Tax planning

The just-released spring 2007 issue of the Statistics of Income Bulletin includes the first article on farm proprietorship returns by the Internal Revenue Service in more than 20 years, as well as articles on high-income individual income tax returns, taxpayers reporting noncash contributions, qualified zone academy bonds, international boycott reports and S corporations. In addition, this issue of the bulletin presents selected tax year 1990-2004 individual income tax return data that have been indexed for inflation, and tax year 2005 individual income tax return statistics classified by state and size of adjusted gross income. For tax year 2004, there were 3,021,435 individual income tax returns filed with adjusted gross income of $200,000 or more and 3,067,602 returns with expanded income of $200,000 or more. The Bulletin highlights the following: * For tax year 2004, there were 25.3 million individual taxpayers who itemized deductions and reported a deduction for noncash charitable contributions. Those taxpayers reported $43.4 billion in deductions for these noncash contributions. Individuals whose total noncash charitable deductions on Schedule A, Itemized Deductions, exceed $500 are required to report these donations in detail on Form 8283, Noncash Charitable Contributions. For 2004, a total of 6.6 million individuals, representing a little more than a quarter of those who reported noncash charitable contributions, filed Form 8283. These individuals reported noncash contributions valued at almost $37.2 billion, or nearly 86 percent of all noncash contributions. * The number of farm proprietorship returns declined between tax years 1998 and 2004, with the majority of farm proprietorship returns showing a farm net loss. For tax year 2004, some 1.4 million farm proprietorship returns, or 70 percent of the total, had a farm net loss. Gross farm income reported on sole proprietorship returns totaled $93.3 billion for tax year 1998 and increased 8.3 percent to $101 billion in 2004. Total farm expenses grew even more during this period, by 12.9 percent, from $101.2 billion in 1998 to $114.3 billion in 2004. * For tax year 2003, some 1,268 taxpayers filed Form 5713, International Boycott Report; of these, 124 reported receiving boycott requests, and 36 agreed to participate in a boycott. There were 41 taxpayers who lost a portion of their tax benefits as a result of their participation in a boycott or because they had operations in a boycotting country and claimed the extraterritorial income exclusion. Similarly, 1,343 Forms 5713 were filed for tax year 2004; of these, 131 taxpayers reported boycott requests, 45 agreed to participate, and 46 taxpayers reported tax consequences. For both years, the percentage of filers who lost tax benefits was approximately 3 percent. * The final bulletin article takes a look at the dominance of the wholesale and retail trade division among S corporations since 1959. For tax year 2004, some 45 years after the creation of S corporations, wholesale and retail represented the largest portion of total receipts, total deductions, portfolio income, total net income (less deficit) and total assets.

One month after four employees of Big Four firm Ernst & Young were charged with conspiracy to commit tax fraud, a former employee of the audit firm has pled guilty to similar charges. Dallas-based E&Y employee Belle Six entered her plea in Federal District Court in Manhattan. Six, who worked in the firm's Viper Group that created and sold tax shelters, will, according to her agreement, forfeit some $13 million she received as compensation.

Democratic members of Congress have introduced a plan that would close a tax loophole that allows tens of thousands of dollars in tax write-offs for only the largest luxury SUVs. The bill introduced by Reps. Allyson Schwartz, D-Pa., Rahm Emanuel, D-Ill., and Earl Blumenauer, D-Ore., who all serve on the Ways and Means Committee, as well as Rep. Ed Markey, D-Mass., chairman of the Select Committee on Energy Independence and Global Warming, would fix a provision in the Tax Code that provides an additional tax incentive for the luxury market of SUVs weighing over 6,000 lbs. Originally intended to help businesses buy necessary heavy-duty work vehicles, the "Hummer Tax Loophole" has for years allowed write-offs of anywhere from $100,000 to the current figure of $25,000 for the purchase of the largest, most gas-guzzling luxury SUVs, even as concerns over gas prices and dependence on oil have grown. The change would not affect legitimate business investments in trucks or vans, such as plumber and contractor trucks, farm vehicles, construction vehicles, flatbed trucks, cement mixers, and a variety of other vehicles as designated by the IRS. "This bill fixes a perverse, unintended incentive to buy the biggest and most polluting vehicle on the market," said Blumenauer.

The vast majority - 88 percent - of small employers used a tax professional to prepare their most recent federal tax return. For those employers who employ 20 or more people, the percentage using a tax professional increased to 95 percent, according to the National Federation of Independent Business.

GAO EXAMINES IRS '08 BUDGET

The rules for the deductibility of prepaid expenses are riddled with exceptions to the basic premise that neither cash nor accrual-basis taxpayers ought to deduct any prepayment except to the extent that the purchase - whether it is in the form of an asset or a service - is used in the same tax year. Grace periods, exceptions and additional restrictions can all change a result. The latest variation on the theme of "things are not always what they appear," comes in the form of a chief counsel's advice memorandum.

The Internal Revenue Service is reminding tax professionals to make reservations now for one of six Nationwide Tax Forums being held throughout the country. The Nationwide Tax Forums are three-day events that provide tax professionals with the most up-to-date tax information through training seminars presented by IRS experts and partnering organizations. Forums offer an opportunity to receive up to 18 continuing professional education credits through a variety of training seminars. The locations are: · Atlanta - July 17-19· Chicago - July 31-Aug. 2· Las Vegas - Aug. 21-23 · New York - Aug. 28-30 · Anaheim - Sept. 11-13· Orlando - Sept. 18-20 The cost of enrollment is $165 per person, per city for pre-registration and $299 for late or on-site registration. The pre-registration period ends two weeks prior to the start of each forum. Members of the following associations qualify for discounted enrollment costs: the American Association of Attorney-CPAs; the American Bar Association; the American Institute of CPAs; the National Association of Enrolled Agents; the National Association of Tax Professionals; the National Society of Accountants; and the National Society of Tax Professionals.

The Senate Finance Committee has released an energy tax package addressing advanced electricity infrastructure, domestic fuel security, advanced technology vehicles, and conservation and energy efficiency. The committee is scheduled to consider the bill on Tuesday, June 19.Among its provisions, the bill authorizes $750 million in each of calendar years 2008 and 2009 for clean renewable energy bonds; creates a new category of tax credit bonds for advanced coal facilities; and extends the 30 percent investment tax credit for solar and fuel cells, and the 10 percent credit for microturbines for two years. It expands the investment tax credit for clean coal facilities. The bill also extends for two years and modifies the personal tax credit for residential solar electric, solar water heating, and fuel cell property. The modification raises the cap on the credit for solar electric property to $4,000. "This bill reflects energy needs in the 21st Century," said Sen. Chuck Grassley, R-Iowa, and ranking member of the Finance Committee. "People need tax certainty to invest in infrastructure and keep production moving. Production has to meet demand, and alternative energy has never been in such demand."

The tax gap - the difference between the amount that taxpayers pay voluntarily and on time and what they should pay - continues to generate congressional hearings and legislative proposals. The most recent data from 46,000 returns examined under the National Research Program show a net gap of $290 billion for the year 2001.

Thomson Tax & Accounting has acquired the Employee Benefits Institute of America Inc., an Edmonds, Wash.-based provider of benefits research and guidance to corporations and advisory firms.

Taxpayers have an additional two days this year, until July 2, 2007, to file the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1, according to the Internal Revenue Service.The deadline for FBAR forms is June 30, 2007. But because June 30 falls on a Saturday, the IRS is allowing taxpayers to file by July 2. FBAR information returns for the 2006 calendar year must be filed with the U.S. Department of Treasury, P.O. Box 32621, Detroit, Mich., 48232-0621. The address for commercial delivery is: U.S. Department of Treasury, Currency Transaction Reporting, 985 Michigan Avenue, Detroit, Mich., 48226. The FBAR form is not available for electronic filing, but many income tax software packages can prepare a printed copy. FBAR forms are also available on the IRS Web site or FinCEN Web site, and from the IRS via telephone at (800)-829-3676. The FBAR form is required for each U.S. person who has a financial interest in, or signature authority or other authority, over any financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.

A new Treasury Inspector General for Tax Administration audit has found that changes in the Internal Revenue Service's Questionable Refund Program, along with a significant technological failure, dramatically decreased the effectiveness of the program for the 2006 filing season. The IRS relies on the Questionable Refund Program to identify and prevent fraudulent refund claims from being paid. Since its inception in 1977, this program has identified more than $4.3 billion in fraudulent refunds and prevented the issuance of over $3.6 billion in refunds. However, over the past several years, TIGTA has reported that the QRP was becoming increasingly unmanageable due to the growing number of fraudulent claims and the IRS's lack of resources to combat the fraud. "The IRS reacted to legitimate congressional concerns that taxpayers were not being notified when their refunds were delayed, sometimes for years," said Inspector General J. Russell George. "Unfortunately, the IRS overreacted, and it is costing taxpayers millions of dollars." Last tax season, the IRS appropriately began notifying taxpayers when their accounts were temporarily frozen as a result of a suspicious return. However, the agency limited the length of these freezes, which also limited its ability to properly scrutinize many of these returns. "This decision had a direct cost to taxpayers," George said. "Our audit identified nearly $15.9 million in potentially fraudulent refunds that were allowed to be issued."

Senators Max Baucus, D-Mont., and Chuck Grassley, R-Iowa, chairman and ranking member of the Senate Finance Committee, respectively, have introduced legislation to give more than $550 million in tax relief for veterans, soldiers and their employers.

Technology will have to evolve more efficiently to integrate with firms' tax practices, and not just help practitioners perform arithmetic, said tax industry and Internal Revenue Service veteran Lenny Holt at the American Institute of CPAs' information technology conference, Tech+, here.Holt, now with CCH's Firm Services Unit, said that while technology has made quantum leaps since 1986 -- when just 25,000 1040s were e-filed, as opposed to the 76 million in 2007 -- the distinction between tax accounting and other financial services is blurring, and the facility to consolidate that integration is technology."Clients using tax professionals for more than just taxes and technology is a big part," Holt told attendees during a session titled "Technology and Your Tax Practice."Tim Shortlseeve, a partner at the Rochester, N.Y.-based CPA firm of Bonn, Shortsleeve & Ray, told attendees that to hone best technology practices for tax preparation, firms must create an in-house project team and appoint a project champion -- one person with both decision-making and budget-approval powers.The project team's to-do list includes such items as evaluating workflow options, documenting new policies and procedures, and identifying changes to software. A firm must also have an IT technician, even if they have to outsource one."You have to ask yourself, are you using your current technology to your best advantage?" asked Shortsleeve. "And don't overlook training. The dollars you spend on training will come back tenfold."Other checklist items include installing multiple monitors and establishing remote access."You have to communicate the plans and expectations to everyone in the firm," he said. The session included product demonstrations from tax software publishers CCH, Intuit and Thomson.

Notice 2007-54, which provides guidance and transitional relief for the return preparer penalty provisions amended by the Small Business and Work Opportunity Act of 2007, has been issued by the Internal Revenue Service. The new amendments are effective for returns prepared after May 25, 2007. The new law amended several provisions of the Tax Code to extend the return preparer penalties under Section 6694 to preparers of all tax returns, including estate and gift tax returns, employment tax returns, and excise tax returns. Prior to the new law, these penalties applied only to the preparers of income tax returns. The new law also increased the amount of the penalties and changed the standards of conduct that must be met by return preparers in order to avoid penalties under Section 6694. The transitional relief provided by Notice 2007-54 will apply to all returns, amended returns and refund claims due on or before Dec. 31, 2007, including those returns, amended returns and refund claims filed pursuant to extensions to file due on or before Dec. 31, 2007; to 2007 estimated tax returns due on or before Jan. 15, 2008; and to 2007 employment and excise tax returns due on or before Jan. 31, 2008.

In a motion filed last week, lawyers for action star Wesley Snipes asked that tax fraud and tax evasion charges against him be dismissed, claiming that he is being targeted because he is African-American. The eight-count indictment, filed last October, charges Snipes and two Florida men with conspiracy to defraud the Internal Revenue Service and presenting fraudulent claims for payment totaling almost $12 million. Snipes also faces six counts of failing to file income tax returns between 1999 and 2004. The motion notes that although co-defendant Eddie Ray Kahn, the founder of tax scheme promoter American Rights Litigator, had not filed tax returns from 1997 to 2002, he was not charged with failing to file. It was also "possible" that co-defendant and tax preparer Douglas P. Rosile had not filed in 2003 and 2004, but no charges were brought against him. Both Kahn and Rosile, the motion points out, are "Caucasian." Snipes has maintained all along that he was simply the victim of bad tax advice, and that the charges against him were racially based. As further evidence of "selective prosecution," the motion points out that while American Rights Litigator had over 2,000 clients, Snipes was the only one to be prosecuted. His lawyers ask that, should the case continue, he be granted discovery rights to determine the race and tax return status of those other clients, and whether any face charges. In addition, the motion claims that Snipes was singled out because he asked the examining agents to send him written copies of the questions they wished to discuss with him, refused to acknowledge the illegitimacy of his tax strategy, and because he possesses a "national platform" to publicize the issue. Finally, the motion also reveals that Snipes' middle name is Trent.

Six of the nation's largest CPA firms have collaborated on a white paper and submitted it in late May to then-Internal Revenue Service Commissioner Mark Everson with a series of recommendations on strategies to close the $300 billion tax gap. The letter, submitted by executives from BDO Seidman, Deloitte, Ernst & Young, Grant Thornton, KPMG and PricewaterhouseCoopers, told Everson that strategies to narrow the massive payment fissure should encompass such areas as targeting the service's efforts toward high-risk areas of noncompliance, making better use of technologies, and establishing measurable milestones over reasonable time frames to monitor effectiveness. The paper also held tax preparers' feet to the fire as a part of the problem stating that in some cases, the preparers "failed to inquire for complete facts or otherwise facilitating noncompliance. Initiatives directed at improving the performance of paid tax return preparers and strengthening the integrity of the tax system should be undertaken as part of any strategy to improve voluntary compliance and reduce the tax gap," the paper said.

Moving to curb abuse of this year's one-time telephone excise tax refund program, the Justice Department and the Internal Revenue Service have obtained federal indictments against tax preparers who allegedly filed thousands of dollars in fraudulent refund claims. In recent weeks, alleged refund schemes involving preparers in Florida, Georgia, Texas and California have led to federal indictments. Shortly after tax season opened in January, the IRS observed problems with returns from some tax preparers that indicated possible criminal intent. Along with search warrants carried out by the IRS, tax preparers across the nation who prepared questionable refund requests received visits from IRS revenue agents and special agents. "We saw limited but serious instances of abuse," said IRS acting commissioner Kevin M. Brown. "We used our enforcement resources to move swiftly and decisively to protect this valuable refund for the vast majority of taxpayers and tax preparers who are requesting it properly."

On the heels of strong tax revenue gains, state spending during the past fiscal year rose 8.6 percent over the year-ago period, but concerns over tighter budgets and more modest spending levels may be in the near future, according to the National Governors Association and the National Association of State Budget Officers. According to the 2006 Sales Tax Rate Report from tax technology products provider Vertex Inc., the average U.S. sales tax rate hit an historical high in 2006 at 8.579 percent -- up from 8.549 percent in 2005. Vertex also said that the number of tax rate changes in the U.S. grew by 28 percent since the late 1990s. "As the economy was flush with money in the late 90s, there is a recognized decrease in the number of tax rate changes from 1995-2000," said John Minassian, Vertex vice president of Tax Content Development. "However, ever since predictions of an economic bubble burst came to fruition in 2000, we have seen a severe increase in the number of rate changes, likely the result of local, city, county and state needs to increase revenue and balance budgets."

Payroll and benefits outsourcing provider Paychex, Inc. has unveiled Tax Credit Services, a product that provides small and mid-sized businesses with help in identifying and applying for eligible wage-based tax credits they may be eligible to receive. Wage-based tax credits were designed to stimulate economic development and create job growth in targeted areas throughout the country by reducing income tax liability at the state and federal levels. They can be used in the current year or can be carried forward to reduce future tax bills. The Paychex Tax Credit Services target two types of business tax credits: location-based and job-creation tax credits. Paychex veteran executive Cliff Gibson has been tapped to head the company's new Tax Credit Services sales division. For more information go to www.paychex.com