by Jean Miller | Accounting News, Audit and Accounting, Bookkeeping, Business Consulting, Financial Statement Reporting, IRS, News, Tax Consulting, Tax Planning
In a recent decision that considers the authority of the IRS to issue retroactive regulations, the Supreme Court ruled in United States v. Home Concrete that the IRS may not apply an extended six-year limitations period in certain tax shelter cases. The extended limitation period applies under IRC 6501(e) when a taxpayer “omits from gross income an amount properly includible” in excess of 25 percent of gross income. The court’s decision in Home Concrete has reversed cases where the government won in lower courts.
In 2009, the IRS issued temporary and final regulations that reinterpreted the established precedent for IRC 6501(e), Colony Inc. v. Commissioner, where the court had ruled on the language of the Code. The IRS regulation claimed that an overstatement of basis in property was an “omission” of gross income under the statute. The regulation would apply to any taxpayer whose statute of limitations remained open at the time the regulation was issued. The IRS then used this regulation as the basis for challenges to certain taxpayers. The Supreme Court rejected the 2009 IRS interpretation and reaffirmed its ruling in Colony.
In a recent exchange with AccountingWEB, Todd Welty, a partner in the Tax Litigation practice of SNR Denton in Dallas, reviewed the facts of United States v. Home Concrete and discussed its significance for the IRS and accountants. In 2007 through 2009, Welty, along with Senior Managing Associate Laura Gavioli, achieved rare taxpayer victories under the IRS’s six-year statute of limitations, including Grapevine Imports, Ltd. v. United States and MITA Partners v. Commissioner. These cases – like Home Concrete – test the boundaries of an agency’s authority to issue retroactive regulations, and the consequences have broad-reaching effects beyond tax law.
Q: What were the facts of the Home Concrete case? What was the government’s argument? What did the court conclude?
A: These cases began because the government alleged that the taxpayers had engaged in Son of Boss transactions, which the IRS has characterized as abusive tax shelters. Most taxpayers at issue disputed this characterization. Despite the IRS’s claim that failing to audit these taxpayers would result in massive losses of government revenue, the IRS had failed to open examinations against these taxpayers within the normal three-year window for examination and assessment under IRC 6501. According to a Treasury Inspector General report, the IRS “deliberately delayed” examining these taxpayers and allowed the three-year statutes to lapse, citing a need for further issue development.
The IRS instead sought to rely on a statutory exception under IRC 6501(e), which gives the IRS six years to pursue taxpayers who “omit” items of income exceeding 25 percent of the amount shown on the return. According to the IRS, since the taxpayers substantially underreported their taxable income due to the alleged Son of Boss transactions, the taxpayers met the statutory test, and the IRS argued it was entitled to three additional years to audit them.
Q: What was the problem with this view?
A: The IRS’s position was in direct conflict with the Supreme Court’s interpretation of the predecessor statute to IRC 6501(e) in Colony Inc. v. Commissioner, 357 U.S. 28 (1958). In that case, the Supreme Court had examined the exact same language relied on by the IRS and reviewed the legislative history of the statute. The court concluded that the statute was designed to give the IRS additional time to examine returns not just because the amount at issue was large. Rather, the statute gave the IRS this additional time only when the taxpayers’ reporting left the IRS at a “special disadvantage” in detecting errors. Thus, the focus was not on the size of the amount at issue, but on what the IRS could have known or should have known from looking at the return.
Consequently, the Supreme Court in the Colony case held that the term “omits” in the statute should have its plain meaning, that is, to “leave out” entirely. Since the taxpayer in the Colony case had adequately disclosed the disputed transaction and his tax position – even though that position disagreed with the IRS’s view – the IRS had no recourse in the extended statute of limitations. At the end of Colony, the court noted that the predecessor statute had been recently replaced with the current IRC 6501(e) and that the court’s result was “in harmony” with the current statute.
The present taxpayers further argued that Colony was directly on point because, like the taxpayer in Colony, all of the present taxpayers were alleged to have underreported their income due to an overstatement of their basis in property. In Colony, the property was a series of residential lots. In the present cases, the property usually was a short position in Treasury notes. Many of the taxpayers’ disclosures on their returns met or exceeded the disclosures that the taxpayer had made in Colony.
In 2009, after the IRS had lost numerous high-profile cases on this issue, the IRS issued temporary and final regulations that purported to reinterpret IRC 6501(e) in a manner that directly conflicted with the central holding of Colony. The regulations explicitly held that an overstatement of basis in property was an “omission” of gross income under the statute. This regulation purported to apply to any taxpayer whose statute of limitations remained open at the time the regulation was issued. In other words, the regulation was intended to apply to any pending cases that had not become final following an appeal, even if the IRS had already litigated and lost these cases. Essentially, the regulation was meant to undo unfavorable judicial decisions that the IRS had received.
The Supreme Court decision in Home Concrete soundly refused to deviate from Colony. The regulation at issue was an act of overreaching on the government’s part. In particular, the majority noted that it would be difficult to distinguish between the predecessor statute and IRC 6501(e) because they use identical language, the term “omits.” Further, because the court in Colony found the language of IRC 6501(e) to be “unambiguous” on this issue, the court held that the IRS had no discretion to issue a regulation that contradicted a prior controlling interpretation from the court.
Q: On May 1, CCH published a list of cases: Supreme Court Docket: Cert Granted and Cases Remanded Due to Home Concrete. Does this mean that the cases are no longer before the court?
A: This means that the cases are no longer before the court and that the IRS has effectively lost all of the cases. The Supreme Court has reversed any cases where the government won in lower courts and has sent instructions to the lower courts to enter judgment for the taxpayers.
Q: How should accountants use this case in their practice?
A: This case has several important consequences for accountants. First, it is an important reminder that when the IRS intends to rely on an exception to the statute of limitations to audit your client beyond the normal three-year window, the IRS must have a sound argument for relying on that exception and must be able to back that up with solid proof. Accountants should seriously scrutinize any late-received audit notices and carefully consider whether to advise their clients to consent to extending any statutes of limitations in this situation.
Further, this case will have implications for the proper deference to give any Treasury Regulation or other administrative regulation. Under the court’s decision last year in Mayo Foundation v. United States, 562 U.S. (2011), Treasury Regulations are generally entitled to heightened deference. However, Home Concrete shows that not all regulations are created equal and not all are infallible. A regulation issued much later than its originating statute (here, more than fifty years later) may be subject to greater scrutiny. Also, a regulation motivated by an improper purpose (here, interfering with unfavorable judicial decisions) may also be subject to challenge.
Full Article: http://www.accountingweb.com/topic/tax/irs-cannot-extend-three-year-limitation-due-overstatement-basis
by Daniel Kittell | Accounting News, Fraud, IRS, News, Technology
By better ensuring that fraud indicators are recognized and properly investigated during field audits of individual tax returns, the IRS could increase revenue by an estimated $20 million a year, according to a report publicly released by the Treasury Inspector General for Tax Administration (TIGTA).
TIGTA’s audit was initiated to determine whether fraud is recognized and pursued in accordance with IRS procedures and guidelines during field audits of individual tax returns. They found that:
Of the 116 field audits closed between July 2009 and June 2010, twenty-six audits with fraud indicators were not recognized and investigated.
Each of the field audits involved unreported income and/or overstated expenses that resulted in the taxpayers agreeing they owed additional taxes of at least $10,000.
“Our review found that a combination of factors caused indicators of fraud to not always be recognized and properly investigated,” said Treasury Inspector General for Tax Administration J. Russell George. “Because of this, the IRS may be missing opportunities to further promote voluntary compliance and enhance revenue for the Department of the Treasury,” he added.
In its report, TIGA recommended that in order to assist examiners, the IRS should list in the Internal Revenue Manual (IRM) the following six categories of fraud indicators:
- Income
- Expenses or deductions
- Books and records
- Conduct of taxpayer
- Methods of concealment
- Income allocation
Each category, in turn, would contain specific examples of supporting behavior that range from:
- Omitting income
- Overstating expenses that are substantial
- Failing to keep adequate records in an attempt to hinder the audit
- Making false statements
- Failing to disclose relevant facts to an accountant
TIGTA recommended that the Director, Exam Policy, Small Business/Self-Employed Division:
- Enhance the job aid examiners are required to maintain in audit files related to documenting and investigating fraud indicators.
- Provide specific examples in the IRM for examiners and first-line managers to use when considering whether to consult IRS technical advisors when field audits of returns suggest possible fraud.
IRS officials did not agree with the first recommendation. They indicated that the job aid (Fraud Development Lead Sheet) was significantly enhanced in March 2011. In addition, IRS officials did not agree with the second recommendation, but stated that they do plan to take alternative corrective action. IRS officials will issue a memorandum to all examination employees emphasizing the importance of involving the technical advisors in audits.
As part of the review, TIGTA evaluated the enhanced Fraud Development Lead Sheet and continues to believe further enhancements to it would be beneficial.
TIGTA considered the alternative corrective action IRS officials plan to take and concluded that it is responsive to the recommendation. However, TIGTA encourages IRS officials to go beyond merely reiterating existing procedures in their memorandum by providing additional instructions and guidance to clarify when the assistance of a technical advisor should be sought.
IRS officials agreed that TIGTA’s recommendations have the potential to increase revenue by some $19.7 million over a year ($98.5 million over five years) from approximately 1,872 field audits.
Full Article: http://www.accountingweb.com/topic/tax/tigta-irs-can-take-action-recognizeinvestigate-fraud-indicators
by Daniel Kittell | Accounting News, Tax, Uncategorized
As you’re nearing the tax return finish line, you probably have some clients who are stragglers or haven’t “checked in” yet. Fortunately, you can still rely on the automatic tax filing extension to bail procrastinators out of a jam. Here’s some valuable information to pass along to your clients.
The due date for filing 2011 federal income tax returns is April 17, 2012, but that deadline isn’t etched in stone. You can buy yourself more time by filing Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return, by April 17. This provides an automatic extension for filing your return for six months until October 15, 2012 – with absolutely no questions asked by the IRS!
Of course, an extension to file is NOT an extension to pay the tax that’s due. You still have to pay estimated tax in a timely manner to avoid penalties and interest charges.
If you don’t pay the requisite amount of tax by the April 17 deadline, the IRS will impose a penalty of one-half percent each month on the amount of tax owed. And, if you fail to file a return by the October 15 extension date, the IRS will ramp up the penalty to 5 percent per month, up to a maximum of 25 percent.
Why would you need a filing extension? Typically, it’s used by taxpayers who simply couldn’t get their act together in time. But here are few other common reasons for seeking an extension:
1. You don’t have all the information you need for your return or it’s been lost or misplaced. For instance, delays may be caused if you haven’t received a K-1 stating income received in 2011 from a pass-through business entity.
“Frequently, an extension is needed because the business or partnership hasn’t completed its own return,” says Chris Hesse, a partner in CliftonLarsonAllen’s federal tax resource group in Minneapolis, Minnesota. “This has become common because pass-throughs are being used to avoid the double taxation issue. The client must make a payment based on a reasonable estimate.”
2. Circumstances dictate a delay. Even if you fully intended to file your tax return by April 17, sometimes life gets in the way. If there’s been an unexpected illness or death in the family, you might not able to file on time. Similarly, a natural disaster can cause interruptions, although the IRS usually offers relief to those in harm’s way.
3. You don’t have the cash on hand for a retirement plan contribution. If you’re self-employed, you might be using a Keogh plan or SEP to save for retirement. The annual contributions reduce your tax liability, but only if the deposits are made on time, notes Hesse. He says that filing for an extension effectively gives you an extra six months to come up with the money.
4. Obtaining an extension might reduce your tax liability. For example, if you converted a traditional IRA to a Roth in 2011, you must pay tax on the entire account balance at the time of conversion. But the value of the account may have declined since then. By recharacterizing your Roth back into a traditional IRA before you file your tax return, you can avoid an unnecessary tax “overpayment.”
5. You’re concerned about tax audits. There’s a school of thought that filing for an extension reduces your chances of being audited. Here’s why: Normally, IRS auditors examine a certain percentage of returns to randomly check for tax cheats. If you obtain an extension, you might sidestep this auditing procedure entirely, thereby reducing your overall exposure to an audit.
In any event, if you don’t pay the requisite amount of tax by the April 17 deadline, the IRS will impose a penalty of one-half percent each month on the amount of tax owed. And, if you fail to file a return by the October 15 extension date, the IRS will ramp up the penalty to 5 percent per month, up to a maximum of 25 percent.
As with your regular tax return, you can e-file your filing extension request or send it by snail mail. If you’re going to a US Post Office, we recommend using certified mail so you can prove to the IRS that you requested the extension on time.
How do you know how much you have to pay with the filing extension application? It’s not an exact science. Hesse says that his firm refers to figures in prior returns to help arrive at a reasonable amount. Contact your CPA immediately for guidance.
Full Article: http://www.accountingweb.com/topic/tax/five-good-reasons-obtain-filing-extension
by Pete McAllister | Accounting News, IRS, Tax, Uncategorized
The IRS has eliminated an unpopular rule relating to how credit card and debit card payments are accounted for on tax returns, prompting relief from small business owners.
The new process, which was set to go into effect next year, would have mandated that companies explain the differences between numbers on 1099-K forms and their internal records. This rule was termed an “onerous and unnecessary extra step” by the National Federation of Independent Business (NFIB).
The NFIB explained the situation this way: “Section 6050W of the Internal Revenue Code, added by Section 3091 of the Housing and Economic Recovery Act of 2008, requires information returns (Form 1099-K) to be made regarding annual gross receipts reimbursements to settle merchant card transactions. Recently, the IRS added a Line 1a-e on business tax returns requiring business taxpayers to reconcile their actual gross receipts with the aggregate gross receipts amounts from Form 1099-K.”
The IRS announced it would not go forward with Line1a-e on business tax returns. The NFIB had protested the rule, saying that a company’s internal record of gross receipts would “rarely match” the amount payments processors report on 1099-K forms. That figure on the forms could include cash refunds, sales tax, tips, and other fees that merchants would not consider part of gross receipts, CFO magazine reported.
The IRS said in its letter to the NFIB, “There will be no reconciliation required on the 2012 form, nor do we intend to require reconciliation in future years.” The reporting of gross receipts and sales on the 2012 income tax forms will be modeled on the 2010 income tax forms.
“The many complications in our country’s tax code often put the small business owner at a disadvantage with government compliance,” NFIB CEO Dan Danner said in a statement. “For this reason, NFIB fought so hard to have this provision eliminated and we count this as a small, but important, step in the direction of simplifying the tax code overall.” Small businesses spend more than $74 per hour on meeting their tax compliance obligations, the NFIB says.
Lewis Taub, tax director at McGladrey & Pullen LLP, told CFO magazine that business groups might want to change their record keeping. Payment processes must continue to submit 1099-K forms, and a difference between the numbers on the forms and the gross receipts on the merchant’s tax returns could trigger an audit.
Full Article: http://www.accountingweb.com/topic/tax/irs-ends-tax-rule-unpopular-small-businesses
by Jean Miller | Accounting News, Audit and Accounting, CPA, IRS, QuickBooks, Tax Consulting, Uncategorized
Beginning this year, IRS Taxpayer Assistance Centers (TAC) generally will not accept bulk returns for processing and mailing, particularly when it affects taxpayer services. The IRS hopes to eliminate the practice of taxpayer representatives dropping off completed returns for processing, especially during peak operating periods.
The intent of this policy change is not to limit assistance to taxpayers or their authorized representatives. Nor is it intended to limit taxpayer representatives’ visits to support their clients, particularly in situations where the taxpayer is facing financial harm or undue hardship, such as delinquent returns or to start or stop an installment agreement. It is designed, primarily, to stop the practice of dropping off returns solely for processing and mailing when the returns can be mailed directly to the IRS processing center. The TACs will accept returns with imminent statute implications, with remittances or other situations where it’s in the best interest of the taxpayer and the Service to accept them.
Local TAC managers have the authority to make exceptions to this policy and will accept drop-off returns if, in their opinion, tax preparation and other customer account services are not impacted.
The IRS encourages all tax preparers to take advantage of available e-file options to file returns electronically to avoid the need to have returns accepted and mailed at the local Taxpayer Assistance Center.
Full Article: http://www.accountingweb.com/topic/tax/irs-discourages-tax-return-drop-offs-taxpayer-assistance-centers
