August 17, 2008 by Ray Perez.

Internal Revenue Service announced a change in the extended due date on certain business returns to help individuals better meet their filing obligations. The change, which reduces the extension period from six to five months, eases the burden on taxpayers who must report information from Schedules K-1 and similar documents on their individual tax returns.

Income, deductions and credits from partnerships, S corporations, estates and trusts are reported to partners, investors and beneficiaries on Schedules K-1 and other similar statements. The recipients then use that information to complete their own tax returns.

Currently, the extended due date for both businesses and individuals often falls on the same date, generally Oct. 15. This creates a burden for individual taxpayers who rely on the information from Schedule K-1 and other similar statements to prepare and file their personal tax returns in a timely manner.

Note: “We are eliminating the same-day deadline for these returns, which causes needless hardship and puts the individual taxpayer in an awkward position,” said IRS Commissioner Doug Shulman. “We want to correct this timing issue to ensure that all taxpayers have the information they need to file timely and stay in compliance with the law.”

The IRS issued temporary and proposed regulations that will reduce the extension of time to file tax returns for certain businesses that generate Schedules K-1 and other similar statements from six months to five. Requiring these statements to be issued one month earlier, generally by Sept. 15, will provide recipients time to prepare and file returns within the extended time frames.

This change will be effective for extension requests with respect to tax returns due on or after Jan. 1, 2009, and applies to business entities that file the following returns and forms that have a tax year ending on or after Sept. 30, 2008:

• Form 1065, U.S.Return of Partnership Income
• Form 1041, U.S. Income Tax Return for Estates & Trusts
• Form 8804, Annual Return for Partnership Withholding Tax (Section 1446)

The regulation does not change the process for requesting an extension of time to file, nor does it affect extensions of time to file other types of business returns, such as those used by S corporations.

The IRS initiated the proposal to reduce the extension of time to file, carefully weighing the impact on partnerships and other affected entities against the burden the existing deadline puts on individuals, who need this information to file timely and accurate returns.

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August 17, 2008 by Ray Perez.

If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years.

To qualify for this exclusion of gain, you must meet ownership and use tests.

Ownership Test: During the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years.

Use Test: During the 5-year period ending on the date of the sale, you must have lived in the home as your main home at least 2 years. If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount.

If you do not meet the ownership and use tests, you may be allowed to exclude a reduced maximum amount of the gain realized on the sale of your home if you sold your home due to health, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.

If you can exclude all the gain from the sale of your home, you do not report the gain on your federal tax return. If you cannot exclude all the gain from the sale of your home, use Schedule D, Capital Gains and Losses, of the Form 1040 to report it.

Call us for more details and information, or see IRS Publication 523, Selling your Home.

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February 22, 2007 by Ray Perez.

Return preparer fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. This includes inflated requests for the special one-time refund of the long-distance telephone tax. Preparers may also manipulate income figures to obtain tax credits, such as the Earned Income Tax Credit, fraudulently.

In some situations, the client (taxpayer) may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on their tax returns. However, when the IRS detects the false return, the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties.

The IRS Return Preparer Program focuses on enhancing compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Department of Justice for prosecution and/or asserting appropriate civil penalties against unscrupulous return preparers.

While most preparers provide excellent service to their clients, the IRS urges taxpayers to be very careful when choosing a tax preparer. Taxpayers should be as careful as they would be in choosing a doctor or a lawyer. It is important to know that even if someone else prepares a tax return, the taxpayer is ultimately responsible for all the information on the tax return.

Helpful Hints When Choosing a Return Preparer

• Be careful with tax preparers who claim they can obtain larger refunds than other preparers.
• Avoid preparers who base their fee on a percentage of the amount of the refund.
• Stay away from preparers who claim that many, if not most, phone customers can get hundreds of dollars or more back under the telephone tax refund program.
• Use a reputable tax professional who signs your tax return and provides you with a copy for your records.
• Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed.
• Review your return before you sign it and ask questions on entries you don’t understand.
• No matter who prepares your tax return, you (the taxpayer) are ultimately responsible for all of the information on your tax return. Therefore, never sign a blank tax form.
• Find out the person’s credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
• Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.
• Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?

Reputable preparers will ask to see your receipts and will ask you multiple questions to determine your qualifications for expenses, deductions and other items. By doing so, they are trying to help you avoid penalties, interest or additional taxes that could result from an IRS examination.  

Further, tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine.

Criminal Investigation Statistical Information on Return Preparer Fraud

*Incarceration may include prison time, home confinement, electronic monitoring or a combination.

Criminal and Civil Legal Actions

Some return preparers have been convicted of, or have pleaded guilty to, felony charges.

Additionally, the courts have issued 175 permanent injunctions against abusive tax scheme promoters and abusive return preparers since 2003. The following case summaries are excerpts from public record documents on file in the court records in the judicial district in which the legal actions were filed.

California Tax Preparers Sentenced to Prison Terms for Operating Tax Fraud Schemes

On Oct. 6, 2006, in San Diego, Calif., Susan E. O’Brien, a professional tax preparer who operated “The O’Brien Group,” was sentenced to ten years and five months in prison and ordered to pay $113,179 in restitution. She was convicted on May 2, 2006, for tax evasion, defrauding the United States and aiding and assisting in the filing of fraudulent tax returns. Co-defendants Robert Richard Evans and William Dean Cook were also sentenced to prison terms of 78 and 24 months, respectively. In July 2003, O’Brien, Evans, Cook and five others were charged in a 78 count indictment with various tax crimes related to tax years 1996-2002. According to the indictment and trial evidence, O’Brien prepared numerous income tax returns that claimed false business deductions and Evans promoted, sold and managed domestic trusts used by clients to hide their income and assets from the IRS. O’Brien also was convicted of evading the payment of tax on her own income. The tax evasion scheme resulted in a tax loss to the United States  of more than $1 million.

Two Sentenced for Preparing False Tax Returns

On Sept. 20, 2006, in Monroe, La., Eddie Ferrand and William Kennedy were sentenced for aiding and assisting in the preparation of false income tax returns and conspiracy. Ferrand was sentenced to 60 months in prison to be followed by three years supervised release. Ferrand was also ordered to pay $255,890 in restitution to the IRS and a $900 assessment. Kennedy was sentenced to 27 months in prison to be followed by three years supervised release. Kennedy was also ordered to pay $39,020 in restitution to the IRS and an $800 assessment. According to the indictment, Ferrand, as the owner and operator of Mr. Ed’s Tax Service, hired, trained and supervised tax preparers employed at Mr. Ed’s, including co-defendant Kennedy. Ferrand, Kennedy and other co-defendants prepared income tax returns and amended prior year returns by inflating Schedule A deductions and creating false Schedule C businesses in order to increase taxpayer’s refund. The defendants prepared more than three thousand returns expanding over 26 states and generating refunds in excess of $6 million.

Minnesota Tax Preparer Sentenced for Filing False Tax Returns

On March 23, 2006, in Minneapolis, Minn., Richard Reiss was sentenced to 41 months in prison for aiding and assisting in the preparation of 84 false tax returns. Reiss was also ordered to pay a $7,500 criminal fine and $198,958 in back taxes. Reiss prepared tax returns for more than 30 clients and claimed fraudulent and false deductions such as unreimbursed employee business expenses, mileage expenses, meals and entertainment, charitable contributions, medical expenses and tax preparation fees, and business losses resulting from business expenses that were fabricated or inflated. In total, he overstated expenses and deductions for numerous clients by more than $1 million, which resulted in tax losses of about $198,000.

Tax Preparer Who Used Bogus Business Losses to Wipe Out Clients’ Income Taxes Sentenced to 11 Years in Prison

On Feb. 21, 2006, in Los Angeles, Calif., James Earl Wynn was sentenced to 11 years in federal prison following his April 22, 2005 conviction of 24 counts of aiding and advising in the preparation of false income tax returns. Evidence presented in court showed that Wynn solicited his clients by telling them that he operated a number of businesses in which they could invest. Wynn told his clients that if the businesses turned a loss, the clients could claim the loss on their tax return. As part of this arrangement, Wynn offered to prepare the clients’ tax returns charging his clients a percentage of their tax refunds in addition to a return preparation fee. Wynn did not tell his clients that many of the businesses listed on their tax returns did not exist at all. None of the businesses listed on their tax returns as part of the tax fraud scheme ever existed as a partnership, ever filed a partnership tax return or ever sustained the losses claimed on the taxpayers’ returns. Wynn caused more than 2,000 tax returns to be filed with the IRS claiming more than $75 million in false partnership losses. The tax loss to the government exceeded $10 million. On July 18, 2005, Linda M. Hall, who once worked for Wynn, was sentenced to 70 months imprisonment and was ordered to pay restitution of $6,339,023.

Rockford Tax Preparer Sentenced to 56 Months in Federal Prison for Preparing False Tax Returns

On Feb. 13, 2006, in Rockford, Ill., John H. Bell was sentenced to 56 months in prison, followed by one year supervised release, for preparing false federal income tax returns for others and for filing a false federal income tax return for himself. According to the indictment, Bell, the owner of Bell’s Income Tax Service and of Real Estate Investors (REI) #2462, Inc., prepared false income tax returns for others. In order to support the returns, Bell attached W-2s to the returns that falsely stated the amounts of income the taxpayers received from REI and falsely stated the REI had withheld federal income tax from the taxpayers when, in fact, no such taxes had been withheld by Bell or his corporation. The indictment also charged that Bell filed an income tax return for himself that falsely stated that $8,360 in federal income tax had been withheld from him, when no federal income tax had been withheld by REI. As a result of his own false return, Bell wrongfully attempted to obtain a refund of $8,701.

Former City of Houston Employee Sentenced to Prison

On Jan. 27, 2006, in Houston, Tex., Jerome Harris was sentenced to 57 months in prison followed by one year supervised release. The judge further ordered that, effective immediately, Harris be prohibited from preparing tax returns or assisting tax payers in audits. Harris was convicted of 21 counts of willfully preparing fraudulent income tax returns for his clients in September 2005. Harris, a full time employee for the City of Houston, also owned and operated Jay’s Bookkeeping and Tax Service, located at his residence. It was found that Harris had prepared hundreds of false tax returns for the 1995 through 2000 tax years, resulting in claims for fraudulent tax refunds by his clients totaling almost $1.3 million.

Michigan Man Sentenced For Preparing Tax Returns in Violation of Court Order

On Feb. 16, 2006, in Grand Rapids, Mich., Robert L. Mosher, of Cedar Springs, Mich., was sentenced to 105 days in prison for contempt of court after violating injunctions that barred him from preparing tax returns for customers. Two injunctions were obtained after the Justice Department sued Mosher in 2003 for promoting a tax scheme involving sham trusts and preparing fraudulent returns understating customers’ tax liabilities. Mosher continued to prepare income tax returns after these orders were entered.

Federal Court Permanently Shuts Down Louisiana Tax Preparer

On April 18, 2006, Eddie Ferrand of Monroe, La., and two of his employees, Glenda Faye Elliott of Monroe, La., and William Nathaniel Kennedy of Rayville, La., were permanently barred from preparing tax returns. The court found that Ferrand, Elliott and Kennedy regularly understated customers’ tax liabilities, by claiming false dependents, reporting fictitious business expenses and deductions and inflating other deductions.

Federal Judge Stops Tax Refund Fraud by Two Florida Tax Return Preparers

On Aug. 8, 2006, a federal court permanently barred Jean-Marie Boucicaut and Marie Thelemarque of Orlando, Fla., and Boucicaut’s company, Tax Review Corporation, from preparing federal tax returns for others. The court found that the defendants filed amended income tax returns for persons without their authorization and directed the IRS to send the requested refund checks to them.

Federal Court Bars Louisiana Tax Preparers from Claiming Inflated Deductions on Income Tax ReturnsOn Oct. 5, 2006, in New Orleans, La., Rodney G. Bourg and Cynthia M. Bourg of Houma, La., were permanently barred from preparing federal income tax returns claiming inflated deductions or asserting unrealistic positions. The court found the Bourgs prepared federal income tax returns with improper per diem expense deductions for customers who worked as mariners, fishermen, merchant seamen and ferry workers.

Where Do You Report Suspected Tax Fraud Activity?

If you suspect tax fraud or know of an abusive return preparer, report this activity using IRS Form 3949-A, Information Referral. You can download Form 3949-A from this Web site or call 1-800-829-3676 to order by mail. Send the completed form, or a letter detailing the alleged fraudulent activity, to Internal Revenue Service, Fresno, CA 93888. Please include specific information about who you are reporting, the activity you are reporting and how you became aware of it, when the alleged violation took place, the amount of money involved and any other information that might be helpful to an investigation. Although you are not required to identify yourself, it is helpful to do so. Your identity can be kept confidential. You may also be entitled to a reward.

FS-2007-12, January 2007

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October 30, 2006 by Ray Perez.

IRS explains the tax treatment of charitable remainder trusts with REMIC income:
A new revenue ruling explains how various tax rules apply to a charitable remainder trust or charitable remainder unitrust in specified factual situations involving real estate mortgage investment conduit income. Rev Rul 2006-58, 2006-46 IRB

Guidance details treatment of REIT’s excess inclusion income:
IRS has issued a notice that provides guidance on a real estate investment trust’s (REIT’s) and other pass-through entities’ treatment of excess inclusion income. A growing number of REITs are generating excess inclusion income by engaging in mortgage securitization transactions that cause the REIT to be a taxable mortgage pool (TMP) or have a qualified REIT subsidiary that is a TMP. The notice addresses excess inclusion income from real estate mortgage investment conduit (REMIC) residual interests and from REIT TMPs, whether received directly or allocated from another pass-through entity. Notice 2006-97, 2006-46 IRB

New guidance on withholding and information reporting on foreign persons, including bonds held through book-entry systems:
A new notice provides guidance on withholding and information reporting on foreign persons and includes guidance on how to treat bonds held through certain book-entry systems in foreign countries. Notice 2006-99, 2006-46 IRB

In Brief-Federal Tax Updates Arranged by Code Section

Code Section 170—Charitable contributions—deletions from cumulative list.
University Lithotripsy Affiliates, Inc., Newark, NJ, no longer qualifies as org. to which contributions are deductible under Code Sec. 170 . ( Ann. 2006-81, 2006-44 IRB 821 )

Code Section 402—IRAs—waiver of rollover requirement—error due to incorrect information provided by employees of financial institution.
Pursuant to Code Sec. 402(c)(3)(B) , IRS waived 60-day rollover requirement where taxpayer relied on incorrect information provided by employees of financial institution and failed to timely accomplish rollover. So, taxpayer’s stated contribution was considered valid rollover contribution under Code Sec. 402(c)(3) . ( PLR 200643003 )

Code Section 402—IRAs—waiver of rollover requirement—mistake by bank.
Pursuant to Code Sec. 402(c)(3)(B) , IRS waived 60-day rollover requirement where due to mistake by bank taxpayer failed to timely accomplish rollover. So, taxpayer was granted 60-day extension, from date this letter was issued, to contribute stated amount into rollover IRA, and stated amount will be considered valid rollover contribution within meaning of Code Sec. 402(c)(3) . ( PLR 200643004 )

Code Section 402—Trustee to trustee transfers—transfer of assets from pension plan—actual distributions.
Trustee to trustee transfer of assets from member’s money purchase pension plan to multiple employer plan for police officers and fire fighters in state won’t be considered actual distribution to member of amounts transferred and won’t be subject to taxation at time of transfer under Code Sec. 402(a) and Code Sec. 72 . ( PLR 200643005 )

Code Section 408—IRAs —waiver of rollover requirement—error by co.
Pursuant to Code Sec. 408(d)(3)(I) , IRS waived 60-day rollover requirement where due to error by co. taxpayer failed to accomplish rollover with 60-day period. So, stated contribution will be considered valid rollover contribution within meaning of Code Sec. 408(d)(3) . ( PLR 200643002 )

Code Section 408—IRAs—waiver of rollover requirement—failure to understand rollover rules.
Pursuant to Code Sec. 408(d)(3)(I) , IRS declined to waive 60-day rollover requirement where taxpayers’ failure to understand rollover rules wasn’t circumstance described in Rev Proc 2003-16, 2003-4 IRB 359 and ability to complete rollover into IRA within 60-day rollover period was, at all times, within taxpayers’ control. ( PLR 200643006 )

Code Section 501—Exempt orgs.—exempt status—final adverse determination.
Final adverse determination was issued to non-profit corp. that it didn’t qualify for exempt status where it received determination notice that it didn’t operate exclusively for exempt purposes under Code Sec. 501(c)(3) but failed to respond thereto within 30 days. ( PLR 200643007 )

Code Section 664—Charitable remainder trusts—excess inclusion income from residual interests—unrelated business taxable income (UBTI)—effect on exempt status—pass-thru entity tax.
IRS ruled that if charitable remainder trusts are partners in partnerships or shareholders in REITs, and partnerships and REITs have excess inclusion income from holding residual interests in REMICs, then excess inclusion income allocated to charitable remainder trusts isn’t UBTI to trusts and doesn’t affect trusts’ exemption under Code Sec. 664(c) ; trusts aren’t disqualified orgs. under Code Sec. 860E ; and pass-thru entities with excess inclusion income allocable to charitable remainder trusts are subject to pass-thru entity tax under Code Sec. 860E(e)(6)(A) . ( Rev Rul 2006-58, 2006-46 IRB )

Code Section 871—Tax on nonresident alien individuals—rules relating to repeal of tax on interest of nonresident alien individuals and foreign corporations received from certain portfolio debt investments—foreign-targeted registered obligations.
IRS announced that it will issue regs to provide that Reg. § 1.871-14(e) regs on foreign targeted registered obligations won’t apply to obligations issued after 2006, except for obligations issued in 2007 and 2008 with stated maturity of no more than 10 years. Obligations issued before 2009 under those regs will be subject to them until maturity. Also, IRS will issue regs retroactive to 1/1/2001 to remove rules in Reg. § 1.1441-1(b)(7) that impose interest under Code Sec. 6601 when no underlying tax liability is shown to be due, and will clarify that penalties computed based on underpayments won’t be imposed when no tax has been imposed. ( Notice 2006-99, 2006-46 IRB )

Code Section 882—Foreign corps.—income connected with U.S. business—interest expense deduction.
IRS corrected final and temporary regs ( TD 9281, 2006-39 IRB 517) relating to determination of interest expense deduction of foreign corps and applies to foreign corps engaged in trade or business within U.S. ( Ann. 2006-82, 2006-44 IRB 821 )

Code Section 1504—Consolidated returns—affiliated groups.
Sub. was found to be member of Parent consolidated group and must be included in group’s consolidated return as long as sub. continues to meet Code Sec. 1504 tests for affiliation, unless and until permission to discontinue consolidation is granted under Reg. § 1.502-75(h)(2) . ( PLR 200643001 )

Code Section 3402—Income tax collected at source—supplemental wage payments.
IRS corrected final regs ( TD 9276, 2006-37 IRB 423) concerning definition of supplemental wages for income tax withholding purposes and income tax requirements for employers making payments of supplemental wages to employees. ( Ann. 2006-83, 2006-44 IRB 822 )

Code Section 6011—Return requirements—promotion of electronic filing—e-file Partnership Program.
IRS solicits applications from potential partners to participate in 2007 IRS Individual e-file Partnership Program. Partnership opportunities are a result of RRA ‘98 , which requires IRS to receive 80% of all returns electronically by 2007. RRA ‘98 authorized Commissioner to promote benefits of and encourage use of e-file products and services through partnerships with various entities that offer low cost tax preparation and electronic filing of individual income tax returns for qualified taxpayers. Applicants that are accepted as partners will have link(s) and description(s) of their products and services posted to www.irs.gov (Partners Page). ( Ann. 2006-87, 2006-44 IRB 822 )

Code Section 6015—Joint returns—innocent spouse relief—jurisdiction—equitable relief—authority to review IRS’s determination.
Pro se taxpayer’s petition for Code Sec. 6015(f) equitable relief was dismissed for lack of jurisdiction: Tax Court had no authority to consider IRS denials of Code Sec. 6015(f) relief where no deficiency had been asserted. (Carol J. Hunter v. Commissioner, (2006) TC Memo 2006-227 , 2006 RIA TC Memo ¶2006-227 )

Code Section 6015—Joint returns—innocent spouse relief—jurisdiction—equitable relief—authority to review IRS’s determination.
Taxpayer’s petition for Code Sec. 6015(f) equitable relief was dismissed for lack of jurisdiction: Tax Court had no authority to consider IRS denials of Code Sec. 6015(f) relief where no deficiency had been asserted. (Debra Anne Banderas v. Commissioner, (2006) TC Memo 2006-228 , 2006 RIA TC Memo ¶2006-228 )

Code Section 6103—Confidentiality and disclosure—disclosure for investigative purposes.
IRS corrected final regs ( TD 9274, 2006-33 IRB 244) relating to disclosure of return information under Code Sec. 6103(k)(6) . ( Ann. 2006-89, 2006-44 IRB 826 )

Code Section 7402—Actions by U.S.—injunctions—irreparable harm.
5-year permanent injunction was entered against flower shop owners enjoining them from failing to timely withhold and pay FICA and FUTA taxes and failing to file accurate and timely Forms 941, 940 and W-2: govt. suffered harm from taxpayers’ conduct and would suffer irreparable harm absent injunction and taxpayers’ employees were harmed. Also, taxpayers were ordered to provide all employees with Forms W-4 and IRS with list of current employees and to comply with IRS summons. (U.S. v. Molen, DC, Eastern Dist. of CA, 98 AFTR 2d ¶2006-5682 )

Judicial proceedings—Bankruptcy court procedure—post-confirmation complaints—motion to modify confirmed plan.
District Court decision affirming bankruptcy court’s denial as untimely trustee’s request for modification of taxpayers’ confirmed Chap. 13 plan to allow non-exempt portion of tax refund to be applied to amounts due under plan was vacated and remanded: although taxpayers made final plan payment prior to hearing on modification motion, trustee filed motion prior to final plan payment which stayed taxpayers’ discharge until motion could be considered on its merits. (Meza v. Truman, CA, Fifth Circuit, 98 AFTR 2d ¶2006-5683 )

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