NewsNotes

Lesli S. Laffie, J.D., LL.M.

HR 22 OVCI Tax-Accrual Workpapers Tax Shelters

AICPA Activities

HR 22

The AICPA submitted comments to Congress on the Individual and Small Business Tax Simplification Act of 2003 (HR 22). The legislation proposes changes to the following areas:

1. Alternative minimum tax (AMT).

2. Head of household filing status.

3. Taxation of Social Security benefits.

4. Taxation of capital gains.

5. The 2% floor on miscellaneous itemized deductions.

6. Deduction for home mortgage points.

7. Taxation of minor children.

8. Dependent care credit.

9. Phaseout of the overall limit on itemized deductions.

10. Phaseout of personal exemptions.

11. Personal holding company tax.

12. Definition of child.

13. Treatment of government benefits in determining support and cost of maintaining a household.

14. Hope and Lifetime Learning Credits.

15. Definition of qualifying higher education expenses.

16. Passthrough-entity regime.

17. Sec. 179 election.

18. Collapsible corporations.

19. References to general partners.

20. References to limited partners.

21. Partnership income attributable to capital excluded from net earnings from self-employment.

22. Large-partnership reporting rules.

In a letter to Rep. Amo Hougton (R-NY), the bills sponsor, the AICPA noted that HR 22 does an excellent job of focusing on many areas needing simplification. For example, although the AICPA supports outright repeal of the AMT, it concludes that the proposed changes are a reasonable compromise. Accelerating the repeal of the personal exemption phaseouts and the itemized deduction limit, for instance, will make tax planning easier for individuals and eliminate some of the confusing marginal rates.

In addition, simplifying and harmonizing the definition of child will clear up confusion about filing status and dependency exemptions and credits. These changes alone will make the Code more consistent, rational, fair and transparent, particularly for low- and middle-income taxpayers.

While the AICPA notes the revenue costs associated with these reforms, it also acknowledges that the reforms would eliminate significant compliance burdens.

From the IRS

OVCI

According to IR 2003-46, 10 states will grant special consideration to taxpayers who applied by April 15, 2003 for the IRSs Offshore Voluntary Compliance Initiative (OVCI). If individuals amend their state returns and pay all tax, penalties and interest by Oct. 15, 2003, they can avoid state prosecution.

The following states are participating: California, Idaho, Louisiana, Maryland, Nebraska, New Jersey, New York, North Carolina, Utah and Vermont. More states will likely offer similar treatment to OVCI applicants. Many others are assisting the IRS by sharing information about the OVCI on their websites.

Taxpayers had until April 15, 2003 to apply to participate in the OVCI. Launched in mid-January, it was aimed at individuals who used offshore payment cards or other offshore financial arrangements to avoid U.S. taxes. The IRS has already collected millions of dollars from the compliance project. (For details on the OVCI, see Rosenberg and Frishman, Tax Practice and Procedures, Amnesty for Offshore Tax Evaders, TTA, April 2003 and Godfrey, Amnesty Participation Requirements, TTA, April 2003.)

For more information, see the Frequently Asked Questions section of the IRSs Website, at www.irs.gov.

Tax-Accrual Workpapers

CC-2003-012 sets out procedures for IRS requests for tax-accrual and other financial audit workpapers on (1) the tax reserve for deferred tax liabilities and (2) footnotes disclosing contingent tax liabilities appearing on audited financial statements. It also modifies pre-existing procedures for requests for audit and tax-accrual workpapers not affected by Ann. 2002-63.

For listed transactions, Ann. 2002-63 provides that the Service may request tax-accrual workpapers when examining any return filed after June 30, 2002, that claims a tax benefit from a transaction determined to be a listed transaction at the time of the request, under Regs. Sec. 1.6011-4(b)(2). If the listed transaction was disclosed, the IRS will routinely request the workpapers pertaining only to that transaction. If it was not disclosed, the Service will routinely request all tax-accrual workpapers.

In addition, as a discretionary matter, the IRS will request all tax-accrual workpapers if it determines that (1) tax benefits from multiple investments in listed transactions are claimed on a return (regardless of whether the transactions were disclosed); or (2) if, in connection with the examination of a return claiming tax benefits from a disclosed listed transaction, there are reported financial accounting irregularities. In general, requests will be limited to the tax-accrual workpapers for the years under examination.

For a return filed before July 1, 2002, that claims a tax benefit from a listed transaction, the IRS may request workpapers as to such transaction, if the taxpayer had an obligation to disclose it under Regs. Sec. 1.6011-4 and failed to do so.

In general, the information document request will be limited to the workpapers for the listed transaction for the years under examination. However, the Service will request all workpapers for those years, if (1) the taxpayer failed to disclose a listed transaction on a return filed after July 1, 2002; (2) the taxpayer claimed benefits from multiple investments in listed transactions on a return filed after July 1, 2001 (regardless of whether the transactions are disclosed); or (3) there are reported financial irregularities.

Examiners normally request audit and tax-accrual workpapers only in unusual circumstances and when the necessary facts used to support a return cannot be obtained from the taxpayers records. The examiners request for this information should be limited to the portion of the workpapers material and relevant to the examination.

Tax-reconciliation workpapers are used in assembling and compiling preparatory financial data. Neither pre-existing procedures, nor those set out in Ann. 2002-63, apply to requests for such workpapers. Such workpapers may be routinely requested in the course of an examination

Audit workpapers may include work programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents and schedules or commentaries prepared or obtained by the auditor. The audit workpapers provide important support for the independent CPAs opinion as to the fairness of the presentation of the financial statements in conformity with generally accepted auditing standards. Any summons for the audit workpapers is supposed to be coordinated with the IRS Office of Chief Counsel before it is issued.

Tax Shelters

According to IR 2003-51, 78 tax shelter promoters are currently under investigation by the IRSs Large and Mid-Size Business Division (LMSB). Further, the Service has issued 239 summonses to secure investor lists from promoters; 77 of those have been referred to the Justice Department for enforcement. Investor lists covering multiple transactions have been ob-tained from 25 promoters to date.

Treasury and the IRS are moving aggressively to crack down on abusive transactions, with a multifaceted strategy. LMSB is leading a comprehensive effort, supported by Appeals, other operating divisions and Treasury.

The Service said its effort to bring taxpayers into compliance through its voluntary tax shelter disclosure initiative was quite successful. The disclosure program, which extended from December 2001 to April 2002, resulted in 1,664 disclosures from 1,206 taxpayers, revealing transactions in which deductions or losses claimed amounted to billions.

New transactions uncovered through the disclosure initiative are being analyzed to determine whether they are abusive and warrant published guidance or other administrative responses.

In addition to disclosure and guidance initiatives, the IRS stressed that it relies heavily on the Office of Tax Shelter Analysis, which provides centralized data collection and analysis on all aspects of the tax shelter program. (For more on tax shelters, see Mendelson and Emilian, Tax Shelter Final Regs., this issue.)