ataxingmatter

More on the IRS's "targeting of conservative groups"

[edited 2:51 to include additional links to news coverage and Lerner statement]

In my earlier posting on Orrin Hatch's disappointing 'keynote' speech at the concluding ABA Tax Section luncheon, I mentioned his concluding attack on the IRS for "targeting conservative groups." 

TaxProf has provided considerable converage of the media sharkfest over the disclosure on Friday that the IRS's division responsible for overseeing the applications for tax-exempt status had used terms like "patriot" and "tea party" and "9/12" to select applications for scrutiny as to the potential for having passed the cap on political activity permitted for a social welfare organization.  See, e.g., WaPo and WSJ agree: IRS targeting of conservatives is appalling, which includes a plethora of links to various Hill and national papers covering the disclosure.   

The fact that the IRS searched for suitable key terms to find groups that would have the greatest potential for conducting too much political activity to qualify as a social welfare organization is not at all surprising.  As Lois Lerner stated on Friday, this was done as a "shortcut" to pick applications for review, not from "political bias."  It is also odd to say that including the term "patriot" would only identify conservative groups--it is quite possible that there are liberal groups using that term, since progressives do think of themselves as patriots who care deeply about our nation.  Similarly, there might well be a liberal group with an "anti-tea-party" name, intended to provide a political counterpoint to right-wing tea party groups--that group would be, and appropriately should be, selected for deeper scrutiny to be sure it satisfied the requirements for a social welfare group with such a key-word search.  A problem would exist, however, if there were no progressive groups --also likely to be over-involved in politicial activity--identified for deeper scrutiny:  that hasn't been established, as far as I can tell from the media reports.

Sunday's TaxProf post provides Professor Schmalbeck's summary of the discussion at the tax-exempt organization committee's briefing by Lois Lerner at the ABA Tax Section's annual meeting.  Here's the link:  Schmalbeck on the IRS 'Targeting' of Conservative Groups.

Other links in the media today include:

Josh Hicks, Lingering questions about the IRS targeting of conservative groups, Washington Post (May 13, 2013).

Kathleen Hunter & Richard Rubin, Obama says IRS targeting of Tea Party groups 'outrageous', Bloomberg BusinessWeek (May 13, 2013).

CNN Washington Bureau, Obama: Alleged IRS political targeting 'outrageous', CNN Politics (May 13, 2013).

 

Related articles

Orrin Hatch on tax reform at the ABA--a predictable right-wing rant

More on PTINs for previously unregulated tax return preparers

After considering the problems caused by incompetent or fraudulent tax return preparers who were not attorneys, accountants oradmitted to practice before the IRS as enrolled agents, the IRS released a study in 2010 on tax return preparation with recommendations for regulation of the industry.  Amendments to Circular 230, the set of regulations providing standards for "practice" before the IRS under 31 U.S.C. section 330 (originally enacted in 1884), set forth various requirements to bring formerly unregulated tax return preparers under a set of standards, including use of preparer tax identification numbers (PTINs), competency testing, continuing education, and standards for the various work done in tax preparation. 

Three tax return preparers that would be subject to those rules sued claiming that the new rules were beyond the IRS's authority.  In Loving v. IRS, No. 12-385, 2013 WL 204667 (D.D.C. Jan. 18, 2013); ECF No. 21 (Order), the United States district court for the District of Columbia found in their favor, granting both declaratory and injunctive relief on the basis that tax return preparers do not "practice" before the IRS and hence cannot be regulated under the statute.  

The IRS moved quickly for a stay of the injunction against enforcement of the tax return preparer regulations pending appeal to the D.C. Circuit.  That motion was denied, but the court did modify the injunction "to make clear that its requirements are less burdensome than the IRS claims."  See Loving v. IRS, No. 12-385 (D.D.C. Feb. 1, 2013) (link here is to BNA).

The court acknowledges that Congress specifically authorized the PTIN schema by statute in 26 U.S.C. section 6109(a)(4).  The court claims that the PTIN provision does not fall within the scope of the injunction and the IRS may continue to provide PTINs, but it cannot condition eligibility on authorization to practice under the various conditions set out in Circular 230 as required in final regulation 1.6109-2(d).  The court has enjhoined the requirement that tax return preparers who are not attorneys, CPAs, enrolled agents or enrolled actuaries must pay fees, pass a qualifying exam, and complete continuing education requirements.

It is to be hoped that the Circuit Court will quickly overturn this overreaching district court's "stuck in the past" interpretation of the 1884 statute.  If that doesn't happen immediately, then Congress should act expeditiously to "clarify" current law by providing that the PTIN provision includes the ability of the IRS to regulate tax return preparation and that tax return preparation constitutes practice before the IRS.   We have seen considerable evidence of tax return preparers who do not understand the tax laws or who intentionally misapply them (in the home office deduction, etc.).  It is imperative that those who assist others in preparing tax returns demonstrate minimal competency in the tax law as demonstrated by the qualifying exam.

Related articles

IRS Loses Big In Court (Again), Tax Season Chugs Along

IRS requirements for competency testing and continuing education

IRS Prohibited from Enforcing Registered Tax Return Preparer Requirements

Ruling poses new tax-filing snag

IRS vs. tax pros: Uncle Sam wins a bit, loses some in Round 2 of legal battle with preparers over registration and testing

PTIN System Down Due to a Litigation Stay

Tax Relief for Victims of Sandy

The IRS released several bulletins this week providing relief for victims of Hurricane Sandy.

IR-2012-83 extends the return filing and tax payment deadline to Feb. 1, 2013 for hurricane  victims in Connecticut (Fairfield, Middlesex, New Haven, and New London Counties; the Mashantucket Pequot Tribal Nation and the Mohegan Tribal Nationa within New London County), New Jersey (Atlantic, Bergen, Cape May, Essex, Hudson, MIddlesex, Monmouth, Ocean, Somerset, and Union) and New York (Bronx, Kings, Nassau, New York, Queens, Richmond, Rockland, Suffolk and Westchester).  The New Jersey relief starts with the Oct. 26 onset of the storm, while the Connecticut and New York relief start Oct. 27.  The release notes that the relief may be extended to taxpayers in other locations "based on additional damage assessments by FEMA. 

The tax relief postpones various tax filing and payment deadlines that occurred starting in late October. As a result, affected individuals and businesses will have until Feb. 1, 2013 to file these returns and pay any taxes due. This includes the fourth quarter individual estimated tax payment, normally due Jan. 15, 2013. It also includes payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on Oct. 31, 2012 and Jan. 31, 2013 respectively. It also applies to tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period. 

Penalties and interest that would otherwise apply will not apply, and taxpayers don't have to apply for this basic filing extension.  Failure-to-deposit penalties for deposites due when Sandy struck or later are waived if the deposits are made by Nov. 26, 2012. Details on this are available at disaster relief.   

The IRS also noted that it will work with taxpayers who don't live in the designated areas "but whose books, records or tax professional are located in the areas affected by Hurricane Sandy."  Those taxpayers do need to contact the IRS to claim the relief.  The number to call is 866-562-5227.

IR-2012-84 alerts employers and others that qualified disaster relief payments made by an employer or other person in respect of damage from Hurricane Sandy (which has been designated a "qualified disaster") can be excludible from taxable income and that "employer-sp9onsored private foundations may provide disaster relief to employee-victims in areas affected by the hurricane without affecting their tax-exempt status.

Qualified disaster relief payments include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance.

IR-2012-86  expands availability of housing for victims of Hurricane Sandy by temporarily waiving the low-income housing tax credit rules that prohibit owners of low-income housing from providing housing to Sandy victims who do not qualify as low-income.  Other assistance through FEMA may be available:

Assistance can include grants for temporary housing and home repairs, low-cost loans to cover uninsured property losses, and other programs to help individuals and business owners recover from the effects of the disaster. FEMA has also approved Transitional Sheltering Assistance (TSA) in New York and New Jersey for eligible disaster survivors who have a continuing need for shelter because they are unable to return to their homes for an extended period of time. Individuals and business owners who sustained losses can apply for assistance from FEMA by calling 1-800-621-FEMA (3362) via mobile device at m.fema.gov, or online at http://apps.irs.gov/app/scripts/exit.jsp?dest=http://www.disasterassistance.gov/

More information about the low-income housing credit waiver is available in Notice 2012-68.  General information (with links to these and other releases) is available at "Help for Victims of Hurricane Sandy." 

Shulman Stepping Down

Doug Shulman, the 47th Commissioner of the Internal Revenue Service, has stated that he will leave the IRS at the end of his five-year term.  Ordinarily, that would be November 12, 2012, but since it is a holiday, November 9 will be his last day.  Steven Miller, the Deputy Commissioner for Services and Enforcement will serve as acting commissioner until a new Commissioner is appointed.  Miller is a 25-year veteran with the agency.

See IR-2012-76 (available on BNA).

Whistleblower gets millions: good for compliance improvement (and makes us ask again--did Romney get amnesty?)

[Edited 9/13 to add link to Kenneth Thomas]

Bradley Birkenfeld, the UBS whistleblower who helped jumpstart the IRS's enforcement of foreign bank account reporting and helped catch criminal tax evaders, ended up serving a relatively short prison term (for failure to be entirely forthcoming, in the case of one of UBS's private banking customers) but also go a significant $104 million whistleblower award.  See David Kocieniewski, Whistle-Blower awarded $104 Million by I.R.S., New York Times (Sept. 11, 2012);  Whistleblower Brad Birkenfeld Rewarded Record $104M for Exposing How UBS Helped Rich Evade Taxes, DemocracyNow.org (video available); Exhaustive Study Finds Global Elite Hiding Up to $32 Trillion in Offshore Accounts, DemocracyNow.org (July 12, 2012) (video or transcript available); Birkenfeld's bonanza, The Economist (Sept. 11, 2012).

As Birkenfeld's attorney put it:

“Today is a great day for all the honest Americans out there who work their job and pay their taxes. Today is a great day for tax fairness. Today is a terrible day for big-time tax cheats.”  Birkenfeld's bonanza, The Economist (Sept. 11, 2012).

The very public and very large whistleblower award should do two things:

1) encourage other insiders who are aware of egregious company or individual tax-evading behavior to blow the whistle and

2) discourage other insiders and companies from egregious company or individual tax evading behavior.

There have always been anonymous brown-envelope tips to the IRS from those who know what is going on but don't want to participate in it and don't want their competitors to gain a competitive advantage because they do.  But whistleblowers generally have access to inside information that can break the dam on enforcement.  That certainly was the case with Birkenfeld, whose information-- about smuggling diamonds for UBS's private banking clients and other means taken to help such clients avoid reporting their assets to the US government--was instrumental in increasing awareness about tax crimes and increasing the fear of God (or rather, the fear of the "revenuer") in sophisticated, wealthy taxpayers who had been able to hide some of their assets and wealth relatively easily before.

By the way--we still do not know whether GOP presidential candidate Mitt Romney participated in the amnesty program that was introduced in the wake of the UBS exposure of banking secrecy's connection to tax evasion by wealthy Americans.  As most Americans know by now, Romney refuses to release his tax returns for the relevant years when he might have participated in the amnesty program to avoid criminal prosecution.  See, e.g., Kenneth Thomas, UBS Whistleblower's Award Reminds Us Romney Banked at UBS.  Until Romney does release his returns back to 2003 o4 so, there will continue to be questions regarding his taxes, as the wealthiest nominee ever with offshore holdings galore and his sole business experience being a hedge fund with numerous offshore entities and blocker corporations.  Specifically, Americans will wonder how his self-proclaimed patriotism and love of nation plays out in his ordinary decisions.  His hedge fund, Bain Capital, has also made the news as a participant in a claimed conspiracy of hedge funds to deflate the prices they pay for companies they acquire.  See Lichtblau & Lattman, Equity Firms Like Bain Are Depicted as Colluding, New York Times (Sept. 11, 2012).   Both tax evasion and price-rigging are criminal activities, so it behooves Romney to release his returns and ancillary information so Americans can assess how he practices what he preaches in terms of love of country and rule of law.  Did he report his foreign assets as required all along?  Did he invest abroad (so that any purported "job creation" activity didn't benefit us)?  Was he still influential in Bain during the period that it began, or carried on, price-fixing agreements with other powerful hedge funds?  Americans deserve to know.

Will this lead to better compliance in the future?  One suspects that there will always be those who enjoy the game of avoiding taxes so much that they will be willing to pay to play the tax evasion games even on the harder-to-manipulate playing field created by the crackdown on banking secrecy and offshoring of funds.  But hopefully they will be fewer, and less successful! 

Tax information reporting by third parties

As the extraordinarily conservative Republicans in the House (and in the Senate) press to turn back progressive initiatives, the White House and responsible Democrats (assuming there are a few) need to be cautious that they don't concede before they even try to fight and end up dumping out important provisions to appease the right like they did with the "public option" in health care reform.

For example, Obama made a point in his State of the Union address of going along with the demand by small businesses for alteration of the 1099 reporting provision enacted as part of the Health Care Reform bill.  See, e.g., Lavante, What President Obama Really Said in the State of the Union Address about 1099 Reporting (Jan. 2011).  Businesses complain about any new reporting requirement.  First, because they don't want to do any reporting at all if they can get out of it.  Second, because they know that information reporting has a huge impact on the ability of small businesses generally to evade taxes by simply failing to report income.  Compliant businesses ought of course to support reporting requirements, since they end up paying their taxes in full, while the noncompliant businesses that earn income "under the table" are the ones that benefit when there is no reporting requirement. 

Think about this a minute.  Businesses inevitably track their invoices and their customers.  They know who pays and who doesn't.  They know what they've bought and who they've bought it from.  It doesn't require much to file that information (already maintained by most modern businesses on computerized accounting programs) in the appropriate forms so that the IRS has the information to match against what various business vendores report as their income.  This should therefore be a nonissue:  for a small additional cost in the time to do the paperwork, the government will be able to hold businesses accountable in the same way that it holds ordinary wageearners accountable--through the information reports filed by third parties.  

Raising the threshold on the amount for reporting or excluding all "small" businesses from reporting would be a bad idea.  Small businesses are the place where failure to report income likely adds up because of the ease with which such things can be obscured without third party reporting, whereas large companies have various audit and public reporting requirements that would hinder such failures to report: one has to think that it is a number of those family-owned businesses running sole proprietorships and S Corporations that are evading their responsibility to report their income and causing all of us to have to bear a disproportionate amount of the burden.

Of course, this is a broad issue that relates to reporting by third parties in many different situations.  With third-party reporting, the tax gap--somewhere in the range of $200 to $300 billion annually made up of taxes evaded by cheaters--would be significantly reduced, and compliant taxpayers would be restored to equity.  Noncompliant taxpayers would no longer garner a tax advantage from simply failing to report their income on the assumption that the IRS would have considerable difficulty figuring out the additional payments they've received.  It is a no-brainer, given the way that third party reporting assists in overcoming the problems of assymetry of information faced by the government.  See, e.g., United States Government Accountability Office Report to the Committee on Finance, U.S. Senate, "Tax Administration: Costs and Uses of Third-Party Information Returns," GAO-08-266, Nov. 2007 (noted in Citizens for Tax Justice report cited below).   But neither the Republicans nor the Democrats seem to be able to see past the hullabaloo raised by people (presumably including a good many of those who profit from the lack of third-party reporting) about "burdensome" reporting.

There are similar complaints about the IRS's proposed regulations requiring banks to report interest paid to foreign accountholders in the same way that they have been reporting such interest for domestic accountholders for some time, in order to be able to comply with our information reporting requirements under treaties.  Citizens for Tax Justice notes that the so-called "center for freedom and prosperity" (hereinafter CFP) (often represented by Dan Mitchell of the Cato Institute) has as usual distorted and misrepresented the issue here.  See The Tax Cheaters' Lobby is Wrong about IRS Proposed Regulations, CTJ, Jan. 31, 2011.  Not only do we have a responsibility to provide information to other governments under our agreements on tax information exchange, but such reporting will likely aid in the ongoing battle to catch flagrant tax cheats who hide as foreigners to avoid paying income tax on earned interest, as CTJ notes.   

(Again, one suspects that these are some of the same people who hide money in offshore secret banking jurisdictions and conveniently forget to report the income on it on their tax return.  At the recent ABA tax section meeting in Florida, I spoke with a lawyer whose practice includes representation of many of these tax shirks.  He estimates that there are more than 250,000 such shirks with "substantial" amounts socked away in offshore tax havens.  The right-wing CFP, of course, gathers money from these rich folks and spends it vilifying the efforts to squelch tax havens and tax competition, which it considers a wonderful thing because it permits the extraordinarily wealthy to hang onto "their" property (i.e., avoid contributing taxes to pay for the government that made that property possible).  Don't believe anything you read on the "prosperity" center's site--it will almost certainly be distorted by misleading innuendo and misinformation.  The CTJ report is an excellent takedown of the many exaggerated and misleading claims made in the "prosperity" center's materials.  You can also find a number of my own website where I have reviewed some of their videos and found them to rest on a very shaky foundation of speculation and conclusory assertions.)

The Dodd-Frank financial reform bill included a similar new reporting requirement for broker-dealers.  Some experts have concluded that about 25% of those who report capital gains from sales (in most cases, the most affluent amongst us who are making trades in financial assets such as stocks and bonds) have cheated by overreporting basis and thus underreporting gains.  That adds up to a huge part of the tax gap.  Dodd-Frank raised some revenues by requiring brokers to report basis, providing a third party check against an individual's claimed basis amount.  The banks have this information automatically when they conduct trades on stocks or bonds they've sold to the investor and they are gearing up for the initiation of this reporting this year.  See Larry Barrett, Broker-Dealers Brace for Cost Basis Reporting, Security Monitor, Feb. 2, 2011. 

Of course, in enacting the provision, Congress provided much too much flexibility to investors selling financial assets, by allowing them to specifically identify which of completely fungible items they sell (thus cherry picking the basis that gives them the lowest tax liability).  If average basis isn't used (and this is an area of considerable complexity regarding the appropriate rule), then there should be a first in-first out rule that requires investors to be treated as selling their oldest acquired items first.  It is hard to see any justification for allowing cherrypicking that has nothing but a tax-minimization goal as its object--these are fungible financial assets that are exactly the same for every purpose other than tax, so recognizing the tax differences as a basis for a tax beneficial election makes no policy sense at all.  The identification provision that has been in the Code for a long time should be deleted, and owners of financial assets should not be able to specfically identify consideration received for such items in any context, whether reorganizations (where the Bush Treasury instituted a rule permitting such identification in 2006, claiming wrongly that it was a necessary corollary to their decision to treat a share of stock as the base unit of property in reorgs) or otherwise.

Meanwhile, other provisions in the Dodd-Frank reforms, limited though they were, now face a struggle against a headwind of Republican cost-cutting and business-friendly attitudes.  The SEC seems to be suggesting that it thinks it will have to rely on the banks' own self-regulatory apparatus--i.e., it appears to be willing to let the fox watch the henhouse when it comes to the Dodd-Frank fiduciary standard.  And the CFTC sees itself needing considerably more resources in order to institute the swaps exchange which is essential to the re-regulation of the swaps market that lay at  the heart of the financial speculation carried on by TBTF banks.  See Dodd-Frank Tax Battle Coming, Securities Monitor, Feb. 2, 2011.  Too many in the new Congress seem to think that the tea party crazies represent the majority of American voters, and are planning a range of truly stupid actions, from failing to approve a new debt ceiling (this, of course, after fighting singlemindedly for hundreds of billions of tax cuts for the extraordinarily wealthy) to failing to fund the regulatory apparatus necessary to give us any hope that 21st century global capitalism can be responsive to democratic, people-centered objectives for society.

Tax Preparer --old abuses, new procedures

The days of just anyone becoming a tax return preparer and playing havoc with the rules, as some have, seem to be winding down.

The courts, for one, are now taking fairly strong action against tax return preparers who actively assist clients in tax evasion schemes.  See, e.g.,  US v. Sommerstedt et al, 106 AFTR2d 2010-5403 (DC NV 2010), available with other case materials on justia.com, here.  A tax return preparer who was permanently enjoyined from acting as a return preparer or promoting tax evasion schemes had been required to notify clients of the injunction against him and to file a certification that he had done so.  He filed for relief from notification and certification, claiming that it violated his Fifth Amendment rights.  The court rejected that claim, indicating that he was not being ordered to make a testimonial statement but merely inform clients of an injunction against him that was a matter of public record.  Until he files, he'll be fined $1000 a day for contempt of court.  That should mean that the preparer's days of profiting from promoting tax evasion are over.

Similarly, the IRS Is moving ahead with the oversight rules for requiring "preparer tax identification numbers" (PTINs) for all preparers on federal returns starting Jan. 1.  The rules cover anyone who is paid to prepare all or substantially all of a return or claim for refund.  125,000 notification letters are slated to go out weekly for the next eight weeks to remind preparers who already have PTINs that they will be required to sign up under the new system.   The new PTIN sign-up application, with a fee of $64.25 due, is  available through www.IRS.gov/taxpros.  See IR-2010-106  and the PTIN page  and Overview for more information.  (By the way, for taxpayers with concerns about how to choose a tax preparer, the IRS provides a "tipsheet" that may be of interest and also provides information on "complaints against tax professionals".)

There has been the typical clamor about burdensome new regulations connected with the new PTIN, testing and registration requirements.  See, e.g., AICPA VP testimony at IRS hearing on changes needed, Oct. 8, 2010 (comments on the proposed regulations, in particular objecting to registration and testing for nonsigning staff of CPA firms and student interns); VSCPA expressing concerns regarding IRS proposal to regulate paid income tax return preparers, Virginia Soc. of CPAs, July 10, 2010;  ; Members of Congress Ask Treasury to Modify Return Preparer Registration Plans, J. of Acc'tancy, Aug. 11, 2010 (indicating, surprisingly,  that some congressmen don't think the need for testing has been demonstrated).  Some of these concerns do call for practical remedies--testing and registration for student interns, for example, could well be difficult.  Some appear to reflect typical knee-jerk reactions to any new regulation that can be claimed to be burdensome--in particular, the congressional letter questioning the need for testing seems highly questionable, since there are demonstrable problems with lack of competency.  For some evidence of the type of errors committed, see "Top Errors for Taxpayers and Paid Preparers on Return Submissions" at the IRS website. 

The IRS has responded to various of these complaints in different ways.   Rev. Proc. 2010-41 provides some relief for foreign tax preparers and those without a Social Security number vecause of conscientious religious objections.  At an AICPA fall meeting, Commissioner Shulman announced that there would likely be "some relief for testing and continuing education requirements for people who do not sign a return and work in a professional firm under the supervision of an accountant, enrolled agent or lawyer."  Text of AICPA keynote address.   To address further concerns about the new requirements, Commissioner Shulman announced today the creation of an IRS Return Preparer Office to have "broad responsibility" over the initiative, with David R. Williams as head. Download Shulman ann. of Williams to head tax return preparer office.102610.

 

Defective Chinese-made Drywall--safe harbor to claim repairs are casualty losses

In IR 2010-102 (Sept. 30, 2010), the IRS announced that damages from corrosive drywall would be able to be treated as a casualty loss, and in Rev. Proc. 2010-36, there is a "safe harbor" formula for determining the amount of the loss.  The Rev Proc also provides a link to the Drywall Information Center, for guidance on identifying problem drywall.

The drywall, manufactured in China, has high levels of hydrogen sulfide and can result in corrosion of copper in appliances and wiring and high levels of gas.  If a taxpayer doesn't have an existing or potential claim for reimbursement, the casualty loss is the unreimbursed repair cost; if there is a claim, the taxpayer may take 75% of the unreimbursed amount.   Amounts that increase the value of the house above its pre-loss value are not counted as part of the casualty loss.   Depending on the actual amount of the reimbursement, the taxpayer may have income or an additional deduction in the year of the reimbursement.  There are of course additional limitations to casualty loss claims:  only taxpayers who itemize may take casualty losses, the first 100 of the loss is not deductible, and the loss is only deductible to the extent that it exceeds 10% of adjusted gross income.

S Corporations: GAO report, recommendations regarding noncompliance

The Government Accountability Office (GAO)  issued a December 2009 report to the Senate Finance Committee on the "Tax Gap: Actions Needed to Address Noncompliance with S Corporation Tax Rules."

Many Americans doubtless don't know an S Corporation from a German silent partnership, except for the attention the S Corp got when John Edwards was running for President and word got out that he managed some considerable tax savings through his  S Corp.  So, herewith a small primer.

S corporations are ordinary "C corporations" that have made an election that permits qualifying corporations to avoid the corporate level tax and pass through the tax items (income, deductions, etc.) to the S corporation shareholders.  S corporations cannot have multiple classes of stock and can only have certain types of shareholders, so that they are somewhat less flexible than taxable C corporations.  Most S corporations have just 1-3 shareholders.  (Of course, some of the tax changes made during the Bush years made the S corporation more widely available, and in particular facilitated certain banks' use of the form.)  S corporations have been increasing in popularity, because of the combination of limited liability protection and pass-through of tax items that avoids an entity level tax. 

According to the report, a large majority of S corp returns (68% for 2003-2004, the last years for which the reporters had data) misreport at least one item and tend to misreport to the favor of the S corporation/shareholder 80% of the time.   The returns misreport net income, basis, distributions, and gross sales.  Many treat shareholders' personal expenses as deductible in calcuating the net income reportable.  Many don't substantiate the expenses that are taken as a deduction.  A common error is for a shareholder to use losses that should be disallowed because the shareholder doesn't have enough basis to take the loss. Another common problem is underreporting of shareholder compensation, which, unlike distributions, is subject to payroll taxes.  (/this was the issue raised about John Edwards' S corporation.).  The fewer shareholders the S corporation has, the more likely it is to have errors on the return.  And of course, paid preparers tend to add to problems (71% use paid preparers).

The recommendations include improving return preparer compliance, which the IRS already has started working on, and changing the statute to require basis calculation at the entity level.  The report also note that the vagueness about what constitutes reasonable wage compensation is a problem that could be addressed in the Code or regulations, and lack of IRS nenforcement in this area is a problem.  The report discusses some legislative options (such as making net business income subject to emplyment taxes) and some administrative options (such as improving guidance for examiners and better educating taxpayers).

By the way, these S Corporation shareholders are mostly comprised of the "small businessmen" that the right-wing anti-tax crowd constantly claims is overtaxed.   Hmmmm. Looks like the bigger issue with this group is noncompliance, not overtaxation.  We need to increase enforcement efforts, especially focused on the particular items that have tended to be misreported in S corporation returns.

IRS tips for year-end deductions

Publication 526 offers information on charitable contributions, but at the end of the year when many donations are made, the IRS often offers reminders about key guidelines.  IR-2009-114 offers a number of tips for taxpayers who want to be able to deduct year-end gifts.  Here's the list:

1) Limited time offer (I hope) tax-free deduction for $100,000 contributions direct from IRAs for owners 70 1/2 and older

Clearly this is a benefit for the wealthy donors who already get most of the benefit of the charitable contribution deduction.  Another of those Bush-era options (created in 2006) that should be allowed to bite the dust when it expires at end of this year.

2) Donations of household items and clothing "must be in good used condition" to be deductible

Hmmm. How many people attempt to get a deduction for junk contributed to Salvation Army??? And will whether or not there is this requirement???  Hey folks.  Give that stuff away and don't try to claim a deduction.  You probably don't deserve to get to call it charity if it is junk to you--i.e., stuff that you don't want anyway.

3) Monetary donations require a "bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution."

The release notes that contributions for credit card charges are dated from the "transaction posting date", while bank records include "canceled checks" or "bank or credit union statements".  That seems to conflict with some authority that suggests that the mailing rule applies rather than the cancelation date for the check.  The material in ""reminders"  clarifies, helpfully, that charges to a card by year-end are ok, even if they aren't paid til 2010, and that checks mailed in 2009 are ok, so long as they are cleared shortly thereafter. 

My own advice--be wary of mailed charge-card contributions to charities.  They often take quite a while to process and may not be charged to your account by year-end even if you mailed a charge slip with your donation early in December.

4) Substantiation of gifts is stricter than it used to be

A taxpayer is also supposed to have an acknowledgment from the charity for donations of $250 or more.

If the amount of all noncash contributions is over $500, taxpayers have to complete Form 8283 with their tax return.

5) Donating a motor vehicle, boat, or airplane will permit a deduction limited to the gross proceeds from the charity's sale of the vehicle.  See Form 1098-C, required to be provided by the charity to the donor and attached to the tax return.