Tax Watch: Treasury is mapping a simplified tax system

The Department of the Treasury is beginning to work on tax reform, and plans to consider a replacement system that will ease compliance, promote economic growth and simplify administration, according to Pamela F. Olson, deputy assistant secretary for tax policy.

In a recent speech in Washington, Ms. Olson said the current tax system is “obviously very complicated and expensive to administer” and is “loaded with uncertainty.”

To provide more clarity, the department has outlined two priorities: advocating rules that are “comprehensible,” and accurately answering questions.

Ms. Olson also said that the Treasury and the Internal Revenue Service are monitoring tax shelters closely to determine if the recently released corporate regulations are effective.

She said shelter activity has fallen dramatically, as has tax shelter promotion in the corporate area.

Court hits hard at tax frivolity

Getting one’s day in court may prove to be an expensive proposition for some taxpayers.

People face stiff fines from the U.S. Tax Court, appeals courts and U.S. district courts for pursuing frivolous tax cases.

The IRS recently warned that the courts are sending a clear message.

“Congress was concerned about taxpayers misusing the courts and obstructing the appeal rights of others when it enacted tougher sanctions in the 1980s,” IRS Commissioner Charles O. Rossotti said recently.

“The courts are for resolving unclear issues of law, not a forum for repeating arguments that the courts have already rejected.

“Taxpayers intending to use the courts as a soapbox should consider the potential cost.”

The law allows the courts to impose a penalty of up to $25,000 should they reach any of the following conclusions:

* A taxpayer instituted a proceeding primarily for delay.

* A position is frivolous or groundless.

* A taxpayer unreasonably failed to pursue administrative remedies.

For example, the Tax Court last month penalized two California residents in separate cases for trying to avoid taxes through the use of trusts.

On June 21, the court said that Charles and Francesca Sigerseth of El Macero met all three of the above criteria, and fined them $15,000.

The court said the case was “a waste of judicial and administrative resources that could have been devoted to resolving bona fide claims of other taxpayers” (Sigerseth v. Commissioner).

On June 7, the court found that Andy Hromiko of Roseville, not his trust, was the true earner of income. It noted that he had made “shopworn arguments characteristic of the tax protester rhetoric that has been universally rejected by this and other courts,” and fined him $12,500 (Mitrixinfosys Trust v. Commissioner).

Trust transfers qualify as gifts

The IRS has ruled that a father’s transfers and proposed transfers to a trust can count as gifts of present interests qualifying for the annual exclusion for taxable gifts.

What’s more, the resulting trust assets are not includable in the father’s gross estate.

According to the IRS, a father created an irrevocable trust to benefit his children. During his life, trust principal and income may be distributed to the children.

Learn the benefits of an Irrevocable Trust.

The trustee must notify the children of the existence of the power to withdraw funds, as well as any contributions made to the trust subject to that power.

The IRS noted that the trustee is legally required to notify the children of the withdrawal power and any contributions to the trust. Plus, the children have adequate time to exercise their right of withdrawal after notice.

The IRS also ruled that the father had not retained any right to have the use, possession, right to income or enjoyment of the property applied toward the discharge of a legal obligation. Thus, the trust property is not includable in the father’s gross estate.

Cite: LTR 200123034

Related Topics: Taxes