<DOC>
[DOCID: f:52240.wais]


                        [JOINT COMMITTEE PRINT]

 
                         GENERAL EXPLANATION OF
                    TAX LEGISLATION ENACTED IN 1998

                               __________

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                           NOVEMBER 24, 1998


                                 _____


                      U.S. GOVERNMENT PRINTING OFFICE
 52-240                      WASHINGTON : 1998                 JCS-6-98
_______________________________________________________________________
           For sale by the U.S. Government Printing Office, 
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402



                      JOINT COMMITTEE ON TAXATION

                      105th Congress, 2nd Session
                                 ------                                
               SENATE                               HOUSE
WILLIAM V. ROTH, Jr., Delaware,      BILL ARCHER, Texas,
  Chairman                             Vice Chairman
JOHN H. CHAFEE, Rhode Island         PHILIP M. CRANE, Illinois
CHARLES GRASSLEY, Iowa               WILLIAM M. THOMAS, California
DANIEL PATRICK MOYNIHAN, New York    CHARLES B. RANGEL, New York
MAX BAUCUS, Montana                  FORTNEY PETE STARK, California
                     Lindy L. Paull, Chief of Staff
              Mary M. Schmitt, Deputy Chief of Staff (Law)
      Bernard A. Schmitt, Deputy Chief of Staff (Revenue Analysis)


                            SUMMARY CONTENTS

                              ----------                              
                                                                   Page
Introduction.....................................................     1

Part One: Surface Transportation Revenue Act of 1998 (Title IX of 
  H.R. 2400).....................................................     2

Part Two: Internal Revenue Service Restructuring and Reform Act 
  of 1998 (H.R. 2676)............................................    16

Part Three: Tax and Trade Relief Extension Act of 1998 (Division 
  J of H.R. 4328, The Omnibus Consolidated and Emergency 
  Supplemental Appropriations Act, 1999).........................   235

Part Four: Ricky Ray Hemophilia Relief Fund Act of 1998 (Sec. 
  103(h) of H.R. 1023)...........................................   303

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  1998...........................................................   305


                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1

Part One: Surface Transportation Revenue Act of 1998 (Title IX of 
  H.R. 2400).....................................................     2

    A. Extension of Highway Trust Fund, Aquatic Resources Trust 
      Fund, and National Recreational Trails Trust Fund Excise 
      Taxes and Expenditure Authority (secs. 9002-9005, 9008, 
      9009, and 9011)............................................     2

    B. Repeal of 1.25-Cents-Per-Gallon Tax Rate on Rail Fuel 
      (sec. 9006)................................................    11

    C. Purposes for Which Amtrak NOL Monies May Be Used In Non-
      Amtrak States (sec. 9007)..................................    12

    D. Exclusion from Income for Employer-Provided Transportation 
      Benefits (sec. 9010).......................................    13

    E. Identification of Limited Tax Benefits (sec. 9012)........    15

Part Two: Internal Revenue Service Restructuring and Reform Act 
  of 1998 (H.R. 2676)............................................    16

Title I. Reorganization of Structure and Management of the IRS...    16

    A. IRS Restructuring and Creation of IRS Oversight Board.....    16

        1. IRS mission and restructuring (secs. 1001 and 1002)...    16

        2. Establishment and duties of IRS Oversight Board (sec. 
          1101)..................................................    18

    B. Appointment and Duties of IRS Commissioner and Chief 
      Counsel and Other Personnel................................    26

        1. IRS Commissioner and other personnel (secs. 1102(a) 
          and 1104)..............................................    26

        2. IRS Chief Counsel (sec. 1102(b))......................    27

    C. Structure and Funding of the Employee Plans and Exempt 
      Organizations Division (``EP/EO'') (sec. 1101).............    29

    D. Taxpayer Advocate (sec. 1102(a), (c), and (d))............    31

    E. Treasury Office of Inspector General; IRS Office of the 
      Chief Inspector (secs. 1102 and 1103)......................    35

    F. Prohibition on Executive Branch Influence Over Taxpayer 
      Audits (sec. 1105).........................................    44

    G. IRS Personnel Flexibilities (secs. 1201-1205).............    45

Title II. Electronic Filing......................................    51

    A. Electronic Filing of Tax and Information Returns (sec. 
      2001)......................................................    51

    B. Due Date for Certain Information Returns (sec. 2002)......    52

    C. Paperless Electronic Filing (sec. 2003)...................    53

    D. Return-Free Tax System (sec. 2004)........................    54

    E. Access to Account Information (sec. 2005).................    55

Title III. Taxpayer Protection and Rights........................    56

    A. Burden of Proof (sec. 3001)...............................    56

    B. Proceedings by Taxpayers..................................    59
        1. Expansion of authority to award costs and certain fees 
          (sec. 3101)............................................    59
        2. Civil damages for collection actions (sec. 3102)......    61
        3. Increase in size of cases permitted on small case 
          calendar (sec. 3103)...................................    62
        4. Actions for refund with respect to certain estates 
          which have elected the installment method of payment 
          (sec. 3104)............................................    63
        5. Administrative appeal of adverse IRS determination of 
          a bond issue's tax-exempt status (sec. 3105)...........    64
        6. Civil action for release of erroneous lien (sec. 3106)    65

    C. Relief for Innocent Spouses and for Taxpayers Unable to 
      Manage Their Financial Affairs Due to Disabilities.........    66
        1. Relief for innocent spouses (sec. 3201)...............    66
        2. Suspension of statute of limitations on filing refund 
          claims during periods of disability (sec. 3202)........    72

    D. Provisions Relating to Interest and Penalties.............    73
        1. Elimination of interest differential on overlapping 
          periods of interest on income tax overpayments and 
          underpayments (sec. 3301)..............................    73
        2. Increase in overpayment rate payable to taxpayers 
          other than corporations (sec. 3302)....................    75
        3. Mitigation of penalty for individual's failure to pay 
          during period of installment agreement (sec. 3303).....    75
        4. Mitigation of failure to deposit penalty (sec. 3304)..    76
        5. Suspension of interest and certain penalties if 
          Secretary fails to contact individual taxpayer (sec. 
          3305)..................................................    77
        6. Procedural requirements for imposition of penalties 
          and additions to tax (sec. 3306).......................    78
        7. Personal delivery of notice of penalty under section 
          6672 (sec. 3307).......................................    79
        8. Notice of interest charges (sec. 3308)................    79
        9. Abatement of interest on underpayments by taxpayers in 
          Presidentially declared disaster areas (sec. 3309).....    80

    E. Protections for Taxpayers Subject to Audit or Collection 
      Activities.................................................    81

        1. Due process in IRS collection actions (sec. 3401).....    81

        2. Examination activities................................    86
            a. Uniform application of confidentiality privilege 
              to taxpayer communications with federally 
              authorized practitioners (sec. 3411)...............    86
            b. Limitation on financial status audit techniques 
              (sec. 3412)........................................    88
            c. Software trade secrets protection (sec. 3413).....    89
            d. Threat of audit prohibited to coerce tip reporting 
              alternative commitment agreements (sec. 3414)......    92
            e. Taxpayers allowed motion to quash all third-party 
              summonses (sec. 3415)..............................    93
            f. Service of summonses to third-party recordkeepers 
              permitted by mail (sec. 3416)......................    94
            g. Notice of IRS contact of third parties (sec. 3417)    95
        3. Collection activities.................................    96
            a. Approval process for liens, levies, and seizures 
              (sec. 3421)........................................    96
            b. Modifications to certain levy exemption amounts 
              (sec. 3431)........................................    96
            c. Release of levy upon agreement that amount is 
              uncollectible (sec. 3432)..........................    97
            d. Levy prohibited during pendency of refund 
              proceedings (sec. 3433)............................    98
            e. Approval required for jeopardy and termination 
              assessments and jeopardy levies (sec. 3434)........    99
            f. Increase in amount of certain property on which 
              lien not valid (sec. 3435).........................    99
            g. Waiver of early withdrawal tax for IRS levies on 
              employer-sponsored retirement plans or IRAs (sec. 
              3436)..............................................   100
            h. Prohibition of sales of seized property at less 
              than minimum bid (sec. 3441).......................   102
            i. Accounting of sales of seized property (sec. 3442)   102
            j. Uniform asset disposal mechanism (sec. 3443)......   103
            k. Codification of IRS administrative procedures for 
              seizure of taxpayer's property (sec. 3444).........   104
            l. Procedures for seizure of residences and 
              businesses (sec. 3445).............................   104
        4. Provisions relating to examination and collection 
          activities.............................................   105
            a. Procedures relating to extensions of statute of 
              limitations by agreement (sec. 3461)...............   105
            b. Offers-in-compromise (sec. 3462)..................   107
            c. Notice of deficiency to specify deadlines for 
              filing Tax Court petition (sec. 3463)..............   109
            d. Refund or credit of overpayments before final 
              determination (sec. 3464)..........................   110
            e. IRS procedures relating to appeal of examinations 
              and collections (sec. 3465)........................   110
            f. Application of certain fair debt collection 
              practices (sec. 3466)..............................   112
            g. Guaranteed availability of installment agreements 
              (sec. 3467)........................................   113
            h. Prohibition on requests to taxpayers to waive 
              rights to bring actions (sec. 3468)................   114

    F. Disclosures to Taxpayers..................................   114

        1. Explanation of joint and several liability (sec. 3501)   114
        2. Explanation of taxpayers' rights in interviews with 
          the IRS (sec. 3502)....................................   115
        3. Disclosure of criteria for examination selection (sec. 
          3503)..................................................   116
        4. Explanation of the appeals and collection process 
          (sec. 3504)............................................   116
        5. Explanation of reason for refund disallowance (sec. 
          3505)..................................................   117
        6. Statements to taxpayers with installment agreements 
          (sec. 3506)............................................   118
        7. Notification of change in tax matters partner (sec. 
          3507)..................................................   118
        8. Conditions under which taxpayers' returns may be 
          disclosed (sec. 3508)..................................   119
        9. Disclosure of Chief Counsel advice (sec. 3509)........   120

    G. Low-Income Taxpayer Clinics (sec. 3601)...................   124

    H. Other Provisions..........................................   125

         1. Cataloging complaints (sec. 3701)....................   125
         2. Archive of records of Internal Revenue Service (sec. 
          3702)..................................................   126
         3. Payment of taxes (sec. 3703).........................   127
         4. Clarification of authority of Secretary relating to 
          the making of elections (sec. 3704)....................   127
         5. IRS employee contacts (sec. 3705)....................   128
         6. Use of pseudonyms by IRS employees (sec. 3706).......   129
         7. Illegal tax protestor designations (sec. 3707).......   129
         8. Provision of confidential information to Congress by 
          whistleblowers (sec. 3708).............................   130
         9. Listing of local IRS telephone numbers and addresses 
          (sec. 3709)............................................   131
        10. Identification of return preparers (sec. 3710).......   131
        11. Offset of past-due, legally enforceable State income 
          tax obligations against overpayments (sec. 3711).......   132
        12. Reporting requirements relating to education tax 
          credits (sec. 3712)....................................   133

    I. Studies...................................................   136

        1. Administration of penalties and interest (sec. 3801)..   136
        2. Confidentiality of tax return information (sec. 3802).   136
        3. Noncompliance with revenue laws by taxpayers (sec. 
          3803)..................................................   137
        4. Payments for detection of underpayments and fraud 
          (sec. 3804)............................................   138

Title IV. Congressional Accountability for the IRS...............   139

    A. Review of Requests for GAO Investigations of the IRS (sec. 
      4001)......................................................   139

    B. Joint Congressional Reviews and Coordinated Oversight 
      Reports (secs. 4001 and 4002)..............................   140

    C. Funding for Century Date Change (sec. 4011)...............   141

    D. Tax Law Complexity Analysis (secs. 4021 and 4022).........   142

Title V. Additional Provisions...................................   144

    A. Elimination of 18-Month Holding Period for Capital Gains 
      (sec. 5001)................................................   144

    B. Deductibility of Meals Provided for the Convenience of the 
      Employer (sec. 5002).......................................   145

Title VI. Tax Technical Corrections..............................   147

    technical corrections to the taxpayer relief act of 1997        147

    A. Amendments to Title I of the 1997 Act Relating to the 
      Child Credit...............................................   147

        1. Stacking rules for the child credit under the 
          limitations based on tax liability (sec. 6003(a))......   148
        2. Treatment of a portion of the child credit as a 
          supplemental child credit (sec. 6003(b))...............   148

    B. Amendments to Title II of the 1997 Act Relating to 
      Education Incentives.......................................   149

        1. Clarifications to HOPE and Lifetime Learning tax 
          credits (sec. 6004(a)).................................   149
        2. Deduction for student loan interest (sec. 6004(b))....   150

        3. Qualified State tuition programs (sec. 6004(c)).......   151

        4. Education IRAs (sec. 6004(d)).........................   152
        5. Enhanced deduction for corporate contributions of 
          computer technology and equipment (sec. 6004(e)).......   155
        6. Treatment of cancellation of certain student loans 
          (sec. 6004(f)).........................................   156
        7. Qualified zone academy bonds (sec. 6004(g))...........   156

    C. Amendments to Title III of the 1997 Act Relating to 
      Savings Incentives.........................................   157

        1. Conversions of IRAs into Roth IRAs (sec. 6005(b)).....   157
        2. Penalty-free distributions from IRAs for education 
          expenses and purchase of first homes (sec. 6005(c))....   160
        3. Limits based on modified adjusted gross income (sec. 
          6005(b))...............................................   161
        4. Contribution limit to Roth IRAs (sec. 6005(b))........   162
        5. Contribution limitations for active participants in an 
          IRA (sec. 6005(a)).....................................   162

    D. Amendments to Title III of the 1997 Act Relating to 
      Capital Gains..............................................   163

        1. Individual capital gains rate reductions (sec. 
          6005(d))...............................................   163
        2. Exclusion of gain on the sale of a principal residence 
          owned and used less than two years (sec. 6005(e) (1) 
          and (2)................................................   165
        3. Effective date of the exclusion of gain on the sale of 
          a principal residence (sec. 6005(e)(3))................   166
        4. Rollover of gain from sale of qualified stock (sec. 
          6005(f))...............................................   167

    E. Amendments to Title IV of the 1997 Act Relating to 
      Alternative Minimum Tax....................................   167

        1. Clarification of small business exemption (sec. 
          6006(a))...............................................   167
        2. Election to use AMT depreciation for regular tax 
          purposes (sec. 6006(b))................................   168

    F. Amendments to Title V of the 1997 Act Relating to Estate 
      and Gift Taxes.............................................   169

         1. Clarification of effective date for indexing of 
          generation-skipping exemption (sec. 6007(a))...........   169
         2. Conversion of qualified family-owned business 
          exclusion into a deduction (sec. 6007(b)(1)(A))........   170
         3. Coordination between unified credit and family-owned 
          business provision (secs. 6007(b)(1)(B) and 6007(b)(4))   170
         4. Clarification of businesses eligible for family-owned 
          business provision (sec. 6007(b)(2))...................   172
         5. Clarification of ``trade or business'' requirement 
          for family-owned business provision (sec. 6007(b)(5))..   172
         6. Clarification that interests eligible for family-
          owned business provision must be passed to a qualified 
          heir (sec. 6007(b)(1)(B))..............................   173
         7. Other modifications to the qualified family-owned 
          business provision (secs. 6007(b)(3), 6007(b)(6), and 
          6007(b)(7))............................................   173
         8. Clarification of interest on installment payment of 
          estate tax on holding companies (sec. 6007(c)).........   174
         9. Clarification on declaratory judgment jurisdiction of 
          U.S. Tax Court regarding installment payment of estate 
          (sec. 6007(d)).........................................   175

        10. Clarification of rules governing revaluation of gifts 
          (sec. 6007(e)).........................................   175
        11. Clarification with respect to post-mortem 
          conservation easements (sec. 6007(g))..................   176

    G. Amendments to Title VII of the 1997 Act Relating to 
      Incentives for the District of Columbia (sec. 6008)........   176

    H. Amendments to Title IX of the 1997 Act Relating to 
      Miscellaneous Provisions...................................   180

        1. Clarification of qualification for reduced rate of 
          excise tax on certain hard ciders (sec. 6009(a)).......   180
        2. Election for 1987 partnerships to continue exception 
          from treatment of publicly traded partnerships as 
          corporations (sec. 6009(b))............................   181
        3. Depreciation limitations for electric vehicles (sec. 
          6009(c))...............................................   182
        4. Combined employment tax reporting demonstration 
          project (sec. 6009(d)).................................   182
        5. Modification of operation of elective carryback of 
          existing net operating losses of the National Railroad 
          Passenger Corporation (``Amtrak'') (sec. 6009(e))......   183

    I. Amendments to Title X of the 1997 Act Relating to Revenue-
      Raising Provisions.........................................   184

         1. Exception from constructive sales rules for certain 
          debt positions (sec. 6010(a)(1)).......................   184
         2. Definition of forward contract under constructive 
          sales rules (sec. 6010(a)(2))..........................   184
         3. Treatment of mark-to-market gains of electing traders 
          (sec. 6010(a)(3))......................................   185
         4. Special effective date for constructive sale rules 
          (sec. 6010(a)(4))......................................   186
         5. Gain recognition for certain extraordinary dividends 
          (sec. 6010(b)).........................................   186
         6. Treatment of certain corporate distributions (sec. 
          6010(c))...............................................   187
         7. Application of section 304 to certain international 
          transactions (sec. 6010(d))............................   191
         8. Certain preferred stock treated as ``boot''--
          treatment of transferor (sec. 6010(e)(1))..............   193
         9. Certain preferred stock treated as ``boot''--statute 
          of limitations (sec. 6010(e)(2)).......................   193
        10. Establish IRS continuous levy and improve debt 
          collection (sec. 6010(f))..............................   194
        11. Clarification regarding aviation gasoline excise tax 
          (sec. 6010(g)).........................................   194
        12. Clarification of requirement that registered fuel 
          terminals offer dyed fuel (sec. 6010(h))...............   195
        13. Clarification of treatment of prepaid telephone cards 
          (sec. 6010(i)).........................................   195
        14. Modify UBIT rules applicable to second-tier 
          subsidiaries (sec. 6010(j))............................   196
        15. Application of foreign tax credit holding period rule 
          to RICs and clarification of exception from such rule 
          for securities dealers (sec. 6010(k))..................   197
        16. Clarification of provision expanding the limitations 
          on deductibility of premiums and interest with respect 
          to life insurance, endowment, and annuity contracts 
          (sec. 6010(o)).........................................   198
        17. Clarification of allocation of basis of properties 
          distributed by a partnership (sec. 6010(m))............   200
        18. Clarification to the definition of modified adjusted 
          gross income for purposes of the earned income credit 
          phaseout (sec. 6010(p))................................   201

    J. Amendments to Title XI of the 1997 Act Relating to Foreign 
      Provisions.................................................   202

        1. Application of attribution rules under PFIC provisions 
          (sec. 6011(b)(2))......................................   202
        2. Treatment of PFIC option holders (sec. 6011(b)(1))....   203
        3. Application of PFIC mark-to-market rules to RICs (sec. 
          6011(c)(3))............................................   205
        4. Interaction between the PFIC provisions and other 
          mark-to-market rules (sec. 6011(c)(2)).................   206
        5. Information reporting with respect to certain foreign 
          corporations and partnerships (sec. 6011(f))...........   207

    K. Amendments to Title XII of the 1997 Act Relating to 
      Simplification Provisions..................................   207

        1. Travel expenses of Federal employees participating in 
          a Federal criminal investigation (sec. 6012(a))........   207
        2. Magnetic media returns for partnerships having more 
          than 100 partners (sec. 6012(d)).......................   208
        3. Effective date for provisions relating to electing 
          large partnerships, partnership returns required on 
          magnetic media, and treatment of partnership items of 
          individual retirement arrangements (sec. 6012(e))......   208
        4. Modification of distribution rule for REITS (sec. 
          6012(g))...............................................   209

    L. Amendments to Title XIII of the 1997 Act Relating to 
      Estate, Gift and Trust Simplification......................   209

        1. Clarification of treatment of revocable trusts for 
          purposes of the generation-skipping transfer tax (sec. 
          6013(a))...............................................   209
        2. Provision of regulatory authority for simplified 
          reporting of funeral trusts terminated during taxable 
          year (sec. 6013(b))....................................   210
    M. Amendment to Title XIV of the 1997 Act Relating to Excise 
      Tax Simplification.........................................   211

        1. Transfers of bulk imports of wine to wineries or beer 
          to breweries (secs. 6014(a)(1) and (b)(1)).............   211
        2. Refunds when wine returned to wineries or beer 
          returned to breweries (secs. 6014(a)(2) and (b)(2))....   211
        3. Clarification of the provision allowing wine imported 
          in bulk to be transferred to a U.S. winery without 
          payment of tax (sec. 6014(b)(3)).......................   212

    N. Amendments to Title XV of the 1997 Act Relating to 
      Pensions and Employee Benefits.............................   212

        1. Treatment of certain disability payments to public 
          safety employees (sec. 6015(c))........................   212

    O.  Amendments to Title XVI of the 1997 Act Relating to 
      Technical Corrections......................................   213

        1. Application of requirements for SIMPLE IRAs in the 
          case of mergers and acquisitions (sec. 6016(a)(1)).....   213
        2. Treatment of Indian tribal governments under section 
          403(b) (sec. 6016(a)(2))...............................   214

    technical corrections to other tax legislation...............   214

    A. Amendment Related to the Transportation Equity Act for the 
      21st Century...............................................   214

        1. Simplified refund provisions for tax on gasoline, 
          diesel fuel and kerosene (sec. 6017)...................   214
        2. Conforming changes to the Highway Trust Fund 
          expenditure authority (sec. 9015)......................   215

    B. Amendment to the Small Business Job Protection Act of 1996   215

        1. Treatment of adoption tax credit carryovers (sec. 
          6018)..................................................   215

    C. Amendments Related to Taxpayer Bill of Rights 2...........   216

        1. Disclosure requirements for apostolic organizations 
          (sec. 6019(a) and (b)).................................   216
        2. Disclosure of returns and return information (sec. 
          6019(c))...............................................   217

    D. Amendment Related to the Omnibus Budget Reconciliation Act 
      of 1993....................................................   217

        1. Allow deduction for unused employer social security 
          credit (sec. 6020).....................................   217

    E. Amendment Related to the Revenue Reconciliation Act of 
      1990.......................................................   218

        1. Earned income credit qualification rules (sec. 6021)..   218

Title VII. Revenue Offsets.......................................   220

    A. Employer Deductions for Vacation and Severance Pay (sec. 
      7001)......................................................   220

    B. Freeze Grandfather Status of Stapled REITs (sec. 7002)....   222

    C. Make Certain Trade Receivables Ineligible for Mark-to-
      Market Treatment (sec. 7003)...............................   231

    D. Exclusion of Minimum Required Distributions from AGI for 
      Roth IRA Conversions (sec. 7004)...........................   233

Title VIII. Identification of Limited Tax Benefits Under the Line 
  Item Veto Act (sec. 8001)......................................   234

Part Three: Tax and Trade Relief Extension Act of 1998 (Division 
  J of H.R. 4328, the Omnibus Consolidated and Emergency 
  Supplemental Appropriations Act, 1999).........................   235

Title I. Extension of Expiring Provisions........................   235

    A. Extension of Research Tax Credit (sec. 1001)..............   235

    B. Extension of the Work Opportunity Tax Credit (sec. 1002)..   237
    C. Extension of the Welfare-to-Work Tax Credit (sec. 1003)...   238

    D. Make Permanent the Deduction Provided for Contributions of 
      Appreciated Stock to Private Foundations; Public Inspection 
      of Private Foundation Annual Returns.......................   239

        1. Make permanent the deduction provided for 
          contributions of appreciated stock to private 
          foundations (sec. 1004(a)).............................   239
        2. Public inspection of private foundation public returns 
          (sec. 1004(b)).........................................   240

    E. Exceptions under Subpart F for Certain Active Financing 
      Income (sec. 1005).........................................   243

    F. Disclosure of Return Information to Department of 
      Education in Connection With Income Contingent Loans (sec. 
      1006)......................................................   264

Title II. Other Provisions.......................................   266

    Subtitle A.--Provisions Relating to Individuals..............   266

    A. Personal Credits Fully Allowed Against Regular Tax 
      Liability During 1998 (sec. 2001)..........................   266

    B. Increase Deduction for Health Insurance Expenses of Self-
      Employed Individuals (sec. 2002)...........................   271

    C. Modification of Individual Estimated Tax Safe Harbors 
      (sec. 2003)................................................   272

    Subtitle B.--Provisions Relating to Farmers..................   273

    A. Permanent Extension of Income Averaging for Farmers (sec. 
      2011)......................................................   273

    B. Farm Production Flexibility Payments (sec. 2012)..........   274

    C. Extend the Net Operating Loss Carryback Period for Farmers 
      (sec. 2013)................................................   276


    Subtitle C.-Miscellaneous Provisions.........................   277

    A. Increase State Volume Limits on Private Activity Tax-
      Exempt Bonds (sec. 2021)...................................   277

    B. Comprehensive Study of Recovery Periods and Depreciation 
      Methods Under Section 168 (sec. 2022)......................   278

    C. State Election to Exempt Student Employees From Social 
      Security (sec. 2023).......................................   279

Title III. Revenue Offset Provisions.............................   281

    A. Treatment of Certain Deductible Liquidating Distributions 
      of Regulated Investment Companies and Real Estate 
      Investment Trusts (sec. 3001)..............................   281

    B. Add Vaccines Against Rotavirus Gastroenteritis to the List 
      of Taxable Vaccines (sec. 3002)............................   282

    C. Clarify and Expand Mathematical Error Procedures (sec. 
      3003)......................................................   284

    D. Restrict 10-Year Net Operating Loss Carryback Rules for 
      Specified Liability Losses (sec. 3004).....................   285

    E. Tax Treatment of Prizes and Awards (sec. 5301)............   286

Title IV. Technical Corrections..................................   289

    A. Technical Corrections to the 1998 IRS Restructuring Act...   289

        1. Burden of proof (sec. 4002(b))........................   289
        2. Relief for innocent spouses (sec. 4002(c))............   289
        3. Interest netting (sec. 4002(d)).......................   290
        4. Effective date for elimination of 18-month holding 
          period for capital gains (sec. 4002(i))................   291

    B. Technical Corrections to the 1997 Act.....................   292

         1. Treatment of interest on qualified education loans 
          (sec. 4003(a)).........................................   292
         2. Capital gains distributions of charitable remainder 
          trusts (secs. 4002(i)(3) and 4003(b))..................   293
         3. Gifts may not be revalued for estate tax purposes 
          after expiration of limitations (sec. 4003(c)).........   294
         4. Coordinate Vaccine Injury Compensation Trust Fund 
          expenditure purposes with list of taxable vaccines 
          (sec. 4003(d)).........................................   295
         5. Abatement of interest by reason of Presidentially 
          declared disasters (sec. 4003(e))......................   296
         6. Treatment of certain corporate distributions (sec. 
          4003(f))...............................................   296
         7. Treatment of affiliated group including formerly tax-
          exempt organization (sec. 4003(g)).....................   297
         8. Treatment of net operating losses arising from 
          certain eligible losses (sec. 4003(h)).................   298
         9. Determination of unborrowed cash value under COLI pro 
          rata interest disallowance rules (sec. 4003(i))........   299
        10. Payment of taxes by commercially acceptable means 
          (sec. 4003(k)).........................................   300

    C. Technical Corrections to the 1984 Act.....................   300

        1. Casualty loss deduction (sec. 4004)...................   300

    D. Perfecting Amendments Related to Withholding From Social 
      Security Benefits and Other Federal Payments (sec. 4005)...   301
    E. Disclosure of Tax Return Information to Department of 
      Agriculture (sec. 4006(a)).................................   301
    F. Technical Corrections to the Transportation Equity Act for 
      the 21st Century (sec. 4006(b))............................   302

Part Four: Ricky Ray Hemophilia Relief Fund Act of 1998 (Sec. 
  103(h) of H.R. 1023)...........................................   303

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  1998...........................................................   305



                              INTRODUCTION

    This pamphlet,<SUP>1</SUP> prepared by the staff of the 
Joint Committee on Taxation in consultation with the staffs of 
the House Committee on Ways and Means and Senate Committee on 
Finance, provides an explanation of tax legislation enacted in 
1998.
---------------------------------------------------------------------------
    \1\ This pamphlet may be cited as follows: Joint Committee on 
Taxation, General Explanation of Tax Legislation Enacted in 1998 (JCS-
6-98), November 24, 1998.
---------------------------------------------------------------------------
    A committee report on legislation issued by a Congressional 
committee sets forth the committee's explanation of the bill as 
it was reported by that committee. In some instances, a 
committee report does not serve as an explanation of the final 
provisions of the legislation as enacted. This is because the 
version of the bill adopted by the conference committee may 
differ significantly from the versions of the bill reported by 
committee or passed by the House and the Senate. The material 
contained in this pamphlet is prepared so that Members of 
Congress, tax practitioners, and other interested parties can 
have a detailed explanation of the final tax legislation 
enacted in 1998 in one publication.
    Part One of the pamphlet is an explanation of the 
provisions of the Surface Transportation Revenue Act of 1998 
(Title IX of H.R. 2400, P.L. 105-178) relating to the extension 
and revision of the Highway Trust Fund excise taxes. Part Two 
is an explanation of the Internal Revenue Service Restructuring 
and Reform Act of 1998 (H.R. 2676, P.L. 105-206). Part Three is 
an explanation of the revenue provisions of the Tax and Trade 
Relief Act of 1998 (Division J of the Omnibus Consolidated and 
Emergency Supplemental Appropriations Act, 1999, H.R. 4328, 
P.L. 105-277). Part Four is an explanation of the revenue 
provision in the Ricky Ray Hemophilia Relief Fund Act of 1998 
(sec. 103(h) of H.R. 1023, P.L. 105-369). The Appendix provides 
estimates of the budget effects of revenue legislation enacted 
in 1998 for the fiscal year period, 1999-2007.
    The first footnote in each part gives the legislative 
history of each of the 1998 Acts.



PART ONE: SURFACE TRANSPORTATION REVENUE ACT OF 1998 (TITLE IX OF H.R. 
                           2400) <SUP>2</SUP>
---------------------------------------------------------------------------

    \2\ Title IX of H.R. 2400 (``Surface Transportation Revenue Act of 
1998''); P.L. 105-178. The revenue provisions (Title IX) of H.R. 2400 
were reported by the House Committee on Ways and Means on March 27, 
1998 (H. Rept. 105-467, Part II). H.R. 2400 was passed by the House on 
April 1, 1998.
    The Senate passed H.R. 2400, as amended with the provisions of S. 
1173, on April 2, 1998. The conference report was filed on the bill on 
May 22, 1998 (H. Rept. 105-550), and was passed by the House and the 
Senate on May 22, 1998. H.R. 2400 was signed by the President on June 
9, 1998.
---------------------------------------------------------------------------

 A. Extension of Highway Trust Fund, Aquatic Resources Trust Fund, and 
 National Recreational Trails Trust Fund Excise Taxes and Expenditure 
 Authority (secs. 9002-9005, 9008, 9009, and 9011 of the Act and secs. 
  4041-4042, 4051-4053, 4071-4073, 4081-4084, 4101, 4481-4484, 9503, 
                      9504, and 9511 of the Code)

                         Present and Prior Law

Highway and related transportation excise taxes
            Overview
    The present and prior law highway transportation excise 
taxes consist of:
    (1) taxes on gasoline, diesel fuel, kerosene, and special 
motor fuels;
    (2) a retail sales tax imposed on tractors, trucks, and 
trailers having gross vehicle weights in excess of prescribed 
thresholds;
    (3) a tax on manufacturers of tires designed for use on 
heavy highway vehicles; and
    (4) an annual use tax imposed on trucks and tractors having 
taxable gross weights in excess of prescribed thresholds.
    Special motor fuels include liquefied natural gas 
(``LNG''), benzol, naphtha, liquefied petroleum gas (e.g., 
propane), natural gasoline, and any other liquid (e.g., ethanol 
and methanol) other than gasoline or diesel fuel. Compressed 
natural gas (``CNG'') also is subject to tax as a special motor 
fuel, but at a lower rate than other special motor fuels.
    With the exception of 4.3 cents per gallon of the motor 
fuels excise tax rates, these taxes were scheduled to expire 
after September 30, 1999.
            Highway motor fuels taxes
    Tax rates.--The present and prior law highway motor fules 
excise tax rates are shown in Table 1.

    Table 1. --Federal Highway Trust Fund Motor Fuels Excise Tax Rates,
                      as of    October 1, 1998 \1\
                    [Rates shown in cents per gallon]
------------------------------------------------------------------------
                                                               Tax rate
                        Highway fuel                             \2\
------------------------------------------------------------------------
Gasoline \3\...............................................         18.3
Diesel Fuel \4\............................................         24.3
Special Motor Fuels Generally..............................     \5\ 18.3
CNG........................................................     \6\ 4.3
------------------------------------------------------------------------
\1\ The rates shown include the 4.3-cents-per-gallon tax rate which was
  transferred to the Highway Trust Fund beginning on October 1, 1997,
  pursuant to the Taxpayer Relief Act of 1997.
\2\ Excludes an additional 0.1-cent-per-gallon rate imposed on these
  motor fuels to finance the Leaking Underground Storage Tank Trust
  Fund.
\3\ Gasoline used in motorboats and in certain off-highway recreational
  vehicles and small engines is subject to tax in the same manner and at
  the same rates as gasoline used in highway vehicles. 6.8 cents per
  gallon of the revenues from the tax on gasoline used in these uses was
  retained in the General Fund under prior law; the remaining 11.5 cents
  per gallon was deposited in the Aquatic Resources Trust Fund
  (motorboat and small engine gasoline), the Land and Water Conservation
  Fund ($1 million of motorboat gasoline tax revenues), and the National
  Recreational Trails Trust Fund (off-highway recreational vehicles).
\4\ Kerosene is taxed at the same rate as diesel fuel.
\5\ The rate is 13.6 cents per gallon for propane, 11.9 cents per gallon
  for liquefied natural gas, and 11.3 cents per gallon for methanol fuel
  from natural gas. In each case the tax rate is based on the relative
  energy equivalence of the fuel to gasoline.
\6\ The statutory rate is 48.54 cents per thousand cubic feet (``MCF'').

     Administration of highway motor fuels excise taxes.--The 
gasoline, diesel fuel, and kerosene excise taxes are imposed on 
removal of the fuel from a refinery or on importation, unless 
the fuel is transferred by pipeline or barge to a registered 
terminal facility. In such a case, tax is imposed on removal of 
the fuel from the terminal facility (i.e., at the ``terminal 
rack'').<SUP>3</SUP> A large majority of these taxes is imposed 
at the terminal rack. The special motor fuels tax, which 
accounts for a relatively small portion of motor fuels tax 
revenues, is imposed at the retail level. Present law imposes 
tax on all gasoline, diesel fuel, and kerosene that is removed 
from a terminal facility, except diesel fuel and kerosene that 
is destined for nontaxable use (including a partially taxable 
use in an intercity bus or a train) and that is indelibly dyed 
in accordance with Treasury Department regulations.<SUP>4</SUP> 
Effective after June 30, 1998, prior law provided that as a 
condition of holding untaxed fuel, terminals that sold diesel 
fuel were required to offer both dyed and undyed fuel to their 
customers and terminals that sold kerosene were required to 
offer both dyed and undyed kerosene. The person holding an 
inventory position in the terminal at the time the fuel is 
removed from that facility (the ``position holder'') is liable 
for payment of the tax.
---------------------------------------------------------------------------
    \3\ Gasoline, diesel fuel, and kerosene may be removed from a 
refinery without payment of tax only if the party removing the fuel and 
all subsequent parties before its removal from a terminal facility are 
registered with the Internal Revenue Service. If fuel is sold to an 
unregistered party before leaving the terminal facility, tax 
immediately is imposed. This tax does not preclude imposition of a 
second tax at the terminal rack; however, the second tax may be 
refunded upon request. This dual tax regime was enacted in 1990 in 
response to reports that gasoline was being removed without payment of 
tax from terminals upon a claim that tax had already been paid, when in 
fact it had not been paid.
    \4\ Undyed kerosene also may be removed from terminals without 
payment of tax if the fuel is destined for use as aviation fuel or for 
certain nonfuel industrial purposes.
---------------------------------------------------------------------------
    Under prior law, gasoline, diesel fuel, and kerosene excise 
tax refunds were administered separately, subject to separate 
quarterly minimum filing thresholds. For gasoline, the minimum 
refund claim was $1,000 in the calendar quarter to which the 
claim relates. Certain diesel fuel claims were subject to this 
same standard; certain other diesel and aviation fuel claims 
could be filed in any of the first three calendar quarters in 
which the aggregate year-to-date refund equals $750. Fourth 
quarter refunds were required to be claimed as income tax 
credits regardless of amount.
    Highway fuels tax exemptions.--Prior law and present law 
include numerous exemptions (including partial exemptions for 
specified uses of taxable fuels or for specified fuels), 
typically for governments or for uses not involving use of (and 
thereby damage to) the highway system. Because the gasoline, 
diesel fuel, and kerosene taxes generally are imposed before 
the end use of the fuel is known, many of these exemptions are 
realized through refunds to end users of tax paid by a party 
that processed the fuel earlier in the distribution chain. 
These exempt uses and fuels include:
          (1) use in State and local government and nonprofit 
        educational organization vehicles;
          (2) use in buses engaged in transporting students and 
        employees of schools;
          (3) use in private local mass transit buses having a 
        seating capacity of at least 20 adults (not including 
        the driver) when the buses operate under contract with 
        (or are subsidized by) a State or local governmental 
        unit;
          (4) use in private intercity buses serving the 
        general public along scheduled routes (totally exempt 
        from the gasoline tax and exempt from 17 cents per 
        gallon of the diesel tax); and
          (5) use in off-highway uses such as farming.
    LNG, propane, CNG, and methanol derived from natural gas 
are subject to reduced tax rates based on the energy 
equivalence of these fuels to gasoline.
    Ethanol and methanol derived from renewable sources (e.g., 
biomass) are eligible for income tax benefits (the ``alcohol 
fuels credit'') equal, under prior law, to 54 cents per gallon 
(ethanol) and 60 cents per gallon (methanol).<SUP>5</SUP> In 
addition, small ethanol producers are eligible for a separate 
10-cents-per-gallon production credit.<SUP>6</SUP> The 54-
cents-per-gallon ethanol and 60-cents-per-gallon renewable 
source methanol tax credits may be claimed through reduced 
excise taxes paid on gasoline and special motor fuels as well 
as through credits against income tax.<SUP>7</SUP>
---------------------------------------------------------------------------
    \5\ Under prior law, the alcohol fuels credit was scheduled to 
expire after December 31, 2000, or earlier, if the Highway Fund excise 
taxes actually expired before that date.
    \6\ The small ethanol producer credit is available on up to 15 
million gallons of ethanol produced by persons whose annual production 
capacity does not exceed 30 million gallons.
    \7\ Authority to claim the ethanol and renewable source methanol 
tax benefits through excise tax reductions was scheduled to expire 
after September 30, 2000 (or earlier, if the underlying excise taxes 
actually expire before September 30, 2000) under prior law.
---------------------------------------------------------------------------
            Non-fuel Highway Trust Fund excise taxes
    In addition to the highway motor fuels excise tax revenues, 
the Highway Trust Fund receives revenues produced by three 
excise taxes imposed exclusively on heavy highway vehicles or 
tires. Under prior law and present law, these taxes are:
    (1) A 12-percent excise tax imposed on the first retail 
sale of highway vehicles, tractors, and trailers (generally, 
trucks having a gross vehicle weight in excess of 33,000 pounds 
and trailers having such a weight in excess of 26,000 pounds);
    (2) An excise tax imposed at graduated rates on highway 
tires weighing more than 40 pounds; and
    (3) An annual use tax imposed on highway vehicles having a 
taxable gross weight of 55,000 pounds or more. (The maximum 
rate for this tax is $550 per year, imposed on vehicles having 
a taxable gross weight over 75,000 pounds.)

Aquatic Resources Trust Fund and National Recreational Trails Trust 
        Fund taxes

     Gasoline and special motor fuels used in motorboats and in 
certain off-highway recreational vehicles and in small engines 
are subject to tax in the same manner and the same rates as 
gasoline and special motor fuels used in highway vehicles. Of 
the tax revenues from these uses, 6.8 cents per gallon was 
retained in the General Fund under prior law; the remaining 
11.5 cents per gallon was deposited in the Aquatic Resources 
Trust Fund (``Aquatic Fund'') (motorboat gasoline and special 
motor fuels and small-engine gasoline), the Land and Water 
Conservation Fund (``Land and Water Fund'') (limited to $1 
million of motorboat fuels tax revenues), and the National 
Recreational Trails Trust Fund (the ``Trails Fund'') (fuels 
used in off-highway recreational vehicles). Transfers to these 
Funds were scheduled to terminate after September 30, 1998 
under prior law. Transfers to the Trails Fund were contingent 
on appropriations from that Fund; no appropriations from the 
Trails Fund were enacted under prior law.

Highway Trust Fund expenditure authority provisions

            In general
     Dedication of excise tax revenues to the Highway Trust 
Fund and expenditures from the Highway Trust Fund are governed 
by provisions of the Code (sec. 9503).<SUP>8</SUP> Under prior 
law, revenues from the highway excise taxes, as imposed through 
September 30, 1999, were dedicated to the Highway Trust Fund. 
Also, the Highway Trust Fund earned interest on its cash 
balances each year from investments in Treasury securities 
under prior law (sec. 9602). Further, the Code authorized 
expenditures (subject to appropriations) from the Highway Trust 
Fund through September 30, 1998, for the purposes provided in 
authorizing legislation, as in effect on the date of enactment 
of Public Law 105-130.
---------------------------------------------------------------------------
    \8\ The Highway Trust Fund statutory provisions were placed in the 
Internal Revenue Code in 1982.
---------------------------------------------------------------------------
     Highway Trust Fund provisions also governed transfer of 
11.5 cents per gallon of the revenues from the tax imposed on 
gasoline used in motorboats, small engines, and off-highway 
recreational vehicles. Those revenues were transferred from the 
Highway Trust Fund to the Aquatic Fund, the Land and Water 
Fund, and the Trails Fund, respectively, through September 30, 
1998.
            Prior-law Highway Trust Fund expenditure purposes
     The Highway Trust Fund is divided into two accounts: a 
Highway Account and a Mass Transit Account, each of which is 
the funding source for specific programs.
     Highway and Mass Transit Account expenditure purposes have 
been revised with passage of each authorization Act enacted 
since establishment of the Highway Trust Fund in 1956. In 
general, expenditures authorized under those Acts (as the Acts 
were in effect on the date of enactment of the most recent of 
such authorizing Acts) are approved Highway Trust Fund 
expenditure purposes.<SUP>9</SUP> Authority to make 
expenditures from the Highway Trust Fund was scheduled to 
expire after September 30, 1998. Thus, no Highway Trust Fund 
monies could be spent for a purpose not already approved by the 
tax-writing committees of Congress. Further, no Highway Trust 
Fund expenditures could occur after September 30, 1998, without 
such approval.
---------------------------------------------------------------------------
    \9\ The authorizing Acts which were referenced in the Highway Trust 
Fund (for the Highway Account) under prior law were the Highway Revenue 
Act of 1956, Titles I and II of the Surface Transportation Assistance 
Act of 1982, the Surface Transportation and Uniform Relocation Act of 
1987, the Intermodal Surface Transportation Efficiency Act of 1991, and 
Public Law 105-130.
---------------------------------------------------------------------------
     Under prior law and present law, Highway Trust Fund 
spending further is limited by two anti-deficit provisions 
which are internal to the Highway Fund. The first of these 
provisions limits the unfunded Highway Account authorizations 
at the end of any fiscal year to amounts not exceeding the 
unobligated balance plus revenues projected to be collected for 
that Account by the dedicated excise taxes during the two 
following fiscal years. Under prior law, the second anti-
deficit provision similarly limited unfunded Mass Transit 
Account authorizations to the dedicated excise taxes expected 
to be collected during the next fiscal year. Because of these 
two provisions, the highway transportation excise taxes 
typically have been scheduled to expire at least two years 
after current authorizing Acts. If either of these provisions 
is violated, spending for specified programs funded by the 
relevant Trust Fund Account is reduced proportionately, in much 
the same manner as would occur under a general Budget Act 
sequester.
     Highway Account.--The Highway Trust Fund's Highway Account 
receives revenues from all non-fuel highway transportation 
excise taxes and under prior law, revenues from all but 2.85 
cents per gallon (2.0 cents before October 1, 1997) of the 
highway motor fuels excise taxes. Programs financed from the 
Highway Account included expenditures for the following general 
purposes:
          (1) Federal-aid highways, including the Interstate 
        System, National Highway System, forest and public 
        lands highways, scenic highways, and certain overseas 
        highways (includes construction and planning and 
        traffic control projects);
          (2) Interstate highway resurfacing and repair;
          (3) Bridge replacement and repair;
          (4) Surface transportation programs;
          (5) Congestion mitigation and air quality 
        improvement;
          (6) Highway safety programs and research and 
        development, including a share of the cost of National 
        Highway Traffic Safety Administration (``NHTSA'') 
        programs and university research centers;
          (7) Transportation research, technology, and 
        training;
          (8) Intermodal urban projects and mass transit 
        (including carpool and vanpool) grants;
          (9) Intelligent transportation systems;
          (10) Transportation enhancements (including 
        transportation-related historic restoration, scenic 
        beautification, removal of billboards);
          (11) Construction of ferry boats and ferry terminal 
        facilities;
          (12) Certain administrative costs of the Federal 
        Highway Administration and NHTSA;
          (13) Grants to the Internal Revenue Service for motor 
        fuels tax and highway use tax enforcement activities; 
        and
          (14) Certain other highway and transit-related 
        programs (including bicycle pathways and pedestrian 
        walkways).
    Mass Transit Account.--Under prior law, the Highway Fund's 
Mass Transit Account received revenues equivalent to 2.85 cents 
per gallon (2.0 cents before October 1, 1997) of the highway 
motor fuels excise taxes. Mass Transit Account monies were 
available through September 30, 1998, for capital and capital-
related expenditures under sections 5338(a)(1) and (b)(1) of 
Title 49, United States Code, or the Intermodal Surface 
Transportation Efficiency Act of 1991.
    The capital and capital-related mass transit programs 
included new rail or busway facilities, rail rolling stock, 
buses, improvement and maintenance of existing rail and other 
fixed guideway systems, and upgrading of bus systems.

Aquatic Fund and Land and Water Fund provisions

    Under prior law, transfers of recreational motorboat 
gasoline and special fuels tax revenues from the Highway Trust 
Fund to the Boat Safety Account of the Aquatic Fund were 
limited to a maximum of $70 million per fiscal year. Any excess 
motorboat fuels tax revenues were transferred to the Land and 
Water Fund (limited to $1 million per year) and to the Sport 
Fish Restoration Account of the Aquatic Fund.<SUP>10</SUP> The 
authority to transfer revenues to the Aquatic Fund was 
scheduled to expire after September 30, 1998.
---------------------------------------------------------------------------
    \10\ Under prior law, the maximum balance that could accumulate in 
the Boat Safety Account was $70 million.
---------------------------------------------------------------------------
    Expenditures from the Boat Safety Account and Land and 
Water Fund were subject to appropriation Acts. The Sport Fish 
Restoration Account has a permanent appropriation, and all 
moneys transferred to that Account are automatically 
appropriated in the fiscal year following the fiscal year of 
receipt.
    Under prior law, expenditures were authorized from the Boat 
Safety Account, as follows:
          (1) One-half of the amount allocated to the Account 
        for State boating safety programs; and
          (2) One-half of the amount allocated to the Account 
        for operating expenses of the Coast Guard to defray the 
        cost of services provided for recreational boating 
        safety.

Recreational Trails Trust Fund provisions

    The Trails Fund was established in the Intermodal Surface 
Transportation Act of 1991 (``1991 Act''). Amounts are 
authorized to be transferred from the Highway Trust Fund into 
the Trails Fund equivalent to revenues received from 
``nonhighway recreational fuel taxes'' (not to exceed $30 
million per year under an obligational ceiling set in the 1991 
Act), subject to amounts actually being appropriated from the 
Trails Fund. No monies were ever transferred because no amounts 
were appropriated from the Trails Fund. The authority to 
transfer revenues to the Trails Fund was scheduled to expire 
after September 30, 1998 under prior law.
    Nonhighway recreational fuels taxes included the taxes 
imposed on (1) fuel used in vehicles and equipment on 
recreational trails or back country terrain, or (2) fuel used 
in camp stoves and other outdoor recreational equipment. Such 
revenues did not include small-engine gasoline tax revenues 
which are transferred to the Aquatic Fund.
    Expenditures were authorized from the Trails Fund, subject 
to appropriations, for allocations to States for use on trails 
and trail-related projects as set forth in the 1991 Act. 
Authorized uses included (1) acquisition of new trails and 
access areas, (2) maintenance and restoration of existing 
trails, (3) State environmental protection education programs, 
and (4) program administrative costs.

                           Reasons for Change

    The Transportation Equity Act for the 21st Century (the 
``Act'') authorized expenditures (through contract authority 
and discretionary spending subject to appropriations) for 
Highway Trust Fund and Aquatic Fund programs during fiscal 
years 1998 through 2003. The Act further provided that Highway 
Trust Fund spending and revenues would not be considered for 
certain budget calculations. The excise taxes which constitute 
a dedicated revenue source for these programs under prior law 
were scheduled to expire after September 30, 1999. Thus, absent 
an extension of these taxes, contemplated highway, mass 
transit, and boat safety programs would not have been funded. 
The Congress concluded that a separate Trails Fund was not 
necessary, because no revenues had been deposited in the Trust 
Fund since its inception and because similar expenditure 
programs are financed from the Highway Trust Fund under the 
Act.

                       Explanation of Provisions

Highway tax and trust fund provisions

            Extension of existing Highway Trust Fund excise taxes
     The scheduled expiration date of the Highway Trust Fund 
excise taxes on motor fuels and on heavy highway vehicles and 
tires was extended, from September 30, 1999 through September 
30, 2005.
            Extension and modification of renewable source alcohol tax 
                    provisions
     The prior-law tax benefits for ethanol and renewable 
source methanol were extended for seven years from their 
previously scheduled expiration dates; the ethanol benefits 
were modified to reduce the benefit levels during the extension 
period. The modified ethanol benefit levels are as follows: 
2001 and 2002, 53 cents per gallon; 2003 and 2004, 52 cents per 
gallon; and, 2005 through 2007, 51 cents per gallon. The 
extension and the modifications apply to both the alcohol fuels 
credit and to the associated excise tax provisions.
             Motor fuels tax refund procedure
    The Act combined the quarterly excise tax refund procedures 
for all taxable motor fuels, allowing aggregation of quarterly 
amounts and filing of refund claims once a single $750 minimum 
amount is reached (determined on a year-to-date basis rather 
than an individual quarter basis). Fourth quarter refund claims 
are allowed under the same rules as applicable to the first 
three quarters.
            Requirement that motor fuels terminals offer dyed fuel
    As described under prior law, diesel fuel and kerosene 
(after June 30, 1998) are taxed on removal from a registered 
terminal facility unless the fuel is destined for a nontaxable 
use and is indelibly dyed. After June 30, 1998, prior law 
required terminals to offer dyed fuel as a condition of being 
allowed to store untaxed fuel. The Act delayed the effective 
date of the requirement that terminals offer dyed fuel for two 
years, to July 1, 2000.
            Extension and modification of Highway Trust Fund provisions
     The prior-law September 30, 1998 expiration date of 
authority to spend monies from the Highway Trust Fund was 
extended, from September 30, 1998 through September 30, 2003.
     The Code provisions governing purposes for which monies in 
the Highway Trust Fund may be spent were updated to include the 
purposes provided in the Act, as of the date of enactment.
     The anti-deficit provisions of the Mass Transit Account 
were conformed to those of the Highway Account so that 
permitted obligations will be determined by reference to two 
years of projected revenues.
    Provisions were incorporated into the Highway Trust Fund 
clarifying that expenditures from the Highway Trust Fund may 
occur only as provided in the Code. Clarification was further 
provided that the expiration date for expenditures allowed from 
the Highway Trust Fund does not preclude disbursements to 
liquidate contracts which were validly entered into before the 
last date permitted under those provisions. Expenditures for 
contracts entered into or for amounts otherwise obligated after 
that date (or for other non-contract authority purposes 
permitted by non-Code provisions) are not permitted, 
notwithstanding the provisions of any subsequently enacted 
authorization or appropriations legislation. If any such 
subsequent non-tax legislation provided for expenditures not 
provided for in the Code, or if any executive agency authorized 
such expenditures in contravention of the Code restrictions, 
excise tax revenues otherwise to be deposited in the Highway 
Fund would be retained in the General Fund beginning on the 
date of any unauthorized expenditure (including an obligation 
of funds under contract authority) pursuant to such legislation 
or the date of such an action by an executive 
agency.<SUP>11</SUP>
---------------------------------------------------------------------------
    \11\ The Congress did not intend that tax deposits terminate as a 
result of inadvertent administrative errors provided those errors are 
corrected within a reasonable period and do not evidence a pattern of 
disregard of this provision.
---------------------------------------------------------------------------
     A technical amendment to the Taxpayer Relief Act of 1997 
was included clarifying that excise tax revenues attributable 
to LNG, CNG, propane, and methanol from natural gas (all of 
which are subject to reduced, energy equivalent rates, as 
indicated in Table 1) are divided between the Highway and Mass 
Transit Accounts of the Highway Trust Fund in the same 
proportions as gasoline tax revenues are divided between those 
two accounts.
    A technical correction to the Taxpayer Relief Act of 1997 
was included providing that the amount of gasoline and diesel 
fuel tax revenues deposited into the Mass Transit Account is 
2.86 cents per gallon (rather than 2.85 cents per gallon as 
provided in that 1997 Act).
    The Act provided that the Highway Trust Fund (including the 
Mass Transit Account) will no longer earn interest on unspent 
balances, effective after September 30, 1998. Further, the 
balance in excess of $8 billion in the Highway Account of the 
Highway Trust Fund was canceled on October 1, 1998.

Aquatic Fund provisions

    The Act extends transfers of motorboat fuels tax revenues 
to the Boat Safety Account and Wetlands sub-Account of the 
Aquatic Fund through September 30, 2003. The Act further 
provided that an additional 1.5 cents per gallon of taxes 
imposed during fiscal years 2002 and 2003 (for a total of 13 
cents), and an additional 2 cents per gallon thereafter (for a 
total of 13.5), will be transferred to the Aquatic Fund.
    The Act extends the expenditure authority for the Boat 
Safety Account through September 30, 2003. The expenditure 
purposes of the Aquatic Fund (including those of the Sport Fish 
Restoration Account) are conformed to those purposes in effect 
in the authorizing provisions of the Act as of the date of 
enactment.
    The Act further incorporated provisions into the Aquatic 
Fund clarifying that expenditures from the Fund may occur only 
as provided in the Code Trust Fund provisions.

Repeal of Trails Fund

     The Act repealed the Trails Fund and the transfers of 
nonhighway recreational fuels taxes to that Trust Fund, 
effective on the date of the Act's enactment. (Under 
authorizing provisions of the Act, Highway Trust Fund 
expenditures are authorized for purposes similar to those of 
the prior-law Trails Fund.)

                             Revenue Effect

     The highway tax and trust fund provisions (other than the 
provisions relating to dyed fuel and refund procedures) are 
estimated to increase Federal fiscal year budget receipts by $9 
million in 2001, $12 million in 2002, $23 million in 2003, $27 
million in 2004, $39 million in 2005, $44 million in 2006, and 
$44 million in 2007 above amounts already included in the 
baseline. (Excise taxes dedicated to trust funds are assumed to 
be imposed permanently notwithstanding statutory expiration 
dates.) The provision delaying the requirement that registered 
terminals offerdyed fuel is estimated to have a negligible 
effect on Federal fiscal year budget receipts. The provision modifying 
the refund procedures for fuels excise taxes is estimated to decrease 
Federal fiscal year budget receipts by $5 million in 1999 and by less 
than $500,000 in each of the years 2000-2007. The provisions 
transferring additional revenues to the Aquatic Resources Trust Fund 
and repealing the National Recreational Trails Trust Fund are estimated 
to have no revenue effect.

  B. Repeal of 1.25-Cents-Per-Gallon Tax Rate on Rail Fuel (sec. 9006)

                               Prior Law

    Under prior law, diesel fuel used in trains was subject to 
a 5.65-cents-per-gallon excise tax. (Of this amount, 0.1 cent 
per gallon is dedicated to the Leaking Underground Storage Tank 
Trust Fund; this rate is scheduled to expire after March 31, 
2005.) The remaining 5.55 cents per gallon was a General Fund 
tax, with 4.3 cents per gallon being permanently imposed and 
1.25 cents per gallon being scheduled to expire after September 
30, 1999.

                           Reasons for Change

    The 1.25-cents-per-gallon rail fuel tax rate was repealed 
because the Congress believed it is inappropriate for railroads 
to pay a fuel tax for deficit reduction when most other 
transportation modes pay taxes only to support trust fund 
programs that benefit those industries.

                        Explanation of Provision

    The Act repeals the 1.25-cents-per-gallon rate on rail 
diesel fuel that was scheduled to expire after September 30, 
1999, effective on November 1, 1998.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $24 million in 1999 and less than $500,000 
in 2000.

   C. Purposes for Which Amtrak NOL Monies May be Used in Non-Amtrak 
   States (sec. 9007 of the Act, modifying sec. 977(e)(1)(B) of the 
                      Taxpayer Relief Act of 1997)

                         Present and Prior Law

    The Taxpayer Relief Act of 1997 provided elective 
procedures that allow Amtrak to consider the tax attributes of 
its predecessors in the use of its net operating losses. The 
election was conditioned on Amtrak agreeing to make payments 
equal to one percent of the amount it receives as a result of 
the election to the States that do not receive Amtrak service. 
The non-Amtrak States are required to spend these monies for 
qualified purposes. Qualified purposes were limited to the 
capital costs connected with the provision of intercity 
passenger rail and bus service, or the purchase of intercity 
rail service from Amtrak. Any amounts not spent by the non-
Amtrak States for qualified purposes by 2010 must be returned 
to the Treasury.

                           Reasons for Change

    The Congress believed that all States, whether or not 
served by Amtrak, should share in the Federal income tax 
benefits provided Amtrak in the Taxpayer Relief Act of 1997. 
The Congress believed that each non-Amtrak State's share should 
be available for appropriate transportation projects within 
that State. Since enactment of the Taxpayer Relief Act of 1997, 
the Congress has become aware of additional appropriate 
transportation projects within the non-Amtrak States.

                        Explanation of Provision

    The provision expands the list of qualified purposes to 
include (a) capital expenditures related to State owned rail 
operations, (b) projects eligible to receive funding under 
section 5309, 5310, or 5311 of Title 49, (c) projects that are 
eligible to receive funding under section 130 or 152 of Title 
23, (d) upgrading and maintenance of intercity primary and 
rural air service facilities, including the purchase of air 
service between primary and rural airports and regional hubs, 
(e) the provision of passenger ferryboat service and (f) 
certain harbor and highway improvements that are eligible to 
receive funding under section 103, 133, 144, and 149 of Title 
23.

                             Effective Date

    The provision is effective on August 5, 1997, as if it had 
been included in the Taxpayer Relief Act of 1997.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

D. Exclusion from Income for Employer-Provided Transportation Benefits 
            (sec. 9010 of the Act and sec. 132 of the Code)

                         Present and Prior Law

    Qualified transportation fringe benefits provided by an 
employer are excluded from an employee's gross income. 
Qualified transportation fringe benefits include parking, 
transit passes, and vanpool benefits. In addition, in the case 
of employer-provided parking, no amount is includible in income 
of an employee merely because the employer offers the employee 
a choice between cash and employer-provided parking. Under 
prior law, transit passes and vanpool benefits were only 
excludable if provided in addition to, and not in lieu of, any 
compensation otherwise payable to an employee. Up to $175 per 
month of employer-provided parking is excludable from income. 
Under prior law, up to $65 per month of employer-provided 
transit and vanpool benefits were excludable from gross income. 
Under prior law, these dollar amounts were indexed annually for 
inflation, rounded to the nearest multiple of $5.
    Under present and prior law, qualified transportation 
fringe benefits include a cash reimbursement by an employer to 
an employee. However, in the case of transit passes, a cash 
reimbursement is considered a qualified transportation fringe 
benefit only if a voucher or similar item which may be 
exchanged only for a transit pass is not readily available for 
direct distribution by the employer to the employee. The 
position of the Treasury Department is that a voucher or 
similar item is ``readily available'' if an employer can obtain 
it on terms no less favorable than those available to an 
individual employee and without incurring a significant 
administrative cost.<SUP>12</SUP>
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    \12\ I.R.S. Notice 94-3, 1994 C.B. 327.
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    Present and prior law impose limits on the amount of annual 
additions that can be made to a tax-qualified pension plan. In 
the case of defined contribution plans, the limit is the lesser 
of $30,000 or 25 percent of compensation. For this purpose, 
under section 415(c)(3), compensation is generally taxable 
compensation, plus salary reduction contributions under a 
qualified cash or deferred arrangement (a ``section 401(k) 
plan''), a tax-sheltered annuity (a ``section 403(b) 
annuity''), a SIMPLE plan, certain plans of deferred 
compensation for State and local government employees and 
employees of tax-exempt organizations (a ``sec. 457 plan''), 
and a cafeteria plan. Tax-qualified pension plans are also 
subject to nondiscrimination rules designed to ensure that an 
employer's pension plans benefit a broad cross section of 
employees. For purposes of applying these rules, compensation 
is generally defined as under Code section 415(c)(3). However, 
an employer can elect not to include as compensation salary 
reduction contributions under a section 401(k) plan, 403(b) 
annuity, or cafeteria plan. In addition, as provided by the 
Secretary, an employer can use an alternative definition of 
compensation for nondiscrimination testing purposes. Any such 
alternative definitions must not discriminate in favor of 
highly compensated employees.

                        Explanation of Provision

    The Act permits employers to offer employees a choice 
between cash compensation or any qualified transportation 
benefit or a combination of any of such benefits. Thus, under 
the Act, no amount is includible in gross income or wages 
merely because the employee is offered the choice of cash in 
lieu of one or more qualified transportation benefits (up to 
the applicable dollar limit). Also, no amount is includible in 
income or wages merely because the employee is offered a choice 
among qualified transportation benefits. The amount of cash 
offered is includible in income and wages only to the extent 
the employee elects cash.
    It is intended that salary reduction amounts used to 
provide qualified transportation benefits under the provision 
be treated for pension plan purposes the same as other salary 
reduction contributions. Thus, it is intended that such amounts 
be included for purposes of applying the limits on 
contributions and benefits, and that an employer may elect 
whether or not to include such amounts in compensation for 
nondiscrimination testing.<SUP>13</SUP> It is expected that the 
Secretary, in prescribing rules regarding the alternative 
definition of compensation, will treat salary reduction amounts 
under this provision the same as other salary reduction 
contributions.
---------------------------------------------------------------------------
    \13\ A technical correction may be necessary so that the statute 
reflects this intent.
---------------------------------------------------------------------------
    The provision does not change the rules regarding when a 
cash reimbursement for transit passes is treated as a qualified 
transportation fringe benefit.
    In addition, beginning in 2002, the Act increases the 
exclusion for transit passes and vanpooling to $100 per month. 
Beginning in 2003, the $100 amount is indexed as under prior 
law.
    Further, the Act provides that there is no indexing of any 
qualified transportation benefit in 1999.

                             Effective Date

    The provision permitting a cash option for any 
transportation benefit is effective for taxable years beginning 
after December 31, 1997; the increase in the exclusion for 
transit passes and vanpooling to $100 per month is effective 
for taxable years beginning after December 31, 2001; and 
indexing on the $100 amount for transit passes and vanpooling 
is effective for taxable years beginning after December 31, 
2002.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $3 million in 1999, $3 million in 2000, $4 
million in 2001, and to decrease Federal fiscal year budget 
receipts by $1 million in 2002, $3 million in 2003, $10 million 
in 2004, $7 million in 2005, $12 million in 2006, and $8 
million in 2007.

               E. Identification of Limited Tax Benefits

                         (sec. 9012 of the Act)

                         Present and Prior Law

    The Line Item Veto Act amended the Congressional Budget and 
Impoundment Act of 1974 to grant the President the limited 
authority to cancel specific dollar amounts of discretionary 
budget authority, certain new direct spending, and limited tax 
benefits. The Line Item Veto Act provides that the Joint 
Committee on Taxation is required to examine any revenue or 
reconciliation bill or joint resolution that amends the 
Internal Revenue Code of 1986 prior to its filing by a 
conference committee in order to determine whether or not the 
bill or joint resolution contains any limited tax benefits and 
to provide a statement to the conference committee that either 
(1) identifies each limited tax benefit contained in the bill 
or resolution, or (2) states that the bill or resolution 
contains no limited tax benefits. The Line Item Veto Act 
provides that the conferees determine whether or not to include 
the Joint Committee's statement in the conference report. If 
the conference report includes the information from the Joint 
Committee on Taxation identifying provisions that are limited 
tax benefits, then the President can cancel one or more of 
those, but only those, provisions that have been identified. If 
such a conference report contains a statement from the Joint 
Committee on Taxation that none of the provisions in the 
conference report are limited tax benefits, then the President 
has no authority to cancel any of the specific tax provisions, 
because there are no tax provisions that are eligible for 
cancellation under the Line Item Veto Act.
    On June 25, 1998, the U.S. Supreme Court held that the 
cancellation procedures set forth in the Line Item Veto Act are 
unconstitutional. Clinton v. City of New York, 118 S. Ct. 2091 
(June 25, 1998).

                        Explanation of Provision

    Pursuant to the provisions of the Line Item Veto Act as in 
effect at the time the Surface Transportation Revenue Act of 
1998 was passed by the Congress, that Act included a provision 
stating that the Joint Committee on Taxation determined that 
the Act contains no provision involving limited tax benefits 
within the meaning of the Line Item Veto Act.

PART TWO: INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998 
                        (H.R. 2676)<SUP>14</SUP>
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    \14\ P.L. 105-206. H.R. 2676 was reported by the House Committee on 
Ways and Means on October 31, 1997 (H. Rept. 105-364, Part I). The 
House passed the bill on November 5, 1997, and added (as new Title VI) 
the provisions of H.R. 2645 (``Tax Technical Corrections Act of 1997'') 
as previously reported by the Committee on Ways and Means (H. Rept. 
105-356, October 29, 1997).
    H.R. 2676 was reported, as amended, by the Senate Committee on 
Finance on April 22, 1998 (S. Rept. 105-174), and was passed by the 
Senate, as amended, on May 7, 1998. The conference report on H.R. 2676 
was filed on June 24, 1998 (H. Rept. 105-599). The House passed the 
conference report on June 25, 1998, and the Senate passed it on July 9, 
1998.
    H.R. 2676 was signed by the President on July 22, 1998.
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     TITLE I. REORGANIZATION OF STRUCTURE AND MANAGEMENT OF THE IRS

        A. IRS Restructuring and Creation of IRS Oversight Board

1. IRS mission and restructuring (secs. 1001 and 1002 of the Act)

                               Prior Law

IRS mission statement
    Under prior law, the Internal Revenue Service (``IRS'') 
mission statement provided that:

          The purpose of the Internal Revenue Service is to 
        collect the proper amount of tax revenue at the least 
        cost; serve the public by continually improving the 
        quality of our products and services; and perform in a 
        manner warranting the highest degree of public 
        confidence in our integrity and fairness.
IRS organizational plan
    Under Reorganization Plan No. 1 of 1952, the IRS is 
organized into a 3-tier geographic structure with a multi-
functional National Office, Regional Offices, and District 
Offices. A number of IRS reorganizations have occurred since 
then, but no major changes have been made to the basic 3-tier 
structure. A 1995 reorganization provided for a Regional 
Commissioner, a Regional Counsel and a Regional Director of 
Appeals for each of the following 4 regions: (1) the Northeast 
Region (headquartered in New York); (2) the Southeast Region 
(Atlanta); (3) the Midstates Region (Dallas); and (4) the 
Western Region (San Francisco). There were 33 District Offices, 
10 service centers, and 3 computing centers.

                           Reasons for Change

    The Congress believed that a key reason for taxpayer 
frustration with the IRS is the lack of appropriate attention 
to taxpayer needs. Taxpayers should be able to receive from the 
IRS the same level of service expected from the private sector. 
For example, taxpayer inquiries should be answered promptly and 
accurately; taxpayers should be able to obtain timely 
resolutions of problems and information regarding activity on 
their accounts; and taxpayers should be treated fairly and 
courteously at all times. The Commissioner of Internal Revenue 
has indicated his interest in improving customer service. The 
Congress believed that taxpayer service is of such importance 
that the Congress should not only support the Commissioner's 
efforts, but also mandate that a key part of the IRS mission 
must be taxpayer service.
    The Commissioner announced a broad outline of a plan to 
reorganize the structure of the IRS in order to help make the 
IRS more oriented toward assisting taxpayers and providing 
better taxpayer service. Under this plan, the present regional 
structure would be replaced with a structure based on units 
that serve particular groups of taxpayers with similar needs. 
The Commissioner preliminarily identified four different groups 
of taxpayers with similar needs: individual taxpayers, small 
businesses, large businesses, and the tax-exempt sector 
(including employee plans, exempt organizations and State and 
local governments). Under this structure, each unit would be 
charged with end-to-end responsibility for serving a particular 
group of taxpayers. The Commissioner believed that this type of 
structure will solve many of the problems taxpayers encounter 
now with the IRS. For example, each of the 33 district offices 
and 10 service centers were required to deal with every kind of 
taxpayer and every type of issue. The proposed plan would 
enable IRS personnel to understand the needs and problems 
affecting particular groups of taxpayers, and better address 
those issues. The prior-law structure also impeded continuity 
and accountability. For example, if a taxpayer moved, the 
responsibility for the taxpayer's account moved to another 
geographical area. Further, every taxpayer was serviced by both 
a service center and at least one district. Thus, many 
taxpayers had to deal with different IRS offices on the same 
issues. The proposed structure would eliminate many of these 
problems.
    The Congress believed that the former IRS organizational 
structure was one of the factors contributing to the inability 
of the IRS to properly serve taxpayers and the proposed 
structure would help enable the IRS to better serve taxpayers 
and provide the necessary level of services and accountability 
to taxpayers. The Congress supported the Commissioner in his 
efforts to modernize and update the IRS and believed it 
appropriate to provide statutory direction for the 
reorganization of the IRS.

                        Explanation of Provision

    The IRS is directed to revise its mission statement to 
provide greater emphasis on serving the public and meeting the 
needs of taxpayers.
    The IRS Commissioner is directed to restructure the IRS by 
eliminating or substantially modifying the three-tier 
geographic structure and replacing it with an organizational 
structure that features operating units serving particular 
groups of taxpayers with similar needs. The plan is also 
required to ensure an independent appeals function within the 
IRS. As part of ensuring an independent appeals function, the 
reorganization plan is to prohibit ex parte communications 
between appeals officers and other IRS employees to the extent 
such communications appear to compromise the independence of 
the appeals officers. The legality of IRS actions is not 
affected pending further appropriate statutory changes relating 
to such a reorganization (e.g., eliminating statutory 
references to obsolete positions).

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
2. Establishment and duties of IRS Oversight Board (sec. 1101 of the 
        Act and sec. 7802 of the Code)

                         Present and Prior Law

    The administration and enforcement of the internal revenue 
laws are performed by or under the supervision of the Secretary 
of the Treasury.<SUP>15</SUP> The Secretary has delegated the 
responsibility to administer and enforce the Internal Revenue 
laws to the Commissioner. The Commissioner has the final 
authority of the IRS concerning the substantive interpretation 
of the tax laws as reflected in legislative and regulatory 
proposals, revenue rulings, letter rulings, and technical 
advice memoranda. The duties of the Chief Counsel of the IRS 
are prescribed by the Secretary. Under prior law, the Secretary 
delegated authority over the Chief Counsel to General Counsel 
of the Treasury, and the General Counsel delegated authority to 
serve as the legal adviser to the Commissioner to the Chief 
Counsel.
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    \15\ Code section 7801(a).
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    Federal employees are subject to rules designed to prevent 
conflicts of interest or the appearance of conflicts of 
interest. The rules applicable to any particular employee 
depend in part on whether the employee is a regular, full-time 
Federal Government employee or a special government employee, 
the length of service of the employee and the pay grade of the 
employee. A ``special government employee'' is, in general, an 
officer or employee of the executive or legislative branch of 
the U.S. government who is appointed or employed to perform 
(with or without compensation) for not to exceed 130 days 
during any period of 365 days, temporary duties either on a 
full-time or intermittent basis. Violations of the ethical 
conduct rules aregenerally punishable by imprisonment for up to 
1 year (5 years in the case of wilful conduct), a civil fine, or both. 
The amount of the fine with respect to each violation cannot exceed the 
greater of $50,000 or the compensation received by the employee in 
connection with the prohibited conduct.
    Under the ethical conduct rules, all Federal Government 
employees (including special government employees) are 
precluded from participating in a matter in which the employee 
(or a related party) has a financial interest. In addition, 
special government employees cannot represent a party (whether 
or not for compensation) or receive compensation for 
representation of a party <SUP>16</SUP> in relation to a matter 
(1) in which the employee has at any time participated 
personally and substantially, or (2) which is pending in the 
department or agency of the Government in which the special 
government employee is serving. In the case of a special 
government employee who has served in a department no more than 
60 days during the immediately preceding 365 days, item (2) 
does not apply. Thus, for example, such an individual can 
receive compensation for representational services with respect 
to matters pending in the department in which the employee 
serves, as long as it is not a matter involving parties in 
which the employee personally and substantially 
participated.<SUP>17</SUP>
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    \16\ The prohibition on receipt of compensation applies regardless 
of whether the services are performed by the Federal employee or 
someone else. For example, it would preclude a Federal employee from 
sharing in the compensation received by a partner of the Federal 
employee with respect to covered matters.
    \17\ More stringent rules apply to regular Federal Government 
employees. Such employees generally cannot receive compensation for 
representational services (whether rendered by the individual or 
another) in matters in which the United States is a party or has a 
direct and substantial interest before any department, agency or court. 
In addition, a Federal Government employee generally cannot act as 
agent or attorney (whether or not for compensation) for prosecuting any 
claim against the United States or act as agent or attorney for anyone 
before any department, agency, or court in which the United States is a 
party or has a direct and substantial interest.
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    The conflict of interest rules also impose restrictions on 
what a Federal Government employee can do after leaving the 
Government. Under these rules, senior level officers and 
employees (including special government employees) who served 
at least 60 days cannot represent anyone other than the United 
States before the individual's former department or agency for 
1 year after terminating employment. Whether an employee is a 
senior level officer or employee is determined by pay grade. 
The one-year post employment restriction does not apply to 
special government employees who serve less than 60 days during 
the 365-day period before termination of 
employment.<SUP>18</SUP>
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    \18\ All Federal Government employees generally are permanently 
prohibited from representing a party other than the government in 
connection with a particular matter (1) in which the government is a 
party or has an interest, (2) in which the individual participated 
personally and substantially, and (3) which involved a specific party 
or parties at the time of their participation. In addition, Federal 
employees generally cannot, within 2 years after terminating 
employment, represent any person other than the United States in 
connection with any matter (1) in which the government is a party or 
has a direct and substantial interest, (2) which the person knows or 
reasonably should know was actually pending under his or her official 
responsibility within one year before termination of employment, and 
(3) which involved a specific party or parties at the time it was 
pending.
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    Federal employees with pay grades above certain levels (and 
who have at least 60 days of service) are required to file 
annually public financial disclosures.

                           Reasons for Change

    The Congress believed that a well-run IRS is critical to 
the operation of our tax system. Public confidence in the IRS 
must be restored so that our system of voluntary compliance 
will not be compromised. The Congress believed that most 
Americans are willing to pay their fair share of taxes, and 
that public confidence in the IRS is key to maintaining that 
willingness.
    The National Commission on Restructuring the IRS (the 
``Restructuring Commission'') conducted a year-long study of 
the IRS and found that a number of factors contribute to 
current IRS management problems. The Restructuring Commission 
found that, while the Treasury is responsible for IRS 
oversight, it has generally provided little consistent 
strategic oversight or guidance to the IRS. The Secretary and 
Deputy Secretary have many other broad responsibilities and 
generally leave the IRS largely independent. The average tenure 
of an IRS Commissioner is under 3 years, as is the average 
tenure of senior Treasury officials responsible for IRS 
oversight. Many of the issues that need to be addressed by the 
IRS require expertise in various areas, particularly management 
and technology.
    The Restructuring Commission concluded the following:

          ``problems throughout the IRS cannot be solved 
        without focus, consistency and direction from the top. 
        The current structure, which includes Congress, the 
        President, the Department of the Treasury, and the IRS 
        itself, does not allow the IRS to set and maintain 
        consistent long-term strategy and priorities, nor to 
        develop and execute focused plans for improvement. 
        Additionally, the structure does not ensure that the 
        IRS budget, staffing and technology are targeted toward 
        achieving organizational success.''

    The Congress shared the concerns of the Commission, and 
believed that fundamental change in IRS management and 
oversight is essential. The Congress believed that a new 
management structure that will bring greater expertise in 
needed areas, and more focus and continuity will help the IRS 
to become an efficient, responsive, and respected agency that 
acts appropriately in carrying out its functions.
    The Congress believed that private sector input is a 
necessary part of any new management structure. The Congress 
believed that appropriate ethics rules should be applied to the 
private sector members of the new IRS management in order to 
enhance the ability of such members to demonstrate impartiality 
in the performance of their duties, while not unduly 
restricting the available pool of potential candidates.
    The Congress was aware that the taxpaying public does not 
relish contacts with the agency responsible for collecting 
taxes. Nevertheless, by establishing a new management structure 
that will better enable the IRS to develop and fulfill long-
term goals, the Congress believed the IRS would provide better 
service and reduce IRS contact with taxpayers. The Congress was 
also aware that changes being made to IRS management structure 
are not the final step, and that continued oversight of the 
IRS, by Congress as well as the Administration, is necessary in 
order to ensure long-term progress.

                        Explanation of Provision

Duties, responsibilities, and powers of the IRS Oversight Board

            General responsibilities of the Board
    The provision provides for the establishment within the 
Treasury Department of the Internal Revenue Service Oversight 
Board (referred to as the ``Board''). The general 
responsibilities of the Board are to oversee the IRS in the 
administration, management, conduct, direction, and supervision 
of the execution and application of the internal revenue laws. 
As part of its oversight responsibilities, the Board has the 
responsibility to ensure that the organization and operation of 
the IRS allow it to carry out its mission.
            Specific responsibilities of the Board
    The Board has the following specific responsibilities: (1) 
to review and approve strategic plans of the IRS, including the 
establishment of mission and objectives (and standards of 
performance) and annual and long-range strategic plans; (2) to 
review the operational functions of the IRS, including plans 
for modernization of the tax administration system, outsourcing 
or managed competition, and training and education; (3) to 
review and approve the Commissioner's plans for major 
reorganization of the IRS; and (4) to review operations of the 
IRS in order to ensure the proper treatment of taxpayers. The 
Board also has the following specific responsibilities relating 
to management: (1) to recommend to the President candidates for 
Commissioner (and to recommend the removal of the 
Commissioner); and (2) to review the Commissioner's selection, 
evaluation, and compensation of IRS senior executives who have 
program management responsibility over significant functions of 
the IRS. The Congress expected that the Chair of the Board will 
consider establishing a financial management subcommittee to 
advise the Commissioner on financial management issues.
    Consistent with the Board's responsibility to review and 
approve plans for major reorganizations, Congress intended for 
the Board to have the authority to review and approve the 
reorganization plan that is contained in Title I of the Act. 
However, to the extent that the Commissioner has already taken 
measures to develop and implement such a plan, Congress did not 
want to impede such efforts. Thus, Congress did not intend in 
any way that the Commissioner should be precluded from moving 
ahead with such planning and implementation prior to the 
appointment of the Board.
    In addition, the Board's specific responsibilities include 
the responsibility to review and approve the budget request of 
the IRS prepared by the Commissioner, submit such budget 
request to the Secretary, and ensure that the budget request 
supports the annual and long-range strategic plans of the IRS. 
The Secretary is required to submit the budget request approved 
by the Board to the President, who is required to submit such 
request, without revision, to the Congress together with the 
President's annual budget request for the IRS. The provision 
does not affect the ability of the President to include, in 
addition, his own budget request relating to the IRS.
    It is intended that the Board will reach a formal decision 
on all matters subject to its review. With respect to those 
matters over which the Board has approval authority, the 
Board's decisions will be determinative.
    The Board has no responsibilities or authority with respect 
to the development and formulation of Federal tax policy 
relating to existing or proposed internal revenue laws. In 
addition, the Board has no authority (1) to intervene in 
specific taxpayer cases, including compliance activities 
involving specific taxpayers such as criminal investigations, 
examinations, and collection activities, (2) to engage in 
specific procurement activities of the IRS (e.g., selecting 
vendors or awarding contracts), or (3) to intervene in specific 
individual personnel matters.
    In exercising its duties, it is expected that the members 
of the Board shall maintain appropriate confidentiality (e.g., 
regarding enforcement matters).
    It is expected that the Treasury Department will no longer 
utilize the IRS Management Board once the new Board created by 
the provision is in place, as the functions of the IRS 
Management Board would be taken over by the new Board.
            Composition of the Board
    The Board is composed of 9 members. Six of the members are 
so-called ``private-life'' members who are not otherwise 
Federal officers or employees. These private-life members are 
appointed by the President, with the advice and consent of the 
Senate. The other members are: (1) the Secretary (or, if the 
Secretary so designates, the Deputy Secretary); (2) the 
Commissioner; and (3) an individual who is a full-time Federal 
employee or a representative of employees (``employee 
representative'') and who is appointed by the President, with 
the advice and consent of the Senate.
            Section 6103 authority
    Board members have limited access to confidential tax 
return and return information under section 6103. This limited 
access permits the Board to receive such information (i.e., 
information that has not been redacted to remove confidential 
tax return and return information) from the Treasury IG for Tax 
Administration or the Commissioner in connection with reports 
made to the Board. This access to section 6103 information does 
not include the taxpayer's name, address, or taxpayer or 
employer identification number. The Board members are subject 
to the anti-browsing rules applicable to IRS employees under 
present law.<SUP>19</SUP>
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    \19\ The provision does not affect the Secretary's (or Deputy 
Secretary's) or the Commissioner's access to section 6103 information 
or the application of the anti-browsing rules to the Secretary (or 
Deputy Secretary) or the Commissioner.
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            Qualifications of Board members
    The private-life members of the Board are appointed without 
regard to political affiliation and based solely on their 
expertise in the following areas: (1) management of large 
service organizations; (2) customer service; (3) the Federal 
tax laws, including administration and compliance; (4) 
information technology; (5) organization development; (6) the 
needs and concerns of taxpayers; and (7) the needs and concerns 
of small businesses. In the aggregate, the private-life members 
of the Board should collectively bring to bear expertise in 
these enumerated areas.
    A private-life Board member and the employee representative 
Board member may be removed at the will of the President. In 
addition, the Secretary (or Deputy Secretary) and the IRS 
Commissioner are automatically removed from the Board upon his 
or her termination of employment as such.

Ethical standards for private-life members

            Representational activities and compensation matters
    The ethical conduct rules applicable to private-life Board 
members depend on whether or not such members are determined to 
be ``special government employees'' under Federal law. It is 
expected that they generally will be.<SUP>20</SUP> In that 
case, they will be subject, at a minimum, to the ethical 
conduct rules applicable to special government employees. In 
addition, during their term as a Board member, a private-life 
Board member cannot represent any party (whether or not for 
compensation) with respect to (1) any matter before the Board 
or the IRS, (2) any tax-related matter before the Treasury 
Department or (3) any court proceeding with respect to a matter 
described in (1) or (2). Thus, for example, the day after 
appointment to the Board, a private-life Board member could not 
meet with representatives of the IRS or Treasury on behalf of a 
client or the Board member's corporate employer with respect to 
proposed tax regulations. On the other hand, the Board member 
could, for example, represent clients before the U.S. Customs 
Service. The special rules applicable to private-life Board 
members generally do not preclude the Board member from sharing 
in compensation from representation of clients by another 
person (e.g., a partner of the Board member) before the IRS or 
Treasury.<SUP>21</SUP>
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    \20\ If the Board members are determined not to be special 
government employees, then they will be subject to the ethical conduct 
rules relating to regular Federal Government employees.
    \21\ Certain limitations to this exception to the otherwise 
applicable ethical rules apply. For example, this exception does not 
apply if the matter was one in which the Board member personally and 
substantially participated.
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            Post-employment restrictions
    Private-life Board members are subject to the 1-year post 
employment restriction applicable to individuals above certain 
pay grades and who have served at least 60 days (whether or not 
the members are special government employees).
            Financial disclosure reports
    The private-life Board members are subject to the public 
financial disclosure rules applicable to Federal government 
employees above certain pay grades and who have at least 60 
days of service. Thus, the private-life Board members are 
required to file a public financial disclosure report for 
purposes of confirmation, annually during their tenure on the 
Board, and upon termination of appointment.

Ethical standards for employee representative

    The same ethics rules applicable to the private-life 
members regarding the representational activities and 
compensation matters apply to the employee representative if 
the individual is a special government employee (i.e., the 
individual is not already an officer or employee of the Federal 
Government). In addition, the same post-employment restrictions 
and the financial disclosure requirements applicable to the 
private-life members apply to the employee representative.
    The provision grants the President the authority to waive, 
at the time the President nominates the employee representative 
to the Board, for the term of the member, any appropriate 
provisions of chapter 11 of title 18 of the United States Code, 
to the extent such waiver is necessary to allow such member to 
participate in the decisions of the Board while continuing 
toserve as an employee representative. Any such waiver is not effective 
unless a written intent of waiver to exempt the member (and the actual 
waiver language) is submitted to the Senate with the nomination of the 
member. It is not intended that waiver of the restrictions on post-
employment provided under the provision be necessary to allow such 
member to participate in the decisions of the Board while continuing to 
serve as an employee representative.

Administrative matters

            Term of appointments
    The 6 private-life Board members and the employee 
representative are appointed for 5-year terms. The private-life 
members and the employee representative may serve no more than 
two 5-year terms. Board member terms are staggered, as a result 
of a special rule providing that some private-life members 
first appointed to the Board serve terms of less than 5 years. 
Under this rule, 2 private-life members first appointed have a 
term of 3 years, 2 private-life members have a term of 4 years, 
and 2 private-life members have a term of 5 years. The terms of 
the initial Board members run from the date of appointment. 
Subsequent terms will run from expiration of the previous term. 
A Board member appointed to fill a vacancy before the 
expiration of a term will be appointed to the remainder of the 
term. Such a member could be appointed to subsequent 5-year 
term.
            Chair of the Board
    The members of the Board are to elect a Chair from the 
private-life members for a 2-year term. Except as otherwise 
provided by a majority of the Board, the authority of the Chair 
includes the authority to hire appropriate staff, call 
meetings, establish committees, establish the agenda for 
meetings, and develop rules for the conduct of business.
            Meetings and quorum
    The Board is required to meet on a regular basis (as 
determined necessary by the Chair), but no less frequently than 
quarterly. The Board can meet privately, and is not subject to 
public disclosure laws.
    A quorum of 5 members is required in order for the Board to 
conduct business. Actions of the Board can be taken by a 
majority vote of those members present and voting.
            Staffing
    The Chair is authorized to hire (and terminate) such 
personnel as the Chair finds necessary to enable the Board to 
carry out its duties. In addition, the Board will have such 
staff as detailed by the Commissioner or from another Federal 
agency at the request of the Chair of the Board. The Chair can 
procure temporary and intermittent services under section 
3109(b) of title 5 of the U.S. Code. The Congress intended that 
the size of the staff be limited to a small number, and the 
Board is encouraged to use outside consultants whenever 
necessary.
            Claims against Board members
    The private-life Board members and the employee 
representative have no personal liability under Federal law 
with respect to any claim arising out of or resulting from an 
act or omission by the Board member within the scope of service 
as a Board member. The provision does not affect any other 
immunities and protections that may be available under 
applicable law or any other right or remedy against the United 
States under applicable law, or limit or alter the immunities 
that are available under applicable law for Federal officers 
and employees.
            Compensation of Board members
    The private-life members of the Board are compensated at a 
rate of $30,000 per year, except that the Chair is compensated 
at a rate of $50,000 a year. The employee representative member 
of the Board is compensated at a rate of $30,000 per year 
unless the individual is already an officer or employee of the 
Federal Government. The other Board members will receive no 
compensation for their services as a Board member. The members 
of the Board are entitled to travel expenses for purposes of 
attending meetings of the Board. Travel expenses other than 
those incurred to attend Board meetings are allowed if approved 
in advance by the Chair, and the Board is to report annually to 
Congress the amount of travel expenditures incurred by the 
Board.
            Reports
    The Board is required to report each year regarding the 
conduct of its responsibilities, and information on travel 
expenditures incurred. The annual report is to be provided to 
the President and the House Committees on Ways and Means, 
Government Reform and Oversight, and Appropriations and the 
Senate Committees on Finance, Governmental Affairs, and 
Appropriations. In addition, the Board is required to report to 
the Ways and Means and Finance Committees if the IRS does not 
address problems identified by the Board.

                             Effective Date

    The provisions relating to the Board are effective on the 
date of enactment (July 22, 1998). The President is directed to 
submit nominations for Board members to the Senate within 6 
months of the date of enactment. Provisions relating to the 
Board are not to be construed to invalidate the actions and 
authority of the IRS prior to the appointment of members of the 
Board.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

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

1. IRS Commissioner and other personnel (secs. 1102(a) and 1104 of the 
        Act and secs. 7803 and 7804 of the Code)

                         Present and Prior Law

    Within the Department of the Treasury is a Commissioner of 
Internal Revenue, who is appointed by the President, with the 
advice and consent of the Senate. Under prior law, the 
Commissioner had such duties and powers as were prescribed by 
the Secretary.<SUP>22</SUP> The Secretary has delegated to the 
Commissioner the administration and enforcement of the internal 
revenue laws.<SUP>23</SUP> The Commissioner generally does not 
have authority with respect to tax policy matters.<SUP>24</SUP>
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    \22\ Code section 7802(a).
    \23\ Treasury Order 150-10 (April 22, 1982).
    \24\ See, e.g., Treasury Order 111-2 (March 16, 1981), which 
delegates to the Assistant Secretary (Tax Policy) the exclusive 
authority to make the final determination of the Treasury Department's 
position with respect to issues of tax policy arising in connection 
with regulations, published Revenue Rulings and Revenue Procedures, and 
tax return forms and to determine the time, form and manner for the 
public communication of such position.
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    The Secretary is authorized to employ such persons as the 
Secretary deems appropriate for the administration and 
enforcement of the internal revenue laws and to assign posts of 
duty.

                           Reasons for Change

    The Congress believed that the duties and responsibilities 
of the Commissioner are of such significance that the 
Commissioner should continue to be appointed by the 
President.<SUP>25</SUP> However, the frequency with which the 
Commissioner changes--the average tenure in office is under 3 
years--is one of the factors contributing to lack of IRS 
management continuity. The Congress believed (as did the 
National Commission on Restructuring the IRS) that providing a 
statutory term for the Commissioner to serve would help ensure 
greater continuity of IRS management.
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    \25\ Retaining prior law also eliminates any constitutional issues 
that may arise if the Commissioner is appointed by someone other than 
the President, such as by the Board, as suggested by the National 
Commission on Restructuring the IRS.
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                        Explanation of Provision

    As under prior law, the Commissioner is appointed by the 
President, with the advice and consent of the Senate, and may 
be removed at will by the President. Under the provision, one 
of the qualifications of the Commissioner is demonstrated 
ability in management. The Commissioner is appointed to a 5-
year term, beginning with the date of appointment. The 
Commissioner may be reappointed for more than one 5-year term. 
The Board recommends candidates to the President for the 
position of Commissioner; however, the President is not 
required to nominate for Commissioner a candidate recommended 
by the Board. The Board has the authority to recommend the 
removal of the Commissioner.
    The Commissioner has such duties and powers as prescribed 
by the Secretary. Unless otherwise specified by the Secretary, 
such duties and powers include the power to administer, manage, 
conduct, direct, and supervise the execution and application of 
the internal revenue laws or related statutes and tax 
conventions to which the United States is a party, to exercise 
the IRS' final authority concerning the substantive 
interpretation of the tax laws, and to recommend to the 
President a candidate for Chief Counsel (and recommend the 
removal of the Chief Counsel). If the Secretary determines not 
to delegate such specified duties to the Commissioner, such 
determination will not take effect until 30 days after the 
Secretary notifies the House Committees on Ways and Means, 
Government Reform and Oversight, and Appropriations, and the 
Senate Committees on Finance, Governmental Affairs, and 
Appropriations. The Commissioner is to consult with the Board 
on all matters within the Board's authority (other than the 
recommendation of candidates for Commissioner and the 
recommendation to remove the Commissioner).
    Unless otherwise specified by the Secretary, the 
Commissioner is authorized to employ such persons as the 
Commissioner deems proper for the administration and 
enforcement of the internal revenue laws and is required to 
issue all necessary directions, instructions, orders, and rules 
applicable to such persons. Unless otherwise provided by the 
Secretary, the Commissioner will determine and designate the 
posts of duty.

                             Effective Date

    The provisions relating to the Commissioner are effective 
on the date of enactment (July 22, 1998). The provision 
relating to the 5-year term of office applies to the 
Commissioner in office on the date of enactment. The 5-year 
term runs from the date of appointment.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

2. IRS Chief Counsel (sec. 1102(b) of the Act and sec. 7803 of the 
        Code)

                         Present and Prior Law

    The President is authorized to appoint, by and with the 
consent of the Senate, an Assistant General Counsel of the 
Treasury, who is the Chief Counsel of the IRS. The Chief 
Counsel is the chief law officer for the IRS and has had such 
duties as may be prescribed by the Secretary. The Secretary has 
delegated authority over the Chief Counsel to the Treasury 
General Counsel. Under prior law, the Chief Counsel did not 
report to the Commissioner, but to the Treasury General 
Counsel. As delegated by the Treasury General Counsel, the 
duties of the Chief Counsel included: (1) to be the legal 
advisor to the Commissioner and his or her officers and 
employees; (2) to furnish such legal opinions as may be 
required in the preparation and review of rulings and memoranda 
of technical advice and the performance of other duties 
delegated to the Chief Counsel; (3) to prepare, review, or 
assist in the preparation of proposed legislation, treaties, 
regulations and Executive Orders relating to laws affecting the 
IRS; (4) to represent the Commissioner in cases before the Tax 
Court; (5) to determine what civil actions should be brought in 
the courts under the laws affecting the IRS and to prepare 
recommendations to the Department of Justice for the 
commencement of such actions and to authorize or sanction 
commencement of such actions.

                        Explanation of Provision

    As under prior law, the Chief Counsel is appointed by the 
President, with the advice and consent of the Senate.
    The Chief Counsel is to report directly to the 
Commissioner, with two exceptions. First, the Chief Counsel is 
to report to both the Commissioner and the General Counsel of 
the Treasury Department with respect to (1) legal advice or 
interpretation of the tax law not relating solely to tax 
policy, and (2) tax litigation. Under this rule, the Congress 
intended that the Chief Counsel's dual reporting to the 
Commissioner and to the General Counsel include reporting with 
respect to legal advice or interpretation of the tax law set 
forth in regulations, revenue rulings and revenue procedures, 
technical advice and other similar memoranda, private letter 
rulings, and published guidance not described in the foregoing.
    Second, the Chief Counsel is to report to the General 
Counsel with respect to legal advice or interpretation of the 
tax law relating solely to tax policy. Under this rule, the 
Congress intended that the Chief Counsel's reporting to the 
General Counsel include proposed legislation and international 
tax treaties.
    The provision provides that if there is any disagreement 
between the Commissioner and the General Counsel with respect 
to any matter on which the Chief Counsel has dual reporting to 
both the Commissioner and the General Counsel, the matter is to 
be submitted to the Secretary or the Deputy Secretary of the 
Treasury for resolution.
    The Congress intended that under the general rule, the 
Chief Counsel's reporting directly to the Commissioner include 
reporting with respect to budget, organizational structure and 
reorganizations, mission and strategic plans. In addition, the 
Congress intended that the Chief Counsel's reporting directly 
to the Commissioner include reporting with respect to all 
matters relating to the day-to-day operations of the IRS, such 
as management of the IRS and procurement.
    The provision provides that all personnel in the Office of 
the Chief Counsel are to report to the Chief Counsel (and not 
to any person at the IRS or elsewhere within the Treasury 
Department).
    The Chief Counsel has such duties and powers as prescribed 
by the Secretary. Unless otherwise specified by the Secretary, 
these duties include the duties delegated under prior law to 
the Chief Counsel as described above. If the Secretary 
determines not to delegate such specified duties to the Chief 
Counsel, such determination is subject to the same notice 
requirement applicable to changes in the delegation of 
authority with respect to the Commissioner.

                             Effective Date

    The provision is generally effective on the date of 
enactment (July 22, 1998). The provision providing that the 
Chief Counsel reports directly to the Commissioner is effective 
90 days after the date of enactment (October 20, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

C. Structure and Funding of the Employee Plans and Exempt Organizations 
 Division (``EP/EO'') (sec. 1101 of the Act and former sec. 7802(b) of 
                               the Code)

                               Prior Law

    Prior to 1974, no one specific office in the IRS had 
primary responsibility for employee plans and tax-exempt 
organizations. As part of the reforms contained in the Employee 
Retirement Income Security Act of 1974 (``ERISA''), Congress 
statutorily created the Office of Employee Plans and Exempt 
Organizations (``EP/EO'') under the direction of an Assistant 
Commissioner.<SUP>26</SUP> EP/EO was created to oversee 
deferred compensation plans governed by sections 401-414 of the 
Code and organizations exempt from tax under Code section 
501(a).
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    \26\ Former Code section 7802(b).
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    In general, EP/EO was established in response to concern 
about the level of IRS resources devoted to oversight of 
employee plans and exempt organizations. The legislative 
history of Code section 7802(b) states that, with respect to 
administration of laws relating to employee plans and exempt 
organizations, ``the natural tendency is for the Service to 
emphasize those areas that produce revenue rather than those 
areas primarily concerned with maintaining the integrity and 
carrying out the purposes of exemption provisions.'' 
<SUP>27</SUP>
---------------------------------------------------------------------------
    \27\ S. Rept. 93-383, 108 (1973). See also H. Rept. 93-807, 104 
(1974).
---------------------------------------------------------------------------
    To provide funding for the new EP/EO office, ERISA 
authorized the appropriation of an amount equal to the sum of 
the section 4940 excise tax on investment income of private 
foundations (assuming a rate of 2 percent) as would have been 
collected during the second preceding year plus the greater of 
the same amount or $30 million.<SUP>28</SUP> However, amounts 
raised by the section 4940 excise were never dedicated to the 
administration of EP/EO, but were transferred instead to 
general revenues. Thus, the level of EP/EO funding, like that 
of the rest of the IRS, has always been dependent on annual 
Congressional appropriations to the Treasury Department.
---------------------------------------------------------------------------
    \28\ Former Code section 7802(b)(2).
---------------------------------------------------------------------------

                           Reasons for Change

    To facilitate the reorganization of the IRS along 
functional lines, the Congress believed that the statutory 
provision requiring the establishment of the Office of Employee 
Plans and Exempt Organizations under the direction of an 
Assistant Commissioner should be eliminated. In addition, 
because the funding formula for EP/EO set forth in section 
7802(b)(2) would, if utilized, result in an unstable level of 
funding that may bear little or no relation to the amount of 
financial resources actually required by the EP/EO division, 
the Congress believed that it was appropriate to repeal the 
funding mechanism.

                        Explanation of Provision

    The Act eliminates the statutory requirement contained in 
section 7802(b) that there be an ``Office of Employee Plans and 
Exempt Organizations'' under the supervision and direction of 
an Assistant Commissioner. However, the Congress intended that 
a comparable structure be created administratively to ensure 
that adequate resources within the IRS are devoted to oversight 
of the tax-exempt sector.
    In addition, the Act repeals the funding mechanism set 
forth in section 7802(b)(2). Thus, the appropriate level of 
funding for EP/EO is, consistent with current practice, subject 
to annual Congressional appropriations, as are other functions 
within the IRS. In this regard, however, the Congress noted 
that, given the magnitude of the sectors EP/EO is charged with 
regulating, as well as the unique nature of its mandate, an 
adequately funded EP/EO is extremely important to the efficient 
and fair administration of the Federal tax system. Accordingly, 
the Congress intended that financial resources for EP/EO should 
not be constrained on the basis that EP/EO isa ``non-core'' IRS 
function; rather, EP/EO, like all functions of the IRS, should be 
funded so as to promote the efficient and fair administration of the 
Federal tax system.
    For example, the Congress noted that it is important to 
allocate sufficient funds for EP/EO staffing adequately to 
monitor and assist businesses in establishing and maintaining 
retirement plans. In Revenue Procedure 98-22, the IRS announced 
the expansion of the self-correction programs it offers 
employers to encourage companies to identify and correct errors 
without incurring significant penalties. The Congress welcomed 
these changes, and did not intend that the elimination of the 
statutory requirement contained in section 7802(b)(1) or the 
self-funding mechanism described in section 7802(b)(2) impede 
the implementation of these and EP/EO's other programs and 
activities. Rather, the Congress intended that there be 
adequate funding for EP/EO, including these self-correction 
programs that will encourage the establishment and continuation 
of retirement plans to increase coverage of American workers 
while protecting the rights of employees to benefits under 
these plans and maintaining the integrity and purposes of the 
exemption provisions.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

D. Taxpayer Advocate (secs. 1102 (a), (c), and (d) of the Act and sec. 
                          7803(c) of the Code)

                         Present and Prior Law

Taxpayer Advocate

    In 1996, the Taxpayer Bill of Rights 2 (``TBOR 2'') 
established the position of Taxpayer Advocate, which replaced 
the position of Taxpayer Ombudsman, created in 1979 by the IRS. 
The Taxpayer Advocate is appointed by and reports directly to 
the IRS Commissioner.
    TBOR 2 also created the Office of the Taxpayer Advocate. 
The functions of the office are (1) to assist taxpayers in 
resolving problems with the IRS, (2) to identify areas in which 
taxpayers have problems in dealings with the IRS, (3) to 
propose changes (to the extent possible) in the administrative 
practices of the IRS that will mitigate those problems, and (4) 
to identify potential legislative changes that may mitigate 
those problems.

Taxpayer assistance orders

    Under the rules enacted in TBOR 2, taxpayers could request 
that the Taxpayer Advocate issue a taxpayer assistance order 
(``TAO'') if the taxpayer is suffering or about to suffer a 
significant hardship as a result of the manner in which the 
internal revenue laws are being administered. A TAO may require 
the IRS to release property of the taxpayer that has been 
levied upon, or to cease any action, take any action as 
permitted by law, or refrain from taking any action with 
respect to the taxpayer.
    Under prior law, the direct point of contact for taxpayers 
seeking taxpayer assistance orders was a problem resolution 
officer appointed by a District Director or a Regional Director 
of Appeals. The Taxpayer Advocate designated the authority to 
issue taxpayer assistance orders to the local and regional 
problem resolution officers.

Reports of the Taxpayer Advocate

    The Taxpayer Advocate is required to report annually to the 
House Committee on Ways and Means and the Senate Finance 
Committee on the objectives of the Taxpayer Advocate for the 
upcoming fiscal year. This report is required to be provided no 
later than June 30 of each calendar year and is to contain full 
and substantive analysis, in addition to statistical 
information.
    The Taxpayer Advocate is also required to report annually 
to the House Committee on Ways and Means and the Senate Finance 
Committee on the activities of the Taxpayer Advocate during the 
most recently ended fiscal year. This report is required to be 
provided no later than December 31 of each calendar year, and 
is to contain full and substantive analysis, in addition to 
statistical information. This report is also required to: (1) 
identify the initiatives the Taxpayer Advocate has taken on 
improving taxpayer services and IRS responsiveness; (2) contain 
recommendations received from individuals with the authority to 
issue TAOs; (3) contain a summary of at least 20 of the most 
serious problems encountered by taxpayers, including a 
description of the nature of such problems; (4) contain an 
inventory of the items described in (1), (2), and (3) for which 
action has been taken and the result of such action; (5) 
contain an inventory of the items described in (1), (2), and 
(3) for which action remains to be completed and the period 
during which each item has remained on such inventory; (6) 
contain an inventory of the items described in (1), (2) and (3) 
for which no action has been taken, the period during which the 
item has remained on the inventory, the reasons for the 
inaction, and identify any IRS official who is responsible for 
the inaction; (7) identify any TAO that was not honored by the 
IRS in a timely manner; (8) contain recommendations for such 
administrative and legislative action as may be appropriate to 
resolve problems encountered by taxpayers; (9) describe the 
extent to which regional problem resolution officers 
participate in the selection and evaluation of local problem 
resolution officers, and (10) include such other information as 
the Taxpayer Advocate deems advisable.
    The reports of the Taxpayer Advocate are to be submitted 
directly to the Congressional Committees without prior review 
or comment from the Commissioner, Secretary, any other officer 
or employee of the Treasury, or the Office of Management and 
Budget.

                           Reasons for Change

    The Congress believed that the Taxpayer Advocate serves an 
important role within the IRS in terms of preserving taxpayer 
rights and solving problems that taxpayers encounter in their 
dealings with the IRS. To that end, it was believed appropriate 
that the IRS Oversight Board have input in the selection of the 
Taxpayer Advocate. Due to the enhanced powers of the Taxpayer 
Advocate in TBOR2 and this legislation, the Congress was 
advised that the Taxpayer Advocate should be appointed by the 
Secretary to avoid constitutional problems. In addition, the 
Congress believed that the Taxpayer Advocate should have 
experience appropriate to the position and that the Taxpayer 
Advocate's objectivity would be best preserved by limiting 
prior and future employment with the IRS. The Congress also 
believed that the reporting requirements of the Taxpayer 
Advocate should be targeted not only towards solving problems 
with the IRS but also towards preventing problems before they 
arise.
    In determining whether a taxpayer assistance order should 
be issued, the Taxpayer Advocate should consider certain 
factors as constituting a ``significant hardship'' for the 
taxpayer. In addition to providing relief if the taxpayer is 
about to suffer a significant hardship, the Taxpayer Assistance 
Order should be issued in other appropriate situations, such as 
if there is an immediate threat of adverse action, if there has 
been a delay of more than 30 days in resolving the taxpayer's 
account problems, the taxpayer will have to pay significant 
costs if relief is not granted, or the taxpayer will suffer 
irreparable injury, or long-term adverse impact, if relief is 
not granted.

                        Explanation of Provision

National Taxpayer Advocate

    The provision renames the Taxpayer Advocate the ``National 
Taxpayer Advocate.'' The National Taxpayer Advocate is 
appointed by the Secretary after consultation with the 
Commissioner and the Board (without regard to the provisions of 
Title 5 of the U.S. Code, relating to appointments in the 
competitive service or the Senior Executive Service). An 
individual may be appointed as the National Taxpayer Advocate 
only if the individual was not an officer or employee of the 
IRS during the 2-year period ending with such appointment and 
the individual agrees not to accept employment with the IRS for 
at least 5 years after ceasing to be the National Taxpayer 
Advocate. Service as an officer or employee of the Office of 
the Taxpayer Advocate is not taken into account, for purposes 
of these 2-year and 5-year rules. The National Taxpayer 
Advocate's compensation is to be at the highest rate of basic 
pay established for the Senior Executive Service, or, if the 
Treasury Secretary so determines, at a rate fixed under 5 U.S. 
Code section 9503.
    The provision replaces the prior-law problem resolution 
system with a system of localTaxpayer Advocates who report 
directly to the National Taxpayer Advocate and who will be employees of 
the Taxpayer Advocate's Office, independent from the IRS examination, 
collection, and appeals functions.
    Each local taxpayer advocate reports to the National 
Taxpayer Advocate or his delegate. The Congress intended that a 
delegate mean the Taxpayer Advocate for the appropriate 
organizational unit. It is not intended that a local Taxpayer 
Advocate report to a District Director of the IRS, for example. 
Providing reporting to a delegate of the National Taxpayer 
Advocate under the provision was intended to provide reporting 
flexibility sufficient to take into account the necessities of 
any reorganization of the IRS.
    The National Taxpayer Advocate has the responsibility to 
evaluate and take personnel actions (including dismissal) with 
respect to any local Taxpayer Advocate or any employee in the 
Office of the National Taxpayer Advocate. In conjunction with 
the Commissioner, the National Taxpayer Advocate is required to 
develop career paths for local Taxpayer Advocates. The Congress 
intended that the National Taxpayer Advocate's responsibility 
to appoint local Taxpayer Advocates and make available at least 
one local Taxpayer Advocate for each State means that a local 
Taxpayer Advocate will be available to taxpayers in each State. 
The Congress intended that the National Taxpayer Advocate be 
able to hire and consult counsel as appropriate.
    The National Taxpayer Advocate is required to monitor the 
coverage and geographical allocation of the local Taxpayer 
Advocates, develop guidance to be distributed to all IRS 
officers and employees outlining the criteria for referral of 
taxpayer inquires to local taxpayer advocates, ensure that the 
local telephone number for the local taxpayer advocate is 
published and available to taxpayers.
    Each local Taxpayer Advocate may consult with the 
appropriate supervisory personnel of the IRS regarding the 
daily operation of the office of the Taxpayer Advocate. At the 
initial meeting with any taxpayer seeking the assistance of the 
Office of the Taxpayer Advocate, the local taxpayer advocate is 
required to notify the taxpayer that the Office operates 
independently of any other IRS office and reports directly to 
Congress through the National Taxpayer Advocate. At the 
discretion of the local taxpayer advocate, the advocate shall 
not disclose to the IRS any contact with or information 
provided by the taxpayer. Each local office of the Taxpayer 
Advocate is to maintain a separate phone, facsimile, and other 
electronic communication access, and a separate post office 
address.
    The IRS is required to publish the taxpayer's right to 
contact the local Taxpayer Advocate on the statutory notice of 
deficiency.

Taxpayer assistance orders

    The provision expands the circumstances under which a TAO 
may be issued. The provision provides that a ``significant 
hardship'' is deemed to occur if one of the following four 
factors exists: (1) there is an immediate threat of adverse 
action; (2) there has been a delay of more than 30 days in 
resolving the taxpayer's account problems; (3) the taxpayer 
will have to pay significant costs (including fees for 
professional services) if relief is not granted; or (4) the 
taxpayer will suffer irreparable injury, or a long-term adverse 
impact, if relief is not granted. The National Taxpayer 
Advocate may also issue a TAO if the taxpayer meets 
requirements set forth in regulations. It was intended that the 
circumstances set forth in regulations be based on 
considerations of equity.
    In determining whether to issue a TAO in cases in which the 
IRS failed to follow applicable published guidance (including 
procedures set forth in the Internal Revenue Manual), the 
Taxpayer Advocate is to construe the matter in a manner most 
favorable to the taxpayer.

Reports of the National Taxpayer Advocate

    The provision requires the annual report regarding the 
activities of the National Taxpayer Advocate for the most 
recently ended fiscal year to (in addition to the information 
required under present law): (1) identify areas of the tax law 
that impose significant compliance burdens on taxpayers or the 
IRS, including specific recommendations for remedying such 
problems; and (2) identify the 10 most litigated issues for 
each category of taxpayers, including recommendations for 
mitigating such disputes.

                             Effective Date

    The provision is generally effective on the date of 
enactment (July 22, 1998), except that in appointing the first 
National Taxpayer Advocate after date of enactment, the 
Treasury Secretary may not appoint anyone who was an officer or 
employee of the IRS at any time during the 2-year period ending 
on the date of appointment, and the Treasury Secretary need not 
consult with the Board if the Board has not been appointed.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

   E. Treasury Office of Inspector General; IRS Office of the Chief 
 Inspector (secs. 1102 and 1103 of the Act, sec. 7803(d) of the Code, 
      and secs. 2, 8D, and 9 of the Inspector General Act of 1978)

                         Present and Prior Law

Treasury Inspector General

            In general
    The Treasury Office of Inspector General (``Treasury IG'') 
was established in 1988 and charged with conducting independent 
audits, investigations and review to help the Department of 
Treasury accomplish its mission, improve its programs and 
operations, promote economy, efficiency and effectiveness, and 
prevent and detect fraud and abuse. The Treasury IG derives its 
statutory authority under the Inspector General Act of 1978, as 
amended (``IG Act of 1978'').
            Appointment and qualifications
    The IG Act of 1978 provides that the Treasury IG is 
selected by the President, with the advice and consent of the 
Senate, without regard to political affiliation and solely on 
the basis of integrity and demonstrated ability in accounting, 
auditing, financial analysis, law, management analysis, public 
administration, or investigations. The Treasury IG can be 
removed from office by the President. The President must 
communicate the reasons for such removal to both Houses of 
Congress.
            Duties and responsibilities
     The Treasury IG generally is authorized to conduct, 
supervise and coordinate internal audits and investigations 
relating to the programs and operations of the Treasury, 
including all of its bureaus and offices.<SUP>29</SUP> Special 
rules apply, however, with respect to the Treasury IG's 
jurisdiction over ATF, Customs, the Secret Service and the 
IRS--the four so-called ``law enforcement bureaus.'' Upon its 
establishment, the Treasury IG assumed the internal audit 
functions previously performed by the offices of internal 
affairs of ATF, Customs and the Secret Service. Although the 
Treasury IG was granted oversight responsibility for the 
internal investigations performed by the Office of Internal 
Affairs of ATF, the Office of Internal Affairs of Customs, and 
the Office of Inspections of the Secret Service, the internal 
investigation or inspection functions of these offices remained 
with the respective bureaus. The Treasury IG did not assume 
responsibility for either the internal audit or inspection 
functions of the IRS Office of the Chief Inspector. However, it 
was directed to oversee the internal audits and internal 
investigations performed by the IRS Office of the Chief 
Inspector.
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    \29\ The Treasury Department organization includes the Departmental 
offices as well as the Bureau of Alcohol, Tobacco and Firearms 
(``ATF''), the Office of the Comptroller of the Currency (``OCC''), the 
U.S. Customs Service (``Customs''), the Bureau of Engraving and 
Printing, the Federal Law Enforcement Training Center, the Financial 
Management Service, the U.S. Mint, the Bureau of the Public Debt, the 
U.S. Secret Service (``Secret Service''), the Office of Thrift 
Supervision, and the IRS.
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    The Commissioner and the Treasury IG have entered into two 
Memorandums of Understanding (``MOUs'') <SUP>30</SUP> to 
clarify the respective roles of the IRS Office of the Chief 
Inspector and the Treasury IG in two primary areas: (1) the 
investigation of allegations of wrongdoing by IRS executives 
and employees in situations where the independence of the 
Office of the Chief Inspector could be questioned, and (2) 
oversight by the Treasury IG of the IRS Office of the Chief 
Inspector.<SUP>31</SUP> Pursuant to the 1990 MOU, the 
Commissioner agreed to transfer 21 FTEs and $1.9 million from 
the IRS appropriation to the Treasury IG appropriation to be 
used for the following purposes: (1) oversight of the 
operations of the Office of the Chief Inspector; (2) conduct of 
special reviews of IRS operations; (3) investigation of 
allegations of misconduct concerning the Commissioner, the 
Senior Deputy Commissioner, and employees of the IRS Office of 
the Chief Inspector; and (4) investigation of allegations of 
misconduct where the independence of the IRS Office of the 
Chief Inspector might be questioned. With respect to item (4), 
the Commissioner and Treasury IG agreed that all allegations of 
misconduct involving IRS executives and managers (Grade 15 and 
above), as well as any other allegation involving ``significant 
or notorious'' matters were to be referred to the Treasury IG, 
and that investigations arising out of such referrals generally 
would be conducted by the Treasury IG.
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    \30\ The first MOU was entered into in 1990 and the second in 1994.
    \31\ Treasury Directive 40-01 (September 21, 1992) reiterates that 
the Treasury IG is responsible for investigating alleged misconduct on 
the part of IRS employees at the grade 15 level and above, all 
employees of the Office of the Chief Inspector. In addition, Treasury 
Directive 40-01 states that the Treasury IG is responsible for 
investigating alleged misconduct on the part of Office of Chief Counsel 
employees (excluding employees of the National Director, Office of 
Appeals).
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    In general, under the IG Act of 1978, Inspectors General 
are instructed to report expeditiously to the Attorney General 
whenever the Inspector General has reasonable grounds to 
believe there has been a violation of Federal criminal law. 
However, in matters involving criminal violations of the 
Internal Revenue Code, the Treasury IG may report to the 
Attorney General only those offenses under section 7214 of the 
Code (unlawful acts of revenue officers or agents, including 
extortion, bribery and fraud) without the consent of the 
Commissioner.
            Authority
    The Treasury IG reports to and is under the general 
supervision of the Secretary of Treasury, acting through the 
Deputy Secretary. In general, the Secretary cannot prevent or 
prohibit the Treasury IG from initiating, carrying out, or 
completing any audit or investigation orfrom issuing any 
subpoena during the course of any audit or investigation.
    However, section 8D of the IG Act of 1978 grants the 
Secretary authority to prohibit audits or investigations by the 
Treasury IG under certain circumstances. In particular, the 
Treasury IG is under the authority, direction, and control of 
the Secretary with respect to audits or investigations, or the 
issuance of subpoenas, which require access to sensitive 
information concerning: (1) ongoing criminal investigations or 
proceedings; (2) undercover operations; (3) the identity of 
confidential sources, including protected witnesses; (4) 
deliberations and decisions on policy matters, including 
documented information used as a basis for making policy 
decisions, the disclosure of which could reasonably be expected 
to have a significant influence on the economy or market 
behavior; (5) intelligence or counterintelligence matters; (6) 
other matters the disclosure of which would constitute a 
serious threat to national security or to the protection of 
certain persons. With respect to audits, investigations or 
subpoenas that require access to the above-listed information, 
the Secretary may prohibit the Treasury IG from carrying out 
such audit, investigation or subpoena if the Secretary 
determines that such prohibition is necessary to prevent the 
disclosure of such information or to prevent significant 
impairment to the national interests of the United States. The 
Secretary must provide written notice of such a prohibition to 
the Treasury IG, who must, in turn, transmit a copy of such 
notice to the Committees on Government Reform and Oversight and 
Ways and Means of the House and the Committees on Governmental 
Affairs and Finance of the Senate.
            Access to taxpayer returns and return information
    The Treasury IG has access to taxpayer returns and return 
information under section 6103(h)(1) of the Code. However, such 
access is subject to certain special requirements, including 
the requirement that the Treasury IG notify the IRS Office of 
the Chief Inspector (or the Deputy Commissioner in certain 
circumstances) of its intent to access returns and return 
information.
            Reporting requirements
    Under the IG Act of 1978, the Treasury IG reports to the 
Congress semiannually on its activities. Reports from the 
Treasury IG are transmitted to the Committees on Government 
Reform and Oversight and Ways and Means of the House and the 
Committees on Governmental Affairs and Finance of the Senate.
            Resources
    For fiscal year 1997, the Treasury IG had 296 FTEs and 
total funding of $29.7 million. 174 FTEs were assigned to the 
Treasury IG's audit function and 61 were assigned to the 
investigative function. The remaining FTEs were divided among 
the following functions: evaluations, legal, program, 
technology and administrative support. Of the total Treasury IG 
FTEs, approximately 23 were used for IRS oversight activities 
in fiscal year 1997.

IRS Office of Chief Inspector

    The IRS Office of the Chief Inspector (also known as the 
``Inspection Service'') was established on October 1, 1951, in 
response to publicity revealing widespread corruption in the 
IRS. At the time of its creation, President Harry S. Truman 
stated, ``A strong, vigorous inspection service will be 
established and will be made completely independent of the rest 
of the Internal Revenue Service.''
            Appointment of the Chief Inspector
    In 1952, the Office of the Assistant Commissioner 
(Inspection) was established. The office was redesignated as 
the Office of the Chief Inspector on March 25, 1990. The Chief 
Inspector is appointed by the Commissioner. In this regard, 
pursuant to Treasury Directive 40-01, the Commissioner must 
consult with the Treasury IG before selecting candidates for 
the position of Chief Inspector (and all other senior executive 
service (``SES'') positions in the Office of the Chief 
Inspector). The Commissioner must also consult with the 
Treasury IG regarding annual performance appraisals for the 
Chief Inspector and other SES officials.
    The Office of the Chief Inspector consists of a National 
Office and the offices of the Regional Inspectors. The offices 
of the Regional Inspectors are located in the same cities and 
have the same geographic boundaries as the offices of the four 
IRS Regional Commissioners. The Regional Inspectors report 
directly to the Chief Inspector.
            Duties and responsibilities
    The Office of the Chief Inspector generally is responsible 
for carrying out internal audits and investigations that: (1) 
promote the economic, efficient, and effective administration 
of the nation's tax laws; (2) detect and deter fraud and abuse 
in IRS programs and operations; and (3) protect the IRS against 
external attempts to corrupt or threaten its employees. The 
Chief Inspector reports directly to the Commissioner and Deputy 
Commissioner of the IRS.
    The IRS Inspection Service is divided into three functions: 
Internal Security, Internal Audit, and Integrity Investigations 
and Activities. Internal Security's responsibilities include 
criminal investigations (employee conduct, bribery, assault and 
threat and investigations of non-IRS employees for acts such as 
impersonation, theft, enrolled agent misconduct, disclosure, 
and anti-domestic terrorism) investigative support activities 
(including forensic lab, computer investigative support, and 
maintenance of law enforcement equipment), protection, and 
background investigations.
    Internal Audit is responsible for providing IRS management 
with independent reviews and appraisals of all IRS activities 
and operations. In addition, Internal Audit makes 
recommendations to improve the efficiency and effectiveness of 
programs and to assist IRS officials in carrying out their 
program and operational responsibilities. In this regard, 
Internal Audit generally conducts performance reviews (program 
audits, system development audits, internal control audits) and 
financial reviews (financial statement audits and financial 
related reviews).
    Integrity Investigations and Activities are joint internal 
audit and internal security operations undertaken as a 
proactive effort to detect and deter fraud and abuse within the 
IRS. Integrity Investigations and Activities also includes the 
UNAX Central Case Development Center. The Center was developed 
in October, 1997, in response to the Taxpayer Browsing 
Protection Act of 1997. Its purpose is to detect unauthorized 
accesses to IRS computer systems by IRS employees and to refer 
such instances to Internal Security investigators for further 
investigation.
            Authority
    The Chief Inspector derives specific and general authority 
from delegation by the Commissioner and Deputy Commissioner. In 
addition, under section 7608(b) of the Code, the Chief 
Inspector is authorized to perform certain functions in 
connection with the duty of enforcing any of the criminal 
provisions of the Code, including executing and serving search 
and arrest warrants, serving subpoenas and summonses, making 
arrests without warrant, carrying firearms, and seizing 
property subject to forfeiture under the Code.
            Access to taxpayer returns and return information
    The Office of the Chief Inspector has full access to 
taxpayer returns and return information.
            Reporting requirements
    The Office of the Chief Inspector reports facts developed 
through its internal audit and internal security activities to 
IRS management officials, who are charged with the 
responsibility of reviewing IRS activities. The results of the 
Chief Inspector's internal audit and internal security 
activities also are reported to the Treasury IG and are 
included in the Treasury IG's semiannual reports to Congress.
    Internal audit reports prepared by the Office of the Chief 
Inspector are provided monthly to the Government Accounting 
Office, as well as to the House and Senate Appropriations 
Committees. In addition, a monthly list of Internal Audit 
reports is provided to Treasury and the Office of Management 
and Budget. Reports of Investigation regarding criminal conduct 
are referred to the Department of Justice for prosecution.
            Resources
    The IRS Office of the Chief Inspector had 1,202 FTEs for 
1997 and total funding of$100.1 million. Of these FTEs, 
approximately 442 performed Internal Audit functions, 511 performed 
Internal Security functions, and 94 performed Integrity Investigations 
and Activities. Of the remaining FTEs, approximately 95 were dedicated 
to information technology functions and 60 staffed the offices of the 
Chief Inspector and the Regional Inspectors.

                           Reasons for Change

    The Congress believed that the current IRS Office of the 
Chief Inspector lacks sufficient structural and actual autonomy 
from the agency it is charged with monitoring and overseeing. 
Further, the current relationship between the Treasury IG and 
the IRS Office of the Chief Inspector does not foster 
appropriate oversight over the IRS. The Congress believed that 
the establishment of an independent Inspector General within 
the Department of Treasury whose primary focus and 
responsibility will be to audit, investigate, and evaluate IRS 
programs will improve the quality as well as the credibility of 
IRS oversight.

                        Explanation of Provision

In general

    The Act establishes a new, independent, Treasury Inspector 
General for Tax Administration (``Treasury IG for Tax 
Administration'') within the Department of Treasury. The IRS 
Office of the Chief Inspector is eliminated, and all of its 
powers and responsibilities are transferred to the Treasury IG 
for Tax Administration. The Treasury IG for Tax Administration 
has the powers and responsibilities generally granted to 
Inspectors General under the IG Act of 1978, without the 
limitations that currently apply to the Treasury IG under 
section D of the Act. The role of the existing Treasury IG is 
redefined to exclude responsibility for the IRS. The Treasury 
IG for Tax Administration is under the supervision of the 
Secretary of Treasury, with certain additional reporting to the 
Oversight Board and the Congress.

Appointment and qualifications of Treasury IG for Tax Administration

    The Treasury IG for Tax Administration is selected by the 
President, with the advice and consent of the Senate. The 
Treasury IG for Tax Administration can be removed from office 
by the President. The President must communicate the reasons 
for such removal to both Houses of Congress.
    The Treasury IG for Tax Administration must be selected 
without regard to political affiliation and solely on the basis 
of integrity and demonstrated ability in accounting, auditing, 
financial analysis, law, management analysis, public 
administration, or investigations. In addition, the Treasury IG 
for Tax Administration should have demonstrated ability to lead 
a large and complex organization. The Treasury IG for Tax 
Administration may not be employed by the IRS within the two 
years preceding and the five years following his or her 
appointment.
    The Treasury IG for Tax Administration is required to 
appoint an Assistant Inspector General for Auditing and an 
Assistant Inspector for Inspections. Under the Act, such 
appointees, as well as any Deputy Inspector General(s) 
appointed by the Treasury IG for Tax Administration, may not be 
employed by the IRS within the two years preceding and the five 
years following their appointments.

Duties and responsibilities of Treasury IG for Tax Administration

    The Treasury IG for Tax Administration has the present-law 
duties and responsibilities currently delegated to the Treasury 
IG with respect to the IRS. In addition, the Treasury IG for 
Tax Administration assumes all of the duties and 
responsibilities currently delegated to the IRS Office of the 
Chief Inspector. The Treasury IG for Tax Administration has 
jurisdiction over IRS matters, as well as matters involving the 
Board.
    Accordingly, the Treasury IG for Tax Administration is 
charged with conducting audits, investigations, and evaluations 
of IRS programs and operations (including the Board) to promote 
the economic, efficient and effective administration of the 
nation's tax laws and to detect and deter fraud and abuse in 
IRS programs and operations. In this regard, the Treasury IG 
for Tax Administration specifically is directed to evaluate the 
adequacy and security of IRS technology on an ongoing basis. 
The Treasury IG for Tax Administration is charged with 
investigating allegations of criminal misconduct (e.g., Code 
sections 7212, 7213, 7214, 7216 and new section 7217), as well 
as administrative misconduct (e.g., violations of the Taxpayer 
Bill of Rights and the Taxpayer Bill of Rights 2, the Office of 
Government Ethics Standards of Ethical Conduct and the IRS 
Supplemental Standards of Ethical Conduct). The Act provides, 
however, that the responsibility for (1) protecting IRS 
employees and (2) investigating the backgrounds of prospective 
IRS employees shall not be transferred to the Treasury IG for 
Tax Administration, but shall remain with the IRS.
    In addition, the Act directs the Treasury IG for Tax 
Administration to implement a program periodically to audit at 
least one percent of all determinations (identified through a 
random selection process) where the IRS has asserted either 
section 6103 (directly or in connection with the Freedom of 
Information Act or the Privacy Act) or law enforcement 
considerations (i.e., executive privilege) as a rationale for 
refusing to disclose requested information. The program must be 
implemented within 6 months after establishment of the Treasury 
IG for Tax Administration. The Treasury IG for Tax 
Administration is directed to report any findings of improper 
assertion of section 6103 or law enforcement considerations to 
the Board.
    Further, the Treasury IG for Tax Administration is directed 
to establish a toll-free confidential telephone number for 
taxpayers to register complaints of misconduct by IRS employees 
and to publish the telephone number in IRS Publication 1.
    There are no restrictions on the Treasury IG for Tax 
Administration's ability to refer matters to the Department of 
Justice. Thus, the Treasury IG for Tax Administration is 
required to report to the Attorney General whenever the 
Treasury IG for Tax Administration has reasonable grounds to 
believe that there has been a violation of Federal criminal 
law.

Authority of Treasury IG for Tax Administration

    The Treasury IG for Tax Administration reports to and is 
under the general supervision of the Secretary of Treasury. 
Under the Act, the Secretary cannot prevent or prohibit the 
Treasury IG for Tax Administration from initiating, carrying 
out, or completing any audit or investigation or from issuing 
any subpoena during the course of any audit or investigation.
    Under the Act, the Treasury IG for Tax Administration must 
provide to the Board all reports regarding IRS matters on a 
timely basis and conduct audits or investigations requested by 
the Board. The Treasury IG for Tax Administration also must, in 
a timely manner, conduct such audits or investigations and 
provide such reports as may be requested by the Commissioner. 
In addition, the Act provides that the Commissioner or the 
Board may request the Treasury IG for Tax Administration to 
conduct an audit or investigation relating to the IRS. If the 
Treasury IG for Tax Administration determines not to conduct an 
audit or investigation requested by the Commissioner or the 
Board, the Treasury IG for Tax Administration shall timely 
provide the requesting party with a written explanation of its 
determination. In this regard, it is intended that the Treasury 
IG for Tax Administration shall make all reasonable efforts to 
be responsive to the requests of the Commissioner and the 
Board.
    In carrying out the duties and responsibilities described 
above, the Treasury IG for Tax Administration has the present-
law authority generally granted to Inspectors General under the 
IG Act of 1978. The limitations on the authority of the 
Treasury IG under such Act do not apply to the Treasury IG for 
Tax Administration. In addition, the Treasury IG for Tax 
Administration has the authority granted to the IRS Office of 
the Chief Inspector under present-law Code section 7608, 
including the right to execute and serve search and arrest 
warrants, to serve subpoenas and summonses, to make arrests 
without warrant, to carry firearms, and to seize property 
subject to forfeiture under the Code.

Resources

    To ensure that the Treasury IG for Tax Administration has 
sufficient resources to carry out his or her duties and 
responsibilities under the Act, all but 300 FTEs from the IRS 
Office of the Chief Inspector are transferred to the Treasury 
IG for Tax Administration. Such FTEs include all of the FTEs 
performing investigative functions in the Office of the Chief 
Inspector Internal Security and Integrity Investigations and 
Activities. In addition, the 21 FTEs previously transferred 
from Inspection to Treasury IG pursuant to the 1990 MOU to 
perform oversight of the IRS are transferred to the Treasury IG 
for Tax Administration.
    The Commissioner will retain approximately 300 FTEs from 
the IRS Office of the Chief Inspector to staff an audit 
function (including support staff) for internal IRS management 
purposes. Like other IRS functions, however, this audit 
function is subject to oversight and review by the Treasury IG 
for Tax Administration.

Access to taxpayer returns and return information

    Taxpayer returns and return information are available for 
inspection by the Treasury IG for Tax Administration pursuant 
to section 6103(h)(1). Thus, the Treasury IG for Tax 
Administration has the same access to taxpayer returns and 
return information as does the Chief Inspector under prior law.

Reporting requirements

    The Treasury IG for Tax Administration is subject to the 
semiannual reporting requirements set forth in section 5 of the 
IG Act of 1978. As under prior law, reports are made to the 
Committees on Government Reform and Oversight and Ways and 
Means of the House and the Committees on Governmental Affairs 
and Finance of the Senate. The reports must contain the 
information that is required to be reported by the Treasury IG 
with respect to the IRS under present law, as well as 
information regarding the source, nature and status of taxpayer 
complaints and allegations of serious misconduct by IRS 
employees received by the IRS or by the Treasury IG for Tax 
Administration. In addition, the Treasury IG for Tax 
Administration is required to report annually on certain 
additional information (e.g., regarding the use of enforcement 
statistics in evaluating IRS employees, the implementation of 
various taxpayer rights protections, and IRS employee 
terminations and mitigations) required by the Act.

Treasury IG

    The Treasury IG generally continues to have its prior-law 
responsibilities and authority with respect to all Treasury 
functions other than the IRS and the Board. However, the 
Treasury IG generally does not have access to taxpayer returns 
and return information under section 6103 (unless the Secretary 
specifically authorizes such access).
    The Treasury IG for Tax Administration operates 
independently of the Treasury IG. The Secretary of Treasury is 
directed to establish procedures pursuant to which the Treasury 
IG for Tax Administration and the Treasury IG shall coordinate 
audits and investigations in cases involving overlapping 
jurisdiction.
    The Treasury IG continues to have responsibility for 
providing an opinion on the Department of Treasury's 
consolidated financial statement as required under the Chief 
Financial Officer Act. The Treasury IG for Tax Administration 
is responsible for rendering an opinion on the IRS custodial 
and administrative accounts (to the extent the Government 
Accounting Office does not exercise its option to preempt under 
the CFO Act).

                             Effective Date

    The provision is effective 180 days after the date of 
enactment (January 18, 1999). <SUP>32</SUP>
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    \32\ Division C, Title 1, sec. 101 of H.R. 4328, the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act, 1999, 
provides for appointment by the President of an acting Treasury IG for 
Tax Administration to serve during the period beginning on the date of 
enactment of the provision (October 21, 1998) and ending on the earlier 
of April 30, 1999, or the date on which the first Treasury IG for Tax 
Administration takes office. The acting Treasury IG for Tax 
Administration is to, before January 18, 1999 (the date that is 180 
days after the date of enactment of the Internal Revenue Service 
Restructuring and Reform Act of 1988), take only such actions as are 
necessary to begin operation of the office of Treasury IG for Tax 
Administration, including: (1) making interim arrangements for 
administrative support for the office; (2) establishing interim 
positions in the office into which personnel will be transferred upon 
the transfer of functions and duties to the office on January 18, 1999; 
(3) appointing such acting personnel on an interim basis as may be 
necessary upon the transfer of functions and duties to the office on 
January 18, 1999; and (4) providing guidance and input for the fiscal 
year 2000 budget process for the office. No person appointed as acting 
Treasury IG for Tax Administration may serve on or after January 19, 
1999, unless on or before such date the President has submitted to the 
Senate his nomination of an individual to serve as the first Treasury 
IG for Tax Administration. A person who is appointed to the position of 
acting Treasury IG for Tax Administration may not serve concurrently as 
the Treasury IG or the acting Treasury IG. In addition, the acting 
Treasury IG for Tax Administration may not be employed by the IRS 
within the two years preceding and the five years following such 
individual's appointment.
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                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

F. Prohibition on Executive Branch Influence Over Taxpayer Audits (sec. 
             1105 of the Act and new sec. 7217 of the Code)

                         Present and Prior Law

    There was no prior-law explicit prohibition in the Code 
against high-level Executive Branch influence over taxpayer 
audits and collection activity.
    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431).

                           Reasons for Change

    The Congress believed that the perception that it is 
possible that high-level Executive Branch influence over 
taxpayer audits and collection activity could occur has a 
negative influence on taxpayers' views of the tax system. 
Accordingly, the Congress believed that it is appropriate to 
prohibit such influence.

                        Explanation of Provision

    The provision makes it unlawful for a specified person to 
request that any officer or employee of the IRS conduct or 
terminate an audit or otherwise investigate or terminate the 
investigation of any particular taxpayer with respect to the 
tax liability of that taxpayer. The prohibition applies to the 
President, the Vice President, and employees of the executive 
offices of either the President or Vice President, as well as 
any individual (except the Attorney General) serving in a 
position specified in section 5312 of Title 5 of the United 
States Code (these are generally Cabinet-level positions). The 
prohibition applies to both direct requests and requests made 
through an intermediary. In the case of a law enforcement 
action authorized by the Attorney General, discussions 
involving specified persons with respect to that law 
enforcement action shall not be considered to be requests made 
through an intermediary.
    Any request made in violation of this rule must be reported 
by the IRS employee to whom the request was made to the Chief 
Inspector of the IRS. The Chief Inspector has the authority to 
investigate such violations and to refer any violations to the 
Department of Justice for possible prosecution, as appropriate. 
Anyone convicted of violating this provision will be punished 
by imprisonment of not more than 5 years or a fine not 
exceeding $5,000 (or both).
    Three exceptions to the general prohibition apply. First, 
the prohibition does not apply to a request made to a specified 
person by or on behalf of a taxpayer that is forwarded by the 
specified person to the IRS. This exception is intended to 
cover two types of situations. The first situation is where a 
taxpayer (or a taxpayer's representative) writes to a specified 
person seeking assistance in resolving a difficulty with the 
IRS. This exception permits the specified person who receives 
such a request to forward it to the IRS for resolution without 
violating the general prohibition. The second situation that 
this first exception is intended to cover is an audit or 
investigation by the IRS of a Presidential nominee. Under 
present law (sec. 6103(c)), nominees for Presidentially 
appointed positions consent to disclosure of their tax returns 
and return information so that background checks may be 
conducted. Sometimes an audit or other investigation is 
initiated as part of that background check. The Committee 
anticipates that any such audit or investigation that is part 
of such a background check will be encompassed within this 
first exception.
    The second exception to the general prohibition applies to 
requests for disclosure of returns or return information under 
section 6103 if the request is made in accordance with the 
requirements of section 6103.
    The third exception to the general prohibition applies to 
requests made by the Secretary of the Treasury as a consequence 
of the implementation of a change in tax policy.

                             Effective Date

    The provision applies to violations occurring after the 
date of enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

  G. IRS Personnel Flexibilities (secs. 1201-1205 of the Act and new 
                     chapter 95 of Title 5, U.S.C.)

                         Present and Prior Law

    Under present and prior law, the IRS is subject to the 
personnel rules and procedures set forth in title 5, United 
States Code, which regulate hiring, evaluating, promoting, and 
firing employees. Under these rules, IRS employees generally 
are classified under the General Schedule or the Senior 
Executive Service.

                           Reasons for Change

    The Congress believed that as part of restructuring the 
IRS, the Commissioner should have the ability to bring in 
experts and the flexibility to revitalize the current IRS 
workforce. The current hiring practices often inhibit the 
ability of the Commissioner to change the IRS' institutional 
culture. Commissioner Rossotti has indicated that, in order to 
maximize efforts to transform the IRS into an efficient, modern 
and responsive agency, the ability to recruit and retain a top-
notch leadership and technical team is critical.
    The Congress believed the IRS needs the flexibility to 
recruit employees from the private sector, to redesign its 
salary and incentive structures to reward employees who meet 
their objectives, and to hold non-performers accountable. 
Personnel and pay flexibilities are necessary prerequisites for 
larger fundamental changes in the IRS.
    The Congress wanted to support the Commissioner's 
initiatives to reposition the current IRS workforce as part of 
implementing a new organization designed around the needs of 
taxpayers.

                        Explanation of Provision

In general

    The Act amends title 5 of the United States Code to provide 
certain personnel flexibilities to the IRS. The Act provides 
that the IRS exercise the personnel flexibilities consistently 
with pre-existing rules relating to merit system principles, 
prohibited personnel practices, and preference eligibles. In 
those cases where the exercise of personnel flexibilities would 
affect members of the employees' union, such employees will not 
be subject to the exercise of any flexibility unless there is a 
written agreement between the IRS and the employees' union. 
Negotiation impasses between the IRS and the employees' union 
may be appealed to the Federal Services Impasse Panel. This 
provision (in particular the written agreement requirement) is 
not intended to expand the jurisdiction of the Federal Services 
Impasse Panel.

Senior management and technical positions

            Streamlined critical pay authority
    The Act provides a streamlined process for the Secretary of 
the Treasury, or his delegate, to fix the compensation of and 
appoint up to 40 individuals to designated critical technical 
and professional positions, provided that: (1) the positions 
require expertise of an extremely high level in a technical, 
administrative or professional field and are critical to the 
IRS; (2) exercise of the authority is necessary to recruit or 
retain an individual exceptionally well qualified for the 
position; (3) designation of such positions is approved by the 
Secretary; (4) the terms of such appointments are limited to no 
more than four years; (5) appointees to such positions were not 
IRS employees prior to June 1, 1998; and (6) the total annual 
compensation for any position (including performance bonuses) 
does not exceed the rate of pay of the Vice President 
(currently, $175,400).
    These appointments are not subject to the otherwise 
applicable requirements under title 5. All such appointments 
are excluded from the collective bargaining unit and the 
appointments will not be subject to approval of the Office of 
Management and Budget (``OMB'') or the Office of Personnel 
Management (``OPM'').
    The streamlined authority is limited to a period of 10 
years after the date of enactment.
            Critical pay authority
    The Act provides OMB with authority to set the pay for 
certain critical pay positions requested by the Secretary under 
section 5377 of title 5 of the United States Code at levels 
higher than authorized under prior law. These critical pay 
positions are critical, technical, administrative and 
professional positions other than those designated under the 
streamlined authority. Under the Act, OMB is authorized to 
approve requests for critical position pay up to the rate of 
pay of the Vice President (currently, $175,400).
            Recruitment, retention and relocation incentives
    The Act authorizes the Secretary to vary from the pre-
existing provisions governing recruitment, retention and 
relocation incentives. The authority is for a period of 10 
years after the date of enactment and is be subject to OPM 
approval.
    In addition, for a period of 10 years after the date of 
enactment, the provision authorizes the IRS to pay certain 
relocation expenses for individuals appointed to critical pay 
positions after June 1, 1998.
            Career-reserve Senior Executive Service (``SES'') positions
    The Act broadens the definition of a ``career reserved 
position'' in the SES to include a limited emergency appointee 
or a limited term appointee who, immediately upon entering the 
career-reserved position, was serving under a career or a 
career-conditional appointment outside the SES or whose limited 
emergency or limited term appointment is approved in advance by 
OPM. The number of appointments to these SES positions is 
limited to up to 10 percent of the total number of SES 
positions available to the IRS. These positions are limited to 
a 3-year term, with the option of extending the term for 2 
additional 3-year terms.
            Performance awards for senior executives
    The Act provides the Secretary with the authority to 
provide performance bonus awards to IRS senior executives of up 
to one-third of the individual's annual compensation. The bonus 
award is based on meeting preset performance goals established 
by the IRS. An individual's total annual compensation, 
including the bonus, cannot exceed the rate of pay of the Vice 
President. The authority is not subject to OPM approval. It is 
anticipated that the bonuses will not be available to more than 
25 IRS senior executives annually.

General workforce

            Performance management system
    The Act requires the IRS to establish a new performance 
management system within one year from the date of enactment. 
The performance management system is to maintain individual 
accountability by: (1) establishing one or more retention 
standards for each employee related to the work of the employee 
and expressed in terms of performance; (2) providing for 
periodic performance evaluations to determine whether employees 
are meeting the applicable retention standard; and (3) taking 
appropriate action, in accordance with applicable laws, with 
respect to any employee whose performance does not meet 
established retention standards.
    In addition, the performance management system is to 
provide for: (1) establishing goals or objectives for 
individual, group or organizational performance and taxpayer 
service surveys; (2) communicating such goals or objectives to 
employees; and (3) using such goals or objectives to make 
performance distinctions among employees or groups of 
employees. The Congressintends that in no event will 
performance measures be used which rank employees or groups of 
employees based solely on enforcement results, establish dollar goals 
for assessments or collections, or otherwise undermine fair treatment 
of taxpayers.
    The Congress intends to give the IRS flexibility to 
establish a new performance management system. The Congress 
expects that this will refocus the IRS' personnel system on the 
overall mission of the IRS and how each employee's performance 
relates to that mission. Although the new performance standards 
are premised on the notion of retention, such standards should 
go beyond simply establishing a retention/non-retention or 
pass-fail performance system. At a minimum, the Congress 
believes that there should be at least one standard above the 
retention standard. This will enable managers to make 
meaningful distinctions among employees based on performance, 
to encourage employees to perform at a higher level and to 
reward superior performance.
            Awards
    The Act provides the Secretary the authority to establish 
an awards program for IRS employees. The program is designed to 
provide incentives for and recognition of individual, group and 
organizational achievements. The Secretary has the authority to 
provide awards between $10,000 and $25,000 without OPM 
approval.
    These awards are to be based on performance under the new 
performance management system, and in no case are awards to be 
made (or performance measured) based on tax enforcement 
results.
            Workforce classification and pay banding
    The Act provides the Secretary with authority to establish 
one or more broad band pay systems covering all or any portion 
of the IRS workforce, subject to OPM criteria. At a minimum, 
the OPM criteria must: (1) ensure that the pay band system 
maintain the concept of equal pay for substantially equal work; 
(2) establish the minimum and maximum number of grades that may 
be combined into pay bands; (3) establish requirements for 
setting minimum and maximum rates of pay in a pay band; (4) 
establish requirements for adjusting the pay of an employee 
within a pay band; (5) establish requirements for setting the 
pay of a supervisory employee in a pay band; and (6) establish 
requirements and methodologies for setting the pay of an 
employee upon conversion to a broad-banded system, initial 
appointment, change of position or type of appointment and 
movement between a broad-banded system and another pay system.
            Workforce staffing
    The Act provides the IRS with flexibility in filling 
certain permanent appointments with qualified temporary 
employees. A qualified temporary employee is defined as a 
temporary employee of the IRS with at least two years of 
continuous service, who has met all applicable retention 
standards and who meets the minimum qualifications for the 
vacant position.
    The Act authorizes the IRS to establish category rating 
systems for evaluating job applicants, under which qualified 
candidates are divided into two or more quality categories on 
the basis of relative degrees of merit, rather than assigned 
individual numerical ratings. Managers are authorized to select 
any candidate from the highest quality category, and are not 
limited to the three highest ranked candidates. In 
administering these category rating systems, the IRS generally 
is required to list preference eligibles ahead of other 
individuals within each quality category. The appointing 
authority, however, can select any candidate from the highest 
quality category, as long as pre-existing requirements relating 
to passing over preference eligibles are satisfied.
    The Act authorizes the IRS to establish probation periods 
for IRS employees of up to 3 years, when it is determined that 
a shorter period will not be sufficient for an employee to 
demonstrate proficiency in a position.

Voluntary separation incentives

    The Act provides authority to the IRS to use Voluntary 
Separation Incentive Pay (``buyouts'') through December 31, 
2002. The use of voluntary separation incentive is not intended 
to necessarily reduce the total number of Full Time Equivalents 
(``FTE'') positions in the IRS.

Demonstration projects

    The Act provides the IRS with authority to conduct one or 
more demonstration projects through a streamlined process. The 
authority will enable the IRS to test new approaches to Human 
Resource Management. The Act provides authority to the 
Secretary and OPM to waive the termination of a demonstration 
project, thereby making it permanent. At least 90 days prior to 
waiving the termination date, OPM is required to publish a 
notice of such intent in the Federal Register and inform the 
appropriate Committees (including the House Ways and Means 
Committee, the House Government Reform and Oversight Committee, 
the Senate Finance Committee and the Senate Governmental 
Affairs Committee) of both Houses of Congress in writing.

Violations for which IRS employees may be terminated

    The Act requires the IRS to terminate 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.
    The Act 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. The Act also provides that 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. The Treasury IG is 
required to track employee terminations and terminations that 
would have occurred had the Commissioner not determined that 
there were mitigation factors and include such information in 
the IG's annual report.

Performance measures

    The IRS is directed to develop employee performance 
measures that favor taxpayer service and prohibit awarding 
merit pay or bonuses that are based on enforcement quotas, 
goals, or statistics.

IRS employee training program

    The Act requires the IRS to implement an employee training 
program no later than 180 days after enactment. The Act also 
requires the IRS to submit to Congressional tax writing 
committees within 180 days of the date of enactment an employee 
training plan which will: (1) detail a comprehensive employee 
training program to ensure adequate customer service training; 
(2) detail a schedule for training and the fiscal years during 
which the training will occur; (3) detail the funding of the 
program and relevant information to demonstrate the priority 
and commitment of resources to the plan; (4) review the 
organizational design of customer service; (5) provide for the 
implementation of a performance development system; and (6) 
provide for at least 16 hours of conflict management training 
in fiscal year 1999 for collection employees.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

                      TITLE II. ELECTRONIC FILING

 A. Electronic Filing of Tax and Information Returns (sec. 2001 of the 
                                  Act)

                         Present and Prior Law

    Treasury Regulations section 1.6012-5 provides that the 
Commissioner may authorize a taxpayer to elect to file a 
composite return in lieu of a paper return. An electronically 
filed return is a composite return consisting of electronically 
transmitted data and certain paper documents that cannot be 
electronically transmitted.
    The IRS periodically publishes a list of the forms and 
schedules that may be electronically transmitted, as well as a 
list of forms, schedules, and other information that cannot be 
electronically filed.
    During the 1997 tax filing season, the IRS received 
approximately 20 million individual income tax returns 
electronically.

                           Reasons for Change

    The Congress believed that the implementation of a 
comprehensive strategy to encourage electronic filing of tax 
and information returns holds significant potential to benefit 
taxpayers and make the IRS returns processing function more 
efficient. For example, the error rate associated with 
processing paper tax returns is approximately 20 percent, half 
of which is attributable to the IRS and half to errors in 
taxpayer data. Because electronically-filed returns usually are 
prepared using computer software programs with built-in 
accuracy checks, undergo pre-screening by the IRS, and 
experience no key punch errors, electronic returns have an 
error rate of less than one percent. Thus, the Congress 
believed that an expansion of electronic filing would 
significantly reduce errors (and the resulting notices that are 
triggered by such errors). In addition, taxpayers who file 
their returns electronically receive confirmation from the IRS 
that their return was received.

                        Explanation of Provision

    The Act states that the policy of Congress is to promote 
paperless filing, with a long-range goal of providing for the 
filing of at least 80 percent of all tax returns in electronic 
form by the year 2007. The provision requires the Secretary of 
the Treasury to establish a strategic plan to eliminate 
barriers, provide incentives, and use competitive market forces 
to increase taxpayer use of electronic filing. The provision 
requires all returns prepared in electronic form but filed in 
paper form to be filed electronically, to the extent 
practicable, for taxable years beginning after 2001.
    The provision requires the Secretary to promote electronic 
filing and to create an electronic commerce advisory group and 
to report annually to the Congress on electronic filing 
implementation issues. The Act also requires that the annual 
report discuss the effects on small businesses and the self-
employed of electronically filing tax and information returns.
    In addition, the Act states that the policy of Congress is 
that the IRS should cooperate with and encourage the private 
sector by encouraging competition to increase electronic filing 
of returns. The intent of the Congress with respect to this 
provision is for the IRS and Treasury to press for robust 
private sector competition. When disputes arise between the IRS 
and the private sector on the question of whether services 
offered by the IRS inhibit competition or are appropriate 
services not reasonably available to taxpayers or tax 
preparers, the Electronic Commerce Advisory Group shall 
recommend to the IRS Commissioner an appropriate course of 
action. Those recommendations shall also be made available to 
the Congress. Notwithstanding the previous sentence, the 
Congress also intends that the IRS should continue to offer and 
improve its Telefile program and make available a comparable 
program on the Internet.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

   B. Due Date for Certain Information Returns (sec. 2002 of the Act)

                         Present and Prior Law

    Information such as the amount of dividends, partnership 
distributions, and interest paid during the calendar year must 
be supplied to taxpayers by the payors by January 31 of the 
following calendar year. The payors must file an information 
return with the IRS with the information by February 28 of the 
year following the calendar year for which the return must be 
filed. Under prior law, the due date for filing information 
returns with the IRS was the same whether such returns are 
filed on paper, on magnetic media, or electronically. Most 
information returns are filed on magnetic media (such as 
computer tapes), which are physically shipped to the IRS.

                           Reasons for Change

    The Congress believed that encouraging information return 
filers to file electronically would substantially increase the 
efficiency of the tax system by avoiding the need to convert 
the information from magnetic media or paper to electronic form 
before return matching.

                        Explanation of Provision

    The Act provides an incentive to filers of information 
returns to use electronic filing by extending the due date for 
filing such returns with the IRS from February 28 (under prior 
law) to March 31 of the year following the calendar year to 
which the return relates.
    The Act also requires the Treasury to issue a study 
evaluating the merits and disadvantages, if any, of extending 
the deadline for providing taxpayers with copies of information 
returns (other than Forms W-2) from January 31 to February 15.

                             Effective Date

    The provision is effective for information returns required 
to be filed after December 31, 1999. The Treasury study is due 
by June 30, 1999.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

 C. Paperless Electronic Filing (sec. 2003 of the Act and sec. 6061 of 
                               the Code)

                         Present and Prior Law

    Code section 6061 requires that tax forms be signed as 
required by the Secretary. Under prior law, the IRS would not 
accept an electronically filed return unless it had also 
received a Form 8453, which is a paper form that contains 
signature information of the filer.
    A return generally is considered timely filed when it is 
received by the IRS on or before the due date of the return. If 
the requirements of Code section 7502 are met, timely mailing 
is treated as timely filing. If the return is mailed by 
registered mail, the dated registration statement is prima 
facie evidence of delivery.
    The IRS periodically publishes a list of the forms and 
schedules that may be electronically transmitted, as well as a 
list of forms, schedules, and other information that cannot be 
electronically filed.

                           Reasons for Change

    Electronically filed returns cannot provide the maximum 
efficiency for taxpayers and the IRS under current rules that 
require signature information to be filed on paper. Also, 
taxpayers need to know how the IRS will determine the filing 
date of a return filed electronically. The Congress believed 
that more types of returns could be filed electronically if 
revised procedures were in place. Also, as the IRS shifts to a 
paperless tax return system, the Congress intended for the IRS 
to assist taxpayers in shifting to paperless record retention.

                        Explanation of Provision

    The Act requires the Secretary to develop procedures that 
would eliminate the need to file a paper form relating to 
signature information. The Secretary is permitted to waive the 
signature requirement, but only returns signed or subscribed 
under alternative methods prescribed by the Secretary (not 
including waiver) are entitled to be treated as though signed 
or subscribed.
    The provision also authorizes the Secretary to provide 
rules for determining when electronic returns are deemed filed 
and requires the Secretary to provide rules to authorize return 
preparers to communicate with the IRS on matters included on 
electronically filed returns.
    The provision requires the Secretary to establish 
procedures, to the extent practicable, to receive all forms 
electronically for taxable periods beginning after December 31, 
1999.
    The Secretary of the Treasury must establish procedures for 
all tax forms, instructions, and publications created in the 
most recent 5-year period to be made available electronically 
on the Internet in a searchable database at approximately the 
same time such records are available to the public in printed 
form. The Secretary of the Treasury must, to the extent 
practicable, establish procedures for other taxpayer guidance 
to be made available electronically on the Internet in a 
searchable database at approximately the same time such 
guidance is available to the public in printed form.

                             Effective Date

    The provision is generally effective on the date of 
enactment (July 22, 1998). The provision which relates to 
Internet access to IRS forms, instructions, publications, and 
guidance is effective for taxable periods beginning after 
December 31, 1998. The provision that requires the Secretary, 
to the extent practicable, to receive all forms electronically 
applies to taxable periods after December 31, 1999.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

            D. Return-Free Tax System (sec. 2004 of the Act)

                         Present and Prior Law

    Taxpayers generally are required to calculate their own tax 
liabilities and submit returns showing their calculations. 
Under prior law, there was no statutory requirement that 
Treasury study the implementation of a return-free tax system.

                           Reasons for Change

    The Congress believed that it could benefit taxpayers to be 
relieved, to the extent feasible, from the burden of 
determining tax liability and filing returns. Accordingly, the 
Congress believed that further study of those issues would be 
valuable.

                        Explanation of Provision

    The provision requires the Secretary or his delegate to 
study the feasibility of, and develop procedures for, the 
implementation of a return-free tax system for appropriate 
individuals for taxable years beginning after 2007. The 
Secretary is required to report annually to the tax-writing 
committees on the progress in the development of such system. 
The Secretary is required to make the first report on the 
development of the return-free tax system to the tax-writing 
committees by June 30, 2000.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

        E. Access to Account Information (sec. 2005 of the Act)

                               Prior Law

    Taxpayers who filed their returns electronically could not 
review their accounts electronically.

                           Reasons for Change

    The Congress believed that it would be desirable for a 
taxpayer (or the taxpayer's designee) to be able to review that 
taxpayer's account electronically, but only if all necessary 
privacy safeguards are in place.

                        Explanation of Provision

    The Act requires the Secretary to develop procedures not 
later than December 31, 2006, under which a taxpayer filing 
returns electronically (or the taxpayer's designee under 
section 6103(c)) can review the taxpayer's own account 
electronically, but only if all necessary privacy safeguards 
are in place by that date. The Secretary is also required to 
issue an interim progress report to the tax-writing committees 
by December 31, 2003.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

               TITLE III. TAXPAYER PROTECTION AND RIGHTS

A. Burden of Proof (sec. 3001 of the Act and new sec. 7491 of the Code)

                         Present and Prior Law

    Under present law, a rebuttable presumption exists that the 
Commissioner's determination of tax liability is 
correct.<SUP>33</SUP> ``This presumption in favor of the 
Commissioner is a procedural device that requires the plaintiff 
to go forward with prima facie evidence to support a finding 
contrary to the Commissioner's determination. Once this 
procedural burden is satisfied, the taxpayer must still carry 
the ultimate burden of proof or persuasion on the merits. Thus, 
the plaintiff not only has the burden of proof of establishing 
that the Commissioner's determination was incorrect, but also 
of establishing the merit of its claims by a preponderance of 
the evidence.'' <SUP>34</SUP>
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    \33\ Welch v. Helvering, 290 U.S. 111, 115 (l933).
    \34\ Danville Plywood Corp. v. U.S., U.S. Cl. Ct., 63 AFTR 2d 89-
1036, 1043 (1989).
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    The general rebuttable presumption that the Commissioner's 
determination of tax liability is correct is a fundamental 
element of the structure of the Internal Revenue Code. Although 
this presumption is judicially based, rather than legislatively 
based, there is considerable evidence that the presumption has 
been repeatedly considered and approved by the Congress. This 
is the case because the Internal Revenue Code contains a number 
of civil provisions that explicitly place the burden of proof 
on the Commissioner in specifically designated circumstances.
    Under prior law, there was no statutory provision that 
generally provided burden of proof rules.

                           Reasons for Change

    The Congress was concerned that individual and small 
business taxpayers frequently are at a disadvantage when forced 
to litigate with the Internal Revenue Service. The Congress 
believed that the prior-law burden of proof rules contributed 
to that disadvantage. The Congress believed that, all other 
things being equal, facts asserted by individual and small 
business taxpayers who cooperate with the IRS and satisfy 
relevant recordkeeping and substantiation requirements should 
be accepted. The Congress believed that shifting the burden of 
proof to the Secretary in such circumstances would create a 
better balance between the IRS and such taxpayers, without 
encouraging tax avoidance.
    The Congress believed that it is inappropriate for the IRS 
to rely solely on statistical information on unrelated 
taxpayers to reconstruct unreported income of an individual 
taxpayer. The Congress also believed that, in a court 
proceeding, the IRS should not be able to rest on its 
presumption of correctness if it does not provide any evidence 
whatsoever relating to penalties.

                        Explanation of Provision

    The Act provides that the Secretary has the burden of proof 
in any court proceeding with respect to a factual issue if the 
taxpayer introduces credible evidence with respect to the 
factual issue relevant to ascertaining the taxpayer's specified 
tax liability. The provision applies to income,<SUP>35</SUP> 
estate, gift, and generation-skipping transfer taxes. Four 
conditions apply. First, the taxpayer must comply with the 
requirements of the Internal Revenue Code and the regulations 
issued thereunder to substantiate any item (as under prior 
law). Second, the taxpayer must maintain records required by 
the Code and regulations (as under prior law). Third, the 
taxpayer must cooperate with reasonable requests by the 
Secretary for meetings, interviews, witnesses, information, and 
documents (including providing, within a reasonable period of 
time, access to and inspection of witnesses, information, and 
documents within the control of the taxpayer, as reasonably 
requested by the Secretary). Cooperation also includes 
providing reasonable assistance to the Secretary in obtaining 
access to and inspection of witnesses, information, or 
documents not within the control of the taxpayer (including any 
witnesses, information, or documents located in foreign 
countries <SUP>36</SUP>). A necessary element of cooperating 
with the Secretary is that the taxpayer must exhaust his or her 
administrative remedies (including any appeal rights provided 
by the IRS). The taxpayer is not required to agree to extend 
the statute of limitations to be considered to have cooperated 
with the Secretary. Cooperation also means that the taxpayer 
must establish the applicability of any asserted privilege. 
Fourth, taxpayers other than individuals or estates must meet 
the net worth limitations that apply for awarding attorney's 
fees (accordingly, no net worth limitation would be applicable 
to individuals). Corporations, trusts,<SUP>37</SUP> and 
partnerships whose net worth exceeds $7 million are not 
eligible for the benefits of the provision. The taxpayer has 
the burden of proving that it meets each of these conditions, 
because they are necessary prerequisites to establishing that 
the burden of proof is on the Secretary.
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    \35\ For this purpose, self-employment taxes are treated as income 
taxes.
    \36\ Cooperation also includes providing English translations, as 
reasonably requested by the Secretary.
    \37\ An exception to this rule removes the net worth limitation 
from certain revocable trusts for the same period of time that the 
trust would have been treated as part of the estate had the trust made 
the election under section 645 to be treated as part of the estate. 
This reflects the technical correction enacted in section 4002(b) of 
the Tax and Trade Relief Extension Act of 1998, described in Part Three 
of this publication.
---------------------------------------------------------------------------
    The burden will shift to the Secretary under this provision 
only if the taxpayer first introduces credible evidence with 
respect to a factual issue relevant to ascertaining the 
taxpayer's income tax liability. Credible evidence is the 
quality of evidence which, after critical analysis, the court 
would find sufficient upon which to base a decision on the 
issue if no contrary evidence were submitted (without regard to 
the judicial presumption of IRS correctness). A taxpayer has 
not produced credible evidence for these purposes if the 
taxpayer merely makes implausible factual assertions, frivolous 
claims, or tax protestor-type arguments. The introduction of 
evidence will not meet this standard if the court is not 
convinced that it is worthy of belief. If after evidence from 
both sides, the court believes that the evidence is equally 
balanced, the court shall find that the Secretary has not 
sustained his burden of proof.
    Nothing in the provision shall be construed to override any 
requirement under the Code or regulations to substantiate any 
item. Accordingly, taxpayers must meet applicable 
substantiation requirements, whether generally imposed 
<SUP>38</SUP> or imposed with respect to specific items, such 
as charitable contributions <SUP>39</SUP> or meals, 
entertainment, travel, and certain other expenses.<SUP>40</SUP> 
Substantiation requirements include any requirement of the Code 
or regulations that the taxpayer establish an item to the 
satisfaction of the Secretary.<SUP>41</SUP> Taxpayers who fail 
to substantiate any item in accordance with the legal 
requirement of substantiation will not have satisfied the legal 
conditions that are prerequisite to claiming the item on the 
taxpayer's tax return and will accordingly be unable to avail 
themselves of this provision regarding the burden of proof. 
Thus, if a taxpayer required to substantiate an item fails to 
do so in the manner required (or destroys the substantiation), 
this burden of proof provision is inapplicable.<SUP>42</SUP>
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    \38\ See e.g., sec. 6001 and Treas. Reg. sec. 1.6001-1 requiring 
every person liable for any tax imposed by this Title to keep such 
records as the Secretary may from time to time prescribe, and secs. 
6038 and 6038A requiring United States persons to furnish certain 
information the Secretary may prescribe with respect to foreign 
businesses controlled by the U.S. person.
    \39\ Sec. 170(a)(1) and (f)(8) and Treas. Reg. sec. 1.170A-13.
    \40\ See e.g., Sec. 274(d) and Treas. Reg. sec. 1.274(d)-1, 1.274-
5T, and 1.274-5A.
    \41\ For example, sec. 905(b) of the Code provides that foreign tax 
credits shall be allowed only if the taxpayer establishes to the 
satisfaction of the Secretary all information necessary for the 
verification and computation of the credit. Instructions for meeting 
that requirement are set forth in Treas. Reg. sec. 1.905-2.
    \42\ If, however, the taxpayer can demonstrate that he had 
maintained the required substantiation but that it was destroyed or 
lost through no fault of the taxpayer, such as by fire or flood, 
existing tax rules regarding reconstruction of those records would 
continue to apply.
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    In the case of an individual taxpayer, the Secretary has 
the burden of proof in any court proceeding with respect to any 
item of income which was reconstructed by the Secretary solely 
through the use of statistical information on unrelated 
taxpayers.
    Further, the provision provides that, in any court 
proceeding, the Secretary must initiallycome forward with 
evidence that it is appropriate to apply a particular penalty to the 
taxpayer before the court can impose the penalty. This provision is not 
intended to require the Secretary to introduce evidence of elements 
such as reasonable cause or substantial authority. Rather, the 
Secretary must come forward initially with evidence regarding the 
appropriateness of applying a particular penalty to the taxpayer; if 
the taxpayer believes that, because of reasonable cause, substantial 
authority, or a similar provision, it is inappropriate to impose the 
penalty, it is the taxpayer's responsibility (and not the Secretary's 
obligation) to raise those issues.

                             Effective Date

    The provision applies to court proceedings arising in 
connection with examinations commencing after the date of 
enactment (after July 22, 1998). In any case in which there is 
no examination, the provision applies to court proceedings 
arising in connection with taxable periods or events beginning 
or occurring after the date of enactment. An audit is not the 
only event that would be considered an examination for purposes 
of this provision. For example, the matching of an information 
return against amounts reported on a tax return is intended to 
be an examination for purposes of this provision. Similarly, 
the review of a claim for refund prior to issuing that refund 
is also intended to be an examination for purposes of this 
provision.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by less than $1 million in 1998, $231 million 
in 1999, $256 million in 2000, $269 million in 2001, $278 
million in 2002, $297 million in 2003, $311 million in 2004, 
$327 million in 2005, $344 million in 2006, and $360 million in 
2007.

                      B. Proceedings by Taxpayers

1. Expansion of authority to award costs and certain fees (sec. 3101 of 
        the Act and sec. 7430 of the Code)

                         Present and Prior Law

    Any person who substantially prevails in any action by or 
against the United States in connection with the determination, 
collection, or refund of any tax, interest, or penalty may be 
awarded reasonable administrative costs incurred before the IRS 
and reasonable litigation costs incurred in connection with any 
court proceeding. Reasonable administrative costs are defined 
as (1) any administrative fees or similar charges imposed by 
the IRS and (2) expenses, costs and fees related to attorneys, 
expert witnesses, and studies or analyses necessary for 
preparation of the case, to the extent that such costs are 
incurred after the earlier of the date of the notice of 
decision by IRS Appeals or the notice of deficiency. Net worth 
limitations apply.
    Reasonable litigation costs include reasonable fees paid or 
incurred for the services of attorneys, except that, under 
prior law, the attorney's fees were not reimbursed at a rate in 
excess of $110 per hour (indexed for inflation) unless the 
court determined that a special factor, such as the limited 
availability of qualified attorneys for the proceeding, 
justified a higher rate.
    Rule 68 of the Federal Rules of Civil Procedure (FRCP) 
provides a procedure under which a party may recover costs if 
the party's offer for judgment was rejected and the subsequent 
court judgment was less favorable to the opposing party than 
the offer. The offering party's recoverable costs are limited 
to the costs (excluding attorney's fees) incurred after the 
offer was made. The FRCP generally apply to tax litigation in 
the district courts and the United States Court of Federal 
Claims.
    Code section 7431 permits the award of civil damages for 
unauthorized inspection or disclosure of return information. 
The Federal appellate courts were, under prior law, split over 
whether a party who substantially prevails over the United 
States in an action under Code section 7431 is eligible for an 
award of fees and reasonable costs.

                           Reasons for Change

    The Congress believed that taxpayers should be allowed to 
recover the reasonable administrative costs they incur where 
the IRS takes a position against the taxpayer that is not 
substantially justified, beginning at the time that the IRS 
establishes its initial position by issuing a letter of 
proposed deficiency which allows the taxpayer an opportunity 
for administrative review by the IRS Office of Appeals.
    The Congress believed that the pro bono publicum 
representation of taxpayers should be encouraged and the value 
of the legal services rendered in these situations should be 
recognized. Where the IRS takes positions that are not 
substantially justified, it should not be relieved of its 
obligation to bear reasonable administrative and litigation 
costs because representation was provided the taxpayer on a pro 
bono basis.
    The Congress was concerned that the IRS may continue to 
litigate issues that have previously been decided in favor of 
taxpayers in other circuits. The Congress believed that this 
places an undue burden on taxpayers that are required to 
litigate such issues. Accordingly, the Congress believed it is 
important that the court take into account whether the IRS has 
lost in the courts of appeals of other circuits on similar 
issues in determining whether the IRS has taken a position that 
is not substantially justified and thus liable for reasonable 
administrative and litigation costs.
    The Congress believed that settlement of tax cases should 
be encouraged whenever possible. Accordingly, the Congress 
believed that the application of a rule similar to FRCP 68 is 
appropriate to provide an incentive for the IRS to settle 
taxpayers' cases for appropriate amounts, by requiring 
reimbursement of taxpayer's costs when the IRS fails to do so.
    The Congress believed that when the IRS violates taxpayer's 
right to privacy by engaging in unauthorized inspection or 
disclosure activities, it is appropriate to reimburse taxpayers 
for the costs of their damages.

                        Explanation of Provision

    The Act:
    (1) Moves the point in time after which reasonable 
administrative costs can be awarded to the date on which the 
first letter of proposed deficiency that allows the taxpayer an 
opportunity for administrative review in the IRS Office of 
Appeals is sent;
    (2) Raises the hourly rate to $125 per hour, which 
parallels the rate utilized under the Equal Access to Justice 
Act (the statute that authorizes the awarding of attorney's 
fees in non-tax Federal cases). This new cap will continue to 
be indexed for inflation (as under prior law). Provides that 
the difficulty of the issues presented or the unavailability of 
local tax expertise can be used to justify an award of 
attorney's fees of more than the statutory limit of $125 per 
hour;
    (3) Permits the award of reasonable attorney's fees to 
specified persons who represent for no more than a nominal fee 
a taxpayer who is a prevailing party;
    (4) Provides that in determining whether the position of 
the United States was substantially justified, the court shall 
take into account whether the United States has lost in other 
courts of appeal on substantially similar issues;
    (5) Provides that if a taxpayer makes an offer after the 
taxpayer has a right to administrative review in the IRS Office 
of Appeals, the IRS rejects the offer, and later the IRS 
obtains a judgment against the taxpayer in an amount that is 
equal to or less than the taxpayer's offer for the amount of 
the tax liability (excluding interest), reasonable costs and 
attorney's fees from the date of the offer would be awarded; 
and
    (6) Clarifies that the award of attorney's fees is 
permitted in actions for civil damages for unauthorized 
inspection or disclosure of taxpayer returns and return 
information. Fees are payable by the United States only when 
the United States is the defendant and the plaintiff is a 
prevailing party. Also, individual defendants (such as State 
employees or contractors) may be liable for attorneys' fees and 
costs in cases where the United States is not a party, whenever 
they are found to have made a wrongful disclosure.

                             Effective Date

    The provision is effective with respect to costs incurred 
and services performed more than 180 days after the date of 
enactment (after January 18, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts in 1998, and to reduce Federal 
fiscal year budget receipts by $11 million in 1999, $12 million 
in 2000, $13 million in 2001, $14 million in 2002, $16 million 
in 2003, $18 million in 2004, $19 million in 2005, $20 million 
in 2006, and $22 million in 2007.

2. Civil damages for collection actions (sec. 3102 of the Act and secs. 
        7426 and 7433 of the Code)

                               Prior Law

    A taxpayer could sue the United States for up to $1 million 
of civil damages caused by an officer or employee of the IRS 
who recklessly or intentionally disregards provisions of the 
Internal Revenue Code or Treasury regulations in connection 
with the collection of Federal tax with respect to the 
taxpayer.

                           Reasons for Change

    The Congress believed that taxpayers should also be able to 
recover economic damages they incur as a result of the 
negligent disregard of the Code or regulations by an officer or 
employee of the IRS in connection with a collection matter. The 
Congress also believed that taxpayers should be able to recover 
civil damages they incur as a result of a willful violation of 
the Bankruptcy Code by an officer or employee of the IRS. As 
third parties may also be subject to IRS collection actions, 
the Congress believed it appropriate to afford them the 
opportunity to recover damages for unauthorized collection 
actions.

                        Explanation of Provision

    The Act permits recovery of up to $100,000 in civil damages 
caused by an officer or employee of the IRS who negligently 
disregards provisions of the Internal Revenue Code or Treasury 
regulations in connection with the collection of Federal tax 
with respect to the taxpayer. The provision also permits 
recovery of up to $1 million in civil damages caused by an 
officer or employee of the IRS who willfully violates 
provisions of the Bankruptcy Code relating to automatic stays 
or discharges. The provision also provides that persons other 
than the taxpayer may sue for civil damages for unauthorized 
collection actions.

                             Effective Date

    The provision is effective with respect to actions of 
officers or employees of the IRS occurring after the date of 
enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $2 million in 1998, $15 million in 1999, $25 
million in 2000, $50 million in 2001, $30 million in 2002, and 
$25 million in each of the years 2003 through 2007.

3. Increase in size of cases permitted on small case calendar (sec. 
        3103 of the Act and sec. 7463 of the Code)

                         Present and Prior Law

    Taxpayers may choose to contest many tax disputes in the 
Tax Court. Special small case procedures apply to disputes 
involving up to a specified maximum, if the taxpayer chooses to 
utilize these procedures (and the Tax Court concurs). The IRS 
cannot require the taxpayer to use the small case procedures. 
The Tax Court generally concurs with the taxpayer's request to 
use the small case procedures, unless it decides that the case 
involves an issue that should be heard under the normal 
procedures. After the case has commenced, the Tax Court may 
order that the small case procedures should be discontinued 
only if (1) there is reason to believe that the amount in 
controversy will exceed the specified maximum, or (2) justice 
would require the change in procedure. Under prior law, the 
specified maximum for small case treatment was $10,000.

                           Reasons for Change

    The Congress believed that use of the small case procedures 
should be expanded.

                        Explanation of Provision

    The Act increases the specified maximum for small case 
treatment from $10,000 to $50,000. An increase of this size may 
encompass a small number of cases of significant precedential 
value. Accordingly, it is anticipated that the Tax Court will 
carefully consider (1) IRS objections to small case treatment, 
such as objections based upon the potential precedential value 
of the case, as well as (2) the financial impact on the 
taxpayer, including additional legal fees and costs, of not 
utilizing small case treatment.

                             Effective Date

    The provision is effective with respect to proceedings 
commenced after the date of enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

4. Actions for refund with respect to certain estates which have 
        elected the installment method of payment (sec. 3104 of the Act 
        and sec. 7422 of the Code)

                         Present and Prior Law

    In general, the U.S. Court of Federal Claims and the U.S. 
district courts have jurisdiction over suits for the refund of 
taxes, as long as full payment of the assessed tax liability 
has been made. Under Code section 6166, if certain conditions 
are met, the executor of a decedent's estate may elect to pay 
the estate tax attributable to certain closely-held businesses 
over a 14-year period. Under prior law, courts had held that 
U.S. district courts and the U.S. Court of Federal Claims do 
not have jurisdiction over claims for refunds by taxpayers 
deferring estate tax payments pursuant to section 6166 unless 
the entire estate tax liability has been paid. Under section 
7479 of prior law, the U.S. Tax Court had limited authority to 
provide declaratory judgments regarding initial or continuing 
eligibility for deferral under section 6166.

                           Reasons for Change

    The Congress believed that the refund jurisdiction of the 
U.S. Court of Federal Claims and the U.S. district courts 
should apply without regard to whether the taxpayer has 
elected, and the Secretary accepted, the payment of that tax in 
installments.

                        Explanation of Provision

    The Act grants the U.S. Court of Federal Claims and the 
U.S. district courts jurisdiction to determine the correct 
amount of estate tax liability (or refund) in actions brought 
by taxpayers deferring estate tax payments under section 6166, 
as long as certain conditions are met. In order to qualify for 
the provision: (1) the estate must have made an election 
pursuant to section 6166; (2) the estate must have fully paid 
each installment of principal and/or interest due (and all non-
6166-related estate taxes due) before the date the suit is 
filed; (3) no portion of the payments due may have been 
accelerated; (4) there must be no suits for declaratory 
judgment pursuant to section 7479 pending; and (5) there must 
be no outstanding deficiency notices against the estate. In 
general, to the extent that a taxpayer has previously litigated 
its estate tax liability, the taxpayer would not be able to 
take advantage of this procedure under principles of res 
judicata. Taxpayers are not relieved of the liability to make 
any installment payments that become due during the pendency of 
the suit (i.e., failure to make such payments would subject the 
taxpayer to the existing provisions of section 6166(g)(3)).
    The Act further provides that once a final judgment has 
been entered by a district court or the U.S. Court of Federal 
Claims, the IRS is not permitted to collect any amount 
disallowed by the court, and any amounts paid by the taxpayer 
in excess of the amount the court finds to be currently due and 
payable are refunded to the taxpayer, with interest. Lastly, 
the provision provides that the two-year statute of limitations 
for filing a refund action is suspended during the pendency of 
any action brought by a taxpayer pursuant to section 7479 for a 
declaratoryjudgment as to an estate's eligibility for section 
6166.

                             Effective Date

    The provision is effective for claims for refunds filed 
after the date of enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

5. Administrative appeal of adverse IRS determination of a bond issue's 
        tax-exempt status (sec. 3105 of the Act)

                         Present and Prior Law

    Interest on debt incurred by States or local governments 
generally is excluded from gross income if the proceeds of the 
borrowing are used to carry out governmental functions of those 
entities and the debt is repaid with governmental funds.
    A State or local government that seeks to issue bonds, the 
interest on which is intended to be excludable from gross 
income, can request a ruling from the IRS regarding the 
eligibility of such bonds for tax-exemption. The prospective 
issuer can challenge the IRS's determination (or failure to 
make a timely determination) in a declaratory judgment 
proceeding in the Tax Court. Under prior law, there was no 
mechanism that explicitly allowed tax-exempt bond issuers 
examined by the IRS to appeal adverse examination 
determinations to the Appeals Division of the IRS as a matter 
of right.

                           Reasons for Change

    The Congress believed that issuers of governmental bonds, 
as parties with a strong incentive to ensure the continued tax-
exemption of outstanding bonds, should have the opportunity to 
appeal IRS revocations of the tax-exempt status of the bonds, 
in order better to protect the holders of those bonds and the 
market.

                        Explanation of Provision

    The Act directs the Internal Revenue Service to modify its 
administrative procedures to allow tax-exempt bond issuers 
examined by the IRS to appeal adverse examination 
determinations to the Appeals Division of the IRS as a matter 
of right. Because of the complexity of the issues involved, the 
IRS is directed to provide that these appeals will be heard by 
senior appeals officers having experience in resolving complex 
cases.
    It is intended that Congress will evaluate judicial 
remedies in future legislation once the IRS's tax-exempt bond 
examination program has developed more fully and the Congress 
is better able to ensure that any such future measure protects 
all parties in interest to these determinations (i.e., issuers, 
bondholders, conduit borrowers, and the Federal Government).

                             Effective Date

    The direction to the IRS is effective on the date of 
enactment (July 22, 1998).

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by less than $1 million in 1998, and $5 million 
in 1999, and $2 million in each of the years 2000 through 2007.

6. Civil action for release of erroneous lien (sec. 3106 of the Act and 
        sec. 6325 of the Code)

                               Prior Law

    Prior to 1995, the provisions governing jurisdiction over 
refund suits had generally been interpreted to apply only if an 
action was brought by the taxpayer against whom tax was 
assessed. Remedies for third parties from whom tax was 
collected (rather than assessed) were found in other provisions 
of the Internal Revenue Code. The Supreme Court has held 
<SUP>43</SUP> that a third party who paid another person's tax 
under protest to remove a lien on the third party's property 
could bring a refund suit, because she had no other adequate 
administrative or judicial remedy. In that case, the IRS had 
filed a nominee lien against property that was owned by the 
taxpayer's former spouse and that was under a contract for 
sale. In order to complete the sale, the former spouse paid the 
amount of the lien under protest, and then sued in district 
court to recover the amount paid. The Supreme Court held that 
parties who are forced to pay another's tax under duress could 
bring a refund suit, because no other judicial remedy was 
adequate.
---------------------------------------------------------------------------
    \43\ Williams v. United States, 514 U.S. 527 (1995).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed that third parties should have a 
mechanism to release an erroneous tax lien. Accordingly, the 
Congress believed it appropriate to provide relief similar to 
that provided to third parties who are subject to wrongful levy 
of property.

                        Explanation of Provision

    The Act creates an administrative procedure permitting a 
record owner of property against which a Federal tax lien has 
been filed to obtain a certificate of discharge of property 
from the lien as a matter of right. The third party is required 
to apply to the Secretary of the Treasury for such a 
certificate and either to deposit cash or to furnish a bond 
sufficient to protect the lien interest of the United States.
    The Act also establishes a judicial cause of action for 
third parties challenging a lien. The period within which such 
an action must be commenced is 120 days after the date the 
certificate of discharge is issued to ensure an early 
resolution of the parties' interests.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.

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

1. Relief for innocent spouses (sec. 3201 of the Act and new sec. 6015 
        of the Code)

                               Prior Law

    Under prior law, relief from liability for tax, interest 
and penalties was available for ``innocent spouses'' only in 
certain limited circumstances. To qualify for such relief, the 
innocent spouse was required to establish: (1) that a joint 
return was made; (2) that an understatement of tax, which 
exceeds the greater of $500 or a specified percentage 
<SUP>44</SUP> of the innocent spouse's adjusted gross income 
for the preadjustment (most recent) year, was attributable to a 
grossly erroneous item of the other spouse; (3) that in signing 
the return, the innocent spouse did not know, and had no reason 
to know, that there was an understatement of tax; and (4) that 
taking into account all the facts and circumstances, it was 
inequitable to hold the innocent spouse liable for the 
deficiency in tax.
---------------------------------------------------------------------------
    \44\  The specified percentage was 10 percent if adjusted gross 
income was $20,000 or less. Otherwise, the specified percentage was 25 
percent.
---------------------------------------------------------------------------
    The proper forum for contesting the Secretary's denial of 
innocent spouse relief under prior law was determined by 
whether an underpayment was asserted or the taxpayer was 
seeking a refund of overpaid taxes. Accordingly, the Tax Court 
did not have jurisdiction to review all denials of innocent 
spouse relief.

                           Reasons for Change

    The Congress was concerned that the innocent spouse 
provisions of prior law were inadequate. The Congress believed 
it was inappropriate to limit innocent spouse relief only to 
the most egregious cases, those cases where the understatement 
was large and the tax position taken grossly erroneous. The 
Congress believed that partial innocent spouse relief should be 
considered in appropriate circumstances, and that all taxpayers 
should have access to the Tax Court in resolving disputes 
concerning their status as an innocent spouse.
    The Congress believed that an elective system based on 
separate liabilities would provide more appropriate protection 
for taxpayers that are no longer married, are separated, or are 
living apart than does the current system. The Congress 
intended that this election only be available for tax 
deficiencies attributable to items of which the electing spouse 
had no knowledge. The Congress was concerned that taxpayers not 
be allowed to abuse these rules by knowingly signing false 
returns, or by transferring assets for the purpose of avoiding 
the payment of tax by the use of this election. The Congress 
believed that rules restricting the ability of taxpayers to 
limit their liability in such situations are appropriate.
    The Congress believed that taxpayers need to be informed of 
their right to make this election and that the IRS is the best 
source of that information. The Congress believed that the 
failure of spouses to receive timely notice of their joint tax 
liabilities has contributed to the difficulties they face. 
Accordingly, the Congress believed that the IRS should take 
appropriate steps to insure that both spouses are made aware of 
their tax situation, and not rely on a single notice sent to a 
single address to inform both spouses.

                 Explanation of Provision <SUP>45</SUP>
---------------------------------------------------------------------------

    \45\ This reflects the technical correction enacted in section 
4002(c) of the Tax and Trade Relief Extension Act of 1998, described in 
Part Three of this publication.
---------------------------------------------------------------------------

In general

    The provision establishes three procedures for limiting the 
portion of a joint and several liability that is a spouse's (or 
former spouse's) responsibility. First, the provision 
establishes a separate liability election for a taxpayer who is 
no longer married to, is legally separated from, or has been 
living apart at all times for at least 12 months from the 
person with whom the taxpayer originally filed the joint 
return. Second, the provision expands the circumstances in 
which innocent spouse relief similar to that available under 
prior law is available. Third, the provision authorizes the 
Secretary to provide equitable relief in appropriate 
situations. The provision also establishes jurisdiction in the 
Tax Court over disputes arising in this area.

Deficiencies of taxpayers who are no longer married, are separated, or 
        are living apart

    The provision establishes a separate liability election 
applicable to the deficiencies of a taxpayer who, at the time 
of election, is no longer married <SUP>46</SUP> to, is legally 
separated from, or has been living apart at all times for at 
least 12 months from the person with whom the taxpayer 
originally filed the joint return. Such taxpayers may elect to 
limit their liability for any deficiency to the portion of the 
deficiency that is attributable to items allocable to the 
taxpayer. Items are generally allocated between spouses in the 
same manner as they would have been allocated had the spouses 
filed separate returns. However, if any item of credit or 
deduction would be disallowed solely because a separate return 
is filed, the item of credit or deduction will be computed for 
this purpose without regard to such prohibition. The Secretary 
may prescribe other methods of allocation by regulation. The 
allocation of items is to be accomplished without regard to 
community property laws. An electing spouse has the burden of 
proof with respect to establishing the portion of any 
deficiency that is allocable to him or her under this 
provision.
---------------------------------------------------------------------------
    \46\ For the purpose of this rule, a taxpayer is no longer married 
if he or she is widowed.
---------------------------------------------------------------------------
    The election applies to all unpaid taxes under subtitle A 
of the Internal Revenue Code, including the income tax and the 
self-employment tax. The election may be made at any time not 
later than 2 years after collection activities begin with 
respect to the electing spouse. It is intended that the 2 year 
period not begin until collection activities have been 
undertaken against the electing spouse that have the effect of 
giving the spouse notice of the IRS' intention to collect the 
joint liability from such spouse. For example, garnishment of 
wages or a notice of intent to levy against the property of the 
electing spouse would constitute collection activity against 
the electing spouse. The mailing of a notice of deficiency and 
demand for payment to the last known address of the electing 
spouse, addressed to both spouses, would not.
    If the deficiency relates entirely to an item attributable 
to one spouse, the other spouse is responsible for none of the 
deficiency if he or she elects limited liability under this 
provision. For example, a deficiency is assessed after IRS 
audit of a joint return. The deficiency relates to income 
earned by the husband that was not reported on the return. If 
the spouses who joined in the return are no longer married, are 
legally separated, or have lived apart for at least 12 months, 
either may elect limited liability under this provision. If the 
wife elects, she would owe none of the deficiency. The 
deficiency would be the sole responsibility of the husband 
whose income gave rise to the deficiency.
    If the deficiency relates to the items of both spouses, the 
separate liability for the deficiency is allocated between the 
spouses in the same proportion as the net items taken into 
account in determining the deficiency. For example, a 
deficiency is assessed that is attributable to $70,000 of 
unreported income allocable to the husband and the disallowance 
of a $30,000 miscellaneous itemized deduction allocable to the 
wife. If the spouses who joined in the return are no longer 
married, are legally separated, or have lived apart for at 
least 12 months, either may elect limited liability under this 
provision. If the husband and wife both elect, the husband's 
liability would be limited to 70 percent of the deficiency and 
the wife's liability limited to 30 percent. This would be the 
case even if a portion of the miscellaneous itemized deductions 
had been disallowed under section 67(a). Each spouse is 
required to make the election in order to limit his or her 
liability. If either spouse fails to elect, the non-electing 
spouse would be liable for the full amount of the deficiency, 
unless reduced by innocent spouse relief or pursuant to the 
grant of authority to the Secretary to provide equitable 
relief.
    If the deficiency arises as a result of the denial of an 
item of deduction or credit, the amount of the deficiency 
attributable to the spouse to whom the item of deduction or 
credit is allocated is limited to the amount of income or tax 
allocated to such spouse that was offset by the deduction or 
credit. The remainder of the liability is allocated to the 
other spouse to reflect the fact that income or tax allocated 
to that spouse was originally offset by a portion of the 
disallowed deduction or credit.
    For example, a married couple files a joint return with 
wage income of $100,000 allocable to the wife and $30,000 of 
self-employment income allocable to the husband. On 
examination, a $20,000 deduction allocated to the husband is 
disallowed, resulting in a deficiency of $5,600. Under the 
provision, the liability is allocated in proportion to the 
items giving rise to the deficiency. Since the only item giving 
rise to the deficiency is allocable to the husband, and because 
he reported sufficient income to offset the item of deduction, 
the entire deficiency is allocated to the husband and the wife 
has no liability with regard to the deficiency, regardless of 
the ability of the IRS to collect the deficiency from the 
husband.
    If the joint return had shown only $15,000 (instead of 
$30,000) of self-employment income for the husband, the income 
offset limitation rule discussed above would apply. In this 
case, the disallowed $20,000 deduction entirely offsets the 
$15,000 of income of the husband, and $5,000 remains. This 
remaining $5,000 of the disallowed deduction offsets income of 
the wife. The liability for the deficiency is therefore divided 
in proportion to the amount of income offset for each spouse. 
In this example, the husband is liable for \3/4\ of the 
deficiency ($4,200), and the wife is liable for the remaining 
\1/4\ ($1,400).
    Where a deficiency is attributable to the disallowance of a 
credit, or to any tax other than regular or alternative minimum 
income tax, the portion of the deficiency attributable to such 
credit or other tax is considered first. For example, on 
examination a deficiency of $10,000 ($2,800 of self-employment 
tax and $7,200 of income tax) is determined to be attributable 
to $20,000 of unreported self-employment income of the husband 
and a disallowed itemized deduction of $5,000 allocable to the 
wife. The $2,800 of deficient self-employment taxes is first 
allocated to the husband, and the remaining $7,200 of income 
tax deficiency is allocated 80 percent to the husband and 20 
percent to the wife.
    Special rules to prevent the inappropriate use of the 
election are included.
    First, if the IRS demonstrates that assets were transferred 
between the spouses in a fraudulent scheme joined in by both 
spouses, neither spouse is eligible to make the election under 
the provision (and consequently joint and several liability 
applies to both spouses).
    Second, if the IRS proves that the electing spouse had 
actual knowledge that an item on a return is incorrect, the 
election will not apply to the extent any deficiency is 
attributable to such item. Such actual knowledge must be 
established by the evidence and shall not be inferred based on 
indications that the electing spouse had a reason to know.
    The rule that the election will not apply to the extent any 
deficiency is attributable to an item the electing spouse had 
actual knowledge of is expected to be applied by treating the 
item as fully allocable to both spouses. For example a divorced 
couple filed a joint return during their marriage with wage 
income of $150,000 allocable to the wife and $30,000 of self-
employment income allocable to the husband. On examination, an 
additional $20,000 of the husband's self-employment income is 
discovered, resulting in a deficiency of $9,000. The IRS proves 
that the wife had actual knowledge of $5,000 of this additional 
self-employment income, but had no knowledge of the remaining 
$15,000. In this case, the husband would be liable for the full 
amount of the deficiency, since the item giving rise to the 
deficiency is fully allocable to him. In addition, the wife 
would be liable for the amount that would have been calculated 
as the deficiency based on the $5,000 of unreported income of 
which she had actual knowledge. Even if the wife elects to 
limit the liability for the deficiency under this provision, 
the IRS would be allowed to collect that amount from either 
spouse, while the remainder of the deficiency could be 
collected only from the husband.
    Third, the portion of the deficiency for which the electing 
spouse is liable is increased by the value of any disqualified 
assets received from the other spouse. Disqualified assets 
include any property or right to property that was transferred 
to an electing spouse if the principal purpose of the transfer 
is the avoidance of tax (including the avoidance of payment of 
tax). A rebuttable presumption exists that a transfer is made 
for tax avoidance purposes if the transfer was made less than 
one year before the earlier of the payment due date or the date 
of the notice of proposed deficiency. The rebuttable 
presumption does not apply to transfers pursuant to a decree of 
divorce or separate maintenance. The presumption may be 
rebutted by a showing that the principal purpose of the 
transfer was not the avoidance of tax or the avoidance of the 
payment of tax.

Innocent spouse relief

    The provision also expands the circumstances under which 
innocent spouse relief is available. For example, a taxpayer 
may be ineligible to make the separate liability election for a 
deficiency because he or she is not widowed, divorced, legally 
separated, or living apart (for at least 12 months) from the 
person with whom the taxpayer originally filed the joint 
return. Such a taxpayer may apply for relief of any deficiency 
that is attributable to an erroneous item of the other spouse, 
provided he or she did not know and had no reason to know of 
the understatement of tax, and it would be inequitable to hold 
the taxpayer responsible for the deficiency. The requirements 
of prior law that the understatement of tax be substantial, and 
that the item or items to which the understatement is 
attributable be grossly erroneous, are repealed.
    The innocent spouse election is required to be made no 
later than the date that is two years after the Secretary has 
begun collection actions with respect to the individual. 
Innocent spouse relief may be provided on an apportioned basis. 
A spouse may be relieved of liability for the portion of an 
understatement of tax even if the spouse knew or had reason to 
know of other understatements of tax on the same return.

Equitable relief in other circumstances

    The provision authorizes the Secretary to provide equitable 
relief in appropriate situations to avoid the inequitable 
treatment of spouses in such situations. For example, the 
Congress intends that equitable relief be available to a spouse 
that did not know, and had no reason to know, that funds 
intended for the payment of tax were taken by the other spouse 
for such other spouse's benefit. The Secretary is also 
authorized to provide relief at his discretion in other 
situations.

Jurisdiction of Tax Court

    The Act specifically provides that the Tax Court has 
jurisdiction to review any denial of innocent spouse relief. 
Except for termination and jeopardy assessments, the Secretary 
may not levy or proceed in court to collect any tax from a 
taxpayer claiming innocent spouse status with regard to such 
tax until the expiration of the 90-day period in which such 
taxpayer may petition the Tax Court or, if such a petition is 
filed in Tax Court, before the decision of the Tax Court has 
become final. The running of the statute of limitations is 
suspended in such situations with respect to the spouse 
claiming innocent spouse status.
    The Tax Court also has jurisdiction of disputes arising 
from the separate liability election. For example, a spouse who 
makes the separate liability election may petition the Tax 
Court to determine the limits on liability applicable under 
this provision. The Tax Court is authorized to establish rules 
that would allow the Secretary of the Treasury and the electing 
spouse to require, with adequate notice, the other spouse to 
become a party to any proceeding before the Tax Court.

Separate notice requirement

    The Secretary is expected, wherever practicable, to send 
any notice relating to a joint return separately to each 
spouse.

                             Effective Date

    The separate liability election, expanded innocent spouse 
relief and authority to provide equitable relief all apply to 
liabilities for tax arising after the date of enactment (after 
July 22, 1998), as well as any liability for tax arising on or 
before the date of enactment that remains unpaid on the date of 
enactment. The applicable 2-year election periods do not expire 
before the date that is two years after the first collection 
activity taken by the IRS after the date of enactment. An 
individual may be eligible for relief under the provision 
without regard to whether such individual has previously been 
denied innocent spouse relief under prior law. The Secretary is 
required to develop a separate form for electing innocent 
spouse relief within 180 days after the date of enactment.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $10 million in 1998, $131 million in 1999, 
$92 million in 2000, $74 million in 2001, $86 million in 2002, 
$121 million in 2003, $157 million in 2004, $204 million in 
2005, $243 million in 2006, and $288 million in 2007.

2. Suspension of statute of limitations on filing refund claims during 
        periods of disability (sec. 3202 of the Act and sec. 6511 of 
        the Code)

                         Present and Prior Law

    In general, a taxpayer must file a refund claim within 
three years of the filing of the return or within two years of 
the payment of the tax, whichever period expires later (if no 
return is filed, the two-year limit applies) (sec. 6511(a)). A 
refund claim that is not filed within these time periods is 
rejected as untimely.
    Under prior law, there was no explicit statutory rule 
providing for equitable tolling of the statute of limitations. 
The U.S. Supreme Court had held <SUP>47</SUP> that Congress did 
not intend the equitable tolling doctrine to apply to the 
statutory limitations of section 6511 on the filing of tax 
refund claims.
---------------------------------------------------------------------------
    \47\ U.S. v. Brockamp, 519 U.S. 347 (1997).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed that, in cases of severe disability, 
equitable tolling should be considered in the application of 
the statutory limitations on the filing of tax refund claims.

                        Explanation of Provision

    The Act permits equitable tolling of the statute of 
limitations for refund claims of an individual taxpayer during 
any period of the individual's life in which he or she is 
unable to manage his or her financial affairs by reason of a 
medically determinable physical or mental impairment that can 
be expected to result in death or to last for a continuous 
period of not less than 12 months. Tolling does not apply 
during periods in which the taxpayer's spouse or another person 
is authorized to act on the taxpayer's behalf in financial 
matters.

                             Effective Date

    The provision applies to periods of disability before, on, 
or after the date of enactment (July 22, 1998) but does not 
apply to any claim for refund or credit that (without regard to 
the provision) is barred by the operation of any law, including 
the statute of limitations, as of the date of enactment.

                             Revenue Effect

    The provision is estimated to reduce Federal budget 
receipts by $10 million in 1998, $70 million in 1999, $35 
million in 2000, $15 million in 2001, $16 million in 2002, $17 
million in 2003, $18 million in 2004, $19 million in 2005, $20 
million in 2006, and $21 million in 2007.

            D. Provisions Relating to Interest and Penalties

1. Elimination of interest differential on overlapping periods of 
        interest on income tax overpayments and underpayments (sec. 
        3301 of the Act and sec. 6621 of the Code)

                         Present and Prior Law

    A taxpayer that underpays its taxes is required to pay 
interest on the underpayment at a rate equal to the Federal 
short term interest rate plus three percentage 
points.<SUP>48</SUP> A special ``hot interest'' rate equal to 
the Federal short term interest rate plus five percentage 
points applies in the case of certain large corporate 
underpayments.
---------------------------------------------------------------------------
    \48\ This provision was modified with respect to non-corporate 
taxpayers (see sec. 3302 of the Act).
---------------------------------------------------------------------------
    A taxpayer that overpays its taxes receives interest on the 
overpayment at a rate equal to the Federal short term interest 
rate plus two percentage points. In the case of corporate 
overpayments in excess of $10,000, this is reduced to the 
Federal short term interest rate plus one-half of a percentage 
point.
    If a taxpayer has an underpayment of tax from one year and 
an overpayment of tax from a different year that are 
outstanding at the same time, the IRS will typically offset the 
overpayment against the underpayment and apply the appropriate 
interest to the resulting net underpayment or overpayment. 
However, under prior law, if either the underpayment or 
overpayment has been satisfied, the IRS did not typically 
offset the two amounts, but rather assessed or credited 
interest on the full underpayment or overpayment at the 
underpayment or overpayment rate. This had the effect of 
assessing the underpayment at the higher underpayment rate and 
crediting the overpayment at the lower overpayment rate. This 
resulted in the taxpayer being assessed a net interest charge, 
even if the amounts of the overpayment and underpayment were 
the same.
    The Secretary has the authority to credit the amount of any 
overpayment against any liability under the Code. Congress has 
previously directed the Internal Revenue Service to implement 
procedures for ``netting'' overpayments and underpayments to 
the extent a portion of tax due is satisfied by a credit of an 
overpayment.

                           Reasons for Change

    The Congress did not believe that the Federal Government 
should charge taxpayers a higher interest rate than the Federal 
Government pays to the extent interest is owed both by and to 
the Federal Government for the same period on equivalent 
amounts.
    The Congress was also concerned that prior practices 
provided an incentive to taxpayers to delay the payment of 
underpayments they do not contest, so that the underpayments 
will be available to offset any overpayments that are later 
determined. The Congress believed this contrary to sound tax 
administrative practice and that taxpayers should not be 
disadvantaged solely because they promptly pay their tax bills.

                        Explanation of Provision

    The provision <SUP>49</SUP> establishes a net interest rate 
of zero where interest is payable and allowable on equivalent 
amounts of overpayment and underpayment for a period of any tax 
that is imposed by the Internal Revenue Code. Each overpayment 
and underpayment is considered only once in determining whether 
equivalent amounts of overpayment and underpayment exist. The 
special rules that increase the interest rate paid on large 
corporate underpayments and decrease the interest rate received 
on corporate overpayments in excess of $10,000 do not prevent 
the application of the net zero rate. It is anticipated that 
the Secretary will take into account interest paid on 
previously determined deficiencies or refunds for the purpose 
of determining the rate of interest in periods for which this 
provision is effective without regard to whether the 
underpayments or overpayments are currently outstanding. It is 
also anticipated that where interest is both payable from and 
allowable to an individual taxpayer for the same period, the 
Secretary will take all reasonable efforts to offset the 
liabilities, rather than process them separately using the net 
interest rate of zero. Where interest is payable and allowable 
on an equivalent amount of underpayment and overpayment that is 
attributable to a taxpayer's interest in a pass-thru entity 
(e.g., a partnership), it is intended that the benefits of the 
provision apply.
---------------------------------------------------------------------------
    \49\ This reflects the technical correction enacted in section 
4002(d) of the Tax and Trade Relief Extension Act of 1998, described in 
Part Three of this publication.
---------------------------------------------------------------------------
    The Congress expects the Secretary to implement the 
procedures necessary to allow for the automatic application of 
this provision when practicable. Until such procedures are 
implemented, the Congress expects that the Secretary will 
promptly and carefully consider any taxpayer's request to have 
interest charges recalculated in accordance with this 
provision.

                             Effective Date

    The provision affects the determination of interest for 
periods beginning after the date of enactment (after July 22, 
1998). In addition, the provision applies to the determination 
of interest for periods beginning before the date of enactment 
if: (1) as of the date of enactment, a statute of limitations 
has not expired with respect to the underpayment or 
overpayment; (2) the taxpayer identifies the periods of 
underpayment and overpayment for which the zero rate applies; 
and (3) on or before December 31, 1999, the taxpayer asks the 
Secretary to apply the zero rate. A statute of limitations must 
not have expired as of the date of enactment with respect to 
both the underpayment and overpayment for the provision to 
apply.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $26 million in 1998, $68 million in 1999, 
$58 million in 2000, $61 million in 2001, $56 million in 2002, 
$59 million in 2003, $62 million in 2004, $65 million in 2005, 
$68 million in 2006, and $72 million in 2007.

2. Increase in overpayment rate payable to taxpayers other than 
        corporations (sec. 3302 of the Act and sec. 6621 of the Code)

                         Present and Prior Law

    A taxpayer that underpays its taxes is required to pay 
interest on the underpayment at a rate equal to the Federal 
short-term interest rate (``AFR'') plus three percentage 
points. A taxpayer that overpays its taxes receives interest on 
the overpayment at a rate equal to the Federal short-term 
interest rate (``AFR'') plus two percentage points; under prior 
law, this rule applied to all taxpayers.

                           Reasons for Change

    The Congress believed that the interest differential for 
noncorporate taxpayers should be eliminated.

                        Explanation of Provision

    The Act provides that the overpayment interest rate is AFR 
plus three percentage points, except that for corporations, the 
rate remains at AFR plus two percentage points.

                             Effective Date

    The provision is effective for interest for the second and 
succeeding calendar quarters beginning after the date of 
enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts in 1998, and to reduce such 
receipts by $36 million in 1999, $54 million in 2000, $56 
million in 2001, $59 million in 2002, $62 million in 2003, $65 
million in 2004, $69 million in 2005, $72 million in 2006, and 
$76 million in 2007.

3. Mitigation of penalty for individual's failure to pay during period 
        of installment agreement (sec. 3303 of the Act and sec. 6651 of 
        the Code)

                         Present and Prior Law

    Taxpayers who fail to pay their taxes are subject to a 
penalty of one-half percent per month on the unpaid amount, up 
to a maximum of 25 percent. If the liability is shown on the 
return, the penalty begins to accrue on the date prescribed for 
payment of the tax (with regard to extensions). If the 
liability should have been shown on the return but was not, the 
penalty generally begins to accrue after the date that is 21 
days from the date of the IRS notice and demand for payment 
with respect to such liability. Under prior law, taxpayers who 
made installment payments pursuant to an agreement with the IRS 
could also be subject to the full amount of this penalty.

                           Reasons for Change

    The Congress believed it inappropriate to apply the full 
amount of the penalty for failure to pay taxes to taxpayers who 
are in fact paying their taxes through an installment 
agreement.

                        Explanation of Provision

    The Act provides that the rate of the penalty for failure 
to pay taxes is half the usual rate (0.25 percent instead of 
0.5 percent) for any month in which an installment payment 
agreement with the IRS is in effect, provided that the 
individual filed the tax return in a timely manner (including 
extensions).

                             Effective Date

    The provision is effective for installment agreement 
payments made after December 31, 1999.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts in 1998 and 1999, and to reduce 
such receipts by $108 million in 2000, $136 million in 2001, 
$143 million in 2002, $152 million in 2003, $159 million in 
2004, $167 million in 2005, $175 million in 2006, and $185 
million in 2007.

4. Mitigation of failure to deposit penalty (sec. 3304 of the Act and 
        sec. 6656 of the Code)

                         Present and Prior Law

    Deposits of payroll taxes are allocated to the earliest 
period for which such a deposit is due. If a taxpayer misses or 
makes an insufficient deposit, later deposits will first be 
applied to satisfy the shortfall for the earlier period, the 
remainder is then applied to satisfy the obligation for the 
current period. Cascading penalties may result as payments that 
would otherwise be sufficient to satisfy current liabilities 
are applied to satisfy earlier shortfalls. The Secretary may 
waive the failure to make deposit penalty for inadvertent 
failures by first-time depositors of employment taxes. Under 
prior law, there may have been impediments to the ability of 
taxpayers to designate the period to which each deposit is 
applied.

                           Reasons for Change

    The Congress believed that the cascading penalty effect is 
unfair and that depositors should be able to designate payments 
to minimize its effect.

                        Explanation of Provision

    The Act allows the taxpayer to designate the period to 
which each deposit is applied. The designation must be made 
during the 90 days immediately following the sending of the 
related IRS penalty notice. The provision also extends the 
authorization to waive the failure to deposit penalty to the 
first deposit a taxpayer is required to make after the taxpayer 
is required to change the frequency of the taxpayer's deposits. 
For deposits required to be made after December 31, 2001, any 
deposit is to be applied to the most recent period to which the 
deposit relates, unless the taxpayer explicitly designates 
otherwise.

                             Effective Date

    The provision is effective for deposits made more than 180 
days after the date of enactment (after January 18, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts in 1998, and to reduce such 
receipts by $47 million in 1999, $64 million in each of the 
years 2000 and 2001, $65 million in 2002, $66 million in each 
of the years 2003 and 2004, $67 million in 2005, and $68 
million in each of the years 2006 and 2007.

5. Suspension of interest and certain penalties if Secretary fails to 
        contact individual taxpayer (sec. 3305 of the Act and sec. 6404 
        of the Code)

                               Prior Law

    In general, interest and penalties accrued during periods 
for which taxes were unpaid without regard to whether the 
taxpayer was aware that there was tax due.

                           Reasons for Change

    The Congress believed that the IRS should promptly inform 
taxpayers of their obligations with respect to tax deficiencies 
and amounts due. In addition, the Congress was concerned that 
accrual of interest and penalties absent prompt resolution of 
tax deficiencies may lead to the perception that the IRS is 
more concerned about collecting revenue than in resolving 
taxpayer's problems.

                        Explanation of Provision

    The Act suspends the accrual of penalties and interest 
after 1 year if the IRS has not sent the taxpayer a notice 
specifically stating the taxpayer's liability and the basis for 
the liability within the specified period. With respect to 
taxable years beginning before January 1, 2004, the 1-year 
period is increased to 18 months. Interest and penalties resume 
21 days after the IRS sends the required notice to the 
taxpayer. The provision is applied separately with respect to 
each item or adjustment. The provision does not apply where a 
taxpayer has self-assessed the tax. The suspension only applies 
to taxpayers who file a timely tax return. The Act applies only 
to individuals and does not apply to the failure to pay 
penalty, in the case of fraud, or with respect to criminal 
penalties.
    For example, if the IRS sends a math error notice to a 
taxpayer 2 months after the return is filed and also sends a 
notice of deficiency related to a different item 2 years later, 
the provision applies to the item reflected on the second 
notice (notwithstanding that the first notice was sent within 
the applicable time period).

                             Effective Date

    The provision is effective for taxable years ending after 
the date of enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts in 1998 and 1999, and to reduce 
such receipts by $146 million in 2000, $174 million in 2001, 
$196 million in 2002, $209 million in 2003, $248 million in 
2004, $431 million in 2005, $435 million in 2006, and $439 
million in 2007.

6. Procedural requirements for imposition of penalties and additions to 
        tax (sec. 3306 of the Act and new sec. 6751 of the Code)

                               Prior Law

    Prior law did not require the IRS to show how penalties are 
computed on the notice of penalty. In some cases, penalties may 
have been imposed without supervisory approval.

                           Reasons for Change

    The Congress believed that taxpayers are entitled to an 
explanation of the penalties imposed upon them. The Congress 
believed that penalties should only be imposed where 
appropriate and not as a bargaining chip.

                        Explanation of Provision

    The Act requires that each notice imposing a penalty 
include the name of the penalty, the Code section imposing the 
penalty, and a computation of the penalty.
    The Act also requires the specific approval of IRS 
management to assess all non-computer generated penalties 
unless excepted. This provision does not apply to failure to 
file penalties, failure to pay penalties, or to penalties for 
failure to pay estimated tax.

                             Effective Date

    The provision is effective for notices issued and penalties 
assessed after December 31, 2000.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.

7. Personal delivery of notice of penalty under section 6672 (sec. 3307 
        of the Act and sec. 6672 of the Code)

                         Present and Prior Law

    Any person who is required to collect, truthfully account 
for, and pay over any tax imposed by the Internal Revenue Code 
who willfully fails to do so is liable for a penalty equal to 
the amount of the tax. Before the IRS may assess any such 
``100-percent penalty,'' it must mail a written preliminary 
notice informing the person of the proposed penalty to that 
person's last known address. Under prior law, personal delivery 
was not permitted. The mailing of such notice must precede any 
notice and demand for payment of the penalty by at least 60 
days. The statute of limitations on assessments does not expire 
before the date 90 days after the date on which the notice was 
mailed. These restrictions do not apply if the Secretary finds 
the collection of the penalty is in jeopardy.

                           Reasons for Change

    The imposition of the 100-percent penalty is a serious 
matter. The Congress believed that permitting personal service 
of the preliminary notice required under Code section 6672 may 
afford taxpayers the opportunity to resolve cases involving the 
100-percent penalty at an earlier stage.

                        Explanation of Provision

    The Act permits in-person delivery, as an alternative to 
delivery by mail, of a preliminary notice that the IRS intends 
to assess a 100-percent penalty.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

8. Notice of interest charges (sec. 3308 of the Act and new sec. 6631 
        of the Code)

                         Present and Prior Law

    Taxpayers generally must pay interest on amounts due to the 
IRS. Under prior law, there was no explicit statutory 
requirement that every IRS notice sent to an individual 
taxpayer that includes an amount of interest required to be 
paid by the taxpayer also include a detailed computation of the 
interest charged and a citation to the Code section under which 
such interest is imposed.

                           Reasons for Change

    The Congress believed that taxpayers should be provided the 
detail to support the amount of interest charged by the IRS. 
The computation of interest is a complex calculation, often 
involving multiple interest rates. The Congress believed that 
it is appropriate to require the IRS to give notice to the 
taxpayer that interest is being charged, how it is calculated, 
and the total amount of the interest.

                        Explanation of Provision

    The Act requires that every IRS notice sent to an 
individual taxpayer that includes an amount of interest 
required to be paid by the taxpayer also include a detailed 
computation of the interest charged and a citation to the Code 
section under which such interest is imposed.

                             Effective Date

    The provision is effective for notices issued after 
December 31, 2000.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

9. Abatement of interest on underpayments by taxpayers in 
        Presidentially declared disaster areas (sec. 3309 of the Act 
        and sec. 6404 of the Code)

                         Present and Prior Law

    In the case of a Presidentially declared disaster, the 
Secretary of the Treasury has the authority to postpone some 
tax-related deadlines; however, under prior law, there was no 
general authority to abate interest.
    Under a provision of the Taxpayer Relief Act of 1997, if 
the Secretary of the Treasury extends the filing date of an 
individual tax return for individuals living in an area that 
has been declared a disaster area by the President during 
1997,<SUP>50</SUP> no interest is charged as a result of the 
failure of the individual taxpayer to file an individual tax 
return, or to pay the taxes shown on such return, during the 
extension.
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    \50\ This provision also applies to disasters declared in 1998. 
This reflects the technical correction enacted in section 4003(e) of 
the Tax and Trade Relief Extension Act of 1998, described in Part Three 
of this publication.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed it appropriate to extend permanently 
this special 1997 rule.

                        Explanation of Provision

    The Act provides that taxpayers located in a Presidentially 
declared disaster area do not have to pay interest on taxes due 
for the length of any extension for filing their tax returns 
granted by the Secretary of the Treasury.
     This provision is designated as emergency legislation 
under section 252(e) of the Balanced Budget and Emergency 
Deficit Control Act.

                             Effective Date

    The provision is effective for disasters declared after 
December 31, 1997, with respect to taxable years beginning 
after December 31, 1997.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $8 million in 1998 and by $25 million in 
each of the years 1999 through 2007.

E. Protections for Taxpayers Subject to Audit or Collection Activities

1. Due process in IRS collection actions (sec. 3401 of the Act and new 
        secs. 6320 and 6330 of the Code)

                         Present and Prior 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 the 
Federal tax lien has attached to such property. The Federal tax 
lien arises automatically where (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. A Notice of Lien must be filed in order to 
inform potential purchasers or creditors of the Federal 
government's priority interest in the taxpayer's property.
    The IRS may collect taxes by levy upon a taxpayer's 
property or rights to property (including accrued salary and 
wages) if the taxpayer neglects or refuses to pay the tax 
within 10 days after notice and demand that the tax be paid. 
Notice of the IRS's intent to collect taxes by levy must be 
given no less than 30 days (90 days in the case of a life 
insurance contract) before the day of the levy. The notice of 
levy must describe the procedures that will be used, the 
administrative appeals available to the taxpayer and the 
procedures relating to such appeals, the alternatives available 
to the taxpayer that could prevent levy, and the procedures for 
redemption of property and release of liens.
    The effect of a levy on salary or wages payable to or 
received by a taxpayer is continuous from the date the levy is 
first made until it is released.
    If the IRS district director finds that the collection of 
any tax is in jeopardy, collection by levy may be made without 
regard to either notice period. A similar rule applies in the 
case of termination assessments.

                           Reasons for Change

    The Congress believed that the IRS should afford taxpayers 
adequate notice of collection activity and a meaningful hearing 
before the IRS deprives them of their property. When collection 
of tax is in jeopardy, the Congress believed it appropriate to 
provide notice and a hearing promptly after the seizure of 
property. The Congress also believed that a dwelling that is 
the principal residence of the taxpayer, the taxpayer's spouse, 
or the taxpayer's minor children should only be seized for the 
payment of taxes as a last resort and only where judicial 
approval is obtained prior to seizure. The Congress believed 
that following procedures designed to afford taxpayers due 
process in collections would increase fairness to taxpayers.

                        Explanation of Provision

In general

    The provision establishes new due process procedures the 
IRS must follow whenever it seeks to levy against the property 
of a taxpayer in the collection of a Federal tax liability or a 
Notice of Lien is filed.

Levies

    Before the IRS can seize a taxpayer's property, it is 
required to provide the taxpayer with a ``Notice of Intent to 
Levy,'' formally stating its intention to collect a tax 
liability by levy against the taxpayer's property or rights to 
property. Subject to the exceptions noted below, no levy can 
occur within the 30-day period beginning with the mailing of 
the ``Notice of Intent to Levy.'' During that 30-day period, 
the taxpayer may demand a hearing before an appeals officer who 
has had no prior involvement with the taxpayer's case, other 
than in connection with a hearing after the filing of a notice 
of tax lien. If a hearing is requested within the 30-day 
period, no levy can occur until a determination by the appeals 
officer is rendered. This procedure applies only with regard to 
the first levy with respect to the amount of the unpaid tax for 
a taxable period.
    The Notice of Intent to Levy must be provided to the 
taxpayer either by personal delivery, by leaving it at the 
taxpayer's dwelling or usual place of business, or by sending 
the notice to the taxpayer's last known address by certified or 
registered mail. The due process notice must describe in simple 
and nontechnical terms (1) the amount of unpaid tax, (2) the 
taxpayer's right to request a hearing within the 30-day period, 
and (3) the proposed action by the Secretary and the rights of 
the person with respect to such action. Such notice must also 
include a brief statement that sets forth the provision of the 
Code applicable to the levy and sale of property, the 
procedures that will be used, the administrative appeals 
available to the taxpayer and the procedures relating to such 
appeals, the alternatives available to the taxpayer that could 
prevent levy, and the procedures for redemption of property and 
release of liens.
    The IRS is required to verify at the hearing that all 
statutory, regulatory, and administrative requirements for the 
proposed collection action have been met. These verifications 
are expected to include (but not be limited to) showings that:
          (1) the revenue officer recommending the collection 
        action has verified the taxpayer's liability;
          (2) the estimated expenses of levy and sale will not 
        exceed the value of the property to be seized;
          (3) the revenue officer has determined that there is 
        sufficient equity in the property to be seized to yield 
        net proceeds from sale to apply to the unpaid tax 
        liabilities; and
          (4) with respect to the seizure of the assets of a 
        going business, the revenue officer recommending the 
        collection action has thoroughly considered the facts 
        of the case, including the availability of alternative 
        collection methods, before recommending the collection 
        action.
    The taxpayer is allowed to raise any issue relevant to the 
proposed collection activity at the hearing. Issues eligible to 
be raised include (but are not limited to):
          (1) appropriate spousal defenses under section 6015;
          (2) challenges to the appropriateness of collection 
        actions; and
          (3) collection alternatives, which could include the 
        posting of a bond, substitution of other assets, an 
        installment agreement or an offer-in-compromise.
    The validity of the tax liability can be challenged during 
the hearing only if the taxpayer did not actually receive the 
statutory notice of deficiency or has not otherwise had an 
opportunity to dispute the liability. Also, an issue may not be 
raised as part of a due process hearing if it was raised and 
considered at a prior due process or other judicial or 
administrative hearing and the person seeking to raise the 
issue meaningfully participated in that prior hearing.
    Following the hearing, the appeals officer conducting the 
hearing is expected to issue his or her determination. The 
determination of the appeals officer is to address whether the 
proposed collection action balances the need for the efficient 
collection of taxes with the legitimate concern of the taxpayer 
that the collection action be no more intrusive than necessary. 
The Internal Revenue Office of Appeals retains jurisdiction 
with respect to the determination. It may, in its discretion, 
hold additional hearings at the request of the taxpayer to 
determine if collection actions undertaken by the Secretary are 
consistent with its determination or to consider whether a 
change in circumstances justifies a revision of the original 
determination. <SUP>51</SUP> Such additional hearings may be 
held by the appellate officer making the original determination 
or by another appellate officer.
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    \51\ A taxpayer must exhaust any other available administrative 
remedy before it requests that a change in circumstances be considered 
as the basis for a change in a determination.
---------------------------------------------------------------------------
    If a delivery of a Notice of Intent to Levy is accomplished 
by sending the notice to the taxpayer's last known address by 
certified or registered mail and the return receipt is not 
returned, the Secretary may proceed to levy on the taxpayer's 
property or rights to property 30 days after the Notice of 
Intent to Levy was mailed. The Congress expects that the 
Secretary will provide a hearing equivalent to the pre-levy 
hearing if later requested by the taxpayer. The Secretary is 
not required to suspend the levy process pending the completion 
of a hearing that is not requested within 30 days of the 
mailing of the Notice. However, if the taxpayer demonstrates 
that it did not receive the required notice and requests a 
hearing after collection activity has begun, the Congress 
expects that the collection process will be suspended and a 
hearing provided to the taxpayer.
    This provision does not apply in the case of jeopardy and 
termination assessments. Jeopardy and termination assessments 
are subject to post-seizure review as part of the Appeals 
determination hearing as well as through any existing judicial 
procedure. A jeopardy or termination assessment must be 
approved by the IRS District Counsel responsible for the case. 
Failure to obtain District Counsel approval would render the 
jeopardy or termination assessment void. The provision does not 
apply in the case of a state tax offset procedure.

Notices of lien

    The IRS is required to issue a due process notice to a 
taxpayer whenever it files a Notice of Lien against the 
taxpayer's property or the taxpayer's rights to property. This 
due process notice must be provided not more than five (5) 
business days after the Notice of Lien is filed. The due 
process notice must be provided to the taxpayer either by 
personal delivery, by leaving it at the taxpayer's dwelling or 
usual place of business, or by sending the notice to the 
taxpayer's last known address by certified or registered mail. 
The due process notice must describe in simple and nontechnical 
terms (1) the amount of unpaid tax to which the Notice of Lien 
relates, (2) the taxpayer's right to a hearing, and (3) the 
administrative appeals available to the taxpayer with respect 
to such lien and the procedures related to appeals. This 
procedure applies only with regard to the first Notice of Lien 
with respect to the amount of the unpaid tax for the taxable 
period. <SUP>52</SUP>
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    \52\ A technical correction may be necessary to accomplish this 
result.
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    At any time during the 30-day period that begins with the 
mailing or delivery of the due process notice that relates to 
the first Notice of Lien filed in connection with a particular 
tax liability, the taxpayer may demand a hearing before an 
appeals officer who has had no prior involvement with respect 
to the particular liability of the taxpayer. <SUP>53</SUP> In 
general, any issue relevant to the lien or to the 
appropriateness of any other proposed collection action against 
the taxpayer can be raised at this hearing. For example, the 
taxpayer can request section 6015 spousal relief, request the 
abatement of penalties or interest, make an offer-in-
compromise, propose an installment agreement or suggest which 
assets should be used to satisfy the tax liability. However, 
the validity of the tax liability can be challenged only if the 
taxpayer did not actually receive the statutory notice of 
deficiency or has not otherwise had an opportunity to dispute 
the liability.
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    \53\ A taxpayer may waive the requirement that the hearing be held 
before an Appeals officer that had no prior involvement with respect to 
the particular liability.
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    A taxpayer is entitled to only one hearing under this 
provision with respect to the taxable period to which the 
liability relates. The taxpayer must request the hearing within 
the 30-day period that begins with the delivery or mailing of 
the first due process notice. The receipt of subsequent due 
process notices related to the same liability for the same 
taxable period do not create a right to an additional hearing 
under this provision, unless all previous due process notices 
failed to properly inform the taxpayer of his right to a 
hearing. In such cases, the Congress expects that the previous 
due process notices will be disregarded for this purpose, that 
the taxpayer will be properly informed of the right to a 
hearing under this provision in the next due process notice, 
and that any timely request for such a hearing will be 
respected.

Combined hearings

    The Congress anticipates that the IRS will combine Notice 
of Intent to Levy and Notice of Lien hearings whenever 
possible. If multiple hearings are held, it is expected that, 
to the extent practicable, the same appellate officer will hear 
the taxpayer with regard to both lien and levy issues. If the 
taxpayer requests a hearing following receipt of a Notice of 
Lien or Notice of Intent to Levy and, prior to the date of the 
hearing, receives the other notice, the scheduled hearing will 
serve for both purposes and the taxpayer is obligated to raise 
all relevant issues at such hearing. The Congress does not 
intend that a Notice of Lien hearing be delayed to allow a 
Notice of Intent to Levy to be issued.

Judicial review

    The Congress expects that the appeals officer will prepare 
a written determination addressing the issues presented by the 
taxpayer and considered at the due process hearing. The 
determination of the appeals officer may be appealed to Tax 
Court or, where appropriate, the Federal district court. Where 
the validity of the tax liability was properly at issue in the 
hearing, and where the determination with regard to the tax 
liability is a part of the appeal, no levy may take place 
during the pendency of the appeal. The amount of the tax 
liability will in such cases be reviewed by the appropriate 
court on a de novo basis. Where the validity of the tax 
liability isnot properly part of the appeal, the taxpayer may 
challenge the determination of the appeals officer for abuse of 
discretion. In such cases, the appeals officer's determination as to 
the appropriateness of collection activity will be reviewed using an 
abuse of discretion standard of review. Levies will not be suspended 
during the appeal provided the Secretary shows good cause why the levy 
should be allowed to proceed.
    No further hearings are provided under this provision as a 
matter of right. It is the responsibility of the taxpayer to 
raise all relevant issues at the time of the hearing. A 
taxpayer can apply for consideration of new information, make 
an offer-in-compromise, request an installment agreement, or 
raise other considerations at any time before, during, or after 
the hearing. Nothing in this provision is intended to limit any 
remedy that is otherwise available under present law.

Prior judicial approval required for seizures of principal residences

    No seizure of a dwelling that is the principal residence of 
the taxpayer or the taxpayer's spouse, former spouse, or minor 
child would be allowed without prior judicial approval. Notice 
of the judicial hearing must be provided to the taxpayer and 
family members residing in the property. At the judicial 
hearing, the Secretary would be required to demonstrate (1) 
that the requirements of any applicable law or administrative 
procedure relevant to the levy have been met, (2) that the 
liability is owed, and (3) that no reasonable alternative for 
the collection of the taxpayer's debt exists.

                             Effective Date

    The provision is effective for collection actions initiated 
more than 180 days after the date of enactment (after January 
18, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts in 1998, and to reduce such 
receipts by $11 million in 1999, $7 million in each of the 
years 2000 through 2004, and $8 million in each of the years 
2005 through 2007.

2. Examination activities

            a. Uniform application of confidentiality privilege to 
                    taxpayer communications with federally authorized 
                    practitioners (sec. 3411 of the Act and new sec. 
                    7525 of the Code)

                         Present and Prior Law

    A common law privilege of confidentiality exists for 
communications between an attorney and client with respect to 
the legal advice the attorney gives the client. Communications 
protected by the attorney-client privilege must be based on 
facts of which the attorney is informed by the taxpayer, for 
the purpose of securing the professional advice of the 
attorney. The privilege may not be claimed where the purpose of 
the communication is the commission of a crime or tort. The 
taxpayer must either be a client of the attorney or be seeking 
to become a client of the attorney.
    The privilege of confidentiality applies only where the 
attorney is advising the client on legal matters. It does not 
apply in situations where the attorney is acting in other 
capacities. Thus, a taxpayer may not claim the benefits of the 
attorney-client privilege simply by hiring an attorney to 
perform some other function. For example, if an attorney is 
retained to prepare a tax return, the attorney-client privilege 
will not automatically apply to communications and documents 
generated in the course of preparing the return.
    The privilege of confidentiality also does not apply where 
the communication is made for further communication to third 
parties. For example, information that is communicated to an 
attorney for inclusion in a tax return is not privileged 
because it is communicated for the purpose of disclosure. The 
privilege of confidentiality does not apply where an attorney 
is acting in another capacity, or where an attorney who is 
licensed to practice another profession is performing such 
other profession.
    The attorney-client privilege is considered waived if the 
communication is voluntarily disclosed to anyone other than the 
attorney, the client or the agents of the client or the 
attorney.
    The attorney-client privilege in tax matters is limited to 
communications between taxpayers and attorneys. Under prior 
law, no equivalent privilege was provided for communications 
between taxpayers and other professionals authorized to 
practice before the Internal Revenue Service, such as 
accountants or enrolled agents.

                           Reasons for Change

    The Congress believed that a right to privileged 
communications between a taxpayer and his or her advisor should 
be available in noncriminal proceedings before the IRS and in 
noncriminal proceedings in Federal courts with respect to such 
matters where the IRS is a party, so long as the advisor is 
authorized to practice before the IRS. A right to privileged 
communications in such situations should not depend upon 
whether the advisor is also licensed to practice law.

                        Explanation of Provision

    The provision extends the attorney-client privilege of 
confidentiality to tax advice that is furnished to a client-
taxpayer (or potential client-taxpayer) by any individual who 
is authorized under Federal law to practice before the IRS if 
such practice is subject to regulation under section 330 of 
Title 31, United States Code. Individuals subject to regulation 
under section 330 of Title 31, United States Code include 
attorneys, certified public accountants, enrolled agents and 
enrolled actuaries. Tax advice means advice that is within the 
scope of authority for such individual's practice with respect 
to matters under Title 26 (the Internal Revenue Code). The 
privilege of confidentiality may be asserted in any noncriminal 
tax proceeding before the IRS, as well as in any noncriminal 
tax proceeding in Federal court brought by or against the 
United States.
    The provision allows taxpayers to consult with other 
qualified tax advisors in the same manner they currently may 
consult with tax advisors that are licensed to practice law. 
The provision does not modify the attorney-client privilege of 
confidentiality, other than to extend it to other authorized 
practitioners. The privilege established by the provision 
applies only to the extent that communications would be 
privileged if they were between a taxpayer and an attorney. 
Accordingly, the privilege does not apply to any communication 
between a certified public accountant, enrolled agent, or 
enrolled actuary and such individual's client (or prospective 
client) if the communication would not have been privileged 
between an attorney and the attorney's client or prospective 
client. For example, information disclosed to an attorney for 
the purpose of preparing a tax return was not privileged under 
prior law. Such information would not be privileged under the 
provision whether it was disclosed to an attorney, certified 
public accountant, enrolled agent or enrolled actuary.
    The privilege granted by the provision may only be asserted 
in noncriminal tax proceedings before the IRS and in any 
noncriminal tax proceeding in Federal court brought by or 
against the United States.
    The privilege may not be asserted to prevent the disclosure 
of information to any regulatory body other than the IRS. The 
ability of any other regulatory body, including the Securities 
and Exchange Commission (``SEC''), to gain or compel 
information is unchanged by the provision. No privilege may be 
asserted under this provision by a taxpayer in dealings with 
such other regulatory bodies in an administrative or court 
proceeding. The privilege of confidentiality created by this 
provision does not apply to any written communication between a 
federally authorized tax practitioner and any director, 
shareholder, officer, employee, agent, or representative of a 
corporation in connection with the promotion of the direct or 
indirect participation of such corporation in any tax shelter 
(as defined in section 6662(d)(2)(C)(iii)). A tax shelter for 
this purpose is any partnership, entity, plan, or arrangement a 
significant purpose of which is the avoidance or evasion of 
income tax. Tax shelters for which no privilege of 
confidentiality will apply include, but are not limited to, 
those required to be registered as confidential corporate tax 
shelter arrangements under section 6111(d).
    The privilege created by this provision may be waived in 
the same manner as the attorney-client privilege. For example, 
if a taxpayer or federally authorized tax practitioner 
discloses to a third party the substance of a communication 
protected by the privilege, the privilege for that 
communication and any related communications is considered to 
be waived to the same extent and in the same manner as the 
privilege would be waived if the disclosure related to an 
attorney-client communication.
    This provision relates only to matters of privileged 
communications. No inference is intended as to whether aspects 
of Federal tax practice covered by the new privilege constitute 
the authorized or unauthorized practice of law under various 
State laws.

                             Effective Date

    The provision is effective with regard to communications 
made on or after the date of enactment (July 22, 1998).

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by less than $5 million in each of the years 
1998 through 2007.
            b. Limitation on financial status audit techniques (sec. 
                    3412 of the Act and sec. 7602 of the Code)

                         Present and Prior Law

    The Secretary is authorized and required to make the 
inquiries and determinations necessary to insure the assessment 
of Federal income taxes. For this purpose, any reasonable 
method may be used to determine the amount of Federal income 
tax owed. The courts have upheld the use of financial status 
and economic reality examination techniques to determine the 
existence of unreported income in appropriate circumstances. 
There were no restrictions under prior law on the use of these 
examination techniques.

                           Reasons for Change

    The Congress believed that financial status audit 
techniques are intrusive, and that their use should be limited 
to situations where the IRS already has indications of 
unreported income.

                        Explanation of Provision

    The Act prohibits the IRS from using financial status or 
economic reality examination techniques to determine the 
existence of unreported income of any taxpayer unless the IRS 
has a reasonable indication that there is a likelihood of 
unreported income.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
            c. Software trade secrets protection (sec. 3413 of the Act 
                    and new sec. 7612 of the Code)

                         Present and Prior Law

    The Secretary of the Treasury is authorized to examine any 
books, papers, records, or other data that may be relevant or 
material to an inquiry into the correctness of any Federal tax 
return. The Secretary may issue and serve summonses necessary 
to obtain such data, including summonses on certain third-party 
recordkeepers.
    The Secretary is considered to have made a prima facie case 
for the enforcement of a summons if the so-called ``Powell 
standards'' are met.\54\ The Powell standards require: (1) that 
the examination to which the summons relates is being conducted 
pursuant to a legitimate purpose; (2) that the summons seek 
information that may be relevant to such examination; (3) that 
the IRS not already be in possession of the information; and 
(4) that the administrative steps required by the Code have 
been followed. However, a summons will not be enforced if the 
burden it places on the summonsed party is out of proportion to 
the end sought.\55\ Where the summons is issued against a 
third-party, particularly one that is a stranger to the 
taxpayer's affairs, the IRS has been required to show that the 
circumstances of the investigation indicate a realistic 
expectation, and not merely an idle hope, that something 
relevant to the investigation may be discovered in order to 
have the summons enforced.\56\
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    \54\ See Powell v. U.S., 379 U.S. 48 (1964).
    \55\ Harrington v. U.S., 388 F. 2d 520 (2nd Cir, 1968).
    \56\ Harrington, supra.
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    Under prior law, there were no specific statutory 
restrictions on the ability of the Secretary to demand the 
production of computer records, programs, source code or 
similar materials, whether held by the taxpayer or by a third-
party.

                           Reasons for Change

    The Congress believed that the intellectual property rights 
of the developers and owners of computer programs should be 
respected. The Congress was concerned that the examination of 
computer programs and source code by the IRS could lead to the 
diminution of those rights through the inadvertent disclosure 
of trade secrets. The Congress believed that special protection 
against such inadvertent disclosure should be established.
    The Congress also believed that the indiscriminate 
examination of computer source code by the IRS is 
inappropriate. The Congress believed that a summons for the 
production of certain computer source code should only be 
issued where the IRS is not otherwise able to ascertain through 
reasonable efforts the manner in which a taxpayer has arrived 
at an item on a return, identifies with specificity the portion 
of the computer source code it seeks to examine, and determines 
that the need to see the source code outweighs the risk of 
unauthorized disclosure of trade secrets.

                        Explanation of Provision

    The provision establishes a number of specific protections 
against the disclosure and improper use of trade secrets and 
confidential information incident to the examination by the 
Secretary of any computer software program or source code that 
comes into the possession or control of the Secretary in the 
course of any examination with respect to any taxpayer. These 
protections include the following:
          (1) Such software or source code may be examined only 
        in connection with the examination of the taxpayer's 
        return with regard to which it was received. This is 
        intended to prevent the Secretary from using the 
        software for the purpose of examining other, unrelated 
        taxpayers. It is not intended to prevent the Secretary 
        from using knowledge it obtains in the course of the 
        examination, so long as such use does not result in the 
        disclosure of tax return information (including the 
        software or source code) or the violation of any 
        statutory protection or judicial order.
          (2) Such software or source code must be maintained 
        in a secure area.
          (3) Such source code may not be removed from the 
        owner's place of business without the owner's consent 
        unless such removal is pursuant to a court order.
          (4) Such software or source code may not be 
        decompiled or disassembled.
          (5) Such software or source code may be copied only 
        as necessary to perform the specific examination. The 
        owner of the software must be informed of any copies 
        that are made, such copies must be numbered, and at the 
        conclusion of the examination and any related court 
        proceedings, all such copies must be accounted for and 
        returned to the owner, permanently deleted, or 
        destroyed. The Secretary must provide the owner of such 
        software or source code with the names of any 
        individuals who will have access to such software or 
        source code.
          (6) If an individual who is not an officer or 
        employee of the U.S. Government will examine the 
        software or source code, such individual must enter 
        into a written agreement with the Secretary that such 
        individual will not disclose such software or source 
        code to any person other than authorized employees or 
        agents of the Secretary at any time, and that such 
        individualwill not participate in the development of 
software that is intended for a similar purpose as such software for a 
period of two years.
          (7) Criminal penalties are provided where any person 
        willfully divulges or makes known software that was 
        obtained (whether or not by summons) for the purpose of 
        examining a taxpayer's return in violation of this 
        provision.
          (8) Computer software or source code that is obtained 
        by the IRS in the course of the examination of a 
        taxpayer's return is considered to be return 
        information for the purposes of section 6103.

Summons of tax-related computer software source code

    No summons may be issued for tax-related computer software 
source code unless (1) the Secretary is unable otherwise to 
ascertain the correctness of any item on a return from the 
taxpayer's books and records or the computer software program 
and associated data, (2) the Secretary identifies with 
reasonable specificity the portion of the computer source code 
needed to verify the correctness of the item and (3) the 
Secretary determines that the need for the source code 
outweighs the risk of unauthorized disclosure of trade secrets. 
The Secretary is considered to have satisfied the first two of 
these requirements if the Secretary makes a formal request for 
such materials to both the taxpayer and the owner of the 
software that is not satisfied within 180 days.
    This limitation on the summons of tax-related computer 
software source code does not apply if the summons is issued in 
connection with an inquiry into any offense connected with the 
administration or enforcement of the internal revenue laws. The 
limitation also does not apply to a summons of computer 
software source code that was acquired or developed by the 
taxpayer or a related person primarily for internal use by the 
taxpayer or such person rather than for commercial 
distribution. A finding that computer software source code was 
developed for internal use, and thus not eligible for the 
limitation in summons authority in this provision, is not 
intended to be dispositive of whether such software was 
intended for internal use for any other purpose of this title.
    Communications between the owner of the tax-related 
computer software source code and the taxpayer are not 
protected from summons by this provision. Communications 
between the owner of the tax-related source code and persons 
not related to the taxpayer that are related to the functioning 
and operation of the software may be treated as a part of the 
computer software source code.

Other issues

    The provision does not change or eliminate any other 
requirement of the Code. A summons for third-party tax-related 
computer source code that meets the standards established by 
the provision will not be enforced if it would not have been 
enforced under prior law. For example, if the Secretary's 
purpose in issuing the summons is shown to be improper, the 
summons would not be enforced, even if the Secretary otherwise 
met the standards for the summons of computer source code 
established by the provision. The limitations on the summons of 
tax-related computer software source code apply only with 
respect to computer software that is used for accounting, tax 
return preparation, tax compliance or tax planning purposes. No 
inference is intended with respect to computer software used 
for all other purposes. In such cases, prior law will continue 
to apply, subject to the protections against the disclosure and 
improper use of trade secrets and other confidential 
information added by this provision.
    Software or source code that is required to be provided 
under prior law must be provided without regard to this 
provision. For example, computer software or source code that 
is required to be provided in connection with the registration 
of a confidential corporate tax shelter arrangement under 
section 6111 would continue to be required to be provided 
without regard to this provision. Thus, the registration 
requirement of section 6111 cannot be avoided where the tax 
benefits of the shelter are discernible only from the operation 
of a computer program.

                             Effective Date

    The provision is effective for summonses issued and 
software acquired after the date of enactment (after July 22, 
1998). In addition, 90 days after the date of enactment, the 
protections against the disclosure and improper use of trade 
secrets and confidential information added by the provision 
(except for the requirement that the Secretary provide a 
written agreement from non-U.S. government officers and 
employees) apply to software and source code acquired on or 
before the date of enactment.

                             Revenue Effect

    The provision is estimated to have no revenue effect on 
Federal fiscal year budget receipts in 1998, and to reduce such 
receipts by $13 million in 1999, $16 million in 2000, $20 
million in 2001, $22 million in 2002, $26 million in 2003, $30 
million in 2004, $33 million in 2005, $36 million in 2006, and 
$37 million in 2007.
            d. Threat of audit prohibited to coerce tip reporting 
                    alternative commitment agreements (sec. 3414 of the 
                    Act)

                         Present and Prior Law

    Restaurants may enter into Tip Reporting Alternative 
Commitment (``TRAC'') agreements. A restaurant entering into a 
TRAC agreement is obligated to educate its employees on their 
tip reporting obligations, to institute formal tip reporting 
procedures, to fulfill all filing and record keeping 
requirements, and to pay and deposit taxes. In return, the IRS 
agrees to base the restaurant's liability for employment taxes 
solely on reported tips and any unreported tips discovered 
during an IRS audit of an employee. Under prior law, there was 
no statutory prohibition on threatening to audit a taxpayer in 
an attempt to coerce the taxpayer to enter into a TRAC 
agreement.

                           Reasons for Change

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

                        Explanation of Provision

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

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal years budget receipts.
            e. Taxpayers allowed motion to quash all third-party 
                    summonses (sec. 3415 of the Act and sec. 7609 of 
                    the Code)

                         Present and Prior Law

    When the IRS issues a summons to a ``third-party 
recordkeeper'' relating to the business transactions or affairs 
of a taxpayer, notice of the summons must be given to the 
taxpayer within three days by certified or registered mail. The 
taxpayer is thereafter given up to 23 days to begin a court 
proceeding to quash the summons. If the taxpayer does so, 
third-party recordkeepers are prohibited from complying with 
the summons until the court rules on the taxpayer's petition or 
motion to quash, but the statute of limitations for assessment 
and collection with respect to the taxpayer is stayed during 
the pendency of such a proceeding. Under prior law, third-party 
recordkeepers were generally persons who hold financial 
information about the taxpayer, such as banks, brokers, 
attorneys, and accountants; some third parties were not 
included.

                           Reasons for Change

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

                        Explanation of Provision

    The Act generally expands the ``third-party recordkeeper'' 
procedures to apply to summonses issued to persons other than 
the taxpayer. Thus, the taxpayer whose liability is being 
investigated receives notice of the summons and is entitled to 
bring an action in the appropriate U.S. District Court to quash 
the summons. As under the prior-law third-party recordkeeper 
provision, the statute of limitations on assessment and 
collection is stayed during the litigation, and certain kinds 
of summonses specified under prior law are not subject to these 
requirements. Nothing in section 7609 of the Code (relating to 
special procedures for third-party summonses) shall be 
construed to limit the ability of the IRS to obtain information 
(other than by summons) through formal or informal procedures 
authorized by the Code.

                             Effective Date

    The provision is effective for summonses served after the 
date of enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            f. Service of summonses to third-party recordkeepers 
                    permitted by mail (sec. 3416 of the Act and sec. 
                    7603 of the Code)

                         Present and Prior Law

    Under prior law, a summons was required to be served ``by 
an attested copy delivered in hand to the person to whom it is 
directed or left at his last and usual place of abode.'' Under 
present and prior law, if a third-party recordkeeper summons is 
served, the IRS may give the taxpayer notice of the summons via 
certified or registered mail. The Federal Rules of Civil 
Procedure permit service of process by mail even in summons 
enforcement proceedings, under both present and prior law.

                           Reasons for Change

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

                        Explanation of Provision

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

                             Effective Date

    The provision is effective for summonses served after the 
date of enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
            g. Notice of IRS contact of third parties (sec. 3417 of the 
                    Act and sec. 7602 of the Code)

                         Present and Prior Law

    Third parties may be contacted by the IRS in connection 
with the examination of a taxpayer or the collection of the tax 
liability of the taxpayer. The IRS has the right to summon 
third-party recordkeepers. In general, the taxpayer must be 
notified of the service of summons on a third party within 
three days of the date of service. The IRS also has the right 
to seize property of the taxpayer that is held in the hands of 
third parties. Except in jeopardy situations, the Internal 
Revenue Manual provides that IRS will personally contact the 
taxpayer and inform the taxpayer that seizure of the asset is 
planned. Under prior law, there was no statutory requirement 
that IRS provide reasonable notice that the IRS may contact 
persons other than the taxpayer.

                           Reasons for Change

    The Congress believed that further clarification of these 
provisions would benefit taxpayers.

                        Explanation of Provision

    The Act provides that the IRS may not contact any person 
other than the taxpayer with respect to the determination or 
collection of the tax liability of the taxpayer without 
providing reasonable notice in advance to the taxpayer that the 
IRS may contact persons other than the taxpayer. It is intended 
that in general this notice will be provided as part of an 
existing IRS notice provided to taxpayers. The Act also 
requires the IRS to provide periodically to the taxpayer a 
record of persons previously contacted during that period by 
the IRS with respect to the determination or collection of that 
taxpayer's tax liability. This record shall also be provided 
upon request of the taxpayer. The provision does not apply to 
criminal tax matters, if the collection of the tax liability is 
in jeopardy, if the Secretary determines for good cause shown 
that disclosure may involve reprisal against any person, or if 
the taxpayer authorized the contact.

                             Effective Date

    The provision is effective for contacts made after 180 days 
after the date of enactment (after January 18, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts in 1998, and reduce such receipts 
by less than $5 million in each of the years 1999 through 2007.

3. Collection activities

            a. Approval process for liens, levies, and seizures (sec. 
                    3421 of the Act)

                               Prior Law

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

                           Reasons for Change

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

                        Explanation of Provision

    The Act requires the IRS to implement an approval process 
under which any lien, levy or seizure would, where appropriate, 
be approved by a supervisor, who would review the taxpayer's 
information, verify that a balance is due, and affirm that a 
lien, levy or seizure is appropriate under the circumstances. 
Circumstances to be considered include the amount due and the 
value of the asset.
    The Commissioner is to have discretion in promulgating the 
procedures required by this provision to determine the 
circumstances under which supervisory review of liens or levies 
issued by the automated collection system is or is not 
appropriate.

                             Effective Date

    The provision is effective for collection actions commenced 
after date of enactment (after July 22, 1998), except in the 
case of any action under the automated collection system, the 
provision applies to actions initiated after December 31, 2000.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            b. Modifications to certain levy exemption amounts (sec. 
                    3431 of the Act and sec. 6334 of the Code)

                         Present and Prior Law

    IRS may levy on all non-exempt property of the taxpayer. 
Under prior law, property exempt from levy included up to 
$2,500 in value of fuel, provisions, furniture, and personal 
effects in the taxpayer's household and up to $1,250 in value 
of books and tools necessary for the trade, business or 
profession of the taxpayer.

                           Reasons for Change

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

                        Explanation of Provision

    The Act increases the value of personal effects exempt from 
levy to $6,250 and the value of books and tools exempt from 
levy to $3,125. These amounts are indexed for inflation.

                             Effective Date

    The provision is effective for levies issued after the date 
of enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to reduce the Federal fiscal 
year budget receipts by less than $1 million in 1998, $1 
million in each of the years 1999 through 2002 and $2 million 
in each of the years 2003 through 2007.
            c. Release of levy upon agreement that amount is 
                    uncollectible (sec. 3432 of the Act and sec. 6343 
                    of the Code)

                               Prior Law

    Some taxpayers contended that the IRS did not release a 
wage levy immediately upon receipt of proof that the tax was 
not collectible. Instead, they claimed, the IRS levied on one 
period's wage payment before releasing the levy.

                           Reasons for Change

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

                        Explanation of Provision

    The Act requires the IRS to release, as soon as 
practicable, a wage levy upon agreement with the taxpayer that 
the tax is not collectible. The IRS is not to intentionally 
delay until after one wage payment has been made and levied 
upon before releasing the levy.

                             Effective Date

    The provision is effective for levies imposed after 
December 31, 1999.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            d. Levy prohibited during pendency of refund proceedings 
                    (sec. 3433 of the Act and sec. 6331 of the Code)

                         Present and Prior Law

    The IRS is prohibited from making a tax assessment (and 
thus prohibited from collecting payment) with respect to a tax 
liability while it is being contested in Tax Court. However, 
under prior law, the IRS was permitted to assess and collect 
tax liabilities during the pendency of a refund suit relating 
to such tax liabilities.
    Generally, full payment of the tax at issue is a 
prerequisite to a refund suit. However, if the tax is divisible 
(such as employment taxes or the trust fund penalty under Code 
section 6672), the taxpayer need only pay the tax for the 
applicable period before filing a refund claim.

                           Reasons for Change

    The Congress believed that taxpayers who are litigating a 
refund action over divisible taxes should be protected from 
collection of the full assessed amount, because the court 
considering the refund suit may ultimately determine that the 
taxpayer is not liable.

                        Explanation of Provision

    The Act requires the IRS to withhold collection of 
liabilities that are the subject of a refund suit during the 
pendency of the litigation. This will only apply when refund 
suits can be brought without the full payment of the tax, i.e., 
in the case of divisible taxes. Collection by levy must be 
withheld unless jeopardy exists or the taxpayer waives the 
suspension of collection in writing (because collection will 
stop the running of interest and penalties on the tax 
liability). The Secretary may not commence a civil action to 
collect a liability except in a proceeding related to the 
initial refund proceeding. The statute of limitations on 
collection is stayed for the period during which the IRS is 
prohibited from collecting by levy or otherwise.
    Proceedings related to a proceeding <SUP>57</SUP> under 
this provision include, but are not limited to, civil actions 
or third-party complaints initiated by the United States or 
another person with respect to the same kinds of tax (or 
related taxes or penalties) for the same (or overlapping) tax 
periods. For example, if a taxpayer brings a suit for a refund 
of a portion of a penalty that the taxpayer has paid under 
section 6672, the United States could, consistent with this 
provision, counterclaim against the taxpayer for the balance of 
the penalty or initiate related claims against other persons 
assessed penalties under section 6672 for the same employment 
taxes.
---------------------------------------------------------------------------
    \57\ For purposes of new section 6331(i)(4)(A)(ii) of the Code.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective with respect to unpaid tax 
attributable to taxable periods beginning after December 31, 
1998.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            e. Approval required for jeopardy and termination 
                    assessments and jeopardy levies (sec. 3434 of the 
                    Act and sec. 7429 of the Code)

                         Present and Prior Law

    In general, a 30-day waiting period is imposed after 
assessment of all types of taxes. In certain circumstances, the 
waiting period puts the collection of taxes at risk. The Code 
provides special procedures that allow the IRS to make jeopardy 
assessments or termination assessments in certain extraordinary 
circumstances, such as if the taxpayer is leaving or removing 
property from the United States, or if assessment or collection 
would be jeopardized by delay. In jeopardy or termination 
situations, a levy may be made without the 30-days' notice of 
intent to levy that is ordinarily required. Under prior law, 
there was no statutory requirement of IRS Counsel review and 
approval.

                           Reasons for Change

    The Congress believed that it is appropriate to require 
Counsel review and approval of jeopardy and termination levies, 
because such actions often involve difficult legal issues.

                        Explanation of Provision

    The Act requires IRS Counsel review and approval before the 
IRS can make a jeopardy assessment, a termination assessment, 
or a jeopardy levy. If Counsel's approval is not obtained, the 
taxpayer is entitled to obtain abatement of the assessment or 
release of the levy, and, if the IRS fails to offer such 
relief, to appeal first to IRS Appeals under the new due 
process procedure for IRS collections and then to court.

                             Effective Date

    The provision is effective with respect to taxes assessed 
and levies made after the date of enactment (after July 22, 
1998).

                             Revenue Effect

    The provision is estimated to have a negligible revenue 
effect on Federal fiscal year budget receipts.
            f. Increase in amount of certain property on which lien not 
                    valid (sec. 3435 of the Act and sec. 6323 of the 
                    Code)

                         Present and Prior Law

    A Federal tax lien attaches to all property and rights in 
property of the taxpayer, if the taxpayer fails to pay the 
assessed tax liability after notice and demand. However, the 
Federal tax lien is not valid as to certain ``superpriority'' 
interests.
    Two of these interests are limited by a specific dollar 
amount. Purchasers of personal property at a casual sale were 
protected, under prior law, against a Federal tax lien attached 
to such property to the extent the sale was for less than $250. 
In addition, prior law provided protection to mechanic's 
lienors with respect to the repairs or improvements made to 
owner-occupied personal residences, but only to the extent that 
the contract for repair or improvement was for not more than 
$1,000.
    In addition, a superpriority was granted to banks and 
building and loan associations which make passbook loans to 
their customers, provided that those institutions retained the 
passbooks in their possession until the loan was completely 
paid off.

                           Reasons for Change

    The Congress believed that it is appropriate to increase 
the dollar limits on the superpriority amounts because the 
dollar limits have not been increased for decades and do not 
reflect current prices or values.

                        Explanation of Provision

    The Act increases the dollar limit for purchasers at a 
casual sale from $250 to $1,000, and further increases the 
dollar limit from $1,000 to $5,000 for mechanics lienors 
providing home improvement work for owner-occupied personal 
residences. The Act indexes these amounts for inflation. The 
Act also clarifies the superpriority rules to reflect present 
banking practices, where a passbook-type loan may be made even 
though an actual passbook is not used.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            g. Waiver of early withdrawal tax for IRS levies on 
                    employer-sponsored retirement plans or IRAs (sec. 
                    3436 of the Act and sec. 72(t)(2)(A) of the Code)

                         Present and Prior Law

    Under present law, a distribution from an employer-
sponsored retirement plan or an individual retirement 
arrangement (``IRA'') generally is includible in gross income 
in the year it is paid or distributed, except to the extent the 
amount distributed represents the employee's after-tax 
contributions or investment in the contract (i.e., basis).
    Distributions from qualified plans and IRAs prior to age 
59\1/2\ generally are subject to a 10-percent early withdrawal 
tax on the amount includible in income, unless an exception to 
the tax applies. Exceptions to the 10-percent early withdrawal 
tax applicable to both qualified plans andIRAs include 
distributions due to death or disability, distributions made in the 
form of certain periodic payments, and distributions used to pay 
medical expenses in excess of 7.5 percent of adjusted gross income 
(``AGI''). Also, in the case of distributions from IRAs, there are 
exceptions to the 10-percent early withdrawal tax for distributions for 
education expenses, for up to $10,000 of first-time homebuyer expenses, 
and for the purchase of health insurance by unemployed individuals. 
Furthermore, a distribution from a qualified plan made by an employee 
after separation from service after attainment of age 55 is not subject 
to the 10-percent early withdrawal tax.
    Under present and prior law, the IRS is authorized to levy 
on all non-exempt property of the taxpayer. Benefits under 
employer-sponsored retirement plans (including section 403(b) 
and section 457 plans) and IRAs are not exempt from levy by the 
IRS.
    Distributions from employer-sponsored retirement plans or 
IRAs made on account of an IRS levy are includible in the gross 
income of the individual, except to the extent the amount 
distributed represents after-tax contributions by the employee. 
Under prior law, the amount includible in income also was 
subject to the 10-percent early withdrawal tax, unless an 
exception described above applied.

                           Reasons for Change

    The Congress believed that the imposition of the 10-percent 
early withdrawal tax on amounts distributed from employer-
sponsored retirement plans or IRAs on account of an IRS levy 
may impose significant hardships on taxpayers. Accordingly, the 
Congress believed such distributions should be exempt from the 
10-percent early withdrawal tax.

                        Explanation of Provision

    The Act provides an exception to the 10-percent early 
withdrawal tax for amounts withdrawn from an employer-sponsored 
retirement plan or an IRA as a result of a levy by the IRS on 
the plan or IRA. The exception applies only if the plan or IRA 
is levied; it does not apply, for example, if the taxpayer 
withdraws funds to pay taxes in the absence of a levy or if the 
taxpayer withdraws funds in order to release a levy on other 
interests.

                             Effective Date

    The provision is effective for distributions after December 
31, 1999.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $1 million in 2000, $3 million in 2001, $4 
million in 2002, $4 million in 2003, $5 million in 2004, $5 
million in 2005, $5 million in 2006, and $5 million in 2007.
            h. Prohibition of sales of seized property at less than 
                    minimum bid (sec. 3441 of the Act and sec. 6335 of 
                    the Code)

                         Present and Prior Law

    A minimum bid price must be established for seized property 
offered for sale. To conserve the taxpayer's equity, the 
minimum bid price should normally be computed at 80 percent or 
more of the forced sale value of the property less encumbrances 
having priority over the Federal tax lien. If the group manager 
concurs, the minimum sales price may be set at less than 80 
percent. The taxpayer is to receive notice of the minimum bid 
price within 10 days of the sale. The taxpayer has the 
opportunity to challenge the minimum bid price, which cannot be 
more than the tax liability plus the expenses of sale. Prior 
law did not contemplate a sale of the seized property at less 
than the minimum bid price. Rather, if no person offered the 
minimum bid price, the IRS could have bought the property at 
the minimum bid price or the property could have been released 
to the owner.

                           Reasons for Change

    The Congress believed that strengthening provisions 
regarding the minimum bid price, including preventing the IRS 
from selling the taxpayer's property for less than the minimum 
bid price, are appropriate to preserve taxpayers' rights.

                        Explanation of Provision

    The Act prohibits the IRS from selling seized property for 
less than the minimum bid price. The Act provides that the sale 
of property for less than the minimum bid price would 
constitute an unauthorized collection action, which would 
permit an affected person to sue for civil damages.

                             Effective Date

    This provision is effective with respect to sales occurring 
after the date of enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
            i. Accounting of sales of seized property (sec. 3442 of the 
                    Act and sec. 6340 of the Code)

                         Present and Prior Law

    The IRS is authorized to seize and sell a taxpayer's 
property to satisfy an unpaid tax liability. The IRS is 
required to give written notice to the taxpayer before seizure 
of the property. The IRS must also give written notice to the 
taxpayer at least 10 days before the sale of the seized 
property.
    The IRS is required to keep records of all sales of real 
property. The records must set forth all proceeds and expenses 
of the sale. The IRS is required to apply the proceeds first 
against the expenses of the sale, then against a specific tax 
liability on the seized property, if any, and finally against 
any unpaid tax liability of the taxpayer. Any surplus proceeds 
are credited to the taxpayer or persons legally entitled to the 
proceeds.

                           Reasons for Change

    The Congress believed that taxpayers are entitled to know 
how proceeds from the sale of their property seized by the IRS 
are applied to their tax liability.

                        Explanation of Provision

    The Act requires the IRS to provide a written accounting of 
all sales of seized property, whether real or personal, to the 
taxpayer. The accounting must include a receipt for the amount 
credited to the taxpayer's account.

                             Effective Date

    The provision is effective for seizures occurring after the 
date of enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            j. Uniform asset disposal mechanism (sec. 3443 of the Act)

                         Present and Prior Law

    The IRS must sell property seized by levy either by public 
auction or by public sale under sealed bids. Under prior law, 
these were often conducted by the revenue officer charged with 
collecting the tax liability.

                           Reasons for Change

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

                        Explanation of Provision

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

                             Effective Date

    The Act requires the uniform asset disposal system to be 
implemented within two years from the date of enactment (by 
July 22, 2000).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
            k. Codification of IRS administrative procedures for 
                    seizure of taxpayer's property (sec. 3444 of the 
                    Act and sec. 6331 of the Code)

                         Present and Prior Law

    The Internal Revenue Manual (``IRM'') provides general 
guidelines for seizure actions.
    Prior to the levy action, the revenue officer must 
determine that there is sufficient equity in the property to be 
seized to yield net proceeds from the sale to apply to unpaid 
tax liabilities. If it is determined after seizure that the 
taxpayer's equity is insufficient to yield net proceeds from 
sale to apply to the unpaid tax, the revenue officer will 
immediately release the seized property.

                           Reasons for Change

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

                        Explanation of Provision

    The Act codifies the IRS administrative procedures which 
require the IRS to investigate the status of property to be 
sold pursuant to section 6335 prior to levy.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
            l. Procedures for seizure of residences and businesses 
                    (sec. 3445 of the Act and sec. 6334 of the Code)

                         Present and Prior Law

    Subject to certain procedural rules and limitations, the 
Secretary may seize the property of the taxpayer who neglects 
or refuses to pay any tax within 10 days after notice and 
demand. The IRS may not levy on the personal residence of the 
taxpayer unless the District Director (or the assistant 
District Director) personally approves in writing or in cases 
of jeopardy. Under prior law, there were no special rules for 
property that was used as a residence by parties other than the 
taxpayer. IRS Policy Statement P-5-34 states that the facts of 
a case and alternative collection methods must be thoroughly 
considered before deciding to seize the assets of a going 
business.

                           Reasons for Change

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

                        Explanation of Provision

    The Act generally prohibits the IRS from seizing real 
property that is used as a residence to satisfy an unpaid 
liability of $5,000 or less, including penalties and interest. 
This prohibition applies to any real property used as a 
residence by the taxpayer or any nonrental real property of the 
taxpayer used by any other individual as a residence.
    The Act requires the IRS to exhaust all other payment 
options before seizing the taxpayer's business assets or 
principal residence. The definition of business assets applies 
to tangible personal property or real property used in the 
trade or business of an individual taxpayer (other than real 
property that is rented). Future income that may be derived by 
a taxpayer from the commercial sale of fish or wildlife under a 
specified State permit must be considered in evaluating other 
payment options before seizing the taxpayer's business assets. 
The provision does not apply in cases of jeopardy.
    A levy is permitted on a principal residence only if a 
judge or magistrate of a United States district court approves 
(in writing) of the levy.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to reduce the Federal fiscal 
year budget receipts by less than $1 million in 1998 and by $3 
million in each of the years 1999 through 2007.

4. Provisions relating to examination and collection activities

            a. Procedures relating to extensions of statute of 
                    limitations by agreement (sec. 3461 of the Act and 
                    secs. 6501 and 6502 of the Code)

                         Present and Prior Law

    The statute of limitations within which the IRS may assess 
additional taxes is generally three years from the date a 
return is filed. Prior to the expiration of the statute of 
limitations, both the taxpayer and the IRS may agree in writing 
to extend the statute. An extension may be for either a 
specified period or an indefinite period. The statute of 
limitations within which a tax may be collected after 
assessment is 10 years after assessment. Under prior law, prior 
to the expiration of the statute of limitations on collection, 
both the taxpayer and the IRS could agree in writing to extend 
the statute.

                           Reasons for Change

    The Congress believed that taxpayers should be fully 
informed of their rights with respect to the statute of 
limitations on assessment. The Committee is concerned that in 
some cases taxpayers have not been fully aware of their rights 
to refuse to extend the statute of limitations, and have felt 
that they had no choice but to agree to extend the statute of 
limitations upon the request of the IRS.
    Moreover, the Congress believed that the IRS should collect 
all taxes within 10 years, and that such statute of limitations 
should not generally be extended.

                        Explanation of Provision

    The Act eliminates the provision of prior law that allows 
the statute of limitations on collections to be extended by 
agreement between the taxpayer and the IRS, except that 
extensions of the statute of limitations on collection may be 
made in connection with an installment agreement; the extension 
is only for the period for which the waiver of the statute of 
limitations entered in connection with the original written 
terms of the installment agreement extends beyond the end of 
the otherwise applicable 10-year period, plus 90 days.
    The Act also requires that, on each occasion on which the 
taxpayer is requested by the IRS to extend the statute of 
limitations on assessment, the IRS must notify the taxpayer of 
the taxpayer's right to refuse to extend the statute of 
limitations or to limit the extension to particular issues or 
to a particular period of time.

                             Effective Date

    The provision applies to requests to extend the statute of 
limitations made after December 31, 1999. If, in any request to 
extend the period of limitations made on or before December 31, 
1999, a taxpayer agreed to extend that period beyond the 10-
year statute of limitations on collection, that extension shall 
expire on the latest of: the last day of such 10-year period, 
December 31, 2002, or, in the case of an extension in 
connection with an installment agreement, the 90th day after 
the end of the period of such extension.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts in 1998 and 1999, and reduce such 
receipts by $9 million in 2000, $13 million in 2001, $16 
million in 2002, $18 million in 2003, $19 million in each of 
the years 2004 and 2005, $21 million in 2006, and $24 million 
in 2007.
            b. Offers-in-compromise (sec. 3462 of the Act and secs. 
                    6331 and 7122 of the Code)

                         Present and Prior Law

    The Code permits the IRS to compromise a taxpayer's tax 
liability. An offer-in-compromise is an offer by the taxpayer 
to settle unpaid tax accounts for less than the full amount of 
the assessed balance due. An offer-in-compromise may be 
submitted for all types of taxes, as well as interest and 
penalties, arising under the Internal Revenue Code.
    There are two bases on which an offer can be made: doubt as 
to liability for the amount owed and doubt as to ability to pay 
the amount owed.
    A compromise agreement based on doubt as to ability to pay 
requires the taxpayer to file returns and pay taxes for five 
years from the date the IRS accepts the offer. Failure to do so 
permits the IRS to begin immediate collection actions for the 
original amount of the liability. The Internal Revenue Manual 
provides guidelines for revenue officers to determine whether 
an offer-in-compromise is adequate. An offer is adequate if it 
reasonably reflects collection potential. Although the revenue 
officer is instructed to consider the taxpayer's assets and 
future and present income, the IRM advises that rejection of an 
offer solely based on narrow asset and income evaluations 
should be avoided.
    Pursuant to the IRM, collection normally is withheld during 
the period an offer-in-compromise is pending, unless it is 
determined that the offer is a delaying tactic or collection is 
in jeopardy.

                           Reasons for Change

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

                        Explanation of Provision

    Rights of taxpayers entering into offers-in-compromise.--
The Act requires the IRS to develop and publish schedules of 
national and local allowances that will provide taxpayers 
entering into an offer-in-compromise with adequate means to 
provide for basic living expenses. The IRS also is required to 
consider the facts and circumstances of a particular taxpayer's 
case in determining whether the national and local schedules 
are adequate for that particular taxpayer. If the facts 
indicate that use of scheduled allowances would be inadequate 
under the circumstances, the taxpayer is not limited by the 
national or local allowances.
    The Act prohibits the IRS from rejecting an offer-in-
compromise from a low-income taxpayer solely on the basis of 
the amount of the offer. The Act provides that, in the case of 
an offer-in-compromise submitted solely on the basis of doubt 
as to liability, the IRS may not reject the offer merely 
because the IRS cannot locate the taxpayer's file. The Act 
prohibits the IRS from requesting a financial statement if the 
taxpayer makes an offer-in-compromise based solely on doubt as 
to liability.
    Publication of taxpayer's rights with respect to offers-in-
compromise.--The Act requires the IRS to publish guidance on 
the rights and obligations of taxpayers and the IRS relating to 
offers in compromise, including a compliant spouse's right to 
apply to reinstate an agreement that would otherwise be revoked 
due to the nonfiling or nonpayment of the other spouse, 
providing all payments required under the compromise agreement 
are current.
    Suspend collection by levy while offer-in-compromise or 
installment agreement is pending.--The Act prohibits the IRS 
from collecting a tax liability by levy (1) during any period 
that a taxpayer's offer-in-compromise for that liability is 
being processed, (2) during the 30 days following rejection of 
an offer, and (3) during any period in which an appeal of the 
rejection of an offer is being considered. Collection by levy 
is also prohibited while an installment agreement is pending, 
under similar rules. Taxpayers whose offers are rejected and 
who made good faith revisions of their offers and resubmitted 
them within 30 days of the rejection or return would be 
eligible for a continuous period of relief from collection by 
levy. This prohibition on collection by levy does not apply if 
the IRS determines that collection is in jeopardy or that the 
offer was submitted solely to delay collection. The Act 
provides that the statute of limitations on collection is 
tolled for the period during which collection by levy is 
barred.
    Procedures for reviews of rejections of offers-in-
compromise and installment agreements.--The Act requires that 
the IRS implement procedures to review all proposed IRS 
rejections of taxpayer offers-in-compromise and requests for 
installment agreements prior to the rejection being 
communicated to the taxpayer. The Act requires the IRS to allow 
the taxpayer to appeal any rejection of such offer or agreement 
to the IRS Office of Appeals. The IRS must notify taxpayers of 
their right to have an appeals officer review a rejected offer-
in-compromise on the application form for an offer-in-
compromise.
    Guidelines to determine whether an offer-in-compromise 
should be accepted.--The Act authorizes the Secretary to 
prescribe guidelines for the IRS to determine whether an offer-
in-compromise is adequate and should be accepted to resolve a 
dispute. Accordingly, it is expected that the present 
regulations will be expanded so as to permit the IRS, in 
certain circumstances, to consider additional factors (i.e., 
factors other than doubt as to liability or collectibility) in 
determining whether to compromise the income tax liabilities of 
individual taxpayers. For example, it is anticipated that the 
IRS will take into account factors such as equity, hardship, 
and public policy where a compromise of an individual 
taxpayer's income tax liability would promote effective tax 
administration. It is anticipated that, among other situations, 
the IRS may utilize this new authority to resolve longstanding 
cases by forgoing penalties and interest which have accumulated 
as a result of delay in determining the taxpayer's liability.

                             Effective Date

    The provision is generally effective for offers-in-
compromise and installment agreements submitted after the date 
of enactment (after July 22, 1998). The provision suspending 
levy is effective with respect to offers-in-compromise pending 
on or made after December 31, 1999.

                             Revenue Effect

    The provision is estimated to reduce the Federal fiscal 
year budget receipts by $1 million in 1998, have no revenue 
effect in 1999, and to increase such receipts by $9 million in 
2000 and by $4 million in each of the years 2001 through 2007.
            c. Notice of deficiency to specify deadlines for filing Tax 
                    Court petition (sec. 3463 of the Act and sec. 6213 
                    of the Code)

                               Prior Law

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

                           Reasons for Change

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

                        Explanation of Provision

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

                             Effective Date

    The provision is effective with respect to notices mailed 
after December 31, 1998.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            d. Refund or credit of overpayments before final 
                    determination (sec. 3464 of the Act and sec. 6213 
                    of the Code)

                         Present and Prior Law

    Generally, the IRS may not take action to collect a 
deficiency during the period a taxpayer may petition the Tax 
Court, or if the taxpayer petitions the Tax Court, until the 
decision of the Tax Court becomes final. Actions to collect a 
deficiency attempted during this period may be enjoined, but 
there was no authority under prior law for ordering the refund 
of any amount collected by the IRS during the prohibited 
period.
    If a taxpayer contests a deficiency in the Tax Court, no 
credit or refund of income tax for the contested taxable year 
generally may be made, except in accordance with a decision of 
the Tax Court that has become final. Where the Tax Court 
determines that an overpayment has been made and a refund is 
due the taxpayer, and a party appeals a portion of the decision 
of the Tax Court, no provision existed under prior law for the 
refund of any portion of any overpayment that is not contested 
in the appeal.

                           Reasons for Change

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

                        Explanation of Provision

    The Act provides that a proper court (including the Tax 
Court) may order a refund of any amount that was collected 
within the period during which the Secretary is prohibited from 
collecting the deficiency by levy or other proceeding.
    The provision also allows the refund of that portion of any 
overpayment determined by the Tax Court to the extent the 
overpayment is not contested on appeal.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            e. IRS procedures relating to appeal of examinations and 
                    collections (sec. 3465 of the Act and new sec. 7123 
                    of the Code)

                         Present and Prior Law

    IRS Appeals operates through regional Appeals offices which 
are independent of the local District Director and Regional 
Commissioner's offices. In general, IRS Appeals offices have 
jurisdiction over both pre-assessment and post-assessment 
cases. The taxpayer generally has an opportunity to seek 
Appeals jurisdiction after failing to reach agreement with the 
Examination function and before filing a petition in Tax Court, 
after filing a petition in Tax Court (but before litigation), 
after assessment of certain penalties, after a claim for refund 
has been rejected by the District Director's office, and after 
a proposed rejection of an offer-in-compromise in a collection 
case.
    In certain cases under Coordinated Examination Program 
procedures, the taxpayer has an opportunity to seek early 
Appeals jurisdiction over some issues while an examination is 
still pending on other issues. The early referral procedures 
also apply to employment tax issues on a limited basis.
    A mediation or alternative dispute resolution (``ADR'') 
process is also available in certain cases. ADR is used at the 
end of the administrative process as a final attempt to resolve 
a dispute before litigation. Under prior law, ADR was only 
available for cases with more than $10 million in dispute. ADR 
processes are also available in bankruptcy cases and cases 
involving a competent authority determination.
    In April 1996, the IRS implemented a Collections Appeals 
Program within the Appeals function, which allows taxpayers to 
appeal lien, levy, or seizure actions proposed by the IRS. In 
January 1997, appeals for installment agreements proposed for 
termination were added to the program.

                           Reasons for Change

    The Congress believed that the IRS should be statutorily 
bound to follow the procedures that the IRS had developed to 
facilitate settlement in the IRS Office of Appeals. The 
Congress also believed that mediation, binding arbitration, 
early referral to Appeals, and other procedures would foster 
more timely resolution of taxpayers' problems with the IRS.
    In addition, the Congress believed that the ADR process is 
valuable to the IRS and taxpayers and should be extended to all 
taxpayers.
    The Congress believed that all taxpayers should enjoy 
convenient access to Appeals, regardless of their locality.

                        Explanation of Provision

    The Act codifies existing IRS procedures with respect to 
early referrals to Appeals and the Collections Appeals Process. 
The Act also codifies the existing ADR procedures, modified by 
eliminating the dollar threshold.
    In addition, the IRS is required to establish a pilot 
program of binding arbitration for disputes of all sizes. Under 
the pilot program, binding arbitration must be agreed to by 
both the taxpayer and the IRS.
    The Act requires the IRS to make Appeals officers available 
on a regular basis in each State, and consider 
videoconferencing of Appeals conferences for taxpayers seeking 
appeals in rural or remote areas.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
            f. Application of certain fair debt collection practices 
                    (sec. 3466 of the Act and new sec. 6304 of the 
                    Code)

                         Present and Prior Law

    The Fair Debt Collection Practices Act provides a number of 
rules relating to debt collection practices. Among these are 
restrictions on communication with the consumer, such as a 
general prohibition on telephone calls outside the hours of 
8:00 a.m. to 9:00 p.m. local time, and prohibitions on 
harassing or abusing the consumer. Under prior law, these 
provisions generally did not apply to the Federal 
Government.<SUP>58</SUP>
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    \58\ Several of these provisions were applied to the IRS through 
the annual appropriations process.
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                           Reasons for Change

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

                        Explanation of Provision

    The Act applies the restrictions relating to communication 
with the taxpayer/debtor and the prohibitions on harassing or 
abusing the debtor to the IRS. The restrictions relating to 
communication with the taxpayer/debtor are not intended to 
hinder the ability of the IRS to respond to taxpayer inquiries 
(such as answering telephone calls from taxpayers).

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
            g. Guaranteed availability of installment agreements (sec. 
                    3467 of the Act and sec. 6159 of the Code)

                         Present and Prior 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. An installment 
agreement does not reduce the amount of taxes, interest, or 
penalties owed, but does provide for a longer period during 
which payments may be made during which other IRS enforcement 
actions (such as levies or seizures) are held in abeyance. The 
IRS in most instances readily approves these requests if the 
amounts involved are not large (in general, below $10,000) and 
if the taxpayer has filed tax returns on time in the past. Some 
taxpayers are required to submit background information to the 
IRS substantiating their application.

                           Reasons for Change

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

                        Explanation of Provision

    In the case of individual income taxes, the provision 
requires the Secretary to enter an installment agreement, at 
the taxpayer's option, if: (1) the liability is $10,000, or 
less (excluding penalties and interest); (2) within the 
previous 5 years, the taxpayer has not failed to file or to 
pay, nor entered an installment agreement under this provision; 
(3) if requested by the Secretary, the taxpayer submits 
financial statements, and the Secretary determines that the 
taxpayer is unable to pay the tax due in full; (4) the 
installment agreement provides for full payment of the 
liability within 3 years; and (5) the taxpayer agrees to 
continue to comply with the tax laws and the terms of the 
agreement for the period (up to 3 years) that the agreement is 
in place.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
            h. Prohibition on requests to taxpayers to waive rights to 
                    bring actions (sec. 3468 of the Act)

                               Prior Law

    There was no restriction on the circumstances under which 
the Government could request a taxpayer to waive the taxpayer's 
right to sue the United States or one of its employees for any 
action taken in connection with the tax laws.

                           Reasons for Change

    The Congress believed it would be beneficial to taxpayers 
to circumscribe these requests.

                        Explanation of Provision

    The Act provides that the Government may not request a 
taxpayer to waive the taxpayer's right to sue the United States 
or one of its employees for any action taken in connection with 
the tax laws, unless (1) the taxpayer knowingly and voluntarily 
waives that right, or (2) the request is made to the taxpayer's 
attorney or other representative. This provision is not 
intended to apply to the waiver of claims for attorneys' fees 
or costs or to the waiver of one or more claims brought in the 
same administrative or judicial proceeding with other claims 
that are being settled.

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

                      F. Disclosures to Taxpayers

1. Explanation of joint and several liability (sec. 3501 of the Act)

                         Present and Prior Law

    In general, spouses who file a joint tax return are each 
fully responsible for the accuracy of the tax return and for 
the full liability. Spouses who wish to avoid such joint and 
several liability may file as married persons filing 
separately. Special rules apply in the case of innocent 
spouses.

                           Reasons for Change

    The Congress believed that married taxpayers need to 
clearly understand the legal implications of signing a joint 
return and that it is appropriate for the IRS to provide the 
information necessary for that understanding.

                        Explanation of Provision

    The Act requires that the IRS establish procedures clearly 
to alert married taxpayers of their joint and several liability 
on all appropriate tax publications and instructions. 
Notification must also be given of an individual's right to 
relief under new section 6015 of the Code in Publication Number 
1 and in any collection-related notices.

                             Effective Date

    The provision requires that the procedures be established 
as soon as practicable, but no later than 180 days after the 
date of enactment (by January 18, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

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

                         Present and Prior Law

    Prior to or at initial in-person audit interviews, the IRS 
must explain to taxpayers the audit process and taxpayers' 
rights under that process and the collection process and 
taxpayers' rights under that process. If a taxpayer clearly 
states during an interview with the IRS that the taxpayer 
wishes to consult with the taxpayer's representative, the 
interview must be suspended to afford the taxpayer a reasonable 
opportunity to consult with the representative.

                           Reasons for Change

    The Congress believed that taxpayers should be more fully 
informed of their rights to representation in dealings with the 
IRS, and that those rights should be respected.

                        Explanation of Provision

    The Act requires that the IRS rewrite Publication 1 (``Your 
Rights as a Taxpayer'') to inform taxpayers more clearly of 
their rights (1) to be represented by a representative and (2) 
if the taxpayer is so represented, that the interview may not 
proceed without the presence of the representative unless the 
taxpayer consents.

                             Effective Date

    The addition to Publication 1 must be made not later than 
180 days after the date of enactment (by January 18, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts in 1998, and to reduce such 
receipts by $13 million in 1999 and by less than $1 million in 
each of the years 2000 through 2007.

3. Disclosure of criteria for examination selection (sec. 3503 of the 
        Act)

                         Present and Prior Law

    The IRS examines Federal tax returns to determine the 
correct liability of taxpayers. The IRS selects returns to be 
audited in a number of ways, such as through a computerized 
classification system (the discriminant function (``DIF'') 
system).

                           Reasons for Change

    The Congress believed it is important that taxpayers 
understand the reasons they may be selected for examination.

                        Explanation of Provision

    The provision requires that IRS add to Publication 1 
(``Your Rights as a Taxpayer'') a statement which sets forth in 
simple and nontechnical terms the criteria and procedures for 
selecting taxpayers for examination. The statement must not 
include any information the disclosure of which would be 
detrimental to law enforcement. The statement must specify the 
general procedures used by the IRS, including whether taxpayers 
are selected for examination on the basis of information in the 
media or from informants.

                             Effective Date

    The addition to Publication 1 must be made not later than 
180 days after the date of enactment (by January 18, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

4. Explanation of the appeals and collection process (sec. 3504 of the 
        Act)

                               Prior Law

    There was no statutory requirement that a description of 
the entire process from examination through collections be 
given to taxpayers with the first letter of proposed deficiency 
that allows the taxpayer an opportunity for administrative 
review in the IRS Office of Appeals.

                           Reasons for Change

    The Congress believed it is important that taxpayers 
understand they have a right to have any assessment reviewed by 
the IRS Office of Appeals, as well as be informed of the steps 
they must take to obtain that review.

                        Explanation of Provision

    The Act requires that, no later than 180 days after the 
date of enactment, a description of the entire process from 
examination through collections, including the assistance 
available to taxpayers from the Taxpayer Advocate at various 
points in the process, be provided with the first letter of 
proposed deficiency that allows the taxpayer an opportunity for 
administrative review in the IRS Office of Appeals.

                             Effective Date

    The provision requires that the explanation be included as 
soon as practicable, but no later than 180 days after the date 
of enactment (by January 18, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

5. Explanation of reason for refund disallowance (sec. 3505 of the Act 
        and 6402 of the Code)

                         Present and Prior Law

    The Examination Division of the IRS examines claims for 
refund submitted by taxpayers. The Internal Revenue Manual 
requires examination or other audit action on refund claims 
within 30 days after receipt of the claims. The refund claim is 
preliminarily examined to determine if it should be disallowed 
because it (1) was untimely filed, (2) was based solely on 
alleged unconstitutionality of the Revenue Acts, (3) was 
already waived by the taxpayer as consideration for a 
settlement, (4) covers a taxable year and issues which were the 
subject of a final closing agreement or an offer in compromise, 
or (5) relates to a return closed on the basis of a final order 
of the Tax Court. In those cases, the taxpayer will receive a 
form from the IRS stating that the claim for refund cannot be 
considered. Under prior law, there was no statutory requirement 
that this form include the reason for the disallowance (or 
partial disallowance) of the claim. Other cases are examined as 
quickly as possible and the disposition of the case, including 
the reasons for the disallowance or partial disallowance of the 
refund claim, must be stated in the portion of the revenue 
agent's report that is sent to the taxpayer.

                           Reasons for Change

    The Congress believed that taxpayers are entitled to an 
explanation of the reason for the disallowance or partial 
disallowance of a refund claim so that the taxpayer may 
appropriately respond to the IRS.

                        Explanation of Provision

    The Act requires the IRS to notify the taxpayer of the 
specific reasons for the disallowance (or partial disallowance) 
of the refund claim.

                             Effective Date

    The provision is effective 180 days after the date of 
enactment (January 18, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

6. Statements to taxpayers with installment agreements (sec. 3506 of 
        the Act)

                         Present and Prior Law

    A taxpayer entering into an installment agreement to pay 
tax liabilities due to the IRS must complete a Form 433-D which 
sets forth the installment amounts to be paid monthly and the 
total amount of tax due. Under prior law, the IRS did not 
provide the taxpayer with an annual statement reflecting the 
amounts paid and the remaining amount due.

                           Reasons for Change

    The Congress believed that taxpayers who enter into an 
installment agreement should be kept informed of amounts 
applied towards the outstanding tax liability and amounts 
remaining due.

                        Explanation of Provision

    The Act requires the IRS to send every taxpayer in an 
installment agreement an annual statement of the initial 
balance owed, the payments made during the year, and the 
remaining balance.

                             Effective Date

    The provision is effective beginning on July 1, 2000.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

7. Notification of change in tax matters partner (sec. 3507 of the Act 
        and sec. 6231 of the Code)

                         Present and Prior Law

    In general, the tax treatment of items of partnership 
income, loss, deductions and credits are determined at the 
partnership level in a unified partnership proceeding rather 
than in separate proceedings with each partner. In providing 
notice to taxpayers with respect to partnership proceedings, 
the IRS relies on information furnished by a party designated 
as the tax matters partner (``TMP'') of the partnership. The 
TMP is required to keep each partner informed of all 
administrative and judicial proceedings with respect to the 
partnership. Under certain circumstances, the IRS may require 
the resignation of the incumbent TMP and designate another 
partner as the TMP of a partnership. Under prior law, there was 
no requirement that the IRS notify all partners of any 
resignation of the TMP that is required by the IRS, and notify 
the partners of any successor TMP.

                           Reasons for Change

    The Congress was concerned that, in cases where the IRS 
designates the TMP, that the other partners may be unaware of 
such designation.

                        Explanation of Provision

    The Act requires the IRS to notify all partners of any 
resignation of the TMP that is required by the IRS, and to 
notify the partners of any successor TMP.

                             Effective Date

    The provision is effective with respect to selections of 
TMPs made by the Secretary after the date of enactment (after 
July 22, 1998).

                             Revenue Effect

    The provision is estimated to reduce the Federal fiscal 
year budget receipts by less than $500,000 in each of the years 
1998 through 2007.

8. Conditions under which taxpayers' returns may be disclosed (sec. 
        3508 of the Act)

                               Prior Law

    There was no statutory requirement that the general tax 
forms instruction booklets include a description of conditions 
under which tax return information may be disclosed outside the 
IRS (including to States).

                           Reasons for Change

    The Congress believed it would be valuable to require 
statutorily that this description be provided to taxpayers.

                        Explanation of Provision

    The Act requires that general tax forms instruction 
booklets include a description of conditions under which tax 
return information may be disclosed outside the IRS (including 
to States). The statement currently contained in the general 
tax forms instruction booklets was considered to be sufficient 
to fulfill the requirements of this provision.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

9. Disclosure of Chief Counsel advice (sec. 3509 of the Act and sec. 
        6110 of the Code)

                         Present and Prior Law

    Section 6110 of the Code provides for the public inspection 
of written determinations, i.e., rulings, determination 
letters, and technical advice memoranda. The IRS issues annual 
revenue procedures setting forth the procedures for requests 
for these various forms of written determinations and 
participation in the formulation of such 
determinations.<SUP>59</SUP> Under section 6110 and the 
regulations promulgated thereunder, the taxpayer who is the 
subject of a written determination can participate in the 
redaction of the documents to ensure that the taxpayer's 
privacy is protected and that sensitive private information is 
removed before the determination is publicly disclosed. In the 
event there is disagreement as to the information to be 
deleted, the section provides for litigation in the courts to 
resolve such disagreements.
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    \59\ See, e.g., Rev. Procs. 98-1 and 98-2.
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    One of the Office of Chief Counsel's major roles is to 
advise IRS personnel on legal matters at all stages of case 
development. The Office of Chief Counsel thus issues various 
forms of written legal advice to field agents of the IRS and to 
its own field attorneys that do not fall within the current 
definition of ``written determination'' under section 6110. 
Traditionally, field Counsel offices provided most of the 
assistance to the IRS, usually at IRS field offices, but since 
1988, the National Office of Chief Counsel has been rendering 
more assistance to field Counsel and IRS offices. National 
Office of Chief Counsel assistance in taxpayer-specific cases 
is generally called ``field service advice.'' The taxpayers who 
are the subject of field service advice generally do not 
participate in the process, leading some tax commentators to 
express concern that the field service advice process was 
displacing the technical advice process.
    There had been controversy under prior law as to whether 
the Office of Chief Counsel must release forms of advice other 
than written determinations pursuant to the Freedom of 
Information Act (``FOIA''). In Tax Analysts v. 
IRS,<SUP>60</SUP> the D.C. Circuit held that the legal analysis 
portions of field service advice created in the context of 
specific taxpayers' cases are not ``return information,'' as 
defined by section 6103(b)(2), and must be released under FOIA. 
The court also found that portions of field service advice 
issued in docketed cases may be withheld as privileged attorney 
work product. However, under prior law, some issues remained 
outstanding. Although the extent to which such materials must 
be released was still in dispute, it was clear that they were 
not expressly covered by section 6110. As a consequence, there 
existed no mechanism by which taxpayers could participate in 
the administrative process of redacting their private 
information from such documents or to resolve disagreements in 
court.
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    \60\ 117 F.3d 607 (D.C. Cir. 1997).
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                        Explanation of Provision

In general

    The Congress believed that written documents issued by the 
National Office of Chief Counsel to its field components and 
field agents of the IRS should be subject to public release in 
a manner similar to technical advice memoranda or other written 
determinations. In this way, all taxpayers can be assured of 
access to the ``considered view of the Chief Counsel's national 
office on significant tax issues.'' <SUP>61</SUP> Creating a 
structured mechanism by which these types of legal memoranda 
are open to public inspection will increase the public's 
confidence that the tax system operates fairly and in an even-
handed manner with respect to all taxpayers.
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    \61\ 117 F.3d at 617.
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    As part of making these documents public, however, the 
privacy of the taxpayer who is the subject of the advice must 
be protected. Any procedure for making such advice public must 
therefore include adequate safeguards for taxpayers whose 
privacy interests are implicated. There should be a mechanism 
for taxpayer participation in the deletion of any private 
information. There should also be a process whereby appropriate 
governmental privileges may be asserted by the IRS and 
contested by the public or the taxpayer.
    The provision amends section 6110 of the Code, establishing 
a structured process by which the IRS will make certain work 
products, designated as ``Chief Counsel Advice,'' open to 
public inspection on an ongoing basis. It is designed to 
protect taxpayer privacy while allowing the public inspection 
of these documents in a manner generally consistent with the 
mechanism of section 6110 for the public inspection of written 
determinations. In general, the provision operates by 
establishing that Chief Counsel Advice are written 
determinations subject to the public inspection provisions of 
section 6110.

Definition of Chief Counsel Advice

    For purposes of this provision, Chief Counsel Advice is 
written advice or instruction prepared and issued by any 
national office component of the Office of Chief Counsel to 
field employees of the Service or the Office of Chief Counsel 
that convey certain legal interpretations or positions of the 
IRS or the Office of Chief Counsel concerning existing or 
former revenue provisions. For these purposes, the term 
``revenue provisions'' includes, without limitation: the 
Internal Revenue Code itself; regulations, revenue rulings, 
revenue procedures, or other administrative interpretations or 
guidance, whether published or unpublished (including, for 
example, other Chief Counsel Advice); tax treaties; and court 
decisions and opinions. Chief Counsel Advice also includes 
legal interpretations of State law, foreign law, or other 
federal law relating to the assessment or collection of 
liabilities under revenue provisions.
    Chief Counsel Advice may interpret or set forth policies 
concerning the internal revenue laws either in general or as 
applied to specific taxpayers or groups of specific taxpayers. 
The definition is not, however, meant to include advice written 
with respect to nontax matters, including but not limited to 
employment law, conflicts of interest, or procurement matters.
    The new statutory category of written determination 
encompasses certain existing categories of advisory memoranda 
or instructions written by the National Office of Chief Counsel 
to field personnel of either the IRS or the Office of Chief 
Counsel. Specifically, Chief Counsel Advice includes field 
service advice, technical assistance to the field, service 
center advice, litigation guideline memoranda, tax litigation 
bulletins, general litigation bulletins, and criminal tax 
bulletins. The definition applies not only to the case-specific 
field service advice issued from the offices of the Associate 
Chief Counsel (International), Associate Chief Counsel 
(Employee Benefits and Exempt Organizations), and the Assistant 
Chief Counsel (Field Service), which were at issue in the Tax 
Analysts decision, but any case-specific or noncase-specific 
written advice or instructions issued by the National Office of 
Chief Counsel to field personnel of either the IRS or the 
Office of Chief Counsel.
    Moreover, Chief Counsel Advice includes any documents 
created subsequent to the enactment of this provision that 
satisfy the general statutory definition, regardless of their 
name or designation. Chief Counsel Advice also includes any 
such advice or instruction even if the organizations currently 
issuing them are reorganized or reconstituted as part of any 
IRS restructuring.
    The new subsection covers written advice ``issued'' to 
field personnel of either the IRS or the Office of Chief 
Counsel in its final form. With respect to Chief Counsel 
Advice, issuance occurs when the Chief Counsel Advice has been 
approved within the national office component of the office of 
Chief Counsel in which the Chief Counsel Advice was proposed, 
signed by the person authorized to do so (usually the Assistant 
Chief Counsel or a Branch Chief), and sent to the field. Chief 
Counsel Advice does not include written recordations of 
informal telephonic advice by the National Office of Chief 
Counsel to field personnel of either the IRS or the Office of 
Chief Counsel. Drafts of Chief Counsel Advice sent to the field 
for review, criticism, or comment prior to approval within the 
National Office also need not be made public. However, Chief 
Counsel Advice may be treated as issued even if supplemental 
advice is contemplated. The Secretary is expected to issue 
regulations to clarify the distinction between issuance as it 
applies to Chief Counsel Advice and as it applies to other 
documents disclosed under section 6110.
    The provision also allows the Secretary to promulgate 
regulations providing that additional types of advice or 
instruction issued by the Office of Chief Counsel (or 
components of the Office of Chief Counsel, such as regional or 
local Counsel offices) will be treated as ChiefCounsel Advice 
and subject to public inspection pursuant to this provision. No 
inference is to be drawn from the failure of the Secretary to treat 
additional types of advice or instruction as Chief Counsel Advice in 
determining whether such advice or instruction is to be disclosed under 
FOIA.
    As with other written determinations, Chief Counsel Advice 
may not be used or cited as precedent, except as the Secretary 
otherwise establishes by regulation.

Redaction process

    Under this provision, Chief Counsel Advice will be redacted 
prior to their public release in a manner similar to that 
provided for private letter rulings, technical advice 
memoranda, and determination letters. Specific taxpayers or 
groups of specific taxpayers who are the subject of Chief 
Counsel Advice will be afforded the opportunity to participate 
in the process of redacting the Chief Counsel Advice prior to 
their public release.
    In addition, the new provision affords additional 
protection for certain governmental interests implicated by 
Chief Counsel Advice. Information may be redacted from Chief 
Counsel Advice under subsections (b) and (c) of the FOIA, 5 
U.S.C. sec. 552 (except, with respect to 5 U.S.C. sec. 
552(b)(3), only material required to be withheld under a 
Federal statute, other than title 26, may be redacted), as 
those provisions have been, or shall be, interpreted by the 
courts of the United States. For those deletions that are 
discretionary, such as those under FOIA section 552(b)(5), it 
is expected that the Office of Chief Counsel and the IRS will 
apply any discretionary standards applicable to federal 
agencies in general or the Chief Counsel or the IRS in 
particular.<SUP>62</SUP>
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    \62\ The current standards for the exercise of such discretion are 
set forth in the Internal Revenue Manual (part 1230, section 293(2)) 
and the Attorney General's October 4, 1993, Memorandum for Heads of 
Departments and Agencies.
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    Under new section 6110(i), as with prior and present 
section 6110(c)(1), identifying details consisting of names, 
addresses, and any other information that the Secretary 
determines could identify any person, including the taxpayer's 
representative, will be redacted, after the participation of 
the taxpayer in the redaction process. In some situations, 
information included in a Chief Counsel Advice (other than a 
name or address) may not identify a person as of the time the 
advice is made open to public inspection, but that information, 
together with information that is expected to be disclosed by 
another source at a later date, will serve to identify a 
person. Consequently, in deciding whether a Chief Counsel 
Advice contains identifying information, the Secretary is to 
take into account information that is available to the public 
at the time that the advice is made open to public inspection 
as well as information that is expected to be publicly 
available from other sources within a reasonable time after the 
Chief Counsel Advice is made open to public inspection. 
Generally, it is intended that the standard the IRS is to use 
in determining whether information will identify a person is a 
standard of a reasonable person generally knowledgeable with 
respect to the appropriate community. The standard is not, 
however, to be one of a person with inside knowledge of the 
particular taxpayer.
    As under prior section 6110, taxpayers who are the subject 
of Chief Counsel Advice, as well as members of the public, will 
be afforded the opportunity to challenge judicially the 
redaction determinations by the Secretary.

Relation to prior law

    The public inspection of Chief Counsel Advice is to be 
accomplished only pursuant to the rules and procedures set 
forth in section 6110, as amended, and not under those of any 
other provision of law, such as FOIA. This provision is not 
intended to affect the disclosure under FOIA, or under any 
other provision of law, of any documents not included within 
the definition of Chief Counsel Advice in new sections 
6110(i)(1) and (i)(2). The only FOIA exemption affected by this 
provision is 5 U.S.C. section 552(b)(3), to the extent that it 
incorporates section 6103 of the Code. The timetable and the 
manner in which existing Chief Counsel Advice may ultimately be 
open to public inspection shall be governed by this provision, 
except that the provision is inapplicable to Chief Counsel 
Advice that any federal district court has, prior to the date 
of enactment, ordered be disclosed. Disclosure of any documents 
that are subject to such a court order is to proceed pursuant 
to the order rather than this provision. Finally, no inference 
is intended with respect to the disclosure, under FOIA or any 
other provision of law, of any other documents produced by the 
Office of Chief Counsel that are not included in the definition 
of Chief Counsel Advice.

                             Effective Date

    The provision applies to Chief Counsel Advice issued more 
than 90 days after enactment (after October 20, 1998). In 
addition, the provision contains certain rules governing 
disclosure of any document fitting the definition of Chief 
Counsel Advice issued after 1985 and before 90 days after the 
date of enactment by the offices of the Associate Chief Counsel 
for domestic, employee benefits and exempt organizations, and 
international. It sets forth a schedule for the IRS to release 
such Chief Counsel Advice over a six year period after the date 
of enactment. Finally, additional advice or instruction that 
the Secretary determines by regulations to treat as Chief 
Counsel Advice shall be made public pursuant to this provision 
in accordance with the effective dates set forth in such 
regulations.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

G. Low-Income Taxpayer Clinics (sec. 3601 of the Act and new sec. 7526 
                              of the Code)

                               Prior Law

    There were no provisions in prior law providing for grants 
from the Treasury Department to clinics that assist low-income 
taxpayers.

                           Reasons for Change

    The Congress believed that the provision of tax services by 
accredited nominal-fee clinics to low-income individuals and 
those for whom English is a second language will improve 
compliance with the Federal tax laws and should be encouraged.

                        Explanation of Provision

    The Act provides that the Secretary is authorized to 
provide up to $6,000,000 per year in matching grants to certain 
low-income taxpayer clinics. No clinic can receive more than 
$100,000 per year. 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.
    A ``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 
exempt from tax under Code section 501(c) which either 
represents low-income taxpayers or provides referral to 
qualified representatives.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
year budget receipts.

                          H. Other Provisions

1. Cataloging complaints (sec. 3701 of the Act)

                         Present and Prior Law

    The IRS is required to make an annual report to the 
Congress, beginning in 1997, on all categories of instances 
involving allegations of misconduct by IRS employees, arising 
either from internally identified cases or from taxpayer or 
third-party initiated complaints. The report must identify the 
nature of the misconduct or complaint, the number of instances 
received by category, and the disposition of the complaints.

                           Reasons for Change

    The Congress believed that all allegations of misconduct by 
IRS employees must be carefully investigated. The Congress also 
believed that the annual report to Congress will help develop a 
public perception that the IRS takes such allegations of 
misconduct seriously. The Congress was concerned that, in the 
absence of records detailing taxpayer complaints of misconduct 
on an individual employee basis, the IRS will not be able to 
adequately investigate such allegations or properly prepare the 
required report.

                        Explanation of Provision

    The Act requires that, in collecting data for this report, 
records of taxpayer complaints of misconduct by IRS employees 
must be maintained on an individual employee basis. These 
individual records are not to be listed in the report.

                             Effective Date

    The provision is effective beginning on January 1, 2000.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
2. Archive of records of Internal Revenue Service (sec. 3702 of the Act 
        and sec. 6103 of the Code)

                         Present and Prior Law

    The IRS is obligated to transfer agency records to the 
National Archives and Records Administration (``NARA'') for 
retention or disposal. The IRS is also obligated to protect 
confidential taxpayer records from disclosure. These two 
obligations have created conflict between NARA and the IRS. 
Under prior law, the IRS determined whether records contain 
taxpayer information. Once the IRS had made that determination, 
NARA was not permitted to examine those records. NARA had 
expressed concern that the IRS may be using the disclosure 
prohibition to improperly conceal agency records with 
historical significance.
    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431). Under 
prior law, section 6103 did not authorize the disclosure of 
confidential return information to NARA.

                           Reasons for Change

    The Congress believed that it is appropriate to permit 
disclosure to NARA for purposes of scheduling records for 
destruction or retention, while at the same time preserving the 
confidentiality of taxpayer information in those documents.

                        Explanation of Provision

    The Act provides an exception to the disclosure rules to 
require IRS to disclose IRS records to officers or employees of 
NARA, upon written request from the U.S. Archivist, for 
purposes of the appraisal of such records for destruction or 
retention. The prohibitions on and penalties for disclosure of 
tax information generally apply to NARA.

                             Effective Date

    The provision is effective for requests made by the 
Archivist after the date of enactment (after July 22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
3. Payment of taxes (sec. 3703 of the Act)

                         Present and Prior Law

    The Code provides that it is lawful for the Secretary to 
accept checks or money orders as payment for taxes, to the 
extent and under the conditions provided in regulations 
prescribed by the Secretary (sec. 6311). Under prior law, those 
regulations stated that checks or money orders should be made 
payable to the Internal Revenue Service.

                           Reasons for Change

    The Congress believed it more appropriate that checks be 
made payable to the United States Treasury.

                        Explanation of Provision

    The Act requires the Secretary or his delegate to establish 
such rules, regulations, and procedures as are necessary to 
allow payment of taxes by check or money order to be made 
payable to the United States Treasury.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
4. Clarification of authority of Secretary relating to the making of 
        elections (sec. 3704 of the Act and sec. 7805 of the Code)

                               Prior Law

    Except as otherwise provided, elections provided by the 
Code were to be made in such manner as the Secretary shall by 
regulations or forms prescribe.

                           Reasons for Change

    The Congress wished to eliminate any confusion over the 
type of guidance in which the Secretary may prescribe the 
manner of making any election.

                        Explanation of Provision

    The Act clarifies that, except as otherwise provided, the 
Secretary may prescribe the manner of making of any election by 
any reasonable means.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
5. IRS employee contacts (sec. 3705 of the Act)

                         Present and Prior Law

    The IRS sends many different notices to taxpayers. Under 
prior law, some (but not all) of these notices contained a name 
and telephone number of an IRS employee whom the taxpayer may 
call if the taxpayer has any questions.

                           Reasons for Change

    The Congress believed that it is important that taxpayers 
receive prompt answers to their questions about their tax 
liability. Many taxpayers report frustration because they 
cannot determine the appropriate IRS employee to contact for 
information.

                        Explanation of Provision

    The Act requires that any manually generated correspondence 
received by a taxpayer from the IRS must include in a prominent 
manner the name, telephone number, and unique identifying 
number of an IRS employee the taxpayer may contact with respect 
to the correspondence. Any other correspondence or notice 
received by a taxpayer from the IRS must include in a prominent 
manner a telephone number that the taxpayer may contact. An IRS 
employee must give a taxpayer during a telephone or personal 
contact the employee's name and unique identifying number. In 
addition, to the extent practicable and advantageous to the 
taxpayer, the IRS should assign one employee to handle a matter 
with respect to a taxpayer until that matter is resolved.
    The Act also requires that, in appropriate circumstances, 
IRS telephone helplines provide that taxpayer questions on 
those IRS telephone helplines are answered in Spanish.
    Further, the Act requires that IRS telephone helplines 
provide, in appropriate circumstances, an option for any 
taxpayer to talk to an IRS employee during normal business 
hours. That person can then direct the taxpayer to other IRS 
personnel who can provide assistance to the taxpayer.

                             Effective Date

    The notice provisions are effective 60 days after the date 
of enactment (after September 20, 1998).
    The requirements pertaining to a unique identifying number 
are effective six months after the date of enactment (after 
January 18, 1998). The telephone helpline provisions are 
effective on January 1, 2000.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

6. Use of pseudonyms by IRS employees (sec. 3706 of the Senate 
        amendment)

                               Prior Law

    The Federal Service Impasses Panel had ruled that if an 
employee believes that use of the employee's last name only 
will identify the employee due to the unique nature of the 
employee's last name, and/or nature of the office locale, then 
the employee may ``register'' a pseudonym with the employee's 
supervisor.

                           Reasons for Change

    The Congress was concerned that IRS employees may use 
pseudonyms in inappropriate circumstances.

                        Explanation of Provision

    The Act provides that an IRS employee may use a pseudonym 
only if (1) adequate justification, such as protecting personal 
safety, for using the pseudonym was provided by the employee as 
part of the employee's request, and (2) management has approved 
the request to use the pseudonym prior to its use.

                             Effective Date

    The provision is effective with respect to requests made 
after the date of enactment (July 22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

7. Illegal tax protester designations (sec. 3707 of the Act)

                               Prior Law

    The IRS designated individuals who met certain criteria as 
``illegal tax protesters'' in the IRS master file.

                           Reasons for Change

    The Congress was concerned that taxpayers may be 
stigmatized by a designation as an ``illegal tax protester.''

                        Explanation of Provision

    The Act prohibits the use by the IRS of the ``illegal tax 
protester'' designation. Any extant designation in the 
individual master file (the main computer file for individual 
income taxes) must be removed and any other extant designation 
(such as on paper records that have been archived) must be 
disregarded. The IRS is, however, permitted to designate 
appropriate taxpayers as nonfilers. The IRS must remove the 
nonfiler designation once the taxpayer has filed valid tax 
returns for two consecutive years and paid all taxes shown on 
those returns.
    While this provision prohibits the use by the IRS of the 
``illegal tax protester'' designation, it does allow the IRS to 
continue its current practice of tracking ``potentially 
dangerous taxpayers.'' The Congress recognized the potential 
hazards connected with the assessment and collection of taxes, 
and this provision is not intended to jeopardize the safety of 
IRS employees. Accordingly, if the IRS needs to implement 
additional procedures, such as the maintenance of appropriate 
records, in connection with this provision so as to ensure IRS 
employees' safety, it has the authority to do so.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998), except that the removal of any designation from the 
master file is not required to begin before January 1, 1999.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

8. Provision of confidential information to Congress by whistleblowers 
        (sec. 3708 of the Act and sec. 6103(f) of the Code)

                         Present and Prior Law

    Tax return information generally may not be disclosed, 
except as specifically provided by statute. The Secretary of 
the Treasury may furnish tax return information to the Senate 
Committee on Finance, the House Committee on Ways and Means, 
and the Joint Committee on Taxation upon a written request from 
the chairmen of such committees. If the information can be 
associated with, or otherwise identify, directly or indirectly, 
a particular taxpayer, the information may be furnished to the 
committee only while sitting in closed executive session unless 
such taxpayer otherwise consents in writing to such disclosure.

                           Reasons for Change

    The Congress believed that it is appropriate to have the 
opportunity to receive tax return information directly from 
whistleblowers.

                        Explanation of Provision

    The Act provides that any person (i.e., a whistleblower) 
who otherwise has or had access to any return or return 
information under section 6103 may disclose such return or 
return information to the House Ways and Means Committee, the 
Senate Finance Committee, or the Joint Committee on Taxation or 
to any individual authorized by one of those committees to 
receive or inspect any return or return information if such 
person (the whistleblower) believes such return or return 
information may relate to evidence of possible misconduct, 
maladministration, or taxpayer abuse. Disclosure to one of 
these committees could be made either to the Chairman or to the 
full committee (sitting in closed executive session), but would 
not be permitted to be made to an individual Member of Congress 
(unless explicitly authorized as an agent). No inference is 
intended that such whistleblower disclosures were not permitted 
under prior law.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no revenue effect on 
Federal fiscal year budget receipts.

9. Listing of local IRS telephone numbers and addresses (sec. 3709 of 
        the Act)

                               Prior Law

    The IRS was not statutorily required to publish the local 
telephone number or address of its local offices.

                           Reasons for Change

    The Congress believed it could be helpful to taxpayers if 
the addresses and local phone numbers of local IRS offices were 
published in local telephone directories.

                        Explanation of Provision

    The Act requires the IRS, as soon as is practicable, to 
publish addresses and local telephone numbers of local IRS 
offices in a local telephone directory for that area. It is 
intended that (1) the IRS not be required to publish in more 
than one directory in any local area and (2) publication in 
alternate language directories is permissible.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

10. Identification of return preparers (sec. 3710 of the Act and sec. 
        6109 of the Code)

                               Prior Law

    Any return or claim for refund prepared by an income tax 
return preparer was required to bear the social security number 
of the return preparer, if such preparer is an individual.

                           Reasons for Change

    The Congress was concerned that inappropriate use might be 
made of a return preparer's social security number.

                        Explanation of Provision

    The Act authorizes the IRS to approve alternatives to 
social security numbers to identify tax return preparers.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

11. Offset of past-due, legally enforceable State income tax 
        obligations against overpayments (sec. 3711 of the Act and sec. 
        6402 of the Code)

                         Present and Prior 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. Prior law did not permit the offset of 
past-due, legally enforceable State income tax obligations 
against overpayments.

                           Reasons for Change

    The Congress believed it is appropriate to expand the 
offset program to encompass past-due, legally enforceable State 
income tax obligations.

                        Explanation of Provision

    The Act permits States to participate in the IRS refund 
offset program for specified past-due, legally enforceable 
State income tax debts, providing the person making the Federal 
tax overpayment has shown on the Federal return for the taxable 
year of the overpayment an address that is within the State 
seeking the tax offset. The offset applies after the offsets 
provided in present and prior law for internal revenue tax 
liabilities, past-due support, and past-due, legally 
enforceable obligations owed a Federal agency. The offset 
occurs before the designation of any refund toward future 
Federal tax liability. The provision permits the Secretary to 
prescribe additional conditions (pursuant to new section 
6402(e)(4)(D)) to ensure that the determination is valid that 
the State or local income tax liability is past-due and legally 
enforceable. This is intended to include consideration of 
questions that may arise as a result of the taxpayer being a 
Native American.

                             Effective Date

    The provision is effective with respect to Federal income 
tax refunds payable after December 31, 1999.

                             Revenue Effect

    The provision is estimated to have no revenue effect on 
Federal fiscal year budget receipts in 1998 and 1999, and to 
increase such receipts by $2 million in 2000, $3 million in 
each of the years 2001 through 2004, and $4 million in each of 
the years 2005 through 2007.

12. Reporting requirements relating to education tax credits (sec. 3712 
        of the Act and sec. 6050S of the Code)

                         Present and Prior Law

    Individual taxpayers are allowed to claim a nonrefundable 
HOPE credit against Federal income taxes up to $1,500 per 
eligible student per year of qualified tuition and related 
expenses for the first two years of the student's post-
secondary education in a degree program. A nonrefundable 
Lifetime Learning credit against Federal income taxes equal to 
20 percent of qualified expenses (up to a maximum credit of 
$1,000 per taxpayer return for 1998 through 2002 and $2,000 per 
taxpayer return after 2002) also is available with respect to 
students for whom a Hope credit is not claimed. Qualified 
tuition and related expenses do not include expenses covered by 
educational assistance that is not required to be included in 
the gross income of either the student or the taxpayer claiming 
the credit (e.g., scholarship or fellowship grants).
    Under present and prior law, Code section 6050S requires 
information reporting by eligible educational institutions 
which receive payments for qualified tuition and related 
expenses, and certain other persons who make reimbursement or 
refunds of qualified tuition and related expenses, in order to 
assist students, their parents, and the IRS in calculating the 
amount of the HOPE and Lifetime Learning credits potentially 
available. Under prior law, section 6050S(b) provided that the 
annual information report to the Secretary must be in the form 
prescribed by the Secretary and must contain the following: (1) 
the name, address, and taxpayer identification number (``TIN'') 
of the individual with respect to whom the qualified tuition 
and related expenses were received or the reimbursement or 
refund was paid; (2) the name, address, and TIN of any 
individual certified by the student as the taxpayer who will 
claim that student as a dependent for purposes of the deduction 
under section 151 for any taxable years ending with or within 
the year for which the information return is filed; (3) the 
aggregate amount of payments of qualified tuition and related 
expenses received by the eligible educational institution and 
the aggregate amount of reimbursements or refunds (or similar 
amounts) paid during the calendar year with respect to the 
student; and (4) such other information as the Secretary may 
prescribe. Under section 6050S(d), an eligible educational 
institution also must provide to each person identified on the 
information return submitted to the Secretary (e.g., the 
student and his or her parent(s)) a written statement showing 
the name, address, and phone number of the reporting person's 
information contact, and the amounts set forth in (3) above.
    On December 22, 1997, the Department of Treasury issued 
Notice 97-73 setting forth the information reporting 
requirements under section 6050S for 1998. Notice 97-73 
describes who must report information and the nature of the 
information that must be reported for 1998. In general, the 
required reporting under Notice 97-73 is more limited than that 
which ultimately will be required under section 6050S upon the 
issuance of final regulations. Accordingly, for 1998, 
educational institutions must report the following information: 
(1) the name, address, and TIN of the educational institution; 
(2) the name, address, and TIN of the student with respect to 
whom payments of qualified tuition and related expenses were 
received during 1998; (3) an indication as to whether the 
student was enrolled for at least half the full-time academic 
workload during any academic period commencing in 1998; and (4) 
an indication as to whether the student was enrolled 
exclusively in a program or programs leading to a graduate-
level degree, graduate-level certificate, or other recognized 
graduate-level educational credential. Educational institutions 
must provide the information listed above to students, as well 
as the phone number of the information contact at the school. 
Information returns must be provided to students by February 1, 
1999 and filed with the IRS by March 1, 1999. Notice 97-73 
states that until final regulations are adopted, no penalties 
will be imposed under sections 6721 and 6722 for failure to 
file correct information returns or to furnish correct 
statements to the individuals with respect to whom information 
reporting is required under section 6050S. In addition, Notice 
97-73 states that, even after final regulations are adopted, no 
penalties will be imposed under sections 6721 and 6722 for 1998 
if the institution made a good faith effort to file information 
returns and furnish statements in accordance with Notice 97-73. 
On August 20, 1998, the Department of Treasury issued Notice 
98-46 (I.R.B. 98-36, Sept. 8, 1998), which extended the 
application of Notice 97-73 to information reporting required 
under section 6050S for 1999.

                        Explanation of Provision

    The Act modifies the information reporting requirements 
under section 6050S. In addition to reporting the aggregate 
amount of payments for qualified tuition and related 
expensesreceived by the educational institution with respect to a 
student, the institution must report any grant amount received by the 
student and processed through the institution during the applicable 
calendar year. The institution is not required to report on grant aid 
that is paid directly to the student and is not processed through the 
institution. Furthermore, an educational institution is required to 
report only the aggregate amount of reimbursements or refunds paid to a 
student by the institution (and not by any other party). The Act also 
clarifies that the definition of ``qualified tuition and related 
expenses'' shall be as set forth in section 25A, determined without 
regard to section 25A(g)(2) (which requires adjustments for certain 
scholarships).
    Under the Act, eligible educational institutions that 
receive payments of qualified tuition and related expenses (or 
reimburse or refund such payments) are required separately to 
report the following items with respect to each student under 
section 6050S(b)(2)(C): (1) the aggregate amount of qualified 
tuition and related expenses (not including certain expenses 
relating to sports, games, or hobbies, or nonacademic fees); 
(2) any grant amount (whether or not excludable from income) 
received by such individual for payment of costs of attendance 
and processed through the institution during the applicable 
calendar year; and (3) the aggregate amount of reimbursements 
or refunds (or similar amounts) paid to such individual during 
the calendar year by the institution.
    The Congress understood that the Department of Treasury is 
in the process of issuing regulatory guidance with respect to 
the education credit reporting requirements. In developing such 
guidance, the Congress urged Treasury to minimize the reporting 
burdens imposed on educational institutions in connection with 
the HOPE Scholarship and Lifetime Learning credits. For 
example, section 472(1) of the Higher Education Act contains a 
definition of tuition and fees that is used in calculating a 
student's total ``cost of attendance.'' The Congress urged 
Treasury to conform the definition of ``qualified tuition and 
related expenses'' for purposes of the HOPE Scholarship and 
Lifetime Learning credits to the definition set forth in 
section 472(1) to the extent possible, so as to minimize the 
additional reporting burden on educational institutions.
    In general, the Congress expressed its expectation that the 
regulatory guidance regarding the education credit reporting 
requirements will have an effective date that will provide 
educational institutions with sufficient time, after any notice 
and comment period, to implement additional required reporting. 
In addition, although the provision generally applies to 
taxable years beginning after December 31, 1998, the Congress 
intended that no reporting beyond the reporting currently 
required in Notice 97-73 would be required of educational 
institutions until such final regulatory guidance is available.
    In furtherance of the objective of minimizing the reporting 
burden on educational institutions, the Congress noted that, 
pursuant to the regulatory authority granted in section 25A(i), 
Treasury may exempt educational institutions from the reporting 
requirements with respect to certain categories of students, 
such as non-degree students enrolled in a course for which 
academic credit is not granted by the institution, provided 
that such exemptions do not undermine the overall compliance 
objectives of the provision. The Congress further expressed its 
expectation that Treasury will provide clarification regarding 
the reasonable cause exception contained in section 6724(a) as 
it may apply to the education information reporting 
requirements. Finally, the Congress urged that any update and 
modernization of IRS computer systems incorporate the capacity 
to match a dependent's TIN with the return filed by the person 
claiming the individual as a dependent.

                             Effective Date

    The provision applies to returns required to be filed with 
respect to taxable years beginning after December 31, 1998.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.

                               I. Studies

1. Administration of penalties and interest (sec. 3801 of the Act)

                               Prior Law

    The last major comprehensive revision of the overall 
penalty structure in the Internal Revenue Code was the 
``Improved Penalty Administration and Compliance Tax Act,'' 
enacted as part of the Omnibus Budget Reconciliation Act of 
1989.

                           Reasons for Change

    The Congress believed that it is appropriate to undertake a 
study of penalty and interest administration, which will 
provide the Congress with legislative and administrative 
recommendations for improvement of the current penalty and 
interest structure.

                        Explanation of Provision

    The Act requires the Joint Committee on Taxation and the 
Treasury to each conduct a separate study reviewing the 
interest and penalty provisions of the Code, and making any 
legislative and administrative recommendations they deem 
appropriate to simplify penalty administration and reduce 
taxpayer burden. It is expected that the Joint Committee on 
Taxation and the Treasury Department studies will examine 
whether the current penalty and interest provisions encourage 
voluntary compliance. The studies should also consider whether 
the provisions operate fairly, whether they are effective 
deterrents to undesired behavior, and whether they are designed 
in a manner that promotes efficient and effective 
administration of the provisions by the IRS. It is expected 
that the Joint Committee on Taxation and the Treasury 
Department will consider comments from taxpayers and 
practitioners on issues relevant to the studies.

                             Effective Date

    The reports must be provided not later than one year after 
the date of enactment (by July 22, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

2. Confidentiality of tax return information (sec. 3802 of the Act)

                         Present and Prior Law

    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code. 
Unauthorized disclosure is a felony punishable by a fine not 
exceeding $5,000 or imprisonment of not more than five years, 
or both. An action for civil damages also may be brought for 
unauthorized disclosure. No tax information may be furnished by 
the IRS to another agency unless the other agency establishes 
procedures satisfactory to the IRS for safeguarding the tax 
information it receives.

                           Reasons for Change

    The Congress believed that a study of the confidentiality 
provisions would be useful in assisting the Congress in 
determining whether improvements can be made to these 
provisions.

                        Explanation of Provision

    The Act requires the Joint Committee on Taxation and 
Treasury to each conduct a separate study on provisions 
regarding taxpayer confidentiality. The studies are to examine:
          (1) present-law protections of taxpayer privacy;
          (2) the need, if any, for third parties to use tax 
        return information;
          (3) whether greater levels of voluntary compliance 
        can be achieved by allowing the public to know who is 
        legally required to file tax returns but does not do 
        so;
          (4) the interrelationship of the taxpayer 
        confidentiality provisions in the Internal Revenue Code 
        with those elsewhere in the United States Code (such as 
        the Freedom of Information Act);
          (5) the impact on taxpayer privacy of sharing tax 
        information for the purposes of enforcing State and 
        local tax laws (other than income tax laws); and
          (6) an examination of whether the public interest 
        would be served by greater disclosure of information 
        relating to tax-exempt organizations (described in 
        section 501 of the Code).

                             Effective Date

    The findings of the studies, along with any 
recommendations, are required to be reported to the Congress no 
later than 18 months after the date of enactment (by January 
22, 2000).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

3. Noncompliance with revenue laws by taxpayers (sec. 3803 of the Act)

                               Prior Law

    No provision of prior law required that a study of 
noncompliance with the internal revenue laws be conducted.

                           Reasons for Change

    The Congress believed it would be valuable to receive a 
study of noncompliance with the internal revenue laws.

                        Explanation of Provision

    The Act provides that the Secretary of the Treasury and the 
Commissioner of the Internal Revenue Service, in consultation 
with the Joint Committee on Taxation, must jointly conduct a 
study of noncompliance with the internal revenue laws by 
taxpayers (including willful noncompliance and noncompliance 
due to tax law complexity or other factors).

                             Effective Date

    The study must be reported to the Congress within one year 
of the date of enactment (by July 22, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

4. Payments for detection of underpayments and fraud (sec. 3804 of the 
        Act)

                         Present and Prior Law

    Rewards may be paid for information relating to civil 
violations, as well as criminal violations. The rewards are 
paid out of the proceeds of amounts (other than interest) 
collected by reason of the information provided. An annual 
report on the rewards program is required.

                           Reasons for Change

    The Congress believed that it would be valuable to receive 
a study of this provision.

                        Explanation of Provision

    The Act requires that a study and report be completed by 
the Treasury and submitted to the Congress (within one year of 
the date of enactment) of the reward program (including 
results) and any legislative or administrative recommendations 
regarding the program and its application.

                             Effective Date

    The study must be reported to the Congress within one year 
of the date of enactment (by July 22, 1999).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

           TITLE IV. CONGRESSIONAL ACCOUNTABILITY FOR THE IRS

 A. Review of Requests for GAO Investigations of the IRS (sec. 4001 of 
                 the Act and sec. 8021(e) of the Code)

                         Present and Prior Law

    Under prior law, there was no specific statutory 
requirement that requests for investigations by the General 
Accounting Office (``GAO'') relating to the IRS be reviewed by 
the Joint Committee on Taxation (the ``Joint Committee''). 
However, some of the studies that GAO conducts relating to 
taxation and oversight of the IRS require access under section 
6103 of the Code to confidential tax returns and return 
information. Under section 6103, the GAO may inform the Joint 
Committee of its initiation of an audit of the IRS and obtain 
access to confidential taxpayer information unless, within 30 
days, \3/5\ths of the Members of the Joint Committee disapprove 
of the audit. This provision has not been utilized; the GAO 
generally seeks advance access to confidential taxpayer return 
information from the Joint Committee.

                           Reasons for Change

    The Restructuring Commission recommended changes to the 
approval process for GAO reports based on its findings that the 
GAO conducts myriad audits of the IRS, many of which relate to 
lesser matters and which are not integrated into a 
constructive, focused package. The Congress believed that GAO 
audits and reports can be helpful as an oversight tool, but 
that they should be coordinated so as to ensure appropriate 
allocation of resources, both of the IRS and the GAO.

                        Explanation of Provision

    Under the provision, the Joint Committee on Taxation 
reviews all requests (other than requests by the chair or 
ranking member of a Committee or Subcommittee of the Congress) 
for investigations of the IRS by the GAO and approves such 
requests when appropriate. In reviewing such requests, the 
Joint Committee is to eliminate overlapping investigations, 
ensure that the GAO has the capacity to handle the 
investigation, and ensure that investigations focus on areas of 
primary importance to tax administration. The Congress intends 
that the provision exclude requests made by the chairman or 
ranking member of a committee or subcommittee, investigations 
required by statute, and work initiated by GAO under its basic 
statutory authorities.
    The provision does not change the rules under section 6103.

                             Effective Date

    The provision is effective with respect to requests for GAO 
investigations made after the date of enactment (after July 22, 
1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

B. Joint Congressional Reviews and Coordinated Oversight Reports (secs. 
    4001 and 4002 of the Act and secs. 8021(f) and 8022 of the Code)

                         Present and Prior Law

    Under the Congressional committee structure, a number of 
committees have jurisdiction with respect to IRS oversight. The 
committees most responsible for IRS oversight are the House 
Committees on Ways and Means, Appropriations, Government Reform 
and Oversight, the corresponding Senate Committees on Finance, 
Appropriations, and Government Affairs, and the Joint Committee 
on Taxation. While these Committees have a shared interest in 
IRS matters, they typically act independently, and have 
separate hearings and make separate investigations into IRS 
matters. Each committee also has jurisdiction over certain 
issues. For example, the House Ways and Means Committee and the 
Senate Finance Committee have exclusive jurisdiction over 
changes to the tax laws. Similarly, the House and Senate 
Appropriations Committees have exclusive jurisdiction over IRS 
annual appropriations. The Joint Committee on Taxation does not 
have legislative jurisdiction, but has significant 
responsibilities with respect to tax matters and IRS oversight.

                           Reasons for Change

    The Restructuring Commission found that the Congressional 
committees responsible for IRS oversight ``focus on different 
issues that change from year to year. While these issues are 
important, there is a lack of coordinated focus on high level 
and strategic matters. Because the IRS tries to satisfy 
requests from Congress, this nonintegrated approach to 
oversight further blurs the ability to set strategic direction 
and focus on priorities.''
    The Congress believed that Congressional oversight of the 
IRS should be more coordinated, and should include long-term 
objectives.

                        Explanation of Provision

    Under the provision, there will be one annual joint review 
of: (1) the progress of the IRS in meeting its objectives under 
the strategic and business plans; (2) the progress of the IRS 
in improving taxpayer service and compliance; (3) the progress 
of the IRS on technology modernization; and (4) the annual 
filing season. The review is conducted by two majority and one 
minority members of each of the Senate Committees on Finance, 
Appropriations, and Government Affairs and the House Committees 
on Ways and Means, Appropriations, and Government Reform and 
Oversight. The joint review will be held at the call of the 
Chairman of the Joint Committee on Taxation, and is to take 
place before June 1 of each calendar year. The provision does 
not modify the existing jurisdiction of the Committees involved 
in the joint review.
    The provision provides that the Joint Committee on Taxation 
is to make a report once in each Congress to the Committee on 
Finance and the Committee on Ways and Means on the overall 
state of the Federal tax system, together with recommendations 
with respect to possible simplification proposals and other 
matters relating to the administration of the Federal tax 
system as it may deem advisable. This report shall be prepared 
only if amounts necessary to carry out this requirement are 
specifically appropriated to the Joint Committee on Taxation. 
The Joint Committee on Taxation also is to report annually to 
the Senate Committees on Finance, Appropriations, and 
Government Affairs and the House Committees on Ways and Means, 
Appropriations, and Government Reform and Oversight with 
respect to the matters that are the subject of the joint 
reviews by members of such Committees.

                             Effective Date

    The provision generally is effective on the date of 
enactment (July 22, 1998), except that the requirement for an 
annual joint review, and report by the Joint Committee on 
Taxation, applies only for calendar years 1999-2003.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

       C. Funding for Century Date Change (sec. 4011 of the Act)

                              Present Law

    No specific provision.

                           Reasons for Change

    Operations of the IRS computer systems are critical to the 
viability of the Federal tax system. The Congress believed that 
adequate funding of efforts to resolve this problem is 
essential.

                        Explanation of Provision

    The provision provides that it is the sense of the Congress 
that the IRS should place resolving the century date change 
computing problems as a high priority, and that the IRS efforts 
to resolve the century date change computing problems should be 
fully funded to provide for certain resolution of such 
problems.

                             Effective Date

    The provision is effective on the date of enactment (July 
22, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

      D. Tax Law Complexity Analysis (secs. 4021-4022 of the Act)

                              Present Law

    Present law does not require a formal complexity analysis 
with respect to changes to the tax laws.

                           Reasons for Change

    The National Commission on Restructuring the IRS found a 
clear connection between the complexity of the Internal Revenue 
Code and the difficulty of tax law administration and taxpayer 
frustration. The Committee shares the concern that complexity 
is a serious problem with the Federal tax system. Complexity 
and frequent changes in the tax laws create burdens for both 
the IRS and taxpayers. Failure to address complexity may 
ultimately reduce voluntary compliance.
    The Congress was aware that it may not be possible or 
desirable to eliminate all complexity in the tax system. There 
are many objectives of a tax system and particular tax 
provisions, and simplicity is only one. In some cases other 
policies, such as fairness, may outweigh concerns about 
complexity. Nevertheless, the Congress believed complexity of 
the tax system should be reduced whenever possible. 
Accordingly, the Congress believed it appropriate to introduce 
new procedural rules that will focus attention on complexity.
    The Congress also believed that the tax-writing committees 
should receive periodic input from the IRS regarding areas of 
the law that cause problems for taxpayers. This input will be 
valuable in developing future legislation.

                        Explanation of Provision

Role of the IRS

    The provision provides that it is the sense of the Congress 
that the IRS should provide the Congress with an independent 
view of tax administration and that the tax-writing committees 
should hear from front-line technical experts at the IRS during 
the legislative process with respect to the administrability of 
pending amendments to the Internal Revenue Code.
    The IRS Commissioner is to report to the House Ways and 
Means Committee and the Senate Finance Committee annually not 
later than March 1 of each year, regarding sources of 
complexity in the administration of the Federal tax laws. 
Factors the IRS may take into account include: (1) frequently 
asked questions by taxpayers; (2) common errors made by 
taxpayers in filling out returns; (3) areas of the law that 
frequently result in disagreements between taxpayers and the 
IRS; (4) major areas in which there is no or incomplete 
published guidance or in which the law is uncertain; (5) areas 
in which revenue agents make frequent errors in interpreting or 
applying the law; (6) impact of recent legislation on 
complexity; (7) information regarding forms, including a 
listing of IRS forms, the time it takes for taxpayers to 
complete and review forms, the number of taxpayers who use each 
form, and how the time required changed as a result of recently 
enacted legislation; and (8) recommendations for reducing 
complexity in the administration of the Federal tax system.

Complexity analysis with respect to current legislation

    The provision requires the Joint Committee on Taxation (in 
consultation with the IRS and Treasury) to provide an analysis 
of complexity or administrability concerns raised by tax 
provisions of widespread applicability to individuals or small 
businesses. The analysis is to be included in any Committee 
Report of the House Ways and Means Committee or Senate Finance 
Committee or Conference Report containing tax provisions, or 
provided to the Members of the relevant Committee or Committees 
as soon as practicable after the report is filed. The analysis 
is to include: (1) an estimate of the number and type of 
taxpayers affected; and (2) if applicable, the income level of 
affected individual taxpayers. In addition, such analysis 
should include, if determinable, the following: (1) the extent 
to which existing tax forms would require revision and whether 
a new form or forms would be required; (2) whether and to what 
extent taxpayers would be required to keep additional records; 
(3) the estimated cost to taxpayers to comply with the 
provision; (4) the extent to which enactment of the provision 
would require the IRS to develop or modify regulatory guidance; 
(5) whether and to what extent the provision can be expected to 
lead to disputes between taxpayers and the IRS; and (6) how the 
IRS can be expected to respond to the provision (including the 
impact on internal training, whether the Internal Revenue 
Manual would require revision, whether the change would require 
reprogramming of computers, and the extent to which the IRS 
would be required to divert or redirect resources in response 
to the provision).
    The provision provides that a point of order arises in the 
House of Representatives with respect to the floor 
consideration of a bill or conference report if the required 
complexity analysis has not been completed. The point of order 
may be waived by a majority vote. The point of order is subject 
to the Constitutional right of each House of the Congress to 
establish its own rules and procedures; thus, such point of 
order may be changed at any time pursuant to the procedures of 
the House of Representatives. The Congress intended that the 
complexity analysis be prepared by the staff of the Joint 
Committee on Taxation, and that it shall, to the extent 
feasible, be included in committee or conference committee 
reports.

                             Effective Date

    The provisions are effective for calendar years after 1998.

                             Revenue Effect

    The provisions are estimated to have no effect on Federal 
fiscal year budget receipts.

                     TITLE V. ADDITIONAL PROVISIONS

A. Elimination of 18-Month Holding Period for Capital Gains (sec. 5001 
                 of the Act and sec. 1(h) of the Code)

                               Prior Law

    The Taxpayer Relief Act of 1997 Act (``the 1997 Act'') 
provided lower capital gains rates for individuals. Generally, 
the 1997 Act reduced the maximum rate on the adjusted net 
capital gain of an individual from 28 percent to 20 percent and 
provided a 10-percent rate for the adjusted net capital gain 
otherwise taxed at a 15-percent rate. The ``adjusted net 
capital gain'' is the net capital gain determined without 
regard to certain gain for which the 1997 Act provided a higher 
maximum rate of tax. The 1997 Act retained the prior-law 28-
percent maximum rate for net long-term capital gain 
attributable to the sale or exchange of collectibles, certain 
small business stock to the extent the gain is included in 
income, and property held more than one year but not more than 
18 months. In addition, the 1997 Act provided a maximum rate of 
25 percent for the long-term capital gain attributable to 
depreciation from real estate held more than 18 months. 
Beginning in 2001, lower rates of 8 and 18 percent will apply 
to the gain from certain property held more than five years.

                        Explanation of Provision

    Under the Act, capital gain from the sale of property held 
more than one year (rather than more than 18 months) will be 
eligible for the 10-, 20-, and 25-percent capital gain rates 
provided by the 1997 Act.

                             Effective Date

    The provision applies to capital gains from the sale of 
property held more than one year which are properly taken into 
account on or after January 1, 1998. This generally has the 
effect of applying the lower capital gain rates to property 
sold or exchanged (or installment payments received) after 
1997.
    Generally, in the case of a pass-thru entity, such as a 
partnership or S corporation, capital gains properly taken into 
account by the entity on or after January 1, 1998, will qualify 
for the lower capital gain rates. In the case of a RIC or REIT, 
capital gain dividends made on or after January 1, 1998, will 
qualify for the lower capital gain rates, except for capital 
gains properly taken into account by the RIC or REIT before 
January 1, 1998, by reason of holding an interest in certain 
other pass-thru entities.<SUP>63</SUP> The lower capital gain 
rates will apply to capital gain distributions made by 
charitable remainder trusts on or after January 1, 
1998.<SUP>64</SUP>
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    \63\ The application of this provision to shareholders of RICs and 
REITs reflects the technical correction enacted by section 4002(i)(2) 
of the Tax and Trade Relief Extension Act of 1998, which is described 
in Part Three of this publication.
    \64\ The application of this provision to beneficiaries of 
charitable remainder trusts reflects the technical correction enacted 
by section 4002(i)(3) of the Tax and Trade Relief Extension Act of 
1998, which is described in Part Three of this publication.
---------------------------------------------------------------------------

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $35 million in 1998 and $611 million in 1999 
and to reduce Federal fiscal year budget receipts by $312 
million in 2000, $335 million in 2001, $335 million in 2002, 
$337 million in 2003, $341 million in 2004, $347 million in 
2005, $354 million in 2006 and $362 million in 2007.

B. Deductibility of Meals Provided for the Convenience of the Employer 
            (sec. 5002 of the Act and sec. 119 of the Code)

                         Present and Prior Law

    In general, subject to several exceptions, only 50 percent 
of business meals and entertainment expenses are allowed as a 
deduction (sec. 274(n)). Under one exception, meals that are 
excludable from employees' incomes as a de minimis fringe 
benefit (sec. 132) are fully deductible by the employer.
    In addition, under prior law, the courts that considered 
the issue held that if substantially all of the meals are 
provided for the convenience of the employer pursuant to 
section 119, the cost of such meals is fully deductible because 
the employer is treated as operating a de minimis eating 
facility within the meaning of section 132(e)(2) (Boyd Gaming 
Corp. v. Commissioner <SUP>65</SUP> and Gold Coast Hotel & 
Casino v. I.R.S.<SUP>66</SUP>).
---------------------------------------------------------------------------
    \65\ 106 T.C. No. 19 (May 23, 1996).
    \66\ U.S. D. C. Nev. CV-5-94-1146-HDM(LRL) (September 26, 1996).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed it was appropriate to modify the 
applicability of these rules.

                        Explanation of Provision

    The Act provides that all meals furnished to employees at a 
place of business for the convenience of the employer are 
treated as provided for the convenience of the employer under 
section 119 if more than one-half of employees to whom such 
meals are furnished on the premises are furnished such meals 
for the convenience of the employer under section 119. If these 
conditions are satisfied, the value of all such meals is 
excludable from the employee's income and fully deductible to 
the employer. No inference is intended as to whether such meals 
are fully deductible under prior law.

                             Effective Date

    The provision is effective for taxable years beginning 
before, on, or after the date of enactment (July 22, 1998).

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $20 million in 1999, $33 million in 2000, 
$34 million in 2001, $35 million in 2002, $36 million in 2003, 
$38 million in 2004, $39 million in 2005, $40 million in 2006, 
and $41 million in 2007.

                  TITLE VI. TAX TECHNICAL CORRECTIONS

        TECHNICAL CORRECTIONS TO THE TAXPAYER RELIEF ACT OF 1997

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

1. Stacking rules for the child credit under the limitations based on 
        tax liability (sec. 6003(a) of the 1998 IRS Restructuring Act, 
        sec. 101(a) of the 1997 Act, and sec. 24 of the Code)

                         Present and Prior Law

    Present law provides a $500 ($400 for taxable year 1998) 
tax credit for each qualifying child under the age of 17. A 
qualifying child is defined as an individual for whom the 
taxpayer can claim a dependency exemption and who is a son or 
daughter of the taxpayer (or a descendent of either), a stepson 
or stepdaughter of the taxpayer or an eligible foster child of 
the taxpayer. For taxpayers with modified adjusted gross income 
in excess of certain thresholds, the allowable child credit is 
phased out. The length of the phase-out range is affected by 
the number of the taxpayer's qualifying children.
    Generally, the maximum amount of a taxpayer's child credit 
for each taxable year is limited to the excess of the 
taxpayer's regular tax liability over the taxpayer's tentative 
minimum tax liability (determined without regard to the 
alternative minimum foreign tax credit). In the case of a 
taxpayer with three or more qualifying children, the maximum 
amount of the taxpayer's child credit for each taxable year is 
limited to the greater of: (1) the amount computed under the 
rule described above, or (2) an amount equal to the excess of 
the sum of the taxpayer's regular income tax liability and the 
employee share of FICA taxes (and one-half of the taxpayer's 
SECA tax liability, if applicable) reduced by the earned income 
credit. In the case of a taxpayer with three or more qualifying 
children, the excess of the amount allowed in (2) over the 
amount computed in (1) is a refundable credit.
    Nonrefundable credits may not be used to reduce tax 
liability below a taxpayer's tentative minimum tax. Certain 
credits not used as result of this rule may be carried over to 
other taxable years, while others may not. Special stacking 
rules apply in determining which nonrefundable credits are used 
in the current year. Generally, the stacking rules require that 
nonrefundable personal credits be considered first, 
<SUP>67</SUP> followed by other credits, business credits, and 
the investment tax credit. Under prior law, refundable credits, 
which are not limited by the minimum tax, were not stacked 
until after the nonrefundable credits.
---------------------------------------------------------------------------
    \67\ It is understood that there is also a stacking rule under 
which the income tax liability limitation applies between the 
nonrefundable personal credits, including the nonrefundable portion of 
the child credit. Generally, the nonrefundable portion of the child 
credit and the other nonrefundable personal credits which do not 
provide a carryforward are grouped together and stacked first followed 
by the nonrefundable personal credits which provide a carryforward for 
purposes of applying the income tax liability limitation. Therefore, if 
the sum of the taxpayer's nonrefundable credits exceeds the difference 
between the taxpayer's regular income tax liability and the taxpayer's 
tentative minimum tax (determined without regard to the alternative 
minimum foreign tax credit) then the nonrefundable personal credits 
which do not provide a carryforward would be applied to reduce the 
income tax liability for that year first and any excess credits which 
allow a carryforward would be available to reduce the taxpayer's income 
tax liability in future years.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision clarifies the application of the income tax 
liability limitation to the refundable portion of the child 
credit by treating the refundable portion of the child credit 
in the same way as the other refundable credits. Specifically, 
after all the other credits are applied according to the 
stacking rules of the income tax limitation then the refundable 
credits are applied first to reduce the taxpayer's tax 
liability for the year and then to provide a credit in excess 
of income tax liability for the year.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.
2. Treatment of a portion of the child credit as a supplemental child 
        credit (sec. 6003(b) of the 1998 IRS Restructuring Act, sec. 
        101(b) of the 1997 Act, and sec. 32(n) of the Code)

                         Present and Prior Law

    A portion of the child credit may be treated as a 
supplemental child credit. The supplemental child credit is 
treated as provided under the earned income credit and the 
child credit amount is reduced by the amount of the 
supplemental child credit.

                        Explanation of Provision

    The provision clarifies that the treatment of a portion of 
the child credit as a supplemental child credit under the 
earned income credit (sec. 32) and the offsetting reduction of 
the child credit (sec. 24) does not affect the total tax 
credits allowed to the taxpayer or any other tax credit 
available to the taxpayer. Rather, it simply reduces the 
otherwise allowable nonrefundable child credit dollar-for-
dollar by the amount treated as a supplemental child credit. 
The provision also clarifies that the amount of the 
supplemental child credit under section 32(n) is the lesser of 
(1) the amount by which the taxpayer's total nonrefundable 
personal credits (as limited by the tax liability limitation of 
section 26(a)) are increased by reason of the child credit, or 
(2) the ``negative'' tax liability of the taxpayer, defined as 
the excess of taxpayer's total tax credits,including the earned 
income credit over the sum of the taxpayer's regular income taxes and 
social security taxes. For purposes of this calculation, subsection 
32(n) is not taken into account. The provision also clarifies that the 
earned income credit rules (e.g., the phaseout of the earned income 
credit) generally do not apply to the supplemental child credit.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

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

1. Clarifications to HOPE and Lifetime Learning tax credits (sec. 
        6004(a) of the 1998 IRS Restructuring Act, sec. 201 of the 1997 
        Act, and secs. 25A and 6050S of the Code)

                         Present and Prior Law

    Individual taxpayers are allowed to claim a nonrefundable 
HOPE credit against Federal income taxes up to $1,500 per 
student for qualified tuition and fees paid during the year on 
behalf of a student (i.e., the taxpayer, the taxpayer's spouse, 
or a dependent of the taxpayer) who is enrolled in a post-
secondary degree or certificate program at an eligible post-
secondary institution on at least a half-time basis. The HOPE 
credit is available only for the first two years of a student's 
post-secondary education. The credit rate is 100 percent of the 
first $1,000 of qualified tuition and fees and 50 percent on 
the next $1,000 of qualified tuition and fees. The HOPE credit 
amount that a taxpayer may otherwise claim is phased out for 
taxpayers with modified adjusted gross income (AGI) between 
$40,000 and $50,000 ($80,000 and $100,000 for joint returns). 
For taxable years beginning after 2001, the $1,500 maximum HOPE 
credit amount and the AGI phase-out range will be indexed for 
inflation. The HOPE credit is available for expenses paid after 
December 31, 1997, for education furnished in academic periods 
beginning after such date.
    If a student is not eligible for the HOPE credit (or in 
lieu of claiming a HOPE credit with respect to a student), 
individual taxpayers are allowed to claim a nonrefundable 
Lifetime Learning credit against Federal income taxes equal to 
20 percent of qualified tuition and fees paid during the 
taxable year on behalf of the taxpayer, the taxpayer's spouse, 
or a dependent. In contrast to the HOPE credit, the student 
need not be enrolled on at least a half-time basis in order to 
be eligible for the Lifetime Learning credit, which is 
available for an unlimited number of years of post-secondary 
training. For expenses paid before January 1, 2003, up to 
$5,000 of qualified tuition and fees per taxpayer return will 
be eligible for the Lifetime Learning credit (i.e., the maximum 
credit per taxpayer return will be $1,000). For expenses paid 
after December 31, 2002, up to $10,000 of qualified tuition and 
fees per taxpayer return will be eligible for the Lifetime 
Learning credit (i.e., the maximum credit per taxpayer return 
will be $2,000). The Lifetime Learning credit amount that a 
taxpayer may otherwise claim is phased out over the same 
modified AGI phase-out range as applies for purposes of the 
HOPE credit. The Lifetime Learning credit is available for 
expenses paid after June 30, 1998, for education furnished in 
academic periods beginning after such date.
    Under prior law, Section 6050S provided that certain 
educational institutions and other taxpayers engaged in a trade 
or business must file information returns with the IRS and 
certain individual taxpayers, as required by regulations 
prescribed by the Secretary of the Treasury, containing 
information on individuals who made payments for qualified 
tuition and related expenses or to whom reimbursements or 
refunds were made of such expenses.

                        Explanation of Provision

    The provision clarifies that, under section 6050S, 
information returns containing information with respect to 
qualified tuition and fees must be filed by a person that is 
not an eligible educational institution only if such person is 
engaged in a trade or business of making payments to any 
individual under an insurance arrangement as reimbursements or 
refunds (or similar payments) of qualified tuition and related 
expenses. As under prior law, section 6050S continues to 
require the filing of information returns by persons engaged in 
a trade or business if, in the course of such trade or 
business, the person receives from any individual interest 
aggregating $600 or more for any calendar year on one or more 
qualified education loans.

                             Effective Date

    The provision is effective as if included in the 1997 Act, 
i.e., for expenses paid after December 31, 1997, for education 
furnished in academic periods beginning after such date.

2. Deduction for student loan interest (sec. 6004(b) of the 1998 IRS 
        Restructuring Act, sec. 202 of the 1997 Act, and sec. 221 of 
        the Code)

                         Present and Prior Law

    Certain individuals who have paid interest on qualified 
education loans may claim an above-the-line deduction for such 
interest expenses, up to a maximum deduction of $2,500 per 
year. The deduction is allowed only with respect to interest 
paid on a qualified education loan during the first 60 months 
in which interest payments are required. In this regard, 
required payments of interest do not include nonmandatory 
payments, such as interest payments made during a period of 
loan forbearance. Months during which the qualified education 
loan is in deferral or forbearance do not count against the 60-
month period. No deduction is allowed to an individual if that 
individual is claimed as a dependent on another taxpayer's 
return for the taxable year.
    A qualified education loan generally is defined as any 
indebtedness incurred to pay for the qualified higher education 
expenses of the taxpayer, the taxpayer's spouse, or any 
dependent of the taxpayer as of the time the indebtedness was 
incurred in attending (1) post-secondary educational 
institutions and certain vocational schools defined by 
reference to section 481 of the Higher Education Act of 1965, 
or (2) institutions conducting internship or residency programs 
leading to a degree or certificate from an institution of 
higher education, a hospital, or a health care facility 
conducting postgraduate training.

                        Explanation of Provision

    The provision clarifies that the student loan interest 
deduction may be claimed only by a taxpayer who is legally 
obligated to make the interest payments pursuant to the terms 
of the loan.
    The provision clarifies that a ``qualified education loan'' 
means any indebtedness incurred solely to pay qualified higher 
education expenses. Thus, revolving lines of credit generally 
do not constitute qualified education loans unless the borrower 
agreed to use the line of credit to pay only qualifying 
education expenses. The provision further provides Treasury 
with authority to issue regulations regarding the calculation 
of the 60-month period in the case of consolidated loans, 
collapsed loans, and loans made before the date of enactment of 
the Taxpayer Relief Act of 1997 (August 5, 1997) for purposes 
of determining the deductibility of interest paid on such 
loans. In this regard, it is expected that such regulations 
will mirror the guidance contained in Notice 98-7 issued 
regarding the establishment of the 60-month period with respect 
to such loans for reporting purposes.

                             Effective Date

    The provision is effective for interest payments due and 
paid after December 31, 1997, on any qualified education loan.

3. Qualified State tuition programs (sec. 6004(c) of the 1998 IRS 
        Restructuring Act, sec. 211 of the 1997 Act, and sec. 529 of 
        the Code)

                         Present and Prior Law

    Section 529 provides tax-exempt status to ``qualified State 
tuition programs,'' meaning certain programs established and 
maintained by a State (or agency or instrumentality thereof) 
under which persons may (1) purchase tuition credits or 
certificates on behalf of a designated beneficiary that entitle 
the beneficiary to a waiver or payment of qualified higher 
education expenses of the beneficiary, or (2) make 
contributions to an account that is established for the purpose 
of meeting qualified higher education expenses of the 
designated beneficiary of the account. The term ``qualified 
higher education expenses'' means expenses for tuition, fees, 
books, supplies, and equipment required for the enrollment or 
attendance at an eligible post-secondary educational 
institution, as well as room and board expenses (meaning the 
minimum room and board allowance applicable to the student as 
determined by the institution in calculating costs of 
attendance for Federal financial aid programs under sec. 472 of 
the Higher Education Act of 1965) for any period during which 
the student is at least a half-time student.
    Section 529 also provides that no amount shall be included 
in the gross income of a contributor to, or beneficiary of, a 
qualified State tuition program with respect to any 
distribution from, or earnings under, such program, except that 
(1) amounts distributed or educational benefits provided to a 
beneficiary (e.g., when the beneficiary attends college) will 
be included in the beneficiary's gross income (unless 
excludable under another Code section) to the extent such 
amounts or the value of the educational benefits exceed 
contributions made on behalf of the beneficiary, and (2) 
amounts distributed to a contributor or another distributee 
(e.g., when a parent receives a refund) will be included in the 
contributor's/distributee's gross income to the extent such 
amounts exceed contributions made on behalf of the beneficiary. 
Earnings on an account may be refunded to a contributor or 
beneficiary, but the State or instrumentality must impose a 
more than de minimis monetary penalty unless the refund is (1) 
used for qualified higher education expenses of the 
beneficiary, (2) made on account of the death or disability of 
the beneficiary, or (3) made on account of a scholarship 
received by the designated beneficiary to the extent the amount 
refunded does not exceed the amount of the scholarship used for 
higher education expenses.
    A transfer of credits (or other amounts) from one account 
benefiting one designated beneficiary to another account 
benefiting a different beneficiary will be considered a 
distribution (as will a change in the designated beneficiary of 
an interest in a qualified State tuition program), unless the 
beneficiaries are members of the same family. For this purpose, 
the term ``member of the family'' means persons described in 
paragraphs (1) through (8) of section 152(a)--e.g., sons, 
daughters, brothers, sisters, nephews and nieces, certain in-
laws, etc--and any spouse of such persons.

                        Explanation of Provision

    The provision clarifies that, under rules contained in 
section 72, distributions from qualified State tuition programs 
are treated as representing a pro-rata share of the principal 
(i.e., contributions) and accumulated earnings in the account.
    In addition, the provision modifies section 529(e)(2) to 
clarify that--for purposes of tax-free rollovers and changes of 
designated beneficiaries--a ``member of the family'' includes 
the spouse of the original beneficiary.

                             Effective Date

    The provisions are effective for distributions made after 
December 31, 1997.

4. Education IRAs (sec. 6004(d) of the 1998 IRS Restructuring Act, sec. 
        213 of the 1997 Act, and sec. 530 of the Code)

                         Present and Prior Law

    Section 530 provides that taxpayers may establish 
``education IRAs,'' meaning certain trusts or custodial 
accounts created exclusively for the purpose of paying 
qualified higher education expenses of a named beneficiary. 
Annual contributions to education IRAs may not exceed $500 per 
designated beneficiary, and may not be made after the 
designated beneficiary reaches age 18. Contributions to an 
education IRA may not be made by certain high-income 
taxpayers--i.e., the contribution limit is phased out for 
taxpayers with modified adjusted gross income between $95,000 
and $110,000 ($150,000 and $160,000 for taxpayers filing joint 
returns). No contribution may be made to an education IRA 
during any year in which any contributions are made by anyone 
to a qualified State tuition program on behalf of the same 
beneficiary.
    Until a distribution is made from an education IRA, 
earnings on contributions to the account generally are not 
subject to tax.<SUP>68</SUP> In addition, distributions from an 
education IRA are excludable from gross income to the extent 
that the distribution does not exceed qualified higher 
education expenses incurred by the beneficiary during the year 
the distribution is made (provided that a HOPE credit or 
Lifetime Learning credit is not claimed with respect to the 
beneficiary for the same taxable year). The earnings portion of 
an education IRA distribution not used to pay qualified higher 
education expenses is includible in the gross income of the 
distributee and generally is subject to an additional 10-
percent tax.<SUP>69</SUP> However, the additional 10-percent 
tax does not apply if a distribution is made of excess 
contributions above the $500 limit (and any earnings 
attributable to such excess contributions) if the distribution 
is made on or before the date that a return is required to be 
filed (including extensions of time) by the contributor for the 
year in which the excess contribution was made. In addition, 
section 530 allows tax-free rollovers of account balances from 
an education IRA benefiting one family member to an education 
IRA benefiting another family member. Section 530 is effective 
for taxable years beginning after December 31, 1997.
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    \68\ However, education IRAs are subject to the unrelated business 
income tax (``UBIT'') imposed by section 511.
    \69\ This 10-percent additional tax does not apply if a 
distribution from an education IRA is made on account of the death, 
disability, or scholarship received by the designated beneficiary.
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                        Explanation of Provision

    Consistent with the legislative history to the 1997 Act, 
the provision provides that any balance remaining in an 
education IRA is deemed to be distributed within 30 days after 
the date that the designated beneficiary reaches age 30 (or, if 
earlier, within 30 days of the date that the beneficiary dies). 
The provision further clarifies that, in the event of the death 
of the designated beneficiary, the balance remaining in an 
education IRA may be distributed (without imposition of the 
additional 10-percent tax) to any other (i.e., contingent) 
beneficiary or to the estate of the deceased designated 
beneficiary. If any member of the family of the deceased 
beneficiary becomes the new designated beneficiary of an 
education IRA, then no tax is imposed on such redesignation and 
the account will continue to be treated as an education IRA.
    The provision clarifies that for purposes of the special 
rules regarding tax-free rollovers and changes of designated 
beneficiaries, the new beneficiary must be under the age of 30.
    Under the provision, the additional 10-percent tax provided 
for by section 530(d)(4) does not apply to a distribution from 
an education IRA, which (although used to pay for qualified 
higher education expenses) is includible in the beneficiary's 
gross income solely because the taxpayer elects to claim a HOPE 
or Lifetime Learning credit with respect to the beneficiary. 
The provision further provides that the additional 10-percent 
tax does not apply to the distribution of any contribution to 
an education IRA made during a taxable year if such 
distribution is made on or before the date that a return is 
required to be filed (including extensions of time) by the 
beneficiary for the taxable year during which the contribution 
was made (or, if the beneficiary is not required to file such a 
return, April 15th of the year following the taxable year 
during which the contribution was made). In addition, the 
provision amends section 4973(e) to provide that the excise tax 
penalty applies under that section for each year that an excess 
contribution remains in an education IRA (and not merely the 
year that the excess contribution is made).
    The provision clarifies that, in order for taxpayers to 
establish an education IRA, the designated beneficiary must be 
a life-in-being. The provision also clarifies that, under rules 
contained in present-law section 72, distributions from 
education IRAs are treated as representing a pro-rata share of 
the principal (i.e., contributions) and accumulated earnings in 
the account.<SUP>70</SUP>
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    \70\ For example, if an education IRA has a total balance of 
$10,000, of which $4,000 represents principal (i.e., contributions) and 
$6,000 represents earnings, and if a distribution of $2,000 is made 
from such an account, then $800 of that distribution will be treated as 
a return of principal (which under no event is includible in the gross 
income of the distributee) and $1,200 of the distribution will be 
treated as accumulated earnings. In such a case, if qualified higher 
education expenses of the beneficiary during the year of the 
distribution are at least equal to the $2,000 total amount of the 
distribution (i.e., principal plus earnings), then the entire earnings 
portion of the distribution will be excludible under section 530, 
provided that a Hope credit or Lifetime Learning credit is not claimed 
for that same taxable year on behalf of the beneficiary. If, however, 
the qualified higher education expenses of the beneficiary for the 
taxable year are less than the total amount of the distribution, then 
only a portion of the earnings will be excludable from gross income 
under section 530. Thus, in the example discussed above, if the 
beneficiary incurs only $1,500 of qualified higher education expenses 
in the year that a $2,000 distribution is made, then only $900 of the 
earnings will be excludable from gross income under section 530 (i.e., 
an exclusion will be provided for the pro-rata portion of the earnings, 
based on the ratio that the $1,500 of qualified higher education 
expenses bears to the $2,000 distribution) and the remaining $300 of 
the earnings portion of the distribution will be includible in the 
distributee's gross income.
---------------------------------------------------------------------------
    The provision also provides that, if any qualified higher 
education expenses are taken into account in determining the 
amount of the exclusion under section 530 for a distribution 
from an education IRA, then no deduction (under section 162 or 
any other section), or exclusion (under section 135) or credit 
is allowed under the Internal Revenue Code with respect to such 
qualified higher education expenses.
    In addition, because the 1997 Act allows taxpayers to 
redeem U.S. Savings Bonds and be eligible for the exclusion 
under present-law section 135 (as if the proceeds were used to 
pay qualified higher education expenses) provided the proceeds 
from the redemption are contributed to an education IRA (or to 
a qualified State tuition program defined under section 529) on 
behalf of the taxpayer, the taxpayer's spouse, or a dependent, 
the provision conforms the definition of ``eligible educational 
institution'' under section 135 to the broader definition of 
that term under present-law section 530 (and section 529). 
Thus, for purposes of section 135, as under present-law 
sections 529 and 530, the term ``eligible educational 
institution'' is defined as an institution which (1) is 
described in section 481 of the Higher Education Act of 1965 
(20 U.S.C. 1088) and (2) is eligible to participate in 
Department of Education student aid programs.

                             Effective Date

    The provisions are effective as if included in the 1997 
Act, i.e., for taxable years beginning after December 31, 1997.

5. Enhanced deduction for corporate contributions of computer 
        technology and equipment (sec. 6004(e) of the 1998 IRS 
        Restructuring Act, sec. 224 of the 1997 Act, and sec. 170(e)(6) 
        of the Code)

                         Present and Prior Law

    In computing taxable income, a taxpayer who itemizes 
deductions generally is allowed to deduct the fair market value 
of property contributed to a charitable organization. However, 
in the case of a charitable contribution of inventory or other 
ordinary-income property, short-term capital gain property, or 
certain gifts to private foundations, the amount of the 
deduction is limited to the taxpayer's basis in the property. 
In the case of a charitable contribution of tangible personal 
property, a taxpayer's deduction is limited to the adjusted 
basis in such property if the use by the recipient charitable 
organization is unrelated to the organization's tax-exempt 
purpose.
    The Taxpayer Relief Act of 1997 provided that certain 
contributions of computer and other equipment to eligible 
donees to be used for the benefit of elementary and secondary 
school children qualify for an augmented deduction. Under this 
special rule, the amount of the augmented deduction available 
to a corporation making a qualified contribution generally is 
equal to its basis in the donated property plus one-half of the 
amount of ordinary income that would have been realized if the 
property had been sold. However, the augmented deduction cannot 
exceed twice the basis of the donated property. To qualify for 
the augmented deduction, the contribution must satisfy various 
requirements.
    The legislative history of the provision states that the 
special tax treatment for contributions of computer and other 
equipment was to be effective for contributions made during a 
three-year period in taxable years beginning after December 31, 
1997, and before January 1, 2001.<SUP>71</SUP> However, as a 
result of a drafting error, the statutory provision did not 
apply to contributions made during taxable years beginning 
after December 31, 1999.
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    \71\ H. Rept. 105-220, p. 374.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision corrects the termination date of the 
provision to provide that the special rule applies to 
contributions made during taxable years beginning after 
December 31, 1997, and before December 31, 2000.
    In addition, the provision clarifies that the requirements 
set forth in section 170(e)(6)(B)(ii)-(vii) apply regardless of 
whether the donee is an educational organization or a tax-
exempt charitable entity. Similarly, the rule in section 
170(e)(6)(C)(ii)(I) regarding subsequent contributions by 
private foundations is clarified to permit contributions to 
either educational organizations or tax-exempt charitable 
entities described in section 170(e)(6)(B)(i).

                             Effective Date

    The provision is effective as of August 5, 1997, the date 
of enactment of the 1997 Act.

6. Treatment of cancellation of certain student loans (6004(f) of the 
        1998 IRS Restructuring Act, sec. 225 of the 1997 Act, and sec. 
        108(f) of the Code)

                         Present and Prior Law

    An individual's gross income does not include forgiveness 
of loans made by tax-exempt educational organizations if the 
proceeds of such loans are used to pay costs of attendance at 
an educational institution or to refinance outstanding student 
loans and the student is not employed by the lender 
organization. The exclusion applies only if the forgiveness is 
contingent on the student's working for a certain period of 
time in certain professions for any of a broad class of 
employers. In addition, the student's work must fulfill a 
public service requirement.

                        Explanation of Provision

    The provision clarifies that gross income does not include 
amounts from the forgiveness of loans made by educational 
organizations and certain tax-exempt organizations to refinance 
any existing student loan (and not just loans made by 
educational organizations). In addition, the provision 
clarifies that refinancing loans made by educational 
organizations and certain tax-exempt organizations must be made 
pursuant to a program of the refinancing organization (e.g., 
school or private foundation) that requires the student to 
fulfill a public service work requirement.

                             Effective Date

    The provision is effective as of August 5, 1997, the date 
of enactment of the 1997 Act.

7. Qualified zone academy bonds (sec. 6004(g) of the 1998 IRS 
        Restructuring Act, sec. 226 of the 1997 Act, and sec. 1397E of 
        the Code)

                         Present and Prior Law

    Certain financial institutions (i.e., banks, insurance 
companies, and corporations actively engaged in the business of 
lending money) that hold ``qualified zone academy bonds'' are 
entitled to a nonrefundable tax credit in an amount equal to a 
credit rate (set monthly by the Treasury Department 
<SUP>72</SUP>) multiplied by the face amount of the bond (sec. 
1397E). The credit rate applies to all such bonds issued in 
each month. A taxpayer holding a qualified zone academy bond on 
the credit allowance date (i.e., each one-year anniversary of 
the issuance of the bond) is entitled to a credit. The credit 
is includible in gross income (as if it were an interest 
payment on the bond), and may be claimed against regular income 
tax and AMT liability.
---------------------------------------------------------------------------
    \72\ The Treasury Department will set the credit rate each month at 
a rate estimated to allow issuance of qualified zone academy bonds 
without discount and without interest cost to the issuer.
---------------------------------------------------------------------------
    ``Qualified zone academy bonds'' are defined as any bond 
issued by a State or local government, provided that (1) at 
least 95 percent of the proceeds are used for the purpose of 
renovating, providing equipment to, developing course materials 
for use at, or training teachers and other school personnel in 
a ``qualified zone academy''--meaning certain public schools 
located in empowerment zones or enterprise communities or with 
a certain percentage of students from low-income families--and 
(2) private entities have promised to make contributions to the 
qualified zone academy with a value equal to at least 10 
percent of the bond proceeds.
    A total of $400 million of ``qualified zone academy bonds'' 
may be issued in each of 1998 and 1999. The $400 million 
aggregate bond cap will be allocated each year to the States 
according to their respective populations of individuals below 
the poverty line.<SUP>73</SUP> Each State, in turn, will 
allocate the credit to qualified zone academies within such 
State. A State may carry over any unused allocation into 
subsequent years.
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    \73\ See Rev. Proc. 98-57, which sets forth the maximum face amount 
of qualified zone academy bonds that may be issued for each State 
during 1999; IRS Proposed Rules (REG-119449-97), which provides 
guidance to holders and issuers of qualified zone academy bonds.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision clarifies that, for purposes of section 
6655(g)(1)(B), the credit for certain holders of qualified zone 
academy bonds may be claimed for estimated tax purposes. 
Similarly, the provision clarifies for purposes of section 
6401(b)(1) the manner in which the credit is taken into account 
when determining whether a taxpayer has made an overpayment of 
tax.

                             Effective Date

    The provisions are effective for obligations issued after 
December 31, 1997.

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

1. Conversions of IRAs into Roth IRAs (sec. 6005(b) of the 1998 IRS 
        Restructuring Act, sec. 302 of the 1997 Act, and secs. 408A and 
        72(t) of the Code)

                         Present and Prior Law

    A taxpayer with adjusted gross income of $100,000 or less 
may convert a deductible or nondeductible IRA into a Roth IRA 
at any time. The amount converted is includible in income in 
the year of the conversion, except that, if the conversion 
occurs in 1998, the amount converted is includible in income 
ratably over the 4-year period beginning with the year in which 
the conversion occurs.<SUP>74</SUP> Under prior law, the 
application of the 4-year spread was automatic. Under present 
and prior law, amounts includible in income as a result of the 
conversion are not taken into account in determining whether 
the $100,000 threshold is exceeded. The 10-percent tax on early 
withdrawals does not apply to conversions of IRAs into Roth 
IRAs.
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    \74\ If the conversion is accomplished by means of a withdrawal and 
a rollover into a Roth IRA, the 4-year rule applies if the withdrawal 
is made during 1998 and the rollover occurs within 60 days of the 
withdrawal. In such a case, the 4-year period begins with the year in 
which the withdrawal was made. For purposes of this discussion, such 
conversions are treated as occurring in 1998.
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    In general, distributions of earnings from a Roth IRA are 
excludable from income if the individual has had a Roth IRA for 
at least 5 years and certain other requirements are satisfied. 
(Distributions that are excludable from income are referred to 
as qualified distributions.) Under prior law, the 5-year 
holding period with respect to conversion Roth IRAs began with 
the year of the conversion.
    Prior law did not contain a specific rule addressing what 
happens if an individual dies during the 4-year spread period 
for 1998 conversions.

                        Explanation of Provision

Distributions of converted amounts

            Distributions before the end of the 4-year spread
    The provision modifies the rules relating to conversions of 
IRAs into Roth IRAs in order to prevent taxpayers from 
receiving premature distributions from a Roth conversion IRA 
while retaining the benefits of 4-year income averaging. In the 
case of conversions to which the 4-year income inclusion rule 
applies, income inclusion is accelerated with respect to any 
amounts withdrawn before the final year of inclusion. Under 
this rule, a taxpayer that withdraws converted amounts prior to 
the last year of the 4-year spread is required to include in 
income the amount otherwise includible under the 4-year rule, 
plus the lesser of (1) the taxable amount of the withdrawal, or 
(2) the remaining taxable amount of the conversion (i.e., the 
taxable amount of the conversion not included in income under 
the 4-year rule in the current or a prior taxable year). In 
subsequent years (assuming no such further withdrawals), the 
amount includible in income under the 4-year will be the lesser 
of (1) the amount otherwise required under the 4-year rule 
(determined without regard to the withdrawal) or (2) the 
remaining taxable amount of the conversion.
    Under the provision, application of the 4-year spread is 
elective. The election is made in the time and manner 
prescribed by the Secretary. If no election is made, the 4-year 
rule will be deemed to be elected. An election, or deemed 
election, with respect to the 4-year spread cannot be changed 
after the due date for the return for the first year of the 
income inclusion (including extensions).
    The following example illustrates the application of these 
rules.
    Example: Taxpayer A has a nondeductible IRA with a value of 
$100 (and no other IRAs). The $100 consists of $75 of 
contributions and $25 of earnings. A converts the IRA into a 
Roth IRA in 1998 and elects the 4-year spread. As a result of 
the conversion, $25 is includible in income ratably over 4 
years ($6.25 per year). The 10-percent early withdrawal tax 
does not apply to the conversion. At the beginning of 1999, the 
value of the account is $110, and A makes a withdrawal of $10. 
Under the provision, the withdrawal is treated as attributable 
entirely to amounts that were includible in income due to the 
conversion. In the year of withdrawal, $16.25 is includible in 
income (the $6.25 includible in the year of withdrawal under 
the 4-year rule, plus $10 ($10 is less than the remaining 
taxable amount of $12.50 ($25-$12.50)). In the next year, $2.50 
is includible in income under the 4-year rule. No amount is 
includible in income in year 4 due to the conversion.
            Application of early withdrawal tax to converted amounts
    The provision modifies the rules relating to conversions to 
prevent taxpayers from receiving premature distributions (i.e., 
within 5 years) while retaining the benefit of the nonpayment 
of the early withdrawal tax. Under the provision, if converted 
amounts are withdrawn within the 5-year period beginning with 
the year of the conversion, then, to the extent attributable to 
amounts that were includible in income due to the conversion, 
the amount withdrawn is subject to the 10-percent early 
withdrawal tax.<SUP>75</SUP>
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    \75\ The otherwise available exceptions to the early withdrawal 
tax, e.g., for distributions after age 59\1/2\, apply.
---------------------------------------------------------------------------
    Applying this rule to the example above, the $10 withdrawal 
is subject to the 10-percent early withdrawal tax (unless as 
exception applies).
            Application of 5-year holding period
    The provision also eliminates the special rule under which 
a separate 5-year holding period begins for purposes of 
determining whether a distribution of amounts attributable to a 
conversion is a qualified distribution; thus, the 5-year 
holding rule for Roth IRAs begins with the year for which a 
contribution is first made to a Roth IRA. A subsequent 
conversion does not start the running of a new 5-year period.
            Ordering rules
    Ordering rules apply to determine what amounts are 
withdrawn in the event a Roth IRA contains both conversion 
amounts (possibly from different years) and other 
contributions. Under these rules, regular Roth IRA 
contributions are deemed to be withdrawn first, then converted 
amounts (starting with the amounts first converted). 
Withdrawals of converted amounts are treated as coming first 
from converted amounts that were includible in income. As under 
prior law, earnings are treated as withdrawn after 
contributions. For purposes of these rules, all Roth IRAs, 
whether or not maintained in separate accounts, will be 
considered a single Roth IRA.
            Corrections
    In order to assist individuals who erroneously convert IRAs 
into Roth IRAs or otherwise wish to change the nature of an IRA 
contribution, contributions to an IRA (and earnings thereon) 
may be transferred in a trustee-to-trustee transfer from any 
IRA to another IRA by the due date for the taxpayer's return 
for the year of the contribution (including extensions). Any 
such transferred contributions are treated as if contributed to 
the transferee IRA (and not to the transferor IRA). Trustee-to-
trustee transfers include transfers between IRA trustees as 
well as IRA custodians, apply to transfers from and to IRA 
accounts and annuities, and apply to transfers between IRA 
accounts and annuities with the same trustee or custodian.

Effect of death on 4-year spread

    Under the provision, in general, any amounts remaining to 
be included in income as a result of a 1998 conversion are 
includible in income on the final return of the taxpayer. If 
the surviving spouse is the sole beneficiary of the Roth IRA, 
the spouse may continue the deferral by including the remaining 
amounts in his or her income over the remainder of the 4-year 
period.

Calculation of AGI limit for conversions

    The provision clarifies that for purposes of determining 
the $100,000 adjusted gross income (``AGI'') limit on IRA 
conversions to Roth IRAs, the conversion amount is not taken 
into account. Thus, for this purpose, AGI (and all AGI-based 
phaseouts) are to be determined without taking into account the 
conversion amount. For purposes of computing taxable income, 
the conversion amount (to the extent otherwise includible in 
AGI) is to be taken into account in computing the AGI-based 
phaseout amounts.

                             Effective Date

    The provision is effective as if included in the 1997 Act, 
i.e., for taxable years beginning after December 31, 1997.

2. Penalty-free distributions for education expenses and purchase of 
        first homes (sec. 6005(c) of the 1998 IRS Restructuring Act, 
        secs. 203 and 303 of the 1997 Act, and sec. 402 of the Code)

                         Present and Prior Law

    The 10-percent early withdrawal tax does not apply to 
distributions from an IRA if the distribution is for first-time 
homebuyer expenses, subject to a $10,000 life-time cap, or for 
higher education expenses. These exceptions do not apply to 
distributions from employer-sponsored retirement plans. A 
distribution from an employer-sponsored retirement plan that is 
an ``eligible rollover distribution'' may be rolled over to an 
IRA. The term ``eligible rollover distribution'' means any 
distribution to an employee of all or a portion or the balance 
to the credit of the employee in a qualified trust, except the 
term does not include certain periodic distributions, 
distributions based on life or joint life expectancies and 
distributions required under the minimum distribution rules. 
Generally, distributions from cash or deferred arrangements 
made on account of hardship are eligible rollover 
distributions. An eligible rollover distribution which is not 
transferred directly to another retirement plan or an IRA is 
subject to 20-percent withholding on the distribution. Under 
prior law, participants in employer-sponsored retirement plans 
could avoid the early withdrawal tax applicable to such plans 
by rolling over hardship distributions to an IRA and 
withdrawing the funds from the IRA.

                        Explanation of Provision

    The provision modifies the rules relating to the ability to 
roll over hardship distributions from employer-sponsored 
retirement plans (including section 403(b) plans) in order to 
prevent avoidance of the 10-percent early withdrawal tax. The 
provision provides that distributions from cash or deferred 
arrangements and similar arrangements made on account of 
hardship of the employee are not eligible rollover 
distributions. Such distributions are not subject to the 20-
percent withholding applicable to eligible rollover 
distributions.

                             Effective Date

    The provision is effective for distributions after December 
31, 1998.

3. Limits based on modified adjusted gross income (sec. 6005(b) of the 
        1998 IRS Restructuring Act, sec. 302(a) of the 1997 Act, and 
        sec. 72(t) of the Code)

                         Present and Prior Law

    The $2,000 Roth IRA maximum contribution limit is phased 
out for individual taxpayers with adjusted gross income 
(``AGI'') between $95,000 and $110,000 and for married 
taxpayers filing a joint return with AGI between $150,000 and 
$160,000. The maximum deductible IRA contribution is phased out 
between $0 and $10,000 of AGI in the case of married couples 
filing a separate return.

                        Explanation of Provision

    The provision clarifies the phase-out range for the Roth 
IRA maximum contribution limit for a married individual filing 
a separate return and conforms it to the range for deductible 
IRA contributions. Under the provision, the phase-out range for 
married individuals filing a separate return will be $0 to 
$10,000 of AGI.

                             Effective Date

    The provision is effective as if included in the 1997 Act, 
i.e., for taxable years beginning after December 31, 1997.

4. Contribution limit to Roth IRAs (sec. 6005(b) of the 1998 IRS 
        Restructuring Act, sec. 302 of the 1997 Act, and sec. 408A(c) 
        of the Code)

                         Present and Prior Law

    An individual who is an active participant in an employer-
sponsored plan may deduct annual IRA contributions up to the 
lesser of $2,000 or 100 percent of compensation if the 
individual's adjusted gross income (``AGI'') does not exceed 
certain limits. For 1998, the limit is phased-out over the 
following ranges of AGI: $30,000 to $40,000 in the case of a 
single taxpayer and $50,000 to $60,000 in the case of married 
taxpayers. An individual who is not an active participant in an 
employer-sponsored retirement plan (and whose spouse is not an 
active participant) may deduct IRA contributions up to the 
limits described above without limitation based on income. An 
individual who is not an active participant in an employer-
sponsored retirement plan (and whose spouse is such an active 
participant) may deduct IRA contributions up to the limits 
described above if the AGI of the such individuals filing a 
joint return does not exceed certain limits. The limit is 
phased for out for such individuals with AGI between $150,000 
and $160,000.
    An individual may make nondeductible contributions up to 
the lesser of $2,000 or 100 percent of compensation to a Roth 
IRA if the individual's AGI does not exceed certain limits. An 
individual may make nondeductible contributions to an IRA to 
the extent the individual does not or cannot make deductible 
contributions to an IRA or contributions to a Roth IRA. 
Contributions to all an individual's IRAs for a taxable year 
may not exceed $2,000.

                        Explanation of Provision

    The provision clarifies the intent of the 1997 Act that an 
individual may contribute up to $2,000 a year to all the 
individual's IRAs. Thus, for example, suppose an individual is 
not eligible to make deductible IRA contributions because of 
the phase-out limits, and is eligible to make a $1,000 Roth IRA 
contribution. The individual could contribute $1,000 to the 
Roth IRA and $1,000 to a nondeductible IRA.

                             Effective Date

    The provision is effective as if included in the 1997 Act, 
i.e., for taxable years beginning after December 31, 1997.

5. Contribution limitations for active participants in an IRA (sec. 
        6005(a) of the 1998 IRS Restructuring Act, sec. 301(b) of the 
        1997 Act, and sec. 219(g) of the Code)

                         Present and Prior Law

    If a married individual (filing a joint return) is an 
active participant in an employer-sponsored retirement plan, 
the $2,000 IRA deduction limit is phased out over the following 
levels of adjusted gross income (``AGI''):


           Taxable years beginning in--                Phase-out range

    1997..........................................    $40,000 to $50,000
    1998..........................................    $50,000 to $60,000
    1999..........................................    $51,000 to $61,000
    2000..........................................    $52,000 to $62,000
    2001..........................................    $53,000 to $63,000
    2002..........................................    $54,000 to $64,000
    2003..........................................    $60,000 to $70,000
    2004..........................................    $65,000 to $75,000
    2005..........................................    $70,000 to $80,000
    2006..........................................    $75,000 to $85,000
    2007..........................................   $80,000 to $100,000


    An individual is not considered an active participant in an 
employer-sponsored retirement plan merely because the 
individual's spouse is an active participant. The $2,000 
maximum deductible IRA contribution for an individual who is 
not an active participant, but whose spouse is, is phased out 
for taxpayers with AGI between $150,000 and $160,000.

                        Explanation of Provision

    The provision clarifies the intent of the 1997 Act relating 
to the AGI phase-out ranges for married individuals who are 
active participants in employer-sponsored plans and the AGI 
phase-out range for spouses of such active participants as 
described above.

                             Effective Date

    The provision is effective as if included in the 1997 Act, 
i.e., for taxable years beginning after December 31, 1997.

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

1. Individual capital gains rate reductions (sec. 6005(d) of the 1998 
        IRS Restructuring Act, sec. 311 of the 1997 Act, and sec. 1(h) 
        of the Code)

                         Present and Prior Law

    The 1997 Act provided lower capital gains rates for 
individuals. Generally, the 1997 Act reduced the maximum rate 
on the adjusted net capital gain of an individual from 28 
percent to 20 percent and provided a 10-percent rate for the 
adjusted net capital gain otherwise taxed at a 15-percent rate. 
The ``adjusted net capital gain'' means the net capital gain 
determined without regard to certain gain for which the 1997 
Act provided a higher maximum rate of tax. The 1997 Act 
generally retained a 28-percent maximum rate for the long-term 
capital gain from collectibles, certain long-term capital gain 
included in income from the sale of small business stock, and 
the net capital gain determined by including all capital gains 
and losses properly taken into account after July 28, 1997, 
from property held more than one year but not more than 18 
months and all capital gains and losses properly taken into 
account for the portion of the taxable year before May 7, 1997. 
In addition, the 1997 Act provided a maximum rate of 25 percent 
for the long-term capital gain attributable to real estate 
depreciation (``unrecaptured section 1250 gain''). Beginning in 
2001 and 2006, lower rates of 8 and 18 percent will apply to 
certain property held more than five years.
    The amounts taxed at the 28- and 25-percent rates may not 
exceed the individual's net capital gain and also are reduced 
by amounts otherwise taxed at a 15-percent rate.
    Under the provisions of the 1997 Act, net short-term 
capital losses and long-term capital loss carryovers reduce the 
amount of adjusted net capital gain before reducing amounts 
taxed at the maximum 25- and 28-percent rates.
    The 1997 Act failed to coordinate the new multiple holding 
periods with certain provisions of the Code.

                        Explanation of Provision

    Under the provision, the ``adjusted net capital gain'' of 
an individual is the net capital gain reduced (but not below 
zero) by the sum of the 28-percent rate gain and the 
unrecaptured section 1250 gain.
    ``28-percent rate gain'' means the amount of net gain 
attributable to collectibles gains and losses, an amount of 
gain equal to the gain excluded from gross income on the sale 
of certain small business stock under section 1202, 
<SUP>76</SUP> long-term capital gains and losses properly taken 
into account after July 28, 1997, from property held more than 
one year but not more than 18 months <SUP>77</SUP>, the net 
short-term capital loss for the taxable year and the long-term 
capital loss carryover to the taxable year. Long-term capital 
gains and losses properly taken into account before May 7, 
1997, also are included in computing 28-percent rate gain. 
<SUP>78</SUP>
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    \76\ For example, assume an individual has $300,000 gain from the 
sale of qualified stock in a small business corporation and assume that 
section 1202(b) limits the gain that may be taken into account under 
section 1202(a) to $240,000. $120,000 of the gain (50 percent of 
$240,000) is excluded from gross income under section 1202(a). The 
$180,000 of gain that is included in gross income is included in the 
computation of net capital gain, and $120,000 of that gain is taken 
into account under section 1(h)(5) in computing 28-percent rate gain. 
The maximum effective regular tax rate on the $240,000 of gain to which 
the 50-percent section 1202 exclusion applies is 14 percent and the 
maximum rate on the remaining $60,000 of gain is 20 percent.
    \77\ Section 5001 of the 1998 IRS Restructuring Act eliminated the 
18-month holding period, effective January 1, 1998. This description 
does not include the changes made by that provision.
    \78\ The application of this provision to the beneficiaries of 
charitable remainder trusts was modified by section 4003(b) of the Tax 
and Trade Relief Act of 1998, described in part Three of this 
publication.
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    ``Unrecaptured section 1250 gain'' means the amount of 
long-term capital gain (not otherwise treated as ordinary 
income) which would be treated as ordinary income if section 
1250 recapture applied to all depreciation (rather than only to 
depreciation in excess of straight-line depreciation) from 
property held more than 18 months (one year for amounts 
properly taken into account after May 6, 1997, and before July 
29, 1997). <SUP>79</SUP> The unrecaptured section 1250 
depreciation is reduced (but not below zero) by the excess (if 
any) of amount of losses taken into account in computing 28-
percent gain over the amount of gains taken into account in 
computing 28-percent rate gain.
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    \79\ In the case of a disposition of a partnership interest held 
more than 18 months, the amount of the individual's long-term capital 
gain which would be treated as ordinary income under section 751(a) if 
section 1250 applied to all depreciation, will be taken into account in 
computing unrecaptured section 1250 gain.
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    The provision contains several conforming amendments to 
coordinate the multiple holding periods with other provisions 
of the Code. Inherited property (sec. 1223 (11) and (12)) and 
certain patents (sec. 1235) are deemed to have a holding period 
of more than 18 months, allowing the 10- and 20-percent rates 
to apply. Amounts treated as ordinary income by reason of 
section 1231(c) will be allocated among categories of net 
section 1231 gain in accordance with IRS forms or regulations. 
The provision clarifies that the amount treated as long-term 
capital gain or loss on a section 1256 contract is treated as 
attributable to property held for more than 18 months.
    Under the provision, in applying section 1233(b) where the 
substantially identical property has been held more than one 
year but not more than 18 months, any gain on the closing of 
the short sale will be considered gain from property held not 
more than 18 months, and the substantially identical property 
will have be treated as held for one year on the day before the 
earlier of the date of the closing of the short sale or the 
date the property is disposed of. In applying section 1233(d) 
where, on the date of the short sale, the substantially 
identical property has been held more than 18 months, any loss 
on the closing of the short sale will be treated as a loss from 
the sale or exchange of a capital asset held more than 18 
months. Finally, in applying section 1092(f), any loss with 
respect to the option shall be treated as a loss from the sale 
or exchange of a capital asset held more than 18 months, if at 
the time the loss is realized, gain on the sale or exchange of 
the stock would be treated as gain from the sale or exchange of 
a capital asset held more than 18 months. <SUP>80</SUP>
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    \80\ Any loss treated as a long-term capital loss by reason of 
section 1233(d) or 1092(f) will be taken into account in computing 28-
percent rate gain where the property causing such loss to be treated as 
a long-term capital loss was held not more than 18 months on the 
applicable date.
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    The provision reorders the rate structure under sections 
1(h)(1) and 55(b)(3) without any substantive change.
    The provision makes minor technical changes, including a 
provision to reduce the minimum tax preference on certain small 
business stock to 28 percent, beginning in 2006. <SUP>81</SUP>
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    \81\ Thus, the maximum rate under the minimum tax will be 17.92 
percent (.64 times 28 percent).
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                             Effective Date

    The provision applies to taxable years ending after May 6, 
1997.

2. Exclusion of gain on the sale of a principal residence owned and 
        used less than two years (sec. 6005(e)(1) and (2) of the 1998 
        IRS Restructuring Act, sec. 312(a) of the 1997 Act, and sec. 
        121 of the Code)

                         Present and Prior Law

    A taxpayer generally is able to exclude up to $250,000 
($500,000 if married filing a joint return) of gain realized on 
the sale or exchange of a principal residence. To be eligible 
for the exclusion, the taxpayer must have owned the residence 
and used it as a principal residence for at least two of the 
five years prior to the sale or exchange. A taxpayer who fails 
to meet these requirements by reason of a change of place of 
employment, health, or unforeseen circumstances is able to 
exclude a fraction of the taxpayer's realized gain equal to the 
fraction of the two years that the requirements are met.

                        Explanation of Provision

    The provision clarifies that an otherwise qualifying 
taxpayer who fails to satisfy the two-year ownership and use 
requirements is able to exclude an amount equal to the fraction 
of the $250,000 ($500,000 if married filing a joint return), 
not the fraction of the realized gain which is equal to the 
fraction of the two years that the ownership and use 
requirements are met. For example, an unmarried taxpayer who 
owns and uses a principal residence for one year then sells at 
realized gain of $500,000 may exclude $125,000 of gain (one-
half of $250,000) not $250,000 of gain (one-half of the 
realized gain). Similarly, an unmarried taxpayer who owns and 
uses a principal residence for one year then sells at a 
realized gain of $50,000 may exclude the entire $50,000 of gain 
since it is less than one half of $250,000. The exclusion is 
not limited to $25,000 (one-half of the $50,000 realized gain).
    In addition, the provision provides that if a married 
couple filing a joint return does not qualify for the $500,000 
maximum exclusion, the amount of the maximum exclusion that may 
be claimed by the couple is the sum of each spouse's max