to use the direct e-file program. Further, if intermediaries are used to develop or operate the direct e-file program, such intermediaries may not advertise, market, or offer to sell any products or services.

Under the provision, the Secretary is required to report to Congress every six months regarding the status of the implementation of the direct e-file program. In addition, the Secretary, in consultation with the National Taxpayer Advocate, is required to report to Congress annually (not later than June 30 of each year) on taxpayer usage of the direct e-file program once it is implemented.

EFFECTIVE DATE

The provision is effective on the date of enactment.

K. MODIFICATIONS AND REPORT REGARDING FREE FILE PROGRAM

(Sec. 311 of the bill)

PRESENT LAW

The IRS has entered into cooperative relationships with commercial return preparation services to provide free electronic filing services to eligible low-income or elderly taxpayers. This program is called `Free File.'

REASONS FOR CHANGE

The Committee is concerned that the Free File program may not be free for many taxpayers because of the advertising, marketing and sale of products or services that are not directly related to the preparation of a tax return and believes prohibiting this practice will increase the number of tax returns that are filed electronically.

EXPLANATION OF PROVISION

The provision instructs the IRS to ensure that Free File companies do not advertise, market, or offer to sell products or services that are not directly related to the preparation of a tax return to any taxpayer utilizing Free File. The provision also requires the IRS to establish procedures to encourage companies participating in the Free File Alliance to provide accessible services for the blind.

No later than 270 days after the date of enactment, the Secretary shall report to Congress on the implementation of modifications to the Free File Alliance program required by this provision. As part of that report, the Secretary also shall report on the feasibility of ensuring that members of the Free File program that have contracted separately with a State be required to provide free Federal and State preparation and electronic filing directly through the IRS Free File website. Further, the Secretary shall report on the most optimal way of alerting taxpayers on the IRS Free File website of those companies that provide free services for preparing and filing State tax returns.

EFFECTIVE DATE

The provision is effective on the date of enactment.

L. STUDY ON CLARIFYING RECORDKEEPING RESPONSIBILITIES

(Sec. 312 of the bill)

PRESENT LAW

Every person liable for Federal tax must keep records, provide statements, make returns, and comply with rules and regulations, as prescribed by the Secretary. 32

[Footnote] In general, taxpayers are required to keep records for as long as the statute of limitations may be open.

[Footnote 32: Sec. 6001.]

REASONS FOR CHANGE

The Committee understands that the present-law recordkeeping requirements do not reflect advances in technology. Specifically, the storage requirements may require taxpayers to maintain outdated and cumbersome technologies. The Committee understands that there is a balance, however, between minimizing taxpayer burden and ensuring that taxpayers maintain appropriate recordkeeping for purposes of IRS enforcement. The Committee believes that requiring the Secretary of the Treasury to conduct a study of the recordkeeping requirements will provide the Committee with valuable information as to whether it is appropriate to modify these requirements.

EXPLANATION OF PROVISION

The provision requires the Secretary of the Treasury to study:

The scope of the records required to be maintained by taxpayers;

The utility of requiring taxpayers to maintain all records indefinitely;

The effects of the necessity to upgrade technological storage for outdated records;

The number of negotiated records retention agreements requested by taxpayers and the number entered into by the IRS; and

Proposals regarding taxpayer recordkeeping.

The Secretary is required to submit a report of the study, including recommendations, to the Congress not later than one year after the date of enactment.

EFFECTIVE DATE

The provision is effective on the date of enactment.

M. MODIFICATION OF TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION REPORTING REQUIREMENTS

(Sec. 313 of the bill and sec. 7803 of the Code)

PRESENT LAW

The Treasury Inspector General for Tax Administration (`TIGTA') conducts audits and reviews of IRS operations. TIGTA also is statutorily required to report to the Congress (both annually and semi-annually) on a number of specific issues.

REASONS FOR CHANGE

The Committee understands that the present-law reporting requirements utilize significant resources and that the IRS does not necessarily maintain the data required for these reports. The Committee also understands that the current frequency of reporting gives the IRS a limited and, perhaps, insufficient amount of time to implement corrective actions before another review. The Committee believes that streamlining these TIGTA reporting requirements will yield a more meaningful picture of the IRS and its progress in meeting Congressional expectations.

EXPLANATION OF PROVISION

The provision repeals the statutory requirement that TIGTA issue the following reports:

IRS compliance with the restrictions 33

[Footnote] on directly contacting taxpayers who have indicated that they prefer that their representatives be contacted.

[Footnote 33: Sec. 7521.]

IRS compliance with the requirements relating to disclosure of collection information with respect to joint returns.

IRS compliance with the fair debt collection provisions of the Code.

In addition, the provision requires that all reports currently required to be made semiannually and annually shall be provided biennially (once every two years).

EFFECTIVE DATE

The provision is effective on the date of enactment.

N. STREAMLINE REPORTING PROCESS FOR NATIONAL TAXPAYER ADVOCATE

(Sec. 314 of the bill and sec. 7803 of the Code)

PRESENT LAW

The Code requires the National Taxpayer Advocate to produce two reports for the Congress each year. The first, due by June 30, reports on the objectives for the office; the second, due by December 31, reports on the activities of the office and contains detailed data and recommendations in specified areas.

REASONS FOR CHANGE

The Committee believes that combining the reports required under present law will reduce burdens on the National Taxpayer Advocate. The Committee also believes that authorizing the National Taxpayer Advocate to report to the Congress at any time on any significant issues affecting taxpayer rights will improve the awareness of the Congress of these issues.

EXPLANATION OF PROVISION

The provision combines the two reports the National Taxpayer Advocate must produce under present law into one, due by December 31. The provision also provides that the National Taxpayer Advocate, in his or her sole discretion, may report to the Congress at any time on any significant issues affecting taxpayer rights.

EFFECTIVE DATE

The provision combining the reports is effective for reports in 2007 and thereafter. The provision authorizing reports on significant issues affecting taxpayer rights is effective on the date of enactment.

O. WHISTLEBLOWER REFORMS

(Sec. 315 of the bill and sec. 7623 of the Code)

PRESENT LAW

The Code authorizes the IRS to pay such sums as deemed necessary for: `(1) detecting underpayments of tax; and (2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same.' 34

[Footnote] Amounts are paid based on a percentage of tax, fines, and penalties (but not interest) actually collected based on the information provided. For specific information that caused the investigation and resulted in recovery, the IRS administratively has set the reward in an amount not to exceed 15 percent of the amounts recovered. For information, although not specific, that nonetheless caused the investigation and was of value in the determination of tax liabilities, the reward is not to exceed 10 percent of the amount recovered. For information that caused the investigation, but had no direct relationship to the determination of tax liabilities, the reward is not to exceed one percent of the amount recovered. The reward ceiling is $10 million (for payments made after November 7, 2002), and the reward floor is $100. No reward will be paid if the recovery was so small as to call for payment of less than $100 under the above formulas. Both the ceiling and percentages can be increased with a special agreement. The Code permits the IRS to disclose return information pursuant to a contract for tax administration services. 35

[Footnote]

[Footnote 34: Sec. 7623.]

[Footnote 35: Sec. 6103(n).]

REASONS FOR CHANGE

A recent report by the Treasury Inspector General for Tax Administration concluded that the IRS's informant reward program has been an effective method of identifying and collecting unpaid taxes. 36

[Footnote] The report also made several recommendations for enhancing the effectiveness of the program, including centralizing management of the reward program and reducing the processing time for claims. The Committee also believes that an enhanced reward program would be more attractive to future informants wishing to report violations of the tax laws.

[Footnote 36: Treasury Inspector General for Tax Administration, The Informants' Rewards Program Needs More Centralized Management Oversight, 2006-30-092 (June 2006).]

EXPLANATION OF PROVISION

The provision reforms the reward program for individuals who provide information regarding violations of the tax laws to the Secretary. Generally, the provision establishes a reward floor of 15 percent of the collected proceeds (including penalties, interest, additions to tax and additional amounts) if the IRS moves forward with an administrative or judicial action based on information brought to the IRS's attention by an individual. The provision caps the available reward at 30 percent of the collected proceeds. The provision permits awards of lesser amounts (but no more than 10 percent) if the action was based principally on allegations (other than information provided by the individual) resulting from a judicial or administrative hearing, government report, hearing, audit, investigation, or from the news media. Under the provision, the reward amounts apply to actions in which the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $20,000, and, if the taxpayer is an individual, the individual's gross income exceeds $200,000 for any taxable year.

The provision creates a Whistleblower Office within the IRS to administer the reward program. To the extent possible, it is expected that the office will address the recommendations of the Treasury Inspector General for Tax Administration regarding the informants' reward program, including the recommendation to reduce the processing time for claims. 37

[Footnote] The Whistleblower Office may seek assistance from the individual providing information or from his or her legal representative, and may reimburse the costs incurred by any legal representative out of the amount of the reward. To the extent the disclosure of returns or return information is required to render such assistance, the disclosure must be pursuant to an IRS tax administration contract. It is expected that such disclosures will be infrequent and will be made only when the assigned task cannot be properly or timely completed without the return information to be disclosed.

[Footnote 37: Treasury Inspector General for Tax Administration, The Informants' Rewards Program Needs More Centralized Management Oversight, 2006-30-092 (June 2006).]

The provision also provides an above-the-line deduction for attorneys' fees and costs paid by, or on behalf of, the individual in connection with any award for providing information regarding violations of the tax laws. The amount that may be deducted above-the-line may not exceed the amount includible in the taxpayer's gross income for the taxable year on account of such award (whether by suit or agreement and whether as lump sum or periodic payments).

The provision permits an individual to appeal the amount or a denial of an award determination to the United States Tax Court (the `Tax Court') within 30 days of such determination. Under the provision, Tax Court review of an award determination may be assigned to a special trial judge and, if assigned, decided by the special trial judge.

In addition, the provision requires the Secretary to conduct a study and report to Congress on the effectiveness of the whistleblower reward program and any legislative or administrative recommendations regarding the administration of the program.

EFFECTIVE DATE

The provision is effective for information provided on or after the date of enactment.

P. AUTHORIZATION FOR FINANCIAL MANAGEMENT SERVICE RETENTION OF TRANSACTION FEES FROM LEVIED AMOUNTS

(Sec. 316 of the bill)

PRESENT LAW

To facilitate the collection of tax, the IRS can generally levy upon all property and rights to property of a taxpayer. 38

[Footnote] With respect to specified types of recurring payments, the IRS may impose a continuous levy of up to 15 percent of each payment, which generally continues in effect until the liability is paid. 39

[Footnote] Continuous levies imposed by the IRS on specified Federal payments are administered by the Financial Management Service (`FMS') of the Department of the Treasury. FMS is generally responsible for making most non-defense related Federal payments. FMS is required to charge the IRS for the costs of developing and operating this continuous levy program. The IRS pays these FMS charges out of its appropriations.

[Footnote 38: Sec. 6331.]

[Footnote 39: Sec. 6331(h).]

REASONS FOR CHANGE

The Committee believes that altering the bookkeeping structure of these costs will provide for cost savings to the government.

EXPLANATION OF PROVISION

The provision allows FMS to retain a portion of funds levied under continuous levies as payment of FMS charges for the continuous levy program. The amount credited to the taxpayer's account is not, however, reduced by the amount retained by FMS.

EFFECTIVE DATE

The provision is effective on the date of enactment.

Q. CLARIFICATION OF DEFINITION OF CHURCH TAX INQUIRY

(Sec. 317 of the bill and sec. 7611 of the Code)

PRESENT LAW

Under present law, the IRS may begin a church tax inquiry only if an appropriate high-level Treasury official reasonably believes, on the basis of the facts and circumstances recorded in writing, that an organization (1) may not qualify for tax exemption as a church, (2) may be carrying on an unrelated trade or business, or (3) otherwise may be engaged in taxable activities. 40

[Footnote] A church tax inquiry is defined as any inquiry to a church (other than an examination) that serves as a basis for determining whether the organization qualified for tax exemption as a church or whether it is carrying on an unrelated trade or business or otherwise is engaged in taxable activities. An inquiry is considered to commence when the IRS requests information or materials from a church of a type contained in church records, other than routine requests for information or inquiries regarding matters that do not primarily concern the tax status or liability of the church itself.

[Footnote 40: Sec. 7611.]

REASONS FOR CHANGE

The Committee believes that the present-law church tax inquiry procedures provide important safeguards against the IRS engaging in unnecessary and intrusive examinations of churches. However, the church tax inquiry procedures also have the effect of hampering IRS efforts to educate churches with respect to actions that are not permissible under section 501(c)(3). The Committee believes that a clarification of the scope of the church tax inquiry procedures to make it clear that the IRS may undertake educational outreach efforts with respect to specific churches (e.g., initiating meetings with representatives of a particular church to discuss the rules that apply to such church) will improve compliance with the law by churches.

EXPLANATION OF PROVISION

The provision clarifies that present-law church tax inquiry procedures do not apply to contacts made by the IRS for the purpose of educating churches with respect to the federal income tax law governing tax-exempt organizations. For example, the IRS does not violate the church tax inquiry procedures when written materials are provided to a church or churches for the purpose of educating such church or churches with respect to the types of activities that are not permissible under section 501(c)(3).

EFFECTIVE DATE

The provision is effective on the date of enactment.

R. TREATMENT OF FUNDS FROM INDIAN TRIBAL GOVERNMENTS AS PUBLIC SUPPORT FOR PURPOSES OF THE PUBLIC CHARITY-PRIVATE FOUNDATION CLASSIFICATION

(Sec. 318 of the bill and sec. 7871 of the Code)

PRESENT LAW

Organizations described in section 501(c)(3) are classified either as public charities or private foundations. The public charity classification generally is based on an organization's sources of support. Support from governmental entities is considered as public support in determining whether an organization is publicly or privately supported and thus is classified as a public charity or a private foundation. Support from an Indian Tribal Government is not treated as support from a governmental entity.

REASONS FOR CHANGE

The Code treats Indian Tribal Governments as States for many purposes, including for purposes of the charitable deduction rules. The Committee believes that it is appropriate also to treat the funding of charitable activities by Indian Tribal Governments the same as funding of charitable activities by States for purposes of determining whether a section 501(c)(3) organization is publicly or privately supported.

EXPLANATION OF PROVISION

The provision provides that support from an Indian Tribal Government is treated as support from a State for purposes of determining whether an organization described in section 501(c)(3) is classified as a public charity or a private foundation.

EFFECTIVE DATE

The provision applies to support received before, on, or after the date of enactment and to the determination of the status of any organization with respect to any taxable year beginning after the date of enactment.

S. TAX COURT REVIEW OF REQUESTS FOR EQUITABLE RELIEF FROM JOINT AND SEVERAL LIABILITY

(Sec. 319 of the bill and sec. 6015 of the Code)

PRESENT LAW

In general

Generally, a husband and wife are liable jointly and individually for the entire tax on a joint return. Under certain circumstances, a spouse may be entitled to relief from joint and several liability, `innocent spouse relief.' 41

[Footnote] Generally, the spouse must elect the form of innocent spouse relief no later than two years after the date the IRS began collection activities against the electing spouse.

[Footnote 41: Sec. 6015.]

There are three types of relief, general innocent spouse relief, relief for spouses no longer married or legally separated (separation of liabilities), and equitable relief.

For general relief, the electing spouse must

Have filed a joint return that has an understatement of tax due to the erroneous items of the other spouse,

Establish that at the time of signing the return the electing spouse did not know or have reason to know there was an understatement of tax, and

Taking into account all the facts and circumstances, show that it is inequitable to hold the electing spouse liable for the deficiency in tax. 42

[Footnote]

[Footnote 42: Sec. 6015(b).]

For separation of liabilities relief, the electing spouse

Must have filed a joint return and,

Either (1) is no longer married to or is legally separated from the spouse with whom the return was filed or (2) must not have been a member of the same household with the spouse for a 12-month period. 43

[Footnote]

[Footnote 43: Sec. 6015(c).]

If an individual fails to qualify under the preceding two options, such individual may still be able to obtain equitable relief. 44

[Footnote] To obtain equitable relief, the IRS must determine that taking into account all of the facts and circumstances, it is inequitable to hold the electing spouse liable for any unpaid tax or any deficiency in tax (or any portion of either).

[Footnote 44: Sec. 6015(f).]

In the case of an individual against whom a deficiency has been asserted and elects to have the general relief provisions or the separation of liabilities relief provisions apply, such individual may petition the Tax Court to review the IRS's determinations.

Some courts have noted the absence of an express statement of Tax Court jurisdiction over equitable relief claims in the statute. 45

[Footnote] Other courts have rejected Tax court jurisdiction over such claims on the basis that a deficiency has not been asserted against the claimant. 46

[Footnote] Recently, the United States Tax Court revisited its prior ruling that it had jurisdiction over nondeficiency stand-alone petitions for equitable relief. In light of adverse rulings in the Eighth and Ninth Circuits this year, the Tax Court in Billings vs. Commissioner, recently held that it does not have jurisdiction over such claims in the absence of a deficiency. 47

[Footnote]

[Footnote 45: The Second Circuit has noted that the question of the Tax Court's jurisdiction over an appeal of an adverse determination under section 6015(f) is `not free from doubt.' Maier v. Comm'r, 360 F.3d 361, 363 n. 1 (2d cir. 2004). The court pointed out that `only petitions to review IRS determinations under subsections (b) and (c) are expressly enumerated in section 6015(e) and (h).' Id.; see also French v. United States (In re French), 255 B.R. 1, 2 (Bankr.N.D.Ohio 2000) (dismissing for lack of jurisdiction the debtor's claim that she was entitled to relief under Sec. 6015(f) because `Congress chose to exclude from judicial review the issue of whether a taxpayer is entitled to equitable relief under 6015(f)'); Mira v. United States (In re Mira), 245 B.R. 788, 791-92 (Bankr.M.D.Pa.1999) (reasoning that sec. 6015(f) grants the Secretary of the Treasury discretion to grant equitable relief and, as a decision `committed to agency discretion by law,' 5 U.S.C. sec. 701, it was not reviewable by the court).]

[Footnote 46: Comm'r v. Ewing, 439 F.3d 1009, 1012-14 (9th Cir. 2006) rev'g Ewing v. Comm'r. 118 T.C. 494 (2002); and Bartman v. Comm'r, 446 F.3d 785, 787 (8th Cir. 2006).]

[Footnote 47: Billings v. Commissioner, 127 T.C. No. 2 (July 25, 2006) (holding that the Court lacks jurisdiction to review the Commissioner's decisions to deny relief under section 6015(f) when there is no deficiency but tax went unpaid). In Billings, the IRS had accepted the petitioner's amended return as filed and asserted no deficiency against him. His request for equitable relief from the unpaid tax arising from his wife's embezzlement was denied by the IRS.]

Restrictions on collection and suspension of the running of the period of limitations

Unless the IRS determines that collection will be jeopardized by delay, no levy or proceeding in court is to be made, begun or prosecuted against a spouse seeking general innocent spouse relief or separation of liabilities relief for the collection of any assessment to which the election relates until (1) the expiration of the 90-day period following the date of mailing of the Service's final determination letter, or (2) if a petition is filed with the Tax Court, until the decision of the Tax Court becomes final. 48

[Footnote]

[Footnote 48: Sec. 6015(e)(1)(B) and Treas. Reg. sec. 1.6015-1(c)(1).]

For the spouse seeking general or separation of liabilities relief, the running of the period of limitations on collections of the assessment to which the election relates is suspended for the period during which the IRS is prohibited from collecting by levy or proceeding in court and for 60 days thereafter. However, the requesting spouse may waive the restrictions on collection and the suspension of the period of limitations against collection will terminate 60 days after the date the waiver is filed with the IRS. 49

[Footnote]

[Footnote 49: Sec. 6015(e)(2) and (5); and Treas. Reg. sec. 1.6015-1(c)(3).]

REASONS FOR CHANGE

The Committee finds that it is appropriate to confer Tax Court jurisdiction over equitable relief claims and to also suspend collection activity and the running of the period of limitations while such claims are pending, as is the case for other innocent spouse claims.

EXPLANATION OF PROVISION

The provision clarifies that the Tax Court has jurisdiction over equitable relief claims, even if the individual does not elect to have the general relief or separation of liabilities relief provisions apply and no deficiency is asserted. The provision also extends the present law suspension of collection activity and tolling of the period of limitations provisions to equitable relief claims. With respect to any case the dismissal of which results from or is based on the jurisdictional ruling in Billings v. Commissioner, and is final on or before the date of enactment, such case may be refiled in the United States Tax Court not later than the date which is six months after the date of enactment. The $60 petition filing fee for these cases is waived by the provision. 50

[Footnote]

[Footnote 50: Rule 20(b) of the Tax Court Rules of Practice and Procedure.]

EFFECTIVE DATE

The provision applies to requests for equitable relief with respect to liability for taxes arising or remaining unpaid on or after the date of enactment.

T. AUTHORIZATION OF APPROPRIATIONS FOR TAX LAW ENFORCEMENT RELATING TO HUMAN SEX TRAFFICKING

(Sec. 320 of the bill)

PRESENT LAW

IRS undercover operations are statutorily exempt from the generally applicable restrictions controlling the use of Government funds (which generally provide that all receipts must be deposited in the general fund of the Treasury and all expenses be paid out of appropriated funds). In general, the Code permits the IRS to use proceeds from an undercover operation to pay additional expenses incurred in the undercover operation, through 2006. 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.

There is no explicit authorization of appropriations to the IRS to be used to combat tax crimes where the underlying income is derived from sex trafficking crimes.

REASONS FOR CHANGE

The Committee believes that the IRS should pursue violations of the Code by those persons who are under investigation by Federal, State, or local law enforcement agencies for knowingly recruiting, enticing, harboring, transporting, or providing by any means a person knowing that force, threat, or coercion will be used to cause the person to engage in a commercial sex act, or that the person is a child and will be caused to engage in a commercial sex act. The Committee believes it is appropriate to provide the IRS with additional resources to combat Code violations related to these crimes.

EXPLANATION OF PROVISION

The provision authorizes the IRS to use $2 million toward the establishment of an office in IRS Criminal Investigation (`CI') to investigate tax law violations by human sex traffickers. For purposes of this provision, a human sex trafficker is any person who is under investigation by Federal, State, or local law enforcement agencies for knowingly recruiting, enticing, harboring, transporting, or providing by any means a person knowing that force, threat, or coercion will be used to cause the person to engage in a commercial sex act, or that the person has not attained the age of 18 and will be caused to engage in a commercial sex act (within the meaning of 18 U.S.C. sec. 1591(c)(1)). The Committee does not intend for the office to use its limited resources to investigate persons who are victims of human sex traffickers. The Committee expects the office to work closely with other divisions within the IRS and understands that non-CI personnel may be assigned to the office. The Committee also intends that the office will coordinate closely with the existing task forces in the Department of Justice that are focused on sex trafficking offenders, and also may coordinate with State and local agencies that are conducting investigations of human sex traffickers. Nothing in this provision shall be construed to limit the IRS's broad investigatory authority.

For fiscal years 2007 and 2008, the provision also authorizes and appropriates to the office for additional enforcement activities an amount equal to the income tax, interest, and civil and criminal penalties collected by the IRS as a result of the actions of the office. It is the Committee's intent that the IRS will focus on the employer/employee relationship in these cases and the failure of the human sex trafficker to file information reporting returns required under the existing rules applicable to employers and other payors.

The provision requires the Secretary to report to Congress within one year of the date of enactment on enforcement activities related to tax violations of human sex traffickers.

The provision also modifies the whistleblower reward provisions so that the victims of human sex traffickers will be eligible to participate in the program.

EFFECTIVE DATE

The provision is effective on the date of enactment.

U. REGULATION OF PAYROLL TAX DEPOSIT AGENTS

(Sec. 321 of the bill and new sec. 7531 of the Code)

PRESENT LAW

Taxpayers may choose to fulfill their payroll tax obligations using payroll tax deposit agents. In general, these payroll tax deposit agents are not required to register or post bonds with the IRS. Persons required to collect and pay over taxes to the IRS who fail to do so are subject to penalty.

REASONS FOR CHANGE

The Committee believes that payroll tax deposit agents should be subject to more regulation and oversight. The services provided by these agents are an important part of the employment tax system but additional regulation is necessary to safeguard clients of these agents and ensure that these agents satisfy the payroll tax deposit and other requirements which they have contracted with their clients to do. The Committee believes that this new regulatory regime provides additional safeguards for employers who use payroll tax deposit agents without imposing undue burdens on payroll tax deposit agents.

EXPLANATION OF PROVISION

First, the provision requires the annual registration of payroll tax deposit agents with the IRS. The annual registration fee shall not exceed $100. A payroll tax deposit agent is defined as any person which provides payroll processing or tax filing and deposit services to one or more employers (other than an employer working on its own behalf) if such person has the contractual authority to access such employer's funds for the purpose of making employment tax deposits. A payroll tax deposit agent does not include a person who only transfers such funds (regardless of whether they have the right to determine the amount of such transfer) and does not have the authority to impound such funds for such purpose.

Second, the provision also provides that payroll tax deposit agents must elect either to: (1) post a reasonable bond or (2) submit to an annual audit. If the payroll tax deposit agent elects to post a bond, then the amount of such bond shall not be less than $50,000 nor more than $500,000 and shall be determined with respect to each payroll tax deposit agent under regulations. Any bond or security shall be in such form and with such surety or sureties as may be prescribed by regulations. If the payroll tax deposit agent elects to submit to an annual audit, then the audit shall be performed by an independent third party and shall be based on such audit principles as the Secretary deems necessary. In all cases the audits shall confirm that: (1) the escrow account in which the payroll tax deposit agent holds the employers' taxes is balanced annually to the total of the quarterly reconciliation statements; (2) the escrow account funds are not commingled with the agent's operating funds; (3) no escrow account funds are used to pay the agent's operating expenses; and (4) there is receipt evidence that the agent paid the required taxes for the employers to the proper government employment tax authorities.

Third, the provision directs the Secretary to require payroll tax deposit agents to disclose to each potential and existing client: (1) the client's continuing liability for payment of all Federal and State employment taxes notwithstanding any contractual relationship with a payroll tax deposit agent; (2) the mechanisms available to the client to verify the amount and date of payment of all tax deposits made by the payroll tax deposit agent on behalf of such client; and (3) such information that the Secretary determines necessary or appropriate to assist employers in the selection and use of payroll tax deposit agents. These disclosures are required prior to or at the time of contracting for payroll services.

Fourth, the provision requires payroll tax deposit agents to ensure the direct notification of the employer(s) by any Federal or State employment tax authority regarding the nonpayment of such employment taxes.

Fifth, the provision provides penalties (not to exceed $10,000) for unregistered agents acting as payroll tax deposit agents with respect to Federal tax deposits for each 90 days of noncompliance.

Sixth, the provision provides that only persons registered as payroll tax deposit agents may: (1) make Federal tax deposits on behalf of an employer; (2) sign and file Federal employment tax returns of behalf of a taxpayer; and (3) have access to confidential tax information relating to such employer.

Finally, the provision clarifies that the penalty for failure to collect and pay over tax applies to payroll agents and is not dischargeable in bankruptcy.

The Secretary is directed to issue such guidance as necessary to carry out these provisions.

EFFECTIVE DATE

Generally the provisions are effective on January 1, 2007. The provision relating to penalties for failure to collect and pay over tax is effective for failures occurring after December 31, 2006.

V. EXTENSION OF THE STATUTE OF LIMITATIONS TO FILE CLAIMS FOR REFUNDS RELATING TO DISABILITY DETERMINATIONS BY THE DEPARTMENT OF VETERANS AFFAIRS

(Sec. 322 of the bill and sec. 6511 of the Code)

PRESENT LAW

In general, a taxpayer must file a claim for credit or refund within three years of the filing of the tax return or within two years of the payment of the tax, whichever expires later (if no tax return is filed, the two-year limit applies). A claim for credit or refund that is not filed within these time periods is rejected as untimely.

Generally, military retirement benefits based on length of service are included in income, whereas veterans' benefits based on a service-connected disability are excluded from income. If an individual receives includible retirement benefits and is later retroactively determined to be eligible for service-connected disability benefits, the portion of the retirement benefits attributable to the disability is retroactively excluded from income. In that case, the individual may claim a refund of the tax paid on the retroactively excluded benefits, subject to the statute of limitations on filing a refund claim.

REASONS FOR CHANGE

The Committee believes that disabled veterans should not erroneously be subjected to income tax on their service-connected disability benefits because of delays by the Department of Veterans Affairs in making these disability determinations. The Committee believes that the applicable statute of limitations should be extended with regard to these benefits for such veterans. However, the Committee is mindful of the benefits to both taxpayers and the IRS in having a statute of limitations. The Committee believes that the provision strikes the correct balance between reducing the improper taxation of these service-connected disability benefits and an administrable tax system.

EXPLANATION OF PROVISION

The provision extends the time period for filing claims for credits or refunds for retired military personnel who receive disability determinations from the Department of Veterans Affairs (e.g. determinations after the tax return is filed). Specifically, the provision extends the period for filing such a refund claim until one year after the date of the disability determination (if later than the time periods allowed under present law). The provision applies to any taxable year which begins 5 years before the date of the determination or thereafter. In the case of a determination after December 31, 2000, and on or before the date of enactment, the period for filing a claim for credit or refund is extended until one year after the date of enactment (if later than the time periods allowed under present law).

EFFECTIVE DATE

The provision is effective for claims for credits or refunds filed after the date of enactment.

W. NOTIFICATION REQUIREMENT FOR EXEMPT ENTITIES NOT CURRENTLY REQUIRED TO FILE AN ANNUAL INFORMATION RETURN

(Secs. 6033, 6652, and 7428 of the Code)

PRESENT LAW 51

Under

[Footnote] present law, the requirement that an exempt organization file an annual information return does not apply to several categories of exempt organizations. Organizations excepted from the filing requirement include organizations (other than private foundations), the gross receipts of which in each taxable year normally are not more than $25,000. 52

[Footnote] Also exempt from the requirement are churches, their integrated auxiliaries, and conventions or associations of churches; the exclusively religious activities of any religious order; section 501(c)(1) instrumentalities of the United States; section 501(c)(21) trusts; an interchurch organization of local units of a church; certain mission societies; certain church-affiliated elementary and high schools; certain State institutions whose income is excluded from gross income under section 115; certain governmental units and affiliates of governmental units; and other organizations that the IRS has relieved from the filing requirement pursuant to its statutory discretionary authority.

[Footnote 51: Present law refers to the law in effect on the date of Committee action on the bill. It does not reflect the changes made by the Pension Protection Act of 2006, Pub. L. No. 109-280 (August 17, 2006).]

[Footnote 52: Sec. 6033(a)(2); Treas. Reg. sec. 1.6033-2(a)(2)(i); Treas. Reg. sec. 1.6033-2(g)(1). Sec. 6033(a)(2)(A)(ii) provides a $5,000 annual gross receipts exception from the annual reporting requirements for certain exempt organizations. In Announcement 82-88, 1982-25 I.R.B. 23, the IRS exercised its discretionary authority under section 6033 to increase the gross receipts exception to $25,000, and enlarge the category of exempt organizations that are not required to file Form 990.]

REASONS FOR CHANGE

The Committee believes that it is appropriate under present law that certain small exempt organizations not be required to file an annual information return. However, as a result, the Secretary of the Treasury is not able to maintain a record of the continuing existence of such organizations and the public is unable easily to obtain basic information about the organization, such as the organization's current address. The absence of a record is especially problematic for charitable exempt organizations. Although the Secretary publishes the names of organizations to which charitable contributions may be made, if the organization is not required to file with the Secretary and alert the Secretary of its termination, the Secretary does not know when to omit the organization from its list of names. Accordingly, the Committee believes that exempt organizations that do not have to file an annual information return by virtue of the amount of their gross receipts should file with the Secretary a simple, short annual notice. The Committee does not intend that the annual filing be burdensome and does not believe that a monetary penalty is appropriate for a failure to file the notice. However, if an organization is unable to file a notice with the Secretary for three consecutive years, the Committee believes that revocation of the organization's exempt status is an appropriate sanction under the circumstances. In addition, to ensure equitable treatment among exempt organizations, the sanction of loss of exempt status is extended to consecutive failures to file a required information return.

EXPLANATION OF PROVISION

[The bill does not include the provision as approved by the Committee because an identical or substantially similar provision was enacted into law in the Pension Protection Act of 2006 (Pub. L. No. 109-280, sec. 1223) subsequent to Committee action on the bill. The following discussion describes the provision as approved by the Committee.]

The provision requires organizations that are excused from filing an information return by reason of normally having gross receipts below a certain specified amount (generally, under $25,000) to furnish to the Secretary annually, in electronic form, the legal name of the organization, any name under which the organization operates or does business, the organization's mailing address and Internet web site address (if any), the organization's taxpayer identification number, the name and address of a principal officer, and evidence of the organization's continuing basis for its exemption from the generally applicable information return filing requirements. Upon such organization's termination of existence, the organization is required to furnish notice of such termination.

The provision provides that if an organization fails to provide the required notice for three consecutive years, the organization's tax-exempt status is revoked. In addition, if an organization that is required to file an annual information return under section 6033(a) (Form 990) fails to file such an information return for three consecutive years, the organization's tax-exempt status is revoked. If an organization fails to meet its filing obligation to the IRS for three consecutive years in cases where the organization is subject to the information return filing requirement in one or more years during a three-year period and also is subject to the notice requirement for one or more years during the same three-year period, the organization's tax-exempt status is revoked.

A revocation under the provision is effective from the date that the Secretary determines was the last day the organization could have timely filed the third required information return or notice. To again be recognized as tax exempt, the organization must apply to the Secretary for recognition of tax exemption, irrespective of whether the organization was required to make an application for recognition of tax exemption in order to gain tax exemption originally.

If, upon application for tax-exempt status after a revocation under the provision, the organ