Daily Tax Update - April 30, 2008

IRS, TREASURY ISSUE FINAL REGULATIONS ON SUMMONSES:  On April 29, the IRS and Treasury Department issued final regulations relating to third-party and John Doe summonses. Section 7603 provides the statutory basis for the service of a summons by the IRS, and section 7609 sets forth the procedures to be followed for third-party summonses. The final regulations amend § 301.7603 and § 301.7609 effective April 30, and substantially adopt proposed regulations published on July 21, 2006.

  • A third-party summons is a summons sent by the IRS to a third-party inquiring about a taxpayer's financial affairs. The 1998 IRS Reform Act imposed a requirement on the IRS that the IRS must, in most cases, notify the taxpayer if it issues a summons to a third-party. 
  • A John Doe summons is any summons in which the name of the taxpayer under investigation is unknown and therefore unidentified, and can only be served after approval by a Federal court. 
  • The final regulations provide guidance relating to
    • the manner in which summonses may be served on third-party recordkeepers,
    • the expanded class of third-party summonses to which the notice requirements and other procedures apply,
    • the suspension of a taxpayer’s periods of limitations if that taxpayer petitions to quash a third-party or John Doe summons or intervenes in a proceeding to enforce such a summons, and
    • the suspension of a taxpayer’s periods of limitations if a summoned third-party does not finally resolve its response to a summons within six months after service of a summons. 
  • For additional information, contact: J. Walker Johnson – wjohnson@steptoe.com, Matthew D. Lerner – mlerner@steptoe.com, or Arthur L. Bailey – abailey@steptoe.com
  • The regulations can be accessed via: http://www.steptoe.com/attachment.html/3390.pdf

IRS ALLOWS WITHDRAWAL WITHOUT PENALTY OF ECONOMIC STIMULUS REBATES DIRECTLY DEPOSITED INTO IRAs:  Today, the IRS announced that economic stimulus payments directly deposited into individual retirement accounts and other tax-favored accounts may be withdrawn tax-free and penalty-free.

  • According to the IRS, "This relief is designed to help taxpayers who may have been unaware that by choosing direct deposit for their entire regular tax refund, they were also choosing to have their stimulus payment directly deposited as well. If a taxpayer elected a split refund, however, their stimulus payment will be paid by a paper check. This relief is available for amounts withdrawn from these tax-favored accounts that are less than or equal to a taxpayer’s directly deposited stimulus payment. To qualify for this relief, funds must be taken out by April 15, 2009, in most cases. Without this relief, taxes, penalties and other special rules would apply to amounts removed from these accounts. Regular refunds are not eligible for this relief.”
  • Additional information can be accessed via: http://www.irs.gov/newsroom/article/0,,id=182058,00.html

HSAs CRITICIZED AS “TAX SHELTER FOR WEALTHY”:  Today, House Oversight and Government Reform Committee Chairman Henry Waxman (D-CA) and Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) released a Government Accountability Office (GAO) report finding that Health Savings Accounts (HSAs) are used more often as a tax shelter by wealthy individuals rather than as a mechanism to help working families obtain needed health care. Specifically, the report finds that instead of being used by low and middle-income Americans most likely to be without health insurance, HSAs are increasingly a popular tax shelter option for wealthy taxpayers.

  • Rep. Stark said, “The GAO confirms that HSAs are not the way to meet the health care needs of most Americans. Instead, they are an effective tax shelter for people whose average incomes are nearly triple that of average tax filers.”
  • The report can be accessed via: http://waysandmeans.house.gov/media/pdf/110/HSAReport.pdf

H.R. 5923: To amend the Internal Revenue Code of 1986 to allow individuals a refundable and advanceable credit against income tax for health insurance costs, to allow employees who elect not to participate in employer subsidized health plans an exclusion from gross income for employer payments in lieu of such participations, and for other purposes.
Sponsor: Rep Shadegg, John B. [AZ-3] (introduced 4/29/2008)      Cosponsors (18)

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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