NSTP TESTIMONY ON PREPARER REGULATION IN · PDF filePlaN eth I cs co R N e R Pa g e 14 ... NSTP Testimony on IRS Return Preparer Regulation ... although no formal action has yet taken

FEDERAL TAX ALERT PAGE 1 SEPTEMBER 2011

NEWS ITEMS

A PUBLICATION OF THE NATIONAL SOCIETY OF TAX PROFESSIONALS SEPTEMBER 2011A PUBLICATION OF THE NATIONAL SOCIETY OF TAX PROFESSIONALS SEPTEMBER 2011

New DefiNitioN of Small BuSiNeSS?

News Items Page 3

HealtH Care CreDit regulatioNS

IRs actIoN News Page 5

firSt time HomeBuyer CreDit DeNieD

couRt oPINIoNs Page 11

CoNgreSS examiNeS PreParer regulatioN PlaN

ethIcs coRNeR Page 14

airliNe tiCket tax DeBaCle

et ceteRa Page 16

CoNteNtSNews Items ..............................1IRS Action News .....................4Court Opinions .................... 11Ethics Corner ....................... 13Et Cetera ................................ 16Quotes.................................... 16

iNSertSNSTP Testimony on IRS Return Preparer Regulation

NStP Now oN faCeBook

The National Society of Tax Professionals is now on Facebook. We hope this new communication channel will build on our partnership with you as tax professionals. Join us on Facebook by searching for “National Society of Tax Professionals.” Then, “Like” us! Also, watch for membership announcements, IRS news, and other important alerts. We want to see you there.

NSTP TESTIMONY ON PREPARER REGULATION IN THIS ISSUE

DeBt Deal reaCHeD: No New taxeS, But SHarP DefeNSe CutS PoSSiBle

Congress and the President reached an agreement on the debt ceiling increase August 1st, just one day before the U.S. was scheduled to run out of borrowing power. Both the House and the Senate passed the bill, and the President signed it within hours.

Under the agreement, the debt ceiling will be raised by $900 billion immediately and either $1.5 trillion or $1.2 trillion later, depending on the next round of spending reductions. This increase should tide over the U.S. Treasury until 2013, after the next elections. Spending will be cut by at least $2.4 tril-lion over 10 years.

There are no tax increases in the first phase of the agreement. Instead, significant spending cuts will come from the defense side of the budget. The agree-ment also creates a bipartisan committee, called the “super-committee,” to produce $1.5 trillion in deficit reduction. Although tax increases are off the table for now, the bipartisan committee is not limited to spending cuts. It can recom-mend tax increases or loophole closers as well.

The deficit reduction plan developed by the supercom-

mittee will get an up or down vote in Congress late this Fall. If Congress does not pass the plan, a “trigger” will automati-cally impose $1.2 trillion of spending cuts over 10 years. The cuts will be split 50/50 between domestic and defense spending. However, the “trigger” mechanism exempts Social Security, Medicare beneficiaries, and low-income programs from the automatic cuts. This means that the defense department could face even more significant spending cuts because defense spending is such a large part of the non-entitlement budget.

The Tax AngleGoing forward on the tax

side, Members of Congress, think-tanks, and commentators are already debating whether or not the bipartisan committee will be working with budget numbers that include a continu-ation of the Bush tax cuts or the expiration of the Bush cuts. Right now, the Bush tax cuts are set to expire at the end of 2012. One thing is clear. Under the new debt ceiling plan, tax changes are still on the table. If the supercommittee does not include tax reform in its deficit reduction proposals or if Congress does not approve the committee’s plan, the battle on extension of the Bush tax cuts moves to election season 2012.

U.S. Rating Still Downgraded

Despite the agreement, Standard & Poors still down-graded the U.S. credit AAA rating one level to AA+. The rating company attributed the downgrade to lawmakers having failed to reduce the deficit to a more sustainable level and to the political climate of gridlock in the Nation’s capital.

DefiCit reDuCtioN SuPerCommittee NameD, agreemeNt Due By tHaNkSgiViNg

With the downgrading of the U.S. bond rating, the Admin-istration is adamant that the so-called “supercommittee” produce a serious agreement which includes “tax reform that will ask those who can afford it to pay their fair share,” according to a recent statement by the President.

FEDERAL TAX ALERT PAGE 2 SEPTEMBER 2011 FEDERAL TAX ALERT PAGE 3 SEPTEMBER 2011

FROM THE EDITORThe debt ceiling standoff in Congress dominated the news this Summer, with

the final resolution nothing more than a plan to deal with the problem later. Well, later is rapidly approaching as the Supercommittee of Members from both sides of Congress sits down to work out another tax and spending deal. Meanwhile, Treasury is examining the definition of small business and may rework the concept to drop the numbers. The significance of this exercise is that many key government spending programs and tax benefits are keyed to the small business definition. Small business groups see the move as ominous, although no formal action has yet taken place.

The IRS has released regulations on the credit for health insurance premiums which is to take effect in 2014. Tax professionals are studying the voluminous rules even as a federal appeals court struck down the individual mandate. These events leave tax professionals in a dilemma. How much time do we spend learning the rules when they may be moot very soon? Here is our answer: review the basic rules to answer client questions and then watch developments carefully for updates. This controversy could be ongoing for some time—until the Supreme Court makes a final ruling.

This month’s Ethics Corner covers many new developments out of the IRS on return preparer regulation, including the PTIN renewal rules, final Circular 230 amendments, more information on the competency exam, and a solicitation for comments on continuing education providers. Also discussed is the gap in the plan which results from not requiring CPAs and Attorneys to take tax classes and not requiring employees of big box tax prep firms to take any courses at all. Finally, NSTP’s Congressional testimony on the IRS’s return preparer plan is included as an insert in this issue.

The Court Opinions feature includes an interesting first-time homebuyer credit case involving a parent and child, and Et Cetera explains the $400 million airline ticket tax problem.

Lucia Smeal, Esq., EditorProfessor, Georgia State [email protected]

Technical Editor:Ronald F. Larson, Esq.

Contributing Writers:Winifred AkandeRobert J. LandyMiriam Ribiero

The 12 members of the supercommittee have been named, with three House and three Senate members appointed by Repub-licans and three House members and three Senators appointed by Democrats. Other congressional committees must get their

recommendations to the supercommittee by October 14, 2011. The supercommittee is slated to make its recommendations by Thanksgiving, which would then be subject to an up or down vote in Congress by December 23rd.

Supercommittee MembersThe six Senators on the panel include:

Sen. John Kerry (D-Mass.)Senate Finance Committee Chairman Max Baucus (D-Mont.), an establishment veteranSen. Patty Murray (D-Wash.)Senate Republican Whip Jon Kyl (R-Ariz.)Sen. Pat Toomey (R-Pa.), former head of the anti-tax Club for GrowthSen. Rob Portman (R-Ohio), former budget director for President George W. Bush

No members from the Senate are from the bipartisan “Gang of Six” who earlier had tried to fashion a compromise on tax and spending provisions.

In the House, Majority Leader John Boehner (R-Ohio) appointed: Rep. Jeb Hensarling (R-Tex.), a tea party favoriteRep. Dave Camp (R-Mich.), House Ways and Means Committee Chairman Rep. Fred Upton (R-Mich.)

House Minority Leader Nancy Pelosi (D-Calif.) selected:Rep. James Clyburn (D-S.C.),Rep. Chris Van Hollen (D-Md.), senior Democrat on the House Budget CommitteeRep. Xavier Becerra (D-Calif.), chairman of the House Democratic Caucus

A majority of the 12 supercommittee members must support the package for it to pass. Therefore, with six Democrats and six Republicans, only one member would have to defect from either party to obtain that majority.

Republican Presidential Candidates Oppose Any Taxes

All of the Republican presidential candidates announced at an Iowa debate that they oppose any taxes being included in the supercommittee’s deficit reduction package.

All eight candidates participating in the debate pledged that they would even reject a deficit-reduction deal that included a ratio of $10 in spending cuts for every $1 in tax increases.

Observation: The supercommittee has already drawn so many lines in the sand that it is a wonder that they will even be able to decide where to meet. With no new revenues possible on the Republican side, the Democrats will have to concede the


The Federal Tax Alert is published 10 times a year by the National Society of Tax Professionals.Mailing address: The Federal Tax Alert, 910 NE Minnehaha St., Suite 6 Vancouver, WA 98665. Telephone: 800-367-8130.

Opinions expressed in The Federal Tax Alert are those of the editors and contributors.Editor: Lucia Smeal; Technical Editor: Ronald Larson; Subscription Services: Glyness Scott;

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tax side or both parties will face failure of the supercommittee, which will trigger substantial defense spending cuts. Who wants to own that?

oBama aDmiNiStratioN faCeS New fiSCal CHalleNgeS, PreSiDeNt ProPoSeS VeteraNS HiriNg tax

With the landscape of the U.S.’s economic problems changing each day, the Obama Administration has taken new steps to address fiscal problems, first with an announcement that Treasury Secretary Geithner is staying, at least for now. Earlier Geithner had announced he would be leaving his position after the debt ceiling was raised. Geithner’s decision to stay may signal that the Administration sees the economic situation as too unstable to risk a major change in personnel.

Tax Breaks for Hiring VeteransPresident Obama also has proposed new

hiring incentives for employers who hire veterans, including:

Returning Heroes Wounded Warrior yTax Credits: A new $2,400 credit for firms that hire unemployed veterans, with a $4,800 credit for every long-term unemployed hire; and

Wounded Warrior Tax Credits y : This credit will increase to $9,600 per veteran the existing tax credit for firms that hire veterans with service-connected disabilities who have been unemployed long-term. This proposal would continue the existing $4,800 credit for all other veterans with a service-connected disability.

The President’s proposal, while a noble idea, would still have to get through a fractious Congress, so do not expect any quick action on this tax change. However, job tax credits and a payroll tax reduc-tion are continuing themes advanced by this Administration which Democratic members of the deficit committee may take a look at in their upcoming meetings. Besides deficit reduction, job creation is the most pressing issue facing Congress before the 2012 elections.

treaSury DeVeloPS New metHoD to DefiNe ‘Small BuSiNeSS’, NumBerS woulD DeCreaSe SigNifiCaNtly

A recent technical paper from the Trea-sury Department’s Office of Tax Analysis seeks to redefine the method for iden-tifying small businesses in a way which would result in a significant reduction in the number of businesses getting that label. The report, “Methodology to Iden-tify Small Businesses and Their Owners, contends that there is no consensus on the exact factors that make a business qualify as a “small business.” It says a new, standardized approach is warranted.

The report observes that small busi-ness classification frequently hinges on pass-through income, which does not adequately exclude businesses organized as corporations. Under the previous approach of defining small-businesses, 34.7 million small business owners reported $662 billion in net pass-through income in 2007, according to the report. Businesses with over $10 million in income were not considered to be small businesses. Applying new criteria to the same data, 20 million small businesses filers made $376 billion in net business income. An even narrower classification, which requires small-business income to account for 25 percent of an owner’s adjusted gross income, would result in 12.9 million filers with $335 billion in net income.

Details on Old v. New CriteriaThe report noted that “although ‘small

business owners’ are often the subject of tax policy debate, a consensus does not exist regarding the specific attributes that distinguish small businesses from other firms.” Previously, the Office of Tax Analysis had counted a small business owner as any individual who receives flow-through income from a sole proprietorship, partner-ship, S corporation, farming operation or miscellaneous rental activity. This “overly broad” definition was used because, for the majority of flow-through business income (partnerships and S corporations), it was not possible to trace income from the busi-

ness entity to the respective owners. Due to newly accessible tax data, this technical constraint has been overcome.

Small Business Tax FormsThe revised methodology begins with the

characteristics that define a “business.” The Office recommends looking at the six tax forms and schedules filed by individuals or firms that could potentially represent busi-ness activity: Form 1040 Schedules C, E and F, Forms 1065, 1120 and 1120S. Treasury developed two tests based on income and deductions reported on those forms and schedules to separate filers into business and non-business groups. The business groups are then subdivided further into small and other businesses.

Drawing from various tax code provi-sions that provide preferential treatment to certain filers, the method sets the small business threshold at $10 million of income or deductions. Using these criteria, the report found that 54 percent of taxpayers who file one of the six forms or schedules qualify as both a business and a small busi-ness for tax year 2007. Those small busi-nesses reported approximately 17 percent of total and net business income. Also, slightly more than one-fifth of those small businesses were considered employers.


The methodology also separates small business income reported on the indi-vidual income tax return from other busi-ness income. In this manner, the Office identified relevant characteristics of small business owners such as reported Adjusted Gross Income (AGI) and applicable marginal tax rates.

Small Business Owners with Two JobsThe proposed new methodology excludes

those who make less than $10,000 in busi-ness income and report less than $5,000 in deductions from the definition of a small business. The new research also found that wage income represents more than 40 percent of the 1040 income of business owners and indicates that many small busi-ness owners have two jobs.

The report notes that the Office of Tax Analysis believes its revised methodology is just “one reasonable approach” that could be used to identify small businesses and their owners. However, the report goes on to say that the new method represents a “significant improvement” over previous methodologies used to identify small businesses.

Note: Eligibility for many tax breaks and government programs hinges on status as a small business. Expect to see a lot more debate on whether Treasury’s new criteria more accu-rately reflect the true numbers for the small business segment of the U.S. economy.

gao fiNDS ComPlexity fuelS tHe tax gaP

In recent testimony before the Senate Finance Committee, Michael Brostek, Director, Tax Issues for the Government Accountability Office (GAO), submitted a study on the U.S. tax gap and identified factors and possible solutions to help close the gap. As the U.S. government deficit continues to grow, understanding the tax gap and how to close it have become increasingly more important, Brostek said.

Areas for ImprovementThe study found several areas that

contribute to the growing tax gap. First, the federal tax system is an ever-increasing web of complex rules. Provisions in the Code for exemptions, exclusions, deductions and credits have more than doubled since 1974. These provisions place a tremendous burden on taxpayers by requiring addi-tional recordkeeping, planning, computa-tion and filing requirements. A 2005 GAO study revealed that the most conservative

estimate for tax compliance costs totals approximately $107 billion.

GAO also found that taxpayers with more complex forms of income such as capital gains, rents and self-employment income are required to make complicated calculations and keep additional detailed records. This complexity can produce errors and under-paid taxes. GAO has documented “millions of taxpayer errors” in following complex rules for determining basis in securities they sold or corporations they own.

Strategies to ImproveThe study concludes that there is not a

single approach to completely and cost-effectively closing the tax gap. Several strat-egies could improve taxpayer compliance but require action by Congress or the IRS. GAO offered the following strategies:

Enhance information reporting y to reduce the complexity for taxpayers.Ensure high-quality taxpayer services y to help those who want to comply but do not understand how.Simplify the tax code y to make it easier for taxpayers to understand and comply voluntarily with their tax obligations.Devote more resources to enforcement y .Expand compliance checks y before the IRS issues refunds.Use consistent definitions y across the Code to help taxpayers understand and comply with their obligations.

IRS ACTION NEWS

irS giVeS uP oN two-year limit for maNy iNNoCeNt SPouSe reQueStS

In a complete reversal of its position, the IRS announced that it will eliminate the two-year limit it imposed on so-called “equitable” innocent spouse claims. The IRS took the unusual action after a number of embarrassing losses in Tax Court and under heavy pressure from Congress, including Republican presidential candi-date Rep. Michele Bachmann, R-Minn. Available only to someone who files a joint return, innocent spouse relief is designed to help a taxpayer who did not know that his or her spouse understated or underpaid an income tax liability.

Under the Code, spouses have two paths available to them to obtain innocent spouse relief. One involves strict legal rules and a requirement that relief be requested within two years after the IRS begins to collect the tax. The equitable relief provisions added later to the Code, allow a spouse to apply for innocent spouse status when they do not qualify for regular relief but it would be inequitable to hold the spouse liable. Congress did not put a two-year limitation in this part of the Code, but the IRS wrote regulations applying the two-year rule to equitable relief requests.

“In recent months, it became clear to me that we need to make significant changes involving innocent spouse relief,” said IRS Commissioner Douglas Shulman “...We know these are difficult situations for people to face, and today’s change will help innocent spouses victimized in the past, present and the future,” Shulman said.

New RulesThe IRS launched a review of the equitable

relief provisions of the innocent spouse program earlier this year. As a result of that review, it made the following changes:

The IRS will no longer apply the ytwo-year limit to new equitable relief requests or requests currently being considered by the agency.

A taxpayer whose equitable relief yrequest was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collec-tion statute of limitations for the tax years involved has not expired. Taxpayers with cases currently pending will automatically come under the new rule and should not reapply.

The IRS will not apply the two-year ylimit in any unconcluded litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.

This change is effective immediately, and details are in Notice 2011-70, posted on the IRS website, www.irs.gov. The Notice is effective as of July 25, 2011. The IRS also plans to issue regulations formally removing this time limit.

The two-year election period for seeking innocent spouse relief under the regular innocent spouse provisions continues to


apply. The normal refund statute of limita-tions also continues to apply to tax years covered by any innocent spouse request.

Publication 971, Innocent Spouse Relief, has more information about the program.

Congress Reacts to NewsCongresswoman Michele Bachmann

(R-Minn.), a former federal tax litigation attorney reacted quickly to the news, stating, ““Earlier this year, I reintroduced common sense legislation…to remove the two-year time limit for innocent spouses to file for tax relief from the IRS due to the reporting errors of their spouses. Sadly, many situa-tions requiring innocent spouse relief arise due to an abusive or manipulative spouse failing to tell the other person about their tax debts. Often, the two-year window has not provided adequate time for victims to file the necessary paperwork proving innocence. I support the IRS’s decision to remove the two-year timeline on most relief requests. I hope this change proves to be sufficient to lift the burden off men and women who are proved innocent from their spouse’s tax liability.”

Bachmann had sponsored H.R. 1450, the “Innocent Spouse Relief Act,” to legislatively overrule the IRS’s two-year limitation regu-lation. The bill was referred to the House Committee on Ways and Means on April 8, 2011, but did not receive further action.

Also commending the IRS announce-ment were Senate Finance Committee Chairman Max Baucus (D-Mont.), Senator Tom Harkin (D-Iowa) and Senator Sherrod Brown (D-Ohio). The Senators first wrote to the IRS in April asking for a full review of the two-year limit. “Thanks to today’s decision, the innocent spouse law will ensure fair tax treatment of people in Montana and across the country, many of whom are victims of domestic abuse. This is yet another step in the process of making our tax system more fair for all Americans,” said Senator Baucus. “The IRS made the right decision: to protect innocent spouses who do not know the details of their partner’s financial situation,” added Senator Harkin.

Observations: Noting that equitable relief is used primarily in cases of domestic violence, the National Taxpayer Advocate also fought against the two-year limit. With Congress, many courts, and the National Taxpayer Advocate all opposed to the IRS regulation, it is difficult to understand why the IRS held on to its untenable position for

so long. The litigation costs for the IRS were substantial and the scorecard was not good. One explanation is that some one person within the IRS “owned” this position and was unwilling to give it up. Commissioner Shulman likely had to find a diplomatic way to overrule a loyal deputy before the Service was embarrassed by a Congres-sional reversal.

treaSury iSSueS ProPoSeD ruleS oN HealtH iNSuraNCe tax CreDit

The Treasury Department has issued proposed regulations implementing the tax credit for health insurance premiums that is directed at the middle-class. The guid-ance also explains the rules for enrollment in plans through insurance exchanges. The Health Care Act allows individuals and small businesses to buy private health insurance through state-based insurance exchanges. To enable taxpayers to buy this insurance, the Act allows a refundable tax credit for health insurance premiums. The rules are effective beginning in 2014.

Eligibility and Advance PaymentsThe premium tax credit is available to

individuals and families with incomes between 100% and 400% of the federal poverty level ($22,350 to $89,400 for a family of four in 2011). Larger tax credits apply for older Americans who face higher premiums. The Congressional Budget Office estimates that, when the Health Care Act is fully phased in, individuals receiving premium tax credits will get an average subsidy of over $5,000 per year. For lower-income families, the Treasury Department will make an advance payment directly to insurance companies as an advance on the credit. Later, the advance payment will be reconciled against the amount of the family’s actual premium tax credit, as calculated on the family’s federal income tax return.

Other requirements are: Covered individuals must be enrolled yin a “qualified health plan” through an Affordable Insurance Exchange. Covered individuals must be legally ypresent in the United States and not incarcerated.Covered individuals must not be eligible yfor other qualifying coverage, such as Medicare, Medicaid, or “affordable” employer-sponsored coverage.

What is an ‘Affordable’ Employer Plan?The credit is only available if the taxpayer

does not have “affordable” coverage through his or her employer. Under the regulations, plans are not affordable if the self-only premium exceeds 9.5% of household income or the plan fails to cover 60% of total allowed costs.

Amount of CreditThe credit amount is equal to the differ-

ence between the premium for the “bench-mark plan” and the taxpayer’s “expected contribution.” The “expected contribution” is a specified percentage of the taxpayer’s household income. The percentage increases as income increases, from 2% of income for families at 100% of the federal poverty level to 9.5% of income for families at 400% of the poverty level. The “benchmark plan” is the second-lowest-cost plan that would cover the family at a specified level of coverage. Also, the credit is capped at the premium for the plan the family chooses (so no one receives a credit that is larger than the amount they actually pay for their plan).

Any repayment due from the taxpayer is subject to a cap for taxpayers with incomes under 400% of the poverty level. The caps range from $600 for married taxpayers ($300 for single taxpayers) with household income under 200% of the poverty level to $2,500 for married taxpayers ($1,250 for single taxpayers) with household income above 300% but less than 400% of federal poverty level. If a family ends the year with household income less than the federal poverty level, the taxpayer will not be required to repay any portion of the advance credit payment.

Employer Calculation of AffordabilitySome employer health plans will incur

penalties if they do not meet an afford-ability test. The regulations clarify that the affordability test is based on the amount of self-only premiums. The IRS indicated that it will create a safe harbor permitting employers to base the afford-ability calculation on the wages they pay their employees instead of employees’ household income.

Public CommentsTreasury has asked for public comments

on the new rules, due by October 13. It intends to hold a hearing on the regulations on November 17, 2011.


irS moDifieS guiDaNCe oN Partial exCHaNgeS of aNNuity CoNtraCtS

The IRS has updated guidance on the exchange of part of the cash surrender value of an existing annuity contract for a second annuity contract. Revenue Procedure 2011-38 explains how the partial exchange of annuity contracts can qualify for tax-free treatment. Generally, no gain or loss is recognized when annuity contracts are exchanged. However, if the taxpayer receives any other property or money in the exchange, then the taxpayer may recognize gain.

Under the new rule, a direct transfer of cash surrender value of an annuity contract for a second annuity contract will be tax-free if no amount other than a 10-year annuity is received for 180 days after the

transfer. Previously, the time limit was 12 months. The two annuity contracts can be issued by the same or different companies. The guidance also eliminates the require-ment that one of the standard conditions for tax-free treatment be met. These condi-tions include the taxpayer being age 59 ½, disability, substantially equal periodic payments, etc. The new revenue procedure is effective for transfers that are completed on or after October 24, 2011.

New SPeCS for SuBStitute form 941

The IRS has updated the specifications for creation of paper and laser-printed substi-tutes for Form 941, Employer’s Quarterly Federal Tax Return, along with two asso-ciated schedules. The Schedules covered by the revenue procedure are Schedule B, Report of Tax Liability for Semiweekly Schedule Depositors, and Schedule R, Allocation Schedule for Aggregate Form 941 Filers. The new specifications are in Revenue Procedure 2011-39. To obtain the Revenue Procedure, go to the IRS website, www.irs.gov and enter “rev. proc. 2011-39” in the search box on the upper right-hand corner of the homepage.

irS exPlaiNS timiNg reQuiremeNt for worker ClaSSifiCatioN Safe HarBorS

The IRS recently explained the timeline an employer must satisfy to take advan-tage of safe harbors allowed for worker classification of employees. In a Program Managers Technical Advice, the IRS considered whether a local government had reasonably relied on “industry practice” when classifying workers as independent contractors. The specific issue is whether the taxpayer demonstrated that it reason-ably relied on the safe harbor before hiring workers as independent contractors.

The IRS analyzed several court cases on the issue noting that the courts have consistently held that taxpayers cannot offer retroactive justification for worker classification decisions. In other words, the taxpayer must know of the rule they are relying on at the time the employment decision is made. Here is the IRS’s expla-nation of the rule:

In determining whether a taxpayer receives Section 530 relief for a tax period, the taxpayer must, among other things, show that it has a reason-

Premium Tax Credit Calculation: Three Examples

Example 1: Family of Four with Income of $50,000, Purchases Benchmark PlanThe premium tax credit is generally set based on the benchmark plan. The family’s expected contribution is a percentage of the family’s household income.

• IncomeasaPercentageofFPL(Federal Poverty Level) 224%• ExpectedFamilyContribution: $3,570• PremiumforBenchmarkPlan: $9,000• PremiumTaxCredit: $5,430($9,000-$3,570)• PremiumforPlanFamilyChooses: $9,000• ActualFamilyContribution: $3,570

Example 2: Family of Four with Income of $50,000, Purchases Less Expensive PlanIf a family chooses a plan that is less expensive than the benchmark plan, the family will generally pay less, thereby creating an incentive to choose a less costly plan and reducing overall health care costs.

• IncomeasaPercentageofFPL 224%• ExpectedFamilyContribution: $3,570• PremiumforBenchmarkPlan: $9,000• PremiumTaxCredit: $5,430($9,000-$3,570)• PremiumforPlanFamilyChooses: $7,500• ActualFamilyContribution: $2,070($7,500-$5,430)

Example 3: Family of Four with Income of $50,000, Parents are between the ages of 55 and 64Because premiums are generally higher for older individuals, the premium tax credit also is higher for these individuals.

• IncomeasaPercentageofFPL 224%• ExpectedFamilyContribution: $3,570• PremiumforBenchmarkPlan: $14,000• PremiumTaxCredit: $10,430($14,000-$3,570)• PremiumforPlanFamilyChooses: $14,000• ActualFamilyContribution: $3,570

IRS ExamplesSet forth below are three examples of the credit calculation provided by the IRS in its fact sheet.

feDeral aPPealS Court StrikeS DowN iNDiViDual HealtH iNSuraNCe maNDate

In the latest court action on the Obama health care plan, the 11th Circuit Court of Appeals in Atlanta has struck down the requirement that virtually all Ameri-cans must carry health insurance or face penalties. Twenty-six states sued to block the law.

Another appeals court and three federal district court judges have upheld the law while two have invalidated it. With a split emerging in the courts, ultimately, the Supreme Court will have to decide the fate of the health care program.


able basis for its treatment of the workers as independent contractors. A taxpayer will satisfy this requirement by showing that its treatment for such period was in reasonable reliance on one of the safe harbors. The principle that “[t]he statute does not coun-tenance ex post facto justification” means the taxpayer must demonstrate actual and reasonable reliance prior to the period for which employment decisions are made. This standard is most clearly met when the taxpayer can demonstrate actual and reasonable reliance on the asserted reasonable basis prior to engaging the services of the workers at issue or substantially similar workers — in other words, prior to the initial employment decision being made. However, the taxpayer may be able to satisfy the reasonable basis requirement by establishing that it actually and reasonably relied upon the asserted basis prior to making the employment decisions regarding the workers’ status for later periods.

Note: Program Manager Advice cannot be used or cited as precedent by taxpayers; however, the documents are useful to gauge the IRS’s thinking on particular tax issues.

What is Section 530 Relief?Employers are required to withhold and pay employment taxes on wages paid to employees. For this purpose, “employ-ment taxes” are the employer and employee shares of Federal Insurance Contributions Act (FICA) tax, Federal Unemployment Tax Act (FUTA) tax, and withheld income taxes. However, Section 530 of the Revenue Act of 1978, provides relief for employers who have treated workers as nonemployees for the tax periods at issue if the following require-ments are met:

The employer consistently treated 1. the workers as nonemployees.

The employer filed all returns 2. required for the workers for the applicable periods, and the returns were all consistent with nonem-ployee status; and

The employer had a reasonable 3. basis for treating the workers as nonemployees.

Section 530 provides three safe harbors for establishing “reasonable basis.” An employer’s classification of worker is reasonable if the employer relies on one of the following:

Judicial precedent, published rulings, 1. or technical advice or a letter ruling to the taxpayer;A past employment tax audit in which 2. no assessment was made for improper classification of workers holding substantially similar positions; orA long-standing recognized practice 3. of a significant segment of the industry in which the worker worked.

The taxpayer may also establish another reasonable basis for its classification.

The Program Advice described above clarifies that the employer must know of and be relying upon one of these three justifications at the time the employer classifies the worker.

irS giVeS truCkerS 3-moNtH exteNSioN for HigHway uSe tax returNS

The IRS has extended for three months the due date for federal highway use tax returns filed by truckers and other owners of heavy vehicles. Instead of being due on August 31st, the returns will be due on November 30, 2011. Because the highway use tax is currently scheduled to expire at the end of September, this extension is designed to alleviate any confusion and possible multiple filings that could result if Congress reinstates or modifies the tax after that date.

The November 30th filing deadline for Form 2290, Heavy Highway Vehicle Use Tax Return, for the tax period that begins on July 1, 2011, applies to vehicles used during July, as well as those first used during August or September. The IRS has instructed that returns should not be filed and payments should not be made prior to November 1st.

The $550 per vehicle highway use tax applies to trucks, truck tractors, and buses with a gross taxable weight of 55,000 pounds or more. Ordinarily, vans, pick-ups and panel trucks are not taxable because they fall below the 55,000-pound threshold. Special rules apply to vehicles with minimal road use, logging or agricultural vehicles,

vehicles transferred during the year and those first used on the road after July.

State Registration ProcessUnder new rules issued with the exten-

sion, states are required to accept as proof of payment last year’s stamped Schedule 1 of Form 2290 through the November 30th filing date. Normally, states can only accept a prior year Schedule 1 up until October 1st. For those acquiring and registering a new or used vehicle during the July-to-November period, the new regulations require a state to register the vehicle without proof that the highway use tax was paid. The person regis-tering the vehicle must present a copy of the bill of sale showing that the vehicle was purchased within the previous 150 days.

Note: NSTP has been told that State govern-ments have been notified of this change. However, you still may want to advise your clients to print out a copy of IRS News Release 2011-77 to take to their state vehicle registration office.

irS uPDateS PuBliCatioN oN e-filiNg SPeCS

The IRS has updated Publication 1346, Electronic Return File Specifications and Record Layouts for Individual Income Tax Return (Tax Year 2011). The update is a draft of Record Layout and Error Reject Code Changes for TY 2011. The draft changes are effective January 13, 2012. Note that some of these changes may change again in future updates. The publi-cation is now available on the IRS website, www.irs.gov.

fiNal regS oN iNCreaSiNg reSearCH aCtiVitieS

The IRS has finalized regulations under Section 41 of the Code on the computa-tion of the credit for increasing research activities. The final rules address the calcu-lation of the alternative simplified credit. Taxpayers have to elect the alternative simplified credit and a taxpayer may make or revoke an election each taxable year by obtaining the consent of the Commissioner. To access the final rules, go to the IRS website, www.irs.gov and enter “t.d. 9528” in the search box on the upper right-hand corner of the homepage.

Did you know…States participating in 1040MeF are listed at: http://www.irs.gov/efile/article/0,,id=211658,00.html.


irS to elimiNate ‘HigH-low’ rateS for BuSiNeSS traVel

In a recent announcement, the IRS said it plans to discontinue the “high-low” method of substantiating away-from-home travel expenses. The Service plans to publish a revenue procedure providing the general rules and procedures for substantiating lodging, meal, and incidental expenses incurred in traveling away from home (omitting the high-low substantiation method). After that, the IRS will publish updated revenue procedures only when it modifies the substantiation rules. The IRS also will publish special transportation rates in an annual notice.

Observations: Upon learning of this change, one of our Directors remarked, “I wonder what the replacement will be.” For administrative purposes, the IRS must have some type of standard allowance for business travel expenses. It is too difficult to evaluate the reasonableness of claimed expenses in every different situation. The IRS likely will use some national average, without taking into account the variation in costs around the country.

New limitS oN CommuNiCatioNS BetweeN aPPealS aND irS ageNtS

The IRS has updated the rules governing the communications that can take place between the Appeals Office and IRS agents without the taxpayer present. These “ex parte” communications generally are frowned upon because the IRS Appeals Office is supposed to be independent in its review of a taxpayer’s situation.

The updates are necessary because the IRS has made changes to some of its business practices and adopted new ones since the existing rules were issued in 2000. The rules implement a provision in the IRS Restruc-turing and Reform Act of 1998 aimed at ensuring that the Office of Appeals remains an independent avenue for settling audit and collection-related disputes between taxpayers and the IRS. Details are in Notice 2011-62, which is posted on the IRS website, www.irs.gov.

In one key change, Appeals will no longer participate on issue management teams but can be briefed by the teams as long as the discussion remains generic rather than case-specific. These teams include representatives from various IRS offices, typically Compli-ance and Counsel. The meetings usually

involve general discussions of how to handle technical issues or procedural matters.

The Office of Appeals resolves more than 100,000 tax cases each year.

New irS DePuty CHief CouNSel (teCHNiCal) aNNouNCeD

Effective Aug. 28, 2011, Erik Corwin became Deputy Chief Counsel (Technical) at the IRS. Since 2007, Corwin has served as a partner with Ropes & Gray LLP in Washington, D.C. , focusing on federal tax issues related to domestic and international business transactions, regulated investment companies, and bankruptcy and restruc-turing. From 1992 to 1993, he also served as a clerk at the U.S. Court of Appeals for the District of Columbia Circuit.

The Deputy Chief Counsel (Technical) serves as alter ego to the Chief Counsel in the overall executive direction of the Office’s technical tax operations. The Deputy is responsible for planning and coordinating all non-litigation work related to the devel-opment, interpretation, and application of Federal tax regulations. He also serves as the Chief Counsel’s primary personal advisor on national and international tax matters under his jurisdiction.

irS HolDS NatioNwiDe ‘freSH Start’ oPeN HouSe

The IRS opened the doors at its Taxpayer Assistance Centers on Saturday, July 16, 2011, to answer taxpayer questions and provide help with tax filing issues. This event was intended for people who want to make a “fresh start” by taking steps to have liens withdrawn. The IRS recently adjusted its policies concerning liens by allowing for the withdrawal of a lien when a taxpayer enters into a direct debit install-ment agreement.

“Sometimes taxpayers need one-on-one assistance with their tax issues,” IRS Commissioner Douglas Shulman said. “Our goal at these open houses is to provide that and help taxpayers move their issues toward resolution.” A total of 74 Taxpayer Assistance Centers opened across in 34 states, Washington, D.C. and Puerto Rico. In addition to helping taxpayers with liens, the Taxpayer Assistance Centers offered the same range of services at the open house that they do during regular weekday hours. At previous open houses, IRS personnel helped more than 16,000 taxpayers.

irS uPDateS teCHNiQueS for auDitiNg BuSiNeSS CoNSultaNtS

Noting that business consulting is “one of the fastest growing industries in the world today,” the IRS has updated and expanded its audit techniques guide for examination of business consultants. The guide is based on an issue list developed through examinations of sole proprietors, corporations and partnerships completed by revenue agents. The audit techniques guide is a tool used by examiners to assist in identifying frequent and unique issues associated with the business consulting industry. The guide provides the examiner information on each potential issue that may arise in an audit within this industry. Each issue includes an introduction to the issue, pre-audit suggestions, audit techniques to evaluate the issue and a law section describing the legal background for each issue.

To obtain this guide or other audit tech-nique guides, go to the IRS website at www.irs.gov. Click on the “Businesses” tab at the top of the home page. In the left column, select “More Topics.” Under the heading “Topics for Businesses,” go down to “Audit Technique Guide.” Click on this heading and you will get an alphabetical list of all of the Audit Technique Guides available.

Note: These audit guides can be very useful when filling out a tax return or advising clients. The guides identify the tax items that the IRS is likely to scrutinize when processing returns.

irS offerS SeVeN tiPS for JoB SeekerS

With the employment market still bleak in the U.S., the IRS has come out with a list of tax benefits for job seekers. Here are seven rules on the deduction of job search expenses.

To qualify for a deduction, the expenses 1. must be spent on a job search in a taxpayer’s current occupation. Taxpayers may not deduct expenses for finding a different type of job.

Taxpayers can deduct employment and 2. outplacement agency fees paid while looking for a job in their present occu-pation. If an employer later reimburses these fees, the taxpayer must take them into income up to the amount of the deduction previously taken.


Taxpayers can deduct amounts spent for 3. preparing and mailing copies of their résumés to prospective employers.

If a taxpayer travels to an area to look 4. for a new job, the travel expenses will be deductible. The trip must be primarily to look for a new job and not for other personal purposes

Taxpayers cannot deduct job search 5. expenses if there was a substantial break between the end of their last job and the time they begin looking for a new one.

Taxpayers cannot deduct job search 6. expenses if they are looking for a job for the first time.

The amount of job search expenses that 7. a taxpayer can claim is subject to the 2% floor on miscellaneous itemized deduc-tions, figured on Schedule A.

irS reViSeS PuBliCatioN oN tiN matCHiNg Program aND BaCkuP witHHolDiNg

The IRS has posted a new version of Publication 2108A, On-line Taxpayer Identification Number (TIN) Matching Program, on its website. The TIN matching program is used by payors of Form 1099 income who are required to deduct backup withholding at a 28% tax rate on payments made to payees who had either a missing or an incorrect taxpayer identification number. Payors may check the TIN furnished by the payee before filing the Form 1099.

Users of the system may submit up to 25 name/TIN combinations at one time during a session and they will receive an immediate response to their request. The system allows only 999 separate interactive requests to be input by one User ID during a 24-hour period.

Observations: The IRS is aggressively pursuing Form 1099 compliance and backup withholding. If the payor is required to withhold the 28% because the payee refused to provide a TIN or provided an inaccurate TIN, the payor will have a problem. This, of course, is the reason to verify all of the information prior to hiring and paying a subcontractor and to make sure a W-9 has been properly completed. Given these problems, it is imperative that businesses and third-par-ties who handle 1099s, such as tax prac-titioners, use the TIN matching process

to avoid errors and costly penalties that can result from problems with 1099 and backup withholding requirements.

irS iDeNtifieS New SCamSIt seems like each week the IRS is

issuing a new warning about scams being perpetrated upon taxpayers. The IRS has noted an increase in tax-return-related scams, frequently involving unsuspecting taxpayers who normally do not have a filing requirement in the first place. Many of these recent scams have targeted the South and the Midwest.

Here are the latest scams identified by the IRS:

Fictitious claims for refunds or rebates ybased on excess or withheld Social Secu-rity benefits.

Unfamiliar for-profit tax services yteaming up with local churches.

Homemade flyers and brochures yimplying credits or refunds are available without proof of eligibility.

Promises of refunds for “Low Income — yNo Documents Tax Returns.”

Claims for the expired Economic yRecovery Credit Program or Recovery Rebate Credit.

The IRS has warned that scam promoters are targeting church congregations, exploiting their good intentions and cred-ibility or are preying upon low-income individuals and the elderly.

irS reQuireS maNual eNtry of tiNS for e-filiNg

The IRS has told Individual (IMF) Participants, Modernized Electronic Filing (MeF) Transmitters, Software Developers, Electronic Return Originators (EROs,) and States that for tax year 2011, the IRS will require manual key entry of the Taxpayer Identification Numbers (TINs) for all taxpayers with Individual Taxpayer Identifi-cation Numbers (ITINs) who are reporting wages. No software package should use the auto-population feature regardless of the presence of an override feature to populate the TIN on the Form W-2 for these ITIN filers. Failure to comply with this require-ment could result in a written reprimand, suspension or expulsion from the e-file program, the IRS warns.

2010 eState tax oPt-out ProCeDureS exPlaiNeD By irS

The IRS has issued guidance for opting out of the estate tax for estates of decedents who died in 2010. Executors who are making the choice to opt out of the estate tax and have the carryover basis rules apply will need to file Form 8939, the basis allocation form. The form is due November 15, 2011.

Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent, must be filed to have the new carryover basis rules apply. The IRS expects to issue Form 8939 and instructions early this fall.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax was repealed for persons who died in 2010. However, 2010 legislation reinstated the estate tax for persons who died in 2010. This recent law allows executors of the estates of decedents who died in 2010 to opt out of the estate tax, and instead elect to be governed by the repealed carry-over basis provisions of the 2001 Act. This choice is to be made by filing Form 8939.

irS eaSeS ruleS for low-iNCome HouSiNg ProJeCt iN alaBama

The IRS has temporarily suspended some income limitations for low-income housing projects due to the devastation caused by severe storms this past Spring. The suspension applies to low-income housing projects in which vacant units are rented to displaced individuals. The suspension will not extend beyond August 31, 2012.

In a July letter to Treasury Secretary Timothy Geithner, Alabama Governor Robert Bentley requested the same relief provided earlier to Missouri. Bentley pointed out that 43 counties in Alabama have been declared federal disaster areas eligible for assistance. Currently, there are approximately 600 vacant housing credit-financed units available in Alabama. Easing the income limitations will make these homes available to storm victims, Bentley explained.

r&D attaCHmeNt No loNger reQuireD oN SCHeDule m-3

The IRS has advised corporate taxpayers that they will not have to submit details of their research and development expendi-tures on an attachment to Schedule M-3, Net Income (Loss) Reconciliation, of corpo-


rate tax returns. Schedule M-3 is attached to corporate and partnership returns in the 1120 and 1065 series. The require-ment is suspended for 2010-2011. Revised instructions for the Schedule had required a supporting attachment giving details of R&D expenses. Corporate taxpayers still will report the expenses on a line on the Schedule but will not need to attach a supporting document.

New aCtuarial taBleS aVailaBle

The IRS has finalized regulations which revise the actuarial tables for valuing annui-ties, interests for life or terms of years, and remainder or reversionary interests. The rules will affect the valuation of inter vivos (during life) and testamentary transfers (after death) of interests dependent on one or more measuring lives. These regulations are necessary because the IRS is required to update the actuarial tables periodically to reflect the most recent mortality experience available.

The final regulations were issued under Code section 7520 and are contained in Treasury Decision (T.D.) 9540. The rules are effective August 10, 2011.

NatioNal taxPayer aDVoCate SayS lieN filiNg CaN Hurt tax ColleCtioNS

National Taxpayer Advocate Nina E. Olson released a report to Congress that identifies the priority issues the Taxpayer Advocate Service (TAS) will address during the 2012 fiscal year. The National Taxpayer Advocate is required by statute to submit annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The report expresses concern about the impact of IRS budget cuts on taxpayer service and tax compliance. The report also addresses problems with IRS lien filing practices.

Recently enacted provisions including the economic stimulus payments and first-time homebuyer credit have been difficult to claim and substantiate by taxpayers, the report observes. This situation has led to a significant increase in taxpayer inquires and problems. Simultaneously, the Service’s ability to respond to taxpayers has declined. The report points out that funding for the IRS was decreased for FY 2011 and funding for FY 2012 is uncertain. Comparing FY 2010 with FY 2004, the

percentage of phone calls the IRS answered from taxpayers seeking to reach a telephone assistor declined from 87 percent to 74 percent, and the percentage of unanswered correspondence classified as “overage” at year’s end increased by 135 percent. The National Taxpayer Advocate has previously suggested that the IRS generally be exempt from budget caps or reductions.

The reports notes that TAS’s cases have risen from about 169,000 in FY 2004 to about 299,000 in FY 2010, an increase of 77 percent. It expresses concern that if TAS does not receive sufficient resources to handle its growing workload, it will have no choice but to decline to accept certain categories of cases, “leaving taxpayers to fend for themselves.”

IRS Lien PracticesThe report also reiterates the NTA’s

concern about IRS collection practices and urges the IRS to adopt changes to reduce the harm that “unproductive liens can inflict on taxpayers.” The report says the IRS should file liens based not on a dollar threshold, but instead based on a taxpayer’s financial situation. Filing liens in cases where the taxpayer is suffering economic hardship or has no significant assets will not further tax collection, the report notes. Instead, it could damage a taxpayer’s credit rating, increasing the taxpayer’s cost of living, and reducing the chance the taxpayer will be able to obtain a job and pay off the tax debt. The TAS is conducting its own study of the impact of lien filings on future tax compli-ance and will refine its recommendations based on the study results.

Other TAS InitiativesAdditional areas of focus for the National

Taxpayer Advocate include the following:

Government Shutdowns y . In prepara-tion for a government shutdown, the IRS revised its contingency plan to identify the limited functions it could perform. The plan identified exempt activities to protect government property. However, the plan did not identify exempt activi-ties to protect taxpayers’ lives or prop-erty. The National Taxpayer Advocate believes permissible IRS activities should include protection for taxpayers’ lives and property.

Tax Simplification. y The National Taxpayer Advocate has established an electronic suggestion box to get input from taxpayers on tax simplification.

EITC. y The earned income tax credit (EITC) is often criticized for the high level of improper payments. The TAS believes that much of the noncompli-ance results from the difficulty taxpayers face in substantiating their claims to the satisfaction of the IRS. TAS will review proposals to help reduce EITC noncompliance.Identity Theft. y TAS and the IRS will continue to work to mitigate identity theft problems and improve identity theft case processing.Innocent Spouses and Domestic yViolence. TAS and the IRS will start working to improve “innocent spouse” rules. In addition, TAS is partnering with a domestic violence coalition to provide training for TAS and IRS about assisting and working with taxpayers who are victims of domestic violence and abuse.

foreigN aCCouNt ComPliaNCe guiDaNCe

The IRS has issued a notice explaining plans to phase in the requirements of the Foreign Account Tax Compliance Act (FATCA). Enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, FATCA requires foreign financial institutions to report to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

The goal of the new law targets noncom-pliance by U.S. taxpayers through foreign accounts. Under the notice’s phased imple-mentation approach, foreign banks and U.S. withholding agents have been given time to build the systems needed to fully comply with FATCA under the following schedule:

2013: y Due diligence requirements for identifying new and pre-existing U.S. accounts begin.June 30, 2013: y A foreign financial insti-tution must enter an agreement with the IRS by this date to ensure the insti-tution will be a participating institution which will allow withholding agents to refrain from withholding beginning on January 1, 2014.2014: y Reporting requirements begin.Jan. 1, 2014: y Withholding on U.S. source dividends and interest paid to non-participating foreign financial institutions will begin.


Jan. 1, 2015: y Withholding on all with-holdable payments (including on gross proceeds) will be fully implemented.

tigta tellS irS to CatCH imProPer ClaimS for Home Buyer CreDit

The original First-Time Homebuyer Credit in the Housing and Economic Recovery Act of 2008 has been revised and extended by three bills. From 2008-2010, eligible homebuyers could have taken advantage of the First-Time Home-buyer Credit. The Homebuyer Credit was at first an interest-free loan and then was changed to a fully refundable credit, depending on when the taxpayer purchased his or her home.

A recent evaluation by the Treasury Inspector General for Tax Administration (TIGTA) found that while the IRS has taken positive steps to properly process Homebuyer Credits claimed on amended returns, there is still work to be done. The IRS is catching more amended returns with questionable claims before they are processed. However, taxpayers are continuing to manipulate purchase dates to improperly claim the credit. Therefore, TIGTA recommends that the IRS make certain that taxpayers changing the year of purchase or receiving a greater home buyer credit than they are allowed are identi-fied and that invalid claims are recovered through more examinations.

irS guiDeS PerSoNNel iN aPPlyiNg tHe eCoNomiC SuBStaNCe DoCtriNe

The IRS has issued guidelines for personnel in its Large Business & Inter-national (LB&I) Division on how to seek approval to apply the new codi-fied economic substance doctrine. The doctrine provides that the tax benefits of a transaction may be challenged by the IRS if the transaction does not change the taxpayer’s economic position in a mean-ingful way and the taxpayer does not have a substantial business purpose for entering into the transaction other than to obtain the tax benefits.

IRS examiners and managers must seek the approval of the Director of Field Operations before raising the issue of economic substance of a transaction in an examination. If the examiner believes economic substance is an issue, the exam-

iner must take four steps to determine if raising the doctrine is warranted. The steps include such requirements as iden-tifying how the transaction is promoted, whether it is at arm’s length, whether there are unnecessary steps, whether losses are accelerated and whether the transaction is outside of the taxpayer’s ordinary busi-ness operations.

The examiner must notify the taxpayer that he or she is considering whether to apply the economic substance doctrine when the examiner begins the four-step analysis. If the Director of Field Opera-tions believes the economic substance inquiry has merit, then the taxpayer must be given the chance to explain and defend the transaction.

More Information: To obtain the direc-tive, go to the IRS website, www.irs.gov and enter the search, “economic substance” and directive in the search box at the top right-hand corner of the homepage.

COURT OpINIONS

Taxpayers Not Entitled to First-Time Homebuyer Tax Credit:

Wilfredo emilio rodriguez et al. v. Commissioner t.C. memo. 2011-122 u.S tax Court June 2, 2011

Issue: Whether the taxpayer is entitled to the First-Time Homebuyer Tax Credit.

Facts: Emilio was born in April 2001 to Wilfredo and Soledad Rodriguez and is mentally and physically handicapped due to trauma he suffered at birth. In 2004, Emilio received $463,907.10 in settle-ment for the injuries he sustained at birth. Steven W. Conner, a CPA, was appointed guardian of the property of Emilio because his parents were financially unsophisti-cated. The Rodriguez parents receive a monthly allowance from Emilio’s funds of $300 for the payment of medical and other bills for their son. In early 2009, Conner learned that the parents were experi-encing financial difficulty and had missed several mortgage payments. The CPA then petitioned the probate court for an order authorizing a loan from Emilio’s funds to satisfy the mortgage. Connor contacted

the mortgage holder who refused to accept payment from Emilio. Conner then transferred $106,621.46, the loan pay-off amount, from Emilio’s bank account to the escrow account of his CPA. firm. Mr. and Mrs. Rodriguez executed a warranty deed transferring the home to Conner in his individual capacity. Seven days later, Conner executed a warranty deed in his individual capacity transferring the home to himself as guardian. That same day Conner in his individual capacity as seller and as guardian and buyer executed a purchase and sale agreement listing a purchase price for the home of $106,621.46. When Connor prepared Emilio’s 2009 federal tax return, he claimed an $8,000 First-Time Homebuyer Credit relating to Emilio’s purchase of the home. The IRS disallowed the credit.

Analysis and Conclusion: The Tax Court agreed with the IRS and deter-mined Emilio to be ineligible because he purchased the home from related persons. The Court explained that a sale by one person cannot be trans-formed for tax purposes into a sale by another by using the CPA/guardian as a conduit through which to pass title. The economic substance and step transaction doctrines require an analysis of the facts to see whether the true substance of the transaction is different from its form or whether the form reflects what actu-ally happened. In this case, Emilio was deemed to have purchased the home from his parents. Conner argued that Emilio did not purchase the home directly from his parents because the mortgage holder would not accept payment directly from him. The Court ruled that Connor did not offer any evidence to substantiate this claim. The Court further noted that Connor must have researched the credit rules and purposefully orchestrated the purchase and sale to make it appear as if Emilio purchased the home from Conner in his individual capacity.

Notes: The Code allows a credit of up to $8,000 to a first-time homebuyer of a prin-cipal residence in the United States, with time limitations. The credit for purchase of a principal residence in 2009 may be claimed on either the taxpayer’s 2008 or 2009 Federal income tax return. However, the first time homebuyer’s credit is not available to a taxpayer who purchases a home from a related person, which includes direct ancestors such as parents.


Taxpayers With No Compensation Income Not Entitled to Deduct IRA Contribution:

Joseph B. niesen et ux. v. Commissioner t.C. Summary oP. 2011-71 u.S. tax Court JuNe 16, 2001

Issue: Whether petitioners are entitled to a deduction for a contribution to an indi-vidual retirement account (IRA).

Facts: On their 2007 Federal income tax return, Petitioners reported in income: taxable interest, ordinary dividends, taxable refunds, a capital loss, taxable pension and annuity income, a farming loss, and taxable Social Security benefits. Petitioners claimed a $5,000 deduction for an IRA contribution made by petitioner Rosemary A. Niesen. In a notice of deficiency, the IRS determined that petitioners were not entitled to the claimed IRA contribution deduction of $5,000 for 2007 because they did not have any taxable compensation.

Analysis and Conclusion: The Tax Court ruled in favor of the IRS. In explaining its decision, the Court pointed out that deduc-tions for IRA contributions are limited to the amount of the taxpayer’s compensation includable in gross income. Petitioners’ gross income consisted of interest income, ordinary dividends, taxable refunds, pension and annuity income, and Social Security benefits, none of which is compen-sation as defined in the Internal Revenue Code. There were no net earnings from self-employment, no earned income, and, therefore, no compensation. Petitioners also argued that the IRS determined the same issue in petitioners’ favor as to 2006, thereby establishing precedent. The Court, however, dismissed the argument explaining that each taxable year stands alone, and the Commissioner may challenge in a succeeding year what was condoned or agreed to in a previous year. The Court held that Petitioners are not entitled to the claimed IRA contribution deduction.

Notes: Generally, under Section 219(a) of the Internal Revenue Code, a taxpayer is entitled to deduct an amount contributed to an IRA. The deduction, however, may not exceed the lesser of:

The deductible amount; or yAn amount equal to the taxpayer’s ycompensation includable in gross income.

For years beginning after 2008, the maximum deductible amount is $5,000. Individuals 50 or older are allowed a $6,000 deduction.

Compensation includes earned income, which is defined as “the net earnings from self-employment.” Section 1402(a) defines net earnings from self-employment as “the gross income derived by an individual from a trade or business carried on by such individual, less deductions attributable to such trade or business.” Compensation excludes any amounts received as interest and dividends, a pension or annuity, and Social Security benefits.

CPA Denied Deductions of Various Expenses:

leonard fein, et ux. v. Commissioner t.C. memo. 2011-142 u.S tax Court June 22, 2011

Issue: Whether petitioner is entitled to claim business and entertainment expenses relating to his accounting and photographic activities.

Facts: Since the late 1970s petitioner has been a certified public accountant. From 2002 through 2004, petitioner worked as an accountant and engaged in some photographic activity. Petitioner paid his children what he refers to as “per diem,” allegedly in connection with services his children performed in his accounting activity. These per diem payments, however, appear to have been set at amounts that would allow the children to benefit from the earned income tax credit. Documentation maintained regarding petitioner’s accounting and photographic activities was disorganized and incom-plete. Unfortunately, during the years in issue petitioner had severe medical problems. In 2004 he traveled to Israel, where he received medical treatment for his eye problems. To make matters worse, petitioners’ Federal income tax returns for 2002, 2003, and 2004 were filed late. On each of the returns, petitioner attached two Schedules C, Profit or Loss From Business, one relating to his accounting activity and the other to his photographic activity. He claimed various business expenses including depreciation deductions. The IRS disallowed all of them.

Analysis and Conclusion: The Tax Court agreed with the IRS that petitioner is not entitled to deduct the claimed expenses because of lack of proper and adequate documentation and substantia-tion. Documentation petitioner offered to substantiate the claimed expenses was illegible, some of it was blank, and much of it was not in petitioner’s name. Much of the documentation that was legible was also unclear as to the purpose of the claimed expense—whether personal, accounting, or photography. The Court also found no credible evidence that petitioners’ children worked in any meaningful way in either of his activi-ties that would have justified the per diem payments. In support of claimed depreciation, petitioner offered a list of assets for 2006. This list was deemed insufficient to establish that petitioner purchased and placed into service the depreciable assets and that the depre-ciation amounts claimed were correct. Although petitioner claimed that some of the documentation relating to the business expenses was destroyed in a fire or lost in a computer crash, the Court concluded that petitioner’s inability to produce numerous receipts called this excuse into question. Finally, petitioner claimed his 2004 trip to Israel qualified as a business trip in his photographic activities; however, the Court found no credible evidence supporting that claim and ruled that the trip to Israel was most likely related to needed medical treat-ment. The Court sustained the IRS’ disal-lowance of all the expenses claimed on the Schedules C-1 or C-2 on petitioner’s 2002, 2003, and 2004 Federal income tax returns. Petitioner was also held respon-sible for late-filing and accuracy related penalties.

Notes: Deductions are a matter of legis-lative grace, and the taxpayers generally bear the burden of proving they are enti-tled to the deductions claimed. Taxpayers must be able to substantiate both the amount paid and the purpose of claimed deductions. One of the requirements to overcome this burden is the retention of business records. Under Section 1006 of the Internal Revenue Code, taxpayers have a responsibility to maintain records sufficient to determine their correct Federal income tax. Failure to do so can be quite costly as such failure tends to end in deductions being disallowed.


Taxpayer Meets Reasonable Cause Requirements, Penalties and Additions to Tax Abated:

Custom stairs & trim ltd. v. Commissioner t.C. memo. 2011-155 u.S. tax Court July 5, 2011

Issue: Whether penalties and additions to tax should be abated because Petitioner’s failure to make payroll tax deposits was due to reasonable cause.

Facts: Custom Stairs has been in business since December 1985 making stairways for residential properties along the Gulf Coast. Its troubles began in September 2004 when Hurricane Ivan struck the Gulf Coast. In 2005 through 2008 as Petitioner felt the effects of the hurricane, collapse of the housing bubble, and economic recession, it began laying off employees, eliminating vacations and paid holidays, and cutting employee benefits. In 2008, Petitioner also tried to sell its office property to use the proceeds to pay off debts. Petitioner has a long history of timely filing its Forms 941 and making deposits of the tax assessed. However, following the hurricane, the company developed a record of failing to pay the full amount and having to pay penalties and interest.

During the years 2005 through June 2008, Petitioner was consistently in arrears, so that the numerous undesig-nated payments it made were frequently applied to pay past due liabilities. Final payments satisfying the total tax amounts due were made shortly after a lien was filed, leaving only a portion of the 2008 penalties unpaid. Custom Stairs filed a petition for review claiming that because it could not pay the tax liability, there was reasonable cause for the failure to pay and the penalties should be abated. Custom Stairs concluded that since the penalty was improper, there was no underlying tax liability to warrant a lien against its property and the lien was unnecessary and unreasonable.

Analysis and Conclusion: The Tax Court agreed with the taxpayer and ruled that the failure to pay was due to reason-able cause and not willful neglect. The Court relied on previous cases to explain that reasonable cause is found if the taxpayer exercised ordinary business care

and prudence in providing for payment of his tax liability and was still either unable to pay the tax or would suffer an undue hardship. The primary factors used to determine whether a taxpayer exercised ordinary business care are: (1) The taxpayer’s favoring other creditors over the Government, (2) a history of failing to make deposits, (3) the taxpayer’s financial decisions, and (4) the taxpayer’s willingness to decrease expenses and personnel. In applying these factors, the Court found that Custom Stairs exercised ordinary business care and prudence in cutting benefits and payroll, selectively and prudently paying business expenses, and attempting to sell its real property to pay its tax liability. The Court also under-stood that Petitioner’s failure to make the deposits was due in significant part to Hurricane Ivan, the 2008 economic collapse, and the practical fact of the penalties themselves. Given these facts, the Court found it appropriate to negate the penalties and additions to tax that had been imposed by the IRS.

Notes: A number of Code sections cover penalties and liens for nonpayment of taxes. Here’s a rundown of some of those provisions:

Section 6331(a) of the Internal Revenue Code authorizes the Commissioner to levy upon property or property rights of a taxpayer liable for taxes who fails to pay those taxes within 10 days after a notice and demand for payment is made. The levy may be made only if the Commis-sioner has given written notice to the taxpayer 30 days before the levy. Other provisions include:

Section 6656(a) imposed a penalty yif a taxpayer fails to make a required payroll tax deposit on time.

Section 6656(a) provides that the ypenalty will not be imposed if it is shown that the failure is due to reasonable cause and not due to willful neglect.

Section 6651(a)(2) imposes an yaddition to tax of 0.5 percent per month up to an aggregate total maximum of 25 percent for failure to timely pay tax. This addition to tax is not applied if the failure to pay was due to reasonable cause and not willful neglect.

ETHICS CORNER

irS fiNDS 100,000 PreParerS wHo fileD returNS witHout PtiNS, SetS PtiN exPiratioN at CaleNDar year

The IRS has identified 100,000 tax preparers who prepared returns during the 2011 filing season without proper PTINs. The Service started sending the noncompliant preparers letters July 7th explaining the new oversight program and telling them how to register for a PTIN. At the same time, the IRS announced that PTINs obtained by compliant preparers will expire on a calendar-year basis, with the first expiration date December 31, 2011.

Letters to TaxpayersIn an effort to identify these “ghost

preparers,” the IRS also plans to send letters to taxpayers who appear to have had assistance with their returns but lack tax return preparer signatures. The letter will inform taxpayers how to file a complaint against preparers who failed to sign returns. It also will explain how to choose “legitimate tax preparers.”

Repeated Preparer ErrorsThe IRS also said it is working to identify

tax return preparers who make “repeated errors” and noted that it has had “face-to-face” meetings with thousands of these preparers over the past two years.

PTINS Will Expire on Calendar-Year Basis

The IRS has sent PTIN holders a notice and has posted on its website updated renewal rules for PTINs. Your PTIN will now expire on a calendar-year basis, so if you obtained or renewed your PTIN between September 28, 2010 and the present, it will expire on December 31, 2011. Therefore, your PTIN number will expire at the end of the calendar year rather than one year after you acquired it.

Here are the IRS FAQs on PTIN expiration:

1. When can I renew my PTIN for the 2012 filing season? (posted 6/9/11)PTIN renewal is expected to be available in October 2011. Check www.irs.gov/ptin for updates.


2. When does my PTIN expire? (posted 6/29/11)

PTINs now expire on a calendar year basis. If you obtained or renewed your PTIN for the 2011 filing season (e.g., between September 28, 2010 - present), your PTIN expires on 12/31/2011.

ruleS oN attorNeyS, CPaS aND NoNSigNiNg HelPerS leaVe gaPS iN PreParer regulatioN PlaN

With over 700,000 tax preparers now registered and the final Circular 230 rules now in place, we all have a little time to reflect on the IRS’s return preparer regula-tion plan and to consider some lingering problems. The main gaps in the program involved continuing education for Attor-neys and CPAs and the registration exemp-tion afforded supervised employees at the large national tax preparation firms.

Attorneys and CPAs are exempt from the mandatory continuing education hours and the competency exam, primarily because they must take an entrance exam to acquire their credentials and they must meet the continuing education requirements of their State Bar or State CPA society. (Enrolled Agents (EAs) are exempt from the new requirements as well, but are required to take tax courses to maintain their credential.) The problem is that neither type of profes-sional is required to take any tax classes to maintain a license, whether or not they hold themselves out to be tax experts. Realisti-cally, responsible lawyers and accountants would be expected to take courses in their primary areas of practice. However, no law compels them to do so.

This loophole of sorts has not gone unno-ticed by the IRS but, to date, the IRS has not made any formal proposals. One approach would be to lobby State Bar Associations and CPA Societies to impose their own standards for tax courses.

Employees of Large Firms Also Exempt Under pressure from the large tax

preparation firms, the IRS also decided to exempt employees working under a signing preparer from both the competency exam and the continuing education require-ments, although these employees still have to register for PTINs. (See page 10 of the January 2011 issue of the Federal Tax Alert for an article on this exemption.) These firms have their own exams and training

programs which they argue are more difficult than what is likely to come out of the IRS. However, again there is no legal requirement that the big box firms train and test their employees.

ConclusionThe wisdom of these exemptions is yet to

be determined. Moreover, the IRS is busy trying to finish implementing the program to make major changes at this time. It also must develop ways to measure whether the current preparer regulation plan will improve compliance and tax administra-tion. (See the article below on the recent Congressional hearing on the plan.) Once these tasks are complete, it is possible the IRS may revisit these exemptions. The new status of registered preparers also is likely to increase their clout, leading to efforts to level the playing field for all tax return preparers.

Important Update on Testing: IRS Officials recently indicated that the results of the competency tests will be available immediately following testing, before the test-taker leaves the facility.

CoNgreSS HolDS HeariNg oN PreParer regulatioN

On July 28, the House Ways and Means Oversight Subcommittee held a hearing on the IRS’s tax return preparer regulation plan. The hearing focused on how the plan is progressing and on how it might ultimately affect both taxpayers and the return preparer community. Committee Chairman Charles Boustany (R-La) opened the meeting stating that although the initiative enjoys broad-based support, there are lingering concerns and questions that remain unanswered. The Committee heard from the IRS Director of the Return Preparer Office David Williams, the GAO, and representatives of large tax preparation companies and tax preparer groups. The NSTP submitted testimony which is reprinted as an insert in this issue.

Competency Tests and Background Checks Start in October

Return Preparer Office Director Williams told the Committee that more than 8 out of 10 taxpayers use a tax preparer or tax soft-ware. To date, the IRS has registered over 717,000 return preparers. Williams noted that of these, 62 percent of PTIN holders are not attorneys, certified public accoun-

tants, or enrolled agents. These unenrolled preparers will be subject to the new compe-tency test and the new continuing educa-tion requirements. Williams said both the competency tests and background checks will begin in October 2011.

Components of the IRS strategy also include: reviewing the personal tax compli-ance of return preparers; visiting preparers; reviewing a sampling of a preparer’s client returns where misconduct is suspected; and “e-file visits” where a revenue agent stops by and reviews whether a preparer is following all e-file rules. Williams also told the panel that the IRS is developing statistical methods to identify “ghost preparers” who prepare a return for compensation, but do not sign the return.

The Return Preparer Office is developing a public database and a general public outreach campaign. The database will give taxpayers the ability to look up the regis-tration status of their tax preparers. It also will give taxpayers searching for a preparer a tool to find an authorized person in their geographic area. Williams said the data-base and outreach campaign will launch in 2013 around the deadline for testing and fingerprinting.

GAO Says IRS Needs Framework for Leveraging Regulation Plan

James R. White, Director of Strategic Issues at the General Accountability Office (GAO), told Subcommittee members that the IRS needs better plans for leveraging the paid preparer requirements. In short, the GAO wants to know how the IRS is going to use the registration program and the data it collects to improve tax compliance.

White said the GAO found in a March study that the IRS had discussed but not documented a framework for how it plans to develop service and enforcement efforts. The IRS began implementing the require-ments before laying out strategies for how to leverage them and measure their impact, White observed.

The IRS now is developing a strategic plan and the GAO has suggested several ways the IRS can leverage the paid preparer require-ments to provide better service to taxpayers and improve taxpayer compliance. For example, the IRS needs to conduct compli-ance research to identify areas of noncom-pliance, justify resource requests and target scarce resources. In addition, given IRS’s new strategy for modernizing the way it


manages individual taxpayer accounts, IRS could conduct analyses of tax return infor-mation and data on paid preparers earlier in the filing season. This would allow IRS to reach out to paid preparers during the filing season to either correct widespread errors or to contact a paid preparer who repeatedly makes the same type of error on tax returns. The IRS also must determine how to measure the effects that requiring continuing education and testing have on tax return accuracy. GAO believes all of these steps are necessary for a successful regulation program.

Cost a ConcernChairman Boustany expressed concern

that lawmakers do not yet know the full cost and compliance burdens the new program will place on return preparers, or whether the requirements will yield the intended benefits. He offered that the new requirements will cost tax return preparers an estimated $51 to $77 million annually in registration fees alone. This does not include the additional costs associated with taking the competency examination and continuing education. Witnesses testifying on the program echoed this same concern. Boustany said that Congress will continue to exercise oversight over the program to judge whether the new program improves tax compliance.

irS ameNDS fiNal CirCular 230 ruleS

The IRS has amended the final Circular 230 regulations to make a few clarifica-tions. The final regulations were published

in June 2011. The regulations modify the rules governing practice before the IRS and the standards with respect to tax returns. In particular, Circular 230 revises the standards for tax return positions and includes new rules applicable to registered tax return preparers.

Application DeadlinesOne change related to deadlines. The

final rules were changed to clarify that the rules for application to become an enrolled agent, enrolled retirement plan agent, or registered tax return preparer apply to applications received on or after August 2, 2011. Previously, the language referred to applications received “August 2, 2011” which implied that it referred only to applications actually received on that date.

Disciplinary ProceedingsAnother change clarifies that the rules for

the institution of a disciplinary proceeding for violations of Circular 230 rules apply to employers, firms or other entities as well as to individual practitioners.

Representation at Disciplinary Hearings

The section on representation during proceedings before Administrative Law Judges was changed to add the rule that a respondent (taxpayer) may appear in person, be represented by a practitioner, or be represented by an attorney. A prac-titioner or an attorney representing a respondent or proposed respondent may sign the answer or any document required to be filed in the proceeding on behalf of the respondent.

irS PoStS New VerSioN of CirCular 230

The IRS has posted on its website the new version of Circular 230, the rules of practice before the IRS. The revised version, Circular 230 (Rev. 8-2011) incorporates changes made by recent regulations including the new rules applicable to registered tax return preparers. Use the link below to access the revised publication.

http://www.irs.gov/pub/irs-pdf/pcir230.pdf

irS reQueStS CommeNtS oN aPProVal of CoNtiNuiNg eDuCatioN ProViDerS

The IRS has issued a Notice requesting public comments on the process for approving continuing education providers. The IRS seeks input on the procedures and standards that will govern the approval process from education providers, tax return preparers, industry and consumer groups, and taxpayers.

Under IRS regulations issued in June, registered tax return preparers must complete 15 hours of continuing educa-tion per year. Continuing education providers approved by the IRS must teach the courses. To qualify, a continuing education course must enhance profes-sional knowledge in Federal taxation, must be consistent with the Code and effective tax administration, and must be conducted by a qualified instructor.

Timetable, NSTP CommentsThe continuing education requirement

for registered tax return preparers has a tentative start date of January 1, 2012. Continuing education providers must be approved by then, so comments on the approval process were due within just a few weeks of release of the Notice, by August 17, 2011. NSTP submitted comments in response to the Notice. The NSTP comment paper will be reprinted in the October 2011 issue of the Federal Tax Alert. NSTP will continue to obtain IRS approval for its many continuing education courses, most of which currently are approved under the very stringent requirements of the National Association of State Boards of Accountancy (NASBA). We assure you that NSTP will continue to carefully watch developments on the continuing education requirements and on all issues relating to preparer regulation and will keep you informed.

TIMELINE FOR RETURN PREPARER REGULATION PLANFROM GAO TESTIMONY, SOURCE: IRS

2010 2011 2012 2013 2014

PTIN registration began• Fee of $64.25 charged• Registrants asked about

personal tax compliance and felonies

PTIN revoked ifcompetency

test not passed

Searchabledatabase of paid

preparersavailable

Competencytesting available• User fee–To be

determined (TBD)

Continuing education requirement–TBD• 15 annual hours required• User fee–TBD

Sep

tem

ber 2

8

Oct

ober

Dec

embe

r 31

Janu

ary

31

FEDERAL TAX ALERT PAGE 16 SEPTEMBER 2011

www.nstp.orgService to the Tax Profession

ET CETERA

airliNe tiCket tax DeBaCleWhen our Congressmen were going

after each other over the debt ceiling like some rabid dogs of August, there were other events working their way through Congress. Or should we say other messes? Funding for the Federal Aviation Admin-istration (FAA) was allowed to expire on July 23. Air traffic controllers stayed on the job, but others in the agency were affected by layoffs. Other than controllers, how many other employees can there be? There are about 44,000, including those controllers, according to the FAA, and another 30,000 independent contractors. How agencies can grow when the public is not paying attention.

In any case, the agency did not get its funding, it laid off a number of workers, and Congress muddled along until August 5th and did what Congress does best—kicked the can down the road. By a unanimous voice vote, the Senate approved the funding of the agency until September 6th. That is not the end of the story.

Here is what happened due to the two-week delay in FAA funding:

The FAA is in the business of tax 1. collecting. It collects airline ticket taxes. With its legislative authority having expired, so did the ticket tax.

Most of the airlines, instead of not 2. collecting the taxes and collecting just the fare, raised their fares, by the exact amount of the taxes so consumers paid the same, and the airlines pock-eted the difference.

The new legislation was retroactive, 3. so theoretically, the airlines and the passengers are now liable for that tax, and the airlines should have to pay the tax on the higher fare.

Consumer Advocacy groups were up 4. in arms at the airlines’ grab of the cash and wanted something done.

On Friday, August 12th, President Obama commented that the $400 million (two weeks worth of ticket taxes) would be hard to recover, and the IRS announced it would not go after these taxes. End of story…until September 6th, when the extension is up.

aNotHer Blow for tHe PoSt offiCe

Taxpayers in many states have come to rely on getting their state tax forms placed conveniently in their mailbox each year. However, if you live in Ohio, don’t look for them next year. The reason? It costs over $1.2 million to send them out, according to the State of Ohio. It will be interesting to see if the State’s collections will go down with this strategy.

tHe tax rate NumBerS gameDifferent personal income tax rates are

bantered about as if they have real meaning. The top rate is 35%, an outrage say some, not enough say others. That number may be meaningless, much like the 90% tax rate of some years ago. The fact is, taxpayers rarely pay the top rate. What is really paid? The internet political site, Politico, made a recent stab at breaking down some of the latest IRS numbers for returns filed in 2009 for tax year 2008. They found that the average tax rate paid, considering all taxpayers, was 11.4%, down from 12.5% the previous year. The numbers also show that there are 235,000 millionaires in the U.S. and they pay an average of 24.4%. That figure represents an overall drop in that demographic’s rate from 28.5% in 2002, when George W. Bush was president. The Tax Foundation figures that this group of millionaires comprises only .2% of taxpayers. Ninety-seven percent of taxpayers had incomes under $200,000 in the same period.

With Washington politicians looking for money, this group should be nervous, which calls to mind famed bank robber Willie Sutton. When they asked him why he robbed banks, he answered simply: “Because that’s where the money is.”

ex-irS ageNt may HaVe uSeD BaDge iN ProStituioN SCHeme

KOLO TV in Reno, Nevada recently reported that the Reno police have arrested a local man, Kemp Shiffer, under suspicion of using his IRS badge to coerce young women into prostitution. Shiffer, who is a former IRS agent, also was an accountancy instructor at the University of Nevada. He had tried to get a license for a legal brothel, but was denied the license. Shiffer was caught in an online sting operation and is suspected of going to California to recruit women. It is thought that his activities go back over 10 years.

QUOTES

Taxpayer “wallets are safe.”

—Grover Norquist, President of Americans for Tax Reform, in a state-ment made after the GOP supercom-mittee members were named.

“Tax increases could ‘come into play’ as a result of the debt ceiling deal.”

—Rep. Phil Gingrey, (R-Ga.) in a news statement announcing his “no” vote on the debt ceiling deal.

“…[E]ven the Commissioner of the IRS testified that he relies on a paid tax return preparer.”

—Charles Boustany (R-LA), Chairman of the House Ways and Means Subcommittee on Oversight, in a statement opening the hearing on tax preparer regulation.

“We are told that this is an odious and unpopular tax. I never knew a tax that was not odious and unpopular with the people who paid it.”

—John Sherman, President of the Fulton County Taxpayers Foundation, Atlanta, Georgia.

“Just because you have a briefcase full of cash doesn’t mean that you’re out to cheat the government.”

—Pete Rose, famous baseball hitter (still not in the Hall of Fame).

“Service to the Tax Profession”

WRITTEN TESTIMONY OF GRETA BARNCORD, EA ON BEHALF OF

THE NATIONAL SOCIETY OF TAX PROFESSIONALS

BEFORE THE

COMMITTEE ON WAYS AND MEANS SUBCOMMITTEE ON OVERSIGHT

THE UNITED STATES HOUSE OF REPRESENTATIVES

HEARING ON NEW IRS PAID TAX RETURN PREPARER PROGRAM

JULY 28, 2011

Mr. Chairman and members of the subcommittee, thank you for the opportunity to testify on the new IRS Paid Tax Return Preparer Program. My name is Greta Barncord and I am the President of the Board of the National Society of Tax Professionals (NSTP). Our organization is comprised of tax practitioners with varying types of professional credentials and different levels of practice. Thus, we are uniquely qualified to offer our membership’s views on the IRS’s plan for regulating tax return preparers.

We have many concerns about the program that we have expressed to the IRS throughout the imple-mentation process. As many elements of the plan are in place, we will not revisit those myriad concerns in this testimony. Rather, we would like to focus our remarks on two issues that remain problematic: the fair treatment of experienced, professional preparers; and the continuing problem of nonsigning preparers, who will be able to avoid the reach of the IRS’s current preparer regulation plan.

Competency Exams

We remain concerned that competency testing will be a barrier to entry for unenrolled preparers, many of whom now work with underserved populations in rural areas and with lower-income taxpayers. Many unenrolled practitioners are highly competent and serve their clients well. If they are forbidden to practice going forward, the existing enrolled community could not absorb the overwhelming number of new clients. Tax preparation fees would go up. Many taxpayers could be underserved, and the IRS workload and staffing expense would also increase dramatically due to the overflow. For these reasons, we continue to recommend the “grandfathering in” of paid return preparers with 3-5 years experience and a history of signing accurate returns.

Competency testing is set to begin in October of this year. We believe the IRS should carefully track the pass/fail rates of experienced paid preparers and, if there are high initial failure rates, the IRS should again consider some sort of grandfather program for experienced tax preparers. We suggest the model used by some State Bar Associations for “waiving in” out-of-state professionals. That is, allow a tax preparer to waive in to the program without testing if they can show they have been practicing for 3 to 5 years and have been regularly signing tax returns during that time. A similar rule already is in place for revenue agents who have worked for the IRS for 5 years. Circular 230 allows them to obtain the Enrolled Agent credential without testing. In short, there should be some method of becoming grandfathered in based on a preparer’s demonstrated professional experience.

Nonsigning Preparers

While we understand the IRS’s frustration with misconduct by some tax preparers, we believe the new PTIN registration requirement and competency testing program will not address many of the abuses the IRS is seeking to prevent—primarily, unsigned, erroneous and fraudulent returns. The focus of the IRS’s regulation plan so far has been on legitimate, signing paid tax preparers. The IRS must concurrently implement a comprehen-sive, aggressive plan to stop return preparation by nonsigning preparers who do not register for a PTIN, do not sign the returns they prepare, and who do not comply with the new testing, education, or ethical requirements.

The IRS has indicated that it is working to identify returns prepared by a nonsigning preparer but filed by the taxpayer. This strategy clearly is not enough. At the same time, the IRS has been making compliance visits to above-board, signing preparers around the country in a program that began early this year. The NSTP recommends that the IRS shift its resources, particularly for these preparer visits, to investigating and visiting tax preparation offices that are run by nonsigning, underground tax preparers.

Taxpayers who submit ostensibly self-prepared returns also should be required to certify by some type of jurat on both print and electronic returns that they did not pay a nonsigning preparer to complete the return. The statement should be included in both hand-written and paper returns and also should be incorporated into tax preparation software so every self-prepared return includes the affirmation. This requirement should be enforced by strict monetary penalties on taxpayers who fail to report nonsigning paid preparers and by criminal penalties for the noncompliant preparers, when identified.

In conclusion, return preparer regulation will not be successful unless the most serious noncompliance problem, that of fly-by-night, underground return preparers, is addressed with the same commitment, level of resources, and comprehensive strategy which is now in place for legitimate paid tax return preparers.

We commend the Committee for holding this hearing to explore the issues concerning the new IRS Return Preparer Regulation Program. Thank you for consideration of our views. I would be pleased to address any questions you may have. I can be reached by phone at (407)365-6204 or by e-mail at [email protected].

Respectfully submitted, Greta Barncord, EAPresidentNSTP Board of Directors

About the NSTP

The National Society of Tax Professionals (NSTP) is a nonprofit organization founded in 1985 and is made up of approximately 5000 members who are certified public accountants, attorneys, enrolled agents, financial planners, and other tax professionals. About one-half of our members are unenrolled preparers. NSTP supports the tax professional community with educational programs designed to enhance professional ability and knowledge. Every NSTP Member is required to abide by the NSTP Code of Professional Conduct which is designed to promote high standards of competence and ethics within the profession and to promote mutual respect, cooperation and communication between the Internal Revenue Service and tax professionals. For more information, visit www.nstp.org.

910 NE Minnehaha Street, Suite 6 • Vancouver, Washington 98665 • (800)367-8130 (phone) • (360)695-7115 (FAX)

(800) 367-8130www.nstp.org

NATIONAL SOCIETY OF TAX PROFESSIONALS"Service to the Tax Profession"

2011 FEDERAL TAX UPDATE AND REVIEW SEMINARS

Topic Highlights

Any and All 2011 LegislationSelected Provisions of “Tax Relief Act of 2010”Selected Provisions of the “Job Creation Act of 2010”IRS Mandate on Registration of Tax PreparersIntroduction to the “2010 Health Care Act” and “2010 Reconciliation Act”2011 Forms ReviewTax Transactions in 2011 and Beyond Affected by the Legislation of the 21st CenturyPreparing Your Business Clients for the Credit Card Transaction Reporting IssuesAMT: What’s Happening?NSTP Hotline Hot TopicsSchedule C Issues§108 Home Mortgage Debt Relief Issues Still AliveIRS Regulation and Announcement ReviewTax Court Case Review§1244 Small Business Stock LossesUnderstanding the Importance of Focusing on AGIPreferential Capital Gain Rate Issues: The Zero Rate Still Alive for 2011 and 2012Review of the New Basis Rules on Covered Securities Beginning 2011And A Whole Lot More...

*Hotel locations TBA

NOTICE: All 2011 Fall Update locations and dates are subject to change

CANCELLATION: NSTP reserves the right to cancel any program or course for circumstancesthat are not under direct control of NSTP. If a course or program is canceled, participants willbe refunded 100% of their registration fee.

For more information please visit www.nstp.org

http://www.nstp.org/

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