Excludes from gross income interest paid on any tax overpayment by individuals.
Abates interest with respect to: (1) an erroneous refund check without regard to the refund amount (currently $50,000); and (2) taxpayer reliance on written erroneous Internal Revenue Service (IRS) advice.
Permits making cash bond deposits to offset potential tax underpayments.
Applies the interest netting rules without regard to the 45-day period for individuals.
Waives certain penalties for first-time unintentional minor errors for individuals.
Establishes a civil penalty, in addition to other penalties provided by law, for certain frivolous tax submissions. Directs the IRS to prescribe a list of frivolous submissions. Gives a person an opportunity to withdraw such submission upon notice by the IRS.
[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5550 Introduced in House (IH)]
107th CONGRESS
2d Session
H. R. 5550
To amend the Internal Revenue Code of 1986 to reform its penalty and
interest provisions.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
October 3, 2002
Mr. Houghton introduced the following bill; which was referred to the
Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to reform its penalty and
interest provisions.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``Penalty and
Interest Reform Act of 2002''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is expressed in
terms of an amendment to, or repeal of, a section or other provision,
the reference shall be considered to be made to a section or other
provision of the Internal Revenue Code of 1986.
(c) Table of Contents.--
Sec. 1. Short title; etc.
Sec. 2. Failure to pay estimated tax penalty converted to interest
charge on accumulated unpaid balance.
Sec. 3. Exclusion from gross income for interest on overpayments of
income tax by individuals.
Sec. 4. Abatement of interest.
Sec. 5. Deposits made to suspend running of interest on potential
underpayments.
Sec. 6. Expansion of interest netting for individuals.
Sec. 7. Waiver of certain penalties for first-time unintentional minor
errors.
Sec. 8. Frivolous tax submissions.
Sec. 9. Clarification of application of Federal tax deposit penalty.
SEC. 2. FAILURE TO PAY ESTIMATED TAX PENALTY CONVERTED TO INTEREST
CHARGE ON ACCUMULATED UNPAID BALANCE.
(a) Penalty Moved to Interest Chapter of Code.--The Internal
Revenue Code of 1986 is amended by redesignating section 6654 as
section 6641 and by moving section 6641 (as so redesignated) from part
I of subchapter A of chapter 68 to the end of subchapter E of chapter
67 (as added by subsection (e)(1) of this section).
(b) Penalty Converted to Interest Charge.--The heading and
subsections (a) and (b) of section 6641 (as so redesignated) are
amended to read as follows:
``SEC. 6641. INTEREST ON FAILURE BY INDIVIDUAL TO PAY ESTIMATED INCOME
TAX.
``(a) In General.--Interest shall be paid on any underpayment of
estimated tax by an individual for a taxable year for each day of such
underpayment. The amount of such interest for any day shall be the
product of the underpayment rate established under subsection (b)(2)
multiplied by the amount of the underpayment.
``(b) Amount of Underpayment; Interest Rate.--For purposes of
subsection (a)--
``(1) Amount.--The amount of the underpayment on any day
shall be the excess of--
``(A) the sum of the required installments for the
taxable year the due dates for which are on or before
such day, over
``(B) the sum of the amounts (if any) of estimated
tax payments made on or before such day on such
required installments.
``(2) Determination of interest rate.--
``(A) In general.--The underpayment rate with
respect to any day in an installment underpayment
period shall be the underpayment rate established under
section 6621 for the first day of the calendar quarter
in which such installment underpayment period begins.
``(B) Installment underpayment period.--For
purposes of subparagraph (A), the term `installment
underpayment period' means the period beginning on the
day after the due date for a required installment and
ending on the due date for the subsequent required
installment (or in the case of the 4th required
installment, the 15th day of the 4th month following
the close of a taxable year).
``(C) Daily rate.--The rate determined under
subparagraph (A) shall be applied on a daily basis and
shall be based on the assumption of 365 days in a
calendar year.
``(3) Termination of estimated tax interest.--No day after
the end of the installment underpayment period for the 4th
required installment specified in paragraph (2)(B) for a
taxable year shall be treated as a day of underpayment with
respect to such taxable year.''.
(c) Increase in Safe Harbor Where Tax is Small.--
(1) In general.--Clause (i) of section 6641(d)(1)(B) (as so
redesignated) is amended to read as follows:
``(i) the lesser of--
``(I) 90 percent of the tax shown
on the return for the taxable year (or,
if no return is filed, 90 percent of
the tax for such year), or
``(II) the tax shown on the return
for the taxable year (or, if no return
is filed, the tax for such year)
reduced (but not below zero) by $2,000,
or''.
(2) Conforming amendment.--Subsection (e) of section 6641
(as so redesignated) is amended by striking paragraph (1) and
redesignating paragraphs (2) and (3) as paragraphs (1) and (2),
respectively.
(d) Conforming Amendments.--
(1) Paragraphs (1) and (2) of subsection (e) (as
redesignated by subsection (c)(2)) and subsection (h) of
section 6641 (as so designated) are each amended by striking
``addition to tax'' each place it occurs and inserting
``interest''.
(2) Section 167(g)(5)(D) is amended by striking ``6654''
and inserting ``6641''.
(3) Section 460(b)(1) is amended by striking ``6654'' and
inserting ``6641''.
(4) Section 3510(b) is amended--
(A) by striking ``section 6654'' in paragraph (1)
and inserting ``section 6641'';
(B) by amending paragraph (2)(B) to read as
follows:
``(B) no interest would be required to be paid (but
for this section) under 6641 for such taxable year by
reason of the $2,000 amount specified in section
6641(d)(1)(B)(i)(II).'';
(C) by striking ``section 6654(d)(2)'' in paragraph
(3) and inserting ``section 6641(d)(2)''; and
(D) by striking paragraph (4).
(5) Section 6201(b)(1) is amended by striking ``6654'' and
inserting ``6641''.
(6) Section 6601(h) is amended by striking ``6654'' and
inserting ``6641''.
(7) Section 6621(b)(2)(B) is amended by striking ``addition
to tax under section 6654'' and inserting ``interest required
to be paid under section 6641''.
(8) Section 6622(b) is amended--
(A) by striking ``Penalty for'' in the heading; and
(B) by striking ``addition to tax under section
6654 or 6655'' and inserting ``interest required to be
paid under section 6641 or addition to tax under
section 6655''.
(9) Section 6658(a) is amended--
(A) by striking ``6654, or 6655'' and inserting
``or 6655, and no interest shall be required to be paid
under section 6641,''; and
(B) by inserting ``or paying interest'' after ``the
tax'' in paragraph (2)(B)(ii).
(10) Section 6665(b) is amended--
(A) in the matter preceding paragraph (1) by
striking ``, 6654,''; and
(B) in paragraph (2) by striking ``6654 or''.
(11) Section 7203 is amended by striking ``section 6654 or
6655'' and inserting ``section 6655 or interest required to be
paid under section 6641''.
(e) Clerical Amendments.--
(1) Chapter 67 is amended by inserting after subchapter D
the following:
``Subchapter E--Interest on Failure by Individual to Pay Estimated
Income Tax
``Sec. 6641. Interest on failure by
individual to pay estimated
income tax.''.
(2) The table of subchapters for chapter 67 is amended by
adding at the end the following new items:
``Subchapter D. Notice requirements.
``Subchapter E. Interest on failure by
individual to pay estimated
income tax.''.
(3) The table of sections for part I of subchapter A of
chapter 68 is amended by striking the item relating to section
6654.
(f) Effective Date.--The amendments made by this section shall
apply to installment payments for taxable years beginning after
December 31, 2002.
SEC. 3. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS OF
INCOME TAX BY INDIVIDUALS.
(a) In General.--Part III of subchapter B of chapter 1 (relating to
items specifically excluded from gross income) is amended by inserting
after section 139 the following new section:
``SEC. 139A. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS
OF INCOME TAX BY INDIVIDUALS.
``(a) In General.--In the case of an individual, gross income shall
not include interest paid under section 6611 on any overpayment of tax
imposed by this subtitle.
``(b) Exception.--Subsection (a) shall not apply in the case of a
failure to claim items resulting in the overpayment on the original
return if the Secretary determines that the principal purpose of such
failure is to take advantage of subsection (a).
``(c) Special Rule for Determining Modified Adjusted Gross
Income.--For purposes of this title, interest not included in gross
income under subsection (a) shall not be treated as interest which is
exempt from tax for purposes of sections 32(i)(2)(B) and 6012(d) or any
computation in which interest exempt from tax under this title is added
to adjusted gross income.''.
(b) Clerical Amendment.--The table of sections for part III of
subchapter B of chapter 1 is amended by inserting after the item
relating to section 139 the following new item:
``Sec. 139A. Exclusion from gross income
for interest on overpayments of
income tax by individuals.''.
(c) Effective Date.--The amendments made by this section shall
apply to interest received in calendar years beginning after the date
of the enactment of this Act.
SEC. 4. ABATEMENT OF INTEREST.
(a) Abatement of Interest With Respect to Erroneous Refund Check
Without Regard to Size of Refund.--Paragraph (2) of section 6404(e) is
amended by striking ``unless--'' and all that follows and inserting
``unless the taxpayer (or a related party) has in any way caused such
erroneous refund.''.
(b) Abatement of Interest to Extent Interest is Attributable to
Taxpayer Reliance on Written Statements of the IRS.--Subsection (f) of
section 6404 is amended--
(1) in the subsection heading, by striking ``Penalty or
Addition'' and inserting ``Interest, Penalty, or Addition'';
and
(2) in paragraph (1) and in subparagraph (B) of paragraph
(2), by striking ``penalty or addition'' and inserting
``interest, penalty, or addition''.
(c) Effective Date.--The amendments made by this section shall
apply with respect to interest accruing on or after the date of the
enactment of this Act.
SEC. 5. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL
UNDERPAYMENTS.
(a) In General.--Subchapter A of chapter 67 (relating to interest
on underpayments) is amended by adding at the end the following new
section:
``SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL
UNDERPAYMENTS, ETC.
``(a) Authority To Make Deposits Other Than As Payment of Tax.--A
taxpayer may make a cash deposit with the Secretary which may be used
by the Secretary to pay any tax imposed under subtitle A or B or
chapter 41, 42, 43, or 44 which has not been assessed at the time of
the deposit. Such a deposit shall be made in such manner as the
Secretary shall prescribe.
``(b) No Interest Imposed.--To the extent that such deposit is used
by the Secretary to pay tax, for purposes of section 6601 (relating to
interest on underpayments), the tax shall be treated as paid when the
deposit is made.
``(c) Return of Deposit.--Except in a case where the Secretary
determines that collection of tax is in jeopardy, the Secretary shall
return to the taxpayer any amount of the deposit (to the extent not
used for a payment of tax) which the taxpayer requests in writing.
``(d) Payment of Interest.--
``(1) In general.--For purposes of section 6611 (relating
to interest on overpayments), a deposit which is returned to a
taxpayer shall be treated as a payment of tax for any period to
the extent (and only to the extent) attributable to a
disputable tax for such period. Under regulations prescribed by
the Secretary, rules similar to the rules of section 6611(b)(2)
shall apply.
``(2) Disputable tax.--
``(A) In general.--For purposes of this section,
the term `disputable tax' means the amount of tax
specified at the time of the deposit as the taxpayer's
reasonable estimate of the maximum amount of any tax
attributable to disputable items.
``(B) Safe harbor based on 30-day letter.--In the
case of a taxpayer who has been issued a 30-day letter,
the maximum amount of tax under subparagraph (A) shall
not be less than the amount of the proposed deficiency
specified in such letter.
``(3) Other definitions.--For purposes of paragraph (2)--
``(A) Disputable item.--The term `disputable item'
means any item of income, gain, loss, deduction, or
credit if the taxpayer--
``(i) has a reasonable basis for its
treatment of such item, and
``(ii) reasonably believes that the
Secretary also has a reasonable basis for
disallowing the taxpayer's treatment of such
item.
``(B) 30-day letter.--The term `30-day letter'
means the first letter of proposed deficiency which
allows the taxpayer an opportunity for administrative
review in the Internal Revenue Service Office of
Appeals.
``(4) Rate of interest.--The rate of interest allowable
under this subsection shall be the Federal short-term rate
determined under section 6621(b), compounded daily.
``(e) Use of Deposits.--
``(1) Payment of tax.--Except as otherwise provided by the
taxpayer, deposits shall be treated as used for the payment of
tax in the order deposited.
``(2) Returns of deposits.--Deposits shall be treated as
returned to the taxpayer on a last-in, first-out basis.''.
(b) Clerical Amendment.--The table of sections for subchapter A of
chapter 67 is amended by adding at the end the following new item:
``Sec. 6603. Deposits made to suspend
running of interest on
potential underpayments,
etc.''.
(c) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to deposits made after the date of the enactment of this
Act.
(2) Coordination with deposits made under revenue procedure
84-58.--In the case of an amount held by the Secretary of the
Treasury or his delegate on the date of the enactment of this
Act as a deposit in the nature of a cash bond deposit pursuant
to Revenue Procedure 84-58, the date that the taxpayer identifies such
amount as a deposit made pursuant to section 6603 of the Internal
Revenue Code (as added by this Act) shall be treated as the date such
amount is deposited for purposes of such section 6603.
SEC. 6. EXPANSION OF INTEREST NETTING FOR INDIVIDUALS.
(a) In General.--Subsection (d) of section 6621 (relating to
elimination of interest on overlapping periods of tax overpayments and
underpayments) is amended by adding at the end the following: ``Solely
for purposes of the preceding sentence, section 6611(e) shall not apply
in the case of an individual.''.
(b) Effective Date.--The amendment made by subsection (a) shall
apply to interest accrued after December 31, 2002.
SEC. 7. WAIVER OF CERTAIN PENALTIES FOR FIRST-TIME UNINTENTIONAL MINOR
ERRORS.
(a) In General.--Section 6651 (relating to failure to file tax
return or to pay tax) is amended by adding at the end the following new
subsection:
``(i) Treatment of First-Time Unintentional Minor Errors.--
``(1) In general.--In the case of a return of tax imposed
by subtitle A filed by an individual, the Secretary may waive
an addition to tax under subsection (a) if--
``(A) the individual has a history of compliance
with the requirements of this title,
``(B) it is shown that the failure is due to an
unintentional minor error,
``(C) the penalty would be grossly disproportionate
to the action or expense that would have been needed to
avoid the error, and imposing the penalty would be
against equity and good conscience,
``(D) waiving the penalty would promote compliance
with the requirements of this title and effective tax
administration, and
``(E) the taxpayer took all reasonable steps to
remedy the error promptly after discovering it.
``(2) Exceptions.--Paragraph (1) shall not apply if--
``(A) the Secretary has waived any addition to tax
under this subsection with respect to any prior failure
by such individual,
``(B) the failure is a mathematical or clerical
error (as defined in section 6213(g)(2)), or
``(C) the failure is the lack of a required
signature.''.
(b) Effective Date.--The amendment made by this section shall take
effect on January 1, 2003.
SEC. 8. FRIVOLOUS TAX SUBMISSIONS.
(a) Civil Penalties.--Section 6702 is amended to read as follows:
``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.
``(a) Civil Penalty for Frivolous Tax Returns.--A person shall pay
a penalty of $5,000 if--
``(1) such person files what purports to be a return of a
tax imposed by this title but which--
``(A) does not contain information on which the
substantial correctness of the self-assessment may be
judged, or
``(B) contains information that on its face
indicates that the self-assessment is substantially
incorrect; and
``(2) the conduct referred to in paragraph (1)--
``(A) is based on a position which the Secretary
has identified as frivolous under subsection (c), or
``(B) reflects a desire to delay or impede the
administration of Federal tax laws.
``(b) Civil Penalty for Specified Frivolous Submissions.--
``(1) Imposition of Penalty.--Except as provided in
paragraph (3), any person who submits a specified frivolous
submission shall pay a penalty of $5,000.
``(2) Specified frivolous submission.--For purposes of this
section--
``(A) Specified frivolous submission.--The term
`specified frivolous submission' means a specified
submission if any portion of such submission--
``(i) is based on a position which the
Secretary has identified as frivolous under
subsection (c), or
``(ii) reflects a desire to delay or impede
the administration of Federal tax laws.
``(B) Specified submission.--The term `specified
submission' means--
``(i) a request for a hearing under--
``(I) section 6320 (relating to
notice and opportunity for hearing upon
filing of notice of lien), or
``(II) section 6330 (relating to
notice and opportunity for hearing
before levy), and
``(ii) an application under--
``(I) section 7811 (relating to
taxpayer assistance orders),
``(II) section 6159 (relating to
agreements for payment of tax liability
in installments), or
``(III) section 7122 (relating to
compromises).
``(3) Opportunity to withdraw submission.--If the Secretary
provides a person with notice that a submission is a specified
frivolous submission and such person withdraws such submission
promptly after such notice, the penalty imposed under paragraph
(1) shall not apply with respect to such submission.
``(c) Listing of Frivolous Positions.--The Secretary shall
prescribe (and periodically revise) a list of positions which the
Secretary has identified as being frivolous for purposes of this
subsection. The Secretary shall not include in such list any position
that the Secretary determines meets the requirement of section
6662(d)(2)(B)(ii)(II).
``(d) Reduction of Penalty.--The Secretary may reduce the amount of
any penalty imposed under this section if the Secretary determines that
such reduction would promote compliance with and administration of the
Federal tax laws.
``(e) Penalties in Addition to Other Penalties.--The penalties
imposed by this section shall be in addition to any other penalty
provided by law.''.
(b) Treatment of Frivolous Requests for Hearings Before Levy.--
(1) Frivolous requests disregarded.--Section 6330 (relating
to notice and opportunity for hearing before levy) is amended
by adding at the end the following new subsection:
``(g) Frivolous Requests for Hearing, Etc.--Notwithstanding any
other provision of this section, if the Secretary determines that any
portion of a request for a hearing under this section or section 6320
meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A),
then the Secretary may treat such portion as if it were never submitted
and such portion shall not be subject to any further administrative or
judicial review.''.
(2) Preclusion from raising frivolous issues at hearing.--
Section 6330(c)(4) is amended--
(A) by striking ``(A)'' and inserting ``(A)(i)'';
(B) by striking ``(B)'' and inserting ``(ii)'';
(C) by striking the period at the end of the first
sentence and inserting ``; or''; and
(D) by inserting after subparagraph (A)(ii) (as so
redesignated) the following:
``(B) the issue meets the requirement of clause (i)
or (ii) of section 6702(b)(2)(A).''.
(3) Statement of grounds.--Section 6330(b)(1) is amended by
striking ``under subsection (a)(3)(B)'' and inserting ``in
writing under subsection (a)(3)(B) and states the grounds for
the requested hearing''.
(c) Treatment of Frivolous Requests for Hearings Upon Filing of
Notice of Lien.--Section 6320 is amended--
(1) in subsection (b)(1), by striking ``under subsection
(a)(3)(B)'' and inserting ``in writing under subsection
(a)(3)(B) and states the grounds for the requested hearing'',
and
(2) in subsection (c), by striking ``and (e)'' and
inserting ``(e), and (g)''.
(d) Treatment of Frivolous Applications for Offers-in-Compromise
and Installment Agreements.--Section 7122 is amended by adding at the
end the following new subsection:
``(e) Frivolous Submissions, Etc.--Notwithstanding any other
provision of this section, if the Secretary determines that any portion
of an application for an offer-in-compromise or installment agreement
submitted under this section or section 6159 meets the requirement of
clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may
treat such portion as if it were never submitted and such portion shall
not be subject to any further administrative or judicial review.''.
(e) Clerical Amendment.--The table of sections for part I of
subchapter B of chapter 68 is amended by striking the item relating to
section 6702 and inserting the following new item:
``Sec. 6702. Frivolous tax
submissions.''.
(f) Effective Date.--The amendments made by this section shall
apply to submissions made and issues raised after the date on which the
Secretary first prescribes a list under section 6702(c) of the Internal
Revenue Code of 1986, as amended by subsection (a).
SEC. 9. CLARIFICATION OF APPLICATION OF FEDERAL TAX DEPOSIT PENALTY.
Nothing in section 6656 of the Internal Revenue Code of 1986 shall
be construed to permit the percentage specified in subsection
(b)(1)(A)(iii) thereof to apply other than in a case where the failure
is for more than 15 days.
<all>
Introduced in House
Introduced in House
Referred to the House Committee on Ways and Means.
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