Practice Management

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.

Super-regional CPA and business advisory firm Plante & Moran said that it would merge in BKR Dupuis & Ryden, a Flint, Mich.-based concern, effective July 1. Terms were not disclosed. Going forward, the firm will operate under the brand Plante & Moran PLLC. The union with BKR adds seven partners, 60 staff and $7.5 million in revenue to Plante & Moran. Bill Hermann, P&M's managing partner, said that the marriage with BKR "closes the gap" in the firm's geographic footprint in mid-Michigan, better positioning it in the Flint, Saginaw and midland corridor markets. Established in Flint in 1932, BKR is the among the oldest and largest accounting firms in the Flint area. Plante & Moran will operate out of BKR Dupuis & Ryden's Flint offices, while staffers from BKR's offices in Ann Arbor will relocate to Plante & Moran's office there. The addition of BKR boosts Plante & Moran to a total of 204 partners, a total staff of 1,450 and annual revenue of roughly $210 million. Plante & Moran ranked No. 15 on Accounting Today's 2005 Top 100 Firms ranking.

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.