Expanded Access To E-Services • New Gift/Gst Tax Form • 2004 IRS Data Book Statistics •  Treating Qualified Dividends as Investment Income

From the IRS

Expanded Access to E-Services

According to IR-2005-33, the Service has expanded the number of tax professionals who can use its suite of e-Services incentive products; for details, see Maida, Tax Practice Management, IRS Launches Enhanced E-Services, p. 358, this issue. 

New Gift/GST Tax Form

The IRS has issued new Form 8892, Payment of Gift/GST Tax and/or Application for Extension of Time to File Form 709, to request an extension to file Form 709, United States Gift (and Generation-Skipping Transfer Tax) Return, when a donor is not applying for an extension to file an income tax return. The donor uses this form to pay gift or generation-skipping transfer (GST) tax when applying for an extension to file Form 709. New Form 8892 applies to gift tax returns for calendar-year 2004 and thereafter.

Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, is used to apply for an automatic four-month extension. An extension to file a 2004 calendar-year individual income tax return also extends the time to file Form 709 for 2004; however, it does not extend the time to pay gift or GST tax for that year. To pay gift or GST tax, new Form 8892 must be used, because Form 4868 no longer contains entries for gift or GST tax payment, as it did in past years.

When to use Form 8892: Previously, certain Form 709 extensions were requested by letter; Form 8892 replaces that need. It is used to request an extension to file Form 709 if an individual:

1. Is not applying for an extension to file an individual income tax return (Form 1040) or

2. Has already obtained a four-month extension to file Form 709 on Form 4868 and needs an additional extension for Form 709 only.

Individuals who obtain an additional Form 1040 extension with Form 2688, Application for Additional Extension of Time To File U.S. Individual Income Tax Return, need not file Form 8892, because Form 2688 will give them an additional extension to file Form 709. However, they must use Form 8892 to pay gift or GST tax.

Of course, an extension to file Form 709 does not extend the time to pay the tax. Thus, individuals who have obtained an extension to file Form 709 with Form 4868, but who owe gift or GST tax, must file Form 8892 to pay the gift tax. Likewise, if they received an additional extension to file Form 709 with Form 2688, they must use Form 8892 if they need to pay gift or GST tax.

When to file: Individuals filing Form 8892 to pay gift or GST tax should file by the gift tax return due date (generally, April 15 of the year following the year of the gift). If they file this form to obtain an extension to file, they should file by Form 709s regular due date (or by its extended due date, if a previous extension was granted). The form should be filed sufficiently early so that the Service can respond before the regular or extended due date; this can prevent a late filing penalty should the IRS deny the request.

2004 IRS Data Book Statistics

The Services 2004 Data Book (available at www.irs.gov/pub/irs-soi/04databk.pdf) revealed an increase in audits of both individuals and certain corporations in fiscal year (FY) 2004, when compared with the prior FY.

The report showed a 14.8% increase in total audits and an 18% increase in audits of individual returns. Nevertheless, the Service audited fewer than 1% of taxpayers in FY 2004. However, the data confirmed its continued drive to enhance enforcement efforts.

During FY 2004, the agency initiated 3,917 criminal tax cases and obtained a conviction in 2,008 cases. Almost 1,500 taxpayers were incarcerated.

Large-company examinations: Ac-cording to the report, the Service selected 1,081,134 returns (0.62% of the total returns filed), for audit in FY 2004. The majority of auditsabout eight in 10were handled by IRS compliance centers. A total of 6,721 examinations were coordinated industry case audits, a type of examination that involves a team of auditors comprehensively examining a return.

In total, some 43,788 examinations resulted in refunds; 64,787 were still pending at the close of FY 2004.

The Service audited 0.77% of individual income tax returns and 16.7% of returns filed by corporations with assets exceeding $10 million. Only 1.5% of excise tax returns were audited.

While the frequency of corporate audits decreased for entities with less than $10 million in assets in FY 2004 when compared to FY 2003, the IRS audited more frequently taxpayers monitored by its Large and Mid-Size Business Division, which concentrates on taxpayers with assets exceeding $10 million. For instance, 6.23% of corporate taxpayers with assets totaling $10 million$50 million were audited in FY 2003; 9.35% of those taxpayers were audited in FY 2004. While 29.8% of taxpayers with more than $250 million in assets were audited in FY 2003, 39.8% of those taxpayers were audited in FY 2004.

Tax-exempt organizations filed 863,494 returns during FY 2004; 5,800 of those were audited.

Workload, collections and filings: The IRSs chief counsels office had processed 65,563 cases at the end of FY 2004, a 1,613 decrease since the end of FY 2003. It was litigating 25,891 cases involving more than $20 billion in penalties and fees at the end of FY 2004.

The IRS collected $2.02 trillion in FY 2004, excluding certain excise taxes. Corporations paid 10.6% of that total, while individuals paid 43.9% and employment taxes accounted for 41%.

A total of 224.4 million returns were filed during FY 2004. Of those, 131.3 million were individual tax returns, 3.5 million were for S corporations and 2.5 million were for partnerships.

About 67.6 million returns were filed electronically during FY 2004, including 61.5 million individual returns. Of those individual returns, 70.2% were filed by practitioners.

While it cost $0.41 to collect $100 in FY 2001, it cost $0.48 in FY 2004.

Finally, the IRS accommodated 77.6 million telephone calls and 7.3 million walk-in visits during FY 2004. An estimated 463 million forms, instructions and publications were downloaded from the Internet.

Regulations

Treating Qualified Dividends as Investment Income

The Service has issued final regulations (TD 9191) explaining how noncorporate taxpayers may elect to treat qualified dividend income as investment income when computing the investment interest deduction.

Overview: The investment interest a noncorporate taxpayer may deduct in any tax year is generally limited by Sec. 163(d)(1) to net investment income for the year. Net investment income does not include qualified dividends (i.e., dividends taxed at a top 5% or 15% rate under Sec. 1(h)(11)). However, a taxpayer may choose under Sec. 163(d)(4)(B) to treat qualified dividends as investment income for purposes of the investment income deduction. If the taxpayer makes the election, qualified dividends are taxed as ordinary income, but may be offset by investment interest.

The qualified dividend preferential rates and election were created by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which also lowered the top rate on adjusted net capital gain to 5% or 15%. Even before the JGTRRAs enactment, the Code contained a similar election for net capital gain. Under this rule, which is also contained in Sec. 163(d)(4)(B), net capital gain is not included in investment income and, thus, does not help increase a taxpayers deduction for investment interest unless the taxpayer elects to treat net capital gain as investment income.

New rules: Now, under Regs. Sec. 1.163(d)-1(b), the election to treat qualified dividends as investment income is made in the same way as the one to treat net capital gain as investment income, on Form 4952, Investment Interest Expense Deduction.

Under Regs. Sec. 1.163(d)-1(d), the election applies to tax years beginning after 2002 and before 2009. According to Regs. Sec. 1.163(d)-1(c), once made, the election is revocable only with the Services consent. The rules were effective March 18, 2005.