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Guidance on FIN 48 and Independence • IRS Announces Redesigned Form 8857 • IRS Releases Tax Gap Report • Prop. Regs. Clarify Treatment of Trust Administrative Expenses Alistair M. Nevius, J.D. AICPA Activities Guidance on FIN 48 and Independence The AICPA’s Professional Ethics Executive Committee (PEEC) recently issued nonauthoritative guidance on whether under AICPA Interpretation 101-3, Performance of Nonattest Services, members could assist an attest client in applying FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, without impairing independence, given the potential complexity of the judgments that the client must make or approve in connection with such services. Tax services are considered nonattest services and are therefore subject to the requirements of Interpretation 101-3. Under this interpretation, when an AICPA member performs nonattest services for an attest client, the client must agree to evaluate the adequacy of the results of the services performed and accept responsibility for those results (among other criteria). The member should be satisfied that the client will be able to meet all these criteria and make an informed judgment on the results of the member’s nonattest services. If a client is unwilling or unable to assume these responsibilities under Interpretation 101-3, the CPA’s provision of nonattest services would impair independence. The PEEC decided that a CPA could assist an attest client with the application of FIN 48 without impairing independence, provided the member is satisfied that the client understands why a specific tax position does or does not meet FIN 48’s morelikelythannot (MLTN) threshold and the basis for determining the amount of related unrecognized tax benefits. FIN 48’s MLTN standard requires that (1) a benefit related to an uncertain tax position may not be recognized in the financial statements unless it is more likely than not that the position will be sustained based on its technical merits; and (2) there must be more than a 50% likelihood that the position would be sustained if challenged and considered by the highest court in the relevant jurisdiction. Although the degree of complexity involved in the subject matter of any service is a factor to consider in determining whether a client can meet the requirements of Interpretation 101-3, the PEEC does not believe that the complexities involved in applying FIN 48 automatically preclude CPAs from assisting attest clients with its implementation. In most cases, a CPA should be able to advise a client about whether a tax position meets the MLTN threshold and about the likelihood that portions of the related tax benefit will not be realized. The CPA must adequately inform the client of the factors on which the advice is based so that the client can make an informed judgment on the results of the services provided and can take responsibility for the work. In those instances, the PEEC believes that assisting the attest client in applying FIN 48 will not impair the CPA’s independence. From the IRS IRS Announces Redesigned Form 8857 The Service announced that it has redesigned Form 8857, Request for Innocent Spouse Relief, in order to reduce followup questions and minimize the burden on taxpayers. Previously, Form 12510, Questionnaire for the Requesting Spouse, was separate from Form 8857. The redesigned Form 8857 combines the two forms. The IRS believes that collecting this information early in the process will mean faster processing of requests and will help eliminate an estimated 30,000 followup letters annually. Among the inquiries on the new form are questions on spousal abuse and domestic violence, mental or physical health problems, financial problems, and the requester’s involvement with the household finances. The Service has released a report addressing the tax gap. The tax gap is the shortfall between taxes collected and the actual amount owed, which results from nonfiling, underreporting, and underpayment. For 2001, the IRS estimates that only 86% of taxes owed were collected, resulting in a tax gap of approximately $290 billion. In September 2006, Treasury released a strategy for reducing the tax gap, consisting of seven components:
The IRS report details compliance objectives and initiatives for achieving the components of the strategic plan, along with targeted completion dates. The Service believes that these initiatives will increase the rate of taxpayers’ voluntary compliance with their tax obligations. The report gives detailed information for each step the IRS is currently taking to reduce opportunities for tax evasion, to more effectively use technology, and to support legislative proposals to improve compliance. The full report is available at www.irs.gov/pub/irsnews/tax_gap_report.pdf. Regulations Prop. Regs. Clarify Treatment of Trust Administrative Expenses Under Sec. 67(a), miscellaneous itemized deductions are allowed only to the extent that they exceed 2% of a taxpayer’s adjusted gross income (AGI). The AGI of an estate or trust is computed in the same manner as for an individual for these purposes, except that, under Sec. 67(e)(1), administrative costs that would not have been incurred if the property were not held in an estate or trust are allowed in full as deductions in arriving at AGI (i.e., they are not subject to the 2% floor). Courts have split over what trust administrative costs fall under this exception. For example, the Sixth Circuit has held that investment advisory fees are not subject to the 2% floor and are fully deductible (O’Neill, 994 F2d 302 (6th Cir. 1993)). In contrast, the Second, Fourth, and Federal Circuits have all held that investment advisory fees are subject to the 2% floor (Rudkin Testamentary Trust, 467 F3d 149 (2d Cir. 2006), cert. granted 6/25/07; Scott, 328 F3d 132 (4th Cir. 2003); Mellon Bank, N.A., 265 F3d 1275 (Fed. Cir. 2001)). While the Supreme Court has granted certiorari in Rudkin and should settle the split among the circuits, in order to have a uniform standard for identifying types of costs not subject to the 2% floor, the IRS has issued proposed regulations (REG12822406) providing that costs incurred by estates or nongrantor trusts unique to an estate or trust are not subject to the 2% floor. The proposed regulations define a cost as unique to an estate or trust if it could not have been incurred by an individual in connection with property not held in an estate or trust. Costs that do not meet this definition are subject to the 2% floor. The proposed regulations provide a nonexclusive list of services that either do or do not fit the definition. Seven types of costs are listed as unique to an estate or trust. These are costs incurred for:
These are costs incurred for:
The regulations would apply to payments made after the date the final regulations are published in the Federal Register. The Service has requested comments on the proposed regulations, and a public hearing will be held on November 14, 2007.
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