for a description of the S NEWS ITEMS - NSTP · for a description of the S ... sional action....

FEDERAL TAX ALERT PAGE 1 JUNE/JULY 2010

for a description of the S Corporation Association of America’s position on the provision.) Some commen-tators have observed that the IRS can already chal-lenge the compensation of S Corporation shareholders based on the market value of the services they provide. Outlook: Despite the fact that the General Account-ability Office (GAO) had recommended this change to Congress, opponents are getting traction and it is unlikely the provision will pass without some adjust-ment to ease its affect on smaller S Corporations.

GAO Report Recommended Change

In December 2009, the Government Accountability Office (GAO) released a report describing tax compli-ance problems of S Corpora-tions and recommending that the IRS address the compensation versus profit issue. In that report, the GAO did not recommend Congres-sional action. Noting that S Corporations were one of the fastest growing business types, accounting for nearly 4 million businesses in 2006, it observed that long-standing problems with S Corpora-tion compliance produce significant revenue losses in both individual income taxes and employment taxes. The GAO’s conclusions and recommendations are reprinted below.

EXTENDERS BILL UPDATE: HOUSING CREDIT AND S CORPORATION CHANGES LIKELY

Congress had hoped to have a tax extenders bill finished by the Memorial Day recess or shortly thereafter. However, the legislation, H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010, has stalled, as House and Senate negotiators and Democrat and Republican leaders have wrestled with amendments to the revenue raising provisions designed to make the bill more palatable to a majority of members. The next target date for final action is before the July 4th holiday. Note that most of the tax breaks in the bill are being extended back to January 1, 2010.

Home Buyer Credit Extension

The delay in passage of the extenders bill has allowed one Senator to advance his proposal to extend the time deadline on the home buyer credit. Senator Johnny Isakson, R-Ga., a former real estate executive, has garnered the support of Senate Majority Leader Harry Reid, D-Nev., for extending the time to close on houses eligible for the credit. The proposal would extend the existing June 30th closing deadline to September 30th.

The Isakson amendment would not change the existing eligibility requirement that a taxpayer have a written, binding purchase contract in place by April 30, 2010. The date change was requested by the National Association of Realtors (www.realtors.org), which claims that between 55,000 and 75,000 taxpayers are waiting to close on their houses, but have been delayed for various reasons.

S Corporation Payroll Taxes

The House-passed version includes a provision which would apply payroll taxes to all business profits of active shareholders of S corporations primarily engaged in service busi-nesses. The provision is targeted at service profes-sionals, such as lawyers, doctors, architects, and engineers who route their self-employment income through S Corporations. It would apply to an S Corpo-ration that is a partner in a professional firm and to S Corporations whose service business is based on the reputation and skill of 3 or fewer individuals. The latter provision is being criticized as overly broad and as targeting small businesses. (See page 1 of the May 2010 issue of the Federal Tax Alert

NEWS ITEMS

A PUBLICATION OF THE NATIONAL SOCIETY OF TAX PROFESSIONALS JUNE/JULY 2010A PUBLICATION OF THE NATIONAL SOCIETY OF TAX PROFESSIONALS JUNE/JULY 2010

ANALYSIS Of HEALTH CARE TAX PROvISIONS

News Items Page 4

NEw EIN fORmIRs actIoN News Page 8

CIRCULAR 230 DISCI-PLINARY PROCEDURES

ethIcs coRNeR 3

CHINESE DRYwALL RELIEf

et ceteRa Page 16

CONTENTSNews Items .............................1IRS Action News ...................8Ethics Corner.......................13Et Cetera ...............................16Quotes ...................................16

INSERTSTax Client LetterLetter to NSTP MembersRegional ConferencesFall Update Seminars

FEDERAL TAX ALERT PAGE 2 JUNE/JULY 2010 FEDERAL TAX ALERT PAGE 3 JUNE/JULY 2010

FROM THE EDITORCongress is making slow progress on moving a bill to extend numerous expired

tax provisions, but the controversy remains over how to pay for it. One of the latest revenue raising ideas is to impose payroll taxes on the profits of S Corporation shareholders who are involved in a professional services business. The price tag is right, but centrist members of Congress oppose the bill because of the burden on the numerous small S Corporations who have large voting numbers. It is beginning to look like the tax writers will have to go back to the drawing board and find another way to fund the bill. Meanwhile, the clock keeps ticking. Most of the provisions expired at the beginning of 2010. If they are not extended by the end of the year, the benefits will be lost.

This issue also contains a description of the major tax provisions enacted as part of the Health Care Act. The Act is long and complicated, so the focus of this issue is on the major tax changes affecting individuals and small businesses, such as the small business health care credit, the tax on tanning services, and increased Medicare taxes for high-income taxpayers. The health care tax provisions are covered beginning on page 4.

For tax practitioners, one of the most pressing issues is the e-file mandate. In 2009, Congress enacted a requirement that all practitioners who file more than 10 returns must file electronically. Then the information stopped. The provision was supposed to take effect for returns filed after 2010. Finally, IRS officials have come out with preliminary guidance on the requirement. The e-filing mandate will be phased in over two years, with only those preparers expecting to file over 100 returns required to e-file in 2011. Full implementation will begin in 2012 for return preparers who file more than 10 returns. See page 4 for an article on e-filing. Also, in the Ethics Corner section is an outline of IRS disciplinary procedures under Circular 230, the rules of practice before the IRS. Since all tax preparers soon will be subject to the IRS disciplinary rules, it is important to understand the enforcement process.

IRS Action News includes information on the new SS-4 application for an employer identification number, a description of how to claim the payroll tax exemption for new workers, and excerpts from IRS Commissioner Shulman’s recent speech on the IRS’s information gathering efforts.

The Court Opinions section is omitted this month so we can bring you a copy of a decision in an IRS disciplinary hearing beginning on page 13. Our regular Court Opinions feature will return next month.

Finally, the Et Cetera review of interesting state tax actions features a story on Florida’s giving property tax relief to taxpayers whose home values have been ruined by the dreaded Chinese drywall.

I hope you enjoy your Independence Day holiday.

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

GAO REPORT CONCLUSION AND RECOMMENDATIONS ON S CORPORATIONS

ConclusionsThe high percentage of noncompliant

S corporations leads to substantial lost tax revenue for the federal government. Whether mistakes are intentional or unintentional, misreporting is unfair to compliant taxpayers and under-mines the equity of the tax system. The high rate of misreporting associated with S corporation returns done by paid preparers raises concerns about their competency to deal with the tax complexities arising from S corpora-tion status. New S corporation owners and their preparers may not have the appropriate skills to ensure compli-ance with tax rules, which can require diligent record keeping and complex basis calculations. Further, the lack of guidance on determining shareholder compensation is challenging for both taxpayers and IRS examiners. Without clear guidance or legal requirements, S corporations tend to underpay share-holder wages, resulting in underpaid employment taxes for funding programs like Medicare and Social Security. Nor are IRS examiners fully documenting or using tools that may assist them to analyze whether adequate compensa-tion had been paid. Several options could help address these challenges, either through legislative or adminis-trative change, although each option has its trade-offs. Any of these options should be paired with continued atten-tion to taxpayer service and education.

* * *

RecommendationsTo help address the compliance chal-

lenges with S corporation rules, we recommend that the Commissioner of Internal Revenue take the following four actions:

* Identify and evaluate options for improving the performance of paid preparers who prepare S corporation returns, such as licensing preparers and ensuring that appropriate penalties are available and used.


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;

Printer: BRIDGE TOWN, Portland, Oregon.

* Send additional guidance on S corporation rules and record-keeping requirements to new S corporations to distribute to their shareholders, including providing guidance on calculating basis and directing them to the specific IRS Web site related to S corporation tax rules.

* Require examiners to document their analysis such as using compa-rable salary data when determining adequate shareholder compensation or document why no analysis was needed.

* Provide more specific guidance to shareholders and tax preparers, such as that provided to IRS examiners, on determining adequate shareholder compensation through means such as IRS’s Web site.

Agency CommentsIRS agreed in principle with our

four recommendations. Regarding the performance of paid tax preparers working on S corporation returns, IRS agreed with the need to identify and evaluate options to improve the preparers’ performance and noted that by year end a team convened by the IRS Commissioner would make recommendations to strengthen oversight of tax return preparers overall.

* * * In addition, IRS agreed to ensure that examiners meet work-paper documentation requirements involving their analysis of compa-rable salary data when determining adequate shareholder compensation. IRS was silent on the second part of our recommendation under which IRS also would ensure that examiners document their rationale when they determined no analysis was needed. Our review of examiners’ workpapers indicated a need for documenting

why no analysis was done. We found evidence of an analysis for just 24 of the 114 examinations involving shareholder compensation, leaving open the questions of whether exam-iners did an analysis for the other 90 examinations and if they did, why they had not documented the anal-ysis. Finally, IRS agreed to provide on its Web site (IRS.gov) more specific guidance to all S corporation share-holders and tax preparers on such items as recordkeeping requirements and determining adequate share-holder compensation.

Republican Alternative to Extenders Bill

Senate Republicans have opposed many provisions in the current extender bills and have offered their own alternative plan. The GOP plan, introduced by Senator John Thune, R-S.D., includes a one-year exten-sion of expired tax cuts as in the Demo-crats’ bill. The difference lies in how the extensions would be paid for. Under the Congressional pay-go rules, changes in law that reduce revenues or increase spending must be offset with revenue raisers. There are two ways to raise revenue—increase taxes or reduce government spending. Thune’s plan takes the latter approach and would reduce spending by an esti-mated $113 billion. Thune’s news release described the cuts as follows: “The amend-ment saves the taxpayers $113 billion in unnecessary spending by rescinding $38 billion in unobligated stimulus funds, cutting wasteful and unnecessary govern-ment spending, collecting the unpaid taxes of federal employees, freezing their salaries and capping their numbers, imposing a five percent across-the-board cut in govern-ment spending for all agencies except the VA and DOD, and creating a new deficit reduction trust fund where rescinded balances and moneys saved through this amendment will be deposited for purposes of paying down the federal debt.”

SENATE CLOSING IN ON ESTATE TAX COmPROmISE

The long-standing controversy over how to resolve the estate tax stalemate may soon be over. The estate tax was reduced for the years 2001 through 2009 under the President George W. Bush tax plan. Under that plan, in 2009, the rate was 45% and the exemption level per individual was $3.5 million. Effective 2010, the estate tax was completely repealed although the basis rules for valuing property were changed to increase the taxation of appreciation.

The estate tax is set to come back into existence at the 2001 pre-Bush level with the high rate of 55% and an exemption of only $1 million per taxpayer if Congress does not take action this year. The current debate is whether to extend the estate tax at the 2009 level of 45% with a $3.5 million exemption per taxpayer, decrease the rate to 35% with a $5 million exclusion, or repeal the estate tax permanently.

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Compromise ProposalsThe Obama Administration has backed

a plan passed by the House of Represen-tatives last December, H.R. 4154, which would have preserved the 2009 levels. Many Republicans have called for permanent repeal of the estate tax. The proposal that is gaining the most support in Congress appears to be a compromise measure introduced by Senate Finance Committee member Jon Kyl, R-Ariz. which would have a permanent 35% rate and a $5 million per person exemption. Kyl has stated publicly that he is close to obtaining the 60 votes needed to pass the bill in the Senate, and the provision may be included as part of the new small business relief bill currently makings its way through Congress. (See page 7 of this issue for a description of the small business bill.)

ImPORTANT UPDATE ON E-fILE REQUIREmENT

Under H.R. 3548, the Worker, Home-ownership, and Business Assistance Act of 2009, Public Law 111-92 passed in November 2009, the Secretary of the Treasury is directed to require electronic filing by tax return preparers who prepare ten or more individual income tax returns in a calendar year, including returns for estates, trusts, and individuals. This provision is scheduled to take effect for returns filed after 2010. (See page 3 of the November 2009 issue of the Federal Tax Alert for a description of the bill.) Recently, IRS officials have stated that the e-filing mandate will be phased in over two years, with only those preparers expecting to file over 100 returns required to e-file in 2011. Full implementation will begin in 2012 for return preparers who file more than 10 returns. Also, before that time, the IRS will release regulations on the e-filing mandate which will allow certain exemptions and hardship waivers.

HEALTH CARE TAX PROvISIONSThe 2010 Health Care Act passed by

Congress in March is an amazingly complicated piece of legislation. It contains many tax provisions, both in

the form of incentives and disincentives, for individuals, businesses and insurance companies, designed to increase health insurance coverage for U.S. workers. Most parts of the bill are phased in over time or do not take effect at all for several years. The entire package of changes is included in H.R. 3590, the Patient Protection and Affordable Care Act, Public Law 111-148, signed into law on 3/23/2010 and amended by H.R. 4872, the Health Care and Educa-tion Reconciliation Act of 2010, Public Law 111-152, signed into law on 3/30/2010.

Health Coverage MandateIt is important to understand the over-

reaching feature of the law—both indi-vidual and employer mandates.

Individual Mandate: Individuals are required to obtain health insurance coverage for themselves and their depen-dents after 2013. The law exempts the following persons from this requirement:

● individuals who cannot afford coverage (according to a poverty calculation),

● taxpayers with income below the income tax return filing threshold,

● members of Indian tribes,

● individuals who have short coverage gaps, and

● hardship cases.

Employer Mandate: It also mandates that businesses that employ more than 50 workers will have to offer health coverage or pay a $2,000-per-worker penalty if any of their employees have to seek govern-ment-subsidized coverage on their own.

Employer and Individual Assistance: To offset the effects of these requirements, the bill offers tax credits for individuals and for businesses to acquire private health insurance.

Key Elements of the Act: The two bills that make up the new health care program have hundreds of provisions, many not tax-related or only marginally tax-related. The descriptions below focus on the major tax changes affecting indi-viduals and businesses.

I. Tax Credit for Small Businesses Who Offer Health Insurance Coverage

A new tax credit is available to small businesses that offer health insurance coverage to their employees. The credit is available to employers that pay at least half the cost of single coverage. The maximum credit is 35 percent of premiums paid in 2010 or 25 percent of premiums paid by employers that are tax-exempt organiza-tions. In 2014, the credit increases to 50 percent of premiums paid by small busi-nesses and 35 percent of premiums paid by tax-exempt organizations. Qualifying businesses can claim the credit starting with their 2010 income tax return which will be filed in 2011.

The credit targets small businesses and tax-exempt organizations that primarily employ low and moderate-income workers. To qualify, a business must have 25 or fewer full-time employees whose wages average $50,000 or less per employee per year. The employer also must provide at least one-half of the employee’s health insurance coverage amount.

Note: Because the eligibility rules are based in part on the number of full time equivalent employees rather than the actual number of employees, businesses that use part-time help may qualify even if they employ more than 25 workers.

The maximum credit goes to smaller employers — those with 10 or fewer full time equivalents — paying annual average wages of $25,000 or less. The amount of the credit is reduced for employers with more than 10 full-time equivalents and average wages of more than $25,000 and is completely phased out for employers that have more than 25 full-time equivalents or pay average wages of more than $50,000 per year.

Example: For the 2010 tax year, an employer has the equivalent of 9 full-time employees with average annual wages of $23,000 per worker. The employer pays $72,000 in health care premiums for those employees (which must not exceed the average premium for the small group


market in the employer’s state). This employer’s credit for 2010 would equal $25,200 or 35% x $72,000 in premiums.

Ineligible EmployeesSelf-employed persons, including

partners and sole proprietors, 2% share-holders of an S corporation, and 5% owners of the employer’s company are not treated as employees for purposes of the credit. Sole proprietorships—un-incorporated businesses owned by one person or a married couple—cannot take the credit for the owner and the owner’s family members who work in the busi-ness, although some commentators have taken the position that a spouse-employee who otherwise qualifies would be eligible for the credit. The IRS will have to put out more guidance on this issue, as it is unclear from the legislative language and the IRS news releases.

Coordination with Health Insurance Deduction

Employers now are eligible for a deduc-tion for health insurance premiums paid for their employees. Under the new law, the employer will be able to continue deducting health insurance expenses that exceed the expenses for which the credit was claimed.

II. Tax Credit for Individuals to Buy Health Insurance

The 2010 Health Care Act provides a new refundable tax credit to qualifying taxpayers who buy their own health insur-ance through one of the new Health Care Exchanges to be put in place after 2013. This new credit is called the “premium assistance credit.” The credit will be refundable and will be payable in advance directly to the health insurance provider.

The problem with this credit is that many taxpayers cannot qualify for it. To qualify, a taxpayer must have household income of at least 100% but not more than 400% of the federal poverty line and must not be eligible for Medicaid, employer-sponsored insurance, or other acceptable coverage. The current federal poverty line for a family of four

is $22,050 (slightly higher for Alaska and Hawaii).

Amount of the CreditThe credit will be based on a sliding

scale for individuals and families with household incomes between 100% and 400% of the Federal Poverty Line. The Secretary of Health and Human Services will determine the credit amount based on the percentage of a taxpayer’s income needed to pay health insurance premiums. As the availability of the credit gets closer, the government will be releasing more information to assist taxpayers and their representatives in calculating the available credit.

III. Health Benefits Coverage for Adult Children

Coverage Required to Age 26: The Health Care Act requires group health plans and health insurance issuers that now provide dependent coverage of children to continue to make coverage available for an adult child until age 26. Cafeteria plans can allow employees to immediately make pre-tax salary contributions to provide coverage for children under age 27. (Cafeteria plans allow employees to choose from a menu of tax-free fringe benefit options.) Note: There is no requirement for a health insurer to provide coverage for anyone, including dependents, but if the employer offers a plan for dependent children, the coverage must continue until the child turns 26.

Coverage Excludable to Age 27: Employees who have children who will not have reached age 27 by the end of the year are eligible for a tax exclusion of the amount the employer pays for the adult child’s coverage. This exclusion is available from March 30, 2010 forward, if the child is already covered under the plan or is added to the plan at any time during 2010. Eligible children include a son, daughter, stepchild, adopted child or foster child. Also, self-employed persons may take a deduction for the health insurance costs of their adult children up to age 27.

IV. Excise Tax on High-Value Health Plans

This provision is not a tax on individuals, but is a tax on health insurers who provide high-cost health plans (so-called “Cadillac plans”). The tax will be 40% of the cost of a health plan which exceeds $27,500 for a family and $10,200 for an individual. It takes effect in 2018.

V. Increased Medicare Tax on Individuals and Investment Income

Other revenue raisers in the Health Care Act increase Medicare taxes on higher income individuals by 0.9% and impose a Medicare tax of 3.8% on the net invest-ment income of higher-income taxpayers.

Medicare Hospital Insurance Tax Increase: The Act increases the employee portion of the Medicare Hospital Insur-ance Tax by an additional 0.9% on wages received over the threshold amount of $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all other taxpayers. This additional tax also applies to the Medicare portion of self-employment taxes.

Medicare Tax on Investment Income: The Medicare tax on investment income is a significant change from current law. Under current law, the Medicare tax is only imposed on wage or compensation income. For the first time under this bill, the Medi-care tax will be imposed on investment income—which is income from interest, dividends, annuities, royalties, rents, and capital gains. The tax begins in 2013 and is imposed on net investment income for taxpayers with income which exceeds the threshold amount of $250,000 in adjusted gross income for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all other taxpayers.

VI. Excise Tax on Tanning SalonsA 10% excise tax is imposed on indoor

tanning services beginning on July 1, 2010. The tax is imposed on the total amount paid for the tanning service. The salon is required to collect and pay over the tax to


the IRS on a quarterly basis. The IRS has rushed out regulations on the new excise tax since the effective date is imminent. See page 8 of the IRS Action News section for a description of the new rules.

VII. Medical Deduction Threshold Raised

The floor on the itemized deduction for medical expenses is raised from 7.5% of adjusted gross income (AGI) to 10% of AGI, effective in 2013. Thus, taxpayers may only deduct amounts in excess of 10% of their AGI.

VIII. Adoption Credit and Adoption Assistance

Beginning in 2010, the maximum exclu-sion for employer-paid adoption expenses is increased to $13,170 per child. Also, the adoption credit has been made refundable.

IX. Health Reimbursement Accounts

Several changes are made to the rules governing the use of health flexible spending accounts (FSAs), health reim-bursement arrangements (HRAs), health savings accounts (HSAs), and Archer medical savings accounts (MSAs). Effec-tive in 2011, these accounts can no longer be used to purchase over-the-counter drugs. In addition, the tax on distribu-tions from HSAs and MSAs not used for medical expenses is increased to 20% of the amount of unqualified distributions. This provision also takes effect in 2011.

Health FSAs offered through cafeteria plans have a $2,500 contribution limit through salary reductions beginning in 2013.

X. Increased Businesses Reporting Provisions

To help pay for the Health Care Act, a non-health-related tax reporting provision was included in the final legislation: businesses must report payments of $600 or more to other businesses for property or services. Under the provision, any business that pays another business more than $600 a year in gross proceeds for goods or

services must file a 1099 Form with the IRS for the payment.

XI. Economic Substance DoctrineThe Health Care Act codifies the

economic substance doctrine. This doctrine is judge-made law developed through a long line of court cases which allows the IRS to disallow tax benefits in a transaction which is entered into solely for tax reasons—in other words—a trans-action with no economic substance. The Act strengthens the doctrine and adds it to the Internal Revenue Code making its application more certain and more uniform across the country.

A transaction will meet the economic substance test only if two elements are present:

the transaction has to change the 1) taxpayer’s economic position in a meaningful way, and

the taxpayer must have a substantial 2) business purpose for the transaction besides the federal tax benefits.

Penalties: If a taxpayer fails either test, a penalty will be imposed at the rate of 40% of the tax benefits if the taxpayer fails to disclose the transaction. If the transaction is disclosed but has no economic substance, the penalty will be 20% of the claimed tax benefits. The IRS has indicated that it will release guidance soon on disclosure of transactions to help taxpayers avoid the 40% penalty.

Effective Date: The effective date of this change is April 1, 2010, the date after enactment.

XII. Black Liquor Biofuel Credit Repeal

This provision is a revenue raiser and a loophole closer to take away a tax benefit which was never supposed to be used by certain industries. Congress enacted a credit for biofuels in 2008. Paper producers discovered that they could add a byproduct of their manufacturing process, so-called “black liquor,” to the fuel they use to run their boilers, thereby becoming eligible for the biofuels credit. The Act removes the eligibility of black liquor for the credit.

XIII. Compensation of Health Insurance Executives

The Act caps the deduction for compensation of health insurance executives at $500,000 per year per employee beginning in 2013.

STATUS Of ALTERNATIvE mINImUm TAX PATCH

“Patching” the alternative minimum tax (AMT) so it does not apply to upper middle class taxpayers is an issue Congress faces almost every year. When the AMT was originally enacted in 1969, Congress did not put in any mechanism to index the exemption levels for inflation. As a result, each year the tax falls on more and more taxpayers. Rather than structurally address the issue, Congress every couple of years enacts what has become known as the “AMT patch” to increase the exemption level to prevent the tax from dipping down into the middle class. Congress has not acted on the exemption for 2010; therefore, the 2010 exemption level is a mere $45,000 for married taxpayers filing jointly. If Congress does not increase this amount, the tax will affect 20 percent of taxpayers, or 30 million Americans, according to The Tax Foundation.

2009 and 2010 Exemption LevelsFor 2009, the exempt portion of an

individual’s alternative minimum taxable income was $70,950 for married couples and $46,700 for single taxpayers. Since the patch has now expired, the AMT exemp-tion is $45,000 for married taxpayers and $33,750 for single taxpayers.

Administration Proposal, Congressional Action

To make the AMT patch permanent, the Obama Administration has proposed raising the AMT exemption level to around $70,000 for married couples and indexing it for inflation on a yearly basis. There is a two-year extension proposal pending before Congress, and Congress has tempo-rarily exempted the AMT patch from the pay-go rules, which require that any tax relief provision be offset by a tax increase.


It is likely that Congress will put another patch in place before the end of this year. The only permanent fix is likely to come from proposals of the President’s bipar-tisan fiscal commission, which is consid-ering tax reform proposals to address the AMT permanently in a way that does not increase the deficit.

SmALL BUSINESS TAX INCENTIvE BILL

Small business tax relief seems to be the most popular tax bandwagon for Members of Congress to jump on in an election year. Congress has enacted numerous small business relief provi-sions in recent years and a new bill, H.R. 5486, the Small Business Jobs Tax Relief Act of 2010, is designed to implement a provision that has been a major initiative of the Obama Administration. The bill would exclude from tax all capital gains from the sale of stock issued by small businesses between March 15, 2010, and January 1, 2012. The stock must be held for five years. The amount of gain eligible for the exclusion would be limited to the greater of 10 times the taxpayer’s basis in the stock, or $10 million gain from stock in the small business corporation.

Other Tax BenefitsThe bill would relieve small businesses of

penalties for failure to disclose reportable transactions. (See page 5 of the January 2010 issue of the Federal Tax Alert for an article on the Senator Grassley’s efforts to mitigate the effects of this penalty.)

It also would provide an exception to the “at-risk” rules for non-recourse loans that are guaranteed by the Small Business Administration (SBA), thereby making it possible for small businesses to deduct more losses.

Under current law, taxpayers may deduct up to $5,000 in trade or business start-up expenditures. The amount that a business may deduct is reduced by the amount by which start-up expenditures exceed $50,000. For taxable years beginning in 2010 or 2011, the bill would increase the limit on the tax deduction for trade or busi-

ness start-up expenditures from $5,000 to $20,000, and increase threshold amount for reducing such limit to $75,000. In addi-tion, the bill would create a Small Business Borrower Assistance Program that would provide assistance to small businesses that are struggling to meet their obligations to creditors. It would also exclude from gross income any amounts that are received under this program.

To pay for the almost $3+ billion price tag, the bill would remove the biofuel producer tax credit for certain categories of oil and would implement an Admin-istration proposal to limit favorable tax planning by grantor retained annuity trusts (“GRATs”) by requiring a minimum 10-year term. Short-term GRATs allow taxpayers to structure a transfer of assets to another individual, usually a family member, in such a way that substantial gift taxes may be avoided.

IRS Reporting on Penalties Regarding Tax Shelters

Under current law, the Internal Revenue Service is not required to report annu-ally to the Congress on penalties assessed during the year. The bill would require the IRS Commissioner to report annually to the House Ways and Means Committee and the Senate Finance Committee on penalties assessed and enforcement actions taken with respect to tax shelters.

TREASURY INSPECTOR fINDS IRS fAILED TO COLLECT DELINQUENT TAXES

The Treasury Inspector General for Tax Administration (TIGTA) has issued a report which charges that the IRS mishandled liens resulting in a signifi-cant failure to collect delinquent taxes. The report says that between 2002 and 2008, IRS collection efforts fell short by $1.4 billion. In issuing the report, TIGTA observed,

Failure to protect the Govern-ment’s interest on taxes that are owed creates an unfair burden on taxpayers who properly pay their taxes in full and on time.

The IRS often protects its claims against taxpayers who owe delinquent taxes by filing Federal Tax Liens (“liens”) against taxpayers’ assets. Such liens establish the IRS’ priority among secured creditors for the taxpayers’ equity in the assets. Liens should generally be filed on all balance due cases of a certain amount. Decisions not to file liens are limited to taxpayers in bankruptcy, defunct corporations, deceased taxpayers without assets, and some miscellaneous other categories. Revenue officers must document a deci-sion on whether a lien should be filed (called a lien determination) and also must include an explanation when liens are not filed.

The IRS’ inability to continue collec-tion efforts on a growing number of balance due cases combined with not filing tax liens, results in billions of dollars going uncollected, according to TIGTA. Therefore, TIGTA recommends that IRS enhance its Entity Case Manage-ment System, which is programmed to identify and accelerate accounts with large tax assessments. TIGTA believes programming changes will improve IRS managers’ ability to identify cases without a lien filing, ensure lien determi-nations are made on time, and identify cases appropriate for a lien action. The IRS agreed with the premise to request programming changes to its Integrated Collection System (ICS) to ensure action is taken in response to lien reminder notifications.

IRS COmmISSIONER ENvISIONS JOINT AUDITS wITH fOREIGN TAX OffICIALS

States already have a mechanism to conduct joint audits of taxpayers with other states. The Multistate Tax Commission (www.mtc.gov), a govern-mental organization made up of 45 states, sponsors the Joint Audit Program for its member states. Under this program, the Commission’s audit staff performs audits of selected businesses on behalf of several states at one time. The find-ings are then forwarded to the member


states for assessment and collection at the completion of the audit. Now, IRS Commissioner Douglas Shulman has suggested that the IRS and foreign tax officials undertake similar joint audits.

Speaking at a meeting of the Orga-nization for Economic Cooperation and Development (OECD), Shulman said he wants to take “international cooperation to the next level” through joint examinations. He said the IRS is now working on developing a protocol for joint audits with other countries. A joint audit is not a simultaneous exam. Rather, it is a process where two or more countries join together to carry out a single audit of a company with cross-border business activities. The joint audit will be “more sensible and efficient” for the participating busi-ness, Shulman contended, because the business will not have the burden of two exam teams conducting two audits. Also, a joint audit will make sure both countries receive the same information and presentations from the taxpayer.

IRS ACTION NEWS

REvISED fORm SS-4, APPLICATION fOR EmPLOYER IDENTIfICATION NUmBER, REQUIRES ID Of RESPONSIBLE PARTY fOR BUSINESS ENTITIES

The IRS has revised Form SS-4, Applica-tion for Employer Identification Number (EIN), to require a clear identification of the applicant’s true owner. Effective January 2010, all mail, fax, phone, and electronic EIN applications must disclose the name and taxpayer identification number of the true “responsible party” for the entity requesting an EIN.

For an EIN applicant-entity that is publicly traded on an exchange or is regis-tered with the Securities and Exchange Commission, the “responsible party” is the principal officer, general partner, grantor, owner of a disregarded entity, or owner, depending on the type of business

entity of the applicant. For all other enti-ties, the “responsible party” is the person who can control, manage, or direct the entity and the disposition of the entity’s funds and assets.

A “nominee” is an entity with delegated authority to act in name only and can never be the “responsible party” for the Form SS-4 application. The IRS does not accept the use of nominees to obtain EINs. The SS-4 must be signed by an individual with the authority to legally bind the entity; therefore, a nominee cannot sign it.

Prior to the SS-4 revision, taxpayers obtained EINs using nominee individuals for the EIN application process. Entities that used nominees on their applications should update their EIN applications. Third party designees filing online applica-tions must retain a copy of the paper Form SS-4, signed by the responsible party and a signed authorization statement for each EIN application filed with the IRS.

In announcing the new Form require-ments, the IRS noted that clearly identi-fying an entity’s true owner makes it diffi-cult for taxpayers to conceal their income and assets. The IRS also warned that it will pursue penalties, injunctions, or other enforcement action to prevent the misuse of EIN applications.

IRS REGULATIONS CLARIfY APPLICATION Of EXCISE TAX ON TANNING SERvICES

The IRS has rushed out regulations on the new 10-percent excise tax on indoor tanning services that goes into effect on July 1. The measure was passed as part of the Health Care Act. (See page 5 of this issue for a description of the new provi-sion.) Under the new rules, providers of indoor tanning services are required to collect the tax at the time the purchaser pays for the tanning services. The tanning business then must remit these amounts to the government, quarterly, along with IRS Form 720, Quarterly Federal Excise Tax Return.

The regulations specifically exempt phototherapy services performed by a

licensed medical professional on his or her premises from the tax. The regulations also provide an exception for some physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.

IRS NOTICE EXPLAINS SmALL BUSINESS HEALTH CARE CREDIT

The credit for employers that provide health insurance to their employees takes effect this year and is available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small employers that primarily employ low- and moderate-income workers. (For a description of the credit, see page 4 of this issue.)

The IRS has posted a notice on its website which provides detailed guide-lines, illustrated by more than a dozen examples, to help small employers determine whether they qualify for the credit and estimate the amount of the credit. To obtain the notice, go to the IRS website and enter “notice 2010-44” in the search box at the top right-hand side of the IRS homepage.

IRS OUTLINES HOw TO CLAIm NEw EmPLOYEE CREDITS

Under new legislation, businesses may claim a 6.2% percent payroll tax exemp-tion for newly-hired workers and also can get an employee retention credit of up to $1,000 per worker. The IRS has posted on its website the newly-revised payroll tax form, Form 941, Employer’s Quar-terly Federal Tax Return, that eligible employers can use to claim these tax benefits. Employers also must get a signed statement from each eligible new hire, certifying under penalties of perjury, that he or she was not employed for more than 40 hours during the 60 days before begin-ning employment with that employer.

IRS Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, can be used to meet


this requirement. This form is not to be sent to the IRS. Rather the employer should keep it with the employer’s payroll and income tax records. Employers can use their own affidavit as long as it includes the same information as IRS Form W-11.

wORK OPPORTUNITY TAX CREDIT RULES EXPLAINED

Congress has enacted several different types of hiring incentives over the last few years creating a challenge for the IRS to educate small businesses on their various options. The IRS continues to release guid-ance explaining the different tax benefits and their coordination with other employ-ment incentives.

The work opportunity tax credit (WOTC) offers tax savings to busi-nesses that hire employees belonging to various targeted groups. These groups include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, recipients of public assistance, veterans, ex-felons and some youth workers. The instruc-tions for Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, detail the requirements for each of these groups. In general, certification by a state workforce agency is required. A business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work.

Coordination with Payroll Exemption and Retention Credit

An eligible employer can claim both the Work Opportunity Tax Credit and the new hire retention credit for the same employee. However, an employer may not claim both the payroll tax exemption and the Work Opportunity Tax Credit for the same employee. Therefore, any employer that chooses to apply the exemption to wages paid to an employee may not receive the WOTC on any wages paid to that employee during the one-year period beginning on the employee’s hiring date.

EXCLUSION Of GAIN ON SmALL BUSINESS STOCK

An extra incentive is now available to individuals who invest in small businesses. Investors in qualified small business stock can exclude 75 percent of the gain upon sale of the stock. This increased exclusion applies only if the qualified small business stock is acquired after February 17, 2009, and before January 1, 2011. The stock must be held for more than five years. For previously-acquired stock, the exclusion rate remains at 50 percent in most cases. Note that a proposal before Congress, described on page 7 of this edition, would exclude 100% of gain on the sale of small business stock.

IRS REmINDS EmPLOYERS NOT TO fORGET THE COBRA CREDIT

Employers that provide the 65 percent COBRA premium subsidy to eligible former employees can claim a credit for this subsidy on their quarterly or annual payroll tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their payroll tax deposits by the amount of the credit. Employers use Form 941 to claim the credit. For details, see the instructions for Form 941, Employer’s Quarterly Federal Tax Return.

mANY EXEmPT ORGANIZATIONS mISS POSTCARD fILING DEADLINE

IRS Commissioner Douglas Shulman recently acknowledged that many small non-profits missed the May 17th deadline to file their 990-N (e-postcard) informa-tion return despite unprecedented efforts by the IRS to get them onboard. Shulman said efforts will continue to get small organizations to comply and he offered reassurance to the nonprofit community that the IRS will “do what it can” to help these organizations avoid losing their tax exempt status.

In 2006, Congress mandated that small organizations with under $25,000 in annual receipts be required to submit

information returns. However, the IRS has had a difficult time getting these small orga-nizations to file, despite the fact that the Form 990-N was specially designed to make reporting less burdensome. The postcard requires only the following information:

Employer identification number 1. (EIN), also known as a Taxpayer Identification Number (TIN)).

Tax year2.

Legal name and mailing address3.

Any other names the organization 4. uses

Name and address of a principal 5. officer

Web site address if the organization 6. has one

Confirmation that the organization’s 7. annual gross receipts are normally $25,000 or less

If applicable, a statement that the 8. organization has terminated or is terminating (going out of business)

If organizations do not file their e-Postcard on time, the IRS sends them a reminder notice. There is no penalty for late filing. However, an organization that fails to file required e-Postcards (or information returns – Forms 990 or 990-EZ) for three consecutive years will automatically lose its tax-exempt status.

Due Date of the e-PostcardThe e-Postcard is due every year by the

15th day of the 5th month after the close of the organization’s tax year. For example, if an organization’s tax year ended on December 31, the e-Postcard is due May 15 of the following year.

IRS DETAILS NEw EXAmINATION PROCEDURES fOR LARGE AND mID-SIZED BUSINESSES

The IRS has renamed and revised its guide to examining large and mid-sized business (LMSB) taxpayers. The new approach, entitled the “Quality Exami-nation Process” (QEP), is designed


fINAL RULES EXEmPT PUBLIC SAfETY vEHICLES fROm RECORDKEEPIGN REQUIREmENTS

The IRS has finalized regulations which exempt clearly marked vehicles used by public safety officers from the substantia-tion rules required for listed property. The original regulations were issued in 2008. Under the exemption, if an employer provides a public safety employee with a nonpersonal use vehicle, the employee does not need to keep records of how the vehicle is used, and both the business and the personal use of the vehicle will be excluded from the employee’s income as a working condition fringe benefit.

Under prior rules, clearly marked vehicles provided to Federal, state and local government workers only qualified if either a fire department or police depart-ment employed the taxpayer. The final regulations expand the exemption to all emergency responders.

2010 EXPENSING LImITS EXPLAINED BY IRS

The IRS has modified its revenue proce-dure which contains expensing limits for depreciable assets to reflect the extension of the higher limits under the HIRE Act. Prior to enactment of the HIRE Act, the expensing limits were scheduled to revert to the previous level of a $125,000 limit on the current deduction for investment in business property. There also is an upper limit on the amount of purchases a taxpayer may make each year without losing part of the expensing deduction. Prior to the HIRE Act, that limit was scheduled to decrease from $800,000 to $500,000. The way the limit works is that for every dollar above the aggregate purchasing threshold of $800,000, the taxpayer loses $1 of the $250,000 expensing deduction.

The original limits of $125,000 and $500,000 were supposed to be indexed yearly for inflation. The IRS has now explained that the limits extended by the HIRE Act are not indexed for inflation and will remain at $250,000 and $800,000 for taxable years beginning in 2010.

to engage and involve the business taxpayers in the entire examination process. The new process is divided into three distinct phases, including planning, execution, and resolution. A guide to the new procedures is avail-able on the IRS website. It is entitled, “Quality Examination Process Refer-ence Guide” and can be retrieved on the IRS website by entering the title in the search box at the top right-hand corner of the IRS homepage.

IRS GUIDES BUSINESSES ON TIP REPORTING fOR NEw PAYROLL TAX EXEmPTION

The IRS has revised its tip reporting instructions for Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, to explain how to coordinate tip reporting with the new payroll tax exemption enacted by the HIRE Act. (See page 1 of the March/April 2010 issue of the Federal Tax Alert for an article on the payroll tax exemption.) Form 8846 is used by food and beverage establish-ments to claim a business tax credit for FICA taxes on employee tips. The instructions explain that if any tipped employee’s wages are exempt from Social Security taxes due to the HIRE Act, the employer should check the box on line 4 of Form 8846 and attach a separate computation showing the amount of tips subject to only the Medi-care tax rate of 1.45%. The instructions also explain how to compute the FICA exemption for new tipped employees.

INTEREST RATES fOR THIRD QUARTER REmAIN UNCHANGED

Not surprisingly, the IRS has announced that interest rates for the calendar quarter beginning July 1, 2010, will remain the same. The rates will be:

four (4) percent for overpayments *(three (3) percent in the case of a corporation);

four (4) percent for underpay- *ments;

six (6) percent for large corporate *underpayments; and

one and one-half (1.5) percent for *the portion of a corporate over-payment exceeding $10,000.

For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. For corporations, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpay-ments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point. Observation: The above rates drive home the point that the federal short-term rate is still very low, around one percent.

HEALTH SAvINGS ACCOUNT AND HIGH DEDUCTIBLE PLAN LImITS REmAIN UNCHANGED

The IRS has announced that the annual contribution limits on Health Savings Accounts (HSAs) and the high-deductible health plan limits will not be indexed for inflation this year because the Consumer Price Index has not changed significantly for the period. For calendar year 2011, the annual contribution limit for an individual with self-only coverage under a high deductible health plan is $3,050. The annual limitation for an individual with family coverage is $6,150.

For calendar year 2011, a “high deduct-ible health plan” is a health plan with an annual deductible that is at least $1,200 for self-only coverage or $2,400 for family coverage. Also, the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) are $5,950 for self-only coverage or $11,900 for family coverage.


IRS COMMISSIONER’S DESCRIPTION OF NEW INFORMATION REPORTING TOOLS

Set forth below are excerpts from IRS Commissioner Douglas Shul-man’s recent speech to the American Payroll Association and the American Accounts Payable Association which describes the new merchant credit card reporting and business-to-busi-ness information reporting programs.

“We have some recent changes in the law that gave us new tools in our information reporting toolkit. The first applies to businesses that accept credit or debit cards, or other elec-tronic payments.

Beginning in 2012, payment processors will be required to make an annual information report to the merchant and the IRS stating the gross amount paid to the merchant during a calendar year. This will help improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete. Let me dive down a little deeper into how this new law will benefit the tax system.

Imagine a business. At the end of the year, a merchant bank will send that business a 1099 reporting the dollar figure from credit and debit card purchases made by customers at his or her establishment. An iden-tical information document is also sent to the IRS.

When the owner or tax practitioner fills out the business’ tax return, they will segregate the credit/debit card sales from cash sales. . . . and this new report will make it easier to do so. At this point, the IRS can see if the credit card dollar figure reported on the tax return matches the bank’s information return, and also see if the amount of revenue from credit cards makes sense in the context of firm’s overall business.

The information we receive is an important window into under-reporting. It can also help us better

understand tax compliance and trends in different industry sectors.

* * * Congress also recently passed a

new information reporting provi-sion requiring expanded information reporting on payments made from businesses to corporations and on payments businesses make for goods. This new information reporting requirement applies if businesses pay a single entity $600 or more per year in aggregate for these types of transac-tions starting in 2012.

While businesses do not need to file information returns on these payments until January of 2013, business groups — particularly those that represent small businesses — have raised concerns about the burden that this new provision may impose. I want to assure the business community that the IRS will look for opportunities to minimize burden and avoid duplicative reporting. That is why we will be spending the next several months soliciting input from businesses of all types and sizes before proposing regulations to implement the law. We will also look to service providers who help those businesses understand and adapt to new laws and regulations, to help us craft a process that is as efficient as possible. We know that there is no “one-size-fits-all,” so we want to hear your ideas.

At the risk of getting ahead of the game, I wanted to share with you just one example of how we are analyzing this provision, and looking for opportunities to streamline imple-mentation and minimize burden. We plan to use our administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards. These trans-actions will already be covered by reporting requirements on payment card processors, so there is no need for businesses to report them as well. So, whenever a business uses a credit or debit card, there will be no new burden under the new law.

IRS ImPLEmENTS NEw BACKUP wITHHOLDING PROCEDURES

The IRS has announced a change in procedures for payees to follow to obtain validation of social security numbers (“SSNs”) from the Social Security Administration (“SSA”) to prevent or stop backup withholding. The rules apply to payees who have received a second “B” notice from the payor informing the payee that he or she has provided an incorrect name and taxpayer identi-fication number (TIN). After a second B notice is sent, the payor must validate the payee’s TIN directly with the IRS or with the SSA. Otherwise, the payee is subject to backup withholding.

Under the previous rules, a payee had to authorize the SSA to send Form SSA-7028, Notice to Third Party of Social Security Number Assignment, to the payor to validate the payee’s SSN. Effective January 1, 2010, SSA discon-tinued the availability of Form SSA-7028 for purposes of verifying SSNs to avoid backup withholding. Therefore, the IRS has established interim procedures which allow the taxpayer to get a Social Security Number Printout to validate the taxpayer’s SSN.

STORm vICTImS IN mORE STATES ELIGIBLE fOR IRS DISASTER RELIEf

Taxpayers in four different states will get a break from the IRS due to the storms in those regions this spring. Kentucky, Mississippi, Oklahoma and Connecticut all experienced unusually severe weather that invoked the declaration of federal disaster area. The IRS exempts taxpayers in these regions from some filing deadlines and waives penalties as long as the taxes are filed by the new deadlines. Taxpayers with homes and businesses within the affected areas will be automatically given the waivers; however, those with affected businesses or homes outside of the imme-diate area must contact the IRS for the waiver. Taxpayers who do not live in the covered disaster area but whose records necessary to meet a deadline are in the


disaster area also are entitled to relief. In addition, all relief workers affiliated with a government or philanthropic organiza-tion working in the covered disaster area are entitled to relief.

IRS’S LATEST STATISTICS Of INCOmE BULLETIN SHOwS INCREASE IN HIGH-wEALTH INDIvIDUALS

The IRS’s most recent Statistics of Income (SOI) Bulletin, Spring 2010, features data on high-income individual income tax returns filed for tax year 2007, gift tax returns filed in 2008 and trust income from the 2002 through 2006 period. The Bulletin shows that taxpayers filed over 4.5 million returns with adjusted gross income of $200,000 or more for 2007, up from over 4 million returns in the prior year. These high-income returns represent over 3 percent of all returns filed for 2007.

Individual taxpayers who itemized their deductions reported $59 billion in noncash charitable contributions in 2007. Of these nearly 24 million taxpayers, almost 7 million reported close to $53 billion in deductions on Form 8283, Noncash Chari-table Contributions.

About 257,000 gift tax returns were filed in 2008, with 96 percent nontaxable. The reported total amount of gifts was $45 billion. Cash was the predominant type of gift, representing 46 percent of the total, while corporate stock accounted for 24 percent and real estate 17 percent. The majority of gift tax returns, almost 52 percent, were filed by female donors.

Of the more than 400,000 simple trusts analyzed, total income was $15 billion in 2002 and reached $26 billion in 2006. Total deductions grew from $12 billion to $15 billion over the same period for simple trusts. For the more than 700,000 complex trusts analyzed, reported total income increased from $28 billion in tax year 2002 to $60 billion in tax year 2006. Total deductions increased from $15 billion in 2002 to $20 billion in tax year 2006 for complex trusts.

ETHICS CORNER

IRS OffICIAL SAYS PRACTITIONERS mAY BE SUBJECT TO STACKED PENALTIES

Karen Hawkins, Director of the IRS Office of Professional Responsibility (OPR), lately has stepped up efforts to guide practitioners on her depart-ment’s Circular 230 enforcement efforts. Although monetary penalties have traditionally only been imposed under the Internal Revenue Code, she has announced that OPR now will consider imposing a fine for noncom-pliance with preparer ethical standards. Hawkins added that OPR is more likely to impose a monetary penalty against a firm rather than an individual tax practitioner. Hawkins also observed that if a practitioner is suspended from preparing returns, he or she cannot continue to perform background work at a return preparation firm under the Circular 230 rules.

In a different forum, Hawkins, speaking primarily to lawyers, clarified that in-house counsel are subject to the Circular 230 practice rules. She explained that “practice before the IRS,” which is the current definition used to determine who is subject to Circular 230, includes preparing and filing documents, commu-nicating with the IRS in writing or verbally, giving written advice to a client, and representing a client at taxpayer conferences, hearings or meetings. In short, OPR is taking a broad view of what constitutes practice before the IRS.

ILLINOIS AND LOUISIANA ATTORNEYS CONvICTED Of TAX AND BANK fRAUD

Chicago attorney and CPA John B. Ohle III and Louisiana attorney William Bradley were found guilty in early June of wire and tax fraud conspiracy charges stemming from a scheme to fraudulently obtain referral fees relating to a tax

shelter sold by Ohle’s employer, Bank One. The two allegedly failed to accu-rately report those fees to the IRS and pay the appropriate taxes due. A federal court in Manhattan in the Southern District of New York also convicted Ohle of two counts of tax evasion which also encompassed failure to report millions of dollars he embezzled from a trust, and fraudulent tax shelter deductions used to offset reported income.

According to the evidence at the three-week trial, Ohle was the supervisor in the Chicago office of Bank One’s “Innova-tive Strategies Group” (ISG). The ISG provided estate planning and tax shelter strategies for high net worth clients, including a tax shelter called “Hedge Option Monetization of Economic Remainder,” or HOMER, which Ohle and others designed, marketed and implemented together with attorneys at the now-defunct Chicago and Texas law firm of Jenkens & Gilchrist. The scheme involved the pair fraudulently obtaining referral fees for the shelter. Ohle also was found guilty of tax evasion.

Ohle, 42, of Wilmette, Ill., and Bradley, 46, of Hammond, La., each face a maximum sentence of five years in prison on the conspiracy charge and a maximum fine of twice the gross gain or loss from the crime. Ohle also faces five years in prison on each of the tax evasion charges and similar fines, as well as forfeiture of a multimillion-dollar sports memorabilia collection, which was purchased with funds he obtained through the fraud scheme. Ohle and Bradley are scheduled to be sentenced on September 9, 2010.

NEw YORK fEDERAL COURT PERmANENTLY BARS TwO BROTHERS fROm PREPARING TAX RETURNS

A federal court in Brooklyn, N.Y., has permanently barred brothers Archie J. Pugh Jr. and Theodore Pugh from promoting tax evasion schemes and preparing federal income tax returns for others, according to the Justice Depart-ment. Archie Pugh is the sole proprietor


of Archie’s Tax and Accounting Service in Jamaica, N.Y., and both he and Theo-dore Pugh prepared returns at that loca-tion. In the civil injunction order and 71-page decision, the Judge for the U.S. District Court for the Eastern District of New York found that the Pughs promoted the bogus “claim of right tax-evasion scheme,” which falsely claims that compensation paid for work is not subject to income tax. The two prepared tax returns based on that scheme. The court previously entered an injunction in April 2008 to stop the Pughs from marketing the scheme and preparing income tax returns, but the Pughs violated that order in 2009 by preparing 93 returns.

The Pughs attempted to conceal their preparation of the fraudulent returns by failing to sign them as paid preparers. According to the court’s order, the Pughs improperly attempted to deduct over $3.8 million in customers’ wage income and claim over $500,000 in tax refunds.

THE PROCESS fOR CIRCULAR 230 DISCIPLINARY ACTIONS

Tax professionals subject to Circular 230 face formal disciplinary actions by the IRS Office of Professional Respon-sibility (OPR) if they do not comply with the rules. Soon, all tax preparers, including unenrolled preparers will be subject to the Circular 230 disciplinary rules and procedures. This article outlines those procedures and identifies the appeal rights and possible sanctions OPR can impose on a tax professional.

Allegation LetterThe first step is for OPR to open an

investigation of a practitioner. If OPR believes that the Circular 230 rules have been violated, it will open an investiga-tion. Once it determines that the charges have merit, the next step is to send the tax practitioner an allegation letter. The allegation letter summarizes the charges against the practitioner and identifies the Circular 230 provisions that allegedly have been violated.

Informal ResolutionAt this point, the matter may be

resolved administratively once the tax practitioner responds to the allegations if the government and the practitioner can work out a resolution. Most cases are disposed of by a negotiated settle-ment between the IRS and the practi-tioner which usually involves the practi-tioner agreeing to some type of sanction with a commitment not to continue the violations. Otherwise, the case will be reviewed by a panel of OPR attorneys to determine whether a formal complaint against the practitioner should be brought by OPR.

Formal AdjudicationIf OPR decides to proceed with the

case, it will file a formal complaint containing the allegations. The prac-titioner must file an answer to the complaint admitting or denying each allegation. The practitioner has at least 30 days from the date the complaint is served on the practitioner to file an answer. If the practitioner does not file an answer on time, the allegations are deemed admitted and the person’s hearing rights are waived.

Once the answer is filed, a hearing will be set within 180 days. The case then goes to hearing before a federal administrative law judge (ALJ). The hearings are conducted under a more informal process then than required in a regular court of law.

Like in criminal cases, the government has the burden of proving that the prac-titioner violated the law. The standard for evaluating the government’s proof depends on the type of sanction sought by the IRS. If the penalty the IRS is seeking is a suspension from practice of less than six months, the standard of proof is a “preponderance of the evidence.” If the government requests a more severe sanction, it must prove its case with “clear and convincing evidence.” It is OPR’s practice to ask for the maximum sanctions if the case moves to formal adjudication.

The ALJ renders a decision within 180 days of the hearing. Either side can appeal within 30 days of the adverse decision by submitting an appeal request to the IRS Office of Professional Responsibility.

AppealsThe appeal goes to a special counsel of

the IRS Chief Counsel, who is respon-sible under Treasury authority to review all ALJ decisions. Once a final decision is made, either the practitioner or the government may then appeal the case to a federal district court.

Types of SanctionsUnder Circular 230, the IRS may

censure, suspend or disbar an offending practitioner from practice before the IRS. It also can impose monetary penal-ties on both a noncompliant individual or on a firm. These penalties may be in addition to any penalties imposed under the Code or criminal penalties imposed under federal law. A disbarred practitioner may petition the OPR for reinstatement to practice after five years have elapsed since the disbarment.

Cases Available on IRS WebsiteOPR disciplinary actions are made

public on the IRS website by selecting the “Tax Professionals” tab, then choosing the “Circular 230 Tax Pros” link on the left navigator, and selecting the “Final Case Dispositions on Tax Professionals” section.

COPY OF DECISION IN OPR DISCIPLINARY ACTION

Set forth on following page is a copy of a decision in an OPR disci-plinary action against an attorney for failure to file tax returns. These decisions are commonly posted on the IRS website.

United States

Department of the Treasury_______________________________________________________________________________________________

Director, Office of ProfessionalResponsibility,

Complainant-Appellant(“C-A”)

v. Complaint No. 2008-03

Alex J. Llorente, Esq.Respondent-Appellee(“R-A”)

_______________________________________________________________________________________________

Decision on Appeal

Authority

Under the authority of Treasury General Counsel Order No. 9 (January 19, 2001) and the authority vested in her as Acting Assistant General Counsel of the Treasury who was acting Chief Counsel of the Internal Revenue Service, through a Delegation Order dated February 9, 2009, Clarissa Potter delegated to the undersigned the authority to decide disciplinary appeals to the Secretary of Treasury filed under Part 10 of Title 31, Code of Federal Regulations (“Practice Before the Internal Revenue Service,” sometimes known and hereinafter referred to as “Treasury Circular 230”). This is such an Appeal from a Decision By Default entered by Judge Robert A. Giannasi, Chief Administrative Law Judge of the National Labor Relations Boar(the “ALJ”), against R-A, on September 23, 2008.1

Background

This proceeding was commenced on June 18, 2008, when C-A issued a Complaint against R-A alleging that R-A had committed five separate acts of disreputable conduct under § 10.51 and §10.51(d) of Treasury Circular 230 (Rev. 1994) or § 10.51(f)(Rev. 2002) by willfully failing to timely file or willfully failing to file his personal Federal income tax returns (Forms 1040) for the 2000, 2001, 2002, and 2003 tax years, and the 2005 tax year.2 The Complaint also alleged that R-A: had engaged in practice before the Internal Revenue Service as an attorney, and was subject to the disciplinary authority of the Secretary of the Treasury and the Office of Professional Responsibility. The Complaint also informed R-A that he was required to Answer the Complaint within 30 calendar days of the date of service and informed R-A that a failure to timely answer the Complaint could result in a Decision by Default being entered against him.

R-A did not file a timely Answer to the Complaint. On September 8, 2008, after R-A’s time to file an Answer had passed, C-A filed a Motion for Decision By Default with the ALJ, accompanied by a Declaration and Certificate of Service. Copies of the foregoing documents were served upon R-A.3 When R-A filed no response to C-A’s Motion, the ALJ entered his Decision by Default on September 23, 2008.

R-A then filed his Notice of Appeal on October 23, 2008.4 The Notice of Appeal is unclear and subject to two interpretations. Under one interpretation, the Notice of Appeal states that a late filing of personal Federal income tax returns can never be viewed as disreputable conduct as described in § 10.51, §10.51(d)(Rev. 1994) or § 10.51(f)(Rev.2002) of Treasury Circular 230. Under the other interpretation, you can read R-A’s Appeal as limited to the particular circumstances that pertained to R-A given the circumstances of his unraveling marriage in a community property jurisdiction. I find the first argument without merit and the second argument unpersuasive given other courses of action that may have been available to R-A for some, if not all, of the taxable years in issue. ______________________________1 The ALJ’s Decision By Default appears as Attachment 1 to this Decision on Appeal. This Attachment, together with all other Attachments referred to in this Decision on Appeal, are hereby incorporated by reference in this Decision on Appeal as if fully set forth herein. 2 At the time the Complaint was filed, the charge pertaining to the 2000, 2001, 2002 and 2003 tax years was that R-A willfully failed to timely file his personal income tax returns (Form 1040), and the charge pertaining to R-A’s 2005 tax year was initially the failure to file at all. Subsequently, the charge relating to the 2005 tax year was amended to willful failure to timely file R-A’s personal Federal incom tax return (Form 1040) for the 2005 tax year.3 Copies of these documents appear as Attachment 2 to this Decision on Appeal.4 A copy of R-A’s Appeal and the April 9, 2006 letter from R-A to Elizabeth Ahn of the Office of Professional Responsibility (which accompanied it) collectively appear as Attachment 3 to this Decision on Appeal.

Cf. Section 66 of the Internal Revenue Code.5 Whatever difficulties he faced in filing his returns given his awkward marital status and hoped for resolution of his marital difficulties, late filing or non-filing over five years was not an appropriate response. See United States v. Boyle, 469 U.S. 241 (1985), where the Supreme Court stated:

Deadlines are inherently arbitrary; fixed dates, however, are often essential to accomplish necessary results. The Government has millions of taxpayers to monitor, and our system of self-assessment in the initial calculation of a tax simply cannot work on any basis other than one with strict filing standards. Any less rigid standard would risk a lax attitude toward filing dates. Prompt payment of taxes is imperative to the Government, which should not have to assume the burden of unnecessary ad hoc determinations.

469 U.S. at 249. I find this statement equally true in the case of refund and balance due returns, where the burdens imposed on the Internal Revenue Service can be significant.

Subsequently, C-A filed both a Reply and an Amended Reply to R-A’s Appeal.6 In her Amended Reply to R-A’s Appeal, C-A properly noted that R-A had not timely raised these issues either in an Answer to the Complaint or in a timely Response to C-A’s Motion for Default Judgment. C-A noted that R-A had provided no explanation of either of these failures and stated that R-A should not now be permitted to raise these issues on Appeal. I agree. In fact, I see a disturbing commonality between R-A’s conduct with respect to his personal Federal income tax returns (i.e., the underlying charges against him) and his conduct during this proceeding. I therefore AFFIRM the ALJ’s findings and conclusions with respect to the charges against R-A.

Sanction

I review the ALJ’s sanction determination de novo and with the full authority of the Secretary of the Treasury and the charging agency. Accordingly, I may increase the penalty, decrease the penalty or affirm the penalty. For the reasons stated by the Supreme Court in Boyle, supra, I view the willful failure to file a personal Federal income tax return as a serious offense. When confronted by a pattern of willful7 failures to file personal Federal income tax returns extending over five years, I have uniformly imposed a sanction of disbarment. I do not find R-A’s ongoing marital discord to constitute a mitigating factor that I should consider in deviating from my prior practice of disbarring practitioners for such conduct. According, I hereby DISBAR R-A from practice before the Internal Revenue Service.

Conclusion

This Decision on Appeal constitutes FINAL AGENCY ACTION in this proceeding.

_______________________________________________________________________________________________David F. P. O’ConnorSpecial Counsel to the Senior CounselOffice of Chief CounselInternal Revenue Service(As Authorized Representative of the Secretary of the Treasury)

April 10, 2009Washington, D.C.

_______________________________________________________________________________________________5 There is a hint in R-A’s April 9, 2006 letter to Ms. Ahn that his reason for late filing may have been his belief that his best interests (and his wife’s) would be served by delaying filing until they could file a joint return. While R-A may have been correct that their best interests would have been served by filing a joint Federal personal income tax return, R-A had no right to fail to timely file returns when it became evident that circumstances would not permit him to file a timely joint Federal income tax return for those years. In his letter to Ms. Ahn, R-A described a spouse “coming apart at the seams,” personally and financially. It is hard to know where the truth lay. The administrative record does not include the version of events from RA’s spouse. Even if she were to confirm R-A’s version of events, it hardly justifies the late filing of R-A’s returns for the years in issue. In years where he could meet each of the requirements of Section 66 of the Internal Revenue Code, he could file a complete return complying with that provision as “married filing separately.” In any years when he did not meet each of the requirements of Section 66, he could have filed a timely return on the basis of all the information available to him, accompanied by a statement explaining his circumstances and reserving the right to file an amended return reflecting more inclusive information when that information was made available to him. Of course, such a schedule could and probably should have prompted an audit of R-A’s wife for the years in issue.6 These documents appear as Attachments 4 and 5 to this Decision on Appeal.7 R-A has not raised in his Appeal the issue of whether his failures to timely file were “willful.” I have had many occasions to discuss this issue in Treasury Circular 230 disciplinary proceedings. I first did so in a Decision on Appeal in Director, Office of Professional Responsibility v. Joseph R. Banister, Complaint No. 2003-02. A copy of pages 40 through 52 of the Banister Decision on Appeal appear as Attachment 6 to this Decision on Appeal. For the reasons discussed in Attachment 6, I find each of R-A’s violations to have been “willful.”

FEDERAL TAX ALERT PAGE 16 JUNE/JULY 2010

ET CETERA

COURT RULES AGAINST fORD’S COmPLAINT fOR $445 mILLION IN TAX OvERPAYmENT INTEREST

A federal court in Detroit has denied Ford Motor Company’s $445 million complaint against the United States for alleged tax overpayment interest. Ford had sent the IRS a cash bond to stop the accrual of interest on its potential corporate income tax liabilities relating to ongoing IRS audits. Ford later asked that the deposits be converted to tax payments. The IRS even-tually determined that Ford had overpaid its taxes and was entitled to a refund. The IRS calculated tax overpayment interest from the date Ford converted the deposits into a tax payment. Ford argued that the interest should have been calculated from the original date of deposit of the cash bond. The federal Judge held that the IRS’s interpretation of the overpayment interest statute was reasonable and that “Ford’s challenges to the government’s treatment of its deposits fail as a matter of law.”

The ruling has cost Ford $445 million in tax overpayment interest.

fLORIDA PROPERTY OwNERS GET TAX RELIEf fOR CHINESE DRYwALL

On June 2nd, Florida Governor Charlie Crist signed into law HB 965 to give tax relief to taxpayers whose homes have been affected by Chinese drywall. During the housing boom, many builders used imported Chinese drywall due to its cheaper cost. Specifically, this legislation was proposed and signed in response to the numerous homes built with drywall imported from China between 2004 and 2007. The Chinese drywall has been found to be contaminated with illness-causing chemicals, odors, and even caused corrosion of metals in homes. Properties impacted by the drywall are now eligible for an adjustment of the assessed value by a property appraiser. To qualify for an adjustment, a property must have drywall that has had a significant negative impact on the property’s value. Also, the home purchaser must have been unaware of the presence of the defective drywall at the time of purchase. If the building cannot be used without remediation to bring the

QUOTES

“Our forefathers made one mistake. What they should have fought for was represen-tation without taxation.”— Fletcher Knebel, American author of political fiction

“From the Boston Tea Party to now, tax fairness is firmly parked in the American psyche.”— Representative Richard Neal (D-Mass.)

“Congress can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay.”—Milton Friedman, Economist

“The fundamental class division in any society is not between rich and poor, or between farmers and city dwellers, but between taxpayers and tax consumers.”— David Boaz, Executive Vice Presi-dent of the Cato Institute

“We can have all the information in the world . . . we can be bombarded with infor-mation 24/7 . . . and it can mean nothing if we don’t know how to analyze and make the best use of it.”—IRS Commissioner Douglas Shulman speaking to the American Payroll Association about the IRS’s latest information reporting initiatives.

www.nstp.orgService to the Tax Profession

property up to current building standards, then the property will be valued at zero.

As of March 1, 2010, the Florida Depart-ment of Health confirmed that 530 homes have been impacted by Chinese drywall. The bill applies to the 2010 and subsequent tax assessments but is repealed on July 1, 2017, unless reviewed and reenacted by the Legislature.

More Information: There truly is a website for everything. Go to the website, www.chinesedrywall.com for informa-tion on the drywall problems, litigation, and current news. The site appears to be connected to legal services relating to chinese drywall claims. Also see http://chinesedrywallcomplaintcenter.com.

RHODE ISLAND TACKLES TAX REfORm IN TOUGH ECONOmIC TImES

On June 4, the Rhode Island General Assembly approved a tax overhaul bill that would phase out the standard deduc-tion and exemption amounts for higher-income taxpayers while at the same time cutting the top income tax rate. The personal income tax top marginal rate would be reduced from 9.9 percent to 5.99 percent. Supporters of the legislation say the measure will make Rhode Island’s tax system more competitive with those of its neighboring states, including Massachu-setts and Connecticut. The bill also would eliminate some itemized deductions, reduce the number of tax brackets, increase the standard deduction for most taxpayers, reduce the number of tax credits and end the optional flat-tax method of calculating individual income tax.

The final plan is designed to be revenue neutral. To achieve the balance, the plan reduces the value of standard deduction and exemption amounts for taxpayers with adjusted gross incomes (AGI) of between $175,000 and $200,000. For taxpayers with AGI in excess of $200,000, the standard deduction and exemptions will be disallowed.

According to Paul L. Dion, Chief of the State Office of Revenue Analysis, the new plan would have the following effects:

• About 60 percent of resident taxpayers — 297,489 — will see a tax decrease, aver-aging $226 each.• About 21 percent — 103,434 — will see no change.

• About 19 percent — 96,461 — will see a tax increase, averaging $654 each.Governor Don Carcieri is expected to sign the bill. The plan will take effect on January 1, 2011.

Summer 2010 TAX CLIENT NEWSLETTER

tax on the rollover in 2010. You can elect to pay ½ in 2011 and ½ in 2012, spread-ing the income tax hit over two years. You also can make the rollover and then change your mind and undo the rollover anytime up to the 2010 filing date, includ-ing extensions of time to file. Therefore, you could wait until as late as October 15, 2011 to make the final decision.

StrategiesYou must consider where you will

get the money to pay the extra tax if you decide to rollover your IRA into a Roth. Also, you should elect the two-year income split if a one-year rollover would push you into a higher tax bracket. If you already are in a high bracket, you may want to take the entire rollover amount into income in 2010 since it is possible that tax rates may increase for higher income individuals in 2011 when the Bush tax cuts expire. If you expect to be in a lower tax bracket in 2010 because of a job loss or other reduc-tion in income, you may want to take all of the rollover into income in 2010. Again, you must have a source of funds to pay the income taxes. Finally, if you have other losses, such as net operating losses from a business, it may be time to make the switch to a Roth. These losses can help offset the increased income from a Roth conversion.

Act FastTime is running out to make these

decisions. Please contact me and I will evaluate your situation to help you decide if making the special 2010 Roth IRA con-version is beneficial for you. Below is a list of what can and cannot be rolled over into a Roth IRA.

OPPORTUNITY FOR 2010 TAX PLANNING WITH ROTH IRA

You as a taxpayer have a unique opportunity this year to do long-term retirement planning under very favor-able conditions. For 2010 only, it is pos-sible to roll over funds from a traditional IRA into a Roth IRA without penalty and to postpone taxation of the rollover until 2011 and 2012. Also for the first time, there is no income limitation for IRA to Roth rollovers. Prior to 2010, only those persons with adjusted gross income of $100,000 or less could convert to a Roth.

Roth IRAs are different from tradi-tional IRAs because they are more liq-uid—you can pull money more easily out of a Roth before retirement age without penalty, after you have had the Roth for more than 5 years. Also, earnings on a Roth may never be taxed at all if you do not withdraw the earnings portion until after age 59 ½. With Roths, you have no minimum distribution rules, so you do not have to withdraw funds at age 70 ½ if you do not want to.

Another major difference is that Roth IRAs are funded with after-tax money. You get no deduction for contributions to a Roth. So when you convert a traditional IRA, which has never been taxed, into a Roth IRA, you must pay the income tax on the portion of the account that was funded with pre-tax dollars.

Special 2010 Income Splitting RuleThe traditional IRA rules impose a 10

percent penalty on any unqualified with-drawal before age 59 ½. The special 2010 rule allows you to move funds from your traditional IRA into a Roth IRA without paying the 10% penalty. Even better, you do not have to pay the regular income

What Can and Cannot Be Rolled Over Into a Roth IRA

It is important to know what assets can and cannot be rolled over into a Roth IRA. Here’s a run down:

The following items CAN be rolled over into a Roth IRA:

Funds held in another Roth IRA.•

Funds held in a traditional IRA.•

A Simplified Employee Plan (SEP) •or Simple IRA (two years after establishment).A rollover distribution from an •employer retirement plan.An eligible rollover distribution •from a plan where the taxpayer is a beneficiary.

The following items CANNOT be rolled over into a Roth IRA:

Required minimum distributions •(RMDs) from any plan, including inherited IRAs.Hardship distributions.•

Yearly annuity distributions paid •over a taxpayer’s life expectancy or over 10 years or more.Deemed distributions resulting •from a default on an employer plan loan.Dividends on employer securities.•

Corrective distributions of excess •contributions made to a plan.

Special Rule for Inherited IRAsIf a taxpayer inherits an IRA from

his or her spouse, the taxpayer can elect to treat it as the taxpayer’s own plan and can roll it over into a Roth IRA. If a taxpayer inherits an IRA from anyone besides a spouse, it may not be rolled over into an inherited Roth IRA.

Summer 2010 Tax NewS Page 2

The research and development tax •credit for businesses; The new markets tax credit for •businesses; 5-year writeoff for most farm •equipment;Faster depreciation deductions •for new construction, and improvements to restaurants and retail stores; A tax cut for small businesses that •continue to pay employees who have been called to active duty;Tax incentives for use of biodiesel •fuel, hybrids, and other renew-able energy; Tax credit for energy-efficient •new homes and energy-efficient windows. Increased charitable deductions •for contributions of food inven-tory, book inventories, computer equipment, and conservation property;Tax-free distributions from IRAs •used for charitable purposes; Tax incentives for business invest-•ment in low-income areas.Bonus depreciation and small •business expensing for new prop-erty purchased by businesses in Federally-declared disaster areas; Allowing businesses to carryback •to previous tax years losses that are attributable to a Federally-de-clared disaster;

Revenue RaisersIncreased payroll taxes on service •professionals who route their self-employment income through an S corporation.Excise tax increase on oil compa-•nies from 8 cents to 34 cents per barrel to increase the funding for the Oil Spill Liability Trust Fund.Close foreign “loopholes” includ-•ing limits on the foreign tax credit given for taxes paid by U.S. com-panies to other countries.

Taxing “carried interests” of invest-•ment fund managers as ordinary income instead of capital gains.

tions. It would apply to S Corporations whose service business is based on the reputation and skill of 3 or fewer individ-uals or an S Corporation that is a partner in a professional business.

The S Corporation Association of America has opposed the idea as harmful to small businesses, the backbone of the U.S. economy. In fact, the S Corporation is the most common business form for small businesses. If the bill passes, it will take away what is known as the S Cor-poration payroll advantage, which allows S Corporation owner-employees to draw a set salary subject to social security and Medicare tax, while taking the remaining profits out of the business subject only to income taxes. The bill also states that ser-vice professionals cannot use an LLC or LLP to avoid payroll taxes.

Yearly Extensions Now the NormCongress, on a regular basis, extends

these tax breaks one year at a time so each year there is a scramble to pass an exten-sion bill. This year, the provisions already expired as of the end of 2009, so now Congress is faced with extending them retroactively to the beginning of 2010. Even if the extension bill is passed within the next month, as is expected, Congress will be faced with the same problem next year. This bill only extends most of the provisions until the end of 2010, when they will expire again. The entire exercise will then have to be repeated next year.

Expiring Tax Provisions to Be ExtendedTax deduction of $250 per year for •teachers who buy their own class-room supplies. The deduction for college educa-•tion expenses. This provision also would disallow the deduction for higher income families who would receive a higher tax benefit from taking one of the education credits. The additional standard deduc-•tion for State and local property taxes.The deduction for state sales tax •for taxpayers in states that do not have an income tax;

EXTENSION OF POPULAR TAX BREAKS CLOSE TO PASSAGE

The House and Senate are close to resolving their differences on the so-called “Extenders” bills passed by each side over the last few months. The extend-ers bill contains a one-year extension of popular tax breaks such as the tuition deduction, the research credit, and the new markets credit. Reacting to the Gulf oil leak, Congress has just added to the bill an increase in the excise tax on oil to fund clean-up efforts. The House passed H.R. 4213 in December 2009, while the Senate passed its amended version of the measure in March 2010. Both Houses are working on a combined version, try-ing to resolve the conflicts in how to pay for the tax breaks contained in the bills. The new bill with the same number, H.R. 4213, has now taken on the title of the “American Jobs and Closing Tax Loop-holes Act of 2010.”

Under Congressional rules, the tax breaks in the bill have to be paid for with revenue increases (the “pay-go” rule.) The House wants to raise tax revenues by targeting the foreign operations of U.S. corporations. The House bill also contains a provision to increase taxes on hedge fund and other investment fund managers on appreciation of investments (so-called “carried interests”). Under the bill, these interests would be taxed at higher ordinary income rates rather than the lower capital gains rate of 15%. The Senate previously opposed this provision but negotiations are headed toward a compromise. A group of Senators wants to exempt venture capitalists from the carried interest provision.

S Corporation Shareholders Payroll Tax Increase

Senate negotiators added a provi-sion imposing additional payroll taxes on S Corporation income. The provi-sion would apply payroll taxes to all the service-related income of shareholders of S corporations primarily engaged in ser-vice businesses. The provision is targeted at service professionals, such as lawyers and doctors, who route their self-em-ployment income through S Corpora-

Summer 2010 Tax NewS Page 2 Summer 2010 Tax NewS Page 3

be applied as a credit against the employ-ers’ second quarter tax.

Qualified HiresEmployers can only claim the credit

for qualified workers. The Act defines “qualified workers” as individuals who meet the following criteria:

They begin work after February 3, •2010 and before January 1, 2011.

The new law requires employers to •get a statement from each eligible new worker certifying this information: they were unemployed during the 60 days before beginning work or had worked fewer than 40 hours for anyone during the 60 days before being hired. (Note: The IRS has a new form to use for the employee affidavit, which I will provide to you if you want to claim this exemption. You do not have to file this form with your taxes, but you need to keep it on file with other payroll and income tax records.)

They are not employed to replace •another employee unless the previous employee left the job or got fired for cause.

They are not related to the employer. •Strict Eligibility Requirements:

The Congressional Committee that wrote the bill emphasized in its report that the payroll credit will not be allowed if an employer fires an employee to take the credit on some-one else they hire. What this means for you as an employer is that the IRS will be keeping close tabs on your hir-ing and firing practices if you decide to take advantage of the credit.

Employer Must Elect Payroll Credit or Work Opportunity Credit

Under the Act, an employer may not receive the Work Opportunity credit and the payroll credit at the same time. (The Work Opportunity credit allows a credit for employers who hire members of cer-tain targeted groups.) As an employer, you will have to elect which one to take, but you can make this election for each new employee.

IRS has to send the refund within the later of 30 days of the return due date or the date the return is filed. Another new rule would require the IRS to notify tax-payers when it suspects that their identi-ties, or their dependents’ identities, have been stolen.

OutlookThe cell phone change has been pro-

posed before, but has not made it through the Senate. In the past, the cell phone fix has been combined with other tax provi-sions which the Senate objected to. Since this current bill is considered noncon-troversial, and is backed by the Obama Administration, this time it may pass. With the widespread use of cell phones by businesses, the passage of this tax relief would be a significant help to small businesses in difficult times.

Write Your Congressman: You may want to write your Congress-man to encourage the passage of this important taxpayer relief legislation. To find out who represents you in the House and Senate and for a link to their e-mail addresses, go to the website www.contactingthecongress.org and click on your state.

EMPLOYERS GET 2010 PAYROLL TAX HOLIDAY FOR NEW EMPLOYEES

Despite Congress’s stalemate on many legislative agenda items, both sides of the aisle put aside their differences and quickly passed a jobs bill in mid-March. H.R. 2847, the Hiring Incentives to Restore Employment Act (the “HIRE Act”) was signed into law by the Presi-dent on March 18, 2010. The bill gives employers a payroll tax holiday during 2010 for hiring unemployed workers.

Specifically, the HIRE Act relieves employers from having to pay the employer’s share of social security taxes on wages paid to new employees between March 19, 2010 and December 31, 2010. The social security tax rate for employers is 6.2% on wages up to $106,800 for 2010. (The new law does not cover the 1.45% Medicare tax.) A special rule allows a portion of payroll taxes already paid by employers in the first quarter of 2010 to

Increased taxes on corporate •reorganizations, including capi-tal gains taxation of some types of spin-offs of corporate subsid-iaries and taxation of dividends received in certain types of busi-ness reorganizations.

CELL PHONE TAX RELIEF MOVES THROUGH CONGRESS

Just before the April 15th filing dead-line, the House of Representatives passed a bill that would remove the tax on the personal use of employer-provided cell phones. The measure, H.R. 4994, the Tax-payer Assistance Act of 2010, had over-whelming bipartisan support, passing by a vote of 399-9. The bill would relax the burdensome recordkeeping require-ments for businesses that provide cell phones to their employees. Under cur-rent law, personal use of business phones is taxed to employees. Also, employers can only deduct the phones if they can prove the exact amount of business use with extensive records. The bill would remove the recordkeeping requirements, making it easier to get the deduction for business cell phone use.

Offers in Compromise Partial Payment Suspension

The bill also contains a number of other taxpayer relief proposals, including an elimination of the partial payments that are required when you submit an offer to compromise your tax liability. Under current law, taxpayers must send in a partial payment with an their request for an offer in compromise (OIC). The partial payment can be as much as 20% of the total tax liability. Since the partial payment has been required, the number of compromise agreements with the IRS has fallen. Eliminating the up-front pay-ment will make it easier for struggling taxpayers to enter into payment plans with the IRS.

Interest on Tax RefundsThe bill also would require the IRS

to pay interest on refunds on income tax returns which are filed electronically if the refund is not paid promptly. The


exempt organizations. In 2014, the credit increases to 50 percent of premiums paid by small businesses and 35 percent of premiums paid by tax-exempt organiza-tions. If your business qualifies for the credit, you can claim it starting with your 2010 income tax return which will be filed in 2011.

The credit is targeted to small busi-nesses and tax-exempt organizations that primarily employ low and moderate income workers. To qualify, a business must have 25 or fewer full-time employ-ees whose wages average $50,000 or less per employee per year. The employer also must provide at least one-half of the employee’s health insurance cover-age amount.

Note: Because the eligibility rules are based in part on the number of full time equivalent employees rather than the actual number of employees, businesses that use part-time help may qualify even if they employ more than 25 workers. The maximum credit goes to smaller employ-ers -- those with 10 or fewer full time equivalents -- paying annual average wages of $25,000 or less. The amount of the credit is reduced for employers with more than 10 full-time equivalents and average wages of more than $25,000 and is completely phased out for employers that have more than 25 full-time equiva-lents or pay average wages of more than $50,000 per year.

Example: For the 2010 tax year, an employer has the equivalent of 9 full-time employees with average annual wages of $23,000 per worker. The employer pays $72,000 in health care premiums for those employees (which must not exceed the average premium for the small group market in the employer’s state). This employer’s credit for 2010 would equal $25,200 or 35% x $72,000 in premiums.

Ineligible EmployeesSelf-employed persons, includ-

ing partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer’s company are not treated as employees for pur-poses of the credit. Unfortunately, sole proprietorships—unincorporated busi-

designed to increase health insurance coverage for U.S. workers. Most parts of the bill are phased in over time or do not take effect at all for several years.

Health Coverage MandateIt is important to understand the

overreaching feature of the law: indi-viduals are required to obtain health insurance coverage for themselves and their dependents after 2013. The law exempts the following persons from this requirement:

individuals who cannot afford •coverage (according to a poverty calculation), taxpayers with income below •the income tax return filing threshold,members of Indian tribes,•

individuals who have short cover-•age gaps, andhardship cases.•

It also mandates that businesses with more than 50 workers will have to offer health coverage or pay a $2,000-per-worker penalty if any of their employees have to seek government-subsidized cov-erage on their own.

To offset the effects of these require-ments, the bill offers tax credits for indi-viduals and for businesses to acquire pri-vate health insurance. As your tax profes-sional, I have been studying the legisla-tion to determine which provisions will have the most immediate and far-reach-ing effect on you and my other clients. As part of my initial assessment, here is a description of some of the key elements of the new Act and how such elements may affect you or your business.

I. Tax Credit for Small Businesses Who Offer Health Insurance Coverage

A new tax credit is available to small businesses that offer health insurance coverage to their employees. The credit is available to employers that pay at least half the cost of single coverage. The maximum credit is 35 percent of premi-ums paid in 2010 or 25 percent of pre-miums paid by employers that are tax-

Self-Employed, Household Employers Do Not Qualify

The payroll tax holiday is not available for self-employed workers who must pay self-employment taxes, which represent both the employer and employee portion of social security and Medicare taxes. It also is not available for hiring household employees, such as maids or babysitters.

Railroad Retirement TaxThe 2010 HIRE Act includes a rail-

road retirement tax holiday for employ-ers which is similar to the Social Security tax holiday.

Credit for Retained WorkersThe new Act also gives employers

an additional credit for employees who stay on the job for a year. The “retention credit” increases an employer’s general business credit by $1000 for each worker the employer keeps on the payroll for at least 52 weeks. A “retained worker” also must receive wages during the last 26 weeks that are least 80 percent of the wages the employer paid the worker dur-ing the first 26 weeks. While the general business credit usually can be carried back and carried forward, the employee retention credit may not be carried back to earlier tax years.

Higher Deduction for Business Property

The 2010 HIRE Act increases for one year the amount a taxpayer may deduct for investments in business property. Under the bill, taxpayers may take an immediate deduction instead of depreciation for up to $250,000 of the cost of business prop-erty. For taxable years beginning in 2010, these limits were going to be reduced to $125,000, however, the HIRE Act contin-ues the higher limits.

HEALTH CARE TAX PROVISIONSThe 2010 Health Care Act passed by

Congress in March is an amazingly com-plicated piece of legislation. It contains many tax provisions, both in the form of incentives and disincentives for individu-als, businesses and insurance companies


III. Health Benefits Coverage for Adult Children

If you have adult children who need to participate in a group health insurance plan, you now may be able to cover them under your employer’s plan. Health insurance coverage for an employee’s children under 27 years of age is tax-free to the employee, effec-tive March 30, 2010. The Health Care Act requires group health plans and health insurance issuers that now pro-vide dependent coverage of children to continue to make coverage available for an adult child up until age 26.

If you participate in an employer cafeteria plan, your employer can allow you to immediately make pre-tax sal-ary contributions to provide coverage for children under age 27. (Cafeteria plans allow employees to choose from a menu of tax-free fringe benefit options.) Note: There is no requirement for a health insurer to provide coverage for anyone, including dependents, but if the employer offers a plan for dependent children, the coverage must continue until the child turns 26.

Employees who have children who will not have reached age 27 by the end of the year are eligible for a tax exclu-sion of the amount the employer pays for the adult child’s coverage. This exclusion is available from March 30, 2010 forward, if the child is already covered under the plan or is added to the plan at any time during 2010. Eligible children include a son, daugh-ter, stepchild, adopted child or foster child. Also, self-employed persons may take a deduction for the health insurance costs of their adult children up to age 27.

IV. Excise Tax on High-Value Health Plans

This provision is not a tax on indi-viduals, but is a tax on health insurers who provide high-cost health plans (called “Cadillac plans” in the media). There is so much press on this issue, that I have included a basic descrip-tion. The tax will be 40% of the cost

nesses and tax-exempt organizations to make them aware of the new health care tax credit, so you may hear from the tax collector on this issue. In addi-tion, I am studying the IRS and Con-gressional information on the credit, and I will be prepared to evaluate your situation if you incur health insurance costs for your employees, and you believe you are within the employee and wage limits.

II. Tax Credit for Individuals to Buy Health Insurance

The 2010 Health Care Act provides a new refundable tax credit to quali-fying taxpayers who buy their own health insurance through one of the new Health Care Exchanges to be put in place after 2013. This new credit is called the “premium assistance credit.” The credit will be refundable—you can get it even if you have no tax liability—and will be payable in advance directly to the health insurance provider

The problem with this credit is that most taxpayers cannot qualify for it unless they have relatively low income. To qualify, a taxpayer must have house-hold income of at least 100% but not more than 400% of the federal poverty line and must not be eligible for Med-icaid, employer-sponsored insurance, or other acceptable coverage. The cur-rent federal poverty line for a family of four is $22,050 (slightly higher for Alaska and Hawaii).

Amount of the CreditThe credit will be based on a slid-

ing scale for individuals and families with household incomes between 100% and 400% of the Federal Pov-erty Line. The Secretary of Health and Human Services will determine the credit amount based on the per-centage of a taxpayer’s income needed to pay health insurance premiums. As the availability of the credit gets closer, the government will be releas-ing more information to assist tax-payers and their representatives in calculating the available credit.

nesses owned by one person or a mar-ried couple, cannot take the credit for the owner and the owner’s family members who work in the business, although some commentators have taken the position that a spouse-employee who otherwise qualifies would be eligible for the credit. I believe the IRS will have to put out more guidance on this issue, as it is unclear from the legislative language and the IRS news releases.

Coordination with Health Insurance Deduction

Employers now are eligible for a deduction for health insurance premi-ums paid for their employees. Under the new law, the employer will be able to continue to deduct health insurance expenses which exceed the expenses for which the credit was claimed.

Criticism of its ComplexityA number of Republicans in Con-

gress and several small business groups, such as the National Federation of Independent Business, have criticized the credit as being too complicated. The full time equivalency rules and the average wage calculations are mak-ing it difficult for businesses to deter-mine whether they qualify. The credit also drops off sharply once a company gets above 10 workers and $25,000 in average annual wages, so slightly larger business actually may receive a very limited credit. Finally, the credit is not refundable. It is limited to an employer’s federal income tax liability. Therefore, if a small business is losing money due to the economy, it might not be able to use the credit even if the business otherwise qualifies. Congress may have to make some adjustments in the credit to answer these concerns. In the meantime, the IRS has undertaken a media campaign to acquaint small businesses with the existence of this credit, as explained below.

Your Eligibility for the Credit The IRS has mailed postcards to

more than four million small busi-


an official change of address to the U.S. Postal Service. Otherwise, any change of address with the IRS must be in a very specific form. If your address changes, please notify me promptly, especially if you expect any communications from the IRS. I will promptly make the neces-sary changes in your address of record with the IRS.

STORM VICTIMS IN MANY STATES QUALIFY FOR IRS DISASTER RELIEF

The IRS can barely keep up with all of the areas being designated federal disas-ter areas due to recent storms, floods, and other natural disasters. Taxpayers in the following states have recently been given tax relief by the IRS: Alabama, Connecticut, Kentucky, Oklahoma, Tennessee, Massachusetts, Mississippi, North Dakota, New Jersey, Rhode Island, and West Virginia. The relief comes in the form of relaxed filing and pay-ment deadlines for taxpayers who live in disaster areas or who operate a business in a disaster zone. The IRS’s computer systems automatically identify taxpay-ers located in the covered disaster area and apply automatic filing and payment relief. If you live in or have a business in an area located outside of the immediate disaster area, you may still be eligible for tax relief. I will be glad to contact the IRS on your behalf to see if you qualify.

PAYROLL AUDIT PROGRAM LAUNCHED BY IRS

The IRS has begun an extensive pay-roll audit program targeting fringe ben-efits, worker classification and other payroll tax issues. The audits are to begin in June 2010 and will cover 2008 payroll returns. The IRS suspects that $15 billion in unpaid taxes is due to employment and payroll related issues. Beginning in March, the IRS sent out notices to 2,000 companies notifying them of the audits. Next year, 2,000 more payroll companies will be chosen for audits and another 2,000 in year three. The bulk of these audits will be of small businesses and self-employed taxpayers. Those taxpay-ers selected for audit will be audited for all four quarters of 2008.

VI. Increased Medicare Tax on Individuals and Investment Income

Another revenue raiser in the Health Care Act is an increased Medicare tax on higher income individuals of .09% and a Medicare tax of 3.8% on the net invest-ment income of higher-income taxpay-ers. The Act increases the employee portion of the Medicare Hospital Insur-ance Tax by an additional .09% on wages received over the threshold amount of $250,000 for a joint return or surviving spouse, $125,000 for a married individ-ual filing a separate return, and $200,000 for all other taxpayers. This additional tax also applies to the Medicare portion of self-employment taxes.

The Medicare tax on investment income is a significant change from cur-rent law. Under current law, the Medi-care tax is only imposed on wage or compensation income. For the first time under this bill, the Medicare tax will be imposed on investment income—which is income from interest, dividends, annu-ities, royalties, rents, and capital gains. The tax begins in 2013 and is imposed on net investment income if a taxpayer’s income exceeds the threshold amount of $250,000 in adjusted gross income for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all other taxpayers.

NEW PROCEDURES FOR TAXPAYERS’ CHANGE OF ADDRESS

The IRS recently has updated its rules on how taxpayers must change their address in IRS records. The new procedures are effective June 1, 2010. The IRS uses the taxpayer’s address on the most recently filed tax return for all notices, correspon-dence and refunds, which are required to go to the taxpayer’s “last known address.” Note: The designation of a taxpayer’s “last known address” is important because IRS correspondence to a taxpayer’s “last known address” is legally effective even if the taxpayer never receives it.

For this reason, it is important that the IRS have your most up-to-date address on file. The IRS will automati-cally update your address if you provide

of a health plan which exceeds $27,500 for a family and $10,200 for an indi-vidual. It takes effect in 2018.

V. Increased Businesses Reporting Provisions

To help pay for the Health Care Act, a non-health-related tax reporting provi-sion was included in the final legislation requiring businesses to report payments of $600 or more to other businesses for property or services. With the ink barely dry on the new Act, a House Republi-can joined by the National Federation of Independent Business (NFIB) is call-ing for repeal of business-to-business reporting provision. The provision, which is scheduled to take effect in 2012, is estimated to raise $17.1 billion.

Given the large revenue num-ber associated with this provision, it is unlikely that the opponents of the reporting requirement will have much success in the short term in getting it repealed. However, this change could have a very broad-reaching effect on small businesses across the country. Under the provision, any business that pays another business more than $600 a year in gross proceeds for goods or services must file a 1099 Form with the IRS for the payment. Reacting to recent criticism, the IRS Commissioner, Doug-las Schulman, has assured businesses that they will not have to report credit or debit card payments because these transactions already will be reported to the IRS under new rules for credit card processors. Still, businesses will have to report all other payments over $600 made to another business.

OutlookAs more companies become aware of

the business-to-business reporting provi-sion, the opposition may grow and force Congress to retreat by raising the thresh-old or otherwise exempting smaller com-panies. The paperwork burden for small businesses could be significant. As your tax professional, I will be watching to see if Congress or the IRS will relax this rule for smaller companies before it takes effect in 2012.


Farm Income Averaging.3. Farmers can average their current year’s farm income by allocating it over the three prior years. Deductible Farm Expenses.4. The ordinary and necessary costs of oper-ating a farm for profit are deductible business expenses. The expenses must be of the types that are common and accepted in the farming business.Employees and Hired Help.5. Farm-ers who employ farm workers can deduct their wages. This includes full-time employees as well as part-time workers. Items Purchased for Resale.6. Farm-ers may be able to deduct the cost of livestock and other items purchased for resale in the year of sale. This cost includes freight charges for trans-porting the livestock to the farm. Net Operating Losses.7. Farmers may generate a net operating loss that is usable in other tax years if their deductible expenses from operating a farm are more than their income for the year. These net operating losses may be carried over to other years and deducted. If the loss is car-ried back, the farmer may be entitled to a refund of tax paid in past years. Repayment of loans.8. Farmers can deduct the interest on loans used for their farming business. Fuel and Road Use. 9. Farmers are eli-gible for a special credit or refund of federal excise taxes on fuel used on a farm for farming purposes. The IRS carefully scrutinizes the use of the fuel credit because of problems with ineligible taxpayers trying to claim it. Therefore, it is important that you keep records of your fuel use so you can prove the fuel was used for the farming business.

FILING PENALTIES REMINDER If you do not file on time, do not pay

on time, or pay too little, you could face a confusing array of penalties. Here’s a list of the most common penalties taxpay-ers may face for not complying with tax filing requirements. You can avoid these penalties by working with me to file your taxes in a timely and complete manner.

amount of income from the sales. The Court had little sympathy for the tax-payer’s arguments, given that she was an IRS Officer. The lesson in this case is that the taxpayer did not keep adequate records; consequently, she lost the case.

Held Check Included in IncomeIn the second case, Morgan v. Com-

missioner, the taxpayer held a check he received for work performed as a sub-contractor for a consulting company. He received it in December 2006 but did not cash it until 2007 and did not report the $16,989 on his 2006 income tax return. The IRS issued a notice of deficiency. The taxpayer argued that he had an agree-ment with the owner of the company that paid him that he would not cash the check until 2007. However, the company reported the full amount to the IRS on a Form 1099-MISC in 2006.

It has long been settled that when a taxpayer is using a cash basis for account-ing, a check received is considered income upon receipt because it is considered the equivalent of cash. The taxpayer did not present any evidence that there had been an agreement not to cash the check other than his own testimony. Therefore, the holding of the check did not shift the income into 2007. It should have been reported in 2006, which the check was received. The Court found for the IRS.

SPECIAL RULES FOR FARM INCOME AND DEDUCTIONS

If you are in the farming business, there are a number of special tax provi-sions which apply to you. Here is a list of farm tax issues which I can help you with.

Crop Insurance Proceeds. 1. Crop insurance proceeds are income and must be reported on a farmer’s return. Farmers receive these pay-ments as a result of crop damage. Sales Caused by Weather-Related 2. Conditions. If a farmer sells more livestock and poultry than he nor-mally would in a year because of weather-related conditions, the farmer may be able to elect to post-pone reporting the gain until the next year.

The IRS expects to complete the audits within 6-8 months although some may take longer. The IRS says the audits were selected at random, and it did not target any particular industry. The primary focus of the audits will be on determining if some 30 types of fringe benefits are being handled properly. The second main focus will be on determin-ing whether employers are properly classifying their workers as employees vs. independent contractors. The IRS also will be looking at the tip reporting of service employees such as restaurant workers. Finally, the IRS will be scru-tinizing the compensation of company officers and managers.

Observation: The results of the pay-roll audits will affect every business because the IRS will use the information it uncovers in these audits to develop payroll audit strategies for all businesses.

TWO COURT CASES EXPOSE INCOME REPORTING MYTHS

Two recent court cases show how taxpayers can get caught up in filing and income myths if they ignore tax rules or they do not seek advice on their income tax liability.

Keep Adequate Records and Save Receipts for Ebay Auctions

In the first case, Orellana v. Commis-sioner, an IRS Revenue Agent was trad-ing on Ebay, with approximately 1200 transactions over a two-year period. She did not include any income or expenses from this activity on her Federal tax fil-ing. The IRS determined that she had unreported income in excess of $32,000. The taxpayer argued that many of the items sold were her own personal prop-erty that she paid considerably more for than the amount she received when the items were sold. She explained that she liked designer clothes for which she would pay over $350 but might get only $50 when sold. However, she never kept her original purchase receipts. The Court ruled in the IRS’s favor, noting that the burden was on the taxpayer to produce the receipts and prove that the original cost of the items exceeded the


catch “unscrupulous preparers” from fil-ing inaccurate returns.

The IRS also is requiring that all tax preparers register with the IRS in a cen-tral database and put their registration number on all tax returns or claims for refunds that they prepare. Tax prepar-ers who prepare returns for a fee must sign the tax return and must put their number on the return. One problem is that the registration requirement will not catch preparers who do not sign the returns. Only taxpayers can stop pre-parers from preparing returns and then giving them to taxpayers to file without the preparer’s signature.

What This Means for YouAs your tax professional, I want to

assure you that I support the efforts to improve the competency of the profes-sion. I already sign all returns, and I have an IRS registration number. As part of a professional organization, the National Society of Tax Professionals, I abide by a rigorous Code of Ethics, and I regularly take professional continuing education courses to keep up with all tax develop-ments so I can serve you to the best of my ability.

Thank You for Your BusinessAs your tax professional, I assure you

that I will be keeping a watchful eye on Congress and on IRS actions which may affect your business and your tax filings. I will be happy to address any concerns and answer questions you have about any of the issues covered in this newslet-ter. Thank you for the opportunity and privilege of allowing me to serve as your tax professional.

Best regards,

or having a death or serious illness in your family. You also may qual-ify for payment extensions due to financial hardship.

NEW MORTAGE DEBT FORGIVENESS RULES

Under a special rule enacted by Congress in 2007, you may be able to exclude income resulting from the for-giveness of a mortgage debt during tax years 2007 through 2012. Normally, if your mortgage company forgives any amount of your debt, the amount for-given would result in taxable income to you. However, up until 2012, taxpayers can exclude up to $2 million of debt for-given on their principal residence. The limit is $1 million for a married person filing a separate return.

The rule applies both to debt reduced through mortgage restructuring, as well as debt forgiven in a foreclosure. To qualify, the debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and the loan has to be secured by the residence. Refinanced debt used for the purpose of substantially improving the taxpayer’s principal residence also qualifies for the exclusion. Refinanced debt used for other purposes, such as to pay off credit cards, does not qualify for the exclusion.

When a debt is forgiven, lenders send taxpayers a year-end statement, Form 1099-C, Cancellation of Debt, showing the amount of debt forgiven and the fair market value of any property foreclosed. If you have lost your home or sold your home for less than its value and you receive one of these Forms, please con-tact me immediately so I can help you take advantage of this special taxpayer relief provision.

IRS BOOSTS OVERSIGHT OF TAX RETURN PREPARERS

You may have heard recently that the IRS has undertaken a major initiative to regulate all tax return preparers. Not only is the IRS conducting field visits to tax return businesses, but they also are sending out agents posing as taxpayers. The undercover visits were designed to

PENALTIESIf you do not pay your tax by the 1. due date of your tax return, you could face a failure-to-pay penalty.

The failure-to-file penalty is gener-2. ally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, it is better to sim-ply file your tax return and then explore other payment options.

The penalty for filing late is usu-3. ally 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.

If your return is filed more than 4. 60 days after the due date or the extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

You will have to pay a failure-to-5. pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.

If you filed an extension and you 6. paid at least 90 percent of your actual tax liability by the due date, you will not be faced with a fail-ure-to-pay penalty if the remain-ing balance is paid by the extended due date.

If both the failure-to-file penalty 7. and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the fail-ure-to-pay penalty. However, if you file your return more than 60 days after the due date or the extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

You will not have to pay a failure-8. to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of rea-sonable cause and not because of willful neglect. Reasonable cause includes such things as getting incorrect information from the IRS Service to the Tax Profession

Dear Member:

Since the January 5, 2010 announcement by the Internal Revenue Service that all return preparers willbe required to register with the IRS in order to continue to prepare tax returns, NSTP has provided youwith all the details as we have received them.

In the January 5 announcement the IRS also mandated that each tax preparer will be required to pass anexam during an initial three year testing period. At this point in time, no specific details have beenreleased as to the exact time when the exam will be ready for tax preparers to actually sit for the exam.There have been some news releases which state that the exam will be available in May or June of 2011,while other articles state June or July 2011. Other tax associations have made announcements whichwould lead one to think and believe that you have to take a preparation course immediately. One evenasked if you were "scared" about the test! But in reality, at this moment no specific date is available andthe IRS has only recently made an announcement looking for vendors to write the exam. In addition,although a general description of the exam has been given, the exact details of “what” will be testedhave not been released.

In the meantime, NSTP is focusing on the issue that an exam will be required to be taken and passed tocontinue in the field of tax preparation. To ease any concerns you may have about this new requirementand give you confidence going into this exam NSTP is preparing educational materials that will beavailable to assist you in your preparation and successful completion of this exam. So the bottom line isthat you can relax because NSTP's materials are going to help get you ready to pass the test.

The best part of it is that you will be able to choose how you would prefer to study. Whether it is byprinted materials used in your home or office, on the internet while sitting at the pool or a live sessionwith one of NSTP's knowledgeable Instructor's, you will be ready to sit for and pass any exam that theIRS commissions to be created. With the combination of your years of professional experience inpreparing your clients income tax returns and providing them counsel and NSTP's educational materials,instructors and methods you will be ready to pass the test. Remember that you will be a sure winner!

You can rely on NSTP to keep you updated on the IRS examination and any issues that arise along theway. Soon, NSTP will be releasing detailed information about each of the programs that we will beoffering.

NSTP appreciates the trust and confidence of our members and will continue to provide guidance andthe highest quality education and materials possible as we look forward to the future and the changesand opportunities it brings to our profession.

Sincerely,

Paul LaMonaca Director of Education

NatioNal Societyof

tax ProfeSSioNalS

910 NE Minnehaha Street, Suite 6 • Vancouver, WA 98665 • 800-367-8130 • Fax 360-695-7115 www.nstp.org

NatioNal Societyof

tax ProfeSSioNalS

910 NE Minnehaha Street, Suite 6 • Vancouver, WA 98665 • 800-367-8130 • Fax 360-695-7115 www.nstp.org

Dear NSTP Member:

In order to demonstrate the organizations gratitude for your support and loyalty to NSTP, please find enclosed a $25.00 certificate for any educational program offered by NSTP. How you use the $25.00 certificate is up to you! If you would like to attend one of the NSTP’s live seminars, conferences or workshops then it is available. If you would rather use it for one of NSTP’s self-study courses, then feel free to do so.

The Board of Directors know that you take pride in your profession and NSTP prides itself in providing the most affordable and highest quality education of any other tax organization. If you are a regular attendee at NSTP’s educational events, then you know that the $25.00 certificate is the icing on the cake. If you haven’t attended one of our live seminars recently, then the $25.00 certificate is your ticket to get back into the quality education game.

As NSTP expands its medium of presentation into other areas such as DVD’S, teleconferences and web base means you will have a more affordable way to access it.

Again, we thank you for your loyalty to NSTP and ask that you help spread the word to your colleagues and friends about your expanded opportunities by being a member of NSTP. NSTP will send you an additional $25.00 education certificate for each new person you recommend who becomes a member of NSTP. As NSTP grows, more services are offered to you, the Tax Professional.

NSTP is here to serve you, the Tax Professional.

Sincerely,

NSTP Board of Directors

Name:

$25 discount on any NSTP educational course$25 DiscountCert i f icate

Signature

National Society of Tax Professionals

910 NE Minnehaha St., Ste. 6Vancouver, WA 98665800-367-8130www.nstp.org

Not redeemable for cash. Redemption value not to exceed $25.00. Limit one coupon per course. Coupon must be presented at time of resistration.

NSTP 2010 RegionalConferences

At theIRS Nationwide Tax

Forums

City Dates Hotel CPE Credits

Orlando, FL July 25 - 26, 2010

Caribe Royale

12 CPE

8101 World Center Drive Orlando, FL 32821 800-823-8300

New York City, NY August 9, 2010

Hilton New York

8 CPE

1335 Avenue of the Americas New York, NY 10019 800-445-8667

Pricing: Members Non-membersNew York City, NY: $195 $245Orlando, FL: $195 $245Las Vegas, NV: $195 $245

How to Register:

Register Online at www.nstp.orgCall (800) 367-8130; Fax registration to (360) 695-7115 or by mail to:

NSTP910 NE Minnehaha St., Ste. 6Vancouver, WA 98665

The Orleans Hotel & Casino

800-675-3267 Room rate:

$69 plus taxes (Friday & Saturaday)

Las Vegas, NV 89103

$32 plus taxes (Sunday - Wednesday)

Las Vegas, NV August 22 - 23, 2010 4500 W Tropicana Ave. 12 CPE

Orlando: Paul La Monaca

July 25-26, 2010

Topic: Details of Form 1040 Schedules A, B & D

New York Paul La MonacaCity: August 9, 2010

Topic: Schedule C Issues

Las Vegas: Paul La Monaca

August 22-23, 2010

Topic: Details of Form 1040 Schedules A, B & D

Program Announcement

New York City - Monday, August 9, 2010

Meeting the Challenges of the Form 1040 Schedule C

This is a “do not miss” course that introduces the tax professional to reviewing, planning and preparing the tax transaction of the Schedule C Sole Proprietorship by looking at the “big picture”. This is the perfect course for the new kid on the block or the seasoned professional.

Highlights include topics 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!•

Course level addresses the challenges of the experienced tax professional with an introduction approach for the developing practitioner. A working knowledge of tax law is recommended and the instructional method is a “Group Live” offering.

Advanced preparation is not required

The course provides for 8 hours of continuing education credit. NASBA approved.

Course Level: Review to Intermediate

Orlando - Sunday & Monday, July 25-26, 2010

Las Vegas - Sunday & Monday, August 22-23, 2010

Looking at the Details of Form 1040 Schedules A, B & D

This course introduces the new and seasoned tax professional to reviewing, planning and reporting the tax transactions of Schedules A, B and D by drilling down deep into the details of the form requirements

Highlights include topics addressing:

Income, Basis and Gains•Gross Income Defined•Discharge of Indebtedness Issues and Basis•§1211 Limitation on Capital Losses•§1091 Wash Sales•§1233 Short Sale Issues•§1244 Small Business Stock Losses•Qualified Dividends•Tax-exempt Interest•U.S. Savings Bond Interest•Schedule A Itemized Deductions•§68 Limitations•Much, Much, More•

Course level addresses the challenges of the experienced tax professional with an introduction approach for the developing practitioner. A working knowledge of tax law is recommended and the instructional method is a “Group Live” offering.

The course is a “roll up your sleeves” workshop course.

Advance preparation is not required

Course Level: Review to Intermediate

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 course provides for 12 hours of continuing education credit. NASBA approved

Administrative Policies

NSTP follows strict administration policies.

REFUNDS: NSTP provides refunds to registrants canceling within 14 days prior to the date of the education. For those registrants canceling within the 14 days prior to the education date NSTP will allow attendance at another seminar site. If there are extrordinary circumstances NSTP will allow the participant to attend a future education course. An administrative charge of $25 will be assessed if cancelled.

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

CANCELLATION: NSTP reserves the right to cancel any program or course for circumstances that are no under direct control of NSTP. If a course or program is cancelled, participants will be refunded 100% of their registration fee.

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 instructor 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 durning 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 suggestion before recommending the same to a client or implementing the same on a client’s or on his or own behalf.

NSTP910 NE Minnehaha St., Ste. 6

Vancouver, WA 98665Phone: (800) 367-8130Fax: (360) 695-7115

www.nstp.org

(800) 367-8130www.nstp.org

NATIONAL SOCIETY OF TAX PROFESSIONALS“Service to the Tax Profession”

Topic Highlights

IRS Mandate on Registration of Tax Preparers ;Introduction to the “ ; 2010 Health Care Act” and “2010 Reconciliation Act”Introduction to the “HIRE Act of ; 2010”Selected Provisions of the American Recovery and Reinvestment Act of ; 20092010 ; Forms ReviewTax Transactions in ; 2010 and Beyond Affected by the Legislation of the 21st CenturyPreparing Your Business Clients for the Credit Card Transaction Reporting Issues ;AMT: What’s Happening? ;NSTP Hotline Hot Topics ;Expiring Income Tax Provisions: Will They Return? ;Audit Issues Facing the Tax Professional’s Practice ;§108 ; Home Mortgage Debt Relief Issues§1091 ; Wash Sale Rules§1211 ; Overall Limitations on Capital Loss Transactions§1244 ; Small Business Stock LossesUnderstanding the Importance of Focusing on AGI ;Preferential Capital Gain Rate Issues: The Zero Rate Still Alive for ; 2010And A Whole Lot More... ;

*Hotel locations TBA

NOTICE: All 2010 Fall Update locations and dates are subject to change

CANCELLATION: NSTP reserves the right to cancel any program or course for circumstances that are not under direct control of NSTP. If a course or program is canceled, participants will be refunded 100% of their registration fee.

For more information please visit www.nstp.org

2010 FEDERAL TAX UPDATE AND REVIEW SEMINARS

ALABAMABirmingham Nov. 1

ARIZONA Phoenix Nov. 29 Tucson Dec. 13

CALIFORNIA Long Beach Dec. 14

COLORADODenver Nov. 19

CONNECTICUTHartford Nov. 16

FLORIDAFt. Lauderdale/Hollywood Dec. 15 Orlando Grand Event Dec. 13-14 Tampa Dec. 2

GEORGIAAtlanta Nov. 30

ILLINOISChicago Nov. 22

LOUISIANANew Orleans Nov. 30

MARYLANDCollege Park Dec. 20

MASSACHUSETTSBoston/Randolph Nov. 10

MICHIGANDetroit Nov. 3

MINNESOTAMinneapolis/Bloomington Nov. 2

NEVADALas Vegas Grand Event Jan. 3-4, 2011Laughlin Dec. 3

NEW HAMPSHIREManchester Nov. 9

NEW JERSEYAtlantic City Dec. 10Carteret Nov. 19

NEW MEXICOAlbuquerque Dec. 7

NEW YORKNew York City Dec. 8Long Island Nov. 17

NORTH CAROLINACharlotte Dec. 6

OHIOAkron/Canton Nov. 16Dayton Nov. 15

OREGONBend Nov. 4Medford Nov. 6Portland Dec. 17

PENNSYLVANIAPhiladelphia Dec. 17Pittsburgh Dec. 13

TEXASDallas Dec. 9Houston Dec. 10San Antonio Nov. 29

VIRGINIARoanoke Dec. 7Springfield Dec. 1Williamsburg Dec. 17

WASHINGTONSeattle Dec. 16Spokane Oct. 22Tri-Cities Oct. 25

WEST VIRGINIACharlestown Jan.7, 2011Cross Lanes Nov. 12

For more information please visit www.nstp.org

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