Practice Management

The Internal Revenue Service has redesigned Form 941, Employer's Quarterly Federal Tax Return. The new, simplified form is intended to help businesses, tax practitioners and payroll companies avoid common errors, and to reduce the burden associated with completing and filing the form. Form 941 is used to report wages, tips and other compensation paid, as well as Social Security, Medicare and income taxes collected. More than 23 million of these forms are filed annually by 6.6 million employers. The redesigned form features an improved layout, plain-language instructions, simplified deposit reporting and paid preparer identification. The form is also scannable, which the IRS expects will reduce transcription errors. "The new 941 is much easier on the eye and much more user-friendly," said Scott Mezistrano, senior manager of government relations for the American Payroll Association. "With the shading, bigger boxes and improved instructions right on the form, you know exactly what you are supposed to report and where to put it. The IRS did a very thorough job of reviewing every line on the 941 and considering how it could be made more clear."

Dr. David Frantz Bradford, a tax economist who proposed the "X tax," a controversial alternative to supplant the Internal Revenue Code, died at his home here. He was 66. The cause of death was burns suffered in a fire at his home earlier this month. Bradford, a professor of economics and public affairs at Princeton, as well as a professor at New York University, had advocated switching to a system that taxed people on their spending levels. His subsequent proposal, the X tax, was a distant relative to a flat tax system, but Bradford's system applied a graduated rate schedule for people in the higher income brackets. A flat tax applies a single rate of tax for all income brackets. Bradford served as deputy assistant secretary of the Treasury for tax policy in the Ford administration, and later was appointed by President George H. W. Bush to the Council of Economic Advisors from 1991 to 1993. He joined the economics department at Princeton in 1966. He also authored "Untangling the Income Tax."

The average combined sales tax rates across the nation hit a record 8.587 percent over 2004, which fueled some 764 tax rate changes, according to the 2004 Sales Tax Rate Report. The report, released by Vertex, a provider of tax technology solutions headquartered here, said that although 237 new rates were established over the course of 2004, the year also saw a record number of decreases, 160, the highest figure since 1996. Other findings included: o- Three states had state rate increases. Arkansas went from 5.125 percent to 6 percent, California went from 6 percent to 6.25 percent, and Virginia went from 3.5 percent to 4 percent. o- Mississippi, Tennessee and Rhode Island have the highest state sales tax rates, at 7 percent. The average sales tax rate is 5.318 percent. o - Wrangell, Alaska, has the highest city sales tax rate, at 7 percent. The average city sales tax rate is 1.583 percent. o- Arab, Ala., was the jurisdiction with the highest combined sales tax rate of 12 percent. The average combined rate is 8.587. The Vertex Sales Tax Rate Report provides a summary of sales tax rate changes at the state, county, city and district levels nationwide. It is available online at www.vertexinc.com.

The Internal Revenue Service issued a reminder to taxpayers and tax preparers that certain returns from Arizona, Connecticut, Utah and Virginia need to be sent to different service centers than last year. For tax year 2004, the changes affect Connecticut and Virginia returns with or without payments, and Arizona and Utah returns with payments. o Connecticut returns without payments should be sent to the IRS in Kansas City, Mo. o Connecticut returns with payments should be sent to the IRS in St. Louis. o Virginia returns without payments should be sent to the IRS in Fresno, Calif. o Arizona, Utah and Virginia payments with payments should be sent to the IRS in San Francisco. The envelopes included in the tax packages of taxpayers filing paper returns have the correct center addresses; taxpayers who do not receive a package should refer to the back cover of the Form 1040, 1040-A or 1040EZ instructions. E-filing taxpayers are unaffected by the changes.

A report by the Treasury Inspector General for Tax Administration absolves the procedures used by the Internal Revenue Service's Tax Exempt and Government Entities Division for reviewing political activities by exempt organizations. While many charities speak out on public issues, the code prohibits Section 501(c)(3) organizations from specific types of political activities. In response to media reports of allegations that the TE/GE Division was examining these types of activities just prior to the 2004 presidential election for politically motivated reasons, the IRS asked the TIGTA to investigate. "This report confirms what we've said all along," said IRS Commissioner Mark W. Everson. "Political considerations played absolutely no part in the inquiries we launched last summer." Everson said that recommendations in the report would be addressed by the IRS and would be in place for future election cycles.

Tax practitioners preparing 2004 client business and self-employed returns are confronted with a bewildering maze of tax law changes, which in some cases can lead to mistakes.Significant changes affecting 2004 returns include multiple changes to depreciation and expensing, with new limits for sport utility vehicles, passenger automobiles, trucks and vans; bonus depreciation for qualified leasehold property; and newly redesigned Schedule K-1s for partnerships and S corporations.

On Jan. 19, 2005, the Internal Revenue Service released some initial guidance to taxpayers for claiming the new manufacturing deduction available for the first time in 2005 with respect to qualified domestic manufacturing, production, growing and extraction activities.

IRS, TREASURY ISSUE GUIDANCE ON NEW PENALTIES ON POTENTIALLY ABUSIVE TRANSACTIONS: The Treasury Department and the Internal Revenue Service issued interim guidance on two new penalty provisions enacted as part of the American Jobs Creation Act of 2004.

Turnaround specialist Alvarez & Marsal has expanded its tax advisory unit, adding eight managing directors in several regional locations, and unveiling an office here.

At the inaugural meeting of President Bush's Advisory Panel on Federal Tax Reform, Treasury Secretary John Snow told the panel that, "The tax code is dreadfully murky in its complexity, but its size is clear and easy to see." "More than a million words long, the Internal Revenue Code and regulations has more than doubled in terms of page-length over the past 20 years, and today's 'short' income tax form takes more than 11 hours to prepare -- about the same as the 'long form' did a decade ago," Snow said. Former Senator Connie Mack, who serves as chairman of the 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." Former Internal Revenue Service Commissioner Fred T. Goldberg Jr., a partner at Skadden, Arps, Slate, Meagher & Flom LLP, presented a history of the income tax, concluding that we currently have "a grotesquely complicated system that distorts the allocation of resources and violates common-sense notions of fairness." Louis Kaplow, a professor of law and economics at Harvard Law School, explained the central concepts of an income tax and a consumption tax. William G. Gale, with the Brookings Institution and co-director of the Urban-Brookings Tax Policy Center, noted that it is a myth that the consumption tax is more effective at taxing the underground economy than the income tax is. He concluded that the income tax is a fair and proven mechanism for raising revenue, consistent with long-term economic growth. "While it could be improved, it should not be scrapped," he said. Stephen J. Entin, president and executive director at the Institute for Research on the 'Economics of Taxation, said that the fairest tax is proportional to income. Since deductions for costs are necessary to measure income properly, and saving is a cost of earning income, he argued, "The best measure of income is consumption. We should tax what we spend." Entin urged a fair, flat and unbiased neutral tax that would treat all savings like pensions and IRAs, end the double taxation of corporate income, and permanently eliminate the "death tax." The panel, charged with submitting a final report to the Treasury by July 31, 2005, will hold its next meeting March 3.