Taxable Talk

The Orange County Register reports today (one time subscriprtion required) that the IRS cannot tell whether its 400 help centers help taxpayers. The report, from independent auditor J. Russell George, the Treasury Department's Inspector General for Tax Administration, was disputed by the IRS.

Of course, the telephone help has been plagued by possible incorrect answers—anywhere from 22% to 50% of the answers have been wrong, according to reports (see here, here, and here).

The Public Company Accounting Oversight Board announced new standards for tax shelters yesterday. The Wall Street Journal reported on this in today's editions.

The rules, which must be approved by the SEC, state that firms will be prohibited from auditing clients to which they sell aggressive tax shelters. Of course, there's an exception to this: if the firms reasonably believe they have at least a 50% chance of prevailing in an audit with the IRS.

This new regulation stems from the continuing KPMG scandal. The US Department of Justice has not yet announced whether they will pursue criminal charges against KPMG.

I noticed a headline in today's Orange County Register that grabbed my attention: "IRS Will Audit 5,000 Firms to Gauge Unpaid Taxes Nationwide" (one-time registration required). Then I read the article. If I hadn't had heartburn before, now I did. After talking for several years about looking at S Corporations, the IRS has finally decided to see how bad the salary problem is. (You can find the IRS' news release here.)

S Corporations are the most popular form of corporate ownership in the US because of their pass-through nature combined with liability protection. While S Corporations do not (generally) pay taxes, they must file returns; the owners of the S Corporations include their shares of the income on their individual (1040) returns.

Over the past few years, whenever I attended meetings with enforcement personnel from the IRS, they mentioned that (they believe) that many owners are not taking required salaries from their S Corporations and instead are taking all distributions as dividends (which allows them to avoid payroll taxes). Owners do need to take "reasonable" salaries. Of course, there is plenty of room for debate on what is reasonable. However, it's unlikely that the Tax Court would find $0 reasonable.

In any case, the IRS now wants to quantify this problem (and any others they may find) by returning to...the audits from hell.



I've missed out on these (thankfully), but these audits were of people unlucky enough to be randomly selected and had to justify every line of their individual return, and usually had to state what every deposit in their bank accounts represented. Ugh.

Now, under the guise of "research," these audits have returned to haunt us. A lucky 5,000 S Corporations will be selected out of the 3.3 million S Corporations (or one of every 660, or a 0.15% chance). I echo the thoughts of Roth & Company: Please, Mr. Taxman, go somewhere else; Clayton Financial & Tax's returns are fine (and yes, we're an S Corporation). Please?

According to Tax Analysts, the Tax Court has released clarifying statements in the Kanter and Ballard cases. However, the statements are not available on the Tax Court's website.

Tax Analysts is reporting that Chief Judge Joel Gerber released statements outlining the procedures followed in the cases. The Supreme Court in March ordered the Tax Court to release the original findings of Special Trial Judge Couvillion.

The Tax Court today decided a case where the petitioner's complain that the Alternative Minimum Tax (AMT) shouldn't apply to them because of "equitable grounds." The petitioners did not have any tax preference items. They aren't the high income millionaires that the AMT was originally intended for.

But they (and you and I) are stuck with the AMT. And they fell into its' grasp. As the court notes, "Absent some constitutional defect, we are constrained to apply the law as written." “The proper place for a consideration of petitioner’s complaint is the halls of Congress, not here.” Hays Corp. v. Commissioner, 40 T.C. 436, 443 (1963), affd. 331 F.2d 422 (7th Cir. 1964).

This isn't the first such case, and it won't be the last. The AMT is a convoluted beast destined to grasp more of the middle class each year. In general, everything you do to lower your regular tax raises (or causes you to fall into) your AMT.

Case: Wiese v. Commissioner, TC Summary 2005-91

As I previously noted, the Tax Court had a secrecy rule that prevented, in certain circumstances, litigants from knowing what the judge felt the ruling should be. This "star chamber" provision became clear when the Kantar case was decided by the US Supreme Court earlier this year.

Luckily, previously is also the place where that oderous rule has been placed—the junk yard of history. As noted in this article in the Chicago Tribune and this article in the International Herald-Tribune (likely appearing in tomorrow's New York Times), the rule has been rescinded as a direct result of the Supreme Court's ruling. However, its' status as to past cases is unknown.

This is one rule change that is definitely for the better.

I'm amazed that some of my clients don't want to spend the $4.42 for certified mail (return receipt requested) when communicating with the IRS. Today the Tax Court released a case where a filing got misplaced in the mails; however, the petitioner's law firm could show that because the filing was mailed using certified mail, the case will go on.

In the case (Grossman v. Commissioner, T.C. Memo 2005-164) the filing went astray, and instead of arriving at the Tax Court in Washington, ended up in New Jersey. The petition was received late. The IRS argued that it should be disallowed; the petitioner said we can't be blamed for the Postal Service's error.

Because the petitioner (really, his attorney) spent the $4.42, the case will go on. So the next time you just mail the filing, think twice.