Tax Watch: Bush package could make tax code more taxing

Will President Bush’s tax package complicate or simplify the Internal Revenue Code?

“The current environment in Washington can be described, at best, as confusing, with lots of tax bills and lots of tax ideas coming from both sides of the aisles,” says David A. Lifson, a board member of the American Institute of Certified Public Accountants and past chairman of its taxation division executive committee. “There’s also a movement afoot that dates back 12 years for simplification.”

Lindy L. Paull, chief of staff for the Joint Committee on Taxation, recently unveiled recommendations for tax code simplification at an AICPA conference in Washington.

The committee’s recent 1,300-page report on tax simplification was mandated by the Internal Revenue Service Restructuring and Reform Act of 1998. It contained 150 recommendations, including the elimination of 100 outdated provisions and a road map for further simplification.

Ms. Paull noted that the House-passed Rate Reduction Bill (H.R. 3) would complicate the code by doubling the number of people subject to the alternative minimum tax.

“That happens whether you only reduce the lower rates or whether you reduce them across the board,” she said.

Senator shooting at tax refund loans

New Mexico Democrat Jeff Bingaman, a new member of the Senate Finance Committee, recently introduced legislation that would reduce the need for refund-anticipation loans and protect taxpayers from what the senator calls “unscrupulous lenders.”

The Low Income Taxpayer Protection Act of 2001, as introduced, would reportedly take a multipronged approach to the loans.

The bill also contains a variety of provisions aimed at improving services for taxpayers – particularly those with low or moderate income. One such provision would require the Internal Revenue Service to provide tax-related computer software and electronic filing capabilities through the IRS website at a nominal cost or for free.

Mr. Bingaman’s bill would require the Department of the Treasury to set up a registration program for all of those involved in the electronic filing and refund-anticipation process.

The registration would be necessary only for tax return preparers and providers of refund-anticipation loans who prepare more than five returns for a fee; volunteers would not be required to register. The fees and process of registering would be minimal, according to the senator’s proposal.

The proposed bill would also require the Treasury Department to determine limits on interest and fees that could be charged, based on the benefit to the taxpayer and the risk to the lender.

Insurer loses out on loss reserves

In a recent technical advisory, the IRS discusses its position on the deduction of unpaid loss reserves under Section 832, “Other Insurance Firm Income,” concluding that the fair-and-reasonable standard must apply in analyzing the loss reserve deductions.

The taxpayers, a holding company and its property and casualty insurance subsidiaries, reported unpaid loss reserves for several years after internal and external independent actuarial review. In addition, the taxpayers established unpaid loss reserves for potential asbestos and environmental claims for the cleanup of superfund sites.

Upon examination, actuaries hired by the IRS estimated the taxpayers’ loss reserves at amounts lower than had been reported on each of the annual statements.

In response to specific questions in the request for technical advice, the IRS said that Section 832 of the regulations, specifically the part requiring representations of “actual unpaid losses as nearly as it is possible to ascertain them,” and the fair-and-reasonable requirement are not differing standards.

Further, the IRS noted that the taxpayers bear the burden of proof in establishing the reasonableness of the reserves. The IRS must use a historical development analysis in its own determination.

Cite: TAM 200115002