TAX NEWS
	SPRING 1996

SUPREME COURT COMPRESSES TAX REFUND PERIOD

Millions of taxpayers file late returns each year even though many of them are due refunds. Generally, taxpayers have up to three years before the limitations period bars a refund. In an important Supreme Court decision (Lundy) the High Court narrowed the tax refund period for taxpayers who file late returns. By a 7-2 vote, the court lowered the recovery period to two years for late filers seeking a refund in the U.S. Tax Court.

A taxpayer was due a $3,500 refund and filed for it within three years just after the IRS sent him a deficiency note. The Tax Court denied the refund on the grounds that Code Section 6512(b)(3)(B) clearly states that the Tax Court lacks jurisdiction over refund suits that are filed more than two years after the taxes are deemed paid. The two-year period applies only to nonfilers. Conversely, taxpayers who file timely returns are allowed the three year limitations period. The Supreme Court ruling established that nonfilers are allowed only two years to recover refunds in Tax Court, although they are allowed the full three years in District Court. This decision resolves the question of whether a delinquent filer should be granted the same opportunity to recover a refund as a taxpayer who timely files. The decision also held out that if Congress felt this was unfair it should correct any disparity through legislative action.

COLLEGE TUITION EXEMPTION EXPIRES

Budget impasses are not just about political games; sometimes they involve real people and their money. In 1978 a federal law was enacted that allowed employers to give employees up to $5,250 a year in the form of college tuition without having to report the money as income. To stay in effect, this tax exemption needs to be extended every two years. It has already expired and W-2s have been sent out. While the exemption may be restored and made retroactive, recipients will have to report the tuition as income and later file an amended return. Since its inception in 1978, 7 million employees have received this tuition benefit. Currently, approximately 500,000 employees are facing the possibility of paying taxes on the tuition money they received while the budget stalemate continues.

IRS IMPLEMENTS NUMEROUS TAXPAYER RIGHTS CHANGES

The Budget bill has still not become law. An important part of that bill included significant tax provisions, one of which was the Taxpayer Bill of Right II (TBOR II). Even though TBOR II has not become law, the IRS has decided to make a preemptive strike by initiating its own taxpayer rights changes. The changes include:

1. Increased authority for Ombudsman. The Taxpayer Ombudsman will now have the option to issue Taxpayer Assistance Orders (TAOs) to resolve taxpayer problems. Also, the Ombudsman will enjoy an increased status within the IRS and will be allowed to participate in the selecting of local problem resolution officers.

2. New appeal procedures. Beginning April 1, 1996, Internal Revenue Service levies, liens, and seizures can be appealed by affected taxpayers. Publication 1660 (Collection Appeal Rights For Liens, Levies and Seizures), which explains the right to appeal and the procedures for requesting one, will be provided to any taxpayer facing this situation. Also, Form 9423 (Collection Appeal Request) and Publication 594 (Understanding The Collection Process) will be updated to reflect the new changes.

3. Divorced and separated spouses. The Internal Revenue Service is initiating a formal study of tax issues that are unique to divorced and separated spouses who file joint returns. Also, beginning this month, the IRS is allowing its employees to inform one spouse if the other is facing collection activity regarding a joint return liability.

4. Telephone numbers on Form 1099s. To facilitate resolution of disputes between issuers of Form 1099s and recipients, the IRS is encouraging payers to include their telephone number of Taxpayers’ copies. For now, however, this will not be required.

IRS OUTLINES PLANS TO AID SMALL BUSINESSES

After receiving a barrage of criticism from the small business community, the IRS has determined to implement programs designed to alleviate small business concerns. The IRS Commissioner, in recent testimony before the House Committee on Small Business, discussed IRS programs already in place or soon to be implemented. The principal programs or concepts are as follows;

1. Taxpayer notices will be rewritten in plain English. In addition to rewriting notices, the content and format of the notices will be redesigned.

2. The IRS intends to provide most of its information to small businesses through electronic transmissions. Also, the IRS has joined 14 other government agencies to form the U.S. Business Advisor, which Commissioner Richardson has described as “a one-stop Internet shop that directs small business owners to government information online.” In 1996, the IRS will expand its Fed World computer network to include frequently asked tax questions and answers.

3. New regulations are being prepared that will offer unincorporated businesses the option of whether they want to be taxed as a corporation or partnership.

4. Worker classification - whether workers are employees or independent contractors - has caused problems for both the IRS and small businesses. The Internal Revenue Service has decided that a simple, straight-forward definition of employee and independent contractor that is applied uniformly will ease the burden for all. As Part of this initiative, the IRS plans to develop training materials for IRS examiners involved in worker classification issues.

5. The IRS is continuing to work on a solution to the problems of restaurant worker tip reporting. The IRS has introduced the Tip Rate Alternative Commitment, or TRAC. Businesses that agree to TRAC tip reporting procedures can avoid an IRS examination and the possibility of an assessment of tax.

6. The desire to ease record keeping requirements has brought about 35 recommendations. The recommendations will be tested with small businesses, and those that show promise will likely be permanently adopted.

7. Schedule C-EZ is now available, which allows sole proprietors to compute their annual net profit on three lines instead of 36.

MISCELLANEOUS ITEMS

The IRS pays a $270 hourly rate to victorious attorneys who oppose them in tax cases. In 1994, the IRS paid out $836,611 in attorney fees, a 13.4 percent increase over 1993 payouts. The IRS rate of $270 an hour is among the highest paid by any government agency.

The IRS has announced that 97,700 1994 refund checks have been returned to the IRS after being declared undeliverable. The returned checks represent $81 million in refunds. In an effort to improve refund accuracy, the IRS has introduced new Form 8888 (Direct Deposit of Refund), which allows taxpayers to request direct deposit of refunds, and is available for the first time during this tax season.

While taking a tax dispute to court can be both time consuming and expensive, a suprisingly large number of cases before the Tax Court involve small amounts of money. During any given time, there may be 25,000 to 30,000 cases pending before the Court. On average, 4% of those cases account for 94% of all of the dollars at stake. The remaining 96% of the cases deal with relatively small amounts of money.

In political circles or advocacy circles, the debate still continues over who is paying taxes in this country. The Tax Foundation, a Washington research group, has released details of a study which reveal that in 1993 the top 1% of taxpayers, by income, paid nearly 30% of all individual federal taxes. Ten years earlier, in 1983, the top 1% paid only 20% of all individual federal taxes. The study also disclosed that the bottom 50% of taxpayers, by income, paid only 5% of individual federal taxes.

In fiscal 1995, the IRS began to collect more money from taxpayers who owe back taxes. To accomplish this, the IRS changed the way it pursues these taxpayers. In the past, the IRS sent out a stream of five notices over a 26 week period to delinquent taxpayers. The notices were confusing and often ignored. Beginning in fiscal 1995, the IRS sent out three notices over a sixteen week period and if that didn’t produce results the next step was to phone the taxpayer. The IRS attributes the phone call to the increase in taxes collected from delinquent taxpayers.

In 1962, the IRS began requiring receipts for business travel and entertainment expenses that exceeded a $25 threshold. Just recently the IRS raised that threshold level to $75, which is expected to cut out 50 percent of the receipts previously required. This represents a substantial easing of the record keeping burden business travelers face, and puts to rest any worry that the threshold may be lowered - as was once proposed in the 1980s - under the assumption that it would generate additional revenue because taxpayers would have less chance to alter unproven expenses.

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