Tax practice

The Internal Revenue Service announced that as of April 1, some 52 million returns had been filed electronically, 7 percent above last year's e-filing pace. Overall, 65 percent of all returns were e-filed -- up from 60 percent for the same period last year. The service also reported that roughly 4 million returns have been filed via the Free File program -- up 44 percent from the year-ago figures. "As we get deeper into the tax filing season, the percent difference between how many people are using e-file and how many used it last year keeps going up," said IRS Commissioner Mark W. Everson. "This shapes up as a really strong year. Taxpayers who haven't filed yet should check into e-file and Free File." The IRS also said that 42 million refunds have been paid through direct deposit, up 5.7 percent for the same time last year.

Senators from both sides of the aisle and the Treasury Inspector General for Tax Administration questioned the plan by the Internal Revenue Service to cut back its walk-in and telephone Taxpayer Assistance Centers during a hearing on the 2006 IRS budget. IRS Commissioner Mark Everson discussed the agency's plan to close as many as 105 TACs and cut back its toll-free telephone service by 15 hours a week at the Senate Appropriations Subcommittee hearing. TACs are located nationwide and allow taxpayers to have face-to-face meetings with IRS employees who can assist taxpayers with tax law, tax return preparation and account inquiry resolution. "The IRS needs to balance customer service with its compliance and enforcement efforts," said Sen. Christopher Bond, R-Mo., chairman of the Transportation, Treasury and Housing and Urban Development Subcommittee. "I believe that most people who fail to comply with the tax code do so unintentionally because of its difficulty and complexity. Accurate and timely guidance from the service is imperative to ensuring taxpayer compliance." Colleen M. Kelley, president of the National Treasury Employees Union, warned that closing Taxpayer Assistance Centers will result in reduced taxpayer education and compliance at a time when the gap between taxes owed and amounts paid has increased to upwards of $298 billion.

The government is upping its enforcement measures in the wake of its success in catching tax cheats, penalizing promoters, barring unscrupulous preparers and shutting down abusive tax shelters, according to officials. At a joint Internal Revenue Service-Justice Department briefing, agency executives noted that last year, IRS Criminal Investigation referred more than 3,000 cases to the Justice Department for possible criminal prosecution, nearly a 20 percent increase over the previous year. During fiscal year 2004, the conviction rate on cases investigated by the IRS and referred to Justice was 95.4 percent. "If you're thinking about cheating on your taxes, think twice," said IRS Commissioner Mark W. Everson. "The IRS is ramping up its enforcement efforts, particularly for high-income individuals and corporations. Where we need to, we turn to the Justice Department to take people to court." The Justice Department's Tax Division's criminal enforcement priorities include prosecuting schemes that involve using trusts or other entities to conceal control over income and assets; shifting assets and income to hidden offshore accounts; claiming fictitious deductions; using frivolous justifications for not filing truthful tax returns; failing to withhold, report and pay payroll and income taxes; failing to report income; and failing to file tax returns.

The Internal Revenue Service is accepting applications for joining its Taxpayer Advocacy Panel. The TAP provides a forum for citizens from each state to make suggestions regarding IRS decision-making, and works to identify and prioritize taxpayer issues. "We are committed to working with taxpayers to improve the customer-service focus of the IRS," said Nina Olson, IRS National Taxpayer Advocate, in a statement. "Working with taxpayers directly helps us identify issues that may not be on the IRS radar screen. We can also hear their concerns about issues the IRS is already addressing." TAP applicants must be U.S. citizens and be able to commit 300 to 500 hours during the year to the panel. In addition, they must be current with their tax obligations and pass a criminal background check. The application is available at www.improveirs.org, or by calling (888) 912-1227. Applications must be received by the TAP office by April 29.

* SUPREME COURT REQUIRES TAX COURT TO INCLUDE TRIAL JUDGES' REPORTS ON APPEAL: The Supreme Court ruled in a 7-2 decision that the Tax Court may not exclude from the record on appeal Rule 183(b) reports submitted by special trial judges.The Tax Court's chief judge appoints special trial judges to hear certain cases, but the ultimate decision, when tax deficiencies are greater than $50,000, is reserved for the court itself. Tax Court Rule 183(b) directs the special trial judge to submit a report to the chief judge, who assigns the case to a judge of the court. The Tax Court judge is to give due regard to the report and presume that findings of fact contained in the report are correct. The Tax Court judge may then adopt the report "or may modify it or reject it in whole or in part."

The American Jobs Creation Act of 2004 enacted Code Sec. 409A, which requires the current inclusion in income of deferred compensation that does not meet the new, more stringent requirements of Code Sec. 409A.

The Winter 2004-2005 Statistics of Income Bulletin, a quarterly compilation of information on various topics from federal tax returns and other documents, has been released by the Internal Revenue Service. For tax years 1995 to 2001, corporation aggregate pretax book income -- the amount reported to shareholders -- peaked at $853.7 billion in 1999, falling to $221.3 billion in 2001. Aggregate tax net income peaked in 1997 at $607.5 billion, declining to $270.8 billion in 2001. In all years but 2001, aggregate pretax book income exceeded tax net income, reaching a maximum dollar difference of $318.4 billion in 1999. Preliminary data also show that taxpayers filed 130.6 million individual income tax returns for 2003. Adjusted gross income totaled $6.2 trillion, while taxable income was $4.2 trillion, and total income tax was $750 billion. The largest component of AGI was salaries and wages, totaling nearly $4.7 trillion. A total of $261.4 billion in business net income was reported on 14.4 million returns.

Gary Barnett, the embattled football coach at the University of Colorado, whose program has been investigated for sexual assault and recruiting violations over the past several years, now has Uncle Sam to contend with. The Internal Revenue Service has begun an investigation into two summer football camps that Barnett operates for boys ages eight to 13. Although university officials and the IRS declined to reveal what the investigation has centered on, Barnett's lawyer told the Rocky Mountain News that he thinks the probe is related to media reports that focused on allegations of questionable accounting and lax oversight of camp expenditures. Barnett said that he was cooperating and was "anxious for the truth to get out." The IRS probe follows a report by a Colorado grand jury that criticized how Barnett's football camps tracked money, alleging that the procedures amounted to a "slush fund" for the coaches. The grand jury convened about a year ago to delve into allegations that the CU program freely used sex and alcohol to procure potential recruits.In 2001, three women charged that they had been sexually assaulted by CU football players. Those charges quickly morphed into a series of investigations by the police, prosecutors and the grand jury.

The General Accountability Office and the Internal Revenue Service have added their own muscle to a Public Company Accounting Oversight Board proposal that would restrict the ability of accountants to provide tax services to audit clients.

E-file, direct deposit and e-payment programs are running at record paces so far this year, according to the Internal Revenue Service. Through March 25, 49 million returns were filed electronically, a 7 percent increase from last year. Overall, 64 percent of all returns were e-filed, up from 62 percent for the same period last year. While this percentage will decline as April 15 approaches, the IRS still expects to have more than half of all individual tax returns filed electronically for the first time. "This shapes up as a really strong year," said IRS Commissioner Mark W. Everson. "Taxpayers who haven't filed yet should check into e-file and Free File." Also, record numbers of individuals are now paying their taxes with credit cards. So far this year, almost half a million taxpayers have paid their taxes with a credit card, up from 324,000 at the same time last year.

More than two thirds of consumers participating in a survey by the National Retail Federation and CNN/Money expect to receive a tax refund this year -- and are ready to spend it. The NRF found that just one out seven respondents plans to wait until April to file this year, in anticipation of their refunds. The Internal Revenue Service reports that the average tax refund this year will be $2,259. Half of those expecting IRS largesse will use the refund to pay down debt, while others indicated that they plan to use part of their monies for such things as vacations or major purchases. In a gender breakdown, the NRF said that women were almost twice as likely as men to use portions of their refund for a major purchase.

The first study of taxpayer compliance since 1988 shows that the vast majority of American taxpayers pay their taxes on time and accurately, but that the nation still has a significant tax gap, according to the Internal Revenue Service. The National Research Program, launched in 2001, randomly selected about 46,000 returns for review and examination from 2001 to 2004. The return selection process included an oversampling of high-income returns to enable IRS researchers to draw valid conclusions about important sub-categories of taxpayers. The preliminary findings show that the gross tax gap -- the difference between what taxpayers should pay and what they actually pay on a timely basis -- exceeds $300 billion per year. IRS enforcement activities, coupled with late payments, recover about $55 billion of the tax gap, leaving a net tax gap of between $257 billion and $298 billion. The study found that underreporting of income is the largest component of the tax gap, accounting for more than 80 percent of the total, with non-filing and underpayment at about 10 percent each. Individual income tax is the single largest source of the annual tax gap, accounting for about two-thirds of the total. For individual underreporting, more than 80 percent comes from understated income, not overstated deductions, and most of the understated income comes from business activities, not wages or investment income. IRS Commissioner Mark W. Everson said that the study confirms two key points involving tax enforcement and simplification. "The IRS needs to enforce the law so that when Americans pay their taxes, they are confident that neighbors and business competitors are doing the same," Everson said. "At the same time, this research underscores [President George W. Bush's] call for tax reform. Complexity obscures understanding. Complexity in the tax code compromises both the service and enforcement missions of the IRS." "Those who try to follow the law but cannot understand their tax obligations may make inadvertent errors or ultimately throw up their hands and say, 'Why bother?' Meanwhile, individuals who seek to pay less than what they owe often hide behind the tax code's complexity in order to escape detection by the IRS and pay less than their fare share," Everson added.

A ruling by the Tax Court has underscored the way in which the alternative minimum tax penalizes holders of incentive stock options when the stock loses value after the option is exercised. Ronald Speltz thought that his employer was doing him a favor by issuing him ISOs to augment his salary, which was less than $100,000 a year. Instead, the ISOs triggered a tax nightmare when he exercised them before the tech bubble burst, leaving him with nearly worthless stock but with an unexpected tax bill of nearly $225,000. Although Speltz and his wife borrowed $134,000 to help pay state and federal taxes, and offered the cash value of his life insurance policy as a compromise for the remainder, the Internal Revenue Service rejected his offer. The Tax Court agreed. Even though the offer-in-compromise provisions include a compromise to promote effective tax administration -- explained by the regs to cover situations "where collection in full could be achieved but would cause economic hardship" -- the court found that the Speltz's had sufficient income to meet "basic living expenses" and therefore didn't qualify. The court said that it sympathized with the situation, but it is up to Congress, not the courts or the IRS, to come up with a solution.

More people have used Free File so far this year than for all of last year, according to the latest figures from the Internal Revenue Service. As of March 16, 3.55 million tax returns have gone through Free File, up 44 percent compared to the same time last year and exceeding last year's total of 3.51 million. Now in its third year, Free File is a partnership between the IRS and a consortium of tax software manufacturers. Electronic filing continues to surge, with e-filed returns running 7 percent ahead of last year. Of the 67 million returns filed as of March 18, 68 percent were e-filed. While this percentage will decline as April 15 approaches, the IRS said it expects that for the first time more than half of all individual tax returns will be electronically filed this year.

Taxpayers participating in "Son of Boss" tax shelter settlements have so far paid in more than $3.2 billion, a figure that should top $3.5 billion when the project concludes in the coming months, according to the Internal Revenue Service. Son of Boss, an offshoot of an earlier shelter called Boss ("bond and option sales strategy") was an abusive transaction aggressively marketed in the late 1990s and 2000 primarily to wealthy individuals. Both the Boss and Son of Boss shelters were structured using derivatives, noted Selva Ozelli, CPA, an international tax attorney with RIA. "Derivatives were used because of their uncertain tax treatment, limited financial statement disclosure and uncertainty regarding their valuation," she said. The settlement initiative required taxpayers to concede 100 percent of the claimed tax losses and pay a penalty of either 10 percent or 20 percent, unless they previous disclosed the transactions to the IRS. "This was a particularly bad shelter, and we're glad so many chose to get right with the government," said IRS Commissioner Mark W. Everson. "Despite the tough terms we offered, two-thirds of Son of Boss participants have come forward and paid up." Thus far, nearly 1,200 Son of Boss taxpayers have settled with the IRS. Typical settlements were about $1 million, while 18 taxpayers forked over $20 million apiece, and one paid a whopping $100 million. Based on disclosures that the IRS has received from promoter investigations and from investor lists from Justice Department litigation, the agency determined that over 1,800 people participated in Son of Boss. "For those who didn't come forward, we know who they are," Everson said. "We are going after them."

The IRS has released Rev. Proc. 2005-13, which details the limitations on depreciation deductions for owners of passenger automobiles first placed in service during calendar year 2005. Special tables of limitations on depreciation deductions are also provided for trucks and vans, and for passenger automobiles designed to be propelled primarily by electricity and built by an original equipment manufacturer (electric automobiles). In addition, the revenue procedure details the amounts to be included in income by lessees of passenger automobiles first leased during calendar year 2005, including a separate table of inclusion amounts for lessees of trucks and vans, and a separate table for lessees of electric automobiles.

The Internal Revenue Service has expanded the number of tax professionals who can use its suite of e-Services incentive products. Effective immediately, tax professionals who e-file any combination of five or more accepted individual and business tax returns in a calendar year can use these e-Services products: disclosure authorization, electronic account resolution and transcript delivery. These three products increase tax filing efficiency and save time and resources for tax practitioners. When launched in the summer of 2004, the e-Services incentive products were reserved for those who e-filed 100 or more individual returns. "These services make it easier for taxpayers to deal with the IRS and obtain information to help their clients," said IRS Commissioner Mark W. Everson. Other e-Services products available to all tax professionals include: e-Services registration, preparer tax identification numbers, IRS e-file applications, and taxpayer identification number matching.

"Where's My Refund?" -- the Internet-based service to check on federal income tax refunds -- now offers a way to trace refund checks and update flawed mailing addresses. The enhancements allow taxpayers to start a trace for lost or missing refund checks and notify the Internal Revenue Service of an address change when a refund check goes undelivered. "This new feature lets taxpayers take quick and easy steps to track down a lost refund," said IRS Commissioner Mark W. Everson. "It can reduce headaches for nearly 88,000 taxpayers who wind up with undelivered refund checks each year." Taxpayers securely access their personal refund information through www.irs.gov, and enter their Social Security number, filing status and the exact amount of their refund. These shared secrets -- data known only to the taxpayer and the IRS - verify that the person is authorized to access the account and make it possible to avoid delays in tracing refunds and changing an address.

The President's Advisory Panel on Federal Tax Reform will hold its fifth meeting on March 23 in New Orleans. The focus will be on additional perspectives about the fairness of the tax code and how the tax system affects families. The first panel will discuss, "What Is Fairness and How Can it Be Measured?" Panel members include Bob Greenstein, founder and executive director of the Center on Budget and Policy Priorities, and William W. Beach, director of the Center for Data Analysis of The Heritage Foundation. The topic for the second panel is "Low-Income Taxpayers." Its members include Hilary Hoynes, professor of economics at the University of California at Davis: Mark Moreau, co-director of Southeast Louisiana Legal Services; and David Marzahl, executive director of the Center for Economic Progress. The third panel, "Tax Treatment of Families," will include presentations by Eugene Steuerle, senior fellow at the Urban Institute; Mark Pauly, a professor at the Wharton School of the University of Pennsylvania; and James Alm, a professor at the Andrew Young School of Public Policy of Georgia State University.

The Internal Revenue Service has clarified in Rev. Rul. 2005-11 that interest paid on a loan that is refinanced more than once will retain its status as qualified housing interest, to the extent that the amount of the loan is not increased. That interest is deductible for alternative minimum tax purposes. Any other interest on amounts borrowed that are not used to acquire, construct or substantially improve any property that was a principal residence or qualified residence may not be deducted for AMT purposes, the service said. Revised instructions to Form 6251, which include a worksheet to help taxpayers determine the correct home mortgage interest adjustment, will be posted on the IRS Web site, www.irs.gov