323-07 tax alert - national society of tax professionals fta.pdf · federal tax alert news items...

FEDERAL TAX ALERTNEWS ITEMSTREASURY SECRETARY PAULSON NOMINATES NEW IRS COMMISSIONEROn November 21, 2007, Treasury Secretary Henry Paulson issued the following statement on his intent to nominate Doug Shulman as Commis-sioner of the Internal Revenue Service.

"I am extremely pleased that the President intends to nominate Doug Shulman to be IRS Commissioner, and am grateful for Doug's willingness to serve. Doug is a highly capable executive with extensive management experience and a proven ability to provide innovative leadership to a large organization. His experience as Senior Policy Advisor and Chief of Staff on the National Commission on Restructuring the IRS provides him with fundamental knowledge of the IRS and its critical responsibil-ity of administering the tax code. Doug is an excellent choice to lead the IRS. His energy, creativity, strong management skills, and technology experience will ensure that the IRS fully serves its mission to provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness."

BIG APPLE'S BITE BEHINDJETER'S TAX TROUBLESDerek Jeter's dispute with state tax officials highlights the price such stars must pay to "play the game" in New York.

Jeter claims his main residence for more than a decade has been Florida, which has no state income tax. However, the New York State Department of Taxation and Finance says his primary residence from 2001 to 2003 was actually Manhattan, where the combined state and city income tax peaked at 12.15 percent.

Not that the Yankees shortstop has completely avoided New York taxes all these years; The state collects income tax on all salaries earned in New York, including a big chunk of the $38 million Jeter reportedly was paid during the years in questions. But the city income tax applies only to residents of the five boroughs which is one big reason why Jeter's attorneys claim that his luxury apartment at the Trump World Tower has been more like a hotel room than home since he bought it in 2001.

To defeat the state's tax claim, Jeter needs to prove that his real "domicile" was in Florida and that he spent less than half the year in the city during each of the three years at issue. If not, he will also be subject to city income tax on his Yankees' salary for those years and, presumably, to added state income tax on non-wage income, from his investments and endorsements.

As evidence in support of its argument that Jeter lived mainly in Manhattan from 2001 to 2003, the state asserts he was "immersed in the New York community".

NYC NAMES CELEBRITYTAX DEADBEATSDozens of boldface Big Apple names pepper the state's list of tax deadbeats, according to the most up-to-date records from the NY State Tax Department.

The records show that hip-hop mogul Damon Dash, whose estimated $50 million fortune bought him a chauffeur-driven $500,000 Maybach sedan, diamond-encrusted watches and more than 1,000 pairs of sneakers, owes the state more than $2 million.

Dash, 36, is one of almost 225,000 city debtors who together have short-changed the city and state more than $1 billion in income taxes, penalties and interest, the records show.

Some on the list, including actor Gary Oldman, said they had recently paid up and their warrants should be closed. The State Tax Department ac-

CONTENTSFrom the Editor . . . . . . . . . . . . 2IRS Action News . . . . . . . . . . . 3Tax Law Update . . . . . . . . . . . . 6Inside Washington. . . . . . . . . . 7FYI . . . . . . . . . . . . . . . . . . . . . . 8Members in the Know . . . . . . 10Tax Court Decisions. . . . . . . . 10Et Cetera . . . . . . . . . . . . . . . . 13Tax Rep Roundtable. . . . . . . . 13Ethics Corner. . . . . . . . . . . . . 14Members Ask . . . . . . . . . . . . . 15 Quotes of the Month . . . . . . . 16

INSERTS■ Code of Ethics■ Social Security■ Fall Update DVD

A PUBLICATION OF THE NATIONAL SOCIETY OF TAX PROFESSIONALS DECEMBER 2007

IRS ANNOUNCES SEMINAR RATINGS FOR 2007 IRS NATIONWIDE TAX FORUMS

IRS ACTION NEWS PAGE 3

DELAY IN AMT CHANGES COULD DELAY RETURNS

TAX LAW UPDATE PAGE 6

TAX HISTORY IN THE UNITED STATES

ET CETERA PAGE 13

2007 E-FILE REFUND CYCLE CHART AVAILABLE

IRS ACTION NEWS PAGE 4

WALL STREET BRACES FOR HIGHER TAX RATES

NEWS ITEMS PAGE 2

323-07 Tax Alert.indd 1323-07 Tax Alert.indd 1 12/12/07 7:47:32 AM12/12/07 7:47:32 AM

THE FEDERAL TAX ALERT – DECEMBER 20072

The Federal Tax Alert is published 10 times a year by the National Society of Tax Professionals. Subscription rate is $200 a year; single copy $20.Mailing address: The Federal Tax Alert, 10818 NE Coxley Dr. Ste. A, Vancouver, WA 98662. Telephone: 800-367-8130.

Opinions expressed in The Federal Tax Alert are those of the editors and contributors.Staff-Executive Editor: Beanna Whitlock; Technical Editor: Ronald Larson; Subscription Services: Glyness Scott;

Production: Melissa Bowden Printer: Sunset Printing, Inc., Portland, Oregon.

knowledged it can take several weeks for recent payments to be indicated in their records.

The records showed that Emmy-winning actress Cicely Tyson owes $124,320, while Tony-winning dancer Ben Vereen is behind $119,825 and photographer Annie Leibovitz owes $135,916.

And in a stunning turnaround, former Salomon Brothers CEO John Gutfreund, known as the "King of Wall Street" during the 80's, was named in a $230,440 warrant filed in March. Warrants are filed so the state can seize property or garnish wages.

Some well-known musicians also failed to pay the tax man:

Classical pianist and composer Andre Previn, who won four Oscars for scoring movies including "Gigi"

and "My Fair Lady," owes $30,938."Free jazz" pioneer Ornette Coleman,

awarded the Pulitzer Prize for music this year, and was found to owe $7,814. Rocker John Cale of the influential '60's band, The Velvet Underground, owes $157,743.

Congresswoman Yvette Clarke was named in a warrant for $12,710.

The biggest warrant for almost$16.8 million was filed last year against former philanthropist and money manager Alberto Vilar, who is facing federal fraud charges for allegedly skimming funds from investors to fund his charitable contributions.

Records show lawyer Darnay Hoffman, who represented subway vigilante Bernard Goetz, owes $59,186, and his wife, "Mayflower Madam" Sydney Biddle Barrows, owes $29,167.

City tax deadbeats account for nearly half of the state's 462,802 open tax warrants.

WALL STREET BRACES FORHIGHER TAX RATESThe leading Democratic candidates for president have said they would favor higher investment taxes on upper-income taxpayers, and Wall Streeters do not like it.

There are two forces at play.For investors, higher taxes mean

less potential return on a stock or mutual fund bought outside a tax-sheltered account, such as a 401(k) or IRA. So the theory goes, they are not willing to pay as much as they otherwise would.

Second, investors would have an incentive to get out before higher rates take effect, creating selling pressure.

If lawmakers allow the 2003 tax cuts to expire, which they are scheduled to do by 2011, dividends would go back to being taxed at ordinary income tax rates. Currently, they are taxed at just a 15 percent rate.

The 15 percent long-term capital gains rate would revert to 20 percent.

The push to generate more tax revenue comes at a time when the federal budget will face stiff challenges from at least three factors; the likely reform of the Alternative Minimum Tax, the rising costs of Medicare and Social Security, and a growing bill coming due on U.S. debt issued to foreign investors.

There are studies showing that over the long term there is a strong rela-

Technical Tax advice provided by NSTP Hotline staff is based upon specific information conveyed by the member. Members should take special care in relying upon recommendations and opinions that reflect the understanding of the Hotline staff member. NSTP and the Hotline staff are not responsible for misapplication of information given. Members are responsible for the ultimate verifi-cation and application of any information provided by NSTP.

NOTICETAX HOTLINENEW HOTLINE NUMBER!

3 Days a WeekMonday, Wednesday, Friday

9 – 2 PST 10 – 3 MST 11 – 4 CST 12 – 5 EST

DIRECT LINE360-695-0556

NEW Website Password: taxlaw(use lowercase only)

FROM THE EDITOR What happened to the "off season"? It seems like only yesterday we finished with April 15th and e-filed the last extension and here it is almost time to begin again. I really cannot complain, I love what I do and chances are you enjoy tax season as well.

The end of December will mark another year completed for NSTP and the best is yet to come.

More Federal Tax Alerts with important information and inserts to assist you in your tax practice

Client Newsletters• Education - Regional Conferences and Special Topic Workshops• DVD education presentations• Self-study courses• Expanded vendor offerings with discounts and special offers • New and enhanced web site resources• "Hotline" assistance for your difficult tax issues• And, much, much more!•

2008 membership dues are NOW DUE! The NSTP Board of Directors has voted to keep the membership dues for 2008 at $120. Prompt payment of your dues will ensure that we will continue to provide you the benefits of NSTP membership right now when you need them the most - Tax Season!

In January the NSTP Board of Directors will meet to engage in Strategic Planning for the future of NSTP. The main focus of the planning session is to Catch the Vision with NSTP.

Perhaps you have noticed the new version of the NSTP logo - retaining the established patriotic theme yet modernized to reflect the changes in NSTP!

The business of tax is changing and NSTP is committed to assist you as the challenges present themselves. NSTP is the Best Partner a Tax Professional can have. We proudly carry out our mission to be of Service to the Tax Profession.

Your NSTP staff, Glyness, Brandi, Mr. Steve and I wish each of you and your families the happiest of holiday seasons and we look forward to serving you in 2008. For the New Year we wish for each of you the respect you so richly deserve for your service to America's taxpayers.

BeannaBeanna J. Whitlock, EA CSAEditorSan Antonio, [email protected]


DECEMBER 2007 – THE FEDERAL TAX ALERT3

tionship between stock prices and tax rates. University of Texas economics professor Clemens Sialm looked at the effects of tax changes on stock prices from 1917 to 2004. He found that stock prices tend to be lower when taxes are relatively high.

Should there be a tax rate increase in the offing, it is likely that there will be some selling in the run-up to the anticipated change. Some mutual fund managers might take the opportunity to trim or reallocate in advance of a rate increase.

There are other factors too that could limit the impact. On average the tax law changes every five years or so. If the tax increase is not considered "permanent," its impact could be lessened.

Also, far more investments today are held in tax-deferred accounts than was the case during major tax changes during the past 50 years.

Other events such as a war could dominate market movements. And companies might support their share prices by buying back stock or offering a large one-time dividend payout in advance of a change. And Princeton economist Harvey Rosen said firms may rely more on debt than equity to finance their growth.

SOUTHERN CALIFORNIAMAN GETS 2 YEARS OVER$34 MILLION TAX FRAUDThe owner of an Oxnard, California machine-tool company was sentenced to two years in prison for trying to avoid more than $34 million in income taxes by padding the books with phony expenses.

Gene Francis Haas, 54, of Camarillo, California was sentenced in federal court and ordered to begin serving his sentence on January 14, 2008.

His lawyers requested that Haas be treated for alcohol dependency. The court recommended that he be considered for a 500-hour program in the federal prison system.

Haas owns Haas Automation, Inc., which is believed to be the nation's largest computerized machine tool maker. He also is a noted philan-thropist who donated hundreds of thousands of dollars to Ventura County colleges and nonprofits.

He and four business associates were charged in connection with three separate tax fraud schemes that Haas engineered, according to the U.S. Attorney's Office.

The other defendants all pleaded guilty earlier and will be sentenced next year.

Prosecutors said the tax fraud began in 2000 when Haas tried to recover nearly $9 million he had paid to settle a patent infringement

lawsuit brought by a rival firm. The company's former financial officer reported the scheme to the FBI in 2001, leading to a long investigation.

IRS ACTION NEWSIRS ANNOUNCES SEMINAR RATINGS FOR 2007 IRS NATIONWIDE TAX FORUMSThe Internal Revenue Service has released the seminar ratings for seminars held in conjunction with the 2007 IRS Nationwide Tax Forums.

Of the 42 seminars held, the two seminars presented by NSTP ranked #1 and #2 by the attendees.

The ABC's of LLC's ranked #1 and Circular 230 - It is How We Do Business ranked #2.

For the second year in a row, NSTP presented seminars ranked number 1 and 2 by the attendees.

IRS ANNOUNCES2008 IRS FORUM DATESThe Internal Revenue Service has announced the following dates and locations for the 2008 IRSNationwide Tax Forums:Atlanta, GA

Hilton AtlantaJuly 1-3

Chicago, ILHyatt Regency ChicagoJuly 22-24

Orlando, FLOrlando World CenterAugust 5-7

Las Vegas, NVRio All Suites HotelAugust 19-21

New York, NYHilton New YorkAugust 26-28

San Diego, CATown and CountrySeptember 9-11

IRS REMINDS CHARITIESAND CHURCHES OFPOLITICAL ACTIVITY BANThe Internal Revenue Service has reminded section 501(c)(3) orga-nizations, including charities and churches that federal law prohibits them from becoming directly or indirectly involved in campaigns of political candidates.

The prohibition against political campaign activity has been in effect for more than half a century and bars certain tax-exempt organizations from engaging on behalf of or in opposition to political candidates. However, these organizations can engage in advocating for or against issues and,

to a limited extent, ballot initiatives or other legislative activities.

The IRS' goal is to educate the leadership of these organizations to help them stay within the legal boundaries. In this regard, IRS Revenue Ruling 2007-41 outlines a number of scenarios to help charities and churches understand the ban on political campaign activity and actions that may arise.

In addition to the revenue ruling, the IRS has other helpful information for churches and charities on its website at www.irs.gov/eo. IRS Publication 1828, Tax Guide for Churches and Religious Organiza-tions, contains a discussion of the law affecting political campaign activity by churches and religious institutions.

Violation of the law can result in imposition of an excise tax or, in extreme cases, a loss of tax exempt status.

HONDA HYBRID BEGINS PHASE-OUT ON JANUARY 1American Honda Motor Company, Inc. has submitted quarterly reports indicating that its cumulative sales of qualified vehicles to retail dealers reached the 60,000-vehicle limit during the calendar quarter ending September 30, 2007.

Under the current tax law, the credit for buying a hybrid vehicle begins to phase out in the second calendar quarter after the quarter in which the manufacturer sells its 60,000th hybrid or clean burn technology vehicle.

The credit for all new qualified hybrid passenger automobiles or light trucks manufactured by Honda will begin to phase out on January 1, 2008.

Vehicles purchased before January 1, 2008 qualify for the full credit. For Honda hybrid vehicles bought on or after January 1, 2008, and on or before June 30, 2007, the credit is 50 percent of the otherwise allowable credit amount. Taxpayers buying vehicles on or after July 1, 2008, and on or before December 31, 2008, can only get 25 percent of the credit.

The credit amounts for January 1, 2008, through June 30, 2008 areas follows:Honda Accord Hybrid AT,Model Year 2007 $ 650Honda Accord Hybrid Navi AT,Model Year 2007 $ 650Honda Civic Hybrid CVT,Model Year 2007 $1,050Honda Civic Hybrid CVT,Model Year 2008 $1,050

The credit amounts for July 1,2008, through December 31, 2008are as follows:



Honda Accord Hybrid ATModel Year 2007 $ 325Honda Accord Hybrid Navi ATModel Year 2007 $ 325Honda Civic Hybrid CVTModel Year 2007 $ 525Honda Civic Hybrid CVTModel Year 2008 $ 525

Beginning January 1, 2009, taxpayers who buy a Honda hybrid cannot claim the related tax credit.

TIGTA GIVES ATTABOY TO IRSThe IT managers at the Internal Revenue Service received some good news from an unexpected source: the Treasury Inspector General for Tax Administration.

In a report just released, TIGTA concluded that the IRS had success-fully deployed the latest update to its new database and application engine, called the Customer Account Data Engine (CADE). Developing a working CADE has been a pretty big deal for the IRS; it is at the heart of the agency's multi-billion-dollar mod-ernization effort, which has had its history of troubles.

IRS agents eventually will use CADE to store and access the 200 million individual and business tax files Americans submit every year. The hope is that the files will be updated daily instead of weekly, improving service by allowing IRS employees to give more up-to-date information to taxpayers, and allowing for tax returns to be sent out faster.

This milestone was a big one for the IRS because the new release, called Releases 2.2, included the most commonly used tax forms, including returns for Single, Married Filing Jointly, Married Filing Separately, and Head of Household, as well as profit or loss from a business, Schedule C, capital gains and losses, Schedule D, supplemental income and loss, Schedule E, profit or loss from farming, Schedule F, and self-employ-ment tax, Schedule SE.

But the IRS pulled it off, according to TIGTA. Success meant the IRS accurately posted the returns for those commonly used tax forms. The only drawback, TIGTA reported, was that the IRS processed 11 million returns using CADE instead of the 33 million returns it had set as a goal. The IRS said it missed its goal because it had to postpone launching the new release by two months so it could complete upgrades. The launch had one other hiccup that TIGTA downplayed. TIGTA caught one incident in which the IRS would have sent out $400,000 in undeserved refunds to taxpayers for overpaid

taxes, but the error was caught before the payment was sent.

IRS BLINKS ON STAND AGAINST CIRCULAR 230 FEESThe Internal Revenue Service has softened its opposition to contingent fees charged by Circular 230practitioners.

Originally, the IRS proposed permitting a contingent fee only in connection with an IRS examination or the challenge of an original return, or an amended return filed before a notice of examination was received.

Under the final rules, a tax prac-titioner will be allowed to charge a contingent fee for services rendered in connection with the IRS examination of, or challenge to, an original return, or an amended return or claim for refund or credit where the return was filed within 120 days of the taxpayer receiving a written notice of the examination, or a written challenge to the original return.

The final regulations also permit the use of contingent fees for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties, according to the IRS because "there is no exploitation of the audit lottery in these situations, as they are generally completed on a post-examination basis."

RECORD-BREAKING NUMBER OF TAXPAYERS CHOOSE TO ELECTRONICALLY FILE IN 2007The Internal Revenue Service received nearly 80 million tax returns through e-file in 2007, breaking the record set in 2006.

The 2007 level is up about 9 % from the 73 million returns filed for the same period last year. Of the 139.3 million returns filed in 2007, 79.98 million or about 57.4 percent were filed electronically.

Since 2001, the number of e-filed returns has almost doubled and over the past decade the number of e-filers has increased four-fold.

See the table below for statistics on E-Filing since 1997.

More than 22.6 million returns have been e-filed by taxpayers doing their own returns, up from 20.3 million form the same period last year. More than 57.4 million returns were e-filed by tax professionals, up from nearly 52.9 million last year.

DIRECT DEPOSIT ALSOSETS RECORDSMore people this year chose to have their tax refunds directly deposited than ever before. For the year to date, the IRS has directly deposited 61.4 million refunds, up 8 % from last year.

The IRS web site, irs.gov, also experienced a record year. The IRS recorded 196.2 million visits to irs.gov this year, a more than 10 percent increase from the 177.5 million visits for the same period last year.

2007 E-FILE REFUND CYCLECHART AVAILABLEThe IRS has released publication 2043, IRS E-file Refund Cycle Chart for 2007 tax returns.

The chart shows the dates direct deposit and paper checks are scheduled to be sent or mailed based upon the transmission date of the taxpayer's e-filed tax return. Federal direct deposits of income tax refunds are always made on Fridays, while paper checks are always mailed on Friday, a week after the direct deposit would have taken place.

For example, an e-filed tax return transmitted and accepted by the IRS by noon between January 11 and January 17, 2008 is scheduled to have a direct deposit sent January 25, 2008. If the taxpayer chooses to be sent a paper check, it is scheduled to be mailed February 1, 2008.

The dates shown on this chart are the target dates the IRS has for the refunds.

Additionally, updated e-filing information, such as the calendar showing the starting transmission date this coming season of January 11, 2008 is available. You can find the information through www.irs.gov, the Tax Professionals Pageand e-file links.

RATE OF E-FILING IN RECENT YEARSYear Returns Total E-file Percent E-file1997 121.5 million 19.2 million 15.8%1998 123.8 million 24.6 million 19.9%1999 125.9 million 29.3 million 23.3%2000 128.4 million 35.4 million 27.6%2001 131.0 million 40.2 million 30.7%2002 131.7 million 46.9 million 35.6%2003 131.6 million 52.9 million 40.2%2004 132.2 million 61.5 million 46.5%2005 134.0 million 68.5 million 51.1%2006 136.1 million 73.3 million 53.8%



A pdf copy of the refund cycle chart can be obtained from www.irs.gov by clicking on Forms & Publications and scrolling down for Publication 2043 (Rev. 3-07).

2008 HYBRIDS CERTIFIED AS TAX CREDIT FOR TOYOTA AND LEXUS COMES TO AN ENDThe Internal Revenue Service has acknowledged the certification by Toyota Motor Sales U.S.A., Inc., that several of its Model Year 2008 vehicles qualify for the hybrid vehicle tax credit. Only vehicles purchased prior to October 1, 2007 qualify for a credit.

For purchases made April 1, 2007 through September 30, 2007, the hybrid vehicle certifications recently acknowledged by the IRS and their credit amounts are:

2008 Toyota Prius Hybrid–• $787.502008 Toyota Camry Hybrid–• $6502008 Toyota Highlander• Hybrid 4WD–$6502008 Lexus LS 600h L Hybrid–• $4502008 Lexus RX 400h 2 WD• and 4 WD–$550

No credit is allowed for purchase of these vehicles after September 30, 2007.

The credit amounts reflect a decrease in the credit beginning on October 1, 2006 as a result of the manufacturer's having sold 60,000 qualified hybrid motor vehicles.

IRS AND STATES TO SHARE EMPLOYMENT TAXEXAMINATION RESULTSOfficials from the Internal Revenue Service and 29 state workforce agencies announced they have entered into agreements to share the results of employment tax examinations. The agreements, part of the Questionable Employment Tax Practice initiative, provide a centralized, uniform means for the IRS and state employment officials to exchange data, thereby leveraging resources and encouraging businesses to comply with federal and state employment tax requirements.

The agreements call for col-laborative outreach and education activities designed to help businesses understand their employment and un-employment tax responsibilities.

The states that have signed partnership agreements with the IRS thus far are: Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma,

Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington, and Wisconsin.

2008 NISSAN ALTIMA CERTIFIED AS QUALIFIED HYBRID VEHICLEThe Internal Revenue Service has acknowledged the certification by Nissan North America, Inc., that its 2008 Nissan Altima Hybrid vehicle meets the requirements of the Alternative Motor Vehicle Credit as a qualified hybrid motor vehicle.

The credit amount for the hybrid vehicle certification of the 2008 Nissan Altima Hybrid is $2,350.

The announcement comes after the IRS concluded its quarterly review of the number of hybrid vehicles sold. Nissan sold 2,627 qualifying vehicles to retail dealers in the quarter ending September 30, 2007. This brings the total number of qualified hybrid vehicles sold to 7,849.

IRS ANNOUNCES NEW CHINESE, KOREAN, RUSSIAN AND VIETNAMESE TAX GLOSSARIESTO ASSIST TAXPAYERSThe Internal Revenue Service has announced five new publications to help foreign-language communities understand federal tax forms and publications that are written in English. These new glossaries of tax terminology will help meet increased demand for tax-related resources in languages other than English.

The five new publications are new versions of Publication 850 and are for Chinese (simplified), Chinese (traditional), Korean, Russian and Vietnamese. A Spanish version was already available.

The Virtual Translation Office of the IRS helped create these glossaries of tax terminology to help taxpayers and the profession-als who assist them. The publications were developed in cooperation with numerous professional translators and editors to establish uniformity in language usage in IRS tax products and to function as reference materials for these products.

IRS HAS $110 MILLION IN REFUND CHECKS LOOKING FOR A HOMEThe IRS is looking for 115,478 taxpayers who are due refund checks worth about $110 million after the checks were returned as undeliverable.

The refund checks, averaging about $953, can be claimed as soon as taxpayers update their addresses with the IRS. Some taxpayers have more than one check waiting.

The number of undeliverable refunds each year is a relatively small portion of all refunds returned to taxpayers. So far in 2007, the IRS has

processed nearly 105 million refunds, totaling about $240 billion, either by mail or direct deposit.

In fact, undeliverable refunds account for less than one-tenth of one percent of all refunds, or about one in a thousand.

A refund check is normally returned as undeliverable when a taxpayer moves without updating his or her address with either the U.S. Postal Service or the IRS.

The "Where's My Refund?" tool on irs.gov enables taxpayers to check the status of their refunds. A taxpayer must submit his or her social security number, filing status and amount of refund shown on their 2006 return. The tool will provide the status of their refund and in some cases provide instructions on how to resolve delivery problems.

Taxpayers can access a telephone version of "Where's My Refund?" by calling 800-829-1954.

IRS WARNS OF E-MAIL SCAM SOLICITING DONATIONS TO CALIFORNIA WILDFIRE VICTIMSThe Internal Revenue Service has warned taxpayers to be on the lookout for a new e-mail scam that appears to be a solicitation from the IRS and the U.S. government for charitable contributions to victims of the recent Southern California wildfires.

In an effort to appear legitimate, the bogus e-mails include text from an actual speech about the wildfires by a member of the California Assembly.

The scam e-mail urges recipients to click on a link, which then opens what appears to be the IRS web site but which is, in fact, a fake. An item on the phony web site urges donations and includes a link that opens a donation form which requests the recipient's personal and financial information.

The bogus e-mails appear to be a "phishing" scheme, in which recipients are tricked into providing personal and financial information that can be used to gain access to and steal the e-mail recipient's assets.

The IRS also believes that clicking on the link downloads malware, or malicious software, onto the recipient's computer. The malware will steal passwords and other account information it finds on the victim's computer system and send them to the scamsters.

The IRS does not send e-mails soliciting charitable donations.

Recipients of the scam e-mail can help the IRS shut down this scheme by forwarding the e-mail to an electronic mail box, [email protected], using instructions found in "How to Protect Yourself from Suspicious E-Mails or Phishing Schemes" on this site. The



mail box was established to receive copies of possibly fraudulent e-mails involving misuse of the IRS name, logo or web site for investigation.

Since the establishment of the mail box last year, the IRS has received more than 30,000 e-mails from taxpayers reporting almost 600 separate phishing incidents. To date, investigations by TIGTA have identified almost 900 host sites in at least 55 different countries, as well as the United States.

IRS GRANTS TAX RELIEF FOR SOUTHERN CALIFORNIAWILDFIRE VICTIMSThe IRS is extending tax return filing and payment deadlines for victims of the severe Southern California wildfires.

Taxpayers in the Presidential Dis-aster Area, consisting of Los Angeles, Orange, Riverside, San Bernardino, San Diego, Santa Barbara and Ventura counties, will have until January 31, 2008 to file returns, pay taxes and perform other time-sensitive acts.

The extended deadline applies to items due on or after October 21, 2007, when the fires began, and on or before January 31, 2008. This includes the federal withholding tax return, Form 941, normally due October 31, and the estimated tax payment for the fourth quarter, normally due January 15.

In addition, the IRS is waiving the failure to deposit penalty for employment and excise deposits due on or after October 21, 2007, and on or before November 5, 2007 as long as the deposits are made by November 5, 2007.

If any affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply during the period from October 21, 2007 to January 31, 2008 or October 21, 2007 through November 5, 2007 for failure to deposit penalties. No penalty or interest will be abated for taxpayers that do not have a filing, payment or deposit due date, including an extended filing or payment due date, during this period.

IRS computer systems automati-cally identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. Taxpayers within the covered disaster area do not need to identify themselves as affected by the wildfires by writing on their returns or using the disaster designation in their tax software.

PURCHASERS OF GM HYBRIDS STILL QUALIFY FOR TAX CREDITThe IRS has announced that purchasers of qualified General

Motors Corp. hybrid vehicles may continue to claim the Alternative Motor Vehicle Credit.

GMC sold 123 qualifying vehicles to retail dealers in the quarter ending September 30, 2007. This brings the cumulative number of qualified GM hybrid vehicles sold to 9,577. The credit amount and make and model of qualified vehicles sold are:

Chevrolet Silverado Hybrid 2WD, • Model Years 2006 and 2007 - $250Chevrolet Silverado Hybrid 4WD, • Model Years 2006 and 2007 - $650GMC Sierra Hybrid 2WD, Model • Years 2006 and 2007 - $250GMC Sierra Hybrid 4WD, Model • Years 2006 and 2007 - $650Saturn Vue Green Line• Model Year 2007 - $650Saturn Aura Hybrid• Model Year 2007 - $1,300

Purchasers of GMC's qualified vehicles may continue to rely on the certifications concerning the vehicles' qualification for the credit.

HONDA COMPRESSED NATURAL GAS VEHICLE IS CERTIFIED FOR THE QUALIFIED ALTERNATIVE FUEL MOTOR VEHICLE TAX CREDITThe IRS has acknowledged the cer-tification by American Honda Motor Company, Inc., that its Honda Civic GX Model Year 2008 vehicle meets the requirements of the Qualified Alternative Fuel Motor Vehicle Credit.

The Qualified Alternative Fuel Motor Vehicle Credit was enacted by the Energy Policy Act of 2005. To qualify, these vehicles can operate only on alternative fuels or mixed fuels. The 2008 Honda Civic GX is an alternative fueled vehicle that operates on compressed natural gas. The vehicle should not be confused with hybrid vehicles.

The Qualified Alternative Fuel Motor Vehicle Credit amount for the Honda Civic GX Model Year 2008 is $4,000.

PURCHASERS OF FORD HYBRIDS STILL QUALIFY FOR TAX CREDITThe IRS has announced that purchasers of qualified Ford Motor Company vehicles may continueto claim the Alternative MotorVehicle Credit.

The announcement comes after the IRS concluded its quarterly review of the number of hybrid vehicles sold. Ford sold 5,196 qualifying vehicles to retail dealers during the quarter ending September 30, 2007. This brings the cumulative number of qualified Ford hybrid vehicles sold to 38,743.

The credit amount and make and model of the certified vehicles sold are:

Ford Escape 2 WD Hybrid• Model Year 2008 - $3,000Ford Escape 2WD, Model Years • 2005, 2006 and 2007 - $2,600Ford Escape 4WD Hybrid• Model Year 2008 - $2,200Ford Escape 4WD, Model Years • 2005, 2006 and 2007 - $1,950Mercury Mariner 4WD Hybrid • Model Year 2008 - $2,200Mercury Mariner 4WD, Model • Years 2006 and 2007 - $1,950Mercury Mariner 2WD Hybrid • Model Year 2008 - $3,000

Purchasers of Ford's qualified vehicles may continue to rely on the certifications concerning the vehicles' qualification for the credit.

APPLICABLE FEDERAL RATES (AFRS) AND §7520 RATES FOR DECEMBER 2007When a taxpayer makes a loan or sells something on an installment sale, a minimum interest rate generally has to be charged. The minimum rate depends on the month of the loan or sale. The internal Revenue Service releases the Applicable Federal Rates (AFRs) each month. Short-term 3 years or lessMid-term More than 3 years but

not more than 9 yearsLong-term More than 9 yearsThey are further broken down into Annual, Semi-Annual, Quarterly, or Monthly compounding periods.

The minimum rate for an installment sale is the lowest of rates applicable for the month of the sale or the prior two months.

The December applicable federal rates (AFRs) are: AnnualShort-term 3.88Mid-term 4.13Long-term 4.72

Interest rates used when determining life estate and remainder interests when property has been gifted with the giver retaining a life estate is covered under §7520.

The interest rate for December is 5.0 percent.

TAX LAW UPDATEDELAY IN AMT CHANGES COULD DELAY RETURNSThe Internal Revenue Service has reported that up to 40 million refunds could be delayed because Congress has dragged its feet in approving



changes to the Alternative Minimum Tax, or AMT.

The legislation, which will provide a $51 million tax cut to many middle-income taxpayers and has bipartisan support in Congress, is expected to pass, but bickering on details has stalled its progress.

When the law is passed, the IRS will take up to 10 weeks to reprogram its computerized processing systems.

Linda Stiff, acting IRS Commis-sioner, said that "millions of other taxpayers not involved in AMT returns may also have their refunds delayed because of the backlog in processing other returns."

The House bill also includes another $30 billion in tax cuts, including expanding the child tax credit, providing a property tax deduction to non-itemizers and extending a tax exemption for military combat pay.

Republican lawmakers have recently sent a letter urging the IRS to inform taxpayers that tax-refund payments could be delayed by up to two and a half months.

Treasury Secretary Paulson has warned lawmakers that the bill needed to be passed to avoid the federal government hanging on to $75 billion in taxpayers' refund money.

Under House rules, tax cuts must be offset by increased revenue so that the deficit does not grow. The bill that patches the AMT tax and adds other tax reductions must make up about $80 million in cuts.

The House bill proposes to primarily offset the AMT cuts by eliminating a perk that allows hedge fund managers to pay only a 15-percent tax on profits instead of paying on regular tax rates.

Although the taxpayer will get a refund with the AMT patch, the refund could be delayed beyond normal timeframes until the IRS reprograms its systems to implement the tax law change.

The taxpayer could also experience longer wait times to get IRS assistance to determine what happened to the return.

To illustrate taxpayer impact due to late legislation:

Scenario 1: Single taxpayer with two dependents

Files as Head of Household• Has wages of $50,000• Paid $6,000 of day care for the • two childrenClaims a standard deduction of • $7,850

Without AMT Patch:Regular tax: $4,236AMT: 0Credit for child and dependent

care expenses: 11Owes: $ 225

With AMT Patch:Regular tax $4,236AMT 0Credit for child and dependentcare expenses: $1,200Refund: $ 964

Scenario 2: Married couple with four dependents

Files as Married Filing Jointly• The couple has wages of $75,000• Paid $6,000 of day care for the • two childrenClaims itemized deductions of • $26,000

Without AMT Patch:Regular tax: $3,511AMT: 4,289Credit for child and dependentcare expenses: 0Refund: $ 700

With AMT Patch:Regular tax: $3,511AMT: 0Credit for child and dependent care expenses: $1,200Refund: $6,189

NSTP was contacted by the IRS Oversight Board regarding problems in delaying the AMT patch. NSTP responded with the following:

If the AMT is delayed and e-filed returns • as well as paper returns are delayed in processing until mid to late February, many previous e-filers will opt to file a paper return to get their returns into the processing more quickly.Concern was expressed that the IRS • technology would be sufficient to handle a large number of e-filed returns on the same day to accommodate a backlog.Equally concern was expressed about • the ability of the IRS to process a large inventory of paper filed tax returns.Taxpayers who are in need of their • refunds may be subjected to large interest rates and fees with bank products offered to expedite refunds.

The IRS Oversight Board has encouraged Congress to pass the AMT legislation without any further delay.

TAXPAYERS PREPARE FORCAPITAL GAINS CHANGESNow here is something with a nice ring to it: zero percent tax on capital gains. Taxpayers are already planning how to profit when the tax is eliminated for some taxpayers in 2008, and wealthy people with kids are out in front of this tax change.

The capital gains tax rate drops from its current 5 percent to zero for those in the lowest income-tax brackets from 2008 to 2010. Congress enacted the change in the Jobs and

Growth Tax Relief and Reconciliation Act of 2003.

It is not quite the bonanza it sounds, though, because changes in the "kiddie tax" cut sharply the ranks of those who will qualify to get the zero percent rate. Any strategy must take into account the new, expanded kiddie tax.

Among those best positioned to profit are taxpayers with young adult children out of college but not yet pulling down a big salary. A pretty substantial tax benefit may be in the offing for those who give appreciated stock to these adult children to sell free of capital gains tax. A parent may transfer $12,000 to a child (a couple may give $24,000) without paying gift tax. No capital gains tax is owed if the child's income rate is below the top of the 15 percent bracket.

Indeed, capital gains strategies have long involved shifting investments to a child to get the lower gains rate. Changes this year and last in the kiddie tax have meant that fewer children qualify, and that those who do are older.

The kiddie tax is a set of rules that taxes a child's investment income over a certain threshold, $1,700 in 2007, at the parents' income tax rate. Its reach widens starting in 2008 to include those under 18, dependent children who turn 18 and dependent full-time students ages 19 through 23. For years, only children under 14 were subject to the kiddie tax.

It is not a shoo-in that shifting investments to an older child is the best way to go. Each case must be considered individually because everyone's circumstances are different.

INSIDE WASHINGTONRANGEL PROPOSESTAX POLICY OVERHAULHouse Ways and Means Committee Chairman Charlie Rangel's com-prehensive $78.3 billion tax reform package attempts the most ambitious tax policy overhaul since the Tax Reform Act of 1986 enacted under former President Ronald Reagan.

Rangel's approach would simplify the tax code, which has become replete with measures that benefit specific categories of individual taxpayers or industrial sectors, and introduce more "progressive" income taxation.

The Rangel plan seeks to:Be "revenue neutral" so that tax • increases in some areas are offset by cuts in others;Reduce the top marginal • corporate tax rate;



Permanently repeal the • Alternative Minimum Tax, which has increasingly ensnared mid-dle-class taxpayers by limiting the tax deductions taxpayers can take, resulting in increases in their effective tax rates; and;Impose a 4.0% "surtax" on • couples earning more than a threshold amount established by the Treasury, no less than $200,000 for couples, and $150,000 for individuals, rising to 4.^% for incomes over $500,000.

The Rangel proposal represents a significant step towards defining tax policy after President George Bush leaves office in January 2009. However, the full version of the plan is unlikely to come to a vote this year.

30,000 MEDICAID PROVIDERS CHEATING IRSMore than 30,000 Medicaid providers in seven states failed to pay more than $1 billion in federal taxes last year, but the government cannot trim health care payments in order to collect, according to a recent report released.

In its fifth report to a Senate panel investigating tax cheats that do business with the government, the Government Accountability Office, GAO, says that about 5% of Medicaid providers in the seven states cheat on their taxes, particularly payroll taxes collected from employees.

Some of the more flagrant violators had multimillion-dollar homes, along with fancy cars and boats, the report says. Others were guilty of patient abuse or other health care violations. None of the doctors or providers was identified in the report.

The latest report follows others that detailed how tens of thousands of dense and other government contractors and Medicare providers also cheated on their taxes. All tolled, the reports show nearly $10 billion went uncollected.

Since the inquiry began in 2003, the government has reduced payments in order to recover about $122 million in back taxes. The most has come from defense contractors, $78 million, including $31 million last year.

The original goal of the Senate Permanent Subcommittee on investi-gations was to counter "waste, fraud and abuse." As tax cheats were forced to pay by having their payments reduced, it also became a way for the Internal Revenue Service to close a tiny portion of the "tax gap," an estimated $1 billion or more that goes uncollected each year.

With Medicaid it will not be easy to collect. The federal government pays about 57% of the $324 billion cost for the federal-state health care program for the poor and disabled; it is run through the states.

The GAO conducted in-depth probes of 25 tax cheats and found "abusive and related criminal activity" in every case. Among those detailed in the report, which studied California, Colorado, Florida, Maryland, New York, Pennsylvania and Texas:

The owner of a chain of nursing • homes who owed more than $14 million in taxes had a $2 million home decorated with crystal chandeliers, porcelain china and Oriental rugs.The owners of a hospital who • owed $5 million in payroll taxes purchased a vacation home worth about $1 million.

Five Government Accountability Office reports since 2003 have found that federal government contractors and health care providers owe nearly $10 billion in unpaid taxes. The actual figures are likely higher because not all Medicare and Medicaid providers were examined. Delinquent AmountCategory Taxpayers OwedCivilian contractors 33,000 $3.3 billionDefense contractors 27,000 $3.0 billionGeneral Services Adm. contractors 3,800 $1.4 billionMedicare providers 21,000 $1.0 billionMedicaid providers 30,000 $1.0 billionTotal 114,800 $9.7 billion

FYIMEDICARE PRESCRIPTION DRUG BENEFIT PROGRESS REPORTThe share of seniors without drug coverage dropped significantly under Medicare's new drug benefit. Seniors with drug coverage from any source were less likely to face high monthly drug costs or to skip prescribed medications due to cost than seniors who remained without drug coverage. However, seniors who enrolled in a Medicare Part D plan did not fare as well as those who relied on other sources of drug coverage, such as em-ployer-sponsored coverage or benefits from the Department of Veterans Affairs (VA).

The random-sample survey of more than 16,000 seniors nationally provides an in-depth look at how the Medicare drug benefit affected seniors. The survey provides a com-

prehensive look at seniors' out-of-pocket spending and cost-related experiences, broken out by type of drug coverage, with a more in-depth look at the experiences of seniors with low incomes.

The study also highlights the significant financial protections that the drug benefit's low-income subsidies provided to those who received them. But among low-income seniors not receiving those subsidies, nearly one in three reported that they spent at least $100 per month for their prescriptions and there are an estimated 3.4 million to 4.7 million beneficiaries who are eligible for low-income subsidies but not receiving that extra assistance. Many low-income seniors who were not receiving low-income subsidies said they were unaware of such assistance.

THE A, B, C & DOF DIFFERENT PLANSThe Original Medicare Plan is a fee-for-service plan managed by the Federal Government. In general, with the Original Medicare Plan:

You use your red, white, and • blue Medicare card when you get health care.You can go to any doctor or • supplier that accepts Medicare and is accepting new Medicare patients, or to any hospital or other facility.You pay a set amount for your • health care (a deductible) before Medicare pays its part. Then, Medicare pays its share, and you pay your share (your coinsurance or copayment) for covered services and supplies (unless you have a Medigap policy or other supplemental insurance that may pay for these costs.)You may have a Medigap policy • or other supplemental coverage that may pay deductibles, co-insurance, or other costs that are not covered by the Original Medicare Plan.

Medicare Health Plans(like HMOs and PPOs)Medicare Advantage Plans are health plan options that are approved by Medicare but run by private companies. They are part of the Medicare Program, and sometimes called "Part C." When you join a Medicare Advantage Plan, you are still in Medicare. With Medicare Advantage Plans:

Some of the plans require • referrals to see specialists.In many cases, the premiums or • the costs of services (co-pays and deductibles) can be lower than they are in the Original Medicare



Plan or the Original Medicare Plan with a Medigap policy. Medicare Health Plans charge different premiums and have different costs of services, so it is important to check with the plan before you join.The plans provide all of your Part • A (hospital) and Part B (medical) coverage and must cover medical-ly-necessary services.They often have a network, • which means you may have to see doctors who belong to the plan or go to certain hospitals to get covered services.They generally offer extra • benefits, and many include pre-scription drug coverage.In many cases, your costs for • prescription drug coverage can be lower than in the stand-alone Medicare Prescription Drug Plans.Some of the plans coordinate • your care, using networks and referrals, more than others. This can help manage your overall care and can also result in savings to you.You do not need to buy a Medigap • Policy.

Types of MedicareHealth Plan include:

Health Maintenance Organization • (HMO),Preferred Provider Organization • (PPO),Private Fee-for-Service (PFFS) • Plans,Medicare Medical Savings • Account (MSA) plans,Medicare Special Needs Plans.•

Other Medical Health PlansThere are some types of Medicare Health Plans that are not part of Medicare Advantage, but are still part of the Medicare Program. With these plans, you generally get all your Medicare-covered health care through that plan. Some plans cover prescrip-tions drugs.

Other Medicare Health Plans include:

Medicare Cost Plans,• Demonstration/Pilot Program,• PACE (Programs of All-inclusive • Care for the Elderly).

Medicare Prescription Drug PlansMedicare Prescription Drug Plans are offered by insurance companies and other private companies approved by Medicare. They add coverage to:

The Original Medicare Plan,• Some Medicare Cost Plans,• Some Medicare Private Fee-for-• Service Plans, andMedicare Medical Savings Plans.•

With a Medicare PrescriptionDrug Plan:

Generally, you pay less for your • prescriptions.You will get a plan member • card after you enroll. You use this card when you go to the pharmacy to get your prescrip-tions filled.You will pay the copayment, • coinsurance, and/or deductible, if any.

If you have limited income and resources, you may get extra help to pay for your Medicare drug plan costs.

If you want to compare Medicare Prescription Drug Plans, use the Medicare Prescription Drug Plan Finder, found at www.Medicare.gov.

Medigap PoliciesMedigap policies are health insurance policies sold by private insurance companies to fill "gaps" in Original Medicare Plan coverage. In general, with a Medigap policy:

You get help paying for some • of the health care costs that the Original Medicare Plan does not cover.You also get benefits not covered • by Original Medicare, such as emergency health care outside the United States.You pay a monthly premium • to the private health insurance company that sells you the policy. Medicare and the Medigap policy both pay their shares of covered health care costs.

Employer/Union CoverageSome employer and union-provided health insurance policies can continue or switch over to provide coverage for you when you are 65 and retired. Contact your former employer or union for information on your plan.

Joining a Medicare Plan like an HMO or PPO may limit or end your employer or union coverage, both for you and/or any family members covered by your plan. Carefully read any materials your employer or union sends you. If you have questions, visit their website, or contact the office listed in their materials. If you cannot tell whom to contact, contact your benefits administrator or the office that answers questions about your coverage.

MEDICARE WILL NOT PAY FOR HOSPITAL MISTAKESMedicare will stop paying hospitals for their goofs beginning in October 2008.

Hospitals will not be reimbursed for eight conditions, including injuries caused by in-hospital falls, pressure ulcers, and infections following heart

surgery. In addition, Medicare will no longer pay hospitals to recover instruments left in a patient after surgery or to treat patients harmed by incompatible blood or air embolisms.

Medicare said it would add more conditions next year. So far, Medicare has not said that it will apply penalties to hospitals that commit these errors.

GOOD NEWS: MOST SENIORS NOW HAVE INSURANCE FOR PRESCRIPTIONSHere is a Medicare Part D success story: More than 90 percent of Americans age 65 and older now have prescription drug coverage, compared to more than 75 percent who were covered in 2004, according to a University of Michigan analysis. And poor seniors are as likely to have coverage as the rich.

BAD NEWS: SENIORS IN MEDICARE PART D PAY HIGHER COSTSSeniors enrolled in Medicare Part D are more likely to pay at least $300 a month for medicines than people insured by other plans, according to a survey published in Health Affairs. Eight percent of seniors enrolled in Medicare Part D spent a minimum of $300 out of pocket for prescriptions, compared with 5 percent of those covered by employee insurance or the Veterans Affairs Department.

Medicare recipients were also more likely to delay or forgo filling pre-scriptions because of the cost.

DISABILITY STARTER KITPROVIDES ASSISTANCEThinking about applying for disability benefits through Social Security, get some much needed assistance through the Social Security Disability Starter Kit.

Visit the "Disability Starter Kit" at www.socialsecurity.gov/disability. It will help you prepare for your disability interview and guide you through the application process.

The starter kit gives general information about the disability programs that Social Security offers and about the process used to decide whether you qualify for disability benefits. The kit also provides guidelines about the specific information and documents asked during the interview. It takes some of the mystery out of applying for disability benefits.

Each disability starter kit contains three items.

1. A fact sheet that answers most questions people ask about filing for disability benefits.

2. A checklist of documents and information requested.



3. A worksheet to help you gather and to organize the information needed.

The fact sheet provides the Social Security definition of "disability" and explains how it is decided whether your condition is severe enough to meet the eligibility criteria. It also gives tips on steps you can take to speed up the decision-making process.

The checklist provides a list of the information needed for most disability claims. That includes documents such as your birth certificate, latest W-2 form and military discharge papers, and information such as the names and addresses of all the doctors and other health professionals who have treated you.

The worksheet is designed to reflect many of the most important questions asked during the disability application interview, such as a description of your impairments(s) and the date you became disabled. In addition to the information about your treatment sources as outlined in the checklist, it also asks you to list the medications you take and the medical tests you have had. It asks for information about the kinds of jobs you have held.

Take a look at the disability starter kit at 222.socialsecurity.gov/disability, or call 800-772-1213 and ask that a kit be mailed to you.

MEMBERS IN THE KNOWITIN QUESTIONSNSTP member Joan LeValley from Illinois, who also serves on the IRS Advisory Committee, recently attended a meeting at Judson University in Elgin, Illinois. Joan had the opportunity to ask the following questions and wanted to share the answers from the ITIN Program Office of the Internal Revenue Service.

Question: Can parents request ITIN numbers for children or other dependents that live outside of the country, and those children never live in the U.S. and then declare those same children as dependents when they declare taxes?

Answer: Because of tax treaties between Mexico/Canada and the U.S. only a Mexico/Canada taxpayer residing and working in the U.S. can claim adult and/or children dependents living in Mexico or Canada, subject to the same dependency criteria as U.S. citizens but, only for their exemption. Different rule for all other nationals. For example: Guatemalans in the U.S. cannot claim their dependents living

in Guatemala even if they provide full support. But, this same Guatemalan can claim the children if they too reside in the U.S; for that matter,any other nationality, if they meetthe criteria.

Question: I know they are getting the ITIN's for relatives, but can they also declare those same children for whom they got ITIN's as dependents in their tax declaration?

Answer: Yes, because to get the ITIN they must have listed the dependent child or adult on their tax return.

PRACTITIONER PRIORITY QUESTIONSNSTP member Robert Wunderle, Director, La Posada Tax Clinic in Twin Falls, Idaho, recently experienced ques-tionable actions of IRS personnel on the Practitioner Priority Service Line.

Robert called the PPS line about a client. He was asked two additional questions never asked of him before:

Can you tell me where your client works?

Can you tell me where your client banks?

The questions were posed to verify that he was the clients' true represen-tative, but something did not seem right.

He pursued the matter and asked the purpose of the questions. He was told that it is policy. Customer Service Representatives, CSR's were required to ask them. Robert further asked if the questions were designed to facilitate the issuing of levies. The CSR acknowledged that they were. The CSR also offered that answering the questions was totally optional.

The CSR that Robert spoke with made it clear that she and her colleagues did not like having to ask the questions. Robert felt that calling the IRS for advice, information or to simply update the IRS on the status of a case should not require a taxpayer or their representative to disclose this type of information.

Robert pursued this issue by submitting a systemic issue Form 911 with the National Taxpayer Advocate. The response from Nina Olson, National Taxpayer Advocate, follows:

From my perspective as the NTA, if a taxpayer is calling the IRS general information line or a representative is calling the practitioner hotline, it is inappropriate for the IRS's first questions to be "Where do you work" and "Where is your bank account." The IRS must first ascertain what the taxpayer is calling about. For example, if the taxpayer is calling with a tax law question pertaining to a return he is filling out, immediately probing about potential collection

sources may cause that taxpayer to (1) end the call and file the return incorrectly, or (2) end the call and not file at all.

I fail to see how the IRS's approach described in the original email furthers effective tax administration or encourages voluntary compliance. I have constantly urged the IRS to look at contacts with taxpayers, including in the exam and collection context, as opportunities to educate taxpayers and work with them to bring them into voluntary compliance. My office is looking into the practices described by the original email to see if this is standard practice for the IRS. If it is, we will advocate for cessation of and changes to this practice.

Editor's Note: NSTP members have much to say and there are those who listen.

TAX COURT DECISIONSHECTOR F. ARIAS AND CAROLEE PURCELL V. COMMISSIONERT.C. SUMMARY OPINION 2007-189NOVEMBER 6, 2007Is a distribution from a trusttaxable income?

Patrick Purcell died in August 2003. Mr. Purcell named taxpayer Carolee Purcell and Sherry Purcell as co-personal representatives of his estate and co-trustees of his trust, the Patrick Purcell Trust.

The trust reported on Form 1041, U.S. Income Tax Return for Estates and Trusts, the following taxable items for 2003; interest income of $65, total ordinary dividend income of $378, and annuities, royalties, and other non-passive income of $90,915. On the Distribution Allocation Worksheet for the 2003 Form 1041, the trust reported that it distributed the following taxable items: interest income of $64, total ordinary dividends income of $363, and annuities, royalties, and other non-passive income of $89,627. The trust reported on Schedule K-1 of Form 1041 the Beneficiary's Share of Income, Deductions, Credits, etc., total distributions for 2003 to petitioner Carolee Purcell of $5,033, consisting of interest income of $32, dividend income of $187 and business income of $44,814.

In addition to the items of income, the trust received and distributed: (1) Benefits from a life insurance policy on the life of Mr. Purcell; (2) proceeds from the sale of his home; and (3) proceeds from the liquidation of his brokerage and Roth IRA.



Carolee Purcell received one or more checks drawn on the trust account and payable to her in 2003. She received more than $170,000 from the trust following Mr. Purcell's death.

Taxpayers timely filed their 2003 joint Federal income tax return. Taxpayers did not report any distri-butions from the trust on the 2003 return. The IRS determined a $5,415 deficiency in the taxpayer's Federal income tax return for 2003 attributed to the taxpayers' failure to report a $5,033 trust distribution.

The taxpayers timely petitioned for a redetermination.

In general, the Commissioner's determinations set forth in a notice of deficiency are presumed correct, and the taxpayer bears the burden of showing that the determinations are in error.

The IRS claims that the taxpayers cooperated only partially and that they produced only some of the documentary evidence they possessed. At trial, the taxpayers admitted that they had not searched every location where relevant documents were likely stored. Having not met satisfied the requirements of §7491(a)(2)(A) and (B) the taxpayers did not meet the burden of proof.

The taxpayers received $170,000 or more in distributions from the trust following Mr. Purcell's death. The taxpayers acknowledge receipt of funds from the trust but assert that they were not provided sufficient information to determine whether the distributions constituted gross income. The distributions from the trust included but were not limited to the proceeds from Mr. Purcell's life insurance policy, from the sale of his home, from the liquidation of his brokerage account, and from a liquidating distribution from hisRoth IRA.

In an August 2003 letter to the taxpayer, Mr. Purcell's estate planning attorney explained: "Other than IRA, 401k, bond interest and final pay, the amounts you inherit are income tax free." The attorney informed the taxpayer that the 401(k) plan maintained by Mr. Purcell's employer did not permit "stretching" the retirement benefits and that "your father's entire interest in the plan will be paid to you this year and you will be required to pay income tax on the full amount ofthe distribution."

On September 1, 2003, the taxpayer executed a "Lump Sum Election Form" for the 401(k) account, directing that the entire benefit be paid to the trust and selecting the option for lump-sum payment with 20-percent withholding for Federal income tax.

The Form 1041 filed by the trust does not reflect any tax payments made by the trust, any estimated taxes paid by the trust, any estimated tax payments allocated to the beneficiaries, or any Federal income taxes withheld on payments received by the trust.

Gross income includes all income from whatever source derived, including income in respect of a decedent and income from an interest in an estate or trust. §61(a)(14) and (15). Gross income generally does not include amounts received under a life insurance contract, if received by reason of the death of the insured. §102(a). But gross income does include the income earned on such property. §102(b)(1).

The taxpayer testified that she returned to her home a few weeks after her father died and at that time her sister immediately took control of the estate and managed the estate and the trust. At some point, relations between the sisters became strained. The taxpayer permitted her sister to act as the sole trustee, despite the fact that the taxpayer was a co-personal representative and co-trustee.

The taxpayer contends that her sister distributed funds from the trust to her without identifying the source of the funds. The taxpayer also contends that her sister refused to provide specific information about the estate or the trust. At trial, the taxpayer did not deny receiving payments from the trust but argued that neither the trust nor the IRS clearly identified the distributions at issue as taxable.

Held: The record reflects that the trust distributions to the taxpayer result from dividends, interest, and retirement benefits. The taxpayers have not demonstrated that the $45,033 received from the trust in 2003 was not includable in gross income.

The IRS's determination is sustained

KENNETH BLACK AND MARIE BLACK V. COMMISSIONERT.C. SUMMARY OPINION 2007-188NOVEMBER 5, 2007Did the Appeals officer abuse his discretion in: (1) Sustaining the NFTL; and (2) determining that the NFTL should not be withdrawn?

The taxpayers filed a joint Form 1040, U.S. Individual Income Tax Return, for 2004. The IRS assessed the $24,143 tax shown on the return. The IRS also assessed the following additional amounts: (1) A $143 addition to tax for failure to pay estimated tax; (2) a $115.96 addition to tax for failure to pay timely; and (3) $86.09 in accrued interest.

After the application of a $12, 547 credit for withholding taxes, the additional assessments resulted in an $11,941.05 unpaid balance.

The IRS sent the taxpayers a notice and demand for payment within 60 days of the assessment. In response, petitioners submitted an offer-in-compromise on September 13, 2005, which the IRS rejected, and the taxpayers appealed. While the taxpayers' appeal was pending, the IRS filed a Notice of Federal Tax Lien (NFTL) at the Erie County Clerk, Buffalo, New York, On October 20, 2005. The IRS issued to the taxpayers a Letter 3172(DO), Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320, on October 21, 2005. In response, the taxpayers submitted a timely Form 12153, Request for a Collection Due Process Hearing, on November 9, 2005.

The taxpayers' hearing was held on January 18, 2006. Pursuant to the parties' discussion, the taxpayers signed a Form 433-D, Installment Agreement, on February 10, 2006. The taxpayers, via a letter dated February 9, 2006, requested that the NFTL be withdrawn because the lien's filing would adversely affect their credit rating and could cause them financial hardship. Additionally, the taxpayers expressed their concern that a lien could affect their ability to secure college loans on their son's behalf. In response, the IRS sent the taxpayers a Letter 3193, Notice of Determination Concerning Collection Actions(s) under §6320 on March 28, 2006. The Notice of Determination sustained the NFTL and rejected the taxpayers' withdrawal request.

The taxpayers timely filed a petition with the Court.

§6321 imposes a lien in favor of the United States on all property and rights to property of a person liable for any tax, additions to tax, penalties, interest, and costs that may accrue in addition thereto if there has been a demand for payment and the person has failed to pay. The lien arises at the time of assessment. §6322. In order for the Federal tax lien to have priority over other liens or security interests, the IRS must file an NFTL. § 6323(a).

The taxpayers contend that the IRS Appeals officer abused his discretion by sustaining the NFTL.

The applicable laws and admin-istrative procedures were satisfied. The parties agree that the taxpayers received the required notice and demand for payment within the 60-day timeframe mandated by §6303. And the record shows that the taxpayers received notice of the lien's filing and their right to request



a hearing within the 5-day period prescribed by §6320.

The Appeals officer considered the taxpayers' challenge to the appropri-ateness of the NFTL, noting that the taxpayers requested that the NFTL be withdrawn and not reinstated unless they defaulted on their installment agreement. They were concerned about the negative effect the NFTL might have on their credit rating and the impact it might have on their ability to secure college loans for their son. The Appeals officer concluded that the taxpayers' reasons for withdrawal did not satisfy the conditions authorizing withdrawal. The NFTL's filing was not premature because "an overpayment or other credit was not available" and the NFTL could be maintained in conjunction with the installment agreement without hindering collection of the liability.

The Appeals officer also considered the taxpayers' prior submission of a collection alternative. The record shows that an OIC had been submitted and was determined to be unaccept-able. The taxpayers did not meet the criteria for an OIC because they had the ability to pay the liability in full. The Commissioner had also determined that the taxpayers could obtain an installment agreement that would pay the liability in full within the time prescribed by §6502(a) and would not impose a financial hardship on the taxpayer.

The Appeals officer balanced the need for efficient collection of taxes against the taxpayers' concern over the NFTL's intrusiveness. The Appeals officer testified that the lien was filed to protect the Government's interest: his research indicated that the taxpayers were subject to the claims of competing creditors and the taxpayers could become liable to the State of New York for additional tax for the same year. The Appeals officer testified that since the taxpayers' OIC had been rejected, he concluded that an installment agreement was in their best interest because penalties and interest were accruing during the pendency of the IRS's acceptance, and the installment agreement would forestall the IRS's proposed levy action.

Form 656, Offer in Compromise, which the taxpayers signed, spe-cifically states that an NFTL "may be filed at any time while your offer is being considered."

The taxpayers did not submit any evidence to demonstrate that the withdrawal of the NFTL would facilitate the collection or would be in the best interests of the taxpayer and the United States. The taxpayers testified that the NFTL may cause

their interest rates to increase on their other debts so withdrawal of the NFTL would help them and in turn the United States. But the Court observed that the withdrawal of the lien would facilitate collection and would be in the United States' best interest is only conjectural. There was no showing that the filing of the lien has in fact caused the interest rates on their other obligations to increase sufficiently to impair collection.

The Court concludes that the taxpayer's Appeals officer did not abuse his discretion in upholding the NFTL nor did he in refusing to withdraw the NFTL. Accordingly, the IRS determination is sustained.

FRANCINE EDWARDS V. COMMISSIONERT.C. SUMMARY OPINION 2007-193NOVEMBER 15, 2007Does the Court have jurisdiction to review the grant by the IRS of innocent spouse relief to the taxpayer's former spouse; and should the taxpayer's liability be limited to 50 percent of the deficiency?

The taxpayer and her former spouse filed a joint Federal income tax return for 2001. The taxpayer and her former spouse reported $115,297 on line 22, total income. The taxpayer's third party payer reports, however, showed that the taxpayer received and failed to report the following items of income: (1) $440 as compensation for services reported on a Form W-2, Wage and Tax Statement; (2) $3,339 in unem-ployment compensation reported on a Form 1099-G, Certain Government Payments; (3) $12 in interest reported on a Form 1099-INT, Interest Income; and (4) $6,522 in gross distributions from an individual retirement account reported on a Form 1099-S, Distri-butions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The IRS initiated an examination based on the third party payer reports.

During the examination, the taxpayers former spouse filed a Form 8857, Request for Innocent Spouse Relief, and the IRS granted his request pursuant to §6015(c). The former spouse was relieved from joint and several liability with respect to the deficiency. Thereafter, the IRS issued a notice of deficiency to the taxpayer, determining a $3,784 deficiency. The taxpayer has since conceded that she received and failed to report the items of income.

The taxpayer contends that the IRS erred in granting innocent spouse relief to her former spouse because he knew about the unreported items of

income and shared in the proceeds of their tax refund.

The Tax Court is a court of limited jurisdiction and can exercise its jurisdiction only to the extent provided by Congress. With respect to innocent spouse relief claims, the Court has three jurisdictional bases for reviewing a claim: (1) As an affirmative defense in a deficiency re-determination proceeding pursuant to §6213(a); (2) as a stand-alone petition pursuant to §6015(e) where the Com-missioner has issued a final determi-nation denying the electing spouse's claim for relief or the Commissioner has failed to rule on the claim within 6 months of its filing; and (3) in the context of a petition for review of a lien or levy action pursuant to §6320(c) or §6330(d).

Therefore, the Court lacks jurisdic-tion to review the IRS's decision to grant innocent spouse relief to the taxpayer's former spouse.

The taxpayer further contends that she should not be liable for the full amount of the deficiency. Rather, she argues, her liability should be limited to 50 percent since it was a joint return, her former spouse knew about the unreported items, and he received the benefits of the erroneous joint return.

In general, §6013(d)(3) provides that if a joint return is filed, the tax is computed on the individuals' aggregate income, and liability for the resulting tax is joint and several. A fundamental characteristic of joint and several liability is that the IRS, at its option, may proceed against the taxpayers separately and may obtain a separate judgment against each. The decision to assess or not assess tax against one of the spouses who filed a joint return does not prevent the IRS from proceeding against the other.

Therefore, the Court has no basis for limiting the taxpayer's liability to "50 percent" as she requests. This is especially true in the light of the fact that the taxpayer does not qualify for innocent spouse relief in her own right since she admits to receiving and failing to report the items of income. The taxpayer does not qualify for relief under §6015(b) because she cannot establish that she did not know or had no reason to know that there was an understatement of tax when she signed the return. Because the items giving rise to the deficiency were directly allocable to the taxpayer, §6015(c) does not provide any avenue for relief. Finally, it is not inequitable to hold the taxpayer liable for the deficiency since she fails one of the threshold conditions for relief, "The income tax liability from which the



requesting spouse seeks relief is attrib-utable to an item of the other spouse."

The IRS determination is sustained.

ET CETERATAX HISTORY IN THEUNITED STATESThe origin of the income tax on individuals is generally cited as the passage of the 16th Amendment passed by Congress on July 2, 1909, and ratified February 3, 1913; however, its history actually goes back even further.

During the Civil War, Congress passed the Revenue Act of 1861 which included a tax on personal incomes to help pay war expenses. The tax was repealed ten years later.

However, in 1894 Congress enacted a flat rate Federal income tax, which was ruled unconstitutional the following year by the U.S. Supreme Court because it was a direct tax not apportioned according to the population of each state.

The 16th amendment, ratified in 1913, removed this objection by allowing the Federal government to tax the income of individuals without regard to the population of each State.

MORE AGING BOOMERS WORK FOR THEMSELVESAccording to the U.S. Bureau of Labor Statistics, the ranks of the self-em-ployed aged 55 to 65 rose 33 percent in 2006 to more than 2 million people, while the number of self-employed age 25 to 35 fell 2 percent to about 1.5 million people.

More seniors are staying in the labor force than in the past.

According to the Employee Benefit Research Institute, this trend is a significant change and it is likely driven by a senior's need to obtain affordable employment-based health insurance and the need to continue to accumulate savings in employment-based defined contribution retirement plans.

People age 55 or older in the • labor force increased from about 29 percent in 1993 to 38 percent in 2006. For those ages 65 to 69, the percentage increased from about 18 percent in 1985 to 29 percent in 2006.The percentage of workers age 55 • or older who work full time, full year steadily increased from 54 percent in 1993 to 64 percent in 2005.The percentage of male workers • age 55 or older working full time, full year increased from about 61 percent in 1993 to nearly 70 percent in 2005. Female workers

had an even larger percentage point increase, going from nearly 47 percent in 1993 to about 59 percent in 2005.

TAX REP ROUNDTABLEENROLLED AGENTS REQUIRE 2 HOURS ETHICS TRAINING ANNUALLYAs a reminder to NSTP Enrolled Agent members, every Enrolled Agent is required to have 2 CPE hours of Ethics training annually. Enrolled Agents whose Social Security Numbers end in either a 4 or a 6 are up for renewal in this cycle.

If you have not completed your Ethics training, go to nstp.org and click on Education. NSTP has an on-line Ethics course for 2007 including all the changes recently enacted by the Small Business and Work Opportunity Act as well as by the U.S Department of Treasury.

NATIONAL PUBLIC LIAISON ISSUES SIGNIFICANT ISSUE REPORTThe IRS office of National Public Liaison has issued its Significant Issue Report for May 2007 through September 2007.

The number one issue was initiated by NSTP as follows:

An NSTP member participated in a survey regarding e-Services, and took exception that CPA and not Enrolled Agent was included in the question "type of business". Also, the NSTP was not included in the question regarding professional affiliation.

IRS response:This matter was brought to the

attention of Electronic Tax Adminis-tration, who in consultation with the Russell Research Inc., has agreed to do the following for the remaining interviews in the study:

1. Add "Enrolled Agent" to their list of choices of tax business occupations in Q25 and comb through the "all other" responses captured there thus far to see if there are any "Enrolled Agents" already mentioned in those and, if so, roll them back up into this new "Enrolled Agent" response point.

2. Add "National Society of Tax Professionals or NSTP" to the list of choices of trade/professional orga-nizations in Q36 and comb through the "all other" responses there to see if there are any "National Society of Tax Professionals or NSTP" responses there already and roll them back up to this new code point.

CIRCULAR 230 FAQS FOR E-SERVICES ACCESSCircular 230 practitioners have asked the IRS for unlimited access to e-Services. The IRS is now able to grant their request.

There are three types of practi-tioners: Attorney, Certified Public Accountant and Enrolled Agent.

E-Services increase tax filing efficiency and save valuable time and resources for tax practitioners and the IRS. The expansion of the e-Services suite of offerings to a larger audience is due to high demand and continued requests from the tax practitioner community.

The e-Services incentive products offered include:

Disclosure Authorization• Eligible tax professionals can complete disclosure authoriza-tion forms, and view and modify existing forms, all online. Disclosure Authorization allows tax professionals to electroni-cally submit Form 2848, Power of Attorney and Declaration of Representative; and Form 8821, Tax Information Authorization Disclosure. Disclosure Authori-zation expedites processing and issues a real-time acknowledge-ment of accepted submissions.Electronic Account Resolution• Tax professionals using EAR can quickly resolve clients' account problems by electronically sending and receiving inquiries about individual or business account problems, refunds, installment agreements, missing payments or notices. Tax profes-sionals must have a power of attorney (Form 2848 only) on file before inquiring into a client's account. Responses are delivered to a secure electronic mailbox within three business days. Use Disclosure Authorization to submit the Form 2848 to the IRS.Transcript Delivery System• TDS resolves clients' need for return and account information quickly in a secure, online session. It allows eligible tax professionals, with a power of attorney on file, to request and receive account transcripts, wage and income transcripts, tax return transcripts, and verification of non-filing letters for individual taxpayers and account transcripts for business taxpayers.

The first step is registering for e-Services. Each user must register individually to create and have access to a secure mailbox. The registration process is a one-time automated process where the user selects a username,



password and PIN that will be needed to log onto e-Services. After verifying the information provided, the IRS will mail a registration notice containing a confirmation number to the regis-trant's last known address of record.

The second step is to submit an online e-file application. Anyone who registers with e-Services can create a new or revised application. You must follow the specific e-file application in-structions created for the sole purpose of obtaining e-Services.

Incentive product access is tied to the electronic filing application, the completion of suitability and the submission of the appropriate credentials. The e-Services products will be manually activated once the credentials are received and the individuals and the firm listed on the e-file application pass suitability.

Attorney's will need to submit proof of good standing of the Bar of the highest court in their state, com-monwealth, possession, territory or the District of Columbia, whichever is applicable. Certified Public Accountants must provide a copy of their current and active CPA license or wallet card. Enrolled Agents only need to provide their Enrolled Agent number when completing the e-file application.

The credentials must be sent to the following address:

IRS, Andover Campus,ATTN: EFU AcceptanceTesting Stop 983P. O. Box 4099Woburn, MA 01888If using overnight delivery:310 Lowell StreetAndover, MA 05501

Your e-file application will not be processed until the credentials are received. You will receive an e-mail notice so ensure the email address you use on your e-file application is correct.

Other e-Services products available to you include:

Preparer Tax Identification • Number (PTIN) ApplicationTax professionals may choose to use a PTIN instead of a Social Security Number on returns that are prepared for clients. The PTIN application enables a preparer to apply for and receive a PTIN or look up a forgotten PTIN online. An actual PTIN card can be sent to you if one is requested.Taxpayer Identification Number • (TIN) Matching ApplicationTin Matching is a pre-filing service offered to payers of income subject to backup withholding who submit any of six information returns (Forms

1099-B, INT, DIV, OID, PATR, and MISC). Payers must be listed in the IRS Payer Account File (PAF) database and must have filed information returns with the IRS in one of the past two tax years.

ETHICS CORNERGOVERNMENT SUES TO BAR FIRM FROM DOING TAX RETURNSThe U.S. Department of Justice has filed a lawsuit seeking to permanently bar the operators of a National City, California financial firm from preparing tax returns, alleging that the company understated what customers owed by a total of $18 million over the past five years.

The suit, filed in federal court in San Diego, alleges that Roosevelt Kyle and Rebecca Tyree claimed inflated or bogus deductions, mostly for business expenses and charitable contributions, in preparing tax returns.

According to the suit, Kyle has been a tax preparer since 1983 but was found guilty by a jury in 2002 of failure to file his own tax returns from 1995 to 1998. The suit says Kyle prepared returns for others but had Tyree, the office manager and also a tax preparer, sign them.

Kyle, Tyree and businesses that they are involved with have prepared more than 12,000 returns since 2000, the suit says.

Internal Revenue Service inves-tigators conducted an undercover operation this year at Eagle Financial Services in National City, which Kyle opened earlier this year. In the past, Kyle has operated under other business names.

The suit alleges that Kyle interviewed the undercover agent as if he was preparing the return, but the return was signed by Tyree as the preparer. The return fabricated char-itable-contribution deductions on the undercover agent's return for 2006, as well as inflated business-expense deductions, according to the suit.

Kyle said his company is not preparing tax returns for others, although it did so in the past. He said the business is a counseling service for people with debt problems.

The suit alleges that since it opened, Eagle Financial had prepared more than 1,136 returns as of September 27, 2007 and that the return for the undercover agent contained a bogus $1,900 business-expense deduction for laundry and cleaning. It also alleges that the agent's return claimed more than

$2,000 for charitable contributions, even though the agent gave Kyle no information about donations.

When notified that the Justice Department had filed the suit Kyle responded "tell them to have fun."

PUGH BROTHERS BARREDFROM TAX PREPARATIONIN FRAUD INJUNCTIONArchie J. Pugh, Jr., along with his brother Theodore Pugh of Queens, New York will not be allowed to prepare tax returns ever again. They have both been barred from the business for life.

The United State government first filed charges against the pair for their fraudulent tax preparation techniques in June of 2007. In a Department of Justice statement the brothers were charged with preparing over 80 fraudulent tax returns.

The scheme used to defraud the U.S. government was basic. They simply claimed a non-existent loophole on customers' tax returns. In essence, the two claimed that compensation paid for work was not taxable income.

This particular scam is known as the "claim of right tax-evasion" scheme. It has not been made known if the company's clients were aware of the scam. Archie and Theodore Pugh were charging them a $250 fee for their tax preparation services.

Together, the brothers are responsible for over $2.4 million in lost revenue to the U.S. Treasury.

TAX PREPARER GETS YEARIN FRAUD CASEA former Madison, Alabama tax preparer has been sentenced to a year in prison after he pleaded guilty to charges of conspiracy to defraud the federal government by filing false amended tax returns and wire fraud by transmitting false information for a mortgage loan.

U.S. District Judge Sharon Lovelace Blackburn sentenced Ladon Chrison Baffield, 42. He must surrender to U.S. marshals or turn himself in at a U.S. Bureau of Prisons facility no later than January 5, 2008.

Blackburn, chief judge for the Northern District of Alabama ordered Baffield to serve a year in prison and pay a $25,000 fine. Baffield must pay restitution of $30,406 to the Internal Revenue Service. He will be on probation for three years after he is released. Baffield cannot be a tax preparer or a banker in the future.

Baffield owned and operated LCB Financial Services, an income tax preparation and filing business, and Titanium Mortgage, which obtained new mortgages or refinancing for existing mortgages for customers.



The tax fraud count accused Baffield and a co-defendant, Walter Sullivan, who worked for Baffield and owned Just That Fast Tax, of conspiring to defraud the government in 2002 by filing amended tax returns. Baffield and Sullivan filed false amended returns for the 1999 and 2000 years claiming refunds. The amended returns were filed without the knowledge of the taxpayers who had hired LCB.

Most of the amended returns reported education expenses or business loans that were allegedly omitted from the original tax returns.

According to court papers, Baffield and Sullivan alternated in either forging the name of a taxpayer on a fraudulent amended tax return or signing the Form 1040X as the tax preparer.

In the wire fraud charge, Baffield pleaded guilty to transmitting false information through Titanium Mortgage to Finance America in Downer's Grove, Illinois, in 2005 to obtain a mortgage loan for $104,850.

Finance America, which was trying to verify a business license included in the loan package, learned from the Madison County License Department that the Titanium Mortgage business license had been altered.

TAX PREPARER BARRED FROM PREPARING RETURNSAn East St. Louis, Missouri tax preparer has been barred from preparing taxes for other people after she was accused of falsely filing returns.

Mary Lee Powell was barred by a civil injunction order signed by U.S. District Court Judge Michael J. Reagan.

According to the court order, the IRS examined 109 returns that Powell prepared and determined that all of them understated her customers' tax liabilities. The court found that the estimated total tax loss from Powell's misconduct from 2003 to 2006 was $2.9 million.

Powell is accused of preparing returns with fabricated business-ex-pense deductions, improper education tax credits and with deductions for improperly claiming dependents. According to the court documents, Powell fabricated more than $10,000 in business expenses on the tax returns of a customer who was a police officer with the St. Clair County Sheriff's department.

Powell was ordered to give the government a list of her customers' names, addresses, e-mail addresses, phone numbers and Social Security numbers and to notify her customers of the injunction.

SAN JOSE TAX PREPARER SENTENCED TO PRISON FOR FILING FALSE RETURNA tax preparer who worked in San Jose, California for 20 years has been sentenced to prison for his role in filing a false tax return by deflating his client's income into a lower tax bracket, the U.S. Attorneys Office has announced.

Johnathan Wendy, 56, of Capitola, was sentenced by U.S. District Court Judge Jeremy Fogel in San Jose to one year and one day in prison for his role in shorting the Internal Revenue Service of more than $70,000 in falsely filed tax returns.

Fogel also banned Wendy from ever being a tax consultant again, and ordered him to provide accurate federal tax returns for the years 1998 through 2005.

After being indicted in 2005 on 18 charges, Wendy signed a plea agreement last year to one count of aiding or inducing another to file a false tax return.

In his agreement, Wendy admitted that on July 27, 1999, he prepared a federal income tax return for a client referred to as "F.F." listing that person's income as $94,347, when it was really $104,929, court documents show.

Prosecutors say Wendy admitted in-tentionally reducing the person's tax liability by creating numerous false or grossly inflated deductions for investment interest, professional dues and employee business expenses.

Wendy was also charged with, but did not plead guilty to, preparing 17 other individual tax returns and falsely listing the taxable amount claimed on each return, cheating the government out of $70,000 in taxes.

The prosecution is the result of a one-year investigation lead by IRS Criminal Investigation.

FORMER REVENUEAGENT CONVICTEDSherry Peel Jackson, a former IRS revenue agent and certified public accountant, told a federal jury she was sure she did not have to file income tax returns.

After less than 30 minutes of delib-erations, the jury convicted Jackson of failing to file income tax returns from 2000 through 2004. The Stone Mountain, Georgia woman faces a maximum of four years in prison. She will be sentenced early next year.

Jackson, 45, did not fit the typical profile of a criminal defendant. She worked as a revenue agent from 1988 to 1995 and then as an accountant.

In July 2000, Jackson testified, she began to question whether she had to pay income taxes. By the following

year, she decided she was not going to file a tax return.

Sitting at the witness stand, with large books of federal regulations and the tax code in front of her, Jackson said she could not find any section of the tax code that held her liable for income taxes.

"I'd done a lot of research and I was just about sure," she testified. "I did not have to file an income tax return."

During cross-examination, the assistant U. S. Attorney read Section 1 of the tax code to Jackson, who is married. A tax is imposed on "every married individual," he read, asking Jackson how she could not be an individual.

"I couldn't find the definition of 'individual,'" Jackson replied.

Jackson's attorneys told jurors they should not convict her of willfully disobeying the law because Jackson had a "good faith" reason to believe she did not have to file taxes. He reminded the jury Jackson attended Tuskegee University in Alabama and the University of Georgia, raised a family and lived the life of an ordinary American.

"You may have never heard of this before," her attorney said. "To you, it may sound wild. It may sound crazy...But she believes she's not required to file tax returns."

The U.S. Attorney said Jackson was "absurd." His final remarks included, "You should disbelieve everythingshe said."

MEMBERS ASKBE READY FOR TAX SEASONThe editor had prepared an article about being healthy and educated to go in to tax season; however, Lynn Chilton, NSTP member from Reidsville, NC forwarded an article she wrote which really gets the Tax Professional "ready" for a challenging season. NSTP members are the best in the business of tax. Thank you, Lynn.

The Tax Gap and the EITC!As the 2007 tax year rapidly approaches, I am preparing for it by sending mailings, talking to clients, reading up on the latest changes and watching every move Congress makes concerning tax law legislation.

The tax gap has been addressed constantly throughout the years and looms high like a huge tidal wave waiting to come crashing down on us at any minute. The tax gap can be divided into three components: Nonfiling, underreporting and under-payment according to the IRS.

There is an area which is definitely being abused. The earned income tax



credit (EITC) as my fellow tax profes-sionals know, gives "free money" to those who qualify. Herein lies the problem, qualifying.

Each year in my practice, I use due diligence in asking the right questions to arrive at the point of EITC qualifica-tion. Using due diligence is not for the initial interview only, but continues throughout the tax preparation appointment.

Example 1: The new client comes in and sits down; we engage in conversation and I learn he/she is married, but informs me that he/she always files as "Head of Household" separately with each claiming one or two children. Immediately, I inform the potential client that it is illegal and explain why. Nine out of ten times they will take their W-2's and all other pertinent tax records they brought and go elsewhere to achieve their ultimate goal of receiving the "free money."

Example 2: The same scenario with a twist; the client claims he/she is not married. I proceed with the tax return preparation and during the actual preparation the cell phone rings and he/she apologizes and tells me that it was his/her spouse. Here we go; I stop and ask how long have you been married? He/she says, "We've been married ten years". We once again have a problem.

These are a couple of examples but there are too many to name. Most tax professionals have experienced the same type of situations in their practices. My time has been wasted again, but I have stopped another abuser at my office. The client obviously leaves after I go through my spiel about the legalities once again.

I am not against the EITC for those who qualify legally. It is a huge benefit to many qualifying individuals with low incomes. I have to believe if the EITC is abused so much in my small community, how much more is it abused nationwide?

Yes, I lose business because of my undercover persistent conversation through discovery of the potential fraud. Rarely, the clients will come clean and file the correct way losing the EITC due to not qualifying. For those, I am most proud because they were truly ignorant of the tax laws and consequences of fraud and want to do what is right.

I have a huge poster about the consequences of filing a false tax return placed purposely where each client cannot miss reading it. It is IRS Publication 4122.

I have gained clients because of my stand; taking time to know each situation as much as I possibly can. Tax professionals can make a

difference one client at a time. The clients rely on us for the correct information and application of the tax laws. We must get over the herd them through like cattle approach to increase our bottom line and care about the job we do. Complacency costs money by increasing the tax gap. We are the beginning and the end normally for the preparation of the tax return for our clients.

Do not just ask them one; engage in conversation to get down to where the rubber meets the road; the truth! By taking extra measures, we can help to lower the tax gap in whatever way it will help. We are licensed to higher standards and we should show it. Ethically, it is the right thing to do.

Just like the client who comes in, sits down and tells us he/she purchased a new lawn tractor for personal use and wants to write it off his/her tax return. He/she has our undivided attention instantly. The answer is "no" and we have to explain the reason why.

We should have the same mindset with every client. That is what makes our job unique; each client is different.

To my fellow NSTP members and colleagues who already practice extra due diligence in this area, thank you for doing a job in which we can all take pride!

QUOTES"The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

President Ronald Reagan

"Taxes are paid in the sweat of every man who labors."

President Franklin D. Roosevelt

"Philosophy teaches a man that he cannot take it with him; taxes teach him he cannot leave it behind either."

Mignon McLaughlin, Author

"We must care for each other more, and tax each other less."

Bill ArcherFormer Member House of Representatives

"People who complain about taxes can be divided into two classes: men and women."

Unknown

NEXT ISSUE(JANUARY 2008)

☛ "TAX TOOLS" FOR THE "TAX PROFESSIONAL"

The NSTP Board of Directors wishes each NSTP member a wonderful holiday season filled with love and good will. May the New Year bring you health, prosperity and a wonderful tax season.

Please accept as our gift to you; the NSTP Code of Ethics. We hope you will frame and display it in your office allowing your client's to know the quality of the individual they selected to prepare their return.

Happy Holidays!Dorothy, Greta, Laurie, Jim, Ron and Paul

WWW.NSTP.ORGSERVICE TO THE TAX PROFESSION


Code of EthicsNational Society of Tax Professionals

I. Members shall conduct themselves in such a manner as not to refl ect unfavorably upon the profession.

II. A member shall not violate the confi dential relationship between client and practitioner and shall not disclose confi dential information without the consent of the client or pursuant to a court subpoena.

III. A member shall pursue continuing education in the fi eld of Federal Income Taxation.

IV. A member shall not knowingly misrepresent facts while preparing a return or advising a client.

V. A member who fi nds that information has been omitted, shall promptly advise the client of such error or omission.

VI. A member shall not engage in fraudulent, deceptive or dishonest conduct relating to the member’s professional practice.

VII. A member shall not violate any position of trust.

VIII. A member shall not disparage another practitioner so as to cast doubt upon his or her ability, competence, experience or character.

IX. A member shall avoid preparing returns or offering advice on tax matters outside his or her level of experience and expertise unless competent assistance is obtained.

X. A member shall make every effort to avoid controversies with other fellow members.

XI. A member who has been enjoined from practice, or who has been convicted of a felony will be suspended from NSTP, pending a review by the proper NSTP committee.

XII. A member shall not advertise or solicit clients in a manner that is deceptive or misleading.

XIII. Members shall comply with the appropriate IRS regulations, governing the Rules of Practice for return preparers.

Service to the Tax Profession

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www.nstp.org“Service to the Tax Profession”

Social Security

2008 2007 2006

Cost of living adjustment COLA 2.3% 3.3% 4.1%

Maximum taxable payroll earnings: Social Security 102,000 97,500 94,200 Medicare Unlimited Unlimited Unlimited

Tax rate for employees: Social Security 6.20% 6.20% 6.20% Medicare 1.45% 1.45% 1.45% Total 7.65% 7.65% 7.65%

Earnings required for: One work credit $1,050 $1,000 $3,970 Four work credits $4,200 $4,000 $3,880 (Quarters of coverage)

Allowed earnings, pre full retirement age: Annually $13,560 $12,960 $12,480 Monthly $31,130 $21,080 $21,040

Retirement earnings test in year reaching full retirement age: Annually $36,120 $34,440 $33,240 Monthly $63,010 $32,870 $32,770

Maximum SS benefi ts at full retirement age, per mo. $2,185 $2,116 $2,053 Spouse at 50%, per mo. $1,092 $1,058 $1,026

Federal SSI payments: Individual, per mo. $637 $623 $603 Couple, per mo. $956 $934 $904

Maximum allowed assets for SSI eligibility: Individual $2,000 $2,000 $2,000 Couple $3,000 $3,000 $3,000

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Paul LaMonaca, NSTP Education Director and premier instructor brings the NSTP Fall Update directly to your computer (DVD ROM drive required) or DVD.

For the fi rst time, the NSTP Fall Update has been recorded and you can view the presentation in it’s entirety in the comfort of your offi ce or home.

The 8 hour presentation includes text material, not only an excellent education tool but a valuable reference tool as well, both for just $135. If you want the self-study and Continuing Professional Education Credit, the DVD, text and CPE is $170. These are NSTP member prices; non-members pay $170 and $205.

A N N O U N C I N G !

Topics Include:Highlights of 2007 Small Business Act• Selected Provisions of the Pension Protection Act of 2006• Selected Provisions of the Tax Increase Prevention and Reconciliation Act• Reviewing the IRS DATA BOOK: Where are the Audits?• Self-Employment Tax Issues• The Repeal of the Phase Out of Itemized Deductions and Personal • ExemptionsReview of Provisions that Expire After 2007: Will They Be Back?• Alternative Motor Vehicle Credit: Regular Tax vs. AMT• Federal Tax Court Cases Affecting the Small Practice Professional• AMT: Relief, Repeal, or What?• Kiddie Tax Age Issues• Substantiating Charitable Contributions After the 2006 Legislation• Sole Proprietorship Issues: The Challenges Continue• Reviewing Tax Basis Issues: Who’s on 1• st?Tougher Rules for Offers in Compromise• Qualifi ed Plans Get Rollover Treatment for a Non-Spouse Benefi ciary• Discussion on Preventing The Audit of the Returns Professionals Prepare• Tax Legislation Review of Tax Acts From 2001-2006: What a Great Time • to Be a Tax ProfessionalAGI Focus: Keeping Your Eye On the Ball• Tax Season Emergency Room: Data At the Tax Professional’s Fingertips• Spousal Business: Partnership vs. Sole Proprietorships• MUCH, MUCH, MORE!•

Continues on reverse...

One if by land,Two if by sea,

A fall update just for you, coming by DVD!Did you miss a fall update class this year? Did you think there were not enough tax law changes to warrant attending? Do you now wish you had not missed that NSTP fall update opportunity?

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And, if you have a particular question you need answered, remember, NSTP’s Tax Hotline – make the call, never a charge!

Order today by visiting our websitewww.nstp.org

or call 1-800-367-8130.

Other DVD’s available – S Corporations – 8 hours from set up, through operation and liquidation! Don’t miss this opportunity!

What NSTP members say:

“Great reference tool with subjects indicated on the DVD disk!”

“Easy access to reference material.”

“Just like being in class.”

“Paul was absolutely wonderful!”

NSTP MAKES THE DIFFERENCE!

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323-07 tax alert - national society of tax professionals fta.pdf · federal tax alert news items...

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