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                                                       Calendar No. 498
108th Congress                                                   Report
                                 SENATE
 2d Session                                                     108-257

======================================================================
 
                 TAX ADMINISTRATION GOOD GOVERNMENT ACT

                                _______
                                

                  May 4, 2004.--Ordered to be printed

                                _______
                                

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

                              R E P O R T

                         [To accompany S. 882]

    The Committee on Finance, to which was referred the bill 
(S. 882) to amend the Internal Revenue Code of 1986 to provide 
improvements in tax administration and taxpayer safeguards, and 
for other purposes, reports favorably thereon with an amendment 
in the nature of a substitute and recommends that the bill, as 
amended, do pass.

                                CONTENTS

                                                                   Page
 I. Legislative Background............................................5
    Title I.--Improvements in Tax Administration and Taxpayer 
    Safeguards........................................................5
        A. Improve Efficiency and Safeguards in IRS Collection...     5
            1. Waiver of user fee for installment agreements 
                using automated withdrawals (sec. 101 of the bill 
                and sec. 6159 of the Code).......................     5
            2. Authorize IRS to enter into installment agreements 
                that provide for partial payment (sec. 102 of the 
                bill and sec. 6159 of the Code)..................     6
            3. Termination of installment agreements (sec. 103 of 
                the bill and sec. 6159 of the Code)..............     7
            4. Office of Chief Counsel review of offers-in-
                compromise (sec. 104 of the bill and sec. 7122 of 
                the Code)........................................     8
            5. Permit the IRS to require increased electronic 
                filing of returns prepared by paid return 
                preparers (sec. 105 of the bill and sec. 6011 of 
                the Code)........................................     9
            6. Place threshold on tolling of statute of 
                limitations during review by Taxpayer Advocate 
                Service (sec. 106 of the bill and sec. 7811 of 
                the Code)........................................     9
            7. Increase in penalty for bad checks and money 
                orders (sec. 107 of the bill and sec. 6657 of the 
                Code)............................................    10
            8. Extend time limit for contesting IRS levy (sec. 
                108 of the bill and sec. 6343 of the Code).......    10
            9. Individuals held harmless on improper levy on 
                individual retirement plan (sec. 109 of the bill 
                and sec. 6343 of the Code).......................    11
            10. Allow the Financial Management Service to retain 
                transaction fees from levied amounts (sec. 110 of 
                the bill)........................................    12
            11. Elimination on restriction on offsetting refunds 
                from former residents (sec. 111 of the bill and 
                sec. 6402 of the Code)...........................    13
        B. Processing and Personnel..............................    13
            1. Information regarding statute of limitations (sec. 
                121 of the bill).................................    13
            2. Annual report on IRS performance measures (sec. 
                122 of the bill and sec. 7803 of the Code).......    14
            3. Disclosure of tax information to facilitate 
                combined employment tax reporting (sec. 123 of 
                the bill and sec. 6103 of the Code)..............    15
            4. Extension of declaratory judgment procedures to 
                non-501(c)(3) tax-exempt organizations (sec. 124 
                of the bill and sec. 7428 of the Code)...........    16
            5. Amendment to Treasury auction reforms (sec. 125 of 
                the bill and sec. 202 of the Government 
                Securities Act Amendments of 1993)...............    18
            6. Revisions relating to termination of employment of 
                IRS employees for misconduct (sec. 126 of the 
                bill and new sec. 7804A of the Code).............    18
            7. Expand IRS Oversight Board authority (sec. 127 of 
                the bill and sec. 7802 of the Code)..............    19
            8. IRS Oversight Board approval of use of critical 
                pay authority (sec. 128 of the bill and sec. 7802 
                of the Code).....................................    21
            9. Low-income taxpayer clinics (sec. 129 of the bill 
                and new sec. 7526A of the Code)..................    21
            10. Taxpayer access to financial institutions (sec. 
                130 of the bill).................................    22
            11. Enrolled agents (sec. 131 of the bill and new 
                sec. 7529 of the Code)...........................    23
            12. Establishment of disaster response team (sec. 132 
                of the bill and sec. 7803 of the Code)...........    23
            13. Study of accelerated tax refunds (sec. 133 of the 
                bill)............................................    24
            14. Study of clarifying recordkeeping 
                responsibilities (sec. 134 of the bill)..........    24
            15. Streamline reporting process for National 
                Taxpayer Advocate (sec. 135 of the bill and sec. 
                7803 of the Code)................................    25
            16. IRS Free File program (sec. 136 of the bill).....    26
            17. Modification of TIGTA reporting requirements 
                (sec. 137 of the bill and sec. 7803 of the Code).    26
            18. Study of IRS accounts receivable (sec. 138 of the 
                bill)............................................    27
            19. Electronic commerce advisory group (sec. 139 of 
                the bill and sec. 2001 of the Internal Revenue 
                Service Restructuring and Reform Act of 1998)....    28
            20. Study of modifications to Schedules L and M-1 
                (sec. 140 of the bill)...........................    28
            21. Regulation of Federal income tax return preparers 
                and refund anticipation loan providers (sec. 141 
                of the bill and new sec. 7530 of the Code).......    30
        C. Other Provisions......................................    31
            1. Penalty for failure to report interests in foreign 
                financial accounts (sec. 151 of the bill and sec. 
                5321 of Title 31, United States Code)............    31
            2. Repeal of application of below-market loan rules 
                to amounts paid to certain continuing care 
                facilities (sec. 152 of the bill and sec. 7872 of 
                the Code)........................................    32
    Title II.--Reform of Penalty and Interest........................35
        A. Individual Estimated Tax (sec. 201 of the bill and 
            sec. 6654 of the Code)...............................    35
            1. Increase estimated tax threshold..................    35
            2. Apply one interest rate per estimated tax 
                underpayment period for individuals, estates, and 
                trusts...........................................    36
            3. Provide that underpayment balances are cumulative.    36
            4. Require 365-day year for all estimated tax 
                interest calculations for individuals, estates, 
                and trusts.......................................    37
        B. Corporate Estimated Tax (sec. 202 of the bill and sec. 
            6655 of the Code)....................................    38
        C. Increase in Large Corporation Threshold for Estimated 
            Tax Payments (sec. 203 of the bill and sec. 6655 of 
            the Code)............................................    38
        D. Abatement of Interest (sec. 204 of the bill and sec. 
            6404 of the Code)....................................    39
        E. Deposits Made To Suspend the Running of Interest on 
            Potential Underpayments (sec. 205 of the bill and new 
            sec. 6603 of the Code)...............................    41
        F. Freeze of Provision Regarding Suspension of Interest 
            Where Secretary Fails To Contact Taxpayer (sec. 206 
            of the bill and sec. 6404 of the Code)...............    44
        G. Clarification of Application of Federal Tax Deposit 
            Penalty (sec. 207 of the bill).......................    45
        H. Frivolous Tax Returns and Submissions (sec. 208 of the 
            bill and sec. 6702 of the Code)......................    45
        I. Extension of Notice Requirements With Respect to 
            Interest and Penalty Calculations (sec. 209 of the 
            bill and secs. 3306 and 3308 of the Internal Revenue 
            Service Restructuring and Reform Act of 1998)........    46
        J. Expansion of Interest Netting (sec. 210 of the bill 
            and sec. 6621 of the Code)...........................    47
    Title III.--United States Tax Court Modernization................48
        A. Consolidate Review of Collection Due Process Cases in 
            the Tax Court (sec. 301 of the bill and sec. 6330 of 
            the Code)............................................    48
        B. Extend Authority for Special Trial Judges To Hear and 
            Decide Certain Employment Status Cases (sec. 302 of 
            the bill and sec. 7443A of the Code).................    49
        C. Confirmation of Tax Court Authority To Apply Equitable 
            Recoupment (sec. 303 of the bill and sec. 6214 of the 
            Code)................................................    50
        D. Tax Court Filing Fee (sec. 304 of the bill and sec. 
            7451 of the Code)....................................    51
        E. Appointment of Tax Court Employees (sec. 305 of the 
            bill and sec. 7471(a) of the Code)...................    51
        F. Use of Practitioner Fee (sec. 306 of the bill and sec. 
            7475 of the Code)....................................    53
        G. Tax Court Pension and Compensation....................    54
            1. Judges of the Tax Court (secs. 311-317 and 323 of 
                the bill and secs. 7443, 7447, 7448, and 7472 of 
                the Code)........................................    54
            2. Special trial judges of the Tax Court (secs. 318-
                323 of the bill and sec. 7448 and new secs. 
                7443A, 7443B, and 7443C of the Code).............    56
    Title IV.--Confidentiality and Disclosure........................59
        A. Clarification of Definition of Church Tax Inquiry 
            (sec. 401 of the bill and sec. 7611 of the Code).....    59
        B. Collection Activities with Respect to a Joint Return 
            Disclosable to Either Spouse Based on Oral Request 
            (sec. 402 of the bill and sec. 6103 of the Code).....    60
        C. Taxpayer Representatives Not Subject to Examination on 
            Sole Basis of Representation of Taxpayers (sec. 403 
            of the bill and sec. 6103 of the Code)...............    61
        D. Prohibition of Disclosure of Taxpayer Identification 
            Information With Respect to Disclosure of Accepted 
            Offers-in-Compromise (sec. 404 of the bill and sec. 
            6103 of the Code)....................................    62
        E. Compliance by Contractors With Confidentiality 
            Safeguards (sec. 405 of the bill and sec. 6103 of the 
            Code)................................................    63
        F. Higher Standards for Requests for and Consents to 
            Disclosure (sec. 406 of the bill and sec. 6103 of the 
            Code)................................................    65
        G. Civil Damage Remedies for Unauthorized Disclosure or 
            Inspection (sec. 407 of the bill and sec. 7431 of the 
            Code)................................................    68
        H. Expanded Disclosure in Emergency Circumstances (sec. 
            408 of the bill and sec. 6103 of the Code)...........    70
        I. Disclosure of Taxpayer Identity for Tax Refund 
            Purposes (sec. 409 of the bill and sec. 6103 of the 
            Code)................................................    70
        J. Disclosure to State Officials of Proposed Actions 
            Related to Section 501(c) Organizations (sec. 410 of 
            the bill and sec. 6104 of the Code)..................    71
        K. Treatment of Public Records (sec. 411 of the bill and 
            sec. 6103 of the Code)...............................    74
        L. Employee Identity Disclosures (sec. 412 of the bill 
            and sec. 6103 of the Code)...........................    75
        M. Taxpayer Identification Number Matching (sec. 413 of 
            the bill and sec. 6103 of the Code)..................    77
        N. Form 8300 Disclosures (sec. 414 of the bill and sec. 
            6103 of the Code)....................................    77
        O. Disclosure to Law Enforcement Agencies Regarding 
            Terrorist Activities (sec. 415 of the bill and sec. 
            6103 of the Code)....................................    78
    Title V.--Simplification.........................................79
        A. Establish Uniform Definition of a Qualifying Child 
            (secs. 501 through 508 of the bill and secs. 2, 21, 
            24, 32, 151, and 152 of the Code)....................    79
        B. Simplification Through Elimination of Inoperative 
            Provisions (sec. 511 of the bill)....................    89
    Title VI.--Revenue Raisers.......................................90
        A. Provisions Designed to Curtail Tax Shelters...........    90
            1. Penalty for failing to disclose reportable 
                transaction (sec. 601 of the bill and sec. 6707A 
                of the Code).....................................    90
            2. Accuracy-related penalty for listed transactions 
                and other reportable transactions having a 
                significant tax avoidance purpose (sec. 602 of 
                the bill and sec. 6662A of the Code).............    93
            3. Modifications of substantial understatement 
                penalty for nonreportable transactions (sec. 603 
                of the bill and sec. 6662 of the Code)...........    97
            4. Tax shelter exception to confidentiality 
                privileges relating to taxpayer communications 
                (sec. 604 of the bill and sec. 7525 of the Code).    98
            5. Disclosure of reportable transactions (sec. 605 of 
                the bill and secs. 6111 and 6707 of the Code)....    99
            6. Modification of penalties for failure to register 
                tax shelters or maintain lists of investors 
                (secs. 606 and 607 of the bill and secs. 6707 and 
                6708 of the Code)................................   102
            7. Modification of actions to enjoin certain conduct 
                related to tax shelters and reportable 
                transactions (sec. 608 of the bill and sec. 7408 
                of the Code).....................................   104
            8. Understatement of taxpayer's liability by income 
                tax return preparer (sec. 609 of the bill and 
                sec. 6694 of the Code)...........................   104
            9. Regulation of individuals practicing before the 
                Department of Treasury (sec. 610 of the bill and 
                sec. 330 of Title 31, United States Code)........   105
            10. Penalty on promoters of tax shelters (sec. 611 of 
                the bill and sec. 6700 of the Code)..............   106
            11. Statute of limitations for taxable years for 
                which required listed transactions not disclosed 
                (sec. 612 of the bill and sec. 6501 of the Code).   107
            12. Denial of deduction for interest on underpayments 
                attributable to tax-motivated transactions (sec. 
                613 of the bill and sec. 163 of the Code)........   108
            13. Authorization of appropriations for tax law 
                enforcement (sec. 614 of the bill)...............   109
        B. Other Corporate Governance Provisions.................   109
            1. Affirmation of consolidated return regulation 
                authority (sec. 621 of the bill and sec. 1502 of 
                the Code)........................................   109
            2. Chief Executive Officer required to sign 
                declaration with respect to corporate income tax 
                returns (sec. 622 of the bill)...................   113
            3. Denial of deduction for certain fines, penalties, 
                and other amounts (sec. 623 of the bill and sec. 
                162 of the Code).................................   115
            4. Denial of deduction for punitive damages (sec. 624 
                of the bill and sec. 162 of the Code)............   117
            5. Increase the maximum criminal fraud penalty for 
                individuals to the amount of the tax at issue 
                (sec. 625 of the bill and secs. 7201, 7203, and 
                7206 of the Code)................................   118
            6. Doubling of certain penalties, fines, and interest 
                on underpayments related to certain offshore 
                financial arrangements (sec. 626 of the bill)....   120
        C. Extension of IRS User Fees (sec. 631 of the bill and 
            sec. 7528 of the Code)...............................   123
II. Budget Effects of the Bill......................................124
        A. Committee Estimates...................................   124
        B. Budget Authority and Tax Expenditures.................   130
        C. Consultation With Congressional Budget Office.........   130
III.Votes of the Committee..........................................130

IV. Regulatory Impact and Other Matters.............................130
        A. Regulatory Impact.....................................   130
        B. Unfunded Mandates Statement...........................   131
        C. Tax Complexity Analysis...............................   131
 V. Changes in Existing Law Made by the Bill as Reported............131

                       I. LEGISLATIVE BACKGROUND


Overview

    The Senate Committee on Finance marked up S. 882, the ``Tax 
Administration Good Government Act,'' on February 2, 2004, and 
ordered the bill, with an amendment in the nature of a 
substitute, favorably reported by voice vote.

Hearings

    During the 108th Congress, the Committee held hearings on 
various topics relating to the provisions of the bill, as 
follows:
     October 21, 2003, Tax Shelters: Who's Buying, 
Who's Selling and What's the Government Doing About It?
     May 20, 2003, Joint Review of the Strategic Plans 
and Budget of the Internal Revenue Service, 2003.
     April 1, 2003, Taxpayer Alert: Choosing a Paid 
Preparer and the Pitfalls of Charitable Car Donation.
     February 13, 2003, Enron: The Joint Committee on 
Taxation's Investigative Report.
    During the 107th Congress, the Committee held hearings on 
various topics relating to the provisions of the bill, as 
follows:
     May 14, 2002, Joint Review of the Strategic Plans 
and Budget of the Internal Revenue Service, 2002.
     April 11, 2002, Schemes, Scams and Cons, Part II: 
The IRS Strikes Back.
     March 21, 2002, Corporate Tax Shelters: Looking 
Under the Roof.
     May 8, 2001, Joint Review of the Strategic Plans 
and Budget of the Internal Revenue Service, 2001.
     April 5, 2001, Oversight of the Internal Revenue 
Service ``Taxpayer Beware: Schemes, Scams and Cons.''

  TITLE I.--IMPROVEMENTS IN TAX ADMINISTRATION AND TAXPAYER SAFEGUARDS


         A. Improve Efficiency and Safeguards in IRS Collection


1. Waiver of user fee for installment agreements using automated 
        withdrawals (sec. 101 of the bill and sec. 6159 of the Code)

                              PRESENT LAW

    The Code authorizes the IRS to enter into written 
agreements with any taxpayer under which the taxpayer is 
allowed to pay taxes owed, as well as interest and penalties, 
in installment payments if the IRS determines that doing so 
will facilitate collection of the amounts owed (sec. 6159). An 
installment agreement does not reduce the amount of taxes, 
interest, or penalties owed. Generally, during the period 
installment payments are being made, other IRS enforcement 
actions (such as levies or seizures) with respect to the taxes 
included in that agreement are held in abeyance.
    The IRS charges a $43 user fee if a request for an 
installment agreement is approved.\1\
---------------------------------------------------------------------------
    \1\ See Form 9465; Treas. Reg. see. 300.1.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

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

                             EFFECTIVE DATE

    The provision is effective for agreements entered into on 
or after 180 days after the date of enactment.

2. Authorize IRS to enter into installment agreements that provide for 
        partial payment (sec. 102 of the bill and sec. 6159 of the 
        Code)

                              PRESENT LAW

    The Code authorizes the IRS to enter into written 
agreements with any taxpayer under which the taxpayer is 
allowed to pay taxes owed, as well as interest and penalties, 
in installment payments if the IRS determines that doing so 
will facilitate collection of the amounts owed (sec. 6159). An 
installment agreement does not reduce the amount of taxes, 
interest, or penalties owed. Generally, during the period 
installment payments are being made, other IRS enforcement 
actions (such as levies or seizures) with respect to the taxes 
included in that agreement are held in abeyance.
    Prior to 1998, the IRS administratively entered into 
installment agreements that provided for partial payment 
(rather than full payment) of the total amount owed over the 
period of the agreement. In that year, the IRS Chief Counsel 
issued a memorandum concluding that partial payment installment 
agreements were not permitted.

                           REASONS FOR CHANGE

    According to the Department of the Treasury, at the end of 
fiscal year 2003, the IRS had not pursued 2.25 million cases 
totaling more than $16.5 billion in delinquent taxes. The 
Committee believes that clarifying that the IRS is authorized 
to enter into installment agreements with taxpayers that do not 
provide for full payment of the taxpayer's liability over the 
life of the agreement will improve effective tax 
administration.
    The Committee recognizes that some taxpayers are unable or 
unwilling to enter into a realistic offer-in-compromise. The 
Committee believes that these taxpayers should be encouraged to 
make partial payments toward resolving their tax liability, and 
that providing for partial payment installment agreements will 
help facilitate this. The Committee also believes, however, 
that the offer-in-compromise program should remain the sole 
avenue via which taxpayers fully resolve their tax liabilities 
and attain a fresh start.

                        EXPLANATION OF PROVISION

    The provision clarifies that the IRS is authorized to enter 
into installment agreements with taxpayers which do not provide 
for full payment of the taxpayer's liability over the life of 
the agreement. The provision also requires the IRS to review 
partial payment installment agreements at least every two 
years. The primary purpose of this review is to determine 
whether the financial condition of the taxpayer has 
significantly changed so as to warrant an increase in the value 
of the payments being made.

                             EFFECTIVE DATE

    The provision is effective for installment agreements 
entered into on or after the date of enactment.

3. Termination of installment agreements (sec. 103 of the bill and sec. 
        6159 of the Code)

                              PRESENT LAW

    The Code authorizes the IRS to enter into written 
agreements with any taxpayer under which the taxpayer is 
allowed to pay taxes owed, as well as interest and penalties, 
in installment payments, if the IRS determines that doing so 
will facilitate collection of the amounts owed (sec. 6159). An 
installment agreement does not reduce the amount of taxes, 
interest, or penalties owed. Generally, during the period 
installment payments are being made, other IRS enforcement 
actions (such as levies or seizures) with respect to the taxes 
included in that agreement are held in abeyance.
    Under present law, the IRS is permitted to terminate an 
installment agreement only \2\ if: (1) the taxpayer fails to 
pay an installment at the time the payment is due; (2) the 
taxpayer fails to pay any other tax liability at the time when 
such liability is due; (3) the taxpayer fails to provide a 
financial condition update as required by the IRS; (4) the 
taxpayer provides inadequate or incomplete information when 
applying for an installment agreement; (5) there has been a 
significant change in the financial condition of the taxpayer; 
or (6) the collection of the tax is in jeopardy.\3\
---------------------------------------------------------------------------
    \2\ Sec. 6159(b)(1).
    \3\ Sec. 6159(b)(2), (3), and (4).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

    The provision grants the IRS authority to terminate an 
installment agreement when a taxpayer fails to timely make a 
required Federal tax deposit \4\ or fails to timely file a tax 
return (including extensions). The termination could occur even 
if the taxpayer remained current with payments under the 
installment agreement.
---------------------------------------------------------------------------
    \4\ Failure to timely make a required Federal tax deposit is not 
considered to be a failure to pay any other tax liability at the time 
such liability is due under section 6159(b)(4)(B) because liability for 
tax generally does not accrue until the end of the taxable period, and 
deposits are required to be made prior to that date (sec. 6302).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

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

4. Office of Chief Counsel review of offers-in-compromise (sec. 104 of 
        the bill and sec. 7122 of the Code)

                              PRESENT LAW

    The IRS has the authority to settle a tax debt pursuant to 
an offer-in-compromise. IRS regulations provide that such 
offers can be accepted if the taxpayer is unable to pay the 
full amount of the tax liability and it is doubtful that the 
tax, interest, and penalties can be collected or there is doubt 
as to the validity of the actual tax liability. Amounts of 
$50,000 or more can only be accepted if the reasons for the 
acceptance are documented in detail and supported by a written 
opinion from the IRS Chief Counsel (sec. 7122).

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

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

                             EFFECTIVE DATE

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

5. Permit the IRS to require increased electronic filing of returns 
        prepared by paid return preparers (sec. 105 of the bill and 
        sec. 6011 of the Code)

                              PRESENT LAW

    The Code authorizes the IRS to issue regulations specifying 
which returns must be filed electronically.\5\ There are 
several limitations on this authority. First, it can only apply 
to persons required to file at least 250 returns during the 
year.\6\ Second, the IRS is prohibited from requiring that 
income tax returns of individuals, estates, and trusts be 
submitted in any format other than paper (although these 
returns may by choice be filed electronically).
---------------------------------------------------------------------------
    \5\ Sec. 6011(e).
    \6\ Partnerships with more than 100 partners are required to file 
electronically.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Congress set a goal for the IRS to have 80 percent of 
tax returns filed electronically by 2007. The Committee 
understands that an overwhelming number of tax returns are 
already prepared electronically. Thus, the Committee believes 
that expanding the scope of returns that are prepared by paid 
return preparers and that are required to be filed 
electronically is necessary for the IRS to meet the 80 percent 
goal set by the Congress and will improve tax administration.

                        EXPLANATION OF PROVISION

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

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

6. Place threshold on tolling of statute of limitations during review 
        by Taxpayer Advocate Service (sec. 106 of the bill and sec. 
        7811 of the Code)

                              PRESENT LAW

    Taxpayers suffering significant hardship may request that 
the Office of the Taxpayer Advocate issue a Taxpayer Assistance 
Order, which requires the IRS to take (or refrain from taking) 
specified actions (sec. 7811). The statute of limitations is 
suspended for the period beginning on the date of the 
taxpayer's application and ending on the date of the decision 
by the National Taxpayer Advocate.

                           REASONS FOR CHANGE

    The Committee believes that the administration of this 
suspension of the statute of limitations adds unnecessary 
complexity to the Taxpayer Assistance Order process when the 
National Taxpayer Advocate renders a decision within a short 
period of time. The Committee believes the Taxpayer Assistance 
Order process would be improved by disregarding relatively 
short periods of review by the Taxpayer Advocate.

                        EXPLANATION OF PROVISION

    The provision modifies this suspension of statute of 
limitations by applying it only if the date of the decision by 
the National Taxpayer Advocate is at least 7 days after the 
date of the taxpayer's application.

                             EFFECTIVE DATE

    The provision is effective for applications filed after the 
date of enactment.

7. Increase in penalty for bad checks and money orders (sec. 107 of the 
        bill and sec. 6657 of the Code)

                              PRESENT LAW

    The Code\7\ imposes a penalty for bad checks and money 
orders on the person who tendered it. The penalty is two 
percent of the amount of the bad check or money order. The 
minimum penalty is $15 (or, if less, the amount of the check), 
applicable to checks that are less than $750.
---------------------------------------------------------------------------
    \7\ Sec. 6657.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to increase 
the minimum amount of this penalty so that it is more 
consistent with amounts charged by the private sector for bad 
checks.

                        EXPLANATION OF PROVISION

    The provision increases the minimum penalty to $25 (or, if 
less, the amount of the check), applicable to checks that are 
less than $1,250.

                             EFFECTIVE DATE

    The provision applies to checks or money orders received 
after the date of enactment.

8. Extend time limit for contesting IRS levy (sec. 108 of the bill and 
        sec. 6343 of the Code)

                              PRESENT LAW

    The IRS is authorized to return property that has been 
wrongfully or mistakenly levied upon (sec. 6343). In general, 
monetary proceeds may be returned within 9 months of the date 
of the levy.

                           REASONS FOR CHANGE

    The Committee understands that in many cases this 9-month 
period may be insufficient for taxpayers or third parties to 
discover a wrongful or mistaken levy and seek to remedy it. 
Accordingly, the Committee believes it is appropriate to 
provide for a longer period of time within which a person may 
contest a wrongful IRS levy.

                        EXPLANATION OF PROVISION

    The provision extends this 9-month period to 2 years.

                             EFFECTIVE DATE

    The provision is effective with respect to: (1) Levies made 
after the date of enactment; and (2) levies made on or before 
the date of enactment provided that the 9-month period has not 
expired as of the date of enactment.

9. Individuals held harmless on improper levy on individual retirement 
        plan (sec. 109 of the bill and sec. 6343 of the Code)

                              PRESENT LAW

    Distributions from an individual retirement arrangement 
(``IRA'') made on account of an IRS levy are includible in the 
gross income of the individual under the rules applicable to 
the IRA subject to the levy. Thus, in the case of a traditional 
IRA, the amount distributed as a result of a levy is includible 
in gross income except to the extent such amount represents a 
return of nondeductible contributions (i.e., basis). In the 
case of a Roth IRA, earnings on a distribution are excludable 
from gross income if the distribution is made: (1) After the 
five-taxable year period beginning with the first taxable year 
for which the individual made a contribution to a Roth IRA; and 
(2) after attainment of age 59\1/2\ or on account of certain 
other circumstances. Amounts withdrawn from an IRA due to a 
levy are not subject to the 10 percent early withdrawal tax, 
regardless of whether the amount is includible in income.
    Present law provides rules under which the IRS returns 
amounts subject to an incorrect levy. For example, amounts 
withdrawn from an IRA pursuant to a levy are returned to the 
individual owning the IRA in the case of a wrongful levy or if 
the levy was not in accordance with IRS administrative 
procedures. In the case of a wrongful levy, the IRS is required 
to pay interest on the amount returned to the individual at the 
overpayment rate. The IRS is not required to pay interest if 
the levy was not in accordance with IRS administrative 
procedures.
    Present law does not provide special rules to allow an 
individual to recontribute to an IRA amounts withdrawn from an 
IRA pursuant to a levy and later returned to the individual by 
the IRS (or interest thereon). Thus, if an individual wishes to 
contribute such returned amounts to an IRA, the contribution is 
subject to the normally applicable rules for IRA contributions.

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

    Under the provision, an individual is able to recontribute 
to an IRA amounts withdrawn pursuant to a levy and returned by 
the IRS (and any interest thereon) within 60 days of receipt 
bythe individual, without regard to the normally applicable limits on 
IRA contributions and rollovers. The provision applies to levied 
amounts returned to the individual because the levy (1) was wrongful or 
(2) is determined to be premature or otherwise not in accordance with 
administrative procedures. The contribution has to be made to the same 
type of IRA from which the amounts were withdrawn.
    Under the provision, the IRS is required to pay interest on 
amounts returned to the individual at the overpayment rate in 
the case of a levy that is determined to be premature or 
otherwise not in accordance with administrative procedures (as 
well as in the case of a wrongful levy under present law). 
Interest paid by the IRS on the amount returned to the 
individual and contributed to the IRA is treated as part of the 
distribution made from the IRA on account of the levy and is 
not includible in gross income. In addition, any tax 
attributable to an amount distributed from an IRA by reason of 
a levy is abated if the amount is recontributed to an IRA 
pursuant to the provision.

                             EFFECTIVE DATE

    The provision is effective for levied amounts (and interest 
thereon) returned to individuals after December 31, 2004.

10. Allow the Financial Management Service to retain transaction fees 
        from levied amounts (sec. 110 of the bill)

                              PRESENT LAW

    To facilitate the collection of tax, the IRS can generally 
levy upon all property and rights to property of a taxpayer 
(sec. 6331). With respect to specified types of recurring 
payments, the IRS may impose a continuous levy of up to 15 
percent of each payment, which generally continues in effect 
until the liability is paid (sec. 6331(h)). Continuous levies 
imposed by the IRS on specified Federal payments are 
administered by the Financial Management Service (FMS) of the 
Department of the Treasury. FMS is generally responsible for 
making most non-defense related Federal payments. FMS is 
required to charge the IRS for the costs of developing and 
operating this continuous levy program. The IRS pays these FMS 
charges out of its appropriations.

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

    The provision allows FMS to retain a portion of the levied 
funds as payment of these FMS fees. The amount credited to the 
taxpayer's account would not, however, be reduced by this fee.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

11. Elimination on restriction on offsetting refunds from former 
        residents (sec. 111 of the bill and sec. 6402 of the Code)

                              PRESENT LAW

    Overpayments of Federal tax may be used to pay past-due 
child support and debts owed to Federal agencies, without the 
consent of the taxpayer.\8\ Overpayments of Federal tax may 
also be used to pay specified past-due, legally enforceable 
State income tax debts, provided that the person making the 
Federal tax overpayment has shown on the Federal tax return for 
the taxable year of the overpayment an address that is within 
the State seeking the tax offset.
---------------------------------------------------------------------------
    \8\ Sec. 6402.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

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

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                      B. Processing and Personnel


1. Information regarding statute of limitations (sec. 121 of the bill)

                              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). A refund claim 
that is not filed within these time periods is rejected as 
untimely.
    A special rule applies during periods of disability. 
Equitable tolling of the statute of limitations for refund 
claims of an individual taxpayer applies during any period in 
which an individual 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. 
Equitable 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.
    There is no requirement that IRS publications contain 
information that both describes this statute of limitations 
provision and explains the consequences of failing to file 
within the time period prescribed by the statute of 
limitations.

                           REASONS FOR CHANGE

    Some taxpayers who are due refunds fail to file tax returns 
by the due date. Several years later they realize that they owe 
additional taxes to the IRS for that later year and attempt to 
offset the amount that they owe against the refund that they 
were due for the earlier year. They are unable to do so, 
however, if their claim for the refund is filed beyond the 
statutorily specified deadline. The Committee recognizes that, 
in general, statutes of limitations promote important policy 
goals of repose and certainty. The Committee also believes that 
it is important that taxpayers be adequately informed of the 
operation of these provisions so that they are not 
inadvertently disadvantaged by consequences that they did not 
foresee.

                        EXPLANATION OF PROVISION

    The provision requires the IRS to revise Publication 1 
(``Your Rights as a Taxpayer'') by adding an explanation of the 
consequences of failing to file within the time period 
prescribed by the statute of limitations to the section on 
refunds that describes the statute of limitations. The 
provision also requires the IRS to revise the instructions that 
accompany all of the Form 1040 packages (including 1040A and 
1040EZ) in a similar manner to add a description of this 
statute of limitations and an explanation of the consequences 
of failing to file within the time period prescribed by the 
statute of limitations.

                             EFFECTIVE DATE

    The revisions to Publication 1 are required to be made as 
soon as practicable, but not later than 180 days after the date 
of enactment. The revisions to the Form 1040 instructional 
packages are required to be made for instructions for taxable 
years beginning after December 31, 2004.

2. Annual report on IRS performance measures (sec. 122 of the bill and 
        sec. 7803 of the Code)

                              PRESENT LAW

    There is no specific statutory requirement that the IRS 
Commissioner provide annual reports on performance measures.

                           REASONS FOR CHANGE

    In the 2002 Report of the IRS Oversight Board: Assessment 
of the IRS and the Tax System, the IRS set forth the current 
state of the IRS, the tax administration system, as well as the 
opportunities and challenges that the agency faces. The 
Committee believes that such a report provided on an annual 
basis will meet several needs, including: (1) it will assist 
Congress in holding the IRS and the IRS Commissioner 
accountable, (2) it will give senior management an opportunity 
to state publicly, and in concrete terms, the agency's 
performance goals, and (3) it will serve as a useful reference 
guide for IRS stakeholders. The Committee believes that 
requiring the IRS to report on performance measures, levels, 
and goals, will improve the administration of the tax system.

                        EXPLANATION OF PROVISION

    The provision statutorily requires that the IRS 
Commissioner provide annual reports, on a fiscal year basis, to 
the IRS Oversight Board and to the Congress on performance 
measures. The report must include specific target performance 
goals (including volume projections) for a five-year period 
against which to measure the IRS's performance. For each 
performance goal, the report must include comparisons between 
the target performance level and the actual performance level. 
The report must include a narrative explaining how the IRS 
plans to meet each performance goal. If the IRS fails to meet a 
performance goal, the IRS must explain why. In general, the 
performance goals must cover the following areas: public 
evaluation of the IRS, customer service, compliance, and 
management initiatives. The report must also include a 
narrative regarding the level of the IRS workload and the 
resources available to IRS. The report is due by December 31 of 
each year, covering the preceding fiscal year.

                             EFFECTIVE DATE

    The provision is effective for fiscal year 2004 and 
thereafter.

3. Disclosure of tax information to facilitate combined employment tax 
        reporting (sec. 123 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Traditionally, Federal tax forms are filed with the Federal 
government and State tax forms are filed with individual 
States. This necessitates duplication of items common to both 
returns.
    The Taxpayer Relief Act of 1997 \9\ permitted 
implementation of a demonstration project to assess the 
feasibility and desirability of expanding combined Federal and 
State reporting. There were several limitations on the 
demonstration project. First, it was limited to the sharing of 
information between the State of Montana and the IRS. Second, 
it was limited to employment tax reporting. Third, it was 
limited to disclosure of the name, address, TIN, and signature 
of the taxpayer, which is information common to both the 
Montana and Federal portions of the combined form. Fourth, it 
was limited to a period of five years.
---------------------------------------------------------------------------
    \9\ Sec. 976; P.L. 105-34; August 5, 1997.
---------------------------------------------------------------------------
    The authority for the demonstration project expired on the 
date five years after the date of enactment (August 5, 2002).

                           REASONS FOR CHANGE

    The Committee believes that combined employment tax 
reporting eliminates filing duplication, allowing for a more 
technologically efficient transmission of data, and reducing 
taxpayer burden. The Committee also believes that combined 
employment tax reporting will increase electronic filing.

                        EXPLANATION OF PROVISION

    The provision amends the Code to provide permanent 
authority for any State to participate in a combined Federal 
and State employment tax reporting program, provided that the 
program has been approved by the Secretary.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

4. Extension of declaratory judgment procedures to non-501(c)(3) tax-
        exempt organizations (sec. 124 of the bill and sec. 7428 of the 
        Code)

                              PRESENT LAW

    In order for an organization to be granted tax exemption as 
a charitable entity described in section 501(c)(3), it 
generally must file an application for recognition of exemption 
with the IRS and receive a favorable determination of its 
status. Similarly, for most organizations, a charitable 
organization's eligibility to receive tax-deductible 
contributions is dependent upon its receipt of a favorable 
determination from the IRS. In general, a section 501(c)(3) 
organization can rely on a determination letter or ruling from 
the IRS regarding its tax-exempt status, unless there is a 
material change in its character, purposes, or methods of 
operation. In cases in which an organization violates one or 
more of the requirements for tax exemption under section 
501(c)(3), the IRS is authorized to revoke an organization's 
tax exemption, notwithstanding an earlier favorable 
determination.
    In situations in which the IRS denies an organization's 
application for recognition of exemption under section 
501(c)(3) or fails to act on such application, or in which the 
IRS informs a section 501(c)(3) organization that it is 
considering revoking or adversely modifying its tax-exempt 
status, present law authorizes the organization to seek a 
declaratory judgment regarding its tax status (sec. 7428). 
Section 7428 provides a remedy in the case of a dispute 
involving a determination by the IRS with respect to: (1) the 
initial qualification or continuing qualification of an 
organization as a charitable organization for tax exemption 
purposes or for charitable contribution deduction purposes; (2) 
the initial classification or continuing classification of an 
organization as a private foundation; (3) the initial 
classification or continuing classification of an organization 
as a private operating foundation; or (4) the failure of the 
IRS to make a determination with respect to (1), (2), or (3). A 
``determination'' in this context generally means a final 
decision by the IRS affecting the tax qualification of a 
charitable organization, although it also can include a 
proposed revocation of an organization's tax-exempt status or 
public charity classification. Section 7428 vests jurisdiction 
over controversies involving such a determination in the U.S. 
District Court for the District of Columbia, the U.S. Court of 
Federal Claims, and the U.S. Tax Court.
    Prior to utilizing the declaratory judgment procedure, an 
organization must have exhausted all administrative remedies 
available to it within the IRS. An organization is deemed to 
have exhausted its administrative remedies at the expiration of 
270 days after the date on which the request for a 
determination was made if the organization has taken, in a 
timely manner, all reasonable steps to secure such 
determination.
    If an organization (other than a section 501(c)(3) 
organization) files an application for recognition of exemption 
and receives a favorable determination from the IRS, the 
determination of tax-exempt status is usually effective as of 
the date of formation of the organization if its purposes and 
activities during the period prior to the date of the 
determination letter were consistent with the requirements for 
exemption. However, if the organization files an application 
for recognition of exemption and later receives an adverse 
determination from the IRS, the IRS may assert that the 
organization is subject to tax on some or all of its income for 
open taxableyears. In addition, as with charitable 
organizations, the IRS may revoke or modify an earlier favorable 
determination regarding an organization's tax-exempt status.
    Under present law, a non-charity (i.e., an organization not 
described in section 501(c)(3)) may not seek a declaratory 
judgment with respect to an IRS determination regarding its 
tax-exempt status. The only remedies available to such an 
organization are to petition the U.S. Tax Court for relief 
following the issuance of a notice of deficiency or to pay any 
tax owed and sue for refund in Federal district court or the 
U.S. Court of Federal Claims.

                           REASONS FOR CHANGE

    The Committee believes that it is important to provide 
certainty for organizations that have sought a determination of 
their tax-exempt status. Thus, the Committee finds it 
appropriate to extend the present-law declaratory judgment 
procedures to all organizations that apply for tax-exempt 
status as organizations described in section 501(c) and (d).

                        DESCRIPTION OF PROVISION

    The provision extends declaratory judgment procedures 
similar to those currently available only to charities under 
section 7428 to other section 501(c) and 501(d) determinations. 
The provision limits jurisdiction over controversies involving 
such other determinations to the United States Tax Court.\10\
---------------------------------------------------------------------------
    \10\ This limitation currently applies to declaratory judgments 
relating to tax qualification for certain employee retirement plans 
(sec. 7476).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The extension of the declaratory judgment procedures to 
organizations other than section 501(c)(3) organizations is 
effective for pleadings filed with respect to determinations 
(or requests for determinations) made after December 31, 2004.

5. Amendment to Treasury auction reforms (sec. 125 of the bill and sec. 
        202 of the Government Securities Act Amendments of 1993)

                              PRESENT LAW

    Members of the Treasury Borrowing Advisory Committee are 
prohibited from disclosing anything relating to the securities 
to be auctioned in a midquarter refunding by the Secretary 
until the Secretary makes a public announcement of the 
refunding.

                           REASONS FOR CHANGE

    The Committee believes that permitting disclosure upon the 
release by the Secretary of the minutes of the meeting 
accomplishes the goals of the present-law restrictions without 
needlessly hindering the members of the advisory committee.

                        EXPLANATION OF PROVISION

    The provision permits earlier disclosure upon the release 
by the Secretary of the minutes of the meeting.

                             EFFECTIVE DATE

    The provision applies to meetings held after the date of 
enactment.

6. Revisions relating to termination of employment of IRS employees for 
        misconduct (sec. 126 of the bill and new sec. 7804A of the 
        Code)

                              PRESENT LAW

    Section 1203 of the IRS Restructuring and Reform Act of 
1998 requires the IRS to terminate an employee for certain 
proven violations committed by the employee in connection with 
the performance of official duties. The violations include: (1) 
willful failure to obtain the required approval signatures on 
documents authorizing the seizure of a taxpayer's home, 
personal belongings, or business assets; (2) providing a false 
statement under oath material to a matter involving a taxpayer; 
(3) with respect to a taxpayer, taxpayer representative, or 
other IRS employee, the violation of any right under the U.S. 
Constitution, or any civil right established under titles VI or 
VII of the Civil Rights Act of 1964, title IX of the 
Educational Amendments of 1972, the Age Discrimination in 
Employment Act of 1967, the Age Discrimination Act of 1975, 
sections 501 or 504 of the Rehabilitation Act of 1973 and title 
I of the Americans with Disabilities Act of 1990; (4) 
falsifying or destroying documents to conceal mistakes made by 
any employee with respect to a matter involving a taxpayer or a 
taxpayer representative; (5) assault or battery on a taxpayer 
or other IRS employee, but only if there is a criminal 
conviction or a final judgment by a court in a civil case, with 
respect to the assault or battery; (6) violations of the 
Internal Revenue Code, Treasury Regulations, or policies of the 
IRS (including the Internal Revenue Manual) for the purpose of 
retaliating or harassing a taxpayer or other IRS employee; (7) 
willful misuse of section 6103 for the purpose of concealing 
data from a Congressional inquiry; (8) willful failure to file 
any tax return required under the Code on or before the due 
date (including extensions) unless failure is due to reasonable 
cause; (9) willful understatement of Federal tax liability, 
unless such understatement is due to reasonable cause; and (10) 
threatening to audit a taxpayer for the purpose of extracting 
personal gain or benefit.
    Section 1203 also provides non-delegable authority to the 
Commissioner to determine that mitigating factors exist, that, 
in the Commissioner's sole discretion, mitigate against 
terminating the employee. The Commissioner, in his sole 
discretion, may establish a procedure to determine whether an 
individual should be referred for such a determination by the 
Commissioner.

                           REASONS FOR CHANGE

    The Committee understands that two of the violations under 
present law have resulted in unintended consequences. First, 
the Committee does not believe that an IRS employee due a tax 
refund should be terminated from employment for filing that 
return late. No other taxpayer faces a comparable penalty for 
the late filing of a return due a refund. Investigating and 
resolvingissues related to the late filing by IRS employees of 
refund returns expends resources that could be better spent on other 
tax administration efforts.
    Second, the Committee understands that employees are 
misusing the ``employee versus employee'' violation as 
retaliation against fellow employees. There are other 
administrative remedies that are more appropriate for resolving 
employee versus employee claims, such as Title V adverse action 
cases, as well as actions of the Merit Systems Protection 
Board.
    The Committee believes that removing from the list of 
violations these two provisions that do not directly involve an 
IRS employee's interactions with taxpayers will improve the 
focus of the provision.

                        EXPLANATION OF PROVISION

    The provision removes from the list of violations: (1) the 
late filing of refund returns; and (2) employee versus employee 
assault or battery. The provision also places the entire 
section in the Internal Revenue Code.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

7. Expand IRS Oversight Board authority (sec. 127 of the bill and sec. 
        7802 of the Code)

                              PRESENT LAW

    The Code has established the IRS Oversight Board and has 
given that Board general oversight responsibilities for the 
IRS, as well as specific oversight responsibilities with 
respect to the IRS' strategic plans, operational plans, 
management, budget, and taxpayer protections.\11\ Among these 
responsibilities, the Board is required to review the 
Commissioner's selection, evaluation, and compensation of IRS 
senior executives and to review and approve the IRS budget 
request (having ensured that the budget request supports the 
annual and long-range strategic plans of the IRS). The Board 
must report annually to the Congress with respect to the 
conduct of its responsibilities.
---------------------------------------------------------------------------
    \11\ Sec. 7802(c) and (d).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that the IRS Oversight Board, as 
established, is in a difficult position to exert meaningful 
authority and oversight over the IRS. Although the Board is 
under the Department of Treasury, Congress intended for the 
Board to provide balanced independent oversight over the IRS. 
The Committee understands that the Board's current authority to 
review the IRS Commissioner's selection, evaluation, and 
compensation of senior executives has been unclear and that the 
Board has not been actively engaged and consulted as Congress 
intended. The Committee believes that the Board should have a 
strong and active role in the IRS Commissioner's selection, 
evaluation, and compensation of senior executives. The Board 
should be included in the process before the IRS Commissioner 
acts with respect to the selection, evaluation, and 
compensation of senior executives. Furthermore, the Committee 
understands that the Board's ability to provide a thorough and 
independent analysis of the IRS's budget request is hindered by 
its organizational structure within the Executive Branch. The 
Committee believes that expanding the authority of the IRS 
Oversight Board will improve oversight and accountability of 
the IRS.

                        EXPLANATION OF PROVISION

Approval with respect to senior executives

    The provision requires that the IRS Oversight Board approve 
the IRS Commissioner's selection, evaluation, and compensation 
of senior executives.

Reports

            Budget
    The provision requires that the budget for the IRS that the 
Board submits to the Secretary of the Treasury be detailed and 
contain analysis. The budget is to be submitted without any 
prior review or comment from the Commissioner, the Secretary of 
the Treasury, or any officer or employee of either the 
Department of the Treasury or the Office of Management and 
Budget.
            Annual Report
    The provision requires that the Board submit its annual 
report by March 1st of each year.

Continuity in office

    The provision provides that an Oversight Board member whose 
term has expired shall continue to serve until his or her 
successor takes office (limited to one year after the 
expiration of the Board member's term).

Access to health benefits

    The provision makes Oversight Board members eligible for 
coverage by the Federal Employees' Health Benefits Program on 
the same basis as Federal employees.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

8. IRS Oversight Board approval of use of critical pay authority (sec. 
        128 of the bill and sec. 7802 of the Code)

                              PRESENT LAW

    The Secretary of the Treasury has the authority, subject to 
specified conditions, to increase the pay levels for critical 
positions at the IRS above the levels otherwise provided.\12\
---------------------------------------------------------------------------
    \12\ 5 U.S.C. secs. 9502 and 9503.
---------------------------------------------------------------------------
    The Code has established the IRS Oversight Board and has 
given that board general oversight responsibilities for the 
IRS, as well as specific oversight responsibilities with 
respect to the IRS' strategic plans, operational plans, 
management, budget, and taxpayer protections.\13\
---------------------------------------------------------------------------
    \13\ Sec. 7802(c) and (d).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that some believe that the IRS 
may have used its critical pay authority for positions that do 
not necessarily meet the specified conditions required under 
present law. Critical pay authority gives the IRS the 
flexibility to compensate certain employees at levels that are 
more competitive with the private sector. Thus, such authority 
is intended to aid the IRS in hiring individuals with specific 
expertise. The Committee believes that requiring the IRS 
Oversight Board to review and approve each use of critical pay 
authority will improve the administration and utilization of 
this authority.

                        EXPLANATION OF PROVISION

    The provision requires that the IRS Oversight Board review 
and approve each use of this critical pay authority.

                             EFFECTIVE DATE

    The provision is effective for personnel hired after the 
date of enactment.

9. Low-income taxpayer clinics (sec. 129 of the bill and new sec. 7526A 
        of the Code)

                              PRESENT LAW

    The Code \14\ provides that the Secretary is authorized to 
provide up to $6 million per year in matching grants to 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 (``controversy clinics''). No clinic can receive more 
than $100,000 per year.
---------------------------------------------------------------------------
    \14\ Sec. 7526.
---------------------------------------------------------------------------
    A ``clinic'' includes (1) a clinical program at an 
accredited law, business, or accounting school, in which 
students represent low-income taxpayers, or (2) an organization 
exempt from tax under Code section 501(c) which either 
represents low-income taxpayers or provides referral to 
qualified representatives.

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

    The provision authorizes $10 million in matching grants for 
low-income taxpayer return preparation clinics (``preparation 
clinics''). These clinics may provide routine tax return 
preparation and filing services to low-income taxpayers. The 
authorization of $6 million for low-income controversy clinics 
under present law is also increased to $10 million.
    The provision expands the scope of clinics eligible to 
receive preparation clinic grants to encompass clinics at all 
educational institutions. The provision prohibits the use of 
grants for overhead expenses at both controversy clinics and 
preparation clinics. The provision also authorizes the IRS to 
use mass communications, referrals, and other means to promote 
the benefits and encourage the use of low-income controversy 
and preparation clinics.

                             EFFECTIVE DATE

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

10. Taxpayer access to financial institutions (sec. 130 of the bill)

                              PRESENT LAW

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

                           REASONS FOR CHANGE

    The Committee believes that assisting unbanked taxpayers in 
establishing accounts in depository institutions in connection 
with preparing and filing their tax returns will increase the 
number of taxpayers able to participate fully in electronic 
filing.

                        EXPLANATION OF PROVISION

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

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

11. Enrolled agents (sec. 131 of the bill and new sec. 7529 of the 
        Code)

                              PRESENT LAW

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

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

    The bill adds a new section to the Code permitting the 
Secretary to prescribe regulations to regulate the conduct of 
enrolled agents in regard to their practice before the IRS and 
to permit enrolled agents meeting the Secretary's 
qualifications to use the credentials or designation ``enrolled 
agent'', ``EA'', or ``E.A.''.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

12. Establishment of disaster response team (sec. 132 of the bill and 
        sec. 7803 of the Code)

                              PRESENT LAW

    The Secretary of the Treasury may specify that certain 
deadlines are postponed for a period of up to one year in the 
case of a taxpayer determined to be affected by a 
Presidentially declared disaster or by a terroristic or 
military action.\15\ The deadlines that may be postponed are 
the same as are postponed by reason of service in a combat 
zone.
---------------------------------------------------------------------------
    \15\ Section 7508A.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that the IRS is involved in 
responding to disasters. However, the Committee believes that 
the lack of an established Disaster Response Team within the 
IRS results in delaying the IRS' response to disasters and 
contributes to taxpayer burden when a taxpayer is affected by a 
Presidentially declared disaster. The Committee believes that 
it is important to improve the response of the IRS to 
Presidentially declared disasters.

                        EXPLANATION OF PROVISION

    The provision directs the Secretary to create in the IRS a 
permanent Disaster Response Team, which, in coordination with 
the Federal Emergency Management Agency, is to assist taxpayers 
in clarifying and resolving tax matters associated with a 
Presidentially declared disaster. The provision requires that 
the Disaster Response Team be staffed by personnel from the 
office of the Taxpayer Advocate as well as personnel from the 
national office of the IRS with relevant knowledge and 
experience. The provision also requires the IRS to provide a 
toll-free number dedicated to responding to taxpayers affected 
by a Presidentially declared disaster and to provide relevant 
information via the IRS website.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

13. Study of accelerated tax refunds (sec. 133 of the bill)

                              PRESENT LAW

    Some States have established procedures to provide for 
accelerated tax refunds to taxpayers who maintain the same 
filing characteristics as in the previous year. The IRS does 
not have such a procedure.

                           REASONS FOR CHANGE

    The Committee understands that States have realized 
efficiency gains and cost savings with electronic filing, 
automated deposits of tax refunds, and automated payments of 
tax liabilities. The Committee believes that requiring the 
Secretary of the Treasury to conduct a study of the 
implementation of an accelerated tax refund program for 
taxpayers who maintain the same filing characteristics as in 
the previous year and who elect to receive their refunds via 
direct deposit will provide the Committee with valuable 
information as to whether it is appropriate to implement such a 
system.

                        EXPLANATION OF PROVISION

    The provision requires the Secretary of the Treasury to 
conduct a study of the implementation of an accelerated tax 
refund program for taxpayers who maintain the same filing 
characteristics as in the previous year and who elect to 
receive their refunds via direct deposit.

                             EFFECTIVE DATE

    The Secretary is required to submit the report to the 
Congress not later than one year after the date of enactment.

14. Study of clarifying recordkeeping responsibilities (sec. 134 of the 
        bill)

                              PRESENT LAW

    Every person liable for Federal tax must keep records, 
provide statements, make returns, and comply with rules and 
regulations, as prescribed by the Secretary.16 In 
general, taxpayers are required to keep records for as long as 
the statute of limitations may be open.
---------------------------------------------------------------------------
    \16\ Section 6001.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

    The provision requires the Secretary of the Treasury to 
study:
     The scope of the records required to be maintained 
by taxpayers;
     The utility of requiring taxpayers to maintain all 
records indefinitely;
     The effects of the necessity to upgrade 
technological storage for outdated records;
     The number of negotiated records retention 
agreements requested by taxpayers and the number entered into 
by the IRS; and
     Proposals regarding taxpayer recordkeeping.

                             EFFECTIVE DATE

    The Secretary is required to submit the report to the 
Congress not later than one year after the date of enactment.

15. Streamline reporting process for National Taxpayer Advocate (sec. 
        135 of the bill and sec. 7803 of the Code)

                              PRESENT LAW

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

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

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

                             EFFECTIVE DATE

    The provision combining the reports is effective for 
reports in 2005 and thereafter. The provision authorizing 
reports on significant issues affecting taxpayer rights is 
effective on the date of enactment.

16. IRS Free File program (sec. 136 of the bill)

                              PRESENT LAW

    The IRS has entered into cooperative relationships with 
commercial return preparation services to provide free 
electronic filing services to eligible low-income or elderly 
taxpayers. This program is called ``Free File.'' IRS permits 
these commercial return preparation services to cross-market 
their other services and products to all participating 
taxpayers, except to those taxpayers who explicitly opt out of 
this cross-marketing.

                           REASONS FOR CHANGE

    The Committee believes that functioning of the Free File 
program will be improved if cross-marketing is permitted only 
to taxpayers who explicitly give permission to receive it.

                        EXPLANATION OF PROVISION

    The provision requires that, as a condition for 
participating in the Free File program, commercial return 
preparation services that choose to cross-market their other 
services and products to Free File taxpayers may only do so to 
taxpayers who explicitly choose this (opt in). The provision 
requires the IRS to ensure that this opt-in feature is clear, 
prominently displayed, and in large typeface.

                             EFFECTIVE DATE

    The provision is effective with respect to returns filed 
after December 31, 2004.

17. Modification of TIGTA reporting requirements (sec. 137 of the bill 
        and sec. 7803 of the Code)

                              PRESENT LAW

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

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

    The provision repeals the statutory requirement that TIGTA 
issue the following reports:
     IRS compliance with the restrictions 17 
on directly contacting taxpayers who have indicated that they 
prefer that their representatives be contacted.
---------------------------------------------------------------------------
    \17\ Sec. 7521.
---------------------------------------------------------------------------
     IRS compliance with the requirements relating to 
disclosure of collection information with respect to joint 
returns.
     IRS compliance with the fair debt collection 
provisions of the Code.
     The number of taxpayer complaints received during 
the reporting period.
    In addition, the provision requires that all reports 
currently required to be made annually must be provided semi-
annually.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

18. Study of IRS accounts receivable (sec. 138 of the bill)

                              PRESENT LAW

    There is no statutory requirement of a study of IRS 
accounts receivables.

                           REASONS FOR CHANGE

    The General Accounting Office has reported that it has 
received from the IRS the following information.18 
The gross accounts receivable for tax year 2003 is estimated at 
$246 billion. After a reduction for compliance assessments of 
$31 billion, write-offs of $126 billion, and allowance for 
doubtful accounts of $69 billion, the total net accounts 
receivable is $20 billion. The Committee believes that 
requiring the Secretary of the Treasury to conduct a study of 
IRS accounts receivable will provide the Committee with 
valuable information to assess the current problem and develop 
appropriate solutions to reduce the accounts receivable 
inventory.
---------------------------------------------------------------------------
    \18\ GAO-04-126 IRS's Fiscal Years 2003 and 2002 Financial 
Statements, p.78.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The provision requires the Department of the Treasury to 
conduct a study on the provisions of the Code, and the 
application of those provisions, regarding IRS collection 
procedures to determine whether impediments exist to the 
efficient and timely collection of tax debts. The study is also 
to include an examination of the accounts receivable inventory 
of the IRS.

                             EFFECTIVE DATE

    The study must be completed within one year after the date 
of enactment.

19. Electronic commerce advisory group (sec. 139 of the bill and sec. 
        2001 of the Internal Revenue Service Restructuring and Reform 
        Act of 1998)

                              PRESENT LAW

    The IRS is statutorily required to convene an electronic 
commerce advisory group, including representatives from the 
small business community, from the tax practitioner, preparer, 
and computer tax processor communities and other 
representatives from the electronic filing 
industry.19
---------------------------------------------------------------------------
    \19\ Pub. L. 105-206 (112 Stat. 723, July 22, 1998), sec. 
2001(b)(2).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that expanding the electronic 
commerce advisory group to include consumer advocate 
representation will ensure taxpayer representation and improve 
its functioning.

                        EXPLANATION OF PROVISION

    The provision requires that the electronic commerce 
advisory group include at least two representatives from the 
consumer advocate community.

                             EFFECTIVE DATE

    The initial appointment made in accordance with this 
provision must be made not later than 180 days after the date 
of enactment.

20. Study of modifications to Schedules L and M-1 (sec. 140 of the 
        bill)

                              PRESENT LAW

    The Code requires persons to file tax returns in accordance 
with the forms and regulations prescribed by the Secretary.\20\ 
In general, corporations must file Form 1120. As part of that 
form, a corporation with more than $250,000 of gross receipts 
and total assets must complete Schedule M-1, which reconciles 
book income (or loss) with income (or loss) reported on the tax 
return.
---------------------------------------------------------------------------
    \20\ Sec. 6011(a).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that high-profile cases involving 
profitable corporations (1) reporting little or no taxable 
income, (2) engaging in transactions that increased their 
financial income without affecting their current tax 
liabilities, or (3) engaging in transactions that decreased 
their taxable income without affecting their book income, have 
drawn attention to the sources and magnitudes of differences 
between tax and book income. IRS data shows that the dollar 
amount of the book-tax difference grew from $92.5 billion in 
1996 to more than $159.0 billion in 1998, an increase of nearly 
72 percent.
    The Committee believes that a lack of historical data makes 
it difficult to determine whether this is only a recent 
phenomenon or the continuation of a long-term trend. Current 
reporting of book tax differences via the Schedule M-1 makes 
broad analysis of the sources of these differences extremely 
difficult. In light of this, the Committee believes it is 
appropriate to consider revisions to the relevant tax forms.

                        EXPLANATION OF PROVISION

    The provision requires the Secretary of the Treasury to 
report to the Senate Committee on Finance and the House 
Committee on Ways and Means on proposals to expand Schedules L 
and M-1 to include additional information, such as the 
following:
     The names and identification numbers of the parent 
companies for both book and tax purposes.
     A reconciliation of the consolidated book assets 
reported in public financial disclosure statements to the 
reported assets in the consolidated tax return.
     Worldwide net income as reported in public 
financial disclosure statements.
     The components of tax expense recorded in 
financial statement tax footnotes.
     A reconciliation of the book and tax income of 
entities included in the consolidated financial statement with 
book income as reported on the consolidated tax return.
     The adjustment for book income from domestic and 
foreign entities excluded from financial reporting but included 
for tax purposes.
     The book income of U.S. entities included in the 
consolidated return.
     Taxable income due to actual or deemed dividends 
from foreign subsidiaries.
     A reconciliation to reflect pretax book income of 
the U.S. consolidated tax return group plus taxable deemed or 
actual foreign repatriations.
     The differences in the reporting of income and 
expense between book and tax reporting, including specific 
reporting on pension expense, stock options, and the 
amortization of goodwill.
     Consistency in reporting of any additional items 
not specifically listed above.
    In addition, the proposal requires the Securities and 
Exchange Commission and the Commissioner of Internal Revenue to 
report to the Senate Committee on Finance and the House 
Committee on Ways and Means on proposals to expand the public 
availability and clarity of information relating to book and 
tax differences and Federal tax liability with respect to 
corporations.

                             EFFECTIVE DATE

    The report on modifying Schedules L and M-1 must be 
provided within 6 months after the date of enactment. The 
reports on information to be made public must be provided 
within one year after the date of enactment.

21. Regulation of Federal income tax return preparers and refund 
        anticipation loan providers (sec. 141 of the bill and new sec. 
        7530 of the Code)

                              PRESENT LAW

Federal income tax return preparers

    The Secretary of the Treasury is authorized to regulate the 
practice of representatives of persons before the Department of 
the Treasury.\21\ The Secretary is also authorized to suspend 
or disbar from practice before the Department a representative 
who is incompetent, who is disreputable, who violates the rules 
regulating practice before the Department, or who (with intent 
to defraud) willfully and knowingly misleads or threatens the 
person being represented (or a person who may be represented). 
The rules promulgated by the Secretary pursuant to this 
provision are contained in Circular 230. In general, the 
preparation and filing of tax returns (absent further 
involvement) has not been considered within the scope of these 
Circular 230 provisions.
---------------------------------------------------------------------------
    \21\ 31 U.S.C. 330.
---------------------------------------------------------------------------

Refund anticipation loan providers

    Taxpayers may choose to obtain a loan in the amount of 
their anticipated tax refund (a ``refund anticipation loan''). 
In general, these loans are provided in connection with the 
filing of the taxpayer's return. In general, these loans are 
for relatively short periods of time (as little as several 
weeks, if the taxpayer files electronically).

                           REASONS FOR CHANGE

    In her annual report to the Congress, the National Taxpayer 
Advocate noted that over 55 percent of the 130 million U.S. 
individual taxpayers paid a return preparer to prepare their 
2001 Federal income tax returns and of the 1.2 million known 
tax return preparers, one-quarter to one-half are not regulated 
by any licensing entity or subject to minimum competency 
requirements. The Committee also understands that 57 percent of 
the earned income credit overclaims were attributable to 
returns prepared by paid preparers. The Committee believes that 
Federal income tax return preparers play an important role in 
the tax system. While those preparers authorized to practice 
before the IRS are already subject to oversight, many preparers 
are not. Those preparers should accordingly have greater 
oversight.
    The Committee believes that requiring regulation of both 
Federal income tax return preparers and refund anticipation 
loan providers and increasing the information that must be 
disclosed in connection with a refund anticipation loan will 
improve the fairness and administration of the tax system.

                        EXPLANATION OF PROVISION

Federal income tax return preparers

    The provision requires the annual registration of Federal 
income tax return preparers with the IRS. Any person who is 
paid to prepare five or more returns in a year is required to 
register, except that this provision does not apply to a 
qualified representative (whether or not an attorney) who is 
authorized to practice before the IRS or an applicable court. 
Preparers are required to pass an annual examination and meet 
standards of conduct in order to register. The IRS may charge 
reasonable fees to defray the costs of administering this 
program. The provision imposes penalties for non-compliance 
with this provision. The provision requires the Secretary to 
conduct a public awareness campaign with respect to this 
requirement and to maintain a public list of registered 
preparers. The provision permits the Secretary to use any funds 
specifically appropriated for earned income credit compliance 
to improve compliance with this provision.

Refund anticipation loan providers

    The provision requires the Secretary of the Treasury to 
establish a program to require the registration with the IRS of 
all providers of refund anticipation loans to individual 
taxpayers. The Secretary must also specify the type of 
information that must be disclosed to taxpayers by refund 
anticipation loan providers (such as the fees charged in 
connection with the loan) and the manner and timing of the 
disclosure. The provision permits the imposition of sanctions 
for violations of these provisions.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                          C. Other Provisions


1. Penalty for failure to report interests in foreign financial 
        accounts (sec. 151 of the bill and sec. 5321 of Title 31, 
        United States Code)

                              PRESENT LAW

    The Secretary of the Treasury requires citizens, residents, 
or persons doing business in the United States to keep records 
and file reports when that person makes a transaction or 
maintains an account with a foreign financial entity.\22\ In 
general, individuals must fulfill this requirement by answering 
questions regarding foreign accounts or foreign trusts that are 
contained in Part III of Schedule B of the IRS Form 1040. 
Taxpayers who answer ``yes'' in response to the question 
regarding foreign accounts must then file Treasury Department 
Form TD F 90-22.1. This form must be filed with the Department 
of the Treasury, and not as part of the tax return that is 
filed with the IRS.
---------------------------------------------------------------------------
    \22\ The Secretary must impose these requirements pursuant to 31 
U.S.C. 5314.
---------------------------------------------------------------------------
    The Secretary of the Treasury may impose a civil penalty on 
any person who willfully violates this reporting requirement. 
The civil penalty is the amount of the transaction or the value 
of the account, up to a maximum of $100,000; the minimum amount 
of the penalty is $25,000.\23\ In addition, any person who 
willfully violates this reporting requirement is subject to a 
criminal penalty. The criminal penalty is a fine of not more 
than $250,000 or imprisonment for not more than five years (or 
both); if the violation is part of a pattern of illegal 
activity, the maximum amount of the fine is increased to 
$500,000 and the maximum length of imprisonment is increased to 
10 years.\24\
---------------------------------------------------------------------------
    \23\ 31 U.S.C. 5321(a)(5).
    \24\ 31 U.S.C. 5322.
---------------------------------------------------------------------------
    On April 26, 2002, the Secretary of the Treasury submitted 
to the Congress a report on these reporting requirements.\25\ 
This report, which was statutorily required,\26\ studies 
methods for improving compliance with these reporting 
requirements. It makes several administrative recommendations, 
but no legislative recommendations. A further report was 
required to be submitted by the Secretary of the Treasury to 
the Congress by October 26, 2002.
---------------------------------------------------------------------------
    \25\ A Report to Congress in Accordance with Sec. 361(b) of the 
Uniting and Strengthening America by Providing Appropriate Tools 
Required to Intercept and Obstruct Terrorism Act of 2001, April 26, 
2002.
    \26\ Sec. 361(b) of the USA PATRIOT Act of 2001 (Pub. L. 107-56).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that the number of individuals 
involved in using offshore bank accounts to engage in abusive 
tax scams has grown significantly in recent years. For 
onescheme alone, the IRS estimates that there may be hundreds of 
thousands of taxpayers with offshore bank accounts attempting to 
conceal income from the IRS. The Committee is concerned about this 
activity and believes that improving compliance with this reporting 
requirement is vitally important to sound tax administration, to 
combating terrorism, and to preventing the use of abusive tax schemes 
and scams. Adding a new civil penalty that applies without regard to 
willfulness will improve compliance with this reporting requirement.

                        EXPLANATION OF PROVISION

    The provision adds an additional civil penalty that may be 
imposed on any person who violates this reporting requirement 
(without regard to willfulness). This new civil penalty is up 
to $5,000. The penalty may be waived if any income from the 
account was properly reported on the income tax return and 
there was reasonable cause for the failure to report.

                             EFFECTIVE DATE

    The provision generally is effective for violations 
occurring after the date of enactment.

2. Repeal of application of below-market loan rules to amounts paid to 
        certain continuing care facilities (sec. 152 of the bill and 
        sec. 7872 of the Code)

                              PRESENT LAW

    Certain loans that bear interest at a below-market interest 
rate are treated as loans bearing interest at the market rate 
accompanied by a payment or payments from the lender to the 
borrower which are characterized in accordance with the 
substance of the particular transaction (e.g., gift, 
compensation, dividend, etc.) (sec. 7872). The market rate of 
interest for purposes of the below-market loan rules is assumed 
to be 100 percent of the applicable Federal rate (``AFR'') at 
the time the loan is made in the case of a term loan or, in the 
case of a demand loan, 100 percent of the AFR in effect over 
the time that the loan is outstanding.
    In general, the below-market loan rules apply to (1) loans 
where the foregone (i.e., below-market) interest is in the 
nature of a gift, (2) loans between an employee and an employer 
or between an independent contractor and one for whom the 
independent contractor provides services, (3) loans between a 
corporation and a shareholder of the corporation, (4) loans of 
which one of the principal purposes of the interest arrangement 
is the avoidance of Federal tax, (5) to the extent provided in 
Treasury regulations, any other below-market loans if the 
interest arrangement of such loan has a significant effect on 
any Federal tax liability of either the lender or borrower, and 
(6) loans to any qualified continuing care facility pursuant to 
a continuing care contract.
    In the case of loans made to qualified continuing care 
facilities,\27\ an exception from the below-market loan rules 
is provided for any loan as of the calendar year in which the 
lender has attained age 65, provided the loan is made by the 
lender to the qualified continuing care facility pursuant to a 
continuing care contract.\28\ However, the exception applies 
only to the extent that the principal amount of the loan, when 
added to the aggregate outstanding amount of all other previous 
loans between the lender (or the lender's spouse) and any 
qualified continuing care facility, does not exceed $90,000. 
This amount is indexed for inflation, and the amount for 
calendar year 2004 is $154,500.\29\
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    \27\ A ``qualified continuing care facility'' is defined as one or 
more facilities (1) which are designed to provide services under 
continuing care contracts, and (2) substantially all of the residents 
of which are covered by continuing care contracts. However, a facility 
is not a qualified continuing care facility unless substantially all 
facilities which are used to provide services that are required to be 
provided under a continuing care contract are owned or operated by the 
borrower. In addition, nursing homes do not constitute continuing care 
facilities (sec. 7872(g)(4)).
    \28\ A ``continuing care contract'' is defined as a written 
contract between an individual and a qualified continuing care facility 
under which (1) the individual or indvidual's spouse may use a 
qualified continuing care facility for their life or lives, (2) the 
individual or individual's spouse (a) will first reside in a separate, 
independent living unit with additional facilities outside such unit 
for the providing of means and other personal care, and (b) then will 
be provided long-term and skilled nursing care as the health of such 
individual or individual's spouse requires, and (3) no additional 
substantial payment is required if such individual or individual's 
spouse requires increased personal care services or long-term and 
skilled nursing care.
    \29\ Rev. Rul. 2003-118, 2003-47 I.R.B. 1095.
---------------------------------------------------------------------------
    With regard to continuing care facilities that are not 
qualified continuing care facilities, the IRS takes the 
position that loans made to such facilities by residents are 
not subject to the below-market loan rules until and unless 
Treasury regulations are issued that treat such loans as having 
a significant effect on any Federal tax liability of either the 
facility or the resident.\30\
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    \30\ Tech. Adv. Mem. 9521001 (Dec. 7, 1994).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    In 1985, Congress enacted a limited exception from the 
below-market loan rules for qualified continuing care 
facilities with the expectation that Treasury would issue 
regulations applying such rules to non-qualified continuing 
care facilities based upon the general application of the rules 
to loans the interest arrangements of which have a significant 
effect on the Federal tax liability of either the lender or the 
borrower. The Committee understands that the absence of such 
regulations during the ensuing 20 years has created an 
anomalous situation in which contracts with qualified 
continuing care facilities are not subject to the below-market 
loan rules only if they do not exceed the dollar threshold, 
while contracts with non-qualified continuing care facilities 
are not subject to such rules without limitation. The Committee 
believes that this has resulted in the unintended consequence 
that the present-law rules actually disadvantage qualified 
continuing care facilities and encourage continuing care 
facilities to intentionally fail to satisfy the present-law 
definition of a qualified continuing care facility in order to 
avoid the dollar threshold and the application of the below-
market loan rules altogether.
    The Committee recognizes that the modifications made by 
this provision merely equalize the treatment of qualified 
continuing care facilities and non-qualified continuing care 
facilities, whereas it is intended that contracts with non-
qualified continuing care facilities be subject to the below-
market loan rules if the treatment of such contracts as below-
market loans has a significant effect on the Federal tax 
liability of either the resident or the facility. Thus, the 
Committee encourages Treasury issue regulations that provide 
for the application of the below-market loan rules to non-
qualified continuing care facilities.
    The Committee also believes that certain changes should be 
made to the definitions of a qualified continuing care facility 
and a continuing care contract in order to better reflect the 
current business practices of such facilities.

                        EXPLANATION OF PROVISION

    The provision repeals the application of the below-market 
loan rules to loans that are made to any qualified continuing 
care facility pursuant to a continuing care contract, without 
regard to the principal amount of the loan (including the 
aggregate outstanding amount of any other previous loans 
between the resident or resident's spouse and any qualified 
continuing care facility). The provision also clarifies that 
the determination of whether a facility is a qualified 
continuing care facility is to be made on an annual basis at 
the end of each calendar year, rather than only when the 
continuing care contract is entered into. In addition, the 
provision modifies the definition of a continuing care contract 
to (1) not exclude contracts that require additional 
substantial payment for increased personal care services 
required by the resident or resident's spouse, and (2) provide 
authority for the Treasury to issue guidance that limits such 
definition to contracts that provide to the resident or 
resident's spouse only facilities, care and services that are 
customarily offered by continuing care facilities. The 
provision also clarifies that the definition of a qualified 
continuing care facility requires substantially all of the 
independent living unit residents of the facility to be covered 
by continuing care contracts.
    The provision does not affect the present-law application 
of the below-market loan rules to loans made to any continuing 
care facility that is not a qualified continuing care facility.

                             EFFECTIVE DATE

    The provision applies to calendar years beginning after 
December 31, 2004.

               TITLE II.--REFORM OF PENALTY AND INTEREST


                      A. Individual Estimated Tax


(Sec. 201 of the bill and sec. 6654 of the Code)

1. Increase estimated tax threshold

                              PRESENT LAW

    The Federal income tax system is designed to ensure that 
taxpayers pay taxes throughout the year based on their income 
earned and deductions. To the extent that tax is not collected 
through withholding, taxpayers are required to make quarterly 
estimated payments of tax. If an individual fails to make the 
required estimated tax payments under the rules, a penalty is 
imposed under section 6654. The amount of the penalty is 
determined by applying the underpayment interest rate to the 
amount of the underpayment for the period of the underpayment. 
The amount of the underpayment is the excess of the required 
payment over the amount (if any) of the installment paid on or 
before the due date of the installment. The period of the 
underpayment runs from the due date of the installment to the 
earlier of (1) the 15th day of the fourth month following the 
close of the taxable year or (2) the date on which each portion 
of the underpayment is made. The penalty for failure to pay 
estimated tax is the equivalent of interest, which is based on 
the time value of money.
    Taxpayers are not liable for a penalty for the failure to 
pay estimated tax when the tax shown on the return for the 
taxable year (or, if no return is filed, the tax), reduced by 
withholding, is less than $1,000. This safe harbor does not 
apply, however, when a taxpayer has paid tax throughout the 
year solely through estimated tax payments. For such taxpayers, 
any tax shown on the return for the taxable year, net of 
estimated tax paid, could subject the taxpayer to the penalty 
for failure to pay estimated tax (unless another safe harbor 
applies).

                           REASONS FOR CHANGE

    Some taxpayers are required to complete Form 2210 
(Underpayment of Estimated Tax by Individuals, Estates, and 
Trusts) and attach it to their tax return to show that they 
qualify for an exception that can lower or eliminate the 
penalty for underpayment of estimated tax. The computations 
required to determine the amount of the individual estimated 
tax penalty are complex and difficult to administer. The 
Committee believes that by increasing the estimated tax payment 
threshold, fewer taxpayers will be required to make estimated 
tax payments.

                        EXPLANATION OF PROVISION

    The threshold is increased to $2,000.

                             EFFECTIVE DATE

    The provision is effective for estimated tax payments made 
for taxable years beginning after December 31, 2004.

2. Apply one interest rate per estimated tax underpayment period for 
        individuals, estates, and trusts

                              PRESENT LAW

    The present-law penalty for failure to pay estimated tax is 
equal to the underpayment interest rate multiplied by the 
number of days the underpayment is outstanding, which is the 
number of days between when the taxpayer should have made the 
estimated payment and the earlier of (1) the 15th day of the 
fourth month following the close of the taxable year or (2) the 
date on which each portion of the underpayment is made. The 
interest rate, which equals the Federal short-term rate plus 
three percentage points, is subject to change on the first day 
of each quarter, which is January 1, April 1, July 1, and 
October 1.
    If interest rates change while an underpayment of estimated 
tax is outstanding, then taxpayers are required to make 
separate calculations for the periods before and after the 
interest rate change. Such calculations generally are needed to 
cover 15-day periods. For example, the July 1 interest rate 
occurs 15 days after the June 15 payment date (for calendar-
year taxpayers). A change in interest rates, which occurs on 
the first day of each calendar quarter, would require the use 
of different interest rates during one estimated tax 
underpayment period and would increase the number of 
calculations that a taxpayer must make in calculating a penalty 
for failure to pay estimated tax.

                           REASONS FOR CHANGE

    The adjustment of the interest rate for underpayments 
greatly complicates the computation of interest. When interest 
rates change during an underpayment period, taxpayers must 
perform multiple calculations to account for the change in 
interest rate. Thus, the Committee finds that, if only one 
interest rate applied per underpayment period, complexity would 
be reduced because there generally would be only one interest 
calculation required per underpayment period.

                        EXPLANATION OF PROVISION

    The interest rates are aligned so that, for any given 
estimated tax underpayment period, only one interest rate will 
apply. The underpayment interest rate in effect on the first 
day of the quarter in which the pertinent estimated payment due 
date arises is the interest rate that will apply during an 
entire underpayment period.

                             EFFECTIVE DATE

    The provision is effective for estimated tax payments made 
for taxable years beginning after December 31, 2004.

3. Provide that underpayment balances are cumulative

                              PRESENT LAW

    Section 6654(b)(1) defines ``underpayment'' as the amount 
of an installment due over the amount of any installment paid 
(including withholding) on or before the due date of the 
installment. In determining an underpayment penalty for a 
calendar year taxpayer, the period of underpayment runs for 
each underpayment from the payment's due date through the 
earlier of the date on which any portion of the payment is made 
or the 15th day of the fourth month following the close of the 
taxable year. Underpayment balances are not cumulative and must 
be tracked separately for each estimated tax underpayment 
period.

                           REASONS FOR CHANGE

    Tracking underpayments separately results in additional 
complexity in calculating interest on underpayments of 
estimated tax. The Committee thus finds that the calculation of 
interest on underpayments of estimated tax would be simplified 
by providing that underpayment balances would roll into the 
next estimated tax period so that interest would be calculated 
once per cumulative underpayment, per period.

                        EXPLANATION OF PROVISION

    The definition of ``underpayment'' is changed to allow 
existing underpayment balances to be used in underpayment 
calculations for succeeding estimated payment periods. 
Taxpayers will now calculate a cumulative underpayment at the 
end of each underpayment period.

                             EFFECTIVE DATE

    The provision is effective for estimated tax payments made 
for taxable years beginning after December 31, 2004.

4. Require 365-day year for all estimated tax interest calculations for 
        individuals, estates, and trusts

                              PRESENT LAW

    Under current IRS procedures, taxpayers with outstanding 
underpayment balances that extend from a leap year through a 
non-leap year are required to make separate calculations solely 
to account for the different number of days in the two 
different years. For example, if a taxpayer has an underpayment 
outstanding from September 15, 2004, through January 15, 2005, 
then the taxpayer must account for the period from September 
15, 2004, through December 31, 2004, by using a 366-day 
formula.\31\ The taxpayer then must account for the period from 
January 1, 2005, through January 15, 2005, under a 365-day 
formula. This calculation is required regardless of whether the 
interest rate changes on January 1, 2005.
---------------------------------------------------------------------------
    \31\ The year 2004 is a leap year, the year 2005 is not.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee finds that complexity in calculating interest 
on underpayments of estimated tax would be reduced by 
eliminating the extra calculation that is required for 
underpayment balances that extend from a leap year to a non-
leap year or from a non-leap year to a leap year.

                        EXPLANATION OF PROVISION

    A 365-day year is used for all individual, estate, and 
trust estimated tax interest calculations.

                             EFFECTIVE DATE

    The provision is effective for estimated tax payments made 
for taxable years beginning after December 31, 2004.

                       B. Corporate Estimated Tax


(Sec. 202 of the bill and sec. 6655 of the Code)

                              PRESENT LAW

    In general, corporations are required to make quarterly 
estimated tax payments of their income tax liability (sec. 
6655). An exception to this requirement applies if the amount 
of tax for the taxable year is less than $500.

                           REASONS FOR CHANGE

    The Committee believes that increasing the value of this 
exception will reduce taxpayer burden and simplify 
administration of the tax laws.

                        EXPLANATION OF PROVISION

    The provision increases the value of this exception to 
amounts of tax that are less than $1,000.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2004.

 C. Increase in Large Corporation Threshold for Estimated Tax Payments


(Sec. 203 of the bill and sec. 6655 of the Code)

                              PRESENT LAW

    In general, corporations are required to make quarterly 
estimated tax payments of their income tax liability (sec. 
6655). In general, annual payments must total either 100 
percent of the current year's tax or 100 percent of the 
previous year's tax. Large corporations may not base their 
payments on the previous year's tax. A large corporation has 
taxable income of $1 million or more for any taxable year in 
the preceding three taxable years.

                           REASONS FOR CHANGE

    The Committee believes that increasing this threshold will 
reduce taxpayer burden and simplify administration of the tax 
laws.

                        EXPLANATION OF PROVISION

    The provision increases this $1 million threshold defining 
large corporations by $50,000 every year beginning after 2004 
until it reaches $1.5 million.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2004.

                        D. Abatement of Interest


(Sec. 204 of the bill and sec. 6404 of the Code)

                              PRESENT LAW

In general

    The Secretary of the Treasury can abate or suspend the 
accrual of interest in a number of situations. In general, the 
Secretary is authorized to abate interest that is not owed by 
the taxpayer, either because the interest was erroneously or 
illegally assessed, or because the interest was assessed after 
the expiration of the period of limitations. The Secretary also 
may abate interest that is attributable to certain unreasonable 
errors and delays by the Internal Revenue Service. The 
Secretary may abate interest where, in his judgment, the 
administration and collection costs involved do not warrant the 
collection of the amount due.
    The Secretary is required to abate interest in the case of 
a declared disaster or certain erroneous refunds attributable 
solely to errors made by the IRS. The Secretary is required to 
suspend the accrual of interest if the IRS fails to contact the 
taxpayer in a timely manner and in the case of taxpayers 
serving in a combat zone.
    Interest that is abated is not owed by the taxpayer and 
does not accrue additional interest through compounding or 
result in any additional penalties. If the accrual of interest 
is suspended for a period, then that period is not taken into 
account in determining the interest owed on an underpayment.
    Most abatements of interest are a result of adjustments to 
the underlying tax liability. Underpayment interest is assessed 
any time an underpayment is assessed. If the underlying tax 
liability is later adjusted, resulting in a reduction in the 
amount of the underpayment, the portion of the interest 
attributable to such adjustment must be abated.

Abatement of interest attributable to unreasonable IRS errors or delays

    The Secretary is permitted to abate interest on any 
deficiency attributable in whole or in part to any unreasonable 
error or delay by an IRS employee in performing a ministerial 
or managerial act.

Abatement of penalties and additions to tax attributable to erroneous 
        written advice given by the IRS

    The Secretary is required to abate any portion of any 
penalty or addition to tax attributable to erroneous advice 
furnished to the taxpayer in writing by an officer or employee 
of the IRS acting in his or her official capacity. The 
abatement applies only if (1) the advice is given in response 
to a specific written request made by the taxpayer, (2) the 
taxpayer reasonably relied on the advice, and (3) the taxpayer 
provided adequate and accurate information.
    Only penalties and additions to tax that are attributable 
to erroneous written advice given by the IRS are abated under 
this rule. Interest is abated only to the extent that it is 
attributable to abated penalties and additions to tax. Interest 
attributable to an underpayment of tax, where such underpayment 
is the result of the taxpayer's proper reliance on written 
advice of the IRS, is not eligible for abatement.

Procedures for the abatement of interest

    Taxpayers may apply for the abatement of interest by filing 
a claim on Form 843 with the Internal Revenue Service Center 
that has assessed the interest the taxpayer seeks to have 
abated.
    Typically, interest is abated when the amount of tax 
assessed is reduced. Thus, any procedure that may result in the 
reduction of assessed tax may also result in an abatement of 
interest.

                           REASONS FOR CHANGE

    The Committee believes that the narrow definition of 
ministerial and managerial act prevents the abatement of 
interest in certain situations where there are errors or 
delays. Further, the abatement of interest does not apply to 
employment taxes and certain excise taxes. As with other types 
of taxes, errors and delays occur in the administration of 
employment and excise taxes. The Committee believes that there 
are additional situations in which it is not appropriate for 
the Secretary to collect interest on an underpayment of tax to 
promote efficiency in administration of the tax laws and 
fairness to taxpayers.

                        EXPLANATION OF PROVISION

Expand abatement of interest for unreasonable IRS errors or delays

    The provision expands the scope of interest that may be 
abated by removing the requirement that the error or delay 
occur in performing a ministerial or managerial act and by 
applying it to interest for all types of taxes.

Allow the abatement of interest to the extent the interest is 
        attributable to taxpayer reliance on written statements of the 
        IRS

    The provision requires the Secretary to abate interest on 
an underpayment where the underpayment is attributable to 
erroneous advice furnished to the taxpayer in writing by an 
officer or employee of the IRS acting in his or her official 
capacity. It is anticipated that the abatement would apply to 
interest attributable to the period of time from the issuance 
of the erroneous advice through the day that is 21 days (10 
days in the case of an underpayment in excess of $100,000) 
after the day the IRS gives written notice that its advice was 
erroneous. The proposal does not eliminate the taxpayer's 
obligation to satisfy any underpayment of tax attributable to 
such erroneous advice.

                             EFFECTIVE DATE

    The changes made by these provisions are effective with 
respect to interest accruing on or after the date of enactment.

   E. Deposits Made To Suspend the Running of Interest on Potential 
                             Underpayments


(Sec. 205 of the bill and new sec. 6603 of the Code)

                              PRESENT LAW

    Generally, interest on underpayments and overpayments 
continues to accrue during the period that a taxpayer and the 
IRS dispute a liability. The accrual of interest on an 
underpayment is suspended if the IRS fails to notify an 
individual taxpayer in a timely manner, but interest will begin 
to accrue once the taxpayer is properly notified. No similar 
suspension is available for other taxpayers.
    A taxpayer that wants to limit its exposure to underpayment 
interest has a limited number of options. The taxpayer can 
continue to dispute the amount owed and risk paying a 
significant amount of interest. If the taxpayer continues to 
dispute the amount and ultimately loses, the taxpayer will be 
required to pay interest on the underpayment from the original 
due date of the return until the date of payment.
    In order to avoid the accrual of underpayment interest, the 
taxpayer may choose to pay the disputed amount and immediately 
file a claim for refund. Payment of the disputed amount will 
prevent further interest from accruing if the taxpayer loses 
(since there is no longer any underpayment) and the taxpayer 
will earn interest on the resultant overpayment if the taxpayer 
wins. However, the taxpayer will generally lose access to the 
Tax Court if it follows this alternative. Amounts paid 
generally cannot be recovered by the taxpayer on demand, but 
must await final determination of the taxpayer's liability. 
Even if an overpayment is ultimately determined, overpaid 
amounts may not be refunded if they are eligible to be offset 
against other liabilities of the taxpayer.
    The taxpayer may also make a deposit in the nature of a 
cash bond. The procedures for making a deposit in the nature of 
a cash bond are provided in Rev. Proc. 84-58.
    A deposit in the nature of a cash bond will stop the 
running of interest on an amount of underpayment equal to the 
deposit, but the deposit does not itself earn interest. A 
deposit in the nature of a cash bond is not a payment of tax 
and is not subject to a claim for credit or refund. A deposit 
in the nature of a cash bond may be made for all or part of the 
disputed liability and generally may be recovered by the 
taxpayer prior to a final determination. However, a deposit in 
the nature of a cash bond need not be refunded to the extent 
the Secretary determines that the assessment or collection of 
the tax determined would be in jeopardy, or that the deposit 
should be applied against another liability of the taxpayer in 
the same manner as an overpayment of tax. If the taxpayer 
recovers the deposit prior to final determination and a 
deficiency is later determined, the taxpayer will not receive 
credit for the period in which the funds were held as a 
deposit. The taxable year to which the deposit in the nature of 
a cash bond relates must be designated, but the taxpayer may 
request that the deposit be applied to a different year under 
certain circumstances.

                           REASONS FOR CHANGE

    The Committee believes that taxpayers should be able to 
limit their underpayment interest exposure in a tax dispute. An 
improved deposit system will help taxpayers better manage their 
exposure to underpayment interest without requiring them to 
surrender access to their funds or requiring them to make a 
potentially indefinite-term investment in a non-interest 
bearing account. The Committee believes that an improved 
deposit system that allows for the payment of interest on 
amounts that are not ultimately needed to offset tax liability 
when the taxpayer's position is upheld, as well as allowing for 
the offset of tax liability when the taxpayer's position fails, 
will provide an effective way for taxpayers to manage their 
exposure to underpayment interest. However, the Committee 
believes that such an improved deposit system should be 
reserved for the issues that are known to both parties, either 
through IRS examination or voluntary taxpayer disclosure.

                        EXPLANATION OF PROVISION

In general

    The provision allows a taxpayer to deposit cash with the 
IRS that may subsequently be used to pay an underpayment of 
income, gift, estate, generation-skipping, or certain excise 
taxes. Interest will not be charged on the portion of the 
underpayment that is deposited for the period that the amount 
is on deposit. Generally, deposited amounts that have not been 
used to pay a tax may be withdrawn at any time if the taxpayer 
so requests in writing. The withdrawn amounts will earn 
interest at the applicable Federal rate to the extent they are 
attributable to a disputable tax.
    The Secretary may issue rules relating to the making, use, 
and return of the deposits.

Use of a deposit to offset underpayments of tax

    Any amount on deposit may be used to pay an underpayment of 
tax that is ultimately assessed. If an underpayment is paid in 
this manner, the taxpayer will not be charged underpayment 
interest on the portion of the underpayment that is so paid for 
the period the funds were on deposit.
    For example, assume a calendar year individual taxpayer 
deposits $20,000 on May 15, 2005, with respect to a disputable 
item on its 2004 income tax return. On April 15, 2007, an 
examination of the taxpayer's year 2004 income tax return is 
completed, and the taxpayer and the IRS agree that the taxable 
year 2004 taxes were underpaid by $25,000. The $20,000 on 
deposit is used to pay $20,000 of the underpayment, and the 
taxpayer also pays the remaining $5,000. In this case, the 
taxpayer will owe underpayment interest from April 15, 2005 
(the original due date of the return) to the date of payment 
(April 15, 2007) only with respect to the $5,000 of the 
underpayment that is not paid by the deposit. The taxpayer will 
owe underpayment interest on the remaining $20,000 of the 
underpayment only from April 15, 2005, to May 15, 2005, the 
date the $20,000 was deposited.

Withdrawal of amounts

    A taxpayer may request the withdrawal of any amount of 
deposit at any time. The Secretary must comply with the 
withdrawal request unless the amount has already been used to 
pay tax or the Secretary properly determines that collection of 
tax is in jeopardy. Interest will be paid on deposited amounts 
that are withdrawn at a rate equal to the short-term applicable 
Federal rate for the period from the date of deposit to a date 
not more than 30 days preceding the date of the check paying 
the withdrawal. Interest is not payable to the extent the 
deposit was not attributable to a disputable tax.
    For example, assume a calendar year individual taxpayer 
receives a 30-day letter showing a deficiency of $20,000 for 
taxable year 2004 and deposits $20,000 on May 15, 2006. On 
April 15, 2007, an administrative appeal is completed, and the 
taxpayer and the IRS agree that the 2004 taxes were underpaid 
by $15,000. $15,000 of the deposit is used to pay the 
underpayment. In this case, the taxpayer will owe underpayment 
interest from April 15, 2005 (the original due date of the 
return) to May 15, 2006, the date the $20,000 was deposited. 
Simultaneously with the use of the $15,000 to offset the 
underpayment, the taxpayer requests the return of the remaining 
amount of the deposit (after reduction for the underpayment 
interest owed by the taxpayer from April 15, 2005, to May 15, 
2006). This amount must be returned to the taxpayer with 
interest determined at the short-term applicable Federal rate 
from the May 15, 2006, to a date not more than 30 days 
preceding the date of the check repaying the deposit to the 
taxpayer.

Limitation on amounts for which interest may be allowed

    Interest on a deposit that is returned to a taxpayer shall 
be allowed for any period only to the extent attributable to a 
disputable item for that period. A disputable item is any item 
for which the taxpayer (1) has a reasonable basis for the 
treatment used on its return and (2) reasonably believes that 
the Secretary also has a reasonable basis for disallowing the 
taxpayer's treatment of such item.
    All items included in a 30-day letter to a taxpayer are 
deemed disputable for this purpose. Thus, once a 30-day letter 
has been issued, the disputable amount cannot be less than the 
amount of the deficiency shown in the 30-day letter. A 30-day 
letter is the first letter of proposed deficiency that allows 
the taxpayer an opportunity for administrative review in the 
Internal Revenue Service Office of Appeals.

Deposits are not payments of tax

    A deposit is not a payment of tax prior to the time the 
deposited amount is used to pay a tax. Similarly, withdrawal of 
a deposit will not establish a period for which interest was 
allowable at the short-term applicable Federal rate for the 
purpose of establishing a net zero interest rate on a similar 
amount of underpayment for the same period.

                             EFFECTIVE DATE

    The provision applies to deposits made after one year after 
the date of enactment. Amounts already on deposit as of the 
date of enactment are treated as deposited (for purposes of 
applying this provision) on the date (after one year after the 
date of enactment) the taxpayer identifies the amount as a 
deposit made pursuant to this provision.

F. Freeze of Provision Regarding Suspension of Interest Where Secretary 
                       Fails To Contact Taxpayer


(Sec. 206 of the bill and sec. 6404 of the Code)

                              PRESENT LAW

    In general, interest and penalties accrue during periods 
for which taxes were unpaid without regard to whether the 
taxpayer was aware that there was tax due. The Code suspends 
the accrual of certain penalties and interest after 1 year if 
the IRS has not sent the taxpayer a notice specifically stating 
the taxpayer's liability and the basis for the liability within 
the specified period.\32\ With respect to taxable years 
beginning before January 1, 2004, the one-year period is 
increased to 18 months. Interest and penalties resume 21 days 
after the IRS sends the required notice to the taxpayer. The 
provision is applied separately with respect to each item or 
adjustment. The provision does not apply where a taxpayer has 
self-assessed the tax. The suspension only applies to taxpayers 
who file a timely tax return. The provision applies only to 
individuals and does not apply to the failure to pay penalty, 
in the case of fraud, or with respect to criminal penalties.
---------------------------------------------------------------------------
    \32\ Sec. 6404(g). This provision was added to the Code by sec. 
3305 of the IRS Restructuring and Reform Act of 1998 (Pub. L. No. 105-
206, July 22,1998).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The volume and complexity of the IRS workload has 
significantly increased. The Committee believes that, in light 
of current IRS capabilities, staffing levels, and resource 
constraints the one-year period is too short and that the 18-
month period should be made the permanent rule.

                        EXPLANATION OF PROVISION

    The provision makes the 18-month rule the permanent rule. 
The provision also adds gross misstatements\33\ to the list of 
provisions to which the suspension of interest rules do not 
apply.
---------------------------------------------------------------------------
    \33\ This includes any substantial omission of items to which the 
six-year statute of limitations applies (sec. 6051(e), gross valuation 
misstatements (sec. 6662(h)), and similar provisions.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2003.\34\
---------------------------------------------------------------------------
    \34\ It is intended that this proposal apply retroactively to the 
period beginning January 1, 2004 and ending on the date of enactment.
---------------------------------------------------------------------------

     G. Clarification of Application of Federal Tax Deposit Penalty


(Sec. 207 of the bill)

                              PRESENT LAW

    In many instances, taxpayers are required to make deposits 
of Federal taxes (sec. 6302). Failure to do so is subject to a 
penalty (sec. 6656). The amount of that penalty depends on the 
length of time that the deposit was not made. The penalty is 2 
percent of the underpayment if the failure to deposit is for 
not more than 5 days, 5 percent for 6 through 15 days, and 10 
percent for more than 15 days. The IRS has stated its position 
that the 10 percent penalty rate automatically applies if a 
deposit is not made in the manner required.

                           REASONS FOR CHANGE

    The Committee believes that the position of the IRS does 
not reflect the intent of the Congress in enacting this 
penalty, that the rate of the penalty vary depending on the 
time of the failure, whether the failure being penalized is a 
failure to make a deposit in the manner required or a failure 
to make a deposit at all. The Committee considers it anomalous 
that the IRS would interpret this penalty so that individuals 
who make the correct deposit but not in the manner required are 
penalized at a higher rate than those that do not make a 
deposit at all until several days after the due date. The 
Committee believes it is more appropriate to penalize taxpayers 
in similar situations similarly.

                        EXPLANATION OF PROVISION

    The application of the Federal tax deposit penalty is 
clarified so that the 10 percent penalty rate only applies in 
cases where the failure to deposit extends for more than 15 
days. Thus, a taxpayer who makes a deposit on time but not in 
the manner required will be subject to a penalty of 2 percent.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                H. Frivolous Tax Returns and Submissions


(Sec. 208 of the bill and sec. 6702 of the Code)

                              PRESENT LAW

    The Code provides that an individual who files a frivolous 
income tax return is subject to a penalty of $500 imposed by 
the IRS (sec. 6702). The Code also permits the Tax Court to 
impose a penalty of up to $25,000 if a taxpayer has instituted 
or maintained proceedings primarily for delay or if the 
taxpayer's position in the proceeding is frivolous or 
groundless (sec. 6673(a)).

                           REASONS FOR CHANGE

    The Committee believes that frivolous returns and 
submissions consume resources at the IRS and in the courts that 
can better be utilized in resolving legitimate disputes with 
taxpayers. Expanding the scope of the penalty to cover all 
taxpayers and tax returns promotes fairness in the tax system. 
The Committee believes that adopting this provision will 
improve effective tax administration.

                        EXPLANATION OF PROVISION

    The provision modifies this IRS-imposed penalty by 
increasing the amount of the penalty to up to $5,000 and by 
applying it to all taxpayers and to all types of Federal taxes.
    The provision also modifies present law with respect to 
certain submissions that raise frivolous arguments. The 
submissions to which this provision applies are requests for a 
collection due process hearing, installment agreements, offers-
in-compromise, and taxpayer assistance orders. The proposal 
permits the IRS to impose a penalty of up to $5,000 for such 
requests, unless the taxpayer withdraws the request promptly 
after being given an opportunity to do so.
    The provision requires the IRS to publish a list of 
positions, arguments, requests, and proposals determined to be 
frivolous for purposes of these provisions.

                             EFFECTIVE DATE

    The provision is effective for submissions made and issues 
raised after the date on which the Secretary first prescribes 
the required list.

   I. Extension of Notice Requirements With Respect to Interest and 
                          Penalty Calculations


(Sec. 209 of the bill and secs. 3306 and 3308 of the Internal Revenue 
        Service Restructuring and Reform Act of 1998)

                              PRESENT LAW

    The Code requires that the IRS include in every notice to 
an individual taxpayer requiring the payment of interest a 
computation of the interest and information regarding the 
provision of the Code under which interest is 
imposed.35 A similar requirement generally applies 
with respect to notices imposing penalties.36 In the 
case of notices issued after June 30, 2001, and before July 1, 
2003, these requirements were treated as met if the notice 
contained a telephone number for the IRS from whom the taxpayer 
could request the relevant information.
---------------------------------------------------------------------------
    \35\ Sec. 6631.
    \36\ Sec. 6751.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    In light of IRS resources and technology constraints, the 
Committee believes that the application of this special 
telephone number rule should be extended for several years.

                        EXPLANATION OF PROVISION

    The provision extends the application of this special 
telephone number rule.

                             EFFECTIVE DATE

    The provision is effective for notices issued before July 
1, 2006.

                    J. Expansion of Interest Netting


(Sec. 210 of the bill and sec. 6621 of the Code)

                              PRESENT LAW

    A special net interest rate of zero applies 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. If both the underpayment 
and overpayment are unsatisfied, the interest rate applied to 
both will be zero. If either the underpayment or overpayment 
has previously been satisfied, the interest rate applicable to 
the unsatisfied amount will be equal to the interest rate 
applicable to the satisfied amount to the extent that interest 
was allowable or payable on both the underpayment and the 
overpayment for the same period.
    Interest must be both payable and allowable for interest 
netting to apply. If interest is not payable by the taxpayer 
with respect to an underpayment of tax, or interest is not 
allowable to the taxpayer on an overpayment of tax, the 
interest netting rules will not apply.
    For example, on July 1, 2017, a deficiency of $1,500 is 
determined with respect to a taxpayer's 2014 Federal income tax 
return, which the taxpayer pays within 21 days. In the 
meantime, the taxpayer has filed returns for 2015 and 2016, 
showing a refund due to overwithholding each year of $1,000. 
The IRS issues the appropriate refund checks on May 15 of each 
year, within 45 days of the due date of the return. Thus, 
interest is not allowable to the taxpayer with respect to 
either 2015 or 2016. In this case, the taxpayer owes interest 
on the $1,500 year 2014 underpayment from the original due date 
of the return (April 15, 2015) until the underpayment is 
satisfied. Although, there are offsetting periods of 
overpayment (April 15, 2016 to May 15, 2016 and April 15, 2017 
to May 15, 2017), there is no offsetting period for which 
interest is allowable on an overpayment.

                           REASONS FOR CHANGE

    Interest represents the time value of money. The Committee 
believes that allowing taxpayers to consider the period of time 
the Secretary is allowed to process a refund in determining a 
net interest rate reflects this principle by recognizing that 
the government had use of the taxpayer's overpayment even 
though such overpayment was not allowable (i.e., periods of 
mutual indebtedness).

                        EXPLANATION OF PROVISION

    In the case of any taxpayer (whether an individual or 
corporation or other), the interest netting rules are applied 
without regard to the 45-day period in which the Secretary may 
refund an overpayment of tax without the payment of interest 
under section 6611(e). Solely for the purpose of the interest 
netting computation, the portion of the 45-day period before 
repayment of the overpayment is considered as a period for 
which overpayment interest was allowable at a zero rate. The 
provision does not modify the period for which interest is 
payable or allowable for any other purpose.
    In the example discussed as part of present law, above, a 
net interest rate of zero would be applied to $1,000 of the 
taxpayer's year 2014 underpayment for the periods between the 
due date of the 2015 and 2016 returns and the dates on which 
the refunds are made. The taxpayer in the example would owe 
interest at the underpayment rate for the periods from April 
16, 2015, to April 15, 2016; May 16, 2016 to April 15, 2017; 
and from May 16, 2017 to July 1, 2017. For the periods April 
15, 2016, to May 15, 2016 and April 15, 2017 to May 15, 2017, a 
zero net interest rate will apply.

                             EFFECTIVE DATE

    The provision is effective for interest accrued after 
December 31, 2010.

           TITLE III.--UNITED STATES TAX COURT MODERNIZATION


 A. Consolidate Review of Collection Due Process Cases in the Tax Court


(Sec. 301 of the bill and sec. 6330 of the Code)

                              PRESENT LAW

    In general, the Internal Revenue Service (``IRS'') is 
required to notify taxpayers that they have a right to a fair 
and impartial hearing before levy may be made on any property 
or right to property.37 Similar rules apply with 
respect to liens.38 The hearing is held by an 
impartial officer from the IRS Office of Appeals, who is 
required to issue a determination with respect to the issues 
raised by the taxpayer at the hearing. The taxpayer is entitled 
to appeal that determination to a court. The appeal must be 
brought to the Tax Court, unless the Tax Court does not have 
jurisdiction over the underlying tax liability. If that is the 
case, then the appeal must be brought in the district court of 
the United States.39 If a court determines that an 
appeal was not made to the correct court, the taxpayer has 30 
days after such determination to file with the correct court.
---------------------------------------------------------------------------
    \37\ Sec. 6330(a).
    \38\ Sec. 6320.
    \39\ Sec. 6330(d).
---------------------------------------------------------------------------
    The Tax Court is established under Article I of the United 
States Constitution 40 and is a court of limited 
jurisdiction.41 Thus, the Tax Court may not have 
jurisdiction over the underlying tax liability with respect to 
an appeal of a due process hearing relating to a collections 
matter. As a practical matter, many cases involving such 
appeals (whether within the jurisdiction of the Tax Court or a 
district court) do not involve the underlying tax liability.
---------------------------------------------------------------------------
    \40\ Sec. 7441.
    \41\ Sec. 7442.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Tax Court does not have jurisdiction over all of the 
tax issues underlying collection due process cases (such as 
issues involving most excise taxes). The judicial appeals 
structure of present law was designed in recognition of these 
jurisdictional limitations; however, in many cases the 
underlying taxes are not involved in determining the due 
process issue. The present-law structure can lead to confusion 
over which court is the proper court in which to file an 
appeal. Some believe that this confusion may also be used by 
some taxpayers seeking to delay the collection process. 
Accordingly, the Committee believes that the Tax Court should 
have jurisdiction over all appeals of collection due process 
determinations. The simplification provided will both benefit 
the taxpayers involved and the IRS by eliminating confusion 
over which court is the proper venue for appeal and will reduce 
the period of time before judicial review. This provision will 
also eliminate the opportunity to use the present-law rules in 
unintended ways to delay or defeat the collection process.

                        EXPLANATION OF PROVISION

    The provision modifies the jurisdiction of the Tax Court by 
providing that all appeals of collection due process 
determinations are to be made to the United States Tax Court.

                             EFFECTIVE DATE

    The provision applies to determinations made by the IRS 
after the date of enactment.

B. Extend Authority for Special Trial Judges To Hear and Decide Certain 
                        Employment Status Cases


(Sec. 302 of the bill and sec. 7443A of the Code)

                              PRESENT LAW

    In connection with the audit of any person, if there is an 
actual controversy involving a determination by the IRS as part 
of an examination that (1) one or more individuals performing 
services for that person are employees of that person or (2) 
that person is not entitled to relief under section 530 of the 
Revenue Act of 1978, the Tax Court has jurisdiction to 
determine whether the IRS is correct and the proper amount of 
employment tax under such determination.\42\ Any 
redetermination by the Tax Court has the force and effect of a 
decision of the Tax Court and is reviewable.
---------------------------------------------------------------------------
    \42\ Sec. 7436.
---------------------------------------------------------------------------
    An election may be made by the taxpayer for small case 
procedures if the amount of the employment taxes in dispute is 
$50,000 or less for each calendar quarter involved.\43\ The 
decision entered under the small case procedure is not 
reviewable in any other court and should not be cited as 
authority.
---------------------------------------------------------------------------
    \43\ Sec. 7436(c).
---------------------------------------------------------------------------
    The chief judge of the Tax Court may assign proceedings to 
special trial judges. The Code enumerates certain types of 
proceedings that may be so assigned and may be decided by a 
special trial judge. In addition, the chief judge may designate 
any other proceeding to be heard by a special trial judge.\44\
---------------------------------------------------------------------------
    \44\ Sec. 7443A.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that clarifying that special trial 
judges may decide proceedings involving a determination of 
employment status in which the amount of employment taxes in 
dispute is $50,000 or less for each calendar quarter involved 
will improve the operations and internal functioning of the Tax 
Court.

                        EXPLANATION OF PROVISION

    The provision clarifies that the chief judge of the Tax 
Court may assign to special trial judges any employment tax 
cases that are subject to the small case procedure and may 
authorize special trial judges to decide such small tax cases.

                             EFFECTIVE DATE

    The provision is effective for any action or proceeding in 
the Tax Court with respect to which a decision has not become 
final as of the date of enactment.

  C. Confirmation of Tax Court Authority To Apply Equitable Recoupment


(Sec. 303 of the bill and sec. 6214 of the Code)

                              PRESENT LAW

    Equitable recoupment is a common-law equitable principle 
that permits the defensive use of an otherwise time-barred 
claim to reduce or defeat an opponent's claim if both claims 
arise from the same transaction. U.S. District Courts and the 
U.S. Court of Federal Claims, the two Federal tax refund 
forums, may apply equitable recoupment in deciding tax refund 
cases.\45\ In Estate of Mueller v. Commissioner,\46\ the Court 
of Appeals for the Sixth Circuit held that the Tax Court may 
not apply the doctrine of equitable recoupment. More recently, 
the Court of Appeals for the Ninth Circuit, in Branson v. 
Commissioner,\47\ held that the Tax Court may apply the 
doctrine of equitable recoupment.
---------------------------------------------------------------------------
    \45\ See Stone v. White, 301 U.S. 532 (1937); Bull v. United 
States, 295 U.S. 247 (1935).
    \46\ 153 F.3d 302 (6th Cir.), cert. den., 525 U.S. 1140 (1999).
    \47\ 264 F.3d 904 (9th Cir.), cert. den., 2002 U.S. LEXIS 1545 
(U.S. Mar. 18, 2002).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is important to resolve the 
conflict among the circuit courts by eliminating the 
uncertainty or confusion of differing results in differing 
circuits. The Committee also believes that the provision will 
provide simplification benefits to both taxpayers and the IRS.

                        EXPLANATION OF PROVISION

    The provision confirms that the Tax Court may apply the 
principle of equitable recoupment to the same extent that it 
may be applied in Federal civil tax cases by the U.S. District 
Courts or the U.S. Court of Claims. No implication is intended 
as to whether the Tax Court has the authority to continue to 
apply other equitable principles in deciding matters over which 
it has jurisdiction.

                             EFFECTIVE DATE

    The provision is effective for any action or proceeding in 
the Tax Court with respect to which a decision has not become 
final as of the date of enactment.

                        D. Tax Court Filing Fee


(Sec. 304 of the bill and sec. 7451 of the Code)

                              PRESENT LAW

    The Tax Court is authorized to impose a fee of up to $60 
for the filing of any petition for the redetermination of a 
deficiency or for declaratory judgments relating to the status 
and classification of 501(c)(3) organizations, the judicial 
review of final partnership administrative adjustments, and the 
judicial review of partnership items if an administrative 
adjustment request is not allowed in full.\48\ The statute does 
not specifically authorize the Tax Court to impose a filing fee 
for the filing of a petition for review of the IRS's failure to 
abate interest or for failure to award administrative costs and 
other areas of jurisdiction for which a petition may be filed. 
The practice of the Tax Court is to impose a $60 filing fee in 
all cases commenced by petition.\49\
---------------------------------------------------------------------------
    \48\ Sec. 7451.
    \49\ See Rule 20(a) of the Tax Court Rules of Practice and 
Procedure.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to clarify that 
the Tax Court filing fee applies to any case commenced by the 
filing of a petition.

                        EXPLANATION OF PROVISION

    The provision provides that the Tax Court is authorized to 
charge a filing fee of up to $60 in all cases commenced by the 
filing of a petition.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                 E. Appointment of Tax Court Employees


(Sec. 305 of the bill and sec. 7471(a) of the Code)

                              PRESENT LAW

    The Tax Court is a legislative court established by the 
Congress pursuant to Article I of the U.S. Constitution (an 
``Article I'' court).\50\ The Tax Court is authorized to 
appoint employees, subject to the rules applicable to 
employment with the Executive Branch of the Federal Government 
(generally referred to as ``competitive service''), as 
administered by the Office of Personnel Management.\51\
---------------------------------------------------------------------------
    \50\ Sec. 7441.
    \51\ Sec. 7471.
---------------------------------------------------------------------------
    Employment with the Federal Executive Branch is governed by 
certain general statutory principles, such as recruitment of 
qualified individuals, fair and equitable treatment of 
employees and applicants, maintenance of high standards of 
employee conduct, and protection of employees against arbitrary 
action. The rules for employment in the Federal Executive 
Branch address various aspects of such employment, including: 
(1) procedures for the appointment of employees in the 
competitive service, including preferences for certain 
individuals (e.g., veterans); (2) compensation, benefits, and 
leave programs for employees; (3) appraisals of employee 
performance; (4) disciplinary actions; and (5) employee rights, 
including appeal rights. In addition, employees are protected 
from certain personnel practices (referred to as ``prohibited 
personnel practices''), such as discrimination on the basis of 
race, color, religion, age, sex, national origin, political 
affiliation, marital status, or handicapping condition.

                           REASONS FOR CHANGE

    The Tax Court was established as an Article I court in part 
because of its need for independence from the Executive Branch 
and its responsibility for reviewing determinations of a 
Federal Executive Branch agency (i.e., the Internal Revenue 
Service).\52\ Accordingly, the Committee believes that the Tax 
Court should have the authority to establish its own personnel 
system, rather than being subject to the rules administered by 
the Federal Executive Branch. Similar authority has previously 
been provided to other Article I courts and to courts 
established under Article III of the U.S. Constitution. The 
Committee also believes that a personnel system established by 
the Tax Court should be consistent with the general principles 
that govern other employment with the Federal Government and 
should provide certain protections to employees.
---------------------------------------------------------------------------
    \52\ See, e.g., S. Rep. No. 91-552, at 302 (1969).
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The provision extends to the Tax Court authority to 
establish its own personnel management system. Any personnel 
management system adopted by the Tax Court must: (1) include 
the merit system principles that govern employment with the 
Federal Executive Branch; (2) prohibit personnel practices that 
are prohibited in the Federal Executive Branch; and (3) in the 
case of an individual eligible for preference for employment in 
the Federal Executive Branch, provide preference for that 
individual in a manner and to an extent consistent with 
preference in the Federal Executive Branch.
    The provision requires the Tax Court to prohibit 
discrimination on the basis of race, color, religion, age, sex, 
national origin, political affiliation, marital status, or 
handicapping condition. The Tax Court is also required to 
promulgate procedures for resolving complaints of 
discrimination by employees and applicants for employment.
    The provision allows the Tax Court to appoint a clerk 
without regard to the Federal Executive Branch rules regarding 
appointments in the competitive service. Under the provision, 
the clerk serves at the pleasure of the Tax Court.
    The provision also allows the Tax Court to appoint other 
necessary employees without regard to the Federal Executive 
Branch rules regarding appointments in the competitive service. 
Under the provision, these employees are subject to removal by 
the Tax Court.
    The provision allows judges and special trial judges of the 
Tax Court to appoint law clerks and secretaries, in such 
numbers as the Tax Court may approve, without regard to the 
Federal Executive Branch rules regarding appointments in the 
competitive service. Under the provision, a law clerk or 
secretary serves at the pleasure of the appointing judge.
    The provision exempts law clerks from the sick leave and 
annual leave provisions applicable to employees of the Federal 
Executive Branch. Any unused sick or annual leave to the credit 
of a law clerk as of the effective date of the provision 
remains credited to the individual and is available to the 
individual upon separation from the Federal Government, or upon 
transfer to a position subject to such sick leave and annual 
leave provisions.
    The provision allows the Tax Court to fix and adjust the 
compensation of the clerk and other employees without regard to 
the Federal Executive Branch rules regarding employee 
classifications and pay rates. To the maximum extent feasible, 
Tax Court employees are to be compensated at rates consistent 
with those of employees holding comparable positions in the 
Federal Judicial Branch. The Tax Court may also establish 
programs for employee evaluations, premium pay, and resolution 
of employee grievances.
    In the case of an individual who is an employee of the Tax 
Court on the day before the effective date of the provision, 
the provision preserves certain rights that the employee is 
entitled to as of that day. The provision preserves the right 
to: (1) appeal a reduction in grade or removal; (2) appeal an 
adverse action; (3) appeal a prohibited personnel practice; (4) 
make an allegation of a prohibited personnel practice; or (5) 
file an employment discrimination appeal. These rights are 
preserved for as long as the individual remains an employee of 
the Tax Court.
    Under the provision, a Tax Court employee who completes at 
least one year of continuous service under a nontemporary 
appointment with the Tax Court acquires competitive service 
status for appointment to any position in the Federal Executive 
Branch competitive service for which the employee possesses the 
required qualifications.
    The provision also allows the Tax Court to procure the 
services of experts and consultants in accordance with Federal 
Executive Branch rules.

                             EFFECTIVE DATE

    The provision is effective on the date that the Tax Court 
adopts a personnel management system after date of enactment of 
the provision.

                       F. Use of Practitioner Fee


(Sec. 306 of the bill and sec. 7475 of the Code)

                              PRESENT LAW

    The Tax Court is authorized to impose on practitioners 
admitted to practice before the Tax Court a fee of up to $30 
per year.\53\ These fees are to be used to employ independent 
counsel to pursue disciplinary matters.
---------------------------------------------------------------------------
    \53\ Sec. 7475.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

    The provision provides that Tax Court fees imposed on 
practitioners also are available to provide services to pro se 
taxpayers.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                 G. Tax Court Pension and Compensation


1. Judges of the Tax Court (secs. 311-317 and 323 of the bill and secs. 
        7443, 7447, 7448, and 7472 of the Code)

                              PRESENT LAW

    The Tax Court is established by the Congress pursuant to 
Article I of the U.S. Constitution.\54\ The salary of a Tax 
Court judge is the same salary as received by a United States 
District Court judge.\55\ Present law also provides Tax Court 
judges with some benefits that correspond to benefits provided 
to United States District Court judges, including specific 
retirement and survivor benefit programs for Tax Court 
judges.\56\
---------------------------------------------------------------------------
    \54\ Sec. 7441.
    \55\ Sec. 7443(c).
    \56\ Secs. 7447 and 7448.
---------------------------------------------------------------------------
    Under the retirement program, a Tax Court judge may elect 
to receive retirement pay from the Tax Court in lieu of 
benefits under another Federal retirement program. A Tax Court 
judge may also elect to participate in a plan providing annuity 
benefits for the judge's surviving spouse and dependent 
children (the ``survivors' annuity plan''). Generally, benefits 
under the survivors' annuity plan are payable only if the judge 
has performed at least five years of service. Cost-of-living 
increases in benefits under the survivors' annuity plan are 
generally based on increases in pay for active judges.
    Tax Court judges participate in the Federal Employees Group 
Life Insurance program (the ``FEGLI'' program). Retired Tax 
Court judges are eligible to participate in the FEGLI program 
as the result of an administrative determination of their 
eligibility, rather than a specific statutory provision.
    Tax Court judges are not covered by the leave system for 
Federal Executive Branch employees. As a result, an individual 
who works in the Federal Executive Branch before being 
appointed to the Tax Court does not continue to accrue annual 
leave under the same leave program and may not use leave 
accrued prior to his or her appointment to the Tax Court.
    Tax Court judges are not eligible to participate in the 
Thrift Savings Plan.
    Tax Court judges are subject to limitations on outside 
earned income under the Ethics in Government Act of 1978.

                           REASONS FOR CHANGE

    Tax Court judges receive compensation at the same rate as 
United States District Court judges. In addition, the benefit 
programs for Tax Court judges are intended to accord with 
similar programs applicable to District Court judges.\57\ 
However, subsequent legislative changes in the benefits 
provided to District Court judges have not applied to Tax Court 
judges, thus creating disparities between the treatment of Tax 
Court judges and the treatment of District Court judges. The 
Committee believes that parity should exist between the 
benefits provided to Tax Court judges and those provided to 
District Court judges.
---------------------------------------------------------------------------
    \57\ See, e.g., S. Rep. No. 91-552, at 303 (1969).
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

Survivor annuities for assassinated judges

    Under the provision, benefits under the survivors' annuity 
plan are payable if a Tax Court judge is assassinated before 
the judge has performed five years of service.

Cost-of-living adjustments for survivor annuities

    The provision provides that cost-of-living increases in 
benefits under the survivors' annuity plan are generally based 
on cost-of-living increases in benefits paid under the Civil 
Service Retirement System.

Life insurance coverage

    Under the provision, a judge or retired judge of the Tax 
Court is deemed to be an employee continuing in active 
employment for purposes of participation in the Federal 
Employees Group Life Insurance program. In addition, in the 
case of a Tax Court judge age 65 or over, the Tax Court is 
authorized to pay on behalf of the judge any increase in 
employee premiums under the FEGLI program that occur after 
April 24, 1999,\58\ including expenses generated by such 
payment, as authorized by the chief judge of the Tax Court in a 
manner consistent with payments authorized by the Judicial 
Conference of the United States (i.e., the body with policy-
making authority over the administration of the courts of the 
Federal Judicial Branch).
---------------------------------------------------------------------------
    \58\ This date relates to changes in the FEGLI program, including 
changes to premium rates to reflect employees' ages.
---------------------------------------------------------------------------

Accrued annual leave

    Under the provision, in the case of a judge who is employed 
by the Federal Executive Branch before appointment to the Tax 
Court, the judge is entitled to receive a lump-sum payment for 
the balance of his or her accrued annual leave on appointment 
to the Tax Court.

Thrift Savings Plan participation

    Under the provision, Tax Court judges are permitted to 
participate in the Thrift Savings Plan. A Tax Court judge is 
not eligible for agency contributions to the Thrift Savings 
Plan.

Exemption for teaching compensation from outside earned income 
        limitations

    Under the provision, compensation earned by a retired Tax 
Court judge for teaching is not treated as outside earned 
income for purposes of limitations under the Ethics in 
Government Act of 1978.

                             EFFECTIVE DATE

    The provisions are effective on the date of enactment, 
except that: (1) the provision relating to cost-of-living 
increases in benefits under the survivors' annuity plan applies 
with respect to increases in Civil Service Retirement benefits 
taking effect after the date of enactment; (2) the provision 
relating to payment of accrued annual leave applies to any Tax 
Court judge with an outstanding leave balance as of the date of 
enactment and to any individual appointed to serve as a Tax 
Court judge after such date; (3) the provision relating to 
participation by Tax Court judges in the Thrift Savings Plan 
applies as of the next open season; and (4) the provision 
relating to teaching compensation of a retired Tax Court judge 
applies to any individual serving as a retired Tax Court judge 
on or after the date of enactment.

2. Special trial judges of the Tax Court (secs. 318-323 of the bill and 
        sec. 7448 and new secs. 7443A, 7443B, and 7443C of the Code)

                              PRESENT LAW

    The Tax Court is established by the Congress pursuant to 
Article I of the U.S. Constitution.\59\ The chief judge of the 
Tax Court may appoint special trial judges to handle certain 
cases.\60\ Special trial judges serve for an indefinite term. 
Special trial judges receive a salary of 90 percent of the 
salary of a Tax Court judge and are generally covered by the 
benefit programs that apply to Federal Executive Branch 
employees, including the Civil Service Retirement System or the 
Federal Employees' Retirement System.
---------------------------------------------------------------------------
    \59\ Sec. 7441.
    \60\ Sec. 7443A.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Special trial judges of the Tax Court perform a role 
similar to that of magistrate judges in courts established 
under Article III of the U.S. Constitution (``Article III'' 
courts). However, disparities exist between the positions of 
magistrate judges of Article III courts and special trial 
judges of the Tax Court. For example, magistrate judges of 
Article III courts are appointed for a specific term, are 
subject to removal only in limited circumstances, and are 
eligible for coverage under special retirement and survivor 
benefit programs. The Committee believes that special trial 
judges of the Tax Court and magistrate judges of Article III 
courts should receive comparable treatment as to the status of 
the position, salary, and benefits.

                        EXPLANATION OF PROVISION

Magistrate judges of the Tax Court

    Under the provision, the position of special trial judge of 
the Tax Court is renamed as magistrate judge of the Tax Court. 
Magistrate judges are appointed (or reappointed) to serve for 
eight-year terms and are subject to removal in limited 
circumstances.
    Under the provision, a magistrate judge receives a salary 
of 92 percent of the salary of a Tax Court judge.
    The provision exempts magistrate judges from the leave 
program that applies to employees of the Federal Executive 
Branch and provides rules for individuals who are subject to 
such leave program before becoming exempt.

Survivors' annuity plan

    Under the provision, magistrate judges of the Tax Court may 
elect to participate in the survivors' annuity plan for Tax 
Court judges. An election to participate in the survivors' 
annuity plan must be filed not later than the latest of six 
months after: (1) the date of enactment of the provision; (2) 
the date the judge takes office; or (3) the date the judge 
marries.

Retirement annuity program for magistrate judges

    The provision establishes a new retirement annuity program 
for magistrate judges of the Tax Court, under which a 
magistrate judge may elect to receive a retirement annuity from 
the Tax Court in lieu of benefits under another Federal 
retirement program. A magistrate judge may elect to be covered 
by the retirement program within five years of appointment or 
five years of date of enactment. A magistrate judge who elects 
to be covered by the retirement program generally receives a 
refund of contributions (with interest) made to the Civil 
Service Retirement System or the Federal Employees' Retirement 
System.
    A magistrate judge may retire at age 65 with 14 years of 
service and receive an annuity equal to his or her salary at 
the time of retirement. For this purpose, service may include 
service performed as a special trial judge or a magistrate 
judge, provided the service is performed no earlier than 9\1/2\ 
years before the date of enactment of the provision. The 
provision also provides for payment of a reduced annuity in the 
case a magistrate judge with at least eight years of service or 
in the case of disability or failure to be reappointed.
    A magistrate judge receiving a retirement annuity is 
entitled to cost-of-living increases based on cost-of-living 
increases in benefits paid under the Civil Service Retirement 
System. However, such an increase cannot cause the retirement 
annuity to exceed the current salary of a magistrate judge.
    Contributions of one percent of salary are withheld from 
the salary of a magistrate judge who elects to participate in 
the retirement annuity program. Such contributions must be made 
also with respect to prior service for which the magistrate 
judge elects credit under the retirement annuity program. No 
contributions are required after 14 years of service. A lump 
sum refund ofthe magistrate judge's contributions (with 
interest) is made if no annuity is payable, for example, if the 
magistrate judge dies before retirement.
    A magistrate judge's right to a retirement annuity is 
generally suspended or reduced in the case of employment 
outside the Tax Court.
    The provision includes rules under which annuity payments 
may be made to a person other than the magistrate judge in 
certain circumstances, such as divorce or legal separation, 
under a court decree, a court order, or court-approved property 
settlement.
    The provision establishes the Tax Court Judicial Officers' 
Retirement Fund (the ``Fund''). Amounts in the Fund are 
authorized to be appropriated for the payment of annuities, 
refunds, and other payments under the retirement annuity 
program. Contributions withheld from a magistrate judge's 
salary are deposited in the Fund. In addition, the provision 
authorizes to be appropriated to the Fund amounts required to 
reduce the Fund's unfunded liability to zero. For this purpose, 
the Fund's unfunded liability means the estimated excess, 
actuarially determined on an annual basis, of the present value 
of benefits payable from the Fund over the sum of (1) the 
present value of contributions to be withheld from the future 
salary of the magistrate judges and (2) the balance in the Fund 
as of the date the unfunded liability is determined.
    Under the provision, a magistrate judge who elects to 
participate in the retirement annuity program is also permitted 
to participate in the Thrift Savings Plan. Such a magistrate 
judge is not eligible for agency contributions to the Thrift 
Savings Plan.

Retirement annuity rule for incumbent magistrate judges

    The provision provides a transition rule for magistrate 
judges in active service on the date of enactment of the 
provision. Under the transition rule, such a magistrate judge 
is entitled to an annuity under the Civil Service Retirement 
System or the Federal Employees' Retirement System based on 
prior service that is not credited under the magistrate judges' 
retirement annuity program. If the magistrate judge made 
contributions to the Civil Service Retirement System or the 
Federal Employees' Retirement System with respect to service 
that is credited under the magistrate judges' retirement 
annuity program, such contributions are refunded (with 
interest).
    A magistrate judge who elects the transition rule is also 
entitled to the annuity payable under the magistrate judges' 
retirement program in the case of retirement with at least 
eight years of service or on failure to be reappointed. This 
annuity is based on service as a magistrate judge or special 
trial judge of the Tax Court that is performed no earlier than 
9\1/2\ years before the date of enactment of the provision and 
for which the magistrate judge makes contributions of one 
percent of salary.

Recall of retired magistrate judges

    The provision provides rules under which a retired 
magistrate judge may be recalled to perform services for a 
limited period.

                             EFFECTIVE DATE

    The provisions are effective on date of enactment.

               TITLE IV.--CONFIDENTIALITY AND DISCLOSURE


          A. Clarification of Definition of Church Tax Inquiry


(Sec. 401 of the bill and sec. 7611 of the Code)

                              PRESENT LAW

    Under present law, the IRS may begin a church tax inquiry 
only if an appropriate high-level Treasury official reasonably 
believes, on the basis of the facts and circumstances recorded 
in writing, that an organization (1) may not qualify for tax 
exemption as a church, (2) may be carrying on an unrelated 
trade or business, or (3) otherwise may be engaged in taxable 
activities.\61\ A church tax inquiry is defined as any inquiry 
to a church (other than an examination) that serves as a basis 
for determining whether the organization qualified for tax 
exemption as a church or whether it is carrying on an unrelated 
trade or business or otherwise is engaged in taxable 
activities. An inquiry is considered to commence when the IRS 
requests information or materials from a church of a type 
contained in church records, other than routine requests for 
information or inquiries regarding matters that do not 
primarily concern the tax status or liability of the church 
itself.
---------------------------------------------------------------------------
    \61\ Sec. 7611.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

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

                        DESCRIPTION OF PROVISION

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

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

B. Collection Activities With Respect to a Joint Return Disclosable to 
                  Either Spouse Based on Oral Request


(Sec. 402 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Section 6103(e) concerns disclosures to persons with a 
material interest. section 6103(e)(1)(B) requires, upon written 
request, the IRS to allow the inspection or disclosure of a 
joint return to either of the individuals with respect to whom 
the return is filed. Section 6103(e)(7) permits the IRS to 
disclose return information to the same persons who may have 
access to a return under the other provisions of section 
6103(e). Requests for information pursuant to section 
6103(e)(7) do not have to be in writing. Pursuant to section 
6103(e)(7) and section 6103(e)(1)(B), either spouse may obtain 
return information regarding a joint return, including 
collection information without making a written request.
    In response to concerns that former spouses were not able 
to obtain information regarding collection activities relating 
to a joint return, the Taxpayer Bill of Rights 2 added section 
6103(e)(8).\62\ When a deficiency is assessed with respect to a 
joint return and the individuals are no longer married or no 
longer reside in the same household, upon request in writing by 
either of such individuals, the IRS is required to disclose: 
(1) whether the IRS has attempted to collect such deficiency 
from the other individual; (2) the general nature of such 
collection activities; and (3) the amount collected.\63\
---------------------------------------------------------------------------
    \62\ ``The IRS does not routinely disclose collection information 
to a former spouse that relates to tax liabilities attributable to a 
joint return that was filed when married.'' Joint Committee on 
Taxation, General Explanation of Taxation Legislation Enacted in the 
104th Congress (JCS-12-96), December 18, 1996 at 29.
    \63\ Sec. 6103(e)(8).
---------------------------------------------------------------------------
    The Treasury Inspector General for Tax Administration 
conducts semiannual reports involving a review and 
certification of whether the Secretary is complying with the 
requirements of disclosing information to an individual filing 
a joint return on collection activity involving the other 
individual filing the return.\64\
---------------------------------------------------------------------------
    \64\ Sec. 7803(d)(1)(B).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that former spouses should be able 
to receive collection information with respect to a joint 
return in the same manner as if they were current spouses. 
Thus, a former spouse should not be required to make a written 
request because if the spouses were still married, a written 
request would not be required.

                        EXPLANATION OF PROVISION

    The provision eliminates the requirement for former spouses 
to make a written request for disclosure of collection 
activities with respect to a joint return. The provision also 
eliminates the Treasury Inspector General for Tax 
Administration's reporting requirement associated with the 
disclosure of collection activities with respect to a joint 
return.

                             EFFECTIVE DATE

    The provision is effective for requests and reports made 
after the date of enactment.

C. Taxpayer Representatives Not Subject to Examination on Sole Basis of 
                      Representation of Taxpayers


(Sec. 403 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Under section 6103(h)(1), returns and return information 
are, without written request, open to inspection by or 
disclosure to officers and employees of the Department of the 
Treasury, including IRS employees, whose official duties 
require such inspection or disclosure for tax administration 
purposes. The Office of Chief Counsel issued an opinion stating 
that it was appropriate for a local IRS employee to examine tax 
records to determine whether taxpayer representatives who 
submit Form 2848 (Power of Attorney) are current in their tax 
obligations.\65\ The opinion concluded that section 6103(h)(1) 
permits local IRS employees to access the Integrated Data 
Retrieval System \66\ to determine whether a taxpayer's 
representative is current in his or her tax obligations.
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    \65\ Internal Revenue Service, IRS Legal Memorandum ILM 199941038 
(August 19, 1999).
    \66\ The Integrated Data Retrieval System (commonly referred to as 
``IDRS'') is the IRS's primary computer database for return 
information.
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                           REASONS FOR CHANGE

    The Committee believes that the official duties of the IRS 
employee examining a taxpayer concern the tax affairs of the 
taxpayer, not the taxpayer's representative. The taxpayer is 
under audit, not the taxpayer's representative. Whether the 
representative has filed his or her returns ordinarily has no 
bearing on the IRS's determination of the liability of the 
taxpayer. An IRS employee should make a referral to the 
Director of Practice, if the employee has reason to believe the 
taxpayer's representative has engaged in inappropriate 
behavior.

                        EXPLANATION OF PROVISION

    The provision clarifies that an IRS employee conducting an 
examination of a taxpayer is not authorized to inspect a 
taxpayer representative's return or return information solely 
on the basis of the representative's relationship to the 
taxpayer. Under the provision, the supervisor of an IRS 
employee is required to approve such inspection after making a 
determination that other grounds justify such an inspection. 
The provision does not affect the ability of employees of the 
IRS Director of Practice, or other employees whose assigned 
duties concern the regulation of practice before the IRS, to 
access returns and return information of a representative.

                             EFFECTIVE DATE

    The provision is effective after the date of enactment.

  D. Prohibition of Disclosure of Taxpayer Identification Information 
      With Respect To Disclosure of Accepted Offers-in-Compromise


(Sec. 404 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Section 6103 permits the IRS to disclose return information 
to members of the general public to permit inspection of 
accepted offers in compromise.\67\ For one year after the date 
of execution, a copy of the Form 7249, ``Offer Acceptance 
Report,'' for each accepted offer in compromise with respect to 
any liability for a tax imposed by Title 26 is made available 
for inspection and copying in the location designated by the 
Compliance Area Director or Compliance Services Field Director 
within the Small Business and Self-Employed Division of the 
taxpayer's geographic area of residence.\68\ Currently, this 
form contains the taxpayer identification number of the 
taxpayer, e.g., the social security number in the case of an 
individual taxpayer, along with the taxpayer's name and full 
address.
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    \67\ Sec. 6103(k)(l).
    \68\ Treas. Reg. sec. 601.702(d)(8).
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                           REASONS FOR CHANGE

    The IRS's determination to accept an offer-in-compromise is 
based on decisions relating to analysis of the individual 
taxpayer's facts and circumstances and financial situation. 
Summaries of accepted offers-in-compromise, Form 7249--Offer 
Acceptance Report, are available for public inspection in the 
IRS district offices. Currently, this form contains the 
taxpayer identification number of the taxpayer, e.g., the 
social security number in the case of an individual taxpayer, 
along with the taxpayer's name and full address. The Committee 
believes that if disclosure is warranted, such disclosure 
should be limited to the least amount of information necessary. 
The Committee believes that the disclosure of a taxpayer's 
taxpayer identification number is unnecessary and an 
unwarranted invasion of privacy. In addition, the Committee 
believes such disclosure provides an opportunity for identity 
fraud and abuse.

                        EXPLANATION OF PROVISION

    The provision prohibits the disclosure of the taxpayer's 
taxpayer identification number as part of the publicly 
available summaries of accepted offers-in-compromise.

                             EFFECTIVE DATE

    The provision applies to disclosures made after the date of 
enactment.

      E. Compliance by Contractors With Confidentiality Safeguards


(Sec. 405 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Section 6103 permits the disclosure of returns and return 
information to State agencies, as well as to other Federal 
agencies for specified purposes. Section 6103(p)(4) requires, 
as conditions of receiving returns and return information, that 
State agencies (and others) provide safeguards as prescribed by 
the Secretary of the Treasury by regulation to be necessary or 
appropriate to protect the confidentiality of returns or return 
information.\69\ It also requires that a report be furnished to 
the Secretary at such time and containing such information as 
prescribed by the Secretary regarding the procedures 
established and utilized for ensuring the confidentiality of 
returns and return information.\70\ After an administrative 
review, the Secretary may take such actions as are necessary to 
ensure these requirements are met, including the refusal to 
disclose returns and return information.\71\
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    \69\ Sec. 6103(p)(4)(D).
    \70\ Sec. 6103(p)(4)(E).
    \71\ Sec. 6103(p)(4) (flush language) and (7); Treas. Reg. sec. 
301.6103(p)(7)-1.
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    Under present law, employees of a State tax agency may 
disclose returns and return information to contractors for tax 
administration purposes.\72\ These disclosures can be made only 
to the extent necessary to procure contractually equipment, 
other property, or the providing of services, related to tax 
administration.\73\
---------------------------------------------------------------------------
    \72\ Sec. 6103(n) and Treas. Reg. sec. 301.6103(n)-1(a). ``Tax 
administration'' includes ``the administration, management, conduct, 
direction, and supervision of the execution and application of internal 
revenue laws or related statutes (or equivalent laws and statutes of a 
State) * * *'' Sec. 6103(b)(4).
    \73\ Treas. Reg. sec. 301.6013(n)-1(a). Such services include the 
processing, storage, transmission or reproduction of such returns or 
return information, the programming, maintenance, repair, or testing of 
equipment or other property, or the providing of other services for 
purposes of tax administration.
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    The contractors can make redisclosures of returns and 
return information to their employees as necessary to 
accomplish the tax administration purposes of the contract, but 
only tocontractor personnel whose duties require 
disclosure.\74\ Treasury regulations prohibit redisclosure to anyone 
other than contractor personnel without the written approval of the 
IRS.\75\
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    \74\ Treas. Reg. sec. 301.6103(n)-1(a) and (b). A disclosure is 
necessary if such procurement or the performance of such services 
cannot otherwise be reasonably, properly, or economically accomplished 
without such disclosure. Treas. Reg. sec. 301.6103(n)-1(b). The 
regulations limit the quantity of information to that needed to perform 
the contract.
    \75\ Treas. Reg. sec. 301.6103(n)-1(a).
---------------------------------------------------------------------------
    By regulation, all contracts must provide that the 
contractor will comply with all applicable restrictions and 
conditions for protecting confidentiality prescribed by 
regulation, published rules or procedures, or written 
communication to the contractor.\76\ Failure to comply with 
such restrictions or conditions may cause the IRS to terminate 
or suspend the duties under the contract or the disclosures of 
returns and return information to the contractor.\77\ In 
addition, the IRS can suspend disclosures to the State tax 
agency until the IRS determines that the conditions are or will 
be satisfied.\78\ The IRS may take such other actions as deemed 
necessary to ensure that such conditions or requirements are or 
will be satisfied.\79\
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    \76\ Treas. Reg. sec. 301.6103(n)-1(d).
    \77\ Treas. Reg. sec. 301.6103(n)-1(d)(1).
    \78\ Treas. Reg. sec. 301.6103(n)-1(d)(2).
    \79\ Treas. Reg. sec. 301.6103(n)-1(d).
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                           REASONS FOR CHANGE

    The Committee notes the increasing use of contractors by 
government agencies to perform the work of the government. In 
the Committee's view, the IRS has insufficient resources to 
monitor the compliance of every contractor in addition to its 
other duties. Further, the Committee finds that it is 
appropriate to require that Federal, State and local agency 
recipients of tax information monitor and certify that their 
contractors and other agents have in place adequate safeguards 
to protect this information.

                        EXPLANATION OF PROVISION

    The provision requires that a State, local, or Federal 
agency conduct on-site reviews every three years of all of its 
contractors or other agents receiving Federal returns and 
return information. If the duration of the contract or 
agreement is less than one year, a review is required at the 
mid-point of the contract. The purpose of the review is to 
assess the contractor's efforts to safeguard Federal returns 
and return information. This review is intended to cover secure 
storage, restricting access, computer security, and other 
safeguards deemed appropriate by the Secretary. Under the 
provision, the State, local or Federal agency is required to 
submit a report of its findings to the IRS and certify annually 
that such contractors and other agents are in compliance with 
the requirements to safeguard the confidentiality of Federal 
returns and return information. The certification is required 
to include the name and address of each contractor or other 
agent with the agency, the duration of the contract, and a 
description of the contract or agreement with the State, local, 
or Federal agency.
    The provision does not apply to contracts for purposes of 
Federal tax administration.
    This provision does not alter or affect in any way the 
right of the IRS to conduct safeguard reviews of State, local, 
or Federal agency contractors or other agents. It also does not 
affect the right of the IRS to initially approve the safeguard 
language in the contract or agreement and the safeguards in 
place prior to any disclosures made in connection with such 
contracts or agreements.

                             EFFECTIVE DATE

    The provision is effective for disclosures made after the 
date of enactment. The first certification is required to be 
made with respect to the portion of calendar year 2004 
following the date of enactment.

    F. Higher Standards for Requests for and Consents to Disclosure


(Sec. 406 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

In general

    As a general rule, returns and return information are 
confidential and cannot be disclosed unless authorized by Title 
26.\80\ Under section 6103(c), a taxpayer may designate in a 
request or consent to the disclosure by the IRS of his or her 
return or return information to a third party. Treasury 
regulations set forth the requirements for such consent.\81\ 
The request or consent may be written or nonwritten form. The 
Treasury regulations require that the taxpayer sign and date a 
written consent. At the time the consent is signed and dated by 
the taxpayer, the written document must indicate (1) the 
taxpayer's taxpayer identity information; (2) the identity of 
the person to whom disclosure is to be made; (3) the type of 
return (or specified portion of the return) or return 
information (and the particular data) that is to be disclosed; 
and (4) the taxable year covered by the return or return 
information. The regulations also require that the consent be 
submitted within 60 days of the date signed and dated, however, 
at the time of submission, the IRS generally is unaware of 
whether a consent form was completed or dated after the 
taxpayer signs it. Present law does not require that a 
recipient receiving returns or return information by consent 
maintain the confidentiality of the information received. Under 
present law, the recipient is also free to use the information 
for purposes other than for which the information was solicited 
from the taxpayer.
---------------------------------------------------------------------------
    \80\ Sec. 6103(a).
    \81\ Treas. Reg. sec. 301.6103(c)-1.
---------------------------------------------------------------------------
    Section 6103(c) consents are often used in connection with 
mortgage loan applications. Mortgage originators qualify loan 
applicants as meeting or not meeting the requirements for loan 
approval. This process involves the verification and 
investigation of information and conditions. If the loan is 
granted, the mortgage originator may use its own money to fund 
the loan. Alternatively, another entity, an ``investor,'' may 
buy the loan and provide the money. Investors typically perform 
a re-investigation of loans received for funding. Such re-
investigations may include verification through the IRS of the 
tax return provided by the taxpayer to the mortgage originator.
    Usually the mortgage originator does not know which 
investor will ultimately fund the loan. Thus, at the time of 
application, the originator asks the borrower/taxpayer to sign 
a consent (Form 4506) designating the originator as the third 
party to receive the taxpayer's returns. Subsequently, at 
closing, the investor may request that the originator obtain 
another Form 4506 naming the investor as the third party to 
receive the taxpayer's return.
    Ostensibly to avoid confusion over why the taxpayer would 
be authorizing a party other than the originator to receive his 
tax return, the taxpayer may be asked to sign a blank Form 4506 
at closing. In some cases, mortgage originators ask taxpayers 
not to date the Form 4506. This allows the form to be submitted 
to the IRS at a later date, often months or years later, for 
purposes of mortgage resale.

Criminal penalties

    Under section 7206, it is a felony to willfully make and 
subscribe any document that contains or is verified by a 
written declaration that it is made under penalties of perjury 
and which such person does not believe to be true and correct 
as to every material matter.\82\ Upon conviction, such person 
may be fined up to $100,000 ($500,000 in the case of a 
corporation) or imprisoned up to 3 years, or both, together 
with the costs of prosecution.
---------------------------------------------------------------------------
    \82\ Sec. 7206(1).
---------------------------------------------------------------------------
    Under section 7213, criminal penalties apply to: (1) 
willful unauthorized disclosures of returns and return 
information by Federal and State employees and other persons; 
(2) the offering of any item of material value in exchange for 
a return or return information and the receipt of such 
information pursuant to such an offer; and (3) the unauthorized 
disclosure of return information received by certain 
shareholders under the material interest provision of section 
6103. Under section 7213, a court can impose a fine up to 
$5,000, up to five years imprisonment, or both, together with 
the costs of prosecution. If the offense is committed by a 
Federal employee or officer, the employee or officer will be 
discharged from office upon conviction.
    The willful and unauthorized inspection of returns and 
return information can subject Federal and State employees and 
others to a maximum fine of $1,000, up to a year in prison, or 
both, in addition to the costs of prosecution. If the offense 
is committed by a Federal employee or officer, the employee or 
officer will be discharged from office upon conviction.

Civil damage remedies for unauthorized disclosure or inspection

    If a Federal employee makes an unauthorized disclosure or 
inspection, a taxpayer can bring suit against the United States 
in Federal district court. If a person other than a Federal 
employee makes an unauthorized disclosure or inspection, suit 
may be brought directly against such person. No liability 
results from a disclosure based on a good faith, but erroneous, 
interpretation of section 6103. A disclosure or inspection made 
at the request of the taxpayer will also relieve liability.
    Upon a finding of liability, a taxpayer can recover the 
greater of $1,000 per act of unauthorized disclosure (or 
inspection), or the sum of actual damages plus, in the case of 
an inspection or disclosure that was willful or the result of 
gross negligence, punitive damages. The taxpayer may also 
recover the costs of the action and, if found to be a 
prevailing party, reasonable attorney fees.
    The taxpayer has two years from the date of the discovery 
of the unauthorized inspection or disclosure to bring suit. The 
IRS is required to notify a taxpayer of an unauthorized 
inspection or disclosure as soon as practicable after any 
person is criminally charged by indictment or information for 
unlawful inspection or disclosure.

                           REASONS FOR CHANGE

    The Committee does not believe that the practice of asking 
taxpayers to sign blank or undated consent forms is 
appropriate. While recognizing that investors may want to 
minimize their risks in buying a loan, the Committee finds that 
these practices can abuse the taxpayer consent process. It is 
doubtful that a taxpayer is aware that by not dating the form, 
it could be used months or years after the date it is executed. 
Taxpayers may be unaware that a blank consent form which does 
not designate a recipient can be used for purposes other than 
those related to the transaction under which the request for 
consent arose.
    In addition, the IRS does not have the resources to verify 
that the return information was used solely for the stated 
purpose. The IRS estimates that it receives annually more than 
800,000 requests from taxpayers directing that their returns or 
return information be sent to a third party. Examples of third 
party entities to which the IRS provides information include 
financial institutions (including the mortgage banking 
industry), colleges and universities, and Federal, State, and 
local governmental entities.
    The Committee believes that to preserve the integrity of 
the consent process, a penalty must be placed on the third 
party soliciting a taxpayer to sign an undated or otherwise 
incomplete consent. Consistent with a taxpayer's reasonable 
expectation of privacy, the Committee believes that limitations 
should be placed on the use of returns and return information 
obtained by consent.

                        EXPLANATION OF PROVISION

    The provision requires the consent form prescribed by the 
IRS to contain a warning, prominently displayed, informing the 
taxpayer that he or she should not sign the form unless it is 
complete. The provision requires the consent form to state that 
if the taxpayer believes there is an attempt to coerce him to 
sign an incomplete or blank form, the taxpayer should report 
the matter to the Treasury Inspector General for Tax 
Administration. The telephone number and address for the 
Treasury Inspector General for Tax Administration must be 
included on the form. The returns and return information of any 
taxpayer disclosed to a designee of the taxpayer for a purpose 
specified in writing, electronically, or orally may be 
disclosed or used by such persons only for the purpose of, and 
to the extent necessary in, accomplishing the purpose for the 
disclosure specified and cannot not be disclosed or used for 
any other purpose. The provision makes a violation of these 
requirements, or use or disclosure of information obtained by 
consent for purposes not permitted by section 6103, punishable 
by a civil penalty.
    The Secretary of Treasury is required to submit a report to 
Congress on compliance with the designation and certification 
requirements no later than 18 months after the date of 
enactment. Such report must evaluate (on the basis of random 
sampling) whether the provision is achieving its purpose, 
whether requesters and submitters are continuing to evade the 
purpose of the provision, whether the sanctions are adequate, 
and such recommendations as considered necessary or appropriate 
to better achieve the purposes of the provision.
    Any request for or consent to disclose any return or return 
information under section 6103(c) made before the date of 
enactment of the provision remains in effect until the earlier 
of the date such request or consent is otherwise terminated or 
the date three years after the date of enactment.

                             EFFECTIVE DATE

    The provision applies to requests and consents made after 
three months after the date of enactment.

   G. Civil Damage Remedies for Unauthorized Disclosure or Inspection


(Sec. 407 of the bill and sec. 7431 of the Code)

                              PRESENT LAW

    If a Federal employee makes an unauthorized disclosure or 
inspection, a taxpayer can bring suit against the United States 
in Federal district court. If a person other than a Federal 
employee makes an unauthorized disclosure or inspection, suit 
may be brought directly against such person. No liability 
results from a disclosure based on a good faith, but erroneous, 
interpretation of section 6103. A disclosure or inspection made 
at the request of the taxpayer will also relieve liability.
    Upon a finding of liability, a taxpayer can recover the 
greater of $1,000 per act of unauthorized disclosure (or 
inspection), or the sum of actual damages plus, in the case of 
an inspection or disclosure that was willful or the result of 
gross negligence, punitive damages. The taxpayer may also 
recover the costs of the action and, if found to be a 
prevailing party, reasonable attorney fees.
    The taxpayer has two years from the date of the discovery 
of the unauthorized inspection or disclosure to bring suit. The 
IRS is required to notify a taxpayer of an unauthorized 
inspection or disclosure as soon as practicable after any 
person is criminally charged by indictment or information for 
unlawful inspection or disclosure.

                           REASONS FOR CHANGE

    Currently, the IRS is not required to notify a taxpayer 
that an unlawful disclosure or inspection of the taxpayer's 
return or return information has occurred until the offender 
has been charged by criminal indictment or information. 
Accordingly, the Committee believes that the IRS should provide 
notice to taxpayers if an administrative determination is made 
as to any disciplinary or adverse action against an IRS 
employee when returns or return information have been 
unlawfully accessed or disclosed. The Committee also believes 
that it is important that such notice include the date of 
inspection or disclosure and the rights of the affected 
taxpayer.
    The Committee believes that a taxpayer should exhaust all 
administrative remedies within the IRS prior to receiving an 
award of damages.
    The Committee believes that the Secretary of Treasury 
should report annually to the Committee on Finance of the 
Senate and the Committee on Ways and Means of the House of 
Representatives when damage claim payments are made from the 
United States Judgment Fund.
    The Committee also believes that the IRS should provide as 
part of its public annual report information on unauthorized 
disclosures or inspections of return and return information. 
The Committee believes such information will allow review of 
the enforcement efforts in this area and the extent to which 
taxpayer privacy is being protected.

                        EXPLANATION OF PROVISION

    The provision requires the Secretary to notify a taxpayer 
if the IRS or, upon notice to the Secretary by a Federal or 
State agency, if such Federal or State agency, proposes an 
administrative determination as to disciplinary or adverse 
action against an employee arising from the employee's 
unauthorized inspection or disclosure of the taxpayer's return 
or return information. The provision requires the notice to 
include the date of the inspection or disclosure and the rights 
of the taxpayer as a result of such administrative 
determination.
    Under the provision, in action for civil damages for 
unauthorized disclosure or inspection, any person who made the 
inspection or disclosure bears the burden of proving the 
existence of a good faith interpretation of section 6103 to 
avoid liability.
    The provision adds a new exhaustion of administrative 
remedies requirement. A judgment for damages will not be 
awarded unless the court determines that the plaintiff has 
exhausted the administrative remedies available. The provision 
also clarifies that unauthorized disclosure or inspection 
damage claims are payable out of funds appropriated under 
section 1304 of title 31 of the United States Code (relating to 
the United States Judgment Fund). Both administrative 
settlements and settlements of judicial proceedings are paid 
out of this fund. The Secretary of the Treasury will report 
annually to the Committee on Finance of the Senate and the 
Committee on Ways and Means of the House of Representatives 
regarding damage claim payments made from the United States 
Judgment Fund.
    As part of its public report on disclosures, the provision 
requires the Secretary to furnish information regarding the 
willful unauthorized disclosure and inspection of returns and 
return information. Such information includes the number, 
status, and results of: (1) administrative investigations, (2) 
civil lawsuits brought under section 7431 (including the 
amounts for which such lawsuits were settled and the amounts of 
damages awarded), and (3) criminal prosecutions.

                             EFFECTIVE DATE

    The provision is effective: (1) for determinations made 
after 180 days after the date of enactment with respect to the 
taxpayer notice requirement; (2) for inspections and 
disclosures occurring on and after 180 days after the date of 
enactment with respect to the provisions relating to the 
exhaustion of administrative remedies and burden of proof; (3) 
180 days after the date of enactment with respect to the 
payment authority; and (4) for calendar years ending after 180 
days after the date of enactment with respect to the reporting 
requirements.

           H. Expanded Disclosure in Emergency Circumstances


(Sec. 408 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Section 6103(i)(3)(B) permits the IRS to disclose return 
information to the extent necessary to apprise Federal or State 
law enforcement officials of circumstances involving an 
imminent danger of death or physical injury to an individual. 
Recipients of such information are required to adhere to 
certain recordkeeping, reporting, and safeguard requirements as 
a condition of receiving such information (sec. 6103(p)(4)). 
Upon completion of use of such information, the Code requires 
the recipient to return the information to the IRS or make the 
information undisclosable and furnish a report to the IRS as to 
the manner in which the information was made undisclosable 
(``destruction requirements'') (sec. 6103(p)(4)(F)(i)).

                           REASONS FOR CHANGE

    Local law enforcement officials need to receive information 
regarding exigent circumstances in the same manner that Federal 
and State law enforcement officials receive such information. 
The Committee believes that expanding this provision to permit 
disclosure to local law enforcement authorities will permit 
more rapid response to these situations.

                        EXPLANATION OF PROVISION

    The provision expands present law to permit disclosure of 
return information to local law enforcement authorities to 
apprise them of circumstances involving imminent danger of 
death or physical injury to an individual. The provision 
eliminates the recordkeeping, safeguard and destruction 
requirements for all such disclosures to Federal, State or 
local law enforcement officials.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

       I. Disclosure of Taxpayer Identity for Tax Refund Purposes


(Sec. 409 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    When the IRS is unable to find a taxpayer due a refund, 
present law provides that the IRS may use ``the press or other 
media'' to notify the taxpayer of the refund.\83\ Section 
6103(m) allows the IRS to give the press taxpayer identity 
information for this purpose.\84\ Taxpayer identity includes 
name, mailing address, taxpayer identification number or 
combination thereof.
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    \83\ Sec. 6103(m)(1). This section provides:
    The Secretary may disclose taxpayer identity information to the 
press or other media for purposes of notifying persons entitled to tax 
refunds when the Secretary, after reasonable effort and lapse of time, 
has been unable to locate such persons.
    \84\ Sec. 6103(m)(1), and (b)(6) (definition of ``taxpayer 
identity'').
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    The IRS believes that the current statutory framework of 
``press and other media'' does not permit disclosures via the 
Internet. The legislative history of the present-law provision 
does not address the meaning of ``press and other media.'' At 
the time of the statute's enactment in 1976, the press 
(newspapers and periodicals) and other traditional media were 
the only means available for the IRS to distribute undelivered 
refund information to the public. Thus, the IRS interprets the 
term ``other media'' to exclude the Internet.

                           REASONS FOR CHANGE

    In November 2002, the IRS announced that the U.S. Postal 
Service returned more than 96,792 refund checks as 
undeliverable.\85\ These checks totaled over $80 million.\86\ 
It is the understanding of the Committee that the current 
method of notification, by newspaper, is ineffective. The 
Committee believes that the IRS should be able to use any 
method of mass communication, including the Internet, to reach 
a taxpayer who is due a refund.
---------------------------------------------------------------------------
    \85\ Internal Revenue Service, Information Release IR-2002-121 
(November 13, 2002).
    \86\ Id.
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                        explanation of provision

    The provision allows the IRS to use any means of ``mass 
communication,'' including the Internet, to notify the taxpayer 
of an undelivered refund. It limits the amount of return 
information that may be disclosed to a taxpayer's name, and the 
city, State, and zip code of the taxpayer's mailing address.

                             EFFECTIVE DATE

    The provision is effective upon date of enactment.

J. Disclosure to State Officials of Proposed Actions Related to Section 
                          501(c) Organizations


(Sec. 410 of the bill and sec. 6104 of the Code)

                              PRESENT LAW

    In the case of organizations that are described in section 
501(c)(3) and exempt from tax under section 501(a) or that have 
applied for exemption as an organization so described, present 
law (sec. 6104(c)) requires the Secretary to notify the 
appropriate State officer of (1) a refusal to recognize such 
organization as an organization described in section 501(c)(3), 
(2) a revocation of a section 501(c)(3) organization's tax-
exempt status, and (3) the mailing of a notice of deficiency 
for any tax imposed under section 507, chapter 41, or chapter 
42.\87\ In addition, at the request of such appropriate State 
officer, the Secretary is required to make available for 
inspection and copying, such returns, filed statements, 
records, reports, and other information relating to the above-
described disclosures, as are relevant to any State law 
determination. An appropriate State officer is the State 
attorney general, State tax officer, or any State official 
charged with overseeing organizations of the type described in 
section 501(c)(3).
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    \87\ The applicable taxes include the termination tax on private 
foundations; taxes on public charities for certain excess lobbying 
expenses; taxes on a private foundation's net investment income, self-
dealing activities, undistributed income, excess business holdings, 
investments that jeopardize charitable purposes, and taxable 
expenditures (some of these taxes also apply to certain non-exempt 
trusts); taxes on the political expenditures and excess benefit 
transactions of section 501(c)(3) organizations; and certain taxes on 
black lung benefit trusts and foreign organizations.
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    In general, return and return information (as such terms 
are defined in sec. 6103(b)) is confidential and may not be 
disclosed or inspected unless expressly provided by law.\88\ 
Present law requires the Secretary to keep records of 
disclosures and requests for inspection \89\ and requires that 
persons authorized to receive return and return information 
maintain various safeguards to protect such information against 
unauthorized disclosure.\90\ Willful unauthorized disclosure or 
inspection of return or return information is subject to a fine 
and/or imprisonment.\91\ The knowing or negligent unauthorized 
inspection or disclosure of returns or return information gives 
the taxpayer a right to bring a civil suit.\92\ Such present-
law protections against unauthorized disclosure or inspection 
of return and return information do not apply to the 
disclosures or inspections, described above, that are 
authorized by section 6104(c).
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    \88\ Sec. 6103(a).
    \89\ Sec. 6103(p)(3).
    \90\ Sec. 6103(p)(4).
    \91\ Secs. 7213 and 7213A.
    \92\ Sec. 7431.
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                           REASONS FOR CHANGE

    The Committee believes that State officials that are 
charged with oversight of certain organizations described in 
section 501(c) have an important and legitimate interest in 
receiving certain information about such organizations' tax-
exempt status and tax filings, in some cases before the IRS has 
made a final determination with respect to an organization's 
tax-exempt status or liability for tax. By providing 
appropriate State officials with earlier access to information 
about the activities of certain section 501(c) organizations, 
State officials will be able to monitor such organizations more 
effectively and better protect the public's interest in 
assuring that organizations that have been given the benefit of 
tax-exemption operate consistently with their exempt 
purposes.\93\
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    \93\ The staff of the Joint Committee on Taxation recommended the 
adoption of a similar provision. Joint Committee on Taxation, Study of 
Present-Law Taxpayer Confidentiality and Disclosure Provisions as 
Required by Section 3802 of the Internal Revenue Service Restructuring 
and Reform Act of 1998, Volume II: Study of Disclosure Provisions 
Relating to Tax-Exempt Organizations (JCS-1-00), January 28, 2000 at 
101-105.
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    The Committee stresses the importance of maintaining the 
confidentiality of taxpayer return and return information and 
believes it is important to extend existing protections against 
unauthorized disclosure or inspection of return and return 
information to disclosures made or inspections allowed by the 
Secretary of return and return information regarding such 
section 501(c) organizations.

                        EXPLANATION OF PROVISION

    The provision provides that upon written request by an 
appropriate State officer, the Secretary may disclose: (1) a 
notice of proposed refusal to recognize an organization as a 
section 501(c)(3) organization; (2) a notice of proposed 
revocation of tax-exemption of a section 501(c)(3) 
organization; (3) the issuance of a proposed deficiency of tax 
imposed under section 507, chapter 41, or chapter 42; (4) the 
names, addresses, and taxpayer identification numbers of 
organizations that have applied for recognition as section 
501(c)(3) organizations; and (5) returns and return information 
of organizations with respect to which information has been 
disclosed under (1) through (4) above.\94\ Disclosure or 
inspection is permitted for the purpose of, and only to the 
extent necessary in, the administration of State laws 
regulating section 501(c)(3) organizations, such as laws 
regulating tax-exempt status, charitable trusts, charitable 
solicitation, and fraud. Disclosure or inspection may be made 
only to or by designated representatives of the appropriate 
State officer, which does not include any contractor or agent. 
The Secretary also is permitted to disclose or open to 
inspection the return and return information of an organization 
that is recognized as tax-exempt under section 501(c)(3), or 
that has applied for such recognition, to an appropriate State 
officer if the Secretary determines that disclosure or 
inspection may facilitate the resolution of Federal or State 
issues relating to the tax-exempt status of the organization. 
For this purpose, appropriate State officer means the State 
attorney general or any other State official charged with 
overseeing organizations of the type described in section 
501(c)(3).
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    \94\ Such returns and return information also may be open to 
inspection by an appropriate State officer.
---------------------------------------------------------------------------
    In addition, the provision provides that upon the written 
request by an appropriate State officer, the Secretary may make 
available for inspection or disclosure returns and return 
information of an organization described in section 501(c)(2) 
(certain title holding companies), 501(c)(4) (certain social 
welfare organizations), 501(c)(6) (certain business leagues and 
similar organizations), 501(c)(7) (certain recreational clubs), 
501(c)(8) (certain fraternal organizations), 501(c)(10) 
(certain domestic fraternal organizations operating under the 
lodge system), and 501(c)(13) (certain cemetery companies). 
Such return and return information is available for inspection 
or disclosure only for the purpose of, and to the extent 
necessary in, the administration of State laws regulating the 
solicitation or administration of the charitable funds or 
charitable assets of such organizations. Disclosure or 
inspection may be made only to or by designated representatives 
of the appropriate State officer, which does not include any 
contractor or agent. For this purpose, appropriate State 
officer means the State attorney general and the head of an 
agency designated by the State attorney general as having 
primary responsibility for overseeing the solicitation of funds 
for charitable purposes of such organizations.
    In addition, the provision provides that any return and 
return information disclosed under section 6104(c) may be 
disclosed in civil administrative and civil judicial 
proceedings pertaining to the enforcement of State laws 
regulating the applicable tax-exempt organization in a manner 
prescribed by the Secretary. Returns and return information are 
not to be disclosed under section 6104(c), or in such an 
administrative or judicial proceeding, to the extent that the 
Secretary determines that such disclosure would seriously 
impair Federal tax administration. The provision makes 
disclosures of returns and return information under section 
6104(c) subject to the disclosure, recordkeeping, and safeguard 
provisions of section 6103, including the requirements that 
such information remain confidential (sec. 6103(a)(2)), that 
the Secretary maintain a permanent system of records of 
requests for disclosure (sec. 6103(p)(3)), and that the 
appropriate State officer maintain various safeguards that 
protect against unauthorized disclosure (sec. 6103(p)(4)). The 
provision provides that the willful unauthorized disclosure of 
returns or return information described in section 6104(c) is a 
felony subject to a fine of up to $5,000 and/or imprisonment of 
up to five years (sec. 7213(a)(2)), the willful unauthorized 
inspection of returns or return information described in 
section 6104(c) is subject to a fine of up to $1,000 and/or 
imprisonment of up to one year (sec. 7213A), and provides the 
taxpayer the right to bring a civil action for damages in the 
case of knowing or negligent unauthorized disclosure or 
inspection of such information (sec. 7431(a)(2)).

                             EFFECTIVE DATE

    The provision is effective on the date of enactment but 
does not apply to requests made before such date.

                     K. Treatment of Public Records


(Sec. 411 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Section 6103 provides that ``returns and return information 
shall be confidential and except as authorized by this title * 
* * [none of the identified persons] shall disclose any return 
or return information obtained by him * * *'' \95\ A taxpayer 
can sue the United States government for the unauthorized 
disclosure and/or inspection of returns and return 
information.\96\ Section 6103 does not expressly address the 
disclosure of returns and return information made a part of the 
public record.
---------------------------------------------------------------------------
    \95\ Sec. 6103(a).
    \96\ Sec. 7431.
---------------------------------------------------------------------------
    Returns and return information become part of the public 
record in many ways. For example, returns and return 
information introduced in judicial proceedings constitutes 
publicly available court records.\97\ As another example, 
notices of Federal tax lien filed with the county recorder 
alert the public of the IRS's interest in a taxpayer's 
property.\98\
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    \97\ See, e.g., sec. 7461 regarding the publicity of U.S. Tax Court 
proceedings.
    \98\ See sec. 6323(f) regarding where to file notices of Federal 
tax lien.
---------------------------------------------------------------------------
    The courts are divided on whether section 6103 applies to 
publicly disclosed returns and return information. Some courts 
have strictly interpreted section 6103, applying it despite the 
information's public availability. Other courts have found that 
returns and return information found in the public record loses 
its confidential status so that a person disclosing it does not 
violate section 6103. Still other courts have looked to the 
source of the information being disclosed. These courts find 
that section 6103 does not protect returns and return 
information taken directly from a public source, while 
information taken directly from IRS records remains protected.

                           REASONS FOR CHANGE

    The Committee believes that Congress sought to prohibit 
only the disclosure of confidential tax return information. 
Once tax return information is made a part of the public 
domain, the taxpayer may no longer claim a right of privacy in 
that information. The Committee believes that, in general, it 
is inappropriate to treat information that has properly been 
made part of the public record as continuing to be subject to 
the general rules of confidentiality contained in the Code.

                        EXPLANATION OF PROVISION

    Under the provision, the general confidentiality 
restrictions do not apply to returns and return information 
disclosed: (1) in the course of any judicial or administrative 
proceeding or pursuant to tax administration activities, and 
(2) properly made part of the public record. In a situation in 
which a third-party is seeking to have the IRS divulge 
information that would otherwise be protected by section 6103, 
the Committee expects the third party to initially point to 
specific information in the public record that appears to 
duplicate that being withheld. For example, if a third party 
makes a Freedom of Information Act request for a record that is 
contained both in a publicly available court file and also in 
an IRS administrative file, the requester would need to provide 
to the IRS evidence that the information sought from the IRS is 
also in the court file.

                             EFFECTIVE DATE

    The provision is effective before, on, and after the date 
of enactment.

                    L. Employee Identity Disclosures


(Sec. 412 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    In such manner as prescribed by regulation, IRS and 
Treasury Inspector General for Tax Administration personnel may 
disclose return information in connection with their official 
duties relating to any audit, collection activity, or civil or 
criminal tax investigation, or any offense under the internal 
revenue laws.\99\ Such disclosure may only be made to the 
extent necessary in obtaining information not otherwise 
reasonably available with respect to the correct determination 
of tax, liability for tax, or the amount collected or with 
respect to the enforcement of any other provision of the Code.
---------------------------------------------------------------------------
    \99\ Sec. 6103(k)(6).
---------------------------------------------------------------------------
    IRS special agents are investigating agents of the IRS 
Criminal Investigation (``CI''). These agents investigate tax 
crimes. In unauthorized disclosure litigation, taxpayers have 
asserted that CI special agents, by various means, wrongfully 
disclosed the criminal nature of the investigation of the 
taxpayers in the course of conducting third party witness 
interviews or inquiries.\100\ For example, in Gandy v. United 
States,\101\ the court held that a special agent made an 
unauthorized disclosure of return information when the agent 
identified himself as such during interviews of third parties. 
The court found that the agent by identifying himself disclosed 
the fact of a criminal investigation. The fact of a criminal 
investigation is return information protected by section 6103 
and the court found that such disclosure was not necessary to 
obtain information from the third parties.
---------------------------------------------------------------------------
    \100\ See, e.g., Comyns v. United States, 155 F. Supp. 2d 1344 
(S.D. Fla. 2001), aff'd, 287 F.3d 1034 (11th Cir. 2002); Payne v. 
United States, 91 F. Supp. 2d 1014 (S.D. Tex. 1999), rev'd, 289 F.3d 
377 (5th Cir. 2002); Gandy v. United States, 99-1 U.S. Tax Cas. (CCH) 
50,237 (E.D. Tex. 1999), aff'd, 234 F.3d 281 (5th Cir. 2000); Rhodes v. 
United States, 903 F. Supp. 819 (M.D. Pa. 1995); Diamond v. United 
States, 944 F.2d 431 (8th Cir. 1991).
    \101\ 243 F.3d 281 (2000).
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    On July 10, 2003, the Department of Treasury issued 
temporary regulations, effective on that date, which allow 
internal revenue employees to identify themselves and their 
organizational affiliation, and the nature of their 
investigation when making contact with a third party witness:

          (3) Internal revenue and [Treasury Inspector General 
        for Tax Administration (``TIGTA'')] employees may 
        identify themselves, their organizational affiliation 
        with the Internal Revenue Service (IRS) (e.g., Criminal 
        Investigation (CI)) or TIGTA (e.g., Office of 
        Investigations (OI)), and the nature of their 
        investigation, when making an oral, written, or 
        electronic contact with a third party witness through 
        the use and presentation of any identification media 
        (including, but not limited to, an IRS or TIGTA badge, 
        credential, or business card) or through the use of an 
        information document request, summons, or 
        correspondence on IRS or TIGTA letterhead or which 
        bears a return address or signature block that reveals 
        affiliation with the IRS or TIGTA.\102\
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    \102\ Treas. Reg. sec. 301.6103(k)(6)-1T(a)(3). It is not clear 
whether the regulations permit an IRS employee to disclose their 
organizational affiliation orally, for example, as part of a telephone 
conversation.
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                           REASONS FOR CHANGE

    Department of Treasury agents are specifically authorized 
\103\ to disclose return information to the extent necessary to 
gather data that may be relevant to an investigation. 
Situations in which special agents may have to make such 
disclosures in order to perform their duties arise on a daily 
basis. For example, this occurs whenever they contact third 
parties believed to have information pertinent to a tax 
investigation. The Committee believes that it is appropriate to 
permit Department of Treasury agents (in connection with their 
official duties) to disclose return information to the extent 
necessary to obtain information relating to such official 
duties or to properly accomplish any activity connected with 
such official duties.
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    \103\ Sec. 6103(k)(6).
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The provision amends section 6103 to provide that nothing 
in section 6103 may be construed to prohibit agents of the 
Department of Treasury from identifying themselves, their 
organizational affiliation, and the nature of an investigation 
when contacting third parties in writing or in person.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

               M. Taxpayer Identification Number Matching


(Sec. 413 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    A taxpayer identification number (TIN) is an identification 
number used by the IRS for purposes of tax administration. A 
TIN must be furnished on all returns, statements, or other tax 
related documents.\104\ The Code imposes information reporting 
requirements upon payors of income. The Code provides that a 
person (the payor) required to make a return with respect to 
another person (the payee) must ask the payee for the 
identifying number prescribed for securing the proper 
identification of the payee and include that number in the 
return.\105\ Typically, if there is an error with the name/TIN 
combination furnished by the payee, the disclosure of such 
error to the payor is permitted when the reportable payment is 
already subject to backup withholding.\106\
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    \104\ Sec. 6109(a)(1).
    \105\ Sec. 6109(a)(3).
    \106\ Sec. 3406.
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                           REASONS FOR CHANGE

    The Committee is concerned with the number of information 
returns that the IRS receives each year containing missing or 
incorrect name and TIN information. Therefore, the Committee 
believes that compliance will be greatly enhanced if payors 
have the ability to verify with the IRS payee TINs prior to 
filing information returns for reportable payments on behalf of 
such payees.

                        EXPLANATION OF PROVISION

    The provision permits the IRS to disclose to any person 
required to provide a taxpayer identifying number to the IRS 
whether such information matches records maintained by the IRS. 
This will allow a payor to verify the TIN furnished by a payee 
prior to filing information returns for reportable payments on 
behalf of the payee. Under the provision, the IRS informs the 
payor whether there is an error with the name/TIN combination 
furnished by the payee. The verification is limited to whether 
the information provided by the payor matches the records of 
the IRS. The IRS will not disclose correct TINs if an error 
arises, as it will be the responsibility of the payor to obtain 
the correct TIN from the payee.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                        N. Form 8300 Disclosures


(Sec. 414 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Under the Code, any person engaged in a trade or business 
who receives more than $10,000 in cash in one transaction (or 
in two or more related transactions) is required to report the 
receipt of cash to the IRS and the Financial Crimes Enforcement 
Network (FinCEN) on Form 8300 (Report of Cash Payments Over 
$10,000 Received in a Trade or Business).\107\ Any Federal 
agency, State or local government agency, or foreign government 
agency may have access, upon written request, to the 
information contained in returns filed under section 6050I. The 
Code provides that disclosures of information from Form 8300 be 
made on the same basis and subject to the same conditions as 
apply to disclosures of information filed on Currency 
Transaction Reports under the Bank Secrecy Act.\108\ This 
provision however, cannot be used to obtain disclosures for tax 
administration purposes. The general safeguard requirements of 
the Code apply to such disclosures.\109\ For example, as a 
condition of disclosure, requesting agencies must file with the 
IRS a report describing the procedures established and utilized 
by the agency for ensuring the confidentiality of return 
information.
---------------------------------------------------------------------------
    \107\ Sec. 6050I and 31 U.S.C. sec. 5331.
    \108\ 31 U.S.C. sec. 5313.
    \109\ Sec. 6103(p)(4).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Form 8300 is similar to a Currency Transaction Report, 
which is required to be filed by financial institutions in 
connection with currency transactions of more than $10,000. 
Both Form 8300 and Currency Transaction Reports are filed with 
the IRS; however, Title 31 governs Currency Transaction 
Reports. The USA Patriot Act (Pub. L. No. 107-56) imposed a 
duplicate reporting requirement for Form 8300 information under 
Title 31 of the U.S. Code, in part to facilitate law 
enforcement's access to such information. The Code's safeguard 
requirements for return information were perceived to be 
cumbersome in comparison to the disclosure rules imposed on 
similar information governed by Title 31, such as Currency 
Transaction Reports. Because the Code envisions that Form 8300 
information will be disclosed on the same basis and subject to 
the same conditions as Currency Transaction Reports, and a 
duplicate report of the same information is required under 
Title 31, the Committee believes it is appropriate to conform 
treatment and remove the specific Title 26 safeguards with 
respect to these information reports.

                        EXPLANATION OF PROVISION

    The provision repeals the safeguard requirements applicable 
to the disclosure of returns filed reflecting cash receipts of 
more than $10,000 received in a trade or business.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

     O. Disclosure to Law Enforcement Agencies Regarding Terrorist 
                               Activities


(Sec. 415 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Return information includes a taxpayer's identity.\110\ The 
IRS may disclose return information, other than taxpayer return 
information, to officers and employees of Federal law 
enforcement upon a written request. The request must be made by 
the head of the Federal law enforcement agency (or his 
delegate) involved in the response to or investigation of 
terrorist incidents, threats, or activities, and set forth the 
specific reason or reasons why such disclosure may be relevant 
to a terrorist incident, threat, or activity. The information 
is to be disclosed to officers and employees of the Federal law 
enforcement agency who would be personally and directly 
involved in the response to or investigation of terrorist 
incidents, threats, or activities. The information is to be 
used by such officers and employees solely for such response or 
investigation.\111\
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    \110\ Sec. 6103(b)(2)(A).
    \111\ Sec. 6103(i)(7)(A).
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    The Federal law enforcement agency may redisclose the 
information to officers and employees of State and local law 
enforcement personally and directly engaged in the response to 
or investigation of the terrorist incident, threat, or 
activity. The State or local law enforcement agency must be 
part of an investigative or response team with the Federal law 
enforcement agency for these disclosures to be made.\112\ No 
disclosures may be made under this provision after December 31, 
2003.
---------------------------------------------------------------------------
    \112\ Sec. 6103(i)(7)(A)(ii).
---------------------------------------------------------------------------
    If a taxpayer's identity is taken from a return or other 
information filed with or furnished to the IRS by or on behalf 
of the taxpayer, it is taxpayer return information. Since 
taxpayer return information is not covered by this disclosure 
authorization, taxpayer identity so obtained cannot be 
disclosed and thus associated with the other information being 
provided.

                           REASONS FOR CHANGE

    The Committee understands the importance of law enforcement 
efforts investigating terrorist activities. Therefore, the 
Committee believes that it is appropriate for the IRS to 
disclose to officers and employees of a Federal law enforcement 
agency a taxpayer's identity to the extent necessary to assist 
in the investigation of terrorist incidents, threats, or 
activities.

                        EXPLANATION OF PROVISION

    The provision makes a technical change to clarify that a 
taxpayer's identity is not treated as taxpayer return 
information for purposes of disclosures to law enforcement 
agencies regarding terrorist activities.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                        TITLE V.--SIMPLIFICATION


         A. Establish Uniform Definition of a Qualifying Child


(Secs. 501 through 508 of the bill and secs. 2, 21, 24, 32, 151, and 
        152 of the Code)

                              PRESENT LAW

In general

    Present law contains five commonly used provisions that 
provide benefits to taxpayers with children: (1) the dependency 
exemption; (2) the child credit; (3) the earned income credit; 
(4) the dependent care credit; and (5) head of household filing 
status. Each provision has separate criteria for determining 
whether the taxpayer qualifies for the applicable tax benefit 
with respect to a particular child. The separate criteria 
include factors such as the relationship (if any) the child 
must bear to the taxpayer, the age of the child, and whether 
the child must live with the taxpayer. Thus, a taxpayer is 
required to apply different definitions to the same individual 
when determining eligibility for these provisions, and an 
individual who qualifies a taxpayer for one provision does not 
automatically qualify the taxpayer for another provision.

Dependency exemption \113\
---------------------------------------------------------------------------

    \113\ Secs. 151 and 152. Under the statutory structure, section 151 
provides for the deduction for personal exemptions with respect to 
``dependents.'' The term ``dependent'' is defined in section 152. Most 
of the requirements regarding dependents are contained in section 152; 
section 151 contains additional requirements that must be satisfied in 
order to obtain a dependency exemption with respect to a dependent (as 
so defined). In particular, section 151 contains the gross income test, 
the rules relating to married dependents filing a joint return, and the 
requirement for a taxpayer identification number. The other rules 
discussed here are contained in section 151.
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            In general
    Taxpayers are entitled to a personal exemption deduction 
for the taxpayer, his or her spouse, and each dependent. For 
2003, the amount deductible for each personal exemption is 
$3,050. The deduction for personal exemptions is phased out for 
taxpayers with incomes above certain thresholds.\114\
---------------------------------------------------------------------------
    \114\ Sec. 151(d)(3).
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    In general, a taxpayer is entitled to a dependency 
exemption for an individual if the individual: (1) satisfies a 
relationship test or is a member of the taxpayer's household 
for the entire taxable year; (2) satisfies a support test; (3) 
satisfies a gross income test or is a child of the taxpayer 
under a certain age; (4) is a citizen or resident of the U.S. 
or resident of Canada or Mexico; \115\ and (5) did not file a 
joint return with his or her spouse for the year.\116\ In 
addition, the taxpayer identification number of the individual 
must be included on the taxpayer's return.
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    \115\ A legally adopted child who does not satisfy the residency or 
citizenship requirement may nevertheless qualify as a dependent 
(provided other applicable requirements are met) if (1) the child's 
principal place of abode is the taxpayer's home and (2) the taxpayer is 
a citizen or national of the United States. Sec. 152(b)(3).
    \116\ This restriction does not apply if the return was filed 
solely to obtain a refund and no tax liability would exist for either 
spouse if they filed separate returns. Rev. Rul. 54-567, 1954-2 C.B. 
108.
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            Relationship or member of household test
    Relationship test.--The relationship test is satisfied if 
an individual is the taxpayer's (1) son or daughter or a 
descendant of either (e.g., grandchild or great-grandchild); 
(2) stepson or stepdaughter; (3) brother or sister (including 
half brother, half sister, stepbrother, or stepsister); (4) 
parent, grandparent, or other direct ancestor (but not foster 
parent); (5) stepfather or stepmother; (6) brother or sister of 
the taxpayer's father or mother; (7) son or daughter of the 
taxpayer's brother or sister; or (8) the taxpayer's father-in-
law, mother-in-law, son-in-law, daughter-in-law, brother-in-
law, or sister-in-law.
    An adopted child (or a child who is a member of the 
taxpayer's household and who has been placed with the taxpayer 
for adoption) is treated as a child of the taxpayer. A foster 
child is treated as a child of the taxpayer if the foster child 
is a member of the taxpayer's household for the entire taxable 
year.
    Member of household test.--If the relationship test is not 
satisfied, then the individual may be considered the dependent 
of the taxpayer if the individual is a member of the taxpayer's 
household for the entire year. Thus, a taxpayer may be eligible 
to claim a dependency exemption with respect to an unrelated 
child who lives with the taxpayer for the entire year.
    For the member of household test to be satisfied, the 
taxpayer must both maintain the household and occupy the 
household with the individual.\117\ A taxpayer or other 
individual does not fail to be considered a member of a 
household because of ``temporary'' absences due to special 
circumstances, including absences due to illness, education, 
business, vacation, and military service.\118\ Similarly, an 
individual does not fail to be considered a member of the 
taxpayer's household due to a custody agreement under which the 
individual is absent for less than six months.\119\ Indefinite 
absences that last for more than the taxable year may be 
considered ``temporary.'' For example, the IRS has ruled that 
an elderly woman who was indefinitely confined to a nursing 
home was temporarily absent from a taxpayer's household. Under 
the facts of the ruling, the woman had been an occupant of the 
household before being confined to a nursing home, the 
confinement had extended for several years, and it was possible 
that the woman would die before becoming well enough to return 
to the taxpayer's household. There was no intent on the part of 
the taxpayer or the woman to change her principal place of 
abode.\120\
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    \117\ Treas. Reg. sec. 1.152-1(b).
    \118\ Id.
    \119\ Id.
    \120\ Rev. Rul. 66-28, 1966-1 C.B. 31.
---------------------------------------------------------------------------
            Support test
    In general.--The support test is satisfied if the taxpayer 
provides over one half of the support of the individual for the 
taxable year. To determine whether a taxpayer has provided more 
than one half of an individual's support, the amount the 
taxpayer contributed to the individual's support is compared 
with the entire amount of support the individual received from 
all sources, including the individual's own funds.\121\ 
Governmental payments and subsidies (e.g., Temporary Assistance 
to Needy Families, food stamps, and housing) generally are 
treated as support provided by a third party. Expenses that are 
not directly related to any one member of a household, such as 
the cost of food for the household, must be divided among the 
members of the household. If any person furnishes support in 
kind (e.g., in the form of housing), then the fair market value 
of that support must be determined.
---------------------------------------------------------------------------
    \121\ In the case of a son, daughter, stepson, or stepdaughter of 
the taxpayer who is a full-time student, scholarships are not taken 
into account for purpose of the support test. Sec. 152(d).
---------------------------------------------------------------------------
    Multiple support agreements.--In some cases, no one 
taxpayer provides more than one half of the support of a 
individual. Instead, two or more taxpayers, each of whom would 
be able to claim a dependency exemption but for the support 
test, together provide more than one half of the individual's 
support. If this occurs, the taxpayers may agree to designate 
that one of the taxpayers who individually provides more than 
10 percent of the individual's support can claim a dependency 
exemption for the child. Each of the others must sign a written 
statement agreeing not to claim the exemption for that year. 
The statements must be filed with the income tax return of the 
taxpayer who claims the exemption.
    Special rules for divorced or legally separated parents.--
Special rules apply in the case of a child of divorced or 
legally separated parents (or parents who live apart at all 
times during the last six months of the year) who provide over 
one half the child's support during the calendar year.\122\ If 
such a child is in the custody of one or both of the parents 
for more than one half of the year, then the parent having 
custody for the greater portion of the year is deemed to 
satisfy the support test; however, the custodial parent may 
release the dependency exemption to the noncustodial parent by 
filing a written declaration with the IRS.\123\
---------------------------------------------------------------------------
    \122\ For purposes of this rule, a ``child'' means a son, daughter, 
stepson, or stepdaughter (including an adopted child or foster child, 
or child placed with the taxpayer for adoption). Sec. 152(e)(1)(A).
    \123\ Special support rules also apply in the case of certain pre-
1985 agreements between divorced or legally separated parents. Sec. 
152(e)(4).
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            Gross income test
    In general, an individual may not be claimed as a dependent 
of a taxpayer if the individual has gross income that is at 
least equal to the personal exemption amount for the taxable 
year.\124\ If the individual is the child of the taxpayer and 
under age 19 (or under age 24, if a full-time student), the 
gross income test does not apply.\125\ For purposes of this 
rule, a ``child'' means a son, daughter, stepson, or 
stepdaughter (including an adopted child of the taxpayer, a 
foster child who resides with the taxpayer for the entire year, 
or a child placed with the taxpayer for adoption by an 
authorized adoption agency).
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    \124\ Certain income from sheltered workshops is not taken into 
account in determining the gross income of permanently and totally 
disabled individuals. Sec. 151(c)(5).
    \125\ Sec. 151(c).
---------------------------------------------------------------------------

Earned income credit \126\
---------------------------------------------------------------------------

    \126\ Sec. 32.
---------------------------------------------------------------------------
            In general
    In general, the earned income credit is a refundable credit 
for low-income workers. The amount of the credit depends on the 
earned income of the taxpayer and whether the taxpayer has one, 
more than one, or no ``qualifying children.'' In order to be a 
qualifying child for the earned income credit, an individual 
must satisfy a relationship test, a residency test, and an age 
test. In addition, the name, age, and taxpayer identification 
number of the qualifying child must be included on the return.
            Relationship test
    An individual satisfies the relationship test under the 
earned income credit if the individual is the taxpayer's: (1) 
son, daughter, stepson, or stepdaughter, or a descendant of any 
such individual; \127\ (2) brother, sister, stepbrother, or 
stepsister, or a descendant of any such individual, who the 
taxpayer cares for as the taxpayer's own child; or (3) eligible 
foster child. An eligible foster child is an individual (1) who 
is placed with the taxpayer by an authorized placement agency, 
and (2) who the taxpayer cares for as her or his own child. A 
married child of the taxpayer is not treated as meeting the 
relationship test unless the taxpayer is entitled to a 
dependency exemption with respect to the married child (e.g., 
the support test is satisfied) or would be entitled to the 
exemption if the taxpayer had not waived the exemption to the 
noncustodial parent.\128\
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    \127\ A child who is legally adopted or placed with the taxpayer 
for adoption by an authorized adoption agency is treated as the 
taxpayer's own child. Sec. 32(c)(3)(B)(iv).
    \128\ Sec. 32(c)(3)(B)(ii).
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            Residency test
    The residency test is satisfied if the individual has the 
same principal place of abode as the taxpayer for more than one 
half of the taxable year. The residence must be in the United 
States.\129\ As under the dependency exemption (and head of 
household filing status), temporary absences due to special 
circumstances, including absences due to illness, education, 
business, vacation, and military service are not treated as 
absences for purposes of determining whether the residency test 
is satisfied.\130\ Under the earned income credit, there is no 
requirement that the taxpayer maintain the household in which 
the taxpayer and the qualifying individual reside.
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    \129\ The principal place of abode of a member of the Armed 
Services is treated as in the United States during any period during 
which the individual is stationed outside the United States on active 
duty. Sec. 32(c)(4).
    \130\ IRS Publication 596, Earned Income Credit (EIC), at 13. H. 
Rep. 101-964 (October 27, 1990), at 1037.
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            Age test
    In general, the age test is satisfied if the individual has 
not attained age 19 as of the close of the calendar year. In 
the case of a full-time student, the age test is satisfied if 
the individual has not attained age 24 as of the close of the 
calendar year. In the case of an individual who is permanently 
and totally disabled, no age limit applies.

Child credit \131\
---------------------------------------------------------------------------

    \131\ Sec. 24.
---------------------------------------------------------------------------
    Taxpayers with incomes below certain amounts are eligible 
for a child credit for each qualifying child of the taxpayer. 
The amount of the child credit is up to $600, in the case of 
taxable years beginning in 2003 or 2004. The child credit 
increases to $700 for taxable years beginning in 2005 through 
2008, $800 for taxable years beginning in 2009, and $1,000 for 
taxable years beginning in 2010. The credit declines to $500 in 
taxable year 2011.\132\ For purposes of this credit, a 
qualifying child is an individual: (1) with respect to whom the 
taxpayer is entitled to a dependency exemption for the year; 
(2) who satisfies the same relationship test applicable to the 
earned income credit; and (3) who has not attained age 17 as of 
the close of the calendar year. In addition, the child must be 
a citizen or resident of the United States.\133\ A portion of 
the child credit is refundable under certain 
circumstances.\134\
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    \132\ Economic Growth and Tax Relief Reconciliation Act of 2001 
(``EGTRRA''), Pub. L. No. 107-16, sec. 901(a) (2001) (making, by way of 
the EGTRRA sunset provision, the increase in the child credit 
inapplicable to taxable years beginning after December 31, 2010).
    \133\ The child credit does not apply with respect to a child who 
is a resident of Canada or Mexico and is not a U.S. citizen, even if a 
dependency exemption is available with respect to the child. Sec. 
24(c)(2). The child credit is, however, available with respect to a 
child dependent who is not a resident or citizen of the United States 
if: (1) the child has been legally adopted by the taxpayer; (2) the 
child's principal place of abode is the taxpayer's home; and (3) the 
taxpayer is a U.S. citizen or national. See sec. 24(c)(2) and sec. 
152(b)(3).
    \134\ Sec. 24(d).
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Dependent care credit \135\
---------------------------------------------------------------------------

    \135\ Sec. 21.
---------------------------------------------------------------------------
    The dependent care credit may be claimed by a taxpayer who 
maintains a household that includes one or more qualifying 
individuals and who has employment-related expenses. A 
qualifying individual means (1) a dependent of the taxpayer 
under age 13 for whom the taxpayer is entitled to a dependency 
exemption, (2) a dependent of the taxpayer who is physically or 
mentally incapable of caring for himself or herself,\136\ or 
(3) the spouse of the taxpayer, if the spouse is physically or 
mentally incapable of caring for himself or herself. In 
addition, a taxpayer identification number for the qualifying 
individual must be included on the return.
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    \136\ Although such an individual must be a dependent of the 
taxpayer as defined in section 152, it is not required that the 
taxpayer be entitled to a dependency exemption with respect to the 
individual under section 151. Thus, such an individual may be a 
qualifying individual for purposes of the dependent care credit, even 
though the taxpayer is not entitled to a dependency exemption because 
the individual does not meet the gross income test.
---------------------------------------------------------------------------
    A taxpayer is considered to maintain a household for a 
period if over one half the cost of maintaining the household 
for the period is furnished by the taxpayer (or, if married, 
the taxpayer and his or her spouse). Costs of maintaining the 
household include expenses such as rent, mortgage interest (but 
not principal), real estate taxes, insurance on the home, 
repairs (but not home improvements), utilities, and food eaten 
in the home.
    A special rule applies in the case of a child who is under 
age 13 or is physically or mentally incapable of caring for 
himself or herself if the custodial parent has waived his or 
her dependency exemption to the noncustodial parent.\137\ For 
the dependent care credit, the child is treated as a qualifying 
individual with respect to the custodial parent, not the parent 
entitled to claim the dependency exemption.
---------------------------------------------------------------------------
    \137\ Sec. 21(e)(5).
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Head of household filing status \138\
---------------------------------------------------------------------------

    \138\ Sec. 2(b).
---------------------------------------------------------------------------
    A taxpayer may claim head of household filing status if the 
taxpayer is unmarried (and not a surviving spouse) and pays 
more than one half of the cost of maintaining as his or her 
home a household which is the principal place of abode for more 
than one half of the year of (1) an unmarried son, daughter, 
stepson or stepdaughter of the taxpayer or an unmarried 
descendant of the taxpayer's son or daughter, (2) an individual 
described in (1) who is married, if the taxpayer may claim a 
dependency exemption with respect to the individual (or could 
claim the exemptionif the taxpayer had not waived the exemption 
to the noncustodial parent), or (3) a relative with respect to whom the 
taxpayer may claim a dependency exemption.\139\ If certain other 
requirements are satisfied, head of household filing status also may be 
claimed if the taxpayer is entitled to a dependency exemption with 
respect to one of the taxpayer's parents.
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    \139\ Sec. 2(b)(1)(A)(ii), as qualified by sec. 2(b)(3)(B). An 
individual for whom the taxpayer is entitled to claim a dependency 
exemption by reason of a multiple support agreement does not qualify 
the taxpayer for head of household filing status.
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                           REASONS FOR CHANGE

    Present law contains five commonly used provisions that 
provide benefits to taxpayers with children: (1) the dependency 
exemption; (2) the child credit; (3) the earned income credit; 
(4) the dependent care credit; and (5) head of household filing 
status. Each provision has separate criteria for determining 
whether the taxpayer qualifies for the applicable tax benefit 
with respect to a particular child. The separate criteria 
include factors such as the relationship (if any) the child 
must bear to the taxpayer, the age of the child, and whether 
the child must live with the taxpayer. Thus, a taxpayer is 
required to apply different definitions to the same individual 
when determining eligibility for these provisions, and an 
individual who qualifies a taxpayer for one provision does not 
automatically qualify the taxpayer for another provision. The 
use of different tests to determine whether a taxpayer may 
claim one or more of these tax benefits with respect to a child 
causes complexity for taxpayers and the IRS. The different 
tests relating to qualifying children are a source of errors 
for taxpayers both because the rules for each provision are 
different and because of the complexity of particular rules. 
The variety of rules cause taxpayers inadvertently to claim tax 
benefits for which they do not qualify, as well as to fail to 
claim tax benefits for which they do qualify. Adopting a 
uniform definition of qualifying child for five commonly used 
provisions (the dependency exemption, the child credit, the 
earned income credit, the dependent care credit, and head of 
household filing status) would achieve simplification by making 
it easier for taxpayers to determine whether they qualify for 
the various tax benefits relating to children, would reduce 
inadvertent taxpayer errors arising from confusion due to 
differing rules, and would make the applicable provisions 
easier for the IRS to administer.

                        EXPLANATION OF PROVISION

General description of provision

            In general
    The provision establishes a uniform definition of 
qualifying child for purposes of the dependency exemption, the 
child credit, the earned income credit, the dependent care 
credit, and head of household filing status. A taxpayer 
generally may claim an individual who does not meet the uniform 
definition of qualifying child (with respect to any taxpayer) 
as a dependent if the present-law dependency requirements are 
satisfied. The provision generally does not modify other 
parameters of each tax benefit (e.g., the earned income 
requirements of the earned income credit) or the rules for 
determining whether individuals other than children qualify for 
each tax benefit.
    Under the uniform definition, in general, a child is a 
qualifying child of a taxpayer if the child satisfies each of 
three tests: (1) the child has the same principal place of 
abode as the taxpayer for more than one half the taxable year; 
(2) the child has a specified relationship to the taxpayer; and 
(3) the child has not yet attained a specified age. A tie-
breaking rule applies if more than one taxpayer claims a child 
as a qualifying child.
    Under the provision, the present-law support and gross 
income tests for determining whether an individual is a 
dependent generally do not apply to a child who meets the 
requirements of the uniform definition of qualifying child.
            Residency test
    Under the uniform definition's residency test, a child must 
have the same principal place of abode as the taxpayer for more 
than one half of the taxable year. It is intended that, as is 
the case under present law, temporary absences due to special 
circumstances, including absences due to illness, education, 
business, vacation, or military service, would not be treated 
as absences.
            Relationship test
    In order to be a qualifying child under the provision, the 
child must be the taxpayer's son, daughter, stepson, 
stepdaughter, brother, sister, stepbrother, stepsister, or a 
descendant of any such individual. A legally adopted individual 
of the taxpayer, or an individual who is lawfully placed with 
the taxpayer for legal adoption by the taxpayer, is treated as 
a child of such taxpayer by blood. A foster child who is placed 
with the taxpayer by an authorized placement agency or by 
judgment, decree, or other order of any court of competent 
jurisdiction is treated as the taxpayer's child.\140\
---------------------------------------------------------------------------
    \140\ The provision eliminates the present-law rule requiring that 
if a child is the taxpayer's sibling or stepsibling or a descendant of 
any such individual, the taxpayer must care for the child as if the 
child were his or her own child.
---------------------------------------------------------------------------
            Age test
    Under the provision, the age test varies depending upon the 
tax benefit involved. In general, a child must be under age 19 
(or under age 24 in the case of a full-time student) in order 
to be a qualifying child.\141\ In general, no age limit applies 
with respect to individuals who are totally and permanently 
disabled within the meaning of section 22(e)(3) at any time 
during the calendar year. The provision retains the present-law 
requirements that a child must be under age 13 (if he or she is 
not disabled) for purposes of the dependent care credit, and 
under age 17 (whether or not disabled) for purposes of the 
child credit.
---------------------------------------------------------------------------
    \141\ The provision retains the present-law definition of full-time 
student set forth in section 151(c)(4).
---------------------------------------------------------------------------
            Children who support themselves
    Under the provision, a child who provides over one half of 
his or her own support generally is not considered a qualifying 
child of another taxpayer. The provision retains the present-
law rule, however, that a child who provides over one half of 
his or her own support may constitute a qualifying child of 
another taxpayer for purposes of the earned income credit.
            Tie-breaking rules
    If a child would be a qualifying child with respect to more 
than one individual (e.g., a child lives with his or her mother 
and grandmother in the same residence) and more than one person 
claims a benefit with respect to that child, then the following 
``tie-breaking'' rules apply. First, if only one of the 
individuals claiming the child as a qualifying child is the 
child's parent, the child is deemed the qualifying child of the 
parent. Second, if both parents claim the child and the parents 
do not file a joint return, then the child is deemed a 
qualifying child first with respect to the parent with whom the 
child resides for the longest period of time, and second with 
respect to the parent with the highest adjusted gross income. 
Third, if the child's parents do not claim the child, then the 
child is deemed a qualifying child with respect to the claimant 
with the highest adjusted gross income.
            Interaction with present-law rules
    Taxpayers generally may claim an individual who does not 
meet the uniform definition of qualifying child with respect to 
any taxpayer as a dependent if the present-law dependency 
requirements (including the gross income and support tests) are 
satisfied.\142\ Thus, for example, a taxpayer may claim a 
parent as a dependent if the taxpayer provides more than one 
half of the support of the parent and the parent's gross income 
is less than the exemption amount.
---------------------------------------------------------------------------
    \142\ Individuals who satisfy the present-law dependency tests and 
who are not qualifying children are referred to as ``qualifying 
relatives'' under the provision.
---------------------------------------------------------------------------
    Children who are U.S. citizens living abroad or non-U.S. 
citizens living in Canada or Mexico may qualify as a qualifying 
child, as is the case under the present-law dependency tests. A 
legally adopted child who does not satisfy the residency or 
citizenship requirement may nevertheless qualify as a 
qualifying child (provided other applicable requirements are 
met) if (1) the child's principal place of abode is the 
taxpayer's home and (2) the taxpayer is a citizen or national 
of the United States.
            Children of divorced or legally separated parents
    The provision generally retains the present-law rule that 
allows a custodial parent to release the claim to a dependency 
exemption and the child credit to a noncustodial parent. Thus, 
the provision generally grandfathers those custodial waivers 
that are in place and effective on the date of enactment, and 
generally retains the custodial waiver rule for purposes of the 
dependency exemption and the child credit for decrees of 
divorce or separate maintenance or written separation 
agreements that become effective after the date of enactment. 
Under the provision, the custodial waiver rules do not affect 
eligibility with respect to children of divorced or 
legallyseparated parents for purposes of the earned income credit, the 
dependent care credit, and head of household filing status.
            Other provisions
    The provision retains the applicable present-law 
requirements that a taxpayer identification number for a child 
be provided on the taxpayer's return. For purposes of the 
earned income credit, a qualifying child is required to have a 
social security number that is valid for employment in the 
United States (that is, the child must be a U.S. citizen, 
permanent resident, or have a certain type of temporary visa).

Effect of provision on particular tax benefits

            Dependency exemption
    For purposes of the dependency exemption, the provision 
defines a dependent as a qualifying child or a qualifying 
relative. The qualifying child test eliminates the support test 
(other than in the case of a child who provides more than one 
half of his or her own support), and replaces it with the 
residency requirement described above. Further, the present-law 
gross income test does not apply to a qualifying child. The 
rules relating to multiple support agreements do not apply with 
respect to qualifying children because the support test does 
not apply to them. Special tie-breaking rules (described above) 
apply if more than one taxpayer claims a qualifying child under 
the provision. These tie-breaking rules do not apply if a child 
constitutes a qualifying child with respect to multiple 
taxpayers, but only one eligible taxpayer actually claims the 
qualifying child.
    The provision generally permits taxpayers to continue to 
apply the present-law dependency exemption rules to claim a 
dependency exemption for a qualifying relative who does not 
satisfy the qualifying child definition. In such cases, the 
present-law gross income and support tests, including the 
special rules for multiple support agreements, the special 
rules relating to income of handicapped dependents, and the 
special support test in case of students, continue to apply for 
purposes of the dependency exemption.
    As is the case under present law, a child who provides over 
half of his or her own support is not considered a dependent of 
another taxpayer under the provision. Further, an individual 
shall not be treated as a dependent of any taxpayer if such 
individual has filed a joint return with the individual's 
spouse for the taxable year.
            Earned income credit
    In general, the provision adopts a definition of qualifying 
child that is similar to the present-law definition under the 
earned income credit. The present-law requirement that a foster 
child and certain other children be cared for as the taxpayer's 
own child is eliminated. The present-law tie-breaker rule 
applicable to the earned income credit is used for purposes of 
the uniform definition of qualifying child. The provision 
retains the present-law requirement that the taxpayer's 
principal place of abode must be in the United States.
            Child credit
    The present-law child credit generally uses the same 
relationships to define an eligible child as the uniform 
definition. The present-law requirement that a foster child and 
certain other children be cared for as the taxpayer's own child 
is eliminated. The age limitation under the provision retains 
the present-law requirement that the child must be under age 
17, regardless of whether the child is disabled.
            Dependent care credit
    The present-law requirement that a taxpayer maintain a 
household in order to claim the dependent care credit is 
eliminated. Thus, if other applicable requirements are 
satisfied, a taxpayer may claim the dependent care credit with 
respect to a child who lives with the taxpayer for more than 
one half the year, even if the taxpayer does not provide more 
than one half of the cost of maintaining the household.
    The rules for determining eligibility for the credit with 
respect to an individual who is physically or mentally 
incapable of caring for himself or herself are amended to 
include a requirement that the taxpayer and the dependent have 
the same principal place of abode for more than one half the 
taxable year.
            Head of household filing status
    Under the provision, a taxpayer qualifies for head of 
household filing status with respect to a child who is a 
qualifying child as defined under the provision. An individual 
who is not a qualifying child will qualify the taxpayer for 
head of household status only if, as is the case under present 
law, the individual is a dependent of the taxpayer and the 
taxpayer is entitled to a dependency exemption for such 
individual, or the individual is the taxpayer's father or 
mother and certain other requirements are satisfied. Thus, 
under the provision a taxpayer is eligible for head of 
household filing status only with respect to a qualifying child 
or an individual for whom the taxpayer is entitled to a 
dependency exemption.
    The provision retains the present-law requirement that the 
taxpayer provide over one half the cost of maintaining the 
household.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2004.

    B. Simplification Through Elimination of Inoperative Provisions


(Sec. 511 of the bill)

                              PRESENT LAW

    The Internal Revenue Code of 1986 contains provisions that 
are no longer used in computing current taxes or are little 
used or of minor importance. These provisions are popularly 
referred to as ``deadwood''.

                           REASONS FOR CHANGE

    The provision simplifies the Code by deleting ``deadwood'' 
without making substantive changes in the tax law.

                        EXPLANATION OF PROVISION

    The provision contains numerous amendments to the Code 
repealing obsolete provisions to the Internal Revenue Code of 
1986. No substantive changes are intended by the amendments.

                             EFFECTIVE DATE

    The provision takes effect on the date of enactment.

                       TITLE VI.--REVENUE RAISERS


             A. Provisions Designed To Curtail Tax Shelters


1. Penalty for failing to disclose reportable transaction (Sec. 601 of 
        the bill and sec. 6707A of the Code)

                              PRESENT LAW

    Regulations under section 6011 require a taxpayer to 
disclose with its tax return certain information with respect 
to each ``reportable transaction'' in which the taxpayer 
participates.\143\
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    \143\ On February 27, 2003, the Treasury Department and the IRS 
released final regulations regarding the disclosure of reportable 
transactions. In general, the regulations are effective for 
transactions entered into on or after February 28, 2003.
    The discussion of present law refers to the new regulations. The 
rules that apply with respect to transactions entered into on or before 
February 28, 2003, are contained in Treas. Reg. sec. 1.6011-4T in 
effect on the date the transaction was entered into.
---------------------------------------------------------------------------
    There are six categories of reportable transactions. The 
first category is any transaction that is the same as (or 
substantially similar to) \144\ a transaction that is specified 
by the Treasury Department as a tax avoidance transaction whose 
tax benefits are subject to disallowance under present law 
(referred to as a ``listed transaction'').\145\
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    \144\ The regulations clarify that the term ``substantially 
similar'' includes any transaction that is expected to obtain the same 
or similar types of tax consequences and that is either factually 
similar or based on the same or similar tax strategy. Further, the term 
must be broadly construed in favor of disclosure. Treas. Reg. sec. 1-
6011-4(c)(4).
    \145\ Treas. Reg. sec. 1.6011-4(b)(2).
---------------------------------------------------------------------------
    The second category is any transaction that is offered 
under conditions of confidentiality. In general, a transaction 
is considered to be offered to a taxpayer under conditions of 
confidentiality if the advisor who is paid a minimum fee places 
a limitation on disclosure by the taxpayer of the tax treatment 
or tax structure of the transaction and the limitation on 
disclosure protects the confidentiality of that advisor's tax 
strategies (irrespective if such terms are legally 
binding).\146\
---------------------------------------------------------------------------
    \146\ Treas. Reg. sec. 1.6011-4(b)(3).
---------------------------------------------------------------------------
    The third category of reportable transactions is any 
transaction for which (1) the taxpayer has the right to a full 
or partial refund of fees if the intended tax consequences from 
the transaction are not sustained or, (2) the fees are 
contingent on the intended tax consequences from the 
transaction being sustained.\147\
---------------------------------------------------------------------------
    \147\ Treas. Reg. sec. 1.6011-4(b)(4).
---------------------------------------------------------------------------
    The fourth category of reportable transactions relates to 
any transaction resulting in a taxpayer claiming a loss (under 
section 165) of at least (1) $10 million in any single year or 
$20 million in any combination of years by a corporate taxpayer 
or a partnership with only corporate partners; (2) $2 million 
in any single year or $4 million in any combination of years by 
all other partnerships, S corporations, trusts, and 
individuals; or (3) $50,000 in any single year for individuals 
or trusts if the loss arises with respect to foreign currency 
translation losses.\148\
---------------------------------------------------------------------------
    \148\ Treas. Reg. sec. 1.6011-4(b)(5). IRS Rev. Proc. 2003-24, 
2003-11 I.R.B. 599, exempts certain types of losses from this 
reportable transaction category.
---------------------------------------------------------------------------
    The fifth category of reportable transactions refers to any 
transaction done by certain taxpayers \149\ in which the tax 
treatment of the transaction differs (or is expected to differ) 
by more than $10 million from its treatment for book purposes 
(using generally accepted accounting principles) in any 
year.\150\
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    \149\ The significant book-tax category applies only to taxpayers 
that are reporting companies under the Securities Exchange Act of 1934 
or business entities that have $250 million or more in gross assets.
    \150\ Treas. Reg. sec. 1.6011-4(b)(6). IRS Rev. Proc. 2003-25, 
2003-11 I.R.B. 601, exempts certain types of transactions from this 
reportable transaction category.
---------------------------------------------------------------------------
    The final category of reportable transactions is any 
transaction that results in a tax credit exceeding $250,000 
(including a foreign tax credit) if the taxpayer holds the 
underlying asset for less than 45 days.\151\
---------------------------------------------------------------------------
    \151\ Treas. Reg. sec. 1.6011-4(b)(7).
---------------------------------------------------------------------------
    Under present law, there is no specific penalty for failing 
to disclose a reportable transaction; however, such a failure 
can jeopardize a taxpayer's ability to claim that any income 
tax understatement attributable to such undisclosed transaction 
is due to reasonable cause, and that the taxpayer acted in good 
faith.\152\
---------------------------------------------------------------------------
    \152\ Section 6664(c) provides that a taxpayer can avoid the 
imposition of a section 6662 accuracy-related penalty in cases where 
the taxpayer can demonstrate that there was reasonable cause for the 
underpayment and that the taxpayer acted in good faith. Regulations 
under sections 6662 and 6664 provide that a taxpayer's failure to 
disclose a reportable transaction is a strong indication that the 
taxpayer failed to act in good faith, which would bar relief under 
section 6664(c).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is aware that individuals and corporations 
are increasingly using sophisticated transactions to avoid or 
evade Federal income tax.\153\ Such a phenomenon could pose a 
serious threat to the efficacy of the tax system because of 
both the potential loss of revenue and the potential threat to 
the integrity of the self-assessment system.
---------------------------------------------------------------------------
    \153\ In this regard, the Committee has concerns with the outcomes 
and rationales used by courts in some recent decisions involving tax-
motivated transactions. For a more detailed discussion of recent court 
decisions and other developments regarding tax shelters, see Joint 
Committee on Taxation, Background and Present Law Relating to Tax 
Shelters (JCX 19-02), March 19, 2002.
---------------------------------------------------------------------------
    The Committee over three years ago began working on 
legislation to address this significant compliance problem. In 
addition, the Treasury Department, using the tools available, 
issued regulations requiring disclosure of certain transactions 
and requiring organizers and promoters of tax-engineered 
transactions to maintain customer lists and make these lists 
available to the IRS. Nevertheless, the Committee believes that 
additional legislation is needed to provide the Treasury 
Department with additional tools to assist its efforts to 
curtail abusive transactions. Moreover, the Committee believes 
that a penalty for failing to make the required disclosures, 
when the imposition of such penalty is not dependent on the tax 
treatment of the underlying transaction ultimately being 
sustained, will provide an additional incentive for taxpayers 
to satisfy their reporting obligations under the new disclosure 
provisions.

                        EXPLANATION OF PROVISION

In general

    The provision creates a new penalty for any person who 
fails to include with any return or statement any required 
information with respect to a reportable transaction. The new 
penalty applies without regard to whether the transaction 
ultimately results in an understatement of tax, and applies in 
addition to any accuracy-related penalty that may be imposed.

Transactions to be disclosed

    The provision does not define the terms ``listed 
transaction'' \154\ or ``reportable transaction,'' nor does the 
provision explain the type of information that must be 
disclosed in order to avoid the imposition of a penalty. 
Rather, the provision authorizes the Treasury Department to 
define a ``listed transaction'' and a ``reportable 
transaction'' under section 6011.
---------------------------------------------------------------------------
    \154\ The provision states that, except as provided in regulations, 
a listed transaction means a reportable transaction, which is the same 
as, or substantially similar to, a transaction specifically identified 
by the Secretary as a tax avoidance transaction for purposes of section 
6011. For this purpose, it is expected that the definition of 
``substantially similar'' will be the definition used in Treas. Reg. 
sec. 1.6011-4(c)(4). However, the Secretary may modify this definition 
(as well as the definitions of ``listed transaction'' and ``reportable 
transactions'') as appropriate.
---------------------------------------------------------------------------

Penalty rate

    The penalty for failing to disclose a reportable 
transaction is $50,000. The amount is increased to $100,000 if 
the failure is with respect to a listed transaction. For large 
entities and high net worth individuals, the penalty amount is 
doubled (i.e., $100,000 for a reportable transaction and 
$200,000 for a listed transaction). The penalty cannot be 
waived with respect to a listed transaction. As to reportable 
transactions, the penalty can be rescinded (or abated) only if: 
(1) the taxpayer on whom the penalty is imposed has a history 
of complying with the Federal tax laws, (2) it is shown that 
the violation is due to an unintentional mistake of fact, (3) 
imposing the penalty would be against equity and good 
conscience, and (4) rescinding the penalty would promote 
compliance with the tax laws and effective tax administration. 
The authority to rescind the penalty can only be exercised by 
the IRS Commissioner personally or the head of the Office of 
Tax Shelter Analysis. Thus, the penalty cannot be rescinded by 
a revenue agent, an Appeals officer, or any other IRS 
personnel. The decision to rescind a penalty must be 
accompanied by a record describing the facts and reasons for 
the action and the amount rescinded. There will be no taxpayer 
right to appeal a refusal to rescind a penalty. The IRS also is 
required to submit an annual report to Congress summarizing the 
application of the disclosure penalties and providing a 
description of each penalty rescinded under this provision and 
the reasons for the rescission.
    A ``large entity'' is defined as any entity with gross 
receipts in excess of $10 million in the year of the 
transaction or in the preceding year. A ``high net worth 
individual'' is defined as any individual whose net worth 
exceeds $2 million, based on the fair market value of the 
individual's assets and liabilities immediately before entering 
into the transaction.
    A public entity that is required to pay a penalty for 
failing to disclose a listed transaction (or is subject to an 
understatement penalty attributable to a non-disclosed listed 
transaction or a non-disclosed reportable avoidance 
transaction) \155\ must disclose the imposition of the penalty 
in reports to the Securities and Exchange Commission for such 
period as the Secretary shall specify. The provision applies 
without regard to whether the taxpayer determines the amount of 
the penalty to be material to the reports in which the penalty 
must appear, and treats any failure to disclose a transaction 
in such reports as a failure to disclose a listed transaction. 
A taxpayer must disclose a penalty in reports to the Securities 
and Exchange Commission once the taxpayer has exhausted its 
administrative and judicial remedies with respect to the 
penalty (or if earlier, when paid).
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    \155\ A reportable avoidance transaction is a reportable 
transaction with a significant tax avoidance purpose.
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                             EFFECTIVE DATE

    The provision is effective for returns and statements the 
due date for which is after the date of enactment.

2. Accuracy-related penalty for listed transactions and other 
        reportable transactions having a significant tax avoidance 
        purpose (Sec. 602 of the bill and sec. 6662A of the Code)

                              PRESENT LAW

    The accuracy-related penalty applies to the portion of any 
underpayment that is attributable to (1) negligence, (2) any 
substantial understatement of income tax, (3) any substantial 
valuation misstatement, (4) any substantial overstatement of 
pension liabilities, or (5) any substantial estate or gift tax 
valuation understatement. If the correct income tax liability 
exceeds that reported by the taxpayer by the greater of 10 
percent of the correct tax or $5,000 ($10,000 in the case of 
corporations), then a substantial understatement exists and a 
penalty may be imposed equal to 20 percent of the underpayment 
of tax attributable to the understatement.\156\ The amount of 
any understatement generally is reduced by any portion 
attributable to an item if (1) the treatment of the item is or 
was supported by substantial authority, or (2) facts relevant 
to the tax treatment of the item were adequately disclosed and 
there was a reasonable basis for its tax treatment.\157\
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    \156\ Sec. 6662.
    \157\ Sec. 6662(d)(2)(B).
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    Special rules apply with respect to tax shelters.\158\ For 
understatements by non-corporate taxpayers attributable to tax 
shelters, the penalty may be avoided only if the taxpayer 
establishes that, in addition to having substantial authority 
for the position, the taxpayer reasonably believed that the 
treatment claimed was more likely than not the proper treatment 
of the item. This reduction in the penalty is unavailable to 
corporate tax shelters.
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    \158\ Sec. 6662(d)(2)(C).
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    The understatement penalty generally is abated (even with 
respect to tax shelters) in cases in which the taxpayer can 
demonstrate that there was ``reasonable cause'' for the 
underpayment and that the taxpayer acted in good faith.\159\ 
The relevant regulations provide that reasonable cause exists 
where the taxpayer ``reasonably relies in good faith on an 
opinion based on a professional tax advisor's analysis of the 
pertinent facts and authorities [that] * * * unambiguously 
concludes that there is a greater than 50-percent likelihood 
that the tax treatment of the item will be upheld if 
challenged'' by the IRS.\160\
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    \159\ Sec. 6664(c).
    \160\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 
1.6664-4(c).
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                           REASONS FOR CHANGE

    Because the Treasury shelter initiative emphasizes 
combating abusive tax avoidance transactions by requiring 
increased disclosure of such transactions by all parties 
involved, the Committee believes that taxpayers should be 
subject to a strict liability penalty on an understatement of 
tax that is attributable to non-disclosed listed transactions 
or non-disclosed reportable transactions that have a 
significant purpose of tax avoidance. Furthermore, in order to 
deter taxpayers from entering into tax avoidance transactions, 
the Committee believes that a more meaningful (but less 
stringent) accuracy-related penalty should apply to such 
transactions even when disclosed.

                        EXPLANATION OF PROVISION

In general

    The provision modifies the present-law accuracy related 
penalty by replacing the rules applicable to tax shelters with 
a new accuracy-related penalty that applies to listed 
transactions and reportable transactions with a significant tax 
avoidance purpose (hereinafter referred to as a ``reportable 
avoidance transaction'').\161\ The penalty rate and defenses 
available to avoid the penalty vary depending on whether the 
transaction was adequately disclosed.
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    \161\ The terms ``reportable transaction'' and ``listed 
transaction'' have the same meanings as used for purposes of the 
penalty for failing to disclose reportable transactions.
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            Disclosed transactions
    In general, a 20-percent accuracy-related penalty is 
imposed on any understatement attributable to an adequately 
disclosed listed transaction or reportable avoidance 
transaction. The only exception to the penalty is if the 
taxpayer satisfies a more stringent reasonable cause and good 
faith exception (hereinafter referred to as the ``strengthened 
reasonable cause exception''), which is described below. The 
strengthened reasonable cause exception is available only if 
the relevant facts affecting the tax treatment are adequately 
disclosed, there is or was substantial authority for the 
claimed tax treatment, and the taxpayer reasonably believed 
that the claimed tax treatment was more likely than not the 
proper treatment.
            Undisclosed transactions
    If the taxpayer does not adequately disclose the 
transaction, the strengthened reasonable cause exception is not 
available (i.e., a strict-liability penalty applies), and the 
taxpayer is subject to an increased penalty rate equal to 30 
percent of the understatement.
    In addition, a public entity that is required to pay the 
30-percent penalty must disclose the imposition of the penalty 
in reports to the SEC for such periods as the Secretary shall 
specify. The disclosure to the SEC applies without regard to 
whether the taxpayer determines the amount of the penalty to be 
material to the reports in which the penalty must appear, and 
any failure to disclose such penalty in the reports is treated 
as a failure to disclose a listed transaction. A taxpayer must 
disclose a penalty in reports to the SEC once the taxpayer has 
exhausted its administrative and judicial remedies with respect 
to the penalty (or if earlier, when paid).
    Once the 30-percent penalty has been included in the 
Revenue Agent Report, the penalty cannot be compromised for 
purposes of a settlement without approval of the Commissioner 
personally or the head of the Office of Tax Shelter Analysis. 
Furthermore, the IRS is required to submit an annual report to 
Congress summarizing the application of this penalty and 
providing adescription of each penalty compromised under this 
provision and the reasons for the compromise.

Determination of the understatement amount

    The penalty is applied to the amount of any understatement 
attributable to the listed or reportable avoidance transaction 
without regard to other items on the tax return. For purposes 
of this provision, the amount of the understatement is 
determined as the sum of (1) the product of the highest 
corporate or individual tax rate (as appropriate) and the 
increase in taxable income resulting from the difference 
between the taxpayer's treatment of the item and the proper 
treatment of the item (without regard to other items on the tax 
return) \162\, and (2) the amount of any decrease in the 
aggregate amount of credits which results from a difference 
between the taxpayer's treatment of an item and the proper tax 
treatment of such item.
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    \162\ For this purpose, any reduction in the excess of deductions 
allowed for the taxable year over gross income for such year, and any 
reduction in the amount of capital losses which would (without regard 
to section 1211) be allowed for such year, shall be treated as an 
increase in taxable income.
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    Except as provided in regulations, a taxpayer's treatment 
of an item shall not take into account any amendment or 
supplement to a return if the amendment or supplement is filed 
after the earlier of when the taxpayer is first contacted 
regarding an examination of the return or such other date as 
specified by the Secretary.

Strengthened reasonable cause exception

    A penalty is not imposed under the provision with respect 
to any portion of an understatement if it is shown that there 
was reasonable cause for such portion and the taxpayer acted in 
good faith. Such a showing requires (1) adequate disclosure of 
the facts affecting the transaction in accordance with the 
regulations under section 6011,\163\ (2) that there is or was 
substantial authority for such treatment, and (3) that the 
taxpayer reasonably believed that such treatment was more 
likely than not the proper treatment. For this purpose, a 
taxpayer will be treated as having a reasonable belief with 
respect to the tax treatment of an item only if such belief (1) 
is based on the facts and law that exist at the time the tax 
return that includes the item is filed, and (2) relates solely 
to the taxpayer's chances of success on the merits and does not 
take into account the possibility that (a) a return will not be 
audited, (b) the treatment will not be raised on audit, or (c) 
the treatment will be resolved through settlement if raised.
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    \163\ See the previous discussion regarding the penalty for failing 
to disclose a reportable transaction.
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    A taxpayer may (but is not required to) rely on an opinion 
of a tax advisor in establishing its reasonable belief with 
respect to the tax treatment of the item. However, a taxpayer 
may not rely on an opinion of a tax advisor for this purpose if 
the opinion (1) is provided by a ``disqualified tax advisor,'' 
or (2) is a ``disqualified opinion.''
            Disqualified tax advisor
    A disqualified tax advisor is any advisor who (1) is a 
material advisor \164\ and who participates in the 
organization, management, promotion or sale of the transaction 
or is related (within the meaning of section 267(b) or 
707(b)(1)) to any person who so participates, (2) is 
compensated directly or indirectly \165\ by a material advisor 
with respect to the transaction, (3) has a fee arrangement with 
respect to the transaction that is contingent on all or part of 
the intended tax benefits from the transaction being sustained, 
or (4) as determined under regulations prescribed by the 
Secretary, has a disqualifying financial interest with respect 
to the transaction.
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    \164\ The term ``material advisor'' (defined below in connection 
with the new information filing requirements for material advisors) 
means any person who provides any material aid, assistance, or advice 
with respect to organizing, promoting, selling, implementing, or 
carrying out any reportable transaction, and who derives gross income 
in excess of $50,000 in the case of a reportable transaction 
substantially all of the tax benefits from which are provided to 
natural persons ($250,000 in any other case).
    \165\ This situation could arise, for example, when an advisor has 
an arrangement or understanding (oral or written) with an organizer, 
manager, or promoter of a reportable transaction that such party will 
recommend or refer potential participants to the advisor for an opinion 
regarding the tax treatment of the transaction.
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    A material advisor is considered as participating in the 
``organization'' of a transaction if the advisor performs acts 
relating to the development of the transaction. This may 
include, for example, preparing documents (1) establishing a 
structure used in connection with the transaction (such as a 
partnership agreement), (2) describing the transaction (such as 
an offering memorandum or other statement describing the 
transaction), or (3) relating to the registration of the 
transaction with any federal, state or local government 
body.\166\ Participation in the ``management'' of a transaction 
means involvement in the decision-making process regarding any 
business activity with respect to the transaction. 
Participation in the ``promotion or sale'' of a transaction 
means involvement in the marketing or solicitation of the 
transaction to others. Thus, an advisor who provides 
information about the transaction to a potential participant is 
involved in the promotion or sale of a transaction, as is any 
advisor who recommends the transaction to a potential 
participant.
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    \166\ An advisor should not be treated as participating in the 
organization of a transaction if the advisor's only involvement with 
respect to the organization of the transaction is the rendering of an 
opinion regarding the tax consequences of such transaction. However, 
such an advisor may be a ``disqualified tax advisor'' with respect to 
the transaction if the advisor participates in the management, 
promotion or sale of the transaction (or if the advisor is compensated 
by a material advisor, has a fee arrangement that is contingent on the 
tax benefits of the transaction, or as determined by the Secretary, has 
a continuing financial interest with respect to the transaction).
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            Disqualified opinion
    An opinion may not be relied upon if the opinion (1) is 
based on unreasonable factual or legal assumptions (including 
assumptions as to future events), (2) unreasonably relies upon 
representations, statements, finding or agreements of the 
taxpayer or any other person, (3) does not identify and 
consider all relevant facts, or (4) fails to meet any other 
requirement prescribed by the Secretary.

Coordination with other penalties

    Any understatement upon which a penalty is imposed under 
this provision is not subject to the accuracy-related penalty 
under section 6662. However, such understatement is included 
for purposes of determining whether any understatement (as 
defined in sec. 6662(d)(2)) is a substantial understatement as 
defined under section 6662(d)(1).
    The penalty imposed under this provision shall not apply to 
any portion of an understatement to which a fraud penalty is 
applied under section 6663.

                             EFFECTIVE DATE

    The provision is effective for taxable years ending after 
the date of enactment.

3. Modifications of substantial understatement penalty for 
        nonreportable transactions (Sec. 603 of the bill and sec. 6662 
        of the Code)

                              PRESENT LAW

Definition of substantial understatement

    An accuracy-related penalty equal to 20 percent applies to 
any substantial understatement of tax. A ``substantial 
understatement'' exists if the correct income tax liability for 
a taxable year exceeds that reported by the taxpayer by the 
greater of 10 percent of the correct tax or $5,000 ($10,000 in 
the case of most corporations).\167\
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    \167\ Sec. 6662(a) and (d)(1)(A).
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Reduction of understatement for certain positions

    For purposes of determining whether a substantial 
understatement penalty applies, the amount of any 
understatement generally is reduced by any portion attributable 
to an item if (1) the treatment of the item is supported by 
substantial authority, or (2) facts relevant to the tax 
treatment of the item were adequately disclosed and there was a 
reasonable basis for its tax treatment.\168\
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    \168\ Sec. 6662(d)(2)(B).
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    The Secretary is required to publish annually in the 
Federal Register a list of positions for which the Secretary 
believes there is not substantial authority and which affect a 
significant number of taxpayers.\169\
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    \169\ Sec. 6662(d)(2)(D).
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                           REASONS FOR CHANGE

    The Committee believes that the present-law definition of 
substantial understatement allows large corporate taxpayers to 
avoid the accuracy-related penalty on questionable transactions 
of a significant size. The Committee believes that an 
understatement of more than $10 million is substantial in and 
of itself, regardless of the proportion it represents of the 
taxpayer's total tax liability.
    The Committee believes that a higher compliance standard 
should be imposed on any taxpayer in order to reduce the amount 
of an understatement resulting from a transaction that the 
taxpayer did not adequately disclose. The Committee further 
believes that a taxpayer should not take a position on a tax 
return that could give rise to a substantial understatement 
penalty that the taxpayer does not believe is more likely than 
not the correct tax treatment unless this information is 
disclosed to the IRS.

                        EXPLANATION OF PROVISION

Definition of substantial understatement

    The provision modifies the definition of ``substantial'' 
for corporate taxpayers. Under the provision, a corporate 
taxpayer has a substantial understatement if the amount of the 
understatement for the taxable year exceeds the lesser of (1) 
10 percent of the tax required to be shown on the return for 
the taxable year (or, if greater, $10,000), or (2) $10 million.

Reduction of understatement for certain positions

    The provision elevates the standard that a taxpayer must 
satisfy in order to reduce the amount of an understatement for 
undisclosed items. With respect to the treatment of an item 
whose facts are not adequately disclosed, a resulting 
understatement is reduced only if the taxpayer had a reasonable 
belief that the tax treatment was more likely than not the 
proper treatment. The provision also authorizes (but does not 
require) the Secretary to publish a list of positions for which 
it believes there is not substantial authority or there is no 
reasonable belief that the tax treatment is more likely than 
not the proper treatment (without regard to whether such 
positions affect a significant number of taxpayers). The list 
shall be published in the Federal Register or the Internal 
Revenue Bulletin.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after date of enactment.

4. Tax shelter exception to confidentiality privileges relating to 
        taxpayer communications (Sec. 604 of the bill and sec. 7525 of 
        the Code)

                              PRESENT LAW

    In general, 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. The 
Code provides that, with respect to tax advice, the same common 
law protections of confidentiality that apply to a 
communication between a taxpayer and an attorney also apply to 
a communication between a taxpayer and a federally authorized 
tax practitioner to the extent the communication would be 
considered a privileged communication if it were between a 
taxpayer and an attorney. This rule is inapplicable to 
communications regarding corporate tax shelters.

                           REASONS FOR CHANGE

    The Committee believes that the rule currently applicable 
to corporate tax shelters should be applied to all tax 
shelters, regardless of whether or not the participant is a 
corporation.

                        EXPLANATION OF PROVISION

    The provision modifies the rule relating to corporate tax 
shelters by making it applicable to all tax shelters, whether 
entered into by corporations, individuals, partnerships, tax-
exempt entities, or any other entity. Accordingly, 
communications with respect to tax shelters are not subject to 
the confidentiality provision of the Code that otherwise 
applies to a communication between a taxpayer and a federally 
authorized tax practitioner.

                             EFFECTIVE DATE

    The provision is effective with respect to communications 
made on or after the date of enactment.

5. Disclosure of reportable transactions (Sec. 605 of the bill and 
        secs. 6111 and 6707 of the Code)

                              PRESENT LAW

Registration of tax shelter arrangements

    An organizer of a tax shelter is required to register the 
shelter with the Secretary not later than the day on which the 
shelter is first offered for sale.\170\ A ``tax shelter'' means 
any investment with respect to which the tax shelter ratio 
\171\ for any investor as of the close of any of the first five 
years ending after the investment is offered for sale may be 
greater than two to one and which is: (1) required to be 
registered under Federal or State securities laws, (2) sold 
pursuant to an exemption from registration requiring the filing 
of a notice with a Federal or State securities agency, or (3) a 
substantial investment (greater than $250,000 and involving at 
least five investors).\172\
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    \170\ Sec. 6111(a).
    \171\ The tax shelter ratio is, with respect to any year, the ratio 
that the aggregate amount of the deductions and 350 percent of the 
credits, which are represented to be potentially allowable to any 
investor, bears to the investment base (money plus basis of assets 
contributed) as of the close of the tax year.
    \172\ Sec. 6111(c).
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    Other promoted arrangements are treated as tax shelters for 
purposes of the registration requirement if: (1) a significant 
purpose of the arrangement is the avoidance or evasion of 
Federal income tax by a corporate participant; (2) the 
arrangement is offered under conditions of confidentiality; and 
(3) the promoter may receive fees in excess of $100,000 in the 
aggregate.\173\
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    \173\ Sec. 6111(d).
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    In general, a transaction has a ``significant purpose of 
avoiding or evading Federal income tax'' if the transaction: 
(1) is the same as or substantially similar to a ``listed 
transaction,'' \174\ or (2) is structured to produce tax 
benefits that constitute an important part of the intended 
results of the arrangement and the promoter reasonably expects 
to present the arrangement to more than one taxpayer.\175\ 
Certain exceptions are provided with respect to the second 
category of transactions.\176\
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    \174\ Treas. Reg. sec. 301.6111-2(b)(2).
    \175\ Treas. Reg. sec. 301.6111-2(b)(3).
    \176\ Treas. Reg. sec. 301.6111-2(b)(4).
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    An arrangement is offered under conditions of 
confidentiality if: (1) an offeree has an understanding or 
agreement to limit the disclosure of the transaction or any 
significant tax features of the transaction; or (2) the 
promoter knows, or has reason to know, that the offeree's use 
or disclosure of information relating to the transaction is 
limited in any other manner.\177\
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    \177\ The regulations provide that the determination of whether an 
arrangement is offered under conditions of confidentiality is based on 
all the facts and circumstances surrounding the offer. If an offeree's 
disclosure of the structure or tax aspects of the transaction are 
limited in any way by an express or implied understanding or agreement 
with or for the benefit of a tax shelter promoter, an offer is 
considered made under conditions of confidentiality, whether or not 
such understanding or agreement is legally binding. Treas. Reg. sec. 
301.6111-2(c)(1).
---------------------------------------------------------------------------

Failure to register tax shelter

    The penalty for failing to timely register a tax shelter 
(or for filing false or incomplete information with respect to 
the tax shelter registration) generally is the greater of one 
percent of the aggregate amount invested in the shelter or 
$500.\178\ However, if the tax shelter involves an arrangement 
offered to a corporation under conditions of confidentiality, 
the penalty is the greater of $10,000 or 50 percent of the fees 
payable to any promoter with respect to offerings prior to the 
date of late registration. Intentional disregard of the 
requirement to register increases the penalty to 75 percent of 
the applicable fees.
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    \178\ Sec. 6707.
---------------------------------------------------------------------------
    Section 6707 also imposes (1) a $100 penalty on the 
promoter for each failure to furnish the investor with the 
required tax shelter identification number, and (2) a $250 
penalty on the investor for each failure to include the tax 
shelter identification number on a return.

                           REASONS FOR CHANGE

    The Committee has been advised that the current promoter 
registration rules have not proven particularly helpful, 
because the rules are not appropriate for the kinds of abusive 
transactions now prevalent, and because the limitations 
regarding confidential corporate arrangements have proven easy 
to circumvent.
    The Committee believes that providing a single, clear 
definition regarding the types of transactions that must be 
disclosed by taxpayers and material advisors, coupled with more 
meaningful penalties for failing to disclose such transactions, 
are necessary tools if the effort to curb the use of abusive 
tax avoidance transactions is to be effective.

                        EXPLANATION OF PROVISION

Disclosure of reportable transactions by material advisors

    The provision repeals the present law rules with respect to 
registration of tax shelters. Instead, the provision requires 
each material advisor with respect to any reportable 
transaction (including any listed transaction) \179\ to timely 
file an information return with the Secretary (in such form and 
manner as the Secretary may prescribe). The return must be 
filed on such date as specified by the Secretary.
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    \179\ The terms ``reportable transaction'' and ``listed 
transaction'' have the same meaning as previously described in 
connection with the taxpayer-related provisions.
---------------------------------------------------------------------------
    The information return will include (1) information 
identifying and describing the transaction, (2) information 
describing any potential tax benefits expected to result from 
the transaction, and (3) such other information as the 
Secretary may prescribe. It is expected that the Secretary may 
seek from the material advisor the same type of information 
that the Secretary may request from a taxpayer in connection 
with a reportable transaction.\180\
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    \180\ See the previous discussion regarding the disclosure 
requirements under new section 6707A.
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    A ``material advisor'' means any person (1) who provides 
material aid, assistance, or advice with respect to organizing, 
promoting, selling, implementing, or carrying out any 
reportable transaction, and (2) who directly or indirectly 
derives gross income in excess of$250,000 ($50,000 in the case 
of a reportable transaction substantially all of the tax benefits from 
which are provided to natural persons) for such advice or assistance.
    The Secretary may prescribe regulations which provide (1) 
that only one material advisor has to file an information 
return in cases in which two or more material advisors would 
otherwise be required to file information returns with respect 
to a particular reportable transaction, (2) exemptions from the 
requirements of this section, and (3) other rules as may be 
necessary or appropriate to carry out the purposes of this 
section (including, for example, rules regarding the 
aggregation of fees in appropriate circumstances).

Penalty for failing to furnish information regarding reportable 
        transactions

    The provision repeals the present law penalty for failure 
to register tax shelters. Instead, the provision imposes a 
penalty on any material advisor who fails to file an 
information return, or who files a false or incomplete 
information return, with respect to a reportable transaction 
(including a listed transaction).\181\ The amount of the 
penalty is $50,000. If the penalty is with respect to a listed 
transaction, the amount of the penalty is increased to the 
greater of (1) $200,000, or (2) 50 percent of the gross income 
of such person with respect to aid, assistance, or advice which 
is provided with respect to the transaction before the date the 
information return that includes the transaction is filed. 
Intentional disregard by a material advisor of the requirement 
to disclose a listed transaction increases the penalty to 75 
percent of the gross income.
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    \181\ The terms ``reportable transaction'' and ``listed 
transaction'' have the same meaning as previously described in 
connection with the taxpayer-related provisions.
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    The penalty cannot be waived with respect to a listed 
transaction. As to reportable transactions, the penalty can be 
rescinded (or abated) only in exceptional circumstances.\182\ 
All or part of the penalty may be rescinded only if: (1) the 
material advisor on whom the penalty is imposed has a history 
of complying with the Federal tax laws, (2) it is shown that 
the violation is due to an unintentional mistake of fact, (3) 
imposing the penalty would be against equity and good 
conscience, and (4) rescinding the penalty would promote 
compliance with the tax laws and effective tax administration. 
The authority to rescind the penalty can only be exercised by 
the Commissioner personally or the head of the Office of Tax 
Shelter Analysis; this authority to rescind cannot otherwise be 
delegated by the Commissioner. Thus, a revenue agent, an 
Appeals officer, or other IRS personnel cannot rescind the 
penalty. The decision to rescind a penalty must be accompanied 
by a record describing the facts and reasons for the action and 
the amount rescinded. There will be no right to appeal a 
refusal to rescind a penalty. The IRS also is required to 
submit an annual report to Congress summarizing the application 
of the disclosure penalties and providing a description of each 
penalty rescinded under this provision and the reasons for the 
rescission.
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    \182\ The Secretary's present-law authority to postpone certain 
tax-related deadlines because of Presidentially-declared disasters 
(sec. 7508A) will also encompass the authority to postpone the 
reporting deadlines established by the provision.
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                             EFFECTIVE DATE

    The provision requiring disclosure of reportable 
transactions by material advisors applies to transactions with 
respect to which material aid, assistance or advice is provided 
after the date of enactment.
    The provision imposing a penalty for failing to disclose 
reportable transactions applies to returns the due date for 
which is after the date of enactment.

6. Modification of penalties for failure to register tax shelters or 
        maintain lists of investors (Secs. 606 and 607 of the bill and 
        secs. 6707 and 6708 of the Code)

                              PRESENT LAW

Investor lists

    Any organizer or seller of a potentially abusive tax 
shelter must maintain a list identifying each person who was 
sold an interest in any such tax shelter with respect to which 
registration was required under section 6111 (even though the 
particular party may not have been subject to confidentiality 
restrictions).\183\ Recently issued regulations under section 
6112 contain rules regarding the list maintenance 
requirements.\184\ In general, the regulations apply to 
transactions that are potentially abusive tax shelters entered 
into, or acquired after, February 28, 2003.\185\
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    \183\ Sec. 6112.
    \184\ Treas. Reg. sec. 301-6112-1.
    \185\ A special rule applies the list maintenance requirements to 
transactions entered into after February 28, 2000 if the transaction 
becomes a listed transaction (as defined in Treas. Reg. 1.6011-4) after 
February 28, 2003.
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    The regulations provide that a person is an organizer or 
seller of a potentially abusive tax shelter if the person is a 
material advisor with respect to that transaction.\186\ A 
material advisor is defined any person who is required to 
register the transaction under section 6111, or expects to 
receive a minimum fee of (1) $250,000 for a transaction that is 
a potentially abusive tax shelter if all participants are 
corporations, or (2) $50,000 for any other transaction that is 
a potentially abusive tax shelter.\187\ For listed transactions 
(as defined in the regulations under section 6011), the minimum 
fees are reduced to $25,000 and $10,000, respectively.
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    \186\ Treas. Reg. sec. 301.6112-1(c)(1).
    \187\ Treas. Reg. sec. 301.6112-1(c)(2) and (3).
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    A potentially abusive tax shelter is any transaction that 
(1) is required to be registered under section 6111, (2) is a 
listed transaction (as defined under the regulations under 
section 6011), or (3) any transaction that a potential material 
advisor, at the time the transaction isentered into, knows is 
or reasonably expects will become a reportable transaction (as defined 
under the new regulations under section 6011).\188\
---------------------------------------------------------------------------
    \188\ Treas. Reg. sec. 301.6112-1(b).
---------------------------------------------------------------------------
    The Secretary is required to prescribe regulations which 
provide that, in cases in which two or more persons are 
required to maintain the same list, only one person would be 
required to maintain the list.\189\
---------------------------------------------------------------------------
    \189\ Sec. 6112(c)(2).
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Penalty for failing to maintain investor lists

    Under section 6708, the penalty for failing to maintain the 
list required under section 6112 is $50 for each name omitted 
from the list (with a maximum penalty of $100,000 per year).

                           REASONS FOR CHANGE

    The Committee has been advised that the present-law 
penalties for failure to maintain customer lists are not 
meaningful and that promoters often have refused to provide 
requested information to the IRS. The Committee believes that 
requiring material advisors to maintain a list of advisees with 
respect to each reportable transaction, coupled with more 
meaningful penalties for failing to maintain an investor list, 
are important tools in the ongoing efforts to curb the use of 
abusive tax avoidance transactions.

                        EXPLANATION OF PROVISION

Investor lists

    Each material advisor\190\ with respect to a reportable 
transaction (including a listed transaction)\191\ is required 
to maintain a list that (1) identifies each person with respect 
to whom the advisor acted as a material advisor with respect to 
the reportable transaction, and (2) contains other information 
as may be required by the Secretary. In addition, the provision 
authorizes (but does not require) the Secretary to prescribe 
regulations which provide that, in cases in which 2 or more 
persons are required to maintain the same list, only one person 
would be required to maintain the list.
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    \190\ The term ``material advisor'' has the same meaning as when 
used in connection with the requirement to file an information return 
under section 6111.
    \191\ The terms ``reportable transaction'' and ``listed 
transaction'' have the same meaning as previously described in 
connection with the taxpayer-related provisions.
---------------------------------------------------------------------------
    The provision also clarifies that, for purposes of section 
6112, the identity of any person is not privileged under the 
common law attorney-client privilege (or, consequently, the 
section 7525 federally authorized tax practitioner 
confidentiality provision).

Penalty for failing to maintain investor lists

    The provision modifies the penalty for failing to maintain 
the required list by making it a time-sensitive penalty. Thus, 
a material advisor who is required to maintain an investor list 
and who fails to make the list available upon written request 
by the Secretary within 20 business days after the request will 
be subject to a $10,000 per day penalty. The penalty applies to 
a person who fails to maintain a list, maintains an incomplete 
list, or has in fact maintained a list but does not make the 
list available to the Secretary. The penalty can be waived if 
the failure to make the list available is due to reasonable 
cause.\192\
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    \192\ In no event will failure to maintain a list be considered 
reasonable cause for failing to make a list available to the Secretary.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision requiring a material advisor to maintain an 
investor list applies to transactions with respect to which 
material aid, assistance or advice is provided after the date 
of enactment.
    The provision imposing a penalty for failing to maintain 
investor lists applies to requests made after the date of 
enactment.
    The provision clarifying that the identity of any person is 
not privileged for purposes of section 6112 is effective as if 
included in the amendments made by section 142 of the Deficit 
Reduction Act of 1984.

7. Modification of actions to enjoin certain conduct related to tax 
        shelters and reportable transactions (Sec. 608 of the bill and 
        sec. 7408 of the Code)

                              PRESENT LAW

    The Code authorizes civil actions to enjoin any person from 
promoting abusive tax shelters or aiding or abetting the 
understatement of tax liability.\193\
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    \193\ Sec. 7408.
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                           REASONS FOR CHANGE

    The Committee understands that some promoters are blatantly 
ignoring the rules regarding registration and list maintenance 
regardless of the penalties. An injunction would place these 
promoters in a public proceeding under court order. Thus, the 
Committee believes that the types of tax shelter activities 
with respect to which an injunction may be sought should be 
expanded.

                        EXPLANATION OF PROVISION

    The provision expands this rule so that injunctions may 
also be sought with respect to the requirements relating to the 
reporting of reportable transactions 194 and the 
keeping of lists of investors by material 
advisors.195 Thus, under the provision, an 
injunction may be sought against a material advisor to enjoin 
the advisor from (1) failing to file an information return with 
respect to a reportable transaction, or (2) failing to 
maintain, or to timely furnish upon written request by the 
Secretary, a list of investors with respect to each reportable 
transaction.
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    \194\ Sec. 6707, as amended by other provisions of this bill.
    \195\ Sec. 6708, as amended by other provisions of this bill.
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                             EFFECTIVE DATE

    The provision is effective on the day after the date of 
enactment.

8. Understatement of taxpayer's liability by income tax return preparer 
        (Sec. 609 of the bill and sec. 6694 of the Code)

                              PRESENT LAW

    An income tax return preparer who prepares a return with 
respect to which there is an understatement of tax that is due 
to a position for which there was not a realistic possibility 
of being sustained on its merits and the position was not 
disclosed (or was frivolous) is liable for a penalty of $250, 
provided that the preparer knew or reasonably should have known 
of the position. An income tax return preparer who prepares a 
return and engages in specified willful or reckless conduct 
with respect to preparing such a return is liable for a penalty 
of $1,000.

                           REASONS FOR CHANGE

    The Committee believes that the standards of conduct 
applicable to income tax return preparers should be the same as 
the standards applicable to taxpayers. Accordingly, the minimum 
standard for each undisclosed position on a tax return would be 
that the preparer must reasonably believe that the tax 
treatment is more likely than not the proper tax treatment. The 
Committee believes that this standard is appropriate because 
the tax return is signed under penalties of perjury, which 
implies a high standard of diligence in determining the facts 
and substantial accuracy in determining and applying the rules 
that govern those facts. The Committee believes that it is both 
appropriate and vital to the tax system that both taxpayers and 
their return preparers file tax returns that they reasonably 
believe are more likely than not correct. In addition, 
conforming the standards of conduct applicable to income tax 
return preparers to the standards applicable to taxpayers will 
simplify the law by reducing confusion inherent in different 
standards applying to the same behavior.

                        EXPLANATION OF PROVISION

    The provision alters the standards of conduct that must be 
met to avoid imposition of the first penalty. The provision 
replaces the realistic possibility standard with a requirement 
that there be a reasonable belief that the tax treatment of the 
position was more likely than not the proper treatment. The 
provision also replaces the not frivolous standard with the 
requirement that there be a reasonable basis for the tax 
treatment of the position.
    In addition, the provision increases the amount of these 
penalties. The penalty relating to not having a reasonable 
belief that the tax treatment was more likely than not the 
proper tax treatment is increased from $250 to $1,000. The 
penalty relating to willful or reckless conduct is increased 
from $1,000 to $5,000.

                             EFFECTIVE DATE

    The provision is effective for documents prepared after the 
date of enactment.

9. Regulation of individuals practicing before the Department of 
        Treasury (Sec. 610 of the bill and sec. 330 of Title 31, United 
        States Code)

                              PRESENT LAW

    The Secretary of the Treasury is authorized to regulate the 
practice of representatives of persons before the Department of 
the Treasury.196 The Secretary is also authorized to 
suspend or disbar from practice before the Department a 
representative who is incompetent, who is disreputable, who 
violates the rules regulating practice before the Department, 
or who (with intent to defraud) willfully and knowingly 
misleads or threatens the person being represented (or a person 
who may be represented). The rules promulgated by the Secretary 
pursuant to this provision are contained in Circular 230.
---------------------------------------------------------------------------
    \196\ 31 U.S.C. 330.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is critical that the 
Secretary have the authority to censure tax advisors as well as 
to impose monetary sanctions against tax advisors because of 
the important role of tax advisors in our tax system. Use of 
these sanctions is expected to curb the participation of tax 
advisors in both tax shelter activity and any other activity 
that is contrary to Circular 230 standards.

                        EXPLANATION OF PROVISION

    The provision makes two modifications to expand the 
sanctions that the Secretary may impose pursuant to these 
statutory provisions. First, the provision expressly permits 
censure as a sanction. Second, the provision permits the 
imposition of a monetary penalty as a sanction. If the 
representative is acting on behalf of an employer or other 
entity, the Secretary may impose a monetary penalty on the 
employer or other entity if it knew, or reasonably should have 
known, ofthe conduct. This monetary penalty on the employer or 
other entity may be imposed in addition to any monetary penalty imposed 
directly on the representative. These monetary penalties are not to 
exceed the gross income derived (or to be derived) from the conduct 
giving rise to the penalty. These monetary penalties may be in addition 
to, or in lieu of, any suspension, disbarment, or censure.
    The provision also confirms the present-law authority of 
the Secretary to impose standards applicable to written advice 
with respect to an entity, plan, or arrangement that is of a 
type that the Secretary determines as having a potential for 
tax avoidance or evasion.

                             EFFECTIVE DATE

    The modifications to expand the sanctions that the 
Secretary may impose are effective for actions taken after the 
date of enactment.

10. Penalty on promoters of tax shelters (Sec. 611 of the bill and sec. 
        6700 of the Code)

                              PRESENT LAW

    A penalty is imposed on any person who organizes, assists 
in the organization of, or participates in the sale of any 
interest in, a partnership or other entity, any investment plan 
or arrangement, or any other plan or arrangement, if in 
connection with such activity the person makes or furnishes a 
qualifying false or fraudulent statement or a gross valuation 
overstatement.197 A qualified false or fraudulent 
statement is any statement with respect to the allowability of 
any deduction or credit, the excludability of any income, or 
the securing of any other tax benefit by reason of holding an 
interest in the entity or participating in the plan or 
arrangement which the person knows or has reason to know is 
false or fraudulent as to any material matter. A ``gross 
valuation overstatement'' means any statement as to the value 
of any property or services if the stated value exceeds 200 
percent of the correct valuation, and the value is directly 
related to the amount of any allowable income tax deduction or 
credit.
---------------------------------------------------------------------------
    \197\ Sec. 6700.
---------------------------------------------------------------------------
    The amount of the penalty is $1,000 (or, if the person 
establishes that it is less, 100 percent of the gross income 
derived or to be derived by the person from such activity). A 
penalty attributable to a gross valuation misstatement can be 
waived on a showing that there was a reasonable basis for the 
valuation and it was made in good faith.

                           REASONS FOR CHANGE

    The Committee believes that the present-law penalty rate is 
insufficient to deter the type of conduct that gives rise to 
the penalty.

                        EXPLANATION OF PROVISION

    The provision modifies the penalty amount to equal 50 
percent of the gross income derived by the person from the 
activity for which the penalty is imposed. The new penalty rate 
applies to any activity that involves a statement regarding the 
tax benefits of participating in a plan or arrangement if the 
person knows or has reason to know that such statement is false 
or fraudulent as to any material matter. The enhanced penalty 
does not apply to a gross valuation overstatement.

                             EFFECTIVE DATE

    The provision is effective for activities after the date of 
enactment.

11. Statute of limitations for taxable years for which required listed 
        transactions not disclosed (Sec. 612 of the bill and sec. 6501 
        of the Code)

                              PRESENT LAW

    In general, the Code requires that taxes be assessed within 
three years 198 after the date a return is 
filed.199 If there has been a substantial omission 
of items of gross income that totals more than 25 percent of 
the amount of gross income shown on the return, the period 
during which an assessment must be made is extended to six 
years.200 If an assessment is not made within the 
required time periods, the tax generally cannot be assessed or 
collected at any future time. Tax may be assessed at any time 
if the taxpayer files a false or fraudulent return with the 
intent to evade tax or if the taxpayer does not file a tax 
return at all.201
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    \198\ Sec. 6501(a).
    \199\ For this purpose, a return that is filed before the date on 
which it is due is considered to be filed on the required due date 
(sec. 6501(b)(1)).
    \200\ Sec. 6501(e).
    \201\ Sec. 6501(c).
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                           REASONS FOR CHANGE

    The Committee believes that extending the statute of 
limitations if a taxpayer required to disclose a listed 
transaction fails to do so will encourage taxpayers to provide 
the required disclosure and will afford the IRS additional time 
to discover the transaction if the taxpayer does not disclose 
it.

                        EXPLANATION OF PROVISION

    The provision extends the statute of limitations with 
respect to a listed transaction if a taxpayer fails to include 
on any return or statement for any taxable year any information 
with respect to a listed transaction 202 which is 
required to be included (under section 6011) with such return 
or statement. The statute of limitations with respect to such a 
transaction will not expire before the date which is one year 
after the earlier of (1) the date on which the Secretary is 
furnished the information so required, or (2) the date that a 
material advisor (as defined in 6111) satisfies the list 
maintenance requirements (as defined by section 6112) with 
respect to a request by the Secretary. For example, if a 
taxpayer engaged in a transaction in 2005 that becomes a listed 
transaction in 2007 and the taxpayer fails to disclose such 
transaction in the manner required by Treasury regulations, 
then the transaction is subject to the extended statute of 
limitations.203
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    \202\ The term ``listed transaction'' has the same meaning as 
described in a previous provision regarding the penalty for failure to 
disclose reportable transactions.
    \203\ If the Treasury Department lists a transaction in a year 
subsequent to the year in which a taxpayer entered into such 
transaction and the taxpayer's tax return for the year the transaction 
was entered into is closed by the statute of limitations prior to the 
date the transaction became a listed transaction, this provision does 
not re-open the statute of limitations with respect to such transaction 
for such year. However, if the purported tax benefits of the 
transaction are recognized over multiple tax years, the provision's 
extension of the statute of limitations shall apply to such tax 
benefits in any subsequent tax year in which the statute of limitations 
had not closed prior to the date the transaction became a listed 
transaction.
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                             EFFECTIVE DATE

    The provision is effective for taxable years with respect 
to which the period for assessing a deficiency did not expire 
before the date of enactment.

12. Denial of deduction for interest on underpayments attributable to 
        tax-motivated transactions (Sec. 613 of the bill and sec. 163 
        of the Code)

                              PRESENT LAW

    In general, corporations may deduct interest paid or 
accrued within a taxable year on indebtedness.204 
Interest on indebtedness to the Federal government attributable 
to an underpayment of tax generally may be deducted pursuant to 
this provision.
---------------------------------------------------------------------------
    \204\ Sec. 163(a).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is inappropriate for 
corporations to deduct interest paid to the Government with 
respect to certain tax shelter transactions.

                        EXPLANATION OF PROVISION

    The provision disallows any deduction for interest paid or 
accrued within a taxable year on any portion of an underpayment 
of tax that is attributable to an understatement arising from 
(1) an undisclosed reportable avoidance transaction, or (2) an 
undisclosed listed transaction.205
---------------------------------------------------------------------------
    \205\ The definitions of these transactions are the same as those 
previously described in connection with the proposal to modify the 
accuracy-related penalty for listed and certain reportable 
transactions.
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                             EFFECTIVE DATE

    The provision is effective for underpayments attributable 
to transactions entered into in taxable years beginning after 
the date of enactment.

13. Authorization of appropriations for tax law enforcement (Sec. 614 
        of the bill)

                              PRESENT LAW

    There is no explicit authorization of appropriations to the 
Internal Revenue Service to be used to combat abusive tax 
avoidance transactions.

                           REASONS FOR CHANGE

    The Committee believes that authorizing an additional $300 
million to the Internal Revenue Service to be used to combat 
abusive tax avoidance transactions will aid in the 
implementation of the tax shelter measures the Committee is 
simultaneously approving.

                        EXPLANTION OF PROVISION

    The provision includes an authorization of an additional 
$300 million to the Internal Revenue Service to be used to 
combat abusive tax avoidance transactions.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                B. Other Corporate Governance Provisions


1. Affirmation of consolidated return regulation authority (Sec. 621 of 
        the bill and sec. 1502 of the Code)

                              PRESENT LAW

    An affiliated group of corporations may elect to file a 
consolidated return in lieu of separate returns. A condition of 
electing to file a consolidated return is that all corporations 
that are members of the consolidated group must consent to all 
the consolidated return regulations prescribed under section 
1502 prior to the last day prescribed by law for filing such 
return.206
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    \206\ Sec. 1501.
---------------------------------------------------------------------------
    Section 1502 states:

          The Secretary shall prescribe such regulations as he 
        may deem necessary in order that the tax liability of 
        any affiliated group of corporations making a 
        consolidated return and of each corporation in the 
        group, both during and after the period of affiliation, 
        may be returned, determined, computed, assessed, 
        collected, and adjusted, in such manner as clearly to 
        reflect the income-tax liability and the various 
        factors necessary for the determination of such 
        liability, and in order to prevent the avoidance of 
        such tax liability.207
---------------------------------------------------------------------------
    \207\ Sec. 1502.

    Under this authority, the Treasury Department has issued 
extensive consolidated return regulations.208
---------------------------------------------------------------------------
    \208\ Regulations issued under the authority of section 1502 are 
considered to be ``legislative'' regulations rather than 
``interpretative'' regulations, and as such are usually given greater 
deference by courts in case of a taxpayer challenge to such a 
regulation. See, S. Rep. No. 960, 70th Cong., 1st Sess. at 15 (1928), 
describing the consolidated return regulations as ``legislative in 
character''. The Supreme Court has stated that ``. . . legislative 
regulations are given controlling weight unless they are arbitrary, 
capricious, or manifestly contrary to the statute.'' Chevron, U.S.A., 
Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 
(1984) (involving an environmental protection regulation). For examples 
involving consolidated return regulations, see, e.g., Wolter 
Construction Company v. Commissioner, 634 F.2d 1029 (6th Cir. 1980); 
Garvey, Inc. v. United States, 1 Ct. Cl. 108 (1983), aff'd 726 F.2d 
1569 (Fed. Cir. 1984), cert. denied, 469 U.S. 823 (1984). Compare, 
e.g., Audrey J. Walton v. Commissioner, 115 T.C. 589 (2000), describing 
different standards of review. The case did not involve a consolidated 
return regulation.
---------------------------------------------------------------------------
    In the recent case of Rite Aid Corp. v. United 
States,209 the Federal Circuit Court of Appeals 
addressed the application of a particular provision of certain 
consolidated return loss disallowance regulations, and 
concluded that the provision was invalid.210 The 
particular provision, known as the ``duplicated loss'' 
provision,211 would have denied a loss on the sale 
of stock of a subsidiary by a parent corporation that had filed 
a consolidated return with the subsidiary, to the extent the 
subsidiary corporation had assets that had a built-in loss, or 
had a net operating loss, that could be recognized or used 
later.212
---------------------------------------------------------------------------
    \209\ 255 F.3d 1357 (Fed. Cir. 2001), reh'g denied, 2001 U.S. App. 
LEXIS 23207 (Fed. Cir. Oct. 3, 2001).
    \210\ Prior to this decision, there had been a few instances 
involving prior laws in which certain consolidated return regulations 
were held to be invalid. See, e.g., American Standard, Inc. v. United 
States, 602 F.2d 256 (Ct. Cl. 1979), discussed in the text infra. see 
also Union Carbide Corp. v. United States, 612 F.2d 558 (Ct. Cl. 1979), 
and Allied Corporation v. United States, 685 F. 2d 396 (Ct. Cl. 1982), 
all three cases involving the allocation of income and loss within a 
consolidated group for purposes of computation of a deduction allowed 
under prior law by the Code for Western Hemisphere Trading 
Corporations. See also Joseph Weidenhoff v. Commissioner, 32 T.C. 1222, 
1242-1244 (1959), involving the application of certain regulations to 
the excess profits tax credit allowed under prior law, and concluding 
that the Commissioner had applied a particular regulation in an 
arbitrary manner inconsistent with the wording of the regulation and 
inconsistent with even a consolidated group computation. Cf. Kanawha 
Gas & Utilities Co. v. Commissioner, 214 F.2d 685 (1954), concluding 
that the substance of a transaction was an acquisition of assets rather 
than stock. Thus, a regulation governing basis of the assets of 
consolidated subsidiaries did not apply to the case. See also General 
Machinery Corporation v. Commissioner, 33 B.T.A. 1215 (1936); Lefcourt 
Realty Corporation, 31 B.T.A. 978 (1935); Helvering v. Morgans, Inc., 
293 U.S. 121 (1934), interpreting the term ``taxable year.''
    \211\ Treas. Reg. Sec. 1.1502-20(c)(1)(iii).
    \212\ Treasury Regulation section 1.1502-20, generally imposing 
certain ``loss disallowance'' rules on the disposition of subsidiary 
stock, contained other limitations besides the ``duplicated loss'' rule 
that could limit the loss available to the group on a disposition of a 
subsidiary's stock. Treasury Regulation section 1.1502-20 as a whole 
was promulgated in connection with regulations issued under section 
337(d), principally in connection with the so-called General Utilities 
repeal of 1986 (referring to the case of General Utilities & Operating 
Company v. Helvering, 296 U.S. 200 (1935)). Such repeal generally 
required a liquidating corporation, or a corporation acquired in a 
stock acquisition treated as a sale of assets, to pay corporate level 
tax on the excess of the value of its assets over the basis. Treasury 
regulation section 1.1502-20 principally reflected an attempt to 
prevent corporations filing consolidated returns from offsetting income 
with a loss on the sale of subsidiary stock. Such a loss could result 
from the unique upward adjustment of a subsidiary's stock basis 
required under the consolidated return regulations for subsidiary 
income earned in consolidation, an adjustment intended to prevent 
taxation of both the subsidiary and the parent on the same income or 
gain. As one example, absent a denial of certain losses on a sale of 
subsidiary stock, a consolidated group could obtain a loss deduction 
with respect to subsidiary stock, the basis of which originally 
reflected the subsidiary's value at the time of the purchase of the 
stock, and that had then been adjusted upward on recognition of any 
built-in income or gain of the subsidiary reflected in that value. The 
regulations also contained the duplicated loss factor addressed by the 
court in Rite Aid. The preamble to the regulations stated: ``it is not 
administratively feasible to differentiate between loss attributable to 
built-in gain and duplicated loss.'' T.D. 8364, 1991-2 C.B. 43, 46 
(Sept. 13, 1991). The government also argued in the Rite Aid case that 
duplicated loss was a separate concern of the regulations. 255 F.3d at 
1360.
---------------------------------------------------------------------------
    The Federal Circuit Court opinion contained language 
discussing the fact that the regulation produced a result 
different than the result that would have been obtained if the 
corporations had filed separate returns rather than 
consolidated returns.213
---------------------------------------------------------------------------
    \213\ For example, the court stated: ``The duplicated loss factor * 
* * addresses a situation that arises from the sale of stock regardless 
of whether corporations file separate or consolidated returns. With 
I.R.C. secs. 382 and 383, Congress has addressed this situation by 
limiting the subsidiary's potential future deduction, not the parent's 
loss on the sale of stock under I.R.C. sec. 165.'' 255 F.3d 1357, 1360 
(Fed. Cir. 2001).
---------------------------------------------------------------------------
    The Federal Circuit Court opinion cited a 1928 Senate 
Finance Committee Report to legislation that authorized 
consolidated return regulations, which stated that ``many 
difficult and complicated problems, * * * have arisen in the 
administration of the provisions permitting the filing of 
consolidated returns'' and that the committee ``found it 
necessary to delegate power to the commissioner to prescribe 
regulations legislative in character covering them.'' 
214 The Court's opinion also cited a previous 
decision of the Court of Claims for the proposition, 
interpreting this legislative history, that section 1502 grants 
the Secretary ``the power to conform the applicable income tax 
law of the Code to the special, myriad problems resulting from 
the filing of consolidated income tax returns;'' but that 
section 1502 ``does not authorize the Secretary to choose a 
method that imposes a tax on income that would not otherwise be 
taxed.'' 215
---------------------------------------------------------------------------
    \214\ S. Rep. No. 960, 70th Cong., 1st Sess. 15 (1928). Though not 
quoted by the court in Rite Aid, the same Senate report also indicated 
that one purpose of the consolidated return authority was to permit 
treatment of the separate corporations as if they were a single unit, 
stating ``The mere fact that by legal fiction several corporations 
owned by the same shareholders are separate entities should not obscure 
the fact that they are in reality one and the same business owned by 
the same individuals and operated as a unit.'' S. Rep. No. 960, 70th 
Cong., 1st Sess. 29 (1928).
    \215\ American Standard, Inc. v. United States, 602 F.2d 256, 261 
(Ct. Cl. 1979). That case did not involve the question of separate 
returns as compared to a single return approach. It involved the 
computation of a Western Hemisphere Trade Corporation (``WHTC'') 
deduction under prior law (which deduction would have been computed as 
a percentage of each WHTC's taxable income if the corporations had 
filed separate returns), in a case where a consolidated group included 
several WHTCs as well as other corporations. The question was how to 
apportion income and losses of the admittedly consolidated WHTCs and 
how to combine that computation with the rest of the group's 
consolidated income or losses. The court noted that the new, changed 
regulations approach varied from the approach taken to a similar 
problem involving public utilities within a group and previously 
allowed for WHTCs. The court objected that the allocation method 
adopted by the regulation allowed non-WHTC losses to reduce WHTC 
income. However, the court did not disallow a method that would net 
WHTC income of one WHTC with losses of another WHTC, a result that 
would not have occurred under separate returns. Nor did the court 
expressly disallow a different fractional method that would net both 
income and losses of the WHTCs with those of other corporations in the 
consolidated group. The court also found that the regulation had been 
adopted without proper notice.
---------------------------------------------------------------------------
    The Federal Circuit Court construed these authorities and 
applied them to invalidate Treas. Reg. Sec. 1.1502-
20(c)(1)(iii), stating that:

          The loss realized on the sale of a former 
        subsidiary's assets after the consolidated group sells 
        the subsidiary's stock is not a problem resulting from 
        the filing of consolidated income tax returns. The 
        scenario also arises where a corporate shareholder 
        sells the stock of a non-consolidated subsidiary. The 
        corporate shareholder could realize a loss under I.R.C. 
        sec. 1001, and deduct the loss under I.R.C. sec. 165. 
        The subsidiary could then deduct any losses from a 
        later sale of assets. The duplicated loss factor, 
        therefore, addresses a situation that arises from the 
        sale of stock regardless of whether corporations file 
        separate or consolidated returns. With I.R.C. secs. 382 
        and 383, Congress has addressed this situation by 
        limiting the subsidiary's potential future deduction, 
        not the parent's loss on the sale of stock under I.R.C. 
        sec. 165.216
---------------------------------------------------------------------------
    \216\ Rite Aid, 255 F.3d at 1360.

    The Treasury Department has announced that it will not 
continue to litigate the validity of the duplicated loss 
provision of the regulations, and has issued interim 
regulations that permit taxpayers for all years to elect a 
different treatment, though they may apply the provision for 
the past if they wish.217
---------------------------------------------------------------------------
    \217\ See Temp. Reg. Sec. 1.1502-20T(i)(2), Temp. Reg. Sec. 
1.337(d)-2T, and Temp. Reg. Sec. 1.1502-35T. The Treasury Department 
has also indicated its intention to continue to study all the issues 
that the original loss disallowance regulations addressed (including 
issues of furthering single entity principles) and possibly issue 
different regulations (not including the particular approach of Treas. 
Reg. Sec. 1.1502-20(c)(1)(iii)) on the issues in the future. See Notice 
2002-11, 2002-7 I.R.B. 526 (Feb. 19, 2002); T.D. 8984, 67 F.R. 11034 
(March 12, 2002); REG-102740-02, 67 F.R. 11070 (March 12, 2002); see 
also Notice 2002-18, 2002-12 I.R.B. 644 (March 25, 2002); REG-131478-
02, 67 F.R. 65060 (October 18, 2002) T.D. 9048, 68 F.R. 12287 (March 
14, 2003); and T.D. 9118, REG-153172-03 (March 17, 2004).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is concerned that Treasury Department 
resources might be unnecessarily devoted to defending 
challenges to consolidated return regulations on the mere 
assertion by a taxpayer that the result under the consolidated 
return regulations is different than the result for separate 
taxpayers. The consolidated return regulations offer many 
benefits that are not available to separate taxpayers, 
including generally rules that tax income received by the group 
once and attempt to avoid a second tax on that same income when 
stock of a subsidiary is sold.
    The existing statute authorizes adjustments to clearly 
reflect the income of the group and of the separate members of 
the group, during and after the period of affiliation. The 
Committee believes that this standard, which is stated in the 
present-law statute, should be reiterated.

                        EXPLANATION OF PROVISION

    The provision confirms that, in exercising its authority 
under section 1502 to issue consolidated return regulations, 
the Treasury Department may provide rules treating corporations 
filing consolidated returns differently from corporations 
filing separate returns.
    Thus, under the statutory authority of section 1502, the 
Treasury Department is authorized to issue consolidated return 
regulations utilizing either a single taxpayer or separate 
taxpayer approach or a combination of the two approaches, as 
Treasury deems necessary in order that the tax liability of any 
affiliated group of corporations making a consolidated return, 
and of each corporation in the group, both during and after the 
period of affiliation, may be determined and adjusted in such 
manner as clearly to reflect the income-tax liability and the 
various factors necessary for the determination of such 
liability, and in order to prevent avoidance of such liability.
    Rite Aid is thus overruled to the extent it suggests that 
the Secretary is required to identify a problem created from 
the filing of consolidated returns in order to issue 
regulations that change the application of a Code provision. 
The Secretary may promulgate consolidated return regulations to 
change the application of a tax code provision to members of a 
consolidated group, provided that such regulations are 
necessary to clearly reflect the income tax liability of the 
group and each corporation in the group, both during and after 
the period of affiliation.
    The provision nevertheless allows the result of the Rite 
Aid case to stand with respect to the type of factual situation 
presented in the case. That is, the legislation provides for 
the override of the regulatory provision that took the approach 
of denying a loss on a deconsolidating disposition of stock of 
a consolidated subsidiary \218\ to the extent the subsidiary 
had net operating losses or built in losses that could be used 
later outside the group.\219\
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    \218\ Treas. Reg. Sec. 1.1502-20(c)(1)(iii).
    \219\ The provision is not intended to overrule the current Tresury 
Department regulations, which allow taxpayers in certain circumstances 
for the past to follow Treasury Regulations Section 1.1502-
20(c)(1)(iii), if they choose to do so. Temp. Reg. Sec. 1.1502-
20T(i)(2).
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    Retaining the result in the Rite Aid case with respect to 
the particular regulation section 1.1502-20(c)(1)(iii) as 
applied to the factual situation of the case does not in any 
way prevent or invalidate the various approaches Treasury has 
announced it will apply or that it intends to consider in lieu 
of the approach of that regulation, including, for example, the 
denial of a loss on a stock sale if inside losses of a 
subsidiary may also be used by the consolidated group, and the 
possible requirement that inside attributes be adjusted when a 
subsidiary leaves a group.\220\
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    \220\ See, e.g., Notice 2002-11, 2002-7 I.R.B. 526 (Feb. 19, 2002); 
Temp. Reg. Sec. 1.337(d)-2T, (T.D. 8984, 67 F.R. 11034 (March 12, 2002) 
and T.D. 8998, 67 F.R. 37998 (May 31, 2002)); REG-102740-02, 67 F.R. 
11070 (March 12, 2002); see also Notice 2002-18, 2002-12 I.R.B. 644 
(March 25, 2002); REG-131478-02, 67 F.R. 65060 (October 18, 2002); 
Temp. Reg. Sec. 1.1502-35T (T.D. 9048, 68 F.R. 12287 (March 14, 2003)); 
and T.D. 9118, REG-153172-03 (March 17, 2004). In exercising its 
authority under section 1502, the Secretary is also authorized to 
prescribe rules that protect the purpose of General Utilities repeal 
using presumptions and other simplifying conventions.
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                             EFFECTIVE DATE

    The provision is effective for all years, whether beginning 
before, on, or after the date of enactment of the provision. No 
inference is intended that the results following from this 
provision are not the same as the results under present law.

2. Chief Executive Officer required to sign declaration with respect to 
        corporate income tax returns (Sec. 622 of the bill)

                              PRESENT LAW

    The Code requires \221\ that the income tax return of a 
corporation must be signed by either the president, the vice-
president, the treasurer, the assistant treasurer, the chief 
accounting officer, or any other officer of the corporation 
authorized by the corporation to sign the return.
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    \221\ Sec. 6062.
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    The Code also imposes \222\ a criminal penalty on any 
person who willfully signs any tax return under penalties of 
perjury that that person does not believe to be true and 
correct with respect to every material matter at the time of 
filing. If convicted, the person is guilty of a felony; the 
Code imposes a fine of not more than $100,000 \223\ ($500,000 
in the case of a corporation) or imprisonment of not more than 
three years, or both, together with the costs of prosecution.
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    \222\ Sec. 7206.
    \223\ Pursuant to 18 U.S.C. 3571, the maximum fine for an 
individual convicted of a felony is $250,000.
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                           REASONS FOR CHANGE

    The Committee believes that the filing of accurate tax 
returns is essential to the proper functioning of the tax 
system. The Committee believes that requiring that the chief 
executive officer of a corporation sign a declaration that its 
corporate income tax return complies with the Internal Revenue 
Code will elevate both the level of care given to the 
preparation of thosereturns and the level of compliance with 
the Code's requirements, which will in turn help ensure that the proper 
amount of tax is being paid.

                        EXPLANATION OF PROVISION

    The provision requires that the chief executive officer of 
a corporation sign a declaration under penalties of perjury 
that the chief executive officer has put in place processes and 
procedures to ensure that the corporation's Federal income tax 
return complies with the Internal Revenue Code and that the CEO 
was provided reasonable assurance of the accuracy of all 
material aspects of the return. This declaration is part of the 
income tax return. The provision is in addition to the 
requirement of present law as to the signing of the income tax 
return itself. Because a CEO's duties generally do not require 
a detailed or technical understanding of the corporation's tax 
return, it is anticipated that this declaration of the CEO will 
be more limited in scope than the declaration of the officer 
required to sign the return itself.
    The Secretary of the Treasury shall prescribe the matters 
to which the declaration of the CEO applies. It is intended 
that the declaration help insure that the preparation and 
completion of the corporation's tax return be given an 
appropriate level of care. For example, it is anticipated that 
the CEO would declare that processes and procedures have been 
implemented to ensure that the return complies with the 
Internal Revenue Code and applicable regulations and rules 
promulgated thereunder. Although appropriate processes and 
procedures can vary for each taxpayer depending on the size and 
nature of the taxpayer's business, in every case the CEO should 
be briefed on all material aspects of the corporation's tax 
return by the corporation's officer signing the return.
    It is also anticipated that, as part of the declaration, 
the CEO would certify that, to the best of the CEO's knowledge 
and belief: (1) the processes and procedures for ensuring that 
the corporation files a tax return that complies with the 
requirements of the Code are operating effectively; (2) the 
return is true, accurate, and complete; (3) the officer signing 
the return did so under no compulsion to adopt any tax position 
with which that person did not agree; (4) the CEO was briefed 
on all listed transactions as well as all reportable tax 
avoidance transactions otherwise required to be disclosed on 
the tax return; and (5) all required disclosures have been 
filed with the return. The Secretary may by regulations 
prescribe additional requirements for this declaration.\224\
---------------------------------------------------------------------------
    \224\ Sec. 6011(a).
---------------------------------------------------------------------------
    If the corporation does not have a chief executive officer, 
the IRS may designate another officer of the corporation; 
otherwise, no other person is permitted to sign the 
declaration. It is intended that the IRS issue general 
guidance, such as a revenue procedure, to: (1) address 
situations when a corporation does not have a chief executive 
officer; and (2) define who the chief executive officer is, in 
situations (for example) when the primary official bears a 
different title, when a corporation has multiple chief 
executive officers, or when the corporation is a foreign 
corporation and the CEO is not a U.S. resident.\225\ It is 
intended that, in every instance, the highest ranking corporate 
officer (regardless of title) sign this declaration.
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    \225\ With respect to foreign corporations, it is intended that the 
rules for signing this declaration generally parallel the present-law 
rules for signing the return. See Treas. Reg. sec. 1.6062-1(a)(3).
---------------------------------------------------------------------------
    The provision does not apply to the income tax returns of 
mutual funds; \226\ they are required to be signed as under 
present law.
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    \226\ The provision does, however, apply to the income tax returns 
of mutal fund management companies and advisors.
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                             EFFECTIVE DATE

    The provision is effective for returns filed after the date 
of enactment.

3. Denial of deduction for certain fines, penalties, and other amounts 
        (Sec. 623 of the bill and sec. 162 of the Code)

                              PRESENT LAW

    Under present law, no deduction is allowed as a trade or 
business expense under section 162(a) for the payment of a fine 
or similar penalty to a government for the violation of any law 
(sec. 162(f)). The enactment of section 162(f) in 1969 codified 
existing case law that denied the deductibility of fines as 
ordinary and necessary business expenses on the grounds that 
``allowance of the deduction would frustrate sharply defined 
national or State policies proscribing the particular types of 
conduct evidenced by some governmental declaration thereof.'' 
\227\
---------------------------------------------------------------------------
    \227\ S. Rep. 91-552, 91st Cong., 1st Sess. 273-74 (1969), 
referring to Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30 
(1958).
---------------------------------------------------------------------------
    Treasury regulation section 1.162-21(b)(1) provides that a 
fine or similar penalty includes an amount: (1) paid pursuant 
to conviction or a plea of guilty or nolo contendere for a 
crime (felony or misdemeanor) in a criminal proceeding; (2) 
paid as a civil penalty imposed by Federal, State, or local 
law, including additions to tax and additional amounts and 
assessable penalties imposed by chapter 68 of the Code; (3) 
paid in settlement of the taxpayer's actual or potential 
liability for a fine or penalty (civil or criminal); or (4) 
forfeited as collateral posted in connection with a proceeding 
which could result in imposition of such a fine or penalty. 
Treasury regulation section 1.162-21(b)(2) provides, among 
other things, that compensatory damages (including damages 
under section 4A of the Clayton Act (15 U.S.C. 15a), as 
amended) paid to a government do not constitute a fine or 
penalty.

                           REASONS FOR CHANGE

    The Committee is concerned that there is a lack of clarity 
and consistency under present law regarding when taxpayers may 
deduct payments made in settlement of governmentinvestigations 
of potential wrongdoing, as well as in situations where there has been 
a final determination of wrongdoing. If a taxpayer deducts payments 
made in settlement of an investigation of potential wrongdoing or as a 
result of a finding of wrongdoing, the publicly announced amount of the 
settlement payment does not reflect the true after-tax penalty on the 
taxpayer. The Committee also is concerned that allowing a deduction for 
such payments in effect shifts a portion of the penalty to the Federal 
government and to the public.

                        EXPLANATION OF PROVISION

    The provision modifies the rules regarding the 
determination whether payments are nondeductible payments of 
fines or penalties under section 162(f). In particular, the 
provision generally provides that amounts paid or incurred 
(whether by suit, agreement, or otherwise) to, or at the 
direction of, a government in relation to the violation of any 
law or the governmental investigation or inquiry into the 
potential violation of any law \228\ are nondeductible under 
any provision of the income tax provisions.\229\ The provision 
applies to deny a deduction for any such payments, including 
those where there is no admission of guilt or liability and 
those made for the purpose of avoiding further investigation or 
litigation. An exception applies to payments that the taxpayer 
establishes are restitution (including remediation of 
property).\230\ There is also an exception for any amount paid 
or incurred as taxes due.
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    \228\ The provision does not affect amounts paid or incurred in 
performing routine audits or reviews such as annual audits that are 
required of all organizations or individuals in a similar business 
sector, or profession, as a requirement for being allowed to conduct 
business. However, if the government or regulator raises an issue of 
compliance and a payment is required in settlement of such issue, the 
provision would affect such payment. In such cases, the restitution 
exception could permit otherwise allowable deductions of amounts paid 
with respect to specific property or persons to avoid noncompliance or 
to bring the taxpayer into compliance with the required standards (for 
example, to bring a machine up to required emissions or other 
standards).
    \229\ The provision provides that such amounts are nondeductible 
under chapter 1 of the Internal Revenue Code.
    \230\ The provision does not affect the treatment of antitrust 
payments made under section 4 of the Clayton Act, which will continue 
to be governed by the provisions of section 162(g).
---------------------------------------------------------------------------
    The provision applies only where a government (or other 
entity treated in a manner similar to a government under the 
bill) is a complainant or investigator with respect to the 
violation or potential violation of any law.\231\
---------------------------------------------------------------------------
    \231\ Thus, for example, the provision would not apply to payments 
made by one private party to another in a lawsuit between private 
parties, merely because a judge or jury acting in the capacity as a 
court directs the payment to be made. The mere fact that a court enters 
a judgment or directs a result in a private dispute does not cause a 
payment to be made ``at the direction of a government'' for purposes of 
the provision.
---------------------------------------------------------------------------
    It is intended that a payment will be treated as 
restitution only if substantially all of the payment is 
required to be paid to the specific persons, or in relation to 
the specific property, actually harmed (or, in the case of 
property, not in compliance with the required standards) by the 
conduct of the taxpayer that resulted in the payment. Thus, a 
payment to or with respect to a class substantially broader 
than the specific persons or property that were actually harmed 
(e.g., to a class including similarly situated persons or 
property) does not qualify as restitution.\232\ Restitution is 
limited to the amount that bears a substantial quantitative 
relationship to the harm (or, in the case of property, to the 
correction of noncompliance) caused by the past conduct or 
actions of the taxpayer that resulted in the payment in 
question. If the party harmed is a government or other entity, 
then restitution includes payment to such harmed government or 
entity, provided the payment bears a substantial quantitative 
relationship to the harm. However, restitution does not include 
reimbursement of government investigative or litigation costs, 
or payments to whistleblowers.
---------------------------------------------------------------------------
    \232\ Similarly, a payment to a charitable organization benefitting 
a substantially broader class than the persons or property actually 
harmed, or to be paid out without a substantial quantitative 
relationship to the harm caused, would not qualify as restitution. 
Under the provision, such a payment not deductible under section 162 
would also not be deductible under section 170.
---------------------------------------------------------------------------
    Amounts paid or incurred (whether by suit, agreement, or 
otherwise) to, or at the direction of, any self-regulatory 
entity that regulates a financial market or other market that 
is a qualified board or exchange under section 1256(g)(7), and 
that is authorized to impose sanctions (e.g., the National 
Association of Securities Dealers) are likewise subject to the 
provision if paid in relation to a violation, or investigation 
or inquiry into a potential violation, of any law (or any rule 
or other requirement of such entity). To the extent provided in 
regulations, amounts paid or incurred to, or at the direction 
of, any other nongovernmental entity that exercises self-
regulatory powers as part of performing an essential 
governmental function are similarly subject to the provision. 
The exceptions (e.g., for payments that the taxpayer 
establishes are restitution) likewise apply in these cases.
    No inference is intended as to the treatment of payments as 
nondeductible fines or penalties under present law. In 
particular, the bill is not intended to limit the scope of 
present-law section 162(f) or the regulations thereunder.

                             EFFECTIVE DATE

    The provision is effective for amounts paid or incurred on 
or after April 28, 2003; however the provision does not apply 
to amounts paid or incurred under any binding order or 
agreement entered into before such date. Any order or agreement 
requiring court approval is not a binding order or agreement 
for this purpose unless such approval was obtained on or before 
April 27, 2003.

4. Denial of deduction for punitive damages (Sec. 624 of the bill and 
        sec. 162 of the Code)

                              PRESENT LAW

    In general, a deduction is allowed for all ordinary and 
necessary expenses that are paid or incurred by the taxpayer 
during the taxable year in carrying on any trade or 
business.\233\ However, no deduction is allowed for any payment 
that is made to an official of any governmental agency if the 
payment constitutes an illegal bribe or kickback or if the 
payment is to an official or employee of a foreign government 
and is illegal under Federal law.\234\ In addition, no 
deduction is allowed under present law for any fine or similar 
payment made to a government for violation of any law.\235\ 
Furthermore, no deduction is permitted for two-thirds of any 
damage payments made by a taxpayer who is convicted of a 
violation of the Clayton antitrust law or any related antitrust 
law.\236\
---------------------------------------------------------------------------
    \233\ Sec. 162(a).
    \234\ Sec. 162(c).
    \235\ Sec. 162(f).
    \236\ Sec. 162(g).
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    In general, gross income does not include amounts received 
on account of personal physical injuries and physical 
sickness.\237\ However, this exclusion does not apply to 
punitive damages.\238\
---------------------------------------------------------------------------
    \237\ Sec. 104(a).
    \238\ Sec. 104(a)(2).
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                           REASONS FOR CHANGE

    The Committee believes that allowing a tax deduction for 
punitive damages undermines the societal role of punitive 
damages in discouraging and penalizing the activities or 
actions for which punitive damages are imposed. Furthermore, 
the Committee believes that determining the amount of punitive 
damages to be disallowed as a tax deduction is not 
administratively burdensome because taxpayers generally can 
make such a determination readily by reference to pleadings 
filed with a court, and plaintiffs already make such a 
determination in determining the taxable portion of any 
payment.

                        EXPLANATION OF PROVISION

    The provision denies any deduction for punitive damages 
that are paid or incurred by the taxpayer as a result of a 
judgment or in settlement of a claim. If the liability for 
punitive damages is covered by insurance, any such punitive 
damages paid by the insurer are included in gross income of the 
insured person and the insurer is required to report such 
amounts to both the insured person and the IRS.

                             EFFECTIVE DATE

    The provision is effective for punitive damages that are 
paid or incurred on or after the date of enactment.

5. Increase the maximum criminal fraud penalty for individuals to the 
        amount of the tax at issue (Sec. 625 of the bill and secs. 
        7201, 7203, and 7206 of the Code)

                              PRESENT LAW

Attempt to evade or defeat tax

    In general, section 7201 imposes a criminal penalty on 
persons who willfully attempt to evade or defeat any tax 
imposed by the Code. Upon conviction, the Code provides that 
the penalty is up to $100,000 or imprisonment of not more than 
five years (or both). In the case of a corporation, the Code 
increases the monetary penalty to a maximum of $500,000.

Willful failure to file return, supply information, or pay tax

    In general, section 7203 imposes a criminal penalty on 
persons required to make estimated tax payments, pay taxes, 
keep records, or supply information under the Code who 
willfully fails to do so. Upon conviction, the Code provides 
that the penalty is up to $25,000 or imprisonment of not more 
than one year (or both). In the case of a corporation, the Code 
increases the monetary penalty to a maximum of $100,000.

Fraud and false statements

    In general, section 7206 imposes a criminal penalty on 
persons who make fraudulent or false statements under the Code. 
Upon conviction, the Code provides that the penalty is up to 
$100,000 or imprisonment of not more than three years (or 
both). In the case of a corporation, the Code increases the 
monetary penalty to a maximum of $500,000.

Uniform sentencing guidelines

    Under the uniform sentencing guidelines established by 18 
U.S.C. 3571, a defendant found guilty of a criminal offense is 
subject to a maximum fine that is the greatest of: (a) the 
amount specified in the underlying provision, (b) for a felony 
\239\ $250,000 for an individual or $500,000 for an 
organization, or (c) twice the gross gain if a person derives 
pecuniary gain from the offense. This Title 18 provision 
applies to all criminal provisions in the United States Code, 
including those in the Internal Revenue Code. For example, for 
an individual, the maximum fine under present law upon 
conviction of violating section 7206 is $250,000 or, if 
greater, twice the amount of gross gain from the offense.
---------------------------------------------------------------------------
    \239\ Section 7206 states that this offense is a felony. In 
addition, it is a felony pursuant to the classification guidelines of 
18 U.S.C. 3559(a)(5).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    In light of the recent reports of possible criminal 
behavior in connection with the filing and preparation of tax 
returns, the Committee believes it is important to strengthen 
the criminal tax penalties.

                        EXPLANATION OF PROVISION

Attempt to evade or defeat tax

    The provision increases the criminal penalty under section 
7201 of the Code for individuals to $250,000 and for 
corporations to $1,000,000. The provision increases the maximum 
prison sentence to ten years.

Willful failure to file return, supply information, or pay tax

    The provision increases the criminal penalty under section 
7203 of the Code from a misdemeanor to a felony and increases 
the maximum prison sentence to ten years.

Fraud and false statements

    The provision increases the criminal penalty under section 
7206 of the Code for individuals to $250,000 and for 
corporations to $1,000,000. The provision increases the maximum 
prison sentence to five years. The provision also provides that 
in no event shall the amount of the monetary penalty under this 
provision be less than the amount of the underpayment or 
overpayment attributable to fraud.

                             EFFECTIVE DATE

    The provision is effective for underpayments and 
overpayments attributable to actions occurring after the date 
of enactment.

6. Doubling of certain penalties, fines, and interest on underpayments 
        related to certain offshore financial arrangements (Sec. 626 of 
        the bill)

                              PRESENT LAW

In general

    The Code contains numerous civil penalties, such as the 
delinquency, accuracy-related and fraud penalties. These civil 
penalties are in addition to any interest that may be due as a 
result of an underpayment of tax. If all or any part of a tax 
is not paid when due, the Code imposes interest on the 
underpayment, which is assessed and collected in the same 
manner as the underlying tax and is subject to the same statute 
of limitations.

Delinquency penalties

    Failure to file.--Under present law, a taxpayer who fails 
to file a tax return on a timely basis is generally subject to 
a penalty equal to 5 percent of the net amount of tax due for 
each month that the return is not filed, up to a maximum of 
five months or 25 percent. An exception from the penalty 
applies if the failure is due to reasonable cause. The net 
amount of tax due is the excess of the amount of the tax 
required to be shown on the return over the amount of any tax 
paid on or before the due date prescribed for the payment of 
tax.
    Failure to pay.--Taxpayers who fail to pay their taxes are 
subject to a penalty of 0.5 percent per month on the unpaid 
amount, up to a maximum of 25 percent. If a penalty for failure 
to file and a penalty for failure to pay tax shown on a return 
both apply for the same month, the amount of the penalty for 
failure to file for such month is reduced by the amount of the 
penalty for failure to pay tax shown on a return. If a return 
is filed more than 60 days after its due date, then the penalty 
for failure to pay tax shown on a return may not reduce the 
penalty for failure to file below the lesser of $100 or 100 
percent of the amount required to be shown on the return. For 
any month in which an installment payment agreement with the 
IRS is in effect, the rate of the penalty is half the usual 
rate (0.25 percent instead of 0.5 percent), provided that the 
taxpayer filed the tax return in a timely manner (including 
extensions).
    Failure to make timely deposits of tax.--The penalty for 
the failure to make timely deposits of tax consists of a four-
tiered structure in which the amount of the penalty varies with 
the length of time within which the taxpayer corrects the 
failure. A depositor is subject to a penalty equal to 2 percent 
of the amount of the underpayment if the failure is corrected 
on or before the date that is five days after the prescribed 
due date. A depositor is subject to a penalty equal to 5 
percent of the amount of the underpayment if the failure is 
corrected after the date that is five days after the prescribed 
due date but on or before the date that is 15 days after the 
prescribed due date. A depositor is subject to a penalty equal 
to 10 percent of the amount of the underpayment if the failure 
is corrected after the date that is 15 days after the due date 
but on or before the date that is 10 days after the date of the 
first delinquency notice to the taxpayer (under sec. 6303). 
Finally, a depositor is subject to a penalty equal to 15 
percent of the amount of the underpayment if the failure is not 
corrected on or before the date that is 10 days after the date 
of the day on which notice and demand for immediate payment of 
tax is given in cases of jeopardy.
    An exception from the penalty applies if the failure is due 
to reasonable cause. In addition, the Secretary may waive the 
penalty for an inadvertent failure to deposit any tax by 
specified first-time depositors.

Accuracy-related penalties

    The accuracy-related penalty is imposed at a rate of 20 
percent of the portion of any underpayment that is 
attributable, in relevant part, to (1) negligence, (2) any 
substantial understatement of income tax and (3) any 
substantial valuation misstatement. In addition, the penalty is 
doubled for certain gross valuation misstatements. These 
consolidated penalties are also coordinated with the fraud 
penalty. This statutory structure operates to eliminate any 
stacking of the penalties.
    No penalty is to be imposed if it is shown that there was 
reasonable cause for an underpayment and the taxpayer acted in 
good faith. However, Treasury has issued proposed regulations 
that limit the defenses available to the imposition of an 
accuracy-related penalty in connection with a reportable 
transaction when the transaction is not disclosed.
    Negligence or disregard for the rules or regulations.--If 
an underpayment of tax is attributable to negligence, the 
negligence penalty applies only to the portion of the 
underpayment that is attributable to negligence. Negligence 
means any failure to make a reasonable attempt to comply with 
the provisions of the Code. Disregard includes any careless, 
reckless or intentional disregard of the rules or regulations.
    Substantial understatement of income tax.--Generally, an 
understatement is substantial if the understatement exceeds the 
greater of (1) 10 percent of the tax required to be shown on 
the return for the tax year or (2) $5,000. In determining 
whether a substantial understatement exists, the amount of the 
understatement is reduced by any portion attributable to an 
item if (1) the treatment of the item on the return is or was 
supported by substantial authority, or (2) facts relevant to 
the tax treatment of the item were adequately disclosed on the 
return or on a statement attached to the return.
    Substantial valuation misstatement.--A penalty applies to 
the portion of an underpayment that is attributable to a 
substantial valuation misstatement. Generally, a substantial 
valuation misstatement exists if the value or adjusted basis of 
any property claimed on a return is 200 percent or more of the 
correct value or adjusted basis. The amount of the penalty for 
a substantial valuation misstatement is 20 percent of the 
amount of the underpayment if the value or adjusted basis 
claimed is 200 percent or more but less than 400 percent of the 
correct value or adjusted basis. If the value or adjusted basis 
claimed is 400 percent or more of the correct value or adjusted 
basis, then the overvaluation is a gross valuation 
misstatement.
    Gross valuation misstatements.--The rate of the accuracy-
related penalty is doubled (to 40 percent) in the case of gross 
valuation misstatements.

Fraud penalty

    The fraud penalty is imposed at a rate of 75 percent of the 
portion of any underpayment that is attributable to fraud. The 
accuracy-related penalty does not apply to any portion of an 
underpayment on which the fraud penalty is imposed.

Interest provisions

    Taxpayers are required to pay interest to the IRS whenever 
there is an underpayment of tax. An underpayment of tax exists 
whenever the correct amount of tax is not paid by the last date 
prescribed for the payment of the tax. The last date prescribed 
for the payment of the income tax is the original due date of 
the return.
    Different interest rates are provided for the payment of 
interest depending upon the type of taxpayer, whether the 
interest relates to an underpayment or overpayment, and the 
size of the underpayment or overpayment. Interest on 
underpayments is compounded daily.

Offshore Voluntary Compliance Initiative

    In January 2003, Treasury announced the Offshore Voluntary 
Compliance Initiative (``OVCI'') to encourage the voluntary 
disclosure of previously unreported income placed by taxpayers 
in offshore accounts and accessed through credit card or other 
financial arrangements. A taxpayer had to comply with various 
requirements in order to participate in OVCI, including sending 
a written request to participate in the program by April 15, 
2003. This request had to include information about the 
taxpayer, the taxpayer's introduction to the credit card or 
other financial arrangements and the names of parties that 
promoted the transaction. Taxpayers eligible under OVCI will 
not be liable for civil fraud, the fraudulent failure to file 
penalty or the civil information return penalties. The taxpayer 
will pay back taxes, interest and certain accuracy-related and 
delinquency penalties.

Voluntary Disclosure Initiative

    A taxpayer's timely, voluntary disclosure of a substantial 
unreported tax liability has long been an important factor in 
deciding whether the taxpayer's case should ultimately be 
referred for criminal prosecution. The voluntary disclosure 
must be truthful, timely, and complete. The taxpayer must show 
a willingness to cooperate (as well as actual cooperation) with 
the IRS in determining the correct tax liability. The taxpayer 
must make good-faith arrangements with the IRS to pay in full 
the tax, interest, and any penalties determined by the IRS to 
be applicable. A voluntary disclosure does not guarantee 
immunity from prosecution. It creates no substantive or 
procedural rights for taxpayers.

                           REASONS FOR CHANGE

    The Committee is aware that individuals and corporations, 
through sophisticated transactions, are placing unreported 
income in offshore financial accounts accessed through credit 
or debit cards or other financial arrangements in order to 
avoid or evade Federal income tax. Such a phenomenon poses a 
serious threat to the efficacy of the tax system because of 
both the potential loss of revenue and the potential threat to 
the integrity of the self-assessment system. The IRS estimates 
there may be several hundred thousand taxpayers using offshore 
financial arrangements to conceal taxable income from the IRS 
costing the government billions of dollars in lost revenue. 
Under the OVCI initiative, only 1,253 taxpayers from 46 states 
stepped forward to participate in the program. From these 
cases, the IRS expects to identify at least $100 million in 
uncollected tax. At the start of the program, the clear message 
to taxpayers was that those who failed to come forward would be 
pursued by the IRS and would be subject to more significant 
penalties and possible criminal sanctions. The Committee 
believes that doubling the civil penalties, fines and interest 
applicable to taxpayers who entered into these arrangements and 
did not take advantage of OVCI will provide the IRS with the 
significant sanctions needed to stem the promotion and 
participation in these abusive schemes.

                        EXPLANATION OF PROVISION

    The provision increases by a factor of two the total amount 
of civil penalties, interest and fines applicable for taxpayers 
who would have been eligible to participate in either the OVCI 
or the Treasury Department's voluntary disclosure initiative 
(which applies to the taxpayer by reason of the taxpayer's 
underpayment of U.S. income tax liability through certain 
financing arrangements) but did not participate in either 
program.

                             EFFECTIVE DATE

    The provision generally is effective with respect to a 
taxpayer's open tax years on or after date of enactment.

                     C. Extension of IRS User Fees


(Sec. 631 of the bill and sec. 7528 of the Code)

                              PRESENT LAW

    The IRS provides written responses to questions of 
individuals, corporations, and organizations relating to their 
tax status or the effects of particular transactions for tax 
purposes. The IRS generally charges a fee for requests for a 
letter ruling, determination letter, opinion letter, or other 
similar ruling or determination.\240\ Public Law 108-89 \241\ 
extended the statutory authorization for these user fees 
through December 31, 2004, and moved the statutory 
authorization for these fees into the Code.\242\
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    \240\ These user fees were originally enacted in section 10511 of 
the Revenue Act of 1987 (Pub. Law No. 100-203, December 22, 1987). 
Public Law 104-117 (An Act to provide that members of the Armed Forces 
performing services for the peacekeeping efforts in Bosnia and 
Herzegovina, Croatia, and Macedonia shall be entitled to tax benefits 
in the same manner as if such services were performed in a combat zone, 
and for other purposes (March 20, 1996)) extended the statutory 
authorization for these user fees through September 30, 2003.
    \241\ 117 Stat. 1131; H.R. 3146, signed by the President on October 
1, 2003.
    \242\ That Public Law also moved into the Code the user fee 
provision relating to pension plans that was enacted in section 620 of 
the Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. 
107-16, June 7, 2001).
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                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to provide a 
further extension of the applicability of these user fees.

                        EXPLANATION OF PROVISION

    The provision extends the statutory authorization for these 
user fees through September 30, 2013.

                             EFFECTIVE DATE

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

                     II. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the provisions of 
the bill as reported.


                B. Budget Authority and Tax Expenditures


Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the provisions of section 310 of the bill 
involve new or increased budget authority with respect to the 
Tax Court Judicial Officers' Retirement Fund.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the revenue-reducing provisions of the 
bill involve increased tax expenditures (see revenue table in 
Part III.A., above). The revenue increasing provisions of the 
bill generally involve reduced tax expenditures (see revenue 
table in Part III.A., above).

            C. Consultation With Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office has not 
submitted a statement on the bill. The letter from the 
Congressional Budget Office has not been received, and 
therefore will be provided separately.]

                      III. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the following statements are made 
concerning the votes taken on the Committee's consideration of 
the bill.

Motion to report the bill

    The bill as amended was ordered favorably reported by voice 
vote, a quorum being present, on February 2, 2004.

Votes on amendments

    The amendment in the nature of a substitute was passed by 
voice vote. No other amendments were offered and voted upon.

                IV. REGULATORY IMPACT AND OTHER MATTERS


                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of Rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill as amended.

Impact on individuals and businesses

    The bill includes provisions to improve tax administration 
and taxpayer safeguards, to reform the penalty and interest 
provisions of the Internal Revenue Code, to modernize the 
procedures and operation of the United States Tax Court, to 
improve the confidentiality of tax information, to simplify the 
tax laws, to curtail tax shelters, and to improve corporate 
governance.
    The bill includes various other provisions that are not 
expected to impose additional administrative requirements or 
regulatory burdens on individuals or businesses.

Impact on personal privacy and paperwork

    The provisions of the bill do not reduce personal privacy. 
Several provisions of the bill may improve personal privacy 
protections, such as the provision ensuring compliance by 
contractors with confidentiality safeguards (section 405) and 
the provision imposing higher standards for requests for and 
consents to disclosure (section 406).

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
    The Committee has determined that the tax provisions of the 
bill contain no Federal private sector mandates.
    The Committee has determined that the revenue provisions of 
the bill do not impose a Federal intergovernmental mandate on 
State, local, or tribal governments.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the Senate Committee on 
Finance, the House Committee on Ways and Means, or any 
committee of conference if the legislation includes a provision 
that directly or indirectly amends the Internal Revenue Code 
(the ``Code'') and has widespread applicability to individuals 
or small businesses.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that amend the Code and that have ``widespread 
applicability'' to individuals or small businesses.

        V. CHANGES IN EXISTING LAW MADE BY THE BILL AS REPORTED

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).