Tax planning

The Internal Revenue Service announced that as of April 1, some 52 million returns had been filed electronically, 7 percent above last year's e-filing pace. Overall, 65 percent of all returns were e-filed -- up from 60 percent for the same period last year. The service also reported that roughly 4 million returns have been filed via the Free File program -- up 44 percent from the year-ago figures. "As we get deeper into the tax filing season, the percent difference between how many people are using e-file and how many used it last year keeps going up," said IRS Commissioner Mark W. Everson. "This shapes up as a really strong year. Taxpayers who haven't filed yet should check into e-file and Free File." The IRS also said that 42 million refunds have been paid through direct deposit, up 5.7 percent for the same time last year.

Senators from both sides of the aisle and the Treasury Inspector General for Tax Administration questioned the plan by the Internal Revenue Service to cut back its walk-in and telephone Taxpayer Assistance Centers during a hearing on the 2006 IRS budget. IRS Commissioner Mark Everson discussed the agency's plan to close as many as 105 TACs and cut back its toll-free telephone service by 15 hours a week at the Senate Appropriations Subcommittee hearing. TACs are located nationwide and allow taxpayers to have face-to-face meetings with IRS employees who can assist taxpayers with tax law, tax return preparation and account inquiry resolution. "The IRS needs to balance customer service with its compliance and enforcement efforts," said Sen. Christopher Bond, R-Mo., chairman of the Transportation, Treasury and Housing and Urban Development Subcommittee. "I believe that most people who fail to comply with the tax code do so unintentionally because of its difficulty and complexity. Accurate and timely guidance from the service is imperative to ensuring taxpayer compliance." Colleen M. Kelley, president of the National Treasury Employees Union, warned that closing Taxpayer Assistance Centers will result in reduced taxpayer education and compliance at a time when the gap between taxes owed and amounts paid has increased to upwards of $298 billion.

The government is upping its enforcement measures in the wake of its success in catching tax cheats, penalizing promoters, barring unscrupulous preparers and shutting down abusive tax shelters, according to officials. At a joint Internal Revenue Service-Justice Department briefing, agency executives noted that last year, IRS Criminal Investigation referred more than 3,000 cases to the Justice Department for possible criminal prosecution, nearly a 20 percent increase over the previous year. During fiscal year 2004, the conviction rate on cases investigated by the IRS and referred to Justice was 95.4 percent. "If you're thinking about cheating on your taxes, think twice," said IRS Commissioner Mark W. Everson. "The IRS is ramping up its enforcement efforts, particularly for high-income individuals and corporations. Where we need to, we turn to the Justice Department to take people to court." The Justice Department's Tax Division's criminal enforcement priorities include prosecuting schemes that involve using trusts or other entities to conceal control over income and assets; shifting assets and income to hidden offshore accounts; claiming fictitious deductions; using frivolous justifications for not filing truthful tax returns; failing to withhold, report and pay payroll and income taxes; failing to report income; and failing to file tax returns.

Former Senators Connie Mack and John Breaux, chairman and vice-chairman of the President's Advisory Panel on Federal Tax Reform, are inviting interested parties to submit ideas for reforming the tax code. "At our six public meetings that were held all over the country, we learned about the complexities of the tax code and its impact on taxpayers," said Mack. "This request for ideas to reform the tax code marks a shift of our focus from defining the problems in the current code to considering options for reform. We will be reviewing specific proposals for reform that have been offered in the past as well as new ideas that are submitted. We expect to hold more public meetings in the coming months to discuss these options and alternatives." "It is important that we hear from Americans about the kind of tax system they want," added Breaux. "We look forward to receiving comments from all interested parties." This is the panel's second specific request for comments. In connection with its first request, the panel received thousands of comments describing complexities and burdens, unfair aspects, and distortions in the current tax system. Information on how to submit comments, as well as details on the format for comments, are available at www.taxreformpanel.gov/contact/ .Comments submitted in connection with this second request should be received by the panel no later than April 29, 2005. All comments submitted will be made available to the public.

The Justice Department has asked a federal court to bar Ella Mae Peterson, a St. Louis preparer for H&R Block, from preparing income tax returns for others. Peterson worked for 20 years at the St. Louis office. For tax years 2000 through 2003, she prepared 1,751 returns for Block customers. Internal Revenue Service audits of 31 of those returns revealed improper deductions on each return. The deductions included fictitious or inflated charitable contributions, business and medical expenses, and state and local taxes paid. The complaint estimates that returns Peterson prepared for the tax years from 2000 to 2003 have cost the Federal Treasury more than $6.5 million. "People who prepare false or fraudulent tax returns cheat their customers and unfairly shift the tax burden to honest American taxpayers," said Eileen J. O'Connor, assistant attorney general for the Justice Department's Tax Division. "If you have your tax return prepared, review it carefully, and make sure that what you file with the Internal Revenue Service is accurate." Block spokesperson Nancy Wagoner stated: "Our training, monitoring and supervision of tax professionals is unquestionably the best in the industry. Should an incident such as this occur, we do our best to learn from the situation and communicate the appropriate messages to both our clients and our tax professionals." "H&R Block's policy is to cooperate fully with authorities on any investigation, and we have done so in this case," she continued. "We do not, however, comment on employee matters."

The Internal Revenue Service is accepting applications for joining its Taxpayer Advocacy Panel. The TAP provides a forum for citizens from each state to make suggestions regarding IRS decision-making, and works to identify and prioritize taxpayer issues. "We are committed to working with taxpayers to improve the customer-service focus of the IRS," said Nina Olson, IRS National Taxpayer Advocate, in a statement. "Working with taxpayers directly helps us identify issues that may not be on the IRS radar screen. We can also hear their concerns about issues the IRS is already addressing." TAP applicants must be U.S. citizens and be able to commit 300 to 500 hours during the year to the panel. In addition, they must be current with their tax obligations and pass a criminal background check. The application is available at www.improveirs.org, or by calling (888) 912-1227. Applications must be received by the TAP office by April 29.

The 2005 filing season is heading into the homestretch with growth in nearly every category of filing, according to the latest interim figures released by the Internal Revenue Service.

In recent testimony before the President's Advisory Panel on Federal Tax Reform, Federal Reserve Chairman Alan Greenspan floated the idea of a consumption tax to replace all or part of the current income tax.

Federal penalties for taxpayers accused of tax evasion, failure to file a return or making false statements to the Internal Revenue Service could increase dramatically later this year if Congress approves legislation being pushed by Sen. Russ Feingold, D-Wis., to sweeten tax deductions for charitable volunteers.

* SUPREME COURT REQUIRES TAX COURT TO INCLUDE TRIAL JUDGES' REPORTS ON APPEAL: The Supreme Court ruled in a 7-2 decision that the Tax Court may not exclude from the record on appeal Rule 183(b) reports submitted by special trial judges.The Tax Court's chief judge appoints special trial judges to hear certain cases, but the ultimate decision, when tax deficiencies are greater than $50,000, is reserved for the court itself. Tax Court Rule 183(b) directs the special trial judge to submit a report to the chief judge, who assigns the case to a judge of the court. The Tax Court judge is to give due regard to the report and presume that findings of fact contained in the report are correct. The Tax Court judge may then adopt the report "or may modify it or reject it in whole or in part."

The Internal Revenue Service's new rules for qualified retirement plans went into effect on March 28, but the ripple effect from the rules has yet to play out.

The Winter 2004-2005 Statistics of Income Bulletin, a quarterly compilation of information on various topics from federal tax returns and other documents, has been released by the Internal Revenue Service. For tax years 1995 to 2001, corporation aggregate pretax book income -- the amount reported to shareholders -- peaked at $853.7 billion in 1999, falling to $221.3 billion in 2001. Aggregate tax net income peaked in 1997 at $607.5 billion, declining to $270.8 billion in 2001. In all years but 2001, aggregate pretax book income exceeded tax net income, reaching a maximum dollar difference of $318.4 billion in 1999. Preliminary data also show that taxpayers filed 130.6 million individual income tax returns for 2003. Adjusted gross income totaled $6.2 trillion, while taxable income was $4.2 trillion, and total income tax was $750 billion. The largest component of AGI was salaries and wages, totaling nearly $4.7 trillion. A total of $261.4 billion in business net income was reported on 14.4 million returns.

E-file, direct deposit and e-payment programs are running at record paces so far this year, according to the Internal Revenue Service. Through March 25, 49 million returns were filed electronically, a 7 percent increase from last year. Overall, 64 percent of all returns were e-filed, up from 62 percent for the same period last year. While this percentage will decline as April 15 approaches, the IRS still expects to have more than half of all individual tax returns filed electronically for the first time. "This shapes up as a really strong year," said IRS Commissioner Mark W. Everson. "Taxpayers who haven't filed yet should check into e-file and Free File." Also, record numbers of individuals are now paying their taxes with credit cards. So far this year, almost half a million taxpayers have paid their taxes with a credit card, up from 324,000 at the same time last year.

More than two thirds of consumers participating in a survey by the National Retail Federation and CNN/Money expect to receive a tax refund this year -- and are ready to spend it. The NRF found that just one out seven respondents plans to wait until April to file this year, in anticipation of their refunds. The Internal Revenue Service reports that the average tax refund this year will be $2,259. Half of those expecting IRS largesse will use the refund to pay down debt, while others indicated that they plan to use part of their monies for such things as vacations or major purchases. In a gender breakdown, the NRF said that women were almost twice as likely as men to use portions of their refund for a major purchase.

The first study of taxpayer compliance since 1988 shows that the vast majority of American taxpayers pay their taxes on time and accurately, but that the nation still has a significant tax gap, according to the Internal Revenue Service. The National Research Program, launched in 2001, randomly selected about 46,000 returns for review and examination from 2001 to 2004. The return selection process included an oversampling of high-income returns to enable IRS researchers to draw valid conclusions about important sub-categories of taxpayers. The preliminary findings show that the gross tax gap -- the difference between what taxpayers should pay and what they actually pay on a timely basis -- exceeds $300 billion per year. IRS enforcement activities, coupled with late payments, recover about $55 billion of the tax gap, leaving a net tax gap of between $257 billion and $298 billion. The study found that underreporting of income is the largest component of the tax gap, accounting for more than 80 percent of the total, with non-filing and underpayment at about 10 percent each. Individual income tax is the single largest source of the annual tax gap, accounting for about two-thirds of the total. For individual underreporting, more than 80 percent comes from understated income, not overstated deductions, and most of the understated income comes from business activities, not wages or investment income. IRS Commissioner Mark W. Everson said that the study confirms two key points involving tax enforcement and simplification. "The IRS needs to enforce the law so that when Americans pay their taxes, they are confident that neighbors and business competitors are doing the same," Everson said. "At the same time, this research underscores [President George W. Bush's] call for tax reform. Complexity obscures understanding. Complexity in the tax code compromises both the service and enforcement missions of the IRS." "Those who try to follow the law but cannot understand their tax obligations may make inadvertent errors or ultimately throw up their hands and say, 'Why bother?' Meanwhile, individuals who seek to pay less than what they owe often hide behind the tax code's complexity in order to escape detection by the IRS and pay less than their fare share," Everson added.

The President's Advisory Panel on Federal Tax Reform has compiled the witness list for the sixth meeting of the group, scheduled for March 31, here. On the first panel, titled "Overview of International Tax Systems," the speakers will be Willard Taylor, a partner at Sullivan & Cromwell LLP; Mihir Desai, an associate professor at the Rock Center for Entrepreneurship of Harvard Business School; Jeffrey Owens, director of the OECD Center on Tax Policy and Administration; Larry Langdon, a partner at Mayer, Brown, Rowe & Maw LLP and former commissioner of the Internal Revenue Service's Large and Mid-Size Business Division. The second panel, "How Taxes Affect Business Decisions," will hear testimony from Paul Otellini, president and chief operating officer of Intel Corp.; and Robert Grady, managing director of The Carlyle Group. The final panel, "Impact of Taxes on Savings, Investment, and Economic Growth," will hear from Michael Boskin, the Tully M. Friedman Professor of Economics and senior fellow at Stanford University and the Hoover Institute; Alan Auerbach, the Robert D. Burch Professor of Economics and Law at the University of California, Berkeley. Also, renowned economist Milton Friedman will speak to the reform panel on "Perspectives on Tax Reform."

A ruling by the Tax Court has underscored the way in which the alternative minimum tax penalizes holders of incentive stock options when the stock loses value after the option is exercised. Ronald Speltz thought that his employer was doing him a favor by issuing him ISOs to augment his salary, which was less than $100,000 a year. Instead, the ISOs triggered a tax nightmare when he exercised them before the tech bubble burst, leaving him with nearly worthless stock but with an unexpected tax bill of nearly $225,000. Although Speltz and his wife borrowed $134,000 to help pay state and federal taxes, and offered the cash value of his life insurance policy as a compromise for the remainder, the Internal Revenue Service rejected his offer. The Tax Court agreed. Even though the offer-in-compromise provisions include a compromise to promote effective tax administration -- explained by the regs to cover situations "where collection in full could be achieved but would cause economic hardship" -- the court found that the Speltz's had sufficient income to meet "basic living expenses" and therefore didn't qualify. The court said that it sympathized with the situation, but it is up to Congress, not the courts or the IRS, to come up with a solution.

More people have used Free File so far this year than for all of last year, according to the latest figures from the Internal Revenue Service. As of March 16, 3.55 million tax returns have gone through Free File, up 44 percent compared to the same time last year and exceeding last year's total of 3.51 million. Now in its third year, Free File is a partnership between the IRS and a consortium of tax software manufacturers. Electronic filing continues to surge, with e-filed returns running 7 percent ahead of last year. Of the 67 million returns filed as of March 18, 68 percent were e-filed. While this percentage will decline as April 15 approaches, the IRS said it expects that for the first time more than half of all individual tax returns will be electronically filed this year.

The investigative flap over a charity ranch run by combative national radio host Don Imus is over. According to published reports, an official from the New York State Attorney General's charities office wrote to the gruff radio personality telling him that "no further inquiries concerning the Ranch are needed at this time," thus ending the probe launched by AG Eliot Spitzer. The 64-year-old Imus and his wife Deirdre, operate "The Imus Ranch" a 4,000-acre parcel in New Mexico for critically ill children. The ranch became the subject of an unflattering profile in the March 24 edition of The Wall Street Journal, which drew comparisons of the unusually high costs associated with the ranch -- $2.6 million per year for 100 children -- and compared them to other well-known charitable camps such as actor Paul Newman's "Hole in the Wall Gang." The piece detailed the Spitzer probe and questioned the Imus' personal use of the property without reimbursing the ranch. Spitzer's office said the inquiry was launched when the charity requested an extension to file tax data and that the AG's office had received an anonymous letter urging it to investigate Imus's use of the ranch. The cantankerous Imus, known for wearing his trademark 10-gallon hats on the air, labeled the WSJ reporter, Robert Frank, a "punk" and "dishonest," claiming that he (Frank) refused to come to the ranch and that he interviewed him (Imus) just one day before the article appeared. During his morning broadcast, Imus maintained that he never personally benefited from the ranch. "I'm not getting anything out of this other than having fun helping the children," he said. However, Paul Steiger, the Journal's long-time managing editor, said the article was fair and accurate and written by "one of our most experienced and capable reporters."

Expert witnesses at the fifth meeting of the President's Advisory Panel on Federal Tax Reform here, advised the reform group to proceed with extreme caution with regard to the adoption of a national sales tax and changes to the Earned Income Tax Credit. Robert Greenstein, founder and executive director of the Center on Budget and Policy Priorities, told the panel that a consumption tax could be implemented but would carry with it a string of collateral problems such as calls for exemptions and exclusions. Louisiana treasurer John Kennedy said that a sales tax was "not as simple as it might first appear." He added that a sales-and-use tax provides 37 percent of the state's revenue, but advised the panel to examine any and all issues Louisiana had with the state-wide levy. When addressing the merits of the EITC Kennedy also told the panel that it had "done more than any other program to lift people out of poverty." Greenstein pointed out that the EITC increases work efforts while slashing welfare among single parents. Next week the Tax Reform panel will host its sixth meeting, scheduled for March 31, at Fort Mason Center, Landmark Building A, San Francisco. The meeting is scheduled to begin at 9 a.m.