Tax Watch: IRS proves a beneficiary of life insurance

The 8th U.S. Circuit Court of Appeals has ruled that the Internal Revenue Service is entitled to all of the proceeds of a particular woman’s life insurance policies.

Beverly Luxton’s children, the beneficiaries of her life insurance policies, filed suit against State Farm Insurance Co. in Bloomington, Ind., for breach of contract. The children alleged that State Farm had failed to pay them the proceeds of the policies, and they tried to stop disbursement to the IRS.

The IRS asserted claims against the proceeds, arguing that the mother had assigned the right to the money to the agency as payment for her taxes. The children contended they were entitled to the funds under state law, the policies’ terms and the facts of the case.

Chief Circuit Court Judge James B. Loken, reviewing the district court’s decision, determined that Ms. Luxton had made a valid assignment of her insurance proceeds to the IRS. The court noted that the terms of the policy had allowed Ms. Luxton to assign the proceeds in ways that limited the beneficiaries’ interests.

Chief Judge Loken also explained that a Minnesota law favoring beneficiaries over creditors was inoperative, because the IRS was an assignee, not a creditor.

The court also dismissed the argument that the IRS couldn’t claim the proceeds because it had fashioned an informal agreement with Ms. Luxton, rather that a formal offer in compromise.

Cite: Matthew Luxton, et. al., v. United States, 8th Circuit

Spanish translation lagging at the IRS

* A recent survey conducted by the Department of the Treasury’s inspector general for tax administration found that the IRS hadn’t yet translated many basic forms and guidance notes into Spanish.

This lack of translated tax forms runs counter to the fact that the Hispanic community represents the largest ethnic minority group in the United States.

The survey showed that the IRS had translated just 28% of the forms and instructions identified as most important by organizations that work with Spanish-speaking taxpayers.

Although the Treasury Department gave the IRS high marks for making Spanish translators available to taxpayers who call toll-free hot lines and visit community tax centers, only 16 of the 58 most important documents had Spanish-language versions.

Those forms that hadn’t yet been translated include Form 1040 and Form 1040EZ, along with their instructions, which are most commonly used for filing individual returns. The Form 1040, for non-resident aliens, also hadn’t been translated into Spanish.

The IRS had reportedly also failed to produce Spanish-language versions of two essential forms used by every worker: the W-4 form for tax withholding, which must be filled out by all employees when they start a job, and the W-2 form that employers send their employees at yearend to report wages earned. The IRS said that it planned to translate many more documents by 2005.

IRS beefing up telephone support

* The IRS has announced a new centralized toll-free number for the e-Help desk that supports IRS e-file, Electronic Federal Tax Payment System, Telefile and future e-service customers.

The new number, (888) 255-0654, is available at different times at different locations.

From November through April 15, some of the centers will be available on Saturdays.

New bulletin shows the latest per diems

* The General Services Administration recently announced the fiscal 2004 maximum per diem rates for locations within the continental United States.

These are the same rates published by the IRS for use by taxpayers claiming the per diem allowance rather than actual expenses for travel.

The allowance for incidental expenses for all locations has been increased to $3, from $2. The per diem rates can be found in Bulletin 04-1 at gsa.gov/perdiem.

The IRS will soon issue the same information in detailed form, as well as the high-low rates.

Rule is proposed for foreign partners

* The IRS has issued proposed regulations on the withholding obligations of a partnership that has one or more foreign partners and is engaged in a U.S. trade or business.

The proposed rules implement Section 1446, “Payments to Foreign Partners,” which was enacted in 1986 and requires the partnership to withhold tax on the portion of its net income allocable to all foreign partners.

The amount withheld is calculated by applying the highest marginal income tax rate to the foreign-partner share of partnership net income, according to the IRS.

Cite: Reg. 108524-00

H&R Block loses $630 for snitching

* A U.S. District Court has ruled that an individual is entitled to be reimbursed only for the amount paid to a tax preparation service that voluntarily tattled to the IRS before he filed his tax return.

The court awarded damages for breach of contract because the preparer voluntarily gave the IRS documents that supported their suspicions of the individual’s fraud before his tax return was filed.

Walter and Sarah Sorenson sued H&R Block Inc. in Kansas City, Mo., alleging that a Block employee had reported to the IRS suspicions of the Sorensons’ fraud on their 1993 tax return before the return was filed.

Mr. Sorenson alleged that the disclosure had led to audits, a criminal investigation and a civil tax settlement. The Sorensons sought damages for false trade practices, negligence, breach of contract, breach of covenant of good faith and fair dealing, misrepresentation, and loss of consortium.

U.S. District Judge Douglas P. Woodlock granted the Sorensons’ summary judgment on the charges that the voluntary disclosures were a breach of contract, and an unfair and deceptive trade practice.

The court, however, granted summary judgment to H&R Block on the other counts. It awarded return preparation fees to the Sorensons for 1993.

Mr. Woodlock rejected the couple’s attempt to reargue the first determination and refused to reopen the record, as the purported opinion testimony wouldn’t change the result. The court found that the recognition of a privilege of confidentiality with tax preparers isn’t covered by the traditional privilege.

Mr. Woodlock noted that H&R Block was prepared to pay back to the Sorensons the total tax preparation fees they paid for 1993-1995 as damages for the breach-of-contract claim. The judge, doubling the fees under state law, added $200 to the award and held that the couple was entitled to $630.

Cite: Walter F. Sorenson, et ux., v. H&R Block Inc., et al., D. Mass.

IRS, states in cahoots in tax evasion war

* Tax season is still months away, but the IRS couldn’t wait to announce a new partnership with a number of state governments for the purpose of fighting abusive tax avoidance.

Under agreements with 40 states and the District of Columbia, the IRS will share information about abusive tax avoidance transactions and the taxpayers that use them. The IRS expects more states will soon join the partnership.

According to the Department of the Treasury, abusive transactions to avoid taxes deprive state and federal governments of billions of dollars. Corporations and wealthy individuals will reportedly be the first targets.

“We’re closing in on you from all sides,” said IRS Commissioner Mark Everson. “The states and the federal government are now fighting as allies.”

Under the agreement, the federal and state governments will share information when an evasion is first detected or identified. Tax officials currently wait until they finish an audit before sharing information about tax evasion.

Tax filing now more time-consuming

* Figures recently released by the IRS indicate that there is a downside to the recent tax cuts – at least for consumers.

As the IRS continues to draft new forms to take into account the new laws, it’s becoming clear that taxpayers will spend more time filling in longer forms.

Reporting capital gains will, for example, require taxpayers to work with two different rates, taking into account the former 20% rate that existed prior to May 6 and the new 15% rate operational thereafter for stocks held 12 months or longer.

As a result, the draft form for reporting capital gains or losses has reportedly grown to 53 lines, from 40. This could potentially affect up to 15 million taxpayers, according to the IRS.

In the coming tax season, capital gains won’t be the only concern to which taxpayers and their advisers will have to pay extra attention. The IRS expects some 20 million people to conform to new rules for reporting dividend income next year, following rates’ being slashed to 15%. Around 27 million taxpayers who received an advance child tax credit payment will have to complete a worksheet.

The IRS also estimates that some 10% of small businesses will have to spend more time keeping records to benefit from tax breaks on the purchase of new equipment.