Daily Tax Update - January 13, 2006

Today, the IRS issued temporary and proposed regulations providing guidance under subpart F relating to partnerships. These regulations contain rules for determining whether the distributive share of partnership income of a controlled foreign corporation ("CFC") is excluded from foreign personal holding company income under the exception contained in section 954(i) (the active insurance exception). The regulations provide that a CFC's distributive share of partnership income will not be excluded from foreign personal holding company income under section 954(i) unless the CFC is a qualifying insurance company and the income of the partnership would have been qualified insurance income if received directly by the CFC.

Today, the IRS reminded taxpayers that they have until January 23, 2006 to file an election to take part in the global settlement program. According to the IRS, there will be no deadline extension. The IRS stated that the settlement program covers 21 transactions consisting of both listed and non-listed transactions. With the exception of applicable penalties, which vary depending on the level of abusiveness, the settlement terms are identical for all 21 transactions. Details on the covered transactions as well as the settlement terms can be found in Announcement 2005-80 and FS-2005-17.

  • IRS Commissioner Mark Everson said, "This is a last-chance opportunity for taxpayers to put these deals behind them. A recent tax law change involving interest calculation gives taxpayers an even bigger incentive to come forward."
  • The announcement can be accessed here.     

This week, the National Taxpayer Advocate Nina Olson released her annual report and urged Congress to enact fundamental tax simplification. Olson stated, "Our tax code has grown so complex that it creates opportunities for taxpayers to make inadvertent mistakes as well as to game the system. As taxpayers become confused and make mistakes, or deliberately ‘push the envelope,’ the IRS understandably responds with increased enforcement actions. The exploitation of ‘loopholes’ leads to calls for new legislation to crack down on abuses, which in turn makes the tax law more complex. Thus begins an endless cycle – complexity drives inadvertent error and fraud, which drive increased enforcement or new legislation, which drives additional complexity. In short, complexity begets more complexity. This cycle can only be broken by true tax simplification, followed by ongoing legislative and administrative discipline to avoid ‘complexity creep.’"

  • The report identified trends in taxpayer service as the most serious problem.  Olson expressed concern that the IRS is expanding enforcement at the expense of taxpayer service. Olson added, "Although the IRS maintains that it is difficult to measure the impact of high quality taxpayer service on compliance, the National Taxpayer Advocate finds that position unpersuasive. Too much is at stake not to conduct the appropriate research and develop cutting-edge strategies that will provide world-class taxpayer service."
  • The report cites the IRS Criminal Investigation division’s refund freezes as the second most serious problem facing taxpayers. The report states that the Criminal Investigation division places "freezes" on hundreds of thousands of refunds each year due to a suspicion of fraud and then makes a "determination" whether the returns are, in fact, fraudulent without notifying taxpayers that their refund claims are under review or giving them an opportunity to present evidence supporting their positions. According to the IRS, "In FY 2004, more than 28,000 taxpayers whose refunds had been frozen sought assistance from the Taxpayer Advocate Service (TAS)."
  • The report can be accessed here.

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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