Recent IRS Developments — July 2009

IRS Commissioner Douglas Shulman announced at the National Press Club on April 13 that the IRS wants to provide “tangible relief to taxpayers in distress while also helping others from straying across the line into non-compliance.  Mr. Shulman stated that the “tax professional community” is “an integral part” of the tax administration system, constituting a “first line of defense against non-compliance and stop a small problem from becoming a big one.”

¶   Rev. Proc. 2009-20 provides safe harbor treatment for “qualified investors” who experienced losses in certain criminally fraudulent investment arrangements. A uniform manner of determining theft losses alleviates “potentially difficult problems of proof” in determining how much income reported in prior years was fictitious or a return of capital. Taxpayers utilizing safe harbor treatment should append the language “Rev. Proc. 2009-20” on Form 4684, Casualties and Thefts.

¶   According to an audit report issued by the Inspector General for Tax Administration (TIGTA), the Treasury is foregoing more than $100 million in annual revenue by failing to collect unassessed failure to pay tax penalties. Audit Report No. 2009-30-052. TIGTA Report No. 2009-20-050 notes that the motor fuel excise tax compliance program, which accounts for between $30 and $40 billion in annual revenue, needs further improvement in the area of compliance and penalty program effectiveness.

¶   New York currently has a voluntary disclosure program covering all taxes, including income, corporate and sales taxes. Eligible taxpayers (i.e., those who (i) are not under audit, (ii) have not received a bill, and (iii) are not being criminally investigated by New York or any political subdivision thereof, may apply by providing a “detailed explanation” of (i) taxes owed; (ii) the reason for failure to report and pay; and (iii) the rationale for requesting a “limited look-back” clause (if one is being requested). If approved, the taxpayer will be sent a Voluntary Disclosure Agreement covering only the taxes and periods listed on the application. Penalties will be waived. However, if the taxpayer provides false or incomplete information, intentionally fails to pay taxes covered by the agreement, or “intentionally violates any tax law in the future,” New York may “use the information disclosed against [the taxpayer]” and may commence civil or criminal prosecution.

¶     The AFR short-term rate for June 2009 is 0.82%; the mid-term rate, 2.76%; and the long-term rate, 4.36%. Selling depressed assets to a grantor trust in return for an installment note may be effective in “freezing” values for estate tax purposes. Provided the sale is arms-length, the sale of assets comprising interests in an LLC or other family entity (which interests are discounted to reflect lack of control and lack of marketability) can leverage the current $3.5 million lifetime exemption. Note that since the trusts are taxed as grantor trusts, the seller recognizes no income tax gain when the assets are sold to the trust. It appears that the sale must also be preceded by a gift to the trust of assets whose value equals 10 percent of the assets to be sold to the trust. Since the assets will not be included in the estate, basis step up will be lost. However, this problem may be minimized if the trust provides that the grantor may at a future time substitute assets of equal value (with a higher basis).

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