What Tax Pros Had To Say:

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Written by: Joshua Fluegel

Published: 07 September 2011

In this information age, it is not hard to find information on current tax law and recommended practices. It seems that you could even look on the back of your kid’s cereal box and probably find a cartoon tiger explaining Circular 230 requirements. The true trial of even today’s most experienced tax practitioners is finding an up-to-date authoritative source of information that is recognized by the IRS.

The IRS expects professionals to know the ins and outs of every law relevant to a return as well as the correctness of that return. All related documents and affidavits are spelled out in Circular 230 § 10.22 Diligence as to accuracy:

In general. A practitioner must exercise due diligence —

• In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to IRS matters;
• In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and
• In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the IRS.

A professional’s efforts to conduct his/her due diligence on behalf of a client can be in vain if the source of information is not reliable. While referencing current tax code is undisputedly the best practice, tax code does not often address unique tax situations. Even more maddening is that some information from the IRS, such as commentary, analysis, publications and forms, are not considered authority. These frequent situations will lead a professional to look for sometimes obscure but reliable sources. Some IRS approved sources of tax interpretation are:

• Code and other statutory provisions.
• Temporary, proposed and final regulations.
• Revenue rulings and revenue procedures.
• Congressional intent per committee reports.
• Letter rulings and technical advice memoranda.
• Actions on decisions and general counsel memoranda.
• Explanations of tax legislation released by the Joint Committee on Taxation.
• Press releases, notices, announcements or any similar documents published by the IRS in the Internal Revenue Bulletin and tax court decisions.

Searching the Internet for information can be a hazardous line to walk between IRS approved fact and utter fantasy. However, there is good information out there if one only knows where to look.

http://www.ustaxcourt.gov/

The U.S. Tax Court’s Web site has press releases, various court required forms and videos describing the tax court process.

http://www.findlaw.com/casecode/

FindLaw is a database with easy-to-find information on recent tax cases and laws for all 50 states including the District of Columbia and Guam.

Commercial tax research vendors offer a great deal of information that is timely and accurate. Most of it is available as a subscription service.

CCH

Operating since 1913, CCH is a provider of research tax, accounting and audit information, services and software tools such as ProSystem fx Suite and IntelliConnect. For research visit www.cch.com and click on IntelliConnect on the right side under tax products. Do not expect free tax research on this site.

BNA

BNA Tax and Accounting Center offers practitioners an extensive federal tax library. The BNA Portfolios provide analysis of federal tax transactions including primary sources, case law analysis, sample documents, and election statements. Visit www.bna.com and select the Tax and Accounting tab. There is a federal tax blog, a news section and seven-day free trials for income portfolio and tax practice.

Thomson Reuters

Thomson Reuters Checkpoint combines online guidance and analysis from RIA, WG&L and PPC experts, with content from primary sources. Visiting www.ria.thompsonreuters.com/taxresearch and searching Tax Watch, will provide recent tax updates including the often-interesting RIA Observation. There are links to RIA Checkpoint tax research and the option for a 30-day free trial.

Josh Fluegel, graduate of the University of North Texas’ Mayborn School of Journalism, is a contributing writer and the Editorial Coordinator for Tax CPE Course (CPA Magazine). He has also written for organization such as Live Nation and NASA. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Written by: T. Steel Rose, CPA

Published: 07 September 2011

Beginning in taxable year 2010, the Affordable Care Act provides a tax credit to small businesses with no more than 25 full-time employees and average annual wages of less than $50,000 that provide health insurance to their employees. Employers that satisfy the requirements for the credit are referred to as “eligible small employers.” The credit phases out as firm size and average annual wages increase. The full amount of the credit is available to employers with ten or fewer full-time employees and average annual wages of less than $25,000. The credit is not payable in advance and is only available to offset the business’s actual tax liability. For tax-exempt small business, the credit is available as a reduction in payroll taxes. The credit is provided in two phases:

Phase I
Tax Years 2010 - 2013

A tax credit is available to eligible small businesses of up to 35% of an employer’s contribution as long as the employer contributes at least 50% of the total premium or 50% of a benchmark premium. Tax-exempt small businesses meeting the eligibility requirements can receive a tax credit of up to 25% of the employer’s contribution.

Phase II
Tax Years 2014 +

A tax credit is available to eligible small businesses of up to 50% of the employer’s contribution as long as the employer contributes at least 50% of the total premium or 50% of a benchmark premium. The credit is available up to two years. Tax-exempt small businesses meeting the eligibility requirements can receive a tax credit of up to 35% of the employer’s contribution.

Steps to determine whether an employer is eligible for a small business health care credit:

• Determine the employees who are taken into account for purposes of the credit.
• Determine the number of hours of service performed by those employees.
• Calculate the number of the employer’s full-time equivalents (FTEs).
• Determine the average annual wages paid per FTE.
• Determine the premiums paid by the employer that are taken into account for purposes of the credit. Specifically, the premiums must be paid by an employer under a qualifying arrangement and must be paid for health insurance that meets the requirements of section 45R.

 In general, employees who perform services for the employer during the taxable year are taken into account in determining the employer’s FTEs, average wages, and premiums paid, with certain individuals excluded and with employees of certain related employers included.

Exclusions from the definition of an employee are sole proprietors, partners in a partnership, shareholders owning more than two percent of an S corporation and any owners of more than 5% of other businesses. Family members of owners and partners are also not taken into account as employees. For purposes of section 45R, a family member is defined as a spouse, child (or descendant of a child), sibling or step-sibling; a parent (or ancestor of a parent), step-parent, niece or nephew, aunt or uncle, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.

Any other member of the household of these owners and partners who qualifies as a dependent under section 152(d)(2)(H), is not taken into account as an employee for purposes of section 45R. If an individual is not considered an employee, then their wages, hours and premiums paid on their behalf are not counted in determining the amount of the section 45R credit. Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer more than 120 days during the taxable year. All employers treated as a single employer under section 414(b), (c), (m) or (o) are treated as a single employer for purposes of section 45R.

An employee’s hours of service for a year include:

• Each hour for which an employee is paid, or entitled to payment.
• The performance of duties for the employer during the employer’s taxable year.
• Each hour for which an employee is paid, or entitled to payment, by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.

In calculating the total number of hours of service, the employer may use any of the following methods:

• Determine actual hours of service for which payment is made or due (payment is made or due for vacation, holiday, illness or incapacity).
• Use a days-worked equivalency where the employee is credited with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service.
• Use a weeks-worked equivalency where the employee is credited with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service.

 

All examples are for the 2010-2013 taxable years. 1 – An employer’s payroll records indicate that Employee A worked 2,000 hours and was paid for an additional 80 hours on account of vacation, holiday and illness. The employer counts hours actually worked.

Under this method of counting hours, Employee A must be credited with 2,080 hours of service (2,000 hours worked and 80 hours for which payment was made or due).

2 – Employee B worked 49 weeks, took two weeks of vacation with pay, and took one week of leave without pay. The employer uses the weeks-worked equivalency.

Under this method of counting hours, Employee B must be credited with 2,040 hours of service (51 weeks multiplied by 40 hours per week).

FTE Determination Example

The number of an employer’s FTEs is determined by dividing the total hours of service credited during the year to employees taken into account (but not more than 2,080 hours for any employee) by 2,080. The result, if not a whole number, is then rounded to the next lowest whole number. In some circumstances, an employer with 25 or more employees may qualify for the credit if some of its employees work part-time. For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and, therefore, may qualify for the credit.

For example, if an employer pays five employees wages for 2,080 hours each, three employees wages for 1,040 hours each, and one employee wages for 2,300 hours; the employer does not use an equivalency method to determine hours of service for any of these employees.

FTE Calculation

The employer’s FTEs would be calculated as follows:

• Total hours of service not exceeding 2,080 per employee is the sum of:
  • a) 10,400 hours of service for the five employees paid for 2,080 hours each (5 x 2,080)
  • b) 3,120 hours of service for the three employees paid for 1,040 hours each (3 x 1,040), and
  • c) 2,080 hours of service for the one employee paid for 2,300 hours (lesser of 2,300 and 2,080
  • d) The sum of a, b and c equals 15,600 hours of service.
• FTEs equal 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number).

For example, if the 2010 taxable year, an employer has 26 FTEs with average annual wages of $23,000 per FTE; only 20 of the employer’s employees are enrolled in the employer’s health insurance plan.

The hours of service and wages of all employees are taken into consideration in determining whether the employer is an eligible small employer for purposes of the credit. Because the employer does not have fewer than 25 FTEs for the taxable year, the employer is not an eligible small employer for purposes of the credit.

Average Annual Wages Calculation

The average annual wages paid by an employer for a taxable year is determined by dividing the total wages paid by the employer during the employer’s taxable year to employees by the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000).

Only wages that are paid for hours of service are taken into account.

For example, an employer pays $224,000 in wages and has 10 FTEs; the employer’s average annual wages is: $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000).

Acceptable Health Insurance Coverage Example

Only premiums paid by the employer for health insurance coverage are counted in calculating the credit. For example, if an employer pays 80 percent of the premiums for employees’ coverage (with employees paying the other 20 percent), the 80 percent paid by the employer is taken into account in calculating the credit. Any premium paid pursuant to a salary reduction arrangement under a Section 125 Cafeteria Plan is not treated as paid by the employer. An employer’s premium payments are not taken into account for purposes of the credit unless they are paid for health insurance coverage under a qualifying arrangement. A qualifying arrangement is an arrangement where the employer pays at least 50% of the premiums for each employee enrolled in health insurance coverage offered by the employer (must be uniform percentage for all employees).

For example, if an eligible small employer pays 80 percent of the premiums for coverage provided to employees (and employees pay the other 20 percent), the premiums taken into account for purposes of the credit are the lesser of 80 percent of the total actual premiums paid or 80 percent of the premiums that would have been paid for the coverage if the average premium for the small group market in the state (or an area within the state) were substituted for the actual premium.

Example 1 – An eligible small employer offers a health insurance plan with single and family coverage. Employer has nine FTEs with average annual wages of $23,000 per FTE. Four employees are enrolled in single coverage and five are enrolled in family coverage. The employer pays 50 percent of the premiums for all employees enrolled in single coverage and 50 percent of the premiums for all employees enrolled in family coverage (and the employee is responsible for the remainder in each case). The premiums are $4,000 a year for single coverage and $10,000 a year for family coverage. The average premium for the small group market in employer’s state is $5,000 for single coverage and $12,000 for family coverage.

The employer’s premium payments for each FTE ($2,000 for single coverage and $5,000 for family coverage) do not exceed 50 percent of the average premium for the small group market in employer’s state ($2,500 for single coverage and $6,000 for family coverage). Thus, the amount of premiums paid by the employer for purposes of computing the credit equals $33,000 ((4 x $2,000) plus (5 x $5,000)).

Example 2 – Using the same facts as in Example 1, except that the premiums are $6,000 for single coverage and $14,000 for family coverage.

The employer’s premium payments for each employee ($3,000 for single coverage and $7,000 for family coverage) exceed 50 percent of the average premium for the small group market in the employer’s state ($2,500 for single coverage and $6,000 for family coverage). Thus, the amount of premiums paid by the employer for purposes of computing the credit equals $40,000 ((4 x $2,500) plus (5 x $6,000)).

Example 3 – An eligible small employer offers a major medical plan and a dental plan. The employer pays 50 percent of the premium cost for single coverage for all employees enrolled in the major medical plan and 50 percent of the premium cost for single coverage for all employees enrolled in the dental plan. The employer can take into consideration the premiums paid by the employer for both the major medical plan and the dental plan, but only up to 50 percent of the amount of the average premium for single coverage for the small group market in the employer’s state.

Example 4 – Same facts as in Example 3, except that the employer pays 40 percent of the premium cost for single coverage for all employees enrolled in the dental plan.

The employer can take into consideration only the premiums paid by the employer for the major medical plan, and only up to 50% of the amount of the average premium for single coverage for the small group market in the employer’s state. The employer cannot take into consideration premiums paid for the dental plan when employer pays less than 50% for the dental plan.

An employer that pays an amount equal to at least 50% of the premium for single (employee-only) coverage for each employee enrolled in coverage offered to employees by the employer will be deemed to satisfy the uniformity requirement for a qualifying arrangement, even if the employer does not pay the same percentage of the premium for each such employee. The requirement that an employer pay at least 50% of the premium for an employee applies to the premium for single coverage for the employee. An employer will be deemed to satisfy the uniformity requirement for a qualifying arrangement if it pays at least 50% of the premium for single coverage for each employee receiving single coverage; and if the employer offers coverage that is more expensive than single coverage (such as family or self-plus-one coverage), if it pays an amount for each employee receiving the more expensive coverage that is no less than 50% of the premium for single coverage for that employee (even if it is less than 50% of the premium for the more expensive coverage the employee is actually receiving).

State Tax Credits

Some states offer tax credits or subsidies to certain small employers that provide health insurance to their employees. State tax credits and subsidies are treated as amounts paid by the employer for purposes of determining whether the employer has satisfied the “qualifying arrangement” requirement to pay an amount equal to a uniform percentage (not less than 50%) of the premium cost. However, the amount of the credit cannot exceed the amount the employer actually paid in premiums. When calculating the employer’s actual premium payments, the amount of any state tax credit or subsidy is not included.

Credit Phase Out

The credit phases out gradually (but not below zero) for eligible small employers if the number of FTEs exceeds 10 or if the average annual wages exceeds $25,000. If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction; the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15.

If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction; the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000. In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled.

For an employer with both more than ten FTEs and average annual wages exceeding $25,000, the total reduction is the sum of the two reductions.

How to calculate the credit:

• Calculate the maximum amount of the credit.
• Reduce the maximum credit in step 1 in accordance with the phase out rule, if necessary.
• For employers receiving a state credit or subsidy for health insurance, determine the employer’s actual premium payment.

Example 1 – Calculating the maximum credit for a taxable eligible small employer. A taxable eligible small employer has 9 FTEs with average annual wages of $23,000 per FTE. The employer pays $72,000 in health insurance premiums for those employees (which does not exceed the average premium for the small group market in the employer’s state) and otherwise meets the requirements for the credit.

The credit equals $25,200 (35% x $72,000).

Example 2 – Calculating the maximum credit for a tax-exempt eligible small employer. A tax-exempt eligible small employer has ten FTEs with average annual wages of $21,000 per FTE. The employer pays $80,000 in health insurance premiums for its employees (which does not exceed the average premium for the small group market in the employer’s state) and otherwise meets the requirements for the credit. The total amount of the employer’s income tax and Medicare tax withholding plus the employer’s share of the Medicare tax equals $30,000 in 2010. The credit is calculated as follows:

Initial amount of credit determined before any reduction: (25% x $80,000) = $20,000. Employer’s withholding and Medicare taxes: $30,000

Example 3 - Calculating the credit phase-out if the number of FTEs exceeds 10 or average annual wages exceed $25,000.

A taxable eligible small employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health insurance premiums for its employees (which does not exceed the average premium for the small group market in the employer’s state) and otherwise meets the requirements for the credit. The credit is calculated as follows:

• Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600
• Credit reduction for FTEs in excess of 10: (33,600 x 2/15) = $4,480
• Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/ $25,000) = $6,720
• Total credit reduction: ($4,480 + $6,720) = $11,200
• Total tax credit equals $22,400 ($33,600 - $11,200).

Claiming the Credit

The credit is claimed on an eligible small employer’s annual income tax return and offsets an employer’s actual tax liability for the year. Eligible small employers should attach the Form 8941, Credit for Small Employer Health Insurance Premiums, to their tax return. Tax exempt organizations must attach the Form to their 990-T. The credit is a general business credit and any unused credit amount can be carried back one year and carried forward 20 years. For a tax-exempt eligible small employer, the credit will be a reduction in payroll taxes.

The credit can also be used to offset an employer’s alternative minimum tax (AMT) liability for the year but is subject to certain limitations based on the amount of an employer’s regular tax liability. No deduction is allowed for the employer under section 162 for that portion of the health insurance premiums which is equal to the amount of the section 45R credit.

For taxable years beginning in 2014

The maximum amount of the tax credit is 50% of the employer’s contribution (35% for tax-exempt employers). The credit is only available to small businesses purchasing health insurance through an exchange and is also only available for two years (not counting any years prior to 2014 when the small business may have received the credit).

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Written by: T. Steel Rose, CPA

Published: 07 September 2011

I. PREPARER 

______ 1. Signed engagement/separate privilege tax advice engagement section

______2. Update taxpayer information, filing status and dependents

______3. Review prior year returns, work papers, correspondence, and audit results

______4. Review proforma or tax organizer for accuracy

______5. Complete State Individual Tax Return Checklist

______6. Check for carryovers and include effect of prior period tax audits

______7. Review accounting methods

______8. Properly report adjustments for accounting method changes

______9. Consider filing a power of attorney

______10. Consider if disaster relief provisions apply

______11. Determine if requirements for avoiding penalties for improper disclosure or use of taxpayer information by tax return preparers imposed under §§6713and 7216 have been met

II. INCOME

For sales or other disposition of property consider

______1. Recapture

______2. Installment sales treatment

______3. Taxable/deferred/excluded gain on sale of residence or other property

______4. Holding period/basis

______5. Related party transactions

______6. Like-kind exchanges

Consider the following

______1. Salaries and fringe benefits

______2. Taxability of dividends, interest and capital gain distributions

______3. Ordinary income on market discount bonds and deferral of related interest expense

______4. Annuities, retirement plans, IRAs, Roth conversions

______5. Limitations due to at-risk and basis

______6. Passive loss limitations and election

______7. Alimony

______8. Rents

______9. Tax benefit rules

______10. Discharge of indebtedness

______11. Worthless stock/bad debt

______12. Punitive damages

______13. Exclusion of employer-provided educational assistance

______14. Unemployment Compensation

III. DEDUCTIONS

______1. Home office Form 8829

______2. IRA, SEP, SIMPLE, Keogh, MSA, and HSA contribution

______3. Roth IRA and Education Savings Account

______4. Non-deductible contributions

______5. Moving expenses

______6. Casualty losses

______7. Allocation and limitation of interest

______8. Alimony

______9. Itemized deductions

______10. Contributions

______11. State and local sales tax

______12. Teachers’ classroom expenses

______13. Qualified higher education tuition deduction

______14. Sales, use, or excise tax on qualified vehicles

______15. Consider property tax deduction for non-itemizers

______16. Limit on meals and entertainment and exceptions (Rev. Proc. 2007-63) (Rev. Rul. 2008-23)

______17. File Form 8283 for noncash donations

______18. Consider limitations on deductibility of dues and lobbying expenses

IV. DEPRECIATION/AMORTIZATION

______1. § 179 deduction for new and used equipment up to $500,000

______2. § 179D energy tax deduction election

______3. Additional first-year depreciation up to $150,000

______4. Methods and lives

______5. Listed property

______6. Capitalization of leased property

______7. Qualified leasehold improvement property

______8. Amortization of goodwill and other intangibles

______9. Like-kind exchange and involuntary conversion property rules

______10. Amend returns for tax years after 2002 to elect and/or revoke § 179 elections

______11. Compute AMT depreciation

______12. Compute state depreciation, if different

V. TAX COMPUTATION AND CREDITS

______1. Regular and AMT tax

______2. Self-employment tax and deduction

______3. Credits, carryovers and recaptures

______4. Tax on premature distributions

______5. Claim credit for excess FICA, other withholding/payments

VI. E-FILE

______1. Review software validation, create and print e-file return(s)

______2. Provide taxpayer with complete Federal and state return(s) including Form 8879 and state consent form(s)

VII. OTHER CONSIDERATIONS

______1. Risk of accuracy-related penalty. (§ 6662)

______2. Taxable income and tax to projections.

______3. Report tax shelters. Form 8886

______4. Election to forgo NOL carryback.

______5. Inclusion of child’s taxable income. (Kiddie Tax)

______6. Evaluate estimated tax payment/withholding

______7. Household employee requirements

______8. Other returns like gift and qualified plans

______9. Include/attach extensions

______10. Note planning/additional service suggestions

______11. Consider Circular 230 requirements

______12. Consider third-party service provider notification limitations under Sec. 7216, Rev. Ruling 2010-4 revisions for 2010

______13. Consider accuracy-related penalty regarding “substantial authority” language

______14. Consider elections and required statements and attachments

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Written by: T. STEEL ROSE, CPA, AND JASMINE TEMARES

Published: 29 July 2011

The main purpose of tax research is to help clients find solutions to their tax problems. Tax law is continuously changing, so tax researchers must find the most authoritative, useful and updated resources to solve their clients’ tax problems.

While tax law is complex, tax researchers demand simplicity, which is why many look to tax research software for immediate and total access to tax resources. As tax law and technology evolve, so do tax research solutions. Tax research solutions offer the ability to quickly search thousands of sources and databases to provide the most up-to-date and useful results.

This issue, we tapped several resources to gain their expertise on tax research. BNA Software offers five situations when researchers need to gauge nexus exposure. Editor T. Steel Rose, CPA, explains how taxalmanac.org’s tax forums offer practical tax advice and how Tax Analysts e-book provides unique tax explanations for practitioners. CCH, a Wolters Kluwer business discusses the importance of interpretive regulations in tax research. For efficient tax law research and analysis, LexisNexis offers tips from integrating live citations to looking for trusted law literature.

Read on to discover more helpful tax research advice, as the top tax research vendors share their tips to solve tax problems.

 

5 Situations When You Need to Gauge Your Exposure

For state tax purposes, ‘‘nexus’’ means the threshold of contact that must exist between a taxpayer and a state before the state has the power to tax an out-of-state business. The U.S. Constitution requires that there be some minimum connection between a state and the person, property, or transaction it seeks to tax before taxable or substantial nexus can be found to exist.

Despite this constitutional pro-tection, states vary in determining what particular activities performed within their borders might trigger nexus, and then income or sales tax obligations for an out-of-state business.

From a company’s standpoint, the need to gauge nexus exposure generally arises in these five scenarios:

Startups. A company begins operating in only one state, but grows quickly and begins to regularly transact business activities in other jurisdictions.

Mergers, Acquisitions, and Re-organizations. Due diligence reveals nexus exposure in a jurisdiction either before or after the purchase of a target entity.

Change of Tax Personnel. A business replaces its tax manager. The new tax department head concludes that the former manager either incorrectly concluded that the company was not subject to tax in a particular jurisdiction or pursued an overly aggressive nexus policy.

Financial Reporting. A company must comply with FIN 48 or other financial reporting rules by listing nexus exposure as an “uncertain tax position.”

Expanding Nexus Standards. New legislation or case law, results in increased nexus exposure for out-of-state companies.

Different standards have emerged for income tax nexus and sales and use tax nexus.

For income tax, nearly all the states adhere to an “economic nexus” policy, under which a business that is not physically present in a state could be subject to tax if it engages in activities such as issuing credit cards to residents.

For sales tax, however, a company must be physically present within the jurisdiction to trigger nexus.

Despite these standards, gauging a company’s exposure can be challenging because nexus is a notoriously gray area of tax law. There is a general lack of state guidance regarding many types of nexus-creating activities. Even where guidance exists, state tax department nexus determinations tend to be fact specific and subject to interpretation.

Performing regular nexus reviews and keeping apprised of changes to state nexus laws will help guard against unwelcome surprises in this area.

— BNA Software

 

Tax Forums Offer Advice to Practitioners

At first glance taxalmanac.org looks dated. The opening main page feature article is Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted 12/27 of 2010.

The first item under the General information button is 2005 Tax Rate Schedule. A note at the bottom of the page states, “This page was last modified on 2 November 2008, at 21:53.”

You can’t tell a book by its cover in this instance, because the strength of this Web site is in the forums where tax practitioners try to help each other and post very specific problems, sometimes in dealing with the IRS. While you can’t rely on the advice, you can obtain an experienced perspective. One such contributor is Dave Fogel. Responding to a question on how to deal with the IRS question during an audit: “Do you know of any errors on the return?” Fogel responded:

“Regarding your first question, under section 10.21 of Circular 230, you have an obligation to inform the client of the additional errors and the consequences of not correcting them. You have no duty to disclose these errors to the IRS agent.

However, the second question is the problem because you cannot lie to the IRS agent. TKelly recommends that you reply, “I cannot answer that question,” and that you inform the agent about the law of privilege. I presume that the “law of privilege” that TKelly is referring to is Sec. 7525. This section protects communications between a taxpayer and the tax practitioner, and your knowledge of the errors might not be entitled to the confidential protection provided in this section because they aren’t “communications” — you discovered them on your own after going through the return and the client’s records.

In addition, by informing the agent about the “law of privilege,” the agent will become suspicious and will probably expand the audit to other areas of the return. Instead, I would recommend that you reply, “Let me get back to you on this after I’ve had a discussion with my client.” Then convince the client to disclose the errors to the agent. If the client is unconvinced, then withdraw from the engagement. On further investigation it turns out Fogel, is a CPA, EA, who is also admitted to practice before U.S. Tax Court and has 35 years experience representing clients.

There are other useful resources on the site including the Research Resources section on the left side of the main page.

 

The Importance of Interpretive Regulations

Although there have been extensive changes in the techniques for doing tax research in recent years with the growing sophistication of online tax research tools, there is a perception that the analysis of the results of that tax research has not changed much over the years. There are still the primary sources of tax research from the Congress (the Internal Revenue Code, tax treaties and legislative history), from the Administration (Regulations, Rulings, Notices and whatever other documents can be obtained from Treasury and the IRS), and from the Judiciary (court decisions). Then there are the secondary sources of expert analysis and commentary.

Knowing the weight to be placed on the results of that tax research has, however, become increasingly important with increased penalties on taxpayers and return preparers with respect to the support for the positions taken on those returns. The weight given to particular results of tax research determines the amount of authority for a certain tax position. The Internal Revenue Code is always given the most weight in tax research. After that, would generally come regulations, since Congress has given the Treasury general authority to interpret the Internal Revenue Code. Of course, even a regulation could be trumped by a Supreme Court decision stating that the regulation was an improper interpretation of Congressional intent in the statute.

There has been a recent change in the weight to be given to types of tax regulations. Under the traditional view of tax research, there are two types of regulations. Interpretive regulations, enacted under the general statutory authority to interpret the Internal Revenue Code, were to be given less weight than legislative regulations, where Congress in the specific Code provision being interpreted states that the Treasury is to issue regulations fleshing out the meaning of the provision. Legislative regulations were to be given the force and effect of law unless they were arbitrary, capricious, or manifestly contrary to the statute (the Chevron standard). Interpretive regulations were to be given deference if they implemented that statute in a reasonable manner, giving consideration to the plain language, origin and purpose of the statute and the proximity of the timing of the regulations to the enactment of the statute (the National Muffler standard).

In the Supreme Court’s recent decision in Mayo, however, the Court adopts the Chevron standard for both legislative and interpretive regulations. In weighing the results of tax research, interpretive regulations move up a notch. This is already making it more difficult to challenge regulations in court and could also affect the weight to be given to a tax position taken on a return.

— CCH, a Wolters Kluwer business

 

Speed, Accuracy Aid in Tax Law Research

Speed and accuracy are two key elements to efficient tax law research and analysis. When they are both possible, tax law professionals work faster, smoother and with more confidence for better service to their clients. When one element is not present, however, things bog down and more time is spent either finding or verifying tax law and related issues.

With this in mind, here are a few tips on what to look for in tax law technology that combine the elements of speed and accuracy to aid in tax law work:

Integrate live citations, IRS Code and Treasury Regulations with other sources of related information. Look for and use technology solutions that not only offer codes and regulations, but also provide easy and seamless access to related analytical content, law reviews, case annotations, legislative history and other resources. This improves research efficiency and thoroughness by giving the user instant access to multiple tax sources related to a Code or Regulation section, thereby reducing the number of searches.

Choose resources that offer shortcuts to find and verify law. Finding the right law, code or regulation is one thing, while verifying it as accurate, valid and up-to-date is another. Tax law technologies that offer ways to do this quickly can be of great assistance — not only in terms of speed, but in a user’s confidence that he or she has indeed found valid law. For example, some leading tax law solutions feature drop down menus that enable the user to pull up the authority needed and check to make sure that it’s still good Federal or state law with a “wizard” tool. Look for these and use them if your solution offers them, as they do offer a way to find what you need and enable you to move on quickly to your next step.

Look for trusted tax law literature. An effective tax law technology solution will also offer up integrated access to a library of treatises and other written information about tax law to help professionals stay up to date and assist in the thoroughness and accuracy of analysis.

—LexisNexis

When it comes to tax research, Tax Analysts should not be overlooked. They recently announced a new e-book of the entire Internal Revenue Code and Regulations. The interactive e-book with the entire Internal Revenue Code and Regulations will update quarterly.  Tax Analysts offers a unique perspective to help explain taxes to tax clients.

For example, according to their State Tax Notes, “Wireless subscribers in 47 states pay taxes, fees and government-mandated charges that exceed the general retail sales tax rate.” Specifically, “the average American pays a whopping 16.26% on their wireless phone and broadband bills, with Nebraska residents paying as much as 23.69%.”

Joseph Thorndike, director of the tax history project at Tax Analysts, explains that when it comes to tax holidays, “The balance of evidence at this point suggests not particularly successful at creating jobs, if that’s the goal. You could make a marginally better case that as far as stimulus goes, they stimulate the economy, but they’re not the most effective form of stimulus.’”

When clients complain that taxes are rising, David Cay Johnston, a columnist for Tax Notes points out that, “The effective rate for the top 400 taxpayers has gone from 30 cents on the dollar in 1993 to 22 cents at the end of the Clinton years to 16.6 cents under Bush, so their effective rate has gone down more than 40 percent.”

Taking the historical view Thorndike states that the federal income tax, “Enacted as a wartime measure in 1862, roughly 10 percent of Americans, mostly the more affluent Northern citizens, were paying income tax in the late 1860s, compared with 50 percent today.”

Martin Sullivan, an economist at Tax Analysts believes there are dangers in de-fanging the IRS. According to Sullivan, “Taxpayers will lose their fear of the IRS and stop paying taxes, expecting that they could make good the next time the U.S. government offers a reprieve. ‘It actually reduces compliance with the rules,’ he said as reported by The New York Times, ‘In the long run, it’s a revenue loser.’”

Sullivan also reported that booking such a large percentage of its profits in low-tax countries has, “allowed G.E. to bring its U.S. effective tax rate to rock-bottom levels (3.6%).”

In response to the elusive how much salary to pay a Sub-S corporation owner Sullivan reported in The Wall Street Journal that, “The average pay for a Sub-S owner was recently $38,400.” His inference was that was too low.

Sullivan makes the point that, “Short-term incentives for accelerated depreciation, which Congress enacted in 2008, 2009, and 2010 cause companies to report lower current tax expenses.”

Bringing in the practical implications of tax legislation Christopher Bergin, president and publisher of Tax Analysts clarifies, “One of my least favorite tax credits is the ethanol production credit,’ notes ‘In addition to taking care of the farmers and ethanol producers, the credit drives up the price of feed, which drives up the price of pigs, which drives up the price of bacon.”

 

Free Tax Research Sources

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