Tax strategies

Former Senators Connie Mack and John Breaux, chairman and vice-chairman of the President's Advisory Panel on Federal Tax Reform, are inviting interested parties to submit ideas for reforming the tax code. "At our six public meetings that were held all over the country, we learned about the complexities of the tax code and its impact on taxpayers," said Mack. "This request for ideas to reform the tax code marks a shift of our focus from defining the problems in the current code to considering options for reform. We will be reviewing specific proposals for reform that have been offered in the past as well as new ideas that are submitted. We expect to hold more public meetings in the coming months to discuss these options and alternatives." "It is important that we hear from Americans about the kind of tax system they want," added Breaux. "We look forward to receiving comments from all interested parties." This is the panel's second specific request for comments. In connection with its first request, the panel received thousands of comments describing complexities and burdens, unfair aspects, and distortions in the current tax system. Information on how to submit comments, as well as details on the format for comments, are available at www.taxreformpanel.gov/contact/ .Comments submitted in connection with this second request should be received by the panel no later than April 29, 2005. All comments submitted will be made available to the public.

The Justice Department has asked a federal court to bar Ella Mae Peterson, a St. Louis preparer for H&R Block, from preparing income tax returns for others. Peterson worked for 20 years at the St. Louis office. For tax years 2000 through 2003, she prepared 1,751 returns for Block customers. Internal Revenue Service audits of 31 of those returns revealed improper deductions on each return. The deductions included fictitious or inflated charitable contributions, business and medical expenses, and state and local taxes paid. The complaint estimates that returns Peterson prepared for the tax years from 2000 to 2003 have cost the Federal Treasury more than $6.5 million. "People who prepare false or fraudulent tax returns cheat their customers and unfairly shift the tax burden to honest American taxpayers," said Eileen J. O'Connor, assistant attorney general for the Justice Department's Tax Division. "If you have your tax return prepared, review it carefully, and make sure that what you file with the Internal Revenue Service is accurate." Block spokesperson Nancy Wagoner stated: "Our training, monitoring and supervision of tax professionals is unquestionably the best in the industry. Should an incident such as this occur, we do our best to learn from the situation and communicate the appropriate messages to both our clients and our tax professionals." "H&R Block's policy is to cooperate fully with authorities on any investigation, and we have done so in this case," she continued. "We do not, however, comment on employee matters."

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.

The 2005 filing season is heading into the homestretch with growth in nearly every category of filing, according to the latest interim figures released by the Internal Revenue Service.

In recent testimony before the President's Advisory Panel on Federal Tax Reform, Federal Reserve Chairman Alan Greenspan floated the idea of a consumption tax to replace all or part of the current income tax.

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.

* 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 Internal Revenue Service's new rules for qualified retirement plans went into effect on March 28, but the ripple effect from the rules has yet to play out.

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.

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.

The President's Advisory Panel on Federal Tax Reform has compiled the witness list for the sixth meeting of the group, scheduled for March 31, here. On the first panel, titled "Overview of International Tax Systems," the speakers will be Willard Taylor, a partner at Sullivan & Cromwell LLP; Mihir Desai, an associate professor at the Rock Center for Entrepreneurship of Harvard Business School; Jeffrey Owens, director of the OECD Center on Tax Policy and Administration; Larry Langdon, a partner at Mayer, Brown, Rowe & Maw LLP and former commissioner of the Internal Revenue Service's Large and Mid-Size Business Division. The second panel, "How Taxes Affect Business Decisions," will hear testimony from Paul Otellini, president and chief operating officer of Intel Corp.; and Robert Grady, managing director of The Carlyle Group. The final panel, "Impact of Taxes on Savings, Investment, and Economic Growth," will hear from Michael Boskin, the Tully M. Friedman Professor of Economics and senior fellow at Stanford University and the Hoover Institute; Alan Auerbach, the Robert D. Burch Professor of Economics and Law at the University of California, Berkeley. Also, renowned economist Milton Friedman will speak to the reform panel on "Perspectives on Tax Reform."

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.

The investigative flap over a charity ranch run by combative national radio host Don Imus is over. According to published reports, an official from the New York State Attorney General's charities office wrote to the gruff radio personality telling him that "no further inquiries concerning the Ranch are needed at this time," thus ending the probe launched by AG Eliot Spitzer. The 64-year-old Imus and his wife Deirdre, operate "The Imus Ranch" a 4,000-acre parcel in New Mexico for critically ill children. The ranch became the subject of an unflattering profile in the March 24 edition of The Wall Street Journal, which drew comparisons of the unusually high costs associated with the ranch -- $2.6 million per year for 100 children -- and compared them to other well-known charitable camps such as actor Paul Newman's "Hole in the Wall Gang." The piece detailed the Spitzer probe and questioned the Imus' personal use of the property without reimbursing the ranch. Spitzer's office said the inquiry was launched when the charity requested an extension to file tax data and that the AG's office had received an anonymous letter urging it to investigate Imus's use of the ranch. The cantankerous Imus, known for wearing his trademark 10-gallon hats on the air, labeled the WSJ reporter, Robert Frank, a "punk" and "dishonest," claiming that he (Frank) refused to come to the ranch and that he interviewed him (Imus) just one day before the article appeared. During his morning broadcast, Imus maintained that he never personally benefited from the ranch. "I'm not getting anything out of this other than having fun helping the children," he said. However, Paul Steiger, the Journal's long-time managing editor, said the article was fair and accurate and written by "one of our most experienced and capable reporters."

Expert witnesses at the fifth meeting of the President's Advisory Panel on Federal Tax Reform here, advised the reform group to proceed with extreme caution with regard to the adoption of a national sales tax and changes to the Earned Income Tax Credit. Robert Greenstein, founder and executive director of the Center on Budget and Policy Priorities, told the panel that a consumption tax could be implemented but would carry with it a string of collateral problems such as calls for exemptions and exclusions. Louisiana treasurer John Kennedy said that a sales tax was "not as simple as it might first appear." He added that a sales-and-use tax provides 37 percent of the state's revenue, but advised the panel to examine any and all issues Louisiana had with the state-wide levy. When addressing the merits of the EITC Kennedy also told the panel that it had "done more than any other program to lift people out of poverty." Greenstein pointed out that the EITC increases work efforts while slashing welfare among single parents. Next week the Tax Reform panel will host its sixth meeting, scheduled for March 31, at Fort Mason Center, Landmark Building A, San Francisco. The meeting is scheduled to begin at 9 a.m.

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.