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Changes to the Interest Suspension Rules • LMSB Realignment • GO Zone Act Provisions for Hurricane Victims Editor: Mr. Miller is a member of the AICPA Tax Division’s IRS Practice & Procedures Committee. Messrs. Keenan and Bloom are members of that Committee. For further information about this column, contact Mr. Miller at jmiller@mccneb.edu.
Changes to the
Interest Suspension Rules Contained in the GO Zone Act
On Dec. 21, 2005, President
Bush signed into law the Gulf Opportunity Zone Act of 2005 (GO Zone Act). The
GO Zone Act provides tax relief to businesses and individuals affected by the
2005 Suspension of
Interest Rules for Certain Reportable and Listed Transactions
Generally,
interest and penalties accrue during periods for which taxes are unpaid,
regardless of whether a taxpayer knows taxes are due. However, under Sec.
6404(g)(1), the accrual of interest is suspended for individuals unless the IRS
provides the taxpayer with a notice stating the amount and basis of the
liability within 18 months following the later of (1) the original due date of
the return (without regard to extensions) or (2) the date on which the return
is filed.
Sec.
6404(g)(2) sets forth several situations in which
taxpayers are not entitled to the benefits of the interest suspension rules.
One such exception deals with certain reportable and listed transactions.
Interest, penalties, additions to tax or any additional amounts (collectively
referred to herein as “interest”) with respect to a nondisclosed
reportable transaction (i.e., a transaction the taxpayer did not disclose on
Form 8886, Reportable Transaction Disclosure Statement), other than a listed
transaction, will not be suspended under Sec. 6404(g). For listed transactions
(including transactions that are substantially similar), interest will not be
suspended under Sec. 6404(g), regardless of whether the taxpayer adequately
discloses the transaction.
The
exception to the benefits of the interest suspension rules for certain
reportable and listed transactions was added by the AJCA and effective for
interest accruing after Oct. 3, 2004; however, Section 303 of the GO Zone Act
substantially modifies the date. Specifically, it provides that the exception
to the benefits of the interest suspension rules for certain reportable and
listed transactions is retroactive to the beginning of the suspension period
(i.e., no suspension of interest would be allowed), unless the taxpayer can
demonstrate the existence of one of three circumstances.
First,
the retroactive exception to the benefits of the interest suspension rules will
not apply for taxpayers who, as of Jan. 23, 2006, are participating in (or have
entered into) a settlement agreement pursuant to Ann. 2005-80. This initiative
allows taxpayers to settle disputes with the IRS arising from their
participation in any of the eligible 21 listed and nonlisted
transactions identified by the IRS. The exception for participation in the
settlement initiative will not be available, however, if (1) taxpayers withdraw or otherwise
terminate their participation in the settlement initiative or (2) the IRS
determines that a settlement agreement will not be reached within a reasonable
period.
Second,
the retroactive exception to the benefits of the interest suspension rules will
not apply to taxpayers who can demonstrate to the IRS that they acted reasonably
and in good faith. In other words, if a taxpayer can establish that he or she
acted reasonably and in good faith, interest accruing before Oct. 3, 2004 can
be suspended. The GO Zone Act does not however define or otherwise provide
examples of what constitutes acting reasonably and in good faith.
Third,
the retroactive exception to the benefits of the interest suspension rules will
not apply when, as of Dec. 14, 2005, the statute of limitations on assessment
has expired, or when the taxpayer has entered into a closing agreement under
Sec. 7121 for the tax liability arising from the reportable or listed
transaction.
If a
taxpayer falls within one of these three situations, interest will be suspended
under Sec. 6404(g) from the beginning of the suspension
period until Oct. 3, 2004. Suspension of
Interest and Amended Returns
The
GO Zone Act also addresses how the Sec. 6404(g) interest suspension rules apply
when a taxpayer files an amended return or other similar documents. Before the
GO Zone Act, there was no specific mention in Sec. 6404(g)
of the impact (if any) an amended return had on the date of the start of the
18-month notification period. Sec. 6404(g) simply provided that the
notification period began on the later of the date the return was filed or the
return’s due date (without regard to extensions).
In
Rev. Rul. 2005-4, the IRS took the position that an
amended return (or other written notice to the IRS of additional liability not
listed on an original return) filed after the due date (including extensions)
is not “the return” described in Sec. 6404(g)(1).
Accordingly, it concluded that if a taxpayer filed an amended return after the
notification period had expired (i.e., more than 18 months as determined in
Sec. 6404(g)(1)), interest would be suspended until
the date the amended return was filed or 21 days thereafter if the taxpayer did
not remit payment of the additional tax owed with the amended return.
The
IRS does not provide R with the
notice required under Sec. 6404(g) prior to Oct. 14, 2004 (i.e., 18 months from
the due date of the original return).
Because
the IRS did not provide R with the required notice, it concluded that the
imposition of interest was suspended; see Rev. Rul.
2005-4, Situation 2. Specifically,
the interest would be suspended from Oct. 15, 2004 until Nov. 26, 2004 (which
is the date on which R filed an amended return and paid the additional tax
due).
The
GO Zone Act modifies the suspension of interest rules such that, if a taxpayer
files an amended return or any other document showing that additional tax is
owed, the 18-month notification period will not begin until the date that the
last document showing the additional tax is filed. This provision thus creates
a different result than that in Rev. Rul. 2005-4.
Specifically, an amended return will now be considered a “return” in
determining when the 18-month notification period begins.
In
Example 2, the notification period under Sec. 6404(g)(1)
would expire on May 25, 2010, while, under Rev. Rul.
2005-4, it would have expired on Oct. 14, 2008.
The
provision for amended returns will apply to documents provided on or after Dec.
21, 2005.
From John Keenan, Director,
J.D., and Tom Cryan, Director, J.D., LL.M., Deloitte
Tax, LLP, Washington, DC
LMSB Realigns Key
Management Personnel for Greater Efficiency
Several stakeholders, practitioners and business
leaders have asked the IRS about recent organizational changes made to its
Large and Mid-Size Business Division (LMSB), which administers taxes for
businesses, partnerships and corporations with over $10 million in assets.
Most
of the changes have been limited to structural modifications that will improve
management efficiency and operational effectiveness. Such changes have adjusted
the managerial “span of control,” by correcting a long-standing imbalance in
the number of employees reporting to managers; eliminated management redundancy
and overlap in some field offices; and adjusted the geographic “footprints” of
its Industry areas to become more compact and cohesive. Throughout this
process, the IRS has sought to preserve the working relationships between
revenue agents and the taxpayers assigned to them. LMSB at
Startup
LMSB
first emerged as an IRS division in June 2000 following a Congressionally-mandated
restructuring. The change was comprehensive and focused heavily on expanding
taxpayers’ rights and improving customer service. It altered the IRS in
profound ways, and LMSB’s formation was just one of
many significant outcomes.
The
designers of LMSB wanted the division to deliver high-quality services to
taxpayers, vigorously promote corporate tax compliance, quickly
respond to emerging compliance risks and treat taxpayers fairly and
consistently. They sought to create an organization that would foster a strong
sense of community within and enable employees to develop the specialized
skills and knowledge they needed to perform their jobs effectively.
As a
result, a unique organization emerged. Its core would consist of five
industry-specific groups, more commonly known as “Industries,” under the
premise that certain services, enforcement issues and trends tended to be
industry-specific and such an alignment would promote consistency, which is
important to fair tax administration.
LMSB’s original Industries included Communications,
Technology and Media; Financial Services and Healthcare; Heavy Manufacturing,
Construction and Transportation; Natural Resources; and Retailers, Food and
Pharmaceuticals. This lineup changed slightly in 2002 when Healthcare merged
with Retail, Food and Pharmaceuticals, and Construction merged with Natural
Resources, but the five-Industry model remains central to LMSB’s
operations today.
When
LMSB first emerged, just as today, its revenue agents worked individually or in
teams, assisting taxpayers with pre-filing activities, inspecting corporate and
related tax returns, and conducting examinations. Agents reported up through
one of LMSB’s five Industries, depending on the
industry segment of taxpayers they served. On an as-needed basis, agents would
involve other LMSB personnel in examinations (e.g., international examiners
specializing in multinational tax issues; field specialists providing in-depth
technical expertise on many complex subjects; and pre-filing and technical
guidance staff overseeing various examination processes and providing guidance
on sub-industry tax issues).
Agents
and managers from LMSB’s various Industries tended to
be located together in cities where corresponding taxpayers had a strong
presence; decisions on where to situate agents were heavily influenced by
taxpayers’ geographic distributions. For example, a large number of Financial
Services agents reported to IRS offices in
While
the five-Industry structure proved highly successful in bringing an
industry-specific focus to taxpayer services and compliance programs, it also
produced certain challenges. Most of these involved workload imbalances across
teams, and management duplications and overlaps in some posts.
Workload
imbalances were unpredictable and required ongoing vigilance. Duplications and
overlaps in management tended to occur when revenue agents from several
different Industries were resident in a single post-of-duty. Because each
Industry had its own separate management structure (up to and including an Industry
Director), it was conceivable to have multiple lines of Industry management
“touching” a single office. This resulted sometimes in conflicts in how issues
were approached and in the directives given to employees. Workload imbalances
and management overlap were cited by LMSB team members as major frustrations. Early
Adjustments
In
early 2002, the IRS revisited its organizational structure and the unnecessary
complexity the arrangement was creating for LMSB managers and employees. In
addition to team member frustrations, it found directors and territory managers
spending too much time traveling, which was using valuable time that could
otherwise be spent meeting with taxpayers and examination teams. Overall,
instead of having a strong sense of community, LMSB seemed divided along
Industry lines.
In
mid-2002, adjustments were made to correct the problems. The IRS realigned its
Industries and territories to improve geographic congruency and increased the
use of cross-Industry tax examinations as a way of balancing the workload
across the various Industries and posts-of-duty. It coupled these actions with
internal governance, which addressed cross-Industry decision-making. The
adjustments reduced the number of LMSB posts-of-duty with multiple Industry overlaps
from 58 to 16. These changes and others helped foster a greater sense of
teamwork within LMSB and markedly improved employee satisfaction. Recent
Modifications
In
mid-2005, LMSB conducted a study of managerial span of control as part of a
broader IRS initiative. The study pointed out inconsistencies, particularly
within the ranks of the front-line managers. It also identified opportunities
to reduce further multiple Industry crossovers within LMSB posts-of-duty. Over
the course of several months, LMSB realigned the geographic footprints of its
five Industries and further consolidated territories. Within these new
boundaries, it realigned work teams to ensure greater consistency in managerial
span of control. Ultimately LMSB reduced the total number of territories by
seven, and teams by 35.
Throughout
the realignment, LMSB sought to preserve existing revenue agent/taxpayer
relationships. These efforts were largely successful: most revenue agents were
able to retain their existing taxpayers without any disruption. In the few
instances in which changes were necessary, steps were taken to ensure smooth
transitions.
LMSB
sought also to minimize leadership disruptions, although a geographically
influenced realignment would inevitability cause some areas of responsibility
to change. In particular, directors of field operations and territory managers
(LMSB leaders who possess line authority over revenue agents in tax cases) were
affected, some of whom ended up being responsible for different LMSB teams and taxpayers.
LMSB’s executive team worked closely to ensure that
the territory, team and taxpayer transitions went smoothly.
The Future
Through
its realignment, the IRS has sought to retain the benefits of focusing on
taxpayers and consistency, which the industry-aligned structure has provided,
while at the same time achieving the efficiencies that can be realized through
geographic alignment.
Maintaining
a strong Industry focus remains a top priority, and in the coming months LMSB
will continue to provide leadership and guidance on complex industry and
sub-industry tax issues. It will continue to build and expand the resources
available to managers and teams, and take steps to ensure their access to the
latest industry-specific technical guidance and policies. It will continue to
provide continuing professional education that focuses on industry and
sub-industry issues, to ensure employees’ specialized skills and knowledge. Its
leaders will work collaboratively to identify and address procedural and technical
issues affecting taxpayers, including procedures for cross-Industry management
involvement. One of LMSB’s guiding principles is to
be responsive to taxpayers’ compliance needs in a fair and efficient manner.
Maintaining strong industry focus is one way to accomplish that end.
The
IRS will continue to evaluate its structure, products and processes to enhance
its ability to respond to taxpayers’ needs, improve services and deliver fair,
consistent and effective tax administration.
From Deborah M. Nolan,
Commissioner of Large and Mid-size Business Division, IRS
GO Zone Act Provisions
for
Hurricane Victims
On Dec. 21, 2005, President Bush signed the Gulf Op-portunity Zone Act of 2005 (GO Zone Act), the second of two
tax bills that sent relief to Gulf Coast areas affected by Hurricanes Katrina,
Rita and Wilma. The bill is based on three special economic zones: the Katrina
GO Zone, the Rita GO Zone and the Wilma GO Zone. It provides incentives to
businesses and to individuals who live in the zones, and to those who
previously did business there. Further, businesses that want to become
established in the area are also eligible for tax incentives.
Although
many will benefit from the GO Zone Act, some industries are specifically
excluded from its provisions (e.g., casinos, liquor stores, golf courses,
country clubs, massage parlors, hot tub facilities and race tracks).
Besides
the hurricane tax incentives, the GO Zone Act has other provisions that clarify
currently enacted tax provisions. Depreciation
Many
GO Zone Act tax incentives resemble those enacted after the September 11
terrorist acts. One such incentive is the 50% bonus first-year depreciation
allowance for property placed in service in a GO Zone after Aug. 28, 2005 and
before 2008 (2009 for nonresidential real property and residential rental
property). Substantially all of the property’s use must be for the active
conduct of a trade or business in a GO Zone. To qualify, the property must fall
into one of six categories: (1) property to which the modified accelerated cost
recovery system (MACRS) rules apply and which has a recovery period of less
than 20 years, (2) computer software not covered by Sec. 197 to which the MACRS
rules apply, (3) water utility property to which the MACRS rules apply, (4) qualified
leasehold improvement property to which the MACRS rules apply, (5)
nonresidential real property or (6) residential rental property.
The
GO Zone Act increases the maximum amount deductible under Sec. 179 by the
lesser of $100,000 or the cost of qualified Sec. 179 property acquired by the
taxpayer and placed in service during the tax year. This has the effect of
increasing the allowable first-year-depreciation Sec. 179 limits from $100,000
to a maximum $200,000 for qualified GO Zone property. While the current law
allows indexing for inflation, increased expensing in qualified GO Zone areas is not indexed. Further, the GO Zone Act
increases the amount of qualified Sec. 179 GO Zone property placed in service
before Dec. 31, 2007, from $400,000 to $1 million. The additional $600,000 in
the qualified Sec. 179 GO Zone property limit is not indexed for inflation like
the current $400,000 limit. Deductions
Under
the GO Zone Act, taxpayers can elect to treat 50% of any qualified GO Zone
clean-up costs (defined as amounts paid or incurred during the period beginning
Aug. 28, 2005 and ending Dec. 31, 2007) for debris removal caused by demolition
of structures situated on real property located in a GO Zone. Property held by
taxpayers for trade or business use or the production of income must be Sec. 1221(a)(1)
property in the hands of the taxpayer as an expense deductible in the tax year
incurred or paid, rather than otherwise capitalized under the Code.
NOLs
The
GO Zone Act provides a special five-year carryback
for net operating losses (NOLs) to the extent they
were generated from GO Zone expenditures. The NOL amount eligible is the sum of
the following deductions: (1) certain repair expenses related to Hurricane
Katrina, (2) certain moving expenses (principal place of abode was in a GO Zone
before Aug. 28, 2005, and the taxpayer was unable to remain in the abode as a
result of Hurricane Katrina and is employed in a GO Zone by the taxpayer after
the expense is paid or incurred), (3) certain temporary housing expenses, (4)
qualified GO Zone casualty losses and (5) depreciation deductions with regard
to qualified GO Zone property for the tax year that the property is placed in
service. Credits
As
an incentive for students to return to colleges and universities affected by
Hurricane Katrina, the GO Zone Act doubles the HOPE and Lifetime Learning
credits for students attending an eligible educational institution for tax
years beginning in 2005 and 2006. The Hope credit for qualifying students will
be $3,000 and the Lifetime Learning credit will increase to a maximum of
$4,000. In addition to tuition, certain room and board expenditures will be
deductible. Students who attended these educational
institutions prior to the damage caused by Hurricane Katrina, as well as those
newly enrolled, qualify for the increased thresholds.
From Aaron Bloom, CPA, Ribis, Jones & Maresca, P.A.,
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