Daily Tax Update - April 4, 2006

SENATE FINANCE COMMITTEE HOLDS HEARING ON TAX PREPARATION ISSUES:
Today, the Senate Finance Committee held a hearing titled, "Preparing Your Taxes: How Costly Is It?" Various government and private sector witnesses testified on the current state of tax preparation and electronic filing services.

  • Senate Finance Committee Chairman Charles Grassley (R-IA) said, "Today, more than 60 percent of all returns are completed by paid preparers. This means that the paid preparer community annually prepares more than 78 million individual tax returns. While I believe that the large majority of tax return preparers are honest, highly-educated individuals who serve the community well in providing sound financial advice, we are getting reports that an increasing minority is doing a disservice to the American public - some through bad advice, some through incompetence, and some through taking advantage of the public by unscrupulous means." Grassley continued, "Adequate training within the paid preparer community is essential. And for any practitioner who is not abiding by the tax laws, the IRS needs to impose penalties, and prevent that practitioner from preparing returns and representing taxpayers before the IRS. Today, any Joe can hang a shingle and prepare income tax returns - there are no requirements at all. It's incredible that we have legal requirements for someone to qualify as a barber to cut your hair, and yet there are no requirements for someone to prepare your taxes. The worst that can happen when you get a lousy barber is you have a bad hair day. But if you get an unqualified tax preparer who gives you bad advice, you may be audited, owe thousands of dollars, and even face jail time."
  • On the issue of tax preparers providing taxpayer information to third parties, Grassley said, "I am concerned about trends suggesting that tax preparers are interested in selling taxpayer information to make a fast buck, rather than as proprietary information that should be held in confidence by a trusted advisor. We need to change the focus of paid preparers from selling to advising." Grassley continued, "The IRS needs to have an aggressive game plan to increase electronic filing in the near future. In the Congress, we really need to consider whether having the IRS provide a basic means of electronic filing should be seen as an extension of its obligation to taxpayers to provide them with forms and instructions. The Tax Code is complex enough without making it harder for working families. We should continue to look at how we can partner with the private sector and the IRS to make this happen - there should be plenty of room for the software industry to continue to provide value-added services."
  • Ranking member Sen. Max Baucus (D-MT) commented on a recent Government Accountability Office (GAO) report on tax preparation services. Baucus said, "This hearing should be a wake-up call to the paid preparer community. Paid preparers are on the front end of our nation's voluntary tax system. They need to clean up their act, and Congress is going to help them. Although the GAO's undercover investigation was not a scientific survey, the findings they revealed today demonstrate that the quality of millions of tax returns being sent to the IRS may not be worth the paper they are written on." Baucus added, "Americans shouldn't be subject to incompetent, unprofessional or outright fraudulent behavior when they're just trying to pay the right taxes. We need to strengthen S. 832, 'The Taxpayer Protection and Assistance Act' . . . . We should outlaw insurance on tax preparation. I don't see why taxpayers who have already paid for a professional service should have to pay extra to make preparers stand behind their work."
  • Additional testimony can be accessed here

GRASSLEY PROVIDES UPDATE ON TAX LEGISLATIVE ISSUES: Today, Senate Finance Committee Chairman Charles Grassley (R-IA) spoke to the Tax Council on several legislative issues including the tax reconciliation conference. Grassley said that the extent of the revenue offset provisions was one issue that the conferees had to resolve. On the issue of the economic substance revenue raiser in the tax reconciliation bill, Grassley said, "Most Senate offsets have been rejected by the House in previous conferences, the biggest one being clarification of economic substance. I continue to believe that there should be a uniform rule to deny tax benefits where taxpayers hide behind literal compliance in transactions that have little or no economic effects. The same people who argue for a rule-based tax system to provide certainty argue that making a uniform rule to apply the economic substance doctrine would create uncertainty. The principal goal of codifying economic substance is to provide uniformity in application. Critics acknowledge that this is an important goal. So I doubt these critics would complain if the Supreme Court decided a case based on the economic substance test proposed in the Senate bill. But that would be the effect of clarifying the economic substance doctrine by statute."

  • Grassley's speech can be accessed here.   

TAX BILL INTRODUCED APRIL 3:

  • S.2494 sponsored by Sen. Conrad Burns (R-MT) would allow a deduction for the payment of premiums for high deductible health plans and allow a credit for certain employment taxes paid with respect to premiums for high deductible health plans and for contributions to health savings accounts.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
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.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving.  Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them.  Read  more information on Steptoe's tax practice