Taxpayer Relief Act of 1997 p1
Taxpayer Relief Act of 1997 p2
Taxpayer Relief Act of 1997 p3
Taxpayer Relief Act of 1997 p4
Taxpayer Relief Act of 1997 p5
Taxpayer Relief Act of 1997 p6
Taxpayer Relief Act of 1997 p7
Taxpayer Relief Act of 1997 p8
Revenue Reconciliation Act p1
Revenue Reconciliation Act p2
Revenue Reconciliation Act p3
Revenue Reconciliation Act p4
Revenue Reconciliation Act p5
Revenue Reconciliation Act p6
Revenue Reconciliation Act p7
Revenue Reconciliation Act p8
Revenue Reconciliation Act p9
Revenue Reconciliation Act p10
RRA 1998 Conference Report p1
RRA 1998 Conference Report p2
RRA 1998 Conference Report p3
RRA 1998 Conference Report p4
RRA 1998 Conference Report p5
RRA 1998 Conference Report p6
RRA 1998 Conference Report p7
Changes in Existing Law
RRA 1998 Senate Report p1
RRA 1998 Senate Report p2
RRA 1998 Senate Report p3
RRA 1998 Senate Report p4
RRA 1998 Senate Report p5
RRA 1998 Senate Report p6
RRA 1998 Senate Report p7
RRA 1998 Senate Report p8
RRA 1998 House Ways Report p1
RRA 1998 House Ways Report p2
RRA 1998 House Ways Report p3
RRA 1998 House Ways Report p4
RRA 1998 House Ways Report p5
RRA 1998 House Ways Report p6
Report on HR 4297
Tax Reform Act of 2005
Tax Relief Act of 2005

E. Protections for Taxpayers Subject to Audit or Collection Activities

a. Due Process i. Due process in IRS collection actions (sec. 3401 of the bill and new secs. 6320 and 6330 of the Code)

Present Law Levy is the IRS 's administrative authority to seize a taxpayer's property to pay the taxpayer's tax liability. The IRS is entitled to seize a taxpayer's property by levy if the Federal tax lien has attached to such property. The Federal tax lien arises automatically where (1) a tax assessment has been made; (2) the taxpayer has been given notice of the assessment stating the amount and demanding payment; and (3) the taxpayer has failed to pay the amount assessed within ten days after the notice and demand.

The IRS may collect taxes by levy upon a taxpayer's property or rights to property (including accrued salary and wages) if the taxpayer neglects or refuses to pay the tax within 10 days after notice and demand that the tax be paid. Notice of the IRS 's intent to collect taxes by levy must be given no less than 30 days (90 days in the case of a life insurance contract) before the day of the levy. The notice of levy must describe the procedures that will be used, the administrative appeals available to the taxpayer and the procedures relating to such appeals, the alternatives available to the taxpayer that could prevent levy, and the procedures for redemption of property and release of liens.

The effect of a levy on salary or wages payable to or received by a taxpayer is continuous from the date the levy is first made until it is released.

If the IRS district director finds that the collection of any tax is in jeopardy, collection by levy may be made without regard to either notice period. A similar rule applies in the case of termination assessments.

Reasons for Change

The Committee believes that taxpayers are entitled to protections in dealing with the IRS that are similar to those they would have in dealing with any other creditor. Accordingly, the Committee believes that the IRS should afford taxpayers adequate notice of collection activity and a meaningful hearing before the IRS deprives them of their property. When collection of tax is in jeopardy, the Committee believes it is appropriate to provide notice and a hearing promptly after the deprivation of property. The Committee believes that following procedures designed to afford taxpayers due process in collections will increase fairness to taxpayers.

Explanation of Provision

The provision establishes formal procedures designed to insure due process where the IRS seeks to collect taxes by levy (including by seizure). The due process procedures also apply after the Federal tax lien attaches, but before the notice of the Federal tax lien has been given to the taxpayer.

As under present law, notice of the intent to levy must be given at least 30 days (90 days in the case of a life insurance contract) before property can be seized or salary and wages garnished. During the 30-day (90-day) notice period, the taxpayer may demand a hearing to take place before an appeals officer who has had no prior involvement in the taxpayer's case. If the taxpayer demands a hearing within that period, the proposed collection action may not proceed until the hearing has concluded and the appeals officer has issued his or her determination.

During the hearing, the IRS is required to verify that all statutory, regulatory, and administrative requirements for the proposed collection action have been met. IRS verifications are expected to include (but not be limited to) showings that:

(1) the revenue officer recommending the collection action has verified the taxpayer's liability;

(2) the estimated expenses of levy and sale will not exceed the value of the property to be seized;

(3) the revenue officer has determined that there is sufficient equity in the property to be seized to yield net proceeds from sale to apply to the unpaid tax liabilities; and

(4) with respect to the seizure of the assets of a going business, the revenue officer recommending the collection action has thoroughly considered the facts of the case, including the availability of alternative collection methods, before recommending the collection action.

The taxpayer (or affected third party) is allowed to raise any relevant issue at the hearing. Issues eligible to be raised include (but are not limited to):

(1) challenges to the underlying liability as to existence or amount;

(2) appropriate spousal defenses;

(3) challenges to the appropriateness of collection actions; and

(4) collection alternatives, which could include the

posting of a bond, substitution of other assets, an

installment agreement or an offer-in-compromise. Once the taxpayer has had a hearing with respect to an issue, the taxpayer would not be permitted to raise the same issue in another hearing.

The determination of the appeals officer is to address whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary. A proposed collection action should not be approved solely because the IRS shows that it has followed appropriate procedures.

The taxpayer may contest the determination of the appellate officer in Tax Court by filing a petition within 30 days of the date of the determination. The Tax Court is expected to review the appellate officer's determination for abuse of discretion and also may consider procedural issues, as under present law. The IRS may not take any collection action pursuant to the determination during such 30 day period or while the taxpayer's contest is pending in Tax Court.

IRS Appeals would retain jurisdiction over its determinations. IRS Appeals could enter an order requiring the IRS collection division to adhere to the original determination. In addition, the taxpayer would be allowed to return to IRS Appeals to seek a modification of the original determination based on any change of circumstances.

In the case of a continuous levy, the due process procedures would apply to the original imposition of the levy. Except in jeopardy and termination cases, continuous levy would not be allowed to begin without notice and an opportunity for a hearing. A determination allowing the continuous levy to proceed that is entered at the conclusion of a hearing would be subject to post-determination adjustment on application by the taxpayer. Thus, taxpayers would have the right to have IRS Appeals review any continuous levy and take any changes in circumstances into account.

This provision does not apply in the case of jeopardy and termination assessments. Jeopardy and termination assessments would be subject to post-seizure review as part of the Appeals determination hearing as well as through any existing judicial procedure. A jeopardy or termination assessment must be approved by the IRS District Counsel responsible for the case. Failure to obtain District Counsel approval would render the jeopardy or termination assessment void.

Effective Date

The due process procedures apply to collection actions initiated more than six months after the date of enactment.

b. Examination Activities

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

Present Law

A common law privilege of confidentiality exists for communications between an attorney and client with respect to the legal advice the attorney gives the client. Communications protected by the attorney-client privilege must be based on facts of which the attorney is informed by the taxpayer, without the presence of strangers, for the purpose of securing the advice of the attorney. The privilege may not be claimed where the purpose of the communication is the commission of a crime or tort. The taxpayer must either be a client of the attorney or be seeking to become a client of the attorney.

The privilege of confidentiality applies only where the attorney is advising the client on legal matters. It does not apply in situations where the attorney is acting in other capacities. Thus, a taxpayer may not claim the benefits of the attorney-client privilege simply by hiring an attorney to perform some other function. For example, if an attorney is retained to prepare a tax return, the attorney-client privilege will not automatically apply to communications and documents generated in the course of preparing the return.

The privilege of confidentiality also does not apply where an attorney that is licensed to practice another profession is performing such other profession. For example, if a taxpayer retains an attorney who is also licensed as a certified public accountant (CPA), the taxpayer may not assert the attorney-client privilege with regard to communications made and documents prepared by the attorney in his role as a CPA.

The attorney-client privilege is limited to communications between taxpayers and attorneys. No equivalent privilege is provided for communications between taxpayers and other professionals authorized to practice before the Internal Revenue Service, such as accountants or enrolled agents.

Reasons for Change

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

This document is divided into multiple parts. To reach other parts, please use READ. You have reached Part 02

Explanation of Provision

The provision extends the present law attorney-client privilege of confidentiality to tax advice that is furnished to a client-taxpayer (or potential client-taxpayer) by any individual who is authorized under Federal law to practice before the IRS if such practice is subject to regulation under section 330 of Title 31, United States Code. Individuals subject to regulation under section 330 of Title 31, United States Code include attorneys, certified public accountants, enrolled agents and enrolled actuaries. Tax advice means advice that is within the scope of authority for such individual's practice with respect to matters under Title 26 (the Internal Revenue Code). The privilege of confidentiality may be asserted in any noncriminal tax proceeding before the IRS , as well as in noncriminal tax proceedings in the Federal Courts where the IRS is a party to the proceeding.

The provision allows taxpayers to consult with other qualified tax advisors in the same manner they currently may consult with tax advisors that are licensed to practice law. The provision does not modify the attorney-client privilege of confidentiality, other than to extend it to other authorized practitioners. The privilege established by the provision applies only to the extent that communications would be privileged if they were between a taxpayer and an attorney. Accordingly, the privilege does not apply to any communication between a certified public accountant, enrolled agent, or enrolled actuary and such individual's client (or prospective client) if the communication would not have been privileged between an attorney and the attorney's client or prospective client. For example, information disclosed to an attorney for the purpose of preparing a tax return is not privileged under present law. Such information would not be privileged under the provision whether it was disclosed to an attorney, certified public accountant, enrolled agent or enrolled actuary.

The privilege granted by the provision may only be asserted in noncriminal tax proceedings before the IRS and in the Federal Courts with regard to such noncriminal tax matters in proceedings where the IRS is a party. The privilege may not be asserted to prevent the disclosure of information to any regulatory body other than the IRS . The ability of any other regulatory body, including the Securities and Exchange Commission ( SEC ), to gain or compel information is unchanged by the provision. No privilege may be asserted under this provision by a taxpayer in dealings with such other regulatory bodies in an administrative or court proceeding.

Effective Date

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

ii. Limitation on financial status audit techniques (sec. 3412 of the bill and sec. 7602 of the Code)

Present Law

The Secretary is authorized and required to make the inquiries and determinations necessary to insure the assessment of Federal income taxes. For this purpose, any reasonable method may be used to determine the amount of Federal income tax owed. The courts have upheld the use of financial status and economic reality examination techniques to determine the existence of unreported income in appropriate circumstances.

Reasons for Change

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

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

iii. Software trade secrets protection (sec. 3413 of the bill and new sec. 7612 of the Code)

Present Law

The Secretary of the Treasury is authorized to examine any books, papers, records, or other data that may be relevant or material to an inquiry into the correctness of any Federal tax return. The Secretary may issue and serve summonses necessary to obtain such data, including summonses on certain third-party record keepers. There are no specific statutory restrictions on the ability of the Secretary to demand the production of computer records, programs, code or similar materials.

Reasons for Change

The Committee believes that the intellectual property rights of the developers and owners of computer programs should be respected. The Committee is concerned that the examination of computer programs and source code by the IRS could lead to the diminution of those rights through the inadvertent disclosure of trade secrets and believes that special protection against such inadvertent disclosure should be established.

The Committee also believes that the indiscriminate examination of computer source code by the IRS is inappropriate. Accordingly, the Committee believes that a summons for the production of certain computer source code should only be issued where the IRS is not otherwise able to ascertain through reasonable efforts the manner in which a taxpayer has arrived at an item on a return, identifies with specificity the portion of the computer source code it seeks to examine, and determines that the need to see the source code outweighs the risk of unauthorized disclosure of trade secrets.

Explanation of Provision

Discovery of computer source code

The provision generally prohibits the Secretary from issuing a summons in a Federal tax matter for any portion of computer source code. Exceptions to the general rule are provided for inquiries into any criminal offense connected with the administration or enforcement of the internal revenue laws and for computer software source code that was developed by the taxpayer or a related person for internal use by the taxpayer or related person. Computer software source code is considered to have been developed for internal use by the taxpayer or a related person if the software is primarily used in the taxpayer or related person's trade or business, as opposed to being held for sale or license to others. Software is considered to be used in a trade or business if it is used in the provision of services to others. It is anticipated that software that was originally developed for internal use by the taxpayer or a related person will continue to be subject to the exception, even if the software is later transferred to another. For example, software may have originally been developed by the taxpayer to administer the taxpayer's employee benefits system. If that function and the software necessary to perform it is later transferred to an unrelated third party, the software would continue to be subject to the exception.

In addition, the prohibition of the general rule would not apply, and the Secretary would be allowed to summons computer source code if the Secretary: (1) is unable to otherwise reasonably ascertain the correctness of an item on a return from the taxpayer's books and records, or the computer software program and any associated data; (2) identifies with reasonable specificity the portion of the computer source code to be used to verify the correctness of the item; and (3) determines that the need for the source code outweighs the risks of disclosure of the computer source code. No inference is intended as to whether software is included in the definition of a taxpayer's books and records.

It is expected that the Secretary will make a good faith and significant effort to ascertain the correctness of an item prior to seeking computer source code. The portion of the computer source code to be used would be considered identified with reasonable specificity where, for example, the Secretary requests the portion of the code that is used to determine a particular item on the return, that otherwise is necessary to the determination of an item on the return, or that implements an accounting or other method.

The Committee is aware that the refusal of the taxpayer or the owner of the software to cooperate could, in certain situations, prevent the Secretary from establishing the factors necessary to support the summons of computer source code. Accordingly, the requirement that the Secretary be unable to otherwise reasonably ascertain the correctness of an item on a return from the taxpayer's books and records, or from the computer software program and any associated data, and the requirement that the Secretary have identified with reasonable specificity the portion of the computer source code requested, will be deemed to be satisfied where (1) the Secretary makes a good faith determination that it is not feasible to determine the correctness of the return item in question without access to the computer software program and associated data, (2) the Secretary makes a formal request for such program and any data from the taxpayer and requests such program from the owner of the source code after reaching such determination, and (3) the Secretary has not received such program and data within 180 days of making the formal request. In the case of requests to the taxpayer, the Committee expects that a formal request will take the form of an Information Document Request ( IDR ), summons, or similar document. The Committee intends that the Secretary actively pursue the recovery of such program and any data from the taxpayer before seeking to have the normal requirements deemed satisfied under this rule.

Additional protections against disclosure of computer software and source code

The provision establishes a number of protections against the disclosure and improper use of trade secrets and confidential information incident to the examination by the Secretary of any computer software program or source code that comes into the possession or control of the Secretary in the course of any examination with respect to any taxpayer. These protections include the following:

(1) Such software or source code may be examined only in connection with the examination of the taxpayer's return with regard to which it was received. It is expected that the taxpayer will be informed of any alternative data or settings to be used in the examination of the software. However, the Committee does not intend to provide the taxpayer with the right to monitor the examination of the software by the IRS on a key stroke by key stroke or similar basis.

(2) Such software or source code must be maintained in a secure area.

(3) Such source code may not be removed from the owner's place of business without the owner's consent unless such removal is pursuant to a court order. If the owner does not consent to the removal of source code from its place of business, the owner must make available the necessary equipment to review the source code. The owner shall have the right to require the use of equipment that is configured to prevent electronic communication outside the owner's place of business.

(4) Such software or source code may not be decompiled or disassembled.

(5) Such software or source code may only be copied as necessary to perform the specific examination. The owner of the software must be informed of any copies that are made, such copies must be numbered, and at the conclusion of the examination and any related court proceedings, all such copies must be accounted for and returned to the owner, permanently deleted, or destroyed. The Secretary must provide the owner of such software or source code with the names of any individuals who will have access to such software or source code. Source code may be copied (by the use of a scanner or otherwise) from written to machine readable form. However, any such machine readable copies shall be treated as separate copies and must be numbered, accounted for and returned or destroyed at the conclusion of the examination.

(6) If an individual who is not an officer or employee of the U.S. Government will examine the software or source code, such individual must enter into a written agreement with the Secretary that such individual will not disclose such software or source code to any person other than authorized employees or agents of the Secretary at any time, and that such individual will not participate in the development of software that is intended for a similar purpose as the summoned software for a period of two years.

Computer source code is the code written by a programmer using a programming language that is comprehensible to an appropriately trained person, is not machine readable, and is not capable of directly being used to give instructions to a computer. Computer source code also includes any related programmer's notes, design documents, memoranda and similar documentation and customer communications regarding the operation of the program (other than communications with the taxpayer or any person related to the taxpayer).

The Secretary's determination may be contested in any proceeding to enforce the summons, by any person to whom the summons is addressed. In any such proceeding, the court may issue any order that is necessary to prevent the disclosure of confidential information, including (but not limited to) the enforcement of the protections established by this provision.

Criminal penalties are provided where any person willfully divulges or makes known software that was obtained (whether or not by summons) for the purpose of examining a taxpayer's return in violation of this provision.

Effective Date

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

iv. Threat of audit prohibited to coerce tip reporting alternative commitment agreements (sec. 3414 of the bill)

Present Law

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

Reasons for Change

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

Explanation of Provision

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

Effective Date

The provision is effective on the date of enactment.

v. Taxpayers allowed motion to quash all third-party summonses (sec. 3415 of the bill and sec. 7609(a) of the Code)

Present Law

When the IRS issues a summons to a "third-party recordkeeper" relating to the business transactions or affairs of a taxpayer, Code section 7609 requires that notice of the summons be given to the taxpayer within three days by certified or registered mail. The taxpayer is thereafter given up to 23 days to begin a court proceeding to quash the summons. If the taxpayer does so, third-party recordkeepers are prohibited from complying with the summons until the court rules on the taxpayer's petition or motion to quash, but the statute of limitations for assessment and collection with respect to the taxpayer is stayed during the pendency of such a proceeding. Third-party recordkeepers are generally persons who hold financial information about the taxpayer, such as banks, brokers, attorneys, and accountants.

Reasons for Change

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

Explanation of Provision

The provision generally expands the current "third-party recordkeeper" procedures to apply to summonses issued to persons other than the taxpayer. Thus, the taxpayer whose liability is being investigated receives notice of the summons and is entitled to bring an action in the appropriate U.S. District Court to quash the summons. As under the current third-party recordkeeper provision, the statute of limitations on assessment and collection is stayed during the litigation, and certain kinds of summonses specified under current law are not subject to these requirements. No inference is intended with respect to the applicability of present law to summonses to the taxpayer or the scope of the authority to summons testimony, books, papers, or other records.

Effective Date

The provision is effective for summonses served after the date of enactment.

vi. Service of summonses to third-party recordkeepers permitted by mail (sec. 3416 of the bill and sec. 7603 of the Code)

Present Law

Code section 7603 requires that a summons shall be served "by an attested copy delivered in hand to the person to whom it is directed or left at his last and usual place of abode." By contrast, if a third-party recordkeeper summons is served, section 7609 permits the IRS to give the taxpayer notice of the summons via certified or registered mail. Moreover, Rule 4 of the Federal Rules of Civil Procedure permits service of process by mail even in summons enforcement proceedings.

Reasons for Change

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

Explanation of Provision

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

Effective Date

The provision is effective for summonses served after the date of enactment.

vii. Prohibition on IRS contact of third parties without taxpayer pre-notification (sec. 3417 of the bill and sec. 7602 of the Code)

Present Law

Third parties may be contacted by the IRS in connection with the examination of a taxpayer or the collection of the tax liability of the taxpayer. The IRS has the right to summon third-party recordkeepers under Code section 7609. In general, the taxpayer must be notified of the service of summons on a third party within three days of the date of service (sec. 7609(a)). The IRS also has the right to seize property of the taxpayer that is held in the hands of third parties (sec. 6331(a)). Except in jeopardy situations, the Internal Revenue Manual provides that IRS will personally contact the taxpayer and inform the taxpayer that seizure of the asset is planned.

Reasons for Change

The Committee believes that taxpayers should be notified before the IRS contacts third parties regarding examination or collection activities with respect to the taxpayer. Such contacts may have a chilling effect on the taxpayer's business and could damage the taxpayer's reputation in the community. Accordingly, the Committee believes that taxpayers should have the opportunity to resolve issues and volunteer information before the IRS contacts third parties.

Explanation of Provision

The provision requires the IRS to notify the taxpayer before contacting third parties regarding examination or collection activities (including summonses) with respect to the taxpayer. Contacts with government officials relating to matters such as the location of assets or the taxpayer's current address are not restricted by this provision. The provision does not apply to criminal tax matters, if the collection of the tax liability is in jeopardy, or if the taxpayer authorized the contact.

Effective Date

The provision is effective for contacts made after 180 days after the date of enactment.

c. Collection Activities

i. Approval process for liens, levies, and seizures (sec. 3421 of the bill)

Present Law

Supervisory approval of liens, levies or seizures is only required under certain circumstances. For example, a levy on a taxpayer's principal residence is only permitted upon the written approval of the District Director or Assistant District Director (sec. 6334(e)).

Reasons for Change

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

Explanation of Provision

The provision requires the IRS to implement an approval process under which any lien, levy or seizure would be approved by a supervisor, who would review the taxpayer's information, verify that a balance is due, and affirm that a lien, levy or seizure is appropriate under the circumstances. Circumstances to be considered include the amount due and the value of the asset. Failure to follow such procedures should result in disciplinary action against the supervisor and/or revenue officer.

In addition, the Treasury Inspector General for Tax Administration is required to collect information on the approval process and annually report to the tax-writing committees.

Effective Date

The provision is effective for collection actions commenced after date of enactment.

ii. Modifications to certain levy exemption amounts (sec. 3431 of the bill and sec. 6334 of the Code)

Present Law

The Code authorizes the IRS to levy on all non-exempt property of the taxpayer. Property exempt from levy is described in section 6334. Section 6334(a)(2) exempts from levy up to $2,500 in value of fuel, provisions, furniture, and personal effects in the taxpayer's household. Section 6334(a)(3) exempts from levy up to $1,250 in value of books and tools necessary for the trade, business or profession of the taxpayer.

Reasons for Change

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

Explanation of Provision

The provision increases the value of personal effects exempt from levy to $10,000 and the value of books and tools exempt from levy to $5,000. These amounts are indexed for inflation.

Effective Date

The provision is effective for collection actions taken after the date of enactment.

iii. Release of levy upon agreement that amount is uncollectible (sec. 3432 of the bill and sec. 6343 of the Code)

Present Law

Some have contended that the IRS does not release a wage levy immediately upon receipt of proof that the taxpayer is unable to pay the tax, but instead, the IRS levies on one period's wage payment before releasing the levy.

Reasons for Change

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

Explanation of Provision

The IRS is required to immediately release a wage levy upon agreement with the taxpayer that the tax is not collectible.

Effective Date

The provision is effective for levies imposed after date of enactment.

iv. Levy prohibited during pendency of refund proceedings (sec. 3433 of the bill and sec. 6331 of the Code)

Present Law

The IRS is prohibited from making a tax assessment (and thus prohibited from collecting payment) with respect to a tax liability while it is being contested in Tax Court. However, the IRS is permitted to assess and collect tax liabilities during the pendency of a refund suit relating to such tax liabilities, under the circumstances described below.

Generally, full payment of the tax at issue is a prerequisite to a refund suit. However, if the tax is divisible (such as employment taxes or the trust fund penalty under Code section 6672), the taxpayer need only pay the tax for the applicable period before filing a refund claim. Most divisible taxes are not within the Tax Court's jurisdiction; accordingly, the taxpayer has no pre-payment forum for contesting such taxes. In the case of divisible taxes, it is possible that the taxpayer could be properly under the refund jurisdiction of the District Court or the U.S. Court of Federal Claims and still be subject to collection by levy with respect to the entire amount of the tax at issue. The IRS 's policy is generally to exercise forbearance with respect to collection while the refund suit is pending, so long as the interests of the Government are adequately protected (e.g., by the filing of a notice of Federal tax lien) and collection is not in jeopardy. Any refunds due the taxpayer may be credited to the unpaid portion of the liability pending the outcome of the suit.

Reasons for Change

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

Explanation of Provision

The provision requires the IRS to withhold collection by levy of liabilities that are the subject of a refund suit during the pendency of the litigation. This will only apply when refund suits can be brought without the full payment of the tax, i.e., in the case of divisible taxes. Collection by levy would be withheld unless jeopardy exists or the taxpayer waives the suspension of collection in writing (because collection will stop the running of interest and penalties on the tax liability). This provision will not affect the IRS 's ability to collect other assessments that are not the subject of the refund suit, to offset refunds, to counterclaim in a refund suit or related proceeding, or to file a notice of Federal tax lien. The statute of limitations on collection is stayed for the period during which the IRS is prohibited from collecting by levy.

Effective Date

The provision is effective for refund suits brought with respect to tax years beginning after December 31, 1998 .