Tax planning

The threat by Sen. Max Baucus, D-Mont., to hold back the appointment of Eric Solomon as assistant secretary for tax policy at the Department of the Treasury is misplaced, according to observers.Baucus, the ranking member of the Senate Finance Committee, said that he would place a hold on President George W. Bush's nominee for the Treasury's top tax position unless the department details how it will close the tax gap.

A sampling of tax returns filed by fishermen in 2004 revealed that thousands of workers had overpaid an average of $530, after failing to take advantage of the averaging provision in calculating their income tax liability. According to the report from the Treasury Inspector General for Tax Administration, more than 4,600 taxpayers -- about 90 percent of the fishermen who could have benefited from the averaging provision -- didn't take advantage of the provision included the American Jobs Creation Act of 2004. TIGTA said that the overpaid taxes for the individual returns filed during the 2004 tax year totaled more than $2.4 million; and a startling 90 percent of the fishermen’s returns were prepared by paid tax preparers. The 2004 law allows fishermen to elect to compute their tax liabilities by averaging all, or a portion, of their taxable fishing income from the prior three years. The measure was designed to help fishermen recover from low-income years by keeping more of their income in successful years and offsetting potentially high tax burdens in isolated years. At the time of its enactment, the Joint Committee on Taxation estimated the provision could save fishermen up to $61 million in taxes over the next decade -- between $3 million and $10 million annually. During a prior audit, TIGTA noted that less than one half of taxpayers who could benefit from a similar provision for farmers, had actually taken advantage of the measure. The inspector general recommended to a variety of federal offices that a better and broader effort be made to educate both fishermen and tax preparers about the averaging provision. The full report is available at www.treas.gov/tigta/auditreports/2006reports/200630158fr.pdf.

The Internal Revenue Service has issued details on the process for military reservists called to active duty to receive payments from individual retirement accounts, 401(k) plans and 403(b) tax-sheltered annuities, without penalities.

Two months after a senator said he would hold up Treasury appointments until the department provided a comprehensive plan to close the tax gap, the Treasury Department has issued a report titled, “A Comprehensive Strategy for Reducing the Tax Gap.”

An economic think tank in Canada has ranked 81 developed and developing countries according to their tax treatment of business investment. “The 2006 Tax Competitiveness Report,” from the C.D. Howe Institute, pays special attention to how Canada’s tax system ranks against the international competition when judged on general corporate income tax and effective tax rates on capital for the 2006 fiscal year. The report ranks Canada’s effective tax rate on capital as sixth-highest among industrialized countries -- following China, Brazil, Germany, Russia and the United States. The top five rates for developing countries were found in the Republic of Congo, Argentina, Chad, Pakistan and Iran. Prepared by Jack Mintz, a professor of business economics at the University of Toronto’s Rotman School of Management, the study notes that while Canada’s federal and provincial governments have made progress in reducing marginal income tax rates in recent years, the pace of tax reform has been slow compared to some other developed countries, such as Australia, Finland, Ireland and the Netherlands. Mintz also makes the point that Canada’s productivity growth, as well as its income growth, has been slow. And in the years to come, he suggests that achieving better growth may pose stiff challenges, as the population ages. Specifically, the report recommends the Canadian government consider a number of tax reforms aimed at promoting growth, such as:

More than 12,500 of the nation’s largest corporations electronically filed their 2005 corporate tax returns, according to the Internal Revenue Service. Large corporate taxpayers, defined as having $50 million or more in assets and filing at least 250 returns, were required to e-file for the first time beginning with their 2005 tax returns. Sept. 15, 2006 was the extended deadline for filing those returns. In total, more than half a million corporate tax returns were filed electronically, most on a voluntarily basis across a wide array of industries. Based on feedback from external groups, the IRS designed corporate e-file to be flexible enough to accommodate the various needs of large business filers, such as allowing transition rules during the first year. In a statement, the IRS noted that many business taxpayers used commercial software to prepare their returns, with about 400 taxpayers transmitting the return themselves. The agency hopes that electronic filing will allow the IRS to shave many months off of the audit process while allowing examiners to develop analytical tools to better select areas of audit inquiry. The electronic filing requirements will be expanded to include 2006 tax year returns of corporations with $10 million or more in total assets that file 250 or more returns a year. E-file has been available to corporations since 2004.

A church in California has refused to comply with an Internal Revenue Service request to turn over all the documents and e-mails it created during the 2004 election year containing references to political candidates. Last week, the 26-member vestry of All Saints Episcopal Church in Pasadena voted unanimously to challenge the IRS on the matter in court. The refusal to cooperate forces the IRS to either drop the case, or to ask the Justice Department to take the church to court. The agency could also revoke the church’s tax exemption. The church is one of dozens of tax-exempt groups under investigation by the Internal Revenue Service for possible violations of laws against political activities. The church said it regarded an IRS investigation of an antiwar sermon delivered by the church’s former rector on the Sunday before the 2004 election as an attack on freedom of speech and religion. The agency has not said what part of the sermon the reverend delivered may have violated the law. In the sermon, the former rector, imagined Jesus chiding President Bush and Democratic opponent Senator John Kerry on topics including the war in Iraq, nuclear weapons, poverty and the increasing income gap. In July, the IRS warned 15,000 tax-exempt groups across the nation to stay neutral on political matters. IRS officials said then that investigations into charges of improper campaigning would be carried out under a new enforcement program, the Political Activity Compliance Initiative. Under it, the IRS will no longer wait for an annual tax return to be filed or for the tax year to end before investigating allegations of improper campaigning.

The Internal Revenue Service has released the summer 2006 issue of the Statistics of Income Bulletin, taking a closer look at corporations claiming the possessions tax credit and the use of estate tax provisions. The bulletin includes in-depth looks at:

California’s Franchise Tax Board is in the process of notifying more than 200 corporate taxpayers that their information was made public Sept. 19 when an employee accidentally e-mailed a list of companies under audit. The e-mail distribution list included two writers for BNA, a publisher of print and electronic news, which promptly reported that the listing of taxpayers under audit for tax years 2003 and earlier had been released. The list included the name of the taxpayers, their identification numbers, and the name of the auditor assigned to each case. The tax board is responsible for collecting state personal income taxes, as well as bank and corporate taxes for the entire state. Under California’s Revenue and Taxation Code, the board must notify taxpayers that their information had been disclosed, and the responsible employee can be charged with a misdemeanor. An FTB spokeswoman told BNA that the employee intended to send the message to himself, but accidentally sent the message to a broader distribution list. In a follow-up email sent the same day, he asked recipients to permanently delete the e-mail from their computers. According to BNA, the list includes several well-known corporations in a variety of industries, including entertainment, energy, electronics, and banking. Notes in the file appear to show that several of the taxpayers are being audited for possible participation in abusive tax shelters.

Though the Internal Revenue Service’s toll-free customer service line met its performance goals for the 2006 filing season, a federal report was still able to recommend a number of improvements for the system. Overall, the report from the Treasury Inspector General for Tax Administration found that callers waited less time to speak with assistors and abandoned fewer calls while on hold, but the level of service provided was still only on par with the 2005 season, and lower than the 2004 season. During the 2006 filing season, the IRS made approximately 9,900 customer service representatives available to answer the toll-free telephone lines at 25 call centers located throughout the United States and Puerto Rico. The agency met all of its goals -- an 81.8 percent level of service (according to a customer satisfaction survey), a 295-second average speed of answer, and 15 million answered calls. The call centers had originally planned to reduce their operating hours from 15 hours to 12 hours this year, and, accordingly, hire fewer assistors, but Congress passed legislation barring the cuts until the inspector general completed a study of the proposal. When the reduced operating hours didn’t happen, it was too late for the call centers to hire and train seasonal assistors, which the report noted means that the 2006 results were measured against years when there were more assistors available to answer the telephones. Between January and mid-April of 2006, TIGTA broke down the handling of customer calls as follows:

Comptroller General David Walker delivered testimony this week at the Senate Finance Committee’s hearing on “Our Business Tax System: Objectives, Deficiencies and Options for Reform.” Walker, who runs the Government Accountability Office, framed his testimony around the need for broader tax reform, telling the senators that the size of business tax revenues makes them very relevant to any plan for addressing the nation's long-term fiscal imbalance. In a report prepared by the GAO that accompanied Walker’s testimony, the office said that the design of the current system of business taxation is flawed. “It distorts investment decisions, hurting the performance of the economy,” the report said. “Its complexity imposes planning and record keeping costs, facilitates tax shelters and provides potential cover for those who want to cheat.” Walker said that some features of current business taxes channel investments into tax-favored activities and away from more productive activities, reducing the economic well-being of all Americans. Walker said principles that should guide the business tax reform debate include:

And then there were three -- three major tax software companies, that is. With CCH taking over the operations of ATX and TaxWise, there are very few tax preparation software companies left that are not owned by billion-dollar corporations. The remainder are Drake Software, Greatland, Orrtax, Petz Enterprises, and TaxSimple. Everybody else of consequence is owned by CCH, Thomson (Creative Solutions and GoSystem), and Intuit (Lacerte and ProSeries. If anyone is interested in nostalgia, there's a long litany names that have vanished over the last 15 years, and many of them over the last five. But nostalgia doesn't help to run a business, and the question is what this last rush of consolidation means to preparers. It probably means that the large vendors have greater control over pricing, which is where the battle is increasingly taken place, since most vendors had loaded up on features that make a difference. This doesn't necessarily mean higher pricing, because CCH, which was at the high-end of the market with ProSystem fx Tax, is likely to put pressure on Intuit at the low end. But it means the vendors have more flexibility. Suites, or at least one-stop shops, will get greater impetus. CCH has already expressed its intention to bring other accounting firm applications into the ATX and TaxWise offerings. And Internet-based computing will spread. The larger companies have an advantage in being able to develop Web-based platforms, and a big interest in cutting cost by trying to get out of the business of shipping CDs. They have a lot to gain on the cost-cutting and delivery side, and as they integrate their other applications with document management systems, the Web is a natural place to move.

The U.S. government recorded record-high overall and corporate tax receipts on Sept. 15 -- a quarterly deadline for tax payments, the Treasury announced.

A federal grand jury has indicted five individuals for allegedly orchestrating a $14 million tax fraud scheme, the Department of Justice and Internal Revenue Service announced.

Tax administration heads from more than 30 countries have agreed to work together on ways to improve tax administration and address the growing problem of international non-compliance with national tax requirements.

The trio of private debt collection agencies that the Internal Revenue Service selected for a pilot program will soon be able to come knocking. The agency was due to turn over data on 12,500 taxpayers - each owing $25,000 or less in back taxes - toward the end of August.To assist the agency in collecting back taxes, the 2004 American Jobs Creation Act authorized the IRS to hire private firms to collect federal tax debts. IRS Commissioner Mark Everson has openly admitted that the program will cost more than the agency simply hiring more tax collectors, but under federal budget rules, money spent to hire collectors is treated as a discretionary expense, which Congress has been cutting.

The selection by an entity of its company structure, its fiscal year and its method of accounting are the three main mechanisms that a company can employ in performing substantial tax planning, according to Nicholas Crocetti, CPA, a partner in CBiz Accounting Tax & Advisory."The concept of an accounting method is much broader than what many people believe," he said. "Most companies employ a number of accounting methods. First, they have an overall method of accounting - for example, the cash method, accrual or some form of hybrid method. Additionally, companies need accounting methods for every timing item they encounter in their business, such as how to account for inventory, bad debts, vacation pay and self-insured medical expenses."

As part of the recently signed pension bill, the Treasury Department and the Internal Revenue Service will have to better define what constitutes "good" condition for donations of clothing or household items.The IRS can deny deductions for donated items such as furniture, appliances, linens or electronics if the items aren't in appropriate condition.

The newly released 2006-2007 Internal Revenue Service Priority Guidance Plan, designed as the agency's own blueprint for its guidance projects during the coming year, ranges in scope from consolidated returns to tax-exempt bonds.The Guidance Plan contains 10 more projects than last year's plan, and includes projected rulings on corporations and shareholders, employee benefits, executive compensation, excise taxes, exempt organizations, estate and gift taxes, partnerships, S corporations, and international issues.

Word of a potential tax bill registering in the tens of millions for Tyco International Ltd. came to light this week in the government's trial against a former Tyco executive.