Tax Watch: New tax cut may bypass 8 million taxpayers

A recent study by the Urban Institute-Brookings Institution Tax Policy Center claims that 8.1 million low- and middle-income taxpayers who pay billions in income taxes each year will receive no tax reduction under the new tax law.

“The 8.1 million figure includes 5.6 million taxpayers who pay more than $250 in income tax,” the study found.

According to the report, nearly half the taxpayers who pay $250 to $750 in income taxes will receive no tax cut under the Jobs and Growth Tax Relief Reconciliation Act, which President Bush signed May 28.

Meanwhile, Sen. Charles E. Grassley, R-Iowa, chairman of the Senate Finance Committee, has announced that he plans to push for new legislation to restore a Senate-passed provision that would make the child credit refundable.

The measure would accelerate the refundability of the child tax credit for families with no income tax liability, simplify the tax law by providing a uniform definition of a child and make the $1,000 child credit permanent.

Democrats support the refundability provision but may insist that new tax cuts be revenue-neutral.

Senate Minority Leader Tom Daschle, D-S.D., has suggested that lawmakers offset the cost of the plan by reducing tax cuts geared to higher-income taxpayers.

Withholding tables available online

* Effective immediately, the Internal Revenue Service has posted to its website new tables to be used by employers when calculating how much federal income tax to withhold from workers’ wages.

The recently posted tables contain the percentage-method formulas used by payroll programmers.

The IRS expects to mail printed copies of Publication 15-T, which contains all of the tables, to employers nationwide by the third week of June.

In a recently published report, the IRS has provided information on the increased child tax credit and details on the advance payments that are to be made to all eligible taxpayers. The first payment will be mailed July 25, with the last checks going out Aug. 8.

Taxpayers who have received filing extensions will still get the advance-payment checks if they’re eligible. They should have their advance-payment checks about four to six weeks after the IRS receives their 2002 tax return. Taxpayers must have claimed the child tax credit on their 2002 return.

Taxpayers who are not eligible for the advance payment may still qualify for the increased child tax credit of up to $1,000 when they file their 2003 tax return next year.

If you can mail it, they can tax it

* The state of North Carolina reportedly has begun auditing companies for sales taxes that the state claims it is owed on postage. Yes, we’re talking about state taxes on postage.

Those audits, now in the administrative-hearing stage, involve small local co-op mailers that billed clients for postage, according to Melanie C. Hill, a tax specialist with DL&A Price Tax Consulting Group LLC of Greenville, S.C.

Also affected are printers and letter shops that acquire postage for clients as a service, even when that is done at cost “as a straight pass-through,” says Ms. Hill.

Postage is taxable only when it is included on an invoice and only under North Carolina’s new streamlined sales tax plan.

Offshore insurers subject of warning

* The IRS has issued a notice warning individuals not to use investments in purported offshore insurance companies to defer recognition of ordinary income or to characterize the income as capital gains.

In a typical arrangement, an individual invests in the equity of a foreign corporation that is organized as an insurance company. The corporation issues insurance or annuity contracts to “reinsure” risks underwritten by insurers.

Some of the contracts don’t cover insurance risks, while others significantly limit the risks assumed by the corporation through retrospective rating arrangements, unrealistically low policy limits, finite-risk transactions or similar devices.

The corporations then invest the capital in hedge funds, generating returns that substantially exceed the needs of the company’s insurance business.

Generally, the corporation doesn’t distribute the earnings to the shareholder. The shareholder claims that the corporation is an insurance company engaged in the active conduct of an insurance business and is not a passive foreign investment company.

Upon disposing of the interest in the foreign corporation, the shareholder will recognize the gain as a capital gain rather than ordinary income.

Concerned that some foreign corporations and their stakeholders are inappropriately claiming that the corporation is an insurer, the IRS says it will challenge the claimed tax treatment.

These challenges will hinge on whether insurance and insurance contracts exist – that is, whether there is risk shifting and risk distribution, and also whether the foreign corporation qualifies as an insurance company and whether the tax rules on the taxation of passive foreign investment companies apply.

RV parks aren’t lodging facilities

* The IRS has ruled that a taxable real estate investment trust subsidiary that operates parks for recreational vehicles isn’t a corporation that operates a lodging facility.

In one recent instance, several REIT subsidiaries owned and operated RV parks where RV owners leased sites for terms ranging from one day to one year.

The sites were improved with parking pads and utility connections, but tenants were responsible for positioning their RVs and maintaining the utilities.

Some of the parks offered models for sale. The models are similar to manufactured homes and were available for short-term rentals as part of a sales strategy.

The IRS explained that under Section 856, “Real Estate Trust,” rules, lodging facilities include living accommodations within a building or structure. Therefore, RV parks can’t be classified as lodging facilities.

Installment pacts not a sure thing

* Federal tax rules permit taxpayers to pay outstanding tax liability under an installment agreement with the IRS.

The IRS, however, isn’t obligated to allow a taxpayer to do so, as evidenced by a recent decision by a U.S. District Court.

In a recent case, the court held that the IRS’ appeals officer didn’t abuse his discretion by denying an agreement for an employment tax liability.

In previous rulings on the same case, the U.S. Tax Court had noted that the taxpayer was liable for employment taxes in excess of $1 million, wasn’t current on its tax obligations and was having continuing financial problems, and that its outstanding tax liability was escalating.

What’s more, there was nothing in the record to suggest that the taxpayer supported its proposed installment agreement with financial information to show that the payments could be made.

Cite: Stop 26-Riverbend Inc., et al. (2003-1 USTC 50,360; U.S. District Court, So. Dist. Ohio, East Div.)