Taxpayer Advocacy Panel • Rev. Proc. 2005-18: Suspension of Underpayment Interest • Sec. 179 Recapture and SUVs

Editor:
Mark H. Ely, J.D., CPA
Partner
Washington National Tax
KPMG LLP
Washington, DC

Editor’s note: Mr. Ely is the former chair of the AICPA Tax Division’s IRS Practice and Procedures Committee. Ms. Baumann and Mr. Snow are members of that committee.

TAP: Mission and Methods

“If you want to change the IRS…Speak Up!” This is the motto on the Taxpayer Advocacy Panel’s (TAP’s) website (www.improveirs.org). The TAP is a Federal Advisory Committee group comprised of U.S. citizens who serve as advisers to the Treasury Secretary, the IRS Commissioner, the National Taxpayer Advocate and IRS division commissioners. It consists of nearly 100 citizens, including CPAs, attorneys, educators and retired IRS employees. The TAP “listens to taxpayers, identifies taxpayers’ issues, and makes suggestions for improving IRS service and customer satisfaction,” according to its mission statement.

Although the AICPA and the state CPA societies have numerous ways for taxpayers to air their concerns, the TAP is a “grass roots” method available to individuals and small businesses that also want their voices heard. It was established in October 2002 and modeled after the Citizen Advocacy Panel, its successful predecessor formed in 1998. The TAP is authorized via the Treasury Secretary’s authority under Sec. 7801 to administer the Internal Revenue laws.

The TAP’s members represent the 50 states, as well as the District of Columbia and Puerto Rico. These volunteers serve on one of seven geographically based committees, each comprised of 10–18 TAP members and a local Taxpayer Advocate. Members also sit on a specific tax issue committee; see the exhibit. Each geographical area selects a chair who serves on the TAP Joint Committee along with the TAP’s chair and vice-chair. The Joint Committee acts as the TAP’s management and administrative body and is empowered to speak on its behalf.

According to a TAP program manager, Sandy McQuin, this year the panel is researching several important matters, including refund anticipation loans (RALs); Volunteer Income Tax Assistance (VITA) issues (e.g., publicity, small businesses and IRS support); alternative minimum tax education outreach; estate tax filing; notification of change in direct deposit refunds; availability of current-year Forms W-2 and 1099 information; and improving the extension request process.

Accomplishments and Challenges
In 2004, each member of the TAP’s W&I/Reducing Taxpayer Burden/Notices Committee received the “IRS Special Act Award,” in recognition of the committee’s efforts to improve IRS notices by (1) helping the IRS to prioritize which notices to improve first, (2) assisting in scoring and evaluating the written quality of notices and (3) working with different teams to improve notices and the notice process.

The 2004 TAP Annual Report cited 84 recommendations for improving IRS service and customer satisfaction. Many of these suggestions have already been completed, while others are either being assessed or implemented, or awaiting an IRS response. The report, which is available on the TAP’s website or by calling (888) 912-1227, offers suggestions on improving:

• The taxpayer’s refund;

• E-file marketing to tax professionals;

• The earned income credit;

• The Free File Alliance (e.g., customer feedback, state returns, RALs, record retention and charges);

• Offer-in-compromise processing;

• The VITA program;

• Schedule C-EZ’s (Net Profit From Business) 2005, $5,000 expense limit increase;

• Outsourcing tax preparation; and

• Preparer licensing.

According to the annual report, the TAP remains relatively unknown to IRS employees, tax advisers and, most importantly, taxpayers. To get the word out, the panel has developed a comprehensive communication strategy that it will implement this year to educate taxpayers on its mission and objectives.

How to Become a TAP Member
Currently, the TAP hosts one annual face-to-face member and monthly conference calls (TAP-related travel expenses are reimbursed according to Federal regulations). The TAP solicits new members annually in April to serve a term of two or three years. Applications can be submitted online (preferred) or by paper. Requirements include (1) U.S. citizenship, (2) a 300–500-hour annual commitment, (3) current Federal tax filings and financial obligations and (4) a Federal Bureau of Investigation name check. The panel is seeking individuals who have experience (1) working in a team setting and with people from diverse backgrounds, (2) formulating and presenting proposals, (3) resolving disputes and (4) representing the interests of communities, organizations or the government. Applicants may use both personal and professional experience to meet the criteria.

In 2005, the TAP received over 400 applications in the first 11 days of its 29-day application period, despite the rigorous requirements. Applicants will be ranked to fill approximately 30 slots for this year.

How to Contact TAP
Taxpayers wishing to comment on TAP issues can visit TAP online, call (888) 912-1227 or write (IRS, Room 7704 IR TA:TAP, Washington, DC 20224).

All comments are forwarded to TAP staffers, who are employees of the Taxpayer Advocate Service (TAS) and support TAP. The TAS is an independent IRS office that helps taxpayers resolve problems. It also recommends how to prevent such problems.

Suggestions are often anonymous and received either by email, phone or letter. However, when a person’s identity is known, the TAP will respond directly as to whether it will consider that person’s suggestion.

TAP meetings are open to the general public; meeting notices are published in the Federal Register.

From Christine C. Bauman, Ph.D., CPA, Associate Tax Professor, University of Wisconsin–Milwaukee, Milwaukee, WI

New Procedure for the Suspension of Interest on Underpayments

The IRS released Rev. Proc. 2005-18, which provides taxpayers with procedures to make, withdraw or identify deposits to suspend the running of interest on potential underpayments under new Sec. 6603, added by the American Jobs Creation Act of 2004, Section 842(a). Rev. Proc. 2005-18 supersedes Rev. Proc. 84-58, which set forth procedures for making deposits in the nature of a cash bond before Sec. 6603’s enactment.

Sec. 6603
Under Sec. 6603, taxpayers can make a deposit to suspend the running of interest on potential tax underpayments and accrue interest on the “disputable tax” liability eventually refunded after the proposed deficiency is finally resolved. Sec. 6603(d)(2) defines “disputable tax” as the amount of tax specified at the time of the deposit as the taxpayer’s reasonable estimate of the maximum amount of tax attributable to “disputable items.” Sec. 6603(d)(3)(A) defines a “disputable item” as any item of income, gain, loss, deduction or credit for which the taxpayer has a reasonable basis for the treatment of such item and reasonably believes that the Service also has a reasonable basis for disallowing that treatment. If the taxpayer received a 30-day letter, the amount of the proposed deficiency noted in the letter is the minimum amount of the disputable tax.

Making a Deposit
A taxpayer may request the return of all or part of a deposit at any time before the IRS uses it for payment of the tax. However, interest is payable only on the portion of the deposit attributable to the disputable tax.

A deposit must be accompanied by a written statement designating the remittance as a Sec. 6603 deposit. The statement must include the types of tax, tax years and the amount of and basis for the disputable tax. To the extent the deposit is used to pay a tax liability, the tax will be treated as paid on the date of deposit.

Calculation of Disputable Tax
According to the IRS, taxpayers may use any reasonable method to calculate the disputable tax. Taxpayers relying on a proposed deficiency in a 30-day letter may simply provide a copy of the letter with the deposit and written statement. However, if the taxpayer’s calculation of a disputable tax exceeds the deficiency proposed in the 30-day letter or the taxpayer seeks to remit a deposit before receiving such letter, the statement must also include:

• The taxpayer’s calculation;

• A description of the item in question; and

• The basis for the taxpayer’s belief that (1) it has a reasonable basis for how it treated such item and (2) the IRS also has a reasonable basis for disallowing such treatment.

The IRS will not allow interest on a deposit that does not properly identify the amount and nature of the disputable tax.

Effective Date
Rev. Proc. 2005-18 was effective as of March 28, 2005, and sets forth transition rules for deposits made under Rev. Proc. 84-58, but taxpayers had to comply before May 27, 2005.

Taxpayers that made a deposit in the nature of a cash bond under Rev. Proc. 84-58, but before Sec. 6603’s enactment, had to re-designate the amount as a Sec. 6603 deposit by submitting a written statement to the IRS before May 27, 2005. These deposits will be treated as made on Oct. 23, 2004 for Sec. 6603(d) purposes, if the taxpayer sent a written statement to the IRS before May 27, 2005. Statements submitted after that date on such deposits will be treated for interest purposes as made on the date the IRS receives the statement.

In general, taxpayers should consider making this designation, because cash bonds do not accrue interest and, in most cases, the IRS has already identified the disputable tax in a 30-day letter or in Form 5701, Notice of Proposed Adjustment.

Deposits made after Oct. 22, 2004, the enactment date, and before March 28, 2005, will be treated as Sec. 6603 deposits on the date remitted, if the taxpayer sent a written statement to the IRS before May 27, 2005.

Nothing in Rev. Proc. 2005-18 and Sec. 6603 and its legislative history seem to bar a taxpayer from making an advance payment for all or a portion of a deficiency proposed in a 30-day letter and claiming an interest deduction for the allocable amount of the payment. Such an advance payment would eliminate the need to comply with Rev. Proc. 2005-18 requirements, but would preclude the option of going to the Tax Court if the entire proposed deficiency is paid.

From James Dougherty, Director, Thomas Cryan, Director, and Sharlene Sylvia, Manager, Tax Controversy Services, Deloitte Tax LLP, Washington, DC

Sec. 179 Recapture and SUVs

The Jobs and Growth Tax Relief Reconciliation Act of 2003 increased the maximum dollar limit for Sec. 179 expensing to $100,000 for tax years beginning in 2003–2005 (as adjusted for inflation, $102,000 for 2004 and $105,000 for 2005). Prior to enactment of the American Jobs Creation Act of 2004, certain large sport utility vehicles (SUVs) were eligible for this benefit, due to exemptions from the Sec. 280F “luxury car” rules.

The increase in the Sec. 179 limits, combined with the exemptions under Sec. 280F, provided a substantial incentive for many taxpayers to purchase large SUVs in 2003 and 2004. Taxpayers were allowed a much-publicized tax deduction for purchasing an SUV; many took the opportunity.

However, in 2004, gasoline prices reached record levels. By May 2004, the average U.S. price of gasoline was approaching $2 per gallon. Due to the increase in the cost of operating large SUVs, many taxpayers may decide to reduce their business use of these vehicles, or sell or trade them in for more fuel-efficient vehicles. Although there may be logical reasons justifying reduced use and/or disposition of an SUV, such action is not without a price—triggering the Regs. Sec. 1.179-1(e) recapture rules.

Recapture
That regulation provides that if Sec. 179 property is not used predominantly in a trade or business at any time before the end of the property’s recovery period, the taxpayer must recapture any benefit derived from expensing it, on Form 4797, Sales of Business Property (Also Involuntary Conversions and Recapture Amounts Under Sections 179 and 280F(b)(2)). Recapture is required in the year the property ceases to be so used. The benefit to be recaptured is the excess of the amount expensed under Sec. 179 over the amount that would have been allowable as depreciation under Sec. 168 for all prior tax years (including the recapture year).

Additionally, large SUVs are listed property under Sec. 280F(d)(4); thus, recapture of excess depreciation will be required in the first year the vehicle is used 50% or less in a trade or business.

Advice
Tax practitioners should review their files for clients who may have elected Sec. 179 for large SUVs in recent years and advise them of the potential issues on a change in use or a disposition. Recapture or gain recognition could offset any cost savings associated with such a change in use, and may affect a taxpayer’s decision.

From Danny Snow, CPA, Member in Charge, Tax Department, Thompson Dunavant PLC, Memphis, TN