Tax practice

City council member and former Washington mayor Marion Barry is being investigated by the Internal Revenue Service and the U.S. Attorney's Office in Washington for failing to pay taxes, according to published reports.

Complying with the current federal tax code costs American taxpayers at least $100 billion annually, and lost economic efficiency associated with the tax system may top half a trillion dollars, auditors for the Government Accountability Office told Congress.

After a delay brought on by Hurricane Katrina, the President's Advisory Panel on Federal Tax Reform announced two October meetings and a deadline of Nov. 1 to issue its comprehensive report.

Taxpayers affected by Hurricanes Katrina and Rita now have until Feb. 28, 2006 to file tax returns and pay any taxes due, according to the Internal Revenue Service. Taxpayers affected by the hurricanes may be eligible for tax relief regardless of where they live.

Louisiana Gov. Kathleen Blanco asked lawmakers for help in rebuilding the state devastated by Hurricanes Katrina and Rita.

The Internal Revenue Service announced relief for taxpayers affected by Hurricane Rita, including many of the deadline reprieves and fee waivers enacted in the immediate aftermath of Hurricane Katrina.

After years of procedural delays, the trial between investment company Berkshire Hathway Inc. and the Internal Revenue Service has begun over the legality of tax deductions taken by the company in the late 1980s.

The Nelson A. Rockefeller Institute of Government issued a report detailing a 13.3 percent average increase in state tax revenues across the country.

TREASURY, IRS ANNOUNCE PROPOSED COST-SHARING REGS: The U.S. Treasury Department and the Internal Revenue Service announced proposed regulations that provide further guidance to Section 482, which determines taxable income in connection with cost-sharing arrangements affecting intellectual property.The changes could mean a big difference to the bottom lines of companies in the pharmaceutical and software industries, whose main asset is their intellectual property.

Although the Energy Tax Act allocates considerably more dollars to efficient energy production, the homeowner energy conservation credits, along with the alternative motor vehicle credits (examined in our last column, Sept. 5-25, 2005, page 10), have made most of the headlines.While long-term predictions vary on whether the $500 lifetime (i.e., 2006 and 2007) residential energy property credit, the $2,000 credits for solar electricity and hot water, and the fuel-cell credit will be used by most homeowners or only a few, interest in them is high. In the age of Home Depot and ongoing relationships with home contractors, however, there is no doubt that, in time, enough situations will arise to test every issue and explore every fine point.

Completing a two-year project to shutter abusive transactions of 412(i) plans and other arrangements, the Treasury and the Internal Revenue Service have issued final regulations clarifying that any life insurance contract transferred from an employer or a tax-qualified plan to an employee must be taxed at full fair market value. The final regulations are aimed at arrangements that attempt to avoid taxes via the use of "artificial devices" to understate the value of insurance contracts.A 412(i) plan is a tax-qualified retirement plan that is funded by a life insurance contract. An employer is entitled to claim tax deductions for contributions that are used by the plan to pay premiums on an insurance contract covering an employee. The plan may hold the contract until the employee dies, or it may distribute or sell the contract to the employee at a specific point - like retirement. Some companies, however, have promoted a tax-avoidance scheme where an employer establishes a 412(i) plan under which the contributions made to the plan - which are deducted by the employer - are used to purchase a specially designed life insurance contract. Under that arrangement, the cash surrender value (the amount that the contract states the policy is worth if it were cashed in) is lowered to a level significantly below the paid premiums. The contract is then distributed or sold to the employee for the amount of the depressed cash surrender value.

Both the Government Accountability Office and the Treasury Inspector General for Tax Administration have some advice for the Internal Revenue Service.On the heels of an IRS decision to focus on S corporations in order to zero in on the compliance problems of small businesses, the TIGTA issued a report calling on the IRS to improve its efforts against employment tax noncompliance. The GAO also weighed in in the same week with its report, "Tax Compliance: Better Compliance Data and Long-term Goals Would Support a More Strategic IRS Approach to Reducing the Tax Gap."

Despite concerns over the rising deficit, both houses of Congress sent a $6.1 billion Katrina tax-relief bill to President Bush for his signature without a dissenting vote being cast.

A traffic accident above the San Francisco Bay could affect up to an estimated 30,000 taxpayers in 13 states.

In response to the housing crisis as a result of Hurricane Katrina, House Financial Services chairman Michael G. Oxley, R-Ohio, and Rep. Richard Baker, R-La., said they would adjust an affordable housing fund, currently in pending legislation, in order to meet housing needs of Katrina survivors.

Both the House and Senate passed nearly $5 billion in tax cut bills, aimed at helping victims of Hurricane Katrina and the people who provide them shelter.

The Government Accountability Office released a comprehensive overview of the tax reform debate.

The Internal Revenue Service announced that several thousand telephone operators are helping the Federal Emergency Management Agency answer calls from Hurricane Katrina victims.

The Internal Revenue Service and Treasury Department announced an increase to the optional standard mileage rates for the final four months of 2005.

The heads of the President's Advisory Panel on Federal Tax Reform announced that both of the panel's meetings scheduled for September will be postponed indefinitely.