Tax research

The rules for the deductibility of prepaid expenses are riddled with exceptions to the basic premise that neither cash nor accrual-basis taxpayers ought to deduct any prepayment except to the extent that the purchase - whether it is in the form of an asset or a service - is used in the same tax year. Grace periods, exceptions and additional restrictions can all change a result. The latest variation on the theme of "things are not always what they appear," comes in the form of a chief counsel's advice memorandum.

The Internal Revenue Service is reminding tax professionals to make reservations now for one of six Nationwide Tax Forums being held throughout the country. The Nationwide Tax Forums are three-day events that provide tax professionals with the most up-to-date tax information through training seminars presented by IRS experts and partnering organizations. Forums offer an opportunity to receive up to 18 continuing professional education credits through a variety of training seminars. The locations are: · Atlanta - July 17-19· Chicago - July 31-Aug. 2· Las Vegas - Aug. 21-23 · New York - Aug. 28-30 · Anaheim - Sept. 11-13· Orlando - Sept. 18-20 The cost of enrollment is $165 per person, per city for pre-registration and $299 for late or on-site registration. The pre-registration period ends two weeks prior to the start of each forum. Members of the following associations qualify for discounted enrollment costs: the American Association of Attorney-CPAs; the American Bar Association; the American Institute of CPAs; the National Association of Enrolled Agents; the National Association of Tax Professionals; the National Society of Accountants; and the National Society of Tax Professionals.

The Senate Finance Committee has released an energy tax package addressing advanced electricity infrastructure, domestic fuel security, advanced technology vehicles, and conservation and energy efficiency. The committee is scheduled to consider the bill on Tuesday, June 19.Among its provisions, the bill authorizes $750 million in each of calendar years 2008 and 2009 for clean renewable energy bonds; creates a new category of tax credit bonds for advanced coal facilities; and extends the 30 percent investment tax credit for solar and fuel cells, and the 10 percent credit for microturbines for two years. It expands the investment tax credit for clean coal facilities. The bill also extends for two years and modifies the personal tax credit for residential solar electric, solar water heating, and fuel cell property. The modification raises the cap on the credit for solar electric property to $4,000. "This bill reflects energy needs in the 21st Century," said Sen. Chuck Grassley, R-Iowa, and ranking member of the Finance Committee. "People need tax certainty to invest in infrastructure and keep production moving. Production has to meet demand, and alternative energy has never been in such demand."

The tax gap - the difference between the amount that taxpayers pay voluntarily and on time and what they should pay - continues to generate congressional hearings and legislative proposals. The most recent data from 46,000 returns examined under the National Research Program show a net gap of $290 billion for the year 2001.

Thomson Tax & Accounting has acquired the Employee Benefits Institute of America Inc., an Edmonds, Wash.-based provider of benefits research and guidance to corporations and advisory firms.

Taxpayers have an additional two days this year, until July 2, 2007, to file the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1, according to the Internal Revenue Service.The deadline for FBAR forms is June 30, 2007. But because June 30 falls on a Saturday, the IRS is allowing taxpayers to file by July 2. FBAR information returns for the 2006 calendar year must be filed with the U.S. Department of Treasury, P.O. Box 32621, Detroit, Mich., 48232-0621. The address for commercial delivery is: U.S. Department of Treasury, Currency Transaction Reporting, 985 Michigan Avenue, Detroit, Mich., 48226. The FBAR form is not available for electronic filing, but many income tax software packages can prepare a printed copy. FBAR forms are also available on the IRS Web site or FinCEN Web site, and from the IRS via telephone at (800)-829-3676. The FBAR form is required for each U.S. person who has a financial interest in, or signature authority or other authority, over any financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.

A new Treasury Inspector General for Tax Administration audit has found that changes in the Internal Revenue Service's Questionable Refund Program, along with a significant technological failure, dramatically decreased the effectiveness of the program for the 2006 filing season. The IRS relies on the Questionable Refund Program to identify and prevent fraudulent refund claims from being paid. Since its inception in 1977, this program has identified more than $4.3 billion in fraudulent refunds and prevented the issuance of over $3.6 billion in refunds. However, over the past several years, TIGTA has reported that the QRP was becoming increasingly unmanageable due to the growing number of fraudulent claims and the IRS's lack of resources to combat the fraud. "The IRS reacted to legitimate congressional concerns that taxpayers were not being notified when their refunds were delayed, sometimes for years," said Inspector General J. Russell George. "Unfortunately, the IRS overreacted, and it is costing taxpayers millions of dollars." Last tax season, the IRS appropriately began notifying taxpayers when their accounts were temporarily frozen as a result of a suspicious return. However, the agency limited the length of these freezes, which also limited its ability to properly scrutinize many of these returns. "This decision had a direct cost to taxpayers," George said. "Our audit identified nearly $15.9 million in potentially fraudulent refunds that were allowed to be issued."

Senators Max Baucus, D-Mont., and Chuck Grassley, R-Iowa, chairman and ranking member of the Senate Finance Committee, respectively, have introduced legislation to give more than $550 million in tax relief for veterans, soldiers and their employers.

Technology will have to evolve more efficiently to integrate with firms' tax practices, and not just help practitioners perform arithmetic, said tax industry and Internal Revenue Service veteran Lenny Holt at the American Institute of CPAs' information technology conference, Tech+, here.Holt, now with CCH's Firm Services Unit, said that while technology has made quantum leaps since 1986 -- when just 25,000 1040s were e-filed, as opposed to the 76 million in 2007 -- the distinction between tax accounting and other financial services is blurring, and the facility to consolidate that integration is technology."Clients using tax professionals for more than just taxes and technology is a big part," Holt told attendees during a session titled "Technology and Your Tax Practice."Tim Shortlseeve, a partner at the Rochester, N.Y.-based CPA firm of Bonn, Shortsleeve & Ray, told attendees that to hone best technology practices for tax preparation, firms must create an in-house project team and appoint a project champion -- one person with both decision-making and budget-approval powers.The project team's to-do list includes such items as evaluating workflow options, documenting new policies and procedures, and identifying changes to software. A firm must also have an IT technician, even if they have to outsource one."You have to ask yourself, are you using your current technology to your best advantage?" asked Shortsleeve. "And don't overlook training. The dollars you spend on training will come back tenfold."Other checklist items include installing multiple monitors and establishing remote access."You have to communicate the plans and expectations to everyone in the firm," he said. The session included product demonstrations from tax software publishers CCH, Intuit and Thomson.

Notice 2007-54, which provides guidance and transitional relief for the return preparer penalty provisions amended by the Small Business and Work Opportunity Act of 2007, has been issued by the Internal Revenue Service. The new amendments are effective for returns prepared after May 25, 2007. The new law amended several provisions of the Tax Code to extend the return preparer penalties under Section 6694 to preparers of all tax returns, including estate and gift tax returns, employment tax returns, and excise tax returns. Prior to the new law, these penalties applied only to the preparers of income tax returns. The new law also increased the amount of the penalties and changed the standards of conduct that must be met by return preparers in order to avoid penalties under Section 6694. The transitional relief provided by Notice 2007-54 will apply to all returns, amended returns and refund claims due on or before Dec. 31, 2007, including those returns, amended returns and refund claims filed pursuant to extensions to file due on or before Dec. 31, 2007; to 2007 estimated tax returns due on or before Jan. 15, 2008; and to 2007 employment and excise tax returns due on or before Jan. 31, 2008.

In a motion filed last week, lawyers for action star Wesley Snipes asked that tax fraud and tax evasion charges against him be dismissed, claiming that he is being targeted because he is African-American. The eight-count indictment, filed last October, charges Snipes and two Florida men with conspiracy to defraud the Internal Revenue Service and presenting fraudulent claims for payment totaling almost $12 million. Snipes also faces six counts of failing to file income tax returns between 1999 and 2004. The motion notes that although co-defendant Eddie Ray Kahn, the founder of tax scheme promoter American Rights Litigator, had not filed tax returns from 1997 to 2002, he was not charged with failing to file. It was also "possible" that co-defendant and tax preparer Douglas P. Rosile had not filed in 2003 and 2004, but no charges were brought against him. Both Kahn and Rosile, the motion points out, are "Caucasian." Snipes has maintained all along that he was simply the victim of bad tax advice, and that the charges against him were racially based. As further evidence of "selective prosecution," the motion points out that while American Rights Litigator had over 2,000 clients, Snipes was the only one to be prosecuted. His lawyers ask that, should the case continue, he be granted discovery rights to determine the race and tax return status of those other clients, and whether any face charges. In addition, the motion claims that Snipes was singled out because he asked the examining agents to send him written copies of the questions they wished to discuss with him, refused to acknowledge the illegitimacy of his tax strategy, and because he possesses a "national platform" to publicize the issue. Finally, the motion also reveals that Snipes' middle name is Trent.

Six of the nation's largest CPA firms have collaborated on a white paper and submitted it in late May to then-Internal Revenue Service Commissioner Mark Everson with a series of recommendations on strategies to close the $300 billion tax gap. The letter, submitted by executives from BDO Seidman, Deloitte, Ernst & Young, Grant Thornton, KPMG and PricewaterhouseCoopers, told Everson that strategies to narrow the massive payment fissure should encompass such areas as targeting the service's efforts toward high-risk areas of noncompliance, making better use of technologies, and establishing measurable milestones over reasonable time frames to monitor effectiveness. The paper also held tax preparers' feet to the fire as a part of the problem stating that in some cases, the preparers "failed to inquire for complete facts or otherwise facilitating noncompliance. Initiatives directed at improving the performance of paid tax return preparers and strengthening the integrity of the tax system should be undertaken as part of any strategy to improve voluntary compliance and reduce the tax gap," the paper said.

Moving to curb abuse of this year's one-time telephone excise tax refund program, the Justice Department and the Internal Revenue Service have obtained federal indictments against tax preparers who allegedly filed thousands of dollars in fraudulent refund claims. In recent weeks, alleged refund schemes involving preparers in Florida, Georgia, Texas and California have led to federal indictments. Shortly after tax season opened in January, the IRS observed problems with returns from some tax preparers that indicated possible criminal intent. Along with search warrants carried out by the IRS, tax preparers across the nation who prepared questionable refund requests received visits from IRS revenue agents and special agents. "We saw limited but serious instances of abuse," said IRS acting commissioner Kevin M. Brown. "We used our enforcement resources to move swiftly and decisively to protect this valuable refund for the vast majority of taxpayers and tax preparers who are requesting it properly."

On the heels of strong tax revenue gains, state spending during the past fiscal year rose 8.6 percent over the year-ago period, but concerns over tighter budgets and more modest spending levels may be in the near future, according to the National Governors Association and the National Association of State Budget Officers. According to the 2006 Sales Tax Rate Report from tax technology products provider Vertex Inc., the average U.S. sales tax rate hit an historical high in 2006 at 8.579 percent -- up from 8.549 percent in 2005. Vertex also said that the number of tax rate changes in the U.S. grew by 28 percent since the late 1990s. "As the economy was flush with money in the late 90s, there is a recognized decrease in the number of tax rate changes from 1995-2000," said John Minassian, Vertex vice president of Tax Content Development. "However, ever since predictions of an economic bubble burst came to fruition in 2000, we have seen a severe increase in the number of rate changes, likely the result of local, city, county and state needs to increase revenue and balance budgets."

Payroll and benefits outsourcing provider Paychex, Inc. has unveiled Tax Credit Services, a product that provides small and mid-sized businesses with help in identifying and applying for eligible wage-based tax credits they may be eligible to receive. Wage-based tax credits were designed to stimulate economic development and create job growth in targeted areas throughout the country by reducing income tax liability at the state and federal levels. They can be used in the current year or can be carried forward to reduce future tax bills. The Paychex Tax Credit Services target two types of business tax credits: location-based and job-creation tax credits. Paychex veteran executive Cliff Gibson has been tapped to head the company's new Tax Credit Services sales division. For more information go to www.paychex.com

The Internal Revenue Service revealed plans to launch a new National Research Program reporting compliance study for individual taxpayers that would provide updated and more accurate audit selection tools and support efforts to reduce the nation's $300 billion-plus tax gap. The latest NRP study will be the first of an ongoing series of annual individual studies using an innovative multi-year rolling methodology. The study is scheduled to start in October 2007 and examine about 13,000 randomly selected 2006 individual returns. Similar sample sizes will be used in subsequent tax years. The IRS said that the advantage of combining results over rolling three-year periods is that it would be able to make annual updates to compliance estimates and develop more efficient workload plans on an annual basis. Previous studies started from scratch, drew tax returns from a single tax year and involved examinations of more than 45,000 taxpayers. The initial group of taxpayers whose returns are selected for audit under the new NRP study will start receiving official letters in October informing them that they are part of the research study.

Two months after the Justice Department filed lawsuits accusing more than 125 franchised offices of tax-prep company Jackson Hewitt of helping falsify tax returns, the company disclosed that it has come under investigation by the Internal Revenue Service. Accrording to The New York Times, the Parsippany, N.J.-based company said that it was cooperating with the IRS inquiry. The four DOJ lawsuits --filed in federal courts in Chicago, Atlanta, Detroit, and Raleigh, N.C. against five corporations operated under franchise agreements with Jackson Hewitt, allege that the businesses cost more than $70 million in losses to the U.S. Treasury. One of the individual defendants, Farrukh Sohail of Atlanta, wholly or partly owned each of the five corporations, with those franchises filing more than 105,000 federal income tax returns last year. According to the complaint, Sohail and other defendants "created and fostered a business environment" at the franchises, "in which fraudulent tax return preparation is encouraged and flourishes." Jackson Hewitt subsequently launched an in-house review of its practices and retained Fred T. Goldberg, a former IRS commissioner, to head the investigation.

Tax, audit and accounting software and services provider CCH, a Wolters Kluwer Co., had added a Sarbanes-Oxley Section 404 internal controls library to its proprietary Accounting Research Manager database. The new offering includes materials such as: * The American Institute of CPAs: professional standards related to internal controls;*The COSO Internal Control Integrated Framework;* Institute of Internal Auditors' "Designing and Writing Message-Based Audit Reports";* Public Company Accounting Oversight Board auditing standards related to internal control; and,* Securities and Exchange Commission rules and releases related to internal controls. For more information, go to www.accountingresearchmanager.com

The allegations in the criminal indictment of two former and two current Ernst & Young partners for tax fraud conspiracy and related crimes arising out of tax shelters promoted by E&Y makes for some very interesting reading. All four worked in a E&Y group first named VIPER (Value Ideas Produce Extraordinary Results), and later renamed SISG (Strategic Individual Solutions Group). One was the former national director of E&Y’s Center for Wealth Planning, another the national director of E&Y's Personal Income Tax and Retirement Planning practice. The basic premise of the U.S. attorney, as stated in the press release, is: “In order to maximize the appearance that the tax shelters were investments undertaken to generate profits, and to minimize the likelihood that the IRS would learn the transactions were actually designed to create tax losses and deductions, the defendants and their co-conspirators created and assisted in creating transactional documents and other materials containing false and fraudulent descriptions of the clients' motivations for entering into the transactions, and their motivations for taking the various steps that would yield the tax benefits.” The tax shelters are described as “cookie-cutter products that would eliminate, reduce or defer large tax liabilities.” One of the allegations is that the defendants worked with law firms to provide E&Y's clients with opinion letters that claimed the tax shelter losses or deductions would "more likely than not" or "should" survive IRS challenge, and the defendants knew those opinions were based upon false and fraudulent statements that omitted material facts. The indictment also alleges that the defendants and their co-conspirators undertook these actions so E&Y could participate in the highly lucrative tax shelter market in which other accounting firms were already participating. In response to the indictment, E&Y issued a press release stating those indicted are two former partners and two partners who have been on administrative leave, that they were part of a small group within the firm that disbanded years ago, and that E&Y voluntarily made many changes and enhancements to their tax practice. It also mentioned that some changes were made pursuant to a 2003 agreement with the IRS, which E&Y proudly proclaimed the IRS Commissioner called a "model for agreements with practitioners.” The indictment explains in detail how the shelters worked and were marketed, contains numerous quotes attributed to the defendants, and has an allegation the fees charged were based on a percentage of the tax savings obtained. Interestingly, there is a claim that three defendants utilized a fraudulent tax shelter with regard to the proceeds they received when E&Y sold its consulting business to Cap Gemini. The more I read, the more it reminded me of Enron’s downfall. As with Enron, there is an accounting firm involved, law firms certifying the validity of very complicated transactions, and financing from a third party. What is different is, unlike in Enron, the originator of the transactions is the accounting firm. I consider this difference to be very significant. But it is obvious, after the demise of Andersen, the government has decided to go after individuals criminally, rather than the firm, so as not to put the future of a Big Four firm in jeopardy. If it goes to a jury trial, how will the government simplify the transactions? What are the perceived smoking guns that it will present? With regard to the defense, will they claim the tax shelters weren’t criminal but very aggressive attempts at tax savings, similar to 1031 exchanges? If successful, the government will probably feel those in accounting firms, because of fear of criminal prosecution, will reign in a firm from engaging in fraudulent activities. I wonder if the government has successfully made that point already simply by indicting four former or current partners of a Big Four firm. A copy of the indictment is at http://online.wsj.com/public/resources/documents/EYIndictment20070530.pdf. The government’s press release is at usdoj.gov/usao/nys/pressreleases/May07/eyindictmentpr.pdf.

Republican presidential candidates Rudy Giuliani and Sen. John McCain, R-Ariz., have each refused to sign a pledge not to raise taxes if either is elected as the nation’s chief executive.