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FEDERAL TAX ALERT PAGE 1 JULY/AUGUST 2009

IRS, CONGRESS PROPOSE CHANGES IN CELL PHONE TAXATION

Confronting the realities of employee cell phone usage, the IRS has proposed new, simplified approaches to taxing employees’ personal use of busi-ness cell phones. Meanwhile in Congress, members of both the House and Senate tax commit-tees have introduced legislation to ease the rules on proving the amount of cell phone business use. Existing law, which treats cell phones as “listed property,” requires substantial record-keeping by businesses to claim deductions. Also, the businesses must compile detailed records to avoid cell phone use being taxed as income to the employee.

Approaching cell phone taxa-tion from a different angle, a bipartisan group in Congress is pushing a five-year moratorium on all cell phone excise taxes and user fees at the federal, state, and local level. (See the separate news article on state and local cell phone taxes on page 4 of this edition.)

Editor’s Note: With the wide use of cell phones in both small and large-sized businesses, the existing rules are a significant burden on businesses and a real compliance problem for tax practitioners. A review of recent court cases shows that the IRS challenges cell phone deductions regularly. In some cases, the practitioners are sanctioned for including unsubstantiated cell phone expenses on returns. The recent developments discussed

below reveal that there is an opportunity this year to change the law. Thus, as practitioners, you may want to weigh in on the proposed changes and submit your comments to the IRS or to Congress regarding easing of these rules. See comment infor-mation below.

Current LawUnder the current law which

was enacted in 1989, cell phones are treated as “listed property”, which requires that employees go through their monthly phone statements and identify which calls were for business and which were personal. Then, the employer reviews the logs and must calculate a percentage of personal use. To the extent that the employee uses the employer’s cell phone for business purposes, the fair market value of such usage qualifies as a working condition fringe benefit excludable from the employee’s gross income. To the extent the employee uses the employer’s cell phone for personal purposes, the fair market value of such usage is includable in the employee’s gross income. In addition, the employer will not get a deduc-tion for depreciation or other costs of providing cell phones to employees unless the busi-ness use is substantiated.

Substantiation requires adequate records or evidence backing up the taxpayer’s own statement with regard to: (A) the amount of such expense or other item, (B) the use of

NEWS ITEMSthe property, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons using the property.

The current rules contain a controversial element which states that the employer’s cost to provide the cell phone is not determinative of the fair market value of the benefit received by the employee. Thus, even if the personal use is “free” because it is on nights and weekends, the IRS can still place an average value on cell phone usage by minute (as several recent letters to the IRS pointed out.)

IRS Notice Offers Alternative Methods

In a recent Notice, the IRS has proposed three alterna-tive methods for employers to substantiate an employee’s business use of employer-provided cell phones or other similar telecommunications equipment. The three methods include a minimal personal use method, a safe harbor substantiation method, and a statistical sampling method (or some combination of the three). Any simplified cell phone substantiation method will be optional; taxpayers may continue to comply with current law, according to the Notice.

General RequirementsThe IRS has indicated that

any business that wishes to use a simplified cell phone substantiation method will have to implement a written policy that requires employees to use the employer-provided cell phones in connection

A PUBLICATION OF THE NATIONAL SOCIETY OF TAX PROFESSIONALS JULY/AUGUST 2009A PUBLICATION OF THE NATIONAL SOCIETY OF TAX PROFESSIONALS JULY/AUGUST 2009

AdvISORy GROuP uRGES MANdATORy E-FILING

News Items Page 5

OFFSHORE ACCOuNT REPORTING

IRs actIoN News Page 6

dEALER v. INvESTOR IN SALE OF HOuSE LOTS

couRt cases 1

IRS EMPLOyEE FIREd FOR PRIvACy BREACH

ethIcs coRNeR Page 14

TAX FRAud SCHEME RuN OuT OF JAIL CELL

et ceteRa Page 16

CONTENTSNews Items .............................1IRS Action News ...................6Court Opinions ...................11Ethics Corner.......................14Et Cetera ...............................15Click Here ............................16Quotes ...................................16

INSERTS2009 RegionalsWe’re moving

FEDERAL TAX ALERT PAGE 2 JULY/AUGUST 2009 FEDERAL TAX ALERT PAGE 3 JULY/AUGUST 2009

FROM THE EDITOR A tax provision affecting all of us is the subject of the lead story in this

issue. The somewhat Draconian IRS rules for deducting business use of cell phones are under review by the IRS and by Congress, and relief appears to be on the way. The problem is that the recordkeeping required to divide cell phone use between personal calls and business calls is out of proportion with the amount of the deduction for taxpayers and the cost of the deduction to the IRS. Read our detailed analysis of the proposals to gauge what the final rules may look like.

From the IRS, we have another intensive area of focus—reporting of offshore accounts by U.S. taxpayers. With the ever-increasing need to squeeze more revenues out of the current tax system, the FBAR initiative is designed to capture a significant portion of the tax gap from taxpayers who move their wealth offshore. Politically, this is a group that is easier to go after because of the issue of patriotism—keeping U.S. money in the U.S.

This month, the IRS loses in most of our reported court opinions. A significant case being analyzed by practitioners around the country involves the issue of whether a couple who sold off lots for neighborhood development were investors or dealers. The Court found their sales should be taxed as capital gains. The Court identified a number of factors that should be used to make this determination. See the Rice case. The IRS loses again in a case where it could not prove a Notice of Levy mailing. The IRS is a stickler with taxpayers on recordkeeping and substantiation, and the Tax Court held the IRS to the same standard.

Finally, the Ethics Corner section reports that the National Taxpayer Advocate is recommending testing of return preparers and the assignment of Preparer Tax Identification Numbers (PTINs). In another effort to protect taxpayers, a Court has upheld the firing of an IRS employee for unauthorized access of taxpayer files. In industry news, Liberty Tax Service has been fined for deceptive advertising in which they promoted refund anticipation loans as rapid IRS refunds.

There are many continuing education opportunities offered by NSTP later this Summer and Fall. We hope to see you there.

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

provided cell phone. The employer would multiply that percentage times the value of each employee’s total usage to determine the value of personal usage. The remaining portion of the employee’s usage would be deemed to be for business purposes.

Practitioner Comment OpportunityThe IRS is soliciting comments on the

possible methods and will not change the existing procedures until after the IRS and Treasury Department consider public comments and suggestions received in response to the Notice. A number of very interesting comments have been coming in, including several reprinted below. Reading comments sent to the IRS is useful because it can give you insight into the changes the IRS may ultimately adopt. If you are inter-ested in weighing in on the proposed rules yourself, send your comments to the IRS by September 4th. See the instructions on submitting comments below.

The IRS and Treasury Department are particu-larly interested in any comments regarding:

* The specific provisions that should be required to be included in an employer’s written policy prohibiting personal use of employer-provided cell phones;

* The types of employee records sufficient to establish that the employee maintains and uses a personal (non-employer-provided) cell phone for purposes of the first proposed minimum personal use method contained in the notice;

* How to define a specified amount or type of “minimal” personal use (e.g., a maximum number of minutes of use or a list of acceptable personal uses) that should be disregarded in determining the amount of personal use of an employer-provided cell phone for purposes of the second proposed minimum personal use method contained in the notice.

* The business use percentage that should be applied in the proposed safe harbor substantiation method contained in the notice and the data and rationale upon which it is based;

* The methods currently used by employers to determine the fair market value of an employee’s use of an employer-provided cell phone; and

* Whether a simplified method of deter-mining the fair market value of an employee’s use of an employer-provided cell phone would be appropriate, and, if so, suggested simplified methodologies for determining such fair market value.

with the employer’s business and that prohibits personal use except for minimal personal use.

Three alternatives the IRS is considering:

1. Minimal personal use method: If the employee has a personal cell phone as well as an employer-provided cell phone, then the business cell phone is tax free. Alternatively, the employer could define a specified amount of personal use as “minimal” personal use that would be disregarded.

2. Safe Harbor method: An employer would treat a certain percentage of each employee’s use of an employer-provided cell phone as business usage. The remaining percentage of use would be deemed to be for personal purposes. The IRS suggests a 75/25 allocation, where the employer treats 75% as business use and taxes the remaining 25% to the employee.

3. Statistical Sampling method: This method would allow employers to use statistical sampling techniques to measure an employee’s personal use of an employer-


Comments on Proposed IRS Cell Phone ChangesEnrolled Agent Backs Flat Rate

June 12, 2009

Internal Revenue ServiceAttn: CC:PA:LPD:PR(Notice 2009-46), Room 5203P.O. Box 7604Ben Franklin StationWashington, DC 20044

I am an Enrolled Agent who has been in private practice for twenty-three years. Each year there is some issue that really drives my clients crazy. This year it has been the matter of personal cell phone use so I am glad to see you addressing this issue.

Many of the business and personal cell phone plans with most of the providers are now flat-rate plans. As an employer, if I choose a plan for $79 a month that allows 2000 minutes, I am going to pay the $79 fee whether it is used for busi-ness or personal use. While we can track the phone calls from the state-ments, it can take hours to reconcile what is personal and what is business. Many times some of the numbers called could be considered both. We are a small firm and our cell phone bill can be 25-40 pages long depending on the time of year. This is a real burden on both small and large businesses.

It would make sense to have a flat rate fee charged back to the employee as a working condition fringe benefit, which is what our firm does for those who have company cell phones, just like we do with the personal use of the company car.

IRS should come up with a flat rate, much like the standard mileage rate for a phone that is mixed use. If the company policy allows personal use on the phone, then there would be a required amount included in the taxpayer’s salary as a working condition

fringe benefit. This would eliminate any confusion and hours of trying to deter-mine what is/is not business related. It would also eliminate a huge burden off the Revenue Agents who have to audit the records.

Thank you for addressing this matter. I appreciate the opportunity to voice my opinion.

Regards,Lynn Pasqualetti,ATA, ATP, CTP, EAManaging Partner

IRS Employee Seeks Expanded Definition of Cell Phone Devices

From: Orr Donna M [[email protected]]Sent: Tuesday, June 09, 2009 10:41 AMTo: Notice CommentsSubject: Notice 2009-46

Please ensure that the guidance addresses newer devices than just pure “cell phones” -- many taxpayers have blackberries and other similar

Comments must be submitted in writing and should include a reference to Notice 2009-46. Submissions should be sent to:

Internal Revenue ServiceAttn: CC:PA:LPD:PR(Notice 2009-46), Room 5203P.O. Box 7604Ben Franklin StationWashington, DC 20044

Comments also may be submitted by e-mail directly to the IRS via the following address: [email protected]. You should include “Notice 2009-46” in the subject line of any e-mail you send. Note that all comments submitted are subject to public disclosure.

Cell Phone Changes Pushed in CongressRepublican and Democrat tax committee

members in both the House and the Senate have joined together and introduced legis-lation to “modernize” the treatment of business cell phones. In the Senate, Senator John Kerry (D-Mass.) and Sen. John Ensign (R-Nev.) have introduced S. 144, and in the House Rep. Sam Johnson (R-Texas) has introduced H.R. 690. Both bills would remove cellular telephones from “listed property.” The reform would update the Internal Revenue Code to recognize the growth of business-use mobile communi-cations devices and eliminate paperwork required for businesses to claim a deduc-tion, according to a Kerry statement. Now, taxpayers can deduct business expenses associated with the use of cellular tele-phones only if they maintain detailed logs of all employee calls, text messages, and emails, including the date and amount of each use in a tax year. Under these bills, cellular telephones would not be subject to these requirements.

Observation: The problem is that this change would cost the government $237 million over the 2009-2018 period, according to the Joint Tax Committee. With huge federal budget deficits looming, it will be difficult to pass even a worthy tax provi-sion that decreases revenues. However, Senator Kerry has indicated that both Treasury Secretary Timothy Geithner and Internal Revenue Service (IRS) Commis-sioner Douglas Shulman favor the change.

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

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

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devices that are part computer and part phone; while these are just as much “listed property” as a pure “cell phone”, in the business world they try to distinguish them from application to the rules because they are more “computer” than “phone” and so far, the IRS has left laptops / portable computers alone. If networks can be restricted only to the taxpayer’s, then perhaps “sole business use” can be substantiated but if access is unlimited / full internet applies, these devices (which are a fair bit more expensive than a pure phone) fall into the rules. These kinds of devices are much more commonplace in our connected society than pure phones these days -- I hope you take this into account as you develop guidance (so it will be adaptable to newer technologies).

Donna M. OrrLMSB Employment Tax400 N. 8th Street, Room 980Mail Stop 27Richmond, VA [email protected]

CPA Wants De Minimis Fringe Benefit Treatment

From: Marc Porter [[email protected]]Sent: Monday, June 08, 2009 6:52 PMTo: Notice CommentsSubject: Notice 2009-46

To: Internal Revenue ServiceAttn: CC:PA:LPD:PR

Re: Notice 2009-46

I applaud the Service’s recognition that application of the current Sec. 274 substantiation of “listed prop-erty” usage rules to cell phones is impracticable.

Cell phones, which have become relatively inexpensive, are routinely issued to employees for sound business purposes. In my opinion, personal usage of a business-provided cell phone for non-compensatory business reasons should be excluded from taxa-

STATE ANd LOCAL CELL PHONE TAXES uNdER FIRE

Have you ever noticed the $1.50 local city tax on your cell phone bill? Or the $4.40 state sales tax, the $3.30 county sales tax, and the $2.43 federal universal service fund fee? A typical consumer already pays 15.2% in federal, state, and local taxes on their cell phone bill as compared to 7.1% for most other taxable goods and services. Between January 2003 and July 2007, the effective rate of taxa-tion on wireless service increased four times faster than the rate for other taxable goods and services. Largely through the efforts of the group, MyWireless.org, consumer voices are being heard by Congress. As a result, House Reps. Zoe Lofgren (D-CA) and Trent Franks (R-AZ) have introduced the bipartisan H.R. 1521, the “Cell Tax Fairness Act,” which provides for a 5-year moratorium on any new “discriminatory” wireless tax or fee. The sponsors consider the taxes discriminatory because they vary so substantially from state to state and locality to locality, and they are imposed on one particular good or service, cell phones. The bill does not disturb current state and local taxes on wireless service.

In introducing the bill, Rep. Franks stated, “Due to the exorbitant rate at which cell phone taxes have been rising these past several years, current cell phone customers are already paying two to three times the amount of taxes that they pay on almost all other goods and services, for a product that is becoming increasingly important in tech-nological innovation, including the growing trend among educators toward using wireless devices as educational tools.” Single-issue tax bills such as this one are usually dead on arrival and never make it out of committee. But this one has already been the subject of a hearing before the House Judiciary Subcom-mittee on Commercial and Administrative Law in early June. It has 119 cosponsors and the Subcommittee Chairman, Rep. Steve Cohen (D-Tenn.), has indicated there is momentum for moving it through the Committee and to the House floor.

State and local government representatives were quick to challenge the bill in testimony before the Subcommittee. “What this legisla-tion does is preempt state and local taxing authority and represents a federal intrusion into historically-protected state and local tax classifications. Enactment of this bill would lead other industries to seek similar special federal protection from state and local taxes,” according to Don Stapley, President of the National Association of Counties. However, weighing in on the other side was

tion as a Sec. 132 de minimis fringe benefit. Regulation Sec. 1.132-6(e)(1) lists examples of such fringe benefits exempted from taxation on the grounds that they create unreasonable or impractical accounting problems:

Examples of de minimis fringe bene-fits are occasional typing of personal letters by a company secretary; occa-sional personal use of an employer’s copying machine, provided that the employer exercises sufficient control and imposes significant restrictions on the personal use of the machine so that at least 85 percent of the use of the machine is for business purposes; occasional cocktail parties, group meals, or picnics for employees and their guests; traditional birthday or holiday gifts of property (not cash) with a low fair market value; occasional theater or sporting event tickets; coffee, doughnuts, and soft drinks; local telephone calls. . .

Incidental personal usage of cell phones may not cause employers to incur additional cost, just like local telephone calls which are excludable by the regulation. Even though an employer may allow personal use of a cell phone after working hours, many cell phone providers don’t charge extra for nights or weekends usage.

The amount of income subject to tax for incidental personal use of cell phones is small, but the accounting for it is burdensome. For example, assume an employer provides cell phones to certain of its employees at a monthly cost of $60 each. Using the IRS proposed 75% safe harbor busi-ness substantiation method, only $15 of taxable income would be added to each employees’ taxable earnings each month (assuming that the IRS allowed an employer’s cost to be determinative of the value of the benefit).

For these reasons, please consider including incidental personal usage of employer-provided cell phones to the list of excludable de minimis fringe benefits.

Marc Porter, CPA


ETAAC’s 2008/2009 RecommendationsETAAC is making ten recommendations in this 2008/2009 report to Congress that

we believe are critical to achieving the Congressionally-mandated 80% electronic filing target. These recommendations focus on developing an electronic IRS whose services are strategically supported and trusted and are fast and easy to use.

In summary, the recommendations are1. Congress should enable the IRS to require preparers to e-file.

The single biggest opportunity to advance the 80% goal lies with a tax preparer require-ment. ETAAC recommends that Congress provide the IRS with the authority to require an appropriate return threshold. And that the IRS start with a threshold of 200 returns, which could result in 16 million additional e-filed returns. ETAAC proposes that imple-mentation dovetail with the completion of Modernized e-file (MeF) for Form 1040.

2. Congress should fund, and the IRS should complete, the “four pillars” of its Modernization Program.

The IRS’ four priority modernization projects are not only critical to a better IRS but are the foundation for subsequent e-projects. The significant management capacity now devoted to managing these projects limits the IRS’ ability to take on significant new projects such as the advancement of the IRS’ e-strategy.

3. The Data Strategy project should be comprehensive.The IRS should consider broadening its ongoing data strategy project to include

national data standards to improve tax administration with the states and other stake-holders. Common functions such as authentication, e-signatures, data definitions and data interchange would benefit from a more standardized, national approach.

4. The IRS should modernize preparer e-services.Tax preparers represent the largest conduit for e-filed returns. They have long-estab-

lished needs for electronic interaction with the IRS. The expansion and effectiveness of e-services should be supported as a strategic priority.

5. The Electronic Services Strategy should be an enterprise priority.The right electronic services and products cannot be developed without holistic enter-

prise support and governance.

6. The IRS and industry should collaborate on tax software standards.Taxpayers need to be protected by effective and efficiently administered standards.

The IRS and industry should work closely to develop an effective, efficient oversight model that ensures software accuracy, security, privacy and reliability.

7. The IRS should rebrand e-file.It has been more than 15 years since e-file was introduced at the national and state

levels. Marketing objectives need to be reevaluated and emphasis given to taxpayer demographics that present the greatest opportunity to increase e-file.

8. The IRS should develop an operational process for e-file rejects.The e-file reject process can act as a deterrent to e-file for taxpayers and tax preparers.

The IRS should work with industry to develop an efficient process for communicating, reducing and resolving reject issues.

9. The IRS should renew the Free File Alliance agreement.The Free File Program is a basic entry point to the important, and quickly evolving,

free e-file market. This contract renewal year presents an opportunity to continue the IRS’ trend of making the program easier to use and understand.

10. The IRS should ease the signature burden for information return sharing.The IRS currently requires signed taxpayer consent before it will share an information

return with the appropriate state. ETAAC believes that existing federal/state data sharing agreements already permit this for e-filing and that the paper-based barrier should therefore be removed.

Robert D. Atkinson, President of the Information Technology and Innovation Foundation, who argued that taxation of wireless services has a negative effect on the U.S. economy.

Observations, Website on Wireless Issues: This bill appears to have some traction, although it will be difficult for Congress to pass a bill roundly opposed by state and local governments at a time when states are facing serious fiscal crises. If you want to track its progress, the www.mywireless.org website is a good resource. The group pitches itself as a “national non-profit consumer advocacy organization” and offers information on state and federal actions affecting cell phone service as well as e-mail alerts on recent developments.

ETAAC RECOMMENdS MANdATORy E-FILING THRESHOLd FOR TAX PREPARERS

The Electronic Tax Administration Advi-sory Committee (ETAAC) presented its 2009 Annual Report to Congress in June, which includes 10 recommendations to advance the use of electronic filing. For example, the report recommends the IRS require all tax preparers who file at least 200 returns a year to use e-file. The report also calls for continued moderniza-tion of IRS systems as well as collaboration between the IRS and industry regarding soft-ware standards.

In a meeting at the IRS National Office held in conjunction with the release of the report, IRS Commissioner Douglas Shulman stated that the top priority for IRS was to require preparers who file a threshold level of tax returns each year to e-file. Congress has set a goal for the IRS of increasing the e-filing rate to 80 percent, originally by 2007. That date has come and gone, but the IRS seems more determined than ever to get there soon. (See page 4 of the February 2009 issue of the Federal Tax Alert for a statement by Treasury Secretary Timothy Geithner on the IRS’s 80% e-filing goal.)

ETAAC submits an annual progress report to Congress each June. The IRS Electronic Tax Administration created ETAAC in 1998 under the authority of the 1998 IRS Restruc-turing and Reform Act. ETAAC members are appointed by the Secretary of Treasury and serve a three-year term. The Commit-tee’s yearly report is released in June after research and analysis, as well as meetings with senior IRS executives. Public comments on the 2009 report will be solicited in the Fall. The Committee’s 10 recommendations are set forth below.


IRS ACTION NEWS

OFFSHORE ACCOuNT REPORTING FOCuS OF INTENSIvE IRS ENFORCEMENT EFFORT

If you have clients who hold interests in offshore accounts or who are signatories on offshore corporate accounts, then you should be aware of a myriad of new rules affecting the reporting on these accounts. You also should know that many taxpayers fail to comply with reporting requirements because they are not aware of the special reporting forms and the rules for voluntary disclosure. The IRS has released three guid-ance documents in the last month on this issue, and IRS officials have made numerous public appearances to explain the enhanced reporting scheme. Here’s a run down of the recent changes.

Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)

Taxpayers with bank or other financial accounts offshore are required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, each year. (This form is commonly known as the “FBAR.”) The FBAR for calendar year 2008 reporting was due on June 30 of this year. This means that the IRS must have received it by this date—not that it can be postmarked by this date. This form must be filed in addition to the taxpayer’s federal income tax return for the year, even if the full amount of foreign income is reported on the taxpayer’s income tax return. Not only does the FBAR have a different due date than a taxpayer’s income tax return, but it also must be sent to a different address—the IRS Service Center in Detroit, Michigan.

See the first parts I & II of the 8-page FBAR form on next page.

Who is Required to File?The FBAR was revised in October 2008,

but the revised definition of “United States person” in the new Form has caused much confusion. As a result, the IRS allowed taxpayers filing by June 30th to use the prior definition to determine their filing require-ment. The previous form defined a “United States person” as “(1) a citizen or resident of the United States; (2) a domestic partner-ship; (3) a domestic corporation; or (4) a

CAP ANd TRAdE BILL PASSES HOuSE WITH TAX PROvISIONS

In late June, the House of Representatives passed H.R. 2454, the “American Clean Energy and Security Act of 2009” on a slim margin of 219-212. The primary focus of the bill is the introduction of a “cap-and-trade” system of reducing greenhouse gas emis-sions. Under the program, the government sets a limit on the total national carbon emissions and issues emissions permits to companies. The companies can then buy or sell their permits. The program is supposed to reduce total climate-changing emissions by 17 percent in 2020 and over 80 percent by 2050. The bill also sets new efficiency standards for lighting, buildings, and industry, and it mandates that 20 percent of electricity must come from renewable sources by 2020.

The bill also contains tax credits to offset higher energy costs for low-income households. According to the Congres-sional Budget Office, the program will cost the average household $175 a year by 2020. The cost results from the corporate costs of buying these permits which will be passed to consumers. Critics of the bill argue that the actual consumer cost will be much higher.

Another low-income tax relief provision in the bill would increase the credit percentage of the Earned Income Tax Credit (EITC) for individuals with no children from 7.65 to 15.3 percent. The amendment also would increase the beginning of the EITC phaseout amount from $5280 to $13,590.

President Obama has opposed a protec-tionist measure included in the bill at the last minute which would impose tariffs on imports from countries that do not have a system for limiting global warming pollution. The tariffs would take effect in 2020. Otherwise, the Administration is supporting the bill.

The bill now goes to the Senate, which is not expected to act quickly. The Senate is focused on the health care legislation, and is expected to resolve that issue before taking up climate change. With the slim vote in the House, the climate legislation may face a very tough, partisan fight in the Senate. However, with the seating of Al Franken (D-Minn.) in the Senate, the Democrats now have a filibuster-proof majority. Even then, in the House, 44 Democrats voted against the bill while 8 Republicans voted in favor of it. Thus, the Senate vote will not necessarily be along party lines.

TREASuRy dISBuRSING “CASH FOR CLuNKERS” ON AuTO TRAdE-IN

A new law signed by President Obama in late June includes a provision to encourage individuals and businesses to trade in old gas guzzling cars and purchase new more energy-efficient vehicles. The so-called “cash for clunkers” measure gives consumers a voucher of $3,500 or $4,500 depending on the type of vehicle traded in and the fuel efficiency of the vehicle purchased. The new vehicle must be purchased during a narrow period, from July 1 through November 1, 2009. To implement the program, Treasury will send the vouchers directly to the automo-bile dealer to be applied against the cost of a new car purchase. The government vouchers will not be taxed as income to those participating in the program.

KEy CONGRESSMEN ASK IRS TO BACK OFF SMALL BuSINESS TAX SHELTER PENALTIES

Bipartisan lawmakers from the Senate Finance Committee and House Committee on Ways and Means have sent a letter to IRS Commissioner Douglas Shulman asking him to suspend the imposition of large tax shelter penalties on small busi-nesses while Congress works to change a 2004 law which has had unintended consequences. The letter points out that many small business owners who thought they were investing in legitimate benefit plans unknowingly invested in listed tax shelter transactions. They did not learn of this status until they were assessed substantial penalties by the IRS for failing to disclose the transactions on their tax returns. The penalties, authorized by IRC section 6707A, are significantly larger than the tax benefits the small business owners received from their investments.

The higher penalties under Code section 6707A were enacted in the American Jobs Creation Act of 2004 which imposes $100,000 for individuals and $200,000 for entities, including Subchapter C and Subchapter S corporations. The Committee members have asked the IRS to suspend efforts to collect these penal-ties in cases where the annual tax benefits resulting from the listed transactions are less than $100,000 for individuals and $200,000 for other cases, while Congress acts to remedy this situation.


Type of Filer

Filer Information

Information on Financial Account(s) Owned Separately

Part I

Part II

a

Individual

b

Partnership

c

Corporation

d

Consolidated

U.S. Taxpayer Identi�cation Number

Last Name or Organization Name

Address (Number, Street, and Apt. or Suite No.)

City

Does the �ler have a �nancial interest in 25 or more �nancial accounts?

Foreign identi�cation (Complete only if item 3 is not applicable.)

Maximum value of account during calendar year reported

Name of Financial Institution in which account is held

Account number or other designation

City

2

3

6

9

10

14

15

17

18

20

4

Individual’s Date of BirthMM/DD/YYYY

5

a

Number

c

Country of Issue

b

Type:

Passport

Other

Middle Initial

8

First Name

7

(If “Yes” is checked, do not complete Part II or Part III, but retain records of this information)

Yes

No

If “Yes” enter total number of accounts

State

11

Zip/Postal Code

12

Country

13

State, if known

21

Zip/Postal Code, if known

22

Country

23

Mailing Address (Number, Street, Suite Number) of �nancial institution in which account is held

19

Filer Signature

Filer Title, if not reporting a personal account

Date (MM/DD/YYYY)

Type of account

16

Bank

Other—Enter type below

a

Securities

b

c

If filer has no U.S. IdentificationNumber complete Item 4.

e

Fiduciary or Other—Enter type

Signature 44

45

46

domestic estate or trust.” All other require-ments of the 2008 version of the FBAR form and instructions are still in effect. For taxpayers filing the FBAR after June 30th, the IRS will issue follow-up guidance on the requirement to file for future years.

The FBAR is required if the U.S. person has a financial interest in, or signatory authority over, financial accounts in a foreign country with an aggregate value exceeding $10,000 at any time during the tax year. A U.S. taxpayer is considered to have a financial interest in the accounts of an entity such as a corporation, partnership, or trust, if the U.S. person has more than a 50 percent ownership, income, or voting interest in the entity.

Failure to disclose offshore accounts can subject taxpayers to civil and criminal penalties. Below are illustrations of the possible penalties. Paying Tax but Failure to File FBARs

In a new series of FAQs on the IRS website, the IRS addresses the situation where a taxpayer has properly reported all offshore taxable income but has failed to file FBARs in previous years. In this case, the taxpayer should file the delinquent FBAR reports

according to the instructions and attach a statement explaining why the reports are filed late. Taxpayers should use the current version of Form TD F 90-22.1 (revised in October 2008), to file delinquent FBARs to report foreign accounts maintained in prior years. The delinquent FBARs, together with copies of tax returns for all relevant years, should be sent by September 23, 2009, to the Philadelphia Offshore Identification Unit at:

Internal Revenue Service11501 Roosevelt Blvd.South Bldg., Room 2002Philadelphia, PA 19154Attn: Charlie Judge, Offshore Unit, DP S-611

The IRS will not impose a penalty for the failure to file the FBARs where all income from the offshore accounts was properly reported on a taxpayer’s federal return.

Coordination with IRS Voluntary Disclosure Initiative

In March, the IRS put in place a six-month initiative to encourage voluntary disclosure by taxpayers of offshore accounts. (See page 9 of the May 2009 edition of the Federal Tax

Alert for an article on the launch of the volun-tary compliance initiative.) The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to voluntarily come forward and resolve their tax matters, according to the IRS. Thus, the program is only for taxpayers who did not originally pay taxes on offshore income and who did not disclose their offshore accounts.

Taxpayers making a voluntary disclosure of their previous noncompliance with offshore reporting by September 23, 2009 may be able to avoid civil penalties and criminal pros-ecution. The IRS has centralized the civil processing of offshore voluntary disclosures and is offering a uniform penalty structure for taxpayers who voluntarily come forward. Under the voluntary disclosure guidelines, the IRS can look back at the taxpayer’s offshore earnings for the past six years and assess all taxes and interest due for those years or for the earliest year within that six-year period in which an offshore account was opened or acquired. A taxpayer is expected to file correct delinquent or amended tax returns for tax years 2003 to 2008.

FIRST TWO PARTS OF FBAR FORM


To make a voluntary disclosure, the taxpayer must contact the Special Agent in charge of the local IRS Criminal Investigation Division and should include a letter of expla-nation identifying the undisclosed account and explaining the unreported income. The taxpayer also must provide amended returns and any delinquent reports and forms as explained below. Once the IRS Criminal Investigation Division accepts the taxpayer into the voluntary disclosure program, the case is referred to the civil division of IRS for determining the amount of taxes and penal-ties owed on the offshore income.

What to File with Voluntary Disclosure:

The IRS has identified the following items which must be filed with a volun-tary disclosure:* Copies of original and amended federal

income tax returns for tax periods covered by the voluntary disclosure;

* Complete and accurate amended federal income tax returns (or original returns, if not previously filed) of the taxpayer for all tax years covered by the voluntary disclosure;

* An explanation of previously unreported or underreported income or incorrectly claimed deductions or credits related to undisclosed foreign accounts or undis-closed foreign entities, including the reason(s) for the error or omission;

* If the taxpayer is a decedent’s estate, or is an individual who participated in the failure to report the foreign account or foreign entity in a required gift or estate tax return, either as executor or advisor, complete and accurate amended estate or gift tax returns (original returns, if not previ-ously filed) necessary to correct the underreporting of assets held in or transferred through undisclosed foreign accounts or foreign entities;

* Complete and accurate amended infor-mation returns required to be filed by the taxpayer, including, but not limited to, Forms 3520, 3520-A, 5471, 5472, 926 and 8865 (or originals, if not previously filed) for all tax years covered by the volun-tary disclosure, for which the taxpayer requests relief; and

* Complete and accurate Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts, for foreign accounts maintained during calendar years covered by the voluntary disclosure.

Important Note: Taxpayers who are already under criminal investigation are not qualified for the voluntary disclosure program. Since the IRS is stepping up its enforcement efforts in identifying unre-ported offshore accounts, taxpayers wishing to participate in the voluntary program should move quickly before the IRS discovers them and starts a criminal investigation.

Amended Returns Without FBARs Not Enough

The IRS has noted that some taxpayers have filed amended returns reporting the additional income attributable to an offshore account without making a voluntary disclo-sure. These so-called “quiet disclosures” are fraught with problems. Taxpayers who have already made “quiet” disclosures may take advantage of the voluntary disclosure penalty limitations. To do so, the taxpayers must send previously submitted documents, including copies of amended returns, to their local Criminal Investigations Office by September 23, 2009. If these taxpayers do not make a voluntary disclosure to the IRS CI division, they remain subject to being examined and to being prosecuted for all applicable years.

Penalty IllustrationsSet forth below are two examples from the

IRS Voluntary Disclosure FAQs illustrating how the voluntary disclosure penalties apply in two different situations.

Situation One: Voluntary Disclosure by Taxpayer

Assume the taxpayers have the following amounts in a foreign account over a period of six years. Although the amount on deposit may have been in the account for many years, it is assumed for purposes of the example that it is not unreported income in 2003.

Year Amount Interest Account on Deposit Income Balance

2003 $1,000,000 $50,000 $1,050,0002004 $50,000 $1,100,0002005 $50,000 $1,150,0002006 $50,000 $1,200,0002007 $50,000 $1,250,0002008 $50,000 $1,300,000

(NOTE: This example does not provide for compounded interest, and assumes the taxpayers are in the 35-percent tax bracket, file a return but do not include the foreign account or the interest income on the return, and the maximum applicable penalties are imposed.)

If the taxpayer comes forward and has their voluntary disclosure accepted by the IRS, they face this potential scenario:

They would pay $386,000 plus interest. This includes:* Tax of $105,000 (six years at $17,500)

plus interest,* An accuracy-related penalty of $21,000

(i.e., $105,000 x 20%), and* An additional penalty, in lieu of the

FBAR and other potential penalties that may apply, of $260,000 (i.e., $1,300,000 x 20%).

Situation Two: No Disclosure by Taxpayer

If the taxpayers did not come forward and the IRS discovered their offshore activities, they face up to $2,306,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayer would also be liable for interest and possibly additional penalties, and an exami-nation could lead to criminal prosecution.

The civil liabilities potentially include:

* The tax and accuracy-related penalty, plus interest, as described above,

* FBAR penalties totaling up to $2,175,000 for willful failures to file complete and correct FBARs (2003 — $100,000, 2004 — $100,000, 2005 — $100,000, 2006 — $600,000, 2007 — $625,000 and 2008 — $650,000),

* The potential of having the 75 percent fraud penalty apply, and

* The potential of substantial additional information return penalties if the foreign account or assets are held through a foreign entity such as a trust or corporation.

Note that if the foreign activity started more than six years ago, the IRS may also have the right to examine additional years.Observation: The voluntary disclosure program ends in September at the six-month mark. The IRS has indicated it will reevaluate the program at that time and is seeking feedback from the practitioner community. It is thus unclear at this point whether the IRS will extend the voluntary disclosure initiative.

Further Practitioner Info on FBARs:If you have questions about the terms of

the voluntary disclosure program, the IRS has an IRS Voluntary Disclosure Hotline for practitioners which can be reached at (215) 516-4777. Alternatively, you can


vehicle must be purchased after February 16, 2009 and before January 1, 2010. Taxpayers can claim this special deduction only on their 2009 tax returns to be filed next year whether or not they itemize their deductions. The deduction may not be taken on 2008 returns.

The deduction is limited to the fees or taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. It is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

IRS MAy ISSuE IdENTIFICATION NuMBERS TO dECEASEd INdIvIduALS

In a recent legal memorandum, IRS counsel has concluded that the Service has authority to issue Individual Taxpayer Identification Numbers (ITINs) for deceased applicants. The memorandum notes that often an ITIN is needed for a recently deceased taxpayer, spouse, or dependent, in order to process and receive certain tax benefits, such as the depen-dency exemption or a particular filing status.

Before issuing the ITIN, the IRS will require submission of Form W-7, Application for IRS Individual Taxpayer Identification Number, with accompanying documentation to prove identity and alien status. While nothing compels the IRS to issue ITINs to a decedent, the memorandum states that IRS will consider ITIN applications on a case-by-case basis if they are needed for a legitimate tax reason.

IRS uRGES TAXPAyERS TO SAFEGuARd TAX RECORdS IN HuRRICANE AREAS

With the 2009 hurricane season now underway, the IRS is encouraging taxpayers to establish a plan for safeguarding financial records. The Service recommends creating a backup set of records in electronic form which is stored away from the original paper documents. Bank statements, tax returns, insurance policies and other financial records should be scanned and put on a CD, DVD, or external computer hard-drive.

The IRS also urges taxpayers to take photographs or videotape the contents of their home, particularly including valuables. Taxpayers should compile a room-by-room list of furnishings and personal items. IRS Publication 584 contains a disaster loss workbook for this purpose. Publication 584, can help taxpayers compile a room-by-room list of belongings. Employers who use payroll service providers should make sure that the

contact your nearest CI office with ques-tions. For a list of CI offices, visit:http://www.irs.gov/compliance/enforcement/article/0,,id=205909,00.html

For help with questions about FBAR filing requirements, you can call the IRS FBAR Hotline at 1-800-800-2877. When the call is answered, select option 2. You can also submit written questions about the FBAR rules by e-mail addressed to [email protected].

Note that the IRS instructs that you do NOT call the Voluntary Disclosure Hotline with questions about FBAR filing require-ments. The purpose of the Voluntary Disclosure Hotline is to answer questions about how to make voluntary disclosures and what penalties apply, assuming a taxpayer was required to file.

IRS WILL CONTINuE TO LITIGATE APPEALS OFFICER IMPARTIALITy ISSuE

The IRS has announced that it will not acquiesce in a January 2008 Court of Appeals ruling that an IRS Appeals Officer was disqualified from participating in a second Collection Due Process (CDP) hearing because he participated in the first one. The 10th Circuit Court of Appeals reversed the earlier Tax Court holding in the case of Cox v. Commr., 514 F.3d. 1119 (2008). At issue was the collection of married taxpayers’ multiyear liabilities.

After receiving a notice of intent to levy and right to hearing for their unpaid 2000 income tax liability, the taxpayers requested a CDP hearing. The Appeals Officer considered the taxpayers’ failure to pay their 2001 and 2002 tax liabilities in determining that collection for 2000 should proceed. The IRS later issued a separate notice of intent to levy and right to hearing for nonpayment of the 2001-2002 taxes. The taxpayers again requested a CDP hearing and the case was assigned to the same Appeals Officer who handled the earlier hearing. The taxpayers objected to the prior involvement of the same appeals officer. Relying on regulations, the IRS rejected the couple’s request to have a new Officer put on the case. The Appeals Officer then deter-mined it was appropriate to levy for tax years 2001 and 2002, and the Tax Court sustained this determination.

The Tenth Circuit reversed, holding that the hearing for tax year 2000 addressed the 2001 and 2002 tax years and so constituted prohibited “prior involvement.” The Court went on to find that the 2006 version of the

regulations which expressly excluded prior CDP hearings from the definition of “prior involvement” were invalid.

The IRS has determined that it will not acquiesce in the 10th Circuit’s opinion and will continue to litigate this issue because it believes that the Court did not give proper deference to the IRS’s authority to define “prior involvement” in the regulations. The IRS’s explanation of its position is as follows:

“An appeals officer is not legally precluded under the “no prior involvement” language found in section 6330(b)(3) from conducting a taxpayer’s CDP hearing for a given tax year because he considered the taxpayer’s compli-ance history when evaluating the taxpayer’s eligibility for collection alternatives during a prior CDP hearing. Consistent with the construction of “prior involvement” reflected in the regulation, no disqualifying involve-ment arises when the same appeals officer holds consecutive CDP hearings for the same taxpayer who has accrued new, unpaid tax liabilities. Prior involvement refers, instead, to an appeals officer having considered the tax year at issue in a prior non-CDP context, such as when the appeals officer worked on the collection of the tax as a revenue officer.”

Note: When the IRS announces it will not “acquiesce” in a case, that does not mean that it does not have to follow the 10th Circuit’s holding in that case or in other cases appealable to the 10th Circuit. It means that the IRS believes the Court’s holding is incorrect and thus it will continue to liti-gate the issue in other Circuits around the country hoping for an eventual victory.

TAXPAyERS IN STATES WITH NO SALES TAXES CAN STILL BENEFIT FROM SPECIAL TAX BREAK

The IRS has announced that taxpayers who live in states without a sales tax can still benefit from the new car purchase tax break enacted as part of the American Recovery and Reinvestment Act. Under that legisla-tion, taxpayers who buy a vehicle this year are entitled to deduct state or local sales or excise taxes paid on the purchase. However, the following states have no state sales taxes: Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon.

The IRS is allowing taxpayers in these loca-tions to deduct other fees or taxes imposed by the state or local government if they are assessed on the purchase of the vehicle and are based on the vehicle’s sales price or a per unit fee. To qualify for this deduction, the


The work opportunity credit is available to businesses that hire workers belonging to 12 targeted groups, including unem-ployed veterans and disconnected youth. The other 10 groups include those ages 18 to 39 living in designated communities in 43 states and the District of Columbia, Hurricane Katrina employees, recipients of public assistance, and certain veterans, summer youth workers and ex-felons.

IRS PROPOSES SAFE HARBOR FOR 100-yEAR MATuRITy CONTRACTS ANd ISSuES Q&AS FOR EMPLOyER-OWNEd LIFE INSuRANCE CONTRACTS

In two far-reaching IRS Notices, life insurance contracts for those reaching age 100 and contracts owned by employers are subject to new qualification and reporting requirements. For life insurance contracts maturing when an individual reaches 100, the IRS guidance allows a safe harbor to continue treating the policy as a life insur-ance contract as long as the plan uses specific testing methodologies for various aspects of coverage when the insured turns 100 years of age.

For life insurance contracts owned by employers on the lives of employees, 17 questions and answers explain how employers must inform their employees of the coverage and tax consequences. The Q&As address definition of life insurance contract, exceptions to general rule that amounts excluded from gross income of the policyholder shall not exceed the sum of the premiums and other amounts paid for the contract, and notice and consent require-ments associated with these contracts.

IRS RELEASES ITS PERIOdIC LIST OF PRACTITIONERS SuBJECT TO dISCIPLINARy ACTIONS

In Announcements 2009-53 and 2009-54, the IRS Office of Professional Respon-sibility (OPR) has named approximately 38 practitioners who are subject to recent disciplinary sanctions for violations of the rules of practice before the IRS contained in Circular 230. The list includes attor-neys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retire-ment plan agents and appraisers.

OPR has the authority to disclose the grounds for disciplinary sanctions when (1) an Administrative Law Judge or the Treasury Secretary’s delegate on appeal has issued a decision; (2) the individual has settled a

payroll service has a fiduciary bond in place to protect the employer.

IRS Ready to HelpFor disaster-related issues, practitioners can

call an IRS specialist at 1-866-562-5227. Back copies of tax returns and all attachments, including Forms W-2, can be requested by filing Form 4506, Request for Copy of Tax Return. Likewise, transcripts can be ordered using Form 4506-T, Request for Transcript of Tax Return. Returns or transcripts can also be ordered by calling 1-800-829-1040. There is no fee for a transcript or tax return copy for a taxpayer located in a federal disaster area qualifying for individual assistance. Taxpayers should put the assigned Disaster Designation in red ink at the top of the request form.

REGISTER EARLy FOR dISCOuNT ON IRS TAX FORuMS

The six 2009 IRS nationwide tax forums are now underway, and NSTP members can get a discount by registering early for them. Those who sign up by the pre-registration dates shown below pay less than the full fee, a savings of approximately $129.

2009 Registration Fees, Dates and Locations:

The cost of enrollment is $206 per person, per city for preregistration and then $335 up to and including on-site registration. Pre-registration ends two weeks prior to the start of each forum. There is still time for preregis-tration for the following Forums:

Location Dates Preregistration DeadlineOrlando August 4-6 July 21New York August 25-27 August 11Dallas September 8-10 August 25Atlanta September 22-24 September 8

This year, 40 separate seminars and three workshops are being offered, each of which qualifies for CPE credit for enrolled agents and CPAs. Additionally, 17 of the 40 qualify for continuing education credit for certified financial planners, pending acceptance by the Certified Financial Planner Board.

Note: Practitioners are invited to bring an active case to the forums to work with IRS personnel on site for resolution.

To register, attendees should go to taxforuminfo.com. NSTP members should also plan on attending the NSTP Southwest Regional Conferences held in conjunction with the Atlanta and Orlando IRS forums. See the flyer sent out with the June 2009 Federal Tax Alert.

FINAL RuLES ON TIMBER SALES REPORTING ISSuEd By IRS

The IRS has issued final regulations providing guidance on the information reporting requirements for timber sales. The rules require “real estate reporting persons” to report lump-sum payments made to sellers/landowners for sales or exchanges of standing timber. “Real estate reporting persons” include any of the following persons involved in a real estate transaction:

(1) the person (including any attorney or title company) responsible for closing the transaction,

(2) the mortgage lender,

(3) the seller’s broker,

(4) the buyer’s broker, or

(5) any other person designated in Treasury regulations.

BuSINESSES HIRING uNEMPLOyEd vETERANS ANd uNSKILLEd yOuTH GET EXTENdEd TIME TO CLAIM NEW CREdIT

Businesses planning to claim the newly-expanded work opportunity tax credit for unemployed veterans and unskilled youth hired during the first part of 2009 have until August 17 to request the certification required for these workers, according to a recent IRS News Release and Notice. Under the American Recovery and Reinvestment Act, employers must file Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity and Welfare-to-Work Credits) to request certification of eligibility from their state workforce agency within 28 days after an individual begins work. The IRS has extended this deadline to August 17, 2009 for employers who hire workers after December 31, 2008 and before July 17, 2009. Eligible veterans and youth who begin work anytime during 2009 or 2010 may qualify for the credit with timely certification by the state workforce agency.

In general, an “unemployed veteran” is a person discharged or released from the military during the five years preceding the hiring date who received unemployment benefits for at least four weeks during the one-year period ending on the hiring date. A “disconnected youth” is a person age 16 to 24 on the hiring date who has not been regularly employed or attending school and who lacks basic skills.


disciplinary case by signing OPR’s “consent to sanction” form, which requires consenting individuals to admit to one or more viola-tions of the regulations and to consent to the disclosure of the individual’s own return information related to the admitted conduct; or (3) OPR has issued a decision in an expe-dited proceeding for suspension.

To obtain the latest list, go the IRS website at www.irs.gov. Enter “irb 2009-25” in the search box in the top right-hand corner of the IRS homepage. Select the June 22, 2009 IRB from the results list and go to page 1107 of that issue. For the second list, enter “irb 2009-26” in the search box. Select the June 29, 2009 IRB from the search results and go to page 1128.

IRS CAuTIONS TAXPAyERS ON RESIdENTIAL ENERGy PROPERTy CREdITS

The IRS has issued further guidance to taxpayers on claiming the residential energy property credits extended by the American Recovery and Reinvestment Act. The IRS Notice defines what qualifies as an energy efficiency home improvement and details the portions of the “building envelope” which are eligible for the credit, including insulation materials, some types of exterior windows, skylights, doors, metal roofs, and asphalt roofs.

The IRS also cautions taxpayers that the Energy Star label designation does not ensure that the product is eligible for this credit. The Energy Star label only means that the product has met energy efficiency guide-lines set by the Environmental Protection Agency and the Department of Energy. Not all such energy products are credit-eligible components.

The IRS plans to issue regulations on the nonbusiness energy property credit incorpo-rating the guidance in this Notice.

IRS SETS QuARTERLy INTEREST RATES ON uNdERPAyMENTS ANd OvER PAyMENTS

The IRS has set quarterly interest rates for the calendar quarter beginning July 1, 2009. The interest rates are 4% for noncorporate overpayments and underpayments, and for regular corporate underpayments. The rate is 3% for corporate overpayments and the overpayment rate for the portion of a corporate overpayment exceeding $10,000 is 1.5 percent. The large corporate under-payment rate is 6 percent. These rates apply to amounts bearing interest during that calendar quarter.

transaction involving a corporate distribu-tion under Code section 355. Previously, the IRS took the position that it would not rule on only a part of an integrated trans-action with regard to whether it qualified for nonrecognition treatment or whether it constituted a corporate reorganization. Under this Code section, distributions of stock of a controlled corporate entity qualify for tax-free treatment for the distributing corporation and for the share-holders if certain requirements are met.

COURT OPINIONS

Ordinary Income versus Capital Gain on Sale of House Lots:RICE v. COMMISSIONER T.C. MEMO. 2009-142 u.S. TAX COuRT June 16, 2009

Issue: Whether profits from sale of excess lots on a site bought for a residential construc-tion should be considered ordinary income or capital gains for tax purposes.

Facts: Bruce and Donna Rice bought over 14 acres near Austin, Texas to construct their “dream house.” After further thought, Mrs. Rice decided that she would rather live in a neighborhood than in a more isolated setting, so they subdivided and developed the land, complete with neighborhood covenants. Over the next eight years, the couple sold off about one lot a year, mainly to friends and acquaintances, including one lot sold to a relative at a loss. The Rices claimed the loss on the one lot, and capital gains on profits from the other lots. (An accountant prepared the returns, although Mr. Rice was a CPA who owned a 401(k) and trust management business). The IRS issued a deficiency notice to the Rices claiming that that the profit should be considered ordinary income and that the loss was from a related party sale and should be disallowed. The IRS also assessed $7,850 in accuracy related penalties. The Rices appealed.

Analysis and Conclusion: The Tax Court disagreed with the IRS’s assessment. The Court determined that the sale of the excess lots was not a sale of inventory, but a sale of investment property since land develop-ment was not the Rices’ ordinary business. The Court noted that their level of sales (one a year) and casual attitude toward the sales indicated that this was more of an investment than an ongoing business. Also,

PROCEduRES FOR TAKING INvESTMENT TAX CREdIT INSTEAd OF PROduCTION TAX CREdIT

As part of its continuing effort to release guidance on the American Recovery and Reinvestment Act incentives, the IRS has established procedures for the election to tax the investment tax credit rather than the production tax credit for qualified renew-able energy facilities. The taxpayer must first claim the energy credit on Form 3468 which should be filed with the tax return for the year in which property is placed in service. Then, the taxpayer must make a separate election for each qualified facility for which the invest-ment tax credit is being claimed. Under the recovery legislation, the election applies to facilities placed in service after 2008.

IRS INSTRuCTS MANuFACTuRERS ON HOW TO CERTIFy ELIGIBILITy OF PLuG-IN vEHICLES.

In advance of the issuance of regulations, the IRS has released guidance to vehicle manufacturers on how they can certify that their motor vehicles are eligible for the plug-in vehicle credit. The amount of the credit is $2,500 plus $417 for each kilowatt-hour of battery capacity over four kilowatt-hours and is limited to between $7,500 and $15,000, depending on the gross vehicle weight. The credit was extended by the American Recovery and Reinvestment Act, and the requirements for the previous credit are different that the rules for the reenacted credit.

SIX MORE AREAS QuALIFy FOR IRS dISASTER RELIEF

The IRS has added six states which faced natural disasters to the list of areas eligible for tax administrative relief. The areas include disaster sites in Oklahoma, Alabama, Missouri, Alaska, Kentucky and Florida. This designation gives taxpayers living or running a business in these areas extended dead-lines for tax filings, tax payments, payroll deposits, etc. The IRS also waives failure to deposit penalties for employment and excise taxes for certain periods following a natural disaster. Taxpayers in these areas also may be able to claim increased casualty losses.

IRS WILL NOW ISSuE SINGLE ISSuE RuLINGS ON CORPORATE dISTRIBuTIONS

The IRS has changed its ruling practice for certain corporate distribution transac-tions. The IRS will now rule in advance on the tax consequences of only part of a


because the Rices sold primarily to friends, did not advertise widely, and held other fulltime jobs, the Court found they were not dealers but were instead investors, and the lot sales qualified for capital gains treatment. Finally, since the Rices used an accountant and included all information on their returns, the Court also disallowed the accuracy-related penalties. Because the Rices did not address the loss issue in court filings, the Court let the IRS’s ruling on disallowance of the loss deduction stand.

Notes: The Court disallowed IRS assessed penalties. When the taxpayer does not make any effort to hide income, and professional preparers are used, the IRS does not seem to win on penalty rulings. This is an excellent point to be remembered when taxpayers are consid-ering whether to go with a professional preparer or file on their own.

INVENTORY VERSUS CAPITAL ASSETS

The Court in the Rice case identified nine factors that determined whether the property was held for sale or held as inventory in the ordinary course of busi-ness. These factors are:

The taxpayer’s reason for property 1. acquisition.The purpose for subsequently hold-2. ing the property.The taxpayer’s primary business.3. The frequency and volume of sales.4. The extent of improvements.5. The extent of the use of advertising.6. The existence of a business office for 7. property sales.The degree of supervision over sales 8. agents.The time regularly devoted to sales.9.

IRS Failure to Produce Proof of Mailing:

WALTHERS v. COMMISSIONER T.C. MEMO. 2009-139 u.S. TAX COuRT June 15, 2009

Issues: Whether the Tax Court has juris-diction over a levy appeal and whether the IRS properly issued the taxpayer a final notice of levy.

Facts: The IRS claimed that it sent a final notice of intent to levy to Judith Walthers’

last known address and that the notice was returned “unclaimed or refused.” Walthers petitioned the Tax Court for a levy review and claimed that she had never received the final notice. The notice of intent to levy would have given her the opportunity to request a collection due process (CDP) hearing before the levy could proceed. The taxpayer represented herself. The IRS was unable to produce either a copy of the final notice of intent to levy or a certified mailing list for the notice. All the IRS had was a computer transcript noting that the notice had been sent and had come back to them.

Analysis and Conclusion: This was a technical, procedural ruling in which both sides were not properly before the Court. The Court found that it did not have juris-diction over the case because the IRS never issued any notice of determination. The Commissioner must first issue a final notice of intent to levy and send it to the taxpayer at the taxpayer’s last known address before a hearing is held and the notice of determi-nation is issued. Thus, the taxpayer did not exhaust her administrative appeals because she did not receive the levy notice. The Court determined that the only thing for it to decide was the proper basis for dismissal of the action.

The Court dismissed the case because the IRS could not provide proof that the final notice of levy had been mailed. The IRS had urged the Court to dismiss the case on the basis of taxpayer’s failure to timely request a CDP hearing Although the IRS’s internal records showed that the notice had been sent, they could not locate the actual postal form in their files that previous courts have ruled conclusive proof of mailing. With dismissal on this basis, the Petitioner’s request for review of the levy was moot. Dismissal on this ground had the effect of invalidating the supposed levy notice.

Observations: As often happens in tax cases, the core issue was not litigated in this case, but the results came down to a procedural issue: Did the IRS have the paperwork from the post office proving it had mailed the notice? Since the IRS did not, it lost the threshold jurisdiction issue. Often, it is the taxpayer that comes into Court without the proper documen-tation, but this proof requirement cuts both directions. Practitioners should take away from this case the importance of putting the IRS to its proof of documen-tation, and should not assume that the IRS has its files in order.

Alaska City Tax Violated U.S. Constitution:POLAR TANKERS, INC. v. CITy OF vALdEZ, ALASKA u.S. SuPREME COuRT NO. 08-310. June 15, 2009

Synopsis: The U.S. Supreme Court has invali-dated a Valdez, Alaska, ordinance that imposes a personal property tax on large oil tankers. Petitioner Polar Tankers, Inc., whose vessels transport crude oil from the Port of Valdez to refineries in other States, challenged the ordinance in State Court, claiming that (1) the tax was unconstitutional under the Tonnage Clause of Article 10 of the U.S. Constitution, and (2) the tax’s value-allocation method violated the Commerce and Due Process Clauses. The Alaska State Supreme Court upheld the tax, finding that because it was a value-based property tax, the tax was not a duty of tonnage. The State Supreme Court also held the allocation method was fair and thus valid under the Commerce and Due Process Clauses. The U.S. Supreme Court found the tax violated the Tonnage Clause but declined to rule on the Commerce Clause and Due Process Clause claims. The Tonnage Clause prevents States from imposing import and export duties by taxing “the vessels transporting the merchandise.” The judgment was reversed and remanded for further proceedings.

IRS Responsibility to Corroborate Third-Party Information Return:PEREZ v. COMMISSIONER T.C. SuMMARy OPINION 2009-94 u.S. TAX COuRT June 15, 2009

Issue: Whether petitioner had a taxable distribution in 2004 related to a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that Northwestern Mutual Life Insurance Co. (Northwestern) issued.

Facts: Dr. Perez received a Form 1099-R for 2003 reporting a taxable distribution of $22,159 from his insurance company. He had recently been through a Chapter 13 Bankruptcy and was unaware of any distributions from his insurance policy. When he filed his return for 2003, he did not include this amount as income, but did include the 1099-R with a note to the IRS that he “needed help understanding this.” He tried resolving the problem with a series of phone calls and written communications


to the IRS, but the IRS issued a Notice CP2000, Notice of Underreporting Income, dated July 25, 2005, informing Perez of an increase in Federal income tax, penal-ties, and interest for 2003 because of the income reported on the 1099-R. Perez paid the full amount but checked a box saying that he disputed the tax increase. For the 2004 year, Perez received another 1099-R from the insurance company for a similar amount and subsequently received a notice of deficiency for over $7,000 for that taxable year. The doctor petitioned the Tax Court for review disputing the IRS’s assessments and penalties for these two years.

Analysis and Conclusion: Normally, the burden of proof in a dispute with the IRS rests with the taxpayer. However, if the taxpayer fully cooperates providing all information requested, then the burden of proving a factual matter may shift to the IRS if the taxpayer produces “credible evidence” and the evidence in dispute was provided by a third party, as it was in this case. After all, the Court noted, mistakes can be made by third parties. The IRS did not produce any corroborative evidence to support the 1099-R, such as the insurance policy itself, or testimony from the insurance company explaining the policy’s terms. Thus, the Tax Court found for Dr. Perez.

Observations: This case is a solid example of where the dynamic concerning the burden of proof can be switched from the taxpayer to the IRS. Like in the last case involving postal receipts, the IRS could not, or would not, produce basic documentation to prove a legitimate foundation for its assessments. Since the taxpayer fully cooperated, even paying the disputed taxes and penalties, the Court rightly shifted the burden of proof to the IRS, which, as in the earlier case, the IRS could not sustain.

Ability of Alleged Innocent Spouse to Change Filing Status:

HAIGH v. COMMISSIONER T.C. MEMO. 2009-140 u.S. TAX COuRT June 15, 2009

Issues: Whether after filing a joint return, one spouse can re-file for that year as married filing separately, and whether the innocent spouse rules would affect this ability.

Facts: The Haighs were married when they jointly filed their 2004 return, although they were separated when this case was heard. Petitioner James Haigh completed and filed the joint return. His wife had taken an early withdrawal from her IRA during that year,

but the 10% penalty was not computed on the return. When the IRS assessed the couple for the distribution, the Petitioner requested inno-cent spouse status and also requested that he be allowed to re-file, filing separately.

Analysis and Conclusion: The Court disal-lowed his requests. Since it was the Petitioner himself who had completed and submitted the return, the Court ruled that he knew, or should have known about the 10% early with-drawal penalty. The Court also pointed out that once a couple has filed jointly, they cannot go back and re-file separately after the dead-line for filing has passed. However, a taxpayer will not be held liable for the joint return deficiency under the innocent spouse rules, if the innocent spouse claims that he or she filed under duress, which was the claim by the Petitioner in this case. Unfortunately for Mr. Haigh, the Court found that he had presented no evidence to support his claim of duress. To prove that a taxpayer signed a joint return under duress, according to the Court, the taxpayer must show “(1) that the taxpayer was unable to resist the demands of the taxpayer’s spouse to sign the joint return, and (2) that the taxpayer would not have signed the joint return absent the constraint that the taxpayer’s spouse applied to the taxpayer’s will.”

Iowa State Law Claim: Haigh presented an alternative argument: Since his wife had breached the couple’s prenuptial agreement, the joint return was rendered void by Iowa law, requiring the IRS under 10th Amend-ment principles to accept taxpayer’s amended return, thus honoring Iowa’s public policy. The Court rejected this claim outright with little discussion.

Notes: Under the innocent spouse regula-tions, the Court has the latitude to exempt the innocent one from liability, and could have allowed him to re-file separately, even though the deadline had passed. However, there must be credible proof of ignorance or duress, neither of which was proven to be present in this case.

Overstating Basis is Not Understating Income and Does Not Extend IRS Assessment Period:

BAKERSFIELd ENERGy PARTNERS v. COMMISSIONER u.S. COuRT OF APPEALS, NINTH CIRCuIT NO. 07-74275 June 17, 2009

Issue: Whether the IRS can use the extended six year statute of limitations, as opposed to the normal three year statute, if the basis in the sale

of assets in a partnership transaction is over-stated, reducing taxable income.

Facts: Bakersfield Energy Partners consisted of seven partners. The limited partnership entered into an agreement to sell the oil and gas assets of the partnership to a third party, Seneca. Before the sale was completed, four of the seven partners sold their interests to a new partnership that they had formed, and reset their basis from $0 to $19,924,870. The Seneca sale was later closed for over $23 million with the new basis being $19.9 million, resulting in a gross taxable income after the sale of between $3 and $4 million. The IRS mailed Bakersfield a notice of final partnership administrative adjustment (FPAA) finding that the basis should be $0. Because the IRS determined that Bakersfield’s basis in the oil and gas property was zero, the IRS calculated that Bakersfield’s gain from the sale of the oil and gas property to Seneca was $21,905,577, not $5,390,383. Based on this calculation, the IRS determined that Bakersfield had underpaid its taxes and was also liable for a 40% penalty on the under-payment. The case was heard in Tax Court, and the Tax Court ruled that the IRS did not timely send their deficiency notice since it was not sent out until after the three-year statute of limitations. The IRS appealed to the Ninth Circuit Court contending that the statute should be six years, not three, since the gross was incorrectly reported.

Analysis and Conclusion: The IRS claimed that the sale and basis adjustment was a sham that had no business value other than to avoid taxation. The issue of the correct basis computation was not addressed by the Court because it found that the IRS was outside of the time for assessment. The FPAA was not sent to the partnership until almost 6 years after the original partnership tax return was filed. The IRS argued that since the partner-ship misstated its gross income, the IRS was entitled to the extended statute of limitations of six years. The Circuit Court examined the original legislative record and decided that the additional three years was intended by Congress to apply to cases where income had been hidden. In this case, the amount of money received was clearly and totally reported. The dispute was over the proper basis to be used in calculating income. The Court noted that disputes over the amount of the basis have generally not been consid-ered as improper reporting of income by the Courts, it thus held for the taxpayers.

Notes: This case involved an extensive discussion of the meaning of “gross” income. In some instances it means total income and in others, total income after basis is subtracted,


creating ambiguity when trying to interpret the Code, especially since the percentage of unreported income makes a difference as to statute of limitations and penalties. Is the 25% of omitted income--the number that is used as the measure for allowing the extra three years for assessment—computed before or after basis is subtracted? The Court noted that an earlier Supreme Court ruling stated that omitted income is what was being addressed when Congress extended the statute. The partnership reported the gross receipts from the sale but then applied the substantial basis in its computation of income.

A Case of Coke: Interest on Overpayments of Tax on 25-Year Old Case:COCA-COLA COMPANy v. u.S. NO. 03-1155T u.S. COuRT OF FEdERAL CLAIMS June 3, 2009

Issue: Whether Coke is entitled to interest on overpayments of taxes when part of refund was withheld by the IRS.

Facts: This case dates back over 25 years, to 1981 corporate tax filings of Coca-Cola. The IRS initially determined that Coke had overpaid its tax account by over $18 million, taking into account net operating loss (NOL) carrybacks. Within weeks of issuing this refund, the IRS reversed its decision on 2/3 of the refund, and withheld $12 million of the amount to be refunded. This amount was in dispute for years, but was finally settled in 1997 in favor of Coke. After taking “the pause that refreshes,” the company sought interest for the time the IRS held its overpayment.

Analysis and Conclusion: After plowing through the “thicket that is the Internal Revenue Code,” the Court determined that “things go better with Coke” and that Coke was entitled to $162,263.62 in over-assessed defi-ciency interest and $2,587,589.36 in allowable overpayment interest through June 30, 2003, plus additional interest until paid. The IRS had tried to avoid the liability by saying that interest can only be paid on a refund if the refund is not issued within 45 days of it being requested. In this case, the original refund had been issued within twelve days, but had been pulled back before Coke received the money. The Court ruled that the clear meaning of “refund” was that the taxpayer should have the money repaid, which had not happened, despite the refund assessment having been issued. To do other-wise, as the IRS demanded, would have been “to ignore subsequent events” determining that Coke was entitled to the full refund.

ETHICS CORNER

NATIONAL TAXPAyER AdvOCATE RECOMMENdS TESTING, CPE REQuIREMENTS FOR uNENROLLEd TAX PREPARERS

National Taxpayer Advocate (NTA) Nina Olson has submitted her mid-year report to Congress that identifies the priority issues the Office of the Taxpayer Advo-cate will address in the coming fiscal year. One key area of focus is “enhancing IRS oversight of federal tax return preparers,” according to a news release transmitting the report.

Tax return preparers complete about 62 percent of all individual income tax returns, and play a critical role in facilitating tax compliance, she observed. However, the release states that “shop-ping visits conducted by the Govern-ment Accountability Office, the Treasury Inspector General for Tax Administration, and others suggest that a high percentage of preparers prepare inaccurate returns, fail to perform sufficient due diligence, and even take positions that they know are not supportable.” This conduct can result in understatements and overstate-ments of tax.

Olson is asking that the IRS do more to protect taxpayers by regulating unen-rolled federal tax return preparers by, for example, requiring initial testing and continuing professional educa-tion. The report also recommends that the IRS step up enforcement actions against preparers who fail to perform due diligence or consciously facilitate noncompliance. She further recom-mends that the IRS require preparers to use a unique Preparer Tax Identification Number (PTIN) on all returns. The use of PTINs would provide data concerning the number of return preparers, shield the Social Security numbers of return preparers from identity theft, and make it easier for the IRS to identify return preparers who submit unreasonably high numbers of inaccurate returns.

The NTA will be working with the IRS on an initiative it announced earlier in June to develop a revised return preparer strategy by year-end. (See page 1 of the June 2009 issue of the Federal Tax Alert for an article on return preparer regulation.)

IRS EMPLOyEE FIREd FOR uNAuTHORIZEd ACCESS OF TAXPAyER RECORdS; COuRT uPHOLdS IRS dECISION

The case below involves unethical behavior by an IRS employee in accessing taxpayer records for which the employee was fired. The Court draws an interesting distinction between this case and other unauthorized access cases.

MCLEOd v. dEPT. OF TREASuRy u.S. COuRT OF APPEALS, FEdERAL CIRCuIT NO. 08-3335 June 17, 2009

Issue: Whether an IRS employee was properly terminated for accessing taxpayer records with no authorization or business purpose.

Facts: Joseph McLeod had worked for the IRS as a Tax Examiner Technician from 1994 until 2007 when he was relieved of his position after it was discovered that he had accessed confidential taxpayer information fifteen times between 1997 and 2000 without authority and without a business purpose. He gained access through the Integrated Data Retrieval System (IDRS). McLeod did not dispute the charges but contended that the punishment was overly harsh and not in line with how other, similar cases had been resolved. The Merit Systems Protection Board sided with the IRS in allowing termi-nation of the employee. McLeod appealed to the Federal Circuit Court.

Analysis and Conclusion: The Court took the view that the Merit System Protections Board hearing officer had the right to decide that any violation of the UNAX (unauthor-ized access and inspection of tax records) rules demanded termination. McLeod argued that there had been similar cases of unauthorized access in which the employee had only been suspended for thirty days. However, when examining the facts of the earlier case, the Court determined that the employee in that case had accessed a friend’s records with the friend’s approval, thereby giving the friend preferential treatment, whereas the McLeod case involved access that the taxpayer was not aware of, a more serious offense by breaching the taxpayer’s privacy. The Circuit Court upheld the employee’s firing.

Notes: The primary problem with unau-thorized access is that taxpayers should be able to feel secure that their records will not be misused by tax officials, the Court noted.


Since the taxpayer in this case was an unwit-ting victim of the agent’s actions, the punish-ment was not considered too severe by the Federal Circuit Court. The Court observed in a footnote, “UNAX violations can occur either because the employee browses files for his or her own purposes (e.g., curiosity about a friend), or because the employee is giving favored treatment to friends by helping them access their tax records. Neither is permitted, but in the second case, the taxpayer has authorized the employee to access the file.”

IT’S A FAMIy AFFAIRMatthew Berry and his daughters, Karen

and Carla, had a successful family tax preparation business. The only problem is that it was fraudulent, according to the San Bernardino (California) Sun News. It seems that they managed to work their false return scheme up to $45,000,000, according to Leslie P. DeMarco, Special Agent in Charge, IRS Criminal Investigation, Los Angeles Field Office. They had so much cash at times, they literally didn’t know what to do with it, buying cashier’s checks to deposit in their bank to avoid suspicion. Berry was sent up the river for 9 years and each of them were ordered to pay millions in restitution. Pros-ecutors accused Berry and his partners of preparing thousands of false returns, creating false documents for IRS audits and failing to report more than $1 million in receipts. “These dishonest preparers undermine the integrity of our tax system and must be held accountable,” DeMarco said. “This nine-year sentence serves as a reminder to all tax return preparers who intentionally prepare fraudulent tax returns. Their disregard for our tax system can lead them to prison.”

WHAT GOES AROuNd COMES AROuNd; LIBERTy TAX SERvICE FOuNd GuILTy OF dECEPTIvE AdvERTISING

Remember Jerry Brown? California’s “Governor Moonbeam.” Well, like all old politicians, he didn’t go gently into that good night, but moved around to various elected offices. Currently he holds the office of Attorney General of California, and recently he successfully sued the third largest tax preparation firm in the country for decep-tive advertising. “Liberty Tax Service lured cash-strapped Californians into paying for high-cost loans, when they could obtain tax refunds free from the IRS just weeks later,” said Brown in a statement. “This ruling bars Liberty from deceptive advertising that blurs the line between IRS tax refunds and pricey

loans.” Liberty was accused of misleading its customers by promising “Most Refunds in 24 Hours” but selling refund-anticipation loans. For this service, the customers had to pay an upfront fee of $30 plus interest at a rate that could be as high as 395% annu-ally. The taxpayers targeted by the firm were mostly low-income. Approximately 70% of Liberty Tax Service’s refund anticipation loan customers in 2006 and 2007 received the earned income credit.

The Virginia based Liberty was hit with $1.16 million in civil penalties and over $135,000 in restitution, according to the Fresno Bee. The suit was brought under the California Unfair Competition Law and False Advertising Law of the Business and Professions Code. If any franchise violates the agreement not to deceptively advertise, it will be automatically fined $15,000 the first time, and shut down for the third offense, according to the decision. Brown reached settlements with Jackson Hewitt in 2007 and with H&R Block in 2009 over similar claims. Ironically, in 2001, Liberty was awarded over $500,000 in their suit against H&R Block for deceptive advertising.

More Information: To read the Judgement and Statement of Decision in the case, go to the California Department of Justice’s website at www.ag.ca.gov/newsalerts. Scroll down the list to the June 19, 2009 news release on the Liberty case. When you open it up, at the end of the news release (under “Related Attachments”) there are links to PDF copies of the court filings in the case.

ET CETERA

vITA PROGRAM EXPANdEd By GRANTS

The IRS is reporting that the first year of a new grant program to partner with community organizations on Volunteer Income Tax Assistance (VITA) sites was a success with over 2500 sites receiving money. These community sites processed almost 660,000 returns, according to the IRS Office of Stakeholder Partnerships, Educa-tion and Communication. Community partners include such groups as the United Way, AARP, and local organizations that reach underserved communities, such as the elderly, low-income taxpayers, and taxpayers in rural areas. About $8 million was available for the grants, and the IRS received almost 400 grant applications. The 2008 program

gave awards to 111 organizations. Another $8 million is available for the 2010 program through additional funding approved by Congress in a recent appropriations bill.

BEING A BILLIONAIRE IS NOT AS MuCH FuN AS IT uSEd TO BE

Are you a Billionaire if you owe a Billion dollars? Or do you have to HAVE a Billion Dollars? Bankrupt auto dealer tycoon and former billionaire Denny Hecker is definitely in the first category, according to the Minne-apolis Star Tribune. The IRS seems to be first in line with liens for a paltry $2.6 Million, but the Tribune says the line includes the state authorities looking for unpaid sales tax and transfer fees on the autos he sold. It also seems that he neglected to pay off loans on trade-ins for customers. A billion in debt? He should be a government.

TREASuRy uNION LEAdER LAudS INCREASE IN IRS FuNdING

The leader of the union representing IRS employees is praising a 5 percent increase in funding for the IRS included in the fiscal 2010 Financial Services and General Government Appropriations bill under consideration by a House subcommittee. The increase “will result in additional tax revenue at a critical time for our nation,” said National Trea-sury Employees Union (NTEU) President Colleen M. Kelley. “Investing in enforcement operations at the IRS will result in additional tax revenue with an average return on investment of $5 for every $1 spent,” said President Kelley. She also noted that the IRS has experienced a significant increase in the number and complexity of tax returns, but enforcement staffing has declined by almost 30 percent since 1995.

The gap between taxes owed and those paid is said to be approximately $345 billion annually and could be closed significantly by stepped up IRS enforcement, Kelley said.

NTEU is the nation’s largest indepen-dent union of federal workers, repre-senting 150,000 employees in 31 agencies and departments. Their web address is www.nteu.org and contains interesting information on the inside employ-ment disputes between the IRS and its personnel. Among its claimed victories are “Beat back an IRS attempt to close dozens of its Taxpayer Assistance Centers nationwide” and “Secured priority promotion consider-ation for 1,400 IRS employees in the largest case of its kind ever in the federal sector.”

FEDERAL TAX ALERT PAGE 16 JULY/AUGUST 2009

HERE COMES THE JudGE (AS TAX dOdGER)

Anoka County Minnesota District Court Judge Donald James Venne did not get around to filing his taxes for three years, reported the Minneapolis Star Tribune. He only owed a little over $3,000, but the 61- year-old Venne was a Judge. He claimed family stress and post-traumatic stress disorder caused the lapse, and he was fined $900 each for four misdemeanors. And he’ll now be leaving the judging to others.

THE TWO THINGS yOu CAN’T AvOIdWe all know what those are. They have

conveniently converged for conservative powerbroker Ralph Hughes, who spent millions of dollars promoting his anti-tax, small government causes and his favored political candidates. Mr. Hughes, a concrete magnate from Florida, died in June 2008 at 77 years old, and, according to the IRS, he owed them as much as $69 Million in unpaid taxes dating back to 2003.

SALES TAXES: GONE TO THE dOGSIn Harrison County, Indiana, two women

were arrested for selling puppies and not collecting sales tax. They were not your neigh-borhood dog breeder, Virginia Garwood and her daughter, Kristen, had over 240 dogs on their property in Mauckport, Indiana, and the State estimated that they owed over $130,000 in unpaid sales tax, aside from the over $280,000 in other unpaid tax assess-ments and penalties. The pair were charged with criminal tax evasion. To satisfy a tax-jeopardy assessment of more than $132,440 in unpaid sales and income taxes, the investi-gators seized the inventory of the business – 240 dogs and puppies that had been confined in squalid cages – as well as tax records. The dogs were then spread among the Humane Society’s various shelters throughout the state. Apparently the 63- year-old mother and her 26-year-old daughter never bothered keeping records or collecting any sales tax, despite the size of the operation.

MR. BRITNEy SPEAR’S TAX WOESKevin Federline (ex-Mr. Britney Spears)

now is over $14,000 behind in his tax payments with the IRS. Actually, it is his production company that owes the taxes. Apparently, being the ex of the Princess of Pop isn’t as lucrative as he had hoped.

GRAyBAR HOTEL TAX ENTREPRENEuRIf convicted, our next tax cheat will not have

to move very far. Jerry G. Batson Jr., 29, who

currently lists his residence as the Calhoun Correctional Institute of Florida, has been accused of running a tax refund fraud scheme out of his jail cell, reported WMBB-TV of Panama City, Florida. If he’s convicted of defrauding the IRS out of over $50,000 as he has been charged, he could have his resi-dency extended for up to 120 years.

CLICK HERE…TAX RESEARCH FOR YOUR PRACTICE

IRS ENFORCEMENT STATISTICS BY FEDERAL DISTRICT

The Transactional Records Access Clearinghouse (TRAC) is a data gath-ering, research and distribution organiza-tion at Syracuse University. This organi-zation uses the Freedom of Information Act (FOIA) to inform the public about the enforcement activities of the IRS, as well as other government agencies. TRAC maintains a specialized site on the internet with highly detailed but easy-to-understand IRS data.

One useful analysis on the TRAC site attempts to answer the following question: How do the activities of an agency or pros-ecutor in one community compare with those in a neighboring one or the nation as a whole? The analysis contains an infor-mative district-by-district comparison of the following statistics:

Odds of Criminal Referral Odds of Criminal Conviction Lead Charge for Convictions Program Area for Convictions Percent Prosecuted Percent Declined Percent Guilty Percent Prison Sentence Length Prison Sentence

Thus, you can actually see the frequency of IRS criminal tax prosecution for each area of the United States.

To access the TRAC website, use the following steps:

Go to www.trac.syr.eduClick on the TRAC-IRS box.Click on “District Enforcement”Click on “Specific District Figures”Find your federal district on the U.S. map and click on it for detailed information.

QUOTES

“This case forces the court to wade, once again, into the ever-growing thicket that is the Internal Revenue Code.”

--Judge Block, U.S. Court of Federal Claims, in first sentence of opinion in Coca Cola Company v. U.S., discussed elsewhere in this issue.

… “[T]he best policy option would be to use the revenues from cap and trade or from a carbon tax to decrease the marginal tax rates of other distortionary taxes, such as the payroll tax and individual and corpo-rate income taxes,”

-- Recent release from the American Enterprise Institute, in response to Congressional action on the cap and trade bill.

I don’t know if I can live on my income or not -- the government won’t let me try it.

-- Bob Thaves, from cartoon “Frank & Ernest”

All taxes are a drag on economic growth. It’s only a question of degree.

-- Alan Greenspan, former Chairman of the Federal Reserve

A sales tax is a tax on the freedom of purchase.

-- Felix Frankfurter, Supreme Court Justice from 1939-1962

www.nstp.orgService to the Tax Profession

*nstp is MOVING*

As of June 25, 2009 our newmailing address will be:

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Phone, fax and email remain the same.

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announcingNSTP’S

2009 SOUTHEAST Regional Conferencesat the IRS Nationwide Forums

Make plans now to attend one of the two NSTP Southeast Regional Conferences to be held in advance of the IRS Nationwide Tax Forums.

Member Price: $195*Non-Member Price: $245(Price includes text materials)

*Sign up for a Regional Conference before June 15th and receive an EARLY BIRD PRICE of $180.

A $15 late registration fee will be charged if you register 9 days or less before the date of the Regional Conference.

Attendees requiring special assistance should contact the NSTP office at 800-367-8130.

Topic: Meeting the Challenges of the Form 1040 Schedule C

12 CPE Credits

Instructor: Paul LaMonaca, CPA, MST

Dates & Locations

Orlando, FL August 2-3, 2009 Atlanta, GA September 20-21, 2009Caribe Royale Orlando Hilton Atlanta8101 World Center Drive 255 Courtland Street NEOrlando, FL 32821 Atlanta, GA 30303(800) 823-8300 (800) 445-8667Room Rate: $139 Room Rate: $150*Hotel Cut-off Date: July 1, 2009 Hotel Cut-off Date: August 31, 2009Group ID: 5647 *You must specify that you arePassword: 37006250 attending the “2009 IRS Tax Forum”

Make your reservations soon as hotels are filling up fast!

The NSTP Annual Meeting will be held on Sunday afternoon at 5:30 pm after the education session in Orlando, FL.

Register online at www.nstp.org or call 800-367-8130.

"Service to the Tax Profession"

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Program Announcement

This course introduces the tax professional to reviewing, planning and preparing the tax transactions of the Schedule C Sole Proprietorship by looking at the “big picture”.

The course is a "roll up your sleeves" workshop course. Bring your materials and calculators.

Advance preparation is not required.

Course level stresses introduction and review for the developing practitioner and the seasoned professional. It is recommended that participants have a working knowledge of the principles of Federal Income Tax law.

Course Level: Review to Intermediate

The course provides for 12 hours of continuing education credits. Registered with NASBA.

The National Society of Tax Professionals (NSTP) is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National

Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, 37219-2417. NASBA web site: www.nasba.org

This course is recommended for CPA's, CFP's, Accountants, Tax Practitioners, Lawyers and Enrolled Agents with basic knowledge of tax accounting.

The 2009 Regional Conference highlights include issues addressing:

Business vs. Hobby Start Up Cost Basis Issues Benefits and Burdens Business Use vs. Personal Use of Assets Recapture of Depreciation Conversion from a Sole Proprietorship to Another Entity Filing Requirements Employment of Family Members Office in Home Retirement Planning Self-Employment TAX Depreciation Ordinary and Necessary Business Expenses Audit Issues And More!

http://www.nasba.org/

2009 Regional Conference Schedule

Day 1: Sunday12:00 PM Registration1:00 PM - 3:00 PM Introduction to the Issues Facing the Tax Professional3:00 PM - 3:30 PM Break3:30 PM - 5:00 PM Tax Gap Issues and Proper Reporting

Day 2: Monday7:30 AM - 8:00 AM Continued Administration8:00 AM - 10:00 AM Issues Dealing With Start-up, Business vs. Hobby10:00 AM - 10:30 AM Break10:30 AM - 12:00 PM Deductions vs. Personal Items12:00 PM - 1:00 PM Lunch1:00 PM - 2:45 PM Office in Home, Family Matters, Retirement Planning2:45 PM - 3:15 PM Break3:15 PM - 4:30 PM Audit Issues, Retirement Planning and Conversion of Entity Issues

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CONTACT INFORMATION: For more information regarding refund, complaint and/or program cancellation policies, please contact out offices at (800)367-8130.

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Disclaimer

Seminar materials and seminar presentations are intended to stimulate thought and discussion and to provide attendees the useful ideas and guidance in the areas of federal taxation and administration. These materials as well as the comments of the instructors do not constitute and should not be treated as tax advice regarding the use of any particular tax procedure, tax planning technique or device or suggestion or any of the tax consequences associated with them.

Although the author has made every effort to ensure the accuracy of the materials and the seminar presentation, neither the author, the presenter nor the National Society of Tax Professionals assumes any responsibility for any individual's reliance on the written or oral information presented during the presentation. Each attendee should verify independently all statements made in the materials and during the seminar presentation before applying them to a particular fact pattern and should determine independently the tax and other consequences of using any particular device, technique or suggestionbefore recommending the same to a client or implementing the same on a client's or on his or her own behalf.

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2009 Southeast Regional Conferences

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