Tax practice

Electronic filing continues to show a strong increase, with e-filed tax returns running more than 6 percent ahead of last year, according to the Internal Revenue Service. Out of 61 million returns filed as of March 11, 42.7 million, or nearly 70 percent, were e-filed -- up from 65 percent the previous year. While this percentage is expected decline as April 15 approaches, the IRS expects for the first time to have more than half of all individual tax returns filed electronically. Out of tax returns e-filed so far, the biggest increase is among those who prepare their own returns on a home computer -- 10.6 million returns, up more than 14 percent over results from the same period last year. The jump in computer use coincides with another strong year from the Free File program. The IRS and a consortium of tax software manufacturers offer free services through Free File, which is available at www.irs.gov. More than 3.33 million returns came in through Free File through March 9, which is a 44 percent increase from 2.32 million returns for the same period last year.

Internal Revenue Service Commissioner Mark W. Everson praised the agency's improvement in taxpayer service and its renewed emphasis on enforcement of the tax laws. In a speech at the National Press Club, Everson noted that the playing field is no longer tilted toward tax evaders, with only the amount of tax owed at risk. "Now they might have to pay the entire tax, interest and a stiff penalty," he said. "A taxpayer might have to wrestle with questions like, 'How much am I going to have to pay the lawyers and expert witnesses to litigate this thing?' And going to court is a public matter. Damage to one's reputation is a potential factor." Everson said that as the tax reform process unfolds, he doesn't expect to offer support for, or to oppose, any particular policy options. However, he offered these pointers to consider when reforming the code: _ Construct a tax system that recognizes the dynamic of an evolving economy; _ Assess policy options for their potential impact on attitudes towards compliance; _ Any new system should be administratively feasible; _ When looking at policy options, don't compare a sub-optimized existing system to a perfect, theoretical system; and, _ Recognize that transition to a new code must be properly planned and managed, or it may take decades to recover.

In an effort to minimize disputes regarding whether a truck body satisfies the weight-based exclusion provided in Section 4051(a)(2), the Internal Revenue Service, in Rev. Proc. 2005-19, has established four truck body safe harbors. Section 4051(a)(2) provides an exclusion from the tax imposed by Section 4051(a)(1) for truck chassis and bodies suitable for use with a vehicle that has a gross vehicle weight of 33,000 pounds or less. Similarly, Section 4051(a)(3) provides an exclusion for truck trailer and semi-trailer chassis and bodies suitable for use with a trailer or semi-trailer that has a GVW of 26,000 pounds or less. The IRS announced that it will not challenge a seller's determination that any of the following classifications of truck body types meet the "suitable for use" standard and sales thereof are excluded from the retail excise tax pursuant to Section 4051(a)(2): 1. Platform truck bodies 21 feet or less in length; 2. Dry freight and refrigerated truck van bodies 24 feet or less in length; 3. Dump truck bodies with load capacities of eight cubic yards or less; or 4. Refuse packer truck bodies with load capacities of 20 cubic yards or less. Other body types may also still satisfy the "suitable for use" standard if the seller can establish that, pursuant to Reg. 145.4051-1(a)(4), the truck body has practical and commercial fitness for use with a vehicle having a GVW of 33,000 pounds or less. Rev. Proc. 2005-19 is effective for sales on or after April 4, 2005. In the case of sales before April 4, 2005, the IRS won't challenge sellers who take positions consistent with the revenue procedure's safe harbors.

The Taxpayer Advocacy Panel recommended that tax preparers adhere to a basic standard of competence, with the responsibility of certifying and registering all tax preparers delegated to the various national tax associations. The VITA exam given by the Volunteer Income Tax Assistance Program would be the basic testing mechanism, and current preparers would be grandfathered into the program through an application, subject to approval by the Internal Revenue Service. TAP, a volunteer group that works to improve customer service and satisfaction at the Internal Revenue Service, made the recommendation as part of its annual report to the Treasury Department. Other recommendations made by the panel include eliminating the option to apply for refund anticipation loans through the IRS FreeFile Web site; informing taxpayers if all or a significant portion of their return will be outsourced to a location outside the United States; and clarifying that the earnings of newspaper carriers under age 18 are not subject to self-employment tax.

The Internal Revenue Service Oversight Board released a report requesting an additional $11.6 billion in funding for fiscal year 2006, a 9 percent increase over the Bush administration's recommendation. President Bush is required to submit the board's request, without revision, to Congress along with his own request. "One of the board's roles is to provide a private sector perspective," observed board chairman Raymond T. Wagner Jr. "And from this vantage point, it makes perfect sense to make the additional investments in enforcement that will pay for themselves many times over. The IRS and administration estimates show that every dollar invested in enforcement generates four dollars in increased revenues." The board estimated that an additional $435 million for enforcement would result in $1.74 billion in additional tax revenue. The board also called for additional funding toward maintaining and improving customer service and supporting the Business Systems Modernization program, which is replacing the agency's antiquated computer system. In its report, the board stated that its recommendations are backed by taxpayers. Those surveyed in its annual tax compliance survey called for additional funding for the IRS -- 62 percent favored more funding for enforcement and 64 percent favored more taxpayer assistance.

The Internal Revenue Service has taken the offensive against frivolous arguments that taxpayers should avoid when filing their tax returns. "Every filing season, thousands of taxpayers hear groundless theories suggesting that they don't have to pay taxes or file returns," said IRS Commissioner Mark W. Everson. "We want people to know the truth about these frivolous arguments: They don't work." Just-issued IRS Notice 2005-30 describes 23 frivolous arguments that taxpayers should avoid when filing their returns. Five revenue rulings issued in conjunction with the notice address specific frivolous claims often made to the IRS. These include arguments that the income tax is unconstitutional, that taxes may be withheld as a protest against government programs, and arguments that taxpayers may obtain a refund of all Social Security taxes paid by waiving their right to Social Security benefits. The revenue rulings emphasize the adverse consequences to taxpayers who fail to file or fail to pay taxes based on an erroneous belief in any of these frivolous arguments. In addition to tax and interest, taxpayers who file frivolous income tax returns face a $500 penalty, and may be subject to civil penalties of 20 or 75 percent of the underpaid tax. Those who pursue frivolous tax cases in the courts may face an additional penalty of up to $25,000. "The courts have consistently rejected these arguments and imposed substantial penalties on those taking these unsupportable positions," said IRS chief counsel Donald L. Korb. "Those potentially tempted by these schemes need to realize that they carry a heavy price for both the taxpayers and the promoters."

-- The IRS is providing limited transition relief for certain partnerships and other pass-through entities. Section 470 of the American Jobs Creation Act of 2004 generally bars a deduction for "tax-exempt use losses" on "tax-exempt use property," where there are leases of property in sale-in, lease-out transactions involving tax-exempt entities. It is generally applicable to leases entered into after March 12, 2004. In Notice 2005-29, the IRS indicated that it would not apply Section 470 to partnerships or other pass-through entities for taxable years beginning before Jan. 1, 2005, for property treated as tax-exempt use property solely because of the application of Section 168(h)(6). Section 168(h)(6) provides that if any property that isn't otherwise "tax-exempt use property" under Section 168(h) is owned by a partnership that has both a tax-exempt entity and a person who isn't a tax-exempt entity as partners, and any allocation to the tax-exempt entity of partnership items isn't a qualified allocation, an amount equal to the tax-exempt entity's proportionate share of the property generally is treated as tax-exempt use property.

The Bush administration budget for fiscal year 2006 would make permanent the tax cuts passed in 2001 and 2003, close loopholes, and consolidate the many existing retirement plans into one, but it would leave fixing the alternative minimum tax to be considered by the tax reform panel named in January.The proposed budget includes a refundable income tax credit for the cost of health insurance purchased by individuals under age 65, and an additional $500 million for Internal Revenue Service enforcement measures.

If a principal residence is considered the ultimate personal tax shelter for some, then the vacation home is fast approaching a close second for many more.The recent run-up in the market value - and popularity - of second homes has helped solidify their place as a sound investment. The tax advantages make it even more worthwhile: mortgage and real estate tax deductions, rental exclusions and expense offsets on an annual basis, followed by ultimate disposition at primarily capital gains rates - or better, now that the rules are more clear for use of the personal residence exclusion and like-kind exchange deferral, singularly or in tandem.

IRS DENIES PRE-EXISTING SILO BENEFITS: The Internal Revenue Service has designated "sale-in/lease-out" or "Silo" arrangements as abusive tax avoidance transactions.Silo arrangements are designed to exploit the tax law by shifting tax benefits from a tax-indifferent party that cannot use them to a taxpayer that can. Taxpayers entering into Silo arrangements cannot claim tax benefits as the purported owners of property subject to the lease, because they do not acquire tax ownership of the property.

Dallas - High-profile Texas investor and entrepreneur Sam Wyly has filed an $80 million suit against Big Four firm Ernst & Young, charging that the firm's audits of troubled Computer Associates influenced his decision to sell his company, Sterling Software, to CA in a stock transaction.Wyly's suit, which was filed in Texas District Court here, said that he relied on E&Y audits for CA's fiscal 1999 to sell his company to the concern for stock. Roughly one month later CA's shares plunged some 12 percent when its earnings reports were delayed, and then fell further when the company failed to make its earnings forecast. Computer Associates replaced E&Y in 1999 with Big Four rival KPMG.

The interest rate for tax overpayments and underpayments will rise by 1 percent for the calendar quarter beginning April 1, 2005, according to the Internal Revenue Service. The second quarter rate for noncorporate overpayments and underpayments is 6 percent. The interest rate for corporate overpayments is 5 percent, or 3.5 percent for the portion of a corporate overpayment exceeding $10,000. The rate is 6 percent for corporate underpayments, or 8 percent for large corporate underpayments. The interest rates are computed from the federal short-term rate based on daily compounding determined during January 2005.

The President's Advisory Panel on Federal Tax Reform will hold its fourth meeting on Wednesday, March 16, at the University of Chicago Graduate School of Business Gleacher Center. Witnesses will provide perspectives on the impact of the tax laws on important taxpayer decisions and how the tax system treats investment alternatives. Panel I, on taxes and individual decisions, will hear testimony from James J. Heckman, a Nobel Laureate in Economics and professor of economics at the University of Chicago. Panel II will examine taxes and investment alternatives. Its witnesses include Brian Wesbury, chief investment strategist at Claymore Securities Inc.; Kathleen Kennedy, an associate professor of law and director of the Center for Tax Law and Employee Benefits at John Marshall Law School; Dr. Susan Dynarski, assistant professor of public policy at the Kennedy School of Government at Harvard University; and Armond Dinverno, principal and co-president of Balasa Dinverno & Foltz LLC. Panel III, on taxation of financial instruments, will hear David Weisbach, a professor of law at the University of Chicago; and Robert McDonald, a professor of finance at the Kellogg School of Management at Northwestern University.

Individual taxpayers electronically filed 39.2 million returns through March 4 -- up 2.1 million or about 6 percent over last year's numbers, according to the Internal Revenue Service. The biggest increase came in home computer use, which was up 14 percent. Out of 55 million returns filed as of March 4, 72 percent were e-filed -- up from 67 percent the previous year. While this percentage will decline as April 15 approaches, the IRS expects for the first time to have more than half of all individual tax returns filed electronically. The jump in computer use coincides with another strong year for the Free File program, under which the IRS and a consortium of tax software manufacturers offer free services. More than 3 million returns came in through Free File through March 2, a 43 percent increase from 2.15 million returns for the same period last year. Record numbers of individuals are choosing to have their refunds directly deposited into their bank accounts. So far this year, 72 percent of all refunds are through direct deposit -- up from 68 percent over the same period last year.

The President's Advisory Panel on Federal Tax Reform held its third meeting in Tampa on Tuesday, with the objective of understanding how the existing tax system affects business taxpayers. "Small business and self-employed taxpayers, in particular, are burdened by the complexity of our tax code and bear a substantial proportion of the estimated $125 billion in compliance costs," said Connie Mack, chairman of the panel. "As we will learn, it is these same small businesses that are a powerful engine driving our country -- they employ over half of all private sector employees and generate 60 to 80 percent of new jobs." Small-business owner David Hurley told the panel that the tax code places a tremendous burden on the nation's leading job creators. "If you are a big corporation with a compliance department or a tax attorney on staff to help navigate the various tax laws at the federal, state and local levels, then compliance issues aren't nearly as thorny as they are for small businesses," he said. "But if you are a small business owner, in addition to dealing with compliance requirements, you might also be taking out the garbage, ordering inventory and hiring employees."

The President's Advisory Panel on Federal Tax Reform holds its third meeting Tuesday, March 8 at Sago Networks, here. The witnesses invited are expected to provide the panel with perspective on corporate tax reform and how the tax system affects businesses and entrepreneurs. They include Jack Levin, senior partner in the international law firm of Kirkland & Ellis LLP; Douglas Shackelford, a CPA and professor of taxation at the University of North Carolina's Kenan-Flagler Business School; William Gentry, associate professor of Economics at Williams College; Sam Gibbons, chairman of Gibbons & Co., a former congressman and chairman of the Ways and Means Committee; Roger Harris, president and chief executive of Padgett Business Services; Todd Flemming, chief executive of Infrasafe Inc.; David Hurley, owner and principal of Landmark Engineering and Surveying Corp.; and Donald Bruce, assistant professor in the Center for Business and Economic Research and the Department of Economics at the University of Tennessee, Knoxville. Sago Networks is a technology services company that provides solutions for all of its customers' bandwidth and custom telecommunications needs.

Sidney I. Roberts, one of the country's foremost authorities on the complexities of international tax law, died at his home here following a bout with pneumonia. He was 91. Roberts authored some 10 books and countless articles on the tax implications in such areas as overseas stock ownership and dual residences. Roberts & Holland -- the firm he co-founded in 1957 -- evolved into one of the largest international tax firms in the country. He retired as a partner in 1986. In 1967, he co-authored "U.S. Income Taxation of Foreign Corporations and Nonresident Aliens." Roberts also was an adjunct professor at Columbia Law School.

Federal Reserve Chairman Alan Greenspan told the President's Advisory Panel on Federal Tax Reform that a consumption tax, such as a national sales tax or value added tax, would spur economic growth because it would encourage saving and capital formation. However, Greenspan cautioned that moving to a different system than the current one would raise a challenging set of transition issues. Joining Greenspan at the panel's second meeting were former Secretary of State and Secretary of the Treasury James Baker, and Commissioner of Internal Revenue Mark Everson. The panel is charged with examining the existing system and formulating options for reform, which will presented to the Secretary of the Treasury by July 31, 2005. The third meeting will be held March 8 in Tampa, Fla., and will focus on how the tax system affects businesses and entrepreneurs.

At the mid-point of tax filing season, taxpayers have used e-filing at a record rate, according to the Internal Revenue Service. Out of 47 million returns filed through Feb. 25, 74 percent of them were e-filed -- up from 69 percent last year. While this percentage traditionally declines as April 15 approaches, the IRS expects for the first time to have more than half of all individual tax returns filed electronically. Of the 35 million returns that have been e-filed so far this year, the biggest jump comes from self-prepared tax returns filed with a computer, which have increased nearly 14 percent to 8.7 million returns. The jump in computer use coincides with another strong year for the Free File program. More than 2.77 million returns came in through Free File through Feb. 23, which is a 42.6 percent increase from last year's 1.94 million returns. "E-filing is making a strong start," said IRS Commissioner Mark W. Everson. "Taxpayers and tax professionals are becoming increasingly comfortable with e-filing." The growth in e-filing comes as record tax refunds are being sent to taxpayers. The average refund so far is $2,436 -- a record amount and more than $200 more than last year. So far this year, three out of four taxpayers receiving refunds have used direct deposit.

The Internal Revenue Service has finalized a regulation that would limit the use of life insurance and annuity contracts as a way to avoid current taxation of investment earnings. The regulation will prevent taxpayers from turning otherwise taxable investments in hedge funds and other entities into tax-deferred or tax-free investments by purchasing the investments through a life insurance or annuity contract. Life insurance and annuity contracts receive favorable tax treatment in recognition of the importance of protecting loved ones against the potentially devastating financial consequences of death or the risk of exhausting savings while in retirement. The new regulation will help taxpayers purchasing a life insurance or annuity contract to be secure in the knowledge that the contract complies with the tax laws, according to the IRS.This regulation is part of the effort to modernize the rules for these contracts, in recognition of the developments that have occurred in the financial markets in recent years.