Tax

At the mid-point of tax filing season, taxpayers have used e-filing at a record rate, according to the Internal Revenue Service. Out of 47 million returns filed through Feb. 25, 74 percent of them were e-filed -- up from 69 percent last year. While this percentage traditionally declines as April 15 approaches, the IRS expects for the first time to have more than half of all individual tax returns filed electronically. Of the 35 million returns that have been e-filed so far this year, the biggest jump comes from self-prepared tax returns filed with a computer, which have increased nearly 14 percent to 8.7 million returns. The jump in computer use coincides with another strong year for the Free File program. More than 2.77 million returns came in through Free File through Feb. 23, which is a 42.6 percent increase from last year's 1.94 million returns. "E-filing is making a strong start," said IRS Commissioner Mark W. Everson. "Taxpayers and tax professionals are becoming increasingly comfortable with e-filing." The growth in e-filing comes as record tax refunds are being sent to taxpayers. The average refund so far is $2,436 -- a record amount and more than $200 more than last year. So far this year, three out of four taxpayers receiving refunds have used direct deposit.

The Internal Revenue Service has finalized a regulation that would limit the use of life insurance and annuity contracts as a way to avoid current taxation of investment earnings. The regulation will prevent taxpayers from turning otherwise taxable investments in hedge funds and other entities into tax-deferred or tax-free investments by purchasing the investments through a life insurance or annuity contract. Life insurance and annuity contracts receive favorable tax treatment in recognition of the importance of protecting loved ones against the potentially devastating financial consequences of death or the risk of exhausting savings while in retirement. The new regulation will help taxpayers purchasing a life insurance or annuity contract to be secure in the knowledge that the contract complies with the tax laws, according to the IRS.This regulation is part of the effort to modernize the rules for these contracts, in recognition of the developments that have occurred in the financial markets in recent years.

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. Under the bill, the current $100,000 fine for attempting to "evade or defeat tax" liabilities would jump to $250,000, penalties for more serious violations would double to $1 million per offense, and the maximum of prison terms facing taxpayers would rise from five years to 10 years. At the same time, taxpayers charged with "willful failure to file returns, supply information or pay tax" would face felony rather than misdemeanor charges, with maximum penalties climbing to 10 years, up from 12 months currently. Feingold's bill would also double the federal penalties for making false statements to IRS to as much as $1 million and/or five years in prison. These sharply increased penalties are buried in the fine print of a bill that Feingold said is needed to provide equitable tax treatment for volunteers who use their cars for charitable activities. Under current law, these volunteers may be reimbursed up to 14 cents per mile for their donated services without triggering a tax consequence for either the organization or the volunteers. If the charitable organization reimburses any more than that, they are required to file an information return indicating the amount, and the volunteers must include the amount over 14 cents per mile in their taxable income. According to Feingold, this is inequitable because the mileage reimbursement level currently permitted for businesses is a more liberal 40.5 cents per mile. In proposing legislation to eliminate this "disparity," Feingold told the Senate that his new bill "today is identical to a measure I introduced in the 107th Congress and the 108th Congress in nearly every respect." Significantly, however, neither of those earlier Senate bills, nor separate legislation introduced in the House earlier this year by Rep. Todd Platts, R-Pa., to increase charitable mileage deductions, contain the tax penalty increases included in Feingold's current measure. In explaining the new bill's tax sanction provisions, the Wisconsin Democrat said that the sharply increased monetary penalties for taxpayers would offset the cost of raising the mileage deduction for charitable volunteers. That represents a tax break that the Congressional Joint Committee on Taxation has estimated would result in a net federal revenue loss of no more than $1 million over five years. "Though the revenue loss is small," Feingold explained, "it is vital that we do everything we can to move toward a balanced budget, and to that end I have included a provision to fully offset the cost of the measure and make it deficit-neutral."

-- The Thomson Corp. has acquired Atlanta-based Tax Partners, a provider of sales and use tax compliance services, and will fold the concern under its RIA Compliance unit umbrella. Terms were not disclosed. RIA Compliance is a division of Thomson Tax & Accounting. "Adding Tax Partners to our offerings will provide Thomson Tax & Accounting with an important tax compliance service component, enabling us to offer an end-to-end solution to our clients," said Brian Peccarelli, executive vice president of Thomson Tax & Accounting Corporate Markets and general manager of RIA Compliance, in a statement. In 2004, Tax Partners filed more than 540,000 tax returns and remitted $7.5 billion in taxes for clients.

The Internal Revenue Service has unveiled its annual listing of notorious tax scams, the "Dirty Dozen," reminding taxpayers to be wary of schemes that promise to eliminate taxes or otherwise sound too good to be true. The Dirty Dozen for 2005 includes several new scams that either manipulate laws governing charitable groups, abuse credit counseling services or rely on refuted arguments to claim tax exemptions. The agency also sees the continuing spread of identity theft schemes preying on people through e-mail, the Internet or the phone, sometimes with con artists posing as IRS representatives. The IRS removed four scams from the Dirty Dozen this year: slavery reparations, improper home-based businesses, the Americans with Disabilities Act and EITC dependent sharing. But the IRS cautions that taxpayers should remain wary because old scams can resurface or evolve. The IRS urges people to avoid these common schemes: 1. Trust misuse. Unscrupulous promoters urge taxpayers to transfer assets into trusts, promising reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. 2. Frivolous arguments. Myriad outlandish claims are made, including that the Sixteenth Amendment was never ratified, that wages are not income, and that filing a return is voluntary. 3. Return preparer fraud. Dishonest preparers derive financial gain by skimming a portion of clients' refunds and charging inflated fees for services. 4. Credit counseling agencies. Some of these tax-exempt organizations, which are intended to provide education to low-income customers with debt problems, are charging large fees while providing little or no counseling. 5. "Claim of Right" doctrine. The taxpayer attempts to take a deduction equal to the entire amount of wages, labeling it as a necessary expense for the production of income. 6. "No Gain" deduction. Similar to Claim of Right, filers eliminate their entire adjusted gross income by deducting it on Schedule A. 7. Corporation sole. Participants incorporate under the pretext of being a bishop or overseer of a one-person, phony religious organization, with the idea that this entitles the individual to exemption from federal income taxes as a nonprofit religious organization. 8. Identity theft. Fraudsters send bank customers fictitious correspondence and IRS forms to trick them into disclosing their personal financial data, or use Social Security numbers to file false returns without the clients' knowledge. 9. Abuse of charitable organizations and deductions. A taxpayer moves assets to a tax-exempt organization, but maintains control over the assets, thereby obtaining a deduction without transferring a commensurate benefit to charity. 10. Offshore transactions. Income is illegally hidden in offshore accounts. 11. Zero return. Taxpayers enter all zeros on their return. 12. Employment tax evasion. Failure to withhold income tax or other employment taxes based on an incorrect interpretation of Code Section 861.

The Internal Revenue Service, the Department of Justice and the District of Columbia have announced the arrest and indictment of Walter Anderson, 51, a telecommunications entrepreneur. According to the indictment, Anderson obstructed the IRS and defrauded the District of Columbia by failing to pay well in excess of $200 million in taxes. Anderson was involved in starting up long-distance telecommunications businesses at a time when the industry was just being deregulated. The grand jury charged that in 1992, as Anderson realized that the merger of his first successful company -- Mid-Atlantic Telecom -- with another company would result in substantial taxable earnings, he formed an offshore corporation in the British Virgin Islands to receive and disguise his anticipated income. The company that he formed, Gold & Appel Transfer, was allegedly owned by another BVI company, with a trust company serving as registered agent and sole director. Anderson granted himself an exclusive option to purchase Gold & Appel shares for a nominal sum. Neither the option nor Anderson's name was recorded in public records, while Anderson was able to maintain complete control. Between 1992 and 1996, Anderson further obscured his ownership of Gold & Appel by using an alias and forming another offshore corporation in Panama and a mailbox drop in Amsterdam. During this period, Anderson transferred ownership in three telecommunications companies to his offshore companies so that when appreciated stock was sold, he would not appear to be the taxpayer. The indictment alleges that over a five-year period, Anderson personally earned nearly a half billion dollars through investments in business ventures that he conducted through offshore corporations. If convicted of the charges, Anderson faces up to 80 years in prison. "Average Americans deserve to feel confident that when they pay their taxes, neighbors and competitors are doing the same," said IRS Commissioner Mark W. Everson. "The IRS holds all Americans, including the most wealthy, to the same standards of honesty."

Tax shelters provided by accounting firms or external auditors potentially siphoned an aggregate $129 billion in revenue from U.S. coffers over the period from 1998 to 2003, according to a report from the Government Accountability Office. According to the GAO, some 207 Fortune 500 companies, or about 40 percent of the companies in that category, purchased tax shelters from their auditor or from CPA firms, resulting in a potential revenue loss of $56.6 billion. Meanwhile, tax shelter transactions involving the auditor for 61 Fortune 500 companies sidestepped paying about $3.4 billion in taxes between 1998 and 2003, but as a result of the shelter received $1.8 billion in federal tax benefits. The study, which calculated revenue loss from tax shelters purchased by both Fortune 500 corporations and individuals, was launched at the behest of Sen. Carl Levin, D-Mich., the ranking Democrat on the Senate Permanent Subcommittee on Investigations. The GAO noted, however, that the study included only those transactions known to the Internal Revenue Service, and said that its estimates were imprecise because some of the shelters may not be abusive and some transactions may have been counted more than once. The names of the companies and individuals purchasing tax shelters were not identified.

The Internal Revenue Service has redesigned Form 941, Employer's Quarterly Federal Tax Return. The new, simplified form is intended to help businesses, tax practitioners and payroll companies avoid common errors, and to reduce the burden associated with completing and filing the form. Form 941 is used to report wages, tips and other compensation paid, as well as Social Security, Medicare and income taxes collected. More than 23 million of these forms are filed annually by 6.6 million employers. The redesigned form features an improved layout, plain-language instructions, simplified deposit reporting and paid preparer identification. The form is also scannable, which the IRS expects will reduce transcription errors. "The new 941 is much easier on the eye and much more user-friendly," said Scott Mezistrano, senior manager of government relations for the American Payroll Association. "With the shading, bigger boxes and improved instructions right on the form, you know exactly what you are supposed to report and where to put it. The IRS did a very thorough job of reviewing every line on the 941 and considering how it could be made more clear."

Dr. David Frantz Bradford, a tax economist who proposed the "X tax," a controversial alternative to supplant the Internal Revenue Code, died at his home here. He was 66. The cause of death was burns suffered in a fire at his home earlier this month. Bradford, a professor of economics and public affairs at Princeton, as well as a professor at New York University, had advocated switching to a system that taxed people on their spending levels. His subsequent proposal, the X tax, was a distant relative to a flat tax system, but Bradford's system applied a graduated rate schedule for people in the higher income brackets. A flat tax applies a single rate of tax for all income brackets. Bradford served as deputy assistant secretary of the Treasury for tax policy in the Ford administration, and later was appointed by President George H. W. Bush to the Council of Economic Advisors from 1991 to 1993. He joined the economics department at Princeton in 1966. He also authored "Untangling the Income Tax."

The average combined sales tax rates across the nation hit a record 8.587 percent over 2004, which fueled some 764 tax rate changes, according to the 2004 Sales Tax Rate Report. The report, released by Vertex, a provider of tax technology solutions headquartered here, said that although 237 new rates were established over the course of 2004, the year also saw a record number of decreases, 160, the highest figure since 1996. Other findings included: o- Three states had state rate increases. Arkansas went from 5.125 percent to 6 percent, California went from 6 percent to 6.25 percent, and Virginia went from 3.5 percent to 4 percent. o- Mississippi, Tennessee and Rhode Island have the highest state sales tax rates, at 7 percent. The average sales tax rate is 5.318 percent. o - Wrangell, Alaska, has the highest city sales tax rate, at 7 percent. The average city sales tax rate is 1.583 percent. o- Arab, Ala., was the jurisdiction with the highest combined sales tax rate of 12 percent. The average combined rate is 8.587. The Vertex Sales Tax Rate Report provides a summary of sales tax rate changes at the state, county, city and district levels nationwide. It is available online at www.vertexinc.com.