MUTUAL FUND CAPITAL GAINS TO BE TAXED AT LOWER RATES: The Internal Revenue Service and the Treasury Department have clarified that capital gain dividends received from a mutual fund in 2004 will be taxed at the new, lower capital gain rates enacted last year.

Concern had been expressed that the existing rules for dividend designation and the transition to the new, lower capital gain rates enacted last year might cause some 2004 capital gain dividends to be taxed to fund shareholders at the old, higher capital gain rates. The guidance clarifies that this will not occur.

“Last year, the Jobs and Growth Act lowered the rates on dividends,” said acting assistant secretary for tax policy Greg Jenner. “These lower rates mean taxpayers will have more money to invest, save for their children’s education or buy a home.”

Mutual funds with net capital gains may designate some of their dividends as “capital gain dividends,” which are taxed to the fund’s shareholders like long-term capital gains. Since 1997, mutual funds’ designations of capital gain dividends have included an additional designation of which rate applies to the dividend, because long-term capital gains from different sources have been taxed at different tax rates.

IRS WARNS OF ID THEFT SCHEME: Taxpayers who give personal information to combat charges that they are under investigation for tax fraud are opening themselves up to identity theft, according to the Internal Revenue Service.

In this ploy, consumers receive an e-mail claiming that they are under investigation for tax fraud and are subject to prosecution. The e-mail says that they can help the investigation by providing “real” information and directs them to an official-looking Web site,, where detailed personal information must be provided to dispute the charge.

At the request of the IRS and the Treasury Inspector General for Tax Administration, the Internet service provider that was hosting the site has shut it down. The scheme is being investigated by TIGTA, which addresses threats to federal tax administration.

The bogus IRS Web page and the e-mail in this instance contained several grammatical errors, rendering them immediately suspect. However, the IRS warned that new versions of the scam could surface, including more effectively written text and a different destination Web site. Anyone who has received suspect communication should call TIGTA’s toll-free fraud referral hotline at (800) 366-4484.
IRS OFFERS DEAL TO ‘SON OF BOSS’ PARTICIPANTS: As part of its efforts to curb tax shelters, the Internal Revenue Service is urging taxpayers who invested in an abusive tax shelter known as “Son of BOSS” to accept a settlement offer — or face more severe consequences later.

Son of BOSS, an offshoot of an earlier shelter called BOSS (bond and option sales strategy), was aggressively marketed by law firms, accounting firms and investment banks in the late 1990s and 2000 to companies and high-net-worth individuals, according to the IRS.

Under the agreement being offered until June 21, eligible taxpayers must concede 100 percent of the claimed tax losses, pay all applicable interest and accept a penalty, unless they had previously disclosed their participation in the transaction, the IRS said. Taxpayers can deduct as a loss their out-of-pocket transaction costs — typically promoter and professional fees.

Under the program’s penalty structure, taxpayers who voluntarily disclosed the Son of BOSS transaction under Announcement 2002-2 pay no penalty. Taxpayers who didn’t come forward under that announcement will pay a mandatory penalty of either 10 percent if it’s their first and only abusive tax shelter investment, or 20 percent for those who’ve participated in other abusive transactions listed by the IRS.

The IRS warned that taxpayers who don’t participate in the settlement will receive a notice of deficiency disallowing all losses and out-of-pocket costs, and will be assessed the maximum applicable penalties. “We are taking this unusual step because of the severity of the abuse,” IRS Commissioner Mark Everson said. “Anyone who doesn’t come forward can still take the IRS to court. In such an instance, the government will vigorously pursue the full tax due, applicable interest and the maximum penalty.”

“Taxpayers should not expect to settle court cases on terms more favorable than those offered in the IRS settlement initiative,” added IRS chief counsel Donald Korb.

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