Tax Watch: Vote on Internet tax moratorium still possible

Although the U.S. Senate recently postponed a vote on extending an Internet access tax moratorium permanently, Congressional staff members still hope to bring the measure to a vote. Unfortunately, finding time on a busy congressional calendar might prove difficult.

Lawmakers are struggling to renew a ban on Internet access taxes amid concern that it could hurt state coffers.

The House has passed its own legislation extending the tax ban indefinitely. Under terms of the House legislation, the ban on taxing Internet access would become permanent.

However, the House bill also expands the definition of Internet access to cover all telecommunications services that can be used to surf the net. State authorities have expressed concern that this could cost them in the region of $9 billion annually in lost tax revenues, as phone calls, music sales and other activities migrate to the Internet.

Grassley to IRS: Reprioritize

* The General Accounting Office will soon issue a report revealing that less than half of all penalized tax return preparers pay their fines. In fact, according to that report, just 12% of the amount due was collected from tax return preparers.

According to investigators from the GAO, tax officials told them they “cannot afford to make these low-dollar paid-preparer cases a priority given their responsibility for addressing billions of dollars in uncollected taxes.”

Iowa Republican Charles Grassley, chairman of the tax-writing Senate Finance Committee, says, however, that the GAO’s findings demonstrate that the Internal Revenue Service needs to reorder its priorities now that more than half the people filing tax returns use paid preparers.

“Clearly, people benefit from paid preparers, but there are some bad apples in the bunch,” Mr. Grassley says. “The IRS and Congress need to do more to make sure the bad apples are tossed out of the basket.”

The IRS has ordered $2.4 million in penalties against tax preparers in the past two years, according to the report, but has collected only $291,000. This raises questions about the tolerance of poor performance, say the GAO investigators.

In 2001, more than 72 million taxpayers used paid preparers. If even a small percentage of them get bad advice, millions may be ill- served, the GAO report states. Collecting so little in fines levied by the government sends “a mixed message about whether poor performance by preparers will be tolerated,” according to the report.

Nina Olson, the IRS’ national taxpayer advocate, admits the agency needs to change the way it deals with unscrupulous preparers. Questionable preparers have proliferated since the IRS started a campaign to encourage tax preparers to file returns electronically, she says.

According to Ms. Olson, with very little training, a business can prepare tax returns, file them electronically and market the services to customers with incentives to use tax refunds to buy furniture, purchase electronics or put a down payment on a car. The merchandise is often purchased with a “refund anticipation loan,” an immediate loan for part of an expected refund that often carries a high interest charge.

Ms. Olson and others familiar with the situation have proposed requiring tax preparers to register and take regular courses in tax law – procedures that she says most upstanding preparers already follow. The IRS would certify preparers, giving consumers some assurance that they know the basics of tax law. Mr. Grassley says he is considering legislation that would require tax preparers to register with the IRS and help low-income taxpayers set up bank accounts to receive their refunds.

IRS offers e-services for tax professional

* The IRS recently announced the first of a suite of Internet-based business tools to give tax professionals and financial institutions easier access to client information. Known collectively as e-services, the suite of products provides tax professionals with new choices for working electronically with the IRS.

The first three products provide a foundation for future services that will, according to the IRS, significantly enhance how it does business with tax professionals and those who file selected information returns, such as financial institutions. Three e-services applications are being introduced.

Professionals can now register online via irs.gov, obtain a preparer tax identification number or an application for one, and match up to 25 taxpayer identification number and name combinations against IRS records. Future e-services will include an online application for those who want to become authorized e-filers, an expansion of taxpayer identification number matching that allows bulk matching of thousands of such numbers within 24 hours, and special incentive products for e-filers who file more than 100 electronic returns.

The interactive taxpayer identification number matching is a new prefiling service offered to banks and others that pay income subject to backup withholding. Authorized payers can match up to 25 number and name combinations against IRS records before submitting an information return. Results of the match are returned within seconds. This check prevents mismatches and possible penalties for the payer. In the past, only federal agencies could request such matching.

Lease-stripping regs deemed unnecessary

* The Department of the Treasury has announced that in conjunction with the IRS, it has withdrawn proposed regulations relating to the treatment of “obligation-shifting transactions,” including those involving lease stripping.

The regulations outlined complex rules that were designed to ensure that income from these types of transactions was accounted for properly.

“Since the proposed regulations were issued in 1996, says Pam Olson, Treasury assistant secretary for tax policy, “the IRS has won two court cases that have upheld the allowance of tax benefits from lease strip transactions. In view of the IRS’ victories in these cases, we have concluded that the regulations are unnecessary to ensure proper accounting and that the complexity of the proposed regulations outweighs the potential benefit.”

Penalties possible on sale leasebacks

* In a recent legal memorandum, the IRS has found that a company may face accuracy-related penalties for the purported sale leaseback of equipment that arose from a series of apparent sham transactions that may be more approximately treated as a financing arrangement.

Examining the facts and circumstances in this case, the IRS also noted that the company wasn’t entitled to depreciation deductions claimed for the equipment or to an interest deduction on the loan it had secured to buy the equipment. In fact, the company should include original-issue discount income from the deemed financing, according to the IRS. The IRS also said that the transactions’ circular cash flows and lack of a valid business purpose may be cause for assertion of the Section 6602 accuracy-related penalty.

The IRS emphasized that investigators must develop certain important facts of the case in order to support this conclusion. If, on further development, the facts don’t show that the transactions lacked economic substance or amounted to a financing arrangement, the IRS recommended that associate area counsel try to determine whether the tax-exempt-use-property rules could apply to limit the availability of the company’s deprecation deduction.

Cite: Legal Memorandum 200338009