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105th Congress                                            Rept. 105-364
                        HOUSE OF REPRESENTATIVES

 1st Session                                                     Part 1
_______________________________________________________________________


 
     INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1997

                                _______
                                

October 31, 1997.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

_______________________________________________________________________


    Mr. Archer, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 2676]

      [Including cost estimate of the Congressional Budget Office]

                             together with

                    ADDITIONAL AND DISSENTING VIEWS

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


                                CONTENTS
                                                                   Page
  I. Summary and Background..........................................30
          A. Purpose and Summary.................................    30
          B. Background and Need for Legislation.................    32
          C. Legislative History.................................    32
 II. Explanation of the Bill.........................................33
        Title I. Executive Branch Government.....................    33
          A. Creation of IRS Oversight Board (sec. 101)..........    33
          B. Appointment and Duties of IRS Commissioner (secs. 
              102 and 103).......................................    38
          C. Structure and Funding of the Employee Plans and 
              Exempt Organizations Division (sec. 102)...........    40
          D. Taxpayer Advocate (sec. 102)........................    42
          E. Prohibition on Executive Branch Influence Over 
              Taxpayer Audits (sec. 104).........................    44
          F. IRS Personnel Flexibilities (sec. 111)..............    45
        Title II. Electronic Filing..............................    50
          A. Electronic Filing of Tax and Information Returns 
              (sec. 201).........................................    50
          B. Time for Filing Certain Information Returns With the 
              IRS (sec. 202).....................................    51
          C. Paperless Electronic Filing (sec. 203)..............    52
          D. Return-Free Tax System (sec. 204)...................    53
          E. Access to Account Information (sec. 205)............    54
        Title III. Taxpayer Bill of Rights 3.....................    54
          A. Burden of Proof (sec. 301)..........................    54
          B. Proceedings by Taxpayers............................    57
              1. Expansion of authority to award costs and 
                  certain fees (sec. 311)........................    57
              2. Civil damages for negligence in collection 
                  actions (sec. 312).............................    59
              3. Increase in size of cases permitted on small 
                  case calendar (sec. 313).......................    60
          C. Relief for Innocent Spouses and Persons With 
              Disabilities.......................................    60
              1. Innocent spouse relief (sec. 321)...............    60
              2. Suspension of statute of limitations on filing 
                  claims during periods of disability (sec. 322).    62
          D. Provisions Relating to Interest.....................    63
              1. Elimination of interest differential on 
                  overlapping periods of interest on income tax 
                  overpayments and underpayments (sec. 331)......    63
              2. Increase in overpayment rate payable to 
                  taxpayers other than corporations (sec. 332)...    65
          E. Protections for Taxpayers Subject to Audit or 
              Collection.........................................    65
              1. Privilege of confidentiality extended to 
                  taxpayer's dealings with non-attorneys 
                  authorized to practice before the IRS (sec. 
                  341)...........................................    65
              2. Expansion of authority to issue taxpayer 
                  assistance orders (sec. 342)...................    67
              3. Limitation on financial status audits (sec. 343)    67
              4. Limitation on authority to require production of 
                  computer source code (sec. 344)................    68
              5. Procedures relating to extensions of statute of 
                  limitations by agreement (sec. 345)............    69
              6. Offers-in-compromise (sec. 346).................    70
              7. Notice of deficiency to specify deadlines for 
                  filing Tax Court petition (sec. 347)...........    71
              8. Refund or credit of overpayments before final 
                  determination (sec. 348).......................    72
              9. Threat of audit prohibited to coerce tip report 
                  alternative committment agreements (sec. 349)..    73
          F. Disclosures to Taxpayers............................    73
              1. Explanation of joint and several liability (sec. 
                  351)...........................................    73
              2. Explanation of taxpayers' rights in interviews 
                  with the IRS (sec. 352)........................    74
              3. Disclosure of criteria for examination selection 
                  (sec. 353).....................................    74
              4. Explanation of appeals and collection process 
                  (sec. 354).....................................    75
          G. Low-Income Taxpayer Clinics (sec. 361)..............    75
          H. Other Taxpayer Rights Provisions....................    76
              1. Actions for refund with respect to certain 
                  estates which have elected the installment 
                  method of payment (sec. 371)...................    76
              2. Cataloging complaints (sec. 372)................    77
              3. Archive of records of the IRS (sec. 373)........    78
              4. Payment of taxes (sec. 374).....................    80
              5. Clarification of authority of Secretary relating 
                  to the making of elections (sec. 375)..........    81
              6. Limitation on penalty on individual's failure to 
                  pay for months during period of installment 
                  agreement (sec. 376)...........................    81
          I. Studies.............................................    82
              1. Study of penalty administration (sec. 381)......    82
              2. Study of confidentiality of tax return 
                  information (sec. 382).........................    82
        Title IV. Congressional Accountability for the IRS.......    83
          A. Review of Requests for GAO Investigations of the IRS 
              (sec. 401).........................................    83
          B. Joint Congressional Hearings and Coordinated 
              Oversight Reports (secs. 401 and 402)..............    84
          C. Budget Matters......................................    85
              1. Funding for century date change (sec. 411)......    85
              2. Financial management advisory group (sec. 412)..    85
          D. Tax Law Complexity Analysis (sec. 422)..............    86
        Title V. Revenue Offset: Employer Deduction for Vacation 
            Pay (sec. 501).......................................    87
III. Votes of the Committee..........................................91
 IV. Budget Effects of the Bill......................................92
          A. Committee Estimates of Budgetary Effects............    92
          B. Budget Authority and Tax Expenditures...............    96
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................    96
  V. Other Matters to Be Discussed Under the Rules of the House.....102
          A. Committee Oversight Findings and Recommendations....   102
          B. Summary of Findings and Recommendations of the 
              Committee on Government Reform and Oversight.......   102
          C. Constitutional Authority Statement..................   103
          D. Information Relating to Unfunded Mandates...........   103
          E. Applicability of House Rule XXI5(c).................   103
 VI. Changes in Existing Law Made by the Bill, as Reported..........103
VII. Correspondence From Other Committees...........................148
          A. Correspondence from Committee on Government Reform 
              and Oversight......................................   148
          B. Correspondence from Committee on Rules..............   149
VIII.Additional Views...............................................150

 IX. Dissenting Views...............................................161

  The amendment is as follows:
  Strike out all after the enacting clause and insert in lieu 
thereof the following:

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

  (a) Short Title.--This Act may be cited as the ``Internal Revenue 
Service Restructuring and Reform Act of 1997''.
  (b) Amendment of 1986 Code.--Except as otherwise expressly provided, 
whenever in this Act an amendment or repeal is expressed in terms of an 
amendment to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provision of the 
Internal Revenue Code of 1986.
  (c) Table of Contents.--

Sec. 1. Short title; amendment of 1986 Code; table of contents.

   TITLE I--EXECUTIVE BRANCH GOVERNANCE AND SENIOR MANAGEMENT OF THE 
                        INTERNAL REVENUE SERVICE

     Subtitle A--Executive Branch Governance and Senior Management

Sec. 101. Internal Revenue Service Oversight Board.
Sec. 102. Commissioner of Internal Revenue; other officials.
Sec. 103. Other personnel.
Sec. 104. Prohibition on executive branch influence over taxpayer 
audits and other investigations.

                  Subtitle B--Personnel Flexibilities

Sec. 111. Personnel flexibilities.

                      TITLE II--ELECTRONIC FILING

Sec. 201. Electronic filing of tax and information returns.
Sec. 202. Due date for certain information returns filed 
electronically.
Sec. 203. Paperless electronic filing.
Sec. 204. Return-free tax system.
Sec. 205. Access to account information.

               TITLE III--TAXPAYER PROTECTION AND RIGHTS

Sec. 300. Short title.

                      Subtitle A--Burden of Proof

Sec. 301. Burden of proof.

                  Subtitle B--Proceedings by Taxpayers

Sec. 311. Expansion of authority to award costs and certain fees.
Sec. 312. Civil damages for negligence in collection actions.
Sec. 313. Increase in size of cases permitted on small case calendar.

  Subtitle C--Relief for Innocent Spouses and for Taxpayers Unable To 
           Manage Their Financial Affairs Due to Disabilities

Sec. 321. Spouse relieved in whole or in part of liability in certain 
cases.
Sec. 322. Suspension of statute of limitations on filing refund claims 
during periods of disability.

              Subtitle D--Provisions Relating to Interest

Sec. 331. Elimination of interest rate differential on overlapping 
periods of interest on income tax overpayments and underpayments.
Sec. 332. Increase in overpayment rate payable to taxpayers other than 
corporations.

 Subtitle E--Protections for Taxpayers Subject to Audit or Collection 
                               Activities

Sec. 341. Privilege of confidentiality extended to taxpayer's dealings 
with non-attorneys authorized to practice before Internal Revenue 
Service.
Sec. 342. Expansion of authority to issue taxpayer assistance orders.
Sec. 343. Limitation on financial status audit techniques.
Sec. 344. Limitation on authority to require production of computer 
source code.
Sec. 345. Procedures relating to extensions of statute of limitations 
by agreement.
Sec. 346. Offers-in-compromise.
Sec. 347. Notice of deficiency to specify deadlines for filing Tax 
Court petition.
Sec. 348. Refund or credit of overpayments before final determination.
Sec. 349. Threat of audit prohibited to coerce Tip Reporting 
Alternative Commitment Agreements.

                  Subtitle F--Disclosures to Taxpayers

Sec. 351. Explanation of joint and several liability.
Sec. 352. Explanation of taxpayers' rights in interviews with the 
Internal Revenue Service.
Sec. 353. Disclosure of criteria for examination selection.
Sec. 354. Explanations of appeals and collection process.

                Subtitle G--Low Income Taxpayer Clinics

Sec. 361. Low income taxpayer clinics.

                       Subtitle H--Other Matters

Sec. 371. Actions for refund with respect to certain estates which have 
elected the installment method of payment.
Sec. 372. Cataloging complaints.
Sec. 373. Archive of records of Internal Revenue Service.
Sec. 374. Payment of taxes.
Sec. 375. Clarification of authority of Secretary relating to the 
making of elections.
Sec. 376. Limitation on penalty on individual's failure to pay for 
months during period of installment agreement.

                          Subtitle I--Studies

Sec. 381. Penalty administration.
Sec. 382. Confidentiality of tax return information.

TITLE IV--CONGRESSIONAL ACCOUNTABILITY FOR THE INTERNAL REVENUE SERVICE

                         Subtitle A--Oversight

Sec. 401. Expansion of duties of the Joint Committee on Taxation.
Sec. 402. Coordinated oversight reports.

                           Subtitle B--Budget

Sec. 411. Funding for century date change.
Sec. 412. Financial Management Advisory Group.

                     Subtitle C--Tax Law Complexity

Sec. 421. Role of the Internal Revenue Service.
Sec. 422. Tax complexity analysis.

     TITLE V--CLARIFICATION OF DEDUCTION FOR DEFERRED COMPENSATION

Sec. 501. Clarification of deduction for deferred compensation.

   TITLE I--EXECUTIVE BRANCH GOVERNANCE AND SENIOR MANAGEMENT OF THE 
                        INTERNAL REVENUE SERVICE

     Subtitle A--Executive Branch Governance and Senior Management

SEC. 101. INTERNAL REVENUE SERVICE OVERSIGHT BOARD.

  (a) In General.--Section 7802 (relating to the Commissioner of 
Internal Revenue) is amended to read as follows:

``SEC. 7802. INTERNAL REVENUE SERVICE OVERSIGHT BOARD.

  ``(a) Establishment.--There is established within the Department of 
the Treasury the Internal Revenue Service Oversight Board (hereafter in 
this subchapter referred to as the `Oversight Board').
  ``(b) Membership.--
          ``(1) Composition.--The Oversight Board shall be composed of 
        11 members, as follows:
                  ``(A) 8 members shall be individuals who are not 
                Federal officers or employees and who are appointed by 
                the President, by and with the advice and consent of 
                the Senate.
                  ``(B) 1 member shall be the Secretary of the Treasury 
                or, if the Secretary so designates, the Deputy 
                Secretary of the Treasury.
                  ``(C) 1 member shall be the Commissioner of Internal 
                Revenue.
                  ``(D) 1 member shall be an individual who is a 
                representative of an organization that represents a 
                substantial number of Internal Revenue Service 
                employees and who is appointed by the President, by and 
                with the advice and consent of the Senate.
          ``(2) Qualifications and terms.--
                  ``(A) Qualifications.--Members of the Oversight Board 
                described in paragraph (1) (A) shall be appointed 
                solely on the basis of their professional experience 
                and expertise in 1 or more of the following areas:
                          ``(i) Management of large service 
                        organizations.
                          ``(ii) Customer service.
                          ``(iii) Federal tax laws, including tax 
                        administration and compliance.
                          ``(iv) Information technology.
                          ``(v) Organization development.
                          ``(vi) The needs and concerns of taxpayers.
                In the aggregate, the members of the Oversight Board 
                described in paragraph (1) (A) should collectively 
                bring to bear expertise in all of the areas described 
                in the preceding sentence.
                  ``(B) Terms.--Each member who is described in 
                paragraph (1) (A) or (D) shall be appointed for a term 
                of 5 years, except that of the members first appointed 
                under paragraph (1) (A)--
                          ``(i) 1 member shall be appointed for a term 
                        of 1 year,
                          ``(ii) 1 member shall be appointed for a term 
                        of 2 years,
                          ``(iii) 2 members shall be appointed for a 
                        term of 3 years, and
                          ``(iv) 2 members shall be appointed for a 
                        term of 4 years.
                Such terms shall begin on the date of appointment.
                  ``(C) Reappointment.--An individual who is described 
                in paragraph (1) (A) may be appointed to no more than 
                two 5-year terms on the Oversight Board.
                  ``(D) Vacancy.--Any vacancy on the Oversight Board 
                shall be filled in the same manner as the original 
                appointment. Any member appointed to fill a vacancy 
                occurring before the expiration of the term for which 
                the member's predecessor was appointed shall be 
                appointed for the remainder of that term.
                  ``(E) Special government employees.--During the 
                entire period that an individual appointed under 
                paragraph (1) (A) is a member of the Oversight Board, 
                such individual shall be treated as--
                          ``(i) serving as a special government 
                        employee (as defined in section 202 of title 
                        18, United States Code) and as described in 
                        section 207(c)(2) of such title 18, and
                          ``(ii) serving as an officer or employee 
                        referred to in section 101(f) of the Ethics in 
                        Government Act of 1978 for purposes of title I 
                        of such Act.
          ``(3) Quorum.--6 members of the Oversight Board shall 
        constitute a quorum. A majority of members present and voting 
        shall be required for the Oversight Board to take action.
          ``(4) Removal.--
                  ``(A) In general.--Any member of the Oversight Board 
                may be removed at the will of the President.
                  ``(B) Secretary and commissioner.--An individual 
                described in subparagraph (B) or (C) of paragraph (1) 
                shall be removed upon termination of employment.
                  ``(C) Representative of internal revenue service 
                employees.--The member described in paragraph (1)(D) 
                shall be removed upon termination of employment, 
                membership, or other affiliation with the organization 
                described in such paragraph.
          ``(5) Claims.--
                  ``(A) In general.--Members of the Oversight Board who 
                are described in paragraph (1) (A) or (D) shall have no 
                personal liability under Federal law with respect to 
                any claim arising out of or resulting from an act or 
                omission by such member within the scope of service as 
                a member. The preceding sentence shall not be construed 
                to limit personal liability for criminal acts or 
                omissions, willful or malicious conduct, acts or 
                omissions for private gain, or any other act or 
                omission outside the scope of the service of such 
                member on the Oversight Board.
                  ``(B) Effect on other law.--This paragraph shall not 
                be construed--
                          ``(i) to affect any other immunities and 
                        protections that may be available to such 
                        member under applicable law with respect to 
                        such transactions,
                          ``(ii) to affect any other right or remedy 
                        against the United States under applicable law, 
                        or
                          ``(iii) to limit or alter in any way the 
                        immunities that are available under applicable 
                        law for Federal officers and employees.
  ``(c) General Responsibilities.--
          ``(1) In general.--The Oversight Board shall oversee the 
        Internal Revenue Service in its administration, management, 
        conduct, direction, and supervision of the execution and 
        application of the internal revenue laws or related statutes 
        and tax conventions to which the United States is a party.
          ``(2) Exceptions.--The Oversight Board shall have no 
        responsibilities or authority with respect to--
                  ``(A) the development and formulation of Federal tax 
                policy relating to existing or proposed internal 
                revenue laws, related statutes, and tax conventions,
                  ``(B) law enforcement activities of the Internal 
                Revenue Service, including compliance activities such 
                as criminal investigations, examinations, and 
                collection activities, or
                  ``(C) specific procurement activities of the Internal 
                Revenue Service.
          ``(3) Restriction on disclosure of return information to 
        oversight board members.--No return, return information, or 
        taxpayer return information (as defined in section 6103(b)) may 
        be disclosed to any member of the Oversight Board described in 
        subsection (b)(1) (A) or (D). Any request for information not 
        permitted to be disclosed under the preceding sentence, and any 
        contact relating to a specific taxpayer, made by a member of 
        the Oversight Board so described to an officer or employee of 
        the Internal Revenue Service shall be reported by such officer 
        or employee to the Secretary and the Joint Committee on 
        Taxation.
  ``(d) Specific Responsibilities.--The Oversight Board shall have the 
following specific responsibilities:
          ``(1) Strategic plans.--To review and approve strategic plans 
        of the Internal Revenue Service, including the establishment 
        of--
                  ``(A) mission and objectives, and standards of 
                performance relative to either, and
                  ``(B) annual and long-range strategic plans.
          ``(2) Operational plans.--To review the operational functions 
        of the Internal Revenue Service, including--
                  ``(A) plans for modernization of the tax system,
                  ``(B) plans for outsourcing or managed competition, 
                and
                  ``(C) plans for training and education.
          ``(3) Management.--To--
                  ``(A) recommend to the President candidates for 
                appointment as the Commissioner of Internal Revenue and 
                recommend to the President the removal of the 
                Commissioner,
                  ``(B) review the Commissioner's selection, 
                evaluation, and compensation of senior managers, and
                  ``(C) review and approve the Commissioner's plans for 
                any major reorganization of the Internal Revenue 
                Service.
          ``(4) Budget.--To--
                  ``(A) review and approve the budget request of the 
                Internal Revenue Service prepared by the Commissioner,
                  ``(B) submit such budget request to the Secretary of 
                the Treasury, and
                  ``(C) ensure that the budget request supports the 
                annual and long-range strategic plans.
The Secretary shall submit the budget request referred to in paragraph 
(4)(B) for any fiscal year to the President who shall submit such 
request, without revision, to Congress together with the President's 
annual budget request for the Internal Revenue Service for such fiscal 
year.
  ``(e) Board Personnel Matters.--
          ``(1) Compensation of members.--
                  ``(A) In general.--Each member of the Oversight Board 
                who is described in subsection (b)(1)(A) shall be 
                compensated at a rate of $30,000 per year. All other 
                members of the Oversight Board shall serve without 
                compensation for such service.
                  ``(B) Chairperson.--In lieu of the amount specified 
                in subparagraph (A), the Chairperson of the Oversight 
                Board shall be compensated at a rate of $50,000.
          ``(2) Travel expenses.--The members of the Oversight Board 
        shall be allowed travel expenses, including per diem in lieu of 
        subsistence, at rates authorized for employees of agencies 
        under subchapter I of chapter 57 of title 5, United States 
        Code, while away from their homes or regular places of business 
        for purposes of attending meetings of the Oversight Board.
          ``(3) Staff.--At the request of the Chairperson of the 
        Oversight Board, the Commissioner shall detail to the Oversight 
        Board such personnel as may be necessary to enable the 
        Oversight Board to perform its duties. Such detail shall be 
        without interruption or loss of civil service status or 
        privilege.
          ``(4) Procurement of temporary and intermittent services.--
        The Chairperson of the Oversight Board may procure temporary 
        and intermittent services under section 3109(b) of title 5, 
        United States Code.
  ``(f) Administrative Matters.--
          ``(1) Chair.--The members of the Oversight Board shall elect 
        for a 2-year term a chairperson from among the members 
        appointed under subsection (b)(1)(A).
          ``(2) Committees.--The Oversight Board may establish such 
        committees as the Oversight Board determines appropriate.
          ``(3) Meetings.--The Oversight Board shall meet at least once 
        each month and at such other times as the Oversight Board 
        determines appropriate.
          ``(4) Reports.--The Oversight Board shall each year report to 
        the President and the Congress with respect to the conduct of 
        its responsibilities under this title.''.
  (b) Conforming Amendments.--
          (1) Section 4946(c) (relating to definitions and special 
        rules for chapter 42) is amended--
                  (A) by striking ``or'' at the end of paragraph (5),
                  (B) by striking the period at the end of paragraph 
                (6) and inserting ``, or'', and
                  (C) by adding at the end the following new paragraph:
          ``(7) a member of the Internal Revenue Service Oversight 
        Board.''.
          (2) The table of sections for subchapter A of chapter 80 is 
        amended by striking the item relating to section 7802 and 
        inserting the following new item:

                              ``Sec. 7802. Internal Revenue Service 
                                        Oversight Board.''

  (c) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        take effect on the date of the enactment of this Act.
          (2) Nominations to internal revenue service oversight 
        board.--The President shall submit nominations under section 
        7802 of the Internal Revenue Code of 1986, as added by this 
        section, to the Senate not later than 6 months after the date 
        of the enactment of this Act.

SEC. 102. COMMISSIONER OF INTERNAL REVENUE; OTHER OFFICIALS.

  (a) In General.--Section 7803 (relating to other personnel) is 
amended to read as follows:

``SEC. 7803. COMMISSIONER OF INTERNAL REVENUE; OTHER OFFICIALS.

  ``(a) Commissioner of Internal Revenue.--
          ``(1) Appointment.--
                  ``(A) In general.--There shall be in the Department 
                of the Treasury a Commissioner of Internal Revenue who 
                shall be appointed by the President, by and with the 
                advice and consent of the Senate, to a 5-year term. The 
                appointment shall be made without regard to political 
                affiliation or activity.
                  ``(B) Vacancy.--Any individual appointed to fill a 
                vacancy in the position of Commissioner occurring 
                before the expiration of the term for which such 
                individual's predecessor was appointed shall be 
                appointed only for the remainder of that term.
                  ``(C) Removal.--The Commissioner may be removed at 
                the will of the President.
          ``(2) Duties.--The Commissioner shall have such duties and 
        powers as the Secretary may prescribe, including the power to--
                  ``(A) 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; and
                  ``(B) recommend to the President a candidate for 
                appointment as Chief Counsel for the Internal Revenue 
                Service when a vacancy occurs, and recommend to the 
                President the removal of such Chief Counsel.
        If the Secretary determines not to delegate a power specified 
        in subparagraph (A) or (B), such determination may not take 
        effect until 30 days after the Secretary notifies the 
        Committees on Ways and Means, Government Reform and Oversight, 
        and Appropriations of the House of Representatives, the 
        Committees on Finance, Government Operations, and 
        Appropriations of the Senate, and the Joint Committee on 
        Taxation.
          ``(3) Consultation with board.--The Commissioner shall 
        consult with the Oversight Board on all matters set forth in 
        paragraphs (2) and (3) (other than paragraph (3)(A)) of section 
        7802(d).
  ``(b) Assistant Commissioner for Employee Plans and Exempt 
Organizations.--There is established within the Internal Revenue 
Service an office to be known as the `Office of Employee Plans and 
Exempt Organizations' to be under the supervision and direction of an 
Assistant Commissioner of Internal Revenue. As head of the Office, the 
Assistant Commissioner shall be responsible for carrying out such 
functions as the Secretary may prescribe with respect to organizations 
exempt from tax under section 501(a) and with respect to plans to which 
part I of subchapter D of chapter 1 applies (and with respect to 
organizations designed to be exempt under such section and plans 
designed to be plans to which such part applies) and other nonqualified 
deferred compensation arrangements. The Assistant Commissioner shall 
report annually to the Commissioner with respect to the Assistant 
Commissioner's responsibilities under this section.
  ``(c) Office of Taxpayer Advocate.--
          ``(1) In general.--
                  ``(A) Establishment.--There is established in the 
                Internal Revenue Service an office to be known as the 
                `Office of the Taxpayer Advocate'. Such office shall be 
                under the supervision and direction of an official to 
                be known as the `Taxpayer Advocate' who shall be 
                appointed with the approval of the Oversight Board by 
                the Commissioner of Internal Revenue and shall report 
                directly to the Commissioner. The Taxpayer Advocate 
                shall be entitled to compensation at the same rate as 
                the highest level official reporting directly to the 
                Commissioner of Internal Revenue.
                  ``(B) Restriction on subsequent employment.--An 
                individual who is an officer or employee of the 
                Internal Revenue Service may be appointed as Taxpayer 
                Advocate only if such individual agrees not to accept 
                any employment with the Internal Revenue Service for at 
                least 5 years after ceasing to be the Taxpayer 
                Advocate.
          ``(2) Functions of office.--
                  ``(A) In general.--It shall be the function of the 
                Office of Taxpayer Advocate to--
                          ``(i) assist taxpayers in resolving problems 
                        with the Internal Revenue Service,
                          ``(ii) identify areas in which taxpayers have 
                        problems in dealings with the Internal Revenue 
                        Service,
                          ``(iii) to the extent possible, propose 
                        changes in the administrative practices of the 
                        Internal Revenue Service to mitigate problems 
                        identified under clause (ii), and
                          ``(iv) identify potential legislative changes 
                        which may be appropriate to mitigate such 
                        problems.
                  ``(B) Annual reports.--
                          ``(i) Objectives.--Not later than June 30 of 
                        each calendar year, the Taxpayer Advocate shall 
                        report to the Committee on Ways and Means of 
                        the House of Representatives and the Committee 
                        on Finance of the Senate on the objectives of 
                        the Taxpayer Advocate for the fiscal year 
                        beginning in such calendar year. Any such 
                        report shall contain full and substantive 
                        analysis, in addition to statistical 
                        information.
                          ``(ii) Activities.--Not later than December 
                        31 of each calendar year, the Taxpayer Advocate 
                        shall report to the Committee on Ways and Means 
                        of the House of Representatives and the 
                        Committee on Finance of the Senate on the 
                        activities of the Taxpayer Advocate during the 
                        fiscal year ending during such calendar year. 
                        Any such report shall contain full and 
                        substantive analysis, in addition to 
                        statistical information, and shall--
                                  ``(I) identify the initiatives the 
                                Taxpayer Advocate has taken on 
                                improving taxpayer services and 
                                Internal Revenue Service 
                                responsiveness,
                                  ``(II) contain recommendations 
                                received from individuals with the 
                                authority to issue Taxpayer Assistance 
                                Orders under section 7811,
                                  ``(III) contain a summary of at least 
                                20 of the most serious problems 
                                encountered by taxpayers, including a 
                                description of the nature of such 
                                problems,
                                  ``(IV) contain an inventory of the 
                                items described in subclauses (I), 
                                (II), and (III) for which action has 
                                been taken and the result of such 
                                action,
                                  ``(V) contain an inventory of the 
                                items described in subclauses (I), 
                                (II), and (III) for which action 
                                remains to be completed and the period 
                                during which each item has remained on 
                                such inventory,
                                  ``(VI) contain an inventory of the 
                                items described in subclauses (I), 
                                (II), and (III) for which no action has 
                                been taken, the period during which 
                                each item has remained on such 
                                inventory, the reasons for the 
                                inaction, and identify any Internal 
                                Revenue Service official who is 
                                responsible for such inaction,
                                  ``(VII) identify any Taxpayer 
                                Assistance Order which was not honored 
                                by the Internal Revenue Service in a 
                                timely manner, as specified under 
                                section 7811(b),
                                  ``(VIII) contain recommendations for 
                                such administrative and legislative 
                                action as may be appropriate to resolve 
                                problems encountered by taxpayers,
                                  ``(IX) identify areas of the tax law 
                                that impose significant compliance 
                                burdens on taxpayers or the Internal 
                                Revenue Service, including specific 
                                recommendations for remedying these 
                                problems,
                                  ``(X) in conjunction with the 
                                National Director of Appeals, identify 
                                the 10 most litigated issues for each 
                                category of taxpayers, including 
                                recommendations for mitigating such 
                                disputes, and
                                  ``(XI) include such other information 
                                as the Taxpayer Advocate may deem 
                                advisable.
                          ``(iii) Report to be submitted directly.--
                        Each report required under this subparagraph 
                        shall be provided directly to the committees 
                        described in clauses (i) and (ii) without any 
                        prior review or comment from the Oversight 
                        Board, the Secretary of the Treasury, any other 
                        officer or employee of the Department of the 
                        Treasury, or the Office of Management and 
                        Budget.
                  ``(C) Other responsibilities.--The Taxpayer Advocate 
                shall--
                          ``(i) monitor the coverage and geographic 
                        allocation of problem resolution officers, and
                          ``(ii) develop guidance to be distributed to 
                        all Internal Revenue Service officers and 
                        employees outlining the criteria for referral 
                        of taxpayer inquiries to problem resolution 
                        officers.
          ``(3) Responsibilities of commissioner.--The Commissioner 
        shall establish procedures requiring a formal response to all 
        recommendations submitted to the Commissioner by the Taxpayer 
        Advocate within 3 months after submission to the 
        Commissioner.''.
  (b) Conforming Amendments.--
          (1) The table of sections for subchapter A of chapter 80 is 
        amended by striking the item relating to section 7803 and 
        inserting the following new item:

                              ``Sec. 7803. Commissioner of Internal 
                                        Revenue; other officials.''

          (2) Subsection (b) of section 5109 of title 5, United States 
        Code, is amended by striking ``7802(b)'' and inserting 
        ``7803(b)''.
  (c) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        take effect on the date of the enactment of this Act.
          (2) Current officers.--
                  (A) In the case of an individual serving as 
                Commissioner of Internal Revenue on the date of the 
                enactment of this Act who was appointed to such 
                position before such date, the 5-year term required by 
                section 7803(a)(1) of the Internal Revenue Code of 
                1986, as added by this section, shall begin as of the 
                date of such appointment.
                  (B) Section 7803(c)(1)(B) of such Code, as added by 
                this section, shall not apply to the individual serving 
                as Taxpayer Advocate on the date of the enactment of 
                this Act.

SEC. 103. OTHER PERSONNEL.

  (a) In General.--Section 7804 (relating to the effect of 
reorganization plans) is amended to read as follows:

``SEC. 7804. OTHER PERSONNEL.

  ``(a) Appointment and Supervision.--Unless otherwise prescribed by 
the Secretary, the Commissioner of Internal Revenue is authorized to 
employ such number of persons as the Commissioner deems proper for the 
administration and enforcement of the internal revenue laws, and the 
Commissioner shall issue all necessary directions, instructions, 
orders, and rules applicable to such persons.
  ``(b) Posts of Duty of Employees in Field Service or Traveling.--
Unless otherwise prescribed by the Secretary--
          ``(1) Designation of post of duty.--The Commissioner shall 
        determine and designate the posts of duty of all such persons 
        engaged in field work or traveling on official business outside 
        of the District of Columbia.
          ``(2) Detail of personnel from field service.--The 
        Commissioner may order any such person engaged in field work to 
        duty in the District of Columbia, for such periods as the 
        Commissioner may prescribe, and to any designated post of duty 
        outside the District of Columbia upon the completion of such 
        duty.
  ``(c) Delinquent Internal Revenue Officers and Employees.--If any 
officer or employee of the Treasury Department acting in connection 
with the internal revenue laws fails to account for and pay over any 
amount of money or property collected or received by him in connection 
with the internal revenue laws, the Secretary shall issue notice and 
demand to such officer or employee for payment of the amount which he 
failed to account for and pay over, and, upon failure to pay the amount 
demanded within the time specified in such notice, the amount so 
demanded shall be deemed imposed upon such officer or employee and 
assessed upon the date of such notice and demand, and the provisions of 
chapter 64 and all other provisions of law relating to the collection 
of assessed taxes shall be applicable in respect of such amount.''.
  (b) Conforming Amendments.--
          (1) Subsection (b) of section 6344 is amended by striking 
        ``section 7803(d)'' and inserting ``section 7804(c)''.
          (2) The table of sections for subchapter A of chapter 80 is 
        amended by striking the item relating to section 7804 and 
        inserting the following new item:

                              ``Sec. 7804. Other personnel.''

  (c) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 104. PROHIBITION ON EXECUTIVE BRANCH INFLUENCE OVER TAXPAYER 
                    AUDITS AND OTHER INVESTIGATIONS.

  (a) In General.--Part I of subchapter A of chapter 75 (relating to 
crimes, other offenses, and forfeitures) is amended by adding after 
section 7216 the following new section:

``SEC. 7217. PROHIBITION ON EXECUTIVE BRANCH INFLUENCE OVER TAXPAYER 
                    AUDITS AND OTHER INVESTIGATIONS.

  ``(a) Prohibition.--It shall be unlawful for any applicable person to 
request any officer or employee of the Internal Revenue Service to 
conduct or terminate an audit or other investigation of any particular 
taxpayer with respect to the tax liability of such taxpayer.
  ``(b) Reporting Requirement.--Any officer or employee of the Internal 
Revenue Service receiving any request prohibited by subsection (a) 
shall report the receipt of such request to the Chief Inspector of the 
Internal Revenue Service.
  ``(c) Exceptions.--Subsection (a) shall not apply to--
          ``(1) any request made to an applicable person by the 
        taxpayer or a representative of the taxpayer and forwarded by 
        such applicable person to the Internal Revenue Service,
          ``(2) any request by an applicable person for disclosure of 
        return or return information under section 6103 if such request 
        is made in accordance with the requirements of such section, or
          ``(3) any request by the Secretary of the Treasury as a 
        consequence of the implementation of a change in tax policy.
  ``(d) Penalty.--Any person who willfully violates subsection (a) or 
fails to report under subsection (b) shall be punished upon conviction 
by a fine in any amount not exceeding $5,000, or imprisonment of not 
more than 5 years, or both, together with the costs of prosecution.
  ``(e) Applicable Person.--For purposes of this section, the term 
`applicable person' means--
          ``(1) the President, the Vice President, any employee of the 
        executive office of the President, and any employee of the 
        executive office of the Vice President, and
          ``(2) any individual (other than the Attorney General of the 
        United States) serving in a position specified in section 5312 
        of title 5, United States Code.''
  (b) Clerical Amendment.--The table of sections for part I of 
subchapter A of chapter 75 is amended by adding after the item relating 
to section 7216 the following new item:

                              ``Sec. 7217. Prohibition on executive 
                                        branch influence over taxpayer 
                                        audits and other 
                                        investigations.''

  (c) Effective Date.--The amendments made by this section shall apply 
to requests made after the date of the enactment of this Act.

                  Subtitle B--Personnel Flexibilities

SEC. 111. PERSONNEL FLEXIBILITIES.

  (a) In General.--Part III of title 5, United States Code, is amended 
by adding at the end the following new subpart:

                       ``Subpart I--Miscellaneous

``CHAPTER 93--PERSONNEL FLEXIBILITIES RELATING TO THE INTERNAL REVENUE 
                                SERVICE

``Sec.
``9301. General requirements.
``9302. Flexibilities relating to performance management.
``9303. Staffing flexibilities.
``9304. Flexibilities relating to demonstration projects.

``Sec. 9301. General requirements

  ``(a) Conformance With Merit System Principles, Etc.--Any 
flexibilities under this chapter shall be exercised in a manner 
consistent with--
          ``(1) chapter 23, relating to merit system principles and 
        prohibited personnel practices; and
          ``(2) provisions of this title (outside of this subpart) 
        relating to preference eligibles.
  ``(b) Requirement Relating to Units Represented by Labor 
Organizations.--
          ``(1) Written agreement required.--Employees within a unit 
        with respect to which a labor organization is accorded 
        exclusive recognition under chapter 71 shall not be subject to 
        the exercise of any flexibility under section 9302, 9303, or 
        9304, unless there is a written agreement between the Internal 
        Revenue Service and the organization permitting such exercise.
          ``(2) Definition of a written agreement.--In order to satisfy 
        paragraph (1), a written agreement--
                  ``(A) need not be a collective bargaining agreement 
                within the meaning of section 7103(8); and
                  ``(B) may not be an agreement imposed by the Federal 
                Service Impasses Panel under section 7119.

``Sec. 9302. Flexibilities relating to performance management

  ``(a) In General.--The Commissioner of Internal Revenue shall, within 
a year after the date of the enactment of this chapter, establish a 
performance management system which--
          ``(1) subject to section 9301(b), shall cover all employees 
        of the Internal Revenue Service other than--
                  ``(A) the members of the Internal Revenue Service 
                Oversight Board;
                  ``(B) the Commissioner of Internal Revenue; and
                  ``(C) the Chief Counsel for the Internal Revenue 
                Service;
          ``(2) shall maintain individual accountability by--
                  ``(A) establishing standards of performance which--
                          ``(i) shall permit the accurate evaluation of 
                        each employee's performance on the basis of the 
                        individual and organizational performance 
                        requirements applicable with respect to the 
                        evaluation period involved, taking into account 
                        individual contributions toward the attainment 
                        of any goals or objectives under paragraph (3);
                          ``(ii) shall be communicated to an employee 
                        before the start of any period with respect to 
                        which the performance of such employee is to be 
                        evaluated using such standards; and
                          ``(iii) shall include at least 2 standards of 
                        performance, the lowest of which shall denote 
                        the retention standard and shall be equivalent 
                        to fully successful performance;
                  ``(B) providing for periodic performance evaluations 
                to determine whether employees are meeting all 
                applicable retention standards; and
                  ``(C) using the results of such employee's 
                performance evaluation as a basis for adjustments in 
                pay and other appropriate personnel actions; and
          ``(3) shall provide for (A) establishing goals or objectives 
        for individual, group, or organizational performance (or any 
        combination thereof), consistent with Internal Revenue Service 
        performance planning procedures, including those established 
        under the Government Performance and Results Act of 1993, the 
        Information Technology Management Reform Act of 1996, Revenue 
        Procedure 64-22 (as in effect on July 30, 1997), and taxpayer 
        service surveys, (B) communicating such goals or objectives to 
        employees, and (C) using such goals or objectives to make 
        performance distinctions among employees or groups of 
        employees.
For purposes of this title, performance of an employee during any 
period in which such employee is subject to standards of performance 
under paragraph (2) shall be considered to be `unacceptable' if the 
performance of such employee during such period fails to meet any 
retention standard.
  ``(b) Awards.--
          ``(1) For superior accomplishments.--In the case of a 
        proposed award based on the efforts of an employee or former 
        employee of the Internal Revenue Service, any approval required 
        under the provisions of section 4502(b) shall be considered to 
        have been granted if the Office of Personnel Management does 
        not disapprove the proposed award within 60 days after 
        receiving the appropriate certification described in such 
        provisions.
          ``(2) For employees who report directly to the 
        commissioner.--
                  ``(A) In general.--In the case of an employee of the 
                Internal Revenue Service who reports directly to the 
                Commissioner of Internal Revenue, a cash award in an 
                amount up to 50 percent of such employee's annual rate 
                of basic pay may be made if the Commissioner finds such 
                an award to be warranted based on such employee's 
                performance.
                  ``(B) Nature of an award.--A cash award under this 
                paragraph shall not be considered to be part of basic 
                pay.
                  ``(C) Tax enforcement results.--A cash award under 
                this paragraph may not be based solely on tax 
                enforcement results.
                  ``(D) Eligible employees.--Whether or not an employee 
                is an employee who reports directly to the Commissioner 
                of Internal Revenue shall, for purposes of this 
                paragraph, be determined under regulations which the 
                Commissioner shall prescribe, except that in no event 
                shall more than 8 employees be eligible for a cash 
                award under this paragraph in any calendar year.
                  ``(E) Limitation on compensation.--For purposes of 
                applying section 5307 to an employee in connection with 
                any calendar year to which an award made under this 
                paragraph to such employee is attributable, subsection 
                (a)(1) of such section shall be applied by substituting 
                `to equal or exceed the annual rate of compensation for 
                the Vice President for such calendar year' for `to 
                exceed the annual rate of basic pay payable for level I 
                of the Executive Schedule, as of the end of such 
                calendar year'.
                  ``(F) Approval required.--An award under this 
                paragraph may not be made unless--
                          ``(i) the Commissioner of Internal Revenue 
                        certifies to the Office of Personnel Management 
                        that such award is warranted; and
                          ``(ii) the Office approves, or does not 
                        disapprove, the proposed award within 60 days 
                        after the date on which it is so certified.
          ``(3) Based on savings.--
                  ``(A) In general.--The Commissioner of Internal 
                Revenue may authorize the payment of cash awards to 
                employees based on documented financial savings 
                achieved by a group or organization which such 
                employees comprise, if such payments are made pursuant 
                to a plan which--
                          ``(i) specifies minimum levels of service and 
                        quality to be maintained while achieving such 
                        financial savings; and
                          ``(ii) is in conformance with criteria 
                        prescribed by the Office of Personnel 
                        Management.
                  ``(B) Funding.--A cash award under this paragraph may 
                be paid from the fund or appropriation available to the 
                activity primarily benefiting or the various activities 
                benefiting.
                  ``(C) Tax enforcement results.--A cash award under 
                this paragraph may not be based solely on tax 
                enforcement results.
  ``(c) Other Provisions.--
          ``(1) Notice provisions.--In applying sections 4303(b)(1)(A) 
        and 7513(b)(1) to employees of the Internal Revenue Service, 
        `15 days' shall be substituted for `30 days'.
          ``(2) Appeals.--Notwithstanding the second sentence of 
        section 5335(c), an employee of the Internal Revenue Service 
        shall not have a right to appeal the denial of a periodic step 
        increase under section 5335 to the Merit Systems Protection 
        Board.

``Sec. 9303. Staffing flexibilities

  ``(a) Eligibility to Compete for A Permanent Appointment in the 
Competitive Service.--
          ``(1) Eligibility of qualified veterans.--
                  ``(A) In general.--No veteran described in 
                subparagraph (B) shall be denied the opportunity to 
                compete for an announced vacant competitive service 
                position within the Internal Revenue Service by reason 
                of--
                          ``(i) not having acquired competitive status; 
                        or
                          ``(ii) not being an employee of that agency.
                  ``(B) Description.--An individual shall, for purposes 
                of a position for which such individual is applying, be 
                considered a veteran described in this subparagraph if 
                such individual--
                          ``(i) is either a preference eligible, or an 
                        individual (other than a preference eligible) 
                        who has been separated from the armed forces 
                        under honorable conditions after at least 3 
                        years of active service; and
                          ``(ii) meets the minimum qualification 
                        requirements for the position sought.
          ``(2) Eligibility of certain temporary employees.--
                  ``(A) In general.--No temporary employee described in 
                subparagraph (B) shall be denied the opportunity to 
                compete for an announced vacant competitive service 
                position within the Internal Revenue Service by reason 
                of not having acquired competitive status.
                  ``(B) Description.--An individual shall, for purposes 
                of a position for which such individual is applying, be 
                considered a temporary employee described in this 
                subparagraph if--
                          ``(i) such individual is then currently 
                        serving as a temporary employee in the Internal 
                        Revenue Service;
                          ``(ii) such individual has completed at least 
                        2 years of current continuous service in the 
                        competitive service under 1 or more term 
                        appointments, each of which was made under 
                        competitive procedures prescribed for permanent 
                        appointments;
                          ``(iii) such individual's performance under 
                        each term appointment referred to in clause 
                        (ii) met all applicable retention standards; 
                        and
                          ``(iv) such individual meets the minimum 
                        qualification requirements for the position 
                        sought.
  ``(b) Rating Systems.--
          ``(1) In general.--Notwithstanding subchapter I of chapter 
        33, the Commissioner of Internal Revenue may establish category 
        rating systems for evaluating job applicants for positions in 
        the competitive service, under which qualified candidates are 
        divided into 2 or more quality categories on the basis of 
        relative degrees of merit, rather than assigned individual 
        numerical ratings. Each applicant who meets the minimum 
        qualification requirements for the position to be filled shall 
        be assigned to an appropriate category based on an evaluation 
        of the applicant's knowledge, skills, and abilities relative to 
        those needed for successful performance in the job to be 
        filled.
          ``(2) Treatment of preference eligibles.--Within each quality 
        category established under paragraph (1), preference eligibles 
        shall be listed ahead of individuals who are not preference 
        eligibles. For other than scientific and professional positions 
        at or higher than GS-9 (or equivalent), preference eligibles 
        who have a compensable service-connected disability of 10 
        percent or more, and who meet the minimum qualification 
        standards, shall be listed in the highest quality category.
          ``(3) Selection process.--An appointing authority may select 
        any applicant from the highest quality category or, if fewer 
        than 3 candidates have been assigned to the highest quality 
        category, from a merged category consisting of the highest and 
        second highest quality categories. Notwithstanding the 
        preceding sentence, the appointing authority may not pass over 
        a preference eligible in the same or a higher category from 
        which selection is made, unless the requirements of section 
        3317(b) or 3318(b), as applicable, are satisfied, except that 
        in no event may certification of a preference eligible under 
        this subsection be discontinued by the Internal Revenue Service 
        under section 3317(b) before the end of the 6-month period 
        beginning on the date of such employee's first certification.
  ``(c) Involuntary Reassignments and Removals of Career Appointees in 
the Senior Executive Service.--Neither section 3395(e)(1) nor section 
3592(b)(1) shall apply with respect to the Internal Revenue Service.
  ``(d) Probationary Periods.--Notwithstanding any other provision of 
law or regulation, the Commissioner of Internal Revenue may establish a 
period of probation under section 3321 of up to 3 years for any 
position if, as determined by the Commissioner, a shorter period would 
be insufficient for the incumbent to demonstrate complete proficiency 
in such position.
  ``(e) Provisions That Remain Applicable.--No provision of this 
section exempts the Internal Revenue Service from--
          ``(1) any employment priorities established under direction 
        of the President for the placement of surplus or displaced 
        employees; or
          ``(2) its obligations under any court order or decree 
        relating to the employment practices of the Internal Revenue 
        Service.

``Sec. 9304. Flexibilities relating to demonstration projects

  ``(a) Authority To Conduct.--The Commissioner of Internal Revenue 
may, in accordance with this section, conduct 1 or more demonstration 
projects to improve personnel management; provide increased individual 
accountability; eliminate obstacles to the removal of or imposing any 
disciplinary action with respect to poor performers, subject to the 
requirements of due process; expedite appeals from adverse actions or 
performance-based actions; and promote pay based on performance.
  ``(b) General Requirements.--Except as provided in subsection (c), 
each demonstration project under this section shall comply with the 
provisions of section 4703.
  ``(c) Special Rules.--For purposes of any demonstration project under 
this section--
          ``(1) Authority of commissioner.--The Commissioner of 
        Internal Revenue shall exercise the authority provided to the 
        Office of Personnel Management under section 4703.
          ``(2) Provisions not applicable.--The following provisions of 
        section 4703 shall not apply:
                  ``(A) Paragraphs (3) through (6) of subsection (b).
                  ``(B) Paragraphs (1), (2)(B)(ii), and (4) of 
                subsection (c).
                  ``(C) Subsections (d) through (g).
  ``(d) Notification Required To Be Given.--
          ``(1) To employees.--The Commissioner of Internal Revenue 
        shall notify employees likely to be affected by a project 
        proposed under this section at least 90 days in advance of the 
        date such project is to take effect.
          ``(2) To congress and opm.--The Commissioner of Internal 
        Revenue shall, with respect to each demonstration project under 
        this section, provide each House of Congress and the Office of 
        Personnel Management with a report, at least 30 days in advance 
        of the date such project is to take effect, setting forth the 
        final version of the plan for such project. Such report shall, 
        with respect to the project to which it relates, include the 
        information specified in section 4703(b)(1).
    ``(e) Limitations.--No demonstration project under this section 
may--
          ``(1) provide for a waiver of any regulation prescribed under 
        any provision of law referred to in paragraph (2)(B)(i) or (3) 
        of section 4703(c);
          ``(2) provide for a waiver of subchapter V of chapter 63 or 
        subpart G of part III (or any regulations prescribed under such 
        subchapter or subpart);
          ``(3) provide for a waiver of any law or regulation relating 
        to preference eligibles as defined in section 2108 or 
        subchapter II or III of chapter 73 (or any regulations 
        prescribed thereunder);
          ``(4) permit collective bargaining over pay or benefits, or 
        require collective bargaining over any matter which would not 
        be required under section 7106; or
          ``(5) include a system for measuring performance that 
        provides for only 1 level of performance at or above the level 
        of fully successful or better.
  ``(f) Permissible Projects.--Notwithstanding any other provision of 
law, a demonstration project under this section--
          ``(1) may establish alternative means of resolving any 
        dispute within the jurisdiction of the Equal Employment 
        Opportunity Commission, the Merit Systems Protection Board, the 
        Federal Labor Relations Authority, or the Federal Service 
        Impasses Panel; and
          ``(2) may permit the Internal Revenue Service to adopt any 
        alternative dispute resolution procedure that a private entity 
        may lawfully adopt.
  ``(g) Consultation and Coordination.--The Commissioner of Internal 
Revenue shall consult with the Director of the Office of Personnel 
Management in the development and implementation of each demonstration 
project under this section and shall submit such reports to the 
Director as the Director may require. The Director or the Commissioner 
of Internal Revenue may terminate a demonstration project under this 
section if either of them determines that the project creates a 
substantial hardship on, or is not in the best interests of, the 
public, the Federal Government, employees, or qualified applicants for 
employment with the Internal Revenue Service.
  ``(h) Termination.--Each demonstration project under this section 
shall terminate before the end of the 5-year period beginning on the 
date on which the project takes effect, except that any such project 
may continue beyond the end of such period, for not to exceed 2 years, 
if the Commissioner of Internal Revenue, with the concurrence of the 
Director, determines such extension is necessary to validate the 
results of the project. Not later than 6 months before the end of the 
5-year period and any extension under the preceding sentence, the 
Commissioner of Internal Revenue shall, with respect to the 
demonstration project involved, submit a legislative proposal to the 
Congress if the Commissioner determines that such project should be 
made permanent, in whole or in part.''
  (b) Clerical Amendment.--The analysis for part III of title 5, United 
States Code, is amended by adding at the end the following:

                       ``Subpart I--Miscellaneous

``93. Personnel Flexibilities Relating to the Internal          9301''.
Revenue Service.

  (c) Effective Date.--This section shall take effect on the date of 
enactment of this Act.

                      TITLE II--ELECTRONIC FILING

SEC. 201. ELECTRONIC FILING OF TAX AND INFORMATION RETURNS.

  (a) In General.--It is the policy of the Congress that paperless 
filing should be the preferred and most convenient means of filing tax 
and information returns, and that by the year 2007, no more than 20 
percent of all such returns should be filed on paper.
  (b) Strategic Plan.--
          (1) In general.--Not later than 180 days after the date of 
        the enactment of this Act, the Secretary of the Treasury or the 
        Secretary's delegate (hereafter in this section referred to as 
        the ``Secretary'') shall establish a plan to eliminate 
        barriers, provide incentives, and use competitive market forces 
        to increase electronic filing gradually over the next 10 years 
        while maintaining processing times for paper returns at 40 
        days. To the extent practicable, such plan shall provide that 
        all returns prepared electronically for taxable years beginning 
        after 2001 shall be filed electronically.
          (2) Electronic commerce advisory group.--To ensure that the 
        Secretary receives input from the private sector in the 
        development and implementation of the plan required by 
        paragraph (1), the Secretary shall convene an electronic 
        commerce advisory group to include representatives from the 
        small business community and from the tax practitioner, 
        preparer, and computerized tax processor communities and other 
        representatives from the electronic filing industry.
  (c) Promotion of Electronic Filing and Incentives.--Section 6011 is 
amended by redesignating subsection (f) as subsection (g) and by 
inserting after subsection (e) the following new subsection:
  ``(f) Promotion of Electronic Filing.--
          ``(1) In general.--The Secretary is authorized to promote the 
        benefits of and encourage the use of electronic tax 
        administration programs, as they become available, through the 
        use of mass communications and other means.
          ``(2) Incentives.--The Secretary may implement procedures to 
        provide for the payment of appropriate incentives for 
        electronically filed returns.''
  (d) Annual Reports.--Not later than June 30 of each calendar year 
after 1997, the Chairperson of the Internal Revenue Service Oversight 
Board, the Secretary, and the Chairperson of the electronic commerce 
advisory group established under subsection (b)(2) shall report to the 
Committees on Ways and Means, Appropriations, and Government Reform and 
Oversight of the House of Representatives, the Committees on Finance, 
Appropriations, and Government Affairs of the Senate, and the Joint 
Committee on Taxation, on--
          (1) the progress of the Internal Revenue Service in meeting 
        the goal of receiving electronically 80 percent of tax and 
        information returns by 2007;
          (2) the status of the plan required by subsection (b); and
          (3) the legislative changes necessary to assist the Internal 
        Revenue Service in meeting such goal.

SEC. 202. DUE DATE FOR CERTAIN INFORMATION RETURNS FILED 
                    ELECTRONICALLY.

  (a) In General.--Section 6071 (relating to time for filing returns 
and other documents) is amended by redesignating subsection (b) as 
subsection (c) and by inserting after subsection (a) the following new 
subsection:
  ``(b) Electronically Filed Information Returns.--Returns made under 
subparts B and C of part III of this subchapter which are filed 
electronically shall be filed on or before March 31 of the year 
following the calendar year to which such returns relate.''
  (b) Effective Date.--The amendment made by this section shall apply 
to returns required to be filed after December 31, 1999.

SEC. 203. PAPERLESS ELECTRONIC FILING.

  (a) In General.--Section 6061 (relating to signing of returns and 
other documents) is amended--
          (1) by striking ``Except as otherwise provided by'' and 
        inserting the following:
  ``(a) General Rule.--Except as otherwise provided by subsection (b) 
and'', and
          (2) by adding at the end the following new subsection:
  ``(b) Electronic Signatures.--
          ``(1) In general.--The Secretary shall develop procedures for 
        the acceptance of signatures in digital or other electronic 
        form. Until such time as such procedures are in place, the 
        Secretary may waive the requirement of a signature for all 
        returns or classes of returns, or may provide for alternative 
        methods of subscribing all returns, declarations, statements, 
        or other documents required or permitted to be made or written 
        under internal revenue laws and regulations.
          ``(2) Treatment of alternative methods.--Notwithstanding any 
        other provision of law, any return, declaration, statement or 
        other document filed without signature under the authority of 
        this subsection or verified, signed or subscribed under any 
        method adopted under paragraph (1) shall be treated for all 
        purposes (both civil and criminal, including penalties for 
        perjury) in the same manner as though signed and subscribed. 
        Any such return, declaration, statement or other document shall 
        be presumed to have been actually submitted and subscribed by 
        the person on whose behalf it was submitted.
          ``(3) Published guidance.--The Secretary shall publish 
        guidance as appropriate to define and implement any waiver of 
        the signature requirements.''
  (b) Acknowledgment of Electronic Filing.--Section 7502(c) is amended 
to read as follows:
  ``(c) Registered and Certified Mailing; Electronic Filing.--
          ``(1) Registered mail.--For purposes of this section, if any 
        return, claim, statement, or other document, or payment, is 
        sent by United States registered mail--
                  ``(A) such registration shall be prima facie evidence 
                that the return, claim, statement, or other document 
                was delivered to the agency, officer, or office to 
                which addressed, and
                  ``(B) the date of registration shall be deemed the 
                postmark date.
          ``(2) Certified mail; electronic filing.--The Secretary is 
        authorized to provide by regulations the extent to which the 
        provisions of paragraph (1) with respect to prima facie 
        evidence of delivery and the postmark date shall apply to 
        certified mail and electronic filing.''.
  (c) Establishment of Procedures for Other Information.--In the case 
of taxable periods beginning after December 31, 1998, the Secretary of 
the Treasury or the Secretary's delegate shall, to the extent 
practicable, establish procedures to accept, in electronic form, any 
other information, statements, elections, or schedules, from taxpayers 
filing returns electronically, so that such taxpayers will not be 
required to file any paper.
  (d) Procedures for Communications Between IRS and Preparer of 
Electronically-Filed Returns.--The Secretary shall establish procedures 
for taxpayers to authorize, on electronically filed returns, the 
preparer of such returns to communicate with the Internal Revenue 
Service on matters included on such returns.
  (e) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 204. RETURN-FREE TAX SYSTEM.

  (a) In General.--The Secretary of the Treasury or the Secretary's 
delegate shall develop procedures for the implementation of a return-
free tax system under which appropriate individuals would be permitted 
to comply with the Internal Revenue Code of 1986 without making the 
return required under section 6012 of such Code for taxable years 
beginning after 2007.
  (b) Report.--Not later than June 30 of each calendar year after 1999, 
such Secretary shall report to the Committee on Ways and Means of the 
House of Representatives, the Committee on Finance of the Senate, and 
the Joint Committee on Taxation on--
          (1) what additional resources the Internal Revenue Service 
        would need to implement such a system,
          (2) the changes to the Internal Revenue Code of 1986 that 
        could enhance the use of such a system,
          (3) the procedures developed pursuant to subsection (a), and
          (4) the number and classes of taxpayers that would be 
        permitted to use the procedures developed pursuant to 
        subsection (a).

SEC. 205. ACCESS TO ACCOUNT INFORMATION.

  Not later than December 31, 2006, the Secretary of the Treasury or 
the Secretary's delegate shall develop procedures under which a 
taxpayer filing returns electronically would be able to review the 
taxpayer's account electronically, but only if all necessary safeguards 
to ensure the privacy of such account information are in place.

               TITLE III--TAXPAYER PROTECTION AND RIGHTS

SEC. 300. SHORT TITLE.

  This title may be cited as the ``Taxpayer Bill of Rights 3''.

                      Subtitle A--Burden of Proof

SEC. 301. BURDEN OF PROOF.

  (a) In General.--Chapter 76 (relating to judicial proceedings) is 
amended by adding at the end the following new subchapter:

                    ``Subchapter E--Burden of Proof

                              ``Sec. 7491. Burden of proof.

``SEC. 7491. BURDEN OF PROOF.

  ``(a) General Rule.--The Secretary shall have the burden of proof in 
any court proceeding with respect to any factual issue relevant to 
ascertaining the income tax liability of a taxpayer.
  ``(b) Limitations.--Subsection (a) shall only apply with respect to 
an issue if--
          ``(1) the taxpayer asserts a reasonable dispute with respect 
        to such issue,
          ``(2) the taxpayer has fully cooperated with the Secretary 
        with respect to such issue, including providing, within a 
        reasonable period of time, access to and inspection of all 
        witnesses, information, and documents within the control of the 
        taxpayer, as reasonably requested by the Secretary, and
          ``(3) in the case of a partnership, corporation, or trust, 
        the taxpayer is described in section 7430(c)(4)(A)(ii).
  ``(c) Substantiation.--Nothing in this section shall be construed to 
override any requirement of this title to substantiate any item.''
  (b) Conforming Amendments.--
          (1) Section 6201 is amended by striking subsection (d) and 
        redesignating subsection (e) as subsection (d).
          (2) The table of subchapters for chapter 76 is amended by 
        adding at the end the following new item:

                              ``Subchapter E. Burden of proof.''

  (c) Effective Date.--The amendments made by this section shall apply 
to court proceedings arising in connection with examinations commencing 
after the date of the enactment of this Act.

                  Subtitle B--Proceedings by Taxpayers

SEC. 311. EXPANSION OF AUTHORITY TO AWARD COSTS AND CERTAIN FEES.

  (a) Award of Higher Attorney's Fees Based on Complexity of Issues.--
Clause (iii) of section 7430(c)(1)(B) (relating to the award of costs 
and certain fees) is amended by inserting ``the difficulty of the 
issues presented in the case, or the local availability of tax 
expertise,'' before ``justifies a higher rate''.
  (b) Award of Administrative Costs Incurred After 30-Day Letter.--
Paragraph (2) of section 7430(c) is amended by striking the last 
sentence and inserting the following:
        ``Such term shall only include costs incurred on or after 
        whichever of the following is the earliest: (i) the date of the 
        receipt by the taxpayer of the notice of the decision of the 
        Internal Revenue Service Office of Appeals, (ii) the date of 
        the notice of deficiency, or (iii) the date on which the 1st 
        letter of proposed deficiency which allows the taxpayer an 
        opportunity for administrative review in the Internal Revenue 
        Service Office of Appeals is sent.''.
  (c) Award of Fees for Certain Additional Services.--Paragraph (3) of 
section 7430(c) is amended to read as follows:
          ``(3) Attorney's fees.--
                  ``(A) In general.--For purposes of paragraphs (1) and 
                (2), fees for the services of an individual (whether or 
                not an attorney) who is authorized to practice before 
                the Tax Court or before the Internal Revenue Service 
                shall be treated as fees for the services of an 
                attorney.
                  ``(B) Pro bono services.--In any case in which the 
                court could have awarded attorney's fees under 
                subsection (a) but for the fact that an individual is 
                representing the prevailing party for no fee or for a 
                fee which (taking into account all the facts and 
                circumstances) is no more than a nominal fee, the court 
                may also award a judgment or settlement for such 
                amounts as the court determines to be appropriate 
                (based on hours worked and costs expended) for services 
                of such individual but only if such award is paid to 
                such individual or such individual's employer.''
  (d) Determination of Whether Position of United States is 
Substantially Justified.--Subparagraph (B) of section 7430(c)(4) is 
amended by redesignating clause (iii) as clause (iv) and by inserting 
after clause (ii) the following new clause:
                          ``(iii) Effect of losing on substantially 
                        similar issues.--In determining for purposes of 
                        clause (i) whether the position of the United 
                        States was substantially justified, the court 
                        shall take into account whether the United 
                        States has lost in courts of appeal for other 
                        circuits on substantially similar issues.''
  (e) Effective Date.--The amendments made by this section shall apply 
to costs incurred (and, in the case of the amendment made by subsection 
(c), services performed) more than 180 days after the date of the 
enactment of this Act.

SEC. 312. CIVIL DAMAGES FOR NEGLIGENCE IN COLLECTION ACTIONS.

  (a) In General.--Section 7433 (relating to civil damages for certain 
unauthorized collection actions) is amended--
          (1) in subsection (a), by inserting ``, or by reason of 
        negligence,'' after ``recklessly or intentionally'', and
          (2) in subsection (b)--
                  (A) in the matter preceding paragraph (1), by 
                inserting ``($100,000, in the case of negligence)'' 
                after ``$1,000,000'', and
                  (B) in paragraph (1), by inserting ``or negligent'' 
                after ``reckless or intentional''.
  (b) Requirement That Administrative Remedies Be Exhausted.--Paragraph 
(1) of section 7433(d) is amended to read as follows:
          ``(1) Requirement that administrative remedies be 
        exhausted.--A judgment for damages shall not be awarded under 
        subsection (b) unless the court determines that the plaintiff 
        has exhausted the administrative remedies available to such 
        plaintiff within the Internal Revenue Service.''
  (c) Effective Date.--The amendments made by this section shall apply 
to actions of officers or employees of the Internal Revenue Service 
after the date of the enactment of this Act.

SEC. 313. INCREASE IN SIZE OF CASES PERMITTED ON SMALL CASE CALENDAR.

  (a) In General.--Subsection (a) of section 7463 (relating to disputes 
involving $10,000 or less) is amended by striking ``$10,000'' each 
place it appears and inserting ``$25,000''.
  (b) Conforming Amendments.--
          (1) The section heading for section 7463 is amended by 
        striking ``$10,000'' and inserting ``$25,000''.
          (2) The item relating to section 7463 in the table of 
        sections for part II of subchapter C of chapter 76 is amended 
        by striking ``$10,000'' and inserting ``$25,000''.
  (c) Effective Date.--The amendments made by this section shall apply 
to proceedings commencing after the date of the enactment of this Act.

  Subtitle C--Relief for Innocent Spouses and for Taxpayers Unable To 
           Manage Their Financial Affairs Due to Disabilities

SEC. 321. SPOUSE RELIEVED IN WHOLE OR IN PART OF LIABILITY IN CERTAIN 
                    CASES.

  (a) In General.--Subpart B of part II of subchapter A of chapter 61 
is amended by inserting after section 6014 the following new section:

``SEC. 6015. INNOCENT SPOUSE RELIEF; PETITION TO TAX COURT.

  ``(a) Spouse Relieved of Liability in Certain Cases.--
          ``(1) In general.--Under procedures prescribed by the 
        Secretary, if--
                  ``(A) a joint return has been made under section 6013 
                for a taxable year,
                  ``(B) on such return there is an understatement of 
                tax attributable to erroneous items of 1 spouse,
                  ``(C) the other spouse establishes that in signing 
                the return he or she did not know, and had no reason to 
                know, that there was such understatement,
                  ``(D) taking into account all the facts and 
                circumstances, it is inequitable to hold the other 
                spouse liable for the deficiency in tax for such 
                taxable year attributable to such understatement, and
                  ``(E) the other spouse claims (in such form as the 
                Secretary may prescribe) the benefits of this 
                subsection not later than the date which is 2 years 
                after the date of the assessment of such deficiency,
        then the other spouse shall be relieved of liability for tax 
        (including interest, penalties, and other amounts) for such 
        taxable year to the extent such liability is attributable to 
        such understatement.
          ``(2) Apportionment of relief.--If a spouse who, but for 
        paragraph (1)(C), would be relieved of liability under 
        paragraph (1), establishes that in signing the return such 
        spouse did not know, and had no reason to know, the extent of 
        such understatement, then such spouse shall be relieved of 
        liability for tax (including interest, penalties, and other 
        amounts) for such taxable year to the extent that such 
        liability is attributable to the portion of such understatement 
        of which such spouse did not know and had no reason to know.
          ``(3) Understatement.--For purposes of this subsection, the 
        term `understatement' has the meaning given to such term by 
        section 6662(d)(2)(A).
          ``(4) Special rule for community property income.--For 
        purposes of this subsection, the determination of the spouse to 
        whom items of gross income (other than gross income from 
        property) are attributable shall be made without regard to 
        community property laws.
  ``(b) Petition for Review By Tax Court.--In the case of an individual 
who has filed a claim under subsection (a) within the period specified 
in subsection (a)(1)(E)--
          ``(1) In general.--Such individual may petition the Tax Court 
        (and the Tax Court shall have jurisdiction) to determine such 
        claim if such petition is filed during the 90-day period 
        beginning on the earlier of--
                  ``(A) the date which is 6 months after the date such 
                claim is filed with the Secretary, or
                  ``(B) the date on which the Secretary mails by 
                certified or registered mail a notice to such 
                individual denying such claim.
        Such 90-day period shall be determined by not counting 
        Saturday, Sunday, or a legal holiday in the District of 
        Columbia as the last day of such period.
          ``(2) Restrictions applicable to collection of assessment.--
                  ``(A) In general.--Except as otherwise provided in 
                section 6851 or 6861, no levy or proceeding in court 
                for collection of any assessment to which such claim 
                relates shall be made, begun, or prosecuted, until the 
                expiration of the 90-day period described in paragraph 
                (1), nor, if a petition has been filed with the Tax 
                Court, until the decision of the Tax Court has become 
                final. Rules similar to the rules of section 7485 shall 
                apply with respect to the collection of such 
                assessment.
                  ``(B) Authority to enjoin collection actions.--
                Notwithstanding the provisions of section 7421(a), the 
                beginning of such proceeding or levy during the time 
                the prohibition under subparagraph (A) is in force may 
                be enjoined by a proceeding in the proper court, 
                including the Tax Court. The Tax Court shall have no 
                jurisdiction under this paragraph to enjoin any action 
                or proceeding unless a timely petition for a 
                determination of such claim has been filed and then 
                only in respect of the amount of the assessment to 
                which such claim relates.
                  ``(C) Jeopardy collection.--If the Secretary makes a 
                finding that the collection of the tax is in jeopardy, 
                nothing in this subsection shall prevent the immediate 
                collection of such tax.
  ``(c) Suspension of Running of Period of Limitations.--The running of 
the period of limitations in section 6502 on the collection of the 
assessment to which the petition under subsection (b) relates shall be 
suspended for the period during which the Secretary is prohibited by 
subsection (b) from collecting by levy or a proceeding in court and for 
60 days thereafter.
  ``(d) Applicable Rules.--
          ``(1) Allowance of application.--Except as provided in 
        paragraph (2), notwithstanding any other law or rule of law 
        (other than section 6512(b), 7121, or 7122), credit or refund 
        shall be allowed or made to the extent attributable to the 
        application of this section.
          ``(2) Res judicata.--In the case of any claim under 
        subsection (a), the determination of the Tax Court in any prior 
        proceeding for the same taxable periods in which the decision 
        has become final, shall be conclusive except with respect to 
        the qualification of the spouse for relief which was not an 
        issue in such proceeding. The preceding sentence shall not 
        apply if the Tax Court determines that the spouse participated 
        meaningfully in such prior proceeding.
          ``(3) Limitation on tax court jurisdiction.--If a suit for 
        refund is begun by either spouse pursuant to section 6532, the 
        Tax Court shall lose jurisdiction of the spouse's action under 
        this section to whatever extent jurisdiction is acquired by the 
        district court or the United States Court of Federal Claims 
        over the taxable years that are the subject of the suit for 
        refund.''
  (b) Separate Form For Applying For Spousal Relief.--Not later than 
180 days after the date of the enactment of this Act, the Secretary of 
the Treasury shall develop a separate form with instructions for use by 
taxpayers in applying for relief under section 6015(a) of the Internal 
Revenue Code of 1986, as added by this section.
  (c) Conforming Amendments.--
          (1) Section 6013 is amended by striking subsection (e).
          (2) Subparagraph (A) of section 6230(c)(5) is amended by 
        striking ``section 6013(e)'' and inserting ``section 6015''.
  (d) Clerical Amendment.--The table of sections for subpart B of part 
II of subchapter A of chapter 61 is amended by inserting after the item 
relating to section 6014 the following new item:

                              ``Sec. 6015. Innocent spouse relief; 
                                        petition to Tax Court.''

  (e) Effective Date.--The amendments made by this section shall apply 
to understatements for taxable years beginning after the date of the 
enactment of this Act.

SEC. 322. SUSPENSION OF STATUTE OF LIMITATIONS ON FILING REFUND CLAIMS 
                    DURING PERIODS OF DISABILITY.

  (a) In General.--Section 6511 (relating to limitations on credit or 
refund) is amended by redesignating subsection (h) as subsection (i) 
and by inserting after subsection (g) the following new subsection:
  ``(h) Running of Periods of Limitation Suspended While Taxpayer Is 
Unable To Manage Financial Affairs Due to Disability.--
          ``(1) In general.--In the case of an individual, the running 
        of the periods specified in subsections (a), (b), and (c) shall 
        be suspended during any period of such individual's life that 
        such individual is financially disabled.
          ``(2) Financially disabled.--
                  ``(A) In general.--For purposes of paragraph (1), an 
                individual is financially disabled if such individual 
                is unable to manage his financial affairs by reason of 
                his medically determinable physical or mental 
                impairment which can be expected to result in death or 
                which has lasted or can be expected to last for a 
                continuous period of not less than 12 months. An 
                individual shall not be considered to have such an 
                impairment unless proof of the existence thereof is 
                furnished in such form and manner as the Secretary may 
                require.
                  ``(B) Exception where individual has guardian, etc.--
                An individual shall not be treated as financially 
                disabled during any period that such individual's 
                spouse or any other person is authorized to act on 
                behalf of such individual in financial matters.''
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to periods of disability before, on, or after the date of the enactment 
of this Act but shall not apply to any claim for credit or refund which 
(without regard to such amendment) is barred by the operation of any 
law or rule of law (including res judicata) as of January 1, 1998.

              Subtitle D--Provisions Relating to Interest

SEC. 331. ELIMINATION OF INTEREST RATE DIFFERENTIAL ON OVERLAPPING 
                    PERIODS OF INTEREST ON INCOME TAX OVERPAYMENTS AND 
                    UNDERPAYMENTS.

  (a) In General.--Section 6621 (relating to determination of rate of 
interest) is amended by adding at the end the following new subsection:
  ``(d) Elimination of Interest on Overlapping Periods of Income Tax 
Overpayments and Underpayments.--To the extent that, for any period, 
interest is payable under subchapter A and allowable under subchapter B 
on equivalent underpayments and overpayments by the same taxpayer of 
tax imposed by chapters 1 and 2, the net rate of interest under this 
section on such amounts shall be zero for such period.''
  (b) Conforming Amendment.--Subsection (f) of section 6601 (relating 
to satisfaction by credits) is amended by adding at the end the 
following new sentence: ``The preceding sentence shall not apply to the 
extent that section 6621(d) applies.''
  (c) Effective Date.--The amendments made by this section shall apply 
to interest for calendar quarters beginning after the date of the 
enactment of this Act.

SEC. 332. INCREASE IN OVERPAYMENT RATE PAYABLE TO TAXPAYERS OTHER THAN 
                    CORPORATIONS.

  (a) In General.--Subparagraph (B) of section 6621(a)(1) (defining 
overpayment rate) is amended to read as follows:
                  ``(B) 3 percentage points (2 percentage points in the 
                case of a corporation).''
  (b) Effective Date.--The amendment made by this section shall apply 
to interest for calendar quarters beginning after the date of the 
enactment of this Act.

 Subtitle E--Protections for Taxpayers Subject to Audit or Collection 
                               Activities

SEC. 341. PRIVILEGE OF CONFIDENTIALITY EXTENDED TO TAXPAYER'S DEALINGS 
                    WITH NON-ATTORNEYS AUTHORIZED TO PRACTICE BEFORE 
                    INTERNAL REVENUE SERVICE.

  Section 7602 (relating to examination of books and witnesses) is 
amended by adding at the end the following new subsection:
  ``(d) Privilege of Confidentiality Extended to Taxpayer's Dealings 
with Non-Attorneys Authorized to Practice Before Internal Revenue 
Service.--
          ``(1) In general.--In any noncriminal proceeding before the 
        Internal Revenue Service, the taxpayer shall be entitled to the 
        same common law protections of confidentiality with respect to 
        tax advice furnished by any qualified individual (in a manner 
        consistent with State law for such individual's profession) as 
        the taxpayer would have if such individual were an attorney.
          ``(2) Qualified individual.--For purposes of paragraph (1), 
        the term `qualified individual' means any individual (other 
        than an attorney) who is authorized to practice before the 
        Internal Revenue Service.''

SEC. 342. EXPANSION OF AUTHORITY TO ISSUE TAXPAYER ASSISTANCE ORDERS.

  Section 7811(a) (relating to taxpayer assistance orders) is amended--
          (1) by striking ``Upon application'' and inserting the 
        following:
          ``(1) In general.--Upon application'',
          (2) by moving the text 2 ems to the right, and
          (3) by adding at the end the following new paragraphs:
          ``(2) Issuance of taxpayer assistance orders.--For purposes 
        of determining whether to issue a taxpayer assistance order, 
        the Taxpayer Advocate shall consider the following factors, 
        among others:
                  ``(A) Whether there is an immediate threat of adverse 
                action.
                  ``(B) Whether there has been an unreasonable delay in 
                resolving taxpayer account problems.
                  ``(C) Whether the taxpayer will have to pay 
                significant costs (including fees for professional 
                representation) if relief is not granted.
                  ``(D) Whether the taxpayer will suffer irreparable 
                injury, or a long-term adverse impact, if relief is not 
                granted.
          ``(3) Standard where administrative guidance not followed.--
        In cases where any Internal Revenue Service employee is not 
        following applicable published administrative guidance 
        (including the Internal Revenue Manual), the Taxpayer Advocate 
        shall construe the factors taken into account in determining 
        whether to issue a taxpayer assistance order in the manner most 
        favorable to the taxpayer.''

SEC. 343. LIMITATION ON FINANCIAL STATUS AUDIT TECHNIQUES.

  Section 7602 is amended by adding at the end the following new 
subsection:
  ``(e) Limitation on Examination on Unreported Income.--The Secretary 
shall not use financial status or economic reality examination 
techniques to determine the existence of unreported income of any 
taxpayer unless the Secretary has a reasonable indication that there is 
a likelihood of such unreported income.''

SEC. 344. LIMITATION ON AUTHORITY TO REQUIRE PRODUCTION OF COMPUTER 
                    SOURCE CODE.

  (a) In General.--Section 7602 is amended by adding at the end the 
following new subsection:
  ``(f) Limitation on Authority To Require Production of Computer 
Source Code.--
          ``(1) In general.--No summons may be issued under this title, 
        and the Secretary may not begin any action under section 7604 
        to enforce any summons, to produce or examine any tax-related 
        computer source code.
          ``(2) Exception where information not otherwise available to 
        verify correctness of item on return.--Paragraph (1) shall not 
        apply to any portion of a tax-related computer source code if--
                  ``(A) the Secretary is unable to otherwise reasonably 
                ascertain the correctness of any item on a return 
                from--
                          ``(i) the taxpayer's books, papers, records, 
                        or other data, or
                          ``(ii) the computer software program and the 
                        associated data which, when executed, produces 
                        the output to prepare the return for the period 
                        involved, and
                  ``(B) the Secretary identifies with reasonable 
                specificity such portion as to be used to verify the 
                correctness of such item.
        The Secretary shall be treated as meeting the requirements of 
        subparagraphs (A) and (B) after the 90th day after the 
        Secretary makes a formal request to the taxpayer and the owner 
        or developer of the computer software program for the material 
        described in subparagraph (A)(ii) if such material is not 
        provided before the close of such 90th day.
          ``(3) Other exceptions.--Paragraph (1) shall not apply to--
                  ``(A) any inquiry into any offense connected with the 
                administration or enforcement of the internal revenue 
                laws, and
                  ``(B) any tax-related computer source code developed 
                by (or primarily for the benefit of) the taxpayer or a 
                related person (within the meaning of section 267 or 
                707(b)) for internal use by the taxpayer or such person 
                and not for commercial distribution.
          ``(4) Tax-related computer source code.--For purposes of this 
        subsection, the term `tax-related computer source code' means--
                  ``(A) the computer source code for any computer 
                software program for accounting, tax return preparation 
                or compliance, or tax planning, or
                  ``(B) design and development materials related to 
                such a software program (including program notes and 
                memoranda).
          ``(5) Right to contest summons.--The determination of whether 
        the requirements of subparagraphs (A) and (B) of paragraph (2) 
        are met or whether any exception under paragraph (3) applies 
        may be contested in any proceeding under section 7604.
          ``(6) Protection of trade secrets and other confidential 
        information.--In any court proceeding to enforce a summons for 
        any portion of a tax-related computer source code, the court 
        may issue any order necessary to prevent the disclosure of 
        trade secrets or other confidential information with respect to 
        such source code, including providing that any information be 
        placed under seal to be opened only as directed by the court.''
  (b) Application of Special Procedures for Third-Party Summonses.--
Paragraph (3) of section 7609(a) (defining third-party recordkeeper) is 
amended by striking ``and'' at the end of subparagraph (H), by striking 
a period at the end of subparagraph (I) and inserting ``, and'', and by 
adding at the end the following:
                  ``(J) any owner or developer of a tax-related 
                computer source code (as defined in section 
                7602(f)(4)).
        Subparagraph (J) shall apply only with respect to a summons 
        requiring the production of the source code referred to in 
        subparagraph (J) or the program and data described in section 
        7602(f)(2)(A)(ii) to which such source code relates.''
  (c) Effective Date.--The amendments made by this section shall apply 
to summonses issued more than 90 days after the date of the enactment 
of this Act.

SEC. 345. PROCEDURES RELATING TO EXTENSIONS OF STATUTE OF LIMITATIONS 
                    BY AGREEMENT.

  (a) In General.--Paragraph (4) of section 6501(c) (relating to the 
period for limitations on assessment and collection) is amended--
          (1) by striking ``Where'' and inserting the following:
                  ``(A) In general.--Where'',
          (2) by moving the text 2 ems to the right, and
          (3) by adding at the end the following new subparagraph:
                  ``(B) Notice to taxpayer of right to refuse or limit 
                extension.--The Secretary shall notify the taxpayer of 
                the taxpayer's right to refuse to extend the period of 
                limitations, or to limit such extension to particular 
                issues, on each occasion when the taxpayer is requested 
                to provide such consent.''
  (b) Effective Date.--The amendments made by this section shall apply 
to requests to extend the period of limitations made after the date of 
the enactment of this Act.

SEC. 346. OFFERS-IN-COMPROMISE.

  (a) Allowances For Basic Living Expenses.--Section 7122 (relating to 
offers-in-compromise) is amended by adding at the end the following new 
subsection:
  ``(c) Allowances For Basic Living Expenses.--The Secretary shall 
develop and publish schedules of national and local allowances designed 
to provide that taxpayers entering into a compromise have an adequate 
means to provide for basic living expenses.''
  (b) Preparation of Statement Relating to Offers-in-Compromise.--The 
Secretary of the Treasury shall prepare a statement which sets forth in 
simple, nontechnical terms the rights of a taxpayer and the obligations 
of the Internal Revenue Service relating to offers-in-compromise. Such 
statement shall--
          (1) advise taxpayers who have entered into a compromise 
        agreement of the advantages of promptly notifying the Internal 
        Revenue Service of any change of address or marital status, and
          (2) provide notice to taxpayers that in the case of a 
        compromise agreement terminated due to the actions of 1 spouse 
        or former spouse, the Internal Revenue Service will, upon 
        application, reinstate such agreement with the spouse or former 
        spouse who remains in compliance with such agreement.

SEC. 347. NOTICE OF DEFICIENCY TO SPECIFY DEADLINES FOR FILING TAX 
                    COURT PETITION.

  (a) In General.--The Secretary of the Treasury or the Secretary's 
delegate shall include on each notice of deficiency under section 6212 
of the Internal Revenue Code of 1986 the date determined by such 
Secretary (or delegate) as the last day on which the taxpayer may file 
a petition with the Tax Court.
  (b) Later Filing Deadlines Specified on Notice of Deficiency To Be 
Binding.--Subsection (a) of section 6213 (relating to restrictions 
applicable to deficiencies; petition to Tax Court) is amended by adding 
at the end the following new sentence: ``Any petition filed with the 
Tax Court on or before the last date specified for filing such petition 
by the Secretary in the notice of deficiency shall be treated as timely 
filed.''
  (c) Effective Date.--Subsection (a) and the amendment made by 
subsection (b) shall apply to notices mailed after December 31, 1998.

SEC. 348. REFUND OR CREDIT OF OVERPAYMENTS BEFORE FINAL DETERMINATION.

  (a) Tax Court Proceedings.--Subsection (a) of section 6213 is 
amended--
          (1) by striking ``, including the Tax Court.'' and inserting 
        ``, including the Tax Court, and a refund may be ordered by 
        such court of any amount collected within the period during 
        which the Secretary is prohibited from collecting by levy or 
        through a proceeding in court under the provisions of this 
        subsection.'', and
          (2) by striking ``to enjoin any action or proceeding'' and 
        inserting ``to enjoin any action or proceeding or order any 
        refund''.
  (b) Other Proceedings.--Subsection (a) of section 6512 is amended by 
striking the period at the end of paragraph (4) and inserting ``, 
and'', and by inserting after paragraph (4) the following new 
paragraphs:
          ``(5) As to any amount collected within the period during 
        which the Secretary is prohibited from making the assessment or 
        from collecting by levy or through a proceeding in court under 
        the provisions of section 6213(a), and
          ``(6) As to overpayments the Secretary is authorized to 
        refund or credit pending appeal as provided in subsection 
        (b).''
  (c) Refund or Credit Pending Appeal.--Paragraph (1) of section 
6512(b) is amended by adding at the end the following new sentence: 
``If a notice of appeal in respect of the decision of the Tax Court is 
filed under section 7483, the Secretary is authorized to refund or 
credit the overpayment determined by the Tax Court to the extent the 
overpayment is not contested on appeal.''
  (d) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 349. THREAT OF AUDIT PROHIBITED TO COERCE TIP REPORTING 
                    ALTERNATIVE COMMITMENT AGREEMENTS.

  The Secretary of the Treasury or the Secretary's delegate shall 
instruct employees of the Internal Revenue Service that they may not 
threaten to audit any taxpayer in an attempt to coerce the taxpayer 
into entering into a Tip Reporting Alternative Commitment Agreement.

                  Subtitle F--Disclosures to Taxpayers

SEC. 351. EXPLANATION OF JOINT AND SEVERAL LIABILITY.

  The Secretary of the Treasury or the Secretary's delegate shall, as 
soon as practicable, but not later than 180 days after the date of the 
enactment of this Act, establish procedures to clearly alert married 
taxpayers of their joint and several liabilities on all appropriate 
publications and instructions.

SEC. 352. EXPLANATION OF TAXPAYERS' RIGHTS IN INTERVIEWS WITH THE 
                    INTERNAL REVENUE SERVICE.

  The Secretary of the Treasury or the Secretary's delegate shall, as 
soon as practicable, but not later than 180 days after the date of the 
enactment of this Act, revise the statement required by section 6227 of 
the Omnibus Taxpayer Bill of Rights (Internal Revenue Service 
Publication No. 1) to more clearly inform taxpayers of their rights--
          (1) to be represented at interviews with the Internal Revenue 
        Service by any person authorized to practice before the 
        Internal Revenue Service, and
          (2) to suspend an interview pursuant to section 7521(b)(2) of 
        the Internal Revenue Code of 1986.

SEC. 353. DISCLOSURE OF CRITERIA FOR EXAMINATION SELECTION.

  (a) In General.--The Secretary of the Treasury or the Secretary's 
delegate shall, as soon as practicable, but not later than 180 days 
after the date of the enactment of this Act, incorporate into the 
statement required by section 6227 of the Omnibus Taxpayer Bill of 
Rights (Internal Revenue Service Publication No. 1) a statement which 
sets forth in simple and nontechnical terms the criteria and procedures 
for selecting taxpayers for examination. Such statement shall not 
include any information the disclosure of which would be detrimental to 
law enforcement, but shall specify the general procedures used by the 
Internal Revenue Service, including whether taxpayers are selected for 
examination on the basis of information available in the media or on 
the basis of information provided to the Internal Revenue Service by 
informants.
  (b) Transmission to Committees of Congress.--The Secretary shall 
transmit drafts of the statement required under subsection (a) (or 
proposed revisions to any such statement) to the Committee on Ways and 
Means of the House of Representatives, the Committee on Finance of the 
Senate, and the Joint Committee on Taxation on the same day.

SEC. 354. EXPLANATIONS OF APPEALS AND COLLECTION PROCESS.

  The Secretary of the Treasury or the Secretary's delegate shall, as 
soon as practicable but not later than 180 days after the date of the 
enactment of this Act, include with any 1st letter of proposed 
deficiency which allows the taxpayer an opportunity for administrative 
review in the Internal Revenue Service Office of Appeals an explanation 
of the appeals process and the collection process with respect to such 
proposed deficiency.

                Subtitle G--Low Income Taxpayer Clinics

SEC. 361. LOW INCOME TAXPAYER CLINICS.

  (a) In General.--Chapter 77 (relating to miscellaneous provisions) is 
amended by adding at the end the following new section:

``SEC. 7525. LOW INCOME TAXPAYER CLINICS.

  ``(a) In General.--The Secretary shall make grants to provide 
matching funds for the development, expansion, or continuation of 
qualified low income taxpayer clinics.
  ``(b) Definitions.--For purposes of this section--
          ``(1) Qualified low income taxpayer clinic.--
                  ``(A) In general.--The term `qualified low income 
                taxpayer clinic' means a clinic that--
                          ``(i) does not charge more than a nominal fee 
                        for its services (except for reimbursement of 
                        actual costs incurred), and
                          ``(ii)(I) represents low income taxpayers in 
                        controversies with the Internal Revenue 
                        Service, or
                          ``(II) operates programs to inform 
                        individuals for whom English is a second 
                        language about their rights and 
                        responsibilities under this title.
                  ``(B) Representation of low income taxpayers.--A 
                clinic meets the requirements of subparagraph 
                (A)(ii)(I) if--
                          ``(i) at least 90 percent of the taxpayers 
                        represented by the clinic have incomes which do 
                        not exceed 250 percent of the poverty level, as 
                        determined in accordance with criteria 
                        established by the Director of the Office of 
                        Management and Budget, and
                          ``(ii) the amount in controversy for any 
                        taxable year generally does not exceed the 
                        amount specified in section 7463.
          ``(2) Clinic.--The term `clinic' includes--
                  ``(A) a clinical program at an accredited law school 
                in which students represent low income taxpayers in 
                controversies arising under this title, and
                  ``(B) an organization described in section 501(c) and 
                exempt from tax under section 501(a) which satisfies 
                the requirements of paragraph (1) through 
                representation of taxpayers or referral of taxpayers to 
                qualified representatives.
          ``(3) Qualified representative.--The term `qualified 
        representative' means any individual (whether or not an 
        attorney) who is authorized to practice before the Internal 
        Revenue Service or the applicable court.
  ``(c) Special Rules and Limitations.--
          ``(1) Aggregate limitation.--Unless otherwise provided by 
        specific appropriation, the Secretary shall not allocate more 
        than $3,000,000 per year (exclusive of costs of administering 
        the program) to grants under this section.
          ``(2) Limitation on annual grants to a clinic.--The aggregate 
        amount of grants which may be made under this section to a 
        clinic for a year shall not exceed $100,000.
          ``(3) Multi-year grants.--Upon application of a qualified low 
        income taxpayer clinic, the Secretary is authorized to award a 
        multi-year grant not to exceed 3 years.
          ``(4) Criteria for awards.--In determining whether to make a 
        grant under this section, the Secretary shall consider--
                  ``(A) the numbers of taxpayers who will be served by 
                the clinic, including the number of taxpayers in the 
                geographical area for whom English is a second 
                language,
                  ``(B) the existence of other low income taxpayer 
                clinics serving the same population,
                  ``(C) the quality of the program offered by the low 
                income taxpayer clinic, including the qualifications of 
                its administrators and qualified representatives, and 
                its record, if any, in providing service to low income 
                taxpayers, and
                  ``(D) alternative funding sources available to the 
                clinic, including amounts received from other grants 
                and contributions, and the endowment and resources of 
                the institution sponsoring the clinic.
          ``(5) Requirement of matching funds.--A low income taxpayer 
        clinic must provide matching funds on a dollar for dollar basis 
        for all grants provided under this section. Matching funds may 
        include--
                  ``(A) the salary (including fringe benefits) of 
                individuals performing services for the clinic, and
                  ``(B) the cost of equipment used in the clinic.
        Indirect expenses, including general overhead of the 
        institution sponsoring the clinic, shall not be counted as 
        matching funds.''
  (b) Clerical Amendment.--The table of sections for chapter 77 is 
amended by adding at the end the following new section:

                              ``Sec. 7525. Low income taxpayer 
                                        clinics.''

  (c) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

                       Subtitle H--Other Matters

SEC. 371. ACTIONS FOR REFUND WITH RESPECT TO CERTAIN ESTATES WHICH HAVE 
                    ELECTED THE INSTALLMENT METHOD OF PAYMENT.

  (a) In General.--Section 7422 is amended by redesignating subsection 
(j) as subsection (k) and by inserting after subsection (i) the 
following new subsection:
  ``(j) Special Rule for Actions With Respect to Estates for Which An 
Election Under Section 6166 Is Made.--
          ``(1) In general.--The district courts of the United States 
        and the United States Court of Federal Claims shall have 
        jurisdiction over any action brought by the representative of 
        an estate to which this subsection applies to determine the 
        correct amount of the estate tax liability of such estate (or 
        for any refund with respect thereto) even if the full amount of 
        such liability has not been paid.
          ``(2) Estates to which subsection applies.--This subsection 
        shall apply to any estate if, as of the date the action is 
        filed--
                  ``(A) an election under section 6166 is in effect 
                with respect to such estate,
                  ``(B) no portion of the installments payable under 
                such section have been accelerated, and
                  ``(C) all installments the due date for which is on 
                or before the date the action is filed have been paid.
          ``(3) Prohibition on collection of disallowed liability.--If 
        the court redetermines under paragraph (1) the estate tax 
        liability of an estate, no part of such liability which is 
        disallowed by a decision of such court which has become final 
        may be collected by the Secretary, and amounts paid in excess 
        of the installments determined by the court as currently due 
        and payable shall be refunded.''
  (b) Extension of Time To File Refund Suit.--Section 7479 (relating to 
declaratory judgments relating to eligibility of estate with respect to 
installment payments under section 6166) is amended by adding at the 
end the following new subsection:
  ``(c) Extension of Time To File Refund Suit.--The 2-year period in 
section 6532(a)(1) for filing suit for refund after disallowance of a 
claim shall be suspended during the 90-day period after the mailing of 
the notice referred to in subsection (b)(3) and, if a pleading has been 
filed with the Tax Court under this section, until the decision of the 
Tax Court has become final.''
  (c) Effective Date.--The amendments made by this section shall apply 
to any claim for refund filed after the date of the enactment of this 
Act.

SEC. 372. CATALOGING COMPLAINTS.

  In collecting data for the report required under section 1211 of 
Taxpayer Bill of Rights 2 (Public Law 104-168), the Secretary of the 
Treasury or the Secretary's delegate shall maintain records of taxpayer 
complaints of misconduct by Internal Revenue Service employees on an 
individual employee basis.

SEC. 373. ARCHIVE OF RECORDS OF INTERNAL REVENUE SERVICE.

  (a) In General.--Subsection (l) of section 6103 (relating to 
confidentiality and disclosure of returns and return information) is 
amended by adding at the end the following new paragraph:
          ``(17) Disclosure to national archives and records 
        administration.--The Secretary shall, upon written request from 
        the Archivist of the United States, disclose or authorize the 
        disclosure of returns and return information to officers and 
        employees of the National Archives and Records Administration 
        for purposes of, and only to the extent necessary in, the 
        appraisal of records for destruction or retention. No such 
        officer or employee shall, except to the extent authorized by 
        subsections (f), (i)(7), or (p), disclose any return or return 
        information disclosed under the preceding sentence to any 
        person other than to the Secretary, or to another officer or 
        employee of the National Archives and Records Administration 
        whose official duties require such disclosure for purposes of 
        such appraisal.''
  (b) Conforming Amendments.--Section 6103(p) is amended--
          (1) in paragraph (3)(A), by striking ``or (16)'' and 
        inserting ``(16), or (17)'',
          (2) in paragraph (4), by striking ``or (14)'' and inserting 
        ``, (14), or (17)'' in the matter preceding subparagraph (A), 
        and
          (3) in paragraph (4)(F)(ii), by striking ``or (15)'' and 
        inserting ``, (15), or (17)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to requests made by the Archivist of the United States after the date 
of the enactment of this Act.

SEC. 374. PAYMENT OF TAXES.

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

SEC. 375. CLARIFICATION OF AUTHORITY OF SECRETARY RELATING TO THE 
                    MAKING OF ELECTIONS.

  Subsection (d) of section 7805 is amended by striking ``by 
regulations or forms''.

SEC. 376. LIMITATION ON PENALTY ON INDIVIDUAL'S FAILURE TO PAY FOR 
                    MONTHS DURING PERIOD OF INSTALLMENT AGREEMENT.

  (a) In General.--Section 6651 (relating to failure to file tax return 
or to pay tax) is amended by adding at the end the following new 
subsection:
  ``(h) Limitation on Penalty on Individual's Failure To Pay for Months 
During Period of Installment Agreement.--No addition to the tax shall 
be imposed under paragraph (2) or (3) of subsection (a) with respect to 
the tax liability of an individual for any month during which an 
installment agreement under section 6159 is in effect for the payment 
of such tax to the extent that imposing an addition to the tax under 
such paragraph for such month would result in the aggregate number of 
percentage points of such addition to the tax exceeding 9.5.''
  (b) Effective Date.--The amendment made by this section shall apply 
for purposes of determining additions to the tax for months beginning 
after the date of the enactment of this Act.

                          Subtitle I--Studies

SEC. 381. PENALTY ADMINISTRATION.

  The Joint Committee on Taxation shall conduct a study--
          (1) reviewing the administration and implementation by the 
        Internal Revenue Service of the penalty reform provisions of 
        the Omnibus Budget Reconciliation Act of 1989, and
          (2) making any legislative and administrative recommendations 
        it deems appropriate to simplify penalty administration and 
        reduce taxpayer burden.
Such study shall be submitted to the Committee on Ways and Means of the 
House of Representatives and the Committee on Finance of the Senate not 
later than 9 months after the date of enactment of this Act.

SEC. 382. CONFIDENTIALITY OF TAX RETURN INFORMATION.

  The Joint Committee on Taxation shall conduct a study of the scope 
and use of provisions regarding taxpayer confidentiality, and shall 
report the findings of such study, together with such recommendations 
as it deems appropriate, to the Congress not later than one year after 
the date of the enactment of this Act. Such study shall examine the 
present protections for taxpayer privacy, the need for third parties to 
use tax return information, and the ability to achieve greater levels 
of voluntary compliance by allowing the public to know who is legally 
required to file tax returns, but does not file tax returns.

TITLE IV--CONGRESSIONAL ACCOUNTABILITY FOR THE INTERNAL REVENUE SERVICE

                         Subtitle A--Oversight

SEC. 401. EXPANSION OF DUTIES OF THE JOINT COMMITTEE ON TAXATION.

  (a) In General.--Section 8021 (relating to the powers of the Joint 
Committee on Taxation) is amended by adding at the end the following 
new subsections:
  ``(e) Investigations.--The Joint Committee shall review all requests 
(other than requests by the chairman or ranking member of a Committee 
or Subcommittee) for investigations of the Internal Revenue Service by 
the General Accounting Office, and approve such requests when 
appropriate, with a view towards eliminating overlapping 
investigations, ensuring that the General Accounting Office has the 
capacity to handle the investigation, and ensuring that investigations 
focus on areas of primary importance to tax administration.
  ``(f) Relating to Joint Hearings.--
          ``(1) In general.--The Chief of Staff, and such other staff 
        as are appointed pursuant to section 8004, shall provide such 
        assistance as is required for joint hearings described in 
        paragraph (2).
          ``(2) Joint hearings.--On or before April 1 of each calendar 
        year after 1997, there shall be a joint hearing of two members 
        of the majority and one member of the minority from each of the 
        Committees on Finance, Appropriations, and Government Affairs 
        of the Senate, and the Committees on Ways and Means, 
        Appropriations, and Government Reform and Oversight of the 
        House of Representatives, to review the strategic plans and 
        budget for the Internal Revenue Service. After the conclusion 
        of the annual filing season, there shall be a second annual 
        joint hearing to review the other matters outlined in section 
        8022(3)(C).''
  (b) Effective Dates.--
          (1) Subsection (e) of section 8021 of the Internal Revenue 
        Code of 1986, as added by subsection (a) of this section, shall 
        apply to requests made after the date of enactment of this Act.
          (2) Subsection (f) of section 8021 of the Internal Revenue 
        Code of 1986, as added by subsection (a) of this section, shall 
        take effect on the date of the enactment of this Act.

SEC. 402. COORDINATED OVERSIGHT REPORTS.

  (a) In General.--Paragraph (3) of section 8022 (relating to the 
duties of the Joint Committee on Taxation) is amended to read as 
follows:
          ``(3) Reports.--
                  ``(A) To report, from time to time, to the Committee 
                on Finance and the Committee on Ways and Means, and, in 
                its discretion, to the Senate or House of 
                Representatives, or both, the results of its 
                investigations, together with such recommendations as 
                it may deem advisable.
                  ``(B) To report, annually, 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.
                  ``(C) To report, annually, to the Committees on 
                Finance, Appropriations, and Government Affairs of the 
                Senate, and to the Committees on Ways and Means, 
                Appropriations, and Government Reform and Oversight of 
                the House of Representatives, with respect to--
                          ``(i) strategic and business plans for the 
                        Internal Revenue Service;
                          ``(ii) progress of the Internal Revenue 
                        Service in meeting its objectives;
                          ``(iii) the budget for the Internal Revenue 
                        Service and whether it supports its objectives;
                          ``(iv) progress of the Internal Revenue 
                        Service in improving taxpayer service and 
                        compliance;
                          ``(v) progress of the Internal Revenue 
                        Service on technology modernization; and
                          ``(vi) the annual filing season.''
  (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

                           Subtitle B--Budget

SEC. 411. FUNDING FOR CENTURY DATE CHANGE.

  It is the sense of Congress that the Internal Revenue Service efforts 
to resolve the century date change computing problems should be funded 
fully to provide for certain resolution of such problems.

SEC. 412. FINANCIAL MANAGEMENT ADVISORY GROUP.

  The Commissioner shall convene a financial management advisory group 
consisting of individuals with expertise in governmental accounting and 
auditing from both the private sector and the Government to advise the 
Commissioner on financial management issues, including--
          (1) the continued partnership between the Internal Revenue 
        Service and the General Accounting Office;
          (2) the financial accounting aspects of the Internal Revenue 
        Service's system modernization;
          (3) the necessity and utility of year-round auditing; and
          (4) the Commissioner's plans for improving its financial 
        management system.

                     Subtitle C--Tax Law Complexity

SEC. 421. ROLE OF THE INTERNAL REVENUE SERVICE.

  It is the sense of Congress that the Internal Revenue Service should 
provide the Congress with an independent view of tax administration, 
and that during the legislative process, the tax writing committees of 
the Congress should hear from front-line technical experts at the 
Internal Revenue Service with respect to the administrability of 
pending amendments to the Internal Revenue Code of 1986.

SEC. 422. TAX COMPLEXITY ANALYSIS.

  (a) In General.--Chapter 92 (relating to powers and duties of the 
Joint Committee on Taxation) is amended by adding at the end the 
following new section:

``SEC. 8024. TAX COMPLEXITY ANALYSIS.

  ``(a) In General.--If--
          ``(1) legislation is reported by the Committee on Finance of 
        the Senate, the Committee on Ways and Means of the House of 
        Representatives, or any committee of conference, and
          ``(2) such legislation includes any provision amending the 
        Internal Revenue Code of 1986,
the report or statement accompanying such legislation shall contain a 
Tax Complexity Analysis prepared by the staff of the Joint Committee on 
Taxation.
  ``(b) Content of Complexity Analysis.--Each Tax Complexity Analysis 
shall identify the provisions, if any, adding significant complexity or 
providing significant simplification, as determined by the staff of the 
Joint Committee on Taxation, and shall include the basis for such 
determination.
  ``(c) Legislation Subject to Point of Order.--It shall not be in 
order in the Senate or the House of Representatives to consider any 
legislation described in subsection (a) required to be accompanied by a 
Tax Complexity Analysis that does not contain a Tax Complexity 
Analysis.
  ``(d) Responsibilities of the Commissioner.--The Commissioner shall 
provide the Joint Committee on Taxation with such information as is 
necessary to prepare Tax Complexity Analyses.''
  (b) Clerical Amendment.--The table of sections for chapter 92 is 
amended by adding at the end the following new item:

                              ``Sec. 8024. Tax complexity analysis.''

  (c) Effective Date.--The amendments made by this section shall apply 
to legislation considered on or after January 1, 1998.

     TITLE V--CLARIFICATION OF DEDUCTION FOR DEFERRED COMPENSATION

SEC. 501. CLARIFICATION OF DEDUCTION FOR DEFERRED COMPENSATION.

  (a) In General.--Subsection (a) of section 404 is amended by adding 
at the end the following new paragraph:
          ``(11) Determinations relating to deferred compensation.--
                  ``(A) In general.--For purposes of determining under 
                this section--
                          ``(i) whether compensation of an employee is 
                        deferred compensation, and
                          ``(ii) when deferred compensation is paid,
                no amount shall be treated as received by the employee, 
                or paid, until it is actually received by the employee.
                  ``(B) Exception.--Subparagraph (A) shall not apply to 
                severance pay.''
  (b) Sick Leave Pay Treated Like Vacation Pay.--Paragraph (5) of 
section 404(a) is amended by inserting ``or sick leave pay'' after 
``vacation pay''.
  (c) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        apply to taxable years ending after October 8, 1997.
          (2) Change in method of accounting.--In the case of any 
        taxpayer required by this section to change its method of 
        accounting for its first taxable year ending after October 8, 
        1997--
                  (A) such change shall be treated as initiated by the 
                taxpayer,
                  (B) such change shall be treated as made with the 
                consent of the Secretary of the Treasury, and
                  (C) the net amount of the adjustments required to be 
                taken into account by the taxpayer under section 481 of 
                the Internal Revenue Code of 1986 shall be taken into 
                account in such first taxable year.

                       I. SUMMARY AND BACKGROUND

                         A. Purpose and Summary

    H.R. 2676, as amended, modifies the structure and 
procedures of the Internal Revenue Service (``IRS''), provides 
IRS personnel flexibilities, encourages electronic filing, 
provides additional taxpayer rights and protections, modifies 
Congressional oversight of the IRS, and provides a revenue 
offset relating to the treatment of the employer deduction for 
vacation pay.

Title I--Executive branch governance

    The bill establishes within the Treasury Department the 
Internal Revenue Service Oversight Board (the ``Board''). The 
general responsibility of the Board is to oversee the IRS in 
the administration, management, conduct, direction, and 
supervision of the execution and application of the internal 
revenue laws. The Board is to have the following specific 
responsibilities: to review and approve strategic plans of the 
IRS; to review the operational functions of the IRS; to provide 
for the review of the Commissioner's selection, evaluation and 
compensation of senior managers; to review and approve plans 
for major reorganizations; and to review and approve the budget 
of the IRS prepared by the Commissioner. The Board is to be 
composed of 8 private-life members appointed by the President 
with the advice and consent of the Senate, plus the Secretary 
of the Treasury (or the Deputy Secretary), the IRS 
Commissioner, and a representative of a union representing a 
significant number of IRS employees (who would be appointed by 
the President, with the advice and consent of the Senate).
    The bill provides that the IRS Commissioner is appointed as 
under present law by the President, with the advice and consent 
of the Senate. However, the Board has the authority to 
recommend candidates for Commissioner to the President, and to 
recommend removal of the Commissioner. The Commissioner has 
such duties and powers as prescribed by the Secretary. Unless 
otherwise prescribed by the Secretary, such duties include 
certain statutorily enumerated duties. The Secretary must 
notify the Congress of any changes in the duties delegated to 
the Commissioner.
    The bill deletes the present-law funding mechanism for the 
employee plans and exempt organizations division of the IRS in 
Code section 7802(b)(2). Such funding mechanism has never been 
utilized under present law.
    The bill makes changes relating to the Taxpayer Advocate 
designed to strengthen the office, and prohibits Executive 
Branch influence over taxpayer audits and collection activity.
    The bill also makes certain changes to facilitate IRS 
personnel flexibilities.

Title II. Electronic filing

    The bill provides rules designed to facilitate and 
encourage electronic filing of tax returns, whenever feasible. 
Under the bill, electronic filing is encouraged by the use of 
advertising, development of incentives, and setting a goal of 
80 percent of returns to be electronically filed by the year 
2007. With respect to information returns, submitters are 
encouraged to use electronic filing by extending the due date 
for filing from February 28 to March 31. The bill requires 
development of procedures to facilitate electronic filing, 
including those that would permit the Secretary to accept 
returns without a manual signature. The bill also requires the 
IRS to study and develop procedures to implement a return free 
system. The IRS also must develop procedures that would permit, 
to the extent feasible, taxpayers who use electronic filing to 
review their account information electronically.

Title III. Taxpayer bill of rights 3

    The bill contains a number of provisions designed to 
strengthen the rights of taxpayers in their dealings with the 
Internal Revenue Service. Among the more significant of these 
provisions are modifying the burden of proof, providing more 
generous innocent spouse relief, protecting the confidentiality 
of tax advice, expanding the conditions under which taxpayers 
can receive awards of attorney's fees in disputes with the IRS, 
permitting taxpayers to receive civil damages for negligence by 
the IRS in collection actions, and suspending the statute of 
limitations on filing refund claims during periods of 
disability.

Title IV. Congressional accountability for the Internal Revenue Service

    The bill provides that all requests for studies of the IRS 
by the General Accounting Office (other than requests by the 
Chair or ranking member of a committee or subcommittee) must be 
approved by the Joint Committee on Taxation. The bill provides 
for two joint hearings a year of the 6 Congressional Committees 
with oversight jurisdiction over the IRS. The Joint Committee 
on Taxation is required to report annually to the tax-writing 
committees on the state of the Federal tax system, and at the 
joint hearings.
    The bill provides that a committee report or conference 
report on tax legislation is to include a Tax Complexity 
Analysis prepared by the staff of the Joint Committee on 
Taxation.

Title V. Clarification of deduction for vacation pay

    The bill overrules a Tax Court decision by providing that 
vacation pay that is actually received by employees more than 
2\1/2\ months after the end of the year is not deductible until 
paid by the employer. Under the bill, amounts are not 
considered received by employees or paid unless they are 
actually received. Letters of credit, trusts, and similar 
mechanisms will not constitute payment or receipt.

                 B. Background and Need for Legislation

    The National Commission on Restructuring the Internal 
Revenue Service (the ``Commission'') was established to review 
the present practices of the Internal Revenue Service (``IRS'') 
and to make recommendations for modernizing and improving its 
efficiency and taxpayer services. The Commission's report, 
issued June 25, 1997 \1\ contains recommendations relating to 
executive branch governance and management of the IRS, 
Congressional oversight of the IRS, personnel flexibilities, 
customer service and compliance, technology modernization, 
electronic filing, tax law simplification, taxpayer rights, and 
financial accountability. H.R. 2292, introduced on July 30, 
1997, by Mr. Portman and Mr. Cardin, generally mirrors the 
recommendations of the Commission.
---------------------------------------------------------------------------
    \1\ Report of the National Commission on Restructuring the Internal 
Revenue Service, ``A Vision For a New IRS,'' June 25, 1997.
---------------------------------------------------------------------------
    H.R. 2676 builds on the Commission's report and 
recommendations and the provisions of H.R. 2292 to provide for 
a more effective IRS in its administration of the tax laws and 
in improving the IRS's service and responsiveness to taxpayers.

                         C. Legislative History

Committee bill

    H.R. 2676 \2\ was introduced by Chairman Archer and Messrs. 
Portman and Cardin on October 21, 1997, and was amended by the 
Committee in a markup on October 22, 1997. An amendment in the 
nature of a substitute (offered by Chairman Archer) was adopted 
by a voice vote, with a quorum present. The bill, as amended, 
was ordered favorably reported by a roll call of 33 yeas and 4 
nays on October 22, 1997, with a quorum present.
---------------------------------------------------------------------------
    \2\ An earlier, related proposal was introduced by Messrs. Portman 
and Cardin on July 30, 1997, as H.R. 2292.
---------------------------------------------------------------------------

Committee hearings

    Full Committee.--The Committee held public hearings on 
September 16-17, 1997, on the recommendations of the National 
Commission on Restructuring the Internal Revenue Service.
    Subcommittee on Oversight.--The Subcommittee on Oversight 
held public hearings on IRS-related topics in 1997 as follows:
          Annual Report of the Internal Revenue Service 
        Taxpayer Advocate (February 25, 1997).
          ``High-Risk'' Programs Within the Jurisdiction of the 
        Committee on Ways and Means (March 4, 1997).
          IRS Budget for Fiscal Year 1998 and the 1997 Tax 
        Return Filing Season (March 18, 1997).
          Electronic Federal Tax Payment System (April 16, 
        1997).
          Report of the National Commission on Restructuring 
        the Internal Revenue Service (July 24, 1997).
          Recommendations of the National Commission on 
        Restructuring the Internal Revenue Service to Expand 
        Electronic Filing of Tax Returns (September 9, 1997).
          Recommendations of the National Commission on 
        Restructuring the Internal Revenue Service on Taxpayer 
        Protections and Rights (September 26, 1997).
    In addition, the Subcommittee on Oversight submitted 
recommendations on October 20, 1997, to the Full Committee 
relating to (1) electronic filing and (2) taxpayer rights and 
protections. These Subcommittee recommendations are the basis 
for the provisions in Title II and Title III, respectively, of 
the Committee bill. Chairman Archer had directed the 
Subcommittee on Oversight to review these two areas of the 
Commission's report and to make recommendations to the Full 
Committee.

                      II. EXPLANATION OF THE BILL

                  TITLE I. EXECUTIVE BRANCH GOVERNANCE

                   A. Creation of IRS Oversight Board

            (sec. 101 of the bill and sec. 7802 of the Code)

                              Present Law

    Under present law, the administration and enforcement of 
the internal revenue laws are performed by or under the 
supervision of the Secretary of the Treasury.\3\
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    \3\ Code sec. 780(a).
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    Present law imposes standards of ethical conduct on Federal 
employees in order to avoid conflicts of interest. Criminal 
penalties are imposed on violations of these standards. In some 
cases, less strict standards apply to special government 
employees than to regular, full-time Federal government 
employees. In general, a special government employee is an 
individual who is expected to serve no more than 130 days 
during any 365-day period.
    In general, the ethical conduct rules (1) prohibit a 
Federal employee from accepting compensation for representing 
clients before the agency in which the employee serves or 
against the United States; \4\ (2) prohibit a Federal employee 
from acting as agent or attorney for anyone in a claim against 
the United States; \5\ (3) impose post-employment restrictions 
on senior employees in order to prohibit the unfair use of 
prior Government employment; \6\ and (4) prohibit a Federal 
employee from participating personally and substantially in 
matters that affect his or her own financial interest or that 
of persons with certain relationships to the employee.\7\
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    \4\ 18 U.S.C. sec. 203.
    \5\ 18 U.S.C. sec. 205.
    \6\ 18 U.S.C. sec. 207.
    \7\ 18 U.S.C. sec. 208.
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    In the case of a special government employee who serves 
less than 60 days in the preceding 365 days, the restrictions 
in (1) and (2) above only apply with respect to matters in 
which the special government employee personally and 
substantially participated in his or her official capacity.
    One of the post-employment restrictions prohibits senior 
government employees from representing parties other than the 
United States before their former department or agency for one 
year after employment. This restriction does not apply to 
special government employees who serve less than 60 days in the 
final 1-year period of service.
    Federal government employees compensated at certain pay 
grades are subject to public financial disclosure requirements. 
Special government employees who serve less than 60 days in a 
year are not subject to the public financial disclosure 
requirements, but are subject to confidential financial 
disclosure requirements.

                           Reasons for Change

    The Committee believes 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 Committee believes that most 
Americans are willing to pay their fair share of taxes, and 
that public faith in the IRS is key to maintaining that 
willingness.
    The National Commission on Restructuring the IRS (the 
``Restructuring Commission''), which conducted a year-long 
study of the IRS, found that a number of factors contribute to 
current IRS management problems, including the following. 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 will require expertise in various 
areas, particularly management and technology.
    The Restructuring Commission concluded that ``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 Committee shares the concerns of the Commission, and 
agrees that fundamental change in IRS management and oversight 
is essential. The Committee believes that a new management 
structure that will bring greater expertise in more areas, 
focus, and continuity will help the IRS on the path toward 
becoming an efficient, responsive, and respected agency that 
always acts appropriately in carrying out its functions.
    The Committee believes that private sector input is a 
necessary part of any new management structure. The Committee 
believes that the ethics rules applicable to special government 
employees (without regard to exceptions for length of service 
or pay grade) should be applied to the private sector members 
of the new IRS management. These rules will 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 Committee is aware that the taxpaying public may never 
relish contacts with the agency responsible for collecting 
taxes. Nevertheless, by establishing a new managementstructure 
that will better enable the IRS to develop and fulfill long-term goals, 
the Committee believes that the IRS will be able to gain public 
support, and will make contacts with the IRS as infrequent and as 
pleasant as possible. The Committee is 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

    The bill 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 Internal Revenue Service (the 
``IRS'') in its administration, management, conduct, direction, 
and supervision of the execution and application of the 
internal revenue laws. The Board has no responsibilities or 
authority with respect to (1) the development and formulation 
of Federal tax policy relating to existing or proposed internal 
revenue laws, (2) law enforcement activities of the IRS, 
including compliance activities such as criminal 
investigations, examinations, and collection activities,\8\ and 
(3) specific procurement activities of the IRS (e.g., selecting 
vendors or awarding contracts). As discussed more fully in Part 
B., below, the Board also has the authority to recommend 
candidates for IRS Commissioner to the President, and to 
recommend removal of the Commissioner. The members of the Board 
do not have authority to receive confidential taxpayer return 
information.\9\
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    \8\ This provision is not intended to limit the Board's authority 
with respect to the review and approval of strategic plans and the 
budget of the Commissioner or to preclude the Board from review of IRS 
operations generally.
    \9\ The bill does not affect the extent to which the Secretary of 
the Treasury (or the Deputy Secretary) and the IRS Commissioner have 
authority to receive confidential taxpayer return information under 
present law by virtue of such positions. Any request for information 
that cannot be disclosed to Board members and any contact relating to a 
specific tax payer made by a private-life Board member or the union 
representative to an employee of the IRS must be reported by such 
employee to the Secretary and Joint Committee on Taxation.
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    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 system, out sourcing or managed 
competition, and training and education; (3) to provide for the 
review of the Commissioner's selection, evaluation and 
compensation of senior managers; and (4) to review and approve 
the Commissioner's plans for major reorganization of the IRS. 
It is intended that major reorganizations subject to the 
Board's review and approval are limited to major changes in 
organizational structure, such as the 1995 IRS reorganization 
that combined 7 regions into 4 and 63 districts into 33. In 
addition, the Board will 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 bill 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 are determinative. It is fully expected that, 
with respect to those matters over which the Board has approval 
authority (other than as relates to the development of the 
budget), the Secretary will exert his or her oversight 
responsibility over the IRS by working through and with the 
Board.\10\
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    \10\ The budget is excepted from this expectation because the bill 
provides a separate mechanism through which the Secretary may act. The 
procedures relating to the Board permit the President to submit his own 
budget in addition to that approved by the Board.
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    The Board is required to report each year to the President 
and the Congress regarding the conduct of its responsibilities.
    It is expected that the Treasury Department will no longer 
utilize the IRS Management Board once the new Board created by 
the bill 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 11 members. Eight of the members 
are so-called ``private-life'' members who are not Federal 
officers or employees. These private-life members will be 
appointed by the President, with the advice and consent of the 
Senate. The remaining members are (1) the Secretary of the 
Treasury (or, if the Secretary so designates, the Deputy 
Secretary of the Treasury), (2) a representative from a union 
representing a substantial number of IRS employees, who will be 
appointed by the President with the advice and consent of the 
Senate, and \11\ (3) the Commissioner of the IRS.
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    \11\ In appointing the union representative, the President is not 
constrained to choose an individual recommended by a union covering IRS 
employees, but may choose whoever the President determines to be an 
appropriate representative of the union.
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    The private-life members of the Board are to be appointed 
based on their expertise in the following areas: management of 
large service organizations; customer service; the Federal tax 
laws, including administration and compliance; information 
technology; organizationdevelopment; and the needs and concerns 
of taxpayers. In the aggregate, the members of the Board should 
collectively bring to bear expertise in all these enumerated areas.
    The private-life members are considered special government 
employees during the entire period of their appointment. That 
is, they will be considered to be performing services as a 
special government employee on each day during their 
appointment, not just on those days on which they actually 
perform services. Thus, they will be subject to the ethical 
conduct rules applicable to special government employees who 
serve more than 60 days during any 365-day period. Thus, for 
example, private-life Board members would not be able to 
represent clients before the IRS on matters during their term 
as a Board member. Private-life Board members would also be 
subject to the 1-year post-employment restriction applicable to 
senior-level employees. Finally, private-life members would be 
subject to the public financial disclosure rules generally 
applicable to special government employees above certain pay 
grades.

Compensation of Board members

    The private-life members of the Board will be compensated 
at a rate of $30,000 per year, except that the Chair will be 
compensated at a rate of $50,000 a year. Other members of the 
Board will receive no compensation for their services as Board 
members. The members of the Board will be entitled to travel 
expenses for purposes of attending meetings of the Board.

Administrative matters

    The 8 private-life Board members and the union 
representative generally will be appointed for 5-year terms. 
The private-life members may serve no more than two 5-year 
terms. Each 5-year term begins upon appointment. Board member 
terms are staggered, as a result of a special rule providing 
that some private-life members first appointed to the Board 
will serve initial terms of less than 5 years. The members of 
the Board are to elect a chairperson from among the private-
life Board members for a 2-year term. Any member of the Board 
can be removed at the will of the President. In addition, the 
Secretary of the Treasury (or, if so delegated, the Deputy 
Secretary) and the IRS Commissioner are removed from the Board 
upon termination of employment in such positions and the 
representative of IRS employees is removed from the Board upon 
termination of their employment, membership, or other 
affiliation with the organization representing IRS employees.
    The Board is required to meet at least once a month, and 
can meet at such other times as the Board determines 
appropriate.
    A quorum of 6 members is required in order for the Board to 
conduct business. Actions of the Board are taken by a majority 
vote of those members present and voting.
    The Board will not have its own permanent staff, but will 
have such staff as detailed by the Commissioner 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.

Claims against Board members

    The private-life members of the Board and the union 
representative have no personal liability under Federal law 
with respect to any claim arising out of or resulting from an 
act or omission by such Board member within the scope of 
service as a Board member. The bill does not limit personal 
liability for criminal acts or omissions, wilful or malicious 
conduct, acts or omissions for private gain, or any other act 
or omission outside the scope of service of the Board member.
    The bill 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.

                             effective date

    The provisions of the bill relating to the Board are 
effective on the date of enactment. The President is directed 
to submit nominations for Board members to the Senate within 6 
months of the date of enactment.

             B. Appointment and Duties of IRS Commissioner

  (secs. 102 and 103 of the bill and secs. 7803 and 7804 of the Code)

                              present 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. The Commissioner has such 
duties and powers as may be prescribed by the Secretary.\12\ 
The Secretary has delegated to the Commissioner the 
administration and enforcement of the internal revenue 
laws.\13\ The Commissioner generally does not have authority 
with respect to policy matters.\14\
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    \12\ Code sec. 7802(a).
    \13\ Treasury Order 150-10 (April 22, 1982).
    \14\ 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 Committee believes that the duties and responsibilities 
of the Commissioner are of such significance that the 
Commissioner should continue to be appointed by the 
President.\15\ 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 Committee believes (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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    \15\ Retaining present 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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    The Committee believes that it is appropriate to preserve 
the present-law structure under which the duties of the 
Commissioner are delegated by the Secretary of the Treasury. 
Modifying this structure may unnecessarily interfere with the 
operations of the IRS and other agencies withing the Treasury. 
In order to enable the Congress to properly fulfill its 
oversight responsibilities with respect to the IRS, the 
Committee believes that the Congress should be notified of 
changes in the delegation of authority to the Commissioner.

                        explanation of provision

    As under present law, the Commissioner will be appointed by 
the President, with the advice and consent of the Senate, and 
can be removed at will by the President. The Commissioner will 
be appointed to a 5-year term, beginning with the date of 
appointment. The Board has the power to recommend candidates to 
the President for Commissioner. The Board has the authority to 
recommend the removal of the Commissioner. Although the 
President is not required to nominate for Commissioner a 
candidate recommended by the Board (or to remove a Commissioner 
when the Board so recommends), it is expected that the 
President will generally give deference to the Board's 
expertise and familiarity with the needs and functions of the 
IRS and will act in accordance with the Board's 
recommendations.
    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 and to 
recommend to the President a candidate for Chief Counsel (and 
recommend the removal of the Chief Counsel). It is intended 
that the listed duties codify present delegations. However, if 
the Secretary changes such orders, they may be subject to the 
notice requirement of the bill, described below.
    If the Secretary determines not to delegate the 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, the Senate Committees on Finance, 
Government Operations, and Appropriations, and the Joint 
Committee on Taxation.
    This provision is not intended to alter the Secretary's 
existing authority to delegate to agencies other than the IRS 
the authority to administer and enforce certain portions of the 
internal revenue laws. For example, the Secretary currently has 
delegated to the Bureau of Alcohol, Tobacco and Firearms the 
authority to administer and enforce the taxes under section 
4181 and chapters 51, 52, and 53 of the Internal Revenue Code 
(regarding excise and other taxes on alcohol, tobacco, 
firearms, and destructive devices).
    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). With respect to 
those matters within the Board's approval authority (other than 
with respect to the development of the budget), it is fully 
expected that the Secretary will exert his or her oversight 
responsibility over the IRS by working through and with the 
Board.\16\
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    \16\ The budget is excepted from this expectation because the bill 
provides a separate mechanism through which the Secretary may act.
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    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 would be 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.
    The Commissioner is compensated as under present law.

                             effective date

    The provisions of the bill relating to the Commissioner 
generally are effective on the date of enactment. The provision 
relating to the 5-year term of office applies to the 
Commissioner in office on the date of enactment. This 5-year 
term runs from the date of appointment.

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

          (sec. 102 of the bill and sec. 7802(b) of the Code)

                              Present 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.\17\ 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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    \17\ 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.'' \18\
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    \18\ S. Rept. 93-383, 108 (1973). See also H. Rept. 93-807, 104 
(1974).
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    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.\19\ However, amounts raised by 
the section 4940 excise tax have never been dedicated to the 
administration of EP/EO, but are transferred instead to general 
revenues. Thus, the level of EP/EO funding, like that of the 
rest of the IRS, is dependent on annual Congressional 
appropriations to the Treasury Department.
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    \19\ Code section 7802(b)(2).
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                           Reasons for Change

    The Committee believes that it is important to retain the 
Office of Employee Plans and Exempt Organizations under the 
supervision and direction of an Assistant Commissioner of the 
Internal Revenue. Because of EP/EO's expertise in the area of 
retirement benefits, the Committee believes that its 
responsibilities should be expanded to include nonqualified 
deferred compensation arrangements. In addition, the inclusion 
of an annual reporting mechanism in the bill is designed to 
ensure that the Commissioner is adequately informed regarding 
the activities of EP/EO.
    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. In 
repealing the funding mechanism, however, the Committee notes 
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, 
financial resources for EP/EO should not be constrained on the 
basis that EP/EO is a ``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.

                        Explanation of Provision

    The bill retains the Office of Employee Plans and Exempt 
Organizations under the supervision and direction of an 
Assistant Commissioner of the Internal Revenue. As under 
present law, EP/EO is responsible for carrying out functions 
and duties associated with organizations designed to be exempt 
from tax under section 501(a) of the Code and with respect to 
plans designed to be qualified under section 401(a). In 
addition, however, EP/EO's responsibilities are expanded to 
include nonqualified deferred compensation arrangements. The 
bill also provides that the Assistant Commissioner shall report 
annually to the Commissioner on EP/EO operations.
    In addition, the bill repeals the funding mechanism for EP/
EO set forth in section 7802(b). 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.

                             Effective Date

    The provision is effective on the date of enactment.

                          D. Taxpayer Advocate

            (sec. 102 of the bill and sec. 7803 of the Code)

                              Present Law

    In 1996, the Taxpayer Bill of Rights 2 (``TBOR 2'') \20\ 
established the position of Taxpayer Advocate, which replaced 
the position of Taxpayer Ombudsman, created in 1979 by the IRS. 
Before the creation of the Taxpayer Advocate, the Taxpayer 
Ombudsman was a career civil servant selected by and serving at 
the pleasure of the IRS Commissioner. The Taxpayer Advocate is 
appointed by and reports directly to the IRS Commissioner.
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    \20\ Public Law 104-168 (July 30, 1996).
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    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.
    The Taxpayer Advocate is required to submit two annual 
reports to the tax-writing committees, one, due by June 30, 
that describes the objectives of the Taxpayer Advocate for the 
next fiscal year and another, due by December 31, that 
describes the activities of the Taxpayer Advocate for the 
previous fiscal year. The December 31 report must identify what 
the Taxpayer Advocate has done to improve taxpayer services and 
IRS responsiveness, contain recommendations received from 
individuals who have the authority to issue a Taxpayer 
Assistance Order, describe in detail the progress made in 
implementing those recommendations, contain a summary of at 
least 20 of the most serious problems encountered by taxpayers 
in dealing with the IRS, include recommendations for such 
administrative and legislative action as may be appropriate to 
resolve such problems, describe the extent to which regional 
problem resolution officers participate in the selection and 
evaluation of local problem resolution officers, and include 
other such information as the Taxpayer Advocate may deem 
advisable. The reports are submitted without review by the 
Commissioner, the Secretary of the Treasury, or any other 
officer or employee of the Department of Treasury or the Office 
of Management and Budget.

                           Reasons for Change

    The Committee believes 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 is appropriate that the 
IRS Oversight Board have input in the selection of the Taxpayer 
Advocate. In addition, the Committee believes that the Taxpayer 
Advocate should have experience appropriate to the position and 
that the Taxpayer Advocate's objectivity would be best 
preserved by limiting future employment with the IRS. The 
Committee also believes 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.

                        Explanation of Provision

    The bill requires the Commissioner to obtain the approval 
of the IRS Oversight Board on the selection of the Taxpayer 
Advocate. A candidate for the Taxpayer Advocate must have 
either substantial experience representing taxpayers before the 
IRS or have substantial experience within the IRS. If the 
prospective Taxpayer Advocate was an officer or an employee of 
the IRS before being appointed as the Taxpayer Advocate, the 
individual is required to agree not to accept any employment 
with the IRS for at least 5 years after ceasing to be the 
Taxpayer Advocate.
    The bill modifies the information to be included in the 
December 31 report to the tax-writing committees. The report no 
longer needs to include information about the extent to which 
regional problem resolution officers participate in the 
selection and evaluation of local problem resolution officers. 
The report identifies areas of the tax law that impose 
significant compliance burdens on taxpayers or the IRS, 
including specific recommendations for solving these problems. 
The Taxpayer Advocate also is required to work in conjunction 
with the National Director of Appeals to identify the 10 most 
litigated issues for each category of taxpayers, and include 
the list of issues and recommendations for mitigating such 
disputes in the report. Categories of taxpayers include, for 
example, individuals, self-employed individuals, small 
businesses, etc.
    As under present law, the reports are submitted directly to 
the tax-writing committees, without review by the IRS Oversight 
Board, the Secretary of the Treasury, or any other officer or 
employee of the Department of the Treasury or the Office of 
Management and Budget.
    In addition, the bill imposes new responsibilities on the 
Taxpayer Advocate. The Taxpayer Advocate is requested to 
monitor the coverage and geographical allocation of problem 
resolution officers and develop guidance that outlines criteria 
to be used by IRS employees in referring taxpayer inquiries to 
problem resolution officers. In connection with these 
responsibilities, it is anticipated that the Taxpayer Advocate 
will work with the IRS District Offices to ensure convenient 
taxpayer access to the local problem resolution officer. For 
example, the local telephone number for the problem resolution 
officer in each district should be published and available to 
taxpayers.
    It is intended that the Taxpayer Advocate will work with 
the Commissioner in developing career paths for local problem 
resolution officers, so that individuals can progress through 
the General Schedule in the same manner as examination 
employees, without having to leave the problem resolution 
system. In that regard, it is contemplated that the 
compensation levels of local and regional problem resolution 
officers should be the same as those of IRS personnel operating 
in other functional units. Under the current system, local 
problem resolution officers generally must return to an audit 
or collection function to achieve promotion. This lack of a 
career path within the problem resolution system reduces the 
independence of the system. It is contemplated that, to the 
extent feasible, regional problem resolution officers should be 
selected from the available pool of local problem resolution 
officers.

                             Effective Date

    This provision is effective on the date of enactment, 
except that the post-employment restrictions on the Taxpayer 
Advocate do not apply to an individual holding that position on 
the date of enactment.

   E. Prohibition on Executive Branch Influence Over Taxpayer Audits

          (sec. 104 of the bill and new sec. 7217 of the Code)

                              Present Law

    There is no explicit prohibition in the Code on 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 Committee believes 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 Committee believes that it is appropriate to 
prohibit such influence.

                        Explanation of Provision

    The bill 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.
    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 a taxpayer or a taxpayer's representative 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.

                     F. IRS Personnel Flexibilities

   (sec. 111 of the bill and new secs. 9301-9304 of title 5, U.S.C.)

                              Present Law

    The Internal Revenue Service, like almost all other federal 
agencies, is subject to the personnel rules and procedures set 
forth in title 5, United States Code. As such, its employees 
generally are classified under the General Schedule or the 
Senior Executive Service.

                           Reasons for Change

    Under the existing personnel rules and procedures set forth 
in title 5, hiring, evaluating, promoting, and firing employees 
is subject to extensive regulation. Given the role of the IRS 
in the federal government, its unique needs in terms of skilled 
tax, technology, and service personnel, and its present needs 
to motivate its managers and employees to embrace continuous 
improvements and cost savings while maintaining adequate levels 
of service for taxpayers, the Committee finds that certain 
flexibilities are appropriate and will facilitate the efforts 
of the IRS to better manage its workforce.
    The Committee finds that the vast majority of IRS employees 
are competent professionals who perform their jobs as well as 
can be expected under existing organizational constraints. 
However, over the past decade, the quality of IRS interaction 
with taxpayers and the public has deteriorated, in part due to 
lower personnel qualifications, pay levels, and training 
quality. In addition, the stovepipe nature of IRS operations, 
in which functional units such as taxpayer services, exam, 
collection, and appeals set and implement their own priorities 
and objectives, which often are disconnected from the other 
functions and the organization as a whole, adds to the problem 
of decreased taxpayer service. Moreover, the risk averse nature 
of the IRS, which provides minimal incentive for managers or 
front-line employees for achieving mission, stifles creativity, 
innovation, and quick problem resolution.
    Consistent with the rest of this bill, the Committee 
intends section 111 to lead to increased accountability on the 
part of IRS managers and employees and increased focus on the 
IRS mission, goals, and objectives. At the core of this 
accountability and focus lies increased attention on providing 
adequate levels of service to taxpayers. The Committee believes 
that taxpayers should deal only with IRS employees who are 
trained adequately and possess the skills and tools necessary 
to do their jobs well. To provide such service to taxpayers, 
the Committee expects the IRS to use the flexibilities provided 
by this section to hire and promote qualified professionals, to 
provide incentives for employees to treat taxpayers with the 
service and respect that they deserve, and to discipline 
employees who cannot or will not treat taxpayers fairly. In 
short, the Committee expects the IRS to hold all workers--from 
senior managers to front-line employees--accountable for 
carrying out the IRS mission.

                        Explanation of Provision

In general

    Section 111 of the bill would amend title 5, United States 
Code, by inserting a new chapter 93 providing certain personnel 
flexibilities to the IRS. By providing these flexibilities in 
this manner, the Committee intends for the IRS to remain 
subject to all of the rules and procedures of title 5, except 
to the extent that the exercise of flexibilities provided under 
this new chapter 93 is inconsistent with prior law.
    The bill clarifies that the personnel flexibilities for the 
IRS are intended to be exercised consistently with existing 
rules relating to merit system principles, prohibited personnel 
practices, and preference eligibles. Moreover, the Committee 
believes that the employees of the IRS should be involved in 
the reinvention of the bureaucracies in which they work. 
Accordingly, the bill provides that the flexibilities provided 
to the IRS must be negotiated between the IRS and the 
employees' union. Such negotiations need not address all of the 
flexibilities provided under this provision. The written 
agreement should be a consensus document, but is not a contract 
that can be appealed to the federal services impasse panel, or 
otherwise create additional appeal rights. To the extent that 
the exercise of any flexibility, such as that provided by new 
section 9303(c), would not affect members of the employees' 
union, then no written agreement is required.

Performance management

    The bill would require the IRS to establish a new 
performance management system within one year from the date of 
enactment. The Committee expects that this system will refocus 
the IRS's personnel system on the overall mission of the IRS 
and how each employee's performance relates to that mission. 
The new performance standards are premised on the notion of 
retention--performance at the retention standard indicates that 
an employee has performed fully successfully, no better or 
worse. Failure to meet this standard indicates that the 
employee has not performed adequately, and managers should use 
the tools available to encourage the employee to improve 
performance, or if such efforts do not lead to improved 
performance, to remove the employee. The performance standard 
above the retention standard is intended to encourage employees 
to perform at a higher level, and to allow managers to make 
performance distinctions among employees.
    The Committee encourages the IRS to redesign its 
performance measures to more appropriately align employee 
behavior with organizational goals. One of the most significant 
efforts that the IRS must undertake in this regard is to design 
internal measures that will encourage behavior which makes it 
easier for taxpayers to interact with the IRS. While this will 
involve significant effort, the Committee expects that these 
measures will bring the organizational goals and objectives, 
including those established under the Government Performance 
and Results Act of 1993 and Revenue Procedure 64-22, down to 
the individual employee level. In addition, the Committee 
expects the IRS to develop taxpayer service surveys that will 
gauge the level of service that taxpayers actually receive, for 
use in evaluating organizational and group performance. In no 
case should 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. While any system of measures must 
reflect the efficiency and productivity of employees, the 
Committee expects that the IRS will establish a balanced system 
of measures that will ensure that taxpayer satisfaction is 
paramount throughout all IRS functions.

Awards

    There are three types of awards specifically referenced in 
the bill. First, certain awards for superior accomplishments 
will continue to require certification to the Office of 
Personnel Management (OPM), but absent objection from OPM 
within 60 days, the Commissioner's recommendations for such 
awards will take effect. As with all awards, these awards 
should be made based on performance under the new performance 
management system, and in no case should awards be made (or 
performance measured) based solely or principally on tax 
enforcement results.
    The second category of awards relates to the most senior 
managers in the IRS. The Commissioner will have discretion, 
upon consultation with the IRS Oversight Board established 
under section 101 of this bill, to make awards of up to 50 
percent of salary to such managers, so long as the total 
compensation for an employee as a result of such an award does 
not equal or exceed the annual rate of compensation for the 
Vice President for such calendar year. As with awards for 
superior accomplishments, OPM will have 60 days to object. The 
Commissioner will be required to prescribe regulations defining 
how determinations will be made as to whether an employee is 
eligible for such awards. In no case, however, will more than 8 
employees be eligible to receive such awards in any calendar 
year. Moreover, it is not expected that all of the eligible 
pool will receive such awards each year, or that the full 50 
percent would be appropriate, except in cases of extraordinary 
performance.
    Finally, the third category of awards--based on savings--is 
intended to encourage the practice of rewarding employees for 
developing more efficient methods of administration. The 
Committee encourages the IRS to establish programs that 
encourage employee input into reorganizing business processes 
leading to efficiency gains, and sharing resultant savings with 
employees. Provided that taxpayers receive adequate levels of 
service, the Committee expects that such gainsharing awards 
will help to improve the efficiency of the IRS.

Streamlined procedures

    The bill provides two tools to streamline the process of 
taking certain adverse actions for poor performance. First, the 
notice period for taking adverse actions is reduced from 30 
days to 15 days. At the discretion of the IRS, and in 
accordance with regulations issued by OPM, this period can be 
extended.
    Second, the bill prohibits appeals of the denial of a step 
increase to the Merit Systems Protections Board. Aggrieved 
employees nonetheless can appeal such actions pursuant to 
internal agency procedures, including any procedures agreed to 
pursuant to collective bargaining agreements or pursuant to the 
written agreement under section 9301(b) authorizing the use of 
this flexibility.

Staffing flexibilities

    The bill provides the IRS with flexibility in filling 
certain permanent appointments in the competitive service by 
authorizing the IRS to fill such vacancies with either 
qualified veterans or qualified temporary employees. For 
purposes of this provision, a qualified veteran is an 
individual who is either a preference eligible or has been 
separated from the armed forces under honorable conditions 
after at least three years of active service, and who meets the 
minimum qualifications for the vacant position. A qualified 
temporary employee is defined under the bill 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 bill also 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 would be 
authorized to select any candidate from the highest quality 
category, and would not be limited to the three highest ranked 
candidates, as is the case under existing law. In administering 
these category rating systems, the IRS generally will be 
required to list preference eligibles ahead of other 
individuals within each quality category. Nonetheless, the 
appointing authority can select any candidate from the highest 
quality category, as long as existing requirements relating to 
passing over preference eligibles are satisfied.
    The bill authorizes the Commissioner to reassign or remove 
career appointees in the Senior Executive Service immediately 
upon taking office. While the Committee does not intend for any 
Commissioner to make wholesale management changes without 
thorough evaluations, the Committee believes that if the 
Commissioner is to be held accountable, then the Commissioner 
must have the flexibility to recruit his own management team.
    The bill authorizes the Commissioner to establish probation 
periods for IRS employees of up to 3 years, when the 
Commissioner determines that a shorter period is not sufficient 
for an employee to demonstrate proficiency in a position.

Demonstration projects

    The bill makes it easier for the IRS to establish 
demonstration projects under title 5. The Committee expects 
that the IRS will use this flexibility to establish 
demonstration projects to improve personnel management, 
particularly to the extent that such projects lead to increased 
individual accountability. For example, the IRS might use this 
flexibility to establish demonstration projects involving 
broad-banded pay systems or alternative classification systems, 
to provide for variations in the existing rules regarding grade 
and pay retention, or to provide for variations from existing 
provisions relating to payment of recruitment, relocation, and 
retention bonuses. In addition, the Committee expects that the 
IRS will use this flexibility to develop more efficient means 
of handling employee appeals of personnel actions. No 
flexibility can be exercised under this provision that does not 
preserve due process for employees, however.
    To allow the IRS the flexibility to establish these and 
other demonstration projects, as appropriate, the bill 
authorizes any number of projects, and exempts the IRS from 
many of the requirements applicable to demonstration projects 
under section 4703 of title 5, United States Code. 
Specifically, the bill eliminates the requirement that the IRS 
submit plans to establish demonstration projects to a public 
hearing, and streamlines the advance notice requirements of 
section 4703. In addition, the bill allows the IRS to establish 
demonstration projects for any number of its employees, and 
gives the Commissioner greater latitude in working with OPM to 
develop and implement demonstration projects. The bill 
maintains a number of the existing prohibitions on 
demonstration projects, including the prohibition on using 
demonstration projects to waive any requirement of title 5 
relating to family and medical leave. As with the other 
personnel flexibilities provided under this section, the bill 
requires the IRS to negotiate a written agreement with the 
employees' union to the extent that the implementation of a 
demonstration project affects such employees.
    The bill establishes a general time limitation of 5 years 
on the duration of any demonstration project established under 
this section. However, if the Commissioner and the Director of 
OPM concur, a demonstration project may be extended for an 
additional 2 years if necessary to validate the results of the 
project. Not later than 6 months prior to the termination of a 
project, the bill requires the Commissioner to submit a 
legislative proposal to the Congress if the Commissioner 
determines that such project should be made permanent.

                             Effective Date

    The provisions shall take effect on the date of the 
enactment of this Act.

                      TITLE II. ELECTRONIC FILING

          A. Electronic Filing of Tax and Information Returns

            (sec. 201 of the bill and sec. 6011 of the Code)

                              Present Law

    Treas. Reg. section 1.6012-5 provides that the Commissioner 
may authorize, at the option of a person required to make a 
return, the use of 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. Form 8453 
is a paper form that must be received by the IRS before any 
electronically filed return is complete. Form 8453 provides 
signature information to the IRS.
    The IRS conducted the first test of electronic filing in 
1986, for a limited number of tax year 1985 returns.\21\ In 
1990, the IRS permitted nationwide electronic filing of returns 
that had refunds owing.\22\ In 1991, the IRS accepted 
electronically filed returns that had balances due.\23\ In 
1993, the IRS established an electronic filing goal of 80 
million tax returns by 2001. During the 1997 tax filing season, 
the IRS received approximately 20 million individual tax 
returns electronically.
---------------------------------------------------------------------------
    \21\ Rev. Proc. 86-4, 1986-1 C.B. 423.
    \22\ Rev. Proc. 90-62, 1990-2 C.B. 659.
    \23\ Rev. Proc. 91-69, 1991-2 C.B. 893.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes 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 excample, the error rate associated with 
processing paper tax returns is approximately 20 percent, half 
of which is attributable to the IRS and half to error 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 Committee 
believes that an expansion of electronic filing will 
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 bill 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 bill 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 strategic plan 
initially targets returns prepared in electronic form but filed 
in paper form, such as a return prepared by the taxpayer using 
return preparation software, which the taxpayer then printed 
and filed in paper form. The bill requires all such returns to 
be filed electronically, to the extent feasible, by the year 
2002.
    The bill requires the Secretary to create an electronic 
commerce advisory group comprised of representatives from the 
small business, tax practitioner, preparer, and computerized 
tax processor communities and other representatives from the 
electronic filing industry. Under the bill, the Chair of the 
IRS Oversight Board, together with the Secretary and the Chair 
of the electronic commerce advisory group, are required to 
report annually to the tax-writing committees on the IRS's 
progress in implementing its plan to meet the goal of 80 
percent electronic filing by 2007.
    To promote electronic filing, the bill authorizes the 
Secretary to publicize the benefits of electronic filing by 
using mass communications and other means. In addition, the 
bill authorizes the Secretary to implement procedures for 
paying appropriate incentives for electronically filed returns. 
This provision is not intended to override section 1205 of the 
Taxpayer Relief Act of 1997,\24\ which prohibits the IRS from 
paying fees to credit card companies in connection with 
receiving tax payments by credit card.
---------------------------------------------------------------------------
    \24\ Public Law 105-34 (August 5, 1997).
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment.

      B. Time for Filing Certain Information Returns With the IRS

            (sec. 202 of the bill and sec. 6071 of the Code)

                              Present Law

    Information such as the amount of dividends, partnership 
distributions, and interest paid during the tax year must be 
supplied to taxpayers by the payors by January 31 of the year 
following the calendar year for which the return must be filed. 
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 present 
law, the due date for information returns is 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 must be physically shipped 
to the IRS.

                           Reasons for Change

    The Committee believes that encouraging information return 
filers to file electronically will 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 bill provides an incentive to filers of information 
returns to use electronic filing by extending the due date for 
filing such returns from February 28 (under present law) to 
March 31 of the year following the calendar year to which the 
return relates. The bill does not change the requirement that 
payors must supply taxpayers with the applicable information by 
January 31. The Committee anticipates that the IRS will 
cooperate with interested private sector filers of information 
returns in facilitating to the maximum extent feasible the 
utilization of electronic filing for such forms.

                             Effective Date

    The provision applies to information returns required to be 
filed after December 31, 1999.

                     C. Paperless Electronic Filing

            (sec. 203 of the bill and sec. 6061 of the Code)

                              Present Law

    Code section 6061 requires that tax forms be signed as 
required by the Secretary. The IRS will not accept an 
electronically filed return unless it has received a Form 8453 
providing signature information on the filer.
    Generally, a return 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 if mailed by 
registered mail, the dated registration statement is prima 
facie evidence of delivery. As an electronically filed return 
is not mailed, section 7502 does not apply.
    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 Committee believes 
that more types of returns could be filed electronically if 
proper procedures were in place.

                        Explanation of Provision

    The bill requires the Secretary to develop procedures that 
would eliminate the need to file a paper form relating to 
signature information. The Secretary is required to develop 
procedures for the acceptance of signatures in digital or other 
electronic form. Until the procedures are in place, the bill 
authorizes the Secretary to waive the requirement of a 
signature or to provide for alternative methods of subscribing 
all returns, declarations, statements, or other documents. The 
bill treats documents subscribed under such alternative methods 
as signed for all purposes, both civil and criminal, and 
provides a rebuttable presumption that any such return, 
declaration, statement or other document was actually submitted 
and subscribed by the person on whose behalf it was submitted. 
It is contemplated that the IRS will establish procedures for 
rebuttal of the presumption.
    The bill also provides rules for determining when 
electronic returns are deemed filed, and for authorization for 
return preparers to communicate with the IRS on matters 
included on electronically filed returns.
    The bill also requires that the Secretary establish 
procedures, to the extent practicable, to receive all tax forms 
electronically by December 31, 1998.

                             Effective Date

    The provision is effective on the date of enactment.

                       D. Return-Free Tax System

                         (sec. 204 of the bill)

                              Present Law

    Under present law, taxpayers are required to calculate 
their own tax liabilities and submit returns showing their 
calculations.

                           Reasons for Change

    The Committee believes that it would benefit taxpayers to 
be relieved, to the extent feasible, from the burden of 
determining tax liability and filing returns.

                        Explanation of Provision

    The bill requires the Secretary or his delegate to study 
the feasibility of and develop procedures for the 
implementation of a return-free tax system for taxable years 
beginning after 2007. The Secretary is required annually to 
report to the tax-writing committees on the progress of the 
development of such system, including what additional resources 
the IRS would need to implement the system, the changes to the 
Internal Revenue Code that would facilitate the system, the 
procedures developed to date, and the number and classes of 
taxpayers who would be permitted to use such a system. The 
Secretary is required to make the first report on the 
development of the return-free filing system to the tax-writing 
committees on June 30, 1999. It is contemplated that the 
return-free filing system would initially be targeted at 
taxpayers who had taxable income from wages, interest, 
dividends, pensions, and unemployment compensation; did not 
itemize deductions; and did not take any tax credits other than 
the earned income tax credit.\25\
---------------------------------------------------------------------------
    \25\ See ``The President's Tax Proposals to Congress for Fairness, 
Growth, and Simplicity,'' at 115 (May 1985) and The GAO Report on Tax 
Administration Alternative Filing Systems (October 1996).
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment.

                    E. Access to Account Information

                         (sec. 205 of the bill)

                              Present Law

    Taxpayers who file their returns electronically cannot 
review their accounts electronically.

                           Reasons for Change

    The Committee believes, to the extent feasible, that 
taxpayers should have access to their account information held 
by the IRS. If taxpayers file electronically, they should be 
able to review the information electronically, to the extent 
feasible.

                        Explanation of Provision

    The bill requires the Secretary to develop procedures under 
which a taxpayer filing returns electronically could review the 
taxpayer's account electronically not later than December 31, 
2006, but only if all necessary privacy safeguards are in place 
by that date.

                             Effective Date

    The provision is effective on the date of enactment.

                  TITLE III. TAXPAYER BILL OF RIGHTS 3

                           A. Burden of Proof

          (sec. 301 of the bill and new sec. 7491 of the Code)

                              Present Law

    Under present law, a rebuttable presumption exists that the 
Commissioner's determination of tax liability is correct.\26\ 
``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''.\27\
---------------------------------------------------------------------------
    \26\ Welch v. Helvering, 290 U.S. 111, 115 (1933).
    \27\ Danville Plywood Corp. v. U.S., U.S. Cl. Ct., 63 AFTR 2d 89-
1036, 1043 (1989); citations omitted.
---------------------------------------------------------------------------
    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. 
The Congress would have enacted these provisions only if it 
recognized and approved of the general rule of presumptive 
correctness of the Commissioner's determination. A list of 
these civil provisions follows.
    (1) Fraud.--Any proceeding involving the issue of whether 
the taxpayer has been guilty of fraud with intent to evade tax 
(secs. 7454(a) and 7422(e)).
    (2) Required reasonable verification of information 
returns.--In any court proceeding, if a taxpayer asserts a 
reasonable dispute with respect to any item of income reported 
on an information returned filed with the Secretary by a third 
party and the taxpayer has fully cooperated with the Secretary 
(including providing, within a reasonable period of time, 
access to and inspection of all witnesses, information, and 
documents within the control of the taxpayer as reasonably 
requested by the Secretary), the Secretary has the burden of 
producing reasonable and probative information concerning such 
deficiency in addition to such information return (sec. 
6201(d)).
    (3) Foundation managers.--Any proceeding involving the 
issue of whether a foundation manager has knowingly 
participated in prohibited transactions (sec. 7454(b)).
    (4) Transferee liability.--Any proceeding in the Tax Court 
to show that a petitioner is liable as a transferee of property 
of a taxpayer (sec. 6902(a)).
    (5) Review of jeopardy levy or assessment procedures.--Any 
proceeding to review the reasonableness of a jeopardy levy or 
jeopardy assessment (sec. 7429(g)(1)).
    (6) Property transferred in connection with performance of 
services.--In the case of property subject to a restriction 
that by its terms will never lapse and that allows the 
transferee to sell only at a price determined under a formula, 
the price is deemed to be fair market value unless established 
to the contrary by the Secretary (sec. 83(d)(1)).
    (7) Illegal bribes, kickbacks, and other payments.--As to 
whether a payment constitutes an illegal bribe, illegal 
kickback, or other illegal payment (sec. 162(c)(1) and (2)).
    (8) Golden parachute payments.--As to whether a payment is 
a parachute payment on account of a violation of any generally 
enforced securities laws or regulations (sec. 280G(b)(2)(B)).
    (9) Unreasonable accumulation of earnings and profits.--In 
any Tax Court proceeding as to whether earnings and profits 
have been permitted to accumulate beyond the reasonable needs 
of the business, provided that the Commissioner has not 
fulfilled specified procedural requirements (sec. 534).
    (10) Expatriation.--As to whether it is reasonable to 
believe that an individual's loss of citizenship would result 
in a substantial reduction in the individual's income taxes or 
transfer taxes (secs. 877(e), 2107(e), 2501(a)(4)).
    (11) Public inspection of written determinations.--In any 
proceeding seeking additional disclosure of information (sec. 
6110(f)(4)(A)).
    (12) Penalties for promoting abusive tax shelters, aiding 
and abetting the understatement of tax liability, and filing a 
frivolous income return.--As to whether the person is liable 
for the penalty (sec. 6703(a)).
    (13) Income tax return preparers' penalty.--As to whether a 
preparer has willfully attempted to understate tax liability 
(sec. 7427).
    (14) Status as employees.--As to whether individuals are 
employees for purposes of employment taxes (pursuant to the 
safe harbor provisions of section 530 of the Revenue Act of 
1978).\28\
---------------------------------------------------------------------------
    \28\ Public Law 95-600 (November 6, 1978), as amended by section 
1122 of the Small Business Job Protection Act of 1996 (Public Law 104-
188; August 20, 1996).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee is concerned that individual and small 
business taxpayers frequently are at a disadvantage when forced 
to litigate with the Internal Revenue Service. The Committee 
believes that the present burden of proof rules contribute to 
that disadvantage. The Committee believes that, all other 
things being equal, facts asserted by individual and small 
business taxpayers who fully cooperate with the IRS and satisfy 
all relevant substantiation requirements should be accepted. 
The Committee believes that shifting the burden of proof to the 
Secretary in such circumstances will create a better balance 
between the IRS and such taxpayers, without encouraging tax 
avoidance.

                        Explanation of Provision

    The bill provides that the Secretary shall have the burden 
of proof in any court proceeding with respect to a factual 
issue if the taxpayer asserts a reasonable dispute with respect 
to any such issue relevant to ascertaining the taxpayer's 
income tax liability. Two conditions apply. First, the taxpayer 
must fully cooperate at all times with the Secretary (including 
providing, within a reasonable period of time, access to and 
inspection of all witnesses, information, and documents within 
the control of the taxpayer, as reasonably requested by the 
Secretary).\29\ Full 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 \30\). A 
necessary element of fully 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 fully cooperated with the 
Secretary. Second, certain taxpayers must meet the net worth 
limitations that apply for awarding attorney's fees. In 
general, corporations, trusts, 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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    \29\ This requirement parallels the present-law provision relating 
to reasonable verification of information returns (sec. 6201(d)).
    \30\ Full cooperation also includes providing English translations, 
as reasonably requested by the Secretary.
---------------------------------------------------------------------------
    The provision explicitly states that nothing in the 
provision shall be construed to override any requirement under 
the Code or regulations to substantiate any item. Accordingly, 
taxpayers must meet all applicable substantiation requirements, 
whether generally imposed \31\ or imposed with respect to 
specific items, such as charitable contributions \32\ or meals, 
entertainment, travel, and certain other expenses.\33\ 
Substantiation requirements include any requirement of the Code 
or regulations that the taxpayer establish an item to the 
satisfaction of the Secretary.\34\ Taxpayers who fail to 
substantiate any item in accordance with the legal requirement 
of substantiation will not have satisfied all of 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.\35\
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    \31\ 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.
    \32\ Sec. 170(a)(1) and (f)(8) and Treas. Reg. sec. 1.170A-13.
    \33\ Sec. 274(d) and Treas. Reg. sec. 1.274(d)-1, 1.274-5T, and 
1.274-5A.
    \34\ 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.
    \35\ 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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                             Effective Date

    The provision applies to court proceedings arising in 
connection with examinations commencing after the date of 
enactment.

                      B. Proceedings by Taxpayers

1. Expansion of Authority to Award Costs and Certain Fees (sec. 311 of 
        the bill and sec. 7430 of the Code)

                              Present 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. In general, only an individual whose net 
worth does not exceed $2 million is eligible for an award, and 
only a corporation or partnership whose net worth does not 
exceed $7 million is eligible for an award.
    Reasonable litigation costs include reasonable fees paid or 
incurred for the services of attorneys, except that the 
attorney's fees will not be reimbursed at a rate in excess of 
$110 per hour (indexed for inflation) unless the court 
determines that a special factor, such as the limited 
availability of qualified attorneys for the proceeding, 
justifies a higher rate. Awards of reasonable litigation costs 
and reasonable administrative costs cannot exceed amounts paid 
or incurred.
    Once a taxpayer has substantially prevailed over the IRS in 
a tax dispute, the IRS has the burden of proof to establish 
that it was substantially justified in maintaining its position 
against the taxpayer. A rebuttable presumption exists that 
provides that the position of the United States is not 
considered to be substantially justified if the IRS did not 
follow in the administrative proceeding (1) its published 
regulations, revenue rulings, revenue procedures, information 
releases, notices, or announcements, or (2) a private letter 
ruling, determination letter, or technical advice memorandum 
issued to the taxpayer.

                           Reasons for Change

    The Committee believes 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 in the IRS Office of Appeals. In 
determining what constitutes reasonable costs, the Committee 
believes that either the difficulty of issues or the limited 
local availability of tax expertise may justify the payment of 
higher hourly rates.
    The Committee believes 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 Committee is concerned that the IRS may continue to 
litigate issues that have previously been decided in favor of 
taxpayers in other circuits. The Committee believes that this 
places an undue burden on taxpayers that are required to 
litigate such issues. Accordingly, the Committee believes 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.

                        Explanation of Provision

    The bill: (1) 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 $110 per hour; (2) moves the point in time 
after which reasonable administrative costs can be awarded to 
the date on which the first letter of proposed deficiency which 
allows the taxpayer an opportunity for administrative review in 
the IRS Office of Appeals is sent; (3) permits the award of 
attorney's fees (in amounts up to the statutory limit 
determined to be appropriate) to specified persons who 
represent for no more than a nominal fee a taxpayer who is a 
prevailing party; and (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 courts of appeal for other circuits on substantially 
similar issues. The court may also take into account whether 
the United States has won in courts of appeal for other 
circuits on substantially similar issues.

                             Effective Date

    The provision applies to costs incurred and services 
performed more than 180 days after the date of enactment.

2. Civil Damages for Negligence in Collection Actions (sec. 312 of the 
        bill and sec. 7433 of the Code)

                              Present Law

    A taxpayer may 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 Committee believes 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.

                        Explanation of Provision

    The bill provides for 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. Inadvertent errors in IRS 
functions, such as in computer programming, do not trigger the 
application of this provision. No person is entitled to seek 
civil damages for negligent, reckless, or intentional disregard 
of the Code or regulations in a court of law unless he first 
exhausts his administrative remedies.

                             Effective Date

    The provision is effective with respect to actions of 
officers or employees of the IRS occurring after the date of 
enactment.

3. Increase in Size of Cases Permitted on Small Case Calendar (sec. 313 
        of the bill and sec. 7463 of the Code)

                              Present Law

    Taxpayers may choose to contest many tax disputes in the 
Tax Court. Special small case procedures apply to disputes 
involving $10,000 or less, if the taxpayer chooses to utilize 
these procedures (and the Tax Court concurs).

                           Reasons for Change

    The Committee believes that use of the small case 
procedures should be expanded.

                        Explanation of Provision

    The bill increases the cap for small case treatment from 
$10,000 to $25,000.

                             Effective Date

    The provision applies to proceedings commenced after the 
date of enactment.

      C. Relief for Innocent Spouses and Persons With Disabilities

1. Innocent Spouse Relief (sec. 321 of the bill and new sec. 6015 of 
        the Code)

                              Present law

    Spouses who file a joint tax return are each fully 
responsible for the accuracy of the return and for the full tax 
liability. This is true even though only one spouse may have 
earned the wages or income which is shown on the return. This 
is ``joint and several'' liability. A spouse who wishes to 
avoid joint liability may file as a ``married person filing 
separately.''
    Relief from liability for tax, interest and penalties is 
available for ``innocent spouses'' in certain limited 
circumstances. To qualify for such relief, the innocent spouse 
must establish: (1) that a joint return was made; (2) that an 
understatement of tax, which exceeds the greater of $500 or a 
specified percentage of the innocent spouse's adjusted gross 
income for the preadjustment (most recent) year, is 
attributable to a grossly erroneous item \36\ 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 is inequitable to hold the innocent 
spouse liable for the deficiency in tax. The specified 
percentage of adjusted gross income is 10 percent if adjusted 
gross income is $20,000 or less. Otherwise, the specified 
percentage is 25 percent.
---------------------------------------------------------------------------
    \36\ Grossly erroneous items include items of gross income that are 
omitted from reported income and claims of deductions, credits, or 
basis in an amount for which there is no basis in fact of law (code 
sec. 6013(e)(2)).
---------------------------------------------------------------------------
    It is unclear under present law whether a court may grant 
partial innocent spouse relief. The Ninth Circuit Court of 
Appeals in Wiksell v. Commissioner \37\ has allowed partial 
innocent spouse relief where the spouse did not know, and had 
no reason to know, the magnitude of the understatement of tax, 
even though the spouse knew that the return may have included 
some understatement.
---------------------------------------------------------------------------
    \37\ 90 F.3d 1459 (9th Cir. 1997).
---------------------------------------------------------------------------
    The proper forum for contesting a denial by the Secretary 
of innocent spouse relief is determined by whether an 
underpayment is asserted or the taxpayer is seeking a refund of 
overpaid taxes. Accordingly, the Tax Court may not have 
jurisdiction to review all denials of innocent spouse relief.
    No form is currently provided to assist taxpayers in 
applying for innocent spouse relief.

                           Reasons for Change

    The Committee is concerned that the innocent spouse 
provisions of present law are inadequate. The Committee 
believes it is inappropriate to limit innocent spouse relief 
only to the most egregious cases where the understatement is 
large and the tax position taken is grossly erroneous. The 
Committee also believes 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. 
Finally, the Committee believes that taxpayers need to be 
better informed of their right to apply for innocent spouse 
relief in appropriate cases and that the IRS is the best source 
of that information.

                        Explanation of Provision

    The bill generally makes innocent spouse status easier to 
obtain. The bill eliminates all of the understatement 
thresholds and requires only that the understatement of tax be 
attributable to an erroneous (and not just a grossly erroneous) 
item of the other spouse.
    The bill provides that innocent spouse relief may be 
provided on an apportioned basis. That is, the spouse may be 
relieved of liability as an innocent spouse to the extent the 
liability is attributable to the portion of an understatement 
of tax which such spouse did not know of and had no reason to 
know of.
    The bill specifically provides that the Tax Court has 
jurisdiction to review any denial (or failure to rule) by the 
Secretary regarding an application for innocent spouse relief. 
The Tax Court may order refunds as appropriate where it 
determines the spouse qualifies for relief and an overpayment 
exists as a result of the innocent spouse qualifying for such 
relief. The taxpayer must file his or her petition for review 
with the Tax Court during the 90-day period that begins on the 
earlier of (1) 6 months after the date the taxpayer filed his 
or her claim for innocent spouse relief with the Secretary or 
(2) the date a notice denying innocent spouse relief was mailed 
by the Secretary. Except for termination and jeopardy 
assessments (secs. 6851, 6861), 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 the Tax Court considers such 
petition, 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 bill also requires the Secretary of the Treasury to 
develop a separate form with instructions for taxpayers to use 
in applying for innocent spouse relief within 180 days from the 
date of enactment. An innocent spouse seeking relief under this 
provision must claim innocent spouse status with regard to any 
assessment not later than two years after the date of such 
assessment.

                             Effective Date

    The provision is effective for understatements with respect 
to taxable years beginning after the date of enactment.

2. Suspension of Statute of Limitations on Filing Refund Claims During 
        Periods of Disability (sec. 322 of the bill and sec. 6511 of 
        the Code)

                              Present 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.
    There is no explicit statutory rule providing for equitable 
tolling of the statute of limitations. Several courts have 
considered whether equitable tolling implicitly exists. The 
First, Third, Fourth, and Eleventh Circuits have rejected 
equitable tolling with respect to tax refund claims. The Ninth 
Circuit has permitted equitable tolling. However, the U.S. 
Supreme Court has reversed the Ninth Circuit in U.S. v. 
Brockamp,\38\ holding 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.

                           reasons for change
---------------------------------------------------------------------------

    \38\ 117 S. Ct. 849 (1997), reversing 67 F. 3d 260 and 70 F. 3d 
120.
---------------------------------------------------------------------------
    The Committee believes 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 bill 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. Proof of the existence of 
the impairment must be furnished in the form and manner 
required by the Secretary. It is anticipated that, in applying 
the medically determinable test, the Secretary will evaluate 
whether a medical opinion that a physical or mental impairment 
exists has been offered by a person qualified to do so with 
respect to that particular type of impairment. 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 but would not apply to any claim 
for refund or credit which (without regard to the provision) is 
barred by the statute of limitations as of January 1, 1998.

                   D. Provisions Relating to Interest

1. Elimination of Interest Differential on Overlapping Periods of 
        Interest on Income Tax Overpayments and Underpayments (sec. 331 
        of the bill and sec. 6621 of the Code)

                              Present 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. 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.
    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, if either the underpayment or overpayment have been 
satisfied, the IRS will not typically offset the two amounts, 
but rather will assess or credit interest on the full 
underpayment or overpayment at the underpayment or overpayment 
rate. This has the effect of assessing the underpayment at the 
higher underpayment rate and crediting the overpayment at the 
lower overpayment rate. This results in the taxpayer being 
assessed a net interest charge, even if the amounts of the 
overpayment and underpayment are the same.
    The Secretary has the authority to credit the amount of any 
overpayment against any liability under the Code.\39\ Congress 
has previously directed the Internal Revenue Service to 
consider procedures for ``netting'' overpayments and 
underpayments and, to the extent a portion of tax due is 
satisfied by a credit of an overpayment, not impose 
interest.\40\
---------------------------------------------------------------------------
    \39\ Code sec. 6402
    \40\ Pursuant to TBOR2 (1996), the Secretary conducted a study of 
the manner in which the IRS has implemented the netting of interest on 
overpayments and underpayments and the policy and administrative 
implications of global netting. The legislative history to the General 
Agreement on Trade and Tariffs (GATT) (1994) stated that the Secretary 
should implement the most comprehensive crediting procedures that are 
consistent with sound administrative practice, and should do so as 
rapidly as is practicable. A similar statement was included in the 
Conference Report to the Omnibus Budget Reconciliation Act of 1990.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that taxpayers should be charged 
interest only on the amount they actually owe, taking into 
account overpayments and underpayments from all open years. The 
Committee does not believe that the different interest rates 
provided for overpayments and underpayments were ever intended 
to result in the charging of the differential on periods of 
mutual indebtedness.
    The Committee is also concerned that current practices 
provide 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 Committee believes that this is 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 bill establishes a net interest rate of zero on 
equivalent amounts of overpayment and underpayment that exist 
for any period. Each overpayment and underpayment is to be 
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 underpayments in excess of $10,000 do not prevent the 
application of the net zero rate. The bill applies to income 
taxes and self-employment taxes.
    For example, following an examination of his 1998 return, a 
corporate taxpayer is determined to have overpaid its 1998 
taxes by $5,000. Previously, the taxpayer established by an 
amended return that it had underpaid its 1999 taxes by $7,000. 
The taxpayer has paid the 1999 underpayment, plus interest 
determined at the underpayment rate. The statute of limitations 
has not run with respect to either 1998 or 1999. In determining 
the amount of the refund owed the taxpayer with regard to the 
1998 overpayment, the period for which the 1999 underpayment 
was outstanding must be taken into account. For all periods in 
which the underpayment and overpayment run concurrently (i.e., 
from the due date of the 1999 return until the underpayment was 
paid), the interest rate on the $5,000 overpayment and $5,000 
of the underpayment must be the same so that the net interest 
rate of zero applies.\41\ The interest rate on the remaining 
$2,000 of the underpayment that was originally calculated at 
the short term Federal rate plus three percent would not be 
affected.
---------------------------------------------------------------------------
    \41\ In this case, it is assumed that the interest rate on $5,000 
of overpayment will be set equal to the underpayment rate for the 
period that both the underpayment and overpayment are outstanding in 
order to achieve the required net interest rate of zero. However, the 
Secretary may use other procedures or methodologies that he deems 
appropriate, so long as a zero net interest rate is achieved.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to interest for calendar quarters 
beginning after the date of enactment. Until such time as 
procedures are implemented that allow for the automatic 
application of this provision by the IRS, the Committee expects 
that the Secretary will promptly and carefully consider any 
taxpayer's request to have interest charges recalculated in 
accordance with this provision. It is expected that the 
Secretary will extend the statute of limitations where 
necessary to allow for the consideration of such requests.
    In light of past Congressional statements urging the 
Secretary to eliminate interest rate differentials in these 
circumstances, and taking into consideration Congress' belief 
that the Secretary may do so, the Committee continues to expect 
that the Secretary will implement the most comprehensive 
crediting procedures that are consistent with sound 
administrative practice, and not only those affected by this 
provision.

2. Increase in Overpayment Rate Payable to Taxpayers Other than 
        Corporations (sec. 332 of the bill and sec. 6621 of the Code)

                              Present 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.

                           Reasons for Change

    The Committee believes that the interest differential for 
noncorporate taxpayers should be eliminated.

                        Explanation of Provision

    The bill provides that the overpayment interest rate will 
be AFR plus three percentage points, except that for 
corporations, the rate will remain at AFR plus two percentage 
points.

                             Effective Date

    The provision applies to interest for calendar quarters 
beginning after the date of enactment.

      E. Protections for Taxpayers Subject to Audit or Collection

1. Privilege of Confidentiality Extended to Taxpayer's Dealings with 
        Non-attorneys Authorized to Practice Before IRS (sec. 341 of 
        the bill and sec. 7602 of the Code)

                              Present 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, 
without the presence of strangers, for the purpose of securing 
the 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 be, 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 an attorney that 
is licensed to practice another profession is performing such 
other profession. For example, if a taxpayer retains an 
attorney who is also licensed as a certified public accountant 
(CPA), the taxpayer may not assert the attorney-client 
privilege with regard to communications made and documents 
prepared by the attorney in his role as a CPA.
    The attorney-client privilege is limited to communications 
between taxpayers and attorneys. No equivalent privilege is 
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 Committee believes that a right to privileged 
communications between a taxpayer and his or her advisor should 
be available in noncriminal proceedings before the Internal 
Revenue Service, so long as the advisor is authorized to 
practice before the Internal Revenue Service. A right to 
privileged communications in such situations should not depend 
upon whether the advisor is also licensed to practice law. The 
Committee believes that it is appropriate to provide for this 
right within the Committee's jurisdiction, by applying it to 
noncriminal proceedings before the IRS.

                        Explanation of Provision

    The bill extends the present law attorney-client privilege 
of confidentiality to tax advice that is furnished by any 
individual who is authorized to practice before the Internal 
Revenue Service, acting in a manner consistent with State law 
for such individual's profession, to a client-taxpayer (or 
potential client-taxpayer) in any noncriminal proceeding before 
the Internal Revenue Service.
    The provision will allow 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. 
Accordingly, except for criminal proceedings, the privilege of 
confidentiality under this provision applies in the same manner 
and with the same limitations as the attorney-client privilege 
of present law. The provision does not extend the privilege of 
confidentiality to communications that would not be eligible 
for the privilege if prepared by an attorney.
    The provision applies to individuals authorized to practice 
before the Internal Revenue Service, regardless of the method 
pursuant to which they are so authorized. Some, such as 
accountants, are authorized to practice by fulfilling State 
licensing requirements. Others, such as enrolled agents and 
enrolled actuaries, are authorized to practice by passing a 
Treasury Department examination.

                             Effective Date

    The provision is effective on the date of enactment.

2. Expansion of Authority to Issue Taxpayer Assistance Orders (sec. 342 
        of the bill and sec. 7811 of the Code)

                              Present Law

    Taxpayers can request that the Taxpayer Advocate in the 
Internal Revenue Service (''IRS'') issue a taxpayer assistance 
order (``TAO'') if they are suffering or about to suffer a 
significant hardship as a result of the manner in which the 
internal revenue laws are being administered (sec. 7811). 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.

                           Reasons for Change

    The Committee believes that certain factors should 
generally be considered by the Taxpayer Advocate in determining 
whether a taxpayer assistance order should be issued.

                        Explanation of Provision

    The bill provides that in determining whether to issue a 
TAO, the Taxpayer Advocate shall consider, among others, the 
following four factors: (1) whether there is an immediate 
threat of adverse action; (2) whether there has been an 
unreasonable delay in resolving the taxpayer's account 
problems; (3) whether the taxpayer will have to pay significant 
costs (including fees for professional representation) if 
relief is not granted; and (4) whether the taxpayer will suffer 
irreparable injury, or a long-term adverse impact, if relief is 
not granted. In addition, in cases where an IRS employee to 
whom the order would be issued is not following applicable 
published administrative guidance, including the Internal 
Revenue Manual (``IRM''), the Taxpayer Advocate shall construe 
the factors taken into account in determining whether to issue 
a TAO in the manner most favorable to the taxpayer.

                             Effective Date

    The provision is effective on the date of enactment.

3. Limitation on Financial Status Audit Techniques (sec. 343 of the 
        bill and sec. 7602 of the Code)

                              Present 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 Committee believes 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 bill prohibits 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.

4. Limitation on Authority to Require Production of Computer Source 
        Code (sec. 344 of the bill and sec. 7602 of the Code)

                              Present 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 
record keepers. There are no specific statutory restrictions on 
the ability of the Secretary to demand the production of 
computer records, programs, code or similar materials.

                           Reasons for Change

    The Committee believes that the intellectual property 
rights of the developers and owners of computer programs should 
be respected and is concerned that the examination of third-
party tax-related computer source code by the IRS could lead to 
the diminution of those rights through the inadvertent 
disclosure of trade secrets. The Committee also believes that 
the indiscriminate examination of computer source code by the 
IRS to identify issues on a taxpayer's return would be 
inappropriate. Accordingly, the Committee believes that a 
summons for the production of third-party tax-related computer 
source code should only be issued where the IRS has not 
otherwise been able to ascertain through reasonable efforts the 
manner in which a taxpayer has arrived at the entry on a return 
and has identified with specificity the portion of the computer 
source code it seeks to examine.

                        Explanation of Provision

    The Secretary is generally prohibited from issuing (or 
beginning an action to enforce) a summons in a civil action for 
any portion of any third-party tax-related computer source code 
unless (1) the Secretary is unable to otherwise reasonably 
ascertain the correctness of an item on a return from the 
taxpayer's other books, papers, records, other data, or the 
computer software program and associated data itself and (2) 
the Secretary first identifies with reasonable specificity the 
portion of the computer source code to be used to verify the 
correctness of the item.
    The Secretary would be considered to have satisfied these 
requirements with regard to the identified portion of the 
source code if the Secretary makes a formal request for such 
materials to both the taxpayer and the owner or developer of 
the software that is not satisfied within 90 days. Such formal 
request must clearly state that one of the consequences of 
failure to respond to the request will be the waiver of any 
prohibition on the summons of tax-related computer source code 
that might otherwise apply.
    The Secretary's determination that the identified portion 
of the third-party tax-related computer source code may be 
summoned may be contested in any proceeding to enforce the 
summons, by any person to whom the summons is addressed. For 
this purpose, the special procedures for third-party summonses 
\42\ will apply. In any such proceeding, the court may issue 
any order that is necessary to prevent the disclosure of trade 
secrets or other confidential information.
---------------------------------------------------------------------------
    \42\ Sec. 7609
---------------------------------------------------------------------------
    For these purposes, tax-related computer source code 
includes the human readable instructions for any computer 
software program that is used for accounting, tax return 
preparation, tax compliance or tax planning, along with the 
design and development materials related to such software 
program, including any relevant program notes and memoranda.
    The prohibition on issuing summons for tax-related computer 
source code does not apply in connection with any inquiry into 
any offense connected with the administration or enforcement of 
the internal revenue laws. A computer software program will not 
be treated as tax advice for the purpose of the professional-
client privilege contained in section 341 of this bill.
    The prohibition applies only in the case of tax-related 
computer software that is intended for commercial distribution. 
Source code related to computer software that was developed by, 
or primarily for the benefit of, the taxpayer or a related 
person (within the meaning of section 267 or 707(b)) for the 
internal use of the taxpayer or such related person may 
continue to be summonsed by the Secretary to the extent allowed 
under present law.

                             Effective Date

    The provision is effective for summonses issued more than 
90 days after the date of enactment. It is expected that the 
Secretary will not use the 90 day period between the date of 
enactment and the effective date in a manner that would 
circumvent the intent of the provision.

5. Procedures Relating to Extensions of Statute of Limitations by 
        Agreement (sec. 345 of the bill and sec. 6501 of the Code)

                              Present Law

    The statute of limitations within which the IRS may assess 
additional taxes is generally three years from the date a 
return is filed (sec. 6501).\43\ Prior to the expiration of the 
statute of limitations, both the taxpayer and the IRS may agree 
in writing to extend the statute, using Form 872 or 872-A. An 
extension may be for either a specified period or an indefinite 
period. The statute of limitations within which a tax may be 
collected after assessment is 10 years after assessment (sec. 
6502). Prior to the expiration of the statute of limitations, 
both the taxpayer and the IRS may agree in writing to extend 
the statute, using Form 900.
---------------------------------------------------------------------------
    \43\ For this purpose, a return filed before the due date is 
considered to be filed on the due date.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that taxpayers should be fully 
informed of their rights with respect to the statute of 
limitations.

                        Explanation of Provision

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

                             Effective Date

    The provision applies to requests to extend the statute of 
limitations made after the date of enactment.

6. Offers-in-Compromise (sec. 346 of the bill and sec. 7122 of the 
        Code)

                              Present Law

    Section 7122 of the Code permits the IRS to compromise a 
taxpayer's tax liability. In general, this occurs when a 
taxpayer submits an offer-in-compromise to the IRS. An offer-
in-compromise is a proposal 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.
    Taxpayers submit an offer-in-compromise on Form 656. There 
are two bases on which an offer can be made. The first is doubt 
as to the liability for the amount owed. The second is doubt as 
to the taxpayer's ability fully to pay the amount owed. An 
application can be made on either or both of these grounds. 
Taxpayers are required to submit background information to the 
IRS substantiating their application. If they are applying on 
the basis of doubt as to the taxpayer's ability fully to pay 
the amount owed, the taxpayer must complete a financial 
disclosure form enumerating assets and liabilities.
    As part of an offer-in-compromise made on the basis of 
doubt as to ability fully to pay, taxpayers must agree to 
comply with all provisions of the Internal Revenue Code 
relating to filing returns and paying taxes for five years from 
the date the IRS accepts the offer. Failure to observe this 
requirement permits the IRS to begin immediate collection 
actions for the original amount of the liability.

                           Reasons for Change

    The Committee believes that taxpayers should be fully 
informed of the offer-in-compromise procedures, including the 
responsibilities created by those procedures. In determining 
whether there is doubt as to the taxpayer's ability fully to 
pay the amount owed, the Committee believes that the Secretary 
should take into consideration a taxpayer's need to provide for 
the basic living expenses of his or her family, based on the 
cost of living in the taxpayer's locality.

                        Explanation of Provision

    The bill requires the IRS to develop and publish schedules 
of national and local allowances designed to provide taxpayers 
entering into an offer-in-compromise with adequate means to 
provide for basic living expenses. The bill also provides that, 
in the case of a compromise agreement that is terminated due to 
the actions of one spouse or former spouse, the spouse or 
former spouse remaining in compliance with the agreement may 
obtain reinstatement of such agreement on application. All 
payments required under the offer-in-compromise must be current 
for either spouse or former spouse to be in compliance with the 
agreement. Finally, the bill requires the IRS to prepare a 
publication or statement providing guidance to taxpayers on the 
rights and obligations of taxpayers and the IRS relating to 
offers in compromise. This statement will include materials 
explaining to married taxpayers their responsibilities should 
their marital status change and instructions for applying to 
have an offer-in-compromise reinstated under the circumstances 
discussed above. It is expected that this publication or 
statement will be provided to taxpayers considering an offer in 
compromise at appropriate times.

                             Effective Date

    The provision is effective on the date of enactment. It is 
expected that the materials required by this provision will be 
published as soon as practicable, but no later than 180 days 
after the date of enactment. It is expected that offers-in-
compromise based on this provision will be available as of the 
date of enactment.

7. Notice of Deficiency to Specify Deadlines for Filing Tax Court 
        Petition (sec. 347 of the bill and sec. 6213 of the Code)

                              Present Law

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

                           Reasons for Change

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

                        Explanation of Provision

    The bill requires that the IRS 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. It is 
expected that the last day on which a taxpayer who is outside 
the United States may file a petition with the Tax Court will 
be shown as an alternative. The bill provides that a petition 
filed with the Tax Court by this date shall be treated as 
timely filed.

                             Effective Date

    The provision would apply to notices mailed after December 
31, 1998.

8. Refund or Credit of Overpayments Before Final Determination (sec. 
        348 of the bill and sec. 6213 of the Code)

                              Present Law

    A taxpayer may petition the Tax Court for a redetermination 
of a deficiency within 90 days (150 days if the notice is 
addressed to a person outside the United States) from the date 
the notice of deficiency is mailed by the IRS. Generally, the 
Secretary may not make any assessment or commence any levy or 
other proceeding to collect the deficiency during such period 
or, if the taxpayer petitions the Tax Court, until the decision 
of the Tax Court has become final. The making of any such 
assessment, or the commencing of any proceeding or levy, during 
the prohibited period may be enjoined by a proceeding in the 
proper court (including the Tax Court). However, no authority 
is provided for ordering the refund of any amount collected 
within the prohibited period.
    If a taxpayer contests a deficiency in the Tax Court, no 
credit or refund of income tax for the contested taxable year 
generally may be made, except in accordance with a decision of 
the Tax Court that has become final. Where the Tax Court 
determines that an overpayment has been made and a refund is 
due the taxpayer, and a party appeals a portion of the decision 
of the Tax Court, no provision exists for the refund of any 
portion of any overpayment that is not contested in the appeal.

                           Reasons for Change

    The Committee believes that the Secretary should be allowed 
to refund the uncontested portion of an overpayment of taxes, 
without regard to whether other portions of the overpayment are 
contested.

                        Explanation of Provision

    The bill provides that where a timely petition in respect 
of a deficiency is filed in the Tax Court, the 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 bill 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 applies on the date of enactment.

9. Threat of Audit Prohibited to Coerce Tip Reporting Alternative 
        Commitment Agreements (sec. 349 of the bill)

                              Present Law

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

                           Reasons for Change

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

                        Explanation of Provision

    The bill 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.

                      F. Disclosures to Taxpayers

1. Explanation of Joint and Several Liability (sec. 351 of the bill)

                              Present 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. This is true even though only one spouse 
may have earned the wages or income which is shown on the 
return. This is ``joint and several'' liability. Spouses who 
wish to avoid joint and several liability may file as a married 
person filing separately. Special rules apply in the case of 
innocent spouses pursuant to section 6013(e).

                           Reasons for Change

    The Committee believes 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 bill requires that, no later than 180 days after the 
date of enactment, the IRS must establish procedures clearly to 
alert married taxpayers of their joint and several liability on 
all appropriate tax publications and instructions. It is 
anticipated that the IRS will make an appropriate cross-
reference to these statements near the signature line on 
appropriate tax forms.

                             Effective Date

    The bill requires that the procedures be established as 
soon as practicable, but no later than 180 days after the date 
of enactment.

2. Explanation of Taxpayers' Rights in Interviews With the IRS (sec. 
        352 of the bill)

                              Present 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 (sec. 7521). In addition, prior to or 
at initial in-person collection interviews, the IRS must 
explain 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 taxpayers' 
representative, the interview must be suspended to afford the 
taxpayer a reasonable opportunity to consult with the 
representative.

                           Reasons for Change

    The Committee believes 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 bill requires that the IRS rewrite Publication 1 
(``Your Rights as a Taxpayer'') to more clearly inform 
taxpayers 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.

3. Disclosure of Criteria for Examination Selection (sec. 353 of the 
        bill)

                              Present 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 Committee believes it is important that taxpayers 
understand the reasons they may be selected for examination.

                        Explanation of Provision

    The bill 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. Drafts of the statement or proposed 
revisions to the statement are required to be submitted to the 
House Committee on Ways and Means, the Senate Committee on 
Finance, and the Joint Committee on Taxation.

                             Effective Date

    The addition to Publication 1 must be made not later than 
180 days after the date of enactment.

4. Explanations of Appeals and Collection Process (sec. 354 of the 
        bill)

                              Present Law

    There is no statutory requirement that specific notices be 
given to taxpayers along 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 Committee believes 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 bill requires that, no later than 180 days after the 
date of enactment, an explanation of the appeals process and 
the collection 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 bill requires that the explanation be included as soon 
as practicable, but no later than 180 days after the date of 
enactment.

                     G. Low-Income Taxpayer Clinics

          (sec. 361 of the bill and new sec. 7525 of the Code)

                              Present Law

    There are no provisions in present law providing for 
assistance to clinics that assist low-income taxpayers.

                           Reasons for Change

    The Committee believes 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 Secretary shall make matching grants for the 
development, expansion, or continuation of certain low-income 
taxpayer clinics. 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. The term ``clinic'' includes (1) a clinical program 
at an accredited law school in which students represent low-
income taxpayers, and (2) an organization exempt from tax under 
Code section 501(c) which either represents low-income 
taxpayers or provides referral to qualified representatives.
    A clinic is treated as representing low-income taxpayers if 
at least 90 percent of the taxpayers represented by the clinic 
have incomes which do not exceed 250 percent of the poverty 
level and amounts in controversy of $25,000 or less.
    The aggregate amount of grants to be awarded each year is 
limited to $3,000,000. No taxpayer clinic could receive more 
than $100,000 per year. The clinic must provide matching funds 
on a dollar-for-dollar basis. Matching funds may include the 
allocable portion of both the salary (including fringe 
benefits) of individuals performing services for the clinic and 
clinic equipment costs, but not general institutional overhead.
    The following criteria are to be considered in making 
awards: (1) number of taxpayers served by the clinic, including 
the number of taxpayers in the geographical area for whom 
English is a second language; (2) the existence of other 
taxpayer clinics serving the same population; (3) the quality 
of the program; and (4) alternative funding sources available 
to the clinic.

                             Effective Date

    The provision is effective on the date of enactment.

                  H. Other Taxpayer Rights Provisions

1. Actions for Refund with respect to Certain Estates which have 
        Elected the Installment Method of Payment (sec. 371 of the bill 
        and sec. 7422 of the Code)

                              Present 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. Flora v. United States, 357 U.S. 63 (1958), 
aff'd on reh'g, 362 U.S. 145 (1960). 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. Courts have 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 (i.e., timely 
payment of the installments due prior to the bringing of an 
action is not sufficient to invoke jurisdiction). See, e.g., 
Rocovich v. United States, 933 F.2d 991 (Fed. Cir. 1991), 
Abruzzo v. United States, 24 Ct. Cl. 668 (1991).

                           Reasons for Change

    The Committee believes 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 bill 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 for any 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, the estate must have made an 
election pursuant to section 6166, fully paid each installment 
of principal and/or interest due before the date the suit is 
filed (as long as one or more installments are not yet due), 
and no portion of the payments due may have been accelerated. 
The bill further provides that once a final judgment has been 
entered by a district court or the U.S. Court of Federal 
Claims, the IRS would not be 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 would be refunded to the taxpayer. Lastly, the bill 
provides that the 2-year statute of limitations for filing a 
refund action would be suspended during the pendency of any 
action brought by a taxpayer pursuant to section 7479 for a 
declaratory judgment 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.

2. Cataloging Complaints (sec. 372 of the bill)

                              Present 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.\44\ The report must identify 
the nature of the misconduct or complaint, the number of 
instances received by category, and the disposition of the 
complaints.
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    \44\ Section 1211 of the Taxpayer Bill of Rights 2 (Public Law 104-
168; July 30, 1996).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that all allegations of misconduct 
by IRS employees must be carefully investigated. The Committee 
also believes that the annual report to Congress will help 
develop a public perception that the IRS takes such allegations 
of misconduct seriously. The Committee is 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 bill requires that, in collecting data for this report, 
records of taxpayer complaints of misconduct by IRS employees 
shall be maintained on an individual employee basis. These 
individual records are not to be listed in the report, but they 
will be useful in preparing the report. The Committee intends 
that these records be used in evaluating individual employees.

                             Effective Date

    The requirement is effective on the date of enactment.

3. Archive of Records of the IRS (sec. 373 of the bill and sec. 6103 of 
        the Code)

                              Present 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 present law, the IRS determines whether records contain 
taxpayer information. Once the IRS has made that determination, 
NARA is not permitted to examine those records. NARA has 
expressed concern that the IRS may be using the disclosure 
prohibition to improperly conceal agency records with 
historical significance.

IRS obligation to archive records

    The IRS, like all other Federal agencies, must create, 
maintain, and preserve agency records in accordance with 
section 3101 of title 44 of the United States Code. NARA is the 
Government agency responsible for overseeing the management of 
the records of the Federal government.\45\ Federal agencies are 
required to deposit significant and historical records with 
NARA.\46\ The head of each Federal agency must also establish 
safeguards against the removal or loss of records.\47\
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    \45\ 44 U.S.C. sec. 2904.
    \46\ 5 U.S.C. sec. 552a(b)(6).
    \47\ 44 U.S.C. sec. 3105.
---------------------------------------------------------------------------

Authority of NARA

    NARA is authorized, under the Federal Records Act, to 
establish standards for the selective retention of records of 
continuing value.\48\ NARA has the statutory authority to 
inspect records management practices of Federal agencies and to 
make recommendations for improvement.\49\ The head of each 
Federal agency must submit to NARA a list of records to be 
destroyed and a schedule for such destruction.\50\ NARA 
examines the list to determine if any of the records on the 
list have sufficient administrative, legal research, or other 
value to warrant their continued preservation. In many cases, 
the description of the record on the list is sufficient for 
NARA to make the determination. For example, NARA does not need 
to inspect Presidential tax returns to determine that they have 
historical value and should be retained. In some cases, NARA 
may find it helpful to examine a particular record. NARA has 
general authority to inspect records solely for the purpose of 
making recommendations for the improvement of records 
management practices.\51\ However, tax returns and return 
information can only be disclosed under the authority provided 
in section 6103 of the Internal Revenue Code. There is no 
exception to the disclosure prohibition for records management 
inspection by NARA.\52\
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    \48\ 44 U.S.C. sec. 2905.
    \49\ 44 U.S.C. sec. 2904(c)(7).
    \50\ 44 U.S.C. sec. 3303.
    \51\ 44 U.S.C. sec. 2906.
    \52\ American Friends Service Committee v. Webster, 720 F.2d 29 
(D.C. Cir. 1983).
---------------------------------------------------------------------------
    In connection with its evaluation of the records management 
system of the IRS, NARA noted several instances where the 
disclosure prohibitions of Code section 6103 complicated their 
review of many IRS records.
    NARA is also responsible for the custody, use and 
withdrawal of records transferred to it.\53\ Statutory 
provisions that restrict public access to the records in the 
hands of the agency from which the records were transferred 
also apply to NARA. Thus, if a confidential record, such as a 
Presidential tax return, is transferred to NARA for archival 
storage, NARA is not permitted to disclose it. In general, the 
application of such restrictions to records in the hands of 
NARA expire after the records have been in existence for 30 
years.\54\ The issue of whether the specific disclosure 
prohibition of section 6103 takes precedence over the general 
30-year expiration of restrictions generally applicable to 
records in the hands of NARA has not been addressed by a court, 
but an informal advisory opinion from the Office of Legal 
Counsel of the Attorney General concluded that the 30-year 
expiration provision would not reach records subject to section 
6103.\55\
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    \53\ 44 U.S.C. sec. 2108.
    \54\ 44 U.S.C. sec. 2108.
    \55\ Department of Justice, Office of Legal Counsel, Memorandum to 
Richard K. Willard, Assistant Attorney General (Civil Division) 
(February 27, 1986).
---------------------------------------------------------------------------

Confidentiality requirements

    The IRS must preserve the confidentiality of taxpayer 
information contained in Federal income tax returns. Such 
information may not be disclosed except as authorized under 
Code section 6103. Section 6103 was substantially revised in 
1976 to address Congress' concern that tax information was 
being used by Federal agencies in pursuit of objectives 
unrelated to administration and enforcement of the tax laws. 
Congress believed that the wide-spread use of tax information 
by agencies other than the IRS could adversely affect the 
willingness of taxpayers to comply voluntarily with the tax 
laws and could undermine the country's self-assessment tax 
system.\56\ Section 6103 does not authorize the disclosure of 
confidential return information to NARA.
---------------------------------------------------------------------------
    \56\ S. Rept. 94-938, p. 317 (1976).
---------------------------------------------------------------------------
    Section 6103 restricts the disclosure of returns and return 
information only. Return means any tax or information return, 
declaration of estimated tax, or claim for refund, including 
schedules and attachments thereto, filed with the IRS. Return 
information includes the taxpayer's name; nature and source or 
amount of income; and whether the taxpayer's return is under 
investigation. Section 6103(b)(2) provides that ``nothing in 
any other provision of law shall be construed to require the 
disclosure of standards used or to be used for the selection of 
returns for examination, or data used or to be used for 
determining such standards, if the Secretary determines that 
such disclosure will seriously impair assessment, collection, 
or enforcement under the internal revenue laws.'' Section 6103 
does not restrict the disclosure of other records required to 
be maintained by the IRS, such as records documenting agency 
policy, programs and activities, and agency histories. Such 
records are required to be made available to the public under 
the Freedom of Information Act (``FOIA'').\57\
---------------------------------------------------------------------------
    \57\ FOIA does not require disclosure of records or information 
that would frustrate law enforcement efforts. 5 U.S.C. sec. 552(b)(7).
---------------------------------------------------------------------------
    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 Committee believes 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 bill 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 Archivist, for purposes of 
the appraisal of such records for destruction or retention in 
the National Archives. The present-law prohibitions on and 
penalties for disclosure of tax information will generally 
apply to NARA.

                             Effective Date

    The provision is effective for requests made by the 
Archivist after the date of enactment.

 4. Payment of Taxes (sec. 374 of the bill)

                              Present 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). Those regulations \58\ 
state that checks or money orders should be made payable to the 
Internal Revenue Service.
---------------------------------------------------------------------------
    \58\ Treas. Reg. Sec. 301.6311-1(a)(1).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that it more appropriate that checks 
be made payable to the United States Treasury.

                        Explanation of Provision

    The bill 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.

5. Clarification of Authority of Secretary Relating to the Making of 
        Elections (sec. 375 of the bill and sec. 7805 of the Code)

                              Present Law

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

                           Reasons for Change

    The Committee wishes 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 provision 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 as of the date of enactment.

6. Limitation on Penalty on Individual's Failure to Pay for Months 
        During Period of Installment Agreement (sec. 376 of the bill 
        and sec. 6651 of the Code)

                              Present 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 (sec. 6651(a)). Taxpayers who make 
installment payments pursuant to an agreement with the IRS 
(under sec. 6159) are also subject to this penalty.

                           Reasons for Change

    The Committee believes that it is inappropriate to apply 
the full penalty for failure to pay taxes to taxpayers who are 
in fact paying their taxes through an installment agreement.

                        Explanation of Provision

    The bill provides that the penalty for failure to pay taxes 
is not imposed with respect to the tax liability of an 
individual with respect to any month in which an installment 
payment agreement with the IRS (under sec. 6159) is in effect 
to the extent that doing so would result in the cumulative 
penalty percentage exceeding 9.5 percent (instead of 25 
percent).

                             Effective Date

    The provision is effective for installment agreement 
payments made after the date of enactment.

                               I. Studies

1. Study of Penalty Administration (sec. 381 of the bill)

                              Present Law

    The last major revision of the overall penalty structure in 
the Internal Revenue Code was the Improved Penalty 
Administration and Compliance Tax Act, part of the Omnibus 
Budget Reconciliation Act of 1989.\59\
---------------------------------------------------------------------------
    \59\ Subtitle G of Title 7 of the Omnibus Budget Reconciliation Act 
of 1989 (Public Law 101-239).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that it is appropriate to undertake 
a study of penalty administration, which will permit the 
Committee whether the current penalty structure could be 
improved.

                        Explanation of Provision

    The bill requires the Joint Committee on Taxation to 
conduct a study reviewing the administration and implementation 
of the penalty reform provisions of the Omnibus Budget 
Reconciliation Act of 1989, and making any legislative and 
administrative recommendations it deems appropriate to simplify 
penalty administration and reduce taxpayer burden.

                             Effective Date

    The report must be provided not later than nine months 
after the date of enactment.

2. Study of Confidentiality of Tax Return Information (sec. 382 of the 
        bill)

                              Present Law

    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). 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 (sec. 
6103(p)).

                           Reasons for Change

    The Committee believes that a study of the confidentiality 
provisions will be useful in assisting the Committee in 
determining whether improvements can be made to these 
provisions.

                        Explanation of Provision

    The bill requires the Joint Committee on Taxation to 
conduct a study on provisions regarding taxpayer 
confidentiality. The study is to examine present-law 
protections of taxpayer privacy, the need for third parties to 
use tax return information, and the ability to achieve greater 
levels of voluntary compliance by allowing the public to know 
who is legally required to file tax returns but does not do so.

                             Effective Date

    The findings of the study, along with any recommendations, 
are required to be reported to the Congress no later than one 
year after the date of enactment.

           TITLE IV. CONGRESSIONAL ACCOUNTABILITY FOR THE IRS

        A. Review of Requests for GAO Investigations of the IRS

          (sec. 401 of the bill and sec. 8021(e) of the Code)

    There is presently 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, 
three-fifths 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 Committee believes 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 bill, 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 provision does not change the present-law rules under 
section 6103.

                             Effective Date

    The provision is effective with respect to requests for GAO 
investigations made after the date of enactment.

   B. Joint Congressional Hearings and Coordinated Oversight Reports

 (secs. 401 and 402 of the bill and secs. 8021(f) and 8022 of the Code)

                              Present Law

    Under the present 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 Governmental 
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 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 committee believes that Congressional oversight of the 
IRS should be more coordinated, and should include long-term 
objectives.

                        Explanation of Provision

    Under the bill, there will be two annual joint hearings of 
two majority and one minority members of each of the Senate 
Committees on Finance, Appropriations, and Governmental Affairs 
and the House Committees on Ways and Means, Appropriations, and 
Government Reform and Oversight. The first annual hearing is to 
take place before April 1 of each calendar year and is to 
review the strategic plans and budget for the IRS (including 
whether the budget supports IRS objectives). The second annual 
hearing is to be held after the conclusion of the annual tax 
filing season, and is to review the progress of the IRS in 
meeting its objectives under the strategic and business plans, 
the progress of the IRS in improving taxpayer service and 
compliance, progress of the IRS on technology modernization, 
and the annual filing season. The bill does not modify the 
existing jurisdiction of the Committees involved in the joint 
hearings.
    The bill provides that the Joint Committee is to make 
annual reports 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. The 
Joint Committee also is to report annually to the Senate Committees on 
Finance, Appropriations, and Governmental 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 
annual joint hearings of members of such Committees.

                             Effective Date

    The provision is effective on the date of enactment.

                           C. Budget Matters

1. Funding for century date change (sec. 411 of the bill)

                              Present Law

    No specific provision.

                           Reasons for Change

    The Committee believes that adequate funding of efforts to 
resolve this problem is essential.

                        Explanation of Provision

    The bill provides that it is the sense of the Congress 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.

2. Financial management advisory group (sec. 412 of the bill)

                              Present Law

    No provision.

                           Reasons for Change

    The Committee believes that the IRS Commissioner could 
benefit from input from experts in governmental accounting and 
auditing.

                        Explanation of Provision

    The bill directs the Commissioner to convene a financial 
management advisory group consisting of individuals with 
expertise in governmental accounting and auditing from both the 
private sector and the Government to advise the Commissioner on 
financial management issues.

                             Effective Date

    The provision is effective on the date of enactment.

                     D. Tax Law Complexity Analysis

        (sec. 421 and 422 of the bill and sec. 8024 of the Code)

                              Present Law

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

                           Reasons for Change

    The Restructuring Commission 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 Committee is 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 Committee believes it essential to try to 
reduce the complexity of the tax system whenever possible. 
Accordingly, the Committee believes it appropriate to introduce 
new procedural rules that will help to focus attention on 
complexity as an issue. Such rules are an important step, but 
do not take the place of the most effective way to address 
complexity--that is for the Congress and the Administration to 
make reducing complexity a priority when drafting tax 
legislation.
    The Committee also believes that encouraging the 
participation of IRS personnel in drafting legislation will 
help to highlight administrative and complexity issues while 
legislation is being developed.

                        Explanation of Provision

IRS participation in drafting legislation

    The bill 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.

Complexity analysis

    The bill requires the staff of the Joint Committee on 
Taxation to provide a ``Tax Complexity Analysis'' for 
legislation reported by the Senate Committee on Finance and the 
House Committee on Ways and Means and conference reports 
amending the tax laws. The Tax Complexity Analysis is to 
identify those provisions in the bill or conference report 
that, as determined by the staff of the Joint Committee, add 
significant complexity to the tax laws, or provide significant 
simplification. The Complexity Analysis is required to include 
a discussion of the basis for the determination by the staff of 
the Joint Committee. It is expected that, in general, the 
Complexity Analysis will be limited to no more than 20 
provisions. If the staff of the Joint Committee determines that 
a bill or conference report does not contain any provisions 
that add significant complexity or simplification to the tax 
laws, then the Complexity Analysis is to contain a statement to 
that effect.
    Factors that may be taken into account by the staff of the 
Joint Committee in preparing the Complexity Analysis include 
the following: (1) whether the provision is new, modifies or 
replaces existing law, and whether hearings were held to 
discuss the proposal and whether the IRS provided input as to 
its administrability; (2) when the provision becomes effective 
and corresponding compliance requirements on taxpayers; (3) 
whether new IRS forms or worksheets are needed, whether 
existing forms or worksheets must be modified, and whether the 
effective date allows sufficient time for the IRS to prepare 
such forms and educate taxpayers; (4) necessity of additional 
interpretive guidance (e.g., regulations, rulings, notices); 
(5) the extent to which the proposal relies on concepts 
contained in existing law, including definitions; (6) effect on 
existing record keeping requirements and the activities of 
taxpayers, complexity of calculations and likely behavioral 
response, and standard business practices and resource 
requirements; (7) number, type, and sophistication of affected 
taxpayers; and (8) whether the proposal requires the IRS to 
assume responsibilities not directly related to raising revenue 
which could be handled through another Federal agency.
    The bill requires the Commissioner to provide the Joint 
Committee with such information as is necessary to prepare each 
required Tax Complexity Analysis.
    A point of order arises with respect to the floor 
consideration of a bill or conference report that does not 
contain the required Complexity Analysis. The point of order 
may be waived by a majority vote.
    It is hoped that the Administration will include a similar 
complexity analysis when submitting proposed legislation.

                             Effective Date

    The requirement for a Tax Complexity Analysis is effective 
with respect to legislation considered on or after January 1, 
1998.

      TITLE V. REVENUE OFFSET: EMPLOYER DEDUCTION FOR VACATION PAY

            (sec. 501 of the bill and sec. 404 of the Code)

                              Present Law

    For deduction purposes, any method or arrangement that has 
the effect of a plan deferring the receipt of compensation or 
other benefits for employees is treated as a deferred 
compensation plan (sec. 404(b)). In general, contributions 
under a deferred compensation plan (other than certain pension, 
profit-sharing and similar plans) are deductible in the taxable 
year in which an amount attributable to the contribution is 
includible in income. However, vacation pay which is treated as 
deferred compensation is deductible for the taxable year of the 
employer in which the vacation pay is paid to the employee 
(sec. 404(a)(5)).
    Temporary Treasury regulations provide that a plan, method, 
or arrangement defers the receipt of compensation or benefits 
to the extent it is one under which an employee receives 
compensation or benefits more than a brief period of time after 
the end of the employer's taxable year in which the services 
creating the right to such compensation or benefits are 
performed. A plan, method or arrangement is presumed to defer 
the receipt of compensation for more than a brief period of 
time after the end of an employer's taxable year to the extent 
that compensation is received after the 15th day of the 3rd 
calendar month after the end of the employer's taxable year in 
which the related services are rendered (the ``2\1/2\ month'' 
period). A plan, method or arrangement is not considered to 
defer the receipt of compensation or benefits for more than a 
brief period of time after the end of the employer's taxable 
year to the extent that compensation or benefits are received 
by the employee on or before the end of the applicable 2\1/2\ 
month period. (Temp. Treas. Reg. Sec. 1.404(b)-1T A-2.)
    The Tax Court recently addressed the issue of when vacation 
pay and severance pay are considered deferred compensation in 
Schmidt Baking Co., Inc., 107 T.C. 271 (1996). In Schmidt 
Baking, the taxpayer was an accrual basis taxpayer with a 
fiscal year that ended December 28, 1991. The taxpayer funded 
its accrued vacation and severance pay liabilities for 1991 by 
purchasing an irrevocable letter of credit on March 13, 1992. 
The parties stipulated that the letter of credit represented a 
transfer of substantially vested interest in property to 
employees for purposes of section 83, and that the fair market 
value of such interest was includible in the employees' gross 
incomes for 1992 as a result of the transfer.\60\ The Tax Court 
held that the purchase of the letter of credit, and the 
resulting income inclusion, constituted payment of the vacation 
and severance pay within the 2\1/2\ month period. Thus, the 
vacation and severance pay were treated as received by the 
employees within the 2\1/2\ month period and were not treated 
as deferred compensation. The vacation pay and severance pay 
were deductible by the taxpayer for its 1991 fiscal year 
pursuant to its normal accrual method of accounting.
---------------------------------------------------------------------------
    \60\ While the rules of section 83 may govern the income inclusion, 
section 404 governs the deduction if the amount involved is deferred 
compensation.
---------------------------------------------------------------------------

                           Reasons for Change

    Prior to the Tax Reform Act of 1986, an employer could make 
an election to deduct an amount representing a reasonable 
addition to a reserve account for vacation pay earned by 
employees before the close of the current year and expected to 
be paid by the close of that year or within 12 months 
thereafter. As a result of concerns that this rule provided 
more favorable tax treatment for vacation pay than other types 
of compensation or deductible items, the Tax Reform Act of 1986 
limited this special rule to vacation pay that is paid during 
the current taxable year or within 8\1/2\ months after the 
close of the taxable year of the employer with respect to which 
the vacation pay was earned by employees.
    The tax treatment of vacation pay was again changed in the 
Omnibus Budget Reconciliation Act of 1987 (``OBRA 1987''). At 
that time, the Congress was concerned that then-present law 
provided more favorable tax treatment for vacation pay that was 
deferred by employees beyond the end of the year than was 
provided for other deferred benefits. The House and Senate 
bills would have repealed the reserve for accrued vacation pay 
and would have provided that deductions for vacation pay 
generally would be allowed in any taxable year for amounts paid 
during the year, plus vested vacation amounts paid or funded 
within 2\1/2\ months after the end of the year. The conference 
agreement followed a different approach, and provided that 
``vacation pay earned during any taxable year, but not paid to 
employees on or before the date that is 2\1/2\ months after the 
end of the taxable year, is deductible for the taxable year of 
the employer in which it is paid to employees.'' \61\ The key 
difference between the House and Senate provisions and the 
conference agreement to OBRA 1987 is that the conference 
agreement does not allow a deduction for amounts merely because 
they are vested and funded (i.e., are includible in income) 
within 2\1/2\ months after the end of the employer's taxable 
year.
---------------------------------------------------------------------------
    \61\ H. Rept. 100-495, at 921 (December 21, 1987).
---------------------------------------------------------------------------
    The Committee believes that the decision in Schmidt Baking 
reaches an inappropriate result and represents an incorrect 
interpretation of the intent of the Congress in adopting the 
vacation pay provision in OBRA 1987. The Committee believes 
that the intent of that provision was clearly to provide that a 
deduction for vacation pay is not available for the current 
taxable year unless the vacation pay is actually paid to 
employees within 2\1/2\ months after the end of the year. 
Moreover, OBRA 1987 reflects Congressional intent and 
understanding that compensation actually paid beyond the 2\1/2\ 
month period is deferred compensation.
    Further, the Committee is concerned that taxpayers may 
inappropriately extend the rationale of Schmidt Baking to other 
situations in which a deduction or other tax consequences are 
contingent upon an item being paid. The Committee does not 
believe that, as a general rule, letters of credit and similar 
mechanisms should be considered payment for any purposes of the 
Code.

                        Explanation of Provision

    The bill provides that, for purposes of determining whether 
an item of compensation (other than severance pay),\62\ is 
deferred compensation (under Code sec. 404), the compensation 
is not considered to be paid or received until actually 
received by the employee. In addition, an item of deferred 
compensation is not considered paid to an employee until 
actually received by the employee. The bill is intended to 
overrule the result in Schmidt Baking. For example, with 
respect to the determination of whether vacation pay is 
deferred compensation, the fact that the value of the vacation 
pay is includible in the income of employees within the 
applicable 2\1/2\ month period is not relevant. Rather, the 
vacation pay must have been actually received by employees 
within the 2\1/2\ month period in order for the compensation 
not to be treated as deferred compensation.
---------------------------------------------------------------------------
    \62\ This provision is also included in H.R. 2646, the ``Education 
Savings Act for Public and Private Schools Act'' as passed by the House 
on October 23, 1997 (See H. Rept. 105-332, October 21, 1997). A 
provision that overrules Schmidt Baking with respect to severance pay 
was included in H.R. 2644, the ``United States-Caribbean Trade 
Partnership Act,'' as ordered reported by the Committee on Ways and 
Means on October 9, 1997.
---------------------------------------------------------------------------
    It is intended that similar arrangements, in addition to 
the letter of credit approach used in Schmidt Baking, do not 
constitute actual receipt by the employee, even if there is an 
income inclusion. Thus, for example, actual receipt does not 
include the furnishing of a note or letter or other evidence of 
indebtedness of the taxpayer, whether or not the evidence is 
guaranteed by any other instrument or by any third party. As a 
further example, actual receipt does not include a promise of 
the taxpayer to provide service or property in the future 
(whether or not the promise is evidenced by a contract or other 
written agreement). In addition, actual receipt does not 
include an amount transferred as a loan, refundable deposit, or 
contingent payment. Amounts set aside in a trust for employees 
generally are not considered to be actually received by the 
employee.
    Under the bill, sick pay that is deferred compensation is 
treated the same as vacation pay that is deferred compensation, 
and is not deductible until paid to employees. The bill does 
not change the rule under which deferred compensation (other 
than vacation pay and sick pay and deferred compensation under 
qualified plans) is deductible in the year includible in the 
gross income of employees participating in the plan if separate 
accounts are maintained for each employee.
    While Schmidt Baking involved only vacation pay and 
severance pay, there is concern that this type of arrangement 
may be tried to circumvent other provisions of the Code where 
payment is required in order for a deduction to occur. Thus, it 
is intended that the Secretary will prevent the use of similar 
arrangements. No inference is intended that the result in 
Schmidt Baking is present law beyond its immediate facts or 
that the use of similar arrangements is permitted under present 
law.
    The bill does not affect the determination of whether an 
item is includible in income. Thus, for example, using the 
mechanism in Schmidt Baking for vacation pay would still result 
in income inclusion to the employees, but the employer would 
not be entitled to a deduction for the vacation pay until 
actually paid to and received by the employees.

                             Effective Date

    The provision is effective for taxable years ending after 
October 8, 1997. Any change in method of accounting required by 
the proposal will be treated as initiated by the taxpayer with 
the consent of the Secretary of the Treasury. Any adjustment 
required by section 481 as a result of the change will be taken 
into account in the year of the change.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 2(l)(2)(B) of rule XI of the 
Rules of the House of Representatives, the following statements 
are made concerning the votes of the Committee in its 
consideration of the bill, H.R. 2676.

Motion to report the bill

    The bill, H.R. 2676, as amended, was ordered favorably 
reported by a roll call vote of 33 yeas to 4 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
             Representatives                 Yea      Nay            Representatives             Yea       Nay  
----------------------------------------------------------------------------------------------------------------
Mr. Archer..............................        X   .......  Mr. Rangel.....................        X   ........
Mr. Crane...............................        X   .......  Mr. Stark......................  ........        X 
Mr. Thomas..............................        X   .......  Mr. Matsui.....................  ........        X 
Mr. Shaw................................        X   .......  Mrs. Kennelly..................        X   ........
Mrs. Johnson............................        X   .......  Mr. Coyne......................        X   ........
Mr. Bunning.............................        X   .......  Mr. Levin......................        X   ........
Mr. Houghton............................        X   .......  Mr. Cardin.....................        X   ........
Mr. Herger..............................        X   .......  Mr. McDermott..................  ........        X 
Mr. McCrery.............................        X   .......  Mr. Kleczka....................        X   ........
Mr. Camp................................        X   .......  Mr. Lewis......................  ........        X 
Mr. Ramstad.............................        X   .......  Mr. Neal.......................        X   ........
Mr. Nussle..............................        X   .......  Mr. McNulty....................  ........  ........
Mr. Johnson.............................        X   .......  Mr. Jefferson..................        X   ........
Ms. Dunn................................        X   .......  Mr. Tanner.....................        X   ........
Mr. Collins.............................        X   .......  Mr. Becerra \1\................  ........  ........
Mr. Portman.............................        X   .......  Mrs. Thurman...................        X   ........
Mr. English.............................        X   .......                                                     
Mr. Ensign..............................        X   .......                                                     
Mr. Christensen.........................        X   .......                                                     
Mr. Watkins.............................        X   .......                                                     
Mr. Hayworth............................        X   .......                                                     
Mr. Weller..............................        X   .......                                                     
Mr. Hulshof.............................        X   .......                                                     
----------------------------------------------------------------------------------------------------------------
\1\ Mr. Becerra passed.                                                                                         

Vote on amendment

    A roll call vote was conducted on the following amendment 
to the Chairman's amendment in the nature of a substitute.
    An amendment by Mr. Stark that would impose conflict of 
interest requirements on the Board members from the private 
sector was defeated by a roll call vote of 14 yeas to 23 nays. 
The vote was as follows:

----------------------------------------------------------------------------------------------------------------
             Representatives                 Yea      Nay            Representatives             Yea       Nay  
----------------------------------------------------------------------------------------------------------------
Mr. Archer..............................  ........        X  Mr. Rangel.....................        X   ........
Mr. Crane...............................  ........        X  Mr. Stark......................        X   ........
Mr. Thomas..............................  ........        X  Mr. Matsui.....................  ........  ........
Mr. Shaw................................  ........        X  Mrs. Kennelly..................        X   ........
Mrs. Johnson............................  ........        X  Mr. Coyne......................        X   ........
Mr. Bunning.............................  ........        X  Mr. Levin......................        X   ........
Mr. Houghton............................  ........        X  Mr. Cardin.....................  ........        X 
Mr. Herger..............................  ........        X  Mr. McDermott..................        X   ........
Mr. McCrery.............................  ........        X  Mr. Kleczka....................        X   ........
Mr. Camp................................  ........        X  Mr. Lewis......................        X   ........
Mr. Ramstad.............................  ........        X  Mr. Neal.......................        X   ........
Mr. Nussle..............................  ........        X  Mr. McNulty....................  ........  ........
Mr. Johnson.............................  ........        X  Mr. Jefferson..................        X   ........
Ms. Dunn................................  ........        X  Mr. Tanner.....................  ........        X 
Mr. Collins.............................  ........        X  Mr. Becerra....................        X   ........
Mr. Portman.............................  ........        X  Mrs. Thurman...................        X   ........
Mr. English.............................  ........        X                                                     
Mr. Ensign..............................        X   .......                                                     
Mr. Christensen.........................  ........        X                                                     
Mr. Watkins.............................  ........        X                                                     
Mr. Hayworth............................  ........        X                                                     
Mr. Weller..............................        X   .......                                                     
Mr. Hulshof.............................  ........        X                                                     
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

    In compliance with clause 7(a) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the estimated budget effects of H.R. 2676 as 
reported.
    The bill, as reported, is estimated to have the following 
effect on the budget:


                B. Budget Authority and Tax Expenditures

Budget authority

    With respect to subdivision (B) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives (relating to 
budget authority), see the statement of the Congressional 
Budget Office.

Tax expenditures

    In compliance with subdivision (B) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, the 
Committee states that the provisions of the bill as reported 
involve a reduction in tax expenditures for the amounts for the 
vacation pay provision shown in the revenue table in IV.A., 
above.

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with subdivision (C) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, requiring 
cost estimate prepared by the Congressional Budget Office, the 
Committee advises that the Congressional Budget Office has 
submitted the following statement on this bill.

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, October 31, 1997.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2676, the Internal 
Revenue Service Restructuring and Reform Act of 1997.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are John R. 
Righter and Mary Maginniss (for federal costs), Marc Nicole 
(for the impact on state and local governments), and Matthew 
Eyles (for the impact on the private sector).
            Sincerely,
                                              James L. Blum
                                   (For June E. O'Neill, Director).
    Enclosure.

H.R. 2676--Internal Revenue Service Restructuring and Reform Act of 
        1997

    Summary: H.R. 2676 would make a number of changes to the 
management and oversight of the Internal Revenue Service (IRS), 
add or amend 28 taxpayer rights, and require the IRS to 
implement several changes designed to increase the amount of 
forms filed electronically by taxpayers. The Joint Committee on 
Taxation (JCT) estimates that this bill would increase 
governmental receipts (revenues) by $327 million in fiscal year 
1998 but would have no net effect on such receipts over the 
1998-2002 period. Over the 1998-2007 period, JCT estimates that 
enacting this bill would decrease governmental receipts by $2.9 
billion.
    In addition, CBO estimates that enacting H.R. 2676 would 
increase direct spending by $5 million in fiscal year 1998, $25 
million over the 1998-2002 period, and $50 million over the 
1998-2007 period. Because enacting the bill would increase both 
direct spending and receipts, pay-as-you-go procedures would 
apply. H.R. 2676 also would affect discretionary spending, 
subject to the availability of funds. Because of the 
uncertainty of efforts by the Treasury and the IRS under 
current law to increase the availability and use of electronic 
filing by taxpayers, CBO cannot estimate the bill's total 
effect on discretionary spending at this time.
    JCT has determined that H.R. 2676 contains one new private-
sector mandate, as defined in the Unfunded Mandates Reform Act 
of 1995 (UMRA). JCT estimates that the provision clarifying 
employer deductions for vacation pay would increase tax revenue 
by $2.65 billion over the 1998-2002 period, which is the 
estimated cost to the private sector to comply with the 
mandate. The bill contains no intergovernmental mandates as 
defined in UMRA and would impose no costs on state, local, or 
tribal governments.
    Description of major provisions: H.R. 2676 would make a 
number of changes to the management oversights of the IRS and 
to the rights of taxpayers. Specifically, the bill would:
          Establish an 11-member Internal Revenue Service 
        Oversight board within the Department of the Treasury 
        to oversee the service's planning, budgeting, and 
        operations;
          Require the IRS to begin developing a paperless tax 
        return system and authorize it to offer certain 
        incentives to encourage taxpayers to file tax returns 
        electronically;
          Require the IRS, subject to the proper safeguards, to 
        create a system under which taxpayers could review 
        their own IRS files electronically by fiscal year 2007;
          Add or amend 28 provisions affecting taxpayer rights, 
        including shifting the burden from the taxpayer to the 
        IRS in certain court cases, making it easier for 
        taxpayers to recover court costs and to sue the IRS for 
        civil damages, eliminating the threshold and allowing 
        for partial relief from the tax bills owed by innocent 
        spouses, suspending the time limit for disabled 
        individuals to file for a refund, and requiring that 
        the IRS provide additional notification to taxpayers of 
        certain rights and deadlines;
          Make several congressional reforms to discourage the 
        Congress from adding further complexity to the tax code 
        and to coordinate the oversight functions of the 
        various committees that have jurisdiction over the IRS; 
        and
          Clarify employer deductions for vacation pay to raise 
        governmental receipts and offset the cost of other 
        provisions.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 2676 is shown in Table 1. The costs of 
this bill fall within budget function 800 (general government). 
The legislation would also affect revenues.

                                TABLE 1. ESTIMATED COST TO THE FEDERAL GOVERNMENT                               
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                                  1998      1999      2000      2001      2002  
----------------------------------------------------------------------------------------------------------------
                                   CHANGES IN DIRECT SPENDING AND REVENUES \1\                                  
                                                                                                                
Direct spending:                                                                                                
    Estimated Budget authority................................         3         3         5         5         6
    Estimated outlays.........................................         3         3         5         5         6
Revenues:                                                                                                       
    Estimated revenues........................................       327       602        43      -480      -493
----------------------------------------------------------------------------------------------------------------
\1\ Implementing the bill would also require increases in spending subject to appropriation, but CBO cannot     
  estimate these costs at this time.                                                                            

Basis of estimate

    H.R. 2676 would affect both revenues and direct spending. 
JCT estimates the bill would increase revenues by nearly $1 
billion over the fiscal year 1998-2000 period, but decrease 
such receipts by an equal amount over fiscal years 2001 and 
2002. For the 1998-2007 period, JCT estimates that enacting 
H.R. 2676 would decrease governmental receipts by about $2.9 
billion. CBO estimates that enacting the bill would increase 
direct spending, on average, by about $5 million in each of 
fiscal years 1998 through 2002, for a total of about $25 
million. For fiscal years 1998 through 2007, CBO estimates the 
bill would increase direct spending by a total of about $50 
million.
    Subject to the availability of funds, the bill also would 
increase costs at the IRS and JCT to perform various 
requirements of the bill and those increases would probably be 
significant. But, because of the Treasury's plans for 
increasing the availability and use of electronic filing by 
taxpayers are uncertain, CBO cannot estimate the bill's likely 
effect on discretionary spending at this time. The bill's major 
provisions that could affect discretionary spending are 
discussed in detail below.
    This estimates assumes the bill would be enacted by the 
middle of fiscal year 1998.
            Revenues
    H.R. 2676 would make several changes to the Internal 
Revenue code. The major provisions affecting receipts are 
summarized in Table 2.

                                     TABLE 2. ESTIMATED CHANGES IN REVENUES                                     
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                                  1998      1999      2000      2001      2002  
----------------------------------------------------------------------------------------------------------------
Clarify deduction for accrued vacation pay....................       705     1,111       584       120       126
Failure to pay penalty capped at 9.5 percent for individuals..      -176      -196      -209      -220      -231
Burden of proof...............................................       -80      -166      -174      -183      -192
Increase refund interest rate to AFR plus 3 percent for                                                         
 individuals..................................................       -49       -51       -54       -56       -59
                                                                                                                
Suspension of statute of limitations on filing refund claims                                                    
 during periods of disability.................................       -40       -50       -25       -15       -16
Elimination of interest rate differential on overlapping                                                        
 periods of interest on income tax overpayments and                                                             
 underpayments................................................        -1        -9       -28       -42       -54
All Other Provisions Affecting Revenues.......................       -32       -35       -51       -84       -67
                                                               -------------------------------------------------
      Total Estimated Revenues................................       327       602        43      -480      -493
----------------------------------------------------------------------------------------------------------------

            Direct spending
    Low-Income Taxpayer Clinics.--H.R. 2676 would require the 
Secretary of the Treasury to make grants on a matching basis to 
clinics that provide services to low-income taxpayers. The bill 
would limit the total amount of such grants in any one year to 
$3 million. Thus, CBO estimates that enacting this provision 
would increase direct spending by $3 million in each of fiscal 
years 1998 through 2002, or by a total of $15 million.
    Taxpayer Bill of Rights.--The bill also would increase the 
amount of penalties--attorney's fees and administrative costs--
and civil damages that courts could award to taxpayers in 
certain cases brought against the federal government. In 
particular, the bill would provide for up to $100,000 in civil 
damages to taxpayers in cases where a court finds that officers 
or employees of the IRS negligently disregarded provisions of 
the Internal Revenue Code.Courts could award damages only after 
the taxpayer had exhausted all administrative remedies at the IRS. 
Under current law, taxpayers may receive damages only for cases where a 
court finds that an IRS officer or employee has recklessly or 
internationally disregarded provisions of the Internal Revenue Code. 
The government would pay the additional amounts from the permanent, 
indefinite appropriation for claims and judgments.
    Although considerable uncertainty exists as to how the 
courts would determine and award damages based on negligent 
behavior CBO estimates that the provisions would increase 
direct spending, on average, by $10 million over the 1998-2007 
period and by $28 million over the 1998-2007 period. That 
estimate assumes that lowering the standard for civil damages 
would result in courts awarding additional damages to 
taxpayers. Because the provision would apply only to actions 
that occur after enactment and would require taxpayers to first 
exhaust administrative remedies. CBO expects the provision 
initially would have no significant impact on direct spending, 
but would result in a steady increase in damages awarded after 
1999. On average, we estimate that the provision would increase 
direct spending annually by $2 million over the 1998-2002 
period and by $3 million over the 1998-2007 period.
            Spending subject to appropriation
    Electronic Filing.--The bill's biggest potential impact on 
discretionary spending involves its requirements to increase 
the availability and use of electronic filing. H.R. 2676 would 
generally require the IRS to study and implement several major 
changes to the way taxpayers file their returns each year. 
Specifically, the bill would: (1) require the Secretary of the 
Treasury to develop a strategic plan to eliminate barriers and 
provide incentives to increase the number of returns filed 
electronically, (2) beginning in fiscal year 2000, extend the 
due date for electronic filers of information returns from 
February 28 to March 31, (3) require the Treasury to develop 
procedures for accepting signature information from electronic 
filers in a digital or other electronic form, (4) require the 
Treasury to develop procedures for implementing a return-free 
tax system beginning with tax years that begin after 2007, and 
(5) provided the necessary safeguard are in place, require the 
Treasury to develop procedures to enable taxpayers to review 
their account information electronically by 2007.
    The Treasury is already developing or studying most of 
these proposals. For instance, according to the Department of 
the Treasury, the IRS currently is using some signature 
alternatives and studying others. The Treasury also has already 
awarded a contract to design and develop a large educational 
campaign to encourage taxpayers to file electronically. The IRS 
is also implementing new payment methods and preparing its 
systems to accept new forms that should reduce the amount of 
paper filed by taxpayers each year. Finally, the Treasury is 
studying alternatives for allowing taxpayers to eventually 
review account information electronically. Thus, even though 
CBO expects that implementing the bill's procedures would 
increase costs for the Treasury, subject to the availability of 
funds, we cannot estimate the amount that such costs would 
increase. The amount of the costs would depend, in part, on the 
overall effort at the IRS to modernize its information systems, 
for which the Congress has appropriated about $4 billion over 
the last decade.
    In general, receiving and processing forms electronically 
should reduce costs at the IRS in the long run. The IRS is 
currently analyzing the per-unit costs of processing tax forms 
electronically. In the past, the IRS has estimated that it 
costs at least two and one-half times more to process such 
forms by paper, since the data must be input manually into 
IRS's systems, the error rate in processing such forms is 
significantly higher, and the papers require handing and 
storage. Thus, if enacting the bill results in an increase in 
the number of taxpayers that file electronically with the IRS 
each year--in fiscal year 1997, 19.1 million of the estimated 
120 million individual income tax returns were filed with the 
IRS by computer or phone--then the bill should eventually 
reduce the government's annual costs to process tax 
information.
    IRS Oversight Board.--H.R. 2676 would establish an 11-
member management board within the Department of the Treasury 
to oversee the management and operations of the IRS, including 
reviewing and approving the agency's strategic plans and annual 
budget request. The board would consist of eight members from 
outside the federal government, the Secretary of the Treasury, 
a union representative, and the IRS Commissioner. The bill 
would compensate the nonfederal members at a rate of $30,000 
per year, except for the chair, who would receive an annual 
salary of $50,000. The members also could receive reimbursement 
for any travel expenses incurred in attending official board 
meetings. The bill would not provide the board with its own 
permanent staff. The bill would require that the board meet at 
least once a month. Upon enactment, the President would have 
six months to submit nominations to the Senate.
    Based on the bill's requirements and compensation, CBO 
estimates that the board would cost about $400,000 in each of 
fiscal years 1999 through 2002. That estimate assumes the board 
would not meet until the beginning of fiscal year 1999.
    Taxpayer Bill of Rights.--H.R. 2676 would add or amend 28 
taxpayers rights. In general, the new rights would result in 
minimal additional costs for the IRS to write regulations, 
provide additional training to employees, and create or amend 
tax forms and other tax-related documents. CBO estimates that 
these provisions would increase costs at the IRS over fiscal 
years 1998 and 1999 by between $5 million and $10 million. In 
later years, we expect such costs would not be significant.
    Congressional Accountability.--H.R. 2676 would expand the 
responsibilities of the Joint Committee on Taxation (JCT) and 
streamline Congressional procedures for overseeing the IRS. It 
would require JCT to coordinate joint Congressional oversight 
hearings and various reports related to IRS matters, report 
annually on the overall state of the federal tax system, 
prepare a detailed ``Tax Complexity Analysis'' for proposed 
legislation amending tax laws, and conduct two studies within 
one year from the date of enactment. The bill also would 
require JCT to review all Congressional requests (other than 
requests by the chairman or ranking member of a Congressional 
committee or subcommittee) for General Accounting Office (GAO) 
investigations that access confidential information under 
section 6103 of the U.S. Code.
    Under the current structure, several committees have 
jurisdiction over the IRS. Assuming enactment of H.R. 2676, the 
Congress, with the assistance of JCT, would hold two joint 
hearings each year on the IRS. The first would review the 
strategic plans and budget for the IRS; the second would focus 
on the status of the IRS in meeting its budgetary and policy 
goals. The bill would require the JCT to prepare annual reports 
on the overall state of the federal tax system, along with 
recommendations for simplification and other matters. The JCT 
also would be responsible for providing a tax complexity 
analysis for legislation resulting in changes in tax law. This 
review would identify and analyze proposals in a bill or 
conference report that would add or reduce complexity in the 
tax laws.
    CBO estimates that enacting H.R. 2676 would cost JCT 
approximately $200,000 in 1998 and $400,000 beginning in 1999 
and each year thereafter, assuming appropriation of the 
necessary amounts. Depending upon the amount and nature of tax 
legislation considered by the Congress, analyzing the 
complexity of legislative initiatives could increase this cost 
somewhat. According to the GAO, securing JCT approval for 
certain tax investigations would affect perhaps one study 
annually, and thus would have no significant budgetary effect. 
Streamlining the legislative process for overseeing the IRS 
could result in some savings to Congressional committees, but 
any such savings is not expected to be significant.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act of 1985 specifies procedures for 
legislation affecting direct spending and receipts. The 
projected changes in direct spending and receipts are shown in 
the following table for fiscal years 1998 through 2007. For 
purposes of enforcing pay-as-you-go procedures, however, only 
the effects in the budget year and the succeeding four years 
are counted.

                                                   SUMMARY OF EFFECTS ON DIRECT SPENDING AND RECEIPTS                                                   
                                                        [By fiscal year, in millions of dollars]                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  1998     1999     2000     2001     2002     2003     2004     2005     2006     2007 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays............................................        3        3        5        5        6        6        7        7        8        8
Changes in receipts...........................................      327      602       43     -480     -493     -517     -542     -570     -597     -627
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Estimated impact on State, Local, and Tribal Governments: 
H.R. 2676 contains no intergovernmental mandates as defined in 
UMRA and would impose no costs on state, local, or tribal 
governments. The bill would provide $3 million a year for low-
income taxpayer clinics that could be operated by accredited 
law schools (public or private) or certain tax-exempt 
organizations.
    Estimated impact on the private sector: JCT has determined 
that H.R. 2676 contains one new private-sector mandate as 
defined in UMRA. The provision relating to clarification of 
deduction for accrued vacation pay is estimated to increase tax 
revenue by $2.65 billion over fiscal years 1998 through 2002, 
which is the estimated amount that the private sector would be 
required to spend in order to comply with this mandate. The 
revenue provision would offset the budgetary cost of the 
Internal Revenue Service restructuring provisions of the bill. 
The revenue provision would not impose a federal 
intergovernmental mandate on state, local, or tribal 
governments, as such governmental entities are generally exempt 
from the federal income tax.
    Estimate prepared by: Federal costs: John R. Righter and 
Mary Maginniss; Impact on State, local, and tribal governments: 
Marc Nicole; Impact on the private sector: Matthew Eyles.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

          A. Committee Oversight Findings and Recommendations

    With respect to subdivision (A) of clause 2(l)(3) of Rule 
XI of the Rules of the House of Representatives (relating to 
oversight findings), the Committee advises that it was the 
result of the Committee's oversight activities concerning the 
need to restructure and reform the IRS, additional taxpayer 
rights and protections, greater Congressional oversight of the 
IRS, and a revenue offset provision relating to the tax 
treatment of employer deduction for vacation pay that the 
Committee concluded that it is appropriate to enact the 
provisions contained in the bill as reported.
    For a listing of the Committee and Subcommittee hearings 
relating to the provisions of the bill, see Part I.C of this 
report.

    B. Summary of Findings and Recommendations of the Committee on 
                    Government Reform and Oversight

    With respect to subdivision (D) of clause 2(l)(3) of Rule 
XI of the Rules of the House of Representatives, the Committee 
advises that no specific oversight findings or recommendations 
have been submitted to this Committee by the Committee on 
Government Reform and Oversight with respect to the provisions 
contained in the bill. (However, see correspondence received 
from the Chairman, Committee on Government Reform and 
Oversight, regarding the bill in Part VII of this report.)

                 C. Constitutional Authority Statement

    With respect to clause 2(l)(4) of Rule XI of the Rules of 
the House of Representatives (relating to Constitutional 
Authority), the Committee states that the Committee's action in 
reporting this bill is derived from Article I of the 
Constitution, Section 7 (``All bills for raising revenue shall 
originate in the House of Representatives'') and Section 8 
(``The Congress shall have power to lay and collect taxes, 
duties, imposts and excises, to pay the debts . . . of the 
United States''), and from the 16th Amendment to the 
Constitution.

              D. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
    The Committee has determined that the provision of the bill 
relating to the tax treatment of employer deduction for 
vacation pay will impose a Federal mandate on the private 
sector in the amount shown in the revenue table in IV.A., 
above. This revenue is needed to offset the budget cost of the 
IRS restructuring and reform provisions. This provision of the 
bill will not impose a Federal intergovernmental mandate on 
State, local, or tribal governments.

                 E. Applicability of House Rule XXI5(c)

    Rule XXI5(c) of the Rules of the House of Representatives 
provides, in part, that ``No bill or joint resolution, 
amendment, or conference report carrying a Federal income tax 
rate increase shall be considered as passed or agreed to unless 
so determined by a vote of not less than three-fifths of the 
Members.'' The Committee has carefully reviewed the provisions 
of the bill, and states that the provisions of the bill do not 
involve any Federal income tax rate increase within the meaning 
of the rule.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In compliance with clause 3 of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman).

                     INTERNAL REVENUE CODE OF 1986

                        Subtitle A--Income Taxes

          * * * * * * *

                  CHAPTER 1--NORMAL TAXES AND SURTAXES

          * * * * * * *

               Subchapter D--Deferred Compensation, Etc.

          * * * * * * *

        PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC.

          * * * * * * *

                        Subpart A--General Rule

          * * * * * * *

SEC. 404. DEDUCTION FOR CONTRIBUTIONS OF AN EMPLOYER TO AN EMPLOYEES' 
                    TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A 
                    DEFERRED-PAYMENT PLAN.

  (a) General Rule.--If contributions are paid by an employer 
to or under a stock bonus, pension, profit-sharing, or annuity 
plan, or if compensation is paid or accrued on account of any 
employee under a plan deferring the receipt of such 
compensation, such contributions or compensation shall not be 
deductible under this chapter; but, if they would otherwise be 
deductible, they shall be deductible under this section, 
subject, however, to the following limitations as to the 
amounts deductible in any year:
          (1) * * *
          * * * * * * *
          (5) Other plans.--If the plan is not one included in 
        paragraph (1), (2), or (3), in the taxable year in 
        which an amount attributable to the contribution is 
        includible in the gross income of employees 
        participating in the plan, but, in the case of a plan 
        in which more than one employee participates only if 
        separate accounts are maintained for each employee. For 
        purposes of this section, any vacation pay or sick 
        leave pay which is treated as deferred compensation 
        shall be deductible for the taxable year of the 
        employer in which paid to the employee.
          * * * * * * *
          (11) Determinations relating to deferred 
        compensation.--
                  (A) In general.--For purposes of determining 
                under this section--
                          (i) whether compensation of an 
                        employee is deferred compensation, and
                          (ii) when deferred compensation is 
                        paid,
                no amount shall be treated as received by the 
                employee, or paid, until it is actually 
                received by the employee.
                  (B) Exception.--Subparagraph (A) shall not 
                apply to severance pay.
          * * * * * * *

                 Subtitle D--Miscellaneous Excise Taxes

          * * * * * * *

     CHAPTER 42--PRIVATE FOUNDATIONS AND CERTAIN OTHER TAX-EXEMPT 
                             ORGANIZATIONS

          * * * * * * *

                   Subchapter A--Private Foundations

          * * * * * * *

SEC. 4946. DEFINITIONS AND SPECIAL RULES.

  (a) * * *
  (c) Government Official.--For purposes of subsection 
(a)(1)(I) and section 4941, the term ``government official'' 
means, with respect to an act of self-dealing described in 
section 4941, an individual who, at the time of such act, holds 
any of the following offices or positions (other than as a 
``special Government employee'', as defined in section 202(a) 
of title 18, United States Code):
          (1) * * *
          * * * * * * *
          (5) an elective or appointive public office in the 
        executive, legislative, or judicial branch of the 
        government of a State, possession of the United States, 
        or political subdivision or other area of any of the 
        foregoing, or of the District of Columbia, held by an 
        individual receiving gross compensation at an annual 
        rate of $20,000 or more, [or]
          (6) a position as personal or executive assistant or 
        secretary to any of the foregoing[.], or
          (7) a member of the Internal Revenue Service 
        Oversight Board.
          * * * * * * *

                Subtitle F--Procedure and Administration

          * * * * * * *

                  CHAPTER 61--INFORMATION AND RETURNS

          * * * * * * *

                   Subchapter A--Returns and Records

          * * * * * * *

                   PART II--TAX RETURNS OR STATEMENTS

          * * * * * * *

                     Subpart B--Income Tax Returns

        Sec. 6012. Persons required to make returns of income.
     * * * * * * *
        Sec. 6015. Innocent spouse relief; petition to Tax Court.
     * * * * * * *

SEC. 6011. GENERAL REQUIREMENT OF RETURN, STATEMENT, OR LIST.

  (a) * * *
          * * * * * * *
  (f) Promotion of Electronic Filing.--
          (1) In general.--The Secretary is authorized to 
        promote the benefits of and encourage the use of 
        electronic tax administration programs, as they become 
        available, through the use of mass communications and 
        other means.
          (2) Incentives.--The Secretary may implement 
        procedures to provide for the payment of appropriate 
        incentives for electronically filed returns.
  [(f)] (g) Income, Estate, and Gift Taxes.--For requirement 
that returns of income, estate, and gift taxes be made whether 
or not there is tax liability, see subparts B and C.
          * * * * * * *

SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE.

  (a) * * *
          * * * * * * *
  [(e) Spouse Relieved of Liability in Certain Cases.--
          [(1) In general.--Under regulations prescribed by the 
        Secretary, if--
                  [(A) a joint return has been made under this 
                section for a taxable year,
                  [(B) on such return there is a substantial 
                understatement of tax attributable to grossly 
                erroneous items of one spouse,
                  [(C) the other spouse establishes that in 
                signing the return he or she did not know, and 
                had no reason to know, that there was such 
                substantial understatement, and
                  [(D) taking into account all the facts and 
                circumstances, it is inequitable to hold the 
                other spouse liable for the deficiency in tax 
                for such taxable year attributable to such 
                substantial understatement, then the other 
                spouse shall be relieved of liability for tax 
                (including interest, penalties, and other 
                amounts) for such taxable year to the extent 
                such liability is attributable to such 
                substantial understatement.
          [(2) Grossly erroneous items.--For purposes of this 
        subsection, the term ``grossly erroneous items'' means, 
        with respect to any spouse--
                  [(A) any item of gross income attributable to 
                such spouse which is omitted from gross income, 
                and
                  [(B) any claim of a deduction, credit, or 
                basis by such spouse in an amount for which 
                there is no basis in fact or law.
          [(3) Substantial understatement.--For purposes of 
        this subsection, the term ``substantial 
        understatement'' means any understatement (as defined 
        in section 6662(d)(2)(A)) which exceeds $500.
          [(4) Understatement must exceed specified percentage 
        of spouse's income.--
                  [(A) Adjusted gross income of $20,000 or 
                less.--If the spouse's adjusted gross income 
                for the preadjustment year is $20,000 or less, 
                this subsection shall apply only if the 
                liability described in paragraph (1) is greater 
                than 10 percent of such adjusted gross income.
                  [(B) Adjusted gross income of more than 
                $20,000.--If the spouse's adjusted gross income 
                for the preadjustment year is more than 
                $20,000, subparagraph (A) shall be applied by 
                substituting ``25 percent'' for ``10 percent''.
                  [(C) Preadjustment year.--For purposes of 
                this paragraph, the term ``preadjustment year'' 
                means the most recent taxable year of the 
                spouse ending before the date the deficiency 
                notice is mailed.
                  [(D) Computation of spouse's adjusted gross 
                income.--If the spouse is married to another 
                spouse at the close of the preadjustment year, 
                the spouse's adjusted gross income shall 
                include the income of the new spouse (whether 
                or not they file a joint return).
                  [(E) Exception for omissions from gross 
                income.--This paragraph shall not apply to any 
                liability attributable to the omission of an 
                item from gross income.
          [(5) Special rule for community property income.--For 
        purposes of this subsection, the determination of the 
        spouse to whom items of gross income (other than gross 
        income from property) are attributable shall be made 
        without regard to community property laws.]
          * * * * * * *

SEC. 6015. INNOCENT SPOUSE RELIEF; PETITION TO TAX COURT.

  (a) Spouse Relieved of Liability in Certain Cases.--
          (1) In general.--Under procedures prescribed by the 
        Secretary, if--
                  (A) a joint return has been made under 
                section 6013 for a taxable year,
                  (B) on such return there is an understatement 
                of tax attributable to erroneous items of 1 
                spouse,
                  (C) the other spouse establishes that in 
                signing the return he or she did not know, and 
                had no reason to know, that there was such 
                understatement,
                  (D) taking into account all the facts and 
                circumstances, it is inequitable to hold the 
                other spouse liable for the deficiency in tax 
                for such taxable year attributable to such 
                understatement, and
                  (E) the other spouse claims (in such form as 
                the Secretary may prescribe) the benefits of 
                this subsection not later than the date which 
                is 2 years after the date of the assessment of 
                such deficiency,
        then the other spouse shall be relieved of liability 
        for tax (including interest, penalties, and other 
        amounts) for such taxable year to the extent such 
        liability is attributable to such understatement.
          (2) Apportionment of relief.--If a spouse who, but 
        for paragraph (1)(C), would be relieved of liability 
        under paragraph (1), establishes that in signing the 
        return such spouse did not know, and had no reason to 
        know, the extent of such understatement, then such 
        spouse shall be relieved of liability for tax 
        (including interest, penalties, and other amounts) for 
        such taxable year to the extent that such liability is 
        attributable to the portion of such understatement of 
        which such spouse did not know and had no reason to 
        know.
          (3) Understatement.--For purposes of this subsection, 
        the term ``understatement'' has the meaning given to 
        such term by section 6662(d)(2)(A).
          (4) Special rule for community property income.--For 
        purposes of this subsection, the determination of the 
        spouse to whom items of gross income (other than gross 
        income from property) are attributable shall be made 
        without regard to community property laws.
  (b) Petition for Review By Tax Court.--In the case of an 
individual who has filed a claim under subsection (a) within 
the period specified in subsection (a)(1)(E)--
          (1) In general.--Such individual may petition the Tax 
        Court (and the Tax Court shall have jurisdiction) to 
        determine such claim if such petition is filed during 
        the 90-day period beginning on the earlier of--
                  (A) the date which is 6 months after the date 
                such claim is filed with the Secretary, or
                  (B) the date on which the Secretary mails by 
                certified or registered mail a notice to such 
                individual denying such claim.
        Such 90-day period shall be determined by not counting 
        Saturday, Sunday, or a legal holiday in the District of 
        Columbia as the last day of such period.
          (2) Restrictions applicable to collection of 
        assessment.--
                  (A) In general.--Except as otherwise provided 
                in section 6851 or 6861, no levy or proceeding 
                in court for collection of any assessment to 
                which such claim relates shall be made, begun, 
                or prosecuted, until the expiration of the 90-
                day period described in paragraph (1), nor, if 
                a petition has been filed with the Tax Court, 
                until the decision of the Tax Court has become 
                final. Rules similar to the rules of section 
                7485 shall apply with respect to the collection 
                of such assessment.
                  (B) Authority to enjoin collection actions.--
                Notwithstanding the provisions of section 
                7421(a), the beginning of such proceeding or 
                levy during the time the prohibition under 
                subparagraph (A) is in force may be enjoined by 
                a proceeding in the proper court, including the 
                Tax Court. The Tax Court shall have no 
                jurisdiction to enjoin any action or proceeding 
                under this paragraph unless a timely petition 
                for a determination of such claim has been 
                filed and then only in respect of the amount of 
                the assessment to which such claim relates.
                  (C) Jeopardy collection.--If the Secretary 
                makes a finding that the collection of the tax 
                is in jeopardy, nothing in this subsection 
                shall prevent the immediate collection of such 
                tax.
  (c) Suspension of Running of Period of Limitations.--The 
running of the period of limitations in section 6502 on the 
collection of the assessment to which the petition under 
subsection (b) relates shall be suspended for the period during 
which the Secretary is prohibited by subsection (b) from 
collecting by levy or a proceeding in court and for 60 days 
thereafter.
  (d) Applicable Rules.--
          (1) Allowance of application.--Except as provided in 
        paragraph (2), notwithstanding any other law or rule of 
        law (other than section 6512(b), 7121, or 7122), credit 
        or refund shall be allowed or made to the extent 
        attributable to the application of this section.
          (2) Res judicata.--In the case of any claim under 
        subsection (a), the determination of the Tax Court in 
        any prior proceeding for the same taxable periods in 
        which the decision has become final, shall be 
        conclusive except with respect to the qualification of 
        the spouse for relief which was not an issue in such 
        proceeding. The preceding sentence shall not apply if 
        the Tax Court determines that the spouse participated 
        meaningfully in such prior proceeding.
          (3) Limitation on tax court jurisdiction.--If a suit 
        for refund is begun by either spouse pursuant to 
        section 6532, the Tax Court shall lose jurisdiction of 
        the spouse's action under this section to whatever 
        extent jurisdiction is acquired by the district court 
        or the United States Court of Federal Claims over the 
        taxable years that are the subject of the suit for 
        refund.

SEC. 6061. SIGNING OF RETURNS AND OTHER DOCUMENTS.

  [Except as otherwise provided by]
  (a) General Rule.--Except as otherwise provided by subsection 
(b) and sections 6062 and 6063, any return, statement, or other 
document required to be made under any provision of the 
internal revenue laws or regulations shall be signed in 
accordance with forms or regulations prescribed by the 
Secretary.
  (b) Electronic Signatures.--
          (1) In general.--The Secretary shall develop 
        procedures for the acceptance of signatures in digital 
        or other electronic form. Until such time as such 
        procedures are in place, the Secretary may waive the 
        requirement of a signature for all returns or classes 
        of returns, or may provide for alternative methods of 
        subscribing all returns, declarations, statements, or 
        other documents required or permitted to be made or 
        written under internal revenue laws and regulations.
          (2) Treatment of alternative methods.--
        Notwithstanding any other provision of law, any return, 
        declaration, statement or other document filed without 
        signature under the authority of this subsection or 
        verified, signed or subscribed under any method adopted 
        under paragraph (1) shall be treated for all purposes 
        (both civil and criminal, including penalties for 
        perjury) in the same manner as though signed and 
        subscribed. Any such return, declaration, statement or 
        other document shall be presumed to have been actually 
        submitted and subscribed by the person on whose behalf 
        it was submitted.
          (3) Published guidance.--The Secretary shall publish 
        guidance as appropriate to define and implement any 
        waiver of the signature requirements.
          * * * * * * *

          PART V--TIME FOR FILING RETURNS AND OTHER DOCUMENTS

          * * * * * * *

SEC. 6071. TIME FOR FILING RETURNS AND OTHER DOCUMENTS.

  (a) General Rule.--When not otherwise provided for by this 
title, the Secretary shall by regulations prescribe the time 
for filing any return, statement, or other document required by 
this title or by regulations.
  (b) Electronically Filed Information Returns.--Returns made 
under subparts B and C of part III of this subchapter which are 
filed electronically shall be filed on or before March 31 of 
the year following the calendar year to which such returns 
relate.
  [(b)] (c) Special Taxes.--For payment of special taxes before 
engaging in certain trades and businesses, see section 4901 and 
section 5142.
          * * * * * * *

                 Subchapter B--Miscellaneous Provisions

          * * * * * * *

SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN 
                    INFORMATION.

  (a) * * *
          * * * * * * *
  (l) Disclosure of Returns and Return Information for Purposes 
Other Than Tax Administration.--
          (1) * * *
          * * * * * * *
          (17) Disclosure to national archives and records 
        administration.--The Secretary shall, upon written 
        request from the Archivist of the United States, 
        disclose or authorize the disclosure of returns and 
        return information to officers and employees of the 
        National Archives and Records Administration for 
        purposes of, and only to the extent necessary in, the 
        appraisal of records for destruction or retention. No 
        such officer or employee shall, except to the extent 
        authorized by subsections (f), (i)(7), or (p), disclose 
        any return or return information disclosed under the 
        preceding sentence to any person other than to the 
        Secretary, or to another officer or employee of the 
        National Archives and Records Administration whose 
        official duties require such disclosure for purposes of 
        such appraisal.
          * * * * * * *
  (p) Procedure and Recordkeeping.--
          (1) * * *
          * * * * * * *
          (3) Records of inspection and disclosure.--
                  (A) System of recordkeeping.--Except as 
                otherwise provided by this paragraph, the 
                Secretary shall maintain a permanent system of 
                standardized records or accountings of all 
                requests for inspection or disclosure of 
                returns and return information (including the 
                reasons for and dates of such requests) and of 
                returns and return information inspected or 
                disclosed under this section. Notwithstanding 
                the provisions of section 552a(c) of title 5, 
                United States Code, the Secretary shall not be 
                required to maintain a record or accounting of 
                requests for inspection or disclosure of 
                returns and return information, or of returns 
                and return information inspected or disclosed, 
                under the authority of subsections (c), (e), 
                (h)(1), (3)(A), or (4), (i)(4), or (7)(A)(ii), 
                (k)(1), (2), (6), or (8), (l)(1), (4)(B), (5), 
                (7), (8), (9), (10), (11), (12), (13), (14), 
                (15), [or (16)] (16), or (17), (m) or (n). The 
                records or accountings required to be 
                maintained under this paragraph shall be 
                available for examination by the Joint 
                Committee on Taxation or the Chief of Staff of 
                such joint committee. Such record or accounting 
                shall also be available for examination by such 
                person or persons as may be, but only to the 
                extent, authorized to make such examination 
                under section 552a(c)(3) of title 5, United 
                States Code.
          * * * * * * *
          (4) Safeguards.--Any Federal agency described in 
        subsection (h)(2), (h)(6), (i)(1), (2), (3), or (5), 
        (j)(1) or (2), (k)(8), (l)(1), (2), (3), (5), (11), 
        (13), [or (14)], (14), or (17) or (o)(1), the General 
        Accounting Office, or any agency, body, or commission 
        described in subsection (d), (i)(3)(B)(i) or (l)(6), 
        (7), (8), (9), (10), (12) or (15) shall, as a condition 
        for receiving returns or return information--
                  (A) * * *
          * * * * * * *
                  (F) upon completion of use of such returns or 
                return information--
                          (i) * * *
                          (ii) in the case of an agency 
                        described in subsections (h)(2), 
                        (h)(6), (i)(1), (2), (3), or (5), 
                        (j)(1) or (2), (k)(8), (l)(1), (2), 
                        (3), (5), (10), (11), (12), (13), (14), 
                        [or (15)], (15), or (17) or (o)(1), or 
                        the General Accounting Office, either--
                                  (I) * * *
          * * * * * * *

                         CHAPTER 63--ASSESSMENT

          * * * * * * *

                        Subchapter A--In General

          * * * * * * *

SEC. 6201. ASSESSMENT AUTHORITY.

  (a) * * *
          * * * * * * *
  [(d) Required Reasonable Verification of Information 
Returns.--In any court proceeding, if a taxpayer asserts a 
reasonable dispute with respect to any item of income reported 
on an information return filed with the Secretary under subpart 
B or C of part III of subchapter A of chapter 61 by a third 
party and the taxpayer has fully cooperated with the Secretary 
(including providing, within a reasonable period of time, 
access to and inspection of all witnesses, information, and 
documents within the control of the taxpayer as reasonably 
requested by the Secretary), the Secretary shall have the 
burden of producing reasonable and probative information 
concerning such deficiency in addition to such information 
return.]
  [(e)] (d) Deficiency Proceedings.--For special rules 
applicable to deficiencies of income, estate, gift, and certain 
excise taxes, see subchapter B.
          * * * * * * *

  Subchapter B--Deficiency Procedures in the Case of Income, Estate, 
                     Gift, and Certain Excise Taxes

SEC. 6213. RESTRICTIONS APPLICABLE TO DEFICIENCIES; PETITION TO TAX 
                    COURT.

  (a) Time for Filing Petition and Restriction on Assessment.--
Within 90 days, or 150 days if the notice is addressed to a 
person outside the United States, after the notice of 
deficiency authorized in section 6212 is mailed (not counting 
Saturday, Sunday, or a legal holiday in the District of 
Columbia as the last day), the taxpayer may file a petition 
with the Tax Court for a redetermination of the deficiency. 
Except as otherwise provided in section 6851, 6852, or 6861 no 
assessment of a deficiency in respect of any tax imposed by 
subtitle A, or B, chapter 41, 42, 43, or 44 and no levy or 
proceeding in court for its collection shall be made, begun, or 
prosecuted until such notice has been mailed to the taxpayer, 
nor until the expiration of such 90-day or 150-day period, as 
the case may be, nor, if a petition has been filed with the Tax 
Court, until the decision of the Tax Court has become final. 
Notwithstanding the provisions of section 7421(a), the making 
of such assessment or the beginning of such proceeding or levy 
during the time such prohibition is in force may be enjoined by 
a proceeding in the proper court[, including the Tax Court.], 
including the Tax Court, and a refund may be ordered by such 
court of any amount collected within the period during which 
the Secretary is prohibited from collecting by levy or through 
a proceeding in court under the provisions of this subsection. 
The Tax Court shall have no jurisdiction [to enjoin any action 
or proceeding] to enjoin any action or proceeding or order any 
refund under this subsection unless a timely petition for a 
redetermination of the deficiency has been filed and then only 
in respect of the deficiency that is the subject of such 
petition. Any petition filed with the Tax Court on or before 
the last date specified for filing such petition by the 
Secretary in the notice of deficiency shall be treated as 
timely filed.
          * * * * * * *

            Subchapter C--Tax Treatment of Partnership Items

          * * * * * * *

SEC. 6230. ADDITIONAL ADMINISTRATIVE PROVISIONS.

  (a) * * *
          * * * * * * *
  (c) Claims arising out of erroneous computations, etc..--
          (1) * * *
          * * * * * * *
          (5) Rules for seeking innocent spouse relief.--
                  (A) In general.--The spouse of a partner may 
                file a claim for refund on the ground that the 
                Secretary failed to relieve the spouse under 
                section [6013(e)] 6015 from a liability that is 
                attributable to an adjustment to a partnership 
                item.
          * * * * * * *

                         CHAPTER 64--COLLECTION

          * * * * * * *

       Subchapter D--Seizure of Property for Collection of Taxes

          * * * * * * *

SEC. 6344. CROSS REFERENCES.

  (a) * * *
  (b) Delinquent Collection Officers.--
          For distraint proceedings against delinquent internal revenue 
        officers, see [section 7803(d)] section 7804(c).
     * * * * * * *

                        CHAPTER 66--LIMITATIONS

          * * * * * * *

         Subchapter A--Limitations on Assessment and Collection

          * * * * * * *

SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.

  (a) * * *
          * * * * * * *
  (c) Exceptions.--
          (1) * * *
          * * * * * * *
          (4) Extension by agreement.--[Where]
                  (A) In general.--Where, before the expiration 
                of the time prescribed in this section for the 
                assessment of any tax imposed by this title, 
                except the estate tax provided in chapter 11, 
                both the Secretary and the taxpayer have 
                consented in writing to its assessment after 
                such time, the tax may be assessed at any time 
                prior to the expiration of the period agreed 
                upon. The period so agreed upon may be extended 
                by subsequent agreements in writing made before 
                the expiration of the period previously agreed 
                upon.
                  (B) Notice to taxpayer of right to refuse or 
                limit extension.--The Secretary shall notify 
                the taxpayer of the taxpayer's right to refuse 
                to extend the period of limitations, or to 
                limit such extension to particular issues, on 
                each occasion when the taxpayer is requested to 
                provide such consent.
          * * * * * * *

             Subchapter B--Limitations on Credit or Refund

          * * * * * * *

SEC. 6511. LIMITATIONS ON CREDIT OR REFUND.

  (a) * * *
          * * * * * * *
  (h) Running of Periods of Limitation Suspended While Taxpayer 
Is Unable To Manage Financial Affairs Due to Disability.--
          (1) In general.--In the case of an individual, the 
        running of the periods specified in subsections (a), 
        (b), and (c) shall be suspended during any period of 
        such individual's life that such individual is 
        financially disabled.
          (2) Financially disabled.--
                  (A) In general.--For purposes of paragraph 
                (1), an individual is financially disabled if 
                such individual is unable to manage his 
                financial affairs by reason of his medically 
                determinable physical or mental impairment 
                which can be expected to result in death or 
                which has lasted or can be expected to last for 
                a continuous period of not less than 12 months. 
                An individual shall not be considered to have 
                such an impairment unless proof of the 
                existence thereof is furnished in such form and 
                manner as the Secretary may require.
                  (B) Exception where individual has guardian, 
                etc.--An individual shall not be treated as 
                financially disabled during any period that 
                such individual's spouse or any other person is 
                authorized to act on behalf of such individual 
                in financial matters.
  [(h)] (i) Cross References.--
          (1) * * *
     * * * * * * *

SEC. 6512. LIMITATIONS IN CASE OF PETITION TO TAX COURT.

  (a) Effect of Petition to Tax Court.--If the Secretary has 
mailed to the taxpayer a notice of deficiency under section 
6212(a) (relating to deficiencies of income, estate, gift, and 
certain excise taxes) and if the taxpayer files a petition with 
the Tax Court within the time prescribed in section 6213(a) (or 
7481(c) with respect to a determination of statutory interest 
or section 7481(d) solely with respect to a determination of 
estate tax by the Tax Court), no credit or refund of income tax 
for the same taxable year, of gift tax for the same calendar 
year or calendar quarter, of estate tax in respect of the 
taxable estate of the same decedent, or of tax imposed by 
chapter 41, 42, 43, or 44 with respect to any act (or failure 
to act) to which such petition relates, in respect of which the 
Secretary has determined the deficiency shall be allowed or 
made and no suit by the taxpayer for the recovery of any part 
of the tax shall be instituted in any court except--
          (1) * * *
          * * * * * * *
          (4) As to overpayments attributable to partnership 
        items, in accordance with subchapter C of chapter 
        63[.], and
          (5) As to any amount collected within the period 
        during which the Secretary is prohibited from making 
        the assessment or from collecting by levy or through a 
        proceeding in court under the provisions of section 
        6213(a), and
          (6) As to overpayments the Secretary is authorized to 
        refund or credit pending appeal as provided in 
        subsection (b).
  (b) Overpayment Determined by Tax Court.--
          (1) Jurisdiction to determine.--Except as provided by 
        paragraph (3) and by section 7463, if the Tax Court 
        finds that there is no deficiency and further finds 
        that the taxpayer has made an overpayment of income tax 
        for the same taxable year, of gift tax for the same 
        calendar year, or calendar quarter, of estate tax in 
        respect of the taxable estate of the same decedent, or 
        of tax imposed by chapter 41, 42, 43, or 44 with 
        respect to any act (or failure to act) to which such 
        petition relates, in respect of which the Secretary 
        determined the deficiency, or finds that there is a 
        deficiency but that the taxpayer has made an 
        overpayment of such tax, the Tax Court shall have 
        jurisdiction to determine the amount of such 
        overpayment, and such amount shall, when the decision 
        of the Tax Court has become final, be credited or 
        refunded to the taxpayer. If a notice of appeal in 
        respect of the decision of the Tax Court is filed under 
        section 7483, the Secretary is authorized to refund or 
        credit the overpayment determined by the Tax Court to 
        the extent the overpayment is not contested on appeal.
          * * * * * * *

                          CHAPTER 67--INTEREST

          * * * * * * *

                 Subchapter A--Interest on Overpayments

          * * * * * * *

SEC. 6601. INTEREST ON UNDERPAYMENT, NONPAYMENT, OR EXTENSIONS OF TIME 
                    FOR PAYMENT, OF TAX.

  (a) * * *
          * * * * * * *
  (f) Satisfaction by Credits.--If any portion of a tax is 
satisfied by credit of an overpayment, then no interest shall 
be imposed under this section on the portion of the tax so 
satisfied for any period during which, if the credit had not 
been made, interest would have been allowable with respect to 
such overpayment. The preceding sentence shall not apply to the 
extent that section 6621(d) applies.
          * * * * * * *

 Subchapter C--Determination on Interest Rate, Compounding of Interest

          * * * * * * *

SEC. 6621. DETERMINATION OF RATE OF INTEREST.

  (a) General Rule.--
          (1) Overpayment rate.--The overpayment rate 
        established under this section shall be the sum of--
                  (A) the Federal short-term rate determined 
                under subsection (b), plus
                  [(B) 2 percentage points.]
                  (B) 3 percentage points (2 percentage points 
                in the case of a corporation).
        To the extent that an overpayment of tax by a 
        corporation for any taxable period (as defined in 
        subsection (c)(3), applied by substitiuting 
        ``overpayment'' for ``underpayment'') exceeds $10,000, 
        subparagraph (B) shall be applied by substituting ``0.5 
        percentage point'' for ``2 percentage points''.
          * * * * * * *
  (d) Elimination of Interest on Overlapping Periods of Income 
Tax Overpayments and Underpayments.--To the extent that, for 
any period, interest is payable under subchapter A and 
allowable under subchapter B on equivalent underpayments and 
overpayments by the same taxpayer of tax imposed by chapters 1 
and 2, the net rate of interest under this section on such 
amounts shall be zero for such period.
          * * * * * * *

  CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNT, AND ASSESSABLE 
                               PENALTIES

          * * * * * * *

       Subchapter A--Additions to the Tax and Additional Amounts

          * * * * * * *

                       PART I--GENERAL PROVISIONS

          * * * * * * *

SEC. 6651. FAILURE TO FILE TAX RETURN OR TO PAY TAX.

  (a) * * *
          * * * * * * *
  (h) Limitation on Penalty on Individual's Failure To Pay for 
Months During Period of Installment Agreement.--No addition to 
the tax shall be imposed under paragraph (2) or (3) of 
subsection (a) with respect to the tax liability of an 
individual for any month during which an installment agreement 
under section 6159 is in effect for the payment of such tax to 
the extent that imposing an addition to the tax under such 
paragraph for such month would result in the aggregate number 
of percentage points of such addition to the tax exceeding 9.5.
          * * * * * * *

             CHAPTER 74--CLOSING AGREEMENTS AND COMPROMISES

          * * * * * * *

SEC. 7122. COMPROMISES.

  (a) * * *
          * * * * * * *
  (c) Allowances For Basic Living Expenses.--The Secretary 
shall develop and publish schedules of national and local 
allowances designed to provide that taxpayers entering into a 
compromise have an adequate means to provide for basic living 
expenses.
          * * * * * * *

          CHAPTER 75--CRIMES, OTHER OFFENSES, ABD FORFEITURES

          * * * * * * *

                          Subchapter A--Crimes

          * * * * * * *

                       PART I--GENERAL PROVISIONS

        Sec. 7201. Attempt to evade or defeat tax.
     * * * * * * *
        Sec. 7217. Prohibition on executive branch influence over 
                  taxpayer audits and other investigations.
     * * * * * * *

SEC. 7217. PROHIBITION ON EXECUTIVE BRANCH INFLUENCE OVER TAXPAYER 
                    AUDITS AND OTHER INVESTIGATIONS.

  (a) Prohibition.--It shall be unlawful for any applicable 
person to request any officer or employee of the Internal 
Revenue Service to conduct or terminate an audit or other 
investigation of any particular taxpayer with respect to the 
tax liability of such taxpayer.
  (b) Reporting Requirement.--Any officer or employee of the 
Internal Revenue Service receiving any request prohibited by 
subsection (a) shall report the receipt of such request to the 
Chief Inspector of the Internal Revenue Service.
  (c) Exceptions.--Subsection (a) shall not apply to--
          (1) any request made to an applicable person by the 
        taxpayer or a representative of the taxpayer and 
        forwarded by such applicable person to the Internal 
        Revenue Service,
          (2) any request by an applicable person for 
        disclosure of return or return information under 
        section 6103 if such request is made in accordance with 
        the requirements of such section, or
          (3) any request by the Secretary of the Treasury as a 
        consequence of the implementation of a change in tax 
        policy.
  (d) Penalty.--Any person who willfully violates subsection 
(a) or fails to report under subsection (b) shall be punished 
upon conviction by a fine in any amount not exceeding $5,000, 
or imprisonment of not more than 5 years, or both, together 
with the costs of prosecution.
  (e) Applicable Person.--For purposes of this section, the 
term ``applicable person'' means--
          (1) the President, the Vice President, any employee 
        of the executive office of the President, and any 
        employee of the executive office of the Vice President, 
        and
          (2) any individual (other than the Attorney General 
        of the United States) serving in a position specified 
        in section 5312 of title 5, United States Code.
          * * * * * * *

                    CHAPTER 76--JUDICIAL PROCEEDINGS

        Subchapter A. Crimes.
     * * * * * * *
        Subchapter E. Burden of proof.
     * * * * * * *

        Subchapter B--Proceedings by Taxpayers and Third Parties

          * * * * * * *

SEC. 7422. CIVIL ACTIONS FOR REFUND.

  (a) * * *
          * * * * * * *
  (j) Special Rule for Actions With Respect to Estates for 
Which An Election Under Section 6166 Is Made.--
          (1) In general.--The district courts of the United 
        States and the United States Court of Federal Claims 
        shall have jurisdiction over any action brought by the 
        representative of an estate to which this subsection 
        applies to determine the correct amount of the estate 
        tax liability of such estate (or for any refund with 
        respect thereto) even if the full amount of such 
        liability has not been paid.
          (2) Estates to which subsection applies.--This 
        subsection shall apply to any estate if, as of the date 
        the action is filed--
                  (A) an election under section 6166 is in 
                effect with respect to such estate,
                  (B) no portion of the installments payable 
                under such section have been accelerated, and
                  (C) all installments the due date for which 
                is on or before the date the action is filed 
                have been paid.
          (3) Prohibition on collection of disallowed 
        liability.--If the court redetermines under paragraph 
        (1) the estate tax liability of an estate, no part of 
        such liability which is disallowed by a decision of 
        such court which has become final may be collected by 
        the Secretary, and amounts paid in excess of the 
        installments determined by the court as currently due 
        and payable shall be refunded.
  [(j)] (k) Cross References.--
          (1) * * *
          * * * * * * *

SEC. 7430. AWARDING OF COSTS AND CERTAIN FEES.

  (a) * * *
          * * * * * * *
  (c) Definitions.--For purposes of this section--
          (1) Reasonable litigation costs.--The term 
        ``reasonable litigation costs'' includes--
                  (A) reasonable court costs, and
                  (B) based upon prevailing market rates for 
                the kind or quality of services furnished--
                          (i) * * *
          * * * * * * *
                          (iii) reasonable fees paid or 
                        incurred for the services of attorneys 
                        in connection with the court 
                        proceeding, except that such fees shall 
                        not be in excess of $110 per hour 
                        unless the court determines that a 
                        special factor, such as the limited 
                        availability of qualified attorneys for 
                        such proceeding, the difficulty of the 
                        issues presented in the case, or the 
                        local availability of tax expertise, 
                        justifies a higher rate.
        In the case of any calendar year beginning after 1996, 
        the dollar amount referred to in clause (iii) shall be 
        increased by an amount equal to such dollar amount 
        multiplied by the cost-of- living adjustment determined 
        under section 1(f)(3) for such calendar year, by 
        substituting ``calendar year 1995'' for ``calendar year 
        1992'' in subparagraph (B) thereof. If any dollar 
        amount after being increased under the preceding 
        sentence is not a multiple of $10, such dollar amount 
        shall be rounded to the nearest multiple of $10.
          (2) Reasonable administrative costs.--The term 
        ``reasonable administrative costs'' means--
                  (A) any administrative fees or similar 
                charges imposed by the Internal Revenue 
                Service, and
                  (B) expenses, costs, and fees described in 
                paragraph (1)(B), except that any determination 
                made by the court under clause (ii) or (iii) 
                thereof shall be made by the Internal Revenue 
                Service in cases where the determination under 
                paragraph (4)(C) of the awarding of reasonable 
                administrative costs is made by the Internal 
                Revenue Service.
        [Such term shall only include costs incurred on or 
        after the earlier of (i) the date of the receipt by the 
        taxpayer of the notice of the decision of the Internal 
        Revenue Service Office of Appeals, or (ii) the date of 
        the notice of deficiency.] Such term shall only include 
        costs incurred on or after whichever of the following 
        is the earliest: (i) the date of the receipt by the 
        taxpayer of the notice of the decision of the Internal 
        Revenue Service Office of Appeals, (ii) the date of the 
        notice of deficiency, or (iii) the date on which the 
        1st letter of proposed deficiency which allows the 
        taxpayer an opportunity for administrative review in 
        the Internal Revenue Service Office of Appeals is sent.
          [(3) Attorney's fees.--For purposes of paragraphs (1) 
        and (2), fees for the services of an individual 
        (whether or not an attorney) who is authorized to 
        practice before the Tax Court or before the Internal 
        Revenue Service shall be treated as fees for the 
        services of an attorney.]
          (3) Attorney's fees.--
                  (A) In general.--For purposes of paragraphs 
                (1) and (2), fees for the services of an 
                individual (whether or not an attorney) who is 
                authorized to practice before the Tax Court or 
                before the Internal Revenue Service shall be 
                treated as fees for the services of an 
                attorney.
                  (B) Pro bono services.--In any case in which 
                the court could have awarded attorney's fees 
                under subsection (a) but for the fact that an 
                individual is representing the prevailing party 
                for no fee or for a fee which (taking into 
                account all the facts and circumstances) is no 
                more than a nominal fee, the court may also 
                award a judgment or settlement for such amounts 
                as the court determines to be appropriate 
                (based on hours worked and costs expended) for 
                services of such individual but only if such 
                award is paid to such individual or such 
                individual's employer.
          (4) Prevailing party.--
                  (A) * * *
                  (B) Exception if United States establishes 
                that its position was substantially 
                justified.--
                          (i) * * *
          * * * * * * *
                          (iii) Effect of losing on 
                        substantially similar issues.--In 
                        determining for purposes of clause (i) 
                        whether the position of the United 
                        States was substantially justified, the 
                        court shall take into account whether 
                        the United States has lost in courts of 
                        appeal for other circuits on 
                        substantially similar issues.
                          [(iii)] (iv) Applicable published 
                        guidance.--For purposes of clause (ii), 
                        the term ``applicable published 
                        guidance'' means--
                                  (I) regulations, revenue 
                                rulings, revenue procedures, 
                                information releases, notices, 
                                and announcements, and
                                  (II) any of the following 
                                which are issued to the 
                                taxpayer: private letter 
                                rulings, technical advice 
                                memoranda, and determination 
                                letters.
          * * * * * * *

SEC. 7433. CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED COLLECTION ACTIONS.

  (a) In General.--If, in connection with any collection of 
Federal tax with respect to a taxpayer, any officer or employee 
of the Internal Revenue Service recklessly or intentionally, or 
by reason of negligence, disregards any provision of this 
title, or any regulation promulgated under this title, such 
taxpayer may bring a civil action for damages against the 
United States in a district court ofthe United States. Except 
as provided in section 7432, such civil action shall be the exclusive 
remedy for recovering damages resulting from such actions.
  (b) Damages.--In any action brought under subsection (a), 
upon a finding of liability on the part of the defendant, the 
defendant shall be liable to the plaintiff in an amount equal 
to the lesser of $1,000,000 ($100,000, in the case of 
negligence) or the sum of--
          (1) actual, direct economic damages sustained by the 
        plaintiff as a proximate result of the reckless or 
        intentional or negligent actions of the officer or 
        employee, and
          * * * * * * *
  (d) Limitations.--
          [(1) Award for damages may be reduced if 
        administrative remedies not exhausted.--The amount of 
        damages awarded under subsection (b) may be reduced if 
        the court determines that the plaintiff has not 
        exhausted the administrative remedies available to such 
        plaintiff within the Internal Revenue Service.]
          (1) Requirement that administrative remedies be 
        exhausted.--A judgment for damages shall not be awarded 
        under subsection (b) unless the court determines that 
        the plaintiff has exhausted the administrative remedies 
        available to such plaintiff within the Internal Revenue 
        Service.
          * * * * * * *

                      Subchapter C--The Tax Court

          * * * * * * *

                           PART II--PROCEDURE

        Sec. 7451. Fee for filing petition.
     * * * * * * *
        Sec. 7463. Disputes involving [$10,000] $25,000 or less.
     * * * * * * *

SEC. 7463. DISPUTES INVOLVING [$10,000] $25,000 OR LESS.

  (a) In General.--In the case of any petition filed with the 
Tax Court for a redetermination of a deficiency where neither 
the amount of the deficiency placed in dispute, nor the amount 
of any claimed overpayment, exceeds--
          (1) [$10,000] $25,000 for any one taxable year, in 
        the case of the taxes imposed by subtitle A,
          (2) [$10,000] $25,000, in the case of the tax imposed 
        by chapter 11,
          (3) [$10,000] $25,000 for any one calendar year, in 
        the case of the tax imposed by chapter 12, or
          (4) [$10,000] $25,000 for any 1 taxable period (or, 
        if there is no taxable period, taxable event) in the 
        case of any tax imposed by subtitle D which is 
        described in section 6212(a) (relating to a notice of 
        deficiency), at the option of the taxpayer concurred in 
        by the Tax Court or a division thereof before the 
        hearing of the case, proceedings in the case shall be 
        conducted under this section. Notwithstanding the 
        provisions of section 7453, such proceedings shall be 
        conducted in accordance with such rules of evidence, 
        practice, and procedure as the Tax Court may prescribe. 
        A decision, together with a brief summary of the 
        reasons therefor, in any such case shall satisfy the 
        requirements of sections 7459(b) and 7460.
          * * * * * * *

                     PART IV--DECLARATORY JUDGMENTS

          * * * * * * *

SEC. 7479. DECLARATORY JUDGMENTS RELATING TO ELIGIBILITY OF ESTATE WITH 
                    RESPECT TO INSTALLMENT PAYMENTS UNDER SECTION 6166.

  (a) * * *
          * * * * * * *
  (c) Extension of Time To File Refund Suit.--The 2-year period 
in section 6532(a)(1) for filing suit for refund after 
disallowance of a claim shall be suspended during the 90-day 
period after the mailing of the notice referred to in 
subsection (b)(3) and, if a pleading has been filed with the 
Tax Court under this section, until the decision of the Tax 
Court has become final.
          * * * * * * *

                     Subchapter E--Burden of Proof

        Sec. 7491. Burden of proof.

SEC. 7491. BURDEN OF PROOF.

  (a) General Rule.--The Secretary shall have the burden of 
proof in any court proceeding with respect to any factual issue 
relevant to ascertaining the income tax liability of a 
taxpayer.
  (b) Limitations.--Subsection (a) shall only apply with 
respect to an issue if--
          (1) the taxpayer asserts a reasonable dispute with 
        respect to such issue,
          (2) the taxpayer has fully cooperated with the 
        Secretary with respect to such issue, including 
        providing, within a reasonable period of time, access 
        to and inspection of all witnesses, information, and 
        documents within the control of the taxpayer, as 
        reasonably requested by the Secretary, and
          (3) in the case of a partnership, corporation, or 
        trust, the taxpayer is described in section 
        7430(c)(4)(A)(ii).
  (c) Substantiation.--Nothing in this section shall be 
construed to override any requirement of this title to 
substantiate any item.

                  CHAPTER 77--MISCELLANEOUS PROVISIONS

        Sec. 7501. Liability for texes withheld or collected.
     * * * * * * *
        Sec. 7525. Low income taxpayer clinics.
          * * * * * * *

SEC. 7502. TIMELY MAILING TREATED AS TIMELY FILING AND PAYING.

  (a) * * *
          * * * * * * *
  [(c) Registered and Certified Mailing.--
          [(1) Registered mail.--For purposes of this section, 
        if any such return, claim, statement, or other 
        document, or payment, is sent by United States 
        registered mail--
                  [(A) such registration shall be prima facie 
                evidence that the return, claim, statement, or 
                other document was delivered to the agency, 
                officer, or office to which addressed, and
                  [(B) the date of registration shall be deemed 
                the postmark date.
          [(2) Certified mail.--The Secretary is authorized to 
        provide by regulations the extent to which the 
        provisions of paragraph (1) of this subsection with 
        respect to prima facie evidence of delivery and the 
        postmark date shall apply to certified mail.]
  (c) Registered and Certified Mailing; Electronic Filing.--
          (1) Registered mail.--For purposes of this section, 
        if any return, claim, statement, or other document, or 
        payment, is sent by United States registered mail--
                  (A) such registration shall be prima facie 
                evidence that the return, claim, statement, or 
                other document was delivered to the agency, 
                officer, or office to which addressed, and
                  (B) the date of registration shall be deemed 
                the postmark date.
          (2) Certified mail; electronic filing.--The Secretary 
        is authorized to provide by regulations the extent to 
        which the provisions of paragraph (1) with respect to 
        prima facie evidence of delivery and the postmark date 
        shall apply to certified mail and electronic filing.
          * * * * * * *

SEC. 7525. LOW INCOME TAXPAYER CLINICS.

  (a) In General.--The Secretary shall make grants to provide 
matching funds for the development, expansion, or continuation 
of qualified low income taxpayer clinics.
  (b) Definitions.--For purposes of this section--
          (1) Qualified low income taxpayer clinic.--
                  (A) In general.--The term ``qualified low 
                income taxpayer clinic'' means a clinic that--
                          (i) does not charge more than a 
                        nominal fee for its services (except 
                        for reimbursement of actual costs 
                        incurred), and
                          (ii)(I) represents low income 
                        taxpayers in controversies with the 
                        Internal Revenue Service, or
                          (II) operates programs to inform 
                        individuals for whom English is a 
                        second language about their rights and 
                        responsibilities under this title.
                  (B) Representation of low income taxpayers.--
                A clinic meets the requirements of subparagraph 
                (A)(ii)(I) if--
                          (i) at least 90 percent of the 
                        taxpayers represented by the clinic 
                        have incomes which do not exceed 250 
                        percent of the poverty level, as 
                        determined in accordance with criteria 
                        established by the Director of the 
                        Office of Management and Budget, and
                          (ii) the amount in controversy for 
                        any taxable year generally does not 
                        exceed the amount specified in section 
                        7463.
          (2) Clinic.--The term ``clinic'' includes--
                  (A) a clinical program at an accredited law 
                school in which students represent low income 
                taxpayers in controversies arising under this 
                title, and
                  (B) an organization described in section 
                501(c) and exempt from tax under section 501(a) 
                which satisfies the requirements of paragraph 
                (1) through representation of taxpayers or 
                referral of taxpayers to qualified 
                representatives.
          (3) Qualified representative.--The term ``qualified 
        representative'' means any individual (whether or not 
        an attorney) who is authorized to practice before the 
        Internal Revenue Service or the applicable court.
  (c) Special Rules and Limitations.--
          (1) Aggregate limitation.--Unless otherwise provided 
        by specific appropriation, the Secretary shall not 
        allocate more than $3,000,000 per year (exclusive of 
        costs of administering the program) to grants under 
        this section.
          (2) Limitation on annual grants to a clinic.--The 
        aggregate amount of grants which may be made under this 
        section to a clinic for a year shall not exceed 
        $100,000.
          (3) Multi-year grants.--Upon application of a 
        qualified low income taxpayer clinic, the Secretary is 
        authorized to award a multi-year grant not to exceed 3 
        years.
          (4) Criteria for awards.--In determining whether to 
        make a grant under this section, the Secretary shall 
        consider--
                  (A) the numbers of taxpayers who will be 
                served by the clinic, including the number of 
                taxpayers in the geographical area for whom 
                English is a second language,
                  (B) the existence of other low income 
                taxpayer clinics serving the same population,
                  (C) the quality of the program offered by the 
                low income taxpayer clinic, including the 
                qualifications of its administrators and 
                qualified representatives, and its record, if 
                any, in providing service to low income 
                taxpayers, and
                  (D) alternative funding sources available to 
                the clinic, including amounts received from 
                other grants and contributions, and the 
                endowment and resources of the institution 
                sponsoring the clinic.
          (5) Requirement of matching funds.--A low income 
        taxpayer clinic must provide matching funds on a dollar 
        for dollar basis for all grants provided under this 
        section. Matching funds may include--
                  (A) the salary (including fringe benefits) of 
                individuals performing services for the clinic, 
                and
                  (B) the cost of equipment used in the clinic.
        Indirect expenses, including general overhead of the 
        institution sponsoring the clinic, shall not be counted 
        as matching funds.

      CHAPTER 78--DISCOVERY OF LIABILITY AND ENFORCEMENT OF TITLE

          * * * * * * *

                Subchapter A--Examination and Inspection

          * * * * * * *

SEC. 7602. EXAMINATION OF BOOKS AND WITNESSES.

  (a) * * *
          * * * * * * *
  (d) Privilege of Confidentiality Extended to Taxpayer's 
Dealings with Non-Attorneys Authorized to Practice Before 
Internal Revenue Service.--
          (1) In general.--In any noncriminal proceeding before 
        the Internal Revenue Service, the taxpayer shall be 
        entitled to the same common law protections of 
        confidentiality with respect to tax advice furnished by 
        any qualified individual (in a manner consistent with 
        State law for such individual's profession) as the 
        taxpayer would have if such individual were an 
        attorney.
          (2) Qualified individual.--For purposes of paragraph 
        (1), the term ``qualified individual'' means any 
        individual (other than an attorney) who is authorized 
        to practice before the Internal Revenue Service.
  (e) Limitation on Examination on Unreported Income.--The 
Secretary shall not use financial status or economic reality 
examination techniques to determine the existence of unreported 
income of any taxpayer unless the Secretary has a reasonable 
indication that there is a likelihood of such unreported 
income.
  (f) Limitation on Authority To Require Production of Computer 
Source Code.--
          (1) In general.--No summons may be issued under this 
        title, and the Secretary may not begin any action under 
        section 7604 to enforce any summons, to produce or 
        examine any tax-related computer source code.
          (2) Exception where information not otherwise 
        available to verify correctness of item on return.--
        Paragraph (1) shall not apply to any portion of a tax-
        related computer source code if--
                  (A) the Secretary is unable to otherwise 
                reasonably ascertain the correctness of any 
                item on a return from--
                          (i) the taxpayer's books, papers, 
                        records, or other data, or
                          (ii) the computer software program 
                        and the associated data which, when 
                        executed, produces the output to 
                        prepare the return for the period 
                        involved, and
                  (B) the Secretary identifies with reasonable 
                specificity such portion as to be used to 
                verify the correctness of such item.
        The Secretary shall be treated as meeting the 
        requirements of subparagraphs (A) and (B) after the 
        90th day after the Secretary makes a formal request to 
        the taxpayer and the owner or developer of the computer 
        software program for the material described in 
        subparagraph (A)(ii) if such material is not provided 
        before the close of such 90th day.
          (3) Other exceptions.--Paragraph (1) shall not apply 
        to--
                  (A) any inquiry into any offense connected 
                with the administration or enforcement of the 
                internal revenue laws, and
                  (B) any tax-related computer source code 
                developed by (or primarily for the benefit of) 
                the taxpayer or a related person (within the 
                meaning of section 267 or 707(b)) for internal 
                use by the taxpayer or such person and not for 
                commercial distribution.
          (4) Tax-related computer source code.--For purposes 
        of this subsection, the term ``tax-related computer 
        source code'' means--
                  (A) the computer source code for any computer 
                software program for accounting, tax return 
                preparation or compliance, or tax planning, or
                  (B) design and development materials related 
                to such a software program (including program 
                notes and memoranda).
          (5) Right to contest summons.--The determination of 
        whether the requirements of subparagraphs (A) and (B) 
        of paragraph (2) are met or whether any exception under 
        paragraph (3) applies may be contested in any 
        proceeding under section 7604.
          (6) Protection of trade secrets and other 
        confidential information.--In any court proceeding to 
        enforce a summons for any portion of a tax-related 
        computer source code, the court may issue any order 
        necessary to prevent the disclosure of trade secrets or 
        other confidential information with respect to such 
        source code, including providing that any information 
        be placed under seal to be opened only as directed by 
        the court.
          * * * * * * *

SEC. 7609. SPECIAL PROCEDURES FOR THIRD-PARTY SUMMONSES.

  (a) Notice.--
          (1) * * *
          * * * * * * *
          (3) Third-party recordkeeper defined.--For purposes 
        of this subsection, the term ``third-party 
        recordkeeper'' means--
                  (A) * * *
          * * * * * * *
                  (H) any regulated investment company (as 
                defined in section 851) and any agent of such 
                regulated investment company when acting as an 
                agent thereof, [and]
                  (I) any enrolled agent[.], and
                  (J) any owner or developer of a tax-related 
                computer source code (as defined in section 
                7602(f)(4)).
        Subparagraph (J) shall apply only with respect to a 
        summons requiring the production of the source code 
        referred to in subparagraph (J) or the program and data 
        described in section 7602(f)(2)(A)(ii) to which such 
        source code relates.
          * * * * * * *

                       CHAPTER 80--GENERAL RULES

          * * * * * * *

           Subchapter A--Application of Internal Revenue Laws

        Sec. 7801. Authority of Department of the Treasury.
        [Sec. 7802. Commissioner of Internal Revenue; Assistant 
                  Commissioners; Taxpayer Advocate.
        [Sec. 7803. Effect of reorganization plans.
        [Sec. 7804. Rules and regulations.]
        Sec. 7802. Internal Revenue Service Oversight Board.
        Sec. 7803. Commissioner of Internal Revenue; other officials.
        Sec. 7804. Other personnel.
          * * * * * * *

[SEC. 7802. COMMISSIONER OF INTERNAL REVENUE; ASSISTANT.

  [(a) Commissioner of Internal Revenue.--There shall be in the 
Department of the Treasury a Commissioner of Internal Revenue, 
who shall be appointed by the President, by and with the advice 
and consent of the Senate. The Commissioner of Internal Revenue 
shall have such duties and powers as may be prescribed by the 
Secretary of the Treasury.
  [(b) Assistant Commissioner for Employee Plans and Exempt 
Organizations.--
          [(1) Establishment of Office.--There is established 
        within the Internal Revenue Service an office to be 
        known as the ``Office of Employee Plans and Exempt 
        Organizations'' to be under the supervision and 
        direction of an Assistant Commissioner of Internal 
        Revenue. As head of the Office, the Assistant 
        Commissioner shall be responsible for carrying out such 
        functions as the Secretary may prescribe with respect 
        to organizations exempt from tax under section 501(a) 
        and with respect to plans to which part I of subchapter 
        D of chapter 1 applies (and with respect to 
        organizations designed to be exempt under such section 
        and plans designed to be plans to which such part 
        applies).
          [(2) Authorization of appropriations.--There is 
        authorized to be appropriated to the Department of the 
        Treasury to carry out the functions of the Office an 
        amount equal to the sum of--
                  [(A) so much of the collections from taxes 
                imposed under section 4940 (relating to excise 
                tax based on investment income) as would have 
                been collected if the rate of tax under such 
                section was 2 percent during the second 
                preceding fiscal year; and
                  [(B) the greater of--
                          [(i) an amount equal to the amount 
                        described in paragraph (A); or
                          [(ii) $30,000,000.
  [(c) Assistant Commissioner (Taxpayer Services).--There is 
established within the Internal Revenue Service an office to be 
known as the ``Office for Taxpayer Services'' to be under the 
supervision and direction of an Assistant Commissioner of the 
Internal Revenue. The Assistant Commissioner shall be 
responsible for taxpayer services such as telephone, walk-in, 
and taxpayer educational services, and the design and 
production of tax and informational forms.
  [(d) Office of Taxpayer Advocate.--
          [(1) In general.--There is established in the 
        Internal Revenue Service an office to be known as the 
        ``Office of the Taxpayer Advocate''. Such office shall 
        be under the supervision and direction of an official 
        to be known as the ``Taxpayer Advocate'' who shall be 
        appointed by and report directly to the Commissioner of 
        Internal Revenue. The Taxpayer Advocate shall be 
        entitled to compensation at the same rate as the 
        highest level official reporting directly to the Deputy 
        Commissioner of the Internal Revenue Service.
          [(2) Functions of office.--
                  [(A) In general.--It shall be the function of 
                the Office of Taxpayer Advocate to--
                          [(i) assist taxpayers in resolving 
                        problems with the Internal Revenue 
                        Service,
                          [(ii) identify areas in which 
                        taxpayers have problems in dealings 
                        with the Internal Revenue Service,
                          [(iii) to the extent possible, 
                        propose changes in the administrative 
                        practices of the Internal Revenue 
                        Service to mitigate problems identified 
                        under clause (ii), and
                          [(iv) identify potential legislative 
                        changes which may be appropriate to 
                        mitigate such problems.
                  [(B) Annual reports.--
                          [(i) Objectives.--Not later than June 
                        30 of each calendar year after 1995, 
                        the Taxpayer Advocate shall report to 
                        the Committee on Ways and Means of the 
                        House of Representatives and the 
                        Committee on Finance of the Senate on 
                        the objectives of the Taxpayer Advocate 
                        for the fiscal year beginning in such 
                        calendar year. Any such report shall 
                        contain full and substantive analysis, 
                        in addition to statistical information.
                          [(ii) Activities.--Not later than 
                        December 31 of each calendar year after 
                        1995, the Taxpayer Advocate shall 
                        report to the Committee on Ways and 
                        Means of the House of Representatives 
                        and the Committee on Finance of the 
                        Senate on the activities of the 
                        Taxpayer Advocate during the fiscal 
                        year ending during such calendar year. 
                        Any such report shall contain full and 
                        substantive analysis, in addition to 
                        statistical information, and shall--
                                  [(I) identify the initiatives 
                                the Taxpayer Advocate has taken 
                                on improving taxpayer services 
                                and Internal Revenue Service 
                                responsiveness,
                                  [(II) contain recommendations 
                                received from individuals with 
                                the authority to issue Taxpayer 
                                Assistance Orders under section 
                                7811,
                                  [(III) contain a summary of 
                                at least 20 of the most serious 
                                problems encountered by 
                                taxpayers, including a 
                                description of the nature of 
                                such problems,
                                  [(IV) contain an inventory of 
                                the items described in 
                                subclauses (I), (II), and (III) 
                                for which action has been taken 
                                and the result of such action,
                                  [(V) contain an inventory of 
                                the items described in 
                                subclauses (I), (II), and (III) 
                                for which action remains to be 
                                completed and the period during 
                                which each item has remained on 
                                such inventory,
                                  [(VI) contain an inventory of 
                                the items described in 
                                subclauses (II) and (III) for 
                                which no action has been taken, 
                                the period during which each 
                                item has remained on such 
                                inventory, the reasons for the 
                                inaction, and identify any 
                                Internal Revenue Service 
                                official who is responsible for 
                                such inaction,
                                  [(VII) identify any Taxpayer 
                                Assistance Order which was not 
                                honored by the Internal Revenue 
                                Service in a timely manner, as 
                                specified under section 
                                7811(b),
                                  [(VIII) contain 
                                recommendations for such 
                                administrative and legislative 
                                action as may be appropriate to 
                                resolve problems encountered by 
                                taxpayers,
                                  [(IX) describe the extent to 
                                which regional problem 
                                resolution officers participate 
                                in the selection and evaluation 
                                of local problem resolution 
                                officers, and
                                  [(X) include such other 
                                information as the Taxpayer 
                                Advocate may deem advisable.
                          [(iii) Report to be submitted 
                        directly.--Each report required under 
                        this subparagraph shall be provided 
                        directly to the Committees referred to 
                        in clauses (i) and (ii) without any 
                        prior review or comment from the 
                        Commissioner, the Secretary of the 
                        Treasury, any other officer or employee 
                        of the Department of the Treasury, or 
                        the Office of Management and Budget.
          [(3) Responsibilities of Commissioner.--The 
        Commissioner of Internal Revenue shall establish 
        procedures requiring a formal response to all 
        recommendations submitted to the Commissioner by the 
        Taxpayer Advocate within 3 months after submission to 
        the Commissioner.

[SEC. 7803. OTHER PERSONNEL.

  [(a) Appointment and Supervision.--The Secretary is 
authorized to employ such number of persons as the Secretary 
deems proper for the administration and enforcement of the 
internal revenue laws, and the Secretary shall issue all 
necessary directions, instructions, orders, and rules 
applicable to such persons.
  [(b) Posts of Duty of Employees in Field Service or 
Traveling.--
          [(1) Designation of post of duty.--The Secretary 
        shall determine and designate the posts of duty of all 
        such persons engaged in field work or traveling on 
        official business outside of the District of Columbia.
          [(2) Detail of personnel from field service.--The 
        Secretary may order any such person engaged in field 
        work to duty in the District of Columbia, for such 
        periods as the Secretary may prescribe, and to any 
        designated post of duty outside the District of 
        Columbia upon the completion of such duty.
  [(c) Delinquent Internal Revenue Officers and Employees.--If 
any officer or employee of the Treasury Department acting in 
connection with the internal revenue laws fails to account for 
and pay over any amount of money or property collected or 
received by him in connection with the internal revenue laws, 
the Secretary shall issue notice and demand to such officer or 
employee for payment of the amount which he failed to account 
for and pay over, and, upon failure to pay the amount demanded 
within the time specified in such notice, the amount so 
demanded shall be deemed imposed upon such officer or employee 
and assessed upon the date of such notice and demand, and the 
provisions of chapter 64 and all other provisions of law 
relating to the collection of assessed taxes shall be 
applicable in respect of such amount.

[SEC. 7804. EFFECT OF REORGANIZATION PLANS

  [(a) Application.--The provisions of Reorganization Plan 
Numbered 26 of 1950 and Reorganization Plan Numbered 1 of 1952 
shall be applicable to all functions vested by this title, or 
by any act amending this title (except as otherwise expressly 
provided in such amending act), in any officer, employee, or 
agency, of the Department of the Treasury.
  [(b) Preservation of existing rights and remedies.--Nothing 
in Reorganization Plan Numbered 26 of 1950 or Reorganization 
Plan Numbered 1 of 1952 shall be considered to impair any right 
or remedy, including trial by jury, to recover any internal 
revenue tax alleged to have been erroneously or illegally 
assessed or collected, or any penalty claimed to have been 
collected without authority, or any sum alleged to have been 
excessive or in any manner wrongfully collected under the 
internal revenue laws. For the purpose of any action to recover 
any such tax, penalty, or sum, all statutes, rules, and 
regulations referring to the collector of internal revenue, the 
principal officer for the internal revenue district, or the 
Secretary, shall be deemed to refer to the officer whose act or 
acts referred to in the preceding sentence gave rise to such 
action. The venue of any such action shall be the same as under 
existing law.]

SEC. 7802. INTERNAL REVENUE SERVICE OVERSIGHT BOARD.

  (a) Establishment.--There is established within the 
Department of the Treasury the Internal Revenue Service 
Oversight Board (hereafter in this subchapter referred to as 
the ``Oversight Board'').
  (b) Membership.--
          (1) Composition.--The Oversight Board shall be 
        composed of 11 members, as follows:
                  (A) 8 members shall be individuals who are 
                not Federal officers or employees and who are 
                appointed by the President, by and with the 
                advice and consent of the Senate.
                  (B) 1 member shall be the Secretary of the 
                Treasury or, if the Secretary so designates, 
                the Deputy Secretary of the Treasury.
                  (C) 1 member shall be the Commissioner of 
                Internal Revenue.
                  (D) 1 member shall be an individual who is a 
                representative of an organization that 
                represents a substantial number of Internal 
                Revenue Service employees and who is appointed 
                by the President, by and with the advice and 
                consent of the Senate.
          (2) Qualifications and terms.--
                  (A) Qualifications.--Members of the Oversight 
                Board described in paragraph (1)(A) shall be 
                appointed solely on the basis of their 
                professional experience and expertise in 1 or 
                more of the following areas:
                          (i) Management of large service 
                        organizations.
                          (ii) Customer service.
                          (iii) Federal tax laws, including tax 
                        administration and compliance.
                          (iv) Information technology.
                          (v) Organization development.
                          (vi) The needs and concerns of 
                        taxpayers.
                In the aggregate, the members of the Oversight 
                Board described in paragraph (1)(A) should 
                collectively bring to bear expertise in all of 
                the areas described in the preceding sentence.
                  (B) Terms.--Each member who is described in 
                paragraph (1)(A) or (D) shall be appointed for 
                a term of 5 years, except that of the members 
                first appointed under paragraph (1)(A)--
                          (i) 1 member shall be appointed for a 
                        term of 1 year,
                          (ii) 1 member shall be appointed for 
                        a term of 2 years,
                          (iii) 2 members shall be appointed 
                        for a term of 3 years, and
                          (iv) 2 members shall be appointed for 
                        a term of 4 years.
                Such terms shall begin on the date of 
                appointment.
                  (C) Reappointment.--An individual who is 
                described in paragraph (1)(A) may be appointed 
                to no more than two 5-year terms on the 
                Oversight Board.
                  (D) Vacancy.--Any vacancy on the Oversight 
                Board shall be filled in the same manner as the 
                original appointment. Any member appointed to 
                fill a vacancy occurring before the expiration 
                of the term for which the member's predecessor 
                was appointed shall be appointed for the 
                remainder of that term.
                  (E) Special government employees.--During the 
                entire period that an individual appointed 
                under paragraph (1)(A) is a member of the 
                Oversight Board, such individual shall be 
                treated as--
                          (i) serving as a special government 
                        employee (as defined in section 202 of 
                        title 18, United States Code) and as 
                        described in section 207(c)(2) of such 
                        title 18, and
                          (ii) serving as an officer or 
                        employee referred to in section 101(f) 
                        of the Ethics in Government Act of 1978 
                        for purposes of title I of such Act.
          (3) Quorum.--6 members of the Oversight Board shall 
        constitute a quorum. A majority of members present and 
        voting shall be required for the Oversight Board to 
        take action.
          (4) Removal.--
                  (A) In general.--Any member of the Oversight 
                Board may be removed at the will of the 
                President.
                  (B) Secretary and commissioner.--An 
                individual described in subparagraph (B) or (C) 
                of paragraph (1) shall be removed upon 
                termination of employment.
                  (C) Representative of internal revenue 
                service employees.--The member described in 
                paragraph (1)(D) shall be removed upon 
                termination of employment, membership, or other 
                affiliation with the organization described in 
                such paragraph.
          (5) Claims.--
                  (A) In general.--Members of the Oversight 
                Board who are described in paragraph (1)(A) or 
                (D) shall have no personal liability under 
                Federal law with respect to any claim arising 
                out of or resulting from an act or omission by 
                such member within the scope of service as a 
                member. The preceding sentence shall not be 
                construed to limit personal liability for 
                criminal acts or omissions, willful or 
                malicious conduct, acts or omissions for 
                private gain, or any other act or omission 
                outside the scope of the service of such member 
                on the Oversight Board.
                  (B) Effect on other law.--This paragraph 
                shall not be construed--
                          (i) to affect any other immunities 
                        and protections that may be available 
                        to such member under applicable law 
                        with respect to such transactions,
                          (ii) to affect any other right or 
                        remedy against the United States under 
                        applicable law, or
                          (iii) to limit or alter in any way 
                        the immunities that are available under 
                        applicable law for Federal officers and 
                        employees.
  (c) General Responsibilities.--
          (1) In general.--The Oversight Board shall oversee 
        the Internal Revenue Service in its administration, 
        management, conduct, direction, and supervision of the 
        execution and application of the internal revenue laws 
        or related statutes and tax conventions to which the 
        United States is a party.
          (2) Exceptions.--The Oversight Board shall have no 
        responsibilities or authority with respect to--
                  (A) the development and formulation of 
                Federal tax policy relating to existing or 
                proposed internal revenue laws, related 
                statutes, and tax conventions,
                  (B) law enforcement activities of the 
                Internal Revenue Service, including compliance 
                activities such as criminal investigations, 
                examinations, and collection activities, or
                  (C) specific procurement activities of the 
                Internal Revenue Service.
          (3) Restriction on disclosure of return information 
        to oversight board members.--No return, return 
        information, or taxpayer return information (as defined 
        in section 6103(b)) may be disclosed to any member of 
        the Oversight Board described in subsection (b)(1)(A) 
        or (D). Any request for information not permitted to be 
        disclosed under the preceding sentence, and any contact 
        relating to a specific taxpayer, made by a member of 
        the Oversight Board so described to an officer or 
        employee of the Internal Revenue Service shall be 
        reported by such officer or employee to the Secretary 
        and the Joint Committee on Taxation.
  (d) Specific Responsibilities.--The Oversight Board shall 
have the following specific responsibilities:
          (1) Strategic plans.--To review and approve strategic 
        plans of the Internal Revenue Service, including the 
        establishment of--
                  (A) mission and objectives, and standards of 
                performance relative to either, and
                  (B) annual and long-range strategic plans.
          (2) Operational plans.--To review the operational 
        functions of the Internal Revenue Service, including--
                  (A) plans for modernization of the tax 
                system,
                  (B) plans for outsourcing or managed 
                competition, and
                  (C) plans for training and education.
          (3) Management.--To--
                  (A) recommend to the President candidates for 
                appointment as the Commissioner of Internal 
                Revenue and recommend to the President the 
                removal of the Commissioner,
                  (B) review the Commissioner's selection, 
                evaluation, and compensation of senior 
                managers, and
                  (C) review and approve the Commissioner's 
                plans for any major reorganization of the 
                Internal Revenue Service.
          (4) Budget.--To--
                  (A) review and approve the budget request of 
                the Internal Revenue Service prepared by the 
                Commissioner,
                  (B) submit such budget request to the 
                Secretary of the Treasury, and
                  (C) ensure that the budget request supports 
                the annual and long-range strategic plans.
The Secretary shall submit the budget request referred to in 
paragraph (4)(B) for any fiscal year to the President who shall 
submit such request, without revision, to Congress together 
with the President's annual budget request for the Internal 
Revenue Service for such fiscal year.
  (e) Board Personnel Matters.--
          (1) Compensation of members.--
                  (A) In general.--Each member of the Oversight 
                Board who is described in subsection (b)(1)(A) 
                shall be compensated at a rate of $30,000 per 
                year. All other members of the Oversight Board 
                shall serve without compensation for such 
                service.
                  (B) Chairperson.--In lieu of the amount 
                specified in subparagraph (A), the Chairperson 
                of the Oversight Board shall be compensated at 
                a rate of $50,000.
          (2) Travel expenses.--The members of the Oversight 
        Board shall be allowed travel expenses, including per 
        diem in lieu of subsistence, at rates authorized for 
        employees of agencies under subchapter I of chapter 57 
        of title 5, United States Code, while away from their 
        homes or regular places of business for purposes of 
        attending meetings of the Oversight Board.
          (3) Staff.--At the request of the Chairperson of the 
        Oversight Board, the Commissioner shall detail to the 
        Oversight Board such personnel as may be necessary to 
        enable the Oversight Board to perform its duties. Such 
        detail shall be without interruption or loss of civil 
        service status or privilege.
          (4) Procurement of temporary and intermittent 
        services.--The Chairperson of the Oversight Board may 
        procure temporary and intermittent services under 
        section 3109(b) of title 5, United States Code.
  (f) Administrative Matters.--
          (1) Chair.--The members of the Oversight Board shall 
        elect for a 2-year term a chairperson from among the 
        members appointed under subsection (b)(1)(A).
          (2) Committees.--The Oversight Board may establish 
        such committees as the Oversight Board determines 
        appropriate.
          (3) Meetings.--The Oversight Board shall meet at 
        least once each month and at such other times as the 
        Oversight Board determines appropriate.
          (4) Reports.--The Oversight Board shall each year 
        report to the President and the Congress with respect 
        to the conduct of its responsibilities under this 
        title.

SEC. 7803. COMMISSIONER OF INTERNAL REVENUE; OTHER OFFICIALS.

  (a) Commissioner of Internal Revenue.--
          (1) Appointment.--
                  (A) In general.--There shall be in the 
                Department of the Treasury a Commissioner of 
                Internal Revenue who shall be appointed by the 
                President, by and with the advice and consent 
                of the Senate, to a 5-year term. The 
                appointment shall be made without regard to 
                political affiliation or activity.
                  (B) Vacancy.--Any individual appointed to 
                fill a vacancy in the position of Commissioner 
                occurring before the expiration of the term for 
                which such individual's predecessor was 
                appointed shall be appointed only for the 
                remainder of that term.
                  (C) Removal.--The Commissioner may be removed 
                at the will of the President.
          (2) Duties.--The Commissioner shall have such duties 
        and powers as the Secretary may prescribe, including 
        the power to--
                  (A) 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; and
                  (B) recommend to the President a candidate 
                for appointment as Chief Counsel for the 
                Internal Revenue Service when a vacancy occurs, 
                and recommend to the President the removal of 
                such Chief Counsel.
        If the Secretary determines not to delegate a power 
        specified in subparagraph (A) or (B), such 
        determination may not take effect until 30 days after 
        the Secretary notifies the Committees on Ways and 
        Means, Government Reform and Oversight, and 
        Appropriations of the House of Representatives, the 
        Committees on Finance, Government Operations, and 
        Appropriations of the Senate, and the Joint Committee 
        on Taxation.
          (3) Consultation with board.--The Commissioner shall 
        consult with the Oversight Board on all matters set 
        forth in paragraphs (2) and (3) (other than paragraph 
        (3)(A)) of section 7802(d).
  (b) Assistant Commissioner for Employee Plans and Exempt 
Organizations.--There is established within the Internal 
Revenue Service an office to be known as the ``Office of 
Employee Plans and Exempt Organizations'' to be under the 
supervision and direction of an Assistant Commissioner of 
Internal Revenue. As head of the Office, the Assistant 
Commissioner shall be responsible for carrying out such 
functions as the Secretary may prescribe with respect to 
organizations exempt from tax under section 501(a) and with 
respect to plans to which part I of subchapter D of chapter 1 
applies (and with respect to organizations designed to be 
exempt under such section and plans designed to be plans to 
which such part applies) and other nonqualified deferred 
compensation arrangements. The Assistant Commissioner shall 
report annually to the Commissioner with respect to the 
Assistant Commissioner's responsibilities under this section.
  (c) Office of Taxpayer Advocate.--
          (1) In general.--
                  (A) Establishment.--There is established in 
                the Internal Revenue Service an office to be 
                known as the ``Office of the Taxpayer 
                Advocate''. Such office shall be under the 
                supervision and direction of an official to be 
                known as the ``Taxpayer Advocate'' who shall be 
                appointed with the approval of the Oversight 
                Board by the Commissioner of Internal Revenue 
                and shall report directly to the Commissioner. 
                The Taxpayer Advocate shall be entitled to 
                compensation at the same rate as the highest 
                level official reporting directly to the 
                Commissioner of Internal Revenue.
                  (B) Restriction on subsequent employment.--An 
                individual who is an officer or employee of the 
                Internal Revenue Service may be appointed as 
                Taxpayer Advocate only if such individual 
                agrees not to accept any employment with the 
                Internal Revenue Service for at least 5 years 
                after ceasing to be the Taxpayer Advocate.
          (2) Functions of office.--
                  (A) In general.--It shall be the function of 
                the Office of Taxpayer Advocate to--
                          (i) assist taxpayers in resolving 
                        problems with the Internal Revenue 
                        Service,
                          (ii) identify areas in which 
                        taxpayers have problems in dealings 
                        with the Internal Revenue Service,
                          (iii) to the extent possible, propose 
                        changes in the administrative practices 
                        of the Internal Revenue Service to 
                        mitigate problems identified under 
                        clause (ii), and
                          (iv) identify potential legislative 
                        changes which may be appropriate to 
                        mitigate such problems.
                  (B) Annual reports.--
                          (i) Objectives.--Not later than June 
                        30 of each calendar year, the Taxpayer 
                        Advocate shall report to the Committee 
                        on Ways and Means of the House of 
                        Representatives and the Committee on 
                        Finance of the Senate on the objectives 
                        of the Taxpayer Advocate for the fiscal 
                        year beginning in such calendar year. 
                        Any such report shall contain full and 
                        substantive analysis, in addition to 
                        statistical information.
                          (ii) Activities.--Not later than 
                        December 31 of each calendar year, the 
                        Taxpayer Advocate shall report to the 
                        Committee on Ways and Means of the 
                        House of Representatives and the 
                        Committee on Finance of the Senate on 
                        the activities of the Taxpayer Advocate 
                        during the fiscal year ending during 
                        such calendar year. Any such report 
                        shall contain full and substantive 
                        analysis, in addition to statistical 
                        information, and shall--
                                  (I) identify the initiatives 
                                the Taxpayer Advocate has taken 
                                on improving taxpayer services 
                                and Internal Revenue Service 
                                responsiveness,
                                  (II) contain recommendations 
                                received from individuals with 
                                the authority to issue Taxpayer 
                                Assistance Orders under section 
                                7811,
                                  (III) contain a summary of at 
                                least 20 of the most serious 
                                problems encountered by 
                                taxpayers, including a 
                                description of the nature of 
                                such problems,
                                  (IV) contain an inventory of 
                                the items described in 
                                subclauses (I), (II), and (III) 
                                for which action has been taken 
                                and the result of such action,
                                  (V) contain an inventory of 
                                the items described in 
                                subclauses (I), (II), and (III) 
                                for which action remains to be 
                                completed and the period during 
                                which each item has remained on 
                                such inventory,
                                  (VI) contain an inventory of 
                                the items described in 
                                subclauses (I), (II), and (III) 
                                for which no action has been 
                                taken, the period during which 
                                each item has remained on such 
                                inventory, the reasons for the 
                                inaction, and identify any 
                                Internal Revenue Service 
                                official who is responsible for 
                                such inaction,
                                  (VII) identify any Taxpayer 
                                Assistance Order which was not 
                                honored by the Internal Revenue 
                                Service in a timely manner, as 
                                specified under section 
                                7811(b),
                                  (VIII) contain 
                                recommendations for such 
                                administrative and legislative 
                                action as may be appropriate to 
                                resolve problems encountered by 
                                taxpayers,
                                  (IX) identify areas of the 
                                tax law that impose significant 
                                compliance burdens on taxpayers 
                                or the Internal Revenue 
                                Service, including specific 
                                recommendations for remedying 
                                these problems,
                                  (X) in conjunction with the 
                                National Director of Appeals, 
                                identify the 10 most litigated 
                                issues for each category of 
                                taxpayers, including 
                                recommendations for mitigating 
                                such disputes, and
                                  (XI) include such other 
                                information as the Taxpayer 
                                Advocate may deem advisable.
                          (iii) Report to be submitted 
                        directly.--Each report required under 
                        this subparagraph shall be provided 
                        directly to the committees described in 
                        clauses (i) and (ii) without any prior 
                        review or comment from the Oversight 
                        Board, the Secretary of the Treasury, 
                        any other officer or employee of the 
                        Department of the Treasury, or the 
                        Office of Management and Budget.
                  (C) Other responsibilities.--The Taxpayer 
                Advocate shall--
                          (i) monitor the coverage and 
                        geographic allocation of problem 
                        resolution officers, and
                          (ii) develop guidance to be 
                        distributed to all Internal Revenue 
                        Service officers and employees 
                        outlining the criteria for referral of 
                        taxpayer inquiries to problem 
                        resolution officers.
          (3) Responsibilities of commissioner.--The 
        Commissioner shall establish procedures requiring a 
        formal response to all recommendations submitted to the 
        Commissioner by the Taxpayer Advocate within 3 months 
        after submission to the Commissioner.

SEC. 7804. OTHER PERSONNEL.

  (a) Appointment and Supervision.--Unless otherwise prescribed 
by the Secretary, the Commissioner of Internal Revenue is 
authorized to employ such number of persons as the Commissioner 
deems proper for the administration and enforcement of the 
internal revenue laws, and the Commissioner shall issue all 
necessary directions, instructions, orders, and rules 
applicable to such persons.
  (b) Posts of Duty of Employees in Field Service or 
Traveling.--Unless otherwise prescribed by the Secretary--
          (1) Designation of post of duty.--The Commissioner 
        shall determine and designate the posts of duty of all 
        such persons engaged in field work or traveling on 
        official business outside of the District of Columbia.
          (2) Detail of personnel from field service.--The 
        Commissioner may order any such person engaged in field 
        work to duty in the District of Columbia, for such 
        periods as the Commissioner may prescribe, and to any 
        designated post of duty outside the District of 
        Columbia upon the completion of such duty.
  (c) Delinquent Internal Revenue Officers and Employees.--If 
any officer or employee of the Treasury Department acting in 
connection with the internal revenue laws fails to account for 
and pay over any amount of money or property collected or 
received by him in connection with the internal revenue laws, 
the Secretary shall issue notice and demand to such officer or 
employee for payment of the amount which he failed to account 
for and pay over, and, upon failure to pay the amount demanded 
within the time specified in such notice, the amount so 
demanded shall be deemed imposed upon such officer or employee 
and assessed upon the date of such notice and demand, and the 
provisions of chapter 64 and all other provisions of law 
relating to the collection of assessed taxes shall be 
applicable in respect of such amount.

SEC. 7805. RULES AND REGULATIONS.

  (a) * * *
          * * * * * * *
  (d) Manner of Making Elections Prescribed by Secretary.--
Except to the extent otherwise provided by this title, any 
election under this title shall be made at such time and in 
such manner as the Secretary shall [by regulations or forms] 
prescribe.
          * * * * * * *

SEC. 7811. TAXPAYER ASSISTANCE ORDERS.

  (a) Authority to Issue.--[Upon application]
          (1) In general.--Upon application filed by a taxpayer 
        with the Office of the Taxpayer Advocate (in such form, 
        manner, and at such time as the Secretary shall by 
        regulations prescribe), the Taxpayer Advocate may issue 
        a Taxpayer Assistance Order if, in the determination of 
        the Taxpayer Advocate, 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 by the Secretary.
          (2) Issuance of taxpayer assistance orders.--For 
        purposes of determining whether to issue a taxpayer 
        assistance order, the Taxpayer Advocate shall consider 
        the following factors, among others:
                  (A) Whether there is an immediate threat of 
                adverse action.
                  (B) Whether there has been an unreasonable 
                delay in resolving taxpayer account problems.
                  (C) Whether the taxpayer will have to pay 
                significant costs (including fees for 
                professional representation) if relief is not 
                granted.
                  (D) Whether the taxpayer will suffer 
                irreparable injury, or a long-term adverse 
                impact, if relief is not granted.
          (3) Standard where administrative guidance not 
        followed.--In cases where any Internal Revenue Service 
        employee is not following applicable published 
        administrative guidance (including the Internal Revenue 
        Manual), the Taxpayer Advocate shall construe the 
        factors taken into account in determining whether to 
        issue a taxpayer assistance order in the manner most 
        favorable to the taxpayer.
          * * * * * * *

            CHAPTER 92--POWERS AND DUTIES OF JOINT COMMITTEE

        Sec. 8021. Powers.
     * * * * * * *
        Sec. 8024. Tax complexity analysis.
          * * * * * * *

SEC. 8021. POWERS.

  (a) * * *
          * * * * * * *
  (e) Investigations.--The Joint Committee shall review all 
requests (other than requests by the chairman or ranking member 
of a Committee or Subcommittee) for investigations of the 
Internal Revenue Service by the General Accounting Office, and 
approve such requests when appropriate, with a view towards 
eliminating overlapping investigations, ensuring that the 
General Accounting Office has the capacity to handle the 
investigation, and ensuring that investigations focus on areas 
of primary importance to tax administration.
  (f) Relating to Joint Hearings.--
          (1) In general.--The Chief of Staff, and such other 
        staff as are appointed pursuant to section 8004, shall 
        provide such assistance as is required for joint 
        hearings described in paragraph (2).
          (2) Joint hearings.--On or before April 1 of each 
        calendar year after 1997, there shall be a joint 
        hearing of two members of the majority and one member 
        of the minority from each of the Committees on Finance, 
        Appropriations, and Government Affairs of the Senate, 
        and the Committees on Ways and Means, Appropriations, 
        and Government Reform and Oversight of the House of 
        Representatives, to review the strategic plans and 
        budget for the Internal Revenue Service. After the 
        conclusion of the annual filing season, there shall be 
        a second annual joint hearing to review the other 
        matters outlined in section 8022(3)(C).

SEC. 8022. DUTIES.

  It shall be the duty of the Joint Committee--
          (1) * * *
          * * * * * * *
          [(3) Reports.--To report, from time to time, to the 
        Committee on Finance and the Committee on Ways and 
        Means, and, in its discretion, to the Senate or the 
        House of Representatives, or both, the results of its 
        investigations, together with such recommendations as 
        it may deem advisable.]
          (3) Reports.--
                  (A) To report, from time to time, to the 
                Committee on Finance and the Committee on Ways 
                and Means, and, in its discretion, to the 
                Senate or House of Representatives, or both, 
                the results of its investigations, together 
                with such recommendations as it may deem 
                advisable.
                  (B) To report, annually, 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.
                  (C) To report, annually, to the Committees on 
                Finance, Appropriations, and Government Affairs 
                of the Senate, and to the Committees on Ways 
                and Means, Appropriations, and Government 
                Reform and Oversight of the House of 
                Representatives, with respect to--
                          (i) strategic and business plans for 
                        the Internal Revenue Service;
                          (ii) progress of the Internal Revenue 
                        Service in meeting its objectives;
                          (iii) the budget for the Internal 
                        Revenue Service and whether it supports 
                        its objectives;
                          (iv) progress of the Internal Revenue 
                        Service in improving taxpayer service 
                        and compliance;
                          (v) progress of the Internal Revenue 
                        Service on technology modernization; 
                        and
                          (vi) the annual filing season.
          * * * * * * *

SEC. 8024. TAX COMPLEXITY ANALYSIS.

  (a) In General.--If--
          (1) legislation is reported by the Committee on 
        Finance of the Senate, the Committee on Ways and Means 
        of the House of Representatives, or any committee of 
        conference, and
          (2) such legislation includes any provision amending 
        the Internal Revenue Code of 1986,
the report or statement accompanying such legislation shall 
contain a Tax Complexity Analysis prepared by the staff of the 
Joint Committee on Taxation.
  (b) Content of Complexity Analysis.--Each Tax Complexity 
Analysis shall identify the provisions, if any, adding 
significant complexity or providing significant simplification, 
as determined by the staff of the Joint Committee on Taxation, 
and shall include the basis for such determination.
  (c) Legislation Subject to Point of Order.--It shall not be 
in order in the Senate or the House of Representatives to 
consider any legislation described in subsection (a) required 
to be accompanied by a Tax Complexity Analysis that does not 
contain a Tax Complexity Analysis.
  (d) Responsibilities of the Commissioner.--The Commissioner 
shall provide the Joint Committee on Taxation with such 
information as is necessary to prepare Tax Complexity Analyses.
          * * * * * * *
                              ----------                              


                      TITLE 5, UNITED STATES CODE

          * * * * * * *

                          PART III--EMPLOYEES

          * * * * * * *

                     Subpart D--Pay and Allowances

                       CHAPTER 51--CLASSIFICATION

          * * * * * * *

Sec. 5109. Positions classified by statute

  (a) * * *
  (b) The position held by the employee appointed under section 
[7802(b)] 7803(b) of the Internal Revenue Code of 1954 shall be 
considered a position classified above GS-15 pursuant to 
section 5108.
          * * * * * * *

                          PART III--EMPLOYEES

                     Subpart A--General Provisions

Chap.                                                               Sec.
      Definitions...................................................2101
     * * * * * * *

                        Subpart I--Miscellaneous

      Personnel Flexibilities Relating to the Internal Revenue Servi9301
          * * * * * * *

                        Subpart I--Miscellaneous

 CHAPTER 93--PERSONNEL FLEXIBILITIES RELATING TO THE INTERNAL REVENUE 
                                SERVICE

Sec.
9301. General requirements.
9302. Flexibilities relating to performance management.
9303. Staffing flexibilities.
9304. Flexibilities relating to demonstration projects.

Sec. 9301. General requirements

  (a) Conformance With Merit System Principles, Etc.--Any 
flexibilities under this chapter shall be exercised in a manner 
consistent with--
          (1) chapter 23, relating to merit system principles 
        and prohibited personnel practices; and
          (2) provisions of this title (outside of this 
        subpart) relating to preference eligibles.
  (b) Requirement Relating to Units Represented by Labor 
Organizations.--
          (1) Written agreement required.--Employees within a 
        unit with respect to which a labor organization is 
        accorded exclusive recognition under chapter 71 shall 
        not be subject to the exercise of any flexibility under 
        section 9302, 9303, or 9304, unless there is a written 
        agreement between the Internal Revenue Service and the 
        organization permitting such exercise.
          (2) Definition of a written agreement.--In order to 
        satisfy paragraph (1), a written agreement--
                  (A) need not be a collective bargaining 
                agreement within the meaning of section 
                7103(8); and
                  (B) may not be an agreement imposed by the 
                Federal Service Impasses Panel under section 
                7119.

Sec. 9302. Flexibilities relating to performance management

  (a) In General.--The Commissioner of Internal Revenue shall, 
within a year after the date of the enactment of this chapter, 
establish a performance management system which--
          (1) subject to section 9301(b), shall cover all 
        employees of the Internal Revenue Service other than--
                  (A) the members of the Internal Revenue 
                Service Oversight Board;
                  (B) the Commissioner of Internal Revenue; and
                  (C) the Chief Counsel for the Internal 
                Revenue Service;
          (2) shall maintain individual accountability by--
                  (A) establishing standards of performance 
                which--
                          (i) shall permit the accurate 
                        evaluation of each employee's 
                        performance on the basis of the 
                        individual and organizational 
                        performance requirements applicable 
                        with respect to the evaluation period 
                        involved, taking into account 
                        individual contributions toward the 
                        attainment of any goals or objectives 
                        under paragraph (3);
                          (ii) shall be communicated to an 
                        employee before the start of any period 
                        with respect to which the performance 
                        of such employee is to be evaluated 
                        using such standards; and
                          (iii) shall include at least 2 
                        standards of performance, the lowest of 
                        which shall denote the retention 
                        standard and shall be equivalent to 
                        fully successful performance;
                  (B) providing for periodic performance 
                evaluations to determine whether employees are 
                meeting all applicable retention standards; and
                  (C) using the results of such employee's 
                performance evaluation as a basis for 
                adjustments in pay and other appropriate 
                personnel actions; and
          (3) shall provide for (A) establishing goals or 
        objectives for individual, group, or organizational 
        performance (or any combination thereof), consistent 
        with Internal Revenue Service performance planning 
        procedures, including those established under the 
        Government Performance and Results Act of 1993, the 
        Information Technology Management Reform Act of 1996, 
        Revenue Procedure 64-22 (as in effect on July 30, 
        1997), and taxpayer service surveys, (B) communicating 
        such goals or objectives to employees, and (C) using 
        such goals or objectives to make performance 
        distinctions among employees or groups of employees.
For purposes of this title, performance of an employee during 
any period in which such employee is subject to standards of 
performance under paragraph (2) shall be considered to be 
``unacceptable'' if the performance of such employee during 
such period fails to meet any retention standard.
  (b) Awards.--
          (1) For superior accomplishments.--In the case of a 
        proposed award based on the efforts of an employee or 
        former employee of the Internal Revenue Service, any 
        approval required under the provisions of section 
        4502(b) shall be considered to have been granted if the 
        Office of Personnel Management does not disapprove the 
        proposed award within 60 days after receiving the 
        appropriate certification described in such provisions.
          (2) For employees who report directly to the 
        commissioner.--
                  (A) In general.--In the case of an employee 
                of the Internal Revenue Service who reports 
                directly to the Commissioner of Internal 
                Revenue, a cash award in an amount up to 50 
                percent of such employee's annual rate of basic 
                pay may be made if the Commissioner finds such 
                an award to be warranted based on such 
                employee's performance.
                  (B) Nature of an award.--A cash award under 
                this paragraph shall not be considered to be 
                part of basic pay.
                  (C) Tax enforcement results.--A cash award 
                under this paragraph may not be based solely on 
                tax enforcement results.
                  (D) Eligible employees.--Whether or not an 
                employee is an employee who reports directly to 
                the Commissioner of Internal Revenue shall, for 
                purposes of this paragraph, be determined under 
                regulations which the Commissioner shall 
                prescribe, except that in no event shall more 
                than 8 employees be eligible for a cash award 
                under this paragraph in any calendar year.
                  (E) Limitation on compensation.--For purposes 
                of applying section 5307 to an employee in 
                connection with any calendar year to which an 
                award made under this paragraph to such 
                employee is attributable, subsection (a)(1) of 
                such section shall be applied by substituting 
                ``to equal or exceed the annual rate of 
                compensation for the Vice President for such 
                calendar year'' for ``to exceed the annual rate 
                of basic pay payable for level I of the 
                Executive Schedule, as of the end of such 
                calendar year''.
                  (F) Approval required.--An award under this 
                paragraph may not be made unless--
                          (i) the Commissioner of Internal 
                        Revenue certifies to the Office of 
                        Personnel Management that such award is 
                        warranted; and
                          (ii) the Office approves, or does not 
                        disapprove, the proposed award within 
                        60 days after the date on which it is 
                        so certified.
          (3) Based on savings.--
                  (A) In general.--The Commissioner of Internal 
                Revenue may authorize the payment of cash 
                awards to employees based on documented 
                financial savings achieved by a group or 
                organization which such employees comprise, if 
                such payments are made pursuant to a plan 
                which--
                          (i) specifies minimum levels of 
                        service and quality to be maintained 
                        while achieving such financial savings; 
                        and
                          (ii) is in conformance with criteria 
                        prescribed by the Office of Personnel 
                        Management.
                  (B) Funding.--A cash award under this 
                paragraph may be paid from the fund or 
                appropriation available to the activity 
                primarily benefiting or the various activities 
                benefiting.
                  (C) Tax enforcement results.--A cash award 
                under this paragraph may not be based solely on 
                tax enforcement results.
  (c) Other Provisions.--
          (1) Notice provisions.--In applying sections 
        4303(b)(1)(A) and 7513(b)(1) to employees of the 
        Internal Revenue Service, ``15 days'' shall be 
        substituted for ``30 days''.
          (2) Appeals.--Notwithstanding the second sentence of 
        section 5335(c), an employee of the Internal Revenue 
        Service shall not have a right to appeal the denial of 
        a periodic step increase under section 5335 to the 
        Merit Systems Protection Board.

Sec. 9303. Staffing flexibilities

  (a) Eligibility to Compete for A Permanent Appointment in the 
Competitive Service.--
          (1) Eligibility of qualified veterans.--
                  (A) In general.--No veteran described in 
                subparagraph (B) shall be denied the 
                opportunity to compete for an announced vacant 
                competitive service position within the 
                Internal Revenue Service by reason of--
                          (i) not having acquired competitive 
                        status; or
                          (ii) not being an employee of that 
                        agency.
                  (B) Description.--An individual shall, for 
                purposes of a position for which such 
                individual is applying, be considered a veteran 
                described in this subparagraph if such 
                individual--
                          (i) is either a preference eligible, 
                        or an individual (other than a 
                        preference eligible) who has been 
                        separated from the armed forces under 
                        honorable conditions after at least 3 
                        years of active service; and
                          (ii) meets the minimum qualification 
                        requirements for the position sought.
          (2) Eligibility of certain temporary employees.--
                  (A) In general.--No temporary employee 
                described in subparagraph (B) shall be denied 
                the opportunity to compete for an announced 
                vacant competitive service position within the 
                Internal Revenue Service by reason of not 
                having acquired competitive status.
                  (B) Description.--An individual shall, for 
                purposes of a position for which such 
                individual is applying, be considered a 
                temporary employee described in this 
                subparagraph if--
                          (i) such individual is then currently 
                        serving as a temporary employee in the 
                        Internal Revenue Service;
                          (ii) such individual has completed at 
                        least 2 years of current continuous 
                        service in the competitive service 
                        under 1 or more term appointments, each 
                        of which was made under competitive 
                        procedures prescribed for permanent 
                        appointments;
                          (iii) such individual's performance 
                        under each term appointment referred to 
                        in clause (ii) met all applicable 
                        retention standards; and
                          (iv) such individual meets the 
                        minimum qualification requirements for 
                        the position sought.
  (b) Rating Systems.--
          (1) In general.--Notwithstanding subchapter I of 
        chapter 33, the Commissioner of Internal Revenue may 
        establish category rating systems for evaluating job 
        applicants for positions in the competitive service, 
        under which qualified candidates are divided into 2 or 
        more quality categories on the basis of relative 
        degrees of merit, rather than assigned individual 
        numerical ratings. Each applicant who meets the minimum 
        qualification requirements for the position to be 
        filled shall be assigned to an appropriate category 
        based on an evaluation of the applicant's knowledge, 
        skills, and abilities relative to those needed for 
        successful performance in the job to be filled.
          (2) Treatment of preference eligibles.--Within each 
        quality category established under paragraph (1), 
        preference eligibles shall be listed ahead of 
        individuals who are not preference eligibles. For other 
        than scientific and professional positions at or higher 
        than GS-9 (or equivalent), preference eligibles who 
        have a compensable service-connected disability of 10 
        percent or more, and who meet the minimum qualification 
        standards, shall be listed in the highest quality 
        category.
          (3) Selection process.--An appointing authority may 
        select any applicant from the highest quality category 
        or, if fewer than 3 candidates have been assigned to 
        the highest quality category, from a merged category 
        consisting of the highest and second highest quality 
        categories. Notwithstanding the preceding sentence, the 
        appointing authority may not pass over a preference 
        eligible in the same or a higher category from which 
        selection is made, unless the requirements of section 
        3317(b) or3318(b), as applicable, are satisfied, except 
that in no event may certification of a preference eligible under this 
subsection be discontinued by the Internal Revenue Service under 
section 3317(b) before the end of the 6-month period beginning on the 
date of such employee's first certification.
  (c) Involuntary Reassignments and Removals of Career 
Appointees in the Senior Executive Service.--Neither section 
3395(e)(1) nor section 3592(b)(1) shall apply with respect to 
the Internal Revenue Service.
  (d) Probationary Periods.--Notwithstanding any other 
provision of law or regulation, the Commissioner of Internal 
Revenue may establish a period of probation under section 3321 
of up to 3 years for any position if, as determined by the 
Commissioner, a shorter period would be insufficient for the 
incumbent to demonstrate complete proficiency in such position.
  (e) Provisions That Remain Applicable.--No provision of this 
section exempts the Internal Revenue Service from--
          (1) any employment priorities established under 
        direction of the President for the placement of surplus 
        or displaced employees; or
          (2) its obligations under any court order or decree 
        relating to the employment practices of the Internal 
        Revenue Service.

Sec. 9304. Flexibilities relating to demonstration projects

  (a) Authority To Conduct.--The Commissioner of Internal 
Revenue may, in accordance with this section, conduct 1 or more 
demonstration projects to improve personnel management; provide 
increased individual accountability; eliminate obstacles to the 
removal of or imposing any disciplinary action with respect to 
poor performers, subject to the requirements of due process; 
expedite appeals from adverse actions or performance-based 
actions; and promote pay based on performance.
  (b) General Requirements.--Except as provided in subsection 
(c), each demonstration project under this section shall comply 
with the provisions of section 4703.
  (c) Special Rules.--For purposes of any demonstration project 
under this section--
          (1) Authority of commissioner.--The Commissioner of 
        Internal Revenue shall exercise the authority provided 
        to the Office of Personnel Management under section 
        4703.
          (2) Provisions not applicable.--The following 
        provisions of section 4703 shall not apply:
                  (A) Paragraphs (3) through (6) of subsection 
                (b).
                  (B) Paragraphs (1), (2)(B)(ii), and (4) of 
                subsection (c).
                  (C) Subsections (d) through (g).
  (d) Notification Required To Be Given.--
          (1) To employees.--The Commissioner of Internal 
        Revenue shall notify employees likely to be affected by 
        a project proposed under this section at least 90 days 
        in advance of the date such project is to take effect.
          (2) To congress and opm.--The Commissioner of 
        Internal Revenue shall, with respect to each 
        demonstration project under this section, provide each 
        House of Congress and the Office of Personnel 
        Management with a report, at least 30 days in advance 
        of the date such project is to take effect, setting 
        forth the final version of the plan for such project. 
        Such report shall, with respect to the project to which 
        it relates, include the information specified in 
        section 4703(b)(1).
          (e) Limitations.--No demonstration project under this 
        section may--
                  (1) provide for a waiver of any regulation 
                prescribed under any provision of law referred 
                to in paragraph (2)(B)(i) or (3) of section 
                4703(c);
                  (2) provide for a waiver of subchapter V of 
                chapter 63 or subpart G of part III (or any 
                regulations prescribed under such subchapter or 
                subpart);
                  (3) provide for a waiver of any law or 
                regulation relating to preference eligibles as 
                defined in section 2108 or subchapter II or III 
                of chapter 73 (or any regulations prescribed 
                thereunder);
                  (4) permit collective bargaining over pay or 
                benefits, or require collective bargaining over 
                any matter which would not be required under 
                section 7106; or
                  (5) include a system for measuring 
                performance that provides for only 1 level of 
                performance at or above the level of fully 
                successful or better.
  (f) Permissible Projects.--Notwithstanding any other 
provision of law, a demonstration project under this section--
          (1) may establish alternative means of resolving any 
        dispute within the jurisdiction of the Equal Employment 
        Opportunity Commission, the Merit Systems Protection 
        Board, the Federal Labor Relations Authority, or the 
        Federal Service Impasses Panel; and
          (2) may permit the Internal Revenue Service to adopt 
        any alternative dispute resolution procedure that a 
        private entity may lawfully adopt.
  (g) Consultation and Coordination.--The Commissioner of 
Internal Revenue shall consult with the Director of the Office 
of Personnel Management in the development and implementation 
of each demonstration project under this section and shall 
submit such reports to the Director as the Director may 
require. The Director or the Commissioner of Internal Revenue 
may terminate a demonstration project under this section if 
either of them determines that the project creates a 
substantial hardship on, or is not in the best interests of, 
the public, the Federal Government, employees, or qualified 
applicants for employment with the Internal Revenue Service.
  (h) Termination.--Each demonstration project under this 
section shall terminate before the end of the 5-year period 
beginning on the date on which the project takes effect, except 
that any such project may continue beyond the end of such 
period, for not to exceed 2 years, if the Commissioner of 
Internal Revenue, with the concurrence of the Director, 
determines such extension is necessary to validate the results 
of the project. Not later than 6 months before the end of the 
5-year period and any extension under the preceding sentence, 
the Commissioner of Internal Revenue shall, with respect to the 
demonstration project involved, submit a legislative proposal 
to the Congress if the Commissioner determines that such 
project should be made permanent, in whole or in part.
          * * * * * * *

               VII. CORRESPONDENCE FROM OTHER COMMITTEES

  A. Correspondence From Committee on Government Reform and Oversight

    The following correspondence was received from 
Representative Dan Burton, Chairman, Committee on Government 
Reform and Oversight, regarding the bill, H.R. 2676:

                          House of Representatives,
              Committee on Government Reform and Oversight,
                                  Washington, DC, October 31, 1997.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
Washington, DC.
    Dear Mr. Chairman: After several months of negotiation with 
the interested parties, the Committee on Government Reform and 
Oversight agrees to the provisions of H.R. 2676, a bill to 
restructure and reform the Internal Revenue Service. The 
Government Reform and Oversight Committee does not object to 
the current legislation, and therefore does not intend to 
exercise its jurisdiction over H.R. 2676.
    The Committee initially had concerns about the Freedom of 
Information Act and civil service related provisions included 
within the original text. Through negotiation, we were able to 
draft language in these areas that protects the interests of 
taxpayers and institutes employee performance measures that 
provide the IRS Commissioner with the tools necessary to make 
it easier to fire poor performers and people who engage in 
misconduct. I would particularly like to thank Rep. Rob 
Portman, the sponsor of H.R. 2292, and the National Commission 
on Restructuring the Internal Revenue Service in helping with 
our efforts.
    As you know, House Rule X, ``Establishment and Jurisdiction 
of Standing Committees'', grants the Government Reform and 
Oversight Committee jurisdiction over legislation related to 
government information management and the civil service. 
Although the Committee will not mark up H.R. 2676, this does 
not in any way waive this Committee's jurisdiction over the 
bill or related legislation, nor over the general subject 
matters contained in the bill which fall within this 
Committee's jurisdiction. Further, I request that members of 
the Government Reform and Oversight Committee be appointed to 
serve on any conference committee appointed with respect to 
this legislation.
    I look forward to working with you on this and other issues 
throughout the 105th Congress.
            Sincerely,
                                              Dan Burton, Chairman.

               B. Correspondence From Committee on Rules

    The following correspondence was received from 
Representative Gerald B. Solomon, Chairman, Committee on Rules, 
regarding the bill, H.R. 2676:

                          House of Representatives,
                                        Committee on Rules,
                                  Washington, DC, October 28, 1997.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
Washington, DC.
    Dear Mr. Chairman: I am writing concerning H.R. 2676, The 
Internal Revenue Service Restructuring and Reform Act of 1997, 
which your committee ordered reported on October 22 by a vote 
of 33-4.
    This legislation contains provisions in Title IV, 
Congressional Accountability for the Internal Revenue Service, 
which fall within the jurisdiction of the Committee on Rules.
    The Committee on Rules does not intend to consider this 
bill as a matter of original jurisdiction. It is the intention 
of the Committee to address several concerns with the proposed 
language in Title IV during the Rules Committee's consideration 
of an appropriate rule for this legislation.
    I reserve jurisdiction of the Committee on Rules over all 
bills relating to the rules, joint rules, and the order of 
business of the House. It would also be my intention to be 
represented on the conference committee on this bill. Thank you 
for your consideration.
            Sincerely,
                                       Gerald B. Solomon, Chairman.

                         VIII. ADDITIONAL VIEWS

    We provide the following additional views and comments 
regarding H.R. 2676, the Internal Revenue Service Restructuring 
and Reform Act of 1997. Importantly, this legislation would 
restructure the Internal Revenue Service to provide better 
oversight, greater continuity of leadership, improved access to 
expert advice from the private sector, additional management 
flexibility, incentives for expansion of electronic tax filing, 
taxpayer of safeguards in dealing with the IRS, and increased 
Congressional accountability.
    We support the important goals of this legislation and have 
worked on several of its components over the last several 
years. In addition, we are pleased to have participated, on a 
bipartisan basis, in incorporating significant improvements to 
this bill from its original form.
    Over the past year, there has been much heated debate over 
the provisions of various IRS reform bills. We believe that the 
debate was necessary and resulted in many IRS reforms which we 
support. Importantly, expressing our differences in opinion 
confirms our belief that the legislative process can work 
effectively, to the benefit of the public, where there is a 
true commitment to bipartisanship and cooperation.
    There has long been agreement on the need for fundamental 
reform of the IRS. In fact, even back when the Members of the 
National Commission on Restructuring the Internal Revenue 
Service were discussing which recommendations to make to the 
Congress, there was uniform agreement that fundamental reform 
of the IRS was in order, and a consensus on the dozens of 
specific reform measures the Congress should be asked to adopt. 
The Democratic Members of the Committee on Ways and Means have 
continued to support wholeheartedly the vast majority of 
recommendations put forward by the National Commission, which 
were reflected in both H.R. 2428, to improve the operations and 
governance of the Internal Revenue Service, introduced on 
September 8, 1997, and H.R. 2292, the Internal Revenue Service 
Restructuring and Reform Act, introduced on July 30, 1997.
H.R. 2292, as introduced on governance
    There were several aspects of H.R. 2292, legislation 
introduced originally by Rep. Rob Portman and others in 
response to the National Commission's report, which caused us 
great concern and to which we strongly objected. That bill, 
which was the subject of numerous Committee and Subcommittee 
hearings while it was pending before the Committee for over 
three months, remained unchanged by its sponsors before the 
Committee markup. After much bipartisan discussion and debate, 
a clean new version of the bill, H.R. 2676, which reflected 
responses to many of our concerns, was introduced and became 
the focus of the Committee's action. (During this period, many 
of us sponsored an alternative bill, H.R. 2428, which was 
supported by the Administration, to improve the structure of 
IRS management, operations, and oversight).
    Our major concern with the original IRS reform bill was 
that it failed to insure (1) effective and constitutional 
governance of the IRS, and (2) full accountability of the IRS 
to the public (directly and through their elected officials.) 
The original bill would have established an IRS Board of 
Directors, consisting primarily of private-sector appointees, 
with significant powers and authority to run the IRS. For 
example, the bill would have the private-sector Board members 
the authority to hire and fire the IRS Commissioner and would 
have eliminated the current Internal Revenue Code rules that 
place the IRS Commissioner under the control of the Secretary 
of the Treasury (and ultimately the President). Such an 
approach would not have solved any problem that has been 
enumerated by the National Commission or any abuse highlighted 
by recent Senate Committee on Finance hearings. Rather, such 
proposals would have made it more difficult for the IRS to 
function effectively in its efforts to collect Federal revenues 
and provide taxpayer services.
    We believe that handing overall control of the IRS to a 
board composed primarily of private citizens (taxpayers 
themselves) would have reduced significantly the accountability 
of the IRS to the taxpaying public. In our view, the 
Constitution requires that the IRS Commissioner be appointed, 
hired, and, if necessary, fired by the President. The public 
expects the IRS Commissioner to be accountable to them through 
their elected representatives. Further, we believe that efforts 
to increase the IRS's accountability should not blur or 
eliminate the existing chain of command that runs from the IRS 
Commissioner, through the Secretary of the Treasury, and 
ultimately to the President.
    Moreover, we believe that turning effective control of the 
IRS over to a part-time board, dominated by private sector 
individuals, raises significant conflict-of-interest problems. 
Such conflict of interest, whether real or perceived, 
undoubtedly would undermine further the public's support for 
our voluntary Federal income tax system. Accordingly, we 
believe that it would be inappropriate to grant--to a 
relatively small groups of private interests--autonomy and 
broad powers to run the IRS, while they serve as part-time 
public servants with full-time obligations to private sector 
employers or private interest clients.
Bipartisan negotiations and agreement on governance
    Because of our strong commitment to an IRS that works 
fairly for taxpayers and effectively in collecting the 
country's tax revenues, we entered into intense bipartisan 
negotiations with numerous Members of this Committee, the House 
Leadership, and the Administration to improve the original 
legislation. As a result, several critically important 
improvements were made to H.R. 2292. While each of us would 
have made additional modifications, an acceptable compromise 
was reached.
    Under the revised bill adopted by the Committee, the 
President--not a Board of private-sector individuals--would 
have the authority to appoint, hire, and fire the IRS 
Commissioner. As under current law, this Nation's highest-
elected official would remain ultimately responsible for the 
actions of the IRS and the decisions of its commissioner.
    Also, under the revised bill, the lines of authority from 
the Secretary of the Treasury to the IRS Commissioner have been 
defined clearly. Overall management of the IRS, including tax 
policy, tax administration, and tax law enforcement activities, 
would continue to be coordinated through Treasury, as would 
overall responsibility for oversight and management of the IRS.
    Once these two fundamental concerns of ours were addressed, 
we joined our colleagues in supporting H.R. 2676.
    As H.R. 2676 moves forward in the House, we note that the 
bill grants the newly-create IRS Oversight Board members 
authority to review and approve the strategic plans of the IRS, 
authority to review and approve the Commissioner's annual 
budget, and authority to reveiw and approve the Commissioner's 
plans for major reorganization of the IRS. While many of us are 
not in favor of transferring even this much power to an 
independent body, we believe that, on the whole, it constitutes 
an acceptable compromise. Unfortunately, the bill is not clear 
about what happens to our tax administration system under these 
new Board authorities if a consensus is not reached among the 
Board members of the the IRS Commissioner and Treasury 
Secretary disagree with the views of the private-sector 
individuals. We intend to continue to work on resolution of 
these issues in the coming months before a final IRS reform 
bill is enacted into law.

Electronic filing of tax returns

    H.R. 2676 contains important provisions to enhance the 
electronic filing of tax returns and other documents with the 
IRS. These provisions were developed by the Subcommittee on 
Oversight, on a bipartisan basis, for inclusion in the revised 
IRS reform bill. The two underlying IRS reform bills, H.R. 2428 
and H.R. 2292 contained provisions to improve electronic tax 
filing and served as the basis for the Subcommittee's 
recommendations. We believe that these statutory changes are 
critical to bringing the IRS into the modern age of technology 
and strongly support the goal of having 80 percent of all tax 
returns filed electronically within the next ten years.

Taxpayer rights 3

    Of great significance to taxpayers nationwide are the 
provisions in the bill, as approved by the Committee, to 
provide taxpayers with new statutory protections and other 
assistance to millions of Americans in their dealings with the 
IRS. Again, these provisions were developed by the Subcommittee 
on Oversight, on a bipartisan basis, for inclusion in the 
revised IRS reform bill. The Subcommittee's recommendations 
reflect a combination of proposals from H.R. 2292, proposals 
advanced by the Department of the Treasury, and new initiatives 
identified during the Subcommittee's hearings on taxpayer 
rights.
    Of particular importance are the provisions to expand 
``innocent spouse'' tax relief and provide tax refund relief to 
taxpayers during periods of disability. Also, contained in the 
bill are provisions to expand relief for taxpayers through 
issuance of ``taxpayer assistance orders'' by the Taxpayer 
Advocate, grants for low-income tax clinics, and penalty relief 
for taxpayers in installment agreements with the IRS.
    However, we continue to have serious concerns about the 
provision in the bill that shifts the burden of proof from 
taxpayers to the IRS in certain court proceedings with respect 
to factual issues. This provision was not considered by the 
Subcommittee on Oversight, nor was it a recommendation of the 
National Commission.
    We are concerned that the provision may have unintended 
negative consequences for both taxpayers and the tax 
administrative system. Currently, as a result of long-standing 
judicial decisions, a taxpayer in civil tax matters is 
generally required to maintain records substantiating the 
calculation of his or her income tax liability. The courts 
created this rule to facilitate the finding of fact, and thus 
the burden of proof is placed on the taxpayer simply because 
the taxpayer controls the underlying facts and the records. We 
are concerned that at least 15 percent of the revenue loss (and 
we believe more) attributable to the provision is due to 
anticipated additional taxpayer noncompliance. Further, we are 
not persuaded by the view of the Chief of Staff of the Joint 
Committee on Taxation, as stated at the markup, that, while the 
proposal will not do anything for most taxpayers, the public 
will find great comfort in knowing that the burden shifts to 
the IRS for some taxpayers in litigation. We similarly are 
concerned that shifting the burden of proof could result in the 
necessity of more intrusive and aggressive IRS examinations, 
more third-party summonses, and more thorough discovery. Also, 
this provision could assist aggressive taxpayers avoid 
taxation, or induce some taxpayers not to keep records at all. 
We believe that the tax laws should make it easier for 
taxpayers to deal with the IRS. However, we do not think the 
laws should make it easier for someone to evade taxes. The vast 
majority of citizens who obey the law deserve more. We intend 
to work toward improving the burden-of-proof provision in this 
bill in order to insure that it does not increase noncompliance 
and does not serve as an incentive for taxpayers to cease 
retention of appropriate records.
    Finally, it would be wrong not to point out the Internal 
Revenue Service's many substantial accomplishments. As we work 
to reform the IRS, it is understandable that we focus on the 
agency's failings. However, it is easy in such circumstances to 
lose our sense of perspective about this much-disparaged but 
indispensable government agency. In such times, we must 
recognize the difficulty of the mission that the IRS 
undertakes--and the success that it has had in carrying out 
that mission. The IRS processes roughly 200 million forms each 
year and collects nearly one and a half trillion dollars 
annually from over 100 million Americans--all with relatively 
few complaints. That is by no means a small accomplishment. We 
are proud that this Nation has a very high voluntary compliance 
rate--one that is the envy of the world. We must not forget 
that the vast majority of IRS employees are dedicated, hard-
working civil servants who want to do a good job.

                                   Charles B. Rangel,
                                   Barbara B. Kennelly,
                                   Sander Levin,
                                   Richard E. Neal,
                                   William J. Jefferson,
                                   William J. Coyne,
                                   Xavier Becerra,
                                   Michael R. McNulty,
                                   Karen L. Thurman.

     ADDITIONAL VIEWS OF HON. BENJAMIN CARDIN AND HON. JOHN TANNER

    H.R. 2676, the Internal Revenue Service Restructuring Act 
of 1997, represents strong, bipartisan legislation to reform 
the Internal Revenue Service. The bill builds on the 
recommendations of the National Commission on Restructuring the 
IRS. Under the leadership of our colleague Rob Portman and Sen. 
Bob Kerrey, the National Commission undertook a year-long study 
of the IRS, and has made a tremendous difference already in 
raising the level of concern and awareness of the problems that 
plague the agency.
    We are very proud to have joined Rep. Portman in 
cosponsoring H.R. 2292, which has had strong bipartisan support 
in this House. H.R. 2676 takes that very good bill and makes it 
even better. We are especially pleased with two changes in the 
bill. First, it restores the appointment of the Commissioner to 
the President, and second, it clarifies the lines of authority 
from the Secretary of the Treasury to the Commissioner. With 
the support of the Clinton Administration, this bill is poised 
to move very quickly through the House.
    The problems in the management and culture of the IRS are 
not a new revelation to anyone on this committee. While recent 
publicity has brought new media attention to these issues, 
those of us on this committee know that the problems are of 
long duration.
    While these problems are stubborn and deeply-rooted, they 
are not beyond our reach. The legislation before us marks the 
first fundamental reform of the IRS in nearly half a century. 
It will bring a new structure to the IRS, a structure that is 
designed to change the way the IRS treats its customers, the 
American taxpayers.
    The litany of problems at the IRS is familiar to all of 
us--billions of dollars squandered on a bungled computer 
modernization effort, telephones unanswered, taxpayers too 
often treated with disrespect or suspicion, an agency that is 
unable to balance its own books. These problems have not 
emerged recently--they are not the legacy of one 
administration, but of decades.
    In fact, this administration, and particularly this 
Treasury Secretary, have been more attentive to the problems of 
the IRS and more dedicated in seeking solutions than any in 
recent years. Secretary Rubin has made important changes in the 
management of the IRS, and those efforts have begun to show 
results.
    But much more remains to be done, and it is not realistic 
to expect that IRS reform can be accomplished without 
legislation and without bringing new expertise to the 
management of the Service. The solution proposed in this bill 
is the creation of an Oversight Board that will bring private 
sector expertise in the areas where the IRS needs it most. The 
creation of this Board, with real authority to approve the 
strategic plans, major reorganizations, and the budgets of the 
IRS, is the crucial element in bringing real reform to this 
troubled agency.
    The Board members, appointed by the President and confirmed 
by the Senate, will work with the Secretary and the 
Commissioner to help reform the IRS in the areas of customer 
service, information technology, organizational development, 
and meeting the needs and concerns of taxpayers. The Oversight 
Board will bring the expertise the IRS lacks, and it will have 
the authority to help turn this agency around.
    Under this bill, the Commissioner's budget, as approved by 
the Board, will be forwarded to the Congress along with the 
president's budget for the entire government. The Board-
approved budget will not have legal force--Congress will still 
control the purse strings. But the Board's budget will give us 
a clear view of the needs and requirements of the IRS, and will 
be tremendously helpful as we implement the reforms of the 
agency.
    Just as it is not realistic to expect that IRS reform can 
be accomplished without a new management structure, it is not 
realistic to expect the Oversight Board to do this work along. 
IRS reform will require a committed partnership between the 
Board, the Secretary, and the Commissioner, as well as the more 
constructive involvement from those of us here in Congress.
    Legislative oversight of the IRS is too unfocused, too 
scattered, with too many masters and not enough coordination 
among committees. The bill masters and not enough coordination 
among committees. The bill attempts to bring some order and 
structure to the current system.
    In addition to the governance and oversight provisions, the 
bill contains a new set of provisions to be added to the 
Taxpayer Bill of Rights. These provisions, when they are 
enacted, will mark the third TBOR. The provisions address many 
problems that taxpayers have encountered in dealing with the 
IRS, and their enactment will help solve those problems.
    We would add, however, that the broader objective of this 
bill must be to change the culture of the IRS to make it a 
taxpayer-friendly organization to that future Taxpayer Bills of 
Rights will not be necessary.
    The Internal Revenue Service is charged with the vital task 
of collecting the revenue needed to fund the basic and 
essential operations of government. When the IRS is mismanaged 
in ways that create fear and anxiety among taxpayers, the 
result is to undermine the confidence of the American people in 
their government. The purpose of this legislation is to reform 
the IRS so that we can begin to restore that badly damaged 
confidence.

                                   Ben Cardin.
                                   John Tanner.

                ADDITIONAL VIEWS OF HON. XAVIER BECERRA

          The Pharisee stood and prayed thus with himself, 
        ``God, I thank thee that I am not like other men, 
        extortioners, unjust, adulterers, or even like this tax 
        collector.''
          --Luke, Ch. 8, v. 11

          Taxes are what we pay for civilized society.
          --Justice Oliver Wendell Holmes

    No one likes paying taxes; however, an effective tax system 
is fundamental to the health and stability of our nation. 
Reconciling these competing principles is a difficult balancing 
act that necessitates respect for both individual taxpayers and 
the Treasury (i.e. taxpayers collectively). In many respects, 
the Internal Revenue Service Restructuring and Reform Act of 
1997 achieves the goal of transforming the IRS into a world 
class service agency. Unfortunately, it contains several 
troublesome provisions.
    It is encouraging that both Republican and Democratic tax 
writers, in conjunction with the Administration, have committed 
themselves to reforming and improving the IRS. It would have 
been all too simple for either side to not engage in the 
difficult policy deliberations, and score political points by 
bashing the IRS. In today's world of sound-bite politics, that 
party would have scored easy points at the expense of America's 
taxpayers.
    I remain vitally committed to the process of bringing many 
of these overdue reforms to the IRS. The Internal Revenue 
Service Restructuring and Reform Act is a workable bill, but 
several important changes can and should be made to it before 
it is signed into law by the President. I am hopeful that these 
changes will be made.
Shifting of the burden of proof
    Section 301 of the Committee-passed bill contains a 
provision that, on a superficial reading, seems rather 
innocuous: shifting the burden of proof in civil tax cases from 
the taxpayer to the Internal Revenue Service. While this makes 
for good bumper sticker politics, it is bad tax policy, and 
poses the specter of a more, not less, intrusive tax collection 
agency.
    Taxpayers have the burden of proof under current law in 
civil tax cases because they possess the relevant records and 
documents. It is a relatively simple matter for them to come 
forward with those records and disprove IRS's position in a tax 
dispute. Section 301 may provide an incentive for aggressive 
taxpayers, seeking the benefit of the burden shift, not to 
settle their disputes at the administrative level and litigate 
their disputes in court. Some taxpayers might be tempted not to 
keep records at all, effectively making it impossible for the 
IRS to verify whether a taxpayer's position is justified. In 
fact, the Joint Committee on Taxation has estimated that 
shifting the burden of proof will lead to a significant amount 
of reduced taxpayer compliance.
    The overwhelming majority of tax experts reject this 
provision as unwise and unworkable. To quote at length from a 
former Republican Commissioner of the Internal Revenue Service, 
Fred Goldberg:

          Most of us believe that the IRS is far too intrusive 
        today, and that tax administration is far too 
        cumbersome, contentious, and burdensome. Well, as the 
        saying goes, ``you ain't seen nothing yet.'' Change the 
        burden of proof and IRS tactics of today will seem like 
        child's play. Of necessity, the IRS would be forced to 
        resort to far more aggressive techniques in auditing 
        taxpayers and developing cases. Summonses, including 
        third party summonses, would become routine. Expanded 
        record-keeping requirements and increased litigation 
        over discovery issues would be standard fare. In 
        addition, the number of revenue agents and audits of 
        taxpayers would likely increase dramatically. In the 
        world of tax administration, it's hard to imagine a 
        more well-intentioned idea that would have more 
        undesirable consequences.

This is a frightening vision of the future of the IRS which 
runs counter to the spirit behind the Internal Revenue 
Restructuring and Reform Act. For that simple reason, it is 
imperative that the burden of proof provision be removed from 
the bill.

Board member's conflicts of interest

    Another important area in which the Internal Revenue 
Restructuring and Reform Act should be improved is in its 
conflict of interest rules for the private-sector members of 
the newly minted IRS Oversight Board. The American people 
deserve a tax collection agency with the highest ethical 
standards; even the mere appearance of impropriety cannot be 
tolerated. In that vein, section 104 of this legislation 
contains a prohibition on executive branch interference in the 
collection and audit practices of the IRS. Quite simply, 
politics should not play a role in the important business of 
collecting the revenue necessary to fund the functions of 
government. I would note as an aside that there has been no 
credible allegations that this has been a problem at the IRS 
since the early 1970s; nevertheless, this is a meritorious 
provision which I support.
    Unfortunately, similar rigorous standards of conduct were 
not imposed for the IRS Oversight Board members. The Ways and 
Means Committee failed to adopt an amendment offered by my 
fellow Californian, Rep. Stark. The Stark amendment would have 
prohibited Board members from representing clients in tax 
matters before the IRS or in court while a member of the Board 
and for a limited time thereafter. This proposal simply 
recognizes the impropriety--or, more importantly, the 
appearance of impropriety--of those charged with governing the 
IRS having an interest, or representing a party in a tax 
controversy, before the IRS. As most working Americans probably 
can attest (or guess), it would be difficult to be an impartial 
judge in a case involving your boss. While I have every 
confidence in the honesty and integrity of future Board 
members, the defeat of the Stark amendment opens the 
possibility for improper dealing, threatening to erode the 
public's confidence in the integrity of our nation's tax 
collection system and, by extension, our high voluntary 
taxpayer compliance rate.

Disclosure of audit selection criteria

    I am troubled by section 353 of the Internal Revenue 
Service Restructuring and Reform Act, which calls upon the 
Treasury Secretary to reveal the procedures by which returns 
are selected for audit by the IRS. Audits are an unfortunate--
but necessary--element of our tax collection system; an element 
that recognizes that a not inconsequential minority of 
taxpayers do not fully comply with our nation's tax laws, and 
thereby force the vast majority of honest taxpayers to shoulder 
a greater load.
    Section 353 contains a caveat that ``[s]uch statement shall 
not include any information the disclosure of which would be 
detrimental to law enforcement.'' The provision would have been 
strengthened by the further recognition that such disclosure by 
the Treasury should not lead to a reduction involuntary tax 
compliance.

Joint committee on taxation approval of GAO studies

    The Internal Revenue Service Restructuring and Reform Act 
contains many worthy provisions designed to streamline 
Congressional oversight of the IRS. All too often in the past, 
the IRS has had to answer to too many parties, draining 
valuable agency resources from the important business of 
collecting the proper amount of revenues while treating 
taxpayers with the respect and courtesy they deserve. The more 
that Congress speaks with one voice, the more the Service will 
be able to better prioritize its mission.
    At the same time, oversight of the Executive branch is one 
of Congress's most important Constitutional functions. Great 
care must be taken in retooling these procedures. Accordingly, 
I believe that one of these oversight provisions in the IRS 
restructuring bill should be modified. Section 401 of the 
legislation requires the Joint Committee on Taxation (JCT) to 
approve all Congressional requests of the General Accounting 
Office (GAO) to conduct investigations into the IRS, except in 
the case of Chairman and Ranking Members of all Congressional 
Committees and Subcommittees. I would note that if this 
provision were law today, neither of the principal House 
sponsors of the instant legislation--Reps. Portman and Cardin--
would be able to secure a GAO report on the IRS without JCT 
approval. Quite simply, I do not believe that members of 
Congressional committees with substantive jurisdiction over the 
nation's tax laws should be denied access to GAO's resources.

Conclusion

    American taxpayers deserve a world class tax agency. There 
is no dispute on that point. The dispute arises in how to 
achieve that laudatory goal. In many respects, the Internal 
Revenue Service Restructuring and Reform Act accomplishes its 
purpose. However, the bill has a few serious defects--most 
notably, the provision shifting the burden of proof--that may 
lead to a more intrusive IRS, which is exactly the wrong 
direction to take our nation's tax collection agency. I trust 
that these problems can be worked out in the bill as it makes 
its way through the legislative process.

                                                    Xavier Becerra.

                          IX. DISSENTING VIEWS

    We submit our dissenting views on H.R. 2676, the Internal 
Revenue Service Restructuring and Reform Act of 1997, with the 
goal of improving the bill in several critical areas as it 
proceeds through the Congress this year and next. We refuse to 
join in the Republican stampede to use this legislation as the 
forerunner to their efforts to ``tear the IRS out by its 
roots'' or as a political step in their year-long efforts to 
attack the IRS for the purpose of pursuing a campaign issue for 
the 1998 elections.
    We should be clear that the examples of taxpayer abuse 
highlighted by the recent Senate Committee on Finance hearings 
are unacceptable and must be addressed. However, the IRS 
restructuring bill before the Committee had nothing to do with 
these cases. In fact, the IRS Oversight Board created by the 
bill would be specifically precluded from involving itself, in 
any manner, in the ``law enforcement activities of the IRS, 
including criminal investigations, examinations, and collection 
activities.'' The issue debated by the Committee focused on 
overall governance of the IRS, not abuses of the system in 
individual cases. In fact, administrative actions already have 
begun to be taken by the IRS and Treasury to provide relief to 
the taxpayers appearing before the Congress and to hundreds of 
other taxpayers, nationwide, which will resolve the problem 
cases--long before H.R. 2676 is enacted into law.
    Nonetheless, there is much about which we all agree. The 
IRS needs to improve its customer service, training of 
employees, and development and application of technology; 
oversight of the IRS needs to be enhanced, with significant 
input from the Department of the Treasury and the advice of the 
private sector; the IRS Commissioner needs to have flexibility 
in hiring a topnotch team, and to remain as head of the IRS for 
at least 5 years; electronic tax filings need to be enhanced 
and encouraged; protections for taxpayers, in their efforts to 
comply with the tax laws, need to be expanded; and, the 
Congress needs to better coordinate and focus its oversight and 
funding responsibilities with regard to the IRS. To the extent 
the bill addresses these issues, it has our support.
    However, there are several fundamental problems with the 
focus and direction of H.R. 2676 which should not go unnoted. 
These serve as the basis for our dissent.
Executive branch governance
    We believe that mechanisms should be established to provide 
for consistent direction of a long-term strategy at the IRS and 
for holding IRS management accountable for its decisions and 
operations. Similarly, it is important that the IRS have 
systematic input from the Department of the Treasury and the 
private sector on critical aspects of IRS management, 
operations, and taxpayer services.
    However, we do not believe that individual taxpayers from 
the private sector should have final decision-making authority 
over any fundamental aspect of the IRS's administration of the 
tax laws. Allowing eight private-sector individuals to make 
final decisions about the IRS's strategic plans, reorganization 
plans, and annual budget, raises basic and fundamental 
questions of accountability.
    Under the bill, it is clear that the new private-sector 
Board would be integrally involved in the most ``taxpayer 
sensitive'' aspects of IRS's administration of the tax laws. 
Specifically, the Board would be given ``decisive approval'' 
authority over the agency-wide strategic plan, budget, and 
organizational structure. These key management tools define the 
priorities and goals of the IRS--particularly the IRS's 
priorities in the area of compliance, examinations and 
collections. We think that the result of H.R. 2676 is 
unacceptable, and that the bill's governance plans would result 
in an unprecedented transfer of governmental authority to 
individual taxpayers.
    The bill also is flawed fundamentally in its failure to 
address the fact that the Oversight Board largely will be 
comprised of private-sector individuals. These Board members 
will be private-citizen taxpayers for 353 days a year and 
quasi-government employees 12 days a year. The potential for 
conflict of interest (both real and perceived) is guaranteed, 
since the Board members will be given real authorities and 
powers, not just expert advisory responsibilities.
    In fact, during the Committee debate on the bill, 
clarification was requested concerning whether a Board member 
would be able to represent a client or employer in a tax 
dispute with the IRS during his or her tenure on the Board. 
There was agreement that the bill language was not intended to 
allow such conflict of interest. However, an amendment offered 
by Rep. Pete Stark--to insure that the statutory language would 
be changed to reflect the Committee's intent--was defeated by 
the Republicans. Included in this amendment was clarification 
that Board members would be subject to post-employment rules 
similar to those applicable to an IRS Commissioner.
    The conflict-of-interest problems in the bill go even 
deeper--and have been conveniently ignored. What are the Board 
members' ethical obligations with regard to disclosure of 
financial interests, such as stock holdings? Under the bill, 
Board members would not be required to file annual reports 
under the Ethics in Government Act. Also, the Republicans have 
gone to great lengths to publicize that the present nominee for 
IRS Commissioner appropriately will divest his holdings in 
interests which may conflict with his duties to administer 
properly the tax laws. What are the Board members' ethical 
obligations to divest conflicting assets? Under the bill, there 
is no requirement that any of the eight private-sector Board 
members divest conflicting holdings, yet they would have 
fundamental approval authority over the IRS's direction, 
mission, and accountability to the public.

Tax simplification

    We all agree that the tax laws are too complex and must be 
simplified. However, simplifying the tax laws takes more than 
political rhetoric and blaming those merely trying to 
administer the tax laws. Many of those arguing that the IRS 
cannot effectively administer the tax rules are the same people 
responsible for making the tax system worse. An easy example is 
the myriad of miscellaneous credits, phase-outs, phase-ins, 
floors, and income limits contained in the Taxpayer Relief Act 
of 1997.
    Ironically, the Republicans could not even pass their prize 
accomplishment in simple form--capital gains tax relief. The 
IRS estimates that claiming capital gains tax relief now will 
take over four hours to calculate and that the IRS will not 
even be able to process the required capital gains forms for 
tax year 1997 until February 1998.
    It is clear to us that much of the current debate is no 
more than hollow political rhetoric. For example, during the 
Committee's debate on the Taxpayer Relief Act, Rep. Jim 
McDermott offered an amendment which would have reduced the 
marriage penalty of prior law (where some married couples who 
both have relatively equal incomes pay more income tax than 
they would as two single taxpayers filing individual returns). 
The amendment was defeated by Republicans on a party-line vote. 
The bill, as enacted, worsened the marriage penalty. Now, a 
number of the same Members of Congress who helped develop the 
many new inequities and complexities of the 1997 Act decry the 
IRS's inability to easily administer the law. In the case of 
the marriage penalty, some of those same Members now have 
announced that solving the marriage penalty is their highest 
priority. Unfortunately, it is all too easy to understand 
taxpayers' cynicism as they see the games played by many of 
their elected officials.

Burden of proof

    We continue to have serious concerns about the provision in 
the bill that shifts the burden of proof from taxpayers to the 
IRS. We believe that the provision will have unintended 
negative consequences for both taxpayers and the tax 
administration system. The burden of proof is the result of 
long-standing judicial decisions to facilitate the finding of 
fact. Taxpayers in civil tax matters are required to justify 
their income tax liabilities because the taxpayers control the 
underlying facts and the records. We believe that most of the 
revenue loss attributable to the provision is due to additional 
taxpayer noncompliance. We believe that shifting the burden of 
proof will require the IRS to conduct more intrusive and 
aggressive examinations, and that the provision will assist 
aggressive taxpayers avoid taxation and induce some taxpayers 
not to keep records at all. We intend to work toward improving 
the burden of proof provision to insure that it does not 
increase noncompliance and that it does not serve as an 
incentive for taxpayers to cease retention of appropriate 
records.

Influencing IRS audits

    We find it intriguing that the bill imposes criminal 
sanctions on the President, Vice President, and Cabinet 
officials (with limited exceptions) for requesting that the IRS 
conduct or terminate an audit of a specific taxpayer. While the 
Republican Committee Members went to great lengths to clarify 
that they knew of no such abuse by the Executive Branch, they 
seem to have intentionally excluded those individuals in a 
clear position to influence taxpayer audits and collection 
activity--Members of Congress--particularly those in positions 
of great power.

Conclusion

    The Republicans are in the process of perfecting the 
political ``perpetual motion'' machine, and are going through 
their political consultant's dance steps with unusual skill. We 
have not been fooled. The public will not be fooled, either.

                                   Pete Stark,
                                   Robert T. Matsui,
                                   Jim McDermott,
                                   John Lewis.