FEDERAL TAX ALERT - NSTP FTA.pdf · 2016-12-16 · federal tax alert page 1 june 2008 federal tax...

FEDERAL TAX ALERT PAGE 1 JUNE 2008

FEDERAL TAX ALERTFEDERAL TAX ALERT

A PUBLICATION OF THE NATIONAL SOCIETY OF TAX PROFESSIONALS JUNE 2008A PUBLICATION OF THE NATIONAL SOCIETY OF TAX PROFESSIONALS JUNE 2008

NEWS ITEMSCONGRESS PASSES TAX RELIEF FOR MILITARY FAMILIES

THE CHALLENGES OF BUSINESS INCOME

CHARITABLE DEDUCTION AVAILABLE FOR SPECIAL LICENSE PLATES

THE INTERNAL REVENUE SERVICE TAX COUNSEL-ING FOR THE ELDERLY PROGRAM

FINANCIAL TIPS FOR RECENT COLLEGE GRADS

CONGRESS PASSES TAX RELIEF FOR MILITARY FAMILIESCongress moved on May 22 to ease the economic hardships of military families by passing a $2 billion package of tax breaks.

The Senate, by voice vote, approved the legislation that the House passed just two days before on a 403-0 vote. It now goes to President Bush for his signature.

Th e legislation, supported by major service organizations, allows active-duty reservists to make penalty-free withdrawals from retirement plans and provides a tax credit for small business employers who make up the diff erence of wages lost to employees called to active duty.

It makes thousands of veterans eligible for low-interest homeowner loans and makes permanent the ability to include combat pay as earned income for purposes of the Earned Income Tax Credit.

Th e measure also clarifi es that those on active duty who fi le a joint tax return will be eligible for the economic stimulus rebate payment even if the spouse does not have a Social Security number.

Congress timed action on the Heroes Earnings Assistance and Relief Tax Act, or HEART Act, to coincide with the approach of Memorial Day.

Th e bill is paid for by closing a loophole where federal contractors set up sham companies overseas to avoid paying Social Security and Medicare taxes.

HUNDREDS OF THOUSANDS OF TAXPAYERS WILL NOT RECEIVE REBATEWhen Maulit Shelat heard about the Bush administration’s plan to pump up the economy by sending out stimulus checks, he sat down with his wife and drew up a list of priorities; fi rst up, remodeling the bathroom.

But Shelat is married to a foreigner who still has not completed the oft en years-long process that allows her to apply for a Social Security number. Her not having that number makes even him ineligible for the tax rebate checks.

He is among an estimated hundreds of thousands of taxpayers, from legal immi-grants to soldiers based abroad, who will be getting a share of the stimulus package because of a provision aimed at preventing immigrants in the U.S. illegally from getting rebates.

When lawmakers decided to send out the checks, ranging from $300 to $600 per adult taxpayer, plus another $300 for each child, they formulated it so only taxpayers who have Social Security numbers would qualify.

Th e rule unintentionally caught many taxpayers who would have qualifi ed for the bonus, except they fi led jointly with a spouse whose immi-gration status does not allow them to have a Social Security number. Among them are some of the 288,000 troops stationed overseas who may have married a foreigner.

It is not clear how many

members of the armed forces posted abroad have married foreigners. But offi cials in overseas bases say they cannot do anything about the policy.Th e Heroes Earnings and Relief Act has provisions to include these taxpayers in the 2008 Stimulus Rebate. Th ey would not qualify for the “advance” but would receive it on their 2008 tax return. NSTP will continue to monitor this legislation.

SOME STIMULUS CHECKS SENT TO WRONG ACCOUNTSTh rough the wonders of modern technology, some of the advanced 2008 stimulus payments are being directly deposited into recipients’ bank accounts.

But some are not, and are instead winding up in the bank accounts of complete strangers.

One taxpayer, who asked not to be identifi ed, reported that he had discovered an unex-pected deposit of $1,800 in his bank account. He said a review of his bank records revealed that it was a deposit from the IRS bearing another taxpayer’s Social Security numbers.

Th ose taxpayers receiving misdirected IRS deposits must report the mistake to their bank. Similarly paper checks sent to incorrect recipients must be mailed back to the IRS and any money spent before the recipient is aware of the mistake must be repaid.

UP TO 350,000 TAX REBATE CHECKS WRONGUp to 350,000 households are not getting the $300 per child owed them as part of their economic stimulus rebate

NEWS ITEMS PAGE 1

IRS ACTION NEWS PAGE 3

TAX LAW UPDATE PAGE 5

INSIDE WASHINGTON PAGE 7

ET CETERA PAGE 11

CONTENTSNews Items .......................... 1From Th e Editor ................. 2Irs Action News .................. 3Tax Law Update .................. 5Inside Washington ............. 6Members In Th e Know ...... 8Tax Court Decisions .......... 9Et Cetera ............................ 11Tax Rep Roundtable ......... 12Ethics Corner .................... 12FYI ..................................... 14Members Ask .................... 15Quotes ............................... 16

INSERTSWilliamsburgRegionals 2AwardsBy Special Invitation Only

NEXT ISSUEDomestic ProductionActivity Deduction


U.S. MAY REVISE PAYMENT OF SOCIAL SECURITY CHECKSConcerned that “payday” and other high-interest storefront lenders are improp-erly capturing Social Security payments from elderly and disabled benefi ciaries, the Social Security Administration has announced it would likely change how it delivers some benefi ts.

More than 80% of Social Security recipi-ents receive their benefi ts by direct deposit thanks largely to federal rules making it mandatory unless recipients opt out.

Th e government says direct deposit is cheaper than printing millions of paper checks each month, but also safer for recipients because checks can be stolen or destroyed.

While the direct deposit program has been a success, a growing number of high-interest lenders in recent years have used the direct-deposit program to help them capture loan payments and fees from Social Security benefi ts.

Social Security recipients with direct deposit can effectively use their antici-pated Social Security benefits as collat-eral for short-term high interest loans taken out from high-interest lenders and check cashers.

Some lenders require borrowers to have their checks deposited directly into banks that partner with the lenders as a condition of obtaining a loan.

NOTICETAX HOTLINE

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DIRECT LINE360-695-0556

NEW Website Password: pride(use lowercase only)

Technical Tax advice provided by NSTP Hotline staff is based upon specific information conveyed by the member. Members should take special care in relying upon recommendations and opinions that reflect the understanding of the Hotline staff member. NSTP and the Hotline staff are not responsible for misapplication of information given. Members are resposible for the utimate verifi-cation and application of any information provided by NSTP.

FROM THE EDITORWith great anticipation I look forward to seeing many of you at one of the NSTP Regional Conferences over the next several weeks. Atlanta is only a few weeks away and plans are all set for 12 hours of education. Not only will you have the great privilege of hearing the best speaker available today in Paul LaMonaca as he qualifi es us all for assisting our taxpayers with their troublesome real estate transactions but you will hear how we can expand our practices by assisting Senior clients. Now one or two of you may venture into my class, Th e Ugly 1040 Two, and learn about Ima Ugly, a taxpayer who wants you to prepare her “unusual” tax return. I’ll have all of you for the 4 hours on Sunday, LLC’s – Th e Good, Th e Bad and Th e Ugly.

Whether you attend Atlanta, Chicago, Orlando or Las Vegas, the education is certain to whet your appetite for a Fall Update and NSTP is the organization with outstanding instructors to teach what you need to know about tax.

On June 23, 2008, NSTP President Dorothy Leamon, Dr. Bill Stevenson, NSTP’s Ambassador to the IRS and I will attend a courtesy meeting with the new commissioner. Our purpose is to introduce him to NSTP and its members who promise to be good partners in tax administration but like good partners we want something in return. We want to be treated as valued partners, communicating about issues and working together to resolve. More on this meeting in the July Federal Tax Alert.

NSTP’s Annual Meeting is set for August 17, 2008 at 5:15 pm in Las Vegas, NV at the Rio Hotel. You will not want to miss this. A very special guest will be in attendance and a special gift will be presented to each attendee.

Th e NSTP membership never disappoints me and many of you picked up the challenge to enlist a new member in May. NSTP is growing! NSTP wants more members just like you! Ask Michigan Member Barbara Hatfi eld. Her goal is 10,000 NSTP members by 2010 and I’m not about to tell Ms. Barbara it cannot be done. Th anks to all of you and keep up the great promotion of the NSTP – the best partner a tax professional can have.

Catch the Vision!

BeannaBeanna J. Whitlock, EA CSAEditorSan Antonio, [email protected]

payments, the Internal Revenue Service has announced.

Th e IRS says taxpayer human error and computer glitches were responsible for the problem aff ecting a tiny percentage of the 130 million taxpayers expected to benefi t from the refund the government began sending out last month.

Th e rebates, the centerpiece of the government’s $168 billion plan to revive the faltering economy, provide up to $600

for an individual and $1,200 for married couples, based on income levels. In addi-tion, people are entitled to $300 for eligible children younger than 17.

Th e IRS has already refunded some $27 billion to about 30 million taxpayers. It expects to hit 130 million refunds by the end of June, with the last checks, except for those who requested extensions in fi ling their returns and a few other exceptions, going out in July.

The Federal Tax Alert is published 10 times a year by the National Society of Tax Professionals.Mailing address: The Federal Tax Alert, 10818 NE Coxley Dr. Ste. A, Vancouver, WA 98662. Telephone: 800-367-8130.

Opinions expressed in The Federal Tax Alert are those of the editors and contributors.Staff-Executive Editor: Beanna Whitlock; Technical Editor: Ronald Larson; Subscription Services: Glyness Scott;

Printer: Apollo Graphics Printing, LLC, Portland, Oregon.


that pay anything in income taxes, about three-quarters pay at 15 percent or less.Another 22 million, 3.7 million and •1.5 million households pay income taxes at marginal rates of 25 percent, 28 percent and 33 percent, respec-tively. In the year 2000, this top 25 percent of all taxpaying fi lers paid a whopping 83.6 percent of all income taxes. By 2005, they paid 85.6 percent of all taxes. So in spite of tax rate cuts for the well-off , the share of taxes paid by the well-off has risen.

What does all this mean?Simple. When political talk turns to tax “fairness,” no political candidate mentions where a high income begins.Th inking you might want to know:You were in the top 25 percent of taxpayers in 2005 if your taxable income exceeded $61,055.

Millions of Americans have no idea what fat cats they are.

IRS ACTION NEWSTHE CHALLENGES OF BUSINESS INCOMEInternal Revenue Service research indicates that understated Business income contrib-utes signifi cantly to the tax gap, with the majority understated by small businesses.

To assist small business and self-employed taxpayers better understand their reporting obligations, this fact sheet addresses the issue of income and how to determine gross income.Business Income, Gross Receipts or SalesIf there is a connection between any income received and a business, the income is business income. A connection exists if it is clear that the payment of income would not have been made if the business did not exist and operate.

Small business owners and self-employed taxpayers must report on their tax returns all income received from their businesses unless specifi cally excluded by law. In most cases, business income will be in the form of cash, checks and credit card charges.

But business income can be in other forms, such as property or services. Th ere are many forms, including bartering, real estate rents, personal property rents, interest and dividend income, canceled debt, promissory notes, lost income payments, damages, economic injury

Th e basic data is available in the imagina-tively titled work, “Individual Income Tax Rates and Shares, 2005.” Here are the key lessons of that data:

Historically, it is basically same-old, •same-old. In 2005 those of us who paid income taxes collectively paid 13.6 percent of our income. Some paid more. Some paid less. But the average burden was not exactly over-whelming.Today, fewer people pay income taxes. •In 1986, Americans fi led 103 million federal income tax returns. Of those, 84 million had to pay some taxes. Th at is 81.5 percent of all returns. By the time Bill Clinton took offi ce, the percentage of fi lers paying taxes had declined to 75 percent. During the Bush years, the percentage of fi lers who paid taxes continued to decline. It fell to only 67.4 percent in 2005.Th is is not a minor number. In •2005, about 134 million American households fi led tax returns. Only 90 million of them paid any taxes. While the number of households fi ling returns rose by 5 million, the number of households actually paying income taxes fell by 6 million. Basically, 11 million lower-income households do not have to pay income taxes that would have had to pay taxes before the Bush tax cuts.Of course, the federal income tax is •not the only tax that we pay. Anyone who works pays the employment tax, a stiff 15.3 percent of wage income.Today, the rich pay more; the poor •pay less. Th ose with high incomes continue to pay at much higher tax rates than those with lower incomes. Th ey also pay much more of the total tax bill. Only 953,000 taxpayers, about 1 percent of the total who paid taxes, paid at the top 35 percent tax rate in 2005. Th ey paid $315.4 billion in taxes on their $1,094 billion in income.Th e most common marginal tax rate •is 15 percent. Th at is the rate paid by 54.4 million taxpayers. Th is means the typical taxpayer pays at less than half the tax rate of the top earners.Th e second most common marginal tax •rate is 10 percent. About 25.5 million taxpayers pay taxes at that rate. Th is group pays taxes at one-third the rate paid by the highest-income taxpayers. So of the two-thirds of all households

Some lenders “attempt to exercise too much control” over payments sent to Social Security recipients that are then automati-cally transferred to the lender.

Some high-interest lenders arrange bank accounts, typically in other states, that provide no checks or ATM cards to the borrowers.

Th at means borrowers can access their monthly Social Security benefi ts only by visiting the lender to pick up what remains aft er loan payments, including interest and fees are deducted.

Th e Social Security Administration’s request for comment centers on “master/sub accounts,” which allow institutions to receive Social Security benefi ts for many individuals and allocate them to “sub accounts” in each recipient’s name.

Th e agency initially established the master/sub-account arrangements so it could send Social Security benefi ts directly to investment accounts, nursing homes and religious orders with vows of poverty. According to the notice, such arrangements are supposed to be “freely revocable” by the benefi t recipient.

However, the agency said it is “troubled” by loan-agreement provisions “designed to prevent the benefi ciaries from terminating direct-deposit arrangements or preautho-rized transfers, and thus dissuade benefi -ciaries from taking actions they may have the lawful right to take.”

Th e agency said it is seeking information from benefi ciaries, lenders, advocates, and other members of the public so it can revise the payment procedures “to help benefi cia-ries avoid some of the unfortunate outcomes that may result when they enter into agree-ments with some payday lenders.”

KEY TRENDS IN TAX DATATaxes are unpleasant and unfair. We have all heard this. And government works hard to keep it that way. Th e only thing about taxes that all Americans can agree on is that someone else should pay them.

Perhaps we can learn something by examining how much we pay in taxes, who pays them and how our tax payments have changed in the last 20 years or so. We can do this pretty easily thanks to one of our tax-supported government agencies, the Internal Revenue Service.

Every year, the IRS examines all the returns that are fi led and analyzes changes in the patterns of tax payments. Th e latest year for which the data is complete is 2005.


payments, and kickbacks.All income earned is taxable. Directing

payment of income to a third party does not remove the reporting and payment requirements for small businesses and self-employed taxpayers.Cost of Goods SoldSome businesses may make or buy goods to sell. If so, these businesses may deduct the cost of goods sold from their gross receipts. To determine these costs, the value of inventory at the beginning and end of the year must be calculated.

Th ere are several factors that go into deter-mining COGS, including inventory at the beginning of the year; purchases less cost of items withdrawn for personal use; labor costs generally applicable to manufacturing and mining operations; materials and supplies generally applicable to manufac-turing costs; other costs generally applies to manufacturing and mining operations,’ and inventory at the end of the year.

Inventory, net purchases, cost of labor, materials and supplies, and other costs are added together. Inventory at the end of the year is subtracted from this total to determine COGS.Gross IncomeTo calculate gross income, fi rst determine net receipts, gross receipts minus returns and allowances, and minus the cost of goods sold. Returns and allowances include cash or credit refunds made to customers, rebates and other allowances off the actual sales price. Th en add any other income, including fuel tax credits. Gross income must be determined fi rst before deducting business expenses.

Th e Internal Revenue Service refers tax professionals to Publication 334, Tax Guide for Small Business and Publication 583, Starting a Business and Keeping Records.

MANY BUSINESSES DID NOT CLAIM TAX REFUNDSometimes the IRS cannot get people to coop-erate, even when it tries to give money away.

As of last November less than 6 percent of business taxpayers fi ling returns had made claims for the Telephone Excise Tax Refund, a once-only payback for a now defunct tax, according to the Treasury Inspector General for Tax Administration.

Th e most far-reaching tax refund in the history of the Internal Revenue Service was estimated to aff ect between 13.9 million and 15.9 million business taxpayers.

But the inspector general report made public

in late May said only 720,000 of the 12.8 million business taxpayers who had fi led returns, less than 6 percent, had made phone tax refund claims, and the refunds associated with those claims amounted to only $876.6 million, or 17.5 percent of the $5 billion collected.Th e report said it was unclear why so few businesses claimed the refund, but it off ered theories that small businesses believed the work associated with making the claims outweighed the benefi t, did not think they could come up with the necessary records or were unaware of the credit.

Many may still be eligible to fi le claims, the report said, but “we believe a signifi -cant amount of the telephone excise tax collected by the IRS from businesses might never be refunded.”

Th e IRS did slightly better with indi-vidual taxpayers, dispersing about half the $8 billion the IRS had expected to pay them, the inspector general said in a report last October. Th e tax agency had estimated the refund would aff ect 145 million to 165 million taxpayers.

Th e inspector general urged the IRS to survey tax preparers and business taxpayers to determine why some did not claim refunds. He also recommended that the IRS consider shift ing resources for future IRS projects to better achieve their goals.

IRS FACES THINNING RANKSTh e Internal Revenue Service is facing a troublesome manpower drain, as a whop-ping average of 16 percent of its total work-force is now leaving the agency each year.

Th e soaring employee turnover rate has raised eyebrows and concerns among members of the IRS Oversight Board, which warned that the tax service is losing a distressingly large number of talented workers who “possess skills and institu-tional knowledge that are extremely diffi -cult to replace.”

In its annual report on the condition of the IRS, the Oversight Board said that it is growing deeply concerned about the state of the IRS’s human capital. Noting that the tax service ultimately relies on a very talented, skilled, knowledgeable and dedi-cated workforce to accomplish its mission at a high level, the report reminded top IRS offi cials that, “Th is talented workforce cannot be taken for granted.”

Although the warning signs of an IRS manpower drain have been evident for a number of years, the oversight body suggested that the problem is growing more

serious due to the agency’s aging workforce.Currently, about 4,000 of the agency’s

100,000-person staff retire each year, and today more than 14,000, nearly 14 percent, are eligible to exercise that option at any time.

What may be even more disturbing for personnel managers at the tax service is that these retirements account for only one quarter of the total employee turnover each year.

Resignations of IRS workers in their prime, who leave to join other agencies or private sector fi rms, are stripping the tax service of its “problem solvers and mentors,” the report suggested.

Staffi ng losses are especially high for recently hired revenue agents and revenue offi cers, employees considered to be mission-critical by IRS offi cials.

While the Oversight Board off ered little advice on what the IRS should do better to retain its existing workforce, the report bubbled over with suggestions for replacing its departing employees.

In urging the tax service to place more emphasis on bringing new workers on board, the report called on the IRS to recruit like the private sector.

If the IRS is to replace its retirees with skilled individuals, it must change its recruitment strategies and tactics, the report noted. Signifi cantly, the oversight group said that the IRS’s own managers believe that the agency’s recruitment eff orts are out of date.

IRS WARNS OF FAKE E-MAIL, PHONE CALLS FROM IDENTITY THIEVESTaxpayers who scrambled to meet the April 15 tax fi ling deadline have something else to worry about this year, an uptick in scams that prey on the unsuspecting.

Nothing appears too brazen for the con artists seeking to commit identity theft at the taxpayer’s expense.

In one example, an e-mail message recently informed a reporter that a $134.80 tax refund was waiting. Th e e-mail, falsely claiming to have originated from the Internal Revenue Service, indicated that the taxpayer could transfer the refund to his credit or debit card by submitting personal information, including a credit card number and a Social Security number.

Th e IRS said such e-mails are fakes because the agency does not communicate with taxpayers through unsolicited e-mails


illegally accessing the confi dential records of taxpayers.

Th e U.S. Attorney’s Offi ce in the Eastern District of California hit all fi ve with the misdemeanor charge of accessing and inspecting the tax return information of individuals unlawfully and without autho-rization. According to court documents fi led by the U.S. Department of Justice, the fi ve IRS workers accessed and viewed the records of up to 13 diff erent people early in 2006.

A spokeswoman for the U.S. Attorney’s Offi ce based in Fresno, California, said she did not know what relation, if any, the defen-dants had to the people they snooped on.

Th e spokeswoman added, though, that all fi ve were caught by the IRS’ own security system, which routinely audits employees’ computer systems. “Th ey knew they were not supposed to do that and they knew they were going to be audited,” she said.

Corina Yepez is accused of accessing one person’s fi le, while Melissa Moisa and Brenda Jurado both allegedly accessed two people’s fi les. Irene Fierro and David Baker are charged with snooping into the fi les of four people.

Moisa and Baker are slated for prelimi-nary hearings on July 10. Th e other three are set for their hearings on June 26.All fi ve are free awaiting court appearances.

TAX LAW UPDATE

CHARITABLE DEDUCTION AVAILABLE FOR SPECIAL LICENSE PLATESTh e Internal Revenue Service has released a letter issued to a member of the United States House of Representatives regarding the deductibility of amounts paid to the State of Minnesota for a special license plate relating to the conservation of natural habitats. Th e IRS noted in the letter that Minnesota charges an extra $30 over and above the regular license plate fee for such license plates. Th e $30 is used to buy and manage habitats for public use.

Th e letter goes on to say that when a taxpayer has the intention of making a gift , purchases an item from a qualifi ed charity, the excess of the payment made over the value received is a charitable contribution.

No Internal Revenue Code is cited however the statutory support for this deduction is found in §170(c)(1).

about refunds, rebates or sensitive tax matters. Th e tax agency added that the purpose of the scams is to trick taxpayers into disclosing personal information that can be used to commit identity theft , empty the victim’s bank accounts or run up charges on existing credit cards.“Th e internet criminals know that more people are using internet and e-mail services, so they try and dupe people,” said Kevin McKeon, an IRS spokesman in New York.NSTP Member Paul Smihal reports receiving the following e-mail:IRS Logo – Internal Revenue Service United States Department of the TreasuryOver 130 million Americans will receive refunds as part of President Bush program to jumpstart the economy.Our records indicate that you are qualifi ed to receive the 2008 Economic Stimulus Refund.Th e fastest and easiest way to receive your refund is by direct deposit to your checking/savings account.Please click on the link and fi ll out the form and submit before May 12th, 2008 to ensure that your refund will be processed as soon as possible.Submitting your form on May 15th, 2008 or later means that your refund will be delayed due to the volume of requests we anticipate for the Economic Stimulus Refund.To access Economic Stimulus Refund, please click here.

Paul was told his Stimulus Refund was $1,800. As Paul just fi led his tax return as “single” with no dependents he immedi-ately questioned the e-mail.At the bi-monthly IRS National Public Liaison meeting held on May 22, 2008, Nina Olson, the National Taxpayer Advo-cate announced an agency-wide coordi-nated eff ort to detect and stop taxpayer fraud. Th e Taxpayer Advocate is driving this initiative where once the IRS is noti-fi ed a centralized operation will mark the taxpayer’s fi le as a potential identity theft case and then stay with the taxpayer until the matter causing the concern is resolved. NSTP applauds the Advocate for her commitment to this area of taxpayer advo-cacy. Currently, phishing scams should be reported to [email protected].

FIVE IRS EMPLOYEES CHARGED WITH SNOOPING AT TAX RECORDSFive federal workers at an Internal Revenue Service offi ce in California have been charged with computer fraud for

MUNI-BOND TAX BREAK IS UPHELDTh e Supreme Court preserved the wide-spread practice of off ering tax breaks to local residents on state municipal bonds, a ruling that came as a relief to the $2.6 tril-lion bond market.

Th e decision, one of the court’s biggest tax cases in years, reverses a contrary conclu-sion by the Kentucky Court of Appeals, which had triggered anxiety when it ruled that the tax exemption Kentucky gives on local bond interest violated the U.S. Constitution.

A decision at the Supreme Court that upheld the lower court would have roiled the bond market and scrambled one of the state’s primary ways of raising fund. Instead, the municipal-bond market can continue unchanged.

Before the decision, there had been “a meaningful cloud of uncertainty hanging over the market, given how important this state exemption is to so many bonds in our market,” said John Miller, who heads the municipal-bond investing team at money-management fi rm Nuveen Investments.

Under the ruling, the 42 states that tax interest paid on out-of-state bonds while exempting instate interest may continue the long-established practice. Market observes expect that many investors who had been waiting on the sidelines now likely will get back into the market, either directly or through mutual funds.

Th e decision is a boon for funds that invest in single-state bonds because a removal of the tax exemption of these bonds likely would have made them irrelevant. Th ey are key players in the municipal market, managing nearly $156 billion in assets out of $374 billion in all municipal-bond mutual funds as of 2007, according to fund-trade group Investment Company Institute.

Chief Justice John Roberts Jr. and Justices John Paul Stevens, Stephen Breyer, Ruth Bader Ginsburg, Antonin Scalia and Clar-ence Th omas all voted with Justice Souter in the majority.

But the 7-2 vote masks continued disagreement at the Supreme Court about interstate-commerce legal theory, the strain of legal thought underpinning the decision. As is common in Commerce Clause rulings, the justices diff ered on how to reach the legal conclusion and produced several conclusions and produced several concurring opinions and partial dissents to explain their diff erences.


you have the right to appeal. You may request an appeal in writing by completing a “Request for Reconsideration”, Form SSA-561-&2, or you may contact your local Social Security offi ce to fi le your appeal, or request a copy by calling the Social Secu-rity Administration.

You do not need to fi le an appeal if you are requesting a new decision because of an event listed that made your income go down or if you have shown the informa-tion used to be wrong.Contact information:

Social Security 1-800-772-1213www.socialsecurity.gov/mediinfo.htmMedicare Part B 1-800-633-4227www.medicare.gov.

INSIDE WASHINGTON

WAYS AND MEANS COMMITTEE APPROVES EASED TAX PREPARER PROVISION

Th e House Ways and Means Committee has passed a bill that contains a provision advocated by tax professionals.

Th e Energy and Tax Extenders Act of 2008, introduced by committee chairman Charles Rangel, New York, mainly also extends a group of tax credits that expired last year or are scheduled to expire at the end of this year, including incentives for renewable energy.

Tucked inside the bill is language that would conform the penalty standards for tax return preparers with the same stan-dards for taxpayers. Th e provision was originally included in H.R. 4218, intro-duced by Joe Crowley of New York and Jim Ramstad, Minnesota, late last year. Th at bill was incorporated into the latest bill, H.R. 6049, which passed the committee by a vote of 25 to 12.

For undisclosed positions, the penalty standard for return preparers is reduced to substantial authority. For disclosed posi-tions, a return preparer generally must have a reasonable basis for the position. For positions involving tax shelters and certain reportable transactions, a return preparer must have a reasonable belief that the posi-tion would more likely than not be sustained on the merits. Th e proposal is estimated to cost $22 million over 10 years.NSTP continues to watch the progress of this legislation.

Justices Anthony Kennedy and Samuel Alito dissented, arguing that the majority was further weakening the power of interstate-commerce provisions in the Constitution to encourage free and effi -cient markets.

MEDICARE PART B PREMIUMS: NEW RULES FOR BENEFICIARIES WITH HIGHER INCOMES 2008The Medicare Modernization Act of 2003 changed how Medicare Part B premiums are calculated for some higher income beneficiaries. The majority of Medicare beneficiaries are not affected. Part B, medical insurance, helps pay for doctors’ services and outpatient care. It also covers other medical services, such as physical and occupational therapy, and some home health care. For most beneficiaries, the government pays a substantial portion, 75 percent, of the Part B standard premium and the benefi-ciary pays the remaining 25 percent.

Beginning in 2007, the government portion was reduced for higher income benefi ciaries who began paying a larger percentage of the premium based on income they reported to the Internal Revenue Service. In 2008, higher income benefi ciaries will be responsible for 67 percent of their income-related adjust-ment. By 2009, the end of the transition period, these higher income benefi ciaries will pay a monthly premium equal to 35, 50, 65, or 80 percent of the total Part B cost, depending on their income level.

However, the law is expected to aff ect only about 4 to 5 percent of Medicare benefi ciaries, so most people will continue to pay the standard premium, without an income-related adjustment.

To determine if you will pay a higher Part B premium, the IRS will send Social Secu-rity information from your most recent tax return. A sliding scale will be used to make adjustments to premiums. Th e sliding scale will be based on your modi-fi ed adjusted gross income, MAGI. Your MAGI is a combination of your adjusted gross, taxable, income and tax exempt interest income.

In 2008, if you fi le your taxes as “married, fi ling jointly” and your MAGI is more than $164,000, you will pay a higher Part B premium. For all other taxpayer fi ling statuses, if your MAGI is more than $82,000, you will pay a higher Part B premium.

Aft er getting the IRS data, if it is deter-mined you will need to pay a larger percent of the premium; you will receive a letter explaining how the determination was made and what your new premium will be. However, it is important to remember that if your income does not exceed the limits described; this law does not apply to you.

To determine your 2008 Part B premium, the most recently fi led tax return informa-tion will be provided by IRS. Generally, this information is from a tax return fi led in 2007, for tax year 2006. Sometimes, IRS can only provide information from a return fi led in 2006, for tax year 2005. If tax year 2005 data is used and you fi led a return for tax year 2006 or did not need to fi le a tax return for tax year 2006. you should visit the Social Security offi ce nearest you.

If you amended your tax return and it changed the income counted, you should let the Social Security Administration know. Send a copy of the amended tax return that you fi led and your acknowledgment receipt from IRS. Social Security will update their records with the information provided and correct your Part B premiums back to the earliest time in the year you had Part B.

If your income has gone down due to any of the following circumstances and the change will make a diff erence in the income level considered, contact Social Security to explain that you have new information and may need a new decision about your Medicare Part B premium:

You married; •You divorced or your marriage was •annulled;You became a widow/widower; •You or your spouse stopped working •or reduced work hours;You or your spouse lost income from •income-producing property due to a disaster or other event beyond your control; orYou or your spouse’s benefi ts from an •insured pension plan stopped or were reduced.

If any of these events happen, you will need to show the Social Security Administration evidence of the event and tell them how it has reduced your income. Evidence could be a death certifi cate, a letter from your employer about your retirement, or some-thing similar. If you fi led a federal income tax return for the year in question, you will need to show a signed copy of the return.

If you disagree with the decision regarding your Medicare Part B premium amount,


THE INTERNAL REVENUE SERVICE TAX COUNSELING FOR THE ELDERLY PROGRAMAn insider view from the Treasury Inspector General for Tax Adminis-tration – TIGTAOn April 29, 2008 the Treasury Inspector General for Tax Administration released its report to the government on the Oversight and Admin-istration of the Tax Counseling for the Elderly Program citing the need for improvement.

Th e IRS Volunteer Program plays an increasingly important role in achieving the IRS’ goal of improving taxpayer service and facilitating participation in the tax system. In turn, the Tax Counseling Program for the Elderly (TCE) plays a signifi cant role in the Volunteer Program, preparing more than one-half of the tax returns prepared by volunteers. Th e TCE provides free tax assistance to people age 60 and older.

Over the last 3 calendar years, the Volun-teer Program has assisted taxpayers with fi ling more than 6.5 million Federal income tax returns. Th e TCE Program prepared more than one-half of these returns.

Th e Revenue Act of 1978 authorized the TCE Program. Th e IRS can enter into agree-ments with private or nongovernmental, public, nonprofi t agencies and organiza-tions to provide training and technical assistance to volunteers who provide free tax counseling and assistance to seniors in the preparation of their Federal income tax returns. Th e law authorizes appropriation of special funds, in the form of grants, to provide tax assistance to seniors.

Treasury Regulation, Section 601.803(c) (1979) states that all tax preparation provided under this Program must be free of charge and must be provided only to senior individuals. Th e IRS receives the funds as a

line item in the budget appropriation.In 1980, the IRS established the fi rst coop-

erative agreement in the TCE Program, awarding the American Association of Retired Persons (AARP) a grant of all available funds to operate Tax-Aide/TCE Program sites.

In Fiscal Year 1992, 57 grantees were accepted into the Program, and the number of applicants awarded grants has remained consistent.

An organization interested in becoming a TCE Program grantee must meet the following eligibility criteria prior to submit-ting an application to the IRS. A grantee:

Must be a private or public nonprofi t 1. organization that qualifi es for exempt status under Section 501(c) of the Internal Revenue Code of 1986.Must have experience in coordinating 2. volunteer programs.Must operate programs that serve and 3. assist elderly individuals.Cannot be a Federal, State, or local 4. governmental agency or organization.Must be compliant with “Common Rule 5.

Certifi cations” contained in the Applica-tion Package and Guidelines for Managing a TCE Program (Publication 1101).Must be compliant with applicable 6. civil rights requirements.

Th e TCE Program appropriation was $3.95 million for each of Fiscal Years 2005 through 2007. Although other organiza-tions have been awarded TCE Program grants since 1980, the AARP receives approximately 85 percent of the Program’s grant funds. Grants awarded in Fiscal Year 2006 ranged from $1,348 to $56,000 for non-AARP grantees. Th e grant awarded to the AARP was $3,435,658.

IRS guidelines are specifi c as to how

funds may be spent. Case fi les contained no supporting documentation to verify how grantees spent their grant funds. Form 8654 categorizes and reports expenses. However, the case fi les reviewed by TIGTA contained no records or receipts supporting the expenses. Guidelines do not require that grantees submit receipts for certain expenses. However, receipts are required for travel-related expenses for orientation meetings. Nonetheless, only two of the eight grantees claiming orienta-tion meeting expenses submitted receipts or supporting documentation.

Some grantees spent more than the allowed percentage of grant funds for administrative expenses. Publication 1101 instructs grantees that no more than 30 percent of the total grant funds awarded may be expended for administrative expense. An analysis of the 58 grantees showed 9, 16 percent, reported spending more than 30 percent, or $4,111 of the allowable funds, on administrative expenses. None of the nine case fi les contained documentation showing any actions were taken to recover these funds. Six of the nine grantees were awarded Fiscal Year 2007 grants, including the four with the highest percentages of administrative expenses.

Grantees reported total costs rather than only TCE Program costs on the Forms 8654, making it diffi cult to determine how the grantees used the Program funds and if the funds were used appropriately. Grantees may have operating funds other than TCE Program grant funds, including private donations or other Government grants. Form 8654 is to be used to report how TCE Program grant funds are spent. However, Publication 1101 is confusing and unclear as to whether grantees should report all expenses incurred or just those expenses paid out of or allocated to TCE Program grant funds.

Grantees did not submit Forms 8654 on time. Final Forms 8654 are to be submitted to the IRS within 90 calendar days of the end of Program activity. Twelve, 21 percent, of the 58 grantees fi led late fi nal reports. Nine, 75 percent of these 12 grantees received TCE Program grants in Fiscal Year 2007.

Th e IRS did not regularly monitor or analyze the Forms 8654. It did not deter-mine if expenses appeared reasonable or needed follow-up. Th e TIGTA analysis of various expenses identifi ed some expenses signifi cantly above the average.

Tax Returns Prepared by the Volunteer ProgramJanuary – September 2007

Number of Tax Volunteer Program Returns Prepared Percentage

VITA and VITA close to Taxpayer Assistance Center 846,450 34%Military VITA 272,666 11%TCE (Non-AARP) – American Association of Retired Persons 51,203 2%TCE (AARP) – American Association of Retired Persons 1,293,202 52%Other 23,484 1%Totals 2,487,005 100%


Results of TIGTA Review:Improvements are needed to ensure that the most qualifi ed applicants are selected and funds are spent appropriately.

Tax Returns Prepared by the TCE ProgramFor Calendar Years 2006 and 2007

Calendar Year 2006 Calendar Year 2007Tax Returns Prepared Non-AARP AARP Non-AARP AARPPaper Tax Returns 8,523 236,068 12,590 239,519Electronic Tax Returns 31,439 831,802 38,613 1,053,683Total Tax Returns 39,962 1,067,870 51,203 1,293,202Tax Returns Prepared for Seniors 17,691 664,200 25,570 846,674Percentage of Tax ReturnsPrepared for Seniors 44% 62% 50% 65%

TIGTA test results showed that the IRS does not verify the majority of expenses and does not conduct any analyses to iden-tify whether expenses appear to reasonable. TIGTA could not determine if any funds had been spent inappropriately because there were no expense receipts to compare to reported expenses or any documenta-tion to show whether expenses had been verifi ed or analyzed for reasonableness. Th erefore, based on the data provided and tested, TIGTA could not determine if the 2006 TCE Program met the intent of the law or successfully directed its services to elderly taxpayers.

Th e IRS acknowledged many of the issues addressed by TIGTA and further supported several of the initiatives recommended in order to correct and monitor the adminis-tration of the TCE program.

Th e IRS stated they will continue to use the existing measures to gauge performance and expand their focus on targeting the senior population to enhance program success.

MEMBERS IN THE KNOW

IRPAC – OFFICE OF PROFESSIONAL RESPONSIBILITY SUB-GROUPMembers of the Information Reporting Advisory Committee – Offi ce of Profes-sional Responsibility Sub-Group met at a public meeting held April 30, 2008 and urged the IRS Offi ce of Professional Responsibility, OPR, to be fl exible in the way it enforces standards of practice.

Th e members of the committee provided OPR Director Michael Chesman with

correct a deformity arising from a birth defect, disfi guring disease, or injury.Issue:

Are amounts paid by individuals for breast reconstruction surgery, vision correction surgery, and teeth whitening medical care expenses within the meaning of §213(d) and deductible under §213 of the Internal Revenue Code?Facts:

Taxpayer A undergoes mastectomy surgery that removes a breast as part of treatment for cancer and pays a surgeon to reconstruct the breast. Taxpayer B wears glasses to correct myopia and pays a doctor to perform laser eye surgery to correct the myopia. Taxpayer C’s teeth are discolored as a result of age. C pays a dentist to perform a teeth-whitening procedure. A, B, and C are not compensated for their expenses by insurance or otherwise.Law and analysis:

§213(a) allows a deduction for expenses paid during the taxable year, not compen-sated for by insurance or otherwise, for medical care of the taxpayer, spouse, or dependent, to the extent the expenses exceed 7.5 percent of adjusted gross income. Under §213(d)(1)(A), medical care includes amounts paid for the diagnosis, cure, miti-gation, treatment, or prevention of disease, or for the purpose of aff ecting any structure or function of the body.

Medical care does not include cosmetic surgery or other similar procedures, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfi guring disease.

Cosmetic surgery means any procedure that is directed at improving the patient’s appear-ance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. §213(d)(9)(B).

A’s cancer is a disfi guring disease because the treatment results in the loss of A’s breast. Accordingly, the breast recon-struction surgery ameliorates a deformity directly related to a disease and the cost is an expense for medical care within the meaning of §213(d) that A may deduct under §213, subject to the limitations of that section.

Th e cost of B’s laser eye surgery is allowed under §213(d)(9) because the surgery is a procedure that meaningfully promotes the proper function of the body. Vision correction with eyeglasses or contact

suggestions on how OPR could achieve the stated goal of transparency.

Th e sub-group was tasked to create hypo-thetical cases of Circular 230, Federal Code of Regulations, off enses to give guidance to the IRS and practitioners.

Committee Chair, Conrad Davis, expressed concern over some sanction guidelines that the IRS is proposing to place in the Internal Revenue Manual. Th e guidelines, which are in the form of a penalty gird, could lead to a mechanical calculation of violations that do not take into consideration mitigating circum-stances.

Th e sub-group members expressed that from their perspective as practitioners they felt that the use of hypotheticals would be a far more eff ective way to communicate proper behavior and improper behavior and the consequences.

OPR Director Chesman again empha-sized his commitment to transparency and said OPR was focused “on practitioners avoiding being referred to us, rather than punishing those who are referred to us.”NSTP is exceptionally fortunate to have Director and Past President Ron Larson on this prestigious committee as the representative of the National Society of Tax Professionals.

DEDUCTIBILITY OF VISION CORRECTION SURGERYRevenue Ruling 2003-57Medical expenses. Th is ruling holds that amounts paid by individuals for procedures that are directed to improving appearance and do not promote the proper function of the body are not expenses for medical care deductible under section 213 of the Code unless the procedure is necessary to


taxable year 2003. Th e taxpayers timely fi led a petition with the court which stated:

Item 7(b) of the Notice – Depreciation Recapture – is totally without merit. In fact, that issue was “added” the Audit Report aft er an Appeal Request was fi led with the Appeals Offi ce in Sacramento, California. Th is smacks of a retaliatory action by the Auditor.

All other Items are in Dispute. An off er to Seattle was not given any consideration by the Appeals Offi cer; this Case has landed in this Forum because the Appeals Offi ce did nothing for 14 Months (April 2005-June 2006), and then the Appeals Offi cer tried to goad the Taxpayer into Signing an Exten-sion of the Statue of Limitations. Taxpayer indicated that the Extension would only be signed if the Document was limited in its duration and in the scope of the issues involved. Appeals Offi cer refused and issued the Notice of Defi ciency.

Th e taxpayer’s divorce became eff ective on June 28, 2007, pursuant to a decree issued on August 30, 2007. On October 4, 2007, Mrs. Birdsill fi led an amended peti-tion requesting innocent spouse relief. An attachment to the amended petition indi-cated that Mr. Birdsill did not object to her request. At trial on November 7, 2007, in Reno, Nevada, the taxpayer conceded that his spouse was entitled to innocent spouse relief pursuant to §6015(b); there was no objection by the IRS.

As a general rule, the Commissioner’s determination of a defi ciency is presumed correct, and the taxpayer bears the burden of proving that the determination is improper. In this case, the taxpayer did not argue that the burden should shift , and he failed to comply with the substantiation requirements. Accordingly, the burden of proof remained on the taxpayer.

Th e taxpayer alleges that the deprecia-tion recapture is a retaliatory action by the revenue agent who conducted the audit because it became an issue only aft er the taxpayers fi led an appeal request with the IRS Appeals offi ce.

As a general rule, the Court will not look behind a notice of defi ciency. It does not usually examine the evidence used or the propriety of the Commissioner’s motives, policy, or procedures in making audit deter-minations. However, this Court has recog-nized an exception to the rule when there is substantial evidence of unconstitutional conduct on the Commissioner’s part and the integrity of the judicial process would

lenses qualifi es as medical care. Rev. Rul. 74-429, 1974-2 C.B.83. Eye surgery to correct defective vision, including laser procedures such as LASIK and radial keratotomy, corrects a dysfunction of the body. Accordingly, the cost of the laser eye surgery is an expense for medical care within the meaning of § 213(d) that B may deduct under §213, subject to the limita-tions of that section.

In contrast, the teeth-whitening proce-dure does not treat a physical or mental disease or promote the proper function of the body, but is directed at improving C’s appearance. Th e discoloration is not a deformity and is not caused by a disfi g-uring disease or treatment. Accordingly, C may not deduct the cost of whitening teeth as an expense for medical care.Holding:

Amounts paid by individuals for breast reconstruction surgery following a mastec-tomy for cancer and for vision correction surgery are medical care expenses under §213(d) and are deductible under §213, subject to the limitations of that section. Amounts paid by individuals to whiten teeth discolored as a result of age are not medical care expenses under §213(d) and are not deductible.

Th e February edition of the Federal Tax Alert in an eff ort to encourage tax profes-sionals to inquire about medical procedures to determine deductibility did not go into the details of Rev. Proc. 2003-57. While the individual circumstances of the taxpayer will dictate the deductibility of a medical procedure, tax professionals should have the tools with which to make the proper decision about deductibility aft er the proper inquiry. Th e editor appreciates NSTP member Cathy Daignault from North Haven, CT for her clarifi cation of the issue.

TAX COURT DECISIONS

MICHAEL R. AND MELANIE J. BIRDSILL, PRO SE. V COMMISSIONERT. C. Summary Opinion 2008-55May 20, 2008Th e issue is whether the IRS may require $23,756 of depreciation recapture in 2003 on a 1998 GMC Suburban for which the taxpayers claimed a §179 expense deduction on their 2002 joint Federal income tax return.

Th e taxpayer has over 30 years’ experience in the broadcast industry. During 2003, the taxpayer was a full-time chief engineer and operations manager for California State University at Chico, California. In January 2002 the taxpayer started a broad-cast engineering consulting business. In connection with that business he created his own database on digital transmission radio towers in order to capitalize on the new Federal Communications Commis-sion rules approving a digital broadcast standard for radio stations. He believed that many radio stations would require new antenna system.

To create the database the taxpayer surveyed approximately 35 digital trans-mission radio tower sites in northern Cali-fornia in 2003. Approximately half of the radio tower sites that the taxpayer surveyed required one visit by the taxpayer, while the other half required two visits.

Th e taxpayer owned three vehicles during 2003: (1) A 1993 Ford F-250 truck that was purchased in 2000; (2) A 1998 GMC Suburban sport utility vehicle with all-wheel drive that was purchased in 1998; and (3) A 1997 Pontiac that was purchased in 1997.

Th e taxpayer placed the GMC Suburban into use for his business in 2002 and deducted a depreciation expense of $26,396 on his joint return for 2002. Th e taxpayer placed the Ford F-250 into use for his busi-ness on January 3, 2003, and deducted a depreciation expense of $11,968 on his jointly fi led 2003 return.

On the taxpayers joint return for 2003 the Schedule C, Profi t or Loss from Busi-ness, the taxpayer reported $171 in income and claimed $21,558 in deductions for his broadcast engineering consultancy busi-ness. With respect to his motor vehicles, the taxpayer deducted a $2,920 car and truck expense and a $720 insurance expense for the F-250. Th e taxpayer did not deduct any expenses for the GMC Suburban.

Th e taxpayer attached a Form 4562, Depreciation and Amortization, to the joint Form 1040. In Section A, Deprecia-tion and Other Information, of Form 4562, the taxpayer listed as “Property used more than 50% in a qualifi ed business use” the Ford F-250.” In Section B, Information on Use of Vehicles, the taxpayer listed 8,110 miles for both business and total mileage of the Ford F-250.

On December 15, 2006, the IRS mailed to the taxpayer a notice of defi ciency that determined a defi ciency of $11,314 for


be impugned if the Court permitted the Commissioner to benefi t from his conduct.

Although the taxpayer alleged retaliatory action in his petition, he off ered no inde-pendent evidence to support his allegation. Furthermore, the record does not indicate that any of the IRS agents engaged in conduct that violated the taxpayer’s rights. As the taxpayer has not shown that the IRS’ defi ciency determination was arbitrary or erroneous, or that the determination was not supported by the proper foundation, it is inappropriate for this Court to look behind the notice of defi ciency to examine the basis for, or reasons behind the IRS determination. Th e notice of defi ciency, therefore, is valid, and the taxpayer’s defi -ciency determination is presumed correct.

As to the deductions taxpayers must maintain records relating to their income and expenses and must prove their entitle-ment to all claimed deductions, credits, and expenses in controversy. To satisfy the adequate records requirement of §274(d), a taxpayer must maintain records and docu-mentary evidence that in combination are suffi cient to establish each element of an expense or use. Although a contempora-neous log is not required, corroborative evidence to support a taxpayer’s recon-struction “of the elements of the expen-diture or use must have a high degree of probative value to elevate such statement” to the level of credibility of a contempora-neous record.

Under Cohan, if a factual basis exists to do so, the Court may approximate the allowable expense, bearing heavily against the taxpayer who failed to maintain adequate records. However, §274(d) over-rides the Cohan rule with respect to §280F (d)(4) “listed property” and thus specifi -cally precludes the Court from allowing automobile expenses on the basis of any approximation or the taxpayer’s uncor-roborated testimony.

A taxpayer may elect to deduct as a current expense the cost of any §179 property, with certain dollar limitations, that is acquired by purchase in the active conduct of a trade or business and placed in service during the taxable year. To deduct depreciation pursuant to §179 for property subject to §280F, for such automobiles, a taxpayer must establish that business use exceeds 50 percent. If business use of listed property falls to 50 percent or less, then it is subject to the depreciation recapture rules of §179(d)(10) and §280F(b)(2), respectively.

Th e recapture rule of §280F(b)(2) taxes precedence. It provides:

(2) Recapture(A) Where business use percentage does

not exceed 50 percent.(i) property is predominantly used in a

qualifi ed business use in a taxable year in which it is placed in service, and

(ii) such property is not predominantly used in a qualifi ed business use for any subsequent taxable year,

then any excess depreciation shall be included in gross income for the taxable year referred to in clause (ii), and the depreciation deduction for the taxable year referred to in clause (II) and any subse-quent taxable years shall be determined under §168(g), relating to the alternative depreciation system.

A taxpayer must be able to substantiate the use of any “listed property”, as prescribed.

At trial the taxpayer testifi ed that during 2003 he used the Ford F-250 truck for 75 percent of his business mileage and the GMC Suburban for 25 percent o his busi-ness mileage. Th e taxpayer’s estimation of the business use of the GMC Suburban appears to be based on the fact that at least 4 of the 34 or 35 radio tower sites he visited in 2003 required an all wheel drive vehicle to gain access to the site. Th ose four sites, which required the use of the all wheel drive GMC Suburban, were, on average, approximately 150 miles from Chico, Cali-fornia. According to the taxpayer, most of the sites that did not require an all wheel drive vehicle, for which he normally used the Ford F-250, were less than 150 miles from Chico. Th e taxpayer also used the GMC Suburban for “other things he was doing with his business, such as taking a client to an existing radio station.”

While the Court found the taxpayer’s testimony that he used the GMC Suburban for business proposes in 2003 to be cred-ible, it does not establish that the GMC Suburban was used more than 50 percent of the time for business purposes. Th e taxpayer admitted that the GMC Suburban was “used on a personal level to take my spouse to her doctor’s appointments” and “minimal trips, other than medical appointments for my spouse”. Unfor-tunately, the taxpayer did not keep any records of the business or personal use of his GMC Suburban in 2003.

Th e taxpayer’s uncorroborated testimony and bare assertions on brief, without other admissible evidence, do not establish that

he used the GMC Suburban more than 50 percent for business purposes in 2003. Th e Court viewed this testimony, provided some 4 years aft er the fact from memory, as little more than educated speculation. Consequently, the taxpayer has not met the strict substantiation requirements and the Court sustains the IRS determination that $23,756 of depreciation claimed for the GMC Suburban was subject to recapture in taxable year 2003.

Th e Court considered all the taxpayer’s other contentions, arguments, requests, and statements. To the extent not discussed herein, the Court concluded they were meritless, moot or irrelevant.

ANDREA C. CASULA V COMMISSIONERT.C. SUMMARY OPINION 2008-49MAY 5, 2008Did the IRS abuse its discretion in denying the taxpayers Request for Inno-cent Spouse Relief?Th e taxpayer, Andrea Casula, married Christopher Casula on April 23, 1963. On the day of the trial, April 23, 2007, the taxpayer and Mr. Casula were celebrating their 44th wedding anniversary.

From 1963 through 1983, Mr. Casula worked for Montgomery Ward. During this time, he received his Masters of Busi-ness Administration (MBA) from the Kellogg School of Management at North-western University. Th e Taxpayer was not employed outside of the home between 1963 and 1983.

Mr. Casula ended his employment with Montgomery Ward in 1983 and began working as vice president for a Mont-gomery Ward subsidiary that same year. Mr. Casula was employed in this capacity until approximately 1987, when he decided to start his own Internet-based customer service company.

At or around the time that Mr. Casula left Montgomery Ward the taxpayer entered the workforce, fi rst with Northern Trust Bank and then with the fi rm of Marsh & McLennan. Th e taxpayer has worked for Marsh & McLennan for the past 20 years. Th e Casulas’ tax return for 2000 lists the taxpayer’s job title as “executive.”

In 2000 Mr. Casula began experiencing business setbacks that prevented him from taking any salary whatsoever. In order to help provide capital for his operation, Mr. Casula sought assistance from two personal funding sources; namely, employee stock


Th e good news is that recent graduates are much more realistic than previous genera-tions were about retirement. New grads do not expect to receive a pension, and they are skeptical about Social Security. Th e bad news: Th ey have to know more than previous generations about how to make decisions about savings, health care and insurance.

Many also are graduating with student loans and credit-card debt. A report released in March by the American Savings Education Council and the AARP found 83% of those surveyed have some nonmortgage debt.

“We have had a major paradigm shift where pensions are going, going, gone,” says Rande Spiegelman, vice president of fi nancial planning for the Schwab Center for Financial Research. “Kids now know that there is no illusion. Th ey know that no one will take care of you but yourself.”

Mr. Ritter of T. Rowe Price admits he did not know much about fi nances when he graduated from college. As a result, life was either feast or famine. Th e fi rst paycheck of the month went to rent, leaving him with little cash and lots of macaroni and cheese. Th e second paycheck left him fl ush with cash to spend on meals and entertainment. Not a good plan, he admits. Everyone needs a budget, he said, but “be patient and fl exible.”

Ms. Heenan says trade-off s are a part of life. Buying that great car might mean taking longer to save for a house.

Mr. Spiegelman encourages grads to start saving immediately, even if they have loans and credit-card debt. Th e reason: Th ey will not miss it if they begin saving right away. If they are lucky enough to have a job with a 401(k) plan, he recommends saving at least the amount that the company will match.

He advises employees to automate the process so money comes directly out of their paychecks and to consider a life-cycle or target-date fund until they are ready to make portfolio decisions.

Another top priority: Grads need to save cash to cover at least three months of necessary expenses, such as rent and food. Th ey also need to pay off high-interest credit-card debt.

If there is money left , Mr. Spiegelman encourages them to save at least 10% to 15% of their total income in a 401(k) plan. If they do not have a 401(k), then they should consider opening an individual retirement account.

Rachel Poor, another Johns Hopkins senior, learned in Mr. Ritter’s class that new

held by the taxpayer in Marsh & McLennan and Mr. Casula’s 401(k) account.

At Mr. Casula’s request, the taxpayer sold a portion of her Marsh & McLennan stock in 2000 for $16,375. During the same year, Mr. Casula took an early distribution of $53,680 from his 401(k) account. Mr. Casula used the proceeds of these transac-tions for his business.

Mr. Casula’s business continued to experi-ence fi nancial diffi culties throughout 2001. His diffi culties were compounded by a series of medical problems that aff ected him and both of his parents. Mr. Casula eventu-ally decided to cease business operations in December 2001. From 2001 through 2006 Mr. Casula was unemployed and seeking work. He presently works for a Washington, DC based nonprofi t organization.

Th e Casulas had an accountant prepare their jointly fi led 2000 Form 1040, U.S. Individual Income Tax Return on April 13, 2002. Th e Casulas reported total income of $120,977 with $19,168 of itemized deduc-tions and $5,600 of exemption deductions to arrive at $96,029 of taxable income with a resulting $19,981 in tax. Aft er adding tax for an early IRA distribution of $4,413 and aft er applying $4,954 in payments, their return reported $19,440 in tax due. Th ey remitted zero.

Th e IRS accepted the return and assessed additions to the tax for late fi ling and failure to pay as well as interest on the balance due. As of March 27, 2007, the total unpaid liability for 2000 is $19,986.65.

Th e taxpayer submitted her Form 8857 on August 6, 2003, and IRS denied her request for relief on November 17, 2004.

Th e taxpayer bears the burden of proof with respect to her entitlement to relief under §6015. §6013(d)(3) provides that if a joint return is fi led, the tax is computed on the taxpayer’s aggregate income, and liability for the resulting tax is joint and several. In order to obtain relief from joint and several liability a spouse must qualify under §6015(b) or, if eligible, allocate liability under §6015(c). Th e parties agree that the taxpayer is not entitled to seek relief under §6015(b) or (c). If relief is not available under another section, a spouse may seek equitable relief under §6015(f).

Th e IRS may relieve an individual from joint and several liability under §6015(f) if, taking into account all the facts and circumstances, it is inequitable to hold the taxpayer liable for any unpaid tax or defi -ciency and he or she does not qualify for

relief under other sections.Under §6015(f) the Commissioner has the following prescribed guidelines:

Th e requesting spouse fi led a joint 1. return for the year for which relief is sought;Relief is not available under other 2. sections;Th e application for relief is made no 3. later than 2 years aft er the date of the Commissioner’s fi rst collection activity;No assets were transferred between 4. spouses as part of a fraudulent scheme;Th e non-requesting spouse did not 5. transfer disqualifying assets to the requesting spouse;Th e requesting spouse did not fi le or 6. fail to fi le the return with fraudulent intent; andAbsent enumerated exceptions, the 7. liability from which relief is sought is attributable to an item of the non-requesting spouse.

Th e IRS argues that because part of the unpaid liability stems from the taxpayer’s sale of her Marsh & McLennan stock, this last threshold requirement has not been met.

Th e Court considered all other avenues of Innocent Spouse determination and found them to be exhausted without relief for the taxpayer.

Accordingly, since none of the relevant factors identifi ed in the pertinent revenue procedure weigh in favor of granting relief, the Court holds that there was no abuse of discretion by the IRS in denying relief to the taxpayer.

ET CETERAFINANCIAL TIPS FOR RECENT COLLEGE GRADSElizabeth Heenan never thought much about money. Her parents paid her college tuition, and they rarely spoke about their fi nances.

But aft er several overdrawn checks, “I thought I needed to face the music,” says the 21-year old, who will graduate soon from Johns Hopkins University.

So Ms. Heenan enrolled in a personal-fi nance class taught at Hopkins by Stuart Ritter, a fi nancial adviser at T. Rowe Price. Now more confi dent and better informed about money, Ms. Heenan and fi nancial professionals have a few suggestions for the class of 2008.


be in attendance. Dr. Bill was on hand in 2003 and is most anxious to see the changes made in the program. We look forward to his report on the tour.

IRS OFFERS PROCEDURES FOR TAX PREPARER PENALTY CASESA memo from the Internal Revenue Service’s Large and Mid-Sized Business Division introduces new LMSB Procedures for tax return preparer penalty cases.

Th e Small Business and Work Opportu-nity Tax Act of 2007 broadened the defi -nition of a tax return preparer to include any person that has prepared a substantial portion of any tax return or claim for refund. Th e law change will greatly expand the number of practitioners subject to consideration of return preparer penalties, said the IRS.

Th e purpose of asserting the penalties on preparers is to increase compliance, the IRS noted. When examining a return, it is an IRS examiner’s responsibility to ensure that the identifi cation and conduct provi-sions of the Tax Code were followed. If the provisions are not followed, it is the exam-iner’s responsibility to assert the penalties.

During every fi eld examination, exam-iners should determine if any return preparer violations exist. Th e determina-tion will be made based on oral testimony or written evidence during the examina-tion process. If a preparer’s misconduct appears to be pervasive and widespread, consideration will be given to opening a program action case.

ETHICS CORNERINJUNCTION BARS TAX FRAUD SCHEMEA federal judge has granted a Justice Department request to muzzle several Seattle-area residents, among others, who government lawyers say have made millions of dollars promoting a wide-ranging tax fraud scheme.

Th e injunction centers on Pinnacle Quest International, a Florida-based business that has garnered at least $54 million though the sale of anti-income tax materials.

A temporary injunction against Pinnacle Quest followed a request from the Justice Department.

Th e judge’s order bars the company from promoting its tax-avoidance program or conducting overseas conferences. According

grads need to make sure they have appro-priate insurance, which includes health and possibly renter’s insurance. Many students will lose their health coverage the moment they graduate even if they plan to move back home.

WHEN 20-SOMETHINGS MOVE BACK HOME, IT IS NOT ALL BADIn a new twist in U.S. family life, the open nest is replacing the empty nest.

More young adults are returning home to live with their parents in their 20s, and a surprising number of parents are content about it. Based on a new collec-tion of studies, the deepest look so far at the failure-to-launch trend, the pattern is likely to persist. And as it becomes more wide-spread, researchers say, the stigma traditionally linked to young adults’ living at home will fade.

More upper-and-middle-income parents, including many who felt pressed for time when their children were growing up, are not ready to be “fi nished with them” by their 20s, says Katherine Newman, a Princ-eton University sociology professor and one of the project’s 20 researchers. Also, as more students attend college at older ages, parents are coming to regard the 20s as a time of self-discovery.

Th e proportion of 18 to 34-year olds living with their parents has risen by an estimated fi ve percentage points since 1980, to roughly 34%, says Aaron Yelowitz, an associate professor of economics at the University of Kentucky and a contributor to the collection of studies “Th e Price of Independence,” published by the Russell Sage Foundation.

To be sure, living together still causes tension for parents and kids alike. Living with parents reduces young adults’ life satisfaction, Dr. Newman found. But the more widespread the practice, the less psychological toll it takes, she says. In southern Europe, where as many as 60% of young adults live at home, the stigma has eased; she cites research showing more than half of European adults think living longer with one’s parents is a good thing.

Researchers on the project set out to document economic factors driving the trend, but found it is bigger than the fi nan-cial causes usually blamed for it. To be sure, rising housing and commuting costs play a role, Dr. Yelowitz found. But neither those factors nor job-market changes fully explain the 25-year-trend. Th e biggest

increase in young adults living with parents came in the 1980s, when the labor market generally improved, he found. And rising real housing costs explain only about 15% of the drop in independent living among young adults, which started years before the sharpest run-up in housing.

More enduring cultural and social changes are at work, including a growing “child-centeredness” among families, Dr. Newman says. Many parents enjoy having adult kids around as long as they pursue “a future they can endorse.”

TAX REP ROUNDTABLE

IRS CAMPUS COMPLIANCE PROGRAMSOn July 21, 2008 there will be a Practitioner Priority Service phone line for Automatic Under Reporter calls, AUR PPS. Th e number is 866-860-4259. Assistance will be available from 8:00 a.m. to 8:00 p.m. local time and 8:00 a.m. to 8:00 p.m. Pacifi c Daylight Time (Alaska and Hawaii). Callers will be given an option for AUR.

Th e Campus Matching process fi nds information that does not appear to be repeated or missing from tax returns. Four-teen million instances are found yearly and four million cases are worked. Soft notices are being sent to the taxpayer and they will be going out for tax year 2007 in fi scal year 2009. A very small number of soft notices will be mailed out. Th ere will be approximately 15,000 Small Business and Self-Employed notices and 15,000 Wage & Investment notices. A “soft notice” is a notice inquiring of a taxpayer, not a notice assessing the tax.Universal Call Routing is scheduled for June 2009.

CENTRALIZED OIC PROCESSING TOURA walk-through for the IRS Brookhaven Campus is scheduled for practitioners for June 12, 2008. Th ere will be a limit of 20 participants and the group will review the off er in compromise process. Fortunately, the time of the tour will be in the middle of the Centralized Off er in Compromise process thus allowing participants the ability to see why and how cases are worked. Dr. Bill Stevenson, NSTP Member from New York and NSTP’s Ambassador to the IRS will


to the Justice Department, the company has 830 salespeople and 11,500 customers.

Among them is Seattle resident Anthony Larson, who from 2002 to 2006 earned about $1.2 million selling the program, according to court documents. Renton residents Arnold Manansala and Dover Perry each made more than $100,000 selling Pinnacle Quest materials during the same timeframe, as did Kent resident Douglas Hagerty.

Th e government is also seeking injunc-tions against a Tacoma company advocating that the Internal Revenue Service lacks the legal authority to collect most taxes. No criminal charges have been fi led.

FEDERAL JURY IN CHICAGO CONVICTS 6 MEN IN NATIONWIDE IRS FRAUD SCHEMEA federal jury in Chicago convicted six defendants in a nationwide scheme that helped some 650 wealthy taxpayers cheat the Internal Revenue Service out of about $60 million.

Michael Vallone of Orland Park, Edward Bartoli of Clearwater, Florida, Robert Hopper of Gadsden, Alabama. Timothy Dunn of Chesterton, Indiana, William Cover of Naperville and Michael Dowd of Glenview were convicted of tax-fraud conspiracy and other charges aft er the 11-week trial in U.S. District Court.

U.S. District Judge Charles Norgle ordered that Vallone and Dunn be taken into custody following the verdict. Th e other four remain free on bail.

Authorities said the tax-avoidance scheme was one of the largest of its kind ever pros-ecuted in the U.S. A lengthy undercover probe was led by the IRS Criminal Inves-tigation Division.

TAX PREPARER ACCUSED OF HOLDING STIMULUS CHECKSPastor Bernard Franklin is concerned some members of his congregation are dealing with a questionable tax preparer.

“I believe this is the tip of the iceberg,” says Franklin. Cosandra Grover is one of the many taxpayers who used the services of preparer Christopher Canady of Jack-sonville, Florida.

“Christopher Canady, come out and face your accusers,” say Grover.

Canady owns Prosperity Accounting and Business Services. He prepared Grover’s tax return and she says he still owes her money.

Grover said when she called the IRS to

check on her economic stimulus rebate check, she was told it was sent to Canady’s bank account.

Canady said, “When I did their original returns their checks were deposited into my account.”

He added, “A few days ago six Stimulus Checks were deposited into my account and I did not have time to sort out to whom they belonged.”

Canady said he has since mailed out checks to the right people and they should have their Stimulus Check in a few days.

NORTH CAROLINA WOMAN SOLD CHILDREN’S SOCIAL SECURITY NUMBERSAn Enfi eld woman and a Rocky Mount man have been convicted in a scheme in which she sold her children’s Social Security numbers to the man in order that he could claim the youngsters on his state tax returns.

Th e North Carolina Department of Revenue says it is a crime that occurs oft en in the state. Th e scheme involved the 2005 and 2006 tax years.

Johnny Johnson, 40, of Rocky Mount, was convicted of three counts of obtaining property by false pretense, said Tom Dixon, of the Department of Revenue. Johnson was given a suspended sentence of six to eight months and must serve 24 months supervised probation and pay the state back $1,148. He must perform 100 hours of community service.

Th e woman, Andrea R. Gorham, 28, pleaded guilty to two counts of solicitation to aid in the preparation of fraudulent North Carolina individual income tax returns.

Dixon said in a news release Superior Court Judge Howard E. Manning Jr. sentenced Gorham to two consecutive 45-day prison terms. Th e sentences were suspended and Gorham was placed on supervised proba-tion for 12 months. She was ordered to pay a $500 criminal fi ne and must perform 50 hours of community service.

An investigation found Gorham sold her children’s Social Security numbers to Johnson so he could use them to fi le fraud-ulent 2005 and 2006 North Carolina indi-vidual income tax returns. “Th e returns deceived the Department of Revenue and caused the state to issue state income tax refunds to Johnson that were greater than he was entitled to receive,” Dixon said.

Gorham received $1,000 per year for the use of her children’s Social Security numbers.

Th e charges against Gorham and Johnson resulted from an inquiry by a special agent with the Department’s Criminal Investiga-tions Division in Raleigh, North Carolina.

Dixon said dollar-wise, the losses to the state are not as big as they are on the federal level. “Th e state gets hit in the attempt to get federal money,” he said, adding people who commit tax return fraud oft en do not realize they may apply for the federal earned income credit.

Not only is selling Social Security numbers illegal, it promotes identity fraud, Dixon said. “Th eir credit can be ruined as a small child. People will open bank accounts and apply for credit cards.”

Sometimes the fraud is caught by tax preparers who notice something out of the ordinary on a form.

TAX PREPARER CONVICTED OF RIGGING RETURNS - - AGAINA federal jury has found a St. Louis County tax preparer and convicted tax cheat guilty of new crimes that could have cost the U.S. up to $1 million in lost revenue.

Edward Whittington, 60, was convicted aft er a seven-day trial of nine felony counts of aiding in the preparation of false income tax returns, charges that are each punish-able by up to three years in prison.

Whittington used fake or infl ated deduc-tions on at least 50 tax returns worth up to $1 million, Assistant U.S. Attorney Steve Holtshouser said aft er the verdict in court in St. Louis, Missouri.

Th e clients’ benefi ts were short-lived. Th ey must pay any money they owe.

Whittington profi ted by the fees and the word-of mouth business driven to his company by the tax savings he found for clients, Holtshouser said.

It is not the fi rst time Whittington has been in trouble for his tax preparation practices.

In 2002, Whittington was sentenced to a year and a day in prison aft er pleading guilty to one count of aiding in the prepa-ration of false tax returns between 1997 and 2002. While he was in prison his wife kept this business running with contract tax preparers until he was released, then signed the returns until he was off proba-tion, prosecutors said.

Whittington has also failed to fi le his own tax returns with the Internal Revenue Service or pay any tax for years, Holt-shouser said.“He clearly hates the IRS,” the prosecutor said.


FEDERAL COURT IN DALLAS BARS WOMAN FROM PREPARING TAX RETURNS FOR OTHERSA federal court has permanently barred Grace Machoko of Dallas from preparing federal income tax returns for others, the Justice Department has announced. Th e U.S. District Court for the Northern District of Texas held that Machoko, whose business is called Fast Income Tax Services, repeatedly prepared fraudulent tax returns claiming false fuel tax credits.

Th e court found that Machoko prepared at least 45 tax returns claiming a total of more than $200,000 in fraudulent fuel tax credits. In one example alleged in the govern-ment complaint, Machoko claimed that a customer, reportedly a cook, purchased 53,000 gallons of gasoline for off -highway business use in 2005. Th e customer, whose total reported income for the year was $1,571, would have had to spend approxi-mately $116,000 at $2.20 per gallon, to purchase that volume of gasoline.

FYIWHAT ARE THE BENEFITS OF WORKING LONGER?Choosing when to retire is a crucial deci-sion for workers. Working longer increases lifetime earnings, Social Security and employer-sponsored pension credits, and other savings, and shortens the period over which retirement savings must be spread.

On average, working an additional year •increases annual retirement income about 9%.Working an additional fi ve years boosts •annual retirement income about 56%.Th e impact is even larger for people at the •lower end of the income distribution.

Boosting labor supply at older ages also increases government tax revenue.

Th e government would raise about $180 •billion in additional tax revenue in 2045, measured in 2006 dollars, if all workers delayed retirement by one year, reducing the unifi ed federal defi cit by an amount equal to 28% of the Social Security defi cit.Additional tax revenue in 2045 raised by •delaying retirement 5 years would exceed $1 trillion, more than 150% of the Social Security defi cit.

Working longer may also improve emotional well-being and physical health.

Because work is crucial to many workers’ •personal identities, retirement can lead to a partial loss of identity, especially for

those who retire abruptly.Work promotes social integration and •social support.Staying active may promote physical health. •

What Are the Characteristics of Today’s Older Workers?

In 2004 about three-quarters of men age 55-61 were employed. Male employment rates fell to about 53% at age 62-64, about 38% at age 65-69, and about 26% at age 70-74.

Older women are less likely to work for pay than older men. In 2004, female employ-ment rates were about 50% at age 55-61, 40% at age 62-64, and 28% at age 65-69.

Employment rates at older ages increase with education, and are higher among those in better health than those in worse health. Among men, whites have higher employ-ment rates than African Americans. Black-white employment diff erentials are smaller among older women than older men.Many older workers are self-employed, and self-employment rates increase with age.

In 2004, about 45% of working men age •70-74 were self-employed, compared with 29% at age 62-64.About 28% of job changes following •retirement from long-term career jobs involve transitions from wage and salary employment to self-employment.Self-employment rates increase with •education among older men; about 56% of working male college graduates age 70-74 were self-employed in 2004.Self-employment rates are lower among •older women than older men.

Part-time and part-year work is common at older ages.

About 42% of employed men age 65-69 and •62% age 70-74 worked part-time in 2004. Part-time rates for women were about 59% at age 65-69 and 73% at age 70-74.About 56% of job changes following •retirement from long-term career jobs involve transitions from full-time work to part-time work.At age 65-69, about 30% of employed men •and employed women worked only part of the year, less than 50 weeks, in 2004.

Traditional retirements, involving direct transitions from full-time work to no work, are not the norm.

About 60% of older people work aft er •retiring from career jobs.About one-third of workers change occu- •pations aft er age 51.About one-quarter of older adults ‘unre- •tire’ returning to work aft er leaving the labor force.

Many older people lose their jobs or stop working because of health reasons.

About 21% of workers age 51-55 in 1992 •were subsequently laid off before age 62.About 25% of workers age 51-55 in 1992 •subsequently developed health-related work limitations before age 72, including 32% of those who did not complete high school.About 35% of older workers who left full- •time jobs between 1992 and 2006 separated for health reasons or because of layoff s, including 39% of African Americans, 42% of Hispanics, and 45% of those who did not complete high school.

How Has Older Americans’ Labor Supply Changed in Recent Years?

Aft er declining for most of the 20th century, labor force participation rates for older men have been increasing during the past two decades.

Between 1992 and 2007, participation rates for men age 62-64 increased from 41 to 51%, an increase of 24% over the 15-year period. Over the same period, male participation rates at age 65-69 increased from 22 to 34%, an increase of about 55%. Participation rates grew more slowly at age 55-61, increasing from 71 to 76% between 1992 and 2007.

College graduates generally experienced sharper increases in participation rates than those with less education. Between 1992 and 2007, for example, male partici-pation rates increased 10% for college graduates age 62-64, while increasing only 5% for men with only high school diplomas.

Participation rates for older women were relatively constant between 1968 and the late 1980s, but they have been increasing steadily since 1988. Between 1988 and 2007, participation rates for women age 55-61 increased from 44 to 64%, while increasing from 25 to 43% at age 62-64. Participation rates doubled between 1988 and 2007 for women age 65-69, to 26%, and for women age 70 and older, to 8%.

Recent Social Security reforms also appear to have increased labor supply at older ages.

Th e retirement earnings test, which reduces Social Security payments to benefi ciaries with earnings above certain thresholds, was eliminated in 2000 for people beyond the normal retirement age.

Th e normal retirement age began increasing for people born aft er 1937, and will rise to age 67 for those born aft er 1959.


As a result, those who take early benefi ts now experience larger actuarial reductions in their monthly benefi ts than in the past.

Th e delayed retirement credit has been increasing gradually. For people born in 1943 or later, monthly benefi ts will increase 8% for each year that benefi ciaries delay claiming benefi ts beyond the normal retirement age, but before age 70.Concerns about retirement security appear to have contributed to increasing labor force participation rates at older ages.

Much of the increase over the past dozen •years in expected retirement ages among adults in their early 50s appears related to the decline in employer-sponsored defi ned benefi t pension coverage and retiree health insurance off ers.Defi ned benefi t pension plan coverage •plummeted between 1980 and 2006, falling from 39% of the private-sector wage and salary workforce to 20%.Many employers are eliminating retiree •health insurance or providing less generous coverage than they provided in the past. Between 1993 and 2005, the share of private-sector employers with 500 or more workers off ering retiree health benefi ts to retirees younger than age 75 fell from 46 to 29%.

Health gains at older ages may also have boosted labor force participation rates.

Th e share of people age 55-64 and age 65-74 •describing their overall health as fair or poor has declined steadily since 1982.Health gains, however, have slowed since the •mid-1990s, and rising obesity and diabetes rates may presage future health declines.

MEMBERS ASKSTATUTE OF LIMITATIONS – CONTINUED FROM THE MAY 2008 FEDERAL TAX ALERT

Part TwoI. Th e Statute of Limitations on Collection of Tax

A. Aft er an assessment has been made, the IRS has 10 years to collect the tax by administrative means (seizures, levies, off sets) or by a Court proceeding for collection or a judgment. Reference IRC 6502(a).

B. Th e assessment of tax imposes a lien on all of the taxpayer’s tangible and intangible real and personal property. Reference IRC 6321.

II. Th e Ten-Year Statute BeginsA. When does the ten-year period of limi-

tations on collection begin? Th e IRS considers the date of assessment as the

date the appropriate IRS offi cial signs the assessment listing.

B. Th e assessment date is excluded from the 10-year calculation, eff ectively making the collection statute 10 years plus 1 day.

C. Th e IRS has one year aft er expiration of the statute of limitations to administra-tively assess transferee liability. Reference IRC 6901(c).

D. IRS can commence an action to impose transferee liability under federal fraudu-lent conveyance acts. IRS position is that there is no statute of limitations with respect to such actions.

Practitioner’s Alert: For assessment of tax or levy made aft er November 5, 1990, the IRS cannot either collect or levy any tax 10 years aft er the date of assessment of tax or levy. Reference IRC 6502(a)(i) and IRC Section 301.6502-1 of the Income Tax Regulations.Court proceedings must also begin within the 10 year period of limitations. IRC Section 30l.6502-i(a)(1) of the Regulations.For assessments of tax or levy made on or before November 5, 1990, the IRS cannot either collect or levy any tax 6 years aft er the date of assessment of tax or levy. Reference IRC Section 6501(e). However, if the 6 year period ends aft er November 5, 1990, the statute of limitations is 10 years. In order to come under the 6 year statute of limitations, the 6 year period must end prior to November 5, 1990.III. Suspension of the 10-year period

A. If the IRS mails a notice of defi ciency, the period for collection by levy or court action is suspended for the period during which the IRS is prohibited from collecting, normally 90 days from the date of mailing or 150 days if the notice is addressed to a taxpayer outside the United States. If the taxpayer fi les a petition in Tax Court, the collection statute is suspended until the Tax Court’s decision becomes fi nal and for 60 additional days. Reference IRC 6503(a).

B. Th e period of limitations on collection is suspended for any period during which the taxpayer is outside the United States if the period of absence is for a continuous period of at least six months. If at the time of the taxpayer’s return to the United States the period of limitations would expire before the expiration of six months, the period does not expire before the expiration of six months. Reference IRC 6503(c).

C. If the IRS begins a timely court proceeding, the period for collection by levy is extended and does not expire until the liability or judgment arising from the liability is satisfi ed or becomes unenforce-able. Reference IRC 6502(a)

D. Th e period of limitations on collection is suspended for any period that the

taxpayer’s assets are in the control or custody of the court in any proceeding before any court of the United States or of any state or of the District of Columbia, and for six additional months. Reference IRC 6503(b).

E. Wrongful IRS property seizure of a third party allows the collection period to be suspended from the date of the seizure to the date the property is returned or the date of a fi nal judgment in a wrongful levy suit plus 30 additional days. Reference IRC 6503(h).

F. If the taxpayer fi les a case in bankruptcy, the period of limitations is suspended while the IRS is prohibited from collecting and for an additional six months. Refer-ence IRC 6503(h).

G. Th e period allowed IRS for collection is also extended by actions of the taxpayer that have the eff ect of prohibiting the IRS from collection activity including:1. Th e fi ling of a Tax Court petition

appealing the IRS’s denial of a request for innocent spouse relief. Reference IRC 6015(e)(2).

2. A request for a collection due process hearing. Reference IRC 6330(e)(2).

3. Th e submission of an off er in compro-mise. Reference IRC 6331(k).

4. A request for assistance from the Taxpayer Advocate. Reference IRC 7811(d).

5. Additional 90 days aff orded the taxpayer to fi le a petition in Tax Court. Reference IRC 6213(a).

Practitioner’s Alert: A party claiming an interest in property levied upon by IRS must fi le an administrative claim or commence wrongful levy action in federal district court within nine months of date of levy. Reference IRC 6532(c).

H. Th e statute of limitations also may be extended by agreement between the IRS and the taxpayer. Reference Reg. Section 301.6502-1(b).1. In the area of installment agreements,

the period for collection does not expire until 90 days aft er the expira-tion of any period for collection agreed upon in writing by the IRS and the taxpayer at the time the installment agreement was entered. Reference IRC 6502(a)(1).

2. If there is a release of levy aft er the 10-year period, the period for collec-tion does not expire before the expi-ration of any period for collection agreed upon in writing by the IRS and the taxpayer before the release. Refer-ence IRC 6502(a)(2).

IV. Th e Ten-Year PeriodIRC 6502 generally provides that the Service has ten yeas from the date of assessment to collect the tax. Prior to the expiration of the limitations


QUOTES“Rich bachelors should be heavily taxed. It is not fair that some men should be happier than others.” Oscar Wilde

“Th e diff erence between tax avoidance and tax evasion is the thickness of a prison wall.” Denis Healey

“Next to being shot at and missed, nothing is quite as satisfying as an income tax refund.” F. J. Raymond

“Th e only thing that hurts more than paying an income tax is not having to pay an income tax.” Lord Th omas Dewar

“We don’t have a trillion-dollar debt because we haven’t taxed enough; we have a trillion-dollar debt because we spend too much.” Ronald Reagan

period provided by these provisions, the law provided that the taxpayer and the Service could agree in writing to extend the statute of limita-tions. Congress believed that all taxes should be collected within the 10 year statute and that the statute should not be extended.Practitioner’s Alert: Form 900, which previ-ously provided the written agreement between a taxpayer and IRS to extend the ten-year statute of collection is no longer a printed form by the government printing offi ce.Th e authority to extend the collection statute of limitations by agreement ended on December 31, 1999. Any extension of the collection statute already in eff ect on December 31, 1999 expired on December 31, 2002. An exception to this section is provided for extensions related to installment agreements. Th e legislation provides that the period of limitations for extensions related to installment agreements will expire 90 days aft er the end of the extension period.Practitioner’s Alert: Current installment agree-ments come with an automatic extension of the collection statute, the remaining time on the statute of collection or 5 years, whichever is the greater.

A. Under normal circumstances, the ten-year period should be counted as ten calendar years.

B. If the ten-year period is suspended, the period should be counted by the number of elapsed days.

C. In 1964, the Seventh Circuit decided U.S. vs. Tyrell, 329 F.2d 341 (7th Cir. 1964). Th e IRS had been using a months/days method - - if the limitations period was broken by a suspension of the statute a method of eleven calendar months and 30 days. In Tyrell, the IRS relied on its long-standing administrative practice to resist the taxpayer’s use of a counting method based upon the actual elapsed days, so that ten years would be equal to nine calendar years and 365 days.

Practitioner’s Alert: Th ese separate methods do not always produce diff erent results, but they oft en can.Example: Illustrating a ten-year period If the

assessment date is February 29, 2002, the fi rst day which begins the counting in the ten-year period is March 1, 2002. Th e actual day’s method would compute nine calendar years – to February 28, 2011 – and then end the period with an additional 365 days to February 28, 2012. Th e months-days method would actually compute nine years and eleven months to February 1, 2012 and then allow the IRS an additional month of 30 days which would end on March 2, 2012, or an additional 2 days to collect.

D. In U.S. vs. Tyrell, which has a mid-month suspension of the ten-year collection period, Tyrell used the elapsed days

method and included in his argument that the IRS was untimely by two days, while the IRS, relying on the months-days method, argued that it was within the limitation by one day. Th e Tax Court held in the taxpayer’s favor.

Practitioner’s Alert: Th e law on IRS limita-tions and taxpayer limitations is very complex. Unfortunately, the IRS does not generally notify a taxpayer that a tax liability can no longer be collected by the IRS.Part Th reeI. Limitations on Taxpayer’s Right to Claim a

RefundA. A taxpayer may fi le a claim for a refund of

an overpayment of tax within:1. 3 years from the time the return was

fi le or2. 2 years from the time the tax was paid,

whichever period is the last to expire.B. If no return was fi led, the claim may be

made within 2 years from the date that the tax was paid. Reference IRC 6511(a).

C. A taxpayer may fi le a claim within 7 years if the refund pertains to a bad debt under section 166 or 832(c) or in connection with a loss from a worthless security under section 165(g). Reference IRC 6511 (d)(1).

II. Suspension of Statute of Limitations on RefundsA. During fi nancial disability, the time limits

may be suspended under IRC 6511(h).B. For individuals, the refund period can

be suspended when they are unable to manage their fi nancial aff airs because of physical or mental impairment that is medically determinable, and either:1. Has lasted or can be expected to last

continuously for at least 12 months, or2. Can be expected to result in death.

C. Th is suspension will not apply if someone is authorized to act for the taxpayer in fi nancial matters such as a spouse or a guardian.

Part FourReferencesInternal Revenue Manual Part B. AppealsChapter 20 Appeals Records and Processing ManualSection 4. Statute of Limitations — Appeals ProcessingExhibit 8.20.4-5Consent Forms

Form DescriptionSS-10 Consent to Extend the Time to

Assess Employment Taxes872 Consent to Extend the Time to

Assess Tax872-A Special Consent to Extend the Time

to Assess Tax872-B Consent to Extend the Time to

Assess Miscellaneous Excise Tax

872-F Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership or S Corporation Th at Have Converted Under

IRC 6231(b).872-N Notice of Termination of Special

Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership.

872-0 Special Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership.

872-Q Assess Tax Attributable to Items of an S Corporation.

872-R Special Consent to Extend the Time to Assess Tax Attributable to Items of an S Corporation.

872-S Consent to Extend the Time to Assess Tax Attributable to Items of an S Corporation.

872-T Notice of Termination of Special Consent to Extend the Time to Assess Tax.

872-U Change of IRS Address to Submit Notice of Termination of Special Consent to Extend the Time to Assess Tax.

2750 Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty.

977 Consent to Extend the Time to Assess Liability at Law or in Equity for Income, Gift and Estate Tax against a Transferee or Fiduciary.

www.nstp.orgService to the Tax Profession

NSTP’s

OF

EDUCATIONBEGINS

2 0 0 8Regional Conferences

12 CPE Hours EducationAtlanta, GA June 29 & 30 Orlando, FL August 3 & 4Hilton Atlanta Orlando World Center255 Courtland NE MarriottAtlanta, GA 30303 8701 World Center Drive800-445-8667 Orlando, FL 32821 800-621-0638Chicago, IL July 20 & 21Hyatt Regency Las Vegas, NV August 17 & 18Chicago on the Riverwalk Rio All Suites Hotel151 E. Wacker Drive 3700 W. FlamingoChicago, IL 60601 Las Vegas, NV 89103888-421-1442 888-746-7482

Check the NSTP web site at www.nstp.org for Membership Codes for the NSTP room block at each location.

Special BONUS Education: Ed Pittock, President and Founder of the Society for Certified Senior Advisors will present 1 hour of CE – Seniors – Ethics and the Tax Professional. Scheduled during lunch on the Monday of each Regional, Ed will be the luncheon speaker. This entertaining and informative speaker will talk with tax professionals about their increasing ethical responsibility with their Senior clients. He will also announce a new program for Members of NSTP which is certain to bring them new clients. A number of NSTP Affinity Partners will be on hand to talk with Members about their tax professional products. The Regional Conference is a one-stop-shop for the serious tax professional who likes to have a good time! Isn’t that you?

Service to the Tax Profession

SIZZLING HOT SUMMER


Schedule:

Day 1Registration: Noon until 1:00 pm

Seminar - Limited Liability Companies - The Good, The Bad and The Ugly

Examine the versatility of the LLC, when it is the right organization of choice. Discover the limitations of the LLC and why it might not meet your client’s needs. Learn the pitfalls of creating an LLC and why this entity may create problems for your client.

Instructor -Beanna Whitlock, NSTP Executive Director

4 hours CPE 1:00 - 5:00 pm

Day 2Seminar 1 - Real Estate Transactions

In this challenging economic time discover the proper tax treatment of some of the most pesky real estate transactions for your client. Subjects include:

• Acquisitions• Basis of Assets Transferred and Received via

Purchase, Gift, Inheritance, etc.• Basis of the Owners Investment• Carry forward Issues• Casualty Issues• Conversion Issues• Distributions• Filing Requirements• Form 1040 Effects• Form K-1 Presentation• Like-Kind Exchanges• Ownership Issues• Passive Activity Loss Issues• § 1250 Unrecaptured Depreciation Issues• Much, Much More

Instructor: Paul LaMonaca, NSTP Education Director

Seminar 2 - The Ugly 1040 Two

Last year we examined the tax return of Irwin R. and Ursula R. Ugly. This Year Irwin’s Aunt, Ima Ugly, has engaged you to prepare her 1040. Again we will examine the bizarre circumstances that our client has gotten into during the year and will determine the proper tax treatment and prepare her return. Test your 1040 preparation knowledge with this entertaining and challenging presentation.

Instructor: Beanna Whitlock, NSTP Executive Director

When registering for the Regional Conference, list your choice for Day 2 – Seminar 1 or Seminar 2. Once selected, your attendance and book will be reserved for your choice.

8 hours CPE - Monday - 8:00 - 4:30 pm

Sunday afternoon - Break - 3:00 - 3:15 pm

Monday morning - Continental Breakfast 7:00 - 8:00 am

Break 10:00 - 10:15 am

Lunch Noon - 1:00 pm – Special Speaker and 1 hour CPE

Break 3:00 - 3:15 pm

Seminar Ends 4:30 pm

Early Bird Registration: Before June 1, 2008 $180*

Member Price after 6/1 $195

Non-member price $245

A $15 late registration fee will be charged if not registered by the following dates:

Atlanta June 20, 2008Chicago July 11, 2008Orlando July 25, 2008Las Vegas August 8, 2008Register by going to www.nstp.org or call the NSTP officeat800-367-8130.Staffisreadytoassistyou.

Come for the education, come for the networking and come and stay for the IRS Nationwide Tax Forums.

We will be looking for you!

Paul and Beanna

NSTP will honor members who have demonstrated exceptional service during this last year at the NSTP Annual

Meeting in Las Vegas.

Among the presentations will be:

The Claire Robinson Service AwardThe Howard Longley Memorial Award

The Founder’s AwardEducator of the Year

Awards also presented include:

Government Relations AwardPublications Award

Service AwardsNSTP has many members who contribute to the success of our Society offering their services to NSTP in countless ways such as contributing articles to the Federal Tax Alert, holding education events in their areas, and representing NSTP at IRS liaison meetings. NSTP wants to acknowledge and recognize these individuals.

If you know of an individual you would like to nominate to receive an award, please forward the members name to the 2008 Awards Committee. You can fax your nomination to the NSTP office at 360- 695-7115 or mail it to NSTP 10818 NE Coxley Drive, Ste A Vancouver, WA 98662 or email to [email protected].

It only takes a moment to say “thank you”.

During the Annual Meeting, NSTP will once again be reading the roll of members who have past away since we last met. If you know any member who has died, please include this information so we may properly say

our farewells.

Greta Barncord, Awards ChairpersonDeadline for submission – July 1, 2008



By Special Invitation Only:

The Members of theNational Society of Tax Professionals – NSTP

are invited to theAnnual Meeting

August 17, 2008 5:15 pm Rio Hotel Las Vegas, NV

At the conclusion of the Sunday CPE, and after a short break, the meeting will convene in the room used for education. All NSTP members are invited.

Agenda

Call to Order President LeamonIntroductions

Establishment of Quorum Secretary Oliver

State of NSTP Exec. Director

Presentation of Awards V.Pres. Barncord President Leamon

Special Introduction of Guest V. Pres. Barncord

Old Business: Approval of 2006 & 2007 Annual Meeting Minutes

New Business:

Meeting adjourns.

FEDERAL TAX ALERT - NSTP FTA.pdf · 2016-12-16 · federal tax alert page 1 june 2008 federal tax...

Documents

Transcript of FEDERAL TAX ALERT - NSTP FTA.pdf · 2016-12-16 · federal tax alert page 1 june 2008 federal tax...