Daily Tax Update - July 9, 2010

NATIONAL TAXPAYER ADVOCATE REPORT CITES INADEQUATE FUNDING FOR TAXPAYER SERVICES AND OTHER CHALLENGES: The National Taxpayer Advocate's mid-year report released this week “expresses concern about the adequacy of IRS taxpayer service, particularly as the IRS begins to implement health care reform, about new information reporting burdens facing small businesses and others, and about certain IRS collection practices” according to the IRS News Release.

  • Regarding the report's findings on the issue of taxpayer services, the IRS News Release summarizes, “[A]s a result of the imbalance between taxpayer demand and IRS resources, the IRS has fallen short of providing adequate taxpayer service in important areas. Most notably, after answering a high of 87 percent of its calls from taxpayers seeking to reach a telephone assistor in FY 2004, the IRS answered only 53 percent of its calls in FY 2008 and has set of goal of answering only 71 percent in the current fiscal year... While funding for the IRS overall has been increasing in recent years, the additional funding has been earmarked for enforcement programs. An analysis of IRS budget trends conducted by TAS shows that since FY 2004, inflation-adjusted funding for IRS enforcement activities has risen by 17.9 percent while spending for taxpayer service programs has declined by 6.8 percent...” The IRS News Release further summarizes that “many noncompliant taxpayers are baffled by complex rules and states that additional taxpayer service, particularly outreach and education, could improve tax compliance.”
  • With respect to the IRS’s ability to deliver social programs, the report expresses concern that the IRS currently is neither structured nor funded to do the job effectively and recommends that the IRS mission statement be revised to explicitly acknowledge the agency’s dual role as part tax collector and part benefits administrator.
  • Another issue cited in the report is new business and tax-exempt organization reporting requirements. According to the IRS News Release, “The report expresses concern that a new reporting requirement contained in the Patient Protection and Affordable Care Act may impose significant compliance burdens on businesses, charities, and government agencies. Beginning in 2012, all businesses, tax-exempt organizations, and federal, state and local government entities will be required to issue Forms 1099 to vendors from whom they purchase goods totaling $600 or more during a calendar year. To meet this requirement, these businesses and entities will have to keep track of all purchases they make by vendor.”
  • On the issue of IRS collection practices, “The report expresses continuing concern that IRS collection practices emphasize collection of past-due liabilities even where doing so inflicts unnecessary or disproportionate harm on taxpayers and jeopardizes future tax collection.” The conventional wisdom seems to be that more hard-core enforcement actions like liens and levies mean more revenue,” National Taxpayer Advocate Nina Olson said. “But the data don’t bear that out. Since FY 1999, the IRS has increased lien filings by about 475 percent and levies by about 600 percent, yet inflation-adjusted revenue raised by the IRS Collection function has actually declined by about seven percent over that period.” In response to similar concerns expressed in the 2009 National Taxpayer Advocate report, the IRS has convened a senior-level task force to conduct a comprehensive review of collection practices. The report indicates that Ms. Olson appreciates the IRS’s willingness to examine the issue; however, she remains concerned that it will take years to conduct the comprehensive review, and that in the interim, the IRS will continue both to damage taxpayers’ credit ratings and to undermine long-term tax compliance without any significant revenue gains to show for their actions. Accordingly, the report notes that IRS collection practices will remain a key area of focus for the National Taxpayer Advocate in FY 2011.

SELECT REVENUE MEASURES SUBCOMMITTEE TO HOLD HEARING ON REINSURANCE TAXATION: On July 14, the House Ways and Means Select Revenue Measures Subcommittee will hold a hearing on the taxation of reinsurance between affiliated entities. The hearing will focus on the issue of reinsurance between affiliated entities and recent proposals that would impact certain reinsurance premiums paid to related foreign entities. Subcommittee Chairman Richard Neal stated, “Monitoring transactions between related parties is always a difficult task but even more so when insurance is involved. I look forward to hearing the testimony from experts who will inform our understanding of the industry and relevant tax laws.”

Notice 2010-52 provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code. It also provides guidance on the corporate bond monthly yield curve (and the corresponding spot segment rates), the 24-month average segment rates, and the funding transitional segment rates under § 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, and the minimum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning after 2007.

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.