IRS Will Tan Your Hide

When I was a young boy my dad would occasionally threaten to “tan my hide,” meaning that I was about to get a spanking. Well, it looks like Congress and the IRS are now passing out spankings of a financial nature to anyone who uses the services of an indoor tanning salon. The Patient Protection and Affordable Care Act levies a 10 percent excise tax on indoor tanning services. The act was effective July 1, 2010, and requires all indoor tanning salons to charge their customers a 10% excise tax for the use of a tanning bed. The tanning customers may not be the only ones getting their hide tanned because if the customer fails to pay the tax, the tanning salon is liable for it.

There are exemptions from the tax, though, for phototherapy services performed on premises by licensed medical professionals, spray-on tanning services, and certain physical fitness facilities that offer tanning as part of their services without a separate fee. Looks like the fitness club industry has a pretty good lobby, wouldn’t you say?

Tanning salons are required to file the newly revised Form 720, Quarterly Federal Excise Tax Return. Have you seen this thing? If you count the Payment Voucher it is 7 pages long!

Indoor tanning services tax is reported in Part II on page 2 along with the excise tax on bows, quivers, broadheads, fishing tackle boxes, electric outboard motors, fishing poles, and arrow shafts. If tanning beds are so dangerous to your health, maybe it should be reported over on page 1 of Form 720 along with diesel fuel. What do you think?

Circular 230 Rides Again

This week the IRS proposed amendments to Circular 230 to help regulate tax return preparers by making all return preparers subject to the circular’s requirements. The proposed amendments would do the following:

· Define “Practice before the Internal Revenue Service” to clarify that either preparing a document or filing a document may constitute practice before the IRS.
· Establish a new “Registered Tax Return Preparer” designation. (They will probably become RTRP’s don’t you think?)
· Define eligibility to become a Registered Tax Return Preparer. (The regulation of unregistered tax preparers currently being proposed by the IRS.)
· Amend the rules regarding continuing education providers.
· Establish standards for the preparation of tax returns.
· Make RTRPs subject to the solicitation, incompetence and disreputable conduct sections of the circular.

The service also announced that they will stop issuing PTINs effective August 22nd. If you apply for a PTIN before August 22nd. you will have to reapply once the new comprehensive PTIN system is in place. Won’t everyone have to reapply?

The AICPA says that it supports the general goals of improving compliance and raising ethical conduct but has serious concerns with a number of implementation steps (See Journal of Accountancy, “IRS Moves Forward With Preparer Registration Plan,” August 19, 2010). Is requiring compliance with Circular 230 a good plan that will improve tax compliance and ethical standards or is it just more government red tape? What do you think?

THE IRS DOESN’T WANT YOUR TAX RETURN

At least not if it’s a Form 706 Estate Tax return because they don’t know what to do with them and don’t have a place to store them. Congress can’t seem to get its act together to address a fix for this dilemma and so the estate tax will probably remain in limbo at least for the rest this year.

For some tax payers, this is an unbelievable windfall. Take George M. Steinbrenner for example, the late owner of the New York Yankees. George passed away in July 2010. At the time of his death, his net worth was estimated at somewhere around $1.15 billion. And guess what, if the current estate tax regulations are not changed, George’s heirs will owe exactly zero taxes on his estate. Oh to be so lucky. Not George of course, but his heirs. The current estate tax provisions were part of the Economic Growth and Tax Relief Reconciliation Act of 2001 and will end on December 31, 2010. Next year the tax rate will return to a graduated rate with a maximum of 55 percent.

The old saying, “You can’t take it with you,” is still true, but with the current estate tax rules you can sure leave a lot more behind for your friends and relatives. What do you think?

DO YOU KNOW ALL THE TAXES YOU PAY?

I am betting that you don’t have a clue. The reason that I don’t think you really know what taxes you pay is because so many of them are hidden. Take for instance the employer’s portion of your payroll taxes that help fund Social Security and Medicare. These taxes are usually not shown on your pay stub, but they are ultimately passed on to you in the form of lower wages.

It is estimated that some 37% of federal taxes are hidden. A study by the Institute of Policy Innovations suggests that hidden taxes amount to $2,462 per person annually. So what are some of these hidden taxes?

Take gasoline for instance. Approximately fifty cents of the price you pay per gallon goes to pay state and federal taxes. Then there are the sin taxes on alcohol and tobacco. How about the travel taxes on air fares, taxis, car rentals and hotel occupancy? In addition to these that are sometimes actually labeled as taxes there are others that are cleverly disguised as “fees.”?

Just take a look at your cell phone bill. I did and here is what I found. In addition to the state telecom tax, the city telecom tax and the state sales tax, there was the Regulatory Cost Recovery Charge, the Federal Universal Service Charge (whatever that is), the Franchise Tax Recovery Fee and the 911 Service Fee. Thirteen percent of my bill each month is not for the cost of making calls but rather for taxes.

Politicians know that if they raise income or property taxes we will notice and complain. So what do they do? They have businesses add these “taxes” to their products and services and call them fees.

I think that the government is better at picking our pockets than any professional pickpocket. What do you think?

More To The Story Than Meets The Eye

Pendergraft v. U.S. was decided on July 22, 2010. PPC's description of the case is: Mortgage Refinance Proceeds: Taxpayers filed an amended return based in part on their claim that the IRS incorrectly characterized a $35,103 bank deposit from a mortgage refinance as taxable income. The IRS denied the claim because: "You did not document that your share of the loan proceeds were deposited into the accounts considered in determining gross receipts. Rather it appears that your share of the loan proceeds were deposited into one of the accounts not provided to the examining agent which she requested." After noting that funds received from a mortgage refinance are not taxable, the Court of Federal Claims concluded that taxpayers produced sufficient evidence (a letter from Kanaly Trust Company) establishing that they received a check for $35,103 representing one-half of the mortgage refinancing proceeds. Pendergraft v. U.S. , 106 AFTR 2d 2010-XXXX (Ct. Fed. Claims).

I thought this would be an interesting case to read in full. How could the IRS argue that loan proceeds are taxable income? Is this a matter of an IRS correspondence case where the IRS agent added up all bank deposits and the taxpayer explained the additional deposit amount was due to a refinance and the IRS did not understand the explanation? Is this a case where the IRS is ignorant? Is this a case where the IRS tries to extract money from the taxpayer? Or is there more to the story?

There IS more to the story. The case states: The Government highlights the fact that since 1997 Plaintiffs have “created a series of illegal trusts that they believed would enable them to avoid all income taxes.” Gov't Opp. & Cross Mot. at 5. This is not the first time the IRS has had to re-examine Plaintiffs' tax returns. Id. In fact, Plaintiffs filed Form 1040EZ returns between 1998 and 2001 reporting zero taxable income, even though they had received substantial income. Id.; see also NHUSS Trust v. Comm'r, 90 T.C.M. (CCH) 374 [TC Memo 2005-236] (2005) (holding Plaintiffs in the case at bar liable for negligence penalties that arose as a result of the underpayment of taxes in 1999 and 2000). The instant refund claim is a continuation of Plaintiffs' “brazen” “tax-avoidance scheme.” Gov't Opp. & Cross Mot. at 5; see also id. at 6–13 (characterizing Plaintiffs' previous “[s]ham [t]rust [s]tructure and 2005 Tax Court [l]itigation,” and questioning Plaintiffs' 2001 tax return).

Originally the taxpayers filed a joint zero-taxable income return Form 1040EZ for the tax year 2001, then they filed a revised joint tax return claiming an adjusted gross income of $310,701. And then they filed another 1040X.

While the proceeds of a loan refinance are not taxable, is it any surprise that the IRS was suspicious?

And the moral of the case? A brief description of a case, no matter how carefully written and edited, does not tell the whole story. And, many times, we need the truth, the whole truth, and nothing but the truth.

GOING GREEN

In the words of Sesame Street’s Kermit the frog, “It’s not easy being green.” At least that is what a lot of business leaders around the world are discovering. Finding leaders who understand environmental and sustainability issues is difficult and the absence of these leadership skills is probably one of the greatest challenges facing countries wanting to make the move to a low carbon economy.

Whether you believe that going green is necessary or not you have to ask yourself; are our current business models sustainable? How long will it be until we run out of oil or the polar ice caps melt if we don’t reduce our carbon emissions? In order to implement the changes that may be necessary we need leaders with the appropriate leadership skills. There is an organization in the UK, “Business in the Community,” along with several other groups that are developing a best practices guide for sustainable leadership for a wide-range of employees including senior managers, middle managers, customer-facing staff and the general workforce. They have described these key leadership skills as “the ability to develop a long term vision of how the organization will contribute to a sustainable economy, the ability to inspire a broad range of people internally and externally and the ability to work collaboratively with different stakeholders.”

Going green is already having an impact on accounting and tax practices in the US as evidenced by the green initiatives included in some of the 2009 tax acts passed by Congress. If you would like to learn more about these green tax initiatives just click on the following link to a four hour self-study course titled “Going Green Under the New Tax Law.”

http://trainingcpe.thomson.com/CourseFinder/Tax_and_Accounting_Courses.asp?startdate=7/29/2010&enddate=&keywords=Green&category000022=on&featuredlist=&limittodates=&zipcode=&zipradius=25&detaillevel=0

Going green and being green may be just as difficult for us as it is for Kermit the Frog but it may be inevitable. What do you think?

THE FIRST STEP

The curtain is rising on Act One of the new IRS play, which will add rules on preparer behavior. The first stage is simple: we must all register with the IRS.

Proposed §300.9 establishes a $50 user fee to apply for or renew a PTIN. The $50 user fee is based on an annual PTIN renewal period, and the procedures for renewing a PTIN will be provided in other guidance, including forms and instructions. The user fee is nonrefundable regardless of whether the applicant receives a PTIN. PTINs were previously issued to tax return preparers solely for the convenience of the tax return preparers, providing an alternative to using the tax return preparers' social security numbers. Requiring registration through the use of PTINs will enable the IRS to better collect and track data on tax return preparers. This data will allow the IRS to track the number of persons who prepare returns, track the qualifications of those who prepare returns, track the number of returns each person prepares, and more easily locate and review returns prepared by a tax return preparer when instances of misconduct are detected.

A public hearing has been scheduled for Tuesday, August 24, 2010. This is a comment period that we can all participate in.

The statute itself is very simple:

Par. 11. Section 300.9 is added to read as follows:

§300.9 Fee for obtaining a preparer tax identification number.

(a) Applicability. This section applies to the application for and renewal of a preparer tax identification number pursuant to 26 CFR 1.6109-2(d).

(b) Fee. The fee to apply for or renew a preparer tax identification number is $50 per year, which is the cost to the government for processing the application for a preparer tax identification number and does not include any fees charged by the vendor.

(c) Person liable for the fee. The individual liable for the application or renewal fee is the individual applying for and renewing a preparer tax identification number from the IRS.

(d) Effective/applicability date. This section will be applicable on the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register.

Your thoughts? Remember, the comment period is still open. Let the IRS know your thoughts.

And remember, this is only Act One. We'll keep you posted as matters progress.