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Monthly Newsletter for ncpeFellowship Members Vol. 3 No. 8 August 2012

Remarks from Beanna

With just a little help from my friends, a wonderful lyric, we have the business of tax today. The more I read and study the taxation system of the United States and how it came to be, the more respect I have for what people in the business of tax contribute to our voluntary system of taxation.

To understand where we are we need to go back in history!

A Concise History of Changes in U. S. Tax Law

“In this world, nothing can be said to be certain, except death and taxes.”

Benjamin Franklin

Benjamin Franklin was correct in his assessment of both death and taxes, but while taxes have been certain, they have been far from consistent.

In the beginning

America was tax-free for much of its early history. Free of direct taxation such as income tax. It was, after all, taxes that led Americans to revolt against the British in 1773. Following the revolutionary war, the new American government was understandably cautious when it came to taxation. Direct taxation was prevented by the Constitution for all practical purposes. Government revenues, therefore, had to be collected through tariffs and duties on certain items. These excise taxes on liquor, tobacco, sugar, legal documents and so on, betrayed a social agenda as well as a revenue-gathering attempt.

The first challenge to the system came in 1794, when the Whiskey Rebellion broke out. It was basically groups of Pennsylvanian farmers angry about the tax on whiskey burning down tax collectors’ houses and tarring and feathering any collectors too slow to get away. Defending the right to collect

their indirect taxes, Congress put down the revolt by military force.

Taxes Last Longer than War

The sanctity of the Constitution and the ancestral aversion to taxes was tested again in the 1790s, when a war with France led to a property tax. The implementation of this tax was far from perfect, so the later war of 1812 was funded by higher duties and excise taxes. It would take a Civil War to bring income tax into the young nation.

The American Civil War was disastrous and expensive for the nation in that massive amounts of debt were incurred waging war against itself. In order to help pay for the war, the Congress passed the Revenue Act of 1861. The tax was levied on incomes exceeding $800, and was not rescinded until 1872. This act created most of what we consider the modern tax system. The U.S. Internal Revenue Service (IRS) was founded, the tax was progressive and some deductions were allowed.

Rewriting the Constitution

The Constitution forbade any direct taxes that were not levied in proportion to each state’s population. The Supreme Court declared a flat tax contained in the 1894 Wilson-Gorman Tariff Act unconstitutional in 1895. Although a victory for taxpayers, many people were beginning to note the damage that revenue-collecting tariffs and duties were having both on world trade and the living standards of the poor.

So the 16th Amendment was introduced in 1913 to pave the way to an income tax by removing the proportional to population clause. It was quickly followed by an income tax on people with an annual income of over $3,000. This tax touched less than 1% of Americans. Interestingly, the phrase “lawful income” was later changed to simply “income” in 1916, thus giving prosecutors a way to convict organized crime figures such as Al Capone when all other avenues were exhausted.

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World War, World Prosperity, World Depression

World War I led to three Revenue Acts that cranked up tax rates and lowered the exemption levels. The number of people paying taxes in the United States increased to 5%, and separate taxes were introduced for estates and excess business profits. These taxes were rolled back following the war in five phases, and the economy experienced a huge boom. Government tax receipts reached $3.6 billion in 1918, the last year of the war. Despite lowering taxes, the government take reached $6.6 billion in 1920. The crash of 1929 and the financial fallout saw these revenues fall to $1.9 billion by 1932.

Roosevelt and Rising Taxes

The Revenue Act of 1945 rolled back $6 billion in taxes, but the burden of social security and an expanded government kept them from going much lower. Well into the 1950s, the highest tax rate was over 80% and the pay-as-you-go withholding system introduced as a wartime measure was never shut down. Progress in lowering taxes was sporadic and confusing. Rather than rolling back rates as such, the tax code was being rewritten to allow deductions in certain circumstances or to lower rates on private foundations while raising rates on corporate profits.

The 1960s and 1979s were a time of massive inflation, and government deficits continued to grow as Medicare was added to the expensive social security system. Inflation turned out to be a huge problem for taxpayers because taxes were not indexed for it. This meant that although the real value of people’s income was being decreased, they were also required to pay more tax as bracket creep set in.

Reaganomics

The Economic Recovery Tax Act of 1981 represented a turning of the tide for taxation, even though it was only temporary. President Reagan lowered all the individual tax brackets by 25% and changed the way companies accounted for capital expenditures, encouraging investment in equipment. Simultaneously, Reagan sought to bring inflation under control and succeeded a little too well. The government’s budget was based on an accepted rate of inflation, and when the attempts to quash inflation kicked in too quickly, a deficit was created. Consequently, Reagan had to pare back some of his tax cuts in 1984, specifically on the corporate side, to try and make up the

budget shortfall. Despite this, the IRS announced that in 1985 more than 400,000 Americans had reached the millionaire rank thanks to the high-level tax cuts under Reagonomics. In 1986 another tax reform act lowered the top rate from 50 to 28% and cut corporate tax from 50 to 35%. With more Americans now willing to take their wealth in taxable income, the overall tax receipts were relatively unchanged despite the drop.

The Future

In the 1990s and early 2000’s the trend in tax increases have been dialed back, however the burdens of Medicare and Social Security added to the bulging budget. 1993 saw modest increases in taxes and 1997 saw the introduction of negative income tax. Negative income tax is a hidden spending program whereby people who paid no tax could get funds through the tax system in the form of tax credits.

2001 saw a number of tax cuts which expire in 2012, just at a time when the government faces the retirement of the baby boomers and additional strain on social programs. With health care costs it is unlikely that taxpayers will see another downward trend for some time. Bills must be paid, and the American Taxpayer will end up paying them.

With the new emphasis on regulating tax return preparers and many who are not CPAs, Attorneys or EAs having to prove their competency through testing, it is a new day for those in the business of tax.

Now most of us were tax professionals before it was “cool” to be a tax professional but we are living the next phase of tax history – the regulation of the tax industry.

With this new phase of the tax business let us hope, no, let us demand that we be treated with the respect deserved of someone who assists taxpayers to file complete and accurate returns.

Beanna

Beanna@ncpefellowship.com or 775-787-7518

Use Resources and Toolsfor Tax Professionals

On Our WebsitencpeFellowship.comNational Center for Professional Education Fellowship

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Remarks from Beanna

Tax News

Justices Allow the Term ‘Tax’ to Embrace ‘Penalty’The Long Awaited Opinion and SurpriseDespite Supreme Court’s green light on PPACA, enforcement hurdles remainPoll Finds Americans Favor Ending Tax Cuts for Wealthy by 2-1How Delaware Thrives as a Corporate Tax HavenBusiness Tax Law Changes for 2012 You Need to KnowGet Ready for Tax Increases in 2013 under Affordable Care ActMost Members of Congress Keep Their Tax Returns SecretCongressional Research Service Report “Employee

Stock Options: Tax Treatment and Tax Issues”

People in the Tax News

Ernest & Young ReportTax Court: IRS Agent Could Substantiate Only $215 of $95,000 of Claimed Charitable & Medical DeductionsMo Money Customers Have Given Up Hope

IRS News

SCOTUS Ruling Means Bigger, More Intrusive IRSSpecial Tax Benefits for Armed Forces Personnel Expanded Adoption Tax Credit Still Available for Extension FilersTax Relief for Victims of Tropical Storm Debby in FloridaRenting A Vacation HomeIRS Personnel Changes Note$905 Billion DeficitTIGTA Report on IRS and Tax-Exempt OrganizationsAffect of Recession on Household IncomesIRS Faces Daunting ‘Obamacare’ ChallengeKeep the Child and Dependent Care Tax Credit in Mind for Summer PlanningEITC Due Diligence Requires Paid Preparers to Submit Form 8867IRS Electronic Tax Administration Advisory Committee

Delivers Report to Congress

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Contents Page

IRS Offers Tips on How to Fix Errors Made on Your Tax ReturnIRS Return Preparer Visitation Project Needs WorkJob Search Expenses Can be Tax DeductibleTIGTA Audit of IRS on Seizure of Taxpayer PropertyTIGTA Reports on IRS Use of Illegal Tax Protestor CodesTIGTA Report Suggests Changes in VITA Program

Thoughts from the Ragin Cagin

How Sole Proprietors, Partners, and 2% S Corp Shareholders Can Deduct Medicare Premiums

Tax Pros in Trouble

Internal Revenue Service Raids Santa Rosa Tax BusinessTexas Return Preparer Sentenced to Jail for Preparing False Tax ReturnsFugitive Ex-CPA Arraigned on Tax ChargesLawyer Arrested by IRS on Tax EvasionEllington Man Admits Filing False Tax Returns2 Toledoans Charged in Alleged Tax-Fraud SchemeBirmingham Return Preparer Sentenced to 15 monthsEl Paso Tax Preparer Sentenced to Two Years in

Prison for Filing False Tax Returns

Tax Advocacy & Tax Professionals

What Farmers Need to Know About AuditsIRS Promotes Expansion of Fresh Start InitiativeIRS Revises Procedures and Fees for Requesting

Background File Documents

Wayne’s World

Benefit Opportunities to Shareholder/Employees of a C Corporation

Sponsor of the Month

Affordable Checks

Tax Quotes & Funnies

Contents Page

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New Feature of Indexed Page Navigation Direct Link Click:Place the mouse pointer over an article, subject name or page number,

the mouse pointer becomes a hand. Click with the mouse button to go directly to the page of this issue where the article is located.

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Tax NewsJustices Allow the Term ‘Tax’ to Embrace ‘Penalty’

There are lots of taxes that people pay only if they buy something — sales taxes, taxes on cigarettes and taxes on airline tickets among them.

President Franklin D. Roosevelt signed the Social Security bill into law, which was based on the government’s power to tax.By calling the penalty for not buying health insurance a tax, the Supreme Court has effectively created a tax that people will pay only if they do not buy something.

To some extent, calling it a tax does break new ground.

“Nobody here can think of an example where you pay a tax if you do not buy something,” said Howard Gleckman, a resident fellow at the Tax Policy Center in Washington. “But there are plenty of examples of where you get a tax break for doing something or buying something. In effect, your failure to buy something means you will pay more taxes.”

Health insurance, as it happens, has long been one such area. Suppose your employer pays you a $90,000 salary and spends $10,000 to buy health insurance for you. All $100,000 is considered a business expense and is therefore a tax deduction for the company, but you will pay income taxes only on the $90,000.

If the employer did not buy insurance, but instead paid you the full $100,000, the company’s tax bill would be unchanged. But you would pay taxes on the full $100,000, even if you used $10,000 of it to buy the health insurance the employer was no longer providing.

In his majority opinion, Chief Justice John Roberts noted that there was nothing new about Congress using taxes “to encourage buying something,” pointing to the tax breaks for those who buy their homes as an example. He quoted a 1937 Supreme Court decision stating that every tax “interposes an economic impediment to the activity taxed as compared with others not taxed.”

The law in question did not call it a tax. It called it a penalty for not buying health insurance. To the dissenters, that proved it was not a tax. To the chief justice, the choice of words could not obscure the reality. He noted that those who chose to pay the penalty rather than buy health insurance would be writing checks to the Internal Revenue Service and would not end up with a criminal record.

Chief Justice Roberts wrote that the amount of the penalty “is determined by such familiar factors as taxable income, number of dependents and joint filing status,” and that those who did not pay taxes because their income was too low would not have to pay any penalty at all.

There is nothing novel in using the government’s power to

tax as a justification for a new benefits program, said Matt Fink, a former president of the Investment Company Institute who is writing a biography of Carter Glass, a former Treasury secretary and, as a senator, author of banking legislation during the 1930s.

When the establishment of Social Security was challenged after it was enacted in 1935, Mr. Glass said that “the Supreme Court ruled 7-2 that the new Social Security program, based on the government’s broad power to tax, was fully constitutional.”

In that case, however, the government had based its justification for the law on the power to tax, while President Obama and Congressional Democrats specifically denied that they were raising taxes through the penalty for not buying health insurance.

But then, as now, it was a Supreme Court justice who came up with the justification for the program, Mr. Fink said. At a tea party in 1934, Frances Perkins, then the labor secretary, found herself seated next to Justice Harlan F. Stone.

“In their small talk,” said Mr. Fink, the justice “inquired as to how her work was going. The secretary freely admitted they were stuck on the administration’s new Social Security bill, and were uncertain on what basis the new program should be founded. Upon hearing this, the justice looked around to see if anyone was listening, leaned over to her, and putting his hand up to his mouth, whispered: ‘The taxing power of the federal government, my dear; the taxing power is sufficient for everything you want and need.’ The secretary excitedly returned to her staff and announced she had made up her mind. They would base the new program on the government’s power to tax.”

Regardless of whether the required payment for those who choose not to buy health insurance is or is not a tax, the health care program is about to raise taxes on high-income Americans, which could cause some of them to sell stocks before the year is out.

The second health care bill passed by Congress in 2010, devised in part to fix errors in the first law and in part to pay for it, raised the Medicare payroll tax rate by 0.9 percentage points, to 3.8 percent, effective in 2013, for taxpayers with total incomes of more than $200,000, or $250,000 for married taxpayers filing jointly. The law also extended that tax to income on investments, including capital gains, interest, dividends, annuities and royalties, but only for such high-income taxpayers.

For people whose incomes are that high, the effective tax rate on dividends and long-term capital gains will rise to 18.8 percent from the current level of 15 percent, said Robert N. Gordon, president of Twenty-First Securities, a brokerage firm.

It could, of course, go even higher if Congress fails to extend the George W. Bush tax cuts that are now scheduled to expire at the end of the year. Mr. Gordon said that could encourage

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some taxpayers to sell investments before the year ends, rather than wait. “We know taxes are going up,” he said. “It is just a matter of how much.”

Editor’s Note: The terms of an increase in the Medicare tax to take effect in 2013. The higher rate of 3.8 percent will apply only to incomes higher than $200,000 per year, or $250,000 for married taxpayers filing joint returns, and will be applied to investment income as well as ordinary income. Those earning less will continue to be taxed at the rate of 2.9 percent, which will apply only to earned income, as it does now.

The Long Awaited Opinion and Surprise

Last month, the Supreme Court upheld the constitutionality of the Affordable Care Act by defining the individual mandate as a tax. The ruling focused on a technical explanation of the individual mandate, with Chief Justice Roberts noting in his opinion: “…it is reasonable to construe what Congress has done as increasing taxes on those who have a certain amount of income, but choose to go without health insurance. Such legislation is within Congress’s power to tax.”

The Court endorsed the practice of lawmakers encouraging or discouraging individuals to change their behaviors through the tax system. The practice of using the tax code to advance social agendas and to change economic or societal behavior has skyrocketed over the last 25 years. Tax breaks for homeownership, retirement saving, having children, promoting energy conservation and more abound in the tax code. In fact, tax breaks rather than budgeted spending account for one-fourth to one-third of benefits and subsidies granted to the public, according to the Urban Institute’s C. Eugene Steuerle. “Taxes powerfully influence how we all consume, work, save, and invest,” he notes.

The result: a tax code that is millions of words long, with even longer regulations, and one that is an indecipherable patchwork quilt of provisions, breaks, and penalties designed to reward or punish behaviors that our “social scientists” deem important.

Currently the IRS is responsible for $2.5 trillion a year or an estimated 92 percent of all federal government receipts. Each year, Congress enacts legislation that results in numerous changes to the tax code, each requiring new paperwork, updated computer systems, revised audit procedures, and lengthy explanations for tax preparers and the public. And each year, the IRS also fails to collect an estimated $450 billion in individual and corporate income taxes, as well as employment, excise, and estate and gift taxes due, in part, to lack of funding and staffing to keep up with tax code changes.

And now with the Supreme Court’s ruling, we are asking the IRS to add enforcement of an individual health insurance mandate to its portfolio. That means that, on top of its current responsibilities, the IRS will have to collect an assortment of fees that employers and companies would have to pay under the legislation, distribute federal subsidies to small businesses and low-income individuals, and enforce the insurance

mandate. The Congressional Budget Office estimated that the IRS would need an additional $5 billion to $10 billion in funding over 10 years to implement the bill’s provisions.

The Obama Administration asked to increase the IRS’s annual budget to $12.8 billion, in part to fund the necessary changes needed to administer the new program, but Republicans opposed to the bill were successful in cutting the agency’s funds back to $11.8 billion in the budget approved earlier this year, with some Republicans even calling for the elimination of the agency altogether.

While the IRS is the federal agency that most Americans love to hate what is closer to reality is that the IRS has no interest in policing health care.

What is increasingly evident is the reach and magnitude of the power that Congress possesses in its taxing authority. It is our lawmakers and their apparently almost limitless ability to tax that have given us a tax code out of control – subject to the social whims of the day and relied upon to cure societal ills that include a lack of health care coverage, addiction to tobacco, and more.

Despite Supreme Court’s green light on PPACA, enforcement hurdles remain

Although the individual mandate and its associated penalty have been upheld by the Supreme Court as a valid exercise of Congress’s taxing power, there still remain several lingering uncertainties about the Patient Protection and Affordable Care Act (PPACA) and its implementation. For example, IRS is largely responsible for enforcing the mandate via collection of the penalty, but its traditional collection powers have been curtailed.

For tax years ending after Dec. 31, 2013, non-exempt U.S. citizens and legal residents will have to maintain minimum essential health insurance coverage or pay a penalty (the “shared responsibility payment”). “Minimum essential coverage” includes government sponsored programs (e.g., Medicare, Medicaid, Children’s Health Insurance Program), eligible employer-sponsored plans, plans in the individual market, certain grandfathered group health plans and other coverage as recognized by Health and Human Services (HHS) in coordination with IRS. (Code Sec. 5000A)

In addition to the individual mandate, PPACA also carries the following tax provisions (some of which were modified or added by the Health Care and Education Reconciliation Act of 2012, or HCERA), among others:

For tax years beginning after Dec. 31, 2012, an additional 0.9% hospital insurance (HI) tax for high wage workers. (Code Sec. 1401(b)(2))

For tax years beginning after Dec. 31, 2012, a 3.8% surtax on the net investment income of higher-income taxpayers. (Code Sec. 911(a)(1))

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The premium assistance credit under Code Sec. 36B.

For tax years beginning after Dec. 31, 2009, the small employer health insurance credit under Code Sec. 45R.

Qualification of a child under age 27 as a dependent for employer-provided and other health coverage exclusions under Code Sec. 106 and Code Sec. 105(b).

For tax years beginning after Dec. 31, 2013, a reimbursement (or direct payment) for the premiums for coverage under any “qualified health plan” through a health insurance Exchange is a qualified benefit under a cafeteria plan if the employer is a qualified employer. (Code Sec. 125(f)(3)(B)) Otherwise, reimbursement (or direct payment) for the premiums for coverage under any qualified health plan offered through an Exchange is not a qualified benefit under a cafeteria plan. (Code Sec. 125(f)(3)(A))

For months beginning after Dec. 31, 2013, a large employer that doesn’t offer health care coverage for its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60%, must pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. (Code Sec. 4980H)

For tax years beginning after Dec. 31, 2017, a 40% nondeductible excise tax will be levied on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. (Code Sec. 4980I)

In a much awaited opinion, the Supreme Court by a 5-4 vote upheld the individual mandate on the ground that it reflects a constitutional exercise of Congress’s taxing power. In so holding, the majority determined that although not necessarily the most intuitive reading of the statute, the mandate could be interpreted as “a tax hike on certain taxpayers who do not have health insurance.”

Among the reasons advanced by the Court for its plausible construction of the mandate as a tax were: it is paid into the Treasury by taxpayers when they file their tax returns; it doesn’t apply to individuals who don’t pay federal income taxes because their household income doesn’t meet the filing threshold; and the amount of the payment, for those who owe it, is determined by factors such as taxable income, number of dependents, and filing status. (Code Sec. 5000A)

Although PPACA describes the payment as a penalty, not a

tax, this label wasn’t dispositive for purposes of the Court’s constitutional analysis. (For an article on the Supreme Court’s decision, see ¶ 18.)

Although known as a health care law, PPACA carries many tax provisions, the implementation and enforcement of which will fall largely to IRS.

Under Code Sec. 5000A(g), the penalty for failing to carry health insurance “shall be paid upon notice and demand by the Secretary, and...shall be assessed and collected in the same manner as an assessable penalty” under Code Sec. 6671 through Code Sec. 6725. IRS will not be permitted to (i) file a notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty, or (ii) levy on any property of a taxpayer with respect to such a failure. (Code Sec. 5000A(g)(2)(B)) However, the authority to offset refunds or credits is not so limited.

These limitations raise concerns about whether the individual mandate will be truly enforceable. Much of the responsibility of enforcing it has been delegated to IRS, but with limited powers and scant guidance on how to do so.

The extent of this issue is not yet known. Some taxpayers will no doubt decide to obtain health insurance instead of paying the penalty. Others, perhaps as an unintended consequence of PPACA, will simply forego insurance and exercise the perfectly legal option of instead paying the shared responsibility payment—knowing that they can rely on PPACA’s protections for those with pre-existing conditions should any unexpected illness, injury, or condition arise. Others will also likely forego insurance and refuse to pay the penalty, forcing IRS to attempt to collect.

The Congressional Budget Office (CBO) has estimated that approximately 21 million nonelderly residents will be uninsured in 2016, but most of them won’t be subject to the penalty—such as unauthorized immigrants and taxpayers whose income falls below the filing thresholds. CBO projected, accounting for likely compliance rates as well as IRS’s ability to administer and enforce the penalty, that approximately 4 million people will pay the penalty in 2016 on account of being uninsured.

In addition to IRS’s limited enforcement powers, IRS faces logistical hurdles as well. IRS has already been struggling to keep up with a tax code that is rapidly amended and arguably subject to political whim, and PPACA reflects the largest set of tax law changes in over 20 years. The uncertainty of PPACA’s fate—in the political area—has made, and likely continues to make, planning even more difficult.

Numerous reports by the Government Accountability Office and Treasury Inspector General of Tax Administration have indicated that IRS is making progress on implementing PPACA, but still has lots of work to do.

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Poll Finds Americans Favor Ending Tax Cuts for Wealthy by 2-1

Americans in a national poll say by a 2-1 margin that ending the Bush-era tax cuts on annual earnings of $250,000 or more would help the economy, a position President Barack Obama has stressed in his campaign for another term.

The survey by the Pew Research Center shows that 44 percent said the higher taxes would be beneficial, while 22 percent said such a move would harm it and 24 percent said there would be no effect.

In an almost identical finding, 44 percent said the higher taxes for the wealthier would make the tax system fairer, while 21 percent said the result would be a less fair structure and 25 percent said it would make no difference.

While most Democratic and Republican lawmakers favor letting the tax cuts initially enacted under President George W. Bush continue for those below the $250,000 threshold, therates for those above it has been a major divide between theparties and is a major divide between Obama and presumptiveRepublican presidential nominee Mitt Romney. All of the taxcuts, passed in 2001 and 2003, are due to expire Dec. 31.

Obama spotlighted his support for ending tax cuts for the wealthier while continuing them for others in July 9 remarks at the White House, urging Congress to pass such legislation. He made the announcement before campaign stops in Iowa and Virginia, two of the battleground states in the presidential race.

Romney and congressional Republican leaders call for extending the reductions for all taxpayers and making further reductions in the top tax rates paid solely by higher-income Americans.

Republicans say higher taxes for wealthier Americans would hurt the economy because it would discourage job creation. Obama couches the issue as a matter of fairness in efforts to reduce the federal deficit and says Republicans are holding middle-class tax cuts “hostage” to reductions for higher-income taxpayers.

In the Pew poll, 58 percent identified Obama as the candidate wanting the tax cuts to expire for wealthier Americans, while 7 percent named Romney, 7 percent said both took that position, 8 percent said neither and 20 percent said they didn’t know. The survey of 1,015 adults was taken July 12-15 and has a margin of error for its full sample of plus or minus 3.6 percentage points.

How Delaware Thrives as a Corporate Tax Haven

A Delaware address has been held by Viktor Bout, a Russian arms dealer recently sentenced to 25 years in prison.

Timothy S. Durham, who has had a Delaware address, was

found guilty of bilking investors of $207 million.

Delaware’s chief deputy secretary of state, says, “Companies choose our state and we are proud of it.”

NOTHING about 1209 North Orange Street hints at the secrets inside. It’s a humdrum office building, a low-slung affair with a faded awning and a view of a parking garage. Hardly worth a second glance. If a first one.

But behind its doors is one of the most remarkable corporate collections in the world: 1209 North Orange, you see, is the legal address of no fewer than 285,000 separate businesses. Its occupants, on paper, include giants like American Airlines, Apple, Bank of America, Berkshire Hathaway, Cargill, Coca-Cola, Ford, General Electric, Google, JPMorgan Chase, and Wal-Mart. These companies do business across the nation and around the world. Here at 1209 North Orange, they simply have a dropbox.

What attracts these marquee names to 1209 North Orange and to other Delaware addresses also attracts less-upstanding corporate citizens. For instance, 1209 North Orange was, until recently, a business address of Timothy S. Durham, known as “the Midwest Madoff.” On June 20, Mr. Durham was found guilty of bilking 5,000 mostly middle-class and elderly investors out of $207 million. It was also an address of Stanko Subotic, a Serbian businessman and convicted smuggler — just one of many Eastern Europeans drawn to the state.

Big corporations, small-time businesses, rogues, scoundrels and worse — all have turned up at Delaware addresses in hopes of minimizing taxes, skirting regulations, plying friendly courts or, when needed, covering their tracks. Federal authorities worry that, in addition to the legitimate businesses flocking here, drug traffickers, embezzlers and money launderers are increasingly heading to Delaware, too. It’s easy to set up shell companies here, no questions asked.

“Shells are the No. 1 vehicle for laundering illicit money and criminal proceeds,” said Lanny A. Breuer, assistant attorney general for the criminal division of the Justice Department. “It’s an enormous criminal justice problem. It’s ridiculously easy for a criminal to set up a shell corporation and use the banking system, and we have to stop it.”

In these troubled economic times, when many states are desperate for tax dollars, Delaware stands out in sharp relief. The First State, land of DuPont, broiler chickens and, as it happens, Vice President Joseph R. Biden Jr., increasingly resembles a freewheeling offshore haven, right on America’s shores. Officials in other states complain that Delaware’s cozy corporate setup robs their states of billions of tax dollars. Officials in the Cayman Islands, a favorite Caribbean haunt of secretive hedge funds, say Delaware is today playing faster and looser than the offshore jurisdictions that raise hackles in Washington.

And international bodies, most recently the World Bank, are increasingly pointing fingers at the state.

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Of course, business — the legal kind — has been the business of Delaware since 1792, when the state established its Court of Chancery to handle business affairs. By the early 20th century, the state was writing friendly corporate and tax laws to lure companies from New York, New Jersey and elsewhere. Most of the businesses incorporated here are legitimate and many are using all legal means to reduce their tax bills — something that most stockholders applaud.

President Obama has criticized outposts like the Caymans, complaining that they harbor giant tax schemes. But here in Wilmington, just over 100 miles from Washington, is in some ways the biggest corporate haven of all. It takes less than an hour to incorporate a company in Delaware, and the state is so eager to attract businesses that the office of its secretary of state stays open until midnight Monday through Thursday — and until 10:30 p.m. on Friday.

Nearly half of all public corporations in the United States are incorporated in Delaware. Last year, 133,297 businesses set up here. And, at last count, Delaware had more corporate entities, public and private, than people — 945,326 to 897,934.

One Delaware company was used last year to make an anonymous $1 million donation to Restore Our Future, a super PAC that favors Mitt Romney for president. Restore Our Future ultimately disclosed that the money came from a former Bain Capital executive. The Romney campaign declined comment, and Restore Our Future did not return calls.

Delaware’s tax laws are a bonanza for the state. At a time when many states are being squeezed by a difficult economy, Delaware collected roughly $860 million in taxes and fees from its absentee corporate residents in 2011. That money accounted for a quarter of the state’s total budget.

“Companies choose our state and we are proud of it,” said Richard J. Geisenberger, Delaware’s chief deputy secretary of state and its leading ambassador to business. “We spend a lot of time in the United States and traveling internationally to let people know that Delaware is a great place to do business.”

It is also a great place to reduce a tax bill. Delaware today regularly tops lists of domestic and foreign tax havens because it allows companies to lower their taxes in another state — for instance, the state in which they actually do business or have their headquarters — by shifting royalties and similar revenues to holding companies in Delaware, where they are not taxed. In tax circles, the arrangement is known as “the Delaware loophole.” Over the last decade, the Delaware loophole has enabled corporations to reduce the taxes paid to other states by an estimated $9.5 billion.

State lawmakers in Pennsylvania are now trying to close the loophole, arguing that their state is being robbed of its tax dollars. Of particular concern is that many companies involved in drilling for natural gas in the Marcellus Shale region of Pennsylvania are, in fact, incorporating in Delaware instead.

“Delaware is an outlier in the way it does business,” said David

E. Brunori, a professor at George Washington Law Schooland an expert on taxation. “What it offers is an opportunity togame the system and do it legally.”

WHAT does it take to incorporate a company in Delaware? Not a lot, tax experts say. Shell companies — those with no employees, no assets and, in fact, no real business to speak of — are remarkably easy to establish here, and it doesn’t always matter who you are or what business you are in. Viktor Bout, the Russian arms dealer known as “the merchant of death,” used two Delaware addresses. In April he was sentenced to 25 years in prison on terrorism charges resulting from an American sting operation.

Jack Abramoff, the former Washington lobbyist jailed on corruption charges, set up a sham Delaware corporation to hide millions in payments and circumvent federal laws. Mr. Subotic, the Serbian businessman who was tried in absentia last October for his role in a cigarette smuggling scheme and sentenced to six years, used three airplanes that were registered in Delaware, including two at 1209 North Orange. Mr. Subotic lives in Geneva and denies the charges.

The Organized Crime and Corruption Reporting Project, an international group based in Sarajevo, has identified other Eastern Europeans with Delaware links. Among them is Laszlo Kiss, an Romanian accountant and author of “United States, Tax Heaven — Uncle Sam Will Fight Your Taxes!” that praised the state’s lax rules. He is now awaiting trial in Bucharest on charges of helping embezzle and launder $10 million through Delaware shells.

“Delaware is the state that requires the least amount of information,” says David Finzer, the chief executive of Capital Conservator, a registration agent that sets up accounts in Delaware and elsewhere for non-United States citizens. “Basically, it requires none. Delaware has the most secret companies in the world and the easiest to form.”

Mr. Finzer, an American based in Novi Sad, Serbia, advertises his services online. “Tax-Free Havens for Non-U.S. Citizens,” his Web site, says. It goes on: “More than 50 percent of the major corporations in the world are incorporated in Delaware. Why? Because in provides the anonymity that most offshore jurisdictions do not offer.”

That is exactly what troubles law enforcement agencies and some in Congress who are trying to rein in Delaware. The state is seen as an onshore alternative with regulations more lax than such well-known offshore tax havens as the Isle of Man, Jersey and the Caymans, which require greater disclosure. Even more, a Delaware registration allows a business, legitimate or not, to open a bank account anywhere in the world with the patina of an American address.

“You can have companies in Delaware that have no U.S. bank accounts, no requirements for documentation and no one knows who owns them,” says Anthony B. Travers, chairman of the Cayman Islands Stock Exchange and former chairman of that country’s Financial Services Association. “There should

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be a level playing field and Delaware should have to comply with the same standards as the Caymans.”

Delaware isn’t the only state that has gone this route. Three others — Nevada, Wyoming and Oregon — have also been cited by the Financial Crimes Enforcement Network, a division of the United States Treasury Department, as “particularly appealing” for the formation of shell companies. Of those four states, Delaware stands out as the one offering the least transparency and the most secrecy, this group says.

“What is so galling about secrecy in the United States is that there is no attempt to document who owns a corporation,” said Richard Murphy, a senior adviser at the Tax Justice Network based in London that researches tax havens. “Two million corporations are formed each year in the United States, more than anywhere else in the world. Delaware, in turn, is the biggest single source of anonymous corporations in the world.”

Mr. Murphy adds: “Why go to the Caymans when you can just go down the street?”

In 2009, the Tax Justice Network named the United States as No. 1 on its Financial Secrecy Index, ahead of Luxembourg and Switzerland. It cited Delaware as one of the reasons.

That, Mr. Murphy says, elicited howls in Wilmington. “The reaction was: ‘This cannot be true.’ Not only can it be true, it is true.” (The United States has since fallen to fifth place, behind Switzerland, the Caymans, Luxembourg and Hong Kong, after the group changed its method.)

For years, Senator Carl Levin, a Michigan Democrat, has been leading a quixotic effort to adopt legislation that would require states to collect information on the “beneficial ownership” of companies incorporated within their borders.

That would require states to add the name of the person standing behind the corporation — its beneficial owner — on incorporation papers. To sweeten the pot, the legislation would exempt public companies, hedge funds and other large corporations, along with mom-and-pop businesses where ownership is clear. In addition, the federal government would pick up the tab for putting the law into effect.

Senator Levin has long complained that it takes more information to get a driver’s license than to set up a corporation in America. Three times since 2000, he has introduced his legislation — once co-sponsored by Barack Obama when he was a senator from Illinois — and each time the effort has been rebuffed. He has never even been able to get the measure out of committee.

Law enforcement agencies, human rights groups and the administration are on his side. Last month, a letter supporting Mr. Levin’s measure and signed by 41 different groups was sent to every member of Congress.

But that has been no match for the opposition. Most vocal is

the National Association of Secretaries of State, a politically powerful group. It is backed up by the Chamber of Commerce, the American Bar Association and the state of Delaware, which is the lone state to have hired a lobbyist to work on the matter.

Senator Thomas R. Carper, a Delaware Democrat, is in line to be the next chairman of the Senate Homeland Security and Government Affairs Committee, which has jurisdiction over the measure. Mr. Carper has expressed concerns about the measure but has taken no formal position on it.

“Levin is hitting a brick wall,” said Heather Lowe, director of government affairs for Global Financial Integrity, an anticorruption research group. “It’s frustrating. Delaware is playing a significant role in the committee. Senator Carper is well liked and well respected and he’s not moving on this issue.”

The secretaries of state, along with Delaware, argue that the Levin measure would be costly and burdensome, and would discourage business incorporation and capital formation. They add that their offices are generally ill-equipped to process the additional data that would be required. Even more, determining beneficial ownership may not be a simple matter.

“This would be a sea change in how things are done,” said Ross Miller, Nevada’s secretary of state and president-elect of the National Association of Secretaries of State. “It would add red tape and increasing processing time. And if you had a money launderer and asked for his name, he probably wouldn’t be truthful.”

Mr. Geisenberger, the chief deputy secretary of state of Delaware, said of the Levin measure: “This would be a massive inhibitor to starting a business. It would end up taking weeks or months to get a business started. And I think a lot of them would move underground and into the black market and just not form a legal entity.”

COMPANIES that are incorporated in Delaware need someone on the ground here — an agent or go-between to act on their behalf. That is where the CT Corporation comes in.

CT, a subsidiary of the Dutch information services company Wolters Kluwer, is the largest registered agent in Delaware and, it turns out, the registered agent for 1209 North Orange Street. CT is authorized to transact business at that address, and its main duty is to accept legal notices on behalf of the businesses incorporated here and to pass them along.

CT represents nearly a third of all companies registered in Delaware and 60 percent of Fortune 500 companies. It says that before accepting clients, it screens them against the government’s “Specially Designated Nationals,” a list of people barred from doing business in the United States.

Mainly, however, CT says it acts as a middleman. “We check names and addresses against various federal agency lists,” says Timothy Hall, a spokesman for the company, which has no position on the Levin measure. “We will comply with

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whatever law is passed,” he added.

(The New York Times Company has seven corporate subsidiaries registered at 2711 Centerville Road in Wilmington. The registered agent for that address is the Corporation Service Company, which is the second-largest agent in the state.)

For corporate tax planners, Delaware is a dream. The state helps companies legitimately reduce their United States taxes and, sometimes, obscure profits in other countries.

“Companies are able to turn taxable income into tax-exempt income in Delaware and then use it to reduce their tax bills in other states,” said Bradley P. Lindsey, an accounting professor at North Carolina State University and one of three authors of a 2011 study titled “Exploring the Rule Delaware Pays as a Domestic Tax Haven.”Delaware does not tax certain profit-making intangible items — like trademarks, royalties, leases and copyrights. Yet those same intangibles can be part of a tax strategy that allows them to be classified as deductions in other states, reducing a company’s tax bill there.

“Delaware serves as a domestic tax haven, much like the Cayman Islands serves as an offshore foreign tax haven, and offers a similar level of tax avoidance,” the report states.

American corporations find the Caymans alluring for many reasons. There, they can operate in relative secrecy, attract more foreign customers, avoid regulation and enjoy a low tax rate. In one respect, however, Delaware is even better than the Caymans. At some point, American companies have to bring back their foreign profits from the Caymans and pay federal taxes. But in Delaware, the state tax savings through the Delaware loophole are permanent.

And on the reputational front, “Delaware doesn’t carry the same stigma as the Caymans or Bermuda,” Mr. Lindsay said, adding, “Why not attract business to my little state and get something at the expense of the other states?”

WorldCom, the telecom giant that collapsed into bankruptcy after an accounting scandal, could be a symbol for the Delaware loophole. Bankruptcy court filings showed that the company had cut $20 billion from state taxes thanks to an intangible asset it called “management foresight.”

Delaware subsidiaries are especially popular with global energy and mining companies like Exxon, Chevron and Rio Tinto. Among the top 10, some 915 subsidiaries have been set up in Delaware, compared with 51 in Switzerland and 49 in the Caymans, according to a report last September by the Norway chapter of Publish What You Pay, a London-based group that studies natural resources. The study said that this allows these resource extraction companies to put up a “wall of silence” about their far-flung operations and profits, especially from poor countries that may want a greater slice of the revenue. Exxon, Chevron and Rio Tinto declined to comment.

STATES like Pennsylvania are increasingly fed up. More than 400 corporate subsidiaries linked to Marcellus Shale gas exploration have been registered in Delaware, most within the last four years, according to the Pennsylvania Budget and Policy Center, a nonprofit group based in Harrisburg that studies the state’s tax policy.

In 2004, the center estimated that the Delaware loophole had cost the state $400 million annually in lost revenue — and that was before the energy boom.

More than two-thirds of the companies in the Marcellus Shale Coalition, an industry alliance based in Pittsburgh, are registered to a single address: 1209 North Orange Street, according to the center.

“So many of these Marcellus Shale companies have figured out that it is fairly easy to siphon profits from Pennsylvania, so that they don’t pay taxes here,” said Michael Wood, research director at the Harrisburg center.

The center is urging Pennsylvania to try to close the Delaware loophole. But it is running into opposition from Pennsylvania companies that want to retain the break. And, in Delaware, state officials say that their approach to business is good for America.

“We have a system that is the greatest creator of wealth in the history of the world,” said Mr. Geisenberger, the Delaware official. “We will not support any changes that change the friendliness of American business and close our doors to capital formation and the ease of doing business.”

Business Tax Law Changes for 2012 You Need to Know

In most tax years several changes are made to the existing federal tax code. 2012, however, included a few additional adjustments that affected the deductions that were allowed in previous years. Here are seven tax law changes for 2012 and what you need to know about how they could affect you.

1. The maximum allowable Section 179 deduction decreasesto $139,000. This means that if you intend to write off a largepurchase of equipment for your business at once, you won’tbe able to deduct more than $139,000 using this provision.

2. Bonus depreciation decreases to 50 percent. In 2011 youcould write off 100 percent of the additional depreciation butthis was cut in half in 2012.

3. If you earn more than $106,800 annually your payroll taxesmay increase. In 2012, the wage base for figuring SocialSecurity and Medicare taxes goes up to $110,100 whichmeans that you will have to pay a couple of hundred dollarsin additional payroll tax if you fall into the new wage basebracket. It’s also important to note that this wage base increasealso affects self-employed individuals. If you own your ownbusiness and you make a net profit of $106,800 or more youcan expect to pay about $400 in additional payroll tax.

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4. Your FUTA tax may possibly be increased. FUTA taxis a payroll deduction that goes toward funding federalunemployment benefits. While the standard FUTA deductionrate is 6 percent the government may decide to increase it to6.2 percent as a way of re-instituting a previous surtax.

5. Adoptive parents qualify for a smaller company reimbursement.If you’re planning on adopting in 2012 and you’ve beenexpecting to receive a reimbursement from your companyyou’ll find that the reimbursement amount is a bit smaller thanin previous years. The 2012 corporate reimbursement limit is$12,650 compared to $13,360 previously.

6. Corporate transportation assistance also changed in 2012.Reimbursement for monthly parking passes and carpoolingdecreased by over $100, falling to $135 in 2012. Monthly freeparking limits, though, went up to $240 per employee.

7. The amount companies can contribute to profit-sharing anddefined-benefit plans increased. In 2012, companies maycontribute up to $50,000 to profit-sharing plans and up to$200,000 to defined-benefit plans.

Get Ready for Tax Increases in 2013 under Affordable Care Act

Even if Congress were to somehow solve its tax extender problems and kick all the EGTRAA and JGTRRA sunsets down the road for another year, the fact remains that under the Affordable Care Act (the Patient Protection and Affordable Care Act, P.L. 111-148, and the Health Care and Education Reconciliation Act of 2010, P.L. 111-152), a number of important tax increases will go into effect next year. These include higher HI taxes for high earners, a 3.8% surtax on unearned income of higher-income individuals, and caps on health FSA contributions. These changes will cause compliance issues for companies, and some of them also will face new deduction limitations and fees. This article highlights the changes that loom for 2013, along with the scant guidance IRS has issued to date.

For tax years beginning after Dec. 31, 2012, an additional 0.9% hospital insurance (HI) tax applies under Code Sec. 3101(b)(2) to wages received with respect to employment in excessof: $250,000 for joint returns; $125,000 for married taxpayersfiling a separate return; and $200,000 in all other cases. UnderCode Sec. 1401(b)(2), the additional 0.9% HI tax also appliesto self-employment income for the tax year in excess of theabove figures. (Code Sec. 6051(a)(14))

IRS guidance to date has consisted of a series of frequently asked questions (FAQs);

For tax years beginning after Dec. 31, 2012, an unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. (Code Sec. 1411) For an individual, the tax is 3.8% of the lesser of either (1) net investment income or (2) the excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate

return, and $200,000 for all others). For surtax purposes, gross income doesn’t include excluded items, such as interest on tax-exempt bonds, veterans’ benefits, and excluded gain from the sale of a principal residence.

To date, IRS hasn’t issued any guidance on this surtax.

For tax years beginning after Dec. 31, 2012, unreimbursed medical expenses will be deductible by taxpayers under age 65 only to the extent they exceed 10% of adjusted gross income (AGI) for the tax year. (Code Sec. 213(a)) If the taxpayer or his or her spouse has reached age 65 before the close of the tax year, a 7.5% floor applies through 2016 and a 10% floor applies for tax years ending after Dec. 31, 2016. (Code Sec. 213(f))

For tax years beginning after Dec. 31, 2012, for a health flexible spending account (FSA) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee (and dependents and other eligible beneficiaries) under the health FSA for a plan year (or other 12-month coverage period) can’t exceed $2,500. (Code Sec. 125(i))

Notice 2012-40, 2012-25 IRB 1046, provides guidance on the effective date of the $2,500 limit on salary reduction contributions to health FSAs under Code Sec. 125(i), and on when and how plans should be amended to comply with the limit.

Sponsors of qualified retiree prescription drug plans are eligible for subsidy payments from the Secretary of Health and Human Services (HHS) for a portion of each qualified covered retiree’s gross covered prescription drug costs (“qualified retiree prescription drug plan subsidy”). These qualified retiree prescription drug plan subsidies are excludable from the taxpayer’s (plan sponsor’s) gross income for regular income tax and alternative minimum tax (AMT) purposes. For tax years beginning before 2013, a taxpayer may claim a business deduction for covered retiree prescription drug expenses, even though it excludes qualified retiree prescription drug plan subsidies allocable to those expenses. But for tax years beginning after Dec. 31, 2012, under Code Sec. 139A, the amount otherwise allowable as a deduction for retiree prescription drug expenses will be reduced by the amount of the excludable subsidy payments received.

IRS hasn’t issued any guidance on Code Sec. 139A, which some analysts predict will prompt some employers to discontinue retiree drug coverage.

For each policy year ending after Sept. 30, 2012, each specified health insurance policy and each applicable self-insured health plan will have to pay a fee equal to the product of $2 ($1 for policy years ending during 2013) multiplied by the average number of lives covered under the policy. The issuer of the health insurance policy or the self-insured health plan sponsor is liable for and must pay the fee. (Code Sec. 4375, Code Sec. 4376, and Code Sec. 4377)

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IRS has issued proposed reliance regs on this new regulation.

For tax years beginning after Dec. 31, 2012, for services performed during that year, a covered health insurance provider isn’t allowed a compensation deduction for an “applicable individual” (officers, employees, directors, and other workers or service providers such as consultants) in excess of $500,000. (Code Sec. 162(m)(6)(A))

There are no exceptions for performance-based compensation, commissions, or remuneration under existing binding contracts. Also, in the case of remuneration that relates to services that an applicable individual performs during a tax year but that is not deductible until a later year, such as nonqualified deferred compensation, the unused portion (if any) of the $500,000 limit for the year is carried forward until the year in which the compensation is otherwise deductible, and the remaining unused limit is then applied to the compensation.

IRS has yet to issue guidance on this $500,000 limit on compensation deductions.

For sales after Dec. 31, 2012, a 2.3% excise tax applies under Code Sec. 4191 to sales of taxable medical devices intended for humans. The excise tax, paid by the manufacturer, producer, or importer of the device, won’t apply to eyeglasses, contact lenses, hearing aids, and any other medical device determined by IRS to be of a type that is generally purchased by the general public at retail for individual use.

Most Members of Congress Keep Their Tax Returns Secret

Rep. Nancy Pelosi was emphatic. Mitt Romney’s refusal to release more than two years of his personal tax returns, she said, makes him unfit to win confirmation as a member of the president’s Cabinet, let alone to hold the high office himself.

Sen. Harry Reid went farther: Romney’s refusal to make public more of his tax records makes him unfit to be a dogcatcher.

They do not, however, think that standard of transparency should apply to them. The two Democratic leaders of the Senate and the House of Representatives are among hundreds of senators and representatives from both parties who refused to release their tax records. Just 17 out of the 535 members of Congress released their most recent tax forms or provided some similar documentation of their tax liabilities in response to requests from McClatchy over the last three months. Another 19 replied that they wouldn’t release the information, and the remainder never responded to the query.

History of congressional disclosure is spotty.

Congress seldom has volunteered to require its members to disclose more of their finances.

The widespread secrecy in one branch of the government suggests a self-imposed double standard. Yet while American politics has come to expect candidates for the presidency to

release their tax returns, the president isn’t alone in having a say over the nation’s tax laws. Congress also stands to gain or lose by the very tax policies it enacts, and tax records – more than any broad financial disclosure rules now in place – offer the chance to see whether the leaders of the government stand to benefit from their own actions.

“Senior public officials, especially members of Congress and presidential candidates, should be required to disclose their tax returns so that the public can monitor potential conflicts of interest,” said Craig Holman, government affairs lobbyist for Public Citizen, a nonpartisan watchdog group.

The question of taxes is particularly pressing this year, as Congress debates whether to extend all or some of the Bush-era tax cuts that are set to expire Dec. 31. At the same time, tax returns reveal assets and investments.

Absent tax information, members of Congress aren’t fully transparent, said Daniel Auble, who heads the personal finance project for the Center for Responsive Politics, which tracks financial disclosures by members of Congress and appointees confirmed by Congress.

“Having a clearer picture of lawmakers’ interests . . . is definitely important in making available to the public what possible influence there could be,” he said. “In terms of transparency, it would be helpful to have more information.”

Among those who did disclose their tax returns: Sen. Claire McCaskill, D-Mo., and Rep. Barney Frank of Massachusetts, the senior Democrat on the House Financial Services Committee and a co-author of the Dodd-Frank law tightening regulations on Wall Street.

To Pelosi and some other top Democrats, the focus is on Romney, the Republican presidential candidate, who’s released his 2010 return and 2011 estimates and plans to release his 2011 return when it’s completed, but refuses to release any more. They say the very refusal to release more suggests that he’s hiding something.

“He could not even become a Cabinet member for that lack of disclosure, and now with that lack of disclosure he wants to be president of the United States,” said Pelosi, the House minority leader, who’s from California.

“We’d like to know what’s in those tax returns that he refuses to show to the American public. Did he pay any taxes?” Reid asked in an impassioned speech to the Senate on July 11. Days later, Reid, who’s from Nevada, suggested that Romney’s refusal to release more than two years of tax returns would make him ineligible to serve even as dogcatcher.

Rep. Debbie Wasserman Schultz of Florida, the chairwoman of the Democratic National Committee, also has harangued Romney for refusing to release more tax returns, calling it a “penchant for secrecy.”

All three refused repeated requests from McClatchy to release

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their own returns, requests that started before the flap over Romney’s records.

Pelosi aides refused, saying she’s disclosed all that Congress requires.

“The leader has filed a complete financial disclosure report as required by law that includes financial holdings, transactions and other personal information,” Pelosi spokesman Nadeam Elshami said. “There has been no question about where Leader Pelosi and Democrats stand on tax policy: We must extend the middle-class tax cuts and end tax breaks for millionaires and use the revenues to pay down the deficit.”

Challenged at a recent news conference to release hers, Wasserman Schultz said she wouldn’t because she wasn’t running for president. “I file full financial disclosure required under the law,” she said.

What’s required by law is written by Congress itself, a broad financial-disclosure statement that offers no direct information on tax liabilities and no requirement for reporting spousal income other than the source – but not the amount – of any income above $1,000. There’s little way of knowing whether that spousal income is $1,001 or $1 million.

Several members of Congress married into money or have wealthy spouses. Topping that list are Rep. Michael McCaul, R-Texas, whose wife, Linda, is an heiress to the Clear ChannelCommunications fortune, and Sen. John Kerry, D-Mass.,whose wife, Teresa, is the heiress to the Heinz ketchupfortune. Pelosi’s husband, Paul, heads Financial LeasingServices Inc., a San Francisco-based venture capital and realestate firm.

When it comes to the valuation of investments or reporting of income on the annual disclosure forms, what’s required are broad numbers such as between $250,000 and $500,000 or $1 million and $5 million. That makes it hard to determine how much benefit a lawmaker might get from competing tax plans.

“They just don’t provide the same level of detail as a tax return,” said Darrell West, a specialist on governing and a vice president of the Brookings Institution, a center-left research center in Washington.

Most members won’t release that kind of detail.

Only 17 members shared their detailed tax information with McClatchy. Another 19 refused, but the majority of them stressed that they comply with congressional disclosure requirements.

Of the lawmakers who shared their tax returns, most got large deductions for interest on personal and investment real estate. That’s useful information for taxpayers, since a revamp of the tax code is expected in the next few years.

McClatchy isn’t releasing the tax returns under the terms of the agreement with the lawmakers. Reporters requested the

returns to examine in detail how members would be personally affected by changes in tax laws being debated in Congress including income tax rates, as well as taxes on capital gains and dividends and deductions for such expenses as home mortgage interest. In exchange for sharing their returns, members were told their actual returns would not be made public.

Most lawmakers, however, chose to keep their tax liabilities a secret.

“First your publishers and editors and execs should publish their tax returns. They have great influence over public policy,” Rep. Gary Ackerman, D-N.Y., said in an emailed response. Ackerman, who was dogged in 2010 by allegations of a sweetheart stock purchase, isn’t seeking re-election, so his term ends in January.

“Are you guys asking the president to turn over his college records? Or asking him to turn anything over of any kind?” responded Allen Klump, the communications director for Rep. Jeff Duncan, R-S.C.

“Thanks, but we will not give you Sen. Rockefeller’s tax return. Good luck on the project,” said Vincent Morris, a spokesman for Sen. Jay Rockefeller, D-W.Va., whose family surname is synonymous with wealth.

Several lawmakers said they’d disclose what’s required and no more.

Rep. Renee Ellmers “files a financial disclosure form each year in accordance with House ethics rules and this is publicly available,” said Tom Doheny, a spokesman for the North Carolina Republican.

Rep. Joe Wilson “has submitted a financial disclosure form, which is required by law and available to constituents as a matter of public record,” said Caroline Delleney, a spokeswoman for the South Carolina Republican.

Constituents generally know where their particular lawmakers stand on the issue of the expiring tax cuts because the two major political parties have well-defined views. But there’s more at stake than just tax brackets, and voters often have little feel for whether their members of Congress would benefit or be harmed by changes that are under consideration.

From the financial disclosure forms, constituents can, with some work, surmise how lawmakers’ investment income might be taxed under competing plans. Given their salaries, lawmakers would fall into the higher tax bracket for dividends, but it’s unclear where they’d fall individually on the income scale.

“There are clearly some people above (the $250,000 threshold). There’s a bunch of people who might or might not be affected, and you can’t tell,” said Roberton Williams, a senior fellow at the Tax Policy Center, which is run by the Brookings Institution and the centrist Urban Institute.

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Tax data isn’t always a panacea, however.

Missouri Democrat McCaskill was one of the few senators who provided McClatchy with a tax return. Her 1040 form lists her as married filing separately, showing an adjusted gross income of $193,384.

But her husband, Joe Shepard, is a wealthy businessman whose investments sometimes have put her in an unpleasant spotlight. His investment in a reinsurance company in Bermuda – the same country in which a Romney investment has been criticized by Democrats – brought allegations from Republicans in 2009 of tax dodging. Shepard no longer holds the investment.

McCaskill does report dozens of her husband’s investments in her annual financial disclosure statement, with more detail than required. But each still is listed only under ranges of values, not precise amounts.

That’s another reason advocacy groups think that financial-disclosure reporting should be expanded to capture spousal income more fully, and argue that tax data would be a useful, albeit imperfect, tool.

“As public officials, potential conflicts of interest caused by their wealth and assets are a public concern,” said Holman, the Public Citizen lobbyist.

Congressional Research Service Report “Employee Stock Options: Tax Treatment and Tax Issues”

A recent Congressional Research Service (CRS) Report looks at key laws and regs (including a proposed bill) that impact the widespread practice of granting employees options to purchase the company’s stock.

Stock options have been praised as innovative compensation tools that align the interests of the employees with those of the shareholders. They have also been condemned as schemes to enrich insiders and avoid company-level taxes.

Under the Code, there are two general types of employee options—qualified (or statutory) stock options and nonqualified (nonstatutory) stock options.

Qualified options include: (1) incentive stock options (ISOs) under Code Sec. 422, which are limited to $100,000 a year for any one employee, and which may be offered only to officers and highly paid employees; and (2) employee stock purchase plans (ESPPs) under Code Sec. 423, which are limited to $25,000 a year for any employee, and which must be offered to all full-time employees with at least two years of service.

Qualified options aren’t taxed to the employee when granted or exercised (under the regular tax). Instead, tax is imposed only when the stock is sold. If the stock is held one year from purchase and two years from the granting of the option, the

gain is taxed as long-term capital gain. The employer is not allowed a deduction for these options.

If the stock isn’t held the required time, the employee is taxed at ordinary income tax rates and the employer is allowed a deduction. The value of ISOs is included in minimum taxable income for the alternative minimum tax (AMT) in the year of exercise. As a result, some taxpayers can be liable for taxes on “phantom” gains from the exercise of ISOs. On Oct. 3, 2008, the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) was enacted. This law included provisions that provided abatement of any taxes still owed on phantom gains.

Nonqualified options may be granted in unlimited amounts. They are taxed when exercised and all restrictions on selling the stock have expired, based on the difference between the price paid for the stock and its market value at exercise. (Reg. § 1.83-7) The company is allowed a deduction for the sameamount in the year the employee includes it in income. Theyare subject to employment taxes also. Although taxes arepostponed on nonqualified options until they are exercised,the deduction allowed the company is also postponed, sothere is generally little if any tax advantage to these options.

The CRS Report notes that these are the options making the news as creating large fortunes for officers and employees. The CRS Report lists several key laws and regs, including a proposed bill, that impact stock options:

• Under Code Sec. 162(m), a publicly held corporation’sdeduction for compensation paid to its CEO or to one ofits next four highest compensated officers is limited to $1million per year. This limitation doesn’t apply to commissionpayments, other performance based compensation, andqualified plan contributions.

• The Sarbanes-Oxley Act of 2002 (SOX) requires thatall insider transactions in a company’s stock, includingoption grants, be disclosed within two business days.

• The Security Exchange Commission (SEC) changedthe listing standards of the New York Stock Exchange andthe Nasdaq Stock Market to require shareholder approvalof almost all equity-based compensation plans. Firmsmust disclose the material terms of their stock option plansbefore obtaining shareholder approval, including the termson which options will be granted and whether the planallows options to be granted with an exercise price that isbelow market value on the date of the grant.

• The Financial Accounting Standards Board (FASB)issued rules requiring companies to subtract the expenseof options from their earnings. The SEC allows publiccompanies to choose from a number of valuation methodsto estimate the fair market value of their stock options andit continues to refine appropriate methodologies for thevaluation of stock options.

• Under Code Sec. 409A, all amounts deferred undera nonqualified deferred compensation plan for all tax

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years are currently includible in income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless the plan: (1) meets certain distribution, acceleration of benefit, and election requirements; and (2) is operated in accordance with these requirements. Noncompliance results in inclusion in income for all amounts deferred under the plan by a participant, an interest charge (at the underpayment rate plus one percentage point), and an additional 20% tax. These rules apply to stock appreciation rights if the exercise price is less than the fair market value of the underlying stock on the date the stock appreciation rights are granted. Stock options that are subject to Code Sec. 409A are included in income when they vest rather than when they are exercised. The CRS Report notes that Code Sec. 409A reduced the tax advantage of stock options, and thus presumably reduced their use.

• Schedule M-3 (Form 1120), Net Income (Loss)Reconciliation for Corporations with Total Assets of $10Million or More, must be filed by most publicly tradedand many privately held corporations with assets of $10million or more. The CRS Report notes that Schedule M-3provided tax professionals with a wealth of new informationto understand the book-tax gap—the excess of reportedfinancial accounting income over taxable income—including specific differences between book and tax incomethat could be characterized as temporary or permanent.

• In July 2006, the SEC issued new rules designedto enhance the transparency of proxy compensationdisclosures for CEOs, chief financial officers (CFOs), theother three highest paid executive officers, and directors.These rules include provisions that require companies todisclose whether they are timing options grants to makethem more lucrative to executives and other employees.

• On July 14, 2011, Senator Carl Levin (D-MI) introducedS. 1375, the “Ending Excessive Corporate Deductions forStock Options Act.” The bill would close a “tax loophole” byrequiring that the corporate tax deduction for stock optioncompensation be limited to the stock option book expenseshown on a corporation’s financial statement. It would allowcorporations to deduct stock option compensation on theirtax returns in the same year it is recorded on the corporatebooks, without waiting for the options to be exercised.

People in the Tax News

Ernest & Young Report

A political firestorm has broken out over a new report prepared by Ernst & Young that addresses President Obama’s proposal to increase the tax rates for high-income taxpayers. (Ernst & Young LLP - Long-run macroeconomic impact of increasing tax rates on high-income taxpayers in 2013)

The report, which was made public on July 17, was prepared on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the U.S. Chamber of Commerce. According to the executive summary, the report “focuses on the long-term effects of the increase in the top rates.” It examined four sets of provisions that will increase the top tax rates. “These higher tax rates result in a significant increase in the average marginal tax rates (AMTR) on business, wage, and investment income, as well as the marginal effective tax rate (METR) on new business investment,” the report said.

It found that the AMTR “increases significantly” for wages (5%), flow-through business income (6.4%), interest (16.5%), dividends (157.1%), and capital gains (39.3%). The METR on new business investment increases by 15.8% for the corporate sector and 15.6% for flow-through businesses. “Specifically, this report finds that the higher tax rates will have significant adverse economic effects in the long-run: lowering output, employment, investment, the capital stock, and real after-tax wages when the resulting revenue is used to finance additional government spending,” it said.

The White House was quick to respond. The administration “will continue to demand that this debate is based on facts and analysis from non-partisan, independent sources—not based on industry studies like one that was released this morning by Ernst & Young done by [a] former Bush appointee and paid for by industries that have a record of opposing the president’s policies,” said a White House blog posting. The study’s estimates are based on “major flaws, errors and misleading statements,” said Jason Furman, principal deputy director for the National Economic Council. “The study fallaciously assumes that the tax cuts are used to finance additional spending, ignoring the benefits of what the president actually proposed which was to use the revenue as part of a balanced plan to reduce the deficit and stabilize the debt,” Furman said in his analysis.

The Ernst & Young report “is more proof that the president doesn’t understand the economy or what it takes to create jobs in this country,” said Rep. Dave Camp (R-MI), chairman of the House Ways and Means Committee, adding that the administration “appears ready and willing to further derail our economic recovery by raising taxes on small businesses.

Tax Court: IRS Agent Could Substantiate Only $215 of $95,000 of Claimed Charitable & Medical Deductions

Following up on, IRS Fires Agent Who Lost Tax Court Case on Deductibility of Losses from Side Business: Quinn v. Commissioner, T.C. Memo 2012-178:

Petitioner is an experienced tax compliance officer that remains employed by the IRS. Petitioner should have a complete understanding of substantiation requirements. Despite her background, petitioner has presented altered or fabricated documentation in an attempt to deceive respondent

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and the Court.

She understated her income by claiming deductions she was not entitled to claim for each year at issue. Even if we accepted her purported records (which we do not), she still claimed significantly more contributions and expenses than her questionable records supported. It is incredible that a tax compliance officer would be able to substantiate only $185 of charitable contributions yet claim charitable contributions of $48,116 for the years at issue. The charitable organizations confirmed that petitioner claimed contributions that she had not made. It is equally troubling that she was able to substantiate only $30 of the $47,542 of medical and dental expenses claimed.

Petitioner’s records were also incomplete or inauthentic and consistently unreliable. Her employment with the IRS made available other taxpayer records substantiating claimed Schedule A deductions of the types at issue here. While we cannot be certain of the source, we find that some (if not most) of petitioner’s records for each year at issue were altered. Unexplained inaccuracies in other documents imply that petitioner fabricated receipts for both years at issue. Even documents that appeared genuine did not substantiate that the couple actually incurred those costs or expenses.

Her testimony and assertions in the post-trial brief were also inconsistent and implausible. Petitioner maintained she was unaware of the requirements for accurately stating and substantiating income. We find this incredible. In contrast, the credible testimony of her supervisor, her husband and representatives of the charitable organizations contradicted petitioner’s records, testimony and assertions.

Mo Money Customers Have Given Up Hope

Turns out that it may have something to do with how they filed their taxes.

At this point, many Mo Money customers have given up hope they will ever see a check from the tax preparer. And, if they filed direct deposit, the government can’t get their money back.

Whether they knew it or not, customers of Mo Money Taxes agreed to have their tax refunds deposited into Mo Money bank accounts. Mo Money was supposed to take its cut out of their checks and give back what was left.

But hundreds got nothing at all. Michael Robinson of Norfolk took his concerns to the Internal Revenue Service.

“She asked me [if I received] a check or anything, and I was like, ‘not one brown penny,’” Robinson said.

At a House subcommittee hearing in Washington DC, Robinson testified in front of IRS officials. Some were surprised to hear Mo Money refunds went through a chain of banks and processors.

“It’s not clear who is watching these kinds of financial institutions,” Nina Olson, a national taxpayer advocate who works for the IRS said. “That’s what I was interested in; the description of that scheme was falling into some of those cracks.”

Another crack became apparent. The IRS can’t help direct deposit victims get their money back.

“Under the law, if someone steals your paper check and forges your signature on the back and cashes it, the government has a way to reimburse you and Congress has created a fund to reimburse you,” Olson said. “But the way the law is written, it only talks about paper checks. It hasn’t gotten into the 20 th century, much less the 21 st century.”

The Mo Money story exposed that loophole. Congressmen at the hearing said changes must be made immediately to protect victims like Robinson.

“I was encouraged,” Robinson said. “I think something is going to actually happen and get done.”

Many Mo Money customers qualified to have their taxes done for free, but didn’t know it. Congressmen at the hearing say the IRS needs to do a better job publicizing its assistance programs.

IRS News

SCOTUS Ruling Means Bigger, More Intrusive IRS

IRS officials on background tell FOX Business the U.S. Supreme Court ruling on health reform gives the IRS even more powers than previously understood.

The IRS now gets to know about a small business’s entire payroll, the level of their insurance coverage -- and it gets to know the income of not just the primary breadwinner in your house, but your entire family’s income, in order to assess/

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collect the mandated tax.

Plus, it gets to share your personal info with all sorts of government agencies, insurance companies and employers.

And that’s just the tip of the iceberg. “We expect even more lien and levy powers,” an IRS official says. Even the Taxpayer Advocate is deeply concerned.

The IRS army will inexorably increase in size, too. The IRS will now add new agents to hunt down tax cheats, as it has been budgeted to spend $303.5 million building a new system, erected on the back of its old system, to oversee the effects of the health law, including making sure people get the new tax credits they deserve under the law.

As for the new IRS workers, the Government Accountability Office said the total will be about 4,500, with nearly 4,000 slated for enforcement.

On the $303.5 million for health care, the GAO said the IRS will “continue the development of new systems and modifications of existing systems as well as other IRS enforcement systems for health reform.”

Throughout, the IRS will be the agency enforcing the law, collecting these mandate penalties, as well as determining whether individuals buy “adequate” health coverage, and whether small businesses provide “affordable” coverage to workers under the new law.

However, Nina E. Olson, who runs the Taxpayer Advocate Office [TAO], a federal IRS overseer, has warned the new health law may require more IRS intrusions on taxpayer privacy, to determine whether individuals got appropriate health coverage, and whether small businesses provide “affordable” coverage, all of which is defined by the government.

That’s because the health-reform law’s individual mandate requires almost all legal residents of the United States to have “adequate” health-care coverage, as determined by the federal government. And it requires businesses of all sizes must provide “affordable” coverage as defined by the federal government.

Health reform’s insurance mandate says if you do not have “adequate” insurance, you’ll have to pay a fine as part of your tax return. If your business doesn’t provide “affordable”

coverage, that business may have to pay a fine to the IRS, too, as part of its tax return filings.

The TAO has noted Americans must now tell the IRS under the new law:

• Insurance plan information, including who is coveredunder the plan and the dates of coverage;

• The costs of your family’s health insurance plans;• Whether a taxpayer had an offer of employer-sponsored

health insurance;• The cost of employer-sponsored insurance;• Whether a taxpayer received a premium tax credit; and• Whether a taxpayer has an exemption from the individual

responsibility requirement.

The TAO has warned: “This is different from the type of information the IRS typically deals with, and some taxpayers may feel uncomfortable about sharing it with the IRS.”

Olson has said the new law could even ramp up tax evasion: “As a result, some taxpayers could be tempted to not file a tax return or file a return with incorrect or incomplete information, creating problems for both the taxpayer and the IRS.”

The TAO has also reported that “obtaining this new information will require the IRS to communicate with entities and government agencies that it may not deal with now,” including:

• New state-run insurance exchanges;• Employers;• Insurance companies; and• Government insurance programs.

But the TAO has warned that the IRS may not have the necessary skill sets, budget, or staffing to adequately enforce the new health reform law.

Olson notes that the federal tax code is already so complex that even the IRS makes numerous mistakes in administering it.

In the TAO’s 2010 annual report, the service’s overseer says that Congress has been forcing the IRS to oversee more and more social benefit programs, including the Affordable Care Act.

Already, the IRS enforces and collects Medicare and Social Security taxes, making those federal programs’ overhead costs appear lower than they are.

“As part of the recent health-care legislation, the IRS will face a number of decisions and guidance projects unrelated to its employees’ traditional expertise and skill set,” the TAO has said, and now, with the new law, “the IRS must administer the following health care provisions: the Premium Assistance Credit, the Individual Penalty for Lack of Coverage, the Employer Penalty, and the Small Business Tax Credit.”

The IRS should revise its mission statement to make it clear

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that it is administering social benefits as well as collecting revenue, TAO said.

And it’s the intrusiveness of the health reform law that has raised eyebrows. What does the IRS base your mandate penalty on? This is where it gets nutty.

The TAO says that the “IRS will need to determine a taxpayer’s compliance with the individual [insurance] mandate and assess a penalty if coverage is inadequate.”

However, the penalty isn’t based on just your personal net income. The penalty will be based on an entirely different number that is more than just your paycheck earnings — your ‘household income.’

“This determination is based on a concept of ‘household income,’” TAO has said, adding, “this may differ from the income reported on the taxpayer’s return, because it is a composite of all of the income reported by members of a taxpayer’s household -- information that may not be readily accessible to the IRS.”

If the IRS finds you have fallen short of the law, it would hit you with a penalty tied to your household income (which may be that of an individual or several family members).

Under the new health law, the IRS penalty would be based on “modified adjusted gross income,” not adjusted gross income that you normally report at the bottom of the first page of your tax form 1040, before you take deductions or personal exemptions.

The modifications add back in things like non-taxable interest and excluded foreign income to this number.

Next, to assess the fine, the IRS would take the total household income divided by the number of household members who must have insurance under the law.

Got that?

This raises questions of your responsibility for your other household members to abide by the new health reform law. All of this could mean a heavier enforcement hand at the IRS.

The IRS will need more training in privacy requirements, in order to avoid a drop in tax compliance, the TAO said, as taxpayers may feel they need to protect their confidential household income information for everyone who lives under the same roof. And that could also mean more IRS lien and levy powers.

And what would your health reform penalty look like?

The IRS penalty is either a fixed dollar amount, or a percentage of income above the filing threshold, whichever is greater. The law sets the fixed dollar penalty at $95 in 2014, $325 in 2015, $695 in 2016, and indexed to inflation thereafter (capped for a family at 300% of the individual amount).

The percentage of income penalty rises at a lower rate than the fixed dollar amount, from 1% in 2014, to 2% in 2015, and to 2.5% in 2016 and after, and then is capped at the national average premium for what’s called “bronze” coverage, which provides the least amount of coverage under the new law, 60% before the patient must chip in for co-insurance, deductibles and co-payments.

There’s more. Small businesses may get hit too. Less than half of small businesses insure workers, says a House Committee on small business. About 60% of America’s uninsured -- or 28 million -- are small business owners, workers, and their families, it says, adding insurance costs for small businesses have increased 129% since 2000.

The IRS and Treasury have put out for public feedback a new rule to help small businesses contend with a big penalty under health reform that could potentially smack them with tens of thousands of dollars in costs, a fine that could hit already cash-strapped small businesses.

Submarined in the new health-reform law is this big onerous penalty, called a “shared responsibility payment,” that the government can slap against businesses with more than 50 workers if they don’t provide “affordable” health benefits to their full-time employees, which the government gets to define.

The health-reform law exempts all small businesses with fewer than 50 employees from the law’s “shared responsibility requirement,” which begins in 2014. But beginning in 2014, employers with 50 or more employees that do not offer health insurance coverage will pay a fine of $2,000 per full-time worker if any of their employees turn around and get premium tax credits through the new health insurance exchanges.

Even if the small business has 51 workers, and that one worker gets a tax credit to help them buy insurance -- a tax credit provided under health reform -- the small business still has to pay a fine.

And beginning in 2014, the government will slap businesses with a higher, $3,000-per-employee penalty if the government finds they provide workers “unaffordable” health insurance. And who gets to define “unaffordable”? The government.

How is it defined? The government will assess the $3,000 penalty if any worker has to take a tax credit or has to enroll in state health exchanges because his or her boss pays less than 60% of the full value of the coverage, or the premium the employee pays is more than 9.5% of household income.

Again, this means more IRS intrusion into small businesses.

But the Treasury Department and the IRS have asked for input from the public on a proposed “safe harbor” for 2014 that says small businesses would not have to pay the new fine, so long as they can prove to the government their health insurance is really “affordable.”

So how can companies qualify for this safe harbor?

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Watch this – because again health reform has raised serious privacy issues about how much the government can know.

The small business has to prove to the IRS that its insurance is affordable by showing the government the wages that it paid to employees, instead of reporting to the government the employee’s household income.

Meaning, the IRS would deem a business’s coverage affordable so long as a worker’s premium costs did not exceed 9.5% of his W-2 wages.

The IRS said in a statement: “By allowing employers to base their affordability calculations on each employee’s W-2 wages (which employers know) instead of each employee’s household income (which employers generally would not know), the safe harbor could provide a more workable and practical method for measuring the affordability of an employer’s coverage.”

Want to see the headaches the small business has to go through to figure out the penalty owed to the government? The penalty is $2,000 per employee, but the business must first knock out from the math the first 30 workers -- part-timers don’t count.

Example: If you have 51 full-time employees and 15 part-time employees throughout the year, and one full-time employee is receiving a tax credit to help them buy health insurance, your business will have to pay:

51 (the number of full time employees) - 30 (the first 30 employees are excluded)

21 x $ 2,000 = $42,000

Special Tax Benefits for Armed Forces Personnel

Military personnel and their families face unique life challenges with their duties, expenses and transitions. The IRS wants active members of the U.S. Armed Forces to be aware of all the special tax benefits that are available to them.

Here are 10 of those special tax benefits:

1. Moving Expenses If you are a member of the ArmedForces on active duty and you move because of a permanentchange of station, you may be able to deduct some of yourunreimbursed moving expenses.

2. Combat Pay If you serve in a combat zone as an enlistedperson or as a warrant officer for any part of a month, all yourmilitary pay received for military service during that month isnot taxable. For officers, the monthly exclusion is capped at thehighest enlisted pay, plus any hostile fire or imminent dangerpay received. You can also elect to include your nontaxablecombat pay in your “earned income” for purposes of claimingthe Earned Income Tax Credit.

3. Extension of Deadlines The deadline for filing tax returns,paying taxes, filing claims for refund, and taking other actions

with the IRS is automatically extended for qualifying members of the military.

4. Uniform Cost and Upkeep If military regulations prohibityou from wearing certain uniforms when off duty, you candeduct the cost and upkeep of those uniforms, but you mustreduce your expenses by any allowance or reimbursementyou receive.

5. Joint Returns Generally, joint income tax returns mustbe signed by both spouses. However, when one spouse isunavailable due to military duty, a power of attorney may beused to file a joint return.

6. Travel to Reserve Duty If you are a member of the USArmed Forces Reserves, you can deduct unreimbursed travelexpenses for traveling more than 100 miles away from hometo perform your reserve duties.

7. ROTC Students Subsistence allowances paid to ROTCstudents participating in advanced training are not taxable.However, active duty pay – such as pay received duringsummer advanced camp – is taxable.

8. Transitioning Back to Civilian Life You may be able todeduct some costs you incur while looking for a new job.Expenses may include travel, resume preparation fees,and outplacement agency fees. Moving expenses may bedeductible if your move is closely related to the start of workat a new job location, and you meet certain tests.

9. Tax Help Most military installations offer free tax filingand preparation assistance during and/or after the tax filingseason.

10. Tax Information IRS Publication 3, Armed Forces’ TaxGuide, is an excellent resource as it summarizes manyimportant military-related tax topics. Publication 3 can bedownloaded from IRS.gov or may be ordered by calling1-800-TAX-FORM (800-829-3676).

Expanded Adoption Tax Credit Still Available for Extension Filers

If you adopted a child last year and requested an extension of time to file your 2011 taxes, you may be able to claim the expanded adoption credit on your federal tax return. The Affordable Care Act temporarily increased the amount of the credit and made it refundable, which means it can increase the amount of your refund.

Here are eight things to know about this valuable tax credit:

1. The adoption credit for tax year 2011 can be as much as$13,360 for each effort to adopt an eligible child. You mayqualify for the credit if you adopted or attempted to adopt achild in 2010 or 2011 and paid qualified expenses relating tothe adoption.

2. You may be able to claim the credit even if the adoption

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does not become final. If you adopt a special needs child, you may qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.

3. The credit for qualified adoption expenses is subjectto income limitations, and may be reduced or eliminateddepending on your income.

4. Qualified adoption expenses are reasonable and necessaryexpenses directly related to the legal adoption of the childwho is under 18 years old, or physically or mentally incapableof caring for himself or herself. These expenses may includeadoption fees, court costs, attorney fees and travel expenses.

5. To claim the credit, you must file a paper tax return and Form8839, Qualified Adoption Expenses, and attach all supportingdocuments to your return. Documents may include a finaladoption decree, placement agreement from an authorizedagency, court documents and the state’s determination forspecial needs children. You can use IRS Free File to prepareyour return, but it must be printed and mailed to the IRS.Failure to include required documents will delay your refund.

6. If you filed your tax returns for 2010 or 2011 and did not claiman allowable adoption credit, you can file an amended returnto get a refund. Use Form 1040X, Amended U.S. IndividualIncome Tax Return, along with Form 8839 and the requireddocuments to claim the credit. You generally must file Form1040X to claim a refund within three years from the date youfiled your original return or within two years from the date youpaid the tax, whichever is later.

7. The IRS is committed to processing adoption credit claimsquickly, but must also safeguard against improper claims byensuring the standards for receiving the credit are met. If yourreturn is selected for review, please keep in mind that it isnecessary for the IRS to verify that the legal criteria are metbefore the credit can be paid. If you are owed a refund beyondthe adoption credit, you will still receive that part of your refundwhile the review is being conducted.

8. The expanded adoption credit provisions available in 2010and 2011 do not apply in later years. In 2012 the maximumcredit decreases to $12,650 per child and the credit is nolonger refundable. A nonrefundable credit can reduce yourtax, but any excess is not refunded to you.

Tax Relief for Victims of Tropical Storm Debby in Florida

Victims of tropical storm Debby that began on June 23, 2012, in parts of Florida may qualify for tax relief from the Internal Revenue Service.

The President has declared Baker, Bradford, Clay, Columbia, Franklin, Hernando, Highlands, Pasco, Pinellas, Suwannee and Wakulla counties a federal disaster area. Individuals who reside or have a business in this county may qualify for tax relief.The declaration permits the IRS to postpone certain deadlines

for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after June 23 and on or before Aug. 22 have been postponed to Aug. 22, 2012.

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after June 23 and on or before July 9 as long as the deposits are made by July 9, 2012.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief.

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Under section 7508A, the IRS gives affected taxpayers until Aug. 22 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after June 23 and on or before Aug. 22.

The IRS also gives affected taxpayers until Aug. 22 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B.388 (Aug. 20, 2007), that are due to be performed on or afterJune 23 and on or before Aug. 22.

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This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after June 23 and on or before July 9 provided the taxpayer makes these deposits by July 9.

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.

Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “Florida/Tropical Storm Debby” at the top of the form so that the IRS can expedite the processing of the refund.

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Renting A Vacation Home

Income that is received for the rental of a vacation home must generally be reported on your federal income tax return.

However, if you rent the property for only a short time each year, you may not be required to report the rental income.

The IRS offers these tips on reporting rental income from a vacation home such as a house, apartment, condominium, mobile home or boat:

• Rental income, as well as certain rental expenses that

can be deducted, are normally reported on Schedule E, Supplemental Income and Loss.

• When you use a vacation home as your residence andalso rent it to others, you must divide the expensesbetween rental use and personal use, and you may notdeduct the rental portion of the expenses in excess ofthe rental income.

You are considered to use the property as a residence if your personal use is more than 14 days, or more than 10% of the total days it is rented to others if that figure is greater. For example, if you live in your vacation home for 17 days and rent it 160 days during the year, the property is considered used as a residence and your deductible rental expenses would be limited to the amount of rental income.

• If you use a vacation home as a residence and rentit for fewer than 15 days per year, you do not have toreport any of the rental income. Schedule A, ItemizedDeductions, may be used to report regularly deductiblepersonal expenses, such as qualified mortgage interest,property taxes, and casualty losses.

IRS Personnel Changes Note

The following message was announced by of Peggy Bogadi, Commissioner, Wage and Investment Division:

I am pleased to announce that Jerald “Jerry” Heschel has agreed to serve as the Wage and Investment (W&I) Division Extender Legislation Project Director. In this role, he will provide oversight on the implementation of anticipated Extender Legislation for the 2013 filing season. He will be responsible for providing advice and guidance on a wide range of high level and sensitive issues related to Extender Legislation, ensuring a successful 2013 filing season. In his former position, Jerry was the Director, Submission Processing, where he had day-to-day responsibility for the processing of 189 million individual and business tax returns through both electronic and paper means.

He is a 1969 graduate from Ashland University in Ohio and earned a master’s degree in 1984 from Syracuse University in Syracuse, NY. He is also a graduate of the IRS Candidate Development Program Class of 1987.

Paul Mamo will assume the role of Director, Submission Processing, in the W&I Division, where he will be responsible for the day-to-day operation of processing almost two hundred million individual and business tax returns through both electronic and paper means. His responsibilities will also include establishing policies and providing program oversight for all W&I processing centers and lockbox bank operations, and leading an organization of 250 headquarters employees and almost 23,000 field employees. Prior to this assignment, Paul was the Deputy Director, Submission Processing. He has also held the position of Field Director, Ogden Submission Processing Center.

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Paul is a graduate of the 2006 IRS Candidate Development Program and holds a BS degree in management.

Assuming the role of Deputy Director, Submission Processing, in the W&I Division will be Kenneth (Ken) Corbin. As the Deputy, he will share in the day-to-day responsibility of oversight for the W&I submission processing centers and lockbox bank operations with the Director. Previously, Ken was the Field Director, Austin Submission Processing.

Ken is a graduate of the Fall 2008 IRS Candidate Development Program and holds two bachelor degrees, Chemistry and Philosophy, from Emory University in Atlanta, Georgia

Pamela (Pam) Carlson will assume the role of Field Director, Austin Submission Processing, in the W&I Division. She will be responsible for processing more than 10 million individual paper returns and 5 million E-File returns with over 4,000 employees during peak season. Prior to this assignment, Pam served as the Executive Business Technology Advisor to the Deputy Commissioner of Services and Enforcement. In this role she defined and coordinated top level strategies, financial investments, and program direction for information technology being leveraged for business outcomes.

Pam has over thirty years of federal service which spans business experience in IRS, Treasury, and Department of Navy. A graduate of the 2004 IRS Candidate Development Program, she also holds a Bachelor of Science Degree in Education from the University of Texas.

$905 Billion Deficit

The federal government recorded an estimated deficit of $905 billion for the first nine months of fiscal year (FY) 2012, according to a Congressional Budget Office (CBO) report released on July 9.

This was $66 billion less than the deficit recorded for the same period in FY 2011. Overall, receipts were up 5%. Net receipts from corporate income taxes increased by $42 billion (or 31%). “The growth in corporate receipts this year is largely attributable to changes in tax rules in recent years – in particular, the rules governing how quickly firms may deduct the cost of their investments in equipment,”

CBO said. Individual income tax receipts increased by $26 billion (or 3%). Withholding increased by $18 billion (or 2%), and nonwithheld payments rose by $11 billion (or 4%). Receipts from social insurance taxes increased by $17 billion (or 3%)..

TIGTA Report on IRS and Tax-Exempt Organizations

IRS sometimes fails to control or timely process referrals alleging that tax-exempt organizations are possibly violating federal tax law, the Treasury Inspector General for Tax Administration (TIGTA) said in a recent audit. (Audit Report

No. 2012-10-058)

The Referral Unit within the agency’s Exempt Organization (EO) function “has dramatically improved the timeliness of acknowledgment letters being sent to submitters of referrals,” but there are still “significant challenges” in managing referrals, TIGTA said. The audit cited specific examples of problem areas, including the Referral Unit’s inability to readily locate referrals it received, ensure proper control of all referrals, or ensure referrals were being processed in a timely manner.

The unit is also unable to meet certain performance measures. For example, according to the audit, Referral Unit employees are required to make a determination as to whether a referral should be examined within 60 calendar days of receipt of an allegation. However, almost 25% of these referrals took more than 120 calendar days to process, the audit noted. “The EO function must ensure that referrals are controlled and processed appropriately and timely,” said J. Russell George, the inspector general. “If referrals are not properly accounted for or worked timely, the EO function may not be able to identify tax-exempt organizations that are potentially in violation of federal tax law.”

Affect of Recession on Household Incomes

The recent recession has had “a substantial impact” on household income, the amount of taxes owed, and average tax rates, CBO said in a report released on July 10. (The Distribution of Household Income and Federal Taxes, 2008 and 2009.)

According to the report, in 2009, the share of total before-tax income (the sum of market income and government transfers) received by households in the lowest income quintile was 5.1%, the share received by households in the middle quintile was 14.7%, and the share received by households in the highest quintile was 50.8%. Average before-tax income fell 12% from 2007 to 2009 in real terms. The declines in before-tax income were 5% or less for households in each of the four lowest income quintiles and 18% for households in the top quintile (including a 36% decline for households in the top percentile). “Because income fell more rapidly for households in the top percentile than for other income groups, their share of before-tax income also fell, by 5.3 percentage points,” CBO said.

The average federal tax rate before taxes was 17.4% in 2009 for all households and ranged from 1% for households in the lowest quintile to 23.2% for households in the highest quintile (and to 28.9% for households in the top percentile). “The average federal tax rate for all households fell 2.5 percentage points from 2007 to 2009, reaching the lowest level seen in the 1979–2009 period,” CBO said, adding that the largest decline was for households in the lowest income quintile. In 2009, the share of federal taxes owed was 0.3% for households in the lowest income quintile, 9.4% for households in the middle quintile, and 67.9% for those in the highest quintile.

“Declines in before-tax income among households in the top

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income percentile lowered their share of federal tax liabilities from 26.7% to 22.3% between 2007 and 2009,” CBO said. Finally, the report said that additional data available to CBO “suggest[s] that overall income continued to grow slowly in 2010 and 2011 and that income for households toward the higher end of the distribution increased more rapidly than income for households elsewhere in the income distribution in 2010.”

IRS Faces Daunting ‘Obamacare’ Challenge

According to the Treasury inspector general, this law “includes the largest set of tax law changes in more than 20 years.” Not only will it require new regulations, computer programs, and $881 million to implement the program through 2013, but also the hiring of 2,700 new workers. Treasury spokeswoman Sabrina Siddiqui has stated,

Keep the Child and Dependent Care Tax Credit in Mind for Summer Planning

During the summer many parents may be planning the time between school years for their children while they work or look for work. The IRS wants to remind taxpayers that are considering their summer agenda to keep in mind a tax credit that can help them offset some day camp expenses.

The Child and Dependent Care Tax Credit is available for expenses incurred during the summer and throughout the rest of the year. Here are six facts the IRS wants taxpayers to know about the credit:

1. Children must be under age 13 in order to qualify.

2. Taxpayers may qualify for the credit, whether thechildcare provider is a sitter at home or a daycare facilityoutside the home.

3. You may use up to $3,000 of the unreimbursedexpenses paid in a year for one qualifying individual or$6,000 for two or more qualifying individuals to figure thecredit.

4. The credit can be up to 35 percent of qualifyingexpenses, depending on income.

5. Expenses for overnight camps or summer school/tutoring do not qualify.

6. Save receipts and paperwork as a reminder when filingyour 2012 tax return. Remember to note the EmployeeIdentification Number (EIN) of the camp as well as itslocation and the dates attended.

EITC Due Diligence Requires Paid Preparers to Submit Form 8867

The Internal Revenue Service has begun to send out warning letters to those paid preparers who did not submit Form 8867

with EITC returns for 2011.

Penalties will be assessed for 2012 returns that do not include the Form 8867. The IRS suggests review of the EITC Due Diligence training module which can help tax preparers avoid penalties.

Editor’s note: In the resource section of www.ncpefellowship.com there is an additional EITC due diligence worksheet for your use.

IRS Electronic Tax Administration Advisory Committee Delivers Report to Congress

The Electronic Tax Administration Advisory Committee (ETAAC) recently presented its 2012 Annual Report to Congress during a public meeting. The report discusses five groups of recommendations on issues in electronic tax administration.

Highlights of the report include recommendations on the following key outcomes:

• Reinforcing standards for security, privacy, and fraudprevention

• Moving forward on e-file of employment tax andinformation tax returns,

• Creating Internet tools for taxpayers and taxprofessionals,

• Leveraging tax delivery service channels and• Funding Modernized e-File and Customer Account Data

Engine to completion

“Through its recommendations, ETAAC provides an important voice to the IRS,” said David Williams, Director of the Return Preparer Office. “We appreciate the long hours and focus the ETAAC brings, and we will carefully review these recommendations.”

The 14-member committee provides an organized public forum for discussion of electronic tax administration issues and the overriding goal that paperless filing should be the preferred and most-convenient method of filing tax and information returns.

“ETAAC commends IRS on surpassing its goal and receiving more than 80 percent of individual tax returns electronically. IRS can now turn its attention to employment tax returns and re-focus on delivering electronic interactions to taxpayers and tax professionals,” said Mark Steber, ETAAC Chairman.

ETAAC submits an annual progress report to Congress each June. The IRS Electronic Tax Administration created the ETAAC in 1998 as required by the IRS Restructuring and Reform Act of 1998.

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IRS Return Preparer Visitation Project Needs Work

An IRS project to assess the services of tax return preparers by visiting them around the country has been correctly implemented, but its effectiveness remains to be determined, according to a new report.

J. Russell George

The report, by the Treasury Inspector General for Tax Administration, concerned the IRS’s Return Preparer Visitation Project. The overall objective of the review was to evaluate the effectiveness of the IRS’s efforts to conduct visitations to paid preparers to improve the accuracy and quality of filed tax returns.

“With some improvements, this project may yield vital information,” said TIGTA Inspector General J. Russell George in a statement.

While paid preparers generally had a positive view of the revenue agent visitations, 70 percent of respondents to a TIGTA survey stated they would not change the way they prepared tax returns as a result of the visit.

TIGTA initiated its review because the IRS included objectives in its Strategic Plan for Fiscal Years 2009–2013 to strengthen partnerships with tax practitioners and ensure that paid preparers and other third parties adhere to professional standards and follow the law.

RPVP managers were tasked with developing a methodology for revenue agents to visit paid preparers. TIGTA’s analyses of IRS data showed the RPVP issued letters to more than 10,000 paid preparers, and revenue agents completed 2,404 visits, or 96 percent of the FY 2010 RPVP goal.

In addition, TIGTA found that in fiscal year 2011, the RPVP issued letters to more than 10,000 paid preparers and conducted 2,498 visitations, or nearly 100 percent of its goal.TIGTA evaluated the methodology used to select paid preparers and determined that those visited may not have benefited the most from an educational visit. Based on survey responses by the preparers, several paid preparers remarked that the use of IRS resources to visit their office was wasteful

IRS Offers Tips on How to Fix Errors Made on Your Tax Return

If you discover an error after a tax return is filed, you can correct it by amending the return. Here are 10 tips from the Internal Revenue Service about amending a federal tax return:

1. When to amend a return Generally, you should file anamended return if your filing status, number of dependents,total income, tax deductions or tax credits were reportedincorrectly or omitted. Additional reasons for amending areturn are listed in the instructions.

2. When NOT to amend a return In some cases, you do notneed to amend your tax return. The IRS usually correctsmath errors or requests missing forms – such as FormsW-2 or schedules – when processing an original return. Inthese instances, do not amend your return.

3. Form to use Use Form 1040X, Amended U.S. IndividualIncome Tax Return, to amend a previously filed Form 1040,1040A, 1040EZ, 1040NR or 1040NR-EZ. Make sure youcheck the box for the year of the return you are amendingon the Form 1040X. An amended tax return cannot be filedelectronically.

4. Multiple amended returns If you are amending morethan one year’s tax return, prepare a separate 1040X foreach return and mail them in separate envelopes to theappropriate IRS processing center (see “Where to File” inthe instructions for Form 1040X).

5. Form 1040X The Form 1040X has three columns.Column A shows original figures from the original return.Column B shown the changes you are making. Column Cshows the corrected figures. There is an area on the backof the form to explain the specific changes and the reasonsfor the changes.

6. Other forms or schedules If the changes involve otherschedules or forms, attach them to the Form 1040X. Failureto do this will cause a delay in processing.

7. Additional refund If you are amending your return toget an additional refund, wait until you have received youroriginal refund before filing Form 1040X. You may cash thatcheck while waiting for any additional refund.

8. If you owe additional tax, you should file Form 1040Xand pay the tax as soon as possible to limit interest andpenalty charges.

9. When to file Generally, to claim a refund, you must fileForm 1040X within three years from the date you filed youroriginal tax return or within two years from the date youpaid the tax, whichever is later.

10. Processing time Normal processing time for amendedreturns is 8 to 12 weeks.

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deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity unrelated to your job search compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.

5. You cannot deduct your job search expenses if therewas a substantial break between the end of your last joband the time you begin looking for a new one.

6. You cannot deduct job search expenses if you are lookingfor a job for the first time.

7. The amount of job search expenses that you can claimis limited. To determine your deduction, use Schedule A,Itemized Deductions. Job search expenses are claimedas a miscellaneous itemized deduction and the total of allmiscellaneous deductions must be more than two percentof your adjusted gross income.

TIGTA Audit of IRS on Seizure of Taxpayer Property

IRS does not always comply with the statutory requirements regarding the seizure of taxpayers’ property, according to a TIGTA audit that was released on July 16. (Audit Report No. 2012-30-072)

“Although TIGTA did not identify instances in which taxpayers were adversely affected, noncompliance with [Code] requirements could result in abuses of taxpayers’ rights,” the audit said. Auditors reviewed a random sample of 50 of the 747 seizures conducted from July 1, 2010, through June 30, 2011. In the majority of seizures, IRS followed all legal guidelines, TIGTA said.

However, in 11 seizures, auditors found 14 instances in which Code requirements were not followed. These included the following: the sale of the seized property was not properly advertised (Code Sec. 6335(b)); the amount of the liability for which the seizure was made was not correct on the notice of seizure provided to the taxpayer (Code Sec. 6335(a)); proceeds resulting from the seizure were not properly applied to the taxpayer’s account (Code Sec. 6342(a)); and information relating to the sale of the seized property was either incorrect or not provided to the taxpayer (Code Sec. 6340(c))..

TIGTA Reports on IRS Use of Illegal Tax Protestor Codes

IRS has not “reintroduced” the use of Illegal Tax Protestor codes or similar designations on taxpayer accounts, according to an annual audit on the subject conducted by the Treasury Inspector General for Tax Administration (TIGTA). (Audit Report No. 2012-30-066)

The use of any such terminology is barred under a provision of the IRS Restructuring and Reform Act of ‘98, the audit said.

because their continuing professional education requirements were much more extensive than the information presented by the revenue agents.

TIGTA also determined that the RPVP did not have performance measures or tracking procedures to successfully evaluate its effectiveness.

TIGTA recommendations included:

• That the IRS ensure that the RPVP uses data-drivenselection criteria to specifically identify paid preparerswho filed tax returns with errors to make certain the mostegregious paid preparers are receiving educational andenforcement visitations.

• The IRS should develop specific performance measuresand internal controls that can be used to assess theimpact of the RPVP on the paid preparer community. This effort should include a process to monitor and track thebehavior of paid preparers visited to determine whetherthe quality and accuracy of tax returns improved.

In response, IRS officials agreed with both recommendations and stated they have already begun their implementation. The IRS agreed as well that both recommendations will eventually help improve the quality and accuracy of filed tax returns, as well as heighten paid preparers’ awareness of their responsibilities.

Job Search Expenses Can be Tax Deductible

Summertime is the season that often leads to major life decisions, such as buying a home, moving or a job change. If you are looking for a new job that is in the same line of work, you may be able to deduct some of your job hunting expenses on your federal income tax return.

Here are seven things the IRS wants you to know about deducting costs related to your job search:

1. To qualify for a deduction, your expenses must be spenton a job search in your current occupation. You may notdeduct expenses you incur while looking for a job in a newoccupation.

2. You can deduct employment and outplacement agencyfees you pay while looking for a job in your presentoccupation. If your employer pays you back in a later yearfor employment agency fees, you must include the amountyou received in your gross income, up to the amount ofyour tax benefit in the earlier year.

3. You can deduct amounts you spend for preparing andmailing copies of your résumé to prospective employersas long as you are looking for a new job in your presentoccupation.

4. If you travel to look for a new job in your presentoccupation, you may be able to deduct travel expensesto and from the area to which you travelled. You can only

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The reasoning behind the provision is that use of such terminology may stigmatize taxpayers and may cause IRS employee bias in future contacts with these taxpayers, TIGTA said. Prior to enactment of the law, IRS used the Illegal Tax Protester Program to identify individuals and businesses using methods that were not legally valid to protest the tax laws, the audit explained. TIGTA found that “out of approximately 4.2 million records and cases, there were 16 instances in which 16 employees had referred to taxpayers as “Tax Protester,” “Constitutionally Challenged,” or other similar designations in case narratives on the computer systems analyzed.”

TIGTA noted that it made no recommendations in the audit due to IRS’s longstanding disagreement with the inspector general’s position that compliance with the ‘98 law bars the use of these designations. .TIGTA Report Suggests Changes in VITA Program

IRS should better utilize historical data in order to assess its progress in meeting the Volunteer Income Tax Assistance (VITA) Grant Program objective of extending coverage to the underserved, TIGTA said in a recent audit. (Audit Report No. 2012-40-049)

Since receiving its initial funding in fiscal year (FY) 2008, the VITA Grant Program has become an integral part of IRS’s Volunteer Program.

According to the audit, one-third of tax returns prepared by the Volunteer Program are prepared by VITA Grant Program grantees. From FY 2009 to FY 2011, the number of grantees grew from 111 to 179 and the number of tax returns prepared by grantees grew by 38%. Analysis of the 51 grantees that received VITA Grant Program funding in each of these years showed that 21 (or 41%) did not reach 90% of their tax return preparation goals but received increased funding in the subsequent year, the audit said. In addition, 9% of the tax returns prepared in calendar year 2009 and 6% in calendar years 2010 and 2011 were for taxpayers with incomes over the threshold limit, TIGTA said.

Thoughts from the Ragin Cagin

How Sole Proprietors, Partners, and 2% S Corp Shareholders Can Deduct Medicare Premiums

Chief Counsel Advice 201228037

In Chief Counsel Advice (CCA), IRS has provided guidance on the requirements for a sole proprietor, partner, or 2% shareholder of an S corporation to deduct Medicare premiums as medical care insurance under Code Sec. 162(l). Further, the CCA concludes that all Medicare parts (not just the supplemental medical insurance of Medicare Part B) are insurance constituting medical care, and that all Medicare premiums may be deductible under Code Sec. 162(l).

A self-employed individual, a sole proprietor, partner, or more-than-2%-shareholder of an S corporation, can deduct as a business expense the amount paid during the tax year for medical insurance on himself, his spouse and his dependents, or a child (who meets the definition in Code Sec. 152(f)(1) and who hasn’t attained age 27 as of the end of the tax year). (Code Sec. 162(l)(1)) However, no deduction is allowed for a self-employed individual’s health insurance costs to the extent that the deduction exceeds his earned income (within the meaning of Code Sec. 401(c), i.e., net earnings from self-employment) derived from the trade or business with respect to which the plan providing the medical care coverage was established. (Code Sec. 162(l)(2)(A))

The deduction isn’t available to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of the taxpayer. (Code Sec. 162(l)(2)(B))

For purposes of applying the income tax provisions relating to employee fringe benefits, an S corporation is treated as a partnership, and any 2% shareholder of an S corporation is treated as a partner of the partnership. (Code Sec. 1372(a)) For this purpose, a “2% shareholder” is any person who owns (or is considered as owning under the constructive ownership rules of Code Sec. 318) on any day during the S corporation’s tax year more than 2% of the outstanding stock of the corporation or stock possessing more than 2% of the

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total combined voting power of all stock of such corporation. (Code Sec. 1372(b))

A 2% shareholder-employee in an S corporation, who otherwise meets the requirements of Code Sec. 162 Code Sec. (l), is eligible for the deduction under Code Sec. 162(l) if the plan providing the medical care coverage for the 2% shareholder-employee is established by the S corporation. (Rev Rul 91-26, 1991-1 CB 184)

In Notice 2008-1, 2008-2 IRB 251, IRS provided that a 2% shareholder of an S corporation, who is otherwise eligible to deduct medical insurance, may do so only if the plan providing medical care coverage for that shareholder is established by the S corporation—that is, (1) the S corporation makes the premium payments for the accident and health insurance policy covering the 2% shareholder (and his spouse, dependents, or child under age 27, if applicable) in the current tax year; or (2) the 2% shareholder makes the premium payments andfurnishes proof of premium payment to the S corporation andthen the S corporation reimburses the 2% shareholder for thepremium payments in the current tax year.

If the accident and health insurance premiums are not paid or reimbursed by the S corporation and included in the 2% shareholder’s gross income, a plan providing medical care coverage for the 2% shareholder isn’t established by the S corporation and the 2% shareholder in an S corporation isn’t allowed the deduction for medical insurance. In order for the 2% shareholder to deduct accident and health insurance premiums, the S corporation must report the accident and health insurance premiums paid or reimbursed as wages on the 2% shareholder’s Form W-2, Wage and Tax Statement, in that same year. Moreover, the shareholder must report the premium payments or reimbursements from the S corporation as gross income on his Form 1040, U.S. Individual Income Tax Return. (Notice 2008-1)

IRS preliminarily concludes that all Medicare Parts (i.e., in addition to Medicare Part B) are insurance that constitutes medical care under Code Sec. 162(l). IRS reasons that all Medicare premiums are similar to other health insurance premiums and can be used to compute the deduction under Code Sec. 162(l). This conclusion extends to Medicare premiums for coverage of a self-employed individual’s spouse, dependent, or child (who as of the end of the tax year hasn’t attained age 27).

Further, while the instructions to Form 1040 for 2009 and prior years omit any mention of Medicare premiums, the instructions to Form 1040 (2010), p. 28, indicate that Medicare premiums can be used to compute the deduction under Code Sec. 162(l). The CCA notes that self-employed individuals who failed to deduct Medicare premiums in prior years may file an amended return to claim a refund for open tax years.

The 2010 Instructions confined itself only to the deductibility of Medicare Part B premiums. In Chief Counsel Advice 201228037, IRS has now expanded its guidance on when Medicare premiums are deductible under Code Sec. 162(l) to

include all Medicare premiums.

The CCA concludes that a 2% shareholder, and by extension, a partner in a partnership, can claim the Code Sec. 162(l) deduction only if the requirements of Notice 2008-1 are satisfied.

For the premiums to be deductible under Code Sec. 162(l), a partner in a partnership may pay the premiums directly and be reimbursed by the partnership, or the premiums may be paid by the partnership. In either case, the premiums must be reported to the partner as guaranteed payments, and he must report the guaranteed payments as gross income on his Form 1040.

Similarly, a 2% shareholder-employee in an S corporation may pay the premiums directly and be reimbursed by the S corporation, or the premiums may be paid by the S corporation. In either case, the premiums must be reported to the 2% shareholder-employee as wages on Form W-2, and he must report this amount as gross income on his Form 1040.

A sole proprietor must pay the Medicare premiums directly.

If all the requirements of Code Sec. 162(l) are satisfied, Medicare premiums may be deducted under Code Sec. 162(l) for coverage of the self-employed individual’s spouse, dependent or a child who as of the end of the tax year hasn’t attained age 2.

With this clarification, the tax professional and their client who meets the qualification to claim this adjustment to income should feel confident in doing so.

Jerry

Tax Pros in Trouble

Internal Revenue Service Raids Santa Rosa Tax Business

Internal Revenue Service crime scene investigators raided the America’s Income Tax office on Guerneville Road in Santa Rosa on Tuesday, July 17, 2012.

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Federal Internal Revenue Service agents raided a northwest Santa Rosa tax preparation office Tuesday morning with a warrant to search the business west of Coddingtown Mall.

An IRS spokeswoman declined to discuss the purpose of the 9:15 a.m. raid.

“We are out there on official business, but at this point I’m not able to say anything about the purpose of our being there,” spokeswoman Arlette Lee said.

Witnesses said several dozen agents from IRS Criminal Investigations swooped in on America’s Income Tax, located on Guerneville Road in Coddingtown Plaza. One witness, jeweler Loren Hovland, said he was nearly run down by vehicles that swerved into an opposing lane of Range Avenue to use a back entry into the business complex.

Two agents posted outside the door of the tax office declined to comment on the operation. Agents were continuing to search the office into the evening.

America’s Income Tax is owned by Efrain and Elizabeth Jovel, whose two daughters and a family friend also are licensed tax preparers for the firm, according to the company’s website.

They were not available for comment despite repeated phone calls, and the company’s website stopped displaying information later in the day.

Efrain Jovel started the firm out of his home in the early 1980s to help members of the Latino community with their taxes and moved to the Guerneville Road office in 1983, according to the website.

His wife, president of the Hispanic Chamber of Commerce of Sonoma County in 2008, joined him in the business a few years later.

“They’re the nicest family,” said Donna Jones, who works at a nearby optometry office. “I hope there’s not something going on because they really are extremely nice people.”

Texas Return Preparer Sentenced to Jail for Preparing False Tax Returns

Eddye L. Lovely, a tax return preparer from Tomball, Texas, was sentenced to 57 months in federal prison, the Justice Department and Internal Revenue Service (IRS) announced. Lovely appeared before United States District Judge Nancy F. Atlas in Houston.

On April 6, 2011, Lovely was indicted on 14 counts of aiding and assisting in the preparation of false tax returns. On September 28, 2011, Lovely was charged, pursuant to a superseding indictment, with 16 counts of aiding and assisting in the preparation of false tax returns comprising the original 14 counts plus two additional counts. According to the superseding indictment, the court had released Lovely on bond pending trial and ordered him not to prepare any tax

returns or commit additional crimes. While on pre-trial release, Lovely aided and assisted in the preparation of materially false 2010 tax returns for two additional clients. He pleaded guilty on December 12, 2011 to three of the 16 counts charged in the superseding indictment. Following a pretrial hearing, the court revoked Lovely’s bond and ordered him detained.

According to the superseding indictment and plea agreement, Lovely owned and operated “The Tax Master,” a tax return business located in Harris County, Texas. Lovely prepared tax returns that contained fabricated Schedule C losses for businesses that the taxpayers did not own or operate, as well as false or inflated Schedule A deductions for charitable contributions and other expenses.

The court found that the tax loss associated with the three charges to which Lovely pleaded guilty as well as all relevant conduct associated with this case was more than $1 million.

Kathryn Keneally, Assistant Attorney General for the Justice Department’s Tax Division, commended the investigative efforts of the IRS agents involved in the case and Tax Division Trial Attorneys Tracy Gostyla and Kathryn Ward, who prosecuted the case.

Fugitive Ex-CPA Arraigned on Tax Charges

A former CPA and tax preparer who spent the last three years on the run as a fugitive in Pakistan has been arraigned on charges that he submitted false claims for income tax refunds.

Masood Chotani, a tax preparer who used to work in Los Angeles County, was arraigned Monday on charges that he conspired to defraud the United States and made false claims for income tax refunds. A federal grand jury in Riverside returned an indictment against Chotani on June 23, 2010. The indictment was unsealed earlier this year.

Chotani was apprehended with assistance from the U.S. Marshals Service. This case was investigated by special agents of the IRS Criminal Investigation office in Laguna Niguel, Calif.

The indictment alleges that in 2002 and 2003, Chotani along with Ather Ali and Haroon Amin conspired to file at least 250 false income tax returns with the IRS using the names and Social Security numbers of deceased individuals, claiming more than $2,000,000 in tax refunds.

Many of the illegally obtained refund checks were allegedly deposited in bank accounts within the Islamic Republic of Pakistan and the Republic of Armenia, according to prosecutors.

According to court documents, most of the offenses occurred in San Bernardino, Los Angeles, Orange, Riverside, and Ventura counties. Chotani is also charged with personally preparing and filing two false claims for refund on federal income tax returns.

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Ellington Man Admits Filing False Tax Returns

The charge stems from Roland Violette, Jr.’s failure to pay more than $96,528 in federal income taxes in the 2003 and 2004 tax years.

An Ellington man pleaded guilty to filing a false tax return, U.S. Attorney David B. Fein announced Thursday.

Roland Violette, Jr., 45, of Ellington, waived his right to indictment and pleaded guilty before United States District Judge Stefan R. Underhill in Bridgeport to one count of making and subscribing a false tax return.

The charge stems from Violette’s failure to pay more than $96,528 in federal income taxes in the 2003 and 2004 tax years. According to court documents and statements made in court, Violette withheld substantial amounts of business receipts for his two businesses, Ellington Oil Company, LLC, and Violette Mechanical, LLC, from his tax preparer.

In April 2004, Violette filed a 2003 joint income tax return in which he reported a tax liability of $6,701 based on taxable income $31,954, when he knew that the correct tax liability was $45,694 based on taxable income of $157,424. For the 2004 tax year, Violette’s tax return reported a tax liability of $9,664 based on taxable income of $46,352, when Violette knew that the correct tax liability was $68,042 based on taxable income of $223,583.

Judge Underhill has scheduled sentencing for October 4, 2012, at which time Violette faces a maximum term of imprisonment of three years and a fine of up to $250,000. To date, Violette has paid approximately $228,645 in back taxes, interest and penalties. This case was investigated by the Internal Revenue Service – Criminal Investigation and is being prosecuted by AssistantUnited States Attorney Harold H. Chen.

2 Toledoans Charged in Alleged Tax-Fraud Scheme

Two Toledo woman face federal charges for allegedly conspiring to falsify tax forms that resulted in $134,000 in fraudulent refunds over a period of three years.

Wanda Love, 57, and Sonya Moses, 40, were charged in U.S. District Court in Toledo with conspiracy in the preparation of false tax returns, an indictment filed alleges. Ms. Love also is charged with 59 counts of helping to prepare false tax returns.Court records show Ms. Love was a tax return preparer for

Chotani’s trial is scheduled for Sept. 4, 2012. If convicted, he faces up to five years in prison and a $250,000 fine for each count of conspiracy and presenting false claims.

This case is being prosecuted by Assistant U.S. Attorney Charles E. Pell and trial attorney Joseph A. Rillotta of the Justice Department’s Tax Division.

Lawyer Arrested by IRS on Tax Evasion

A Toms River lawyer was arrested at his home by Internal Revenue Service agents on charges that he evaded federal income taxes and failed to pay the payroll taxes for the workers at his law firm for several years, authorities said.

A federal grand jury returned an indictment Thursday charging Lee Gottesman, 56, with four counts of personal income tax evasion and 15 counts of willful failure to pay payroll taxes between 2006 and 2009, according to a news release from New Jersey U.S. Attorney Paul J. Fishman.

According to the indictment unsealed Friday:

Gottesman employed two other attorneys and a legal secretary at his law firm. In 2002, the IRS filed a levy on his assets for unpaid taxes, but he opened a subaccount within his attorney trust account. That subaccount was in his wife’s name, even though she was never one of his clients.

He then began to run personal and business expenses through that account, making more than $90,000 in mortgage payments for his home; using it to pay for more than $17,000 in household expenses — including pool maintenance, construction costs and landscaping services — and using it to pay thousands of dollars in other expenses, including life insurance premiums, auto body repair work and credit-card payments.

Authorities say that he earned more than $440,000 in taxable income, and incurred more than $110,000 in income tax liability during the period covered in the indictment. But he did not pay personal income taxes for that time frame and did not file personal tax returns, authorities said.

Authorities said he also withheld payroll taxes from his employees’ checks but never turned that money over to the IRS.

Each charge carries a maximum of five years in prison.

Fishman credited special agents of the IRS criminal investigation unit for their work on the case.

Assistant U.S. Attorney Zach Intrater is handling the prosecution. It was unclear if Gottesman had retained an attorney.

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H&R Block in Toledo. During that time, the indictment says, Ms. Moses would “recruit and refer individuals to have their tax returns prepared by Love in order to fraudulently obtain tax refund.”

The alleged conspiracy occurred from 2007-09, during which time Ms. Love is charged with preparing and filing 59 false returns, resulting in fraudulent payouts of about $134,000.

Birmingham Return Preparer Sentenced to 15 months

The former operator of a tax preparation service in Jefferson County has been sentenced to 15 months in prison for helping prepare false tax returns.

U.S. District Judge Abdul Kallon imposed the sentence Monday on 47-year-old Dennis Franklin of Birmingham. Franklin pleaded guilty to tax fraud in March. U.S. Attorney Joyce Vance said he admitted causing false tax returns to be filed for seven clients. The clients received larger refunds than they were entitled to receive and then Franklin received a portion of the refunds. The returns were for the tax years 2005 through 2007.

The judge ordered Franklin to pay more than $34,000 in restitution to the Internal Revenue Service.

El Paso Tax Preparer Sentenced to Two Years in Prison for Filing False Tax Returns

An El Paso tax preparer has been sentenced to two years in prison after admitting to filing fraudulent tax returns, IRS officials said.

Charles Showery of Showery Service and Associates was indicted last year on 24 counts of aiding and abetting the preparation of a false tax return. He pleaded guilty in March to three of those counts as part of a plea agreement with federal prosecutors, officials said.

Senior U.S. District Judge sentenced Showery on Thursday. Briones also ordered Showery to pay $164,591 in restitution. According to his indictment, from January 2008 to April 15, 2010, Showery filed tax returns that claimed deductions he knew the taxpayer was not entitled to.

Tax Advocacy & Tax ProfessionalsWhat Farmers Need to Know About Audits

Audit techniques vary for different businesses, so small business owners need to be armed with how an agent might approach their inspection.

The IRS website publishes audit training guides for essentially every profession. So if you are slated for a tax audit of your business, read the IRS Audit Technique Guides to discover

what you should expect.

The IRS often targets farmers for an audit for a variety of reasons, but primarily because income is not reported to farmers on W2s or 1099s. Without an audit, it’s difficult for the IRS to know if a farmer is accurately reporting income. The IRS also tends to suspect that farmers’ book keeping procedures aren’t up to par, and that their internal controls to test income may be lacking. The agency also knows that farmers face significant swings in profitability that hinge on unpredictable events like weather and the economy.

When the farmer is selected for audit, the auditor will seek information to establish background and income potential. She will want to know how many hours the farmer and his spouse work on the farm to determine if there are any passive activity issues, such as losses that cannot be claimed but should be carried forward.

She’ll want detailed depreciation schedules to tie out the capital assets to the ability to purchase them and will study them in conjunction with lease and loan documents and repayment schedules. She will also review grower statements and other income records, as well as crop maps with acres, type of plants and year of planting. She will also ask for crop reports including insurance damage reports. Some of these items will be requested before you ever come face to face with the auditor.

The crop map is a useful tool for the auditor: it allows her to compare the map with industry averages to estimate both income and expenses and compare it to what you reported. If you are within those guidelines, the audit may be cut short. She can compare the crop map with lease agreements to verify if income and expenses are properly allocated. By judging distances between parcels, she can determine if the farmer should be completing highway use tax returns.

The auditor will want to tour the farm to look for capital improvements and compare those with the items listed on the depreciation schedule. She will check to make sure that any vines or trees have been capitalized. The auditor will check the number of houses on the farm and whether or not they have been rented out and if so, determine if the rental activity has been declared on the tax return.

She will also look at the farm animals during the tours to check for the sales of calves (dairy farm) that may have gone unreported. She will inspect the equipment and confirm its use to determine if there is unreported income. For example, if a grape farmer has a cotton picker, eyebrows will go up. If the farmer owns any large trucks, the auditor will wonder if hauling is another source of income and will want to confirm that it has been declared on the tax return.

One of the big issues regarding a farmer’s tax return is a “structural analysis.” The auditor will want to know if there are any related entities: perhaps the farm is a partner in a larger partnership, part of a corporate structure, trust or family partnership. If so, the auditor may move the audit to the larger

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any delinquent state and local taxes. When a taxpayer owes delinquent federal and state or local taxes, and does not have the ability to fully pay the liabilities, monthly payments to state taxing authorities may be allowed in certain circumstances.

The IRS also noted that it is expanding the Allowable Living Expense allowance. Standard allowances incorporate average expenses for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer-in-compromise requests. The National Standard miscellaneous allowance has been expanded. Taxpayers can use the allowance to cover expenses such as credit card payments and bank fees and charges.

IRS Revises Procedures and Fees for Requesting Background File Documents

Rev Proc 2012-31, 2012-33 IRB

In a Revenue Procedure, IRS has updated procedures and revised the fee for processing requests for a background file document, including the costs for searching for the document, duplication and making redactions, relating to a written determination issued by the IRS National Office. The Revenue Procedure is effective for requests received after Sept. 30, 2012.

Code Sec. 6110(a) provides that the text of any written determination and background file document related to a written determination will be open for public inspection, subject to the deletions required by Code Sec. 6110(c) (dealing with items exempt from disclosure) and Code Sec. 6110(i)(3) (dealing with Chief Counsel Advice). Upon receipt of a request for a background file document related to a written determination, IRS must mail a notice of intent to disclose to the individual to whom the written determination pertains. IRS must make the background file document available no earlier than 75 days, but no later than 90 days, after mailing the notice of intent to disclose. Code Sec. 6110(k)(1) authorizes IRS to assess actual costs for duplication of any background file document, searching, and making deletions required under Code Sec. 6110(c) and Code Sec. 6110(i)(3).

In Rev Proc 95-15, 1995-1 CB 523, IRS provided procedures and costs for processing requests for background file documents. For all requests for background file documents relating to written determinations (other than rulings or technical advice memoranda issued by the National Office), IRS charged a search fee of $23.50 for each written determination file, and a deletion and duplication fee of $2.00 for each page.

Rev Proc 2012-31, which supersedes Rev Proc 95-15, provides that requests for a background file document must be in writing and must include the file number of the written determination for which the background file is being requested. The request should specify whether it is for all the documents in the file or only a specific document.

To request a background file document for a specific written determination, the release number or file number of the written

entity with hopes of attaining more tax revenue. It’s also possible there’s been a misallocation of income and expenses between the entities. One way the auditor discovers related entities is by looking at crop loan documents. It’s all about following the money.

Crop contracts will also be reviewed to determine if the quantities sold match up to industry standards and to see if there is any deferred income. Not all deferred payment contracts are valid; much of it depends upon delivery terms.

Grower statements show quantities delivered, and the auditor will compared them to crop contracts for consistency. Quantity accepted by the buyer will be analyzed, the auditor will want to know what happened to any rejected crops – were they sold to another buyer or sold in a different market for a lesser price or disposed of. Was the crop insured?

Farmers will need more than bank statements and cancelled checks to satisfy an auditor. If you are a farmer, be sure to keep all contracts, loan documents and crop maps as they become an integral part of an audit.

IRS Promotes Expansion of Fresh Start Initiative

The Internal Revenue Service reminded taxpayers and tax preparers Monday that it is now offering more flexible terms for its offer-in-compromise program as part of its expanded Fresh Start initiative.

The newest rules enable some financially distressed taxpayers to clear up their tax problems even quicker.

An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to determine the reasonable collection potential.

The expansion of the “Fresh Start” initiative focuses on the financial analysis used to determine which taxpayers qualify for an OIC.

Among the OIC changes are revising the calculation for a taxpayer’s future income The IRS will now look at only one year (instead of four years) of future income for offers paid in five or fewer months; and two years (instead of five years) of future income for offers paid in six to 24 months. All OICs must be paid in full within 24 months of the date the offer is accepted.

The IRS is also making it easier for taxpayers to repay their student loans. Minimum payments on student loans guaranteed by the federal government will be allowed for the taxpayer’s post-high school education. Proof of payment must be provided.

In addition, the IRS is making it easier for taxpayers to pay

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Sections 104, 105, & 106 – Health and disability coverage and reimbursement programs.

Section 119 – Meals or lodging furnished for the convenience of the employer.

Section 120 – Qualified group legal services plan.

Section 125 – Cafeteria plans.

Section 127 – Educational assistance programs.

Section 129 – Dependent care assistance program.

Section 132 – Certain fringe benefits.

No-additional cost service, service must be offered for sale to customers.Qualified employee discounts – 20% limit for service.Working condition fringes – must be deductible by employee if paid by employee.De minimis fringes – too small to fool with.Qualified transportation fringes.Qualified moving expense reimbursement.On-Premises Athletic Facility – must be used by all employees.

Section 83 – Property received in performance of services.

Section 401 – Qualified pension, profit-sharing, and stock bonus plans.

Section 408 – Individual retirement accounts, IRA’s.

Section 422 – Incentive stock option plans.

Section 423 – Employee stock purchase plans.

The following fringe benefits are deductible to a Corporation and tax-free to the employee:

Health insurance;Disability insurance;Free parking, limited to $180 per month;Annual medical checkups;Personal liability insurance;$5,000 death benefit;Free housing and meals on company premises including utilities - §119;Small Christmas gifts – limited to $25 per year for an employee;Subscriptions to business periodicals;Payment of professional and business club dues;Cost of business conventions;De minimis fringes too small to account for; andUniforms and small tools.

The fringe benefits listed above CAN be provided on a “discriminatory basis.”

determination must be included. Code Sec. 6110 written determinations are indexed by Code sections. If requesting background file documents for written determinations under a specific Code section, the release or file numbers for the written determinations should be obtained from the list of published IRS Written Determinations in the Electronic Reading Room on IRS’s website or at the National Office Reading Room.

Rev Proc 2012-31 provides that the fee for processing a request for background file documents is $100 per hour. This fee covers all costs associated with processing the request, including the costs to search for, make deletions to, and make copies of the background file documents.

Requests should contain the requester’s agreement to pay IRS a fee for searching for the file, making deletions, and making copies. The request should state the maximum amount of charges IRS may incur without further authorization from the person making the request. If the request doesn’t contain a stated maximum amount or the fees will exceed the stated maximum amount, IRS will forward to the requester a payment agreement with the estimated cost for processing the request. The payment agreement must be signed and returned to IRS before it will begin processing the file.

Rev Proc 2012-31 also provides a sample of a request letter for background file documents under Code Sec. 6110.

Wayne’s World

Benefit Opportunities to Shareholder/Employees of a C Corporation

The Internal Revenue Code offers a variety of benefits for shareholder/employees of C Corporations.

Section 74 – Employee achievement awards - $400 cap per employee.

Section 79 – Group-term life insurance.

Section 101 – Death benefits from life insurance.

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Fringe benefits that can not be provided on a discriminatory basis that are tax-deductible to a corporation and tax-free or tax-deferred to the employee are:

Recreational and health facilities;Prepaid legal assistance;

Section 127 tuition reimbursement plans, even if not job-related;

Medical reimbursement plans;Child and dependent care up to $5,000 per year;$50,000 of group-term insurance;Discounts on company products and services;No additional-cost service; andMeals provided to employees at cost.

The current corporate tax rates favor corporate income up to $50,000 which is taxed at a rate of 15%.

Personal Service Corporations, PSC’s, remain taxed at the highest individual rate - currently 35 per cent

Running your business as a C Corporation can result in double taxation, meaning your business income gets taxed once at the corporate level and again when liquidated or where dividends are distributed.

Tax professionals should always consider the tax implications of recommending C corporate status to their taxpayers and fringe benefits is one of the considerations.

Wayne

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Tax Quotes & Funnies

“Two things you need to know about taxes. They’ve extended the deadline to April 18, and when you write your check, just make it out to China.” –David Letterman

“Tax day is the day that ordinary Americans send their money to Washington, D.C., and wealthy Americans send their money to the Cayman Islands.” –Jimmy Kimmel

“Every year, I include a piece of chicken in the envelope with my taxes. Not as a bribe, just a little treat for the guy at the IRS who opens it.” –Jimmy Kimmel

“It’s fitting that April 14 is National Pecan Day because today, we recognize nuts. And tomorrow, on April 15, we pay our taxes to support them.” -Craig Ferguson

“I’m not going to pay taxes. When they say I’m going to prison, I’ll say no, prisons cost taxpayers a lot of money. You keep what it would have cost to incarcerate me, and we’ll call it even.” –Jimmy Kimmel

“Because of a holiday, the deadline for taxes is April 18, so you have three extra days to dig through restaurant dumpsters for receipts.” –Jimmy Kimmel

“The government is really asking a lot of us this month -- first we’re supposed to count how many people live in our home -- then we’re supposed to count how much money we owe them. I actually got confused and accidentally sent a check to the census and a member of my household to the IRS. Sorry grandma.” -Jimmy Kimmel

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