The greenbook released by the Obama administration on Monday includes a number of proposals of special interest to tax preparers.
The Treasury Departments greenbook, which contains a general explanation of the administrations fiscal year 2010 revenue proposals, expands the requirements for electronic filing by tax return preparers, along with setting out other provisions for the administrations budget (see Obama Proposes Billions in Tax Cuts and Tax Hikes). The proposal generally would maintain the current rule that regulations may not require any person to file electronically unless the person files at least 250 tax returns during the calendar year, but the proposal also would provide an exception to this rule under which regulations may require electronic filing by tax return preparers (as currently defined in the Tax Code) who file more than 100 tax returns in a calendar year.
The proposal also would allow regulations requiring tax return preparers who file more than 100 returns (or any other person who files more than 250 returns) to e-file tax returns for individuals, estates or trusts. The proposal would be effective for tax returns required to be filed after Dec. 31, 2010.
Other proposals in the greenbook include requiring contractors who receive payments of $600 or more from a business in a calendar year to file a Form W-9 containing their certified taxpayer identification number with the business. The business would then be required to verify the contractors TIN with the IRS. The proposal would be effective for payments made to contractors after Dec. 31, 2009.
The budget also proposes to increase information-reporting penalties for people who file information returns late. The budget would increase first-tier penalties from $15 to $30 per return and the calendar-year maximum would increase from $75,000 to $250,000. The second-tier penalty would be increased from $30 to $60, and the calendar year maximum would be increased from $150,000 to $500,000.
The third-tier penalty would be increased from $50 to $100, and the calendar year maximum would be increased from $250,000 to $1,500,000. For small filers, the calendar-year maximum would be increased from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard would be increased from $100 to $250. The proposal would also provide that every five years the penalty amounts would be adjusted to account for inflation. The proposal would be effective for information returns required to be filed after Dec. 31, 2010.
The budget also proposes requiring electronic filing by certain large organizations. All corporations and partnerships required to file Schedule M-3 (Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More) would be required to file their tax returns electronically.
In the case of certain other large taxpayers not required to file Schedule M-3 (such as exempt organizations), the regulatory authority to require electronic filing would be expanded to allow reduction of the current threshold of filing 250 or more returns during a calendar year. The proposal would be effective for tax years ending after Dec. 31, 2009.
Another proposal would make repeated failure to file a tax return a felony. Current law provides that willful failure to file a tax return is a misdemeanor punishable by a term of imprisonment for not more than one year, a fine of not more than $25,000 ($100,000 in the case of a corporation), or both. A taxpayer who fails to file returns for multiple years commits a separate misdemeanor offense for each year.
Under the administrations proposal, any person who willfully fails to file tax returns in any three years within any five-consecutive-year period, if the aggregated tax liability for such period is at least $50,000, would be subject to a new aggravated failure-to-file criminal penalty. The proposal would classify such a failure as a felony and, upon conviction, impose a fine of not more than $250,000 ($500,000 in the case of a corporation) or imprisonment for not more than five years, or both. The proposal would be effective for returns required to be filed after Dec. 31, 2009.
The administration also proposes to revise the offer-in-compromise application rules to eliminate the requirements that an initial offer-in-compromise include a nonrefundable payment of any portion of the taxpayers offer.
Barry Tovig, a partner in Ernst & Youngs international tax and venture group, pointed out that the administrations proposals also repeal the LIFO, or last-in-first-out, method of inventory accounting, and repeals the lower-cost-of-market method. This leaves very few choices on the table for taxpayers, and will raise taxes on manufacturers and retailers, he said.
The proposal in the greenbook notes that International Financial Reporting Standards do not permit the LIFO method of accounting. Removing the use of this method would remove this possible impediment to the adoption of IFRS in the U.S., according to the Treasury Department. LIFO has been a stumbling block in efforts to converge IFRS with U.S. GAAP.
Another Ernst & Young partner, Glenn Dance, a member of the partnerships and joint ventures group at the firm, noted that the carried interest proposals in the greenbook take away the ability of certain partners to tax income at capital gains rates. The version in the administrations proposal is much more sweeping and broad-based than proposals previously passed by the House of Representatives, he pointed out.
Previous proposals would only have affected certain industries, and those were generally the private equity and hedge fund management industries, he added. The administrations proposals would affect any type of business, like a widget maker that issued private interest. That widget maker, if they sold that interest business down the road, would have to treat the carried interest as ordinary income.
The proposal could also apply to accounting firms, but Dance sees a possible silver lining there.
The way its written right now, the rules suggest that any partner who provides services to the partnership is subject to these rules, he said. In an accounting firm or a law firm a portion of the [income on services partnership interest] would apply. How that apportionment would apply is not discussed in the proposal. As people try to comply, what it might do is put in place changes suggested by the [American Bar Association] and the [American Institute of CPAs], he added. A proposal was suggested about 10 years ago by the ABA and AICPA to be able to exclude from self- employment tax a portion of [contributed or invested capital]. This proposal would on one hand require all service providers to be subject to self-employment tax but would then give them the ability to exclude contributed capital. It may reduce the self-employment tax on contributed capital.
Barbara Angus, a partner in Ernst & Youngs international tax services group, criticized the administration's proposals to crack down on overseas tax havens by multinational corporations. These international tax propels taken together would represent a fundamental change in how U.S. businesses with foreign operations would be taxed, she said. As they move forward, they need to be considered in that broader context. They would move the U.S. tax rules in the opposite direction from where many of our trading partners are moving their tax systems.
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