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.

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.

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.

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.

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.

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.

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.