GAO says Improvements Needed at IRS: The honeymoon’s over for newly installed Internal Revenue Service Commissioner Mark Everson. The General Accounting Office says that the agency needs to improve its internal controls.

A report on issues identified during a fiscal year 2002 audit of the agency sets out areas in which the IRS still had shortcomings on internal control issues. Among the lapses, the report singled out security controls. It found that the IRS did not always ensure that couriers adhered to certain security requirements, and did not maintain consistently effective physical security controls over its receipt processing areas.

In addition, the report said that the IRS did not always ensure that emptied envelopes were truly empty. Finally, the report said that the IRS failed to accept cash payments from taxpayers at some centers as required by IRS policy, and did not always structure installment agreements with taxpayers to provide for full payment of the tax liability, as the code requires.

The IRS agreed with the recommendations and has laid out a plan to correct the weaknesses.

Ala. Governor Seeks Record Billion-Dollar Tax Hike: While President George W. Bush was busy touting a new tax cut package, the freshman governor of Alabama unveiled a billion-dollar-plus package of tax hikes for the cash-strapped state.

Gov. Bob Riley, a conservative Republican who served for six years in Congress, called a special legislative session in late May to explain the initiative, which will be presented to state voters as an all-or-nothing deal.

While the initiative’s passage is by no means assured, Riley has secured the backing of the state’s largest teachers union, which has agreed to concessions on health insurance and retirement benefits. In return, he added a college scholarship program to the bill, as well as a possible pre-kindergarten plan.

The legislation is expected to increase both the property and income tax on the wealthy, and to require teachers to pay more for their health insurance, generating up to $1.2 billion in new revenue each year.

IRS Clarifies Tax Treatment For Various Medical Expenses: The Internal Revenue Service has issued two revenue rulings that clarify the tax treatment of a number of medical expenses: nonprescription drugs recommended by a doctor; nonprescription equipment, supplies or diagnostic devices; breast reconstruction surgery; vision correction surgery; and teeth whitening procedures.

The law limits the deduction for medicine or drugs to insulin and those drugs that require a prescription. Even when recommended by a doctor, over-the-counter medicines are not deductible. However, the IRS says, this limitation does not apply to other nonprescription items, such as bandages, crutches, thermometers or blood sugar test kits. If otherwise qualifying as related to medical care, such items are deductible.

The law does not allow a deduction for cosmetic surgery or similar procedures, unless needed to correct a deformity related to an injury, disease or congenital abnormality, to meaningfully promote the proper function of the body, or to prevent or treat illness or disease.

Revenue Rulings 2003-57, dealing with surgical procedures, and 2003-58, dealing with nonprescription items, are available on the IRS Web site at www.irs.gov, and were published in Internal Revenue Bulletin 2003-22, dated June 2, 2003.

CCH Offers Free Newsletter: CCH has launched CCH Focus on Tax, a free monthly newsletter.

CCH Focus on Tax is an electronic newsletter that provides readers with in-depth and practical analysis on a wide variety of timely subjects selected from the array of books, journals and newsletters published by CCH Inc., a leading provider of tax information and software. “Focus on Tax provides readers with cutting-edge insights presented in excerpts from a wide range of our publications,” said Richard Jarvis, managing editor of CCH Focus on Tax. “Not just abstracts of content, Focus on Tax gives readers entire sections of our content.”

Last month’s issue contained articles on qualified personal residence trusts, employee stock options, stock redemptions in S corporations, and FASB rule changes that affect mergers and acquisitions. To register, visit tax.cchgroup.com and click on the Free Tax News sign-on.

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