From the IRS

Extended Filing Deadline

According to IR-2007-15, taxpayers have until April 17, 2007 to file their 2006 returns and pay any taxes due, because April 15, 2007 is a Sunday and the following day, Monday, April 16, is Emancipation Day, a legal holiday in Washington, DC.

Thus, the entire country has an April 17 deadline. Previously, the April 17 deadline applied just to individuals in Washington, DC and six eastern states served by an IRS processing facility in Massachusetts, where Patriots Day will be observed on April 16, 2007.

Scope: The April 17, 2007 deadline applies to:

• 2006 Federal individual income tax returns, whether filed electronically or on paper.

• Requests for an automatic six-month filing extension, whether submitted electronically or on Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.

• Tax-year 2006 balance-due payments, whether made electronically (direct debit or credit card) or by check.

• Tax-year 2006 contributions to a traditional or Roth IRA.

• Individual estimated tax payments for the first quarter of 2007, whether made electronically or by check.

• Individual refund claims for tax year 2003, if the regular three-year statute of limitations is expiring.

Other tax-filing and payment requirements affected by this change are described in IRS Pub. 509, Tax Calendars for 2007, available at www.irs.gov/pub/irs-pdf/p509.pdf.

Online AMT Calculator

According to IR-2007-18, the IRS has updated its Internet-based calculator to help taxpayers determine whether they owe the alternative minimum tax (AMT). The online AMT Assistant is an automated version of Worksheet to see if you should fill in Form 6251, Alternative Minimum Tax. The worksheet, contained in the Form 1040 instructions, is used to determine how much AMT (if any) a taxpayer owes. The Service projects that most taxpayers using the online AMT Assistant will find that the AMT does not apply to them, and that after they enter their data, they can get an answer in five to 10 minutes.

The AMT Assistant is aimed at individuals and can be used by them, tax practitioners and community or public service organizations. All entries are anonymous. Taxpayers filing paper returns benefit the most from the AMT Assistant, because electronic filing software generally computes AMT liability automatically. Taxpayers can find the tool by entering “AMT Assistant” in the www.irs.gov search box. To use the AMT Assistant, taxpayers must complete a draft Form 1040 through line 44 and have that information at hand.

Sec. 199 Deduction

The Service has released a new “Industry Director Directive” on the Sec. 199 domestic production activities deduction (DPAD). The directive, along with an associated document entitled “Minimum Checks for Section 199; Law and Explanation,” details the minimum audit checks IRS examiners are expected to complete when scrutinizing a corporation’s Sec. 199 DPAD. The directive is not an official legal pronouncement and cannot be used, cited or relied on as such; however, it provides corporations and their tax advisers with valuable insights on the aspects of Sec. 199 likeliest to be probed on audit.

Minimum checks: Under the directive, there are five minimum audit checks examiners should undertake to achieve a “comfort level with the taxpayer’s compliance level,” and give “the subsequent year examination teams a base for further review of the deduction.”

1. Does the taxpayer’s business make sense with the DPAD’s activity requirements? Examples: Most resellers (e.g., clothing stores and wholesalers) should not be claiming the deduction, nor should most professional service companies, as they are selling their services, even if in the process they provide a tangible item (such as a legal document). Auditors are instructed to review the corporation’s website and annual report, among other sources, to answer this question.

2. Compare the domestic production gross receipts (DPGR) reported on Form 8903, Domestic Production Activities Deduction, to the gross receipts or sales less returns and allowances on Form 1120, line 1(c). Gross receipts reported on line 1(c) should be greater than the DPGR reported on line 1 of Form 8903. If the gross receipts on Form 8903 match the gross receipts on line 1(c), the taxpayer may have not allocated to non-DPGR nonqualified income amounts such as gross receipts for services or for resale items, if applicable (this assumes the Regs. Sec. 1.199-1(d)(3)(i) de minimis rule does not apply). However, there may be situations in which DPGR is greater than total gross receipts, such as when partnership or S corporation flowthrough income is not reflected on Form 1120.

3. Is the taxpayer required to allocate gross receipts to remove nonqualified embedded service income, or determine the qualified income portion of a component of an item? If so, how did the taxpayer determine an allocation method? In some cases, the taxpayer must allocate gross receipts between qualifying and nonqualifying items. For example, if it produces/sells widgets and also buys/sells widgets, only the gross receipts from producing/selling widgets will qualify. In other cases, the taxpayer must allocate the gross receipts of an individual item between qualifying and nonqualifying portions. For example, if it produces/sells an item that includes nonqualifying services, it must make an allocation to determine the qualifying portion. However, no allocation is required when the service portion is one of the items specified in Regs. Sec. 1.199-3(i)(4), such as a qualified warranty, delivery, operating manual or installation not separately stated or separately offered by the taxpayer.

4. If the taxpayer is required to use the Sec. 861 method to allocate and apportion deductions, has it used it, and is it consistent with the application of Sec. 861 for foreign tax credit purposes, if applicable? The Sec. 861 method must be used to allocate and apportion deductions if the taxpayer’s average annual gross receipts exceed $100 million or total assets at the end of the tax year exceed $10 million. Within Sec. 861, there are various methods taxpayers can use to make allocations (e.g., gross receipts and asset methods), but they must be consistent with the chosen methods. (For a discussion of the methods, see Rollinson, et al., “Allocation and Apportionment of Expenses for Sec. 199 Purposes,” TTA, June 2006, p. 336.)

5. Has the taxpayer applied the wage and taxable income limit? For example, under Sec. 199(b)(2)(B), for tax years beginning after May 17, 2006, Form W-2 wages for Sec. 199 purposes only include amounts properly allocable to DPGR. If the taxpayer is a member of an expanded affiliated group (a company owned more than 50%, but less than 80%, by another entity), the taxable income limit applies to the expanded affiliated group as a whole, not to the individual member; see Sec. 199(d)(4)(A).