IRS SAVES PAULSON FROM TAX HIT: The Internal Revenue Service will issue guidance clarifying the 20 percent penalty for executives who divest a deferred-compensation arrangement. The new regulations will translate into significant savings for incoming Treasury Secretary Henry Paulson. Paulson will sell off the more than $470 million that he owns in Goldman Sachs stock to comply with conflict-of-interest provisions for his new position. The guidance says that any executive divesting a deferred-compensation arrangement specifically to comply with government rules on conflicts of interest doesn't have to pay the penalty. Paulson will still have to pay regular income taxes on the deferred compensation.A spokesperson for the Treasury said that the IRS had been working on the guidance for some time, but accelerated its work in time for Paulson to be covered. The writing of the new rule hadn't been a priority because so few people are affected under the provision.

The 2004 tax legislation that applied the 20 percent penalty was designed as punishment for executives who cashed out of such compensation plans early. In early July, the compensation committee for investment banking firm Goldman Sachs awarded Paulson, its former chairman and chief executive, an $18.7 million bonus for his last six months of work. Paulson's net worth is estimated at more than $700 million.

CHANGES COMING FOR TAX INFORMANT REWARD PROGRAM: While the Internal Revenue Service's reward program for turning in tax cheats does a good job bringing in money, it's still in need of some revamping, according to a report from the Treasury Inspector General for Tax Administration. The report said that the IRS needs to do a better job of managing the Informants' Claims for Reward Program efficiently and fairly. The IRS has agreed with the recommendations and already begun making changes - including a move to consolidate the program in Ogden, Utah, that should be completed this summer. The agency is also creating a nationwide database of informant claims.

The reward program has brought in more than $340 million over the past five years, with typical tipsters being ex-boyfriends and girlfriends, ex-spouses, and ex-business associates. However, officials at the IRS said that more than 90 percent of the tips provide little usable information - informants with access to financial records are usually the most reliable.

The program's average reward payment has been on the rise in recent years, according to the TIGTA report, though the report also noted that informants wait an average of more than seven years to be paid. For the 2005 fiscal year, 169 rewards totaling $7.6 million were distributed to informants. Over the past six years, the average reward has been nearly $24,000, and the agency sets a cap on maximum payouts at $10 million.

One of the Treasury report's specific criticisms was that analysts couldn't figure out the formula used by the IRS in determining reward amounts for about a third of the paid-claim cases studied. The report also said that the agency needs to treat informants better.

GRASSLEY'S 'PIMP TAX' MOVES OUT OF COMMITTEE: The Senate Finance Committee approved legislation that would empower the Internal Revenue Service to hit sex traffickers with major fines and lengthy prison sentences for failing to file employment paperwork and withhold taxes for the women and girls under their command. Sen. Charles Grassley, R-Iowa, and chairman of the tax-writing Senate committee, brought the proposal forward. "It's a no-brainer to have the IRS go after sex traffickers," he said, in a statement. "Prosecuting Tax Code violations can get these guys off the street and yank from their grasp the girls and women they exploit."

Grassley's bill would make certain tax crimes a felony when the money comes from criminal activity. A one-year prison sentence and $25,000 fine would become a 10-year sentence and $50,000 fine for each employment form that a pimp or sex trafficker fails to file. The change could have the added benefit of making it easier to put pimps out of business without requiring women to testify to abuse and mistreatment.

The proposal also authorizes $2 million toward the establishment of an office in the IRS Criminal Investigation Division to prosecute unlawful sex traffickers for violations of tax laws and the commission of financial crimes. It also includes measures that would repeal the telephone tax and address some administrative matters that apply to IRS taxpayer services.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access