Tax Strategies

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.

Taxpayers participating in "Son of Boss" tax shelter settlements have so far paid in more than $3.2 billion, a figure that should top $3.5 billion when the project concludes in the coming months, according to the Internal Revenue Service. Son of Boss, an offshoot of an earlier shelter called Boss ("bond and option sales strategy") was an abusive transaction aggressively marketed in the late 1990s and 2000 primarily to wealthy individuals. Both the Boss and Son of Boss shelters were structured using derivatives, noted Selva Ozelli, CPA, an international tax attorney with RIA. "Derivatives were used because of their uncertain tax treatment, limited financial statement disclosure and uncertainty regarding their valuation," she said. The settlement initiative required taxpayers to concede 100 percent of the claimed tax losses and pay a penalty of either 10 percent or 20 percent, unless they previous disclosed the transactions to the IRS. "This was a particularly bad shelter, and we're glad so many chose to get right with the government," said IRS Commissioner Mark W. Everson. "Despite the tough terms we offered, two-thirds of Son of Boss participants have come forward and paid up." Thus far, nearly 1,200 Son of Boss taxpayers have settled with the IRS. Typical settlements were about $1 million, while 18 taxpayers forked over $20 million apiece, and one paid a whopping $100 million. Based on disclosures that the IRS has received from promoter investigations and from investor lists from Justice Department litigation, the agency determined that over 1,800 people participated in Son of Boss. "For those who didn't come forward, we know who they are," Everson said. "We are going after them."

The IRS has released Rev. Proc. 2005-13, which details the limitations on depreciation deductions for owners of passenger automobiles first placed in service during calendar year 2005. Special tables of limitations on depreciation deductions are also provided for trucks and vans, and for passenger automobiles designed to be propelled primarily by electricity and built by an original equipment manufacturer (electric automobiles). In addition, the revenue procedure details the amounts to be included in income by lessees of passenger automobiles first leased during calendar year 2005, including a separate table of inclusion amounts for lessees of trucks and vans, and a separate table for lessees of electric automobiles.

The Internal Revenue Service has expanded the number of tax professionals who can use its suite of e-Services incentive products. Effective immediately, tax professionals who e-file any combination of five or more accepted individual and business tax returns in a calendar year can use these e-Services products: disclosure authorization, electronic account resolution and transcript delivery. These three products increase tax filing efficiency and save time and resources for tax practitioners. When launched in the summer of 2004, the e-Services incentive products were reserved for those who e-filed 100 or more individual returns. "These services make it easier for taxpayers to deal with the IRS and obtain information to help their clients," said IRS Commissioner Mark W. Everson. Other e-Services products available to all tax professionals include: e-Services registration, preparer tax identification numbers, IRS e-file applications, and taxpayer identification number matching.

The President's Advisory Panel on Federal Tax Reform will hold its fifth meeting on March 23 in New Orleans. The focus will be on additional perspectives about the fairness of the tax code and how the tax system affects families. The first panel will discuss, "What Is Fairness and How Can it Be Measured?" Panel members include Bob Greenstein, founder and executive director of the Center on Budget and Policy Priorities, and William W. Beach, director of the Center for Data Analysis of The Heritage Foundation. The topic for the second panel is "Low-Income Taxpayers." Its members include Hilary Hoynes, professor of economics at the University of California at Davis: Mark Moreau, co-director of Southeast Louisiana Legal Services; and David Marzahl, executive director of the Center for Economic Progress. The third panel, "Tax Treatment of Families," will include presentations by Eugene Steuerle, senior fellow at the Urban Institute; Mark Pauly, a professor at the Wharton School of the University of Pennsylvania; and James Alm, a professor at the Andrew Young School of Public Policy of Georgia State University.

The Treasury Inspector General for Tax Administration said that while security has improved for information technology systems at the Internal Revenue Service, IRS employees remain a vulnerable target for hackers. As proof, of the 100 IRS managers called by TIGTA employees -- who claimed to be IT helpdesk personnel hoping to fix a problem -- 35 surrendered their login names and actually changed their passwords to those suggested by TIGTA personnel. The TIGTA said that the breach of security could signal an opportunity for hackers or former IRS employees. The TIGTA recommended that the IRS's Office of Mission Assurance and Security Services issue periodic reminders to IRS employees about susceptibility to the hacker threat. On a brighter note, however, the recent test results showed a 50 percent improvement versus a similar test conducted in 2001.

The Internal Revenue Service has clarified in Rev. Rul. 2005-11 that interest paid on a loan that is refinanced more than once will retain its status as qualified housing interest, to the extent that the amount of the loan is not increased. That interest is deductible for alternative minimum tax purposes. Any other interest on amounts borrowed that are not used to acquire, construct or substantially improve any property that was a principal residence or qualified residence may not be deducted for AMT purposes, the service said. Revised instructions to Form 6251, which include a worksheet to help taxpayers determine the correct home mortgage interest adjustment, will be posted on the IRS Web site, www.irs.gov

Electronic filing continues to show a strong increase, with e-filed tax returns running more than 6 percent ahead of last year, according to the Internal Revenue Service. Out of 61 million returns filed as of March 11, 42.7 million, or nearly 70 percent, were e-filed -- up from 65 percent the previous year. While this percentage is expected decline as April 15 approaches, the IRS expects for the first time to have more than half of all individual tax returns filed electronically. Out of tax returns e-filed so far, the biggest increase is among those who prepare their own returns on a home computer -- 10.6 million returns, up more than 14 percent over results from the same period last year. The jump in computer use coincides with another strong year from the Free File program. The IRS and a consortium of tax software manufacturers offer free services through Free File, which is available at www.irs.gov. More than 3.33 million returns came in through Free File through March 9, which is a 44 percent increase from 2.32 million returns for the same period last year.

Internal Revenue Service Commissioner Mark W. Everson praised the agency's improvement in taxpayer service and its renewed emphasis on enforcement of the tax laws. In a speech at the National Press Club, Everson noted that the playing field is no longer tilted toward tax evaders, with only the amount of tax owed at risk. "Now they might have to pay the entire tax, interest and a stiff penalty," he said. "A taxpayer might have to wrestle with questions like, 'How much am I going to have to pay the lawyers and expert witnesses to litigate this thing?' And going to court is a public matter. Damage to one's reputation is a potential factor." Everson said that as the tax reform process unfolds, he doesn't expect to offer support for, or to oppose, any particular policy options. However, he offered these pointers to consider when reforming the code: _ Construct a tax system that recognizes the dynamic of an evolving economy; _ Assess policy options for their potential impact on attitudes towards compliance; _ Any new system should be administratively feasible; _ When looking at policy options, don't compare a sub-optimized existing system to a perfect, theoretical system; and, _ Recognize that transition to a new code must be properly planned and managed, or it may take decades to recover.

In an effort to minimize disputes regarding whether a truck body satisfies the weight-based exclusion provided in Section 4051(a)(2), the Internal Revenue Service, in Rev. Proc. 2005-19, has established four truck body safe harbors. Section 4051(a)(2) provides an exclusion from the tax imposed by Section 4051(a)(1) for truck chassis and bodies suitable for use with a vehicle that has a gross vehicle weight of 33,000 pounds or less. Similarly, Section 4051(a)(3) provides an exclusion for truck trailer and semi-trailer chassis and bodies suitable for use with a trailer or semi-trailer that has a GVW of 26,000 pounds or less. The IRS announced that it will not challenge a seller's determination that any of the following classifications of truck body types meet the "suitable for use" standard and sales thereof are excluded from the retail excise tax pursuant to Section 4051(a)(2): 1. Platform truck bodies 21 feet or less in length; 2. Dry freight and refrigerated truck van bodies 24 feet or less in length; 3. Dump truck bodies with load capacities of eight cubic yards or less; or 4. Refuse packer truck bodies with load capacities of 20 cubic yards or less. Other body types may also still satisfy the "suitable for use" standard if the seller can establish that, pursuant to Reg. 145.4051-1(a)(4), the truck body has practical and commercial fitness for use with a vehicle having a GVW of 33,000 pounds or less. Rev. Proc. 2005-19 is effective for sales on or after April 4, 2005. In the case of sales before April 4, 2005, the IRS won't challenge sellers who take positions consistent with the revenue procedure's safe harbors.