Tax

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."