TREASURY, IRS MOVE TO CURB OPINION LETTERS, IMPROVE DISCLOSURE: The Treasury Department and the Internal Revenue Service announced measures that are expected to have a chilling effect on the use of opinion letters that are drafted by accountants and attorneys, amid other measures aimed at increasing the transparency and disclosure of information to the IRS.
The agencies announced proposed changes to Circular 230 that set out specific requirements for tax opinions provided by attorneys and accountants. The proposed changes describe best practices for tax advisors and call on professional services firms to put in place procedures that are consistent with the best practices. The changes would obligate tax advisors to inform clients explicitly about what protections, if any, an opinion letter provides to the client.
The agencies also announced final regulations that increase the cost of failing to disclose abusive avoidance transactions. The regs also apply to taxpayers that don’t disclose that they have reported items on their tax returns that are based on the position that a Treasury regulation is invalid.
The Treasury issued revised final regulations that limit the disclosure of confidential transactions on a return to transactions for which a promoter has imposed confidentiality to protect the promoter’s tax strategies from disclosure. The Treasury also proposed revisions to Form 8858, which deals with information reporting with respect to foreign disregarded entities.
IRS CAUTIONS TAX-EXEMPT GROUPS: On the eve of an election year, the Internal Revenue Service reminded tax-exempt organizations that their public advocacy activity must adhere to tax rules as well as campaign finance laws.
Under the Internal Revenue Code, social welfare organizations, unions and trade associations may engage in only limited political campaign activity. Revenue Ruling 2004-6, just issued, clarifies the tax implications of advocacy that meets the definition of political campaign activity.
The guidance also serves as a reminder that the Bipartisan Reform Act of 2002 (McCain-Feingold) does not replace the tax rules on public advocacy by tax-exempt organizations, such as those described in sections 501(c)(4), (c)(5), and (c)(6) of the Internal Revenue Code. They must adhere to both.
IRS NAMES NEW CFO: The Internal Revenue Service’s acting chief financial officer, Eileen Powell, is now the tax agency’s official CFO.
The IRS’s CFO is responsible for the custodial accounting of $2 trillion in taxpayer receipts and the agency’s $10 billion operating budget. In addition, the CFO serves as the principal advisor to the IRS commissioner on financial management, financial systems, strategic planning, performance measurement, budget formulation, budget execution and internal controls.
Powell joined the IRS in July 2001 as director of administrative accounting. Before that, she was the project director responsible for implementing the Department of Veterans Affairs’ nationwide core accounting and logistics system.
MAJOR CHANGES MADE TO ITIN APPLICATIONS: The Internal Revenue Service has made major changes to the way it issues Individual Taxpayer Identification Numbers to make sure that they’re used for their intended purpose.
The ITIN, a nine-digit number that begins with the number nine, was created for use on tax returns for taxpayers who don’t qualify for a Social Security number. However, the IRS said that some ITINs are being used as a form of identification.
“About one-quarter of the ITINs issued for tax return purposes never actually find their way onto a tax return,” said IRS Commissioner Mark W. Everson.
All new ITIN applicants will have to provide proof that the ITIN will be used for tax administration purposes. For example, applicants seeking an ITIN in order to file a federal tax return will have to file the return along with the W-7. ITIN applications without proof of need will be rejected.
The IRS also cut the number of documents it will accept as proof of identity to obtain an ITIN, to 13 from 40. The 13 acceptable documents are listed in the new Form W-7 instructions. In addition, the appearance of the ITIN will change from a card to an authorization letter to eliminate similarities to a Social Security number card.
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