The Senate’s top taxwriter will lead the charge.  Sen.  Max Baucus (D-MT)
wants to increase information reporting and clamp down on bad return preparers.
                Some tax gap proposals stand a good chance of passing:  Basis reporting
by brokers when their customers sell securities, as a way to curb underreporting
of gains.  Whatever Congress passes will apply to many types of securities...stocks,
bonds, mutual funds, options, etc.  Brokers will have time to get their systems ready:
The reporting rule will only apply to securities bought 18 months after enactment.
                Making credit card companies file 1099s on payments made to merchants.
Getting the data would help the IRS determine if a seller was underreporting income.

                Extending the three-year statute of limitations on IRS’ ability to collect tax.
                Mandating registration for unlicensed preparers.  Those who aren’t CPAs,
lawyers or enrolled agents would have to pass a test and regularly renew eligibility,
but Congress would make sure IRS had a year or more to gear up for the program.
                Having the Service create a self-audit program for individual taxpayers,
patterned after those now used by some states.  The Service would contact taxpayers
about deductions that other filers have habitually overstated, such as auto expenses
and meals and entertainment.  IRS would explain the rules and give them a chance
to fix the mistake.  In return, any penalty they owed would be reduced or waived.
Congress could also require IRS to expand an existing self-audit program for firms.

                You’ll hear talk about other ideas, but quick action on them is a long shot:
                Having states share more data with IRS.  Although popular with lawmakers,
the idea ran into trouble recently.  IRS had to halt existing data sharing programs
because of faulty computer firewalls.  Congress will wait until IRS fixes the problem.
                Mandating electronic filing for individuals.  Congress will resist the urge
to make individuals e-file...lawmakers know they would get a storm of complaints.
                State and local information reporting.  Those governments will fight a plan
requiring them to send out 1099s on all their payments for goods and services.

                And a huge boost in funding for the Service.  Many lawmakers believe
that the Service would need a much bigger budget to make a real dent in the tax gap.
But IRS’ recent track record of computer glitches and rebate processing problems
will make them leery of forking over big bucks until IRS shows it can spend wisely.

 Making a onetime transfer from an IRA to an HSA can pay off taxwise
 for folks who have made after-tax contributions to the IRA.  The amount
that you transfer to the HSA is deemed to come out of deductible contributions first,
the IRS says.  Thus, a larger portion of future payouts from the IRA will be tax free.
                But there are limits.  You can’t transfer more than the maximum HSA payin
for the year...$5,800 for family coverage or $2,900 for self-only, plus an extra $900
if you were born before 1954.  And distributions can be made only from a regular IRA
or a Roth IRA, not from a SIMPLE-IRA or SEP-IRA.  See Notice 2008-51 for details.

                Access to on-site medical clinics doesn’t bar employees from having HSAs,
according to the IRS.  Receipt of free or low-cost services at a clinic in the workplace
is permitted, including immunizations, physicals, nonprescription pain relievers
and treatment for on-the-job injuries.  But comprehensive health care isn’t allowed.
                HSAs can be tapped to pay Medicare Part D premiums if the owner is 65
or older.  But withdrawals that are used to pay the Part D premiums for a spouse
will be taxed as income and hit with a 10% penalty if the account owner is under 65.
                Employers can give employees debit cards to access funds in their HSAs,
as long as the cards are coded to allow payment only of expenses for health care.
                And HSAs can be used to pay premiums for continued health care coverage
for a spouse or dependent, known as COBRA coverage.  Also, accounts can be used
to pay the medical premiums for a spouse or dependent who is on unemployment.

 Damages received for sexual harassment are taxable, the Tax Court says.
 But there’s a limited exception:  Damages for treating emotional trauma
from the harrassment are tax free.  The victim must be able to document the costs
and must not have deducted them in a previous year (Sanford, TC Memo.  2008-158).

 Charitable remainder trusts can be divvied up without triggering taxes,
 the Service rules.  If a single trust with multiple beneficiaries is split up,
IRS will not deem a sale to have occurred and won’t impose excise tax on gains.
This is a big help to these trusts, in which one or more beneficiaries get payments
for a set term or for life, with any balance remaining going to charity.  The donor
gets to deduct the amount that is expected, using IRS tables, to go to the charity.
Dividing up a charitable trust may be necessary when married beneficiaries divorce.
And when a trust has several named beneficiaries, splitting it up into separate trusts
will enable the charitable organization to get some of the expected money sooner.
Otherwise, the charity must wait until the final beneficiary dies (Rev.  Rul.  2008-41).

 An ex-wife’s failure to sign the divorce decree costs a noncustodial father,
 the Tax Court says.  A divorce court gave the ex-wife custody of their child,
but let the father claim a dependency exemption for the child in odd-numbered years
provided that he made timely child support payments, which he did.  Although his ex
refused to give him a signed Form 8332 for those years, he claimed the exemption,
attaching the divorce decree to his income tax return.  But because his ex-wife
had not actually signed the decree, the Court said that it was not a valid substitute
for Form 8332 and denied him the exemption (Lease, TC Summ.  Op.  2008-73).

 Good news for teachers who elect to be paid over a 12-month period:
 That won’t trigger a penalty tax on the pay they deferred, IRS now says.
By electing to be paid over a 12-month span instead of over the shorter school year,
teachers effectively defer a portion of their compensation to the following tax year.
For example, a teacher who earns $4,800 a month and is paid over the school year
that begins Sept.  1, 2008 and ends June 30, 2009 will get a $4,000 monthly check
if he or she elects to be paid on a 12-month basis.  The IRS won’t tax the teacher
in 2008 for the $800 a month deferred from the final four months of 2008 into 2009.

 With airlines reinstating the Saturday night stayover rule for cheap fares...
 Remember that an extra day tacked onto a business trip can be deductible
if the total cost of the trip is lower as a result.  The extra meal and lodging expenses
for the nonbusiness day must be less than the cost of flying without a Saturday stay.
This is so even if the additional day is used for sightseeing, shopping and the like.
Reimbursement of the extra day’s food and lodging is also tax free to employees.

                An accrual method firm can’t count rebate redemptions before they occur,
the IRS privately tells a retailer.  Although the retailer could predict the percentage
of cash rebates it would pay out from rebate offers customers turned in, IRS says
it can’t offset its gross sales by that amount.  The rebates are deducted when paid.
IRS won’t follow a contrary Tax Court case that treated the rebates as coupons
and approved a deduction for estimated redemptions.  So more litigation is likely.
S corporations cannot deduct premiums paid on key-man insurance...
policies taken out on key owners, providing funds to redeem stock at their deaths.
                But the proceeds don’t reduce the firm’s previously taxed income account,
the Service rules, because the insurance proceeds are tax free (Rev.  Rul.  2008-42).
This account tracks the undistributed S firm income that owners have paid tax on.
That is good news for corporations which had accumulated profits and switched
to S firm status.  The policy proceeds will not trigger tax on distributions made
above the amount of S firm income already taxed to the company’s shareholders.

 Can unrealized gains lower the estate tax value of businesses?
 The government wants the Supreme Court to limit this valuation break.
Last year, an Appeals Court said the full amount of the future capital gains tax bill
could be taken into account for valuation purposes.  It said that the company’s value
must be reduced dollar for dollar by the tax that would be due if the assets were sold
when the owner died.  IRS says the valuation formula should account for the period
over which the company’s assets would be sold.  That would give a smaller discount.

 On state and local tax breaks for volunteer firefighters and emergency staff:
 Rebates are subject to FICA tax if the recipients are government employees,
the Service says in a private ruling.  Congress didn’t exempt the rebates from FICA
when it OK’d the break on federal income taxes for rebates of state and local taxes.
Although the volunteers aren’t paid, they are treated for tax purposes as employees
because their paid jobs put them under the control of the state or local government.
The tax relief OK’d by Congress for these volunteers applies only from 2008 to 2010.

 Limited partners in a securities trading firm get some good news from IRS:
 They needn’t itemize to deduct their share of the company’s interest cost.
The write-off is claimed on Schedule E, not Schedule A, as some taxpayers thought.
But the limited partners’ share of the interest paid is treated as investment interest,
so the write-off is limited to their net investment income.  That’s generally defined
as short-term capital gain, interest and nonqualified dividends (Rev.  Rul.  2008-38).

 An escrow agent’s bankruptcy will blow up a deferred like-kind exchange.
 Gain on the property transferred will be taxed, the Service privately rules,
if the bankrupt escrow intermediary firm fails to acquire the replacement realty
and transfer it to the seller within 180 days of the original sale.  Although the seller
is not at fault for missing the deadline, the IRS cannot extend the 180-day period.
                But the seller can claim a loss deduction for the sales proceeds forfeited
because of the intermediary’s bankruptcy.  However, the deduction can’t be taken
until the amount of the loss is fixed...the year when the bankruptcy case is closed.
That may be a year or longer after the seller pays the capital gains tax on the sale.

 The IRS is ramping up its examination of tool reimbursement plans.
 Firms involved in aviation, agriculture and construction will be audited,
expanding a probe that began with auto dealers, car repair firms and body shops.
The Service decided to act after it discovered widespread marketing of these plans.
IRS believes that many tool reimbursement plans are just shams that are designed
to make a portion of the workers’ pay tax free and save payroll taxes for employers.
Unless employees are required to substantiate tool expenses and return any excess
to their employers, payments made under the plan are taxed and hit with payroll tax.

                Environmental remediation done by polluting firms will be eyed as well.
                Agents will deny deductions for these projects because, in the IRS’ view,
the cost is a nondeductible fine if the work is done to settle government charges
of pollution.  This includes wildlife habitat restoration and wetlands purchases.

 IRS will give a break to accounting firms that outsource tax preparation.
 It’s proposing to let accountants share clients’ Social Security numbers
with foreign preparers.  The change will reverse a rule scheduled to go into effect
on Jan.  1, 2009.  That rule would require the numbers to be wiped out or masked.
Firms must still get their clients’ OK and ensure that data safeguards are in place.

                Businesses no longer have to file an election to amortize start-up expenses,
thanks to new regulations from IRS.  Instead, firms wanting to capitalize these costs
must elect to do so on Form 4562.  The Service says that filers can apply this rule
to costs paid after Oct.  22, 2004, even if no separate amortization election was filed.
Up to $5,000 of start-up costs can be deducted, but this phases out dollar for dollar
once total costs top $50,000.  The remaining balance is amortized over 180 months.
                The same rule applies to organizing costs of partnerships and corporations.

                Shorter filing extensions for partnerships, estates and trusts are coming.
                Only a five-month extension will be given after this year, the Service says.
For calendar year entities, the extended due date for filing will be Sept.  15, 2009.
That way, partners, heirs and trust beneficiaries who requested filing extensions
while waiting for K-1 forms will have the information in time to file their own returns.

 The Revenue Service continues to be plagued by errors in issuing rebates.
 More than 100,000 self-employeds received larger checks than warranted
because the agency overlooked some losses taken by them on Schedules C or F
when it estimated their incomes, according to Treasury inspectors.  The good news
is that they will not be required to send back any excess payments they received.
                And 25,000 clergy members who are exempt from SECA didn’t get rebates
owed to them.  IRS missed them because they weren’t required to file Schedule SE.

                Doling out tax rebates is preventing IRS from getting other jobs done.
                Collection agents have been reassigned to help answer the flood of calls
from taxpayers who are confused about the timing or the amount of their rebates.
The resulting backlog of cases will cost IRS more than $500 million in lost revenue
this year alone.  Also, correspondence from taxpayers about account adjustments
is piling up in IRS offices because there are fewer employees to process the letters.
That’ll lead to more unnecessary collections and more taxpayer frustration with IRS.

For editorial information call us at 202-887-6462

©2008 The Kiplinger Washington Editors