Tax research

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 American Institute of CPAs will urge the Internal Revenue Service to delay, by at least a year, implementation of mandatory electronic filing procedures for large corporations and exempt organizations at a hearing before the IRS on March 16, 2005. The IRS's recently released regulations will generally require corporations with total assets of $50 million or more and tax-exempt organizations with total assets of $100 million or more to e-file their tax returns to the IRS starting in January 2006. In addition, smaller corporations and exempt organizations face an e-filing requirement starting in January 2007 under the regulations. Beginning in January 2007, corporations and exempt organizations with total assets of $10 million or more and all private foundations and charitable trusts, regardless of asset size, will generally be required to electronically file tax returns. "We view this as a dramatic change, with inadequate lead time," said Deborah J. Pflieger, former chair of the AICPA's Practice and Procedure Committee and a managing director in PricewaterhouseCoopers' National Tax Office. "The affected corporations and tax-exempt organizations, software developers and tax practitioners will have to make significant process and technology changes in order to comply with mandatory e-filing requirements," Pflieger said. "The changes require substantial collaboration and coordination by the IRS with all impacted parties, but the taxpayers and tax practitioners who prepare and file the majority of affected returns have not been provided ample opportunity to share their corporate e-file issues."

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.

Washington - Witnesses at the inaugural meeting of President Bush's Advisory Panel on Federal Tax Reform, held here last month, laid the groundwork for considering the roster of options facing panel members, who are saddled with the daunting task of recommending specific changes to the behemoth Internal Revenue Code.Former senator Connie Mack, chairman of the reform panel, said that the group would "take a fresh look at the existing tax code and will formulate options for making the tax system simple, fair and productive."

Washington - The Internal Revenue Service has announced a settlement initiative for executives and companies that participated in an abusive tax avoidance transaction involving the transfer of stock options or restricted stock to family-controlled entities.Under this scheme, executives, often facilitated by their corporate employers, transferred stock options to family-controlled partnerships and related entities typically created for the purpose of receiving the options and avoiding taxes on compensation income normally taxed to the executive. The tax objective was to defer for up to 30 years taxes on the compensation, and the plan resulted, in many cases, in the corporation deferring a legitimate deduction for the same compensation.

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 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 fact-findings contained in the report to be correct. The Tax Court judge may then adopt the report "or may modify it or reject it in whole or in part." After a rule revision in 1983, the reports were no longer included in the record or made public. The taxpayers in the case before the Supreme Court had failed in Tax Court, and believed that the decision -- which said that it agreed with and adopted the opinion of the special trial judge -- did not, in fact, comport with the report of the special trial judge. The appeals court ruled against the taxpayers, holding that the report is protected as part of the court's confidential deliberative process. The Supreme Court reversed, finding that the practice of not disclosing the special trial judge's original report "impedes fully informed appellate review," and ignores the principle that the officer who hears witnesses and sifts through evidence "will have a comprehensive view of the case that cannot be conveyed full-strength by a paper record."

Facing charges of tax evasion, original "Survivor" winner Richard Hatch last week decided to take his chances with a grand jury, pulling out of a plea bargain that had been arranged with the U.S. Attorney in Rhode Island. In January, the government charged that Hatch had filed a false income tax return that omitted the more than $1 million in prize money that he received for winning the popular reality show. He also was charged with failing to report approximately $321,000 paid to him by a Boston radio station for co-hosting a program. Hatch, who lives in Newport, had agreed to plead guilty in return for a lighter sentence. Last Wednesday, however, prosecutors said that he had backed out of the plea deal, and so they dismissed the original charges and said that they would present their case to a grand jury. "The government will not pursue the information filed against Mr. Hatch in January," said Tom Connell, a spokesman for the U.S. Attorney in Rhode Island, "and will instead present the case to a grand jury for consideration of all possible charges."

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.

Electronic forms provider STF Services Corp. has entered into a marketing pact with online sales and use tax concern Avalara, to license STF's flagship SuperForm product. Terms were not disclosed. Avalara's AvaTaxST --which automatically calculates and reports sales tax -- will now include a forms utility that would create automated returns. Currently, AvaTax ST has four functional components: o Customer address validation; o Tax jurisdiction research; o Sales and use tax calculation; and, o Secure reporting for tax filing and audit purposes. "STF's interactive forms technology and years of experience in dealing with the myriad taxing jurisdictions will streamline the sales tax compliance burden with Avalara's system, and help deliver value to customers," remarked STF's president, Charlie Ter Bush, in a statement.

A federal district court has permanently barred St. Louis truck driver Charles Eden from preparing federal income tax returns for customers. In entering the civil injunction order, Judge Stephen Limbaugh found that Eden "continually and repeatedly" understated customers' tax liabilities "by fabricating or grossly inflating their tax deduction." The order states that Eden's activities over the last five years have cost the government nearly $3.5 million. The court ordered Eden to notify his customers of the injunction and to provide the Justice Department with his customers' names, mailing and e-mail addresses, and phone and Social Security numbers. "People who prepare false or fraudulent tax returns are cheating not just the federal treasury, but all law-abiding taxpayers," said Eileen J. O'Connor, assistant attorney general for the Justice Department's Tax Division. "The Department of Justice and the Internal Revenue Service are working vigorously to stop these systematic abuses of the tax system."

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.

Federal penalties for taxpayers accused of tax evasion, failure to file a return, or making false statements to the Internal Revenue Service could increase dramatically later this year if Congress approves legislation being pushed by Sen. Russ Feingold, D-Wis., to sweeten tax deductions for charitable volunteers. Under the bill, the current $100,000 fine for attempting to "evade or defeat tax" liabilities would jump to $250,000, penalties for more serious violations would double to $1 million per offense, and the maximum of prison terms facing taxpayers would rise from five years to 10 years. At the same time, taxpayers charged with "willful failure to file returns, supply information or pay tax" would face felony rather than misdemeanor charges, with maximum penalties climbing to 10 years, up from 12 months currently. Feingold's bill would also double the federal penalties for making false statements to IRS to as much as $1 million and/or five years in prison. These sharply increased penalties are buried in the fine print of a bill that Feingold said is needed to provide equitable tax treatment for volunteers who use their cars for charitable activities. Under current law, these volunteers may be reimbursed up to 14 cents per mile for their donated services without triggering a tax consequence for either the organization or the volunteers. If the charitable organization reimburses any more than that, they are required to file an information return indicating the amount, and the volunteers must include the amount over 14 cents per mile in their taxable income. According to Feingold, this is inequitable because the mileage reimbursement level currently permitted for businesses is a more liberal 40.5 cents per mile. In proposing legislation to eliminate this "disparity," Feingold told the Senate that his new bill "today is identical to a measure I introduced in the 107th Congress and the 108th Congress in nearly every respect." Significantly, however, neither of those earlier Senate bills, nor separate legislation introduced in the House earlier this year by Rep. Todd Platts, R-Pa., to increase charitable mileage deductions, contain the tax penalty increases included in Feingold's current measure. In explaining the new bill's tax sanction provisions, the Wisconsin Democrat said that the sharply increased monetary penalties for taxpayers would offset the cost of raising the mileage deduction for charitable volunteers. That represents a tax break that the Congressional Joint Committee on Taxation has estimated would result in a net federal revenue loss of no more than $1 million over five years. "Though the revenue loss is small," Feingold explained, "it is vital that we do everything we can to move toward a balanced budget, and to that end I have included a provision to fully offset the cost of the measure and make it deficit-neutral."

-- The Thomson Corp. has acquired Atlanta-based Tax Partners, a provider of sales and use tax compliance services, and will fold the concern under its RIA Compliance unit umbrella. Terms were not disclosed. RIA Compliance is a division of Thomson Tax & Accounting. "Adding Tax Partners to our offerings will provide Thomson Tax & Accounting with an important tax compliance service component, enabling us to offer an end-to-end solution to our clients," said Brian Peccarelli, executive vice president of Thomson Tax & Accounting Corporate Markets and general manager of RIA Compliance, in a statement. In 2004, Tax Partners filed more than 540,000 tax returns and remitted $7.5 billion in taxes for clients.