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Monthly Newsletter for ncpe Fellowship Members Vol. 2 No. 9 September 2011

TaxingTimesRemarks from Beanna

Labor Day 2011: Sept. 5

The first observance of Labor Day is believed to have been aparade of 10,000 workers on Sept. 5, 1882, in New York City,organized by Peter J. McGuire, a Carpenters and JoinersUnion secretary. By 1893, more than half the states wereobserving”Labor Day” on one day or another, and Congresspassed a bill to establish a federal holiday in 1894. PresidentGrover Cleveland signed the bill soon afterward, designatingthe first Monday in September as Labor Day.

Who Are We Celebrating?

153.2 millionNumber of people 16 and older in the nation’s labor force inJuly 2011.

Employee Benefits84.7%Percentage of full-time workers 18 to 64 covered by healthinsurance during all or part of 2009

Our JobsAmericans work in a variety of occupations. Here is asampling:

Occupation Number of employeesTeachers (preschool - grade 12) 3,039,523Computer Operators 101,889Actors 10,980Telephone Operators 32,394Bus Drivers 265,429Bakers 117,405Telemarketers 55,733Hairdressers, hairstylists and cosmetologists 395,503Janitors and building cleaners 1,478,204

26.2 millionNumber of female workers 16 and older in management,professional and related occupations. Among male workers,16 and older, 24.0 million were employed in management,professional and related occupations.

0.9%Percentage change in employment in the United Statesbetween December 2009 and December 2010. Employmentincreased in 220 of the 326 largest counties (large countiesare defined as having employment levels of 75,000 or more).

Working at Home8%Percent of total U.S. workforce that were home-basedworkers in 2005, an increase from 7 percent in 1999.

8.1 millionNumber who worked from home exclusively in 2005, anincrease from 6.7 million in 1999.

11+ hoursAbout 11 percent of those who worked at home for some orall of their workweek reported working 11 or more hours in atypical day in 2005. Only about 7 percent of workers whoworked outside the home reported doing so.

Another Day, Another Dollar$47,127 and $36,278The 2009 real median earnings for male and female full-time,year-round workers, respectively.

Hot Jobs53%Projected percentage growth from 2008 to 2018 in thenumber of network systems and data communication analysts.Forecasters expect this occupation to grow at a faster ratethan any other. Meanwhile, the occupation expected to addmore positions over this period than any other is registerednurses (581,500).

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Early, Lonely and Long — the Commute to Work16.5 millionNumber of commuters who leave for work between midnightand 5:59 a.m. They represent 12.4 percent of all commuters.

76.1%Percentage of workers who drive alone to work. Another 10.0percent carpool and 5.0 percent take public transportation(excluding taxicabs).

25.1 minutesThe average time it takes people in the nation to commute towork. New York and Maryland had the most time-consumingcommutes, averaging 31.4 and 31.3 minutes.

3.2 millionNumber of workers who face extreme commutes to work of90 or more minutes each day.

Best wishes for a relaxing Labor Day – to the hardest workingin America – the Tax Professional!

Beanna

Beanna@ncpefellowship.com

Contents Page

Visit our WebsitencpeFellowship.com

Contents Page14

Remarks from BeannaTax News

Monday, August 5, 1861New Debt Ceiling LawBudget Control Act of 2011 Signed Into Law; Tax

Changes Left to Bipartisan CommitteeSIMPLE Cafeteria Plans: Adding Value to Your

Clients Benefit ProgramsHow Cafeteria Plans WorkMany Small Business Owners Are Finding Cafeteria

Plans More AttractiveDo Your Clients Qualify?Requirements for ParticipationAdditional Participation InformationSection 105 Medical Reimbursement Plans Offer

Tax Savings (IRC 105)U.S. Chamber of Commerce Urges Tax Code

OverhaulWhy Do Half of Americans Pay No Federal Income

Tax?Congress Not Likely to Tackle Tax ReformPitfalls of Bequeathing Money to Pampered PetsBusiness or Investment?A Look At the World's New Corporate Tax HavensRemarriage Causes Portability Problems under Estate

Tax ExemptionTax Preparers Kept Fees Stable Last Tax SeasonYear-end planning: Take Advantage of Business

Provisions that May Sunset for Good on December31, 2011

People in the Tax NewsJudge Removed from Case Involving DeutchUMDNJ Professor Admits He Hid More Than $2.5M

From The IRS in Swiss Bank AccountsCEOs Say Yes to Congress on Removing Tax BreaksJackson Hewitt Bankruptcy Plan Gets Court's OKEscort Service Manager Serving Prison Time for

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ContentsTax Evasion Loses Appeal

The City of Philadelphia Goes After AnotherSmall Target

Feds Say Mansion Housed Tax ScamUS Air Force Contract Specialist’s Sentenced for

Filing False ReturnsIRS News

IRS to Build Database of Regulated TaxPreparers for Public Use

IRS Warns of Social Security ScamIRS Workforce Challenged by Changing Tax

LawsAuditors Criticize IRS Implementation of Credit

Card RulesIRS Warns of Scammers Targeting SeniorsIRS In-House Critic Paid to Tell Tax Collecting

Agency of FlawsIRS FAQs Address Expiration of Airline Ticket

and Other Aviation-related TaxesIRS: No Tax Refunds for Fliers, After AllIRS Explains When Employer Must Rely on Sec.

530 Safe Harbor for Employment Tax Relief toApply

Taxpayers Do Not Always Receive QualityResponses When Corresponding About Tax

IssuesDraft Form 706 for 2010 Decedents Reflects Law

and Other ChangesNew Audit Technique Guide Explains How

Examiners Should Probe Attorneys' ReturnsIRS Updates and Expands Audit Technique

Guide for Exams of ConsultantsIRS Reissues Guidance on Processing Tax

Payment Extension Requests Based onUndue Hardship

Mixed Result’s Shown on IRS CollectionFunctions

Contents Page33343436363636373737373838

3939404040

TIGTA Reports on IRS Examination FunctionsIRS Publishes Summertime Tax Tip for

Taxpayers who MoveThoughts from the Ragin Cagin

Tax HistoryTax Pros in Trouble

Tax Preparer Defrauded IRS Out of Nearly $8Million

Dyer Woman Admits IRS SwindlePeekskill Tax Preparer Charged with Identity

TheftTax Preparer Faces up to 143 Years in PrisonTwo Montgomery Tax Preparers Face Federal

IndictmentsRestaurant Accountant Enters Plea Deal in Tax

CaseRutherford Man Pleads Guilty to Tax Fraud,

Cheating N.J. Out of More than $1.1MTaxpayer Advocacy & Tax Professionals

Progress has been Made to Reengineer theExamination Program but Additional Improvements

Are Needed to Reduce Taxpayer BurdenWayne’s World

Taking the Mystery Out Of Retirement PlanningTax QuotesSponsor of the Month

TASC – ArgiPlan and BizPlanTodd Kuehn, Regional Sales DirectorTotal Administration Services Corporation

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Tax News

Monday , August 5, 1861

In the hallowed halls of the Federal Congress, WashingtonDC legislators established the nation’s first personal incometax. Any United States citizen with an income of more than$800 a year was required to tithe 3% to the FederalGovernment. An income tax had been attempted before,during the War of 1812, but the war ended before the tax actcould go into effect.

The Revenue Act of 1861 mostly concerned itself with customsduties. It also levied a direct tax of $20,000,000 upon thestates. Each state had to come up with a certain amount tobe paid to the Federal Government. Pennsylvania, forexample, was required to pay $1,946,719.33, while Oregonwas to muster $35,140.66. Even states that had secededwere taxed. As the Union Army advanced, the tax would becollected. Most loyal states simply absorbed the tax into theirbudget.

The Act was to go into effect on January 1, 1862 and wasexpected to net $90,000,000 total, or roughly $4 per headfrom the loyal states.

New Debt Ceiling Law

With only hours to spare before a potential crisis, PresidentObama signed the debt ceiling compromise bill that passedboth the House and Senate following prolonged and heateddebate among lawmakers. The new deal raises the nation’s$14.3 trillion debt ceiling, takes a two-step approach in cuttingabout $2.5 trillion in government spending over ten years, butdoes not include tax increases or new tax revenues. Theagreement also calls for a new joint congressional committeeto recommend measures for an expanded deficit reduction

package before the end of the year. Some of those changescould involve heavy spending cuts and tax increases.

“What this new committee recommends could substantiallychange the Tax Code,” said CCH Principal Tax Analyst MarkLuscombe, JD, LLM, CPA. “A lot of attention has focused onraising taxes for high earners and there will no doubt be muchdebate over tax rate changes, deductions and whether theBush-era tax cuts will be phased out at the end of 2012 asscheduled.”

Budget Control Act of 201 1 Signed Into Law;Tax Changes Lef t to Bip artisan Committee

After a bitter partisan battle, on August 2 Congress passedand the President signed into law S. 365, the “Budget ControlAct of 2011.” The initial $1 trillion round of deficit reductionover fiscal years 2012 through 2021 doesn’t include revenuehikes, but the second, $1.5 trillion round of deficit reductionover the same years may feature fundamental tax changesas part of the work-product of the bill’s newly established JointSelect Committee on Deficit Reduction (JSC). This articlecarries an overview of the JSC’s mandate, tax changes itcould adopt, a timeline of the JSC’s work, and some thoughtsabout the Budget Control Act’s impact on tax planning.

The JSC’s goal is to reduce the deficit by an additional $1.5trillion over fiscal years 2012 through 2021, and in findingthese savings, its duties are to “provide recommendationsand legislative language that will significantly improve theshort-term and long-term fiscal imbalance of the FederalGovernment.” The Administration’s interpretation of the JSC’smandate is that everything is on the table, including tax reform.Without contesting the point, Republican lawmakers, no doubtlooking at the composition of the committee (see below),believe that in the framework of the compromise legislation itwill be “impossible” (in House Speaker John Boehner’s words)to use the deal to hike taxes.

It is hard to say what, if anything, the JSC might recommendby way of tax changes. But looking to past proposals:

... Businesses may have to give up costly tax breaks,such as accelerated depreciation under Code Sec.168, the domestic production activities deductionunder Code Sec. 199, and the election under CodeSec. 472 to use the last-in, first-out (LIFO) inventoryaccounting method. Industries (such as oil and gas)may have to give up some of their tax preferences. Inreturn, corporations may wind up with a modestly lowertop rate.

... In the international arena, a territorial tax regime maybe adopted, there may be a repatriation holiday to

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induce multinationals to bring home overseas profits,and there may be crackdowns on transfer pricing taxstrategies.

... There could be a new round of loophole closers,such as a crackdown on “carried interest.”

... Individuals may find cutbacks in key tax breaks, suchas the mortgage interest deduction, in exchange forflattened and lowered tax rates.

Other issues the JSC will have to deal with include: the post-2012 expiration of the Bush-era income tax cuts (includingthe current rate schedules, and low tax rates for long-termcapital gains); and the expiration of the Bush-era rules forestate and gift taxation, and the transfer tax rules in the 2010Tax Relief Act, effective for estates of decedents dying, giftsmade, or generation-skipping transfers made after Dec. 31,2012.

In remarks after he signed the Budget Control Act of 2011into law, the President reiterated his call for a balanced planthat includes revenue changes as well as spending cuts. Hesaid that “since you can’t close the deficit with just spendingcuts, we’ll need a balanced approach where everything is onthe table. Yes, that means making some adjustments to protecthealth care programs like Medicare so they’re there for futuregenerations. It also means reforming our tax code so that thewealthiest Americans and biggest corporations pay their fairshare. And it means getting rid of taxpayer subsidies to oiland gas companies, and tax loopholes that help billionairespay a lower tax rate than teachers and nurses .... Everyone isgoing to have to chip in. It’s only fair. That’s the principle I’ll befighting for during the next phase of this process.”

In their August 2 press releases about the Budget Control Actof 2011, neither House Speaker Boehner (R-OH) nor SenateRepublican Leader Mitch McConnell (R-KY) mentioned thepossibility of tax reform as part of the deficit reduction package.

The Budget Control Act of 2011 carries extremely aggressivetargets that Congress and the JSC are supposed to meet.Here’s a summary of what has to be done and when:

· No later than Aug. 16, 2011 (14 days after theenactment date), the 12 members and the co-chairs ofthe JSC must be appointed by the majority and minorityleaders of the Senate, and the Speaker and minorityleader of the House, who each must appoint threemembers. The Speaker and the majority leader of theSenate must each appoint one member to serve as co-chair from among the JSC members.

· No later than Sept. 16, 2011 (45 days after theenactment date), the JSC is to hold its first meeting.

· No later than Oct. 14, 2011, House and Senatecommittees may transmit to the JSC theirrecommendations for law changes necessary to meetthe goal of JSC.

· No later than Nov. 23, 2011, the JSC must vote on areport containing the findings, conclusions, andrecommendations of the committee, as well as theestimates provided by the Congressional Budget Office(CBO), and legislative language in support of thoserecommendations, which must also contain a statementof the deficit reduction achieved over fiscal years 2012through 2021. A majority of JSC members must approvethe report and accompanying legislative language, andthe text of the report and accompanying legislativelanguage must be made public promptly after the voteon adoption of those matters. Any JSC member may fileadditional, supplemental, or minority views within 3calendar days if the member provides notice of thisintention at the time of final vote on adoption of the reportand legislative language.

· No later than Dec. 2, 2011, if a majority of the JSCapprove a report and legislative language, they must betransmitted to the President, Vice President, the Speakerof the House, and the majority and minority leaders ofthe House and Senate.

· No later than Dec. 23, 2011, if the JSC approves areport and legislative language, it must be voted on byboth the Senate and the House of Representatives. Noamendments will be considered.

If a majority of the JSC members fail to approve a report andlegislative language, a sequestration process (i.e., across-the-board reductions) must be implemented, with annual cutsstarting in 2013. The cuts will be split 50-50 between defenseand domestic spending.

The Administration has said that if the JSC doesn’t approvea report, or if Congress fails to pass the JSC’srecommendation, nearly $1 trillion of deficit reduction wouldbe achieved anyway, by letting the Bush-era tax cuts expireat the end of 2012. The threat of a Presidential veto of anextension of the Bush-era tax cuts would, according to theAdministration, help force a balanced deficit reduction withtax increases and spending cuts.

In 2010, businesses and individuals weren’t certain what taxrules would apply to them for 2011 and 2012 until December17, when the 2010 Tax Relief Act was signed into law. Thatpattern of uncertainty until the very last minute is highly likelyto be repeated again this year, making year-end tax planning,and tax planning for a longer horizon, a guessing game atbest until at least the end of this year.

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If the JSC approves recommendations that includecomprehensive tax reform, they are not likely to begin to gointo effect until 2013. If that’s the case, Congress will still needto address the host of tax breaks set to expire at the end ofthis year under current law (such as the Code Sec. 41 researchcredit, the Code Sec. 51 work opportunity tax credit, and theCode Sec. 222 above-the-line deduction for qualified tuitionand related expenses). Also, without yet another “patch,” thehigher alternative minimum tax (AMT) exemptions and abilityto offset AMT with personal credits will both expire at the endof this year.

If the JSC can’t report out a recommendation, or Congressdoesn’t pass it, then the extenders would still have to be dealtwith late this year or early the next. And in 2012, there wouldbe yet another bruising battle over the Bush-era tax cuts thatare scheduled to expire at the end of 2012 under current law.

SIMPLE Cafeteria Plans: Adding V alue toYour Client s Benefit Programs

How Cafeteria Plans Work

SIMPLE Cafeteria Plans (Section 125 Flexible SpendingAccounts) are one of the nation’s leading employer sponsoredbenefits programs which provide tax-savings to both theemployee and the employer. Many employees see a tax-savings (including FICA) of 25% or more! Employers whooffer these Plans not only improve the company’s benefitsprogram at little or no cost to the company, they also receivea reduction in payroll tax for each and every dollar theemployee contributes to the Plan.

Many Small Business Owners Are Finding CafeteriaPlans More Attractive

Non-discrimination rules have often discouraged smallbusiness owners from offering Cafeteria Plans to theiremployees since it meant they could not realize a benefit forthemselves or for their highly-compensated employees.

With the passage of the Patient Protection and AffordableCare Act (PPACA), employers who could not pass the 25%key employee concentration test or the 55% average benefitstest for dependent care can now participate in a SIMPLECafeteria Plan without being concerned about discriminationtesting. This recent development has pushed small businessowners to revisit the idea of SIMPLE Cafeteria Plans for theircompany.

Do Your Client s Qualify?

The PPACA legislation states that a SIMPLE Cafeteria Planmust meet certain minimum eligibility, participation, andcontribution levels in order to avoid the applicable non-discrimination requirements:

1. An employer is eligible to sponsor a SIMPLE CafeteriaPlan if the business has employed 100 or fewer

employees on average (based on business days)during either of the preceding two years.

2. For a new business, eligibility is based on the numberof employees the business is reasonably expected toemploy.

3. All non-excludable employees with at least 1,000 hoursof service during the preceding Plan Year must beeligible to participate in a SIMPLE Cafeteria Plan.

4. Excludable employees are those who:

· Have not attained age 21 before the end of thePlan Year;

· Have less than one year of service as of anyday during the Plan Year;

· Are covered under a collective bargainingagreement; or

· Are nonresident aliens.

· Each eligible employee must be able to electany benefit available under the Plan and underthe same terms and conditions as those whichapply to all other Participants.

Requirements for Participation

An employer’s contribution to a SIMPLE Cafeteria Plan mustbe enough to provide benefits to non-highly compensatedemployees. The employer is required to choose one of thefollowing two contribution options:

1. Uniform Contribution: 2% of employee gross wages,or

2. Matching Contribution: the lesser of 6% employeegross wages or 2x the employee annual Planelection.

Note: If the Matching contribution method is used, the ratefor the highly compensated and key employees can notbe greater than the matching contribution for the non-highlycompensated employees.

Additional Participation Information

A. Funding the Uniform Contribution at 2% will encourageparticipation, with unused funds being refunded backto the employer under the use-it-or-lose-it rule. Therequired contributions must be actual employercontributions, made in addition to any salary reductioncontributions made by the employee.

B. The new rules do not eliminate the requirement thatCafeteria Plan Participants be employees. As undercurrent law, individuals classified as self-employed(including sole proprietors, more than 2%shareholders in a Subchapter S- Corporation,members of a Limited Liability Company, and partnersin a Partnership) will continue to be excluded fromparticipating in a Cafeteria Plan.

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C. While an alternative means of participation remainsunavailable for Sub-Chapter S owners, married soleproprietors, partners in a Partnership, and membersin a LLC maybe able to participate as a dependent iftheir spouse is an employee of the company and isnot an owner, partner, etc. However, under Section318 and 152 of the IRS Tax Code, the spouse wouldbe considered a highly compensated employee.

D. Greater benefits exist for employers with highlycompensated employees who could not participateunder the discrimination rules in a standard CafeteriaPlan. Highly compensated employees are currentlydefined as employees earning more than $110,000per year, or Employees with 5% + ownership in theCompany.

E. The SIMPLE Cafeteria Plan can now benefit smallbusiness owners because they have the opportunityto become a part of the plan along side his or heremployees.

The SIMPLE Cafeteria Plan is a valuable benefits programfor small business owners with a limited number of employees.You may find that many of your Clients prefer it to the HealthSavings Account (HSA) since the funding can be folded intoannual salary increases and un-used dollars are refunded tothe owner through the use-it-or-lose-it rule.

Section 105 Medical Reimbursement PlansOffer Tax Savings(IRC 105)

Qualified Small Business Owners Can Deduct 100% ofFamily Medical Expenses as Business Tax Deductions

Based on Section 105 of the Internal Revenue Code, a self-employed individual who employs a spouse in the businesscan become eligible for a medical reimbursement package.

Qualified small business owners are given the ability to legallydeduct 100% of family medical expenses including:

· All health and qualified long-term care insurancepremiums.

· Out of pocket medical, dental, and vision costs.· Over-the-counter items such as cold medicine, contact

lenses and cleaning solution, allergy medication,aspirin and more.

Qualified small business owners are able to deduct 100% offederal, state, and FICA taxes for family medical costs, andon average save $4,000 or more a year. Key to these savingsis the ability to declare medical expenses as a businessexpense rather than a personal deduction.

For example, self-employed individuals who are in a 13.3%federal tax bracket can save 13.3% on all of their insurance

premiums. Furthermore, with the ability to write off these samepremiums as a business expense, the independentcontractor’s tax savings will climb as high as 33.3% (by saving13.3% on federal, 5% on state, and 15% on self-employmenttaxes).

To turn the personal tax deduction into a business taxdeduction, one must follow these steps outlined by thegovernment. The independent contractor must 1) hire his/herspouse, 2) set-up an employee benefits program, 3)reimburse the employee spouse for the family’s medicalexpenses, and 4) write off these reimbursements as anemployee benefit on (Line 17 of Schedule F or Line 14 ofSchedule C) and save money.

Statistics show that 30% of farmers who file IRS Schedule Fand 10% of small business owners that file Schedule C cantake advantage of a Section 105 Medical Reimbursementplan. Like most tax deductions, certain requirements andcompliance issues must be met to qualify.

Qualifying a Small Business Owner

Besides meeting the requirement of employing a spouse,most businesses that take advantage of a Section 105Medical Reimbursement plan file taxes as SoleProprietorships. C-Corporations may also realize tax savings;and S-Corporations and Partnerships may participate andrealize significant benefits for their employees who are NOTpartners or considered to be owners under provisions of theInternal Revenue Code.

For proper operation of a Section 105 plan, the employershould:

· Establish an Employment Agreement in writing anddistribute the document to all eligible employees.

· Distribute a Summary Plan Description to all eligibleemployees.

· Keep a time log of hours worked for each participatingemployee.

· Pay a W-2 wage to the employee(s).· Reimburse medical expenses to the employee(s)· File the appropriate payroll taxes and forms.

Bona fide employment in a family operated business is thecritical component for taking advantage of Section 105 andthe appropriate rulings. The business relationship betweenthe employed family members must be legitimate andnecessary. Expectations and job duties must be clearlyunderstood and the compensation provided to theemployee(s) must be reasonable for the duties beingperformed.

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Establishing a Reasonable Compensation

Compensation may be paid to the employed spouse in acombination of cash wages and benefits (i.e., healthinsurance, medical reimbursement, etc.). It is important thatthe employee’s total compensation package (wages includingany commodity wages and benefits) be reasonable for theduties being performed. Reasonable compensation largelydepends upon the facts and circumstances of each specificemployment situation, and several factors should beconsidered when establishing a Section 105 MedicalReimbursement compensation package. These include, butare not limited to: the employee’s qualifications, experience,and availability, along with the nature and extent of work, thecomplexity of the business, and prevailing economicconditions.

A W-2 wage should be paid to each employee. Wages mustbe paid from the business or farm account and wages torelated employees must be cashed or deposited into theemployee’s personal or family checking/savings account.Keep in mind that insurance premiums and medicalexpenses not covered by insurance should be paid from theemployee’s account and reimbursed by the employer fromthe farm or business account.

The employee’(s) compensation should include at least somecash wages (not including commodity wages) and be paidconsistently with a payroll check. Regular monthly or quarterlypayments are recommended. Cash compensation is subjectto the appropriate payroll withholding, including timely taxdeposits. The employer should complete a W-2, W-3, andW-4 and file a Form 941 or 943 or 944.

Determining Allowable Expenditures and EmployeeEligibility

Under Section 105 of the Internal Revenue Code, an employercan update his/her employee benefit elections once a year.The beginning of each year is a good time to review the writtenEmployment Agreement (compensation and job duties)between the employer and his/her employees. TheEmployment Agreement should be updated annually to ensurecompliance.

Allowable expenditures may be set to include major medicalhealth insurance premiums, if covered, whether in their entiretyor only a portion thereof (by placing a cap on the amount tobe covered). And while qualified long-term care insurancepremiums, dental insurance premiums and cancer insurancepremiums may be included, keep in mind that disability andterm life insurance premiums are available for the employeeonly. Note also that out-of-pocket expenses must have amaximum dollar amount established. Whenever benefits areadded, an employer should always check to ensure that thecompensation for the employee(s) is still reasonable.

Employers cannot legally offer employee benefits to theiremployed spouse only (thereby excluding other employees).While they must offer the same benefits to all employees,there are ways to legally exclude other employees fromreceiving the same benefits under Safe Harbor Rules. Whileensuring that a spouse meets all set requirements, anemployer might exclude other employees by:

· Establishing a probationary time-period for newemployees (waiting period before employee can takeadvantage of benefits offered).

· Excluding seasonal employees by instituting requirementfor minimum number of months worked.

· Setting a minimum number of hours worked.· Placing an age limitation that excludes employees under

the age of 25.

Editor ’s Note: T ASC, a sponsor of the ncpeFellowship isour Sponsor of the Month. Please refer to the contactinformation at the end of the newsletter for additionalinformation.

U.S. Chamber of Commerce Urges T ax Code

Overhaul

The U.S. Chamber of Commerce is urging the newcongressional deficit-reduction committee to overhaul the taxcode without taking a position on the central issue of whetherhigher taxes should be part of the proposal.

In a letter sent to the committee members, Bruce Josten, thechamber’s chief lobbyist, called for a “complete restructuringof the U.S. tax code” that would lower rates and make the taxcode more efficient.

“The chamber urges you to consider how the current tax lawsact as an impediment to worldwide competitiveness, adeterrent to saving and investment, and an obstacle toinnovation and entrepreneurship,” he wrote in the letter sentTuesday on behalf of the nation’s largest business group.

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The chamber’s board includes executives from PepsiCo,WellPoint, AT&T and Norfolk Southern.

Josten’s letter sidesteps one of the core issues dividingDemocrats and Republicans on the 12-member jointcommittee.

Democrats such as Senate Finance Committee ChairmanMax Baucus of Montana are calling for a balanced approachthat includes tax increases along with spending cuts.Republicans such as Dave Camp of Michigan, who leadsthe House Ways and Means Committee, are opposed tohigher taxes.

Diane Lim Rogers, the chief economist at the ConcordCoalition, a group that advocates for deficit reduction, saidshe was encouraged by the letter, though the group didn’tmention a specific revenue target.

Rogers said the letter places a tax overhaul next to entitlementspending as part of the work for the joint committee. That’sthe same formula used by bipartisan groups that have calledfor tax increases as an element of deficit reduction.

The joint committee, with Democratic Sen. Patty Murray ofWashington and Republican Rep. Jeb Hensarling of Texasas co-chairmen, was given the task by the recent debt-ceilinglaw of finding $1.5 trillion in deficit reduction by Nov. 23. TheHouse and Senate must vote on the recommendations byDec. 23.

The chamber’s letter doesn’t say it would oppose a taxoverhaul that raised more revenue than the current tax systemdoes. Josten did say that tax changes shouldn’t single outindustries.

Why Do Half of Americans Pay No FederalIncome T ax?

You may have heard the claim that about half of Americanspay no federal income tax. That’s a true fact. The Tax PolicyCenter estimates that 46% of households either will pay nofederal income tax in 2011 or will receive more from the IRSthan they pay in.

TPC released a new study that examines why these peopleend up paying no federal income tax.

The number one reason should come as no surprise. It’sbecause they have low incomes.

A couple with two children earning less than $26,400 will payno federal income tax this year because their $11,600standard deduction and four exemptions of $3,700 eachreduce their taxable income to zero. The basic structure ofthe income tax simply exempts subsistence levels of incomefrom tax.

Low incomes (or, if you prefer, the standard deduction andpersonal exemptions) account for fully half of the people whopay no federal income tax.

The second reason is that for many senior citizens, SocialSecurity benefits are exempt from federal income taxes. Thataccounts for about 22% of the people who pay no federalincome tax.

The third reason is that America uses the tax code to providebenefits to low-income families, particularly those withchildren. Taken together, the earned income tax credit, thechild credit, and the childcare credit account for about 15%of the people who pay no federal income tax.

Taken together, those three factors — incomes that fall belowthe standard deduction and personal exemptions; theexemption for most Social Security benefits; and tax benefitsaimed at low-income families and children — account foralmost 90% of the Americans who pay no federal incometax.

Congress Not Likely to T ackle Tax Reform

A special congressional committee created by last week’sdebt ceiling legislation is unlikely to have the time or thepolitical will to tackle any meaningful tax reforms.

The 12-member panel, which will comprise an equal numberof Democrats and Republicans from the House and Senate,will have four months to come up with $1.5 trillion in deficit

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reduction over 10 years either through budget cuts or taxincreases. Given the glacial pace of most legislation inCongress, that isn’t a lot of time.

“It’s difficult to do a full-fledged tax reform effort coming out ofsuch a tightly telescoped time frame,” said John Stanton,senior tax legislative partner at Hogan Lovells U.S. LLP.

Another and perhaps more important factor underminingbroad reform is that the deliberation on tax issues is likely tomirror the contentious discussions on the topic during the debtceiling debate.

The GOP refused to consider tax increases, while Democratsdrew a line at protecting Social Security, Medicare and otherprograms. Each side protected its turf in the final debt ceilingbill.

That makes it unlikely that this new so-called supercommitteewill have the wherewithal to tackle fundamental changes inthe tax code, such as eliminating or reducing tax deductionsprovided for employer-sponsored health care insurance, andtax deferrals for the buildup of cash in insurance policies andretirement savings.

“I don’t see any way in God’s green earth you’re going to gettax increases coming out of this special committee,” saidDean Zerbe, managing director of alliantgroup LP, a companythat specializes in tax services for small and midsizebusinesses.

“The possibility of an agreement on tax reform among thisgroup is pretty remote,” said Brian Graff, executive directorand chief executive of the American Society for PensionProfessionals and Actuaries.

The scope of the committee’s mandate also works againstachieving broad tax reform, according to Sam Olchyk, apartner at Venable LLP.

The panel was established primarily to reduce spending ratherthan engage in the more complicated process of making thetrade-offs required to change the tax code.

“Tax reform and the supercommittee have differingobjectives,” said Mr. Olchyk, a former aide to the SenateFinance Committee and the Joint Committee on Taxation.“It’s difficult to accomplish both within the framework of thecommittee.”

One clue about the committee’s flexibility will come in theappointments that House and Senate leaders make over thenext week.

If the panel roster is filled with hard-line partisans, it is likely tohunker down in the parties’ well-defined positions. If amoderate member or two is tapped, the dynamic couldbecome much more fluid.

Another sign will come in the budget baseline that the panelchooses to use. If it adopts the Congressional Budget Officebaseline, which assumes that the Bush administration tax cutswill expire at the end of next year, it will be much more difficultto consider tax increases.

Some observers, however, hold out hope that the specialcommittee can make substantial progress.

“Chances are as good here as I’ve seen in some time to getcomprehensive tax reform done, but it’s not a slam-dunk,”said Brian Gardner, senior vice president for Washingtonresearch at Keefe Bruyette & Woods Inc. “Sometimes whenyou’re under the gun, it forces you to focus more intently, andthat works in their favor.”

Even if major tax reform is beyond the committee’s grasp,individual tax items are likely to be put on the table.

For instance, taxing carried interest at individual rates insteadof capital gains rates for private fund managers, oil and gasindustry tax breaks and depreciation rules for corporate jetsare likely to be addressed. Reforming the alternative minimumtax also may be discussed.

And even if no tax changes come out of the supercommittee,observers will be watching for signs that could lead to reformsdown the road. If it follows the trend set by last year’spresidential deficit commission and this year’s Senate Gangof Six, the committee could advise their colleagues to begina process of lowering individual rates by making changes inso-called tax expenditures.

“We’re going to be looking at what suggestions the committeewill be making to the tax-writing committees that would impactretirement incentives,” Mr. Graff said.

Perhaps the biggest indictment of the yet-to-be formedsupercommittee comes from Congress itself. If the committeecan’t reach an agreement on deficit reduction, the debt ceilinglaw provides for a trigger that will automatically cut $1.2 trillionin spending over the next 10 years from the budget.

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Pitfalls of Bequeathing Money to Pampered

Pets

Poodle dogs wait for their turn in a spa at the 2011 TaipeiPet Show inside the Hall in Taipei

British Fashion designer Alexander McQueen did it and sodid billionaire hotel operator Leona Helmsley, but legal expertswarn that there can be pitfalls to bequeathing money to apampered pet.

Between 12 and 27 percent of pet owners provide provisionsfor their beloved pets in their wills, according to researchersat Washington University in St. Louis School of Law.

McQueen left 50,000 pounds ($81,000) for the care of hisEnglish bull terriers when he died last year, and Helmsleybequeathed $12 million to her now-deceased Maltese,named Trouble, after her death in 2007.

“Although pet inheritance in America was recognized in 1923,and despite several recent innovations, the law remainsunstable,” said Washington University Law ProfessorAdrienne Davis.

She said trusts must be properly drafted and should namecaretakers who are willing to comply with the trust terms. If afinal resting place is desired for the pet, lawyers should checkthat it will accept animals.

Despite Helmsley’s wishes, a U.S. judge reduced Trouble’sbequest from $12 million to $2 million and more problemsarose after the dog’s recent death.

“The remainder of Trouble’s money will go to Helmsley’scharitable trust,” said Davis, adding that gifts to charitabletrusts would qualify for a tax deduction in the United States.

“However, tax law excludes charitable remainders followingpet trusts from qualifying,” she added in a statement.

The judge also overturned Helmsley’s wish that her charitabletrust go to animal welfare, and allowed the trustees to distributethe money to charities of their choice.

Helmsley also wanted Trouble to be buried in the familymausoleum but pets in the U.S. cannot be buried incemeteries for humans.

Davis called for legal reforms to make sure pets receive whatthey are owed.

“One proposed bill would extend the charitable remaindertax deduction to pet trusts. Other reforms would make it easierto create trusts for future generations, or ‘grand-kid pets.’ That‘companion’ feeling has spilled over owners’ lifetimes intotheir estate plans, with no end in sight.”

Washington University Professor Frances Foster believes thatthe traditional concept of family is outdated and legal changesare needed to reflect how important pets are in peoples’ lives.

“Trouble — and millions of American pets like her — shouldinherit,” she said in an article in the Florida Law Review.

“American inheritance law is trapped in an outdated familyparadigm. That paradigm assumes that the decedent’sclosest relatives by blood, adoption or marriage are the mostdeserving recipients of the decedent’s estate,” she added.

But Foster said for many Americans today that is not the casebecause “their pets, not their human family members, are theirnearest and dearest.”

Business or Investment?

Tax law contains many important distinctions. One of theclassics is between business and investment. Which side ofthe line you’re on has a major impact on your taxes. Often,you and the IRS will have contrary incentives.

If you’ve just made a pile of money on a big land deal or stocktrade, you want to be an investor not a dealer in the business.Investors get capital gain treatment, dealers don’t. Conversely,if you’re incurring legal, brokerage and other expenses, youwant to be in business. Unlike business expense deductions,

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investment expense deductions are limited, subject topercentage limitations and to alternative minimum tax.

You may face even bigger stakes on losses. If you haveinvestment losses, they only offset investment gains, plus$3,000 per year of ordinary income. Business losses areunlimited.

A good recent example of this classic dichotomy involvedwannabe day trader, Richard Kay, Jr. The Tax Courtconsidered whether he was in business or a mere investor.Whether investment activities can be elevated to carrying ona trade or business depends on the person’s intent, the natureof the income, and the frequency, extent, and regularity of thetransactions.

Ruling for the IRS, the court held Richard Kay was only aninvestor so most of his losses and expenses were disallowed.Kay manufactured and distributed ball bearings. He was thesole shareholder, officer, and director and received wagesfrom his company. He also traded securities, trading 73 daysand 313 transactions in 2000; 18 days and 72 transactionsin 2001; and 21 days and 84 transactions in 2002.

His tax return claimed his principal business as “day trade,”and he claimed $1,960,060 in stock losses and $92,577 inexpenses for 2000; $399,162 in stock losses and $578 inexpenses for 2001, along with a $1,396,943 net operatingloss (NOL) carried over from 2000; and $262,921 in stocklosses and $15,376 in expenses for 2002, along with the same$1,396,943 NOL carried over from 2000.

The IRS disallowed Kay’s deductions for ordinary lossesbeyond the $3,000 limit for his trading activities. The Tax Courtagreed with the IRS that Kay was not a trader. To be a trader,the court said:

1. The activity must be substantial (frequent, regular, andcontinuous); and

2. The person must seek to catch swings in daily marketmovements and to profit from these short-term changesrather than to profit from the long-term holding ofinvestments.

Result: Kay didn’t meet either of these conditions. Kay’strading losses were capital, not ordinary. As such, they werelimited to a $3,000 a year. Furthermore, Kay wasn’t entitledto carry forward the NOL generated in 2000. Even theexpenses relating to his trading activity were not deductibleas business expenses. Ouch.

A Look At the W orld’ s New Corporate T axHavens

American companies are finding new overseas tax havensto legally protect some of their profits from the U.S. tax rate of35 percent, among the highest in the world. Lesley Stahlreports.

Our government is in knots over ways to lower the federalbudget deficit. Well, what if we told you we found a pot ofmoney - over $60 billion a year - that could be used to helpout?

That bundle is tax money not coming in to the IRS fromAmerican corporations. One major way they avoid paying thetax man is by parking their profits overseas. They’ll tell youthey’re forced to do that because the corporate 35 percenttax rate is high in relation to other countries, and indeed itseems the tax code actually encourages companies to movebusinesses out of the country.

Companies searching out tax havens is nothing new. In the80s and 90s, there was an exodus to Bermuda and theCayman Islands, where there are no taxes at all.

When President Obama threatened to clamp down on taxdodging, many companies decided to leave the Caribbean,but as we first told you in March, instead of coming backhome, they went to safer havens like Switzerland.

Several of these companies came to a small, quaint medievaltown in Switzerland called Zug.

Hans Marti, who heads Zug’s economic development office,showed off the nearby snow-covered mountains. But Zug’smain selling point isn’t a view of the Alps: he told Lesley Stahlthe taxes are somewhere between 15 and 16 percent.

“And in the United States it’s 35 percent,” Stahl pointed out.

“I know. It’s half price,” Marti said.

Marti told Stahl that Zug most probably has the lowest taxrates in Switzerland.

“So you’re kind of a tax haven within a tax haven?” sheremarked.

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“Maybe, yes,” he acknowledged.

The population of the town of Zug is 26,000; the number ofcompanies in the area is 30,000 and growing at an averagerate of 800 a year. But many are no more than mailboxes.

Texas Democratic Congressman Lloyd Doggett questionswhether the recent moves of several companies are legit. “Agood example is one of my Texas companies that’s been inthe news lately, Transocean,” Rep. Doggett told Stahl.

Transocean owned the drilling rig involved in the giant BP oilspill. They moved to Zug two years ago.

“I’m not sure they even moved that much. They have about1,300 employees still in the Houston area. They have 12 or13 in Switzerland,” Doggett told Stahl.

“And yet they claim that they’re headquartered over there,”Stahl remarked.

“They claim they’re Swiss. And they claim they’re Swiss fortax purposes. And by doing that, by renouncing their Americancitizenship, they’ve saved about $2 billion in taxes,” Doggettexplained.

Stahl and “60 Minutes” decided to visit their operations inZug.

A woman at the door told Stahl, “At the moment my boss isnot here.”

She said her boss wasn’t there and we should call someonehalfway around the world, in Houston.

“But this is the headquarters,” Stahl remarked.

“I know,” the woman said.

When asked if the CEO was there or is normally at the Zugoffice, the woman said “No.”

Remarriage Causes Port ability Problemsunder Est ate Tax Exemption

The Tax Relief, Unemployment Insurance Reauthorization, andJob Creation Act of 2010 introduced the concept of portabilityof the estate tax exemption for the first time, but that newbenefit may have a hitch, John Olivieri a partner with White &Case in New York, told BNA July 25.

Portability allows a surviving spouse’s estate to use the portionof the estate tax exemption that was not used upon the deathof the first spouse.

However if the surviving spouse eventually remarries, theability to use the deceased spouse’s exemption may be lost.

“The complication arises because you can only use theexemption of the last spouse you survived,” Olivieri said. “Asa result, this provision will cause some wealthy widows andwidowers to think twice before remarrying.”

Remarriage could either increase or decrease the amount ofexemption available to the surviving spouse, depending onthe circumstances, he said.

For instance if a husband dies without using his $5 millionexemption, his wife potentially has a $10 million exemption.

However if the wife remarries someone who has already usedup all of their exemption by giving $5 million to his children,the wife would lose the $5 million exemption she should havegotten from the first husband if she outlives the secondhusband.

On the other hand, if the first husband uses his exemptionduring his life, his wife will be limited to a $5 million exemption.But if she later marries someone else who does not use hisexemption (because he has modest assets, for example),then she could have a $10 million exemption.

Olivieri acknowledged that the law fixed the problem ofcarrying over exemptions for 99 percent of the people, butsaid its outcome is highly dependent on who dies first.

Some attorneys are not assuming they can rely on theportability provision because it is expiring at the end of 2012.

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Julie Kwon, a partner in McDermott Will & Emery’s SiliconValley office told BNA July 27 that IRS is probably studyingthe issue but is not likely to devote a lot of time and energy toit because portability is scheduled to expire in a year and ahalf.

In addition, Kwon said the people who are relying onportability are the moderately affluent. “Really wealthy clientshave sophisticated planners who are relying on properformulas, proper divisions and allocations of their client’sproperty, when drafting their plans, rather than the defaultportability rule,” she said.

Olivieri said that clients may still need to title assets separatelyand have a credit shelter or by pass trust in the will of the firstspouse to die.

The only disadvantage to a trust is that the income tax basisof trust assets will not be stepped up to fair market value whenthe surviving spouse dies, Olivieri said.

Tax Prep arers Kept Fees S table Last T axSeason

The average fee for preparing an itemized federal and stateindividual tax return was $233 during the 2011 tax season,only a 1.7 percent increase over 2009.

However, fees for non-itemized returns declined slightly,according to a survey released by the National Society ofAccountants of nearly 8,000 tax preparers across the country.The average cost to prepare a Form 1040 and state returnwithout itemized deductions was $128, a 0.8 percent declinefrom 2009.

Accountants kept their fees largely the same, the NSAconcluded, as their clients went through a difficult economictime.

The survey also measured data about accounting operations.The NSA found that 59.9 percent of accountants’ gross incomein 2010 was generated by preparing federal and state taxreturns. Other significant sources of gross income includedwrite-up work (18.1 percent), payroll preparation (7.2 percent)and tax services (5.1 percent).

Credentials are very important, the NSA noted, and manyaccountants hold multiple credentials: 45.1 percent areenrolled agents, 26.8 percent are accredited tax preparers,24.7 percent are CPAs, 21.7 percent are accredited taxadvisors, and 14.5 percent are accredited business advisors.

“The results show that the accounting profession is alive andwell, serving the increasing needs of individuals andbusinesses faced with an increasingly complex Tax Code,”said NSA executive vice president John Ams in a statement.“It also demonstrates that accountants are very committed toprofessional development and earning the credentials thatdemonstrate their proficiency to clients.”

About 35.3 percent of practices are sole proprietors, while27.5 percent of practices are S-corporations, while 22.9percent of practices are structured as limited liabilitycompanies. Only 7.6 percent are C-corporations, 5.2 percentare professional corporations, and 1.4 percent of practicesare structured as partnerships.

The typical practice, on average, operates as a soleproprietorship, had an annual gross practice income and anet income of $85,247 in 2010, has four full-time employees,two part-time employees, and two seasonal employees.Those that are partnerships typically have three full-timeprincipals or partners, on average.

The typical practice processes an average of 154 non-itemized 1040s annually, and 274 itemized Schedule A 1040sannually. It receive 60 percent of gross income on averagefrom the preparation of federal/state tax returns, charges anhourly fee of $135 to represent clients before the IRS, andhas not seen an increase over the past year in audits.

The typical practice, according to the survey, uses personalinterviews to collect data from clients, is 41 percent paperless,has salaries and benefits (other than retirement) thatrepresent 41 percent of total expenses, and allocates 10percent of its annual expenses toward technology needs,including hardware, software, licensing fees and Internetconnections.

Year-end planning: T ake Advant age ofBusiness Provisions that May Sunset forGood on December 31, 201 1

Although it’s only August, taxpayers are well-advised toconsider how to make the most of tax breaks that areavailable this year but may not be around next year, or maysurvive only in diluted form. Given the wrenching politicalbattle that played out in July over deficits and the debtceiling, many tax provisions expiring at the end of this yearmay not be given another lease on life. Those provisionsthat aid a particular industry or group of taxpayers could bethe most at risk.

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The research credit only applies for amounts paid or accruedbefore Jan. 1, 2012. ( Code Sec. 41(h)(1) ) In general, theresearch credit equals the sum of: (1) 20% of the excess (ifany) of the qualified research expenses for the tax year overa base amount, (unless the taxpayer elected an alternativesimplified research credit); (2) the university basic researchcredit (i.e., 20% of the basic research payments); (3) 20% ofthe taxpayer’s expenditures on qualified energy researchundertaken by an energy research consortium.

The WOTC allows employers who hire members of certaintargeted groups to get a credit against income tax of apercentage of first-year wages up to $6,000 per employee($12,000 for qualified veterans; and $3,000 for qualifiedsummer youth employees). Where the employee is a long-term family assistance (LTFA) recipient, the WOTC is apercentage of first and second year wages, up to $10,000per employee. Generally, the percentage of qualifying wagesis 40% of first-year wages; it’s 25% for employees who havecompleted at least 120 hours, but less than 400 hours ofservice for the employer. For LTFA recipients, it includes anadditional 50% of qualified second-year wages. The term“wages” for WOTC purposes doesn’t include any amount paidor incurred for an individual who begins work after Dec. 31,2011. ( Code Sec. 51(c)(4) )

Under Code Sec. 45D, a taxpayer who holds a qualifiedequity investment in a qualified community development entity(CDE) may be entitled to a NMTC. The credit is 39% of thequalified equity investment during a 7-year credit period. Theinvestor may claim 5% in each of the first 3 years and 6% ineach of the final 4 years. There is a national, annual limitationon the amount designated under Code Sec. 45D. Undercurrent law, the last NMTC dollar limitation is for 2011. ( CodeSec. 45D(f)(1) )

Under Code Sec. 45P, eligible small business employers thatpay differential wages can claim a credit equal to 20% of upto $20,000 of differential pay made to an employee duringthe tax year. Differential wages are payments to employeesfor periods that they are called to active duty with the U.S.uniformed services (for more than 30 days) that represent allor part of the wages that they would have otherwise receivedfrom the employer. An eligible small business employer isone that: (1) employed on average less than 50 employeeson business days during the tax year; and (2) under a writtenplan, provides eligible differential wage payments to each ofits qualified employees. A qualified employee is one who hasbeen an employee for the 91-day period immediatelyproceeding the period for which any differential wage paymentis made. This credit won’t be available for differential wagespaid after Dec. 31, 2011. ( Code Sec. 45P(f) )

An eligible contractor can claim a credit of $2,000 or $1,000for each qualified new energy efficient home either constructedby the contractor or acquired by a person from the contractorfor use as a residence during the tax year. The credit won’tapply to homes acquired after Dec. 31, 2011. ( Code Sec.45L(g) )

The 100% bonus depreciation allowance applies only forqualified property acquired and placed in service after Sept.8, 2010 and before Jan. 1, 2012 (placed in service beforeJan. 1, 2013 for certain aircraft and long-production-periodproperty). For qualified property acquired and placed inservice after Dec. 31, 2011 and before Jan. 1, 2013 (placedin service after Dec. 31, 2012 and before Jan. 1, 2014 forcertain aircraft and long-production-period property), a 50%bonus depreciation allowance will apply. ( Code Sec.168(k)(1) , Code Sec. 168(k)(5) )

The maximum amount that may be expensed under CodeSec. 179 for tax years beginning in 2010 or 2011 is $500,000.For tax years beginning in 2012, the maximum amount willbe $125,000 (indexed for inflation with 2006 as the baseyear). For tax years beginning in 2010 and 2011, the maximumannual expensing amount generally is reduced dollar-for-dollarby the amount of section 179 property placed in service duringthe tax year in excess of $2,000,000 (the investment ceiling).For tax years beginning in 2012, the investment ceiling willbe $500,000 (indexed for inflation with 2006 as the baseyear). ( Code Sec. 179(b) )

Additionally, if placed in service in a tax year beginning in2010 or 2011, up to $250,000 per year of qualified realproperty is eligible for Code Sec. 179 expensing. ( CodeSec. 179(f)(1) , Code Sec. 179(f)(3) ) Qualified real propertyis one of the following types of property: (1) qualified leaseholdimprovement property, (2) qualified restaurant property or (3)qualified retail improvement property. ( Code Sec. 179(f)(2) )

Qualified leasehold improvement property, qualifiedrestaurant property and qualified retail improvement propertyplaced in service after Dec. 31, 2011, will no longer be eligiblefor a 15-year depreciation write-off under MACRS. ( CodeSec. 168(e)(3)(E)(iv) , Code Sec. 168(e)(3)(E)(v) , and CodeSec. 168(e)(3)(E)(ix) ) Instead, such property will have to bedepreciated over 39 years.

The following enhanced charitable contribution rules will notapply to contributions made after Dec. 31, 2011:

... C corporation’s enhanced charitable contributiondeduction equal to the lesser of (a) basis plus half ofthe property’s appreciation, or (b) twice the property’sbasis, for contributions of food inventory that is

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apparently wholesome food, i.e., meant for humanconsumption and meeting certain quality and labelingstandards. The enhanced contribution is also availablefor a taxpayer other than a C corporation, but theaggregate amount of contributions of apparentlywholesome food that may be taken into account forthe tax year can’t exceed 10% of the taxpayer’saggregate net income for that tax year from all tradesor businesses from which those contributions weremade for that tax year. ( Code Sec. 170(e)(3)(C)(iv) )

... C corporation’s enhanced charitable contributiondeduction equal to the lesser of (a) basis plus half ofthe property’s appreciation, or (b) twice the property’sbasis, for qualified contributions of book inventory tocertain public schools if certain donee certificationrequirements are met. ( Code Sec. 170(e)(3)(D)(iv) )

... C corporation’s enhanced charitable contributiondeduction equal to the lesser of (a) basis plus half ofthe property’s appreciation, or (b) twice the property’sbasis, for certain contributions of computer technologyor equipment (software, computer or peripheralequipment, and fiber optic cable) to schools or librariesfor use in the U.S. for educational purposes that arerelated to the donee’s purpose or function. ( Code Sec.170(e)(6)(G) )

A temporary tax incentive to encourage S corporations tomake charitable donations of appreciated assets is availablefor contributions made in tax years beginning before Jan. 1,2012 ( Code Sec. 1367(a)(2) ) Generally, an S corporation’scharitable contribution of property provides its shareholderswith a fair market value (FMV) deduction for gifts of property.In association with the charitable gift, shareholders mustreduce their basis of shares in the corporation. Under thetemporary incentive, shareholders reduce their basis in thestock of the S corporation by their pro rata share of theadjusted basis of the contributed property, rather than by theFMV of the charitable contribution that flows through to theshareholder. The lower basis reduction results in aproportionately larger gain when the stock is later sold by theshareholder. Thus, the shareholder benefits by having thatreduction determined by the basis of the property (which is asmaller amount) rather than its FMV (a larger amount). Forexample, if in 2011 an S corporation with one individualshareholder makes a charitable contribution of stock with abasis of $100 and a FMV of $500, the shareholder is treatedas having made a $500 charitable contribution and reducesthe basis of his S corporation stock by $100. If the Scorporation makes the contribution in tax years beginningafter 2011, the shareholder will be treated as having made a$500 charitable contribution and will reduce the basis of hisS corporation stock by $500.

Taxpayers may elect to expense production costs of qualifiedfilm and television (TV) productions in the U.S., but only for

productions commencing before Jan. 1, 2012. ( Code Sec.181(f) ) Expensing doesn’t apply to the part of the cost of anyqualifying film or TV production that exceeded $15 million foreach qualifying production. The limit is $20 million ifproduction expenses are “significantly incurred” in certain low-income communities or isolated areas of distress.

Taxpayers may elect to treat qualified environmentalremediation expenses that would otherwise be chargeableto a capital account as deductible in the year paid or incurred,but only if the expenses are paid or incurred before Jan. 1,2012. ( Code Sec. 198(h) ) To be deductible currently, pre-2012 expenses must be paid or incurred in connection withthe abatement or control of hazardous substances (includingpetroleum products) at a qualified contaminated site.

The Code Sec. 199 domestic production activities deductionis available only if, among other conditions, the taxpayer hasdomestic production gross receipts (DPGR) from: (1) anysale, exchange or other disposition, or any lease, rental orlicense, of qualifying production property manufactured,produced, grown or extracted by the taxpayer in whole or insignificant part within the U.S.; (2) any sale, exchange, etc.,of qualified films produced by the taxpayer; (3) any sale,exchange or other disposition of electricity, natural gas, orpotable water produced by the taxpayer in the U.S.; (4)construction activities performed in the U.S.; or (5) engineeringor architectural services performed in the U.S. for constructionprojects located in the U.S. For a taxpayer’s first six tax yearsbeginning after 2005 and before Jan. 1, 2012, Puerto Rico isincluded in the term “U.S.”in determining DPGR, but only if allof the taxpayer’s Puerto Rico-sourced gross receipts aretaxable under the federal income tax for individuals orcorporations. ( Code Sec. 199(d)(8)(C) )

The designation of an economically depressed census tractas an “Empowerment Zone” makes businesses and individualresidents within such a Zone eligible for special tax incentives,including: the 20% wage credit under Code Sec. 1396 ;liberalized Code Sec. 179 expensing rules ($35,000 extraexpensing and the break allowing only 50% of expensingeligible property to be counted for purposes of the investment-based phaseout of expensing); tax-exempt bond financingunder Code Sec. 1394 ; and deferral under Code Sec. 1397Bof capital gains tax on sale of qualified assets sold andreplaced. Empowerment Zone designations expire on Dec.31, 2011. ( Code Sec. 1391(d) )

Miscellaneous Provisions Expiring on Dec. 31, 2011:

· The 7-year straight line cost recovery period formotorsports entertainment complexes won’t apply forproperty placed in service after Dec. 31, 2011. ( CodeSec. 168(i)(15)(D) )

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· The Indian employment credit only applies for tax yearsbeginning before Jan. 1, 2012. ( Code Sec. 45A(f) )

· The railroad track maintenance credit applies through2011. ( Code Sec. 45G(f) )

· The mine rescue team training credit applies through2011. ( Code Sec. 45N(e) )

· For tax years beginning after Dec. 31, 2008, and beforeJan. 1, 2012, the 100%-of-taxable-income limitation ofpercentage depletion for oil and gas from marginal wellsapplicable to independent producers and royalty holdersowning interests in marginal wells is suspended. For taxyears beginning on or after Jan. 1, 2012, the 100% ofthe taxable income limit returns for marginal wells. ( CodeSec. 613A(c)(6)(H) )

· A taxpayer may claim a 30% credit for the cost ofinstalling qualified alternative vehicle refueling propertyfor use in the taxpayer’s trade or business (up to $30,000maximum per year per location) or installed at thetaxpayer’s principal residence (up to $1,000 per yearper location). This credit won’t apply to property (exceptfor hydrogen refueling property) placed in service afterDec. 31, 2011. ( Code Sec. 30C(g)(2) )

· Under the energy efficient appliance credit, forappliances produced in 2011, and depending on theirspecifications, manufacturers can claim a (i) $25, $50,or $75 credit for each qualifying dishwasher; (ii) $175 or$225 credit for each qualifying clothes washer; (iii) $150or $200 credit for each qualifying refrigerator. ( CodeSec. 45M )

· The designation of the District of Columbia EnterpriseZone (DC Zone) under Code Sec. 1400(f) appliesthrough Dec. 31, 2011. ( Code Sec. 1400(f) ) Thisdesignation renders businesses and individual residentswithin the Zone eligible for special tax incentives,including additional expensing under Code Sec. 179 anda 20% wage credit under Code Sec. 1396 for eligibleDC Zone employers.

· Accelerated depreciation for qualified Indianreservation property applies for property placed inservice through 2011. ( Code Sec. 168(j) )

· The election to expense 50% of the cost of advancedmine safety equipment applies through 2011. ( CodeSec. 179E(g) )

· The increase in the limit on cover over of rum excisetaxes to Puerto Rico and the Virgin Islands appliesthrough 2011. ( Code Sec. 7652(f) )

· The American Samoa economic development creditapplies for the first six tax years of a taxpayer beginningafter Dec. 31, 2005 and before Jan. 1, 2012. (Sec. 119of P.L. 109-432, as amended by Sec. 756 of P.L. 111-312 ).

People in the T ax News

Judge Removed from Case InvolvingDeutch

The Sacramento Superior Court judge presiding over a caseagainst tax attorney Roni Lynn Deutch, her brother and otherdefendants has been removed from the case.

Roseville attorney Cara O’Neill filed a rare motion - known asa peremptory challenge - to disqualify Judge ShelleyanneW.L. Chang from hearing the case, accusing the judge of biasagainst her clients.

O’Neill is counsel for Deutch’s step-brother Scott Juceam andhis business partner Robert Forsythe of tax preparation firmJuceam Group, and Gregory Flahive, owner of Sacramentotax law firm Prestige Law Corp. Juceam, Forsythe and Flahivewere named as co-defendants in the state’s expanding caseagainst Deutch in a July 8 filing.

The motion is “a serious option rarely used,” said PhilipCarrizosa, a spokesman at the Administrative Office of theCourts in San Francisco “It’s a risky thing to do. You’re tellingthe judge, ‘I don’t think you’re fair.’ A judge doesn’t like to hearthat.”

The motion was granted July 19. Superior Court Judge DavidBrown is now presiding over the case.

The complaint accused Deutch of violating court orders byfraudulently transferring several thousand sales leads to thetrio, diverting money that the state contends should have goneto pay back clients.

UMDNJ Professor Admit s He Hid More Than$2.5M From The IRS in Swiss Bank Account s

As associate director of the Cancer Institute of New Jerseyand former director of its breast cancer research, MichaelReiss is well known for his work in the field of cancer therapy.

But in the criminal justice system, the Princeton resident isnow known as a “tax cheat,” federal officials said.

Reiss, 60, pleaded guilty today in federal court in Manhattanto hiding more than $2.5 million from the Internal RevenueService in various Swiss bank accounts, authorities said.

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Reiss, a professor of internal medicine at the University ofMedicine and Dentistry of New Jersey-Robert Wood JohnsonMedical School, admitted that over a 10-year period heknowingly failed to report any of his Swiss accounts asrequired under federal law, according to the U.S. Attorney’sOffice in New York.

Reiss faces up to five years in prison and, under the terms ofhis plea deal, must pay $400,000 in back taxes and a penaltyof more than $1.2 million.

“As our prosecutions of tax cheats like Michael Reiss shouldmake abundantly clear, failing to report assets overseas tocircumvent the law and avoid paying taxes is a crime,”Manhattan U.S. Attorney Preet Bharara said in a statement.“The people who engage in this conduct are among the moreprivileged in our society, but they are not above the law.”

Reiss’ attorney, Paula Junghans, did not return a call forcomment.

In a statement, UMDNJ spokesman Jeff Tolvin said it appears“the allegations do not involve university or state monies. Weare doing everything we can to determine if that is in fact thecase.”

To hide his money, Reiss admitted he used the services ofSwiss financial adviser Beda Singenberger, who was indictedlast month on charges of conspiring with 60 American clientsto stash more than $184 million at various Swiss banks. Andon Thursday, former UBS banker Gian Gisler was indictedfor conspiring to help at least 38 American clients use Swissbanks to hide more than $215 million from the IRS.

Included in that list of clients is an unnamed New Jersey couple— unconnected to Reiss — who allegedly held UBS accountsfor three decades.

Reiss’ guilty plea is the seventh secured by the U.S. Attorney’sOffice alleging undeclared Swiss accounts. Since 2009, morethan 19,000 U.S. taxpayers have avoided prosecution bydisclosing their accounts to the IRS. In doing so, taxpayershad to identify their offshore accounts, bankers and advisers,as well as how they moved their money. More than 200taxpayers have been questioned by prosecutors building newcases.

CEOs Say Yes to Congress on Removing T axBreaks

The CEO of Wal-Mart Stores Inc. and other major U.S.employers told Congress they would be willing to give up taxbreaks that benefit their companies in return for a steep dropin the country’s 35 percent corporate tax rate.

Companies, including big companies, pay a much loweroverall effective rate by exploiting tax breaks, usually inperfectly legal ways, that in 2011 are costing the governmentabout $102 billion in lost revenue.

“We do believe comprehensive reform means willingness toput everything on the table,” Wal-Mart CEO Mike Duke toldthe Senate Finance Committee. Without lower corporate taxrates, Duke and the other panelists said, U.S. companiesare at a competitive disadvantage both at home and abroad.

Now, amid increasingly frantic debt ceiling negotiations,President Barack Obama and lawmakers are talking aboutagreeing to tackle tax reform in 2012, but analysts areskeptical that this could be before elections in November2012.

Though the hearing was billed as focusing on how the taxcode affects hiring, businesses and economic growth, therewere no specific numbers on how many jobs a lower tax ratewould help to create.

Also missing: any concrete discussion of how a tax break onmultinational repatriation of foreign profits — favored bybusiness — could be structured to ensure that money is laterinvested in more U.S. jobs. A prior tax holiday was later provento have created few, if any, new jobs.

The discussion focused instead on what the tax rate shouldbe and what companies might give up to get there.

All four CEOS agreed the rate should come down, thoughhow far was the topic of some disagreement as was thequestion of which incentives — assailed by critics as breaksor loopholes — might be removed from the tax code.

Wal-Mart’s Duke suggested a 25 percent rate would be agood figure, but Gregory Lang, CEO of semiconductormanufacturer PMC-Sierra Inc, said to compete with his Asianrivals the rate would have to be far lower — 15 percent to 17

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percent. Lang also stopped short of saying he would be willingto give up the research and development tax credit.

Last year, the number of jobs at PMC-Sierra grew by 20percent but only 15 percent of the new positions were in theUnited States. A third were added in Canada, where heemphasized that the research credit is quite generous. PMC-Sierra’s tax rate is significantly below the statutory rate dueto income earned overseas in lower taxed regions and othertax shields. Last year the company paid 27 percent.

Many companies that have most effectively lowered their taxesand benefit the most from the current system, includingGeneral Electric Co and Exxon Mobil Corp, were not on thepanel. Kimberly-Clark’s rate is over 30 percent.

Duke testified that Wal-Mart, as the country’s largest privateemployer, paid $4.7 billion in corporate taxes in 2010, 3percent of all corporate income taxes collected by the U.S.Treasury, an effective tax rate of 32.2 percent. “Manycompanies that testify before you theoretically face similartax rates; we actually pay them,” he said.

CVS Caremark paid the full 35 percent last year, said CEOLarry Merlo, because the company operates only in the UnitedStates and is in an industry with no significant tax breaks. Hesees a lowering of the rate as a way for CVS to bettercompete with companies from outside the United Statesexpanding their U.S. presence including Dutch grocer Ahold.

The group’s overall position was largely in step with what theU.S. Chamber of Commerce has promoted since March,including the lower overall tax rate and elimination of taxbreaks that benefit one industry over another.

Tom Falk, CEO of diaper maker Kimberly-Clark Corp, urgedaction. “Our nation is facing a crisis, and in a crisis you candrive a lot of change. I would urge you to be bold,” Falk said,“and get some things done that couldn’t be done in ordinarytime.”

Falk said he would readily give up the manufacturing andresearch and development credits, and others his companyuses, in exchange for a 22 percent or 23 percent federal taxrate.

Agreement on a corporate tax overhaul seemed unanimous,with Senator Orrin Hatch, the top Republican on thecommittee, calling the current tax system “antiquated.” Thehearing, however, provided few details on how that will getdone.

Jackson Hewitt Bankruptcy Plan Get s Court’ sOK

Parsippany-based Jackson Hewitt Tax Service Inc.announced Tuesday that a U.S. Bankruptcy Court inDelaware has approved its reorganization plan followingthe company’s Chapter 11 bankruptcy filing on May 24.

Under the plan, Jackson Hewitt will emerge frombankruptcy as a private company. Its majority owner will beBayside Capital, an affiliate of Miami-based HIG Capital,the largest holder of secured Jackson Hewitt debt prior tothe restructuring.

Two-thirds of the company’s term debt was forgiven inexchange for post-emergence common equity. Pre-emergence common stock will be extinguished, thecompany said.

Edward B. Deutsch, managing partner at the Morristownlaw firm of McElroy, Deutsch, Mulvaney & Carpenter LLP,said the restructuring plan is similar to other recentcorporate bankruptcies.

“This reorganization is typical of the recent trend incorporate restructurings, for large pre-petition stakeholdersof a troubled company exchanging their debt positions forcontrolling interests in the restructured enterprise,” Deutschsaid.

David G. Weselcouch, vice president of treasury andinvestor relations at Jackson Hewitt, said he expects theclosing conditions attached to the deal to be completedwithin the next several days. Asked whether the company’sfootprint would change in the wake of the deal, he said thecompany won’t finalize its number of locations for theupcoming tax season until the fall, since he said thecompany is always looking to “optimize” its footprint byadding new locations or closing locations in sub-standardreal estate.

Weselcouch said the timing of the restructuring planworked in the company’s favor, and the reorganizationwon’t affect the company’s preparations for the 2012 taxseason.

In a statement announcing the court’s confirmation of theplan, Jackson Hewitt President and CEO Philip H. Sanfordsounded an optimistic note, saying the company is poisedto emerge from bankruptcy “highly energized and financiallyhealthy.”

Sanford noted the company saw a 3 percent increase inthe number of tax returns it prepared in 2011. The companysaid it was the first growth in tax return preparation in fiveyears. The company also saw increased revenues lastyear.

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One reason for that growth has been the firm’s relationshipwith Walmart. Jackson Hewitt has tax prep kiosks in morethan 2,000 Walmart stores, and Sanford said he hopes tofurther expand the relationship.

“Our clients, franchisees, employees and business partnerscan be confident in our future,” he said. “We move forwardwith a strong balance sheet, a fully funded business plan, aseasoned and stable management team, and the ability tomake investments that will better position us to competeand win in the marketplace.”

Escort Service Manager Serving PrisonTime for T ax Evasion Loses Appeal

The former office manager of Salt Lake City-based escortservice Companions on Friday lost her bid to have her three-year prison sentence for tax evasion overturned by the 10thCircuit Court of Appeals in Denver.

Jodi Hoskins, 35, was sentenced to three years in federalprison by U.S. District Judge Dee Benson in July 2010 andordered to pay about $736,000 in restitution for failing to paytaxes. Hoskins worked as a “phone girl” at Companions,booking escorts for private sessions and bachelor parties.

At a January 2010 bench trial, Benson ruled Hoskins under-reported the gross receipts for the business owned by herand her husband, Roy B. Hoskins, 38, on her 2002 individualincome tax return.

Jodi Hoskins claimed on appeal there was insufficientevidence to support her conviction. She claimed when shesigned her 2002 tax return, she didn’t understand the legalconsequences of under-reporting income.

The appeals court rejected the claim. Hoskins will serve therest of her prison sentence in Dublin, Calif., before she isreleased in August 2012.

Benson in May 2010 sentenced Roy Hoskins to 60 months inprison incarceration after he pleaded guilty to tax evasion.Benson ordered him to pay $817,895 in restitution. Theappeals court also rejected a claim from Roy Hoskins to havehis sentence overturned. He is housed in a federal prison innorthern California and is scheduled for release in May 2014.

The City of Philadelphia Goes After AnotherSmall Target

Perhaps perceiving Pulitzer as a synonym for jackpot, theCity of Philadelphia recently sent prize-winning poet StephenDunn a bill for more than $10,000.

“I had no idea what they were talking about,” said Dunn, 72, asemiretired distinguished professor at Richard StocktonCollege of New Jersey, where he has taught for 37 years.

In 2007, Dunn, whose latest, Here and Now, is his 16th volumeof poetry, gave a reading at St. Joseph’s University. The eventwas free and open to the public; he was paid $2,200.

Four years later, the poet was unpleasantly reminded of thatspring evening of verse by a code-enforcement complaint fornonpayment of business-privilege taxes from 2003 through2007, plus fines.

A cool $10,037. Payable now.

Dunn was dumbfounded by the “idiocy” of fines for notreporting work he didn’t do, during years when he wasn’t“doing anything in the city” at all.

Nevertheless, he and an accountant got busy trying to resolvethe matter.

“I don’t get a sense of malice,” Dunn said. “I do get a sense ofbureaucratic craziness.”

Daniel Cantu-Hertzler, chair of the Philadelphia LawDepartment’s corporate and tax group, declined to commenton the case.

But he pointed out that the code requires anyone who doesbusiness in the city - including nonresidents - to obtain abusiness-privilege license and pay taxes on the revenue andnet income.

But how could a $2,200 paycheck generate such agargantuan obligation?

“The purpose of the fines is to compel people to file returnsand pay any taxes due,” Cantu-Hertzler said. “If people paywhen they are billed or respond when they are sued, andremove the need for hefty fines, then it’s generally possible tosettle for substantially less.”

Dunn, whose Different Hours won the 2001 Pulitzer for poetry,summarized his efforts to satisfy the city in a May 30 letter toPatricia R. McDermott, deputy administrator of PhiladelphiaMunicipal Court.He provided his tax records to the Revenue Collection BureauInc., a private bill-collection agency for the city, whichdetermined the poet was liable for $113 in business-privilegetaxes.

The poet said he “reluctantly paid” an initial $58; anotherpayment was due June 6. That was to cover matters includinga $50 licensing fee, which Revenue Collection apparently waswilling to reduce to $15.

Dunn, a veteran of hundreds of readings across America,said he had never before encountered a requirement to obtainwhat amounts to a poetic license.

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“It’s absurd,” he said.

Harriet Goodheart, vice president of communications at St.Joe’s, said she was unaware of other poets being sought fornonpayment of Philadelphia taxes - although she noted thatpart of St. Joe’s campus is in Lower Merion.

So if Dunn had spoken on the other side of City Avenue, allwould have been forgiven?

Added Goodheart: “We will pursue having a discussion withthe city to find some way to resolve this.”

Meanwhile, officials at other cultural institutions in Philadelphiaalso seemed surprised that city regulations would cover avisiting bard.Dunn sees it as an unwelcome mat, economically andotherwise.

“This is so discouraging to anyone who would want to cometo Philadelphia,” said the poet, whose work I’ve admired eversince I took his class at Syracuse University in 1973.

So exemplary were his teachings, in fact, that I came tounderstand I might best serve the world of letters by reading,rather than writing, poetry.

When I asked Dunn whether he believed the matter could beresolved, he said he hoped so.

But “on principle,” he did not make the license payment. Nordid he appear in Municipal Court on July 5 as scheduled.

That explains the notice he has since received of a defaultjudgment against him for the entire $10,073, payable to thefolks over at Revenue Collection.

McDermott, who, like the half-dozen other Philadelphiaemployees I spoke to, was polite and helpful, said she had“flagged [Dunn’s case] to go before a judge” for a review.

“It should have gone right to a judge for a determination,” shesaid. The default was entered “because the defendant didn’tshow.”

A former Atlantic County resident who now lives some fivehours from Philadelphia in western Maryland, Dunn said hehad gotten nothing but a form letter in return for his letter.

“I’m not a scofflaw, or someone who goes around trying todefraud cities,” he said.

I wouldn’t think so.

Nor would I think Philadelphia has an interest in penalizingpoetry.

Feds Say Mansion Housed T ax Scam

Twin Cities developer Jeffrey Wirth, known for creating largehotel water parks and for turning the old Minneapolis AthleticClub into a luxury hotel, had at least one project he neverfinished: his mega-mansion, a tile-roofed villa that hasbecome a weedy eyesore on Lake Minnetonka.

Now, federal prosecutors say the unfinished albatross wasthe focus of a deliberate effort to siphon millions from Wirth’scompanies in a multi-year scheme to dodge taxes.

Wirth, his former wife, Holly C. Damiani, and their tax preparer,Michael J. Murry, were indicted Thursday, charged with tax-evasion conspiracy. Wirth and Damiani were also chargedwith filing false tax returns, and Murry was charged withprocuring false tax returns.

The tax scheme ran from around early 2003 to early 2010,costing the Internal Revenue Service “millions of dollars,”according to the indictment.

Wirth heads the Wirth Cos., a real estate company in BrooklynCenter. He developed the Waterpark of America near the Mallof America and the Grand Rios Hotel and Waterpark inBrooklyn Park, which have since been sold, and owns andmanages other buildings, including offices, apartments andhotels.

Reached on his cellphone, Wirth said, “I just don’t have anycomment.”

Lawyers for both Damiani and Murry said their clients denythe charges and intend to fight them. Wirth’s lawyer, ChrisMadel at Robins Kaplan Miller & Ciresi, could not immediatelybe reached for comment.

In recent years, Wirth has seen several properties go back tolenders or be put on the market. Last year the luxury GrandHotel Minneapolis in downtown Minneapolis, which Wirth

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spent tens of millions of dollars renovating, went back to thelender in a deed in lieu of foreclosure. It was later sold.

The house the Wirths were building on Lake Minnetonka hasbeen on the market since June 2010, the price slashed from$5.9 million to $3.95 million.

According to the indictment, Wirth and the others funneledmore than $2 million from Wirth’s companies to buy the landand build the mansion, and didn’t report the money as incomeon either personal or business tax returns.

The abandoned villa, with its tile roof and arching doorways,sits on a private island connected to the mainland by a bridgein St. Albans Bay.

A Coldwell Banker listing describes the house at 5560 MapleHeights Road in Greenwood as nearly 19,000 square feetwith six bathrooms and seven fireplaces. Work on the housestopped around 2006, and it became a local eyesore. Thecity has gotten a lot of phone calls complaining about thesituation, said City Clerk Gus Karpas.

Karpas said Greenwood passed an ordinance in Januaryrequiring the exterior finishes of buildings to be completedwithin six months of a permit being issued, and Wirth wasgiven until July 19 to finish the exterior.

“They did put some siding on it. They didn’t do the stucco.That was a point of discussion,” Karpas said.

Damiani and Wirth divorced in 2008. Damiani was a vicepresident at the Wirth Cos. from 1988 to 2006 and was thecompany’s chief financial officer from 2003 to 2006.

Prosecutors said the two understated their wages for someof those years, each claiming incomes from the Wirth Cos. of$12,000 a year or less.

They also allegedly failed to report millions of dollars in feeincome during development of the water parks and fraudulentlyeliminated income that should have been taxed by creatingfalse management fee entries.

The couple also allegedly used at least $100,000 of companymoney on personal expenses such as trips to Hawaii andCanada, dry cleaning and private school fees for one of theirchildren, recording them as business expenses.

Murry’s lawyer Bill Mauzy said Murry properly prepared thetax returns “based on information supplied by the clients” anddidn’t intend to violate tax laws.

“Mike Murry is an accountant who has honestly and properlyprepared thousands of tax returns on behalf of hundreds ofclients in the past 38 years,” Mauzy said.

An initial plea hearing for the trio is set for 2 p.m. Monday inSt. Paul before Magistrate Judge Steven Rau.

US Air Force Contract S pecialist’ sSentenced for Filing False Returns

U.S. Air Force contract specialist’s sentence for filing falsereturns for years for which, in connection with hisadministration of govt. contracts, he wired millions of dollarsto overseas accounts but didn’t disclose those accounts orinterest earned thereon, was vacated and remanded. Althoughdistrict court’s decision to increase offense level for significantdisruption of essential govt. function was sufficiently supportedby findings that taxpayer’s conduct forced govt. to engage incomplex contracts review task, that involved substantial timeand taking senior govt. officials away from their regular duties,it was unclear from record as to whether court’s additionaldecisions to deny taxpayer acceptance of responsibilityreduction and to vary upward from applicable U.S.S.G. rangepursuant to 18 USC 3553(a) were infected by some “arguablyimproper consideration.” Notably, it wasn’t clear if, in makingstated decisions, court counted taxpayer’s rightful invocationof his 5th Amendment privilege against him. So, remand wasrequired. (U.S. v. Saani, CA Dist Col, 108 AFTR 2d ¶2011-5046 )

IRS News

IRS to Build Dat abase of Regulated T axPreparers for Public Use

Taxpayers will be able to examine the qualifications of paidtax-return preparers in a database being built by the InternalRevenue Service that may be available as soon as 2013,according to congressional testimony by an IRS official.

The database is part of the phased-in regulation of taxpreparers that began in 2010 with a requirement that theyregister with the IRS and obtain an identification number. Overthe next two years, paid preparers will be required to pass acompetency test. They will also need to take annual continuingeducation courses unless they are in professions, such asaccounting and law, with their own professional standards.

“The goal is to ensure that taxpayers receive top qualityservice from this important industry,” David Williams, directorof the IRS Return Preparer Office, said in a statement beforethe House Ways and Means Committee’s oversightsubcommittee.

Williams said the database will contain the names, addressesand professional qualifications of tax preparers, along withany publicly disclosed professional disciplinary actions.

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Paid tax preparers handle about 60 percent of all tax returnsfiled annually.

About 717,000 paid preparers have registered with the IRSso far.

Williams said the agency does not know the total number ofpaid preparers. Earlier this month, the IRS said it is contactingabout 100,000 preparers who worked on returns this yearand didn’t comply with registration requirements.

Subcommittee chairman Charles Boustany, a LouisianaRepublican, said he is concerned that the IRS isn’t doingenough to publicize its efforts.

Boustany urged the agency to “conduct outreach to ensurethat return preparers and taxpayers alike know andunderstand the new requirements.”

He also said there have been “no basic competencyrequirements for tax-return preparers. Practically anyone canprepare a federal tax return for any other person for a fee.”

The federal government decided to regulate paid preparersafter identifying a troubling level of errors on tax returns theyhandled. In a 2006 report, the Government AccountabilityOffice had tax returns prepared at 19 outlets of tax-preparationchains across the country. “In all 19 cases there weremistakes,” said James R. White, GAO’s director of strategicissues. “Some favored the taxpayer. Some favored thegovernment.”

Kathy Pickering, executive director of The Tax Institute a H&RBlock Inc. (HRB) and vice president of government relationsat the largest U.S. tax-preparation company, proposed thatthe IRS certify the company’s competency testing programfor preparers because it exceeds the IRS requirements.

Williams said he has heard from 15 to 20 businesses seekingsuch certification and is concerned that “we would end upwith a patchwork system. Our concern was there would beconsumer confusion” over which certification was valid.

David Rothstein, a researcher at Policy Matters Ohio, aCleveland-based group that examines how governmentpolicies affect low- and middle-income people, urged the IRSto require tax preparers to provide clear estimates of theircharges to consumers.

“Taxpayers should have the ability to research and compareprices for services,” Rothstein said.

Rothstein said the IRS should improve enforcement of casesof misleading or fraudulent practices by tax preparers.

“Taxpayers are understandably less likely to file taxes, seekhelp, or work with the IRS once they have been victims of ascam,” Rothstein said.

IRS Warns of Social Security Scam

The Internal Revenue Service is warning Ohioans to be onthe lookout for a scam in which they are persuaded to file afalse income tax return with the promise of a large tax refund.

The scam, which has targeted elderly residents in the Midwest,has now spread to Ohio, an IRS news release says.

The victim, typically a senior citizen, is duped into payingsomeone to file an unneeded tax return — not only losing thatmoney, but opening the door for identity theft.

“Scammers are posing as tax return preparers, targeting theelderly and others receiving Social Security benefits. Thescammers promise large tax refunds, and lure unsuspectingvictims into paying for the preparation and filing of fraudulenttax returns claiming false withholding, credits, refunds orrebates,” said Jennifer Jenkins, IRS spokeswoman.

The IRS has noted an increase in tax-return-related scamsinvolving unsuspecting seniors and others who normally donot have a filing requirement in the first place.

These taxpayers are led to believe they should file a returnwith the IRS for money to which they are not entitled.

The scam moved from Erie, PA to Ohio this summer, the IRSsaid.

Fliers and ads for free money from the IRS have beencirculated at community organizations, including churches andorganizations that assist seniors.

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The fliers suggest that taxpayers can file a return and get arefund with little or no documentation.

In the end, victims of these scams discover their claims arerejected or the refund barely exceeds what they paid the scampromoter. Meanwhile, their money and the promoters are longgone.

Anyone victimized or approached by these scam promotersshould contact the local IRS Taxpayer Assistance Center.Others with questions about tax credits or refunds can visitthe IRS website or call the IRS toll-free number at 1-800-829-1040.

This scam alert follows one in July in which the IRS learnedpeople re receiving emails claiming their electronic taxpayments were rejected.

The email directed victims to a bogus link that downloadsmalicious software, allowing the con artist to retrieve personalinformation.

IRS Workforce Challenged by Changing T axLaws

The Internal Revenue Service had to cope with a greatmany changes in tax laws last year that put its growingworkforce under extra pressure, according to a new report.

J. Russell George

The report, by the Treasury Inspector General for TaxAdministration, found that the IRS needed to contend with 56tax provisions from the American Recovery and ReinvestmentAct of 2009, along with at least 42 out of 514 provisions inthe Patient Protection and Affordable Care Act of 2010 thatadded to or amended the Tax Code. Another eight provisionsrequired the IRS to establish new operations.

“The IRS faced many challenges during FY 2010, includingimplementation of provisions related to new tax legislation,”said TIGTA Inspector General J. Russell George in astatement. “Taken together, revisions to these laws representthe largest set of tax law changes in 20 years.”

Helping the IRS to deal with all the extended, expiring andnewly created tax provisions was a growing workforce. In fiscalyear 2009, the IRS brought on board over 2,000 revenueagents and compliance officers, the biggest hiring increasein five years. In fiscal 2010, hiring continued to grow, with theIRS adding nearly 1,300 revenue agents and tax complianceofficers. However, the increased hiring of revenue officersover those two years didn’t entirely make up for the growingworkload and pace of attrition at the agency.

Recent staffing increases at the IRS have led to an increasein collection and examination enforcement personnel by 19percent since fiscal year 2006. That compares with a 4percent increase in the total number of IRS employees duringthis same period, from 103,811 employees in fiscal 2006 to107,622 employees at the end of fiscal 2010.

The activities of the IRS’s collection function in fiscal 2010showed mixed results compared to fiscal 2009, although theIRS continued to increase its use of collection enforcementtools. The number of delinquent accounts closed by a fullpayment increased, as did the amount collected on delinquentaccounts. However, the collection function received moredelinquent accounts than it closed, gross accounts receivableincreased, and the number of tax delinquency investigationtax periods closed with the receipt of a delinquent tax returndecreased. In addition, while the number of taxpayers whohad delinquent accounts and delinquent returns in the queuedecreased, that progress was offset by an increase in thenumber of these cases that were shelved.

The IRS examination function’s recent increase in revenueagents and tax compliance officers resulted in the most taxreturns examined over the past five years, although themajority of those examinations were conducted viacorrespondence. The number of tax returns examinedincreased for individual, corporate, and S Corporation taxreturns in fiscal 2010, while the number of partnershipexaminations decreased and examinations of other types oftax returns remained the same.

The no-change rates for examinations of individual incometax returns by revenue agents and tax compliance officersincreased in fiscal 2010, but remained lower than the no-change rates reported back in fiscal 2006.

Auditors Criticize IRS Implement ation ofCredit Card Rules

An audit said the Internal Revenue Service should improveits administration of a new law that requires companiesinvolved in processing and settling credit-card payments toreport transactions to the government.

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“We found that improvements must be made if this effort is tofunction as intended, which is to help reduce the tax gap”between taxes owed and collected, said J. Russell George,the Treasury inspector general for tax administration.

Congress created the credit-card reporting rules in 2008. Thelaw requires companies involved in payment processing toreport annual totals of transactions with merchants. It tookeffect for transactions starting on Jan. 1, and the first reportsare due in early 2012.

The burden of reporting falls on payment processingcompanies including First Data Corp., Heartland PaymentSystems Inc. (HPY), and Total System Services Inc. (TSS).

IRS officials have said they plan to use the information anddata about cash transaction rates in various industries totarget auditing resources toward businesses that may beunderreporting income.

When the law passed, the congressional Joint Committeeon Taxation estimated that it would generate $9.5 billion inrevenue for the federal government over 10 years.

The audit found that the forms created by the IRS may causethe per-merchant totals reported to the government to includethe cash-back portion of debit card transactions, which isn’tincome to the merchant. It proposed an alternative form thatwould include a separate line for cash back.

The report also found that difficulties in matching taxpayeridentification numbers could cause automatic 28 percentwithholding to be triggered erroneously for many businesseswhen that part of the law takes effect in 2013.

The IRS’ antiquated system for matching tax identificationnumbers to businesses can reject requests because ofdisagreements as simple as replacing “and” with anampersand, said Mary Bennett, director of government andindustry relations at the Electronic Transactions Association,a Washington industry group representing paymentprocessors.

“That is problematic for a number of reasons, and it’sproblematic for all parties, for the merchant, for the acquirerand IRS,” she said.

In the IRS’s official response to the report, Faris Fink, thecommissioner of the Small Business/Self-Employed Division,wrote that the agency disagrees “with the characterizationthat implementation plans could result in burdens for taxpayersand problems for the Internal Revenue Service.”

Fink also wrote that the IRS agrees with the recommendationsand is making changes to some forms and procedures.

IRS Warns of Scammers T argeting Seniors

Northwest Indiana residents, especially seniors, should watchfor tax preparation scams, the Internal Revenue Service saidrecently.

The schemers are increasingly targeting senior citizens, manyof whom don’t make enough to have to file an income taxreturn, the IRS said. They’ll convince potential clients that thepreparer can get the client a significant tax refund when reallythe client is entitled to little, if anything.

“This scam is hitting the Gary area and targeting seniors,”ITS spokesman Luis Garcia said. “They are being encouragedto file false tax returns, for a fee, to get a refund from SocialSecurity benefits.”

The IRS said the schemers place fliers in churches andcommunity centers to hook potential clients.

IRS In-House Critic Paid to T ell Tax CollectingAgency of Flaws

The lowest point in Terry and Stephanie McClung's livesexposed the couple to the ways the U.S. tax system can beabused.

In February 2010, about eight months after the sudden deathof their infant daughter, Kaitlyn, the Finksburg, Maryland couplesaid they discovered that someone stole the baby's SocialSecurity number and used it to claim her as a dependent.The McClung's 2009 federal tax return, on which they hadalready claimed Kaitlyn as a dependent, was rejectedbecause the false return had been filed using the same SocialSecurity number.

Terry McClung says he became lost in the maze of the InternalRevenue Service, spending days on the phone seekinganswers. In all of the phone calls, no one told him about theTaxpayer Advocate Service housed inside the agency. Whenhe stumbled upon it through the assistance of SenatorBarbara Mikulski's office, he said it illustrated to him howtough it is for taxpayers with concerns to get help from theIRS.

"I wish they would have told me about the advocate's office,"Terry McClung, a television production assistant, toldBloomberg Government. "Nobody could point us in the rightdirection."

The McClungs are precisely the type of people the TaxpayerAdvocate Service was created in 1998 to help. They weretwo of almost 300,000 taxpayers to seek its assistance in2010. About 2,000 employees stationed in every state field

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complaints about rejected returns, the collections process andtax liens or penalties imposed by the agency.

Nina Olson, a lawyer and former tax preparer, has run theoffice since March 2001 and has become one of the toughestcritics of the agency's treatment of taxpayers. In an interviewin her office at IRS headquarters in Washington, Olson saidthe agency "really sort of hunkers down and types peopleand just doesn't listen."

"It's understandable if you're in the enforcement side of theIRS and what you see are problems with enforcement, youtend to think that a lot of taxpayers are pulling a fast one," shesaid. "To me, the vast majority of noncompliance is non-purposeful."

Doug Shulman, the third permanent IRS commissioner towhom Olson has reported, said the "taxpayer advocate is avery important position in the U.S. tax system."

"Nina Olson has provided valuable input as we continuallywork to improve service to taxpayers," he said in an emailedstatement.

Olson, 57, operates in an unusual sphere within the IRS. Shewas appointed by Larry Summers in 2001 when he was theTreasury secretary and she doesn't have a specified term.The IRS commissioner is her boss and sets her salary, andstill he can't review or block the reports she delivers toCongress each year, which often detail the agency'sshortcomings.

"She takes an organization that is oftentimes referred to asthe most feared and hated, and then you're the person thathas to deal with the worst complaints," said Pamela Olson,an attorney at Skadden Arps LLP who isn't related to NinaOlson and was an assistant Treasury secretary for tax policyduring the George W. Bush administration.

Congress created Olson's office as part of legislationrestructuring the IRS that was signed into law in 1998. Theoffice was envisioned as a way to allow taxpayers to be heardby the agency.

Given that, the tension inherent in her role is necessary, Olsonsaid.

"There are people who say you could do this job withoutconflict and to those people, I say that's impossible," she said."In a large bureaucracy, one of the key things you need issome internal dissent, an internal critic."

She said her pestering can pay off. She persuaded IRSleaders to reverse the agency's position recently on so-calledinnocent spouse rules. Shulman announced last month that

the agency will give some spouses of accused tax cheatsand tax delinquents more time to limit their liability.

"The announcement on the innocent spouse rule is a perfectexample of the kinds of issues she's good at elevating thatget the attention of people outside and inside the IRS to forcethe IRS to rethink their position," said Christopher Rizek, anattorney at Caplin & Drysdale in Washington.

Olson also persuaded the IRS to regulate the tax preparationindustry, requiring preparers to become certified and takecontinuing education courses each year. She began pressingfor regulation in 2002; the IRS made the change in 2009.Olson said it shouldn't have taken the IRS so long to act.

"That's ridiculous that for seven years, they said no, we don'tneed this," she said. "I have no patience for that."

Since the IRS began certifying tax preparers last fall, about712,000 preparers have registered, according to the agency.Regulation of the tax preparation sector is one of Olson's petinterests as she prepared tax returns between 1975 and1991, and remembers mistakes she made.

"Once I had gone to law school, I had realized lots of thingsthat I had done wrong," she said.

IRS FAQs Address Expiration of Airline T icketand Other Aviation-related T axes

In a series of FAQs, IRS has addressed the practical impactof the expiration on July 22, 2011, of the rules authorizingfederal airline ticket and property-transport excise taxes andimposing higher taxes on aviation gasoline and keroseneused in noncommercial aviation. The expiration affectsbusinesses as well as individuals.

Under Code Sec. 4261, a federal excise tax (i.e., a tickettax) applies to the transport of persons by air, and under CodeSec. 4271, a federal excise tax applies to the air transport ofproperty. Both of these taxes have expiration dates that havebeen periodically extended, often for short periods of time.The last extension gave these taxes a lease on life until July22, 2011, but Congress has failed to once again extend thesetaxes. (On July 20, the House by a vote of 243 to 177 approvedH.R. 2553, the “Airport and Airway Extension Act of 2011,Part IV,” which would extend the taxes through Sept. 16, 2011,but the Senate failed to act on the bill.)

Under Code Sec. 4081, certain fuel used in aviation is subjectto a higher excise tax before a statutory date that has beenperiodically extended, often for a short period of time, and ata lower excise tax rate after that statutory date. The increasedexcise tax on aviation fuel expired on July 22, 2011, becauseCongress failed to act to extend the statutory date. (The

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“Airport and Airway Extension Act of 2011, Part IV,” wouldhave extended the date to Sept. 16, 2011, but as of yet it hasfailed to pass Congress.)

The new FAQs address some of the concerns and questionsthat businesses and individuals have raised about the expiredexcise taxes on transport of passengers and freight, and thelowered tax rate on certain aviation fuel. Here's a summary.

Which excise taxes expired? IRS spells out that until they arereinstated by Congress, the following federal air transportationexcise taxes do not apply to transportation beginning on orafter July 23, 2011:

... The 7.5% excise tax on the base ticket price;

... the domestic segment tax of $3.70 per person per segment(a single takeoff and single landing);

... the international travel facilities tax of $16.30 per personfor flights that begin or end in the U.S., or $8.20 per personfor a flight that begins or ends in Alaska or Hawaii; and

... the 6.25% tax on the amount paid for transporting propertyby air.

IRS says it's not clear whether those buying tickets when thetax is not in effect, but traveling after the tax is reinstated, willbe subject to tax. That will depend on what Congress specifiesin legislation it passes reinstating the tax. It could eitherimpose tax on all travel occurring after its enactment or providean exemption for passengers who bought tickets during theperiod when the tax was not in effect.

Refunds may be due. IRS says that taxpayers who paid fortickets on or before July 22, 2011, for travel beginning on orafter July 23, 2011, may be entitled to a refund of the tax. IRSsays it has asked airlines to refund the tax to the passengerwhen requested to do so. However, passengers who areunable to obtain a refund from the airline may obtain a refundby submitting a claim to the IRS under procedures to beprovided at a future date. Passengers will have to submit proofof taxes paid and travel dates to IRS under procedures thatare under development.

IRS says the rules for the collection and refund of taxes on airfreight are the same as the rules for ticket taxes. However, iftax is imposed on the amount paid by an affiliate of thecompany providing the air freight service (rather than on thecustomer shipping the package), only the shipper or its affiliatecan obtain a refund from the IRS. Customers are advised tocontact the shipper or its affiliate about its policy of rebatingsuch refunds to customers.

On July 23, 2011, the tax rates on aviation gasoline andkerosene used in noncommercial aviation dropped to 4.4¢per gallon.

IRS says that dealers that purchased taxed aviation fuelbefore July 23, 2011, and hold that fuel on July 23, 2011, arenot entitled to a refund for the difference between the pre-July23, 2011, rate and the rate effective on July 23, 2011. Thesame answer would apply if the dealer had purchased aviationgasoline. Similarly, pilots who buy previously taxed aviationfuel after July 22, 2011, can't get a refund for the differencebetween the pre-July 23, 2011, rate and the rate effective onJuly 23, 2011. The same answer would apply if the pilot hadpurchased aviation gasoline.

IRS: No Tax Refunds for Fliers, After All

The Internal Revenue Service says that no fliers who flewduring the past two weeks — when the Federal AviationAdministration was partially shut down — are eligible for tickettax refunds.

The decision may come as a surprise to millions of airlinepassengers who were expecting a refund — up to 15% of theticket price — after the FAA's partial shutdown on July 23.

Airlines and the IRS previously said fliers who bought ticketsprior to July 23 and traveled after that date during the partialshutdown might receive a refund for federal taxes paid oneach ticket.

Airlines stopped collecting the taxes on July 23 becauseCongress was unable to reach an agreement to re-authorizethe FAA.

The Senate approved legislation Friday that ended the FAA'stwo-week partial shutdown and re-authorized FAA operationsthrough Sept. 16. The partial shutdown, which caused afurlough of nearly 4,000 FAA employees and halted more than200 aviation development projects, resulted from an FAAfunding standoff between the House and the Senate.

IRS spokesman Frank Keith says the re-authorization of theFAA's operations through Sept. 16 means that fliers whobought tickets before July 23 and traveled during the partialFAA shutdown should have paid federal taxes.

Keith says, however, that the IRS will "provide relief" to bothpassengers and airlines by not forcing passenger toretroactively pay the taxes or airlines to collect them.

Airlines must resume charging U.S. ticket taxes by 12:01 a.m.,Aug. 8, says Keith.

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The Air Transport Association of America, which representsU.S. airlines, says the refund issue was solely an IRS matter.

"The Internal Revenue Service is the ultimate arbiter on taxmatters, and we defer to its decision regarding the collectionof federal ticket taxes," says Steve Lott, a spokesman for thegroup.

Kate Hanni, executive director of passengers-rights groupFlyersRights.org., says she's "flabbergasted" by the IRS'decision, and that "the flying public has been deceived aboutthe ticket tax refunds."

She says fliers who bought a ticket before July 23 and traveledduring the FAA's partial shutdown paid federal taxes andreceived no benefit from them.

"At what point does the flying public matter to ourgovernment?" she asks.

Before Friday's IRS decision, companies that bought ticketsfor many employees who traveled during the partial FAAshutdown may have been expecting large refunds.

Shane Downey of the Global Business Travel Association,which represents about 5,000 corporate travel departmentsand travel suppliers, says "the important thing" is that nopassengers will be retroactively taxed.

"This outcome is the best you can hope for from a badsituation," he says.

IRS Explains When Employer Must Rely onSec. 530 Safe Harbor for Employment T axRelief to Apply

In Program Manager's Technical Advice (PMTA), IRS saysthat an employer need not demonstrate that it reasonablyrelied on a Section 530 employment tax safe harbor beforeengaging a worker to provide services. It may qualify for reliefif it is able to show reasonable reliance on the asserted safeharbor for its decision to treat workers as independentcontractors sometime after it first engaged the workers butbefore the employment periods at issue. The PMTA dealt withthe so-called “industry practice” safe harbor.

Employers are generally required to withhold and payemployment taxes (FICA, FUTA, and withheld income tax)on wages paid to its employees. In general, Code Sec.3121(d)(2) defines an employee as an individual who, underthe common law (case law) rules has the status of anemployee. However, under Section 530 of the Revenue Actof '78, as amended, for employment tax purposes a businessmay treat an individual as an independent contractor, ratherthan an employee, if:

(1) the taxpayer does not treat the individual as an employeefor any period;

(2) the taxpayer does not treat any other individual holding asubstantially similar position as an employee for purposes ofemployment taxes for any period;

(3) all required federal tax returns are filed by the taxpayer ona basis consistent with its treatment of the individual as anonemployee; and

(4) the taxpayer has a reasonable basis for not treating theindividual as an employee. (Sec. 530(a), PL 95-600, 11/6/78, as amended by Sec. 9(d)(1), PL 96-167, 12/29/79; Sec.1(a), PL 96-541, 12/17/80; Sec. 269(c), PL 97-248, 9/3/82)

A taxpayer has a reasonable basis for not treating anindividual as an employee for a period if the taxpayer'streatment of that individual for that period was in reasonablereliance on one or more of the following safe harbors: (a)judicial precedent or IRS rulings; (b) a past IRS audit; or (3) along-standing practice of a significant segment of the relevantindustry. (Sec. 530(a)(2), PL 95-600, 11/6/78) A taxpayer whocannot meet any one of the three safe havens maynevertheless be entitled to relief if he can demonstrate, insome other way, a “reasonable basis” for not treating theindividual as an employee.

A key question for Section 530 purposes is whether thetaxpayer must demonstrate that it reasonably relied on a safeharbor before engaging the worker to perform services.Cases have held that to fall within any of the above safeharbors, the taxpayer must have relied on the alleged authorityduring the periods in issue—that is, at the time the employmentdecisions were being made. Ex post facto justification is notacceptable. See, e.g., Nu-Look Design Inc., (2003) TC Memo2003-52 .

Peno Trucking involved a taxpayer that believed it was entitledto Sec. 530 relief because the Ohio Industrial Commission(OIC) and the Ohio Court of Common Pleas had previouslyruled that two of its drivers were independent contractors.The Tax Court, however, denied Peno's request for Sec. 530relief ((2007) TC Memo 2007-66 ). It said that for a taxpayerto have a reasonable basis for not treating an individual asan employee, the judicial precedent must have evaluated theemployment relationship at issue through the federal commonlaw tests. There was no evidence that the OIC or the OhioCourt of Common Pleas had evaluated the employmentrelationship between Peno and its drivers under these tests.There was also no indication that the judicial rulings had beenrelied upon by Peno at the time it decided to classify thedrivers as independent contractors. However, the Sixth Circuitreversed the Tax Court ruling on whether Peno was entitledto employment tax relief under Section 530 (Peno Trucking,Inc. v. Commissioner, (CA 6 10/03/2008) 102 AFTR 2d

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¶2008-5360 ). It found that Peno “could have in fact relied” inmaking its employment decision on the OIC ruling because itwas rendered before the tax years at issue. The Sixth Circuitalso said that the OIC appeared to have employed a 20-factorcommon law test for determining whether the drivers wereemployees or independent contractors that was virtuallyidentical to the 20-factor test outlined by IRS for the years atissue.

The PMTA concludes that an employer must demonstrateactual and reasonable reliance before the period for whichemployment decisions are made. This test is most clearlymet when the employer can demonstrate actual andreasonable reliance on the asserted reasonable basis beforetaking on the workers at issue or substantially similarworkers—in other words, before the initial employmentdecision being made. However, the PMTA says an employermay be able to satisfy the reasonable basis requirement byestablishing that it actually and reasonably relied on theasserted basis before making the employment decisionsregarding the workers' status for later periods.

The PMTA concludes that the employers at issue in the requestfor the PMTA must demonstrate reliance in fact, i.e., that thealleged “industry practice” was known to them before the timethe decision regarding whether to treat the workers asindependent contractors was made for the periods at issueand that the alleged “industry practice” was reasonably reliedon for that decision.

Taxpayers Do Not Always Receive QualityResponses When Corresponding About T axIssues

In November 1998, the Internal Revenue Service (IRS) issuedPolicy Statement P-6-12 requiring employees to initiate aresponse to taxpayer correspondence within 30 calendardays. Although most responses to taxpayers’ correspondencetested were accurate, most responses were not timely. Whentaxpayers’ issues are not addressed timely, taxpayers aremailed interim letters. However, none of the systemicallyissued interim letters provide taxpayers with any informationspecific to their accounts, and the content is not clearregarding what taxpayers need to do.

This audit was initiated to determine whether the IRS wasappropriately processing correspondence from taxpayers ortheir representatives when required to meet its own policyrequirements to respond to a taxpayer within 30 calendar daysor provide an update on the status of the response.

Two statistical samples and one judgmental sample from threeIRS functions showed most taxpayers do not receive qualityresponses to their correspondence.

• Of 73 correspondence cases sampled from theAccounts Management function, only 14 (19 percent)taxpayers received timely and accurate responses.

• Of 48 correspondence cases sampled in theAutomated Underreporter Program, all 48 taxpayers receivedaccurate responses, but only 27 (56 percent) of 48 taxpayersreceived their responses timely.

• Of 73 correspondence cases from the FieldAssistance Office, only six (8 percent) taxpayers receivedtimely and accurate responses.

In addition, interim letters, required to be sent to taxpayers ifa response cannot be issued within the 30 calendar days,were not always issued.

Not all procedures are being followed. Cases are not properlycategorized, suspended, or linked, and the quality reviewprocess does not ensure all procedures were followed.

Finally, the IRS is not following Policy Statement P-6-12guidelines and has not implemented any measures orprocesses to monitor and evaluate Policy Statement P-6-12correspondence to ensure taxpayers receive timelyresponses to their correspondence.

TIGTA recommended and the IRS generally agreed to: 1)clarify instructions to ensure employees follow procedures,2) revisit Policy Statement P-6-12 guidelines to ensure theyreflect the IRS’s current procedures and expectations, 3)complete the study of the interim letters, and 4) update qualityreview procedures to include a review of correspondencecategory codes and a determination as to whether casesshould have been suspended and/or linked.

The IRS did not agree with the outcome measures claimedin the report, stating the projections were based on non-representative samples. However, the samples were randomsamples from the defined universe of cases. As such, TIGTAbelieves they are representative. The five-year projectionsare, in fact, forecasts. This type of forecasting is used by theFederal Government in many circumstances.

Draft Form 706 for 2010 Decedent s Reflect sLaw and Other Changes

On its website, IRS has released drafts of Form 706, UnitedStates Estate (and Generation-Skipping Transfer) Tax Returnfor estates of decedents dying after Dec. 31, 2009 and beforeJan. 1, 2011, and its instructions. They reflect law changesmade by the Tax Relief, Unemployment InsuranceReauthorization and Job Creation Act of 2010 (2010 TaxRelief Act), as well as indexing and other changes.

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The draft instructions stress that the current revision is to beused only for decedents dying in calendar year 2010. Theynote that the 2010 Tax Relief Act included these changesaffecting the 2010 Form 706:

• Estates of decedents dying in 2010 may elect to applymodified carryover basis treatment (within the meaning ofCode Sec. 1014) to property acquired or passing from thedecedent.

• For decedents dying between Jan. 1, 2010 and Dec.16, 2010, the due date for Form 706 is Sept. 19, 2011.

• The applicable exclusion amount is $5 million.

• The maximum estate tax rate is 35%.

• The applicable rate for generation-skipping transfers(GSTs) is zero.

• Prior gifts must be calculated at the rate in effect atthe decedent's date of death.

The draft instructions also note that various dollar amountsand limitations relevant to Form 706 are indexed for inflation.For decedents dying in 2010, (a) the ceiling on special-usevaluation is $1 million (same as for decedents dying in 2009);and (b) the amount used in computing the 2% portion of estatetax payable in installments is $1.40 million (up from $1.33million for decedents dying in 2009). IRS says it will publishamounts for future years in an annual revenue procedure.

The final what's new item listed in the draft instructions is thatexecutors must provide documentation of their status.Documentation will vary, but it may be a certified copy of thewill or a court order designating the executor(s). A statementby the executor attesting to his status is insufficient.

The draft instructions also point out that, in 2008, IRS addeda worksheet to help executors figure how much of the estatetax may be paid in installments under Code Sec. 6166.

The draft instructions state that the estate and GST taxes aredue within nine months after the date of the decedent's death.They point out, however, for estates of decedents after Dec.31, 2009 and before Jan. 1, 2011, the due date for paymentis Sept. 19, 2011.

New Audit T echnique Guide Explains HowExaminers Should Probe Attorneys' Returns

IRS recently released a comprehensive Attorneys AuditTechnique Guide (ATG) for auditors to use in reviewing returnsof attorneys. It pinpoints the problem areas that IRS agentsare instructed to probe for, explains in detail how attorney

audits should be conducted, and lists the types of documentsthat should be requested and examined.

Following is an overview of some of the key areas agentsare instructed to examine when reviewing an attorney's return.

Generally, attorneys deposit settlement and award proceedsto their trust accounts. Settlement and award checks areusually made out to both the attorney and the client. Afterdepositing the funds to their trust accounts, attorneys mustdistribute the proceeds. Frequently, the attorney will draw aportion of these funds to cover their fees and case costs, i.e.,when a case is taken on a contingency basis. IRS tells auditorsit is important for them to determine if fees were included inincome at the proper time. Some attorneys may cash feepayment checks or deposit them directly into personal orinvestment accounts. If they determined taxable income bytotaling deposits made into the general operating accounts,these fees are omitted from income. Inspecting theendorsements on checks written to or on behalf of the attorneyfrom trust accounts is one important auditing procedure.These checks are income or expense reimbursements.Auditors are also told to pay special attention to all checksthat either are deposited into accounts other than the generaloperating account or are cashed.

After a case has been settled, an attorney may attempt todefer earned income by allowing fees to remain in the trustaccount until the next year. Once the settlement is received,the attorney's fee is both determinable and available andtherefore should be included in income. The ATG says thatan effective audit step is to analyze the source of fundsremaining in the trust account at year-end, particularly if thereis a large ending balance.

Auditors are told that examination of the client ledger cardswill many times lead to the discovery of noncash payments.Also, verifying the basis of newer assets, such as partnershipinterests or stock, may reveal that they were noncashpayments for services. ATG examples: An attorney mayborrow a large sum of money from a corporate client andthen pay it off by performing legal services. The loan is shownon the attorney's books, but not the income resulting from therelief of the debt. When no loan repayments were noted, thelender was contacted, and it confirmed the loan and the creditsagainst the outstanding balance posted when the attorneyrendered legal services. As another example, an attorney whosets up partnerships or corporations may accept an interestin the formed entity as payment for legal services rendered.

Bartering, namely the exchange of legal services for otherservices, is another source of noncash income. Auditors aretold that an effective audit tool would be to compare theattorney's work schedule with his claimed fees. If the attorney'sworkload has not decreased, but claimed fees from one ormore clients has, that may indicate he is performing services

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in exchange for noncash payments. These variations shouldbe noted and questioned as deemed appropriate, says theATG.

Income earned under the constructive receipt doctrine is anexception to the general rule that cash basis taxpayers musthave actual receipt of income before it is taxable. Income isconstructively received if it is subject to the demand of ataxpayer and there are no substantial limitations or conditionson the right to receive it. The ATG cites the example of acriminal defense attorney acting as a public defender whowas paid an hourly rate plus any costs incurred. He had tosubmit a billing statement to the county government on amonthly basis to receive payment. At the end of the year aForm 1099 was issued to the attorney for the income thatwas actually paid. To defer income, the attorney did not billthe county for services rendered for the second half of theyear. Since billings were submitted only for the first half of theyear, the attorney's gross income was considerablyunderstated.

Attorneys who take cases on a contingency fee basiscommonly pay litigation expenses on behalf of clients andrecover the costs out of the settlement or award. Theseattorneys generally use a cash basis of accounting and maydeduct those expenses when paid, and include the recoveredcosts in income when received. The ATG says this causes adistortion of income since it can take years to resolve thesecases. It concludes that courts have determined that costspaid on behalf of a client are loans for tax purposes, and arenot deductible as a current cost of conducting business. Thecosts are the client's and not the attorney's since there is anexpectation of reimbursement. However, a bad debt deductionmay be taken in the year that any costs are determined to beuncollectible. The ATG advises auditors to raise this issue ifthe amount of deducted client costs is “material.”

By contrast, the ATG says cash-method attorneys aregenerally allowed a current deduction for client reimbursedcosts which are allocated to normal operating expenses (forexample, secretarial costs or copying costs). These aregeneral office type expenses which would reasonably beincurred even if not charged to a particular client. Of course,if a current deduction is taken, any subsequentreimbursement from the client would be treated as income inthe year of reimbursement under the Code Sec. 111 tax benefitrule.

The ATG notes that taxpayers and their representatives haveargued that if advanced costs are to be treated as loans,then the recovery of these loans shouldn't create taxableincome. In Canelo, (1969) 53 TC 217, the Tax Court held thatan “erroneous deduction exception” applied to the tax benefitrule and determined that the tax benefit rule could only beused in cases in which a proper deduction was originallytaken. The ATG points out that there are several Actions on

Decision which address this issue and that many circuit courtshave rejected the Tax Court's “erroneous deductionexception.”

The ATG for attorneys covers a host of other issues, includingthe following:

... Whether an attorney has misclassified employees asindependent contractors.

... Whether the attorney has properly issued Forms 1099 toindependent contractors for payments made to them out ofan attorney's trust fund. The ATG notes that it is possible for ataxpayer to present copies of Forms 1099 to an agent withoutever filing them with IRS or providing copies to the payees,and explains how agents can find out if IRS has received theforms. It also notes that 1099s are required to be filed forpayments to recipients of lawsuit settlements or awards unlessspecifically exempt from tax under Code Sec. 104.

... Whether the attorney has filed Form 8300 where required.Generally, each person engaged in a trade or business who,in the course of that trade or business, receives more than$10,000 in cash in one transaction or in two or more relatedtransactions, must file Form 8300.

IRS Updates and Exp ands Audit T echniqueGuide for Exams of Consult ants

Perhaps in response to the consulting industry's explosivegrowth, IRS has updated its Business Consultants audittechnique guide (ATG). In addition to reflecting newdevelopments, the ATG has been expanded to include a newsection addressing income-shifting and substance versusform.

Following is an overview of some of the key areas agentsare instructed to examine when reviewing a consultant's return.

Examiners are instructed to determine that the taxpayer hasreported all of the income required to be reported and thatthe income was reported in the proper period by the properentity. Among other items, examiners are told to be alert forthe following:

the lack of internal controls;

the types of books and records the taxpayer maintains,particularly in the area of electronic software;

the taxpayer's use of bartering;

the shifting or assignment of income by a taxpayer toa related entity;

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the taxpayer's use of the Internet; and

the taxpayer's use of a fiscal year end in order to deferincome.

Auditors are informed that closely held or one-person personalservices corporations, including business consultants, mayhave assigned or shifted income earned by themselves, asindividuals, or their closely held corporations, to another entityin order to reduce their income and/or self-employment taxes.The taxpayer may shift income earned by one entity to arelated entity in order to offset net operating losses of arelated entity or, in some cases, to circumvent the RothIndividual Retirement Account limitations. Subsequent to thisshifting of income, the taxpayer may take a relatively smallsalary from the entity (that received the assigned income) inrelationship to the amount of income shifted.

Examiners are told to review the taxpayer's consultingagreements/contracts and to look for certain information. Forexample, auditors should look at whether the taxpayer is anS corporation or a partnership and yet the contract requiresthe services of a particular employee/owner. These concernsare aimed at determining whether there has been a shiftingor assignment of income. The ATG discusses various caseson this subject.

The ATG also stresses that how a transaction is taxeddepends upon its substance. At the same time, it notes thattaxpayers are generally bound by the form in which theychoose to cast their transactions.

The ATG notes that the economic substance doctrine hasbeen codified for transactions entered into after Mar. 30, 2010.

The ATG alerts auditors to the possibility that a taxpayer mayhave improperly selected a fiscal tax year other than acalendar year in order to defer income.

The ATG observes that there is extensive travel inside andoutside the U.S. in the consulting field because manyconsultants have a specialized niche and a broadgeographical client base. Auditors are told to look for spousal/family travel and personal travel, particularly out of country.

The ATG observes that the independent contractor versusemployee issue is prevalent in the consulting industry.Potential areas of concern include a former employee comingback to a company as an independent consultant with aminimal break in service. This issue has evolved due to thedownsizing taking place in the business world over the pastdecade. Many employers, in an effort to lower costs, haveterminated specialized employees and then hired them backas independent consultants. This allows the employer to lowertheir costs in payroll and employee benefits.

Another potential issue may arise when a consultant obtainsa client for which he does not have all the resources himselfto fulfill the contract. To meet the client's needs, the consultantforms business relationships (strategic alliances) with otherindividuals. This can lead to an employee/employerrelationship.

Given the considerable travel usually required in the consultingindustry, auditors are alerted that there may be sizeableexpenses for meals and entertainment. Potential areas ofconcern noted in the ATG include the proper application ofthe applicable percentage limitation and the point that travelstatus meals and entertainment should be limited if not beingreimbursed by client. Another area of concern is meals andentertainment in non-travel status.

Here, the ATG looks at whether a C corporation meets thedefinition of a qualifying personal service corporation. Theconcern is twofold. Some C corporations may want to beconsidered a personal service corporation in order to be ableto use the cash method of accounting. Others may not wantto be considered a personal service corporation in order totake advantage of the graduated tax rates.

IRS Reissues Guidance on Processing T axPayment Extension Request s Based onUndue Hardship

IRS's Small Business/Self-Employed (SB/SE) Division hasreissued interim guidance for directors on the proceduresfor processing Form 1127, Applications for Extension of Timefor Payment of Tax Due to Undue Hardship.

In general, taxes are due on the original due date of therelevant returns. However, on a showing of undue hardship,an extension of time is available for payment of the tax shownor required to be shown on any return or declaration, or anyinstallment of a return or declaration, including extensions formaking monthly deposits of communications andtransportation taxes. ( Code Sec. 6161(a) ) “Undue hardship”is defined as more than an inconvenience to the taxpayer,but rather a substantial financial loss, such as one due to thesale of property at a sacrifice price. ( Reg. § 1.6161-1(b) )

The extension period generally may not exceed six monthsfrom the original due date for payment. ( Code Sec.6161(a)(1) ) However, in the case of a taxpayer who is abroad,the extension may be for more than six months. ( Code Sec.6161(a) )

Under Code Sec. 6161(b) , IRS may extend the time forpayment of any part of a deficiency in income tax for a periodnot to exceed 18 months from the date fixed for the payment,as shown on the notice and demand, and, in exceptionalcases, for an additional period of not more than 12 months.

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No extension will be granted if the deficiency is due tonegligence, intentional disregard of rules and regs, or fraudwith intent to evade tax. ( Code Sec. 6161(b)(3) )

Form 1127 may be used to request extensions of time to paythe amount due on a return or a deficiency for a number ofdifferent types of taxes, including income, gift, and certainexcise taxes. (Form 4768 is used to request an extension topay estate and generation-skipping transfer taxes.) With theexception of gift taxes, all Form 1127 applications must befiled with the Advisory Group Manager for the area where thetaxpayer maintains his or her legal residence or principal placeof business.

Under Reg. § 1.6161-1(c) , applications will be examined,and within 30 days, if possible, will be denied, granted, ortentatively granted subject to certain conditions of which thetaxpayer will be notified. Form 1127 includes check boxesfor indicating whether the application is being returned,denied, or approved. The reason(s) for this determination areincluded on the form and explained in a cover letter sent tothe taxpayer.

Reasons for an application to be returned asnonprocessible include that the Form 1127 was improperlyused to request a filing extension, the form was untimelyfiled, it didn't include all required information (e.g., thetaxpayer's name and address, the due date of the return orfor paying the deficiency, the requested extension date,etc.), and the form wasn't properly signed.

If the taxpayer fails to make a satisfactory showing of unduehardship, a cover letter should be sent to the taxpayerexplaining the reasons for the denial. The form and coverletter may be signed by the Advisory Group Manager.

If the taxpayer makes a satisfactory showing of unduehardship, a cover memorandum for the signature of theAdvisory Group Manager to the Territory Manager must beprepared. The memorandum explains why the taxpayer willsuffer an undue hardship if the application is denied, and ifthe Territory Manager agrees, he will sign the form and coverletter. Although interest continues to accrue during theextension period, the taxpayer is relieved from liability forthe Code Sec. 6651 failure to pay penalty through theextended due date.

Specific instructions are also provided for applications for anextension of time to pay taxes due on Form 709, UnitedStates Gift Tax return. These applications are sent to a differentaddress, and once the application is determined to beprocessible, a number of steps, including the determinationof whether to approve or deny the request, are taken withinseven days.

Mixed Result’ s Shown on IRS CollectionFunctions

IRS's fiscal year 2010 Collection function activities “showedmixed results” when compared to the previous year, theTreasury Inspector General for Tax Administration (TIGTA) saidin an audit released on Aug. 17. (Audit Report No. 2011-30-071) On the positive side, the agency continued to increaseits use of collection enforcement tools, the audit said. Therewas an increase in both the number of delinquent accountsclosed by full payment and the amount collected on delinquentaccounts. On the negative side, the Collection functionreceived more delinquent accounts than it closed, grossaccounts receivable increased, and the number of taxdelinquency investigation tax periods closed with the receiptof a delinquent return decreased.

TIGTA Report s on IRS Examination Functions

“The Examination function's recent increase in revenueagents and tax compliance officers resulted in the most taxreturns examined over the past five years, although themajority of these examinations were conducted viacorrespondence,”TIGTA said. There was an increase in thenumber of tax returns examined for individual, corporate, andS Corporation tax returns in FY 2010, while the number ofpartnership examinations decreased. In FY 2009, IRS hiredmore than 2,000 revenue agents and tax compliance officersand, during FY 2010, nearly 1,300 revenue agents and taxcompliance officers were added to the agency's roster.However, revenue officer hiring “continues to face thechallenge of keeping pace with attrition and workload,” theaudit said. “The IRS faced many challenges during FY 2010,including implementation of provisions related to new taxlegislation,” said J. Russell George, the inspector general.“Taken together, revisions to these laws represent the largestset of tax law changes in 20 years.”

IRS Publishes Summertime T ax Tip forTaxpayers who Move

IRS has published a list of tax tips regarding possibledeductions for moving expenses related to starting a new jobor relocating to a new job location. (IRS Summertime Tax Tip2011-16) Among the tips associated with deductions are thefollowing: a move must be closely related to the start of work(within one year of the start of work); a move will meet thedistance test if the new main job location is at least 50 milesfarther from the former home than the previous job locationwas; the taxpayer must work full time for at least 39 weeksduring the first 12 months after arriving in the general area ofthe new job location, or at least 78 weeks during the first 24months if the taxpayer is self-employed; deductions can bemade for lodging expenses for the taxpayer and householdmembers while moving from the former home to the new

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home, as well as for transportation expenses, including airfare,vehicle mileage, parking fees and tolls the taxpayer pays tomove; the cost of packing, crating and transporting householdgoods and personal property can be deducted; and it ispossible to deduct the costs of connecting or disconnectingutilities. A taxpayer can deduct only those expenses that arereasonable for the circumstances of his move. To calculatethe amount of a moving expense deduction, Form 3903,Moving Expenses, should be used.

Thought s from the Ragin Cagun

Tax History

The origin of taxation in the United States can be traced tothe time when the colonists were heavily taxed by Great Britainon everything from tea to legal and business documents thatwere required by the Stamp Tax. The colonists' disdain forthis taxation without representation (so-called because thecolonies had no voice in the establishment of the taxes) gaverise to revolts such as the Boston Tea Party. However, evenafter the Revolutionary War and the adoption of the U.S.Constitution, the main source of revenue for the newly createdstates was money received from customs and excise taxeson items such as carriages, sugar, whiskey, and snuff. Incometax first appeared in the United States in 1862, during theCivil War. At that time only about one percent of the populationwas required to pay the tax. A flat-rate income tax wasimposed in 1867. The income tax was repealed in its entiretyin 1872.

Income tax was a rallying point for the Populist party in 1892,and had enough support two years later that Congress passedthe Income Tax Act of 1894. The tax at that time was twopercent on individual incomes in excess of $4,000, whichmeant that it reached only the wealthiest members of thepopulation. The Supreme Court struck down the tax, holdingthat it violated the constitutional requirement that direct taxesbe apportioned among the states by population (POLLOCKV. FARMERS' LOAN & TRUST, 158 U.S. 601, 15 S. Ct. 912,

39 L. Ed. 1108 [1895]). After many years of debate andcompromise, the Sixteenth Amendment to the Constitutionwas ratified in 1913, providing Congress with the power tolay and collect taxes on income without apportionment amongthe states. The objectives of the income tax were the equitabledistribution of the tax burden and the raising of revenue.

Since 1913 the U.S. income tax system has become verycomplex. In 1913 the income tax laws were contained ineighteen pages of legislation; the explanation of the TaxReform Act of 1986 was more than thirteen hundred pageslong. Commerce Clearing House, a publisher of taxinformation, released a version of the Internal Revenue Codein the early 1990s that was four times thicker than its versionin 1953.

Changes to the tax laws often reflect the times. The flat tax of1913 was later replaced with a graduated tax. After the UnitedStates entered World War I, the War Revenue Act of 1917imposed a maximum tax rate for individuals of 67 percent,compared with a rate of 13 percent in 1916. In 1924 Secretaryof the Treasury Andrew W. Mellon, speaking to Congressabout the high level of taxation, stated,

The present system is a failure. It was an emergency measure,adopted under the pressure of war necessity and not to becounted upon as a permanent part of our revenue structure….The high rates put pressure on taxpayers to reduce theirtaxable income, tend to destroy individual initiative andenterprise, and seriously impede the development ofproductive business…. Ways will always be found to avoidtaxes so destructive in their nature, and the only way to savethe situation is to put the taxes on a reasonable basis that willpermit business to go on and industry to develop.

Consequently, the Revenue Act of 1924 reduced themaximum individual tax rate to 43 percent. In 1926 the ratewas further reduced to 25 percent.

The Revenue Act of 1932 was the first tax law passed duringthe Great Depression). It increased the individual maximumrate from 25 to 63 percent, and reduced personal exemptionsfrom $1,500 to $1,000 for single persons, and from $3,500to $2,500 for married couples. The National Industrial RecoverAct of 1933, part of President FRANKLIN D. ROOSEVELT'sNew Deal, imposed a five percent excise tax on dividendreceipts, imposed a capital stock tax and an excess profitstax, and suspended all deductions for losses. The repeal in1933 of the Eighteenth Amendment, which had prohibitedthe manufacture and sale of alcohol, brought in an estimated$90 million in new liquor taxes in 1934. The Social SecurityAct of 1935 provided for a wage tax, half to be paid by theemployee and half by the employer, to establish a federalretirement fund.

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The Wealth Tax Act, also known as the Revenue Act of 1935,increased the maximum tax rate to 79 percent, the RevenueActs of 1940 and 1941 increased it to 81 percent, theRevenue Act of 1942 raised it to 88 percent, and the IndividualIncome Tax Act of 1944 raised the individual maximum rateto 94 percent.

The post-World War II Revenue Act of 1945 reduced theindividual maximum tax from 94 percent to 91 percent. TheRevenue Act of 1950, during the Korean War, reduced it to84.4 percent, but it was raised the next year to 92 percent. Itremained at this level until 1964, when it was reduced to 70percent.

The Revenue Act of 1954 revised the Internal Revenue Codeof 1939, making major changes that were beneficial to thetaxpayer, including providing for Child Care deductions (laterchanged to credits), an increase in the charitable contributionlimit, a tax credit against taxable retirement income, employeedeductions for business expenses, and liberalizeddepreciation deductions. From 1954 to 1962, the InternalRevenue Code was amended by 183 separate acts.

In 1974 the Employee Retirement Income Security Act(ERISA) created protections for employees whose employerspromised specified pensions or other retirementcontributions. ERISA required that to be tax deductible, theemployer's plan contribution must meet certain minimumstandards as to employee participation and vesting andemployer funding. ERISA also approved the use of individualretirement accounts (IRAs) to encourage tax-deferredretirement savings by individuals.

The Economic Recovery Tax Act of 1981 (ERTA) providedthe largest tax cut up to that time, reducing the maximumindividual rate from 70 percent to 50 percent). The mostsweeping tax changes since World War II were enacted inthe Tax Reform Act of 1986. This bill was signed into law byPresident RONALD REAGAN and was designed to equalizethe tax treatment of various assets, eliminate tax shelters,and lower marginal rates. Conservatives wanted the act toprovide a single, low tax rate that could be applied toeveryone. Although this single, flat rate was not included inthe final bill; tax rates were reduced to 15 percent on the first$17,850 of income for singles and $29,750 for marriedcouples, and set at 28 to 33 percent on remaining income.Many deductions were repealed, such as a deductionavailable to two-income married couples that had been usedto avoid the "marriage penalty" (a greater tax liability incurredwhen two persons filed their income tax return as a marriedcouple rather than as individuals). Although the personalexemption exclusion was increased, an exemption for elderlyand blind persons who itemize deductions was repealed. Inaddition, a special capital gains rate was repealed, as wasan investment tax credit that had been introduced in 1962 byPresident JOHN F. KENNEDY.

The Omnibus Budget Reconciliation Act of 1993, the firstbudget and tax act enacted during the Clinton administration,was vigorously debated, and passed with only the minimumnumber of necessary votes. This law provided for income taxrates of 15, 28, 31, 36, and 39.6 percent on varying levels ofincome and for the taxation of Social Security income if thetaxpayer receives other income over a certain level. In 2001Congress enacted a major income tax cut at the urging ofPresident GEORGE W. BUSH. Over the course of 11 yearsthe law reduces marginal income tax rates across all levelsof income. The 36 percent rate will be lowered to 33 percent,the 31 percent rate to 28 percent, the 28 percent rate to 25percent. In addition, a new bottom 10 percent rate wascreated.

Since the early 1980s, a flat-rate tax system rather than thegraduated bracketed method has been proposed. (Thegraduated bracketed method is the one that has been usedsince graduated taxes were introduced: the percentage oftax differs based on the amount of taxable income.) The flat-rate system would impose one rate, such as 20 percent, onall income and would eliminate special deductions, credits,and exclusions. Despite firm support by some, the flat-ratetax has not been adopted in the United States.

As Congress comes back into session after Labor Day, itwill be of supreme interest to Tax Professionals to see thenext chapter of tax history written.

Jerry

Tax Pros in T rouble

Tax Preparer Defrauded IRS Out of Nearly $8Million

A Southern California tax preparer has pleaded guilty to taxcharges, admitting that he caused a tax loss to the governmentof $7,982,043 for tax years 2003 to 2009 by inflating theamount of mortgage interest on his clients’ tax returns.

Mario Placencia, 70, who worked in Montebello, Calif.,admitted in his plea agreement that he intentionally falsifiedthe federal tax returns of numerous clients by using numbersthat he made up for the home mortgage interest they claimedso he could obtain refunds for the clients that he knew theywere not entitled to receive.

Some of Placencia’s clients received notices of audits fortax years 2004, 2005 and 2006. During those audits,Placencia provided the IRS with false documents so he couldconvince auditors that his clients had incurred expenses that

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he knew they had not incurred and were entitled to deductionsthat Placencia knew had been fabricated.

Placencia admitted that for two of his audited clients, he senta letter on their behalf to an IRS office, enclosing a Form 1098in the name of L.A. Great American Mortgage falsely statingthat the clients had paid $19,876.23 in home mortgageinterest and $5,182.17 in real estate taxes. According toprosecutors, Placencia knew that the L.A. Great AmericanMortgage Form 1098 was false. He admitted in the pleaagreement that he had typed the Form 1098 using a blankform and numbers which he had made up.

Placencia faces up to nine years in federal prison and finesof $750,000 or more. In his guilty plea, he agreed that ifordered by the court, he would make restitution to the U.S.government for up to $5 million in partial compensation forthe losses. Placencia also agreed to file amended personaltax returns for himself for tax years 2005-2009, correctlyreporting all of the unreported income he had received andcorrecting any of the improper deductions or expenses hehad taken.

He also agreed to the entry of a binding civil injunction thatwould bar him for life from aiding in the preparation of taxreturns for anyone other than himself and his wife, and barringhim from representing other individuals before the IRS.

Dyer Woman Admit s IRS Swindle

An emotional Dyer woman has changed her plea to guilty ina case in which she was accused of swindling more than$28,000 from the IRS by lying on clients' tax returns.

Shanda Evans, 44, ran a tax preparation business in EastChicago. According to testimony and court records, in 2007she lied on clients' income tax returns to get them a higherrefund -- of which she took a cut.

By falsely claiming her clients had wages of less than $16,000,Evans helped them get a government refund for much morethan they paid in taxes. Evans also created fraudulent W-2forms for her clients, lying that they worked for her business.

In exchange for her guilty plea to three counts of aiding andassisting in the preparation of false documents under internalrevenue laws, prosecutors agreed to drop the remaining threetax-related charges against her.

Evans, who said she had a doctorate degree, could face upto nine years in prison and $300,000 in fines if she receivesthe maximum sentence for each count.

Kerry Connor, Evans' public defender, declined to comment.Evans' sentencing is scheduled for 1 p.m. Nov. 21 in ChiefJudge Philip P. Simon's courtroom.

Peekskill T ax Prep arer Charged with IdentityThef t

A Poughkeepsie woman who worked for Liberty Tax Servicein the City of Peekskill is facing charges she fraudulentlyutilized credit card information obtained from clients andfalsely charged several thousand dollars in a scheme to boosther sales commissions. Anna Pettersen,32, was charged withfirst degree Identity Theft and two counts of third degree GrandLarceny, both felonies, following the three month investigationwhich was conducted by Detective Todd Gallaher. Liberty TaxService fully cooperated with authorities.

Tax Preparer Faces up to 143 Years in Prison

A California tax preparer could be sentenced to up to 143years in prison after she was charged with preparing falsetax returns, including one that claimed 19 dependents hadbeen born to her on the same day.

Norma Coronel, 40, was charged in a 35-count indictment byprosecutors earlier this year, and was ordered to be furtherdetained at the end of a hearing on her case Monday.

The charges arose from allegations that Coronel filed taxreturns in the names of third parties listing, among other things,false dependents. According to prosecutors, the governmentdetermined from Social Security Administration records thatCoronel had obtained fraudulent Social Security numbers forat least 19 children used to claim false dependents on the taxreturns. Coronel claimed, on separate applications, that thechildren had been born to her at Good Samaritan Hospitalon Dec. 11, 2002. However, according to the hospital’srecords, she gave birth to a single child, a son, on that date.

Coronel, who had been living in Los Angeles at the time thefraudulent returns were filed, was arrested in Livermore, Calif.,on July 12, 2011 and detained pending her appearance inthe Central District of California court.

If convicted of all of the charges in the indictment, she facesup to 143 years in prison and fines totaling $5.6 million.

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Two Montgomery T ax Preparers Face FederalIndictment s

Montgomery tax preparers Yumeitrius Manuel and MargaretKirksey were indicted by a federal grand jury on August 4thon charges of conspiracy, identify theft, wire fraud, false claimsand laying to federal agents.

According to the US Department of Justice and the InternalRevenue Service (IRS), Manuel and Kirksey each owned andran separate tax return preparation businesses inMontgomery, which operated out of the same physicallocation. The indictment alleges that Manuel and Kirkseyagreed to fraudulently inflate tax refunds by placing falseinformation on their clients’ tax returns on their behalf.

If convicted, both Manuel and Kirksey face the possibility ofspending decades in jail and paying millions of dollars in fines.Both would be looking at a maximum of 10 years in prison forthe conspiracy charge, a maximum 20 years in prison for eachwire fraud charge and a minimum of two years in prison foreach aggravated identity theft count. Additionally, Manuelfaces a maximum of five years for lying to a federal agent. Healso faces a maximum fine of $2.225 million for all countscharged in the indictment. Kirksey faces a maximum fine of$2 million for all counts charged against her.

This case was investigated by the IRS-Criminal Investigationand is being prosecuted by Tax Division Trial Attorneys JustinGelfand and Jason Poole.

Restaurant Account ant Enters Plea Deal in T axCase

Federal authorities say an accountant for several Arizona andCalifornia restaurants has entered a plea agreement inconnection with a tax evasion case.

Diane Strehlow, of Tempe, was indicted in April along withthe father and son team who independently own about 20restaurants in the Chuy's Mesquite Broiler chain.

The three were accused of hiring illegal immigrants for thecompany's kitchen operations and paying them under thetable without collecting state or federal income tax for nearlytwo years.

Federal prosecutors said Friday that the 47-year-old Strehlowhas agreed to plead guilty to one count of trying to defraudthe Internal Revenue Service.

They say Strehlow's sentencing will be deferred for six monthsand she could get probation if she cooperates with authoritiesand provides testimony in the case.

Rutherford Man Pleads Guilty to T ax Fraud,Cheating N.J. Out of More than $1.1M

A 68-year-old tax preparer and disbarred lawyer pleadedguilty today in federal court to tax evasion, admitting he bilkedthe government out of more than $1.1 million, federalauthorities said.

Joseph Gallagher of Rutherford submitted false tax returnsand failed to file returns over a five-year span, U.S. AttorneyPaul J. Fishman said.

Citing court documents and statements made before U.S.District Judge Noel L. Hillman, authorities said Gallagher useda consulting company, which he established and someoneelse operated, to evade income taxes by having his tax-preparer income deposited into the firm’s bank account. Theysaid the scheme went on for 15 years.

They also said Gallagher filed income tax returns with theIRS that failed to report approximately $590,513 for 2004;$600,157 for 2005; and $682,373 for 2006. In addition,authorities said, Gallagher failed to file any income tax returnfor 2007 and 2008.

In all, authorities said, Gallagher admitted to not reporting$3,359,182 in taxable income, resulting in a tax loss of about$1,198,196.

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Though Gallagher pleaded guilty to a charge related to the2008 tax year, his plea agreement says the five-year tax losswill be considered at sentencing Dec. 1. He faces up to fiveyears in prison and a $250,000 fine, or twice the gross gainor loss from the offense, authorities said.

Gallagher’s lawyer could not immediately be reached forcomment.

Taxpayer Advocacy & T axProfessionals

Progress has been Made to Reengineer theExamination Program but AdditionalImprovement s are Needed to ReduceTaxpayer Burden

Highlights of Reference Number: 2011-30-016 to the InternalRevenue Service Commissioners for the Small Business/Self-Employed Division and the Wage and Investment Division.

The Correspondence and Discretionary ExaminationProgram (hereafter referred to as the Program) conductsexaminations exclusively by mail to reduce Internal RevenueService (IRS) operational costs and minimize the burden ontaxpayers. However, taxpayers have expressed concerns withthe length of the examination process, the lack ofconsideration given to their information sent to the IRS, andtreatment by IRS employees. While the IRS is reengineeringthe examination process, taxpayer burden continues to exist.

This audit was initiated at the IRS Oversight Board’s requestfor TIGTA to assess whether recent IRS efforts to identifyweaknesses and take actions in its Program actuallyimproved results. Our overall objective was to determinewhether the IRS’s reengineered Program resulted in a moreresponsive and less burdensome process for taxpayers.

Steps have been taken to reengineer the Program andimprove employee compliance with Program guidelines,which could ultimately lessen taxpayer burden and increasetaxpayer rights and entitlements.

TIGTA selected and reviewed two samples to evaluateemployee performance before and after the Programimplemented a new mail model process at one processingsite. Our results showed that after implementing the process,the Program reflected significant improvements in severalattributes used to measure performance. Despite theprogress, results from our statistical sample of cases wheretaxpayers agreed to the additional tax assessments showed28 of 62 cases contained errors.

The majority of these errors related to employees untimelyclosing cases. Our analyses of another statistical and twojudgmental samples of cases where the taxpayer did notagree with the additional assessment showed Programemployees did not always consider the taxpayer’scorrespondence before closing the case.

TIGTA recommended that the IRS ensure all Programemployees 1) follow mail processing guidelines when workingProgram cases until the mail model process is fullyimplemented in all sites and 2) follow Program guidelines forhandling, responding to, and considering taxpayercorrespondence. Although the IRS agreed with ourrecommendations, it did not agree with our reported outcomemeasure. Specifically, the IRS stated many of the errors donot impact taxpayer rights and entitlements because theabsence of a date stamp on a taxpayer’s correspondencewould not constitute burden to the taxpayer. In addition, theIRS expressed concerns with TIGTA’s use of the word “error”because it could lead readers to believe that an incorrectconclusion was reached during the examination.

Our audit findings and recommendations address results thatshowed IRS employees did not adhere to establishedprocedures and/or guidelines when processingcorrespondence taxpayers submit for examinations of theirtax returns. For example, when date stamps, which are appliedto assist employees’ control of documents received fromtaxpayers, are missing, the IRS cannot ensure a timelyresponse to the taxpayer. When employees do not adhere toIRS guidelines and procedures, it is simply an error. TIGTAcontinues to believe that when these errors occur, taxpayersare at risk of not receiving their rights, entitlements, andprotection of due process when they question the accuracyof tax liabilities resulting from Program examinations. TheIRS’s guidelines and procedures are designed to ensure fairand equitable treatment for all taxpayers and to control andmonitor employee work. It is unclear to us why the IRSdisagrees with our outcome measure when it agreed to takecorrective actions for all of our recommendations.

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Wayne’s World

Taking the Mystery Out Of RetirementPlanning

It's not going to be your parents' retirement - rewarded at 65with a gold watch, a guaranteed pension, and health insurancefor life. For many Americans, retiring in this new century is amystery. Earlier generations of workers could rely on employer-provided pensions, but now many workers will need to relyon their own work-related and personal savings plus SocialSecurity benefits. These savings have to last longer becauseAmericans are living longer, often into their eighties andnineties.

Today's and tomorrow's retirees may well have a new kind ofretirement. With a longer and healthier life span, bikes, boats,planes, and RVs may be part of your life, because you aremore likely than previous generations to be an active olderAmerican.

Opportunities to take courses, start a new career, and becomea volunteer can make your future an adventure. A longer life,however, will also mean more medical care, some of whichwill not be covered by the federal Medicare program.

The whole retirement scene has changed and many Americanworkers find it a mystery. In fact, a 2009 survey by theEmployee Benefit Research Institute (EBRI) suggests thatonly 44 percent of Americans have tried to calculate how muchthey need to save for retirement. In this booklet, each chapterwill give you clues on how to take control of your finances sothat when you retire, you have the time and money to do whatyou've always wanted. For some, it's simply being with friendsand family. For others, it's starting a new hobby or craft. Andfor some it's starting a new life.

As a retirement tool, use the Timeline for Retirement below:

Retirement should be well-planned and organized andplanning today will insure the success of tomorrow.

Wayne

Timeline For Retirement

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Tax Quotes

“Government’s view of the economy could be summed up ina few short phrases: If it moves, tax it. If it keeps moving,regulate it. And, if it stops moving, subsides it.”

Ronald Reagan

“Next to being shot at and missed, nothing is really quite assatisfying as an income tax refund.”

F.J. Raymond

“People who complain about paying their income tax can bedivided into two types: men and women.”

Anonymous

“I’m spending a year dead for tax purposes.”

Douglas Adams

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