Miscellaneous Sections Affected by the Taxpayer Bill of Rights 2 and the Personal Responsibility and Work Opportunity Reconciliation Act of 1996

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 8725]

RIN 1545-AU64

Miscellaneous Sections Affected by the Taxpayer Bill of Rights 2

and the Personal Responsibility and Work Opportunity Reconciliation Act

of 1996

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to joint

returns, property exempt from levy, interest, penalties, offers in

compromise, and the awarding of costs and certain fees. The regulations

reflect changes to the law made by the Taxpayer Bill of Rights 2 and a

conforming amendment made by the Personal Responsibility and Work

Opportunity Reconciliation Act of 1996. The regulations affect

taxpayers with respect to filing of returns, interest, penalties, court

costs, and payment, deposit, and collection of taxes.

DATES: These regulations are effective July 22, 1997.

[[Page 39116]]

For dates of applicability of these regulations, see

Secs. 301.6334-1 (e) and (f), 301.6601-1(f) (3) and (4), 301.6651-1

(a)(3) and (g)(2), 301.6656-3(c), 301.7122-1(e)(2), 301.7430-

2(c)(3)(i)(B), 301.7430-4(b)(3)(ii), 301.7430-5(a) and (c)(3), and

301.7430-6.

FOR FURTHER INFORMATION CONTACT: Beverly A. Baughman, (202) 622-4940

regarding joint returns and penalties; Robert A. Miller, (202) 622-3640

regarding levy; Donna J. Welch, (202) 622-4910 regarding interest;

Thomas D. Moffitt, (202) 622-7900 regarding court costs; and Kevin B.

Connelly, (202) 622-3640 regarding compromises (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations

has been reviewed and approved by the Office of Management and Budget

in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under

control number 1545-1356. Responses to this collection of information

are required to obtain an award of reasonable administrative costs.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid control number.

The estimated annual burden per respondent varies from 10 minutes

to 30 minutes, depending on individual circumstances, with an estimated

average of 15 minutes.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be sent to the Internal

Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,

Washington, DC 20224, and to the Office of Management and Budget, Attn:

Desk Officer for the Department of the Treasury, Office of Information

and Regulatory Affairs, Washington, DC 20503.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains amendments to the Income Tax Regulations and

the Regulations on Procedure and Administration (26 CFR parts 1 and

301, respectively) relating to joint returns under section 6013, levy

under section 6334, interest under section 6601, the failure to file

penalty under section 6651, the failure to deposit penalty under

section 6656, compromise under section 7122, and awards of costs and

certain fees under section 7430. These sections were amended by the

Taxpayer Bill of Rights 2 (TBOR2) (Pub. L. 104-168, 110 Stat. 1452

(1996)) and section 110(l)(6) of the Personal Responsibility and Work

Opportunity Reconciliation Act of 1996 (Pub. L. 104-193, 110 Stat.

2105, 2173 (1996)). The changes made by TBOR2 and the Personal

Responsibility and Work Opportunity Reconciliation Act of 1996 are

reflected in the final regulations.

A notice of proposed rulemaking was published in the Federal

Register for January 2, 1997 (62 FR 77). One written comment was

received in response to the notice of proposed rulemaking. No public

hearing was requested or held. The proposed regulations under sections

6013, 6334, 6601, 6651, 6656, 7122, and 7430 are adopted by this

Treasury decision with minor revisions, which are discussed below.

Explanation of Revisions and Summary of Comments

The IRS received one comment regarding the proposed regulations.

The commentator remarked that Sec. 301.6601-1(f)(3) of the proposed

regulations is unclear because, as drafted, the regulation implies that

interest on all additions to tax, including those covered by section

6601(e)(2)(B), runs from the date of the notice and demand. Therefore,

the final regulations clarify that interest on any addition to tax,

except additions to tax described in section 6601(e)(2)(B), begins to

run from the date of the notice and demand.

The commentator also requested clarification for purposes of

computing the $100,000 threshold in Secs. 301.6601-1(f)(3) and (4) and

301.6651-1(a)(3). Sections 303(a) and (b) of TBOR2 extend the interest-

free period to 21 calendar days or 10 business days if the amount for

which the notice and demand is made equals or exceeds $100,000. The

commentator suggested that the $100,000 threshold should include tax,

interest, and penalties. The language in the statute supports this

interpretation. Under section 303(b)(1) of TBOR2, the 10 day period

specifically applies to a notice and demand for interest and penalties.

Therefore, the final regulations clarify that 10 business days is the

applicable interest-free period if the total amount assessed, including

tax, penalties, and interest, and shown on the notice and demand equals

or exceeds $100,000.

In addition, Sec. 301.6651-1(a)(3), regarding the failure to pay

penalty, has been clarified by cross-referencing the definitions of

calendar day and business day in Sec. 301.6601-1(f)(5).

Effective Dates

These regulations are applicable on July 31, 1996, except that

Sec. 301.7122-1(e) is applicable on July 30, 1996, and Sec. 301.6334-

1(a)(2), (a)(3), (a)(11)(i), and (e), Sec. 301.6601-1(f)(3), (f)(4),

and (f)(5), Sec. 301.6651-1(a)(3), and Sec. 301.7430-4(b)(3)(ii) are

applicable on January 1, 1997.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

does not apply to these regulations. Moreover, it is hereby certified

that the regulations in this document will not have a significant

economic impact on a substantial number of small entities. This

certification is based on a determination that in the past only an

average of 38 taxpayers per year, the majority of whom were

individuals, have filed a request to recover administrative costs.

Accordingly, a Regulatory Flexibility Analysis under the Regulatory

Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, the

notice of proposed rulemaking preceding these regulations was submitted

to the Chief Counsel for Advocacy of the Small Business Administration

for comment on the impact of the proposed regulations on small

business.

Drafting Information: The principal authors of these regulations

are Beverly A. Baughman and Donna J. Welch, Office of Assistant Chief

Counsel (Income Tax and Accounting), Robert A. Miller and Kevin B.

Connelly, Office of Assistant Chief Counsel (General Litigation), and

Thomas D. Moffitt, Office of Assistant Chief Counsel (Field Service).

However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income

taxes,

[[Page 39117]]

Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 301 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.6013-2(b)(1) is amended by removing the language

``Unless'' and adding ``Beginning on or before July 30, 1996, unless''

in its place.

PART 301--PROCEDURE AND ADMINISTRATION

Par. 3. The authority citation for part 301 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 4. Section 301.6334-1 is amended by:

1. Revising paragraph (a)(2).

2. Removing the language ``$1,100 ($1,050 for levies issued prior

to January 1, 1990)'' from paragraph (a)(3) and adding ``$1,250'' in

its place.

3. Removing the language ``(relating to aid to families with

dependent children)'' from paragraph (a)(11)(i).

4. Revising paragraph (e).

5. Adding paragraph (f).

The additions and revisions read as follows:

Sec. 301.6334-1 Property exempt from levy.

(a) * * *

(2) Fuel, provisions, furniture, and personal effects. So much of

the fuel, provisions, furniture, and personal effects in the taxpayer's

household, and of the arms for personal use, livestock, and poultry of

the taxpayer, that does not exceed $2,500 in value.

* * * * *

(e) Inflation adjustment. For any calendar year beginning after

December 31, 1997, each dollar amount referred to in paragraphs (a)(2)

and (3) of this section will be increased by an amount equal to the

dollar amount multiplied by the cost-of-living adjustment determined

under section 1(f)(3) for the calendar year (substituting ``calendar

year 1996'' for ``calendar year 1992'' in section 1(f)(3)(B)). If any

dollar amount as adjusted is not a multiple of $10, the dollar amount

will be rounded to the nearest multiple of $10 (rounding up if the

amount is a multiple of $5).

(f) Effective date. Generally, these provisions are applicable with

respect to levies made on or after July 1, 1989. However, any

reasonable attempt by a taxpayer to comply with the statutory

amendments addressed by the regulations in this section prior to

February 21, 1995, will be considered as meeting the requirements of

the regulations in this section. In addition, paragraphs (a)(2), (3),

(11)(i) and (e) of this section are applicable with respect to levies

issued after December 31, 1996.

Par. 5. Section 301.6601-1 is amended by:

1. Revising paragraphs (f)(3) and (f)(4).

2. Redesignating paragraph (f)(5) as paragraph (f)(6) and adding

new paragraph (f)(5).

The additions and revisions read as follows:

Sec. 301.6601-1 Interest on underpayments.

* * * * *

(f) * * *

(3) Interest will not be imposed on any assessable penalty,

addition to the tax (other than an addition to tax described in section

6601(e)(2)(B)), or additional amount if the amount is paid within 21

calendar days (10 business days if the amount assessed and shown on the

notice and demand equals or exceeds $100,000) from the date of the

notice and demand. If interest is imposed, it will be imposed only for

the period from the date of the notice and demand to the date on which

payment is received. This paragraph (f)(3) is applicable with respect

to any notice and demand made after December 31, 1996.

(4) If notice and demand is made after December 31, 1996, for any

amount and the amount is paid within 21 calendar days (10 business days

if the amount assessed and shown on the notice and demand equals or

exceeds $100,000) from the date of the notice and demand, interest will

not be imposed for the period after the date of the notice and demand.

(5) For purposes of paragraphs (f)(3) and (4) of this section--

(i) The term business day means any day other than a Saturday,

Sunday, legal holiday in the District of Columbia, or a statewide legal

holiday in the state where the taxpayer resides or where the taxpayer's

principal place of business is located. With respect to the tenth

business day (after taking into account the first sentence of this

paragraph (f)(5)(i)), see section 7503 relating to time for performance

of acts where the last day falls on a statewide legal holiday in the

state where the act is required to be performed.

(ii) The term calendar day means any day. With respect to the

twenty-first calendar day, see section 7503 relating to time for

performance of acts where the last day falls on a Saturday, Sunday, or

legal holiday.

* * * * *

Par. 6. Section 301.6651-1 is amended by:

1. Revising paragraph (a)(3).

2. Adding paragraph (g).

The addition and revision read as follows:

Sec. 301.6651-1 Failure to file tax return or to pay tax.

(a) * * *

(3) Failure to pay tax not shown on return. In the case of failure

to pay any amount of any tax required to be shown on a return specified

in paragraph (a)(1) of this section that is not so shown (including an

assessment made pursuant to section 6213(b)) within 21 calendar days

from the date of the notice and demand (10 business days if the amount

assessed and shown on the notice and demand equals or exceeds $100,000)

with respect to any notice and demand made after December 31, 1996,

there will be added to the amount stated in the notice and demand the

amount specified below unless the failure to pay the tax within the

prescribed time is shown to the satisfaction of the district director

or the director of the service center to be due to reasonable cause and

not to willful neglect. The amount added to the tax is 0.5 percent of

the amount stated in the notice and demand if the failure is for not

more than 1 month, with an additional 0.5 percent for each additional

month or fraction thereof during which the failure continues, but not

to exceed 25 percent in the aggregate. For purposes of this paragraph

(a)(3), see Sec. 301.6601-1(f)(5) for the definition of calendar day

and business day.

* * * * *

(g) Treatment of returns prepared by the Secretary--(1) In general.

A return prepared by the Secretary under section 6020(b) will be

disregarded for purposes of determining the amount of the addition to

tax for failure to file any return pursuant to paragraph (a)(1) of this

section. However, the return prepared by the Secretary will be treated

as a return filed by the taxpayer for purposes of determining the

amount of the addition to tax for failure to pay the tax shown on any

return and for failure to pay the tax required to be shown on a return

that is not so shown pursuant to paragraphs (a)(2) and (3) of this

section, respectively.

(2) Effective date. This paragraph (g) applies to returns the due

date for which (determined without regard to extensions) is after July

30, 1996.

Par. 7. Section 301.6656-3 is added to read as follows:

[[Page 39118]]

Sec. 301.6656-3 Abatement of penalty.

(a) Exception for first time depositors of employment taxes--(1)

Waiver. The Secretary will generally waive the penalty imposed by

section 6656(a) on a person's failure to deposit any employment tax

under subtitle C of the Internal Revenue Code if--

(i) The failure is inadvertent;

(ii) The person meets the requirements referred to in section

7430(c)(4)(A)(ii) (relating to the net worth requirements applicable

for awards of attorney's fees);

(iii) The failure occurs during the first quarter that the person

is required to deposit any employment tax; and

(iv) The return of the tax is filed on or before the due date.

(2) Inadvertent failure. For purposes of paragraph (a)(1)(i) of

this section, the Secretary will determine if a failure to deposit is

inadvertent based on all the facts and circumstances.

(b) Deposit sent to Secretary. The Secretary may abate the penalty

imposed by section 6656(a) if the first time a depositor is required to

make a deposit, the amount required to be deposited is inadvertently

sent to the Secretary instead of to the appropriate government

depository.

(c) Effective date. This section applies to deposits required to be

made after July 30, 1996.

Par. 8. In Sec. 301.7122-1, paragraph (e) is revised to read as

follows:

Sec. 301.7122-1 Compromises.

* * * * *

(e) Record--(1) In general. If an offer in compromise is accepted,

there will be placed on file the opinion of the Chief Counsel of the

IRS with respect to the compromise, with the reasons for the opinion,

and including a statement of--

(i) The amount of tax assessed;

(ii) The amount of interest, additional amount, addition to the

tax, or assessable penalty, imposed by law on the person against whom

the tax is assessed; and

(iii) The amount actually paid in accordance with the terms of the

compromise.

(2) Exception. For compromises accepted on or after July 30, 1996,

no opinion will be required with respect to the compromise of any civil

case in which the unpaid amount of tax assessed (including any

interest, additional amount, addition to the tax, or assessable

penalty) is less than $50,000. However, the compromise will be subject

to continuing quality review by the Secretary.

* * * * *

Par 9. Section 301.7430-0 is amended by adding entries for

Sec. 301.7430-1(b)(4) and 301.7430-5(c)(3) to read as follows:

Sec. 301.7430-0 Table of contents.

* * * * *

Sec. 301.7430-1 Exhaustion of administrative remedies.

* * * * *

(b) * * *

(4) Failure to agree to extension of time for assessments.

* * * * *

Sec. 301.7430-5 Prevailing party.

* * * * *

(c) * * *

(3) Presumption.

* * * * *

Par. 10. Section 301.7430-1 is amended by adding paragraph (b)(4)

to read as follows:

Sec. 301.7430-1 Exhaustion of administrative remedies.

* * * * *

(b) * * *

(4) Failure to agree to extension of time for assessments. Any

failure by the prevailing party to agree to an extension of the time

for the assessment of any tax will not be taken into account for

purposes of determining whether the prevailing party has exhausted the

administrative remedies available to the party within the Internal

Revenue Service.

* * * * *

Par. 11. Section 301.7430-2 is amended by:

1. Removing the language ``7430(c)(4)(B)(ii)'' from the third

sentence of paragraph (b)(2) and adding ``7430(c)(4)(C)(ii)'' in its

place.

2. Removing the colon from the introductory text of paragraph

(c)(3) and adding a dash in its place.

3. Revising paragraph (c)(3)(i)(B).

4. Removing the language ``If more than $75'' from paragraph

(c)(3)(ii)(C) and adding ``In the case of administrative proceedings

commenced after July 30, 1996, if more than $110'' in its place.

The revision reads as follows:

Sec. 301.7430-2 Requirements and procedures for recovery of reasonable

administrative costs.

* * * * *

(c) * * *

(3) * * *

(i) * * *

(B) A clear and concise statement of the reasons why the taxpayer

alleges that the position of the Internal Revenue Service in the

administrative proceeding was not substantially justified. For

administrative proceedings commenced after July 30, 1996, if the

taxpayer alleges that the Internal Revenue Service did not follow any

applicable published guidance, the statement must identify all

applicable published guidance that the taxpayer alleges that the

Internal Revenue Service did not follow. For purposes of this paragraph

(c)(3)(i)(B), the term applicable published guidance means final or

temporary regulations, revenue rulings, revenue procedures, information

releases, notices, announcements, and, if issued to the taxpayer,

private letter rulings, technical advice memoranda, and determination

letters. Also, for purposes of this paragraph (c)(3)(i)(B), the term

administrative proceeding includes only those administrative

proceedings or portions of administrative proceedings occurring on or

after the administrative proceeding date as defined in Sec. 301.7430-

3(c);

* * * * *

Par. 12. Section 301.7430-4 is amended by:

1. Removing the language ``$75'' from paragraph (b)(3)(i) and

adding ``, in the case of proceedings commenced after July 30, 1996,

$110'' in its place.

2. Revising paragraph (b)(3)(ii).

3. Removing the language ``$75'' from the first, second, and third

sentences of paragraph (b)(3)(iii)(B) and adding ``$110'' in its place.

4. Removing the language ``$75'' from the first sentence of

paragraph (b)(3)(iii)(C) and adding ``$110'' in its place.

5. Removing the language ``$75'' from the third sentence of the

example in paragraph (b)(3)(iii)(D) and adding ``$110'' in its place.

6. Removing the language ``$75'' from the second and third

sentences of paragraph (c)(2)(ii) and adding ``$110'' in its place.

The revision reads as follows:

Sec. 301.7430-4 Reasonable administrative costs.

* * * * *

(b) * * *

(3) * * *

(ii) Cost of living adjustment. The Internal Revenue Service will

make a cost of living adjustment to the $110 per hour limitation for

fees incurred in any calendar year beginning after December 31, 1996.

The cost of living adjustment will be an amount equal to $110

multiplied by the cost of living adjustment determined under section

1(f)(3) for the calendar year (substituting ``calendar year 1995'' for

``calendar year 1992'' in section 1(f)(3)(B)). If the dollar limitation

as adjusted by this cost of living increase is not a multiple of $10,

the dollar amount will be rounded to

[[Page 39119]]

the nearest multiple of $10 (rounding up if the amount is a multiple of

$5).

* * * * *

Par. 13. Section 301.7430-5 is amended by:

1. Revising paragraph (a).

2. Adding paragraph (c)(3).

The addition and revision read as follows:

Sec. 301.7430-5 Prevailing party.

(a) In general. For purposes of an award of reasonable

administrative costs under section 7430 in the case of administrative

proceedings commenced after July 30, 1996, a taxpayer is a prevailing

party only if--

(1) The position of the Internal Revenue Service was not

substantially justified;

(2) The taxpayer substantially prevails as to the amount in

controversy or with respect to the most significant issue or set of

issues presented; and

(3) The taxpayer satisfies the net worth and size limitations

referenced in paragraph (f) of this section.

* * * * *

(c) * * *

(3) Presumption. If the Internal Revenue Service did not follow any

applicable published guidance in an administrative proceeding commenced

after July 30, 1996, the position of the Internal Revenue Service, on

those issues to which the guidance applies and for all periods during

which the guidance was not followed, will be presumed not to be

substantially justified. This presumption may be rebutted. For purposes

of this paragraph (c)(3), the term applicable published guidance means

final or temporary regulations, revenue rulings, revenue procedures,

information releases, notices, announcements, and, if issued to the

taxpayer, private letter rulings, technical advice memoranda, and

determination letters (see Sec. 601.601(d)(2) of this chapter). Also,

for purposes of this paragraph (c)(3), the term administrative

proceeding includes only those administrative proceedings or portions

of administrative proceedings occurring on or after the administrative

proceeding date as defined in Sec. 301.7430-3(c).

* * * * *

Par. 14. Section 301.7430-6 is revised to read as follows:

Sec. 301.7430-6 Effective dates.

Sections 301.7430-2 through 301.7430-6, other than Secs. 301.7430-

2(b)(2), (c)(3)(i)(B), (c)(3)(ii)(C), and (c)(5); Secs. 301.7430-

4(b)(3)(i), (b)(3)(ii), (b)(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)(D),

and (c)(2)(ii); and Secs. 301.7430-5(a) and (c)(3), apply to claims for

reasonable administrative costs filed with the Internal Revenue Service

after December 23, 1992, with respect to costs incurred in

administrative proceedings commenced after November 10, 1988. Section

301.7430-2(c)(5) is applicable March 23, 1993. Sections 301.7430-

2(b)(2), (c)(3)(i)(B), and (c)(3)(ii)(C); 301.7430-4(b)(3)(i),

(b)(3)(ii), (b)(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)(D), and

(c)(2)(ii); and 301.7430-5(a) and (c)(3) are applicable for

administrative proceedings commenced after July 30, 1996.

Dated: June 27, 1997.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved:

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97-19052 Filed 7-21-97; 8:45 am]

BILLING CODE 4830-01-P