Tax Strategies

The ambitious goal of having 80 percent of federal tax returns electronically filed by 2007, suggested by Congress in 1998 legislation, may not be out of reach.

Tax prep giant H&R Block has launched a new business employing CPAs to serve the needs of small business owners. After a test of the small business services concept in the Tampa, Phoenix and Atlanta markets, the company, based here, purchased 11 office locations from American Express Tax & Business Services to enter the market.

The 2006 budget reportedly will not address the hot-button issue of revamping or eliminating the controversial alternative minimum tax or other tax reforms, but will allow President George W. Bush's recently appointed tax reform panel to tackle them.According to Tax Analysts, the bipartisan tax reform panel is expected instead to examine tax reform options that will make the code simpler and fairer. The panel is supposed to make recommendations to Treasury Secretary John Snow by July 31.

The National Association for the Advancement of Colored People said that it is refusing to comply with an Internal Revenue Service request for documents that came as part of the agency's investigation into alleged improper political bias on the part of the civil rights group.The IRS is challenging the group's tax-exempt status because, it says, NAACP chairman Julian Bond made politically partisan remarks while speaking at the group's national convention in Philadelphia last July. The civil rights organization was charged in an Oct. 8 IRS document with "distributing statements in opposition of George W. Bush for the presidency."

The Joint Committee on Taxation has suggested over 60 options to close the $311 billion gap between taxes owed and collected. The report, requested by Sen. Chuck Grassley, R-Iowa, chairman of the Committee on Finance, and ranking member Sen. Max Baucus, D-Mont., consists of numerous revenue raisers, in addition to compliance provisions. The largest revenue raiser, to the tune of $164 billion, is a proposal to include in FICA wages salary reduction amounts used to provide benefits under a cafeteria plan or to provide qualified transportation fringe benefits.Proposals affecting individual income tax include a repeal of the exclusion for employer-provided care, making the dependent care credit the exclusive means for receiving tax benefits for dependent care expenses; a modification of the "kiddie tax" by increasing the age of children to which the kiddie tax provisions apply from under 14 to under 18; and a repeal of the deduction for interest on home equity indebtedness.

Tax practitioners preparing 2004 client business and self-employed returns are confronted with a bewildering maze of tax law changes, which in some cases can lead to mistakes.Significant changes affecting 2004 returns include multiple changes to depreciation and expensing, with new limits for sport utility vehicles, passenger automobiles, trucks and vans; bonus depreciation for qualified leasehold property; and newly redesigned Schedule K-1s for partnerships and S corporations.

Turnaround specialist Alvarez & Marsal has expanded its tax advisory unit, adding eight managing directors in several regional locations, and unveiling an office here.

At the inaugural meeting of President Bush's Advisory Panel on Federal Tax Reform, Treasury Secretary John Snow told the panel that, "The tax code is dreadfully murky in its complexity, but its size is clear and easy to see." "More than a million words long, the Internal Revenue Code and regulations has more than doubled in terms of page-length over the past 20 years, and today's 'short' income tax form takes more than 11 hours to prepare -- about the same as the 'long form' did a decade ago," Snow said. Former Senator Connie Mack, who serves as chairman of the panel, said that the group would "take a fresh look at the existing tax code and will formulate options for making the tax system simple, fair and productive." Former Internal Revenue Service Commissioner Fred T. Goldberg Jr., a partner at Skadden, Arps, Slate, Meagher & Flom LLP, presented a history of the income tax, concluding that we currently have "a grotesquely complicated system that distorts the allocation of resources and violates common-sense notions of fairness." Louis Kaplow, a professor of law and economics at Harvard Law School, explained the central concepts of an income tax and a consumption tax. William G. Gale, with the Brookings Institution and co-director of the Urban-Brookings Tax Policy Center, noted that it is a myth that the consumption tax is more effective at taxing the underground economy than the income tax is. He concluded that the income tax is a fair and proven mechanism for raising revenue, consistent with long-term economic growth. "While it could be improved, it should not be scrapped," he said. Stephen J. Entin, president and executive director at the Institute for Research on the 'Economics of Taxation, said that the fairest tax is proportional to income. Since deductions for costs are necessary to measure income properly, and saving is a cost of earning income, he argued, "The best measure of income is consumption. We should tax what we spend." Entin urged a fair, flat and unbiased neutral tax that would treat all savings like pensions and IRAs, end the double taxation of corporate income, and permanently eliminate the "death tax." The panel, charged with submitting a final report to the Treasury by July 31, 2005, will hold its next meeting March 3.

The Multistate Tax Commission, a cadre of some 47 state governments that works with taxpayers to administer tax laws applicable to multistate and multinational enterprises, said that it is conducting a search to replace long-time executive director Dan Bucks, who resigned. Bucks, 59, served with the MTC for 17 years before leaving to become head Montana's state revenue program. In the interim, René Blocker will serve as interim executive director. Under Bucks' leadership, the MTC expanded from 28 to its current roster of 47 states, increased the efficiency of its audit program, and played a key role in the commission's Streamlined Sales Tax Project. Individuals wishing to apply for the post must do so by Feb. 28, 2005. Information about the job is available at http://www.mtc.gov/CNTACTUS/ExecutiveDirectorRecruit.htm.

The Internal Revenue Service has designated "sale-in/lease-out" or "Silo" arrangements as abusive tax avoidance transactions. SILO arrangements are designed to exploit the tax law by shifting tax benefits from a tax-indifferent party that cannot use them to a taxpayer that can. Taxpayers entering into Silo arrangements cannot claim tax benefits as the purported owners of property subject to the lease because they do not acquire tax ownership of the property. In the American Jobs Creation Act of 2004, Congress enacted limitations on the deductibility of losses from future Silo transactions. In Notice 2005-13, the IRS says that it will challenge the purported tax benefits claimed by taxpayers entering into earlier Silo transactions. It further states that it will consider Silos to be "listed transactions," requiring taxpayers who enter into Silos to disclose their participation to the IRS. In addition, promoters of listed transactions must keep lists of investors and, in certain cases, register those transactions with the IRS. "I appreciate the Treasury Department's effort to shut down these abusive deals," said Sen. Chuck Grassley, R-Iowa, chairman of the Senate Finance Committee. "The department has done a very good job of going after bogus leasing shelters since the Finance Committee exposed them. Today's action complements our new law going after these deals. It reaches back to the deals that otherwise might have gotten away."