Internal Revenue Service
and Reform Act of 1998
By Laura Watts,
Justin Hovey and
Edited by Brian Wainwright, a tax partner in
the firm's Palo Alto office. If you have or can obtain the
or have an Acrobat-enabled web browser,
you may wish to view or download the
printed version of this
bulletin (a 213K pdf file), also available via ftp at ftp.pmstax.com/gen/bull9808.pdf.
This description of the Internal Revenue Service Restructuring and Reform Act of
1998 is part of
the Pillsbury Winthrop
Shaw Pittman LLP Tax
Page, a World Wide Web demonstration project.
Comments are welcome
on the design or content of this material. However, this material is not intended and cannot be
regarded as legal or tax advice.
On July 22, 1998, President Clinton signed into law the Internal Revenue
Service Restructuring and Reform Act of 1998 (the "Act"). The Act makes significant structural
changes in the management and oversight of the Internal Revenue Service (the "IRS" or
"Service"), strengthens and enhances the rights of and protections applicable to taxpayers and
makes other, unrelated changes to the Internal Revenue Code (the "Code"), such as elimination of
the 18-month holding period for the preferential capital gains rates for individuals enacted by the
Taxpayer Relief Act of 1997.
Title I: Reorganization of Structure and Management of the Internal Revenue Service
Title II: Electronic Filing
Title III: Taxpayer Protection and Rights
Title IV: Congressional Accountability for the Internal Revenue Service
Title V: Additional Provisions
Title VI: Tax Technical Corrections
Title VII: Revenue Provisions
Title VIII: Limited Tax Benefits under the Line Item Veto Act
Title I: Reorganization of Structure and Management of the Internal Revenue Service
Subtitle A: Reorganization of the Internal Revenue Service
The Act directs the Commissioner of Internal Revenue (the
"Commissioner") to develop and to implement a plan to reorganize the IRS. Subject to various
savings provisions, the plan shall:
- supersede any organization or reorganization under a currently applicable statute or
- eliminate or substantially modify the existing national, regional and district structure,
- establish organizational units serving particular groups of taxpayers with similar needs
- ensure an independent appeals function within the IRS, including the prohibition of ex
parte communication between appeals officers and other IRS employees where those
communications appear to compromise appeals officers' independence. Act §
In addition, the IRS is to revise its mission statement to provide greater emphasis on serving the
public and meeting the needs of taxpayers. Act § 1002.
Subtitle B: Executive Branch Governance and Senior Management
Internal Revenue Service Oversight Board
The Act establishes the Internal Revenue Service Oversight Board (the
"Oversight Board") within the U.S. Treasury Department. Act § 1101 amending I.R.C.
§ 7802. The Oversight Board is to oversee the IRS in its administration, management,
conduct, direction and supervision of the execution and application of internal revenue laws.
However, the Oversight Board will have no responsibility or authority with respect to:
- the development or formulation of federal tax policy relating to existing or proposed internal
- specific law enforcement activities of the IRS, including specific criminal investigations,
examinations and collection activities,
- specific IRS procurement activities and
- specific personnel matters. I.R.C. § 7082(c).
The specific responsibilities of the Oversight Board are:
- to review and to approve annual and long-term strategic IRS plans,
- to review operational functions of the IRS,
- to recommend candidates for Commissioner and to review the Commissioner's selection,
evaluation and compensation of senior IRS management,
- to review and to approve the Commissioner's plans for any major IRS reorganization,
- to review, to approve and to submit to the Secretary of the Treasury (the "Secretary") the IRS
budget prepared by the Commissioner and
- to review IRS operations to ensure proper treatment of taxpayers. I.R.C.
The Oversight Board is to be comprised of nine members, six members who are not otherwise
federal officers or employees (the "Private Members"), one member who is a full-time federal
employee or a representative of employees (the "Federal Employee Member"), the Secretary (or, if
designated by the Secretary, the Deputy Secretary of the Treasury) and the Commissioner. The
Private Members and Federal Employee Member are appointed by the President with the advice
and consent of the Senate. Private Members of the Oversight Board are to be appointed solely on
the basis of professional experience and expertise in:
- management of large service organizations,
- customer service,
- federal tax laws, including administration and compliance,
- information technology,
- organization development,
- the needs and concerns of taxpayers or
- the needs and concerns of small business.
The Private Members and Federal Employee Member serve five-year terms and can be reappointed
no more than twice. Of the initial Private Members, two serve two-year terms and two serve
four-year terms. I.R.C. § 7802(b)(1), (2). The President is to submit the initial
nominations for the Oversight Board to the Senate no later than six months following July 22,
1998, the date of the Act's enactment. Act § 1101(d)(2).
It is expected that Private Members will generally be "special government employees," as defined
under current law, for purposes of determining applicable ethical conduct rules. In addition,
during his or her term a Private Member cannot represent any party (whether or not for
compensation) with respect to (1) any matter before the Oversight Board or the IRS, (2) any
tax-related matter before the Treasury Department or (3) any court proceeding with respect to a
matter described in clause (1) or (2). For example, the day after appointment to the Oversight
Board, a Private Member could not meet with representatives of the IRS or Treasury Department
on behalf of a client or the Private Member's corporate employer with respect to proposed tax
regulations. On the other hand, the Private Member could represent clients before the U.S.
Customs Service. The special rules applicable to Private Members generally do not preclude a
Private Member from sharing in compensation from representation of clients by another person
(e.g., a partner of the Private Member) before the IRS or Treasury Department. Private
Members are subject to the one-year post-employment restriction and public financial disclosure
rules applicable to federal government employees above certain pay grades who have served at
least 60 days (irrespective of whether the Private Members are special government employees
under current law). Thus, each Private Member is required to file a public financial disclosure
report for purposes of confirmation, annually during his or her tenure on the Oversight Board and
upon termination of appointment. The same rules generally apply to the Federal Employee
Member, although the President may waive certain ethical rules otherwise applicable to the Federal
Employee Member. I.R.C. § 7802(b)(3).
The Commissioner and Other Officials
The Commissioner is appointed by the President with the advice and
consent of the Senate for a five-year term and may be reappointed an unlimited number of times.
One qualification for appointment is demonstrated ability in management. The Commissioner is to
have such powers and duties as the Secretary shall prescribe, including the power to administer,
manage, conduct, direct and supervise the execution and application of the internal revenue laws
and to make recommendations to the President regarding appointment and removal of the IRS
Chief Counsel. Act § 1102(a) amending I.R.C. § 7803(a). Effective July 22,
1998, the date of enactment. Act § 1102(f)(1).
The IRS Chief Counsel will be appointed by the President with the advice and consent of the
Senate. The Chief Counsel will report directly to the Commissioner (not the Treasury General
Counsel as before) except that the Chief Counsel will report (1) to both the Commissioner and the
Treasury General Counsel concerning legal advice or the interpretation of tax laws not relating
solely to tax policy and concerning tax litigation and (2) only to the Treasury General Counsel with
regard to legal advice or interpretation of the tax laws relating solely to tax policy. Chief Counsel
personnel are to report only to the Chief Counsel. Act § 1102(a) amending I.R.C.
§ 7803(b). Effective 90 days after July 22, 1998, the date of enactment. Act
Effective July 22, 1998, the date of enactment, the Act eliminates the statutory requirement (former
I.R.C. § 7802(b)(1)) that there be an Office of Employee Plans and Exempt Organizations
("EP/EO") under an Assistant Commissioner. The Senate Finance Committee believes that a
comparable structure can be created administratively. The Act also eliminates the special funding
mechanism (former I.R.C. § 7802(b)(2)) for EP/EO based upon private foundation
investment income excise tax collections.
The Act renames the IRS' Taxpayer Advocate (originally established by the Taxpayer Bill of
Rights 2 in 1996 as an outgrowth of the IRS Taxpayer Ombudsman established in 1979) the
National Taxpayer Advocate (the "NTA"). The NTA is appointed by the Secretary after
consultation with the Commissioner and the Oversight Board. The NTA cannot have been an IRS
employee during the two years prior to appointment and must agree not to accept employment with
the IRS for at least five years after ceasing to be the NTA. The NTA will appoint local taxpayer
advocates (at least one per state) who will report to the NTA, not the IRS district directors. The
NTA can issue Taxpayer Assistance Orders ("TAOs") if a taxpayer is suffering or about to suffer a
significant hardship as a result of the manner in which the internal revenue laws are being
administered. TAOs will be issued based on criteria contained in regulations which are to embody
considerations of equity. The NTA will provide annual reports to the Senate Finance Committee
and the House Ways and Means Committee. Act § 1102(a) amending I.R.C.
§ 7803(c). Effective July 22, 1998, the date of enactment. Act
§ 1102(f)(1). On August 11, 1998, Commissioner Charles O. Rossotti announced the
appointment as NTA of W. Val Oveson, chair of the Utah State Tax Commission since 1993.
The Act eliminates the IRS office of Chief Inspector and transfers all its powers and duties to a
new, independent Treasury Inspector General for Tax Administration within the Treasury
Department. The role of existing Treasury Inspector General is redefined to exclude responsibility
for the IRS. The Treasury Inspector General for Tax Administration is under the supervision of
the Secretary with additional reporting to the Oversight Board and to Congress. The Treasury
Inspector General for Tax Administration, appointed by the President with the advice and consent
of the Senate, will have the powers formerly held by the IRS Chief Inspector and the Treasury
Inspector General (as they related to the IRS) and will thus conduct audits, investigations and
evaluation of IRS programs and operations (including the Oversight Board) to promote economic,
efficient and effective administration of the tax laws and to detect and to defer fraud and abuse in
IRS programs and operations. Act § 1103 amending the Inspector General Act of
1978. Effective 180 days after July 22, 1998, the date of enactment. Act §
1103(c)(1) amending the Inspector General Act of 1978 § 9(a)(1)(L).
Prohibition on Executive Branch Influence over Taxpayer Audits
Neither the President, Vice President, employees of either the executive
office of the President or the Vice President nor cabinet members (except the Attorney General)
may make any direct or indirect request to any IRS employee to conduct or terminate an audit or
investigation of any particular taxpayer with respect to the tax liability of that taxpayer. Any IRS
employee receiving such a request is required to report its receipt to the Treasury Inspector General
for Tax Administration. Any willful violation of these rules is punishable by imprisonment for not
more than five years, a fine of no more than $5,000 or both. Act § 1105(a) adding
I.R.C. § 7217. These new rules are applicable to requests made after July 22, 1998, the
date of enactment. Act § 1105(c).
Title II: Electronic Filing
Electronic Filing of Tax and Information Returns
The Act declares the policy of Congress that it should be the goal of the
Service to have at least 80 percent of all federal tax and information returns filed electronically by
2007. To that end, the Act directs the Secretary, no later than 180 days following July 22, 1998,
the date of enactment, to establish a strategic plan to eliminate barriers, to provide incentives and to
use competitive market forces to increase the number of electronic returns being filed. The Act also
mandates creation of an electronic commerce advisory group to include small business and tax
practitioner, preparer and computerized tax processing representatives to provide private-sector
input into the development and implementation of the plan. Act § 2001.
Due Date for Certain Information Returns
Under present law, certain information returns (such as the amount of
dividends, partnership distributions and interest paid during the calendar year) must be supplied to
recipients by January 31 of the following calendar year. Payors must also file an information
return with the IRS by February 28. Effective for certain information returns required to be filed
after December 31, 1999, the Act extends their due date to March 31 if they are filed electronically.
The Act also directs the Secretary to conduct a study on the effect of extending the deadline for
providing statements to recipients from January 31 to February 15 and to submit a report to the
Senate Finance Committee and House Ways and Means Committee by June 30, 1999. Act
Paperless Electronic Filing
The Act directs the Secretary to develop procedures for acceptance of
signatures in electronic form. Until those procedures are in place, the Secretary may waive the
requirement of a signature on an electronically filed tax return or provide for alternative methods of
signing. The Secretary must also:
- develop a method to establish prima facie evidence of delivery of electronically filed
(comparable to the postmark date or return receipt for registered mail for paper returns),
- for taxable periods beginning after December 31, 1998, establish procedures for all tax forms,
instructions and publications created in the most recent five-year period to be made available
electronically on the Internet and
- establish procedures for taxpayers to authorize, on an electronically filed return, disclosure of
confidential information to the preparer of the return. Act § 2003.
Return-Free Tax System
The Act directs the Secretary to develop procedures for the implementation
of a return-free tax system for appropriate individuals for taxable years after 2007. Annual reports
concerning this system are to be made to the Senate Finance Committee and House Ways and
Means Committee no later than June 30 of each calendar year after 1999. Act §
Access to Account Information
No later than December 31, 2006, the Secretary is to develop procedures
under which taxpayers filing electronic returns could review their IRS account information. A
report to the Senate Finance Committee and House Ways and Means Committee on the progress
made on developing these procedures is to be submitted no later than December 31, 2003. Act
Title III: Taxpayer Protection and Rights
Subtitle A: Burden of Proof
In general, the burden of proof with respect to a factual issue in any court
proceeding is shifted from the taxpayer to the Internal Revenue Service, provided the taxpayer first
introduces credible evidence with respect to the factual issue and satisfies four conditions:
- The taxpayer has complied with any current requirements to substantiate any item;
- The taxpayer has maintained all records in accordance with then current requirements;
- The taxpayer has cooperated with reasonable requests by the IRS for witnesses, information,
documents, meetings and interviews; and
- If the taxpayer is not an individual, it does not have a net worth in excess of
The burden of proof regarding a factual issue will not be shifted in cases where the Code provides
for a specific burden of proof with respect to such issue. Act § 3001(a) adding I.R.C.
The Conference Report (H.Rpt. 105-599) indicates that credible evidence is evidence which, after
critical analysis, the court would find sufficient upon which to base a decision on the issue if no
contrary evidence were submitted. Implausible factual assertions, frivolous claims, tax
protestor-type arguments and evidence not worthy of belief by the court should not be considered
The Conference Report also notes that a taxpayer has cooperated with the IRS if the
taxpayer has provided reasonable assistance to the IRS in obtaining access to and inspection of the
items requested by the Service. Cooperation also includes exhaustion of the taxpayer's
administrative remedies, including any appeal rights provided by the Service, but does not include
the taxpayer's agreement to extend the statute of limitations.
In the case of an individual taxpayer, the IRS has the burden of proof in any court proceeding with
respect to any item of income which was reconstructed by the Service solely through the use of
statistical information on unrelated taxpayers. I.R.C. § 7491(b). In the case of an
individual taxpayer, the Service also has the burden of production of evidence in any court
proceeding with respect to the imposition of penalties or additions to tax. I.R.C.
§ 7491(c). The Conference Report indicates that taxpayers still have the responsibility
for raising issues such as reasonable cause or substantial authority to refute application of such
These burden of proof provisions apply to court proceedings arising in connection with
examinations that commence after July 22, 1998, the date of enactment. Where there is no
examination, these provisions apply to court proceedings arising in connection with taxable periods
or events beginning or occurring after the date of enactment. Act § 3001(c).
Subtitle B: Proceedings by Taxpayers
Expansion of Authority to Award Costs and Certain Fees
The Act broadens the scope and amount of administrative costs and
attorney's fees that may be awarded to a taxpayer who substantially prevails in any action by or
against the United States in connection with the determination, collection or refund of tax, interest
or penalties. Act § 3101 amending I.R.C. § 7430(c).
The general maximum hourly rate for attorney's fees that may be awarded is increased from $110
to $125. Attorney's fees in excess of $125 per hour may be awarded where the difficulty of the
issues presented in the case or the unavailability of local tax expertise justifies such higher rate. As
under existing law, cost of living disparities or the limited availability of qualified attorneys also
may justify a higher rate. The court may award market-rate, reasonable attorney's fees to an
individual (or such individual's employer) who represents the taxpayer for no fee or a nominal fee,
such as pro bono representation. The date on or after which reasonable administrative
incurred is extended earlier in time to the date that the IRS sends the first letter of proposed
deficiency that allows the taxpayer an opportunity for administrative review in the Internal Revenue
Service Office of Appeals (i.e., a "30-day letter").
In determining whether the position of the United States is substantially justified such that the
taxpayer has not "substantially prevailed" and thus is ineligible for an award of costs or fees, the
court must take into account whether the United States has lost in other United States courts of
appeal on substantially similar issues. If (1) a taxpayer timely makes a "qualified offer" that is
rejected by the Service and (2) the IRS subsequently obtains a judgment against the taxpayer in an
amount that equals or is less than such offer, then the taxpayer must be treated as a prevailing party
eligible for an award of costs and fees. A qualified offer is a written offer for the amount of the
taxpayer's tax liability made by the taxpayer to the United States during the "qualified offer
period," where such offer is designated as a "qualified offer" and remains open until the earliest of
(1) the date the offer is rejected, (2) the date the trial begins or (3) the 90th day after the date the
offer is made. The "qualified offer period" begins on the date that the first 30-day letter is sent and
ends on the date that is 30 days before the date the case is first set for trial.
Reasonable attorney's fees also may be awarded to taxpayers in their actions for civil damages
against the United States for the unauthorized inspection or disclosure of the taxpayer's tax returns
or return information. Act § 3101(f) amending I.R.C. § 7431(c).
These cost and fee award provisions apply to costs incurred and services performed more than 180
days after July 22, 1998, the date of enactment. Act § 3101(g).
Civil Damages for Collection Actions
Prior to the Act, a taxpayer was eligible to receive up to $1 million of civil
damages against the United States as a result of an officer or employee of the Service recklessly or
intentionally disregarding the provisions of the Code or Treasury Regulations in the collection of
federal income tax from the taxpayer. The Act extends civil damages to the case of negligent acts
by an officer or employee of the Service, subject to a cap of $100,000 in civil damages arising
from such negligence. In addition, civil damages of up to $1 million are permitted for damages
caused by an officer or employee of the Service who willfully violates the provisions of the
Bankruptcy Code relating to automatic stays or discharges. Whereas prior to the Act, civil
damages were subject to reduction if the taxpayer did not exhaust its administrative remedies within
the Service, the Act now requires a taxpayer to exhaust such remedies before any civil damages are
awarded. Act § 3102(a), (c) amending I.R.C. § 7433.
The Act also provides that persons other than the taxpayer may sue for civil damages for
unauthorized collection actions. Act § 3102(b) amending I.R.C. § 7426.
These civil damages provisions apply to actions of officers or employees of the Service that occur
after July 22, 1998, the date of enactment. Act § 3102(d).
Increase in Size of Cases Permitted on Small Case Calendar
Taxpayers currently have the option to use special small case procedures in
proceedings before the Tax Court, subject to Tax Court concurrence. Prior to the Act, small case
procedures applied to disputes involving $10,000 or less. The Act increases this limitation from
$10,000 to $50,000, effective for proceedings that commence after July 22, 1998, the date of
enactment. Act § 3103 amending I.R.C. § 7463.
Actions for Refund with Respect to Certain Estates Which have Elected the Installment
Method of Payment
The Act grants the United States district courts and the United States Court
of Federal Claims jurisdiction to determine the correct amount of estate tax liability (or refund) in
any action brought by the executor of an estate, even if such liability has not been paid because of
the executor's election to make tax payments under the installment method provided for in
section 6166 of the Code. To qualify for this provision, the following conditions must be met as
of the date such action is filed:
- No portion of the installments payments due under section 6166 of the Code has been
- All installments payable on or before the action is filed have been paid;
- No case is pending in the Tax Court with respect to estate tax liability;
- There are no outstanding deficiency notices against the estate; and
- There are no pending proceedings for declaratory judgment relating to the estate's eligibility for
installment payments of estate tax.
Once the United States district court or Court of Federal Claims enters a final judgment, the IRS
may not collect any amount disallowed by the court. The Service must refund any amounts
previously paid by the taxpayer in excess of the amount of tax the court has determined to be due
and payable. Act § 3104(a) amending I.R.C. § 7422.
The Act also suspends the two-year statute of limitations period for filing a refund suit during the
pendancy of any action brought by the taxpayer under section 7479 of the Code for declaratory
judgment as to an estate's eligibility to make tax payments under the installment method. Act
§ 3104(b) amending I.R.C. § 7479.
These provisions are effective for claims for refund filed after July 22, 1998, the date of
enactment. Act § 3104(c).
Administrative Appeal of Adverse IRS Determination of Tax-Exempt Status of Bond
The Act directs the IRS to amend its administrative procedures to provide
that a bond issuer has the right to an administrative appeal before a senior officer of the IRS Office
of Appeals, if the Service, upon examination, proposes to the issuer that interest on bonds does not
qualify for tax-exempt treatment. This provision is effective on July 22, 1998, the date of
enactment. Act § 3105.
Civil Action for Release of Erroneous Lien
The Act provides for administrative procedures to permit third party owners
of property against which a federal tax lien has been filed to obtain a certificate of discharge of
property from the lien as a matter of right. This provision applies to property owners other than
the person whose unsatisfied tax liability gave rise to the lien (i.e., "third party owners").
To obtain such certificate, the third party owner must submit a request to the IRS and either deposit
cash or furnish a bond that is satisfactory to the IRS. The Service must refund the amount
deposited or release the bond, as the case may be, to the extent that the Service determines that
either (1) a source other than the property can satisfy the liability that gave rise to the lien or (2) the
value of the United States' interest in the property is less than the Service's prior determination of
such value. Act § 3106(a) amending I.R.C. § 6325.
The Act also provides that third party owners of property may bring a civil action against the
United States in a United States district court for a determination whether the value of the interests
of the United States in such property is less than the value determined by the Service. The owner
must initiate the civil action within 120 days after the day on which a certificate of discharge was
issued. If the court finds in favor of the owner, the IRS must refund the amount deposited or
release the bond, to the extent that the amount of the deposit or bond exceeds the value of the
United States' interest in the property. The Service also must pay interest on such refund. Act
§ 3106(b) amending I.R.C. § 7426. If a third party owner does not initiate such
civil action within the prescribed period, the IRS must, within 60 days after the expiration of such
period (1) apply the amount deposited, or collect on such bond, to the extent necessary to satisfy
the unsatisfied liability secured by the lien and (2) refund (with interest) any portion of the amount
deposited that is not used to satisfy such liability. Act § 3106(a) amending
I.R.C. § 6325.
The running of the statute of limitations for the IRS to collect on an assessment is suspended for a
period equal to the period beginning on the date an owner becomes entitled to a certificate of
discharge (as described above) and ending on the date that is 30 days after the earlier of (1) the
earliest date on which the Service no longer holds any amount as a deposit or bond because such
deposit or bond was used to satisfy unpaid tax or was refunded or released or (2) the date the
court's judgment in the civil action described above becomes final. Act § 3106(b)
amending I.R.C. § 6503.
This provision is effective on July 22, 1998, the date of enactment. Act §
Subtitle C: Relief for Innocent Spouses and for Taxpayers Unable to Manage
Their Financial Affairs Due to Disabilities
Relief from Joint and Several Liability on Joint Return
The Act generally provides two forms of relief from joint and several
liability for spouses in connection with the filing of a joint return, one applies to spouses who did
not know that there was an understatement of tax attributable to the other spouse when signing the
joint return ("innocent spouses") and the other provides for a separate liability election by certain
former spouses. The Act also gives the Tax Court jurisdiction over disputes about innocent spouse
relief and separate liability elections. Act § 3201 adding I.R.C. § 6015.
Innocent spouse relief. If the following conditions are satisfied and the innocent spouse
timely elects relief, an innocent spouse will be relieved of liability for tax (including interest and
penalties) to the extent such liability is attributable to an understatement of tax of the other
- A joint return was made;
- An understatement of tax on such return is attributable to erroneous items of the other
- In signing the return the innocent spouse did not know, and had no reason to know, that there
was such understatement; and
- Taking into account all the facts and circumstances, it is inequitable to hold the innocent spouse
liable for the deficiency in tax attributable to such understatement.
The innocent spouse must elect relief within two years after the date the IRS has begun collection
activities with respect to the innocent spouse. An innocent spouse may be relieved of liability for
the portion of an understatement about which such spouse had no knowledge or reason to know,
even though such spouse knew or had reason to know of other understatements of tax on the same
return. Determinations of the allocation of items to a particular spouse are made without regard to
community property laws. I.R.C. § 6015(b).
Separate liability election. A spouse who is no longer married to, is legally separated from
or has been living apart for at least 12 months from the person with whom such spouse originally
filed a joint return may elect to limit his or her liability for any deficiency on such return to the
portion of the deficiency that is attributable to items allocable to the electing spouse. Such election
must be made no later than two years after the date the IRS has begun collection activities with
respect to the electing spouse. I.R.C. § 6015(e).
Relief is denied to electing spouses under any of the following circumstances:
- The electing spouse was a member of the same household as the other spouse during the
12-month period prior to date the election is filed;
- The IRS demonstrates that the spouses filing the joint return fraudulently transferred assets
- The IRS demonstrates that the electing spouse had actual knowledge that an item on a joint
return was incorrect and was not under duress to sign the return, in which case relief will be denied
to the extent any deficiency is attributable to such item; or
- The electing spouse receives "disqualified assets" from the other spouse to avoid tax, in which
case the portion of the deficiency for which the electing spouse is liable will be increased by the
value of any disqualified assets.
Disqualified assets include any property or right to property that was transferred to the electing
spouse if the principal purpose of the transfer was the avoidance of tax or payment of tax. A
rebuttable presumption exists that a transfer was made to avoid tax if the transfer was made less
than one year before the 30-day letter was sent. The rebuttable presumption does not apply to
transfers pursuant to a decree of divorce or separate maintenance.
In general, an electing spouse limits his or her separate liability for any deficiency on a joint return
to the portion of the deficiency that is attributable to items allocable to the electing spouse. An item
giving rise to a deficiency is generally allocated to a spouse in the same manner as it would have
been allocated if the spouses had filed separate returns. For example, if an item of income is
allocated to one spouse, the deficiency (or portion thereof) attributable to such item is allocated to
that spouse. However, if a deficiency (or portion thereof) relates to the items of both spouses, the
deficiency is allocated between the spouses in the same proportion as the net items taken into
account in determining the deficiency. The following are exceptions to the general allocation
- Under rules to be prescribed, an item otherwise allocable to one spouse may be allocated to the
other spouse to the extent the item gave rise to a tax benefit on the joint return to the other
- If the IRS establishes fraud on the part of either or both spouses, the Service may provide for
an appropriate alternative allocation;
- If an item of deduction or credit is disallowed in its entirety solely because a separate return is
filed, such disallowance is disregarded and the item is computed as if a joint return had been filed
and then allocated appropriately between the spouses; and
- If the liability of a child of a spouse is included on a joint return, such liability shall be
disregarded in computing the separate liability of either spouse and such liability shall be allocated
appropriately between the spouses.
Where a deficiency is attributable to the disallowance of a credit, or to any tax other than regular
individual or alternative minimum tax, and such item is allocated to one spouse, the portion of the
deficiency attributable to such credit or other tax is allocated to that spouse before making the
allocations described above. I.R.C. § 6015(d).
Equitable relief. If both innocent spouse relief and the separate liability election are
unavailable to a spouse and if, under all the facts and circumstances, it is inequitable to hold such
spouse liable for any unpaid tax or deficiency, then under procedures to be prescribed the IRS may
relieve such spouse of such liability. I.R.C. § 6015(f).
The innocent spouse relief, separate liability election and authority to provide equitable relief all
apply to liabilities for tax arising after July 22, 1998, the date of enactment. Act §
Suspension of Statute of Limitations on Filing Refund Claims During Periods of
The Act provides for the equitable tolling of the statute of limitations for
refund claims of an individual taxpayer during periods of the taxpayer's life in which he or she is
unable to manage his or her financial affairs by reason of a medically determinable physical or
mental impairment that can be expected to result in death or to last for a continuous period of at
least 12 months. Tolling does not apply during periods in which the taxpayer's spouse or
representative is authorized to act on the taxpayer's behalf in financial matters. This provision
applies to periods of disability before, on or after July 22, 1998, the date of enactment, but does
not apply to any claim for refund or credit that (without regard to this provision) is barred by the
operation of any law as of that date. Act § 3202 amending I.R.C. § 6511.
Subtitle D: Provisions Relating to Interest and Penalties
Netting of Interest on Offsetting Overpayments and Underpayments
A net interest rate of zero is established when a taxpayer has an equivalent
overpayment and underpayment outstanding during the same period. This rule applies even to
large corporate underpayments or corporate overpayments in excess of $10,000, even though
those particular underpayments and overpayments have special interest rate provisions. Act
§ 3301(a) amending I.R.C. § 6621. This provision is generally effective for
interest for periods beginning after July 22, 1998, the date of the Act's amendment; however, it
can apply to prior periods if the taxpayer so requests before December 31, 1999 and reasonably
identifies and establishes periods of tax overpayments and underpayments for which the zero rate
applies. Act § 3301(c).
Increase of Overpayment Rate
Previously the interest rate charged to taxpayers on underpaid taxes equaled
the applicable federal short-term rate (the "short-term AFR") plus three percentage points, whereas
the rate charged to the government on overpaid taxes equaled the short-term AFR plus
two percentage points. The Act equalizes these rates at the short-term AFR plus three percentage
points, except in the case of corporations, where the rate charged on overpaid amounts is
unchanged. Act § 3302(a) amending I.R.C. § 6621(a). These changes are
applicable to interest for the second and succeeding calendar quarters beginning after July 22,
1998, the date of enactment. Act § 3302(b).
Mitigation of Penalty for Taxpayer's Failure to Pay
A delinquency charge will generally be imposed where a taxpayer fails
to file a tax-return, to pay the tax shown on the return, or to pay the amount which
should have been (but was not) shown on the return. I.R.C. § 6651(a). The rate
imposed is .50 percent for the first month, increasing .50 percent each additional month, to a
ceiling rate of 25 percent. The Act provides that, so long as an individual has filed a return, the
.50 percent rate will be lowered to .25 percent where the taxpayer and the Service have agreed to
allow the taxpayer to pay taxes under an installment payment agreement. Act § 3303(a)
adding I.R.C. § 6651(h). The amendment is effective for additions to tax for months
beginning after December 31, 1999. Act § 3303(b).
Mitigation of Failure to Deposit
Taxpayers required to make deposits of taxes (e.g., payroll taxes)
are generally subject to a penalty whenever such deposits are not timely made. I.R.C. §
6656(a). The penalty increases as the deposit becomes more overdue. I.R.C. §
6656(b). The Act now allows such taxpayers to designate the period to which a deposit is to
be applied. Act § 3304(a) adding I.R.C. § 6656(e)(1). The designation may
only be made during the 90 days after an IRS penalty notice has been received. Act §
3304(a) adding I.R.C. § 6656(e)(2). These changes are applicable to deposits required
to be made 180 days after the date of enactment, July 22, 1998. Act §
The Act also provides that any deposit required to be made after December 31, 2001 will be
applied to the most recent period to which the deposit relates, unless a different period is
designated. Act § 3304(c) adding I.R.C. § 6656(e)(1).
Suspension of Interest and Penalties
The Act calls for the suspension of any interest and penalties if the IRS
fails, within 18 months of a taxpayer's filing of a return, to give notice which specifically states the
amount of and the basis for any liability. Act § 3305 adding I.R.C. 6404(g). The
18-month period is reduced to a 1-year period starting January1, 2004.
The notice requirement imposed on the Service is applied separately to each tax item or adjustment.
Act § 3305(a) adding I.R.C. § 6404(g)(1)(B). Interest and penalties resume
21 days after provision of the notice. Act § 3305(a) adding I.R.C. §
A taxpayer must timely file a return in order to enjoy the protection of this amendment. Moreover,
interest and penalties will not be suspended with respect to (1) amounts already shown on a return
or (2) amounts relating to fraud or other criminal penalty. Act § 3305(a) adding I.R.C.
These changes are effective for taxable years ending after July 22, 1998, the date of enactment.
Act § 3305(b).
Procedural Requirements for Imposition of Interest
The Act requires the IRS to include with each notice imposing a penalty
(1) the name of the penalty, (2) the Code section authorizing the penalty and (3) an actual
computation of the penalty. Act § 3306(a) adding I.R.C. § 6751(a).
Moreover, a supervisor must personally approve, in writing, the initial penalty determination.
Act § 3306(a) adding I.R.C. § 6751(b)(1).
This new notice and approval process does not apply to penalties associated with a taxpayer's
failure (1) to file a return, (2) pay estimated tax or (3) pay amounts already shown on a return.
Act § 3306(a) adding I.R.C. § 6751(b)(2).
These requirements apply to notices issued and penalties assessed after December 31, 2000.
Act § 3306(c).
Notice of Interest Charges
Effective January 1, 2001, the Service must include in each notice sent to
taxpayers with regard to interest owed the amount of interest the taxpayer owes, a citation
of the Code provision justifying the request for payment and an actual computation of the
amount of interest. Act § 6631 adding I.R.C. § 6631.
Abatement of Interest on Underpayment
The Act provides for the abatement of interest for taxpayers located in a
Presidentially declared disaster area who have been granted a filing extension by the Service.
Act § 3309(a) adding I.R.C. § 6404(h). The period of abatement lasts the
length of the extension. The amendment is effective for disasters declared after December 31,
1997. Act § 3309(b).
Subtitle E: Protections for Taxpayers Subject to Audit or Collection
Due Process in Collection Activities
So as to insure due process, the Act affords taxpayers new procedural
rights in cases involving the collection of taxes by levy. Specifically, the Service must send, not
less than 30 days before the date of the first levy, notice to the taxpayer informing him or her of the
right to an impartial hearing. Act § 3401(b) adding I.R.C. § 6330(a). The
taxpayer has the right to request one such hearing within 30 days of the mailing of the notice. The
hearing must be conducted by an officer who has had no prior involvement in the case. Act
§ 3401(b) adding I.R.C. § 6330(b)(3). At the hearing, the taxpayer may raise
relevant defenses or suggest a collection method to be used instead of a levy (i.e.,
substitution of assets or installment payment program). Act § 3401(b) adding I.R.C.
§ 6330(c)(2)(A). The new procedural rights do not apply in the case of jeopardy
assessments. Rather, the taxpayer is only given an opportunity for a hearing "within a reasonable
period of time" after the levy has been made. Act § 3401(b) adding I.R.C. §
6330(f). These new rules apply to collection activities initiated more than 180 days following
July 22, 1998, the date of enactment. Act § 3401(d).
Extension of Attorney-Client Privilege
The attorney-client privilege is now applicable to communications between
taxpayers and individuals authorized to practice before the Service. The privilege is not extended
to criminal tax matters or proceedings nor to communications regarding corporate tax shelters.
Act § 3411(a) adding I.R.C. § 7525(a)(2). The amendment is effective with
regard to communications made on or after, July 22, 1998, the date of enactment. Act §
Limitation on "Financial Status" Audit Technique
When auditing a taxpayer's return, the Service is authorized (1) to examine
any relevant books or data, (2) to summon individuals to testify and provide information and
(3) to take
the testimony of the taxpayer. I.R.C. § 7602(a). Under this authority, the Service
used to conduct "financial status" audits in which the Service would ask probing questions
intended to determine the existence of unreported income. The Act now prohibits such audits
unless there is a "reasonable indication that there is a likelihood of such unreported income."
Act § 3412 adding I.R.C. § 7602(d).
Software Trade Secrets Protection
The Act imposes new standards with regard to the Service's ability to
summons tax-related computer software source code. Specifically, the Secretary may force the
taxpayer to produce the source code if (1) the Service is otherwise unable to reasonably ascertain a
return's accuracy, (2) the Service specifically identifies the portion of the source code needed and
(3) the Service determines that the need for the source code outweighs the risks of unauthorized
disclosure of trade secrets. Act § 3413(a) adding I.R.C. § 7612(b)(1)(A).
The new standards do not apply to software acquired or developed by the taxpayer primarily for
internal use rather than commercial distribution. Act § 3413(a) adding I.R.C. §
The Act also restricts the Service's ability to view the source code after issuance of the summons.
For instance, the Service generally may not make copies nor remove such code from the owner's
place of business. Act § 3413(a) adding I.R.C. § 7612(c)(2). The new
section provides for felony charges in the event an individual willfully divulges the software.
Act § 3413(b) adding I.R.C. § 7213(d).
The amendment applies to summonses issued and software acquired after July 22, 1998, the date
of enactment. Act § 3413(e)(1). As to software acquired on or before that date, the
safeguards which ensure protection of trade secrets and other confidential information apply after
the 90th day following July 22, 1998, the date of enactment. Act § 3413(e)(2).
Tip Reporting Alternative Commitment Agreements
Currently, restaurants may enter into Tip Reporting Alternative
Commitment Agreements ("TRAC Agreements") wherein owners are obligated to pay taxes and
educate employees on tip reporting. Under the Act, IRS employees are now instructed that they
may not threaten to audit any taxpayer in an attempt to coerce such taxpayer to enter into a TRAC
Agreement. Act § 3414.
Notice of IRS Contact of Third Parties
The Act prohibits IRS employees from contacting anyone other than the
taxpayer with respect to a tax liability without first providing the taxpayer reasonable notice. This
prohibition does not apply where (1) the taxpayer has authorized the contact, (2) the collection of
tax would be jeopardized by the issuance of the notice or (3) a criminal investigation is involved.
Act § 3417(a) adding I.R.C. § 7602(c). The changes are effective to contacts
made more than 180 days following July 22, 1998, the date of enactment. Act §
Approval Process for Liens, Levies and Seizures
The Act directs the Commissioner to determine situations in which an
employee's decision to levy or seize a taxpayer's property should be reviewed by a supervisor.
The Commissioner is also directed to adopt procedures which provide for disciplinary action in the
event the review process is not followed. Act § 3421. The section is effective on
the date of enactment, July 22, 1998, except for actions under an automated collection system,
where the section is applicable to actions initiated after December 31, 2000. Act §
Modification of Certain Levy Exemption Amounts
The Code currently prohibits the Service from seizing personal belongings
of the taxpayer up to certain dollar amounts. I.R.C. § 6334. The Act increases this
dollar amount as to specific items. Effective for levies issued after July 22, 1998, the date of
enactment, the Code now exempts from collection (1) fuel, provisions, furniture and personal
effects valued up to $6,250 (previously $2,500) and (2) books and tools of the taxpayer's trade,
business or profession valued up to $3,125 (previously $1,250). The new amounts are indexed
for inflation. Act § 3431 amending I.R.C. § 6334.
Release of Levy upon Agreement
New section 6343(e) of the Code governs levies on taxpayer's salary or
wages. It forces the Service to release such levies as soon as practicable when an agreement is
reached with the taxpayer that the tax is not collectible. Act § 3432 adding I.R.C.
§ 6343(e). Applicable to levies imposed after December 31, 1999. Act §
Levy Prohibited During Pendency of Refund Proceedings
The Act prohibits the Service from collecting any tax by levy while a
taxpayer's refund action is still pending, but only with regard to refund claims that can be brought
without the full payment of taxes. The prohibition does not apply to collections the Secretary finds
are in jeopardy. Act § 3433(a) adding I.R.C. § 6331(i). Applicable to unpaid
taxes attributable to taxable periods after December 1, 1998. Act § 3433(b).
Approval for Jeopardy Assessment
Typically, taxpayers are provided no less than 30 days' notice before their
property may be levied. I.R.C. § 6331(d). This 30-day period is not applicable
where the collection of tax is in jeopardy, i.e., a "jeopardy assessment." The Act now
jeopardy assessments unless the Service's Chief Counsel or delegate personally approves such
assessment. Within five days of such assessment, the taxpayer is now provided a statement listing
information on which the Secretary relied. Act § 3434 amending I.R.C. §
7429(a). Applicable to jeopardy and termination assessments made after July 22, 1998, the
date of enactment. Act § 3434(b).
Increase in Amount on which Lien not Valid
Section 6321 of the Code provides that where any person liable to pay a tax
fails to do so, the amount due becomes a lien in favor of the United States upon all of such
taxpayer's property. In order to perfect this lien, the Service must file a special notice. I.R.C.
Section 6323 of the Code protects certain third parties who themselves have claims to a taxpayer's
property and who perfected such claims before the Service filed notice. The protection of section
6323 has a ceiling dollar amount, which the Act increases. Specifically, a third party will be
protected with respect to purchases for private use of household goods from the taxpayer for less
than $1,000 (previously $250). Also, individuals holding a "mechanics lien" of up to $5,000
(previously $1,000) are protected for repairs or improvements made to a personal residence. Both
these new limits are indexed for inflation. Act § 3435(a) amending I.R.C. §
6323. These changes are effective on July 22, 1998, the date of enactment. Act §
Early Withdrawals from Employer-Sponsored Plans or IRAs
Generally, where an individual receives an early distribution from a
qualified retirement plan (e.g., an individual retirement account or IRA), the tax on the
the distribution includible in gross income is automatically increased by ten percent. I.R.C.
§ 72. For distributions made after December 31, 1998, the Act provides an exception to
this ten percent early withdrawal tax where distributions are made "on account of a levy" by the
Service. Act § 3436 amending I.R.C. § 72(t)(2)(A).
Prohibitions Regarding Sales of Seized Property
After seizing a taxpayer's property, the Service must follow certain
procedures before selling such property in satisfaction of a tax liability. I.R.C. §
6335. Previously, the Code required the IRS to determine the minimum price at which the
property was to be sold. The Act now prohibits the Service from selling seized property below
this minimum amount, effective for sales occurring after July 22, 1998, the date of enactment.
Act § 3441 amending I.R.C. § 6335(e)(1)(A)(i).
Accounting of Sales of Seized Property
Section 6340 of the Code previously required the IRS to maintain specific
records of all sales of seized real property. The Act extends this obligation to sales of all seized
property, both real and personal. Act § 3442(a)(1) amending I.R.C. § 6340.
Moreover, upon such sale, the IRS must now provide the taxpayer (1) the relevant records
(excluding names of purchasers), (2) the amount from the sale applied to the taxpayer's liability
and (3) the remaining balance of the liability. Act § 3442(a)(1) adding I.R.C. §
6340(c). These changes are applicable to seizures occurring after July 22, 1998, the date of
enactment. Act § 3442(b).
Uniform Asset Disposal Mechanism
The IRS is directed to implement, within two years of enactment, a
"uniform asset disposal mechanism" for sales of seized property. The mechanism should prevent
revenue officers from participating in such sales. The Act suggests that the IRS should consider
outsourcing its responsibilities in seized property sales. Act § 3443.
Procedures for Seizure of Taxpayer's Property
The Act implements certain procedural safeguards which must be met
before the IRS may seize an individual's property. Specifically, prior to any seizure the Service
must now (1) verify the taxpayer's liability, (2) insure that the expenses associated with the
property sale do not exceed the property's value, (3) determine that there is enough equity in the
property to apply against the tax liability and (4) consider alternative collection methods. Act
§ 3444(a) adding I.R.C. 6331(j). Effective July 22, 1998, the date of enactment.
Act § 3444(b).
Seizures of Residences and Businesses
Section 6334(a) of the Code lists specific property which may not be levied
by the IRS. The Act expands this section to prohibit the Service from levying upon the taxpayer's
real property which is used as a residence by either the taxpayer or, unless the property is rented,
another individual, but only in either case if the amount of the levy does not exceed $5,000.
Act § 3445(a) amending I.R.C. § 6334(a)(13).
The Act likewise includes a prohibition against levying upon the taxpayer's principal residence or
tangible personal property or real property used in the taxpayer's trade or business, irrespective of
the amount of the levy. Act § 3445(a) amending § 6334(a)(13). A principal
residence is not exempt from levy if a U.S. district court judge or magistrate approves the levy;
similarly, trade or business assets are not exempt from levy if an IRS district director or assistant
district director personally approves the levy or where collection is in jeopardy, but only after a
determination that the taxpayer's other assets are insufficient to satisfy the liability. Act §
3445(b) amending I.R.C. § 6334(e). Effective July 22, 1998, the date of enactment.
Act § 3445(d).
Extension of Statute of Limitations
The IRS must generally assess taxes owed within three years of the filing
of the taxpayer's return. I.R.C. § 6501(a). This three-year period can be extended
by written agreement between the taxpayer and the Service. I.R.C. § 6501(c)(4).
The Act now requires the IRS to notify the taxpayers specifically of their right to refuse to extend
the three-year period, and their right to limit such extension to particular issues or to a particular
period of time. Act § 3461(b)(2) adding I.R.C. § 6501(c)(4)(B). Applicable
to requests for extensions made after December 31, 1999. Act § 3461(c)(1).
Generally, the IRS must collect taxes due within ten years of assessing them. I.R.C. §
6502(a). Previously, the Service and the taxpayer could agree to extend this ten-year period.
I.R.C. § 6502(a). The Act eliminates this ability to extend the statute of limitations
for collection by agreement, except in the case of installment payment agreements between the
Service and the taxpayer. Act § 3461(a) amending I.R.C. § 6502(a). This
change is generally effective for requests for extensions of the statute of limitations made after
December 31, 1999. Act § 3461(c)(1). However, where a taxpayer agrees (or has
agreed) before December 31 1999 to extend the ten-year period, such extension automatically
expires on the latest of (1) the last day of the 10-year period, (2) December 31, 2002 or (3) the
90th day after the end of an extension in connection with an installment agreement. Act §
The Code provides the IRS authority to settle any civil or criminal case
under the internal revenue laws. I.R.C. § 7122. Pursuant to this authority,
taxpayers may make an "offer-in-compromise" setting forth a settlement proposal to resolve a
The Act now requires the Service to prescribe guidelines to its employees for determining whether
such offers are adequate. These guidelines must be designed to insure that taxpayers entering into
a compromise have adequate means to provide for basic living expenses. Act § 3462
adding I.R.C. § 7122(c).
The Act prohibits the IRS from seizing any of the taxpayer's property during the period that an
offer-in-compromise is pending, and for the 30 days following a rejection of such offer.
Comparable rules apply to proposed installment agreements and the termination of existing
installment agreements. Act § 3462(b) adding I.R.C. § 6331(k). The IRS is
now required to establish procedures to review independently rejections of offers-in-compromise
before such rejections are sent to the taxpayer. Moreover, the taxpayer is to be provided a right to
appeal such rejection within the IRS itself. Act § 3462(c)(1) adding I.R.C. §
These changes are applicable to proposed offers-in-compromise and installment agreements
submitted after July 22, 1998, the date of enactment. Act § 3462(e)(1). The
proscription against seizing property applies to offers-in-compromise pending on or submitted after
December 31, 1999. Act § 3462(e)(2).
After receiving notice from the IRS regarding a deficiency of taxes paid, the
taxpayer generally has 90 days in which to file a petition with the Tax Court for a redetermination
of the deficiency. I.R.C. § 6213(a). The Act now requires the Service to include on
each notice of deficiency the actual last date on which the taxpayer may file such a petition. Act
§ 3463(a). Any petition filed on or before the date specified is considered timely.
Act § 3463(b). Applicable to notices of deficiency mailed after December 31, 1998.
Act § 3463(c).
Refund of Overpayments Before Final Determination
Section 6213(a) of the Code generally prohibits the IRS from collecting a
tax deficiency until either 90 days after a notice of deficiency has been mailed or a Tax Court
decision has become final. Notwithstanding this general prohibition, only injunctive relief was
available where the IRS seized property during this period as prior law provided the taxpayer no
refund claim for property prematurely levied. Effective July 22, 1998, the date of enactment, the
Tax Court (or other court with proper jurisdiction) now has the power to compel a refund of any
such amounts wrongfully collected. Act § 3464 amending I.R.C. §§ 6213,
IRS Procedures Relating to Appeals of Examinations and Collections
The Act requires the Service to implement an alternative dispute resolution
process whereby a taxpayer may request early resolution of one or more issues. The Service is
required to provide for a non-binding mediation process, which may be requested by either a
taxpayer or the IRS Office of Appeals following, for example, unsuccessful settlement attempts.
The Service is likewise required to establish a pilot program for binding arbitration in similar
situations. Act § 3465(a) adding I.R.C. § 7123. The IRS Commissioner is
directed to ensure that an IRS appeals officer is available in each state and to consider the use of
videoconferencing of appeals conferences for taxpayers in rural areas. Act §§
3465 (b), (c).
Fair Tax Collection Practices
The IRS is now prohibited from communicating with a taxpayer in
connection with unpaid taxes (1) at any unusual time or place inconvenient to the taxpayer, (2) if
the Service knows the taxpayer is represented by another individual and knows such individual's
name and address or (3) at the taxpayer's place of employment if the IRS knows or has reason to
know that taxpayer is prohibited from receiving such communication. The Service may assume,
absent knowledge to the contrary, that the hours between 8:00 a.m. and 9:00 p.m. local time are
convenient for the taxpayer. Act § 3466(a) adding I.R.C. § 6304.
In addition, when collecting any unpaid tax the Service may not engage in any conduct which
harasses, oppresses or abuses any person. Act § 3466(b) adding § 6304(b).
These new prohibitions are effective July 22, 1998, the date of enactment. Act §
Guaranteed Availability of Installment Agreements
Under section 6159 of the Code, the Service is authorized to enter into
an agreement with a taxpayer whereby the taxpayer's liability may be satisfied in a series of
installment payments. I.R.C. § 6159. The Act now provides the Services no
discretion in certain circumstances when an installment agreement is proposed by the taxpayer.
Specifically, effective July 22, 1998, the date of enactment, the Service must accept an installment
agreement so long as:
- the amount of the liability (excluding interest and penalties) does not exceed $10,000,
- during the preceding five years, the taxpayer has not failed to file a return, failed to pay any tax
required to be shown on such return or entered into an installment agreement,
- the Service determines that the taxpayer is unable to pay the liability in full when due,
- full payment of the liability will be made within three years and
- the taxpayer agrees to comply with the tax laws and provisions of the agreement. Act
§ 3467 adding I.R.C. § 6159(c).
Prohibition on Requests to Taxpayers
The Act prohibits any U.S. officer or employee from requesting that a
taxpayer waive the right to bring a civil action against the United States or any officer or employee
thereof for any action taken in connection with the internal revenue laws. Act §
3468(a). This prohibition does not apply where the taxpayer knowingly and voluntarily
waives such right or where the request is made either in the presence of the taxpayer's attorney (or
other federally authorized tax practitioner) or in writing to the taxpayer's attorney or other
representative. Act § 3468(b).
Subtitle F: Disclosures to Taxpayers
Explanation of Joint and Several Liability
The Act directs the IRS to establish procedures no later than 180 days after
July 22, 1998, the date of enactment, to alert married taxpayers, on all appropriate publications, of
their joint and several liability. Act § 3501(a). The Service must also notify spouses
of the "innocent spouse" relief afforded by section 6015 of the Code. Act §
Explanation of Taxpayer's Rights in Interviews
The IRS must, within 180 days after July 22, 1998, the date of enactment,
revise its Publication 1 ("Your Rights as a Taxpayer") to inform taxpayers more clearly of their
rights to be represented at an interview and to suspend an interview. Act
Disclosure of Criteria of Examination Selection
Within 180 days of July 22, 1998, the date of enactment, the Service must
include in its Publication 1 a simple and nontechnical statement describing the criteria and
procedures used for selecting taxpayers for audit. Although this statement need not disclose any
information "detrimental to law enforcement," it must specify the general procedures used by the
Service, including whether taxpayers are selected for examination on the basis of information
available in the media or provided to the IRS by informants. Act § 3503(a).
Explanation of Appeals and Collection Process
Within 180 days of July 22, 1998, the date of enactment, the IRS must
include with any first letter of proposed deficiency an explanation of the entire tax audit and
collection process. Act § 3504.
Explanation of Reason for Refund Disallowance
The Act requires the Service to provide, in connection with a claim for
refund of an overpayment, an explanation of any disallowance of such claim. Act §
3505(a) adding I.R.C. § 6402(j). Applicable to disallowances more than 180 days
following July 22, 1998, the date of the Act's enactment. Act § 3505(b).
Statements Regarding Installment Agreements
By July 1, 2000 the IRS must provide each taxpayer with an installment
agreement in effect an annual statement setting forth balance and payment information. Act
Notification in Change in Tax Matters Partner
In certain circumstances, the IRS may select a partnership's "tax matters
partner." I.R.C. § 6231(a)(7). In such a circumstance, the Service must now
inform all other partners of the name and address of the person selected within 30 days of such
selection. Act § 3507(a) amending I.R.C. § 6231(a)(7). Effective as to
selections made after July 22, 1998, the date of enactment. Act § 3507(b).
The Act requires the IRS to ensure that all instruction booklets
accompanying individual federal tax forms (including IRS Forms 1040, 1040A and 1040EZ)
include a simple and conspicuous description of the conditions under which information shown on
the return may be disclosed to any party outside the IRS. Act § 3508.
Disclosure of Chief Counsel Advice
Under current law, many IRS publications are open to public inspection.
The Act expands the list of such publicly accessible documents to include "Chief Counsel advice,"
defined as any written advice or instruction prepared by the Office of Chief Counsel which (1) is
issued to field or service center employees of the Service or regional or district employees of the
Office of Chief Counsel and (2) conveys a legal interpretation, policy or position of an internal
revenue law. Act § 3509(b) adding I.R.C. § 6110(i)(1)(A).
Where the document released pertains to specific taxpayers, the IRS within 60 days of issuing the
advice must mail those taxpayers a notice of intention to disclose such document. Act §
3509(b) adding I.R.C. § 6110(i)(4). The Service must delete from the text of the
released document any information which could identify specific taxpayers.
These new disclosure requirements are applicable to any Chief Counsel advice issued more than
90 days after July 22, 1998, the date of enactment. Act § 3509(d). The Act also
contains a schedule for the release of Chief Counsel advice issued after December 31, 1985 but
before this general effective date. Act § 3509(d)(2).
Subtitle G: Low Income Taxpayer Clinics
The Act authorizes the Secretary to make grants of up to $6 million per year
to provide matching funds for the development, expansion or continuation of qualified low income
taxpayer clinics. An individual clinic can receive up to $100,000 under the program. Multi-year
grants of up to three years can also be awarded to qualified low income taxpayer clinics. Each
clinic awarded funds under the program must provide matching funds on a dollar-for-dollar basis,
but these funds can include salaries to individuals performing services for the clinic and the cost of
equipment used by the clinic.
A clinic providing taxpayer assistance may qualify for these matching grants if it (1) charges only a
nominal fee for its services and (2) either represents low income taxpayers in controversies with
the IRS or operates informational programs to assist persons for whom English is a second
language about their rights under the Code. A program may qualify as a clinic if it is operated by
an accredited business, accounting or law school or an organization exempt under section
501(c)(3) of the Code which represents taxpayers or refers taxpayers to qualified
The factors to be consider in awarding these grants include:
- the number of taxpayers who will be assisted by the clinic, including persons for whom
English is a second language,
- the number of existing low income taxpayer clinics in the area,
- the quality of the program and
- alternative funding available to the clinic. Act § 3601 adding I.R.C.
Subtitle H: Other Matters
Under present law, the IRS must make an annual report to Congress
regarding allegations of misconduct by IRS employees, whether arising internally, from taxpayers
or from third parties. No later than January 1, 2000, records of taxpayer complaints must be
maintained on an individual IRS employee basis. Act § 3701.
The IRS is required to transfer agency records to the National Archives and
Records Administration ("NARA") for retention or disposal. The IRS is also required to keep
confidential taxpayer records from disclosure. In the past the IRS has determined which records
are confidential and NARA could not examine them. NARA has been concerned that the IRS is
improperly concealing significant agency records. However, under prior law, any improper
disclosure to NARA would be considered a felony and subject to civil suits under section 6103 of
Effective for requests of the Archivist of the United States (the "Archivist") made after July 22,
1998, the date of enactment, the IRS is authorized to disclose any return information to NARA
officers and employees upon written request of the Archivist solely for the purpose of appraisal of
records for destruction or retention. Act § 3702 adding I.R.C.
Under prior law, checks or money orders for the payment of taxes were
required to be made payable to the Internal Revenue Service. The Act directs the Secretary to
establish rules to provide for payment of taxes by check or money order made payable to the
United States Treasury. Act § 3703.
Clarification of Authority Relating to Elections
Where the Code is silent as to the time and manner of making an election,
the Act provides that the Secretary may prescribe such time and manner by any reasonable means,
not just by regulations or forms. Act § 3704 amending I.R.C. § 7805(d).
Effective 60 days (six months in the case of unique identifying numbers)
following July 22, 1998, the date of enactment,
- manually generated correspondence from the IRS to a taxpayer must include the name,
telephone number and unique identifying number of an IRS employee the taxpayer may contact
regrading the correspondence,
- any other IRS correspondence or notice to a taxpayer must contain a telephone number that the
taxpayer may contact,
- an IRS employee shall give a taxpayer during a telephone or personal contact the employee's
name and unique identifying number and
- Procedures are to be developed under which, to the extent practicable, one IRS employee will
be assigned to handle a taxpayer's matter until it is resolved.
In addition, effective January 1, 2000, the IRS is to provide Spanish speakers on its helplines and
an option for helpline callers to speak to an IRS employee during normal business hours. Act
Use of Pseudonyms by IRS Employees
In certain circumstances, federal employees may use pseudonyms
"registered" with their supervisors. Effective for requests made after July 22, 1998, the date of
enactment, an IRS employee may use a pseudonym only if adequate justification is provided,
including the protection of personal safety, and the use is approved in advance by the employee's
supervisor. Act § 3706.
Illegal Tax Protestor Designations
Effective July 22, 1998, the date of enactment, the IRS may no longer
designate a taxpayer an "illegal tax protestor" and must remove any such existing designations
from its master file and elsewhere; these removals need not begin before January 1, 1999. The
IRS is permitted to designate taxpayers as nonfilers, but must remove such designation once the
taxpayer has filed income tax returns for two consecutive years and paid all taxes shown on those
returns. Act § 3707.
Effective July 22, 1998, the date of enactment, any person (i.e., a
whistleblower) who otherwise has or had access to any return or return information may disclose
such return or return information to the House Ways and Means Committee, the Senate Finance
Committee or the Joint Committee on Taxation (the "Joint Committee") or to any individual
authorized by one of those committees to receive or inspect any return or return information if such
person (the whistleblower) believes such return or return information may relate to evidence of
possible misconduct, maladministration or taxpayer abuse. Act § 3708 adding I.R.C.
Local IRS Telephone Numbers and Addresses
As soon as practicable, local telephone numbers and addresses of IRS
offices in a particular area are to be listed in a telephone book for that area. Act
Tax Return Preparer Identification
Effective July 22, 1998, the IRS is authorized to develop alternatives to
social security numbers to be provided on returns by tax return preparers who are individuals.
Act § 3710.
Offset of Past Due State Income Tax Obligations
Currently, overpayments of federal income tax may be used to pay overdue
child support and debts owed to federal agencies without the consent of the taxpayer. Effective for
refunds payable after December 31, 1999, the Act includes state income tax debts in this offset
scheme. Upon notification by any state that a taxpayer owes a past due, legally enforceable state
income tax obligation, the IRS may reduce any refund to such taxpayer, pay the past due amount to
the state and notify the state of the taxpayer's address. If there is more than one past due state tax
debt, they are paid in the order accrued. The federal income tax return for the taxable year of the
refund must show an address for the taxpayer within the state seeking the offset. Certain
procedural notice requirements must also be met by the state prior to any offset. Act
§ 3711 adding I.R.C. 6402(e).
Education Tax Credit Reporting
Effective for returns with respect to taxable years beginning after
December 31, 1998, the Act adds the amount of any grant received for the payment of costs of
attendance at an eligible educational institution to the items subject to information reporting in
connection with education tax credits. Act § 3712.
Subtitle I: Studies
Administration of Penalties and Interest
Not later than one year following July 22, 1998, the date of enactment, the
Joint Committee and the Secretary shall each submit to the Senate Finance Committee and the
House Ways and Means Committee a separate study on the administration of the interest and
penalty provisions of the Code by the IRS, making recommendations on ways to simplify penalty
or interest administration and to reduce taxpayer burdens. Act § 3801.
Confidentiality of Tax Return Information
No later than 18 months following July 22, 1998, the date of enactment,
the Joint Committee and the Secretary shall each submit to Congress a separate study, including
legislative proposals, on taxpayer confidentiality. Each study is to examine:
- the present protections for taxpayer privacy,
- any need for third parties to use tax return information,
- whether greater levels of voluntary compliance may be achieved by allowing the public to
know who is legally required to file tax returns but does not file returns,
- the interrelationship of the taxpayer confidentiality provisions of the Code and other federal
privacy statutes, including the Freedom of Information Act,
- the impact on taxpayer privacy of the sharing of income tax return information for purposes of
state and local tax law enforcement and
- whether greater disclosure of information concerning organizations exempt from tax under
section 501 of the Code would be in the public interest. Act § 3802.
No later than one year after July 22, 1998, the date of enactment, the
Secretary and the Commissioner are to submit to Congress a joint study, conducted in consultation
with the Joint Committee, of noncompliance with the tax laws (including willful noncompliance
and noncompliance due to tax law complexity). Act § 3803.
Study of Payments Made for Detection of Underpayments and Fraud
No later than one year following July 22, 1998, the date of enactment, the
Secretary shall conduct a study and report to Congress on the use of section 7623 of the Code,
which authorizes the Secretary to make payments to informants. Act § 3804.
Title IV: Congressional Accountability for the Internal Revenue Service
The Joint Committee will now review and approve requests for
Government Accounting Office ("GAO") investigations of the IRS other than requests by the
chairman of the Joint Committee or a ranking member of any congressional committee or
subcommittee. This provision is intended to eliminate overlapping investigations, to ensure the
GAO has the capability to conduct the investigation and to ensure a focus on areas of primary
importance. Act § 4001 adding I.R.C. § 8021(e).
In addition, for the years 1999 through 2003 there will be an annual joint review of the IRS plans
and budget by the various congressional committees with IRS oversight responsibility. This
review will consider IRS progress in (1) its strategic and business plan (2) improving taxpayer
service and compliance and (3) technology modernization as well as the annual filing season.
Act § 4001 adding I.R.C. § 8021(f). The Joint Committee will report
annually to various committees the results of this review and, if funded, will provide a report each
Congress on the overall federal tax system. Act § 4002 amending I.R.C.
Year 2000 Issues
The IRS is to place high priority on resolving Year 2000 problems and its
efforts to resolve "certain" problems should be fully funded. Act § 4011.
Tax Law Complexity
Beginning in 1999, the IRS will conduct an analysis and provide an annual
report on the sources of complexity in the tax laws including the following areas:
- frequent taxpayer questions,
- common taxpayer errors,
- areas of frequent disagreement over the law,
- major areas where the law is uncertain or there is insufficient published guidance,
- frequent revenue agent errors in interpretation or application of the law,
- impact of recent legislation and
- impact on the number and complexity of forms required and how many taxpayers will be
The annual report is to include recommendations for reducing complexity.
Legislation affecting the Code considered on or after January 1, 1999 will require a "Tax
Complexity Analysis" by the Joint Committee in consultation with the IRS and Treasury. The
analysis is to include the estimated number of affected taxpayers and, if applicable, their income
levels. If determinable, the analysis should also include:
- the impact on existing and need for new forms,
- identification of additional taxpayer recordkeeping,
- estimated costs of compliance,
- the impact on regulatory guidance (new or revised),
- the extent to which taxpayers and the IRS may disagree and
- the impact on the IRS.
Failure to include the analysis will be subject to a point of order in the House, subject to waiver by
majority vote. Act §§ 4021, 4022.
Title V: Additional Provisions
Elimination of 18-Month Holding Period for Special Capital Gains
Property held more than one year (rather than more than 18 months
required by the Taxpayer Relief Act of 1997 (the "1997 Act")) will be eligible for the 10, 20 and 25
percent capital gain tax rates provided for individuals by the 1997 Act. Act § 5001(a)
amending I.R.C. §§ 1(h)(5), 1(h)(6), 1(h)(7)(A)(i), (ii), 1(h)(13), 1223(11),
1223(12), 1235(a). This long-term holding period applies for taxable years ending after
December 31, 1997, except with regard to the special rules applicable to sales of property acquired
from a decedent (I.R.C. § 1223(10)), sales by certain qualified heirs (I.R.C. §
1223(11)) and sales of patents (I.R.C. § 1235), where it applies on and after January 1,
1998. Act § 5001(b).
Meals Exclusion Clarification
If more than half of all meals furnished on the employer's premises by the
employer to its employees are for the convenience of the employer, then all of the meals so
furnished are treated as furnished for the convenience of the employer. The most significant
impact of this provision is that the cost of all of such meals will be fully deductible by the employer
under section 274(n) of the Code. This change applies to taxable years beginning on or after
July 22, 1998, the date of enactment. Act § 5002 adding I.R.C.
Elimination of "Most-Favored-Nation" Terminology
In U.S. trade statutes, the term "most-favored-nation" ("MFN") is changed
to "normal trade relations" to reflect more correctly the nature of the relationship defined which, in
fact, represents ordinary or normal treatment rather than any implied preferential treatment.
Afghanistan, Cuba, Laos, North Korea, Serbia and Montenegro and Vietnam are currently the only
countries which are not treated at least as well as those countries currently designated with MFN
status. Act § 5003.
Title VI: Tax Technical Corrections
Unless specifically mentioned otherwise, all technical corrections to the
1997 Act are effective as if included in the 1997 Act as originally enacted. Act §
Child Credit Provisions of the 1997 Act
Under current law, the earned income credit contains a supplemental child
credit. The Act clarifies the computation of the supplemental child credit which reduces the
allowable credit under the child credit provisions of section 24 of the Code, but which does not
reduce a taxpayer's overall tax credits. Act § 6003.
Education Incentives of the 1997 Act
The Act clarifies that:
- the excise tax under section 4973 of the Code applies to each year that excess contributions
remain in an education IRA,
- a beneficiary of an education IRA must be a life-in-being,
- the excise tax under section 530(d)(4) of the Code will not apply to distributions from an
education IRA which are included in gross income solely because a taxpayer elects the HOPE or
Lifetime Learning credit with respect to the beneficiary,
- in the event of the death of the beneficiary, the balance in an education IRA may be distributed
to any other beneficiary or to the estate of the deceased beneficiary, and a tax-free rollover of the
account will be allowed if any member of the family becomes the new beneficiary,
- expenses taken into account in determining the amount of education IRA distributions to be
excluded from gross income are not entitled to a separate deduction, exclusion or credit under the
- with respect to tax-free rollovers and changes in beneficiaries, the new beneficiary must be
under the age of 30. Act § 6004.
A "qualified education loan" means any indebtedness incurred solely to pay
for qualified higher education expenses; a revolving line of credit will not be considered to be a
qualified education loan unless the line of credit is used solely for qualified higher education
expenses. In addition, only a taxpayer who is required to make interest payments under the loan
may deduct such interest payments as student loan interest. The Treasury Department is authorized
to promulgate regulations regarding the calculation of the 60-month period in the case of
consolidated loans, collapsed loans and loans made before the date of the enactment of the 1997
Act (August 5, 1997) for purposes of determining the deductibility of interest paid on such loans.
Act § 6004. It is expected that the regulations will mirror the provisions of Notice
Enhanced Deduction for Corporate Donations of Computers
The Act clarifies the requirements applicable to organizations to which
computers may be donated and extends the expiration of the enhanced deduction to December 31,
2000. Act § 6004.
Qualified State Tuition Programs
For purposes of a qualified state tuition program, the original beneficiary's
spouse is included within the definition of "a member of the family." Act §
Qualified Zone Academy Bonds
The Act clarifies the treatment of this credit for purposes of the estimated
tax and overpayment rules. Act § 6004.
Savings and Investment Incentives of the 1997 Act
Conversion of IRAs into Roth IRAs
The Act provides that a taxpayer converting an IRA into a Roth IRA may
elect to have the amount converted includible in income in the year of conversion (or the year of
withdrawal if conversion is accomplished by rollover) rather than over a four-year period. In the
event that the tax is spread over a four-year period and amounts are withdrawn before the entire
amount is included in income, the amount withdrawn is included in income (in addition to any
amount required to be included under the four-year spread). The amount prematurely withdrawn is
not subject to a 10 percent recapture tax. However, the amount includible in income cannot exceed
the amount converted.
Ordering rules are adopted to determine the character of withdrawals from IRAs. The five-year
holding period for determining whether distributions from Roth IRAs are qualified distributions
begins with the year in which the contribution (including a rollover contribution) is made. Finally,
the Act clarifies that for purposes of determining the $100,000 adjusted gross income ("AGI") limit
on IRA conversions to Roth IRAs, the conversion amount is not taken into account. However, for
purposes of determining taxable income for the year of conversion, the conversion amount (to the
extent otherwise includible in AGI) is taken into account in determining AGI-based phaseout
amounts. Act § 6005.
Penalty-Free Distributions for Education Expenses and Purchase of First
Hardship distributions from qualified cash or deferred arrangements and
tax-sheltered annuities are not eligible rollover distributions (and are not subject to 20 percent
withholding), applicable to distributions after December 31, 1998. Act § 6005.
Small Business Stock Rollover
The small business stock rollover rules of section 1045 of the Code are
conformed to the provisions of subsections (f) through (k) of section 1202 of the Code. For
example, the benefit of a tax-free rollover with respect to the sale of small business stock by a
partnership will flow through to a partner who is not a corporation if the partner held its
partnership interest at all times that the partnership held the small business stock. The Act does not
limit the types of partners that a partnership may have for the benefits of section 1045 of the Code
to apply to a noncorporate partner. Act § 6005.
The Act clarifies the amount of exclusion permitted for married couples
who are not entitled to the full $500,000 of exclusion on the sale of their principal residence.
Act § 6005.
Alternative Minimum Tax ("AMT") Provisions of the 1997 Act
The regular tax election to use AMT depreciation is conformed to
modifications made to the AMT depreciation by the 1997 Act and the availability of the small
corporation exemption is clarified. Act § 6006.
Estate and Gift Tax Provisions of the 1997 Act
The Act clarifies that allocation of the inflation adjustment for the
generation-skipping transfer tax exemption amount may only be made for transfers made during or
after the calendar year for which the inflation adjustment is made, except that no inflation
adjustment for years after the calendar year in which the transferor dies shall apply to transfers by
such transferor. In addition,
- The Act coordinates the unified credit and the qualified family-owned business exclusion;
- The rules governing the revaluation of gifts are clarified;
- The Act clarifies that interests eligible for the family-owned business exclusion must be passed
to a qualified heir;
- The Act converts the family-owned business exclusion to a deduction;
- The Act clarifies the "active trade or business" requirement for the family-owned business
deduction and specifies that an interest in property will not be disqualified, in whole or in part, as
an interest in a family-owned business where the decedent leases that interest on a net cash basis to
a member of the decedent's family who uses the leased property in an active business and that the
rental income derived by the decedent from such net cash lease is not treated as personal holding
company income for purposes of section 2057 of the Code; and
- The treatment of post-mortem conservation contributions is clarified. Act §
Miscellaneous Provisions of the 1997 Act
The Act (1) clarifies the requirements for the reduced rate of tax on hard
ciders, (2) clarifies the treatment of the tax paid by electing publicly traded partnerships, (3)
modifies the depreciation limitation for electric vehicles and (4) modifies the definition of
"non-Amtrak State" for purposes of the Amtrak net operating loss provision. Act §
Revenue-Increase Provisions of the 1997 Act
The Act clarifies that the positions in straight debt exception to the
constructive sales rules does not apply to positions that are convertible into stock. It coordinates
the basis adjustment rules under section 1059 of the Code with respect to extraordinary dividends
with similar rules in the consolidated return regulations so that section 1059 cannot cause basis to
be adjusted to the extent that the consolidated return regulations require that an excess loss be
created. The definition of "control" for purposes of sections 351, 368(a)(1)(D) and 368(a)(2)(H)
of the Code now explicitly disregards a subsequent disposition of stock by shareholders receiving
such stock in a section 355 transaction.
The Act authorizes the Treasury Department to promulgate regulations which prevent multiple
inclusion of any item due to the applicability of section 304 of the Code to a transaction involving a
foreign corporation and clarifies the treatment of prepaid telephone cards for telephone excise tax
Section 901(k) of the Code generally denies a shareholder foreign tax credits normally available
with respect to a dividend if the shareholder has not held the stock for a minimum period during
which it is not protected form risk of loss. The Act clarifies that the exception to the general rule
under section 901(k)(4) of the Code is only available for dividends received on stock that the
shareholder holds in its capacity as a dealer in securities. The Act modifies the interaction between
section 901(k) and foreign tax credit flow-through rules for regulated investment companies
("RICs") and clarifies:
- the treatment of additional covered lives under a master contract for purposes of the effective
date for company owned life insurance,
- the definition of wages under the earned income credit,
- the allocation of basis with respect to properties distributed by a partnership and
- the rules by which aviation grade kerosene may be removed for use as aviation fuel without
payment of the highway excise tax. Act § 6010.
Foreign Provisions of the 1997 Act
The Act provides that stock in a passive foreign investment company
("PFIC") constructively owned by an optionholder will not be eligible for the PFIC and controlled
foreign corporation ("CFC") overlap provisions unless the stock is owned within the meaning of
section 958(a) of the Code by a United States shareholder who is not exempt from tax. The Act
clarifies the application of the PFIC mark-to-market rules with respect to RICs and the interaction
between the PFIC and other mark-to-market regimes is clarified. Finally, the Treasury Department
is authorized to provide guidance with respect to information reporting by CFCs and foreign
partnerships under section 6038 of the Code. Act § 6011.
Simplification Provisions of the 1997 Act
The Act specifies that distributions from a real estate investment trust
("REIT") are deemed to come first from any non-REIT earnings. Under present law, partnerships
with more than 100 partners are required to file returns on magnetic media and a penalty is imposed
in the case of failure to meet the magnetic media requirements. The Act clarifies that the penalty
(under section 6724(c) of the Code) applies to the extent such a failure occurs with respect to more
than 100 information returns. Act § 6012
Estate, Gift and Trust Simplification Provisions of the 1997 Act
Provisions are added that clarify the treatment of revocable trusts for
purposes of the generation-skipping transfer tax and authorize the promulgation of regulations for
simplified reporting of funeral trusts terminated during the taxable year. Act §
Technical Corrections to the Taxpayer Bill of Rights 2 (1996)
In the case of a deficiency with respect to a joint return of individuals who
are no longer married or no longer living in the same household, under certain circumstances the
IRS may disclose the return to one of the individuals. Effective July 22, 1998, the date of
enactment, the Act clarifies that this disclosure may be made to the duly authorized attorney-in-fact
of the person making the disclosure request. Act § 6019.
Title VII: Revenue Provisions
Timing of Deduction for Deferred Compensation
For purposes of determining under section 404 of the Code whether (1)
compensation of an employee is deferred compensation and (2) when deferred compensation is
paid, actual receipt by the employee is required before the amount is treated as paid or received.
Act § 7001 adding I.R.C. § 404(a)(11). This change applies for taxable years
ending after July 22, 1998, the date of enactment, to all covered deferred compensation, including
vacation and severance pay, and is intended to overrule Schmidt Baking where the
employer funded vacation and severance pay with a letter of credit, causing the income to be
includable in income of the employees and therefore deductible by the employer. Act
Freeze of Grandfathered Status of Stapled REITs
A "stapled REIT" is a REIT, the stock of which is traded
with the stock of another entity as a single investment unit. The Tax Reform Act of 1984 (the
"1984 Act") required that in applying four tests for REIT status all so-called stapled entities are
treated as one entity. The four tests relate to (1) organizational structure, (2) source of income,
(3) nature of assets and (4) distribution of income. The grandfather rule excepted REITs that were
part of a group of stapled entities which included a REIT on June 30, 1983.
The Act has frozen this grandfather rule by rendering it applicable only to property interests held on
March 26, 1998 for certain purposes including the "75 percent" and "95 percent" requirements of
the REIT source of income test. A stapled group includes an existing stapled REIT, a stapled
entity or a subsidiary or partnership in which a 10 percent or greater interest is owned by an
existing stapled REIT or stapled entity. For partnership interests the ownership test is measured by
the greater of the interest in the partnership's assets or profits and for interests in corporations the
test is the greater of vote or value. Property interests acquired by the stapled group which are
treated as activities and income of the REIT for the source of income tests are, subject to several
exceptions and special rules, interests acquired by a member of the group after March 26, 1998.
Act § 7002.
Certain Trade Receivables Ineligible for Mark-to-Market
Effective for taxable years ending after July 22, 1998, the date of
enactment, "nonfinancial customer paper" is excluded from mark-to-market treatment under section
475 of the Code. Nonfinancial customer paper is any note, bond, debenture or other evidence of
indebtedness which arises out of the sale of nonfinancial goods or services by a person whose
principal activity is selling or providing nonfinancial goods or services and which is held by such
person or a related party at all times. Act § 7003 adding I.R.C.
§§ 475(c)(4), 475(g)(3).
Exclusion of Minimum Required Distributions from AGI for Roth IRA
Only taxpayers having AGI of no more than
$100,000 may convert an IRA into a Roth IRA. The Act excludes from AGI, but solely for this
purpose, minimum required distributions from IRAs. This change applies to taxable years
beginning after December 21, 2004. Act § 7004 amending I.R.C.
The only provisions of the Act subject to presidential line item veto are
(1) section 3105 (relating to administrative appeal of adverse IRS determination of tax-exempt
status of bonds) and (2) section 3445(c) (relating to state fish and wildlife permits). Act
§ 8001. The presidential line item veto was declared unconstitutional by the U.S.
Supreme Court in Clinton v. The City of New York, __ U.S. __, 118 S.Ct. 2091 (Jun.
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