Daily Tax Update - April 12, 2010

IRS COMMISSIONER DISCUSSES COMPLIANCE ISSUES AT TAX EXECUTIVES INSTITUTE MID-YEAR CONFERENCE: Today, Commissioner of IRS Douglas Shulman addressed the Tax Executives Institute 60th Mid-Year Conference. The Commissioner said, “[T]oday I want to focus on our recent transparency proposal and our evolving approach to the examination process. As I stand before you today, I believe we are entering a new and important chapter in our history at the IRS. We are undertaking a new approach to achieve our mission of balanced tax administration with respect to our large taxpayers. And based on our long and productive history together, I am hopeful that TEI will be an active participant in helping us write this new chapter – one that I hope will be the best yet with respect to the relationships between TEI member taxpayers and the IRS.”

  • The Commissioner continued, “This new chapter, or evolving relationship, stems from the simple belief that at the end of the day, taxpayers and tax authorities pretty much want the same thing out of a tax system, whether it is the US, or a foreign, state, or local system. That is, a balanced tax administration system that provides:
  • Certainty regarding a taxpayer’s tax obligations sooner rather than later;
  • Consistent treatment across taxpayers; and 
  • An efficient use of government and taxpayer resources by focusing on the issues and taxpayers that pose the greatest risk of tax noncompliance.”
  • Shulman added, “Our mission is to collect the proper amount of tax and to efficiently use our compliance tools to foster on-going compliance by all taxpayers. Our responsibility is the same as the responsibility of our taxpayers. Apply the law as it currently exists…not how we would like it to be…and do so with neither a thumb on the scale in favor of the government, nor in favor of the taxpayer. This is the key to balanced and fair tax administration. With our mission and responsibility in mind, our goal for this next chapter in our shared history is to ensure our large corporate taxpayers are in compliance and to keep them there with strategies that are less time and resource intensive for both the IRS and for you. There are several interlocking pieces to this transformation. In essence, it involves more transparency on your part; a re-tooling of our audit approach on our part; and a commitment by us to enhance our ability to resolve issues quickly and clarify uncertainty in the law.”
  • Shulman said that the agency will focus on three critical areas: (1) Eliminating uncertainty as quickly as possible; (2) Evolving our approach to auditing; and (3) providing training to our agents.
  • On the issue of uncertain tax positions, Shulman said, “Essential to our success is ensuring that everyone understands – both IRS agents and taxpayers – that uncertain tax positions are uncertain for a number of reasons, including ambiguity in the law and a lack of published guidance on issues. As a result, we need to engage with taxpayers early – in pre-filing venues, if possible – to eliminate uncertainty as quickly as possible, whenever possible. The most obvious way to do this is to publish guidance. IRS Chief Counsel Bill Wilkins will work with me and our colleagues at the Treasury Department to eliminate as much uncertainty as possible through published guidance that is grounded in business realities and practical administration of the law. In addition, we won’t hesitate to go to Congress when we see issues that are ambiguous, difficult to administer and need clarification. We look forward to working with you on identifying and addressing the areas in most need of clarification.” Shulman continued, “Let me briefly address some of the other specific concerns I have heard around the proposal.” 
  • “First, the schedule of uncertain tax positions is not intended as a list of issues for which deficiencies will always be established. It is entirely consistent with the spirit of this initiative that there are issues for which the correct examination outcome is 'no change.'”
  • “Second, people have raised concerns about our request for maximum tax adjustment. An important thing for you to realize is that a major goal of this proposal is to use the schedule for audit selection, not just as information in audits. That is why we need to obtain disclosure at the time of the return, and why we need some order of magnitude, or materiality, of the issues. Indeed, part of the challenge was the fact that knowing the company’s risk-adjusted number for each issue held the potential to be extremely helpful for purposes of prioritizing issues within an audit…for identifying returns for audit…and for identifying emerging issues of potential concern. We understand that a $100 million issue with low risk to the company is less interesting to the IRS than a $100 million issue that has a high risk to the company where the taxpayer believed that the IRS was more likely than not to win if the issue was litigated. We also understand that, if there is no adjustment for risk, both issues would appear to be the same size on the schedule. However, we were determined to honor the policy of restraint. Therefore, we chose not to ask for a risk percentage or a reserve number. Given these self-imposed restraints, we came up with a maximum number so we have something to use for return selection, while recognizing that the maximum number does not reflect the precise value of the issue. However, we have also asked for comments on alternative approaches for ascertaining materiality, including use of ranges. We very much welcome your feedback on this. We also recognize that we need to wrestle with the issues of transfer pricing and valuation in the context of sizing an issue.” 
  • “Finally, I have had discussions with taxpayers about redundancy of information reported to us. These are legitimate concerns and ones which I encourage you to comment on specifically. One particular area where I encourage your feedback is the overlap of this new schedule and the M3. While the M3 has been a useful tool in specific areas for specific taxpayers, I believe the new schedule has the potential to be a much more valuable tool for fair and effective tax administration. I welcome input regarding the future filing requirements of the M3. As part of this proposal, we also plan to allow the new schedule of uncertain tax positions to serve as adequate disclosure for penalty protection in areas that would now call for filing a Form 8275 or 8275-R, for example, in the case of positions that are inconsistent with published guidance. As I stated earlier, I believe we are beginning a new chapter in balanced tax administration. I understand that all of what I have described may not be easy, but I believe it is necessary to achieve our shared goals of greater certainty, consistency, and efficiency for your organizations and the IRS.”
  • The Commissioner’s remarks can be accessed here

PRESIDENT PROMOTES TAX BENEFITS OF AMERICAN RECOVERY AND REINVESTMENT ACT: In his weekly radio address Saturday, President Obama highlighted the tax relief provisions in the American Recovery and Reinvestment Act signed into law last year. The President said, “So far, Americans who have filed their taxes have discovered that the average refund is up nearly ten percent this year – to an all-time high of about $3,000. This is due in large part to the Recovery Act. In fact, one-third of the Recovery Act was made up of tax cuts – tax cuts that have already provided more than $160 billion in relief for families and businesses, and nearly $100 billion of that directly into the pockets of working Americans.”

The President outlined the following key provisions of the Recovery Act:

  • Making Work Pay – Ninety-five percent of working families are receiving the Recovery Act’s Making Work Pay tax credit of $400 for an individual or $800 for married couples filing jointly in their paychecks in 2009 – and will continue to in 2010.
  • Up to $2,500 in College Expenses – Families and students are eligible for up to $2,500 in tax savings under the American Opportunity Credit as well as enhanced benefits under 529 college savings plans, which help families and students pay for college expenses.
  • Up to $8,000 for Purchase of First Home – Homebuyers can get a credit of up to $8,000 for first homes purchased by April 30, 2010 under the First Time Homebuyer tax credit. Long-time residents who don’t qualify as first-time homebuyers and those with incomes of up to $145,000 for an individual and $245,000 for joint filers are also eligible for a reduced credit.
  • Up to $1,500 in Energy Efficiency and Renewable Energy Incentives – Taxpayers are eligible for up to $1,500 in tax credits for making some energy-efficiency improvements to their homes such as adding insulation and installing energy efficient windows.
  • Money Back for New Vehicle Purchases – Taxpayers can deduct the state and local sales taxes they paid for new vehicles purchased from February 17, 2009 through December 31, 2009 under the vehicle sales tax deduction. In states that don't have a sales tax, some other taxes or fees paid may be deducted.
  • Expanded Family Tax Credits – Moderate income families with children may be eligible for an increase in the Earned Income Tax Credit and the additional Child Tax Credit.
  • Up to $2,400 in Unemployment Benefits Tax Free in 2009 – Unemployment benefits are normally taxable, but the Recovery Act made the first $2,400 of unemployment benefits received in 2009 tax free.

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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