TaxProf Blog

IRS: Defective Chinese Drywall May Qualify for Casualty Loss Deduction

The IRS has sent this letter to Sen. Jim Webb (D-VA), explaining that homeowners may be able to deduct losses caused by defective Chinese drywall as casualty losses under  § 165(c)(3):

[Y]our constituents['] ... homes were constructed with Chinese drywall. The constituents said that Chinese drywall emits putrid smell and gas causing various health problems, as well as extreme and unusual corrosion of pipes, air conditioning coils, and electrical appliances. They indicated that these problems arose soon after construction of the homes, with the result that the homes are uninhabitable. ...

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, and unusual.  Damage or loss resulting from progressive deterioration of property through a steady operating cause is not a casualty loss. ...

The EPA and the Consumer Product Safety Commission are investigating the reported problems with Chinese drywall. If it is determined that Chinese drywall emits an unusual or severe concentration of chemical fumes that causes the extreme and unusual damage you describe, affected taxpayers can qualify for a casualty loss deduction.

• Fox News Orlando
• Sarasota Herald-Tribune
• The Virginian-Pilot
• Web CPA

IRS Not Pursuing 18% of Taxpayers Who Owe >$1m in Taxes

The Treasury Inspector General for Tax Administration has released a report, Collection Actions Could Be Accelerated on Some Large Dollar Balance Due Accounts (2009-30-090):

On December 22, 2007, there were 2,454 individual taxpayers in the IRS’ potentially collectible inventory who each owed more than $1 million in taxes, penalties, and interest. While the vast majority of these individuals (2,006 of 2,454) were being actively pursued for collection, we identified 448 accounts totaling approximately $1.2 billion that were in the Queue1 (357 accounts) or that had been shelved (91 accounts).

• Web CPA:  IRS Overlooks Hundreds of Big Overdue Accounts

Treasury Department Releases Updated Tax Gap Report

The Treasury Department yesterday delivered an Update on Reducing the Federal Tax Gap and Improving Voluntary Compliance to Senate Finance Committee Chair Max Baucus:

Building on reports previously released, this report is intended to provide a comprehensive overview of efforts to close the tax gap. This report is also intended to serve as a baseline for further work and discussion. After briefly discussing the nature and scope of the tax gap, this report summarizes previous Treasury and IRS tax gap reports and identifies the areas of strategic priority detailed in those reports. This report then summarizes the achievements, ongoing efforts, and new initiatives for achieving progress in each of those areas of strategic priority, organized according to the components of the strategy to reduce the tax gap detailed in prior reports.

As this report will make clear, the IRS and Treasury, working with Congress, are pursuing a wide range of initiatives, including a series of legislative proposals included in the Administration’s FY 2010 budget. The Administration recognizes the particular value of those efforts and initiatives that improve voluntary compliance by making the tax filing process easier and more taxpayer-friendly. While aggressive enforcement activity can also help to narrow the tax gap, it is important to recognize that increased enforcement efforts require certain trade-offs. The Administration is committed to working closely with Congress to strike an appropriate balance to maximize revenue collection without imposing unreasonable compliance and enforcement burdens on the vast majority of individuals and businesses that fully and willingly pay what they owe.

• Senate Finance Commitee Press Release

2009 IRS Research Conference Concludes Today at Georgetown

The 2009 IRS Research Conference concludes today at Georgetown.  A list of today's panels, speakers and papers is here and below the fold:

Issues Affecting High-Wealth Individuals

• Moderator:  Anne Parker (Small Business/Self-Employed, IRS)
• Kevin Moore (Board of Governors, Federal Reserve), Barry Johnson & Lisa Schreiber (both of Research, Analysis, and Statistics, IRS), The Income-Wealth Paradox: Connections Between Realized Income and Wealth Among America’s Aging Top Wealth-Holders
• Joshua D. Blank (Rutgers), Overcoming Overdisclosure: Toward Tax Shelter Detection, 56 UCLA L. Rev. ___ (2009) 
• Rahul Tikekar, Kay Wolman & Larry May (all of Research, Analysis, and Statistics, IRS), GraphQuery: A Tool To Detect Patterns of Abusive Tax Transactions
• Discussant: Len Burman (The Urban Institute)

Tax Preparation Services

• Moderator: Chris Hess (Research, Analysis, and Statistics, IRS)
• Elaine Doyle (University of Limerick), Jane Frecknall Hughes (Open University Business School) & Barbara Summers (Leeds University Business School), Cognitive Ethical Reasoning of Tax Practitioners: A Preliminary Investigation Using a Tax-Specific Version of the Defining Issues Test (DIT)
• Leslie Book (Villanova), Increasing Preparer Responsibility, Visibility, and Competence
• Pete Webb (Pacific Consulting Group), Ben Shackleford (Wage & Investment, IRS), Peter Morris (VMN Group) & Chuck Feinstein (VMN Group), Taxpayer Value Model: Incorporating Taxpayer Perspective To Improve Service Interactions
• Discussant: Nina Olson (National Taxpayer Advocate, IRS)

2009 IRS Research Conference Kicks Off Today at Georgetown

The two-day 2009 IRS Research Conference kicks off today at Georgetown.  A list of today's panels, speakers and papers is here and below the fold:

Is There a Gap in the Tax Gap Estimates?

• Moderator:  Mark J. Mazur (Director of Research, Analysis, and Statistics, IRS)
• Edward Emblom (Research, Analysis, and Statistics, IRS)
• Marsha Blumenthal (University of St. Thomas)
• Lawrence B. Gibbs (Miller & Chevalier)

Tax Systems and Taxpayer Behavior

• Moderator:  Don McPartland (Large & Mid-Size Business, IRS)
• Leslie Robinson (Dartmouth) & Joel Slemrod (Michigan), Measuring the Impact of Tax Systems on Economic Behavior Using New Cross-Country Data
• Attah Boame (Canada Revenue Agency), A Panel Analysis of Behavior Change in Canadian Individual Income Tax Compliance
• Peter Jelfs (Mazars) & Andrew Lymer (University of Birmingham), Would the Principles of "Flat Tax" Lead to Simplification of the U.K. Corporate Tax System and How Would Taxpayers Respond? Evidence from the Recent Changes to Capital Gains Tax
• Discussant:  Pamela Olson (Skadden)

The Tax Behavior of Corporations

• Moderator: David Stanley (Large & Mid-Size Business, IRS)
• Drew Johns (Research, Analysis, and Statistics, IRS), Preliminary Results of the 2003/2004 National Research Program S Corporation Underreporting Study
• Ho Jin Lee (Chief Counsel, IRS), Sangjik Lee (Hankuk University) & Akinori Tomohara (Aoyama Gakuin University), Does FIN 48 Benefit Tax Authorities Through Increase in Taxpayer Compliance?
• Judith Freedman, Geoff rey Loomer & John Vella (all of Oxford University), Analyzing the Enhanced Relationship Between Corporate Taxpayers and Revenue Authorities: A United Kingdom Case Study
• Discussant: George Plesko (University of Connecticut)

Measuring and Facilitating Low-Income Tax Benefits

• Moderator:  Martha Eller Gangi (Research, Analysis, and Statistics, IRS)
• Amy O’Hara (U.S. Census Bureau) & Dean Plueger (Wage & Investment, IRS), TY2005 Earned Income Tax Credit Participation Rate
• Deena Ackerman (Office of Tax Analysis, U.S. Treasury Department), Janet Holtzblatt (Congressional Budget Office) & Karen Masken (Research, Analysis, and Statistics, IRS), The Pattern of EITC Claims Over Time: A Panel Data Analysis
• Bárbara J. Robles (Arizona State), A Tax Education and Asset Building Campaign for Low- Income and Limited-English Worker Populations: Lessons from Four States, TY 2004-TY 2007
• Discussant: Janet McCubbin (AARP Public Policy Institute)

The Liaison Capitol Hill

• Sandy Lin & Leann Weyl (both of Research, Analysis, and Statistics, IRS), The Marginal Impact of the 2008 Economic Stimulus Payments on Filing Behavior
• Althea Fulton & Kirsten Davis (both of Wage & Investment, IRS), 2008 W&I Tax Professionals’ Survey
• Terry Nuriddin, Mary Jezek & Mario Fernandez (all of Research, Analysis, and Statistics, IRS), Getting To Know U.S. Taxpayers: Selected Tax Data, by Occupation and Industry, Tax Years 2003-2005
• Lisa Schreiber & Lisa Russ (both of Research, Analysis, and Statistics, IRS), Have It Your Way: The Power of Customizable Data Dissemination Using SOI’s Dynamic Tables Application

IRS Oversight Board Recommends IRS Funding Increase

The IRS Oversight Board yesterday released its FY2010 IRS Budget Recommendation Special Report.  From the press release:

The IRS Oversight Board recommends an FY2010 IRS budget of $12.489 billion, an increase of $966 million over the enacted FY2009 amount of $11.523 billion. This recommendation is $363 million above the President’s request of $12.126 billion.

As the Board stated in its 2008 Annual Report to Congress, our tax administration system has two serious weaknesses, the $290 billion tax gap and the archaic nature of IRS information systems. As a result, the Board recommends that strengthening the system be a national priority.

GAO: IRS Should Reevaluate Tax Penalties

The Government Accountability Office today released IRS Should Evaluate Penalties and Develop a Plan to Focus Its Efforts (GAO-09-567):

Why GAO Did This Study:

Civil tax penalties are an important tool for encouraging compliance with tax laws. It is important that the IRS administers penalties properly and determines the effectiveness of penalties in encouraging compliance.

In response to a congressional request, GAO determined (1) whether IRS is evaluating penalties in a manner that supports sound penalty administration and voluntary compliance and, if not, how IRS may be able to do so, and (2) whether IRS’s guidance for a new penalty for failure to disclose reportable transactions was issued in a timely manner and was useful to affected parties, and whether and how IRS has assessed the penalty. GAO reviewed IRS documents and guidance, and interviewed IRS officials and tax practitioners.

What GAO Recommends:  

The Commissioner of Internal Revenue should direct the Office of Servicewide Penalties (OSP) to evaluate penalty administration and penalties’ effect on voluntary compliance and develop a plan to focus its efforts. The Commissioner also should use IRS’s standard outreach methods to again alert taxpayers of the need to disclose reportable loss transactions.

In commenting on a draft of this report, IRS concurred with GAO’s recommendations, and summarized the actions it plans to take.

Senate Finance Committee Ranking Member comments here.

SOI Releases Two New Studies

The IRS's Statistics of Income Division yesterday released Tax Stats 2009-14, with two new studies:

• International Boycott Study, 2005-2006
• Foreign Tax Credit Study, 2005

National Taxpayer Advocate Releases Mid-Year Report to Congress

National Taxpayer Advocate Nina E. Olson submitted her Mid-Year Report to Congress that identifies the priority issues the Office of the Taxpayer Advocate will address in the coming fiscal year.  From the IRS press release:

Among the key areas of focus will be working with the IRS to improve taxpayer services, enhancing IRS oversight of federal tax return preparers, improving the accessibility of the offer in compromise program, and working with the IRS to improve its ability to administer refundable tax credits effectively.

The report notes that FY 2010 will mark the ten-year anniversary of the Taxpayer Advocate Service, which began operations in March of 2000. “As TAS enters its tenth year, both TAS and the IRS face a difficult environment for achieving what is, in essence, the same mission – ensuring that the IRS treats taxpayers fairly and identifying ways to increase voluntary compliance while addressing noncompliance,” Olson said. She identified the collection of tax revenue at a time when “increasing numbers of taxpayers have difficulty paying their daily living expenses” as a principal challenge.

The Advocate’s report, which is required by law, sets out the objectives of the Office of the Taxpayer Advocate for the upcoming fiscal year and provides substantive analysis of issues and statistical information. Among the areas the report identifies for particular emphasis in FY 2010 are the following:

1. Taxpayer Services
2. Oversight of Tax Return Preparers
3. Offers in Compromise
4. Refundable Tax Credits

IRS Updates FAQ For Individuals With Offshore Accounts

The IRS has updated its 30-question FAQ by adding 21 new questions for individuals with unreported income relating to offshore transactions who want to voluntarily disclose the information to the IRS. (Hat Tip: Peter Lagonowicz.)

GAO Recommends Improvements to IRS Internal Controls

The Government Accountability Office yesterday issued a management report recommending sixteen improvements to the IRS's internal controls:

The purpose of this report is to discuss issues identified during our audit of IRS’s financial statements as of, and for the fiscal year ending, September 30, 2008, regarding internal controls that could be improved for which we currently do not have a specific recommendation outstanding. Although not all of these issues were discussed in our report on the results of our fiscal year 2008 financial statement audit, they all warrant IRS management’s attention. This report contains 16 recommendations that we are proposing IRS implement to improve its internal controls. We will issue a separate report on the implementation status of recommendations from our prior IRS financial audits and related financial management reports, including this one. We conducted our audit in accordance with U.S. generally accepted government auditing standards.

IRS Releases 2009 Form 1040

 

IRS Electronic Advisory Committee Presents Annual Report to Congress

The IRS Electronic Advisory Committee (ETAAC) today presented its 2009 Annual Report to Congress:

ETAAC 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.

1. Congress should enable the IRS to require preparers to e-file.
2. Congress should fund, and the IRS should complete, the “four pillars” of its Modernization Program.
3. The Data Strategy project should be comprehensive.
4. The IRS should modernize preparer e-services.
5. The Electronic Services Strategy should be an enterprise priority.
6. The IRS and industry should collaborate on tax software standards.
7. The IRS should rebrand e-file.
8. The IRS should develop an operational process for e-file rejects.
9. The IRS should renew the Free File Alliance agreement.
10. The IRS should ease the signature burden for information return sharing.

Trends in Tax Compliance

The Treasury Inspector General for Tax Administration today released its annual compliance report, Trends in Compliance Activities Through Fiscal Year 2008:

This report presents the results of our review to provide statistical information and trend analyses of the data for Collection and Examination functions activities. We conduct this review each year . ...

After several years of improved results, many Collection function activities and results declined during FY 2008. However, the results are still significantly higher than those during the years immediately following the implementation of the RRA 98. ...  The Collection function collected almost 12% less than in FY 2007, and the number of taxpayers (981,317) and the amount owed ($43.2 billion) on accounts in the Queue were each at a 10-year high. During FY 2008, the amount owed increased by 24%. ...

During FY 2008, the overall percentage of tax returns examined decreased by almost 3% ...  In FY 2008, the number of corporate tax returns examined increased by approximately 1%, after increasing 4% in FY 2007. However, the number of corporate returns examined has decreased almost 23% since FY 1999. ... The number of tax returns examined for small corporations (those with assets of less than $10 million) increased by almost 3%, while the number of returns examined for large corporations (those with assets of $10 million and greater) decreased by approximately 2%. The dollar yield per hour increased by almost 5% in FY 2008.

 

 
 

New Details Emerge of Scientology-IRS Settlement

One of the enduring tax mysteries is the 26-year battle between the Church of Scientology and the IRS (documented here), culminating in a 1993 settlement (during Fred Goldberg's stint as Commissioner) in which the IRS agreed to grant tax exempt status to the church (Rev. Rul. 93-73, 1993-2 C.B. 75) , which in turn agreed to drop its multi-front litigation "war" against the IRS.  Yesterday's St. Petersburg Times began a three-part special report on the church, with Part 1 including details of the Scientology-IRS settlement (today's Part 2 is here):

Scientology vs. the IRS

By the late 1980s, the battle with the IRS had quieted from the wild days of break-ins and indictments. But Miscavige was no less intent on getting back the church's tax exemption, which he thought would legitimize Scientology.

The new strategy, according to Rathbun: Overwhelm the IRS. Force mistakes.

The church filed about 200 lawsuits against the IRS, seeking documents to prove IRS harassment and challenging the agency's refusal to grant tax exemptions to church entities.

Some 2,300 individual Scientologists also sued the agency, demanding tax deductions for their contributions.

"Before you knew it, these simple little cookie-cutter suits … became full-blown legal cases," Rathbun said.

Washington-based attorney William C. Walsh, who is now helping the church rebut the defectors claims, shepherded many of those cases. "We wanted to get to the bottom of what we felt was discrimination,'' he said. "And we got a lot of documents, evidence that proved it.''

"It's fair to say that when we started, there was a lot of distrust on both sides and suspicion,'' Walsh said. "We had to dispel that and prove who we were and what kind of people we were.''

Yingling teamed with Walsh, Miscavige and Rathbun on the case. She said the IRS investigation of Miscavige resulted in a file thicker than the FBI's file on Dr. Martin Luther King. "I mean it was insane,'' she said.

The church ratcheted up the pressure with a relentless campaign against the IRS.

Armed with IRS records obtained under the Freedom of Information Act, Scientology's magazine, Freedom, featured stories on alleged IRS abuses: lavish retreats on the taxpayers' dime; setting quotas on audits of individual Scientologists; targeting small businesses for audits while politically connected corporations were overlooked.

Scientologists distributed the magazine on the front steps of the IRS building in Washington.

A group called the National Coalition of IRS Whistleblowers waged its own campaign. Unbeknownst to many, it was quietly created and financed by Scientology.

It was a grinding war, with Scientology willing to spend whatever it took to best the federal agency. "I didn't even think about money,'' Rathbun said. "We did whatever we needed to do.''

They also knew the other side was hurting. A memo obtained by the church said the Scientology lawsuits had tapped the IRS's litigation budget before the year was up.

The church used other documents it got from the IRS against the agency.

In one, the Department of Justice scolded the IRS for taking indefensible positions in court cases against Scientology. The department said it feared being "sucked down" with the IRS and tarnished.

Another memo documented a conference of 20 IRS officials in the 1970s. They were trying to figure out how to respond to a judge's ruling that Scientology met the agency's definition of a religion. The IRS' solution? They talked about changing the definition.

Rathbun calls it the "Final Solution" conference, a meeting that demonstrated the IRS bias against Scientology. "We used that (memo) I don't know how many times on them," he said.

By 1991, Miscavige had grown impatient with the legal tussle. He was confident he could personally persuade the IRS to bend. That October, he and Rathbun walked into IRS headquarters in Washington and asked to meet with IRS Commissioner Fred Goldberg. They had no appointment.

Goldberg, who did not respond to interview requests for this story, did not see them that day, but he met with them a week later.

Rathbun says that contrary to rumor, no bribes were paid, no extortion used. It was round-the-clock preparation and persistence — plus thousands of lawsuits, hard-hitting magazine articles and full-page ads in USA Today criticizing the IRS.

"That was enough," Rathbun said. "You didn't need blackmail."

He and Miscavige prepped incessantly for their meeting. "I'm sitting there with three banker's boxes of documents. He (Miscavige) has this 20-page speech to deliver to these guys. And for every sentence, I've got two folders'' of backup.

Miscavige presented the argument that Scientology is a bona fide religion — then offered an olive branch.

Rathbun recalls the gist of the leader's words to the IRS:

Look, we can just turn this off. This isn't the purpose of the church. We're just trying to defend ourselves. And this is the way we defend. We aggressively defend. If we can sit down and actually deal with the merits, get to what we feel we are actually entitled to, this all could be gone.

The two sides took a break.

Rathbun remembered: "Out in the hallway, Goldberg comes up to me because he sees I'm the right-hand guy. He goes: 'Does he mean it? We can really turn it off?' ''

"And I said,'' turning his hand for effect, " 'Like a faucet.' ''

The two sides started talks. Yingling said she warned church leaders to steel themselves, counseling that they answer every question, no matter how offensive.

Agents asked some doozies: about LSD initiation rituals, whether members were shot when they got out of line and about training terrorists in Mexico. "We answered everything,'' Yingling said, crediting Miscavige for insisting the church be open, honest and cooperative.

The back and forth lasted two years and resulted in this agreement: The church paid $12.5 million. The IRS dropped its criminal investigations. All pending cases were dropped.

On Oct. 8, 1993, some 10,000 church members gathered in the Los Angeles Sports Arena to celebrate the leader's announcement: The IRS had restored the church's tax exemption, legitimizing Scientology as a church, not a for-profit operation.

"The war is over," Miscavige told the crowd. "This means everything.''

For a recent example of the continuing impact of the Scientology settlement on the administration of the tax law, see 9th Circuit: Parents Cannot Deduct Payments to Their Children's Religious Schools (12/13/08).  For additional commentary on the IRS and Scientology, see:

• Gregg Polsky, Can Treasury Overrule the Supreme Court?, 84 B.U. L. Rev. 185 (2004).
• Alison H. Eaton, Comment, Can the IRS Overrule the Supreme Court, 45 Emory L.J. 987 (1996).

IRS Bails on Proposal to Tax Employee Cell Phone Use

Following up on my prior posts (here, here, and here):  the IRS today issued a statement bailing on last week's issuance of Notice 2009-46, which proposed three alternative methods for taxing an employee's personal use of an  employer-provided cell phone:

This month, the IRS asked for comments on ways to simplify compliance with rules related to employer-provided cellular telephones. The current law, which has been on the books for many years, is burdensome, poorly understood by taxpayers, and difficult for the IRS to administer consistently. Some have incorrectly implied that the IRS is "cracking down" on employee use of employer-provided cell phones. To the contrary, the IRS is attempting to simplify the rules and eliminate uncertainty for businesses and individuals.

Although some of the proposed changes would add clarity, the current law will inevitably leave widespread confusion among employees and businesses. Therefore, Secretary Geithner and I ask that Congress act to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers. The passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete.

Why Are Tax Forms Blue?

From Web CPA:

Changes should be made in the layout and typeface of 1040 individual tax forms, including more use of boldface, colors and explanations, to help reduce taxpayer errors, recommends a new government report. The Treasury Department’s Inspector General for Tax Administration noted in the report that each year, the IRS sends out more than 7 million math error notices informing taxpayers of mistakes in their tax returns. More than 2.3 million of those errors could have resulted from unclear or inadequate forms, TIGTA noted. An analysis of taxpayer errors on 2005 tax returns identified three areas where modifying the 1040 and its instructions could reduce errors. These included errors made computing the deduction for personal tax exemptions; the omission of dependent Social Security numbers or Individual Taxpayer Identification Numbers; and children claimed for the Child Tax Credit who exceeded the age limit. ...

TIGTA also recommended that the IRS seek congressional approval to use additional colors on tax returns and instructions to highlight important warnings and information. Congressional approval would be needed because the IRS used multiple colors on the cover of of its 1995 tax packet and received some negative publicity. After that happened, Congress mandated in the Treasury Department Appropriations Act of 1997 that the IRS could use only two ink colors on tax packages. ...

The IRS did not comment on the color recommendation, but noted that matters of tax policy are within the jurisdiction of the Treasury Department's Office of Tax Policy, and a copy of the report will be forwarded to that office. However, IRS management agreed to conduct a review of where it could more effectively use shading, bolding, and other changes such as font sizes on the 1040 to highlight the most important areas.

IRS Not Backing Down From Push to Tax Employee Cell Phone Use

Following up on my prior posts (here and here):  today's Wall Street Journal editorializes against the IRS's recent notice on taxing employee cell phone usage: The IRS Phones Home:  What's Next, a Tax on Each Sip of Office Coffee?:

The IRS believes that some percentage of the costs incurred by employees using company-provided wireless devices should count as a "fringe benefit" and thus be subject to taxation. Since workers inevitably end up taking personal calls or emails, the thinking goes, it's only fair that they pay for the privilege. What's next? Maybe a per-cup tax on office coffee, or targeting furtive visits to ESPN or Hulu on the office PC? As one wag put it on the Journal's Web site, "It's like charging for the use of the company washroom." ...

The political class may come to regret stepping into this minefield, however, and not only because this is precisely the sort of common non-sense that incites tax revolts. It's one thing if the next Tom Daschle forgets to pay taxes on his company chauffeur. But it'll be quite another if the next nominee goes down for taking too many personal calls without giving the government its due.

But the Wall Street Journal also reports that IRS Defends Tax Proposal for Employer-Issued Mobile Phones, by Martin Vaughan:

The IRS defended its proposals to enforce a law that taxes personal use of employer-provided cellphones, saying the changes are aimed at helping businesses comply, not taxing individuals. ...

A senior IRS official Friday said the agency is more concerned about making sure employers deduct the correct amounts for cellphone equipment and services provided to employees, than it is about taxing those employees on benefits. ... Marianna Dyson, a lawyer at Miller and Chevalier who specializes in the taxation of employee benefits, said that as a practical matter, the IRS proposals would affect both the business and the employee.

For instance, if IRS implemented its proposal to limit business deductions to 75% of the value of the employer-provided cellphones, and deem the rest personal use, the remaining 25% would have to be counted in an employee's gross income. That would trigger both income tax and payroll tax withholding requirements on the employee's wages. "If they decide 25% is personal use, guess what? It is a wage, and you have to withhold on it," Ms. Dyson said. "For IRS to suggest this would have no impact on employees, is a little disingenuous."

See also:

• CNN
• The Heritage Foundation
• Web CPA.

WSJ: IRS Targets Employer-Provided Cell Phones

Following up on Tuesday's post, today's Wall Street Journal has a front-page story, Tax Man's Target: The Mobile Phone:

The use of company-issued mobile phones could trigger new federal income taxes on millions of Americans as a "fringe benefit."

The IRS proposed employers assign 25% of an employee's annual phone expenses as a taxable benefit. Under that scenario, a worker in the 28% tax bracket, whose wireless device costs the company $1,500 a year, could see $105 in additional federal income tax.

The IRS, in a notice issued this week, said employees could avoid tax liability if they showed proof they used personal cellphones for nonbusiness calls during work hours. The agency also could decide on a set number of phone minutes as "minimal personal use" that would be untaxed. ...

The IRS move, which is spurring efforts by the wireless industry and others to kill the idea, would mark a stricter enforcement of an existing rule that classifies employer-provided cellphones as a taxable benefit, rather than a 24-hour-a-day work tool. ...

Wireless companies also argue the IRS rule is outdated. Rates have declined so dramatically in the past decade -- with night and weekend calls free under many plans -- that it makes little sense for the IRS to assess employee benefits by nickels and dimes. "This is a regulation from a bygone time, dating back to the infancy of the cellphone business, and it is in desperate need of updating," said Howard Woolley, a senior vice president with Verizon Wireless. ...

Such companies as Verizon and Sprint Nextel Corp. are backing congressional proposals to repeal the tax. They are supported by local government, education and farm groups. ...

The 1989 law requires that company-provided wireless services be included in a worker's gross income -- unless the employee keeps detailed records showing the device was used only for work. Following one IRS audit, the University of California system owed additional payroll taxes because it couldn't substantiate that employees' cellphone use was solely work-related.

   

• National Review:  IRS Weighs Rules for Taxing Private Use of Work Cellphones
• Washington Post:  IRS Seeks to Simplify Workers' Cellphone Tax Law

Of course, computers are also listed property under § 280F, so one wonders whether the IRS next will target employees' personal use of computers provided by their employers.

IRS Extends Tax Break for New Car Purchases to Residents of States Without Sales Taxes

The IRS announced today (IR-2009-60) that the special deduction for sales taxes on a new car purchased in 2009 (after February 16) also extends to taxpayers in those states without a sales tax -- Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon.  Taxpayers in these states who purchase a new car in 2009 can deduct other fees and taxes imposed by the state or local government. According to the IRS, Congress intended for these fees or taxes to qualify for this special tax deduction.

The deduction is available even if the taxpayer does not itemize deductions.  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. The amount of the deduction is phased out for taxpayers whose AGI is $125,000- $135,000 (single) and $250,000-$260,000 (married filing jointly).

Apple Announces New iPhone; IRS to Let Your Employer Give You One Tax-Free

Apple yesterday announced its new iPhone 3G S.  Also yesterday, the IRS announced that it was considering new rules that would allow your employer to give you one on a tax-free basis.

I previously blogged the draconian rule of § 280F that employers must include in an employee's W-2 income the value of employer-provided cell phones unless the employee satisfies onerous substantiation rules. Over the past few years, the IRS has increasingly raised this issue on audit, with the result that many employers, including universities, responded by no longer providing cell phones to employees (including professors).

In Notice 2009-46, the IRS requested comments on three alternative methods to simplify the substantiation rules for employer-provided cell phones:

• Minimal Personal Use Method
  • The entire amount of an employee’s use of an employer-provided cell phone would be deemed to be for business purposes if the employee can account to his or her employer with sufficient records to establish that the employee maintains and uses a personal (non-employer-provided) cell phone for personal purposes during the employee’s work hours.  
  • Alternatively, the second proposal would define a specified amount or type of “minimal” personal use that would be disregarded in determining the amount of personal use of an employer-provided cell phone. For example, “minimal” could be defined by reference to a particular number of minutes of use or for certain personal purposes. 
• Safe Harbor Substantiation Method.  The IRS and Treasury Department are considering a safe harbor method under which 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. For this proposal, the IRS and Treasury Department propose a business use percentage of 75 percent.
• Statistical Sampling Method.  The IRS and Treasury Department are considering a proposal that would allow employers to use statistical sampling techniques to measure an employee’s personal use of an employer-provided cell phone. In general, an employer could use an approved statistical sampling methodology similar to that provided in Rev. Proc. 2004–29, 2004–1 C.B. 918, to determine the percentage of personal use of employer-provided cell phones. 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.

Press and blogosphere coverage:

• Inside Higher Ed
• Journal of Accountancy
• Roth & Co.

Prior TaxProf Blog posts:

• Bill Would Liberalize Tax Treatment of Employer-Provided Cell Phones (2/15/08)
• Proposed Bill Would Allow Tax-Free Employee Cell-Phone Use (8/5/08)
• More on the Tax Treatment of Employer-Provided Cell Phones (8/15/08)
• University-Provided Laptops and Cell Phones Are Taxable to Faculty (1/22/09)

IRS to Close Tax Gap by Licensing Tax Preparers

• IR-2009-57, IRS Launches Tax Return Preparer Review; Recommendations to Improve Compliance Expected by Year End
• Associated Press, IRS to Seek More Regulation of Tax Preparers
• Bloomberg, IRS May License Tax Preparers to Help Close "Tax Gap"
• Reuters, IRS Mulls Oversight of Tax Preparers
• Wall Street Journal, IRS To Propose New Standards For Tax Preparers By Year-End
• Washington Times, IRS Considers Regulating Tax Preparers

TIGTA Releases Semi-Annual Report to Congress

The Treasury Inspector General for Tax Administration has released its semi-annual report to Congress:

January 2009 marked the ten-year anniversary of TIGTA’s stand-up as an independent organization. In July of 1998, Congress approved and the President signed into law the IRS Restructuring and Reform Act (RRA 98). In January 1999, TIGTA became operational as a newly formed Office of Inspector General with oversight authority of the IRS. Over the past decade, TIGTA has:

• Issued more than 1,600 final audit reports and made more than 4,000 recommendations to improve tax administration, 3,500 of which the IRS has taken action;
• Identified more than $25 billion in funds that could have been put to better use and $192 million in questioned costs;
• Processed more than 91,684 complaints;
• Opened 44,373 investigations and successfully closed more than 99 percent of those cases; and
• Provided testimony to Congress on 36 occasions.

NY Times: Will BOA Deal Usher in New "Synthetic Consolidation" Tax Shelter?

New York Times:  A Shelter That Could Start a Stampede, by Gretchen Morgenson:

If the Treasury is ever to replenish its coffers, increased tax receipts will be sorely needed. But these inflows could be reduced if an unusual tax-avoidance transaction — set up to allow losses at one company to offset profits at another — gains acceptance throughout corporate America.

Given the potential tax benefits associated with the strategy (and given the enormous losses that have been generated across industries in recent years), the popularity of the maneuver is almost certain. At least that’s the view of Robert Willens, an authority on taxes and accounting, who spent decades at Lehman Brothers and now runs his own shop in New York.

In an article [Synthetic Consolidation: Tne Next Big Thing, 123 Tax Notes 1013 (May 25, 2009)] that was published last week in Tax Notes, a well-regarded publication devoted to tax policy and analysis, Mr. Willens examined a deal that Bank of America completed for a unit of Fairfax Financial Holdings, a Canadian insurance company, and the Odyssey Re Holdings Corporation, a writer of property and casualty reinsurance that had been spun out of Fairfax in 2001.

The complex structure allowed Odyssey to avoid paying taxes on some of its profits by shifting those earnings onto Fairfax’s books. Fairfax had weathered nearly $1 billion in losses accumulated during a previous downturn in the insurance market. So it had losses it could use to offset the Odyssey profits coming onto its books. And the shift saved Odyssey an estimated $400 million in taxes.

The debate over the tax structure is contentious. Fairfax says that the IRS signed off on it and that the company has done nothing untoward. It also disputes Mr. Willens’s impartiality in questioning the transaction, citing his work as a paid consultant for a hedge fund that has targeted Fairfax.

Under tax rules, offsetting losses against gains can occur only among companies operating within the same parent corporation and filing a consolidated income tax return. Therefore, a company hoping to shelter another’s earnings with its own losses must acquire at least 80% of the shares in that profitable enterprise. From a tax standpoint, a stake below 80% would mean the companies wouldn’t be affiliates.

The particulars of the Fairfax deal are as follows: Before the Fairfax-Odyssey transaction, which was created in March 2003 and unwound in August 2006, Fairfax held 73.8% of Odyssey’s shares. To meet the consolidation threshold, Fairfax had to buy 4.3 million additional Odyssey shares. At the time, that required an investment by Fairfax of around $78 million.

But instead of paying cash for the shares, Fairfax struck a deal with Bank of America, its longtime banker, and issued debt to the bank in exchange for the stock. Fairfax issued two notes to an offshore affiliate of the bank in the amount of $78 million. The notes matured in 2010 and carried an interest rate of 3.15%, well below the rate Fairfax would have had to pay if it had issued debt publicly.

Through the affiliate, Bank of America agreed to borrow Odyssey shares from other investors and transfer them to Fairfax. Even though the Bank of America affiliate was short the shares it transferred to Fairfax, it retained several significant attributes of ownership in those shares, Mr. Willens says.

(Hat Tip: Alan Weiner.)

SOI Releases Spring 2009 SOI Bulletin

The IRS's Statistics of Income Division has released the Spring 2009 SOI Bulletin with these six articles:

• High-Income Tax Returns for 2006, by Justin Bryan
• Individual Foreign-Earned Income and Foreign Tax Credit, 2006, by Scott Hollenbeck & Maureen Keenan Kahr
• International Boycott Reports, 2005 and 2006, by Melissa Costa
• U.S. Possessions Corporation Returns, 2005, by Daniel S. Holik
• Qualified Zone Academy Bond Tax Credit Usage in 2005, by Thornton Matheson
• Individual Income Tax Returns, Preliminary Data, 2007, by Michael Strudler & Michael Parisi

In addition, the bulletin contains updated historical tables and appendices.

Garrett Withdraws Nomination for Assistant Secretary for Tax Policy

Tax Prof Elizabeth Garrett (USC) has withdrawn as President Obama's nominee to be Assistant Secretary for Tax Policy.  From Bloomberg (Garrett Withdraws as Top Tax Official in Blow to Obama Agenda):

Garrett ... said in her withdrawal statement that personal considerations “have required that I reassess my initial decision to be considered for this office.” ...  Jeff Trinca, a tax lobbyist at Van Scoyoc & Associates in Washington who became friends with Garrett when both worked on Capitol Hill, said she wasn’t willing to undergo the rigorous vetting process Obama has imposed on his nominees following the administration’s early stumbles. “The nomination process has gotten so harsh that good people like Beth are unwilling to put them and their families through the wringer,” Trinca said.

Worker Faces 10 Years in Jail for Peeing in IRS Elevator

According to this affidavit filed on Tuesday in U.S. District Court in Michigan, an IRS worker faces ten years in prison for repeatedly urinating in the elevator at the IRS Service Center in Detroit and causing $4,626.25 of "deep cleaning expense."

• Associated Press
• Detroit Free Press
• Smoking Gun
• Web CPA

Group Asks IRS to Review Liberty University's Tax-Exempt Status

Following up on Monday's post, Liberty University as Bob Jones University -- Can the IRS Strip Tax-Exempt Status for Revoking Recognition of Democratic Club?:  Americans United for Separation of Church and State today asked the IRS to review Liberty University's tax-exempt status:

• Press Release
• Letter to IRS

IRS Scraps New Web Site After Spending $19.5m

After spending two years and $19.5 million to develop its new website, the IRS has canceled the project six months before its scheduled completion date. From the Treasury Inspector General for Tax Administration, Initial Efforts to Develop a New Web-based Portal Environment Were Not Successful (2009-20-079) (May 19, 2009):

In Fiscal Year 2006, the IRS recognized the need to upgrade its existing portal environment and initiated the New Portal Implementation Project. A major concern that led to developing the new portal environment was that a significant amount of portal equipment was nearing or was at the end of its useful life expectancy. In addition, requirements from existing and planned projects that needed portal support could not be met due to technical limitations of existing equipment.

The IRS planned to complete the new portal environment by November 2008; however, in June 2008, the IRS Chief Information Officer cancelled the Project before it was completely developed. Reasons for the cancellation included the lack of a comprehensive enterprise strategy that considered industry best practices or advancements in portal technology, and budget challenges due to the significant expenditure requirements necessary to replace existing equipment. Subsequent to the Project being cancelled, the IRS hired a contractor to assist in developing an enterprise portal business strategy.

The IRS planned to launch two new projects, the My IRS Account project and a new release of the Modernized e-File project, in the new portal environment. However, because the New Portal Implementation Project was cancelled, the IRS had to expend $9.7 million for new equipment and upgrades to the existing portal capacity to operate projects dependent on the portals, including the My IRS Account and Modernized e-File projects. In addition to extraneous expenses, purchasing new equipment for portal capacity upgrades prior to development of an enterprise portal business strategy increases the risk that new equipment may not integrate with the new portal environment once it is developed.

The IRS uses the Modernization Vision and Strategy process to identify projects that need portal support. However, during our prior audit work and through recent discussions with IRS portal project personnel, we determined that the Modernization Vision and Strategy process has not yet matured to the extent that it includes all information technology projects. The IRS uses various methods to identify existing projects that require portal support, such as the Modernization Vision and Strategy Plan and Unified Work Requests; however, there is no formal process to continuously identify and evaluate future planned projects that may require portal support. As a result, the IRS currently does not have a uniform procedure to continuously identify all projects needing portal support. An interim procedure would assist portal office personnel in recognizing future needs and performing more precise portal capacity studies.

The Chief Technology Officer is re-evaluating the best approach for completing the information technology modernization program. Until final decisions on modernization emphasis are made, the enterprise portal business strategy may remain undecided.

(Hat Tip: WebCPA.)

Memorial Day Tax Resources for U.S. Armed Forces (Plus Their Families & Employers)

Continuing a TaxProf Blog Memorial Day tradition (2008, 2007, 2006, and 2005), I want to pass along links to the Tax Information for Members of the U.S. Armed Forces material maintained on the IRS web site:

The tax laws provide some special benefits for active members of the U.S. Armed Forces, including those serving in combat zones. For federal tax purposes, the U.S. Armed Forces includes officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, the Army, Navy and Air Force. The Coast Guard is also included, but not the U.S. Merchant Marine or the American Red Cross. However, these and other support personnel may qualify for certain tax deadline extensions because of their service in a combat zone.

For dozens of links to military tax resources, see below the fold.

• Economic Stimulus Payments for Military Combat Personnel
• Questions & Answers on Combat Zone Tax Provisions
  • Combat Zones (Q&A-1)
  • Military Pay Exclusion (Qs & As 2-10)
  • Extension of Deadlines (Qs & As 11-31)
  • Miscellaneous Provisions (Qs & As 32-35)
  • Employers with Employees in a Combat Zone (Qs & As 36-49)
• A Combat Zone E-mail Address for members of the Armed Forces or their families worldwide to alert the IRS that they are serving in a combat zone
• Publication 3, Armed Forces' Tax Guide (html or pdf)
  • Gross Income
  • Adjustments to Income
  • Combat Zone Exclusion
  • Alien Status
  • Sale of Home
  • Itemized Deductions
  • Credits
  • Foregiveness of Decedents' Tax Liability
  • Filing Returns
  • Extension of Deadlines
  • Deferral of Payment
  • Maximum Rate of Interest
  • How To Get Tax Help
• Rev. Rul. 2009-11:  Differential Wage Payments to Active Duty Members of the Uniformed Services
• IR-2007-46:  Free Online Tax Filing Available to Many Military Members
• IR-2006-152:  Active Duty Reservists Get Relief on Retirement Plan Payments; Refunds of 10-Percent Tax Available Back to 2001, New Law Says
• IR-2006-129:  New Law Expands IRA Options for Military; Many Can Still Contribute for 2004 and 2005
• Tax Tip 2006-39:  Reservists, Enlistees May Get Deferral for Back Taxes
• Military Family Tax Relief Act of 2003:  Tax Breaks Related to Military Service, Including Two Provisions That May Require Amended Returns
• IR-2003-132:  IRS Helps Military Personnel Get New Law's Tax Breaks
• IR-2003-63:  New Tax Scam Targets Families of Armed Forces Members
• Notice 2003-21:  Tax Relief for Those Involved in Operation Iraqi Freedom
• IR-2003-43:  Tax Assistance for Military Families; New Web Site for Armed Forces
• Fact Sheet 2003-11:  Information for Taxpayers Serving in the Armed Forces
• News Release IR-2002-18:  Tax Relief for Troops in the Afghanistan Combat Zone
• Notice 2002-17:  Tax Relief for Those Involved in Operation Enduring Freedom
• White House Commission on Remembrance, National Moment of Remembrance

For more, see Don't Mess With Taxes and Mauled Again.  The Tax Foundation criticizes these special tax benefits for military personnel in Rethinking Veterans' Tax Benefits, by Gerald Prante.

IRS Initiates Law Student Internship Program

National Law Journal: IRS Division Initiates Internship Program for Law Students:

The IRS's employee plans division, which handles review of employee pension plans, is hiring two law student interns for the first time this summer and may expand the program if all goes well. The tax agency division has hired two students from the John Marshall Law School in Chicago who have studie[d] in that area to work in its Washington office for three months this summer. The division may seek to add such interns in other offices in the future....

The students won't be paid or receive a stipend, but will get school credit. Some law interns have worked in other parts of the IRS in the past ...  The students are working in the Washington office because that's the best place for them to get exposure to whole regulatory process, from the legislative start to implementation of regulations in the field. ... The John Marshall students were tapped in part because of past faculty ties and project work between the agency and the law school's employee benefits law programs. The law school offers LL.M. and M.S. degree programs in the area.

Is Obama Ineligible to Work for the IRS?

From President Obama's Arizona State commencement address (at the 3:10 mark):

President Crowe and the Board of Regents will soon learn all about being audited by the IRS

See Pub. L. No. 105-206, § 1203, 112 Stat. 685 (1998); Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates, and Gifts ¶ 110.1.6 (“[T]he Commissioner of Internal Revenue shall terminate the employment of any employee of the Internal Revenue Service if there is a final administrative or judicial determination that such employee … threaten[ed] to audit a taxpayer for the purpose of extracting personal gain or benefit.”).

IRS Releases 2008 State Tax Data

The IRS's Statistics of Income Division has released Tax Stats 2009-12, with State Tax Data at a Glance for Fiscal Year 2008 and Revised Examination Data for Fiscal Years 2006 and 2007:

IRS Data Book – New state tables that present returns filed, gross collections and refunds issued by type of tax are now available for fiscal year 2008. These tables also present data by state for economic stimulus payments. In addition, revised examination data for individual income tax returns are also now available for fiscal years 2006 and 2007.

IRS Releases 2006 Corporate Tax Data

The IRS has published 2006 Corporate Tax Returns:

This report contains data by industry on assets, liabilities, receipts, deductions, net income, income subject to tax, tax, and credits. Data are also classified by size of total assets, by size of business receipts, and by size of income tax after credits. Other classifications include returns with net income, return types and other selected subjects. More detailed statistics for the industries shown in Table 1 of this report are available in Publication 1053, Source Book of Statistics of Income.

IRS Issues FAQ For Individuals With Offshore Accounts

The IRS yesterday released a 30-point FAQ for taxpayers with unreported income relating to offshore transactions who want to voluntarily disclose the information to the IRS:

3.  Why should I make a voluntary disclosure?

Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.

10. What if the taxpayer has already filed amended returns reporting the additional unreported income, without making a voluntary disclosure (i.e., quiet disclosure)?

The IRS is aware that some taxpayers have attempted so-called “quiet” disclosures by filing amended returns and paying any related tax and interest for previously unreported offshore income without otherwise notifying the IRS. Taxpayers who have already made “quiet” disclosures may take advantage of the penalty framework applicable to voluntary disclosure requests regarding unreported offshore accounts and entities. Those taxpayers must send previously submitted documents, including copies of amended returns, to their local CI office by September 23, 2009. (See FAQ 5).

Taxpayers are strongly encouraged to come forward under the Voluntary Disclosure Practice to make timely, accurate, and complete disclosures. Thosetaxpayers making “quiet” disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.

The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will be closely reviewing these returns to determine whether enforcement action is appropriate.

IRS Explains 2008 and 2009 AMT Changes

The IRS yesterday posted on its web site an updated list of changes made to the AMT for the 2008 and 2009 tax years.

Treasury & IRS Seek Public Comment on 2009-10 Guidance Priority List

The Treasury Department and IRS on Friday issued an advance copy of Notice 2009-43, 2009-21 I.R.B. ___ (May 26, 2009), inviting public comment on recommendations for items that should be included on the 2009-10 Guidance Priority List:

The Treasury Department's Office of Tax Policy and the Service use the Guidance Priority List each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The 2009-2010 Guidance Priority List will establish the guidance that the Treasury Department and the Service intend to issue from July 1, 2009, through June 30, 2010. The Treasury Department and the Service recognize the importance of public input to formulate a Guidance Priority List that focuses resources on guidance items that are most important to taxpayers and tax administration. Published guidance plays an important role in increasing voluntary compliance by helping to clarify ambiguous areas of the tax law. ...

In reviewing recommendations and selecting projects for inclusion on the 2009- 2010 Guidance Priority List, the Treasury Department and the Service will consider the following:

1. Whether the recommended guidance resolves significant issues relevant to many taxpayers;
2. Whether the recommended guidance promotes sound tax administration;
3. Whether the recommended guidance can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance;
4. Whether the Service can administer the recommended guidance on a uniform basis; and
5. Whether the recommended guidance reduces controversy and lessens the burden on taxpayers or the Service.

Recommendations must be submitted by May 31, 2009 for possible inclusion on the original 2009-2010 Guidance Priority List.

Retirement of Tom Petska

Tom Petska retired today after 8 years as Director of the IRS's Statistics of Income Division and 36 years of government service.  Len Burman (Director, Tax Policy Center) offers a wonderful farewell:

SOIis a national treasure. There, a team of statisticians, economists, and programmers produces the giant files of tax data that undergird the models Treasury and JCT use to make revenue estimates and assess the economic effects of tax policy options. SOI also produces volumes of helpful tables and analyses to help citizens, policymakers, and the press dig into the details of our complex tax system. (Those tables comprise the bulk of TPC’s popular Tax Factsweb module.) Finally, SOI produces public use data files that are carefully scrubbed to protect the confidentiality of taxpayer information so that outside organizations like TPC can do independent analysis of tax policies. ...

Directing the SOI is a challenge. The IRS is an enormous bureaucracy. Within that leviathan, SOI is kind of an orphan largely serving the interests of Treasury’s tax policy office, Congressional tax-writing committees, and the public. Protecting SOI’s resources from the rest of IRS, which sees its sole role as administering the tax laws, requires great tenacity and political (small p) skills. Meanwhile, SOI’s “customers” are insatiable in their demand for more and better data.

Tom has navigated that gauntlet astonishingly well, winning the respect and admiration of people within and outside the IRS. We at TPC thank him for his service and wish him all the best as he pursues new challenges and adventures.

IRS Releases Strategic Plan 2009-2013

The IRS yesterday released its Strategic Plan 2009-2013:

The Internal Revenue Service strives to maintain the fairest and most effective system of voluntary tax compliance in the world. The environment in which we operate is complex and constantly changing, and the IRS must change with it. ...

[S]tudies of international tax systems show that the U.S. tax system is extremely effective, and the IRS has a highly motivated workforce that clearly understands its mission. The IRS must continue to deliver this high level of performance both in how we serve taxpayers and in how we enforce the tax laws. The Strategic Plan 2009-2013 will guide the IRS in this work by emphasizing two overarching goals.

Our first goal is to improve service to taxpayers to make voluntary compliance easier. We will work harder to incorporate taxpayer perspectives, expedite resolution of taxpayer issues, and provide timely guidance to help all taxpayers pay their fair share of taxes. We will also strengthen our partnerships with tax practitioners, preparers, and other third parties in the system.

Our second and equally important goal is to enforce the law to ensure everyone meets their obligation to pay taxes. We will be timely in our enforcement actions and expand the approaches and tools we use in compliance activities. We will meet the challenges of globalization by improving our expertise and coordinating better with international organizations.

We need to excel at both service and enforcement to meet our mission: it isn’t an either/or proposition. To succeed, we will support these goals by investing in two strategic foundations – our people and our technology. We will strive to make the IRS the best place to work in government. We will give our people the technology they need to improve efficiency, ensure privacy and security of data, and target the highest-risk areas of tax abuse and fraud.

Major trends affecting the IRS: 2009-2013

• Increasing complexity of tax administration
• Growing human capital challenges
• Explosion in electronic data, online interactions, and related security risks
• Accelerating globalization
• Expanding role of tax practitioners and other third parties in the tax system
• Accelerating change in business models

Goal 1:  Improve service to make voluntary compliance easier

• Objective 1: Incorporate taxpayer perspectives to improve all service interactions
• Objective 2: Expedite and improve issue resolution across all interactions with taxpayers, making it easier to navigate the IRS
• Objective 3: Provide taxpayers with targeted, timely guidance and outreach
• Objective 4: Strengthen partnerships with tax practitioners, tax preparers, and other third parties in order to ensure effective tax administration

Goal 2:  Enforce the law to ensure everyone meets their obligations to pay taxes

• Objective 1: Proactively enforce the law in a timely manner while respecting taxpayer rights and minimizing taxpayer burden
• Objective 2: Expand enforcement approaches and tools
• Objective 3: Meet the challenges of international tax administration
• Objective 4: Allocate compliance resources using a data-driven approach to target existing and emerging high-risk areas
• Objective 5: Continue focused oversight of the tax-exempt sector
• Objective 6: Ensure that all tax practitioners, tax preparers, and other third parties in the tax system adhere to professional standards and follow the law

Strategic Foundations: Invest for high performance:

• Objective 1: Make the IRS the best place to work in government
• Objective 2: Build and deploy advanced information technology systems, processes, and tools to improve IRS efficiency and productivity
• Objective 3: Use data and research across the organization to make informed decisions and allocate resources
• Objective 4: Ensure the privacy and security of data and safety and security of employees

(Hat Tip: Tax Resolution University.)

SOI Releases Foreign Recipients of U.S. Income, 2006

The IRS's Statistics of Income Division has released Foreign Recipients of US Income Study, 2006 Tax Year:

Two tables that present data for tax year 2006 from Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, are now available. The tables include data on the number of returns, total income, income subject to withholding, income exempt from withholding, income by category of income and tax withheld. These data items are available by selected countries and by selected recipient types.

Low Income Taxpayer Clinic Grant Recipients

National Taxpayer Advocate Nina E. Olson announced today (IR-2009-43) that the IRS has awarded $9.5 million in matching grants to Low Income Taxpayer Clinics (LITCs) for the 2009 grant cycle (Jan. 1, 2009, through Dec. 31, 2009). Through the LITC program, the IRS awards matching grants of up to $100,000 a year to qualifying organizations. For the 2008 grant cycle, the IRS awarded LITC grants to 162 organizations representing all 50 states, plus the District of Columbia, Puerto Rico, and Guam. See the full list of grant recipients here. For a list of the 37 law school tax clinic grant recipents, and the amount of their grants, see below the fold:

• Albany ($81,643)
• American ($81,445)
• Arkansas-Little Rock ($85,485)
• Baltimore ($35,000)
• Chapman ($81,643)
• Chicago-Kent ($86,445)
• Connecticut ($81,643)
• Denver ($86,445)
• Duquesne ($72,038)
• Fordham ($91,248)
• Georgia State ($82,603)
• Gonzaga ($76,841)
• Idaho ($86,446)
• Kansas ($62,433)
• Lewis & Clark ($76,840)
• Loyola-Chicago ($71,157)
• Michigan ($48,025)
• Michigan State ($81,643)
• Minnesota ($86,446)
• Missouri-Kansas City ($86,445)
• New Mexico ($48,025)
• Northern-Kentucky ($57,630)
• Ohio State ($67,235)
• Pittsburgh ($81,643)
• Quinnipiac ($81,643)
• Rutgers-Newark ($86,445)
• San Diego ($81,643)
• South Dakota ($48,025)
• Syracuse ($86,445)
• Texas Tech ($48,026)
• University of District of Columbia ($76,840)
• Utah ($67,235)
• Valparaiso ($43,223)
• Villanova ($91,248)
• Washington (Seattle) ($91,248)
• Washington & Lee ($48,026)
• West Virginia ($25,470)

See also Publication 4134: Low Income Taxpayer Clinic List.  For a list of the law school tax clinic grant recipients for prior years, see

• 2008
• 2007

New IRS Appointments

• Steven T. Miller (B,A. Maryland, J.D. George Washington, LL.M. (Taxation), Georgetown), Commissioner of the Large and Mid-Size Business (LMSB) Division
• Sarah Hall Ingram, (B.A. Yale, J.D. Georgetown), Commissioner of the Tax Exempt and Government Entities (TEGE) Division
• Diane Ryan (B.A. & M.B.A. Southern Illinois, J.D. St. Louis), Chief of Appeals

Obama Nominates William J. Wilkins to be IRS Chief Counsel

President Obama today nominated William J. Wilkins to be Chief Counsel for the Internal Revenue Service and Assistant General Counsel in the Department of the Treasury.  From the White House press release: 

William J. Wilkins of Washington, DC has been a partner in the Tax Practice Group of Wilmer Cutler Pickering Hale and Dorr LLP (also known as WilmerHale) since 1988. He has a broad tax practice that includes counseling nonprofit organizations, business entities, and investment funds on tax compliance, business transactions, and government investigations. Prior to joining WilmerHale, Wilkins was Staff Director and Chief Counsel of the United States Senate Committee on Finance. Wilkins joined the Democratic staff of the Committee in 1981 and served as tax counsel before becoming Staff Director and Chief Counsel in 1987. Prior to joining the Finance Committee staff, Wilkins was an associate with King & Spalding in Atlanta, GA. Wilkins is Chair of the Section of Taxation of the American Bar Association, the nation’s largest association of tax lawyers. He has been active in the Section for many years, having previously served as Section Vice-Chair and as Chair of two Section Committees. He has previously served on the governing boards of the American College of Tax Counsel and the American Tax Policy Institute. Wilkins is a graduate of Yale University and Harvard Law School.

IRS Oversight Board Releases Annual Report to Congress

The IRS Oversight Board yesterday released its 2008 Annual Report to Congress:

This report has a dual focus: it evaluates the IRS’ performance during the past year, but it also looks at the IRS’ ability to meet its strategic goals in the future. While the IRS has accomplished much, it still faces several formidable challenges.

IRS Names Jonathan Forman 2009-10 Professor-in-Residence

The IRS announced today that Jonathan Forman (Oklahoma) has been selected as the 2009-2010 Professor in Residence:

Forman since 1985 has been a professor at the University of Oklahoma College of Law where he currently holds the Alfred P. Murrah Professorship. ...  Forman has written extensively about employee benefits, the federal budget and the earned income tax credit.

Prior Professors in Residence:

• 2008-09: David Hasen (Michigan; moving to Penn State)
• 2007-08: Greg D. Polsky (Florida State)
• 2007: Calvin H. Johnson (Texas)

IRS Releases 2007 Individual Income Tax Return Data

The IRS on Friday released 2007 Individual Income Tax Returns Preliminary Data:

Some highlights from the release of data from the forthcoming spring 2009 issue of the Statistics of Income Bulletin (IRS Publication 1136) shows that for tax year 2007, taxpayers filed 144.7 million individual income tax returns, an increase of 4.5% from the 138.4 million returns filed for 2006. In addition, AGI increased from the previous year by 6.9% to $8.5 trillion for 2007. Taxable income increased 6.8% to $5.9 trillion; the AMT rose 8.6% to $20.9 billion; total income tax increased by 6.5 % to $1.1 trillion; and total tax liability rose by 6.4% to $1.1 trillion.
             

Cain: In Defense of the Consensus on CCA 200911007

Pat Cain (Santa Clara) reacts to this morning's post, McMahon: In Defense of CCA 200911007:

1. I agree that spouses have always been treated as separate taxpayers (and I think they should be so treated as long s they both have income).
2. I worried about the $1M limitation and the two home limitation when the 1987 amendment was first adopted creating these limits (and by parentheticals treating a married couple filing separately as one taxpayer).
3. There is nothing in the statute that says a married couple filing jointly should be limited to $1M and only two homes.
4. However, the IRS basically ruled that way in a 2001 FSA – see until FSA 200137033..
5. The FSA seems to adopt the one limit per taxpayer rule but conclude that spouse (no matter how they file) should be treated as one taxpayer.
6. I happen to think that makes no sense.
7. I can see no reason for extending a bad rule as to jointly filing spouses to non-spouses who co-own property.
8. One possible distinction is that spouses, because of 1041, can transfer property ownership back and forth with no tax consequences and so maybe taxing their ownership costs (including mortgages) are justifiably taxed differently from non-spouses.
9. I can see no justification for telling partner A when he buys a house for more than $1 million acquisition debt that so long as he owns it alone he can deduct 100% of the interest, but if he gifts or sells a portion of it to another, he cannot – even though he is still paying interest on $1 million acq debt. (Even under the CCA analysis A could then incur additional, aggregate, acq debt on another property and deduct the interest on the new property. So if the purpose is to encourage home ownership up to $1M why should we in this instance only encourage such ownership if you acquire more than one home?)
10. We do not treat non-spouses as spouses in other provisions of the Code with spouse specific rules – that is what causes the marriage penalty/bonus problem. If you want to take away the benefit from non-spouses here, why isn’t the same argument available for other provisions that distinguish between spouses and non-spouses.
11. The provision requires a taxpayer (or taxpaying unit in the case of a joint return) to allocate interest paid to types of debt before we can determine deductibility. There is deductible business interest, partially deductible investment interest, fully deductible home mortgage interest, and non deductible home mortgage interest that is allocable to “excess” acquisition and home equity debt. Since it is the taxpayer’s payment of the interest that triggers the deduction, it seems to me that we should allocate those payments to the various types of debt and test the amount paid on excess home acq indebtedness at the taxpayer level. If the home mortgage is 1.5M and A pays interest on 2/3rds of the mortgage (because that is the agreement with his co-owner who owns only 1/3rd interest in the property) then isn’t that interest allocable to 2/3rds of the mortgage ($1M) and thus not an excess mortgage?
12. I agree the statute could have been written more clearly.
13. Bottom line, the deduction for mortgage interest is hard to justify in the first place – so it is particularly hard in this case to determine how much interest anyone should be allowed to deduct, But I can’t accept a rule that says unmarried co-owners must be treated the same as spouses (who may not even be co-owners) because of something called marriage neutrality – the Code is not based on marriage neutrality.

McMahon: In Defense of CCA 200911007

Following up on Tuesday's post, IRS Limits Home Mortgage Interest Deduction for Gay/Lesbian Couples: Martin J. McMahon, Jr. (Florida) has graciously agreed to share and expand his contribution on the TaxProf Email Discussion Group, A Dissent to the Generally Expressed Views on TaxProf Regarding CCA 200911007:

CCA 200911007 (Nov. 24, 2008; released Mar. 13, 2009) addressed the amount of interest that was deductible as “qualified residence interest” under § 163(h)(3)(A) when a residence encumbered by a purchase money mortgage of more than $1 million is co-owned by two unmarried taxpayers both of whom are obligated on the mortgage and for both of whom the residence is the principal residence. Most of the participants in the TaxProf blog debate on the rectitude of CCA 200911007 described the CCA as holding that “the $1 million limitation on the deduction of mortgage interest on acquisition indebtedness under § 163(h)(3)(B) applies on a per-mortgage basis.” Most (all ?) of you that have commented have asserted that prior to the issuance of this CCA you assumed that unmarried co-owners could each deduct mortgage interest on $1 million of acquisition indebtedness, thus permitting deduction of interest on a $2 million mortgage on a home they owned in common and that the CCA is wrong.

I dissent from both the general consensus as to the conclusion and its rectitude. I read the CCA to hold that the $1 million ceiling on “acquisition indebtedness,” as defined in § 163(h)(3)(B), applies both on a residence-by-residence basis as well as on a taxpayer-by-taxpayer basis.

The CCA’s reasoning is as follows.

Under § 163(h)(3)(B)(i), acquisition indebtedness is defined, in relevant part, as indebtedness incurred in acquiring a qualified residence of the taxpayer – not as indebtedness incurred in acquiring taxpayer’s portion of a qualified residence. The entire amount of indebtedness incurred in acquiring the qualified residence constitutes “acquisition indebtedness” under § 163(h)(3)(A)(i). In this case, the amount of indebtedness incurred in acquiring [the residence] exceeds $1,000,000. However, under § 163(h)(3)(B)(ii), the amount treated as acquisition indebtedness for purposes of the qualified residence interest deduction is limited to $1,000,000 of total, “aggregate” acquisition indebtedness. This is evident from the parenthetical in § 163(h)(3)(B)(ii).

The CCA addressed only the tax consequences of one of the co-owners — the one who originally had owned the property in fee simple and was solely obligated on the mortgage and who subsequently conveyed an undivided ownership interest to a second person who also became obligated on the mortgage. The CCA concluded that the interest deductible by the taxpayer in question was to be determined by multiplying the amount of interest paid by taxpayer a fraction: $1,000,000 over the amount of mortgage. Thus, for example, if the amount of the mortgage were $1,500,000 and the taxpayer paid $75,000 of interest, the amount of the taxpayer’s interest deduction would be $50,000 ($75,000 x ($1,000,000 ÷ $1,000,000).

I believe that the reasoning and conclusion of the CCA limiting to $1 million the amount of “acquisition indebtedness” that can be taken into account collectively by all of the owners of the residence likely is correct. A careful reading of the statutory language indicates that because § 163(h)(3)(B)(ii) omits any reference to a “taxpayer,” it limits to $1 million the aggregate amount of “acquisition indebtedness” that maybe taken into account in determining the amount of “qualified residence interest” with respect all of the taxpayers that might reside in that residential unit. If it does not do so, and each taxpayer who resides in the residence is an owner, and is obligated on the “acquisition indebtedness” mortgage is entitled to deduct interest paid on up to $1 million of acquisition indebtedness, then on a joint return each of the husband and wife, who are separate and distinct taxpayers (See, e.g., Frahm v Commissioner, T.C. Memo. 2007-351), would be entitled to deduct interest on up to $1 million of “acquisition indebtedness.” But the statute clearly does not contemplate that result, as evidenced by the limitation on the deduction to the interest on $500,000 of acquisition indebtedness by married taxpayers who file separately. The parenthetical indicates, even though it does not expressly state, that a husband and wife who each own a one-half interest in the residence and are jointly and severally liable on the mortgage can deduct interest on up to only $1 million of acquisition indebtedness. An interpretation of the statute that applies the $1 million ceiling on “acquisition indebtedness,” as defined in § 163(h)(3)(B), on both a residence-by-residence basis, and on a taxpayer-by-taxpayer basis avoids this “marriage penalty” that would otherwise arise. The proffered argument by some on the TaxProf list serve that the cross reference to § 121 in § 163(h)(4) for the definition of a “principal residence” incorporates the provisions of Reg. §1.121-2(a)(2), applying the $250,000 exclusion on a per-taxpayer basis in a co-owner situation, is spurious. The cross reference does not incorporate calculational methodology, but merely the definition of principal residence. When § 163(h) was enacted in 1986, old § 1034 provided rollover for gains on the sale of a principal residence: when § 121 was enacted in 1997, § 163(h) was amended just to change the cross reference from § 1034 to § 121. The only purpose of the cross reference is to invoke rules for distinguishing a “principal residence” from a “secondary residence.”

However, even if the basic conclusion of the CCA is correct, the method of computing the amount of the deductible interest is not correct. (To be sure, it gets very complicated when secondary residences with multiple owners are introduced, and as someone who participated in the formulation of Reg. 1.163-10T, my recollection is that no one considered that issue.) Determining the deductible interest for each co-owner can be more complex. to keep it simple, if the taxpayer in question owns only a one-half interest in the residence, is jointly and severally liable on the mortgage, and paid only one half of the interest due on the mortgage, the ceiling on the deduction for that taxpayer should be the interest on the lesser of (1) one-half of the aggregate acquisition debt or (2) $1,000,000 of acquisition debt.

10 Things the IRS Won't Tell You

Smart Money: 10 Things the IRS Won't Tell You:

1. Like it or not, you may need help with your taxes
2. You don’t have to be rich to get audited
3. Fear is often our best weapon
4. The AMT is our ATM
5. Just because we billed you doesn’t mean you owe us money
6. If you don’t pay, we’ll sic a collection agency on you
7. Want to go green? We’ll help pay
8. April 15 isn’t necessarily a hard deadline
9. We may be a government agency, but that doesn’t mean your data’s safe
10. We may still have your refund

(Hat Tip: The Faculty Lounge.)

Karen Hawkins Named Director of IRS Office of Professional Responsibility

Karen Hawkins (Taggart & Hawkins, Oakland) has been named Director of the IRS Office of Professional Responsibility, effective April 12, 2009.  As as result, she submitted her resignation as chair-elect of the ABA Tax Section.  Stuart Lewis has been named chair-elect for the remainder of the 2008-09 term. A new slate of nominees, including Charlie Egerton as the next chair-elect, will be voted on at the ABA Annual Meeting in August.