NewsNotes

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

Audit Sampling • Third-Party Designee • Terroist-Victin Relief • Consolidated-Return Filers May Have to Re-file by March 15! • Where did the FY 2002 Surplus Go?(chart)

From the IRS

Audit Sampling

According to IR-2002-05 and FS-2002-07, starting fall 2002, the IRS will begin a sampling project to improve its methods for targeting taxpayers for audits, involving approximately 50,000 returns. All will be individual returns; about 2,000 (of the over 130 million filed) will be traditional face-to-face, exhaustive audits.

In 1998, as part of the Taxpayer Compliance Management Program, the IRS audited 54,000 returns on a line-by-line, in-person basis. Many taxpayers and practitioners criticized the project as draconian; no tax advisers were allowed to participate.

The new project, the National Research Program (NRP), will involve a semi-random check, crossing income and demographic lines. The NRP will collect a current snapshot of the taxpaying public so the IRS can refine its statistical techniques and better target audits.

About 2,000 returns will be chosen for line-by-line audits under which every exemption, deduction and income item will be scrutinized. Another 30,000 returns will be selected for in-person audits on a limited (and less-intrusive) basis. Approximately 9,000 returns will be targeted for "correspondence" audits, in which the IRS will ask for selected items or information by mail, with no personal appearance required. The final 8,000 returns selected will simply be examined for matching information documents (such as Forms W-2 and 1099), without requiring any taxpayer contact.

Third-Party Designee

IR-2002-04 provides that, for the 2002 tax filing season, individuals can check a box on Form 1040 to select a third-party designee (e.g., friend, family member or paid preparer) authorized to talk directly with the IRS to correct such issues as computation and data omissions arising during return processing. The new third-party designation box is located just above the Form 1040 signature line.

The designation also enables the third party to discuss the status of a refund, payment or other notice with the IRS. The third-party designation does not eliminate the need for a power of attorney for examinations, underreported income, appeals and collection notices.

Legislation

Terrorist-Victim Relief

President Bush signed into law the Victims of Terrorism Tax Relief Act of 2001 (HR 2884) (Act), which provides tax relief to families of those killed in the September 11 terrorist attack, the post-September 11 anthrax mailings and the Oklahoma City bombing. Bush said that HR 2884 offers a "tangible measure of support" for these families.

Bush singled out provisions of the new law exempting from Federal taxes payments made by charities to victims' families and waiving income and payroll taxes on wages earned by victims in the year of death and the preceding year. Disaster payments and payments to victims of the airline disasters likewise will not be taxed. Lower state taxes will apply to victims of terrorist attacks and to armed forces members killed in combat zones.

The victims' tax-relief package also provides families of terrorist victims exemption from estate taxes. The new law exempts death and disability, workers' compensation and government retirement-plan benefits for people injured in the attacks.

The new law allows Treasury to extend tax-filing deadlines for up to one year for victims and their families. Bush stated that bipartisan support for HR 2884 demonstrates "national unity and resolve" in support for the victims. The Act:

• Offers income and estate tax relief for victims of the September 11, Oklahoma City bombing and anthrax attcks.
• Waives income tax liability for the year of death and the year prior to death for victims. A special rule would provide a minimum benefit of $10,000 to each victim. It also includes (and improves) Senate language limiting opportunities for tax avoidance.
• Provides tax-free treatment of death benefits paid by an employer to an employee solely because the employee died as a result of the September 11, Oklahoma City bombing or anthrax attacks.
• Allows charitable organizations to make pro-rata payments prospectively to families of victims without demonstrating financial need. Permits employers to create private foundations to make payments to families of employees who died.
• Provides that income resulting from the discharge of debt in 2001 is tax free.
• Provides general tax relief provisions for victims of terrorist and military actions, Presidentially declared disasters and certain other disasters.
• Clarifies that disaster-relief payments (including payments from the Victims Compensation Fund) are tax free.
• Expands IRS, Department of Labor and Pension Benefit Guaranty Corporation authority to postpone tax- and pension-related deadlines for taxpayers affected by these disasters.
• Protects victims who sell structured settlements. Creates a 40% excise tax on transactions in which structured-settlement payments are sold for a lump sum, unless the transaction is approved by a court as being in the victim's best interest.
• Reduces the taxation of disability trusts. Increases the exemption amount for such trusts from $100/$300 to $3,000.
• Expands IRS disclosure rules. Allows the IRS to share tax return and taxpayer information with Federal law enforcement agencies investigating terrorist attacks. The new rules would sunset after three years.