IRS Employees Targeted in Tax Review
IRS Employees Targeted in Tax Review; 800 Returns Will Face Further Scrutiny
The Associated Press
WASHINGTON Jan. 2 — The Internal Revenue Service has identified 800 employees whose tax returns will face closer scrutiny, part of an effort to make sure IRS employees are filing truthful returns and complying with tax laws.
The agency said Friday that these employees "face an examination on Schedule C issues, most of which are already under way." A Schedule C deals with reporting profits or losses from a business and is filed if the taxpayer or his or her spouse runs a business.
An IRS spokesman declined to say precisely what prompted the IRS to flag the employees for review, but said that the agency had some questions about their returns. The 800 employees are just a fraction of the 115,000 full- and part-time employed by the IRS.
IRS Commissioner Mark Everson said the agency is taking extra steps to make sure IRS employees are following the law.
"The multistep initiative will include a new review of tax behavior of IRS employees, a deeper IRS compliance and auditing effort for employees and an expanded education and outreach effort inside the agency," the IRS said.
The agency already regularly reviews employees' tax returns and other information to ensure they are complying with tax laws.
Earlier this year, a review found that "about half of the 25 employees identified had tax compliance issues following an investigation of their Schedule C filings," the IRS said. "Several employees in the inquiry have already lost their jobs."
Tax Advisers Face Shelter Requirements
Tax Advisers Will Be Required to Take Certain Steps When Weighing a Client's Use of a Tax Shelter
The Associated Press
WASHINGTON Dec. 29 — Lawyers, accountants and other tax advisers would be required to take certain steps when weighing in on a client's use of a tax shelter, the Bush administration proposed Monday in its latest effort to crack down on dubious tax-avoidance schemes.
The Treasury Department's proposed rules are aimed at tax advisers who provide wealthy clients with opinions on whether proposed tax-advantaged transactions would withstand an IRS challenge.
The proposed rules, among other things, would require tax advisers to provide detailed information in their opinions, including applicable tax laws and other facts, to support a claim that the tax shelter is legal.
Advisers also would need to inform clients about what protections, if any, an opinion provides. "For example, tax advisers would have to advise clients about issues that the opinion does not address and warn the client if the opinion will not protect the client against penalties," the department said.
The proposal also describes "best practices" that tax professionals should use when providing advice to clients. These best practices include, communicating clearly with the client about the scope of the advice given and arriving at a "conclusion supported by the law and the facts," the proposal says.
"We are proposing a set of best practices that makes clear that tax professionals should adhere to the highest ethical standards and ensure that their clients are well advised of the law and any risks they are taking," said Pam Olson, Treasury's assistant secretary for tax policy.
Tax shelters are investment strategies aimed at shielding income from taxes; some are legal and others can be deemed by the IRS as outside the bounds of the law.
Business people and the public will have a chance to give the government their thoughts on the proposal. Comments are due Feb. 13. The IRS will hold a public hearing on the proposal on Feb. 18. The proposal could be revised before a final rule is adopted.
Few Tax Changes Expected for Small Biz
Few Tax Law Changes Affecting Small Businesses Are Expected for 2004
The Associated Press
NEW YORK Dec. 17 — While 2003 brought many tax law changes affecting small businesses, it looks as if 2004 might be quieter unless the Bush administration and Congress, mindful that it's an election year, decide to tweak the laws a little further.
"We may see some other bout of tax cuts or tax packages," said Paul Gada, a senior tax analyst with CCH Business Owners Toolkit, a service based in Riverwoods, Ill. Gada noted that there has been significant tax legislation passed in each of the past three years, and "if it's more than two, it becomes traditional."
Gada said one change that has been proposed is a reinstatement of what's called the five-year carryback for net operating losses. That would allow small businesses to amend prior-year returns to include some of the losses from the current tax year.
After the Sept. 11, 2001, terror attacks, Congress passed a law expanding the usual two- or three-year carrybacks to five years for the tax years 2001 and 2002, Gada said. Lawmakers might not only implement the more-generous carrybacks for 2004, but they might also retroactively apply it to 2003, he said.
But at this point, this change and others that would have to be passed by lawmakers are hypothetical.
2004 will, however, bring the changes that typically take effect at the beginning of a new year.
For example, the standard mileage rate, used to compute the deductible cost of operating a car for business purposes, increases to 37.5 cents per mile, up from 36 cents in 2003. The IRS also has announced that businesses operating no more than four vehicles at the same time can use the standard mileage rate. That's a change from past practice, in which businesses operating more than one vehicle had to keep track of and report on their actual expenses for operating the vehicles.
The Section 179 deduction, which allows businesses to deduct upfront up to $100,000 of the cost of new equipment, will be adjusted upward for inflation. The amount of the new deduction is not yet known, Gada said.
There are also new, higher contribution limits for a variety of defined contribution retirement plans, details of which can be found on the IRS Web site at www.irs.gov.
Gada noted that 2004 will be a simpler tax year in some respects for business owners because some provisions in this year's legislation have made 2003 tax computations more complicated.
For example, the new 50 percent bonus depreciation rule, which allows companies to depreciate up to 50 percent of the cost of equipment purchased in a given year, took effect on May 5. That meant that companies wanting to take advantage of the depreciation rule could only apply it to equipment acquired after that date. Anything purchased before May 5 had to be depreciated under old rules.
With the advent of the new tax year, bonus depreciation is available for equipment bought throughout 2004.
The arrival of a new year is often a plus for business owners, giving them an opportunity to do some housekeeping that will make taxes, and their companies' overall finances, less of a chore. For example, if your record keeping is haphazard, adopt a new system as of Jan. 1. Many business owners find that it's easier to keep books on a computer, and there are programs designed for small businesses.
It's also a good time to become more disciplined, keeping track of cash flow and making estimated tax payments when they're due. And you should take advantage of your accountant's fairly clear schedule it won't stay that way for long, with tax season approaching and make an appointment to project what business will be like for your company during 2004.
A little planning will go a long way toward saving your business some money in the new year.
Lawyers Gear Up for Suits on Tax Shelters
Nov. 30 — By Deepa Babington
NEW YORK (Reuters) - Accounting firms may have weathered a storm of criticism on Capitol Hill for promoting dubious tax shelters, but the pressure on them could be just starting to intensify.
In the past year, several former clients have sued top accounting firms like KPMG and Ernst & Young, alleging that the firms advised them to enter into illegal tax shelters that are now being audited by the Internal Revenue Service.
That trickle of lawsuits, however, could become a much bigger wave in coming months, lawyers involved in some of the cases say. The U.S. Senate hearings and the IRS crackdown on tax-shelter promoters and wealthy clients who used them have given lawyers more to work with.
Dallas lawyer David Deary has already filed three lawsuits against accounting firms -- including two class action suits -- and says he is looking to file more suits against accounting and law firms on behalf of about 70 clients in coming months.
Another lawyer active on the tax-shelter front, Blair Fensterstock, says he also expects to file more lawsuits in coming months. Fensterstock has already filed two cases against firms that promoted tax shelters, including one seeking damages of more than $1 billion from Ernst & Young and two law firms.
No stranger to suing accounting firms, Fensterstock also represents a retired partner at now-defunct Andersen who is suing the remaining top accounting firms.
"The potential liability is huge for the promoters. I wouldn't at all be surprised to see an enormous number of suits because the number of taxpayers involved is really large," said Joseph Bankman, a professor at Stanford Law School who has researched tax shelters. "I don't think any of the defendants are going to look very sympathetic. If I were the promoters, I'd be very worried."
Though attention in the past year has focused on the big firms, several smaller accounting and law firms who peddled the shelters could soon be drawn in, say lawyers from Seattle-based Badgley Mullins.
The law firm has brought a tax-shelter suit against KPMG on behalf of Theodore Swartz, a Seattle businessman who founded an educational-travel company. The firm has withdrawn another tax-shelter suit against KPMG it had filed in October.
WAITING FOR THE IRS
KPMG, which has about a dozen lawsuits over tax shelters pending against it, declined to comment beyond its statements before Congress last week.
Senators gave a frosty response to its arguments that the shelters it promoted had been consistent with laws in place at the time and that those shelters are no longer offered to clients.
Ernst & Young -- which has also been hit with several lawsuits and earlier this year came under the spotlight for advising top executives at Sprint Corp. <FON.N> on tax shelters now under IRS scrutiny -- declined to comment.
Whether the suits will succeed is yet to be seen.
In September, a tax-shelter lawsuit against KPMG filed by regional telecom magnate Peter Loftin was dismissed. The judge determined some of the claims were premature because the IRS had not yet settled with Loftin or assessed his liabilities.
Many caught up in the IRS audit net are now waiting for the agency to settle with them and determine the damages that must be paid before suing the accounting firms involved, said Deary, the Dallas attorney.
"Once that happens, the dam is going to break," he said.
Tax Shelters at a Glance
The Associated Press
Nov. 17 — Transactions reviewed by the Senate Government Affairs investigations subcommittee, which will be discussed at hearings scheduled Tuesday and Thursday:
S-Corporation Charitable Contribution Strategy: An individual who owns an S-corporation is approached with a strategy to shelter the corporation's income by making a charitable donation and allocating income to a tax-exempt charity.The S-corporation issues nonvoting shares of stock and donates the shares, which have relatively little value, to a tax-exempt organization. The tax-exempt organization typically is a state or municipal pension fund.
While the tax-exempt organization holds the stock, the S-corporation allocates most of its income to the tax-exempt group. After a specified time, typically two or three years, the charity sells back the shares and gets a cash payment.
The individual claims a deduction for the donated shares, and the individual pays a lower rate of tax on the money that had for a time been allocated to the tax-exempt group. The money is taxed at long-term capital gains rates, not the higher rates for ordinary income.
The subcommittee said the Internal Revenue Service is reviewing the transaction.
Bond Linked Issue Premium Structure: An individual with a large amount of ordinary income or capital gains is approached with a plan to create an artificial loss sufficient to offset the income and shelter it from taxation.
The individual creates a shell corporation and contributes a percentage of the loss to be offset by the strategy. The shell corporation gets a bank loan under strict terms that include an upfront payment equal to the amount of loss that will be offset.
The shell corporation and an investment bank, working together, establish a strategic investment fund. The corporation transfers the loan to the fund, which renegotiates the loan terms. The strategic investment fund uses the money for foreign currency investments, which committee investigators said incurs no risk to investors. Most of the money is converted from dollars to euros and back to dollars. A very small percentage is used to buy foreign currencies whose values are pegged to the U.S. dollar.
When the transaction is unwound, the fund transfers assets back to the corporation, and the taxpayer claims a loss and tax deduction on the $20 billion payment made by the bank on the original loan.
The subcommittee also looked into two other transactions designed to shelter income, known as OPIS and FLIP. In 2000, the IRS declared the losses from these type of transactions not allowable as deductions for federal income tax purposes.
IRS Found Tolerating Poor Tax Preparers
IRS Too Often Tolerating Poor Performance by Tax Preparers, Congressional Investigation Says
The Associated Press
WASHINGTON Nov. 11 — The IRS has ordered $2.4 million in penalties against tax preparers in the past two years but has collected only $291,000, raising questions about toleration of poor performance, congressional auditors say.
Less than half the penalized preparers paid any fine, and the total collected was just 12 percent of the amount due, according to investigators from the General Accounting Office.
Tax officials told the auditors "they cannot afford to make these low-dollar paid-preparer cases a priority given their responsibility for addressing billions of dollars in uncollected taxes."
However, leaders of the tax-writing Senate Finance Committee said the GAO findings to be released later this week demonstrate that the Internal Revenue Service needs to reorder its priorities now that more than half the people filing tax returns use paid preparers.
"Clearly people benefit from paid preparers, but there are some bad apples in the bunch. The IRS and Congress need to do more to make sure the bad apples are tossed out of the basket," said the panel's chairman, Sen. Charles Grassley, R-Iowa.
In 2001 more than 72 million taxpayers used paid preparers. If even a small percentage of them get bad advice, millions may be ill-served, the congressional auditors said.
Collecting so little of the fines levied by the government sends "a mixed message about whether poor performance by preparers will be tolerated," their report said.
Last January the IRS reorganized what is now its Office of Professional Responsibility, doubled its staff and started work on a "national return preparer strategy." But agency officials told the auditors the office still has limited resources.
"The IRS needs to put some teeth into the Office of Professional Responsibility," said Montana Sen. Max Baucus, the senior Democrat on the Senate Committee. "It's time that we not only talk the talk, but walk the walk when it comes to tax compliance,"
Les Shapiro, a former head of the old IRS Office of Director of Practice, which used to oversee tax professionals, said bad advice can come in two forms. Some tax professionals make errors or use outdated laws when preparing returns, causing taxpayers to pay too much or too little and risk an IRS exam.
Worse, Shapiro said, are those he calls "card-table jockeys." Those tax preparers have little or no training in tax law and set up operations during the height of the filing season to profit from tax return preparation. They sometimes flout the law to secure a bigger tax return, and then disappear after April 15. If the IRS contests the return, the preparer may be impossible to find.
National Taxpayer Advocate Nina Olson, who helps taxpayers with difficult problems navigate the IRS, said the agency needs to change the way it deals with unscrupulous preparers. For example, while the IRS can fine a preparer for each illegally prepared return, it regularly limits those fines.
"That's ridiculous," she said.
Questionable tax preparation operations have proliferated since the IRS started a campaign to encourage tax preparers to file returns electronically, Olson said.
With very little tax training, a business can prepare tax returns, file them electronically and market the service to customers with incentives to use tax refunds to buy furniture, purchase electronics or put a down-payment on a car. The merchandise is often purchased with a "refund anticipation loan," an immediate loan for part of an expected refund that often comes at high costs.
Olson and others have proposed requiring tax preparers to register and take regular courses in tax law things she said most upstanding preparers do anyway. The IRS would certify preparers, giving consumers some assurance they know the basics of tax law.
Grassley said he is considering legislation that would require tax preparers to register with the IRS and help low-income taxpayers set up bank accounts to receive their tax refunds.
IRS Hopes to Stem Cheating on Taxes
IRS Hopes to Stem 'Softening' in American Commitment to Pay Taxes Among Lower Income Earners
The Associated Press
WASHINGTON Oct. 30 — The Internal Revenue Service has been waging a high-profile attack on corporate tax evaders, but the agency's new chief warns that midlevel and low-income tax cheaters had better watch out too.
"I think that we have to address this vigorously," IRS Commissioner Mark Everson said in an interview with The Associated Press.
Everson, who is six months into a five-year term, said he wants to make enforcement just as important as customer service, the agency's main focus for the past five years.
The changed emphasis comes as a survey conducted for the IRS Oversight Board shows the number of Americans who believe it's OK to cheat "a little here and there" on their taxes increased from 8 percent in 1999 to 12 percent in 2003.
The same survey showed Americans generally agree with Everson. About 95 percent those surveyed in July by RoperASW said it's "very important" or "somewhat important" for the IRS to make sure corporations and high-income taxpayers pay what they owe.
This year, the survey detected an increase, to 87 percent, in the number of Americans who believe it's just as important for the IRS to make sure that low-income taxpayers pay their fair share. The number who believe that's "very important" jumped 7 percent from last year.
At the top of the income scale, Everson said tax shelter promoters peddle potentially abusive products not just in the United States, but increasingly abroad, both to U.S. subsidiaries and foreign companies, he said.
Among the lowest income brackets, Everson sees challenges in educating new immigrants to a system of taxation that requires people to step forward and voluntarily assess and pay their taxes.
In the middle, he points to changing attitudes among ordinary Americans.
The board describes the evidence of changing attitudes among taxpayers as a "softening" of Americans' commitments to pay what they owe and said the trend merits a watchful eye. Everson said the trend must be stopped before it spreads further.
"People are willing to pay their taxes," he said. "They recognize that important obligation, but they don't want to feel like they're paying when someone else doesn't have to."
Those who believe it's acceptable to cheat "as much as possible" remains small. But it also increased. Last year, 3 percent of those surveyed agreed with the statement. This year, it was 5 percent.
Overall, the number of Americans who believe it's absolutely not acceptable at all to cheat on taxes has declined. Last year, 87 percent of Americans polled said it is not acceptable to cheat while paying income taxes. This year, the number dropped to 81 percent.
Doug Shackelford, professor of taxation at the University of North Carolina at Chapel Hill, said taxpayers may be absorbing the examples of corporate tax evasion and starting to wonder whether they should pay their fair share.
The solution, Everson said, is more visible enforcement. Although most people report that personal integrity is the biggest reason they pay their taxes, the fear of being audited has risen sharply.
Actions already taken against those who promote and use abusive tax shelters appear to be having an effect. Everson said the number of shelter transactions registered with the IRS has leveled off.
Congress and the Bush administration have exerted pressure to stop companies from relocating a shell headquarters in a tax haven such as Bermuda to cut their U.S. tax liabilities by millions of dollars.
"It's tricky because some are intentionally hiding things behind the curtain," Everson said. "Understanding whether this problem behind the curtain is getting smaller or staying the same size is undoubtedly difficult."
Shackelford said the dual missions of the IRS enforcement and service put the agency in a tough spot.
"I sometimes think we have way too high of expectations for the IRS," he said.
"They're supposed to be sort of like the neighborhood cop on the block. They're supposed to get the criminals, and they're supposed to help little old ladies get across the street, and they're supposed to have answers to all your questions when you pick up the phone and call them, and that's probably not realistic."
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