Daily Tax Update - January 5, 2010


IRS ISSUES NEW TAX RETURN PREPARER RECOMMENDATIONS: The IRS has announced that it is proposing new registration, testing, and continuing education requirements for tax return preparers. These new recommendations include:

  • Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS and obtain a preparer tax identification number (PTIN). These preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid.
  • Requiring competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs), and enrolled agents who are active and in good standing with their respective licensing agencies.
  • Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.
  • Extending the ethical rules found in Treasury Department Circular 230—which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS—to all paid preparers. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.
  • IRS Commissioner Doug Shulman said, “As tax season begins, most Americans will turn to tax return preparers to help with one of their biggest financial transactions of the year. The decisions announced today represent a monumental shift in the way the IRS will oversee tax preparers. Our proposals will help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation's tax system. In addition, we are taking immediate action to step up oversight of tax preparers this filing season.”
  • Additional information can be accessed here

LAWMAKERS MAY SKIP FORMAL HEALTH CARE CONFERENCE: House and Senate Democratic leaders are considering whether to forgo a formal conference committee in order to resolve differences in the House and Senate passed health care reform bills. Senate Majority Leader Reid and House Speaker Pelosi spoke last weekend and began informal negotiations. Under this “ping pong” process, the House likely would approve amended legislation that would then be sent to the Senate for final approval.

  • The revenue provisions in the Senate bill include increasing the Medicare Hospital Insurance tax for individuals who earn more than $200,000 and couples who earn more than $250,000. The bill also includes a fee on insurance companies when they sell high-cost health insurance plans. Changes to health care tax incentives include capping FSA contributions, conforming definitions of deductible medical expenses, and changing penalties for HSA spending that is not devoted to health care. The bill also assesses a small excise tax on indoor tanning services.
  • The House bill: 1) imposes a surtax on the income of individuals who do not obtain health care coverage and on employers (other than small business employers) who fail to satisfy health coverage participation requirements; (2) allows a new tax credit for small business employers who provide health care coverage to their employees; (3) increases the penalty for distributions from health savings accounts not used for qualified medical expenses; (4) modifies rules and contribution limits for certain employee benefit plans; (5) allows an exclusion from gross income for the value of certain medical care provided to members of Indian tribes; (6) imposes a 5.4% surtax on individuals whose adjusted gross income exceeds $500,000 ($1 million for married couples filing joint returns); (7) imposes a 2.5% excise tax on medical devices; (8) repeals the worldwide allocation of interest rules; (9) sets forth rules for the application of the economic substance doctrine and imposes penalties for underpayments of tax due to transactions lacking economic substance; (10) extends the tax exemption for employer-provided health care benefits to certain eligible beneficiaries of the taxpayer; and (11) contains a provision aimed at banning “black liquor” from a biofuels tax credit.

IRS ISSUES GUIDANCE ON CORRECTIONS OF CERTAIN FAILURES OF A NONQUALIFIED DEFERRED COMPENSATION PLAN: Notice 2010-06 permits taxpayers to correct certain failures of a nonqualified deferred compensation plan to comply with the plan document requirements of § 409A, or in certain circumstances to limit the amount includible in income and additional taxes under § 409A as a result of a plan document failure. Notice 2010-6 also clarifies certain aspects of Notice 2008-113, which addresses failures of nonqualified deferred compensation plans to comply with § 409A in operation.

Revenue Ruling 2010-04 provides guidance on whether a tax return preparer is liable for criminal and civil penalties under Internal Revenue Code sections 7216 and 6713 when the tax return preparer uses tax return information to contact taxpayers to inform them of changes in tax law that could affect the taxpayers’ income tax liability reported in tax returns previously prepared or processed by the tax return preparer; uses tax return information to determine which taxpayers’ future income tax return filing obligations may be affected by a prospective change in tax rule or regulation and to contact such taxpayers to notify them of the changed rule or regulation, explain how the change may affect them, and advise them with regard to actions they may take in response to the change; or discloses tax return information contained in the list permitted to be maintained by the tax return preparer under section 301.7216-2(n) to a third-party service provider that creates, publishes, or distributes, by mail or e-mail, tax information and general business and economic information or analysis for educational purposes or for purposes of soliciting additional tax return preparation services for the tax return preparer, for the purpose of obtaining the ‘newsletter’ creation, publication, and or distribution services offered by the third-party service provider.

Revenue Ruling 2010-05 provides guidance on whether a tax return preparer is liable for criminal and civil penalties under Internal Revenue Code sections 7216 and 6713 when the tax return preparer discloses (1) to a professional liability insurance carrier tax return information required by the insurance carrier to obtain or maintain professional liability insurance coverage; (2) to a professional liability insurance carrier tax return information required by the insurance carrier to promptly and accurately report a claim or a potential claim against the tax return preparer, or to aid in the investigation of a claim or potential claim against the tax return preparer; (3) to a professional liability insurance carrier tax return information to the preparer’s professional liability insurance carrier in order to obtain legal representation under the terms of the insurance policy; or (4) tax return information to an unrelated attorney for the purpose of evaluating a claim or potential claim against the tax return preparer.

Announcement 2010-03 provides for plan years beginning on or after January 1, 2009, automatic approval for certain changes in funding method with respect to single-employer defined benefit plans that result either from a change in the valuation software used to determine the liabilities for such plans or from a change in the enrolled actuary and the business organization providing actuarial services to the plan. This guidance is being provided in response to numerous requests from actuaries and plan sponsors, many of whom are continuing to modify their valuation software in order to implement the changes to the funding rules made by the Pension Protection Act of 2006, the Worker, Retiree, and Employer Recovery Act of 2008, and guidance regarding these legislative changes.

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 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.