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IRSs Breakthrough ITINs Return Copies and Information Contested Liability Trusts
Editor:
Editors note: Messrs. Ely and Dougherty are former chairs of the AICPA Tax Divisions Tax Practice and Procedures Committee. Messrs. Olmstead and Taylor, and Ms. Gill, are Committee members.
IRS Announces a Breakthrough Plan In its pursuit to obtain audit currency and reduce examinations cycle time, the IRS recently announced a new initiative, Breakthrough. The IRSs Large and Mid-Size Business division formed a team of executives, territory and team managers, revenue agents, specialists and technical advisers to identify ways to improve cycle time without compromising compliance standards. The Breakthrough team developed a three-phase approach to accomplish its goals; phase I has already begun and focuses on closing open inventory and examinations that have not been started. The Breakthrough team evaluated the cycle time on Industry Cases (ICs) and Coordinated Industry Cases (CICs). ICs involve taxpayers with more than $10 million in assets. The CIC program examines the approximately 1,200 largest taxpayers in the country. Cycle time is defined as the period from filing the return until closure of the examination process (including Appeals). The current average cycle time for IC and CIC is 37 months and 60 months, respectively; the IRSs goal is to reduce it to 18 months. The new IRS commissioner has strongly emphasized achieving audit currency and reducing cycle time to move the IRS forward.
ICs Under Breakthrough, agents were required to perform a full risk analysis on all of their ICs (except those under the limited issue focused examination (LIFE) program) by Nov. 14, 2003. Based on this review, they developed strategies to resolve ICs more expeditiously, by limiting the examinations scope to only those issues with a high risk of noncompliance; these cases are expected to close by April 30, 2004. If this deadline cannot be met, the agent must obtain the territory managers approval. There are some exceptions to the established closure deadlines, including: abusive tax shelters; fraud; competent authority; prefiling agreements in process; cases under the Tax Equity and Fiscal Responsibility Act of 1982; LIFE cases; fast track/early referral; cases with material issues (determined using the LIFE definition of materiality); pending counsel advice; high-priority work (e.g., coordinated issues); and cases in which the taxpayers are uncooperative and noncompliant. Status 10 cases are also affected by Breakthrough. Status 10 cases are cases that have been assigned to agents, but for which no work has been performed. Under Breakthrough, Status 10 cases with a filing date before Sept. 1, 2002, should have been surveyed and closed out of the group by Nov. 30, 2003, unless they met one of the following exceptions. The first exception occurs when the group does not have more current cases in their inventory to work. When this occurs, they may choose to examine an aged case, rather than surveying it. However, rather than working old cases, they should consider requesting priority work (e.g., Joint Committee cases, tax shelters, etc.) from remote locations. Another exception is if the Status 10 case is associated (e.g., related returns or multiple-year examinations) with an open case currently being worked.
CICs Similar to the ICs, a full risk analysis was performed on all CIC examinations by Nov. 14, 2003. Aggressive closure deadlines were established for the following cases:
The exceptions that apply to ICs also apply to CIC deadlines. Agents should discuss with taxpayers the revised timelines and examination scope. Before March 31, 2004, the team manager should have reviewed cases from intervening years to determine whether they should be audited. Intervening years are defined as all open years between the current open cycle and calendar-year 2002 returns. All intervening years selected for audit must be closed by June 30, 2005. Agents must examine the return and select only those issues that can be examined and closed timely; they should use various initiatives (e.g., LIFE, fast track, etc.) to ensure that they meet the established closing date and prepare a timeline to ensure that the issues selected for examination can be closed by the deadline. There are several exceptions: material issues, tax shelters, fraud and cases in which the taxpayer is noncompliant. Any other deviations from the deadline require the team managers approval. Lastly, if 2002 is a one-year cycle, it must be closed prior to June 30, 2005. If the 2002 cycle is expanded to include the 2003 return after it is filed, the examination plan should be completed by March 31, 2005, with an expected examination closure date of March 31, 2006.
Phases II and III Breakthroughs phase II, which began in October 2003, includes refining the examination process and enforcing the established milestones. Phase III includes proposing new legislation and making changes to the Internal Revenue Manual and regulations, as well as other changes; it was scheduled to begin around April 2004.
Effect on Taxpayers Breakthrough establishes aggressive deadlines to complete examinations. To meet the milestones, agents will need to narrow the scope of their examinations and use various initiatives. The shorter timeframes for examinations and the need to achieve established deadlines may place a heavier burden on taxpayers. The response times for information document requests and notices of proposed adjustments will be compressed. To alleviate some of the pressure, taxpayers should be involved in the audit planning process. They need to alert the examination team if there will be times during the year when they will not be able to devote substantial resources to the audit (e.g., tax return preparation season). While Breakthrough may present an additional burden, it also presents a tremendous opportunity for taxpayers. It will allow for limited-scope examinations and permit taxpayers to become more current in their examinations which, in turn, should lead to greater financial statement certainty as to the tax reserve. Taxpayers need to evaluate their cases and work with their examination team so that both parties can benefit. For Breakthrough to be successful, the IRS will need to reinvent the audit process and obtain buy-in on the new procedures from all levels of personnel. Once it has implemented Breakthrough, its next challenge will be maintaining and sustaining the new audit process in the future. From Jim Dougherty, Director, and Rona Hummel, Manager, Tax Controversy, Deloitte & Touche LLP, Washington, DC
In Notice 2004-1, the IRS took steps to strengthen controls over the issuance of individual taxpayer identification numbers (ITINs). It revised its procedures for issuing ITINs, in part, by revising Form W-7, Application for IRS Individual Taxpayer Identification Number.
Overview ITINs are issued only to individuals required to have a U.S. taxpayer identification number for U.S. tax purposes, but not eligible to obtain a Social Security number. ITINs are for Federal tax purposes only; they do not entitle a recipient to Social Security benefits, change immigration status or the right to work in the U.S., and are not valid identification outside the tax system. Tax returns filed using ITIN numbers cannot claim the earned income credit. The IRS has issued 7 million ITINs since 1996; only about 75% of these have been used for return purposes. The remaining 25% may have been requested solely to serve as a form of identification; like a Social Security number, an ITIN is a nine-digit number (although all ITINs begin with a 9 and have a 7 or 8 as the fourth digit). However, because ITINs are strictly for tax processing, the IRS does not apply the same standards as do agencies that provide genuine identity certification. The IRS has taken these steps to help ensure that ITINs are used for their intended purpose; consequently, it updated Form W-7.
Program Changes The IRS made the following changes to the ITIN program: 1. All new ITIN applicants have to show a Federal tax purpose for seeking one. For those needing an ITIN to meet their income tax filing obligations, they must file Form W-7 with their original Federal tax return. 2. The IRS will reject applications without proof of need for tax administration purposes. 3. The IRS has reduced to 13 from 40 the number of documents it will accept as proof of identity to obtain an ITIN. A passport is the only document accepted for both identity and foreign status purposes. If a passport is not used, at least two other current documents with expiration dates from a prescribed list in the Form W-7 instructions must be used; at least one of those must contain a recent photograph to support the claim of foreign status. 4. The actual ITIN identification has been changed from a card to an authorization letter, to avoid any possible similarities with a Social Security card. 5. All Form W-7 applications (and the attached Federal tax returns, when required), along with the identification documents, are filed with the IRSs ITIN unit in Pennsylvania. The IRS will assign an ITIN and then process the actual tax return as if it were filed at the address listed in the instructions for that return. Only one copy of the tax return is to be filed. For individuals needing further information, one option is to use an Acceptance Agent. These agents have been authorized by the IRS to assist individuals in obtaining ITINs. They review applicants documentation, complete a certificate of accuracy and forward the certificate and application to the IRS for processing; they can charge for their services. The IRS website (www.irs.gov) contains a link to a list of these agents, by city and state.
Conclusion The IRS has stated it will continue to review this process to issue ITINs only when they are for the intended purposes. A public comment period runs until June 15, 2004, on the revised form and application process. From Trenton S. Olmstead, CPA, Controller, D.C. Industries, Inc., Waterloo, IA
Procedures for Obtaining Return Copies and Information Rev. Proc. 2003-74 revoked Rev. Procs. 66-3, 84-71, 85-56, 87-21, 94-52 and 97-11, which described IRS procedures for providing copies of returns and return information under Secs. 6103 and 6104. The current procedures for obtaining return copies and information are found in Statement of Procedural Rules (26 CFR Part 601) Section 601.702(d)(1), (3), (4) and (5), and on the specific forms prescribed for requesting such copies and information. The information contained in the above rules is briefly summarized below.
Inspection of Returns/ Attachments/Transcripts Internal Revenue laws and regulations govern the inspection of returns and attachments. Written requests for a copy of a return and attachments or a return transcript are made on Form 4506, Request for Copy or Transcript of Tax Form. The IRS may charge a fee, which is currently $23 for each copy of a return requested for a specific tax period. There is no charge to request a return transcript for a Form 1040 currently on file or for the three prior calendar years. In addition, Form 4506 can be used to verify nonfiling status and Form W-2 information, at no charge.
Public Inspection of Certain Documents Disclosure documents: Under Secs. 6033 and 6034 and subject to Sec. 6104 disclosure rules, information furnished on any Form 990 series (exempt organizations) or Form 1041-A, U.S. Information Return, Trust Accumulation of Charitable Amounts, returns, shall be made available for public inspection and copying, on written request. Information furnished by organizations exempt from tax under Sec. 527 on Forms 8871, Political Organization Notice of Section 527 Status, and 8872, Political Organization Report of Contributions and Expenditures, are available for public inspection and copying from the IRS website, at www.irs.gov. The relevant information for a particular political organization can be searched and viewed at www.irs.gov/polorgs. Forms 8871 and 8872 can also be made available for public inspection and copying, on written request. Under Secs. 6104 and 6012(a)(6), information furnished by organizations exempt from tax under Sec. 527 on Form 1120-POL, U.S. Income Tax Return for Certified Political Organizations, must be made available for public inspection and copying, on written request. Form 4506-A, Request for Public Inspection or Copy of Exempt or Political Organization IRS Form, is used to make a written request to inspect or obtain copies of any of the information described above, and sent to the appropriate address listed on that form. Exempt-status applications and determinations: Subject to Sec. 6104 disclosure rules, applications, including Forms 1023, Application for Recognition of Exemption Under Section 501(c) of the Internal Revenue Code, and 1024, Application for Recognition of Exemption Under Section 501(a) for Determination Under Section 120 of the Internal Revenue Code, and certain papers submitted in support of such applications, filed by organizations described in Sec. 501(c) or (d) and determined to be exempt from taxation under Sec. 501(a), and any letter or other document issued by the IRS as to such applications, must be made available for public inspection and copying, on written request. Form 4506-A is used to make a written request to inspect or obtain copies of this information; it should be sent to the appropriate address listed on that form. Employer and employee plans: Subject to Sec. 6104 disclosure rules, forms, applications and papers submitted in support of such applications, as to the qualification of a pension, profit-sharing, or stock bonus plan under Sec. 401(a), 403(a) or 405(a), a Sec. 408(a) IRA, a Sec. 408(b) individual retirement annuity or with respect to the exemption from tax of an organization forming part of such a plan or account, and any document issued by the IRS dealing with such qualification or exemption, must be open to public inspection and copying, on written request. This provision does not apply to plans with no more than 25 plan participants. Written requests to inspect or obtain copies of such material should be directed to: IRS Customer ServiceTax Exempt & Government Entities Division (TEGE), PO Box 2508, Room 2023, Cincinnati, OH 45201. Information furnished under Sec. 6058 on the Form 5500 series of returns (for retirement plans), must be made available for public inspection and copying, on written request. Except for requests for Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plans, written requests to inspect or to obtain a copy of this information should be sent to: Department of Labor, Public Disclosure, Room N-5638, 200 Constitution Avenue, NW, Washington, DC 20210. Written requests to inspect or to obtain a copy of Form 5500-EZ should be sent to Internal Revenue Service Center, PO Box 9941, Stop 6716, Ogden, UT 84409. From Frank Taylor, CPA, Manager, SS&G Financial Services, Solon, OH
Some Contested Liability Trusts Now Listed Transactions The IRSs and Treasurys recent actions have shown their dedication to combating perceived abusive tax-avoidance transactions. In November 2003, the IRS issued Notice 2003-77 (later revised), identifying as listed transactions certain trusts created to accelerate deductions for contested liabilities. In conjunction, Treasury and the IRS issued temporary and proposed regulations limiting a taxpayers ability to deduct contested liabilities under Sec. 461(f) before the resolution of the contest.
Overview The Service issued Notice 2003-77 after discovering transactions in which taxpayers created trusts claiming to qualify under Sec. 461(f). The notice states that transactions that are the same as, or substantially similar to, the following five transactions are listed transactions for purposes of Regs. Secs. 1.6011-4(b)(2) (disclosure requirements), 301.6111-2(b)(2) (registration requirements) and 301.6112-1(b)(2) (list maintenance requirements): 1. Transactions in which a taxpayer transfers money or other property to a trust that purportedly satisfies Sec. 461(f), to provide for the satisfaction of an asserted liability, and retains certain powers over the money or other property transferred; 2 Transactions in which a taxpayer transfers its debt or promise to provide services or property in the future to a trust that supposedly satisfies Sec. 461(f), to provide for the satisfaction of an asserted liability; 3. Transactions in which an accrual-method taxpayer transfers money or other property to a trust that purportedly satisfies Sec. 461(f), to provide for the satisfaction of a workers compensation or tort liability; 4. Transactions in which an accrual-method taxpayer transfers money or other property in tax years beginning after 1991 to a trust that supposedly satisfies Sec. 461(f), to provide for the satisfaction of a liability for which payment is economic performance under Regs. Sec. 1.461-4(g), other than a liability for workers compensation or tort; and 5. Transactions in which a taxpayer transfers its stock, or stock or debt of a related party (as defined in Sec. 267(b)), after Nov. 18, 2003, to a trust that purportedly satisfies Sec. 461(f), to provide for the satisfaction of any asserted liability. For items 3 and 4 above, the notice provides exceptions (1) for trusts to which the liability is owed or (2) when payment to the trust discharges the taxpayers liability to the claimant. Sec. 461(f) allows a taxpayer to deduct a contested liability in a year before resolution of the contest if: 1. The taxpayer disputes a claimed liability; 2. It transfers money or other property to satisfy the claimed liability; 3. The dispute exists after the transfer; and 4. But for the fact that the claimed liability is disputed, a deduction would be allowed for the tax year of the transfer (or for an earlier tax year) determined after the application of Sec. 461(h) (the economic performance rules). A taxpayer meeting these requirements can take a deduction for the liability in the tax year of the transfer. The previous version of Regs. Sec. 1.461-1(c)(1) included conditions required to meet Sec. 461(f). In the temporary regulations, the IRS and Treasury have removed Regs. Sec. 1.461-1(c)(1) and replaced it with clearer guidelines; see Temp. Regs. Sec. 1.461-2T(c)(1)(i) and (ii). Temp. Regs. Sec. 1.461-2T(c)(1)(iii)(D) and (E) exclude as a transfer to provide for the satisfaction of an asserted liability a transfer of a taxpayers debt or promise to provide services or property in the future and a transfer (other than to the person asserting the liability) of a taxpayers stock, or a related-partys debt or stock (as defined in Sec. 267(b)).
Conclusion The IRSs and Treasurys actions clearly show their intent to focus on transactions they deem abusive. Tax advisers can undoubtedly anticipate additional transactions attaining listed status in the near future. From Kimberly Gill, Vice President, Washington Mutual Bank, Seattle, WA |
