divorce by the taxpayer. However, given the capabilities of the existing computer system, it would impose substantial costs on the IRS to require it to search its files each time a notice of deficiency is issued to spouses who have filed a joint return to determine whether the spouses have subsequently filed under separate addresses. These costs would be borne by all taxpayers. Further, if such notification is mandated by statute, it would provide a basis for invalidating deficiency notices, to the potential detriment of the spouse who receives notice and would consequently become the sole source of payment. Because it is in the interest of IRS to notify both parties to a joint return of a deficiency notice wherever feasible, the IRS will begin providing notice to both parties as soon as modernization of its computer system makes it feasible to do so.

11.

Section 402 Disclosure of Collection Activities

Current law. Under sections 6103 (e) (1) (B) and (e) (7), IRS may disclose "return information" to either spouse that has joined in filing a joint return, even if the spouses are divorced or separated at the time of disclosure. Return information includes information concerning collection of tax liabilities.

Proposal. If IRS has assessed a deficiency for a joint return, the IRS would have the discretionary authority, upon the written request of one of the spouses (or former spouses), to disclose whether the IRS had attempted to collect the assessed deficiency from the other spouse (or former spouse), the general nature of any such collection activities and the amount of the deficiency collected from the other spouse (or former spouse).

Administration position. The Administration supports this provision. Although we believe such disclosure already is authorized under current law, this proposal will make explicit the IRS's disclosure authority in cases relating to separated or divorced spouses. We also are in the process of reviewing our procedures with respect to such disclosure to ensure that the procedures are adequate and are being followed correctly.

12. Section 403 Joint Return May Be Made After Separate Returns Without Full Payment of Tax

Current Law. Married taxpayers who file separate returns for a taxable year in which they are entitled to file a joint return may elect to file a joint return after the time for filing the original return has expired. The election to refile on a joint basis may be made only if the entire amount of tax shown as due on the joint return is paid in full by the time the joint return is filed.

Proposal. The requirement that the tax be paid in full by the time the subsequent joint return is filed would be repealed.

Administration position. The Administration supports this provision. Not all taxpayers are able to pay the full amount owed on their returns by the filing deadline. In such circumstances, the IRS encourages the taxpayer to pay the tax as soon as possible or enter into an installment agreement with the Collection Division. However, taxpayers who file separate returns and subsequently determine that their tax liability would have been less if they had filed a joint return are precluded from reducing their tax liability by filing jointly if they are unable to pay the entire amount of the joint return liability. This restriction is unfair to taxpayers experiencing financial difficulties, particularly because there generally is a 10-year

period for the collection of taxes, while the election to file an amended return must be made within three years of the due date for filing the original tax return.

13.

Section 404 Representation of Absent, Divorced or
Separated Spouse by Other Spouse

Current law. A taxpayer that has joined in the filing of a joint return may represent the taxpayer's spouse with respect to a deficiency assessed for the taxable year to which the return applies. Nonetheless, current IRS procedures allow each spouse to separately appeal the statutory notice of deficiency.

Proposal. A taxpayer would not be able to represent a separated or former spouse in an audit of a joint tax return without first obtaining the written authorization of the separated or divorced spouse.

Administration position.

The Administration does not oppose this provision, subject to modification. The provision would need to provide appropriate safeguards, including for example a requirement that the IRS be notified in writing that the spouses have separated or divorced. The provision also should preclude a spouse from delaying or obstructing an audit by withholding consent and should provide that a lack of consent would not invalidate a deficiency notice.

Title V- Collection Activities

14. Section 501 - Notice of Proposed Deficiency

Current law. The IRS generally issues a notice of proposed deficiency prior to issuing a notice of deficiency. The notice of proposed deficiency, commonly referred to as the "30-day letter," offers a taxpayer the opportunity for review of the case by the IRS Appeals Office. The IRS is not required to issue a 30-day letter, but generally does unless the statute of limitations on assessment will expire within six months. 30-day letter is not issued and the taxpayer files a petition in the Tax Court, the taxpayer is permitted to have the case reviewed by Appeals after it is docketed.

If a

Proposal. The IRS would be required to issue a notice of proposed deficiency in every case (other than jeopardy assessment cases) unless the statute of limitations on assessment would expire within six months. If the statute of limitation would expire within six months, the IRS would not be required to issue a notice of proposed deficiency unless the taxpayer extends the statute of limitations.

We

and

Administration position. We oppose this provision. believe that the current system offers taxpayers ample opportunity for administrative and judicial review of a tax case. Although the proposal would generally reflect current IRS policy, codifying this policy would allow taxpayers to challenge potentially invalidate otherwise valid deficiency notices, and the general taxpaying public would bear the resulting burden. We do not believe that the validity of a deficiency notice should depend on the issuance of a 30-day letter.

15.

Section 502

Modifications to Lien and Levy Provisions

Current law. To protect the priority of a tax lien, the IRS must file a notice of lien in the public record. The IRS has discretion in filing such a notice, but may withdraw a filed

notice only if the notice (and the underlying lien) was erroneously filed or if the underlying lien has been paid, bonded or become unenforceable. The IRS is authorized to return leviedupon property to a taxpayer only when the taxpayer has overpaid its liability for tax, interest and penalty. In any event, certain property of a taxpayer is exempt from levy. The exempted property includes personal property with a value of up to $1,650 and books and tools necessary for the taxpayer's trade, business or profession with a value of up to $1,100.

Proposal. The IRS would have the authority to withdraw a notice of federal tax lien if (1) the filing of the notice was premature or was not in accordance with the administrative procedures of the IRS; (2) the taxpayer has entered into an installment agreement for the payment of tax liability with respect to the tax on which the underlying lien is imposed; (3) the withdrawal of the notice will facilitate the collection of the tax liability; or (4) the withdrawal of the notice would be in the best interest of the government and the taxpayer. If the taxpayer so requests in writing, the IRS would be required to notify credit reporting bureaus and financial institutions that the notice has been withdrawn. In addition, the IRS would be required to return levied-upon property to the taxpayer in the same four circumstances. Finally the exemption amounts under the levy rules would be increased to $1,700 for personal property and $1,200 for books and tools. Both these amounts would be indexed for inflation commencing with calendar year 1994.

Administration position. The Administration supports this provision, with certain modifications. First, the proposal should be modified to require only that the IRS provide the taxpayer with a notice of withdrawal in a form suitable for the taxpayer to provide to credit reporting bureaus and other financial institutions. It would unnecessarily increase administrative costs if the IRS were required to send the notice to multiple creditors. Second, the IRS should not be required to

determine independently whether providing the notice of withdrawal is "in the best interest of the taxpayer and the United States." Because the notice would only be provided at the request of the taxpayer, the request should suffice to establish that provision of the notice is in the taxpayer's interest. Moreover, in many instances withdrawal of a notice will not be in the best interest of the government; it simply will be fair to taxpayers and consistent with good tax policy.

With respect to the proposed expansion of the IRS's ability to return levied-upon property to the taxpayer, we believe the proposed expansion should be limited to the three situations most troublesome to taxpayers so as to provide a more administrable standard and to reduce the adverse revenue consequences. One situation is a bank's surrender of levied-upon funds to the IRS prior to the expiration of a mandatory 21-day waiting period after the issuance of an IRS levy. In cases in which the 21-day period has not expired or the taxpayer has initiated a proceeding to stay the levy, the IRS should be able to return the funds to the bank. A second situation is an erroneous jeopardy levy. The third situation is a payment received pursuant to a levy that is issued in violation of an installment agreement. Although levied-upon property should in all fairness be returned in these situations, the IRS is statutorily precluded from doing so in the absence of an overpayment because the IRS immediately applies funds received pursuant to a levy to the outstanding liabilities of the taxpayer. The IRS immediately applies these funds for both policy (principally cash management) and practical reasons (the impracticality of immediately matching payments received with specific levies made).

Finally, subject to revenue constraints, the Administration supports the proposed increase in the amount of personal and business property exempt from levy. The intent of these provisions is to enable a taxpayer to retain personal and business essentials so as to avoid becoming destitute. It is important to protect the value of these exemptions from being eroded by inflation.

Current law. The IRS can compromise any assessed tax that is due and owing, but if the unpaid amount of tax pursuant to the compromise is $500 or more, a written opinion of the Chief Counsel is required. In addition, return information relating to accepted offers is available to the general public.

Proposal. The IRS would be authorized to compromise an assessed tax that is due and owing if doing so would be in the best interest of the government. A written supporting opinion of the Chief Counsel and public disclosure would be required only if the unpaid amount were $50,000 or more. The IRS would be required to subject these offers-in-compromise to continuing IRS quality review.

Administration position. The Administration supports this provision, with a modification. The IRS has begun simplifying the offers-in-compromise process to make it more accessible and comprehensible. An expanded offers-in-compromise program benefits taxpayers by making it possible to liquidate a debt that otherwise could never be repaid. Eliminating the requirement for an opinion of the Chief Counsel and for public disclosure of return information relating to a compromise will eliminate the two significant impediments under current law to the use of compromises by taxpayers. However, we believe the provision also should specify that it may be in the best interest of the government to compromise a tax when there is doubt as to the liability or its collectibility.

Current law. In general, the IRS notifies taxpayers in writing prior to commencing an examination and encloses a copy of Publication 1, "Your Rights as a Taxpayer," with the notice.

Proposal. The IRS would be required to notify a taxpayer in writing prior to commencing an examination and would be required to provide the taxpayer with an explanation of the examination process.

Administration position. The Administration generally does not oppose this provision. However, an exception should be provided for criminal investigations and the provision should specify that failure to comply with the provision does not provide a basis for invalidating a deficiency notice.

18. Section 505 Removal of Certain Limits on Recovery of Civil Damages for Unauthorized Collection Activities

Current law. A taxpayer may sue the United States for up to $100,000 of damages caused by an officer or employee of the IRS who recklessly or intentionally disregards provisions of the Internal Revenue Code or the Treasury regulations promulgated thereunder.

Proposal. The threshold for recovery by a taxpayer would be lowered to a negligence standard and the $100,000 "cap" would be eliminated.

The Administration opposes this

Administration position. provision. Lowering the existing standard to a negligence standard would encourage taxpayers particularly tax protesters to routinely press claims against the United States, which could result in adverse revenue consequences and which in any event would require the IRS to devote significant monetary and personnel resources to defending itself against a flood of claims. In addition, we believe the existing $100,000 cap should be retained for revenue reasons and so the provision does not disproportionately benefit large taxpayers.

19.

Section 506

Safeguards Relating to Designated Summons

Current law. In general, if the IRS issues a "designated summons" to a corporation at least 60 days prior to the expiration of the statute of limitations for the assessment of tax, the statute of limitations is suspended either until a court determines that compliance is not required or until 120 days after the corporation complies with the summons pursuant to a court's determination.

Proposal. A designated summons could only be issued in situations in which the determination of tax could not be made accurately before the expiration of the statute of limitations for the assessment of tax (determined with regard to extensions) as a result of the delay or other action by the taxpayer. Furthermore, the statute of limitations would be extended by a designated summons only (a) if the IRS has not had at least three years to complete the audit; (b) if the taxpayer has refused to extend the statute of limitations for at least two years; or (c) with respect to information for which the IRS previously made a written request the person to be summoned (i) had sufficient time to respond to the written request for information before the issuance of the designated summons; and (ii) failed substantially to comply with the information request. In addition, a taxpayer that receives a notice of a designated summons would be entitled to a conference with the IRS within 15 days of receiving the notice, and to file a petition in the District Court within 10 days of receiving the designated summons, to quash or modify the summons or seek a court determination that the statute of limitations would not be suspended. Before issuing a designated summons, the IRS would be required to notify the taxpayer in writing and explain in the notice why the taxpayer's prior responses to information requests were unsatisfactory, as well as the taxpayer's right to a conference with the IRS within 15 days.

Administration position.

We oppose this provision. It

would unduly hinder examinations of both U.S. and foreign multinational corporations suspected of shifting income to lowtax jurisdictions through manipulation of their transfer prices in violation of section 482. Congress created the designated summons mechanism in 1990 to enable the IRS to obtain adequate information during its examinations of large multinational corporations that are dilatory in responding to informal written document requests, particularly in connection with intercompany pricing disputes under section 482. Congress was concerned that such corporations could obstruct examinations by declining to respond to the IRS's informal document requests. The IRS's administrative practice is to employ the designated summons mechanism only after informal written document requests have proven unsuccessful because the corporate taxpayer has been uncooperative in the hope that the statute of limitations will expire before the corporation is obliged to turn over the requested documents.