Tax Watch: IRS starting fast-track dispute resolution

Beginning this month, small businesses and self-employed taxpayers can resolve tax disputes through a new fast-track mediation program offered by the Internal Revenue Service.

Disputes will be resolved through the new expedited process within 40 days, not several months as with the regular appeal process.

Under the new program, either the taxpayer or the IRS’ small business/self-employed division can propose mediation of disputed examinations or collection actions.

If both parties agree to mediation, a specially trained IRS mediator from the appeals division steps in. The mediator facilitates discussion and may request additional information, but cannot impose a resolution.

The taxpayer and the IRS must agree on any resolution. Taxpayers do not give up any of their rights and can withdraw from mediation at any time.

“A primary focus in the IRS reorganization has been to develop systems and processes that improve service to the taxpayer. Fast-track mediation is geared to meet taxpayer needs by resolving controversy at the earliest resolution point within the IRS,” says Joseph Kehoe, IRS commissioner for the small business/self-employed division.

In June 2000, the IRS began testing fast-track mediation in four cities: Denver, Houston, Hartford, Conn., and Jacksonville, Fla.

The process did indeed shorten the time it takes to resolve a tax dispute. Taxpayer feedback indicated an average satisfaction rate of 4.2 on a scale up to 5.0.

Issues not resolved during the mediation process can follow the normal IRS appeal process.

Certain issues, including Service Center appeals, or those issues with no legal precedent, cannot be addressed in fast-track mediation.

Pricewaterhouse settlement reached

The IRS recently reached an agreement with PricewaterhouseCoopers LLP relating to tax-shelter registration and list maintenance.

Without admitting or denying wrongdoing or legal liability, the New York-based accounting firm will make a substantial payment to the IRS to resolve issues in connection with advice rendered to clients dating to 1995.

Furthermore, the company has reportedly agreed to provide certain legal client information, such as summonses, to the IRS and to work with the IRS to develop processes that ensure compliance with the Internal Revenue Code and Treasury regulations for registering tax shelters and maintaining lists of investors in tax shelters.

Reporting mismatch may trigger letter

Some taxpayers soon will receive mail from the IRS as part of its new “enhanced compliance effort.”

The initative seeks to encourage taxpayers to properly report income or losses from a partnership, S corporation or trust on individual tax returns.

Earlier this year, the IRS began matching information reported on Schedule K-1 with income or losses reported on Form 1040 and other schedules.

The IRS will send notices to taxpayers when there is a mismatch in information provided on tax-year 2000 returns. To date, some 65,000 notices have been issued.

In many cases, according to the IRS, the taxpayer or tax professional can resolve the issue with a letter or phone call.

Partnerships, S corporations and trusts are not, of course, taxable entities. Taxes are levied, in general, directly on partners, shareholders or beneficiaries.

These flow-through entities must file information returns with the IRS and also must provide to members or shareholders a Schedule K-1, which details an individual’s share of profits, losses, deductions or credits.

The IRS processed more than 18 million Schedule K-1 forms for 2000, recording $1.2 trillion in income to partners, stockholders and beneficiaries.

Now, in an effort to perfect the matching program, IRS examiners are screening returns manually to ensure consideration of issues such as passive-loss limitations and income or losses reported on Schedule E.

A notice is generated when the examiners are unable to determine the cause of the discrepancy.

Land sale to Army deemed involuntary

When the Army Corps of Engineers persuaded a corporation to sell its land, the proceeds of the sale were the result of an involuntary conversion, the IRS has ruled.

The corporation’s primary business activity involved the ownership, management and leasing of land.

Hoping to protect the corporation’s land from overdevelopment, the Corps of Engineers expressed interest in purchasing a portion that was used for hunting, camping and other activities.

When the corps mentioned it would invoke eminent domain proceedings if necessary, the corporation sold the land to the corps.

The IRS concluded that the corporation’s land sale meets the requirements of Section 1033, “Involuntary Conversions,” and, thus, qualifies for the three-year replacement period.

Further, the IRS concluded that if the corporation purchases within the three years property that is similar in kind, service or use, such property would be treated as qualified replacement property for the purposes of Section 1033.

Cite: IRS Letter Ruling 200219006

Brokers get break on options reporting

The IRS recently exempted brokers from reporting certain sales of stock received by exercise of options.

Brokers do not have to report such sales if they involve an employee, former employee or other service provider who obtained the options in exchange for services and if they occur on the same day the option is exercised.

However, the exemption does not apply if the employer uses an amount other than the sale price of the shares to calculate the employee’s compensation income generated by the exercise of the option.

Additionally, this exception does not apply to exercises of stock options that had a readily ascertainable fair market value at the date of grant.

The IRS announced this change in Rev. Procedure 2002-50, 2002-29 I.R.B., 7/22/02.

Court won’t bite on anglers’ line

The U.S. Tax Court recently ignored one couple’s fish stories and concluded that they had not entered into their fishing “business” with the required profit motive.

James Peacock, owner of several successful auto dealerships, and his wife, Myrtice Peacock, organized Profitable Management Services Inc., an S corporation, in 1993, according to the IRS.

Mrs. Peacock was the shareholder, and the couple were employees of the corporation. From 1994 to 1997, its activity was the couple’s participation in deep-sea fishing tournaments.

The tournaments were held worldwide, and individual prizes went as high as $1.2 million. Unfortunately, the corporation didn’t win cash prizes in 1994, but did win in 1995, 1996 and 1997.

Mrs. Peacock fished in the tournaments as a team member on the couple’s yacht. Mr. Peacock handled the team’s management and finances.

Using the factors outlined in the tax regulations, Tax Court Judge David Laro concluded that the couple didn’t conduct the fishing activity with the requisite profit motive.

The court also noted that the couple kept inadequate records, did not know know how to run the business for profit, did not seek expert advice on that matter, participated in the activity as a recreational and social pursuit, had a series of losses beyond the startup stage and had sufficient income from other sources such as the dealerships that the losses would lower their tax.

Also, it was clear that the couple enjoyed participating in the tournaments.

Cite: James R. Peacock, et ux., v. Commissioner, T.C. Memo 2002-122