Recent IRS Rulings and Pronouncements — October 2007

The IRS has granted return preparers transitional relief from the revised IRC §6694 penalties enacted under the Small Business and Work Opportunity Tax Act of 2007. The Act made significant changes to return preparer penalties under IRC § 6694, effective for returns prepared after May 25, 2007. For returns prepared after that date, the following transitional relief is provided:

¶ For income tax returns, amended returns, and refund claims, former IRC §6694, and current §6694 regulations will be applied in determining whether penalties will be imposed under IRC §6694(a).

¶  Generally, in applying transitional relief for income tax returns, amended returns, and refund claims, disclosure will be adequate if made on Form 8275, “Disclosure Statement,” or Form 8275-R, “Regulation Disclosure Statement,” attached to the return, amended return, or refund claim, pursuant to the annual Revenue Procedure authorized in Regs. § 1.6694-2(c)(3).

¶ For all other returns, amended returns, and claims for refund, including estate, gift and generation-skipping transfer tax returns, employment tax returns, and excise tax returns, the reasonable basis standard set forth in the regulations issued under IRC §6662, without regard to the disclosure requirements contained therein, will be applied in determining whether the IRS will impose a penalty under §6694(a).

¶  No transitional relief is available under IRC §6694(b) for return preparers who exhibit willful or reckless conduct, regardless of the type of return prepared.

The transitional relief applies to all returns, amended returns, and refund claims due on or before December 31, 2007 (determined with regard to extensions); to 2007 estimated tax returns due on or before January 15, 2008; and to 2007 employment and excise tax returns due on or before January 31, 2008.

House Ways and Means Committee Chairman Charles Rangel (D-NY) introduced legislation that would immediately eliminate the controversial IRS private debt collection program, at an estimated cost of $1.086 billion over 10 years.

The Treasury Inspector General for Tax Administration (TIGTA) has determined that the IRS has been remiss in its oversight of capital gains or losses deferred through like-kind exchanges. More than 338,500 Forms 8824, claiming deferred gains (or losses) of more than $73.6 billion, were filed for tax year 2004. The audit also found that regulations for exchanges involving vacation homes “are complex and may be unclear to taxpayers”.  Under IRC §6166, an election may be made to pay estate tax in installments over 14 years, provided a “closely held business” interest exceeds 35% of the estate. TIGTA found that the IRS has not consistently recorded extended estate tax liens for the period following the expiration of the 10-year general federal estate tax lien.

The State Senate approved a bill that would create an Office of Taxpayer Advocate to assist taxpayers in their dealings with the Tax Department. (A.4606). The objective of the Advocate would be to ensure a “fair and consistent application of the tax laws and departmental policies.” The Advocate would be authorized to issue an order suspending or staying an action by Department creating taxpayer hardship.

Governor Spitzer signed a bill eliminating New York City’s 4% sales tax on clothing and footwear items. (A. 8176). Clothing and footwear items of less than $110 are currently exempt from state and city sales tax. The new law expands the exemption.

Mayor Bloomberg signed a bill providing $1.3 billion in tax relief, including $140 million targeted for small businesses. The bill increases the credit against city personal income tax for business owners subject to the unincorporated business tax. The incidence of double taxation will be eliminated for many taxpayers who pay both personal and corporate tax on the same income. Owners of unincorporated businesses with incomes of up to $42,000 will now be entitled to a full 100% credit. The credit will decrease on a sliding scale, to 23%, for owners whose income is greater than $142,000. (The current credits for those income levels are 65% and 15%, respectively.)

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