blogger visitor

Wednesday, November 29, 2006


As unlikely as it seems, 95,746 taxpayers did not receive tax refund checks due to bad mailing addresses with the IRS. The checks, worth a total of $92.2 million, can be claimed as soon as their owners update their addresses with the IRS. Some taxpayers have more than one check outstanding.

Refund checks can go astray for a variety of reasons. Sometimes a life change results in a change of address. When a taxpayer moves or changes address and fails to notify the IRS or the U.S. Postal Service, a check sent to the taxpayer's last known address is returned to the IRS.

Think you may have missed a refund check? Taxpayers can use the "Where's My Refund?" feature on the home page of the Web site to learn the status of their refunds. This system also allows for the entry of a corrected mailing address i fthe returned check was issued within the last 12 months.

A taxpayer can also ensure the IRS has his or her correct address by filing Form 8822, Change of Address. Download the form from or request it by calling 1-800-TAX-FORM (1-800-829-3676). Another way to avoid a lost refund is to arrange for its payment via direct deposit.

IR-2006-178, Nov. 16, 2006

Monday, November 27, 2006


Florida dealers are obligated to collect sales and use tax, file tax returns, and remit the taxes to the Florida Department of Revenue. As compensation for conducting such activities, the tax filer is entitled to a collection allowance of 2.5% of the first $1,200 of tax due (a maximum of $30) on a return.

Sales and use tax dealers can now elect to donate their collection allowance to the Educational Enhancement Trust Fund. The Fund will be paid out to school districts that have adopted resolutions stating that these funds will be used to ensure that up-to-date technology is purchased for the classrooms in those districts, and the teachers are trained in the use of this technology.

The election is made on a timely sales and use tax return - a check box will be included on the return forms, beginning with the January 2007 return. It must be made with each return, and once made may not be rescinded by the taxpayer.

It appears that the donation will be made to schools in the business county of the taxpayer. However, if that county has not adopted the appropriate resolution, or the taxpayer is located out-of-state, the donation will be divided among all counties adopting the resolution.

Friday, November 24, 2006


The IRS has determined that many U.S. citizens and lawful permanent residents working at foreign embassies, foreign consular offices and international organizations in the U.S. have failed to fulfill their U.S. income tax responsibilities. Some have not timely filed U.S. tax returns. Others have failed to accurately report the tax due by underreporting income, claiming deductions for unallowable expenses, and/or failing to pay self-employment taxes. Also, many of such employees have erroneously established SEP/IRA plans, claimed deductions for contributions to the plans and used the plans as part of their retirement planning. The IRS is offering a carrot to such persons to encourage them to correct their past mistakes.

To use the initiative, the taxpayer must file accurate income tax returns for years 2003 through 2005, and pay applicable interest on any tax underpayments. A principal benefit of filing under the initiative is that penalties will be imposed on only one of those years (the year with the biggest shortfall in tax) instead of for each year.

With respect to SEP/IRA plans, taxpayers will have to pay taxes on the erroneously claimed deductions. Taxpayers will be able to move funds to other tax-favored retirement plans that would have been available to them. The IRS will not impose the annual 6% excise tax under Code Sec. 4973(a) on the excess contributions, the 10% early withdrawal penalty under Code Sec. 72(t) , or the accuracy-related penalty under Code Sec. 6662 on underpayments relating to deductions to the erroneously established SEP/IRA account. Other penalties, additions to tax, and interest will be imposed.

Persons presently under criminal investigation may not use the initiative. The initiative expires on February 20, 2007.

Ann. 2006-95, 2006-50 IRB ; IR 2006-180.

Tuesday, November 21, 2006


December 2006 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 4.91% (4.83%/November -- 4.94%/October -- 5.07%/September)

-Mid Term AFR - Semi-annual Compounding - 4.68% (4.64%/November -- 4.76%/October -- 4.95%/September)

-Long Term AFR - Semi-annual Compounding - 4.84% (4.84%/November -- 4.96%/October -- 5.14%/September)


Sunday, November 19, 2006


The IRS has previously acknowledged that telephone communications for which a toll charge varies only with elapsed time, and not distance, is not subject to the Section 4242(b)(1) excise tax. Refunds or credits are available for amounts paid for long distance service that was billed to taxpayers for the 41-month period from after February 28, 2003 to before August 1, 2006. Instead of manually going through old telephone bills, business and tax-exempt organizations that were subject to the tax have now been provided with a short-cut formula method that they can use to seek a refund.

To request a refund, businesses (including sole proprietors, corporations, and partnerships) and tax-exempt organizations must complete Form 8913, Credit for Federal Telephone Excise Tax Paid. In filling out the form, businesses and tax-exempt organizations may determine the actual amount of refundable long-distance telephone excise taxes they paid for the 41 months from March 2003 through July 2006, or use the formula to figure their refunds. Businesses should attach Form 8913 to their regular 2006 income tax returns. Tax-exempt organizations must attach it to Form 990-T.

Under the formula method, businesses and tax-exempt organizations figure their refund amounts by comparing two telephone bills to determine the percentage of their telephone expenses attributable to the long-distance excise tax. The bills they should use are April 2006 and September 2006. They must first figure the telephone tax as a percentage of their April 2006 telephone bills (which included the excise tax for both local and long-distance service) and their September 2006 telephone bills (which only included the tax on local service). The difference between these two percentages should then be applied to the quarterly or annual telephone expenses to determine the amount of their refunds.

The refund is limited to 2 percent of the total telephone expenses for businesses and tax-exempt organizations with 250 or fewer employees. Larger organizations have a 1 percent cap.

For more information, see IR-2006-179.

Wednesday, November 15, 2006


The IRS acknowledges that it is behind on processing applications for exempt organization status. In an effort to explain the process (and when a taxpayer should make inquiries regarding status) the IRS is advising on how it processes exempt organization applications it receives, and anticipated timetables for some of the applications.

Upon receipt, exemption applications accompanied by the required user fee are initially separated into three groups:

(1) those that can be processed immediately based on information submitted,

(2) those that need minor additional information to be resolved, and

(3) those that require additional development.

If the application is in the first or second group, the taxpayer should receive either the determination letter or a request for additional information, via phone, fax, or letter, within approximately 60 days of the date the application was submitted. If the application falls within the third group, the taxpayer will be contacted once the application has been assigned to a specialist.

Group 3 applications can have a long wait. The IRS indicates it is only now assigning group 3 cases received in April to specialists.

To help with timing issues, the IRS website will keep this assignment date current. To check on it, go to to this site.

The IRS also posts a flowchart of the steps taken in reviewing an exempt organization application. Click here for a chart illustrating the IRS process for exempt organizations determination letter requests.

Sunday, November 12, 2006


Taxpayers sometimes receive erroneous K-1s, showing the wrong partner, shareholder, or beneficiary being allocated items of income and/or expense. The issuing entity may not always be cooperative in filing a correction with the IRS. What should a taxpayer do if he or she receives one, showing net income, and cannot get the issuer to correct it in a timely manner?

Ignoring the K-1 is one choice - that is, don’t report anything from the K-1 on the taxpayer’s tax return. The potential problem with this is IRS computer matching programs - the IRS’ computer may try to match the K-1 items with the taxpayer’s tax return - if the income items are not present this could trigger an inquiry from the IRS, or perhaps even an audit if the amounts are large enough.

One method that tax preparers have successfully used is to report the K-1 items on the taxpayer’s tax returns. Then, a corresponding negative entry is included (often referred to as a nominee entry), showing such amount being directed to the proper person if known, and their taxpayer identification number. In this way, if the IRS’ computers attempt to match, the K-1 items will show up and the computer will not flag a mismatch.

Some CPA’s suggest, however, that another method of dealing with this is to file a Form 8082 with the return, including details of the proper recipient of the K-1 on the form.

Whatever course of action is undertaken, the taxpayer doing this should keep records on the item, in case of future inquiries or audit. The taxpayer should also put the issuer on notice of the error, so at a minimum the issuer should not repeat the error in the following year.

Thursday, November 09, 2006


Section 1(h)(11) of the Internal Revenue Code provides that qualified dividends received by an individual shareholder are taxed as net capital gain. This presently results in a a 5% or 15% tax rate.

When the dividend payor is a foreign corporation, the rate only applies to foreign corporations eligible for the benefits of a comprehensive income tax treaty with the United States which the Secretary determines is satisfactory and which includes an exchange of information program. However, the special treatment also applies to foreign corporations whose stock is publicly traded.

In 2003, the IRS published a list of countries whose corporations meet these requirements. Recently, in Notice 2006-103, the IRS has revised that list.

New to the list are Barbados, Sri Lanka, and Bangladesh. The IRS notes that U.S. agreements with Bermuda, the Netherlands Antilles, and those former Soviet Republics still covered by the old U.S. - U.S.S.R. treaty are insufficient to provide net capital gains treatment for dividends issued by corporations of those countries.

Note that dividends of passive foreign investment companies (PFICs) do not qualify for this net capital gain treatment. Also, dividend recipients who do not meet certain minimum holdings periods also cannot get the benefit of the capital gains treatment.

Monday, November 06, 2006


U.S. persons working abroad are subject to U.S. taxes on their worldwide income. If a foreign country taxes the U.S. person on their income earned in that country, relief may be available through foreign tax credits, or the earned income exclusion provisions of Code Section 911.

Most practitioners also know to consult any applicable income tax treaties, to determine if there are any special provisions that limit what types or amounts of income the foreign country can tax. What is less widely known is that there are other types of international agreements that may apply to this issue and that may need to be consulted.

The first of these is a Status of Forces Agreement (SOFA). These agreements generally provide rules regulating the presence of armed forces and civilian supporting personnel of one country in the jurisdiction of another. These agreement can provide for the exclusion of such forces from local income taxes based on residence in the other country. For example, Article X.1. of the NATO Status of Forces Agreement provides:

"Where the legal incidence of any form of taxation in the receiving State depends upon residence or domicile, periods during which a member of a force or civilian component is in the territory of that State by reason solely of his being a member of such force or civilian component shall not be considered as periods of residence therein, or as creating a change of residence or domicile, for the purposes of such taxation. Members of a force or civilian component shall be exempt from taxation in the receiving State on the salary and emoluments paid to them as such members by the sending State or on any tangible movable property the presence of which in the receiving State is due solely to their temporary presence there. "
Another type of treaty or international that can also provide similar benefits are agreements of the United States Agency for International Development (USAID). These agreements may provide exemptions from local taxation for aid workers present in a foreign country.

Therefore, where military personnel, their supporting civilian personnel, or international aid workers are working in a foreign country, such agreements should be reviewed for applicability.

Thursday, November 02, 2006


A popular estate tax planning technique is a sale of an interest in a corporation or a partnership to a grantor trust (also known as a sale to a defective grantor trust). If properly structured, future growth in the value of the sold interest will not be subject to estate tax when the transferor dies. Further, no income tax arises on the sale.

If the sales price equals the fair market value of what was sold, there is no gift on the transaction, and no gift tax return reporting is of the transaction is required. Since valuing an interest in an entity is not an exact science, gift tax exposure exists if the IRS can establish a higher value than the sales price. Many practitioners elect not to report the transaction, so as to avoid the risk of IRS scrutiny. Since the transaction doesn't typically show up on a gift tax or income tax return, IRS scrutiny is thus substantially diminished.

This type of thinking may shortly fall by the wayside. On a recently released draft Form 706 (estate tax return), the IRS now has a question whether a decedent at any time during his or her lifetime transferred or sold an interest in a partnership, a limited liability company or a closely-held corporation to a trust that was in existence at the decedent’s death and that was (1) created by the decedent during his or her lifetime or (2) created by someone other than the decedent under which the decedent possessed any power, beneficial interest or trusteeship. This question will bring to the IRS' attention a sale to grantor trust transaction, at least at the time of the decedent's death, thus inviting IRS scrutiny of the transaction.

If the IRS determines that a gift occurred on the sale, it can impose gift taxes, penalties, and interest, even if the sale transaction occurred many years prior to death. If this question makes it into the final Form 706, practioners may now want to specifically disclose sale to grantor trust transactions on gift tax returns to get the statute of limitations running since there is a good chance that IRS scrutiny may arise later at the time of estate tax audit due to the Form 706 disclosure. If the IRS does not challenge the transaction within 3 years, this will usually foreclose further tax adjustments by the IRS (including at the subsequent death of the transferor). This is especially true since very few gift taxes are audited.