Bid to expand tax return 'snooping' voted down

Author: Mark E. Battersby

Published: December 13, 2004

Congress has voted unanimously to kill a provision that would have made it easier for lawmakers and aides to look at people's income tax returns. The provision would have allowed leaders of the House and Senate Appropriations committees to sign letters letting other people see tax returns while visiting IRS facilities.

Currently, only top lawmakers on the tax-writing House Ways and Means Committee and Senate Finance Committee can grant such permission.

A spokesman for the House Appropriations Committee blamed a Republican House aide for the controversial provision.

''I can confirm that Rich Efford was the staffer who was involved with the provision,'' committee spokesman John Scofield said.

Senate Majority Leader Bill Frist, R-Tenn., initially associated the provision with Rep. Ernest Istook, R-Okla., chairman of the Appropriations subcommittee that oversees the Internal Revenue Service. Mr. Istook denied responsibility for the provision and Mr. Frist later apologized.

The provision prompted lawmakers of both parties to warn of sinister government snooping into tax returns and complain that huge bills often hide language of which few lawmakers are aware. The recently enacted $388 billion spending bill and other documents supplementing it stood 3,646 pages thick on lawmakers desks.

The provision did not include penalties for improper disclosure of taxpayer information. Criminal and civil penalties currently apply if Senate Finance or House Ways and Means Committee members allow taxpayer information to be improperly disseminated.

Officials from the IRS, which reportedly wrote most of the language, have said they thought thatcongressional aides would insert penalty provisions. House aides have said they thought that the IRS language was sufficient.

''The only people who don't know how this happened are members of Congress,'' said Ways and Means' ranking Democrat, Rep. Charles Rangel of New York.

Defining the sale of a partnership

The IRS has proposed regulations that would provide guidance for determining when transactions can be regarded as disguised sales of partnership interests.

Generally, the proposed regulations follow the model provided in the existing regulations under Section 707 ''Related Interests Transactions.''

The proposed regulations provide, generally, that where a transfer of consideration to partner A by a partnership would not have happened ''but for'' the transfer of consideration to the partnership by partner B, the transfers are treated as a sale of all or a portion of partner A's interest in the partnership to partner B for all purposes under the tax law.

Where the transfers to and from the partnership do not occur on the same date, the transfers are treated as a sale only if the later transfer is not dependent on the entrepreneurial risks of partnership operations.

Cite: REG-149519-03

Signing bonuses defined as wages

The IRS recently published two revenue rulings clarifying that payments by employers to employees in connection with employment contracts are to be treated as wages for purposes of FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding.

In the first ruling, the IRS has clarified that employment taxes must be paid - and income taxes withheld - on bonuses paid for signing an employment contract.

The ruling addresses situations such as signing bonuses paid in connection with the first contract between a baseball club and a baseball player and payment made upon ratification of a collective bargaining agreement.

The second ruling concerns payments made in connection with the cancellation of an employment contract. The ruling clarifies that if an employment contract is canceled before its agreed-upon end and a payment is made in lieu of the remaining period of employment, the payment is treated as wages for purposes of employment taxes and income tax withholding.

Because these rulings revoke or modify prior rulings, the new rulings will not apply to certain payments made before Jan. 12, 2005, such as signing bonuses, sign-on fees or other amounts paid in connection with an employee's initial employment or payments made or agreed to on the cancellation of an employment contract.

This relief applies only where the facts and circumstances relating to the payments are substantially the same as in the revoked or modified rulings.

Cite: Rev. Rul. 2004-109 & Rev. Rul. 2004-110

A lapse in filing proves costly

After consistently filing income tax returns on time for almost 40 years, one couple suddenly stopped in 1987. As the IRS proved, the taxpayers did not file their income tax return for 1987 until May 1991 and did not file another return after that until October 1997, when they filed a return for 1996.

In fact, the couple did not file timely income tax returns for 1988 through 1995 despite having significant taxable income in each of those years.

When the taxpayers eventually filed these income tax returns, they reported adjusted gross income of $107,336 for 1993, $148,231 for 1994 and $97,064 for 1995. The taxpayers did not file their income tax return for 1995 until three years after it was due and then only after the IRS initiated a criminal investigation into the taxpayers' failure to file.

The taxpayers pleaded guilty in May 2000 to willfully failing to file a federal income tax return for 1995.

The U.S. Tax Court considered a number of factors, including the taxpayers' level of cooperation with the IRS, the fact that they took steps to conceal income and assets and failed to report a substantial amount of income over a number of years. Not too surprisingly, the Tax Court found the couple liable for the penalty for fraudulent failure to file.

Cite: Rey E. Mason, T.C. Memo 2004-247

Shift to deficit reduction from tax reform is seen

Panelists at a recent forum sponsored by the Brookings Institution, a Washington-based think tank, listened to predictions that an impending stock market crash or further devaluation of the dollar would force the Bush administration to act to reduce the deficit, thereby pushing tax reform to the back burner.

Bruce Bartlett, a senior fellow for the National Center for Policy Analysis a non-partisan public-policy-research organization in Washington, said that he expects to see a shift in policy focus from tax reform to deficit reduction, stemming from a market crash or similar event.

Mr. Bartlett also suggested that lawmakers could use such an occurrence as an opportunity to fix ''glaring'' problems with the tax code.

In addition to this fairly dim assessment of the prospects for fundamental tax reform, the American Bar Association Section on Taxation is asking lawmakers to repeal or modify the alternative minimum tax.

Claiming that the AMT no longer serves the purpose for which it was originally intended, the group asked that it be repealed or modified to be more in line with its original purpose of applying to high-income taxpayers.

The ABA tax section said the AMT has over time become more of a burden to middle-income taxpayers because Congress has ''(1) added AMT adjustments and preferences, (2) failed to index the AMT exemption for inflation; and (3) decreased income tax rates, thus reducing regular income tax liabilities.''

The ABA tax section also commented on the corporate AMT, saying that it causes problems for struggling or non-high-income companies similar to the problems that face middle-income individuals under the AMT.

Both Mr. Bartlett and William G. Gale, a Brookings senior fellow, expressed skepticism about President Bush's plan to create a tax reform commission.

Mr. Bartlett said the commission represents the ''earliest possible stages'' of the tax reform effort, and ''pie-in-the-sky ridiculous reform ideas,'' such as a national retail sales tax, have gained support because real tax reform efforts haven't begun.

Mr. Gale said that making the Bush tax cuts permanent was the key issue for lawmakers right now. However, the administration has yet to propose a way to pay for that permanence.

FASB to clarify standard for booking tax benefits

The Financial Accounting Standards Board in Norwalk, Conn., reportedly will soon issue a proposal that will clarify when companies can book tax benefits on financial statements.

The new rule is designed to prevent companies from recognizing a tax benefit unless they have a ''probable level of confidence'' that the benefit will withstand scrutiny by the IRS.

The standards board apparently believes the change would reduce a company's ability to use the tax rules to inappropriately inflate earnings on their financial statements and mislead shareholders, thus helping to avoid a repeat of future Enron-style abuses.

Although expected to encounter resistance from the business community, the new FASB guidelines will improve financial accounting standards.