Fellow Bar Members, please note that this month's article will focus on tax highlights over the month of May. A number of exciting things are happening with both the IRS and state tax apportionment. As the latter is still under discussion and debate, this month we will look at federal issues making headlines.
Foreign Bank Account Reporting
For the approximately 15,000 taxpayers who came in under the FBAR voluntary disclosure program, the IRS has begun to assign agents to assist in closing a significant number of these cases by the end of 2010.
In the first week of May, Ronald Schultz, Senior Adviser to the IRS Deputy Commissioner, Services and Enforcement and Rick Raven, IRS Deputy Chief of Criminal Investigations said that the IRS will continue to accept taxpayers who want to come in under the voluntary disclosure program that was in place prior to the recent compliance initiative. The IRS's litmus test is whether the disclosures are "timely, complete, and truthful." According to Raven, the work of processing and analyzing the information received through the special voluntary disclosures and otherwise "is just getting started."
Schultz emphasized that taxpayers who made "quiet" disclosures by simply filing amended returns during the period that the special program was open will not be considered eligible for its benefits and will undergo intense scrutiny.
Form 1099 Necessary for Section 530 Relief
John Tuzynski, Chief of Employment Taxes, Small Business and Self-Employed Division, said on May 8 to the ABA Section of Taxation that for employers seeking safe harbor treatment with respect to worker classification, it is "critically" important to "have issued a 1099, then you're in the game in terms of Section 530, and if you didn't, then you're out of that relief provision."
Petitions Before U.S. Tax Court
Electronic filing will be mandatory for most parties represented by counsel in cases where the petition is filed on or after July 1, 2010.
Temporary Partnership Basis Provisions are Invalid
In Intermountain Insurance Service of Vail LLC v. Commissioner, T.C., No. 25868-06, 134 T.C. No. 11, 5/6/10, the U.S. Tax Court held temporary regulations (T.D. 9466) issued by the Internal Revenue Service defining an overstatement of basis as an omission from gross income for purposes of the extended six-year period for assessment of tax attributable to partnership items invalid.
IRS said when it issued the temporary rules that they were intending to resolve a continuing issue as to whether an overstatement of basis in sold assets results in an omission from gross income. A six-year limitations period is triggered when a taxpayer or partnership "omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return."
The temporary regulations concern tax years "with respect to which the applicable period for assessing tax did not expire before September 24, 2009." Per the court, "we concluded in our September 1, 2009, opinion that the general 3-year limitations period of section 6501(a) was the applicable period for assessing tax in this case."
The court noted Judicial deference to the Supreme Court's decision in Colony Inc. v. Commissioner, 357 U.S. 28 (1958). There, the USTC distinguished that the high court interpreted the statutory language at issue and held a basis overstatement not to be an omission from gross income. The Colony Inc. opinion "unambiguously forecloses" IRS's interpretation of Sections 6229(c)(2) and 6501(e)(1)(A) and "displaces respondent's temporary regulations."
See, BNA, Inc. Daily Tax Report, May 7, 2010
Focus on Taxpayer Reporting Income
50,000 to 60,000 copies of Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips are received annually by the IRS. "Our information shows that we should be receiving 150,000 to 200,000" forms says Daniel R. Lauer, program manager for the IRS National Tip Compliance Program.
Three years ago, the IRS revised Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to require employees to list the employer identification number. Since then, the compliance program has expanded to include audits using employees' Form 4137 filed with IRS under Section 3121(q). Employees who receive cash and charge tips of more than $20 a month and do not report them to the employer have to do so on Form 4137. Employees also must file the form if they have been allocated tips, with employers only liable for their portion of payroll taxes on tips when the employees report them on Form 4137. IRS recently hired an outside contractor to identify large food and beverage businesses across the country. It has found that some employers who have agreed to participate voluntarily in the tip-reporting compliance program are coming up short in reporting.
The program expansion, which has been in effect for six to eight months, involves IRS contacting employers when it finds a discrepancy between an employee's Form 4137 and the business's Form 941, Employer's Quarterly Federal Tax Return.
Preparer Registration Test
Anyone who is not an attorney, certified public accountant, or enrolled agent will be required to pass a competency exam to prepare the returns.
Internal Revenue Service Electronic Tax Administration Director David Williams on May 6 said that while all tax preparers will have to sign up with IRS under a new regulatory regime, they will not be given their registration papers with IRS until they have passed a test to determine their competency. The IRS is also looking at the Circular 230 rules, adding that, "[what] you will see is a redefinition of practice before the IRS to include tax return preparation."
"People who come in [early] will have three years before they have to take the competency exam," he said. "Once you pass the test, we propose to call you an IRS registered tax preparer. We will give folks a certificate that says that." IRS is expecting to sign up between 900,000 and 1.2 million tax preparers.
