Order Code RS21371
December 17, 2002
CRS Report for Congress
Received through the CRS Web
The Tax Administration Reform Act of 2002
American Law Division
The Tax Administration Reform Act of 2002, H.R. 5728, was passed by the House
on November 15, 2002. The Senate adjourned before considering the bill, but it seems
likely that the measures will reappear in the 108th session of Congress. The proposal is
aimed at providing beneficial collection procedures to taxpayers, further safeguarding
confidential taxpayer information, improving the efficiency of tax administration, and
reforming certain interest and penalty provisions.
The Tax Administration Reform Act of 2002, H.R. 5728, was introduced in the
House on November 14, 2002. The House passed the bill by unanimous consent on
November 15, 2002. On November 22, 2002, the Senate adjourned for the session
without considering H.R. 5728. It seems likely that a similar bill may reemerge in the
next session of Congress since many of its provisions have been repeatedly introduced
over the past few years. The provisions seem especially popular in the House, as
exemplified by its unanimous passage of a similar bill, H.R. 4163, in the 106th Congress
(the Senate did not act on the bill).
The majority of the bill’s provisions are advantageous to taxpayers. Title I includes
changes to the Internal Revenue Service’s tax collection procedures that would benefit the
taxpayers involved in such actions. Title II contains measures for improving the
efficiency of tax administration and for strengthening the protection afforded to
confidential taxpayer information. Title III is aimed at reforming certain interest and
penalty provisions in ways that favor taxpayers and at expanding the IRS’s ability to
penalize frivolous taxpayer actions.
This report was written by Erika Lunder under the supervision of Marie Morris, Legislative
Congressional Research Service ˜ The Library of Congress
Title I – Fairness in Tax Collection Procedures
Section 101 would allow the Internal Revenue Service (IRS) to enter into installment
agreements for the partial payment of tax liabilities. Currently, a taxpayer who owes taxes
may qualify under section 6159 of the Internal Revenue Code (I.R.C.) to enter into an
agreement with the IRS to pay the liability in installments. Present law is not clear as to
whether the IRS may enter into an installment agreement that only requires partial
payment of the liability. The bill would expressly allow installment agreements for partial
payment. The agreements would have to be reviewed by the Treasury Secretary every two
Sections 102 and 103 relate to situations where a levy has been wrongfully placed
on a taxpayer’s property. When a taxpayer fails to pay taxes owed, the IRS may collect
the liability by placing a levy on the taxpayer’s property, including money (e.g., wages).
Under I.R.C. § 6343(b), the Treasury Secretary must return any property upon which a
levy is wrongfully placed. When money has been levied or when the levied property has
been sold by the government, the Treasury Secretary has 9 months from the date of the
levy to return an amount of money equal to the amount levied or to the selling price.
Section 102 of the bill would extend this period until 2 years after the date of the levy.
Additionally, the period within which an individual other than the taxpayer may file a
claim of wrongful levy against the IRS would be lengthened. Currently, such an
individual who has an interest in the levied property must file a claim within 9 months of
the levy. Section 102 would change the deadline to 2 years after the date of the levy.
Section 103 would allow the Treasury Secretary, upon the determination that a levy
was wrongly or prematurely placed upon an individual retirement plan, to deposit the
amount of money levied plus interest into the plan if the plan allows rollovers. The entire
deposit would be exempt from tax.
Section 104 would restrict the IRS’s ability to toll certain statutes of limitation when
a taxpayer seeks a taxpayer assistance order. The IRS must meet certain deadlines, called
statutes of limitation, when it pursues collection actions against taxpayers. Under I.R.C.
§ 7811(d), these deadlines are suspended when a taxpayer requests assistance from the
National Taxpayer Advocate. The suspension continues until the Advocate makes a
decision as to whether to grant the request. Section 104 would disallow the deadline
suspension if the Advocate’s decision was made within 7 days of the taxpayer’s request.
Section 105 would require the Treasury Secretary to conduct a study of the IRS’s use
of lien and levy actions. The study would address two issues: (1) the IRS’s declining use
of liens and levies and (2) the practicality of taking such an action when its cost is greater
than the amount to be realized from the property.
Section 106 relates to clinics that represent low-income taxpayers for little or no fee
in disputes with the IRS. Under I.R.C. § 7526, the Treasury Secretary may grant a total
of $6 million in funding to qualifying low-income taxpayer clinics. Section 106 would
gradually increase the amount of available grant money to $15 million by 2004.
Furthermore, the bill would make clear that clinics providing routine tax preparation do
not qualify for the grants.
Title II – Improved Administrative Efficiency and Confidentiality
Subtitle A – Efficiency of Tax Administration
Section 201 would expand the range of disciplinary actions faced by IRS employees
for certain types of misconduct. Currently, an IRS employee who violates section 1203
of the IRS Restructuring and Reform Act of 1998 is automatically terminated. Most of
the section 1203 provisions are related to protecting taxpayers from abusive acts by IRS
employees. The bill would allow the Treasury Secretary to impose disciplinary actions
other than termination. It would also require that most triggering violations be “willfully”
performed by the IRS employee.
Section 202 would authorize the Tax Court to apply the doctrine of equitable
recoupment. This doctrine allows the government to collect a tax or a taxpayer to collect
a refund when the deadline for such collection action has run so long as the collection is
fair and just. Confusion exists as to whether the Tax Court may use this doctrine and the
bill would expressly allow the court to apply it.
Section 203 would give the Tax Court sole jurisdiction over collection due process
cases, which are taxpayer appeals from hearings approving the IRS’s levying of taxpayer
property. Under I.R.C. § 6330(d)(1), the U.S. district courts have jurisdiction in these
cases if the Tax Court does not have jurisdiction over the underlying tax liability. The bill
would give the Tax Court sole jurisdiction over all collection due process cases.
Section 204 would eliminate the requirement that the IRS’s Office of Chief Counsel
(OCC) review offers in compromise. Under I.R.C. § 7122, when the IRS offers to
compromise with a taxpayer over the amount of tax, interest, or penalty owed, the OCC
must review the offer if the amount of unpaid liability will be at least $50,000. In all
other cases, the Treasury Secretary may ask for the OCC’s opinion on the offer. The bill
would make all offers reviewable by the OCC solely upon the Secretary’s request.
Section 205 would give taxpayers who electronically file individual income tax
returns an extra 15 days to file their returns and to pay any taxes owed. Thus, such
individuals could wait until April 30 to file and pay without penalty.
Subtitle B – Confidentiality and Disclosure
Section 211 would make it easier for an individual to request information from the
IRS concerning taxes owed from a return filed jointly with the individual’s former or
separated spouse. Currently, an individual may make a written request under I.R.C. §
6103(e) to the IRS for information concerning any IRS action to collect the deficiency
from the other person. The bill would allow the individual to make an oral request to the
IRS for the information.
Section 212 would clarify that a taxpayer representative may not be subject to
examination solely because the represented taxpayer is being examined.
Section 213 would require that a Federal agency or State take certain actions before
disclosing taxpayer information to contractors of that agency or State. The bill would
require that the agency or State (1) ensures that contractors have safeguards to protect the
confidentiality of taxpayer information, (2) reviews the adequacy of these safeguards and
submits the findings to the Treasury Secretary, and (3) certifies to the Secretary that
contractors are in compliance with the safeguards.
Section 214 would elaborate on the current procedure for IRS disclosure of taxpayer
information to a taxpayer’s designee. Under I.R.C. § 6103(c), the IRS may disclose
taxpayer information to a taxpayer’s designee upon the request or consent of the taxpayer.
Section 214 would specify that all requests designate a recipient and be dated and
certified. Additionally, the designee would be required to keep the information
confidential and to use it solely for the request’s purpose. The bill would also require that
the Treasury Secretary create a request form with a warning to taxpayers that only
completed forms should be signed and information on what to do if coerced into signing
an incomplete form. Finally, the Treasury Inspector General for Tax Administration
(TIGTA) would be required to submit a report to Congress on compliance with these new
Section 215 would require that the IRS notify taxpayers whose return or other
information was inspected or disclosed by an IRS employee or by someone else.
Currently, I.R.C. § 7431(e) only requires taxpayer notification when a person is criminally
charged with the inspection or disclosure of taxpayer information. The bill would expand
the notification requirement to situations where TIGTA determines that the information
was unlawfully disclosed or inspected. Section 215 would also require an annual report
from TIGTA detailing the incidences of unauthorized disclosure and inspection.
Section 216 would expand the group of law enforcement agencies to which the IRS
may disclose limited information in certain emergency circumstances. I.R.C. §
6103(i)(3)(B) allows such disclosure to federal or state law enforcement agencies and the
bill would include local law enforcement agencies.
Subtitle C – Other Provisions
Section 221 would require that TIGTA report to Congress on whether newer
communication technologies (e.g., e-mail and fax) are feasible methods of communication
between the IRS and taxpayers.
Section 222 would allow the Treasury Secretary to issue regulations on the conduct
of enrolled agents who practice before the IRS. The bill would also allow these agents
to identify themselves with the enrolled agent credentials.
Section 223 would enable the Financial Management Service, a division of the
Treasury Department that provides centralized payment and collection services for the
federal government, to charge the IRS for the full cost of implementing the continuous
levy program found in I.R.C. § 6331.
Section 224 would allow for the information about certain security auctions that is
discussed at Treasury Borrowing Advisory Committee meetings to be publically disclosed
once the Treasury Secretary releases the minutes of the meetings. Current law only allows
for disclosure once the Secretary makes a public announcement about the auction.
Title III – Reform of Penalty and Interest Provisions
Section 301 would change the way taxpayers are penalized for failing to make an
estimated tax payment. Currently, a taxpayer who fails to make a payment is assessed a
penalty under I.R.C. § 6654. Section 301 would reorganize section 6654 and renumber
it as section 6641. Two substantive changes would also be made. First, the penalty
would be changed to an interest charge. Second, the safe harbor would be increased from
$1000 to $2000 so that taxpayers with underpayments of less than $2000 would not be
assessed the interest charge.
Section 302 would exclude from taxable income certain interest payments made on
income tax overpayments. Under I.R.C. § 6611, the IRS must pay interest to qualifying
taxpayers who have overpaid the amount of taxes owed. The bill would make these
payments nontaxable if the interest is from the overpayment of individual income tax and
if the Treasury Secretary has not determined that the purpose of the overpayment was to
collect the tax-free interest.
Section 303 would ease the restrictions on the abatement of interest owed to the IRS.
Under I.R.C. § 6404(e)(2), the IRS may not begin to charge interest on an erroneous
refund until the IRS demands the refund’s repayment. However, the IRS may charge
interest before the repayment demand if the taxpayer caused the erroneous refund or if the
erroneous refund is more than $50,000. Section 303 would make erroneous refunds
exceeding $50,000 eligible for abatement. Furthermore, under I.R.C. § 6404(f), the IRS
may not charge a penalty or addition to tax that is attributable to erroneous written advice
from the IRS. The bill would extend this abatement rule to any interest attributable to
such a written statement.
Section 304 would allow taxpayers to make deposits to the IRS for the purpose of
paying taxes not yet assessed. Once an assessment is made, the deposit date would be
treated as the date the tax was paid, thus averting any interest charge for the underpayment
of taxes. The deposit would have to be returned at the written request of the taxpayer
unless the Treasury Secretary determines that the return would jeopardize tax collection.
Section 305 would give individual taxpayers greater opportunity to take advantage
of interest rate netting. Under I.R.C. § 6621(d), when a taxpayer owes interest payments
on an underpayment of tax and is concurrently owed interest payments on an equivalent
tax overpayment, the net interest rate is zero. Thus, the taxpayer neither owes nor is owed
interest payments. This symmetry is disturbed by I.R.C. § 6611(e), which disallows
interest on overpayments that are refunded within 45 days of the date that either the return
is due or the refund is claimed. This rule prevents a taxpayer who owes interest during
this period from netting the interest rate to zero. Section 305 would prevent the 45 day
rule from applying for the interest rate netting purposes of individual taxpayers.
Section 306 would waive certain penalties for first-time unintentional taxpayer
errors. Under I.R.C. § 6651, a taxpayer who fails to file a tax return or to pay a tax is
assessed a penalty on such failure unless the failure was due to a reasonable cause and not
to willful neglect. The bill would grant the Treasury Secretary the discretion to not
penalize first-time unintentional errors. The Secretary would have to find that the
taxpayer has a history of tax compliance and took prompt corrective action, the error was
unintentional and minor, imposition of the penalty would be unfair, and the waiver of the
penalty would promote taxpayer compliance and efficient tax administration.
Section 307 would expand the penalties for frivolous tax filings under I.R.C. § 6702.
First, the civil fine for filing a frivolous tax return would be increased from $500 to
$5,000. Second, a $5,000 fine would be imposed on the making of a specified frivolous
submission, including a request for a lien or levy hearing and an application for a taxpayer
assistance order, installment agreement, or compromise. A taxpayer could withdraw a
frivolous submission and the penalty would then be waived. The Secretary would also
be able to reduce the $5000 penalty if the reduction would promote tax collection and
efficient tax administration.
Section 308 would clarify that the highest percentage penalty under I.R.C. § 6656
for the failure to make a deposit of taxes only applies when the failure is for more than 15
days. The percentages of underpayment charged as the penalty are unchanged: 2% if the
failure is for less than 6 days, 5% if the failure lasts for 6 to 15 days, and 10% if the
failure is for more than 15 days.