I. Taxpayer Advocate Issues 2014 Report
National Taxpayer Advocate Nina Olson recently issued a report detailing the issues on which the Taxpayer Advocate Service (TAS) will focus during the fiscal 2014 tax year. IR-2013-63. The Taxpayer Advocate is required by federal law to issue two reports annually directly to the House Ways and Means Committee and to the Senate Finance Committee without prior review by the IRS, the Treasury, the IRS Oversight Board, or the Office of Management and Budget.
In the June 26, 2013 Report, Ms. Olson expresses particular concern of the impact of cuts to the IRS budget on taxpayer services, taxpayer rights, and revenue collection. She notes that funding for employee training has been cut by 83 percent since fiscal year 2010 and recommends that funding be restored so that IRS employees may obtain the education and professional skills they require to administer the tax system in a manner that respects taxpayers’ rights.
The Report states that the Advocate intends to focus on the following challenges facing the IRS during 2014:
(i) Relief to victims of tax return preparer fraud for financial harm suffered;
(ii) Adequate oversight of the tax return preparer industry;
(iii) Provision of effective, timely and taxpayer-centric relief to victims of identity theft;
(iv) Utilization of effective and timely collection alternative to minimize taxpayer burden while reducing the number and dollar amount of balance-due accounts;
(v) Conducting education and outreach to taxpayers about their responsibilities under the Affordable Care Act;
(vi) Resolving erroneous revocations of the tax-exempt status of small § 501(c)(3) organizations and failure to provide them with a pre-revocation administrative appeal; and
(vii) Establishment of more reasonable “settlement initiatives” for taxpayers with legitimate reasons for overseas bank and financial accounts whose failure to file reports was merely negligent.
Olson also released a special report examining the use by IRS of questionable criteria to screen Section 501(c)(4) applicants for tax-exempt status (civil leagues or organizations). The report analyzes the factors that contributed to the use of questionable screening criteria and processing delays and offers 16 recommendations to address them.
The report offers four categories of contributing factors: (1) lack of guidance and transparency; (2) absence of adequate check and balances; (3) management and administrative failures; and (4) exempt organization “cultural difficulty” with the Taxpayer Advocate Service. She observes in the preface to the report that the exempt organization review processing delays violated 8 of those 10 taxpayer rights.
II. TIGTA Audit Report
The Audit Report of the Treasury Inspector General for Tax Administration (“TIGTA”) recommends improvements on all aspects of IRS administration of the tax system. In its June Report, released on July 17, 2013, TIGTA praised the Taxpayer Protection Program for improvement of identity theft detection, but observed the need for further improvement of case processing controls.
The Taxpayer Protection Program reviews tax returns that are proactively identified by the IRS as potential identity theft and stops fraudulent refunds before they are issued. However, TIGTA found that case processing controls require strengthening to reduce the burden on taxpayers victimized by identity theft. Tests of identity theft cases showed that the controls worked but that training was insufficient.
TIGTA recommends that the IRS develop processes to ensure that required identity theft indicators are placed on taxpayer accounts and employees properly update the Account Management Services system with actions they take when working identity theft cases. TIGTA further recommends the development of timeliness measures to accurately track the length of time required to solve Tax Protection Program cases.
III. Proposed Regs on Employer Reporting of Health Insurance
In September, 2013 the Department of the Treasury and the IRS issued proposed regulations with respect to reporting requirements for insurers and employers under IRC §6056, enacted pursuant to the Affordable Care Act. Section 6056 requires large employers to report to the IRS information concerning their compliance with the employer shared responsibility provisions of Section 4980H of the Code as well as health care coverage they have offered to employees.
The proposed regulations provide that “applicable large employers”” must file a Section 6056 information return with respect to each full-time employee. The regulations also specify the information required to be reported. Such information includes a certification as to whether (i) the applicable large employer offered to its full-time employee the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, (ii) the number of months during the calendar year for which coverage under the plan was available, and (iii) the number of full-time employees for each month during the calendar year.
The proposed regulations also describe a variety of options to potentially reduce or streamline information reporting. These include: (i) replacing section 6056 employee statements with Form W-2 reporting on offers of employer-sponsored coverage to employees, spouses, and dependents; (ii) eliminating the need to determine whether particular employees are employed as full-time employees if adequate coverage is offered to all potentially full-time employees; and (iii) allowing employers to report the specific cost to an employee of purchasing employer-sponsored coverage only if the cost is above a specified dollar amount. The Treasury Department is accepting public comment on the proposed regulations through early November.
IV. Summer 2013 Statistics of Income Bulletin
The Statistics of Income Division of the IRS recently issued its quarterly Statistics of Income Bulletin. The report provides the earliest published annual financial statistics obtained from the various tax and information returns. The report reviewed wage income and elective retirement contributions from Form W-2 for tax years 2008 through 2010. According to the report, average W-2 income rose less than 1 percent from $40,532 in 2008 to $40,892 in 2010. Between 2008 and 2010, men earned more on average than women; however, women reported an increase in their average W-2 earnings and men reported a decline. In 2010, almost half of all taxpayers with W-2 income participated in an employer-sponsored retirement savings plan.
The report also reviewed sole proprietorship returns in 2011. In 2011, there were approximately 23.4 million individual income tax returns that reported nonfarm sole proprietorship activity, a 1.8 percent increase from 2010. Profits reported on these returns rose 5.6 percent from 2010. The largest percentage of total profits, 25.6 percent, was reported by the professional, scientific, and technical services sector. Total receipts increased 5.9 percent from 2010. The largest sole proprietorship industrial sector, based on business receipts, was retail trade.
The report also includes statistics on foreign recipients of U.S. income in 2010. In 2010, foreign persons received $557.8 billion in U.S.-source income, as reported on Form 1042-S, a 2.1 percent increase over the amount received in 2009. Altogether, residents of the United Kingdom, Japan, Germany, Cayman Islands, Switzerland, France, Luxembourg, Canada, the Netherlands, and Belgium accounted for 74.2 percent of the U.S. income paid to foreign persons in 2010.
The report also discusses foreign domestic corporations in 2010. Foreign-controlled domestic corporations represented merely 1.3 percent of all U.S. corporation income tax returns filed in 2010, yet accounted for 15.5 percent of the receipts and 14.1 percent of the assets reported on all U.S. corporation income tax returns. Foreign-controlled domestic corporations owned by persons located in the United Kingdom reported the most total receipts, $0.9 trillion and 21.8 percent of total receipts.
The IRS reported on the use of the Empowerment Zone and Renewal Community Employment Credit for tax years 1998 through 2010. Federal empowerment zones and renewal communities are economically distressed geographic areas eligible for temporary tax incentives to encourage economic development. The amount of allowable credit claimed on individual and corporate tax returns increased from $41.7 million in 1998 to $277.1 million in 2005, then declined to $172.9 million in 2010.
V. IRS Interest Rates for Fourth Quarter 2013
The IRS has announced that certain interest rates it imposes would remain unchanged for the fourth quarter of 2013, beginning October 1. The rates are computed from the federal short-term rate determined during July 2013 to take effect Aug 1, 2013, based on daily compounding. The interest rates will be (i) three percent for overpayments (two percent for corporations); (ii) three percent for underpayments; (iii) five percent for large corporate underpayments; and (iv) 0.5 percent for the portion of a corporate overpayment exceeding $10,000.
VI. Form 990 Available Again After SSN Leak
In July 2013, the independent transparency and public-domain group Public.Resource.org discovered and exposed that the IRS had mistakenly failed to redact tens of thousands of Social Security numbers from forms posted on its public database filed by Section 527 political organizations, including Form 990. The offensive database was removed within 24 hours and the IRS suspended the production of copies of the Form 990 to third-party groups as required under law.
The IRS announced on September 4, 2013 that after an internal review, the IRS has resumed making the Form 990 series filed by exempt organizations available to third-party groups. The IRS has determined that there is low risk of Social Security numbers being included in Form 990 filings. The IRS will periodically conduct a statistically valid sample of new Form 990s to ensure that the risk remains low and will reassess its decision to release data based upon this review. The Service also reminded exempt organizations not to include Social Security numbers or other unnecessary personal information in the filings.
VII. Final Regs on Foreign Tax Credit Promulgated
The IRS has issued final regulations for determining the amount of taxes paid for purposes of the foreign tax credit (T.D. 9634). The Regs finalize proposed regulations issued in 2011 with no substantive change. The regulations primarily affect affiliated groups of corporations that have foreign operations. The regulations provide that amounts paid to a foreign taxing authority that are attributable to a “structured passive investment” arrangement are not treated as an amount of tax paid for purposes of the foreign tax credit.
Structured passive investment arrangements are designed to exploit differences between U.S. and foreign tax law by artificially creating a foreign tax liability that allows the U.S. party to claim a U.S. foreign tax credit and a foreign counterparty to claim a duplicative foreign tax benefit. The U.S. and foreign parties share the cost of the purported foreign tax payments through pricing of the arrangement.