Line Item

Spouse Health Care Deduction

• The IRS says that self-employed individuals can deduct the cost of accident and health coverage for an employee/spouse and any of that spouse’s dependents. The IRS also allows the spouse to exclude coverage costs and medical reimbursements from his or her gross income.

The extent and nature of the spouse’s involvement in the employer’s business are critical in determining whether he or she qualifies as an employee. Although part-time work doesn’t negate employee status, the IRS may challenge work by a spouse that has no economic substance or that does not make a significant contribution to the business. (ISP Coordinated Issue Paper, UIL-162.35-02, 3/29/99).  

Taxpayers Can Get Zero Net Interest Rate

• In the past, taxpayers received interest on their tax refunds at a much lower rate than that charged by the IRS on amounts owed to the government. However, IRC section 6621(d), effective October 1, 1998, specifies a net interest rate of zero when overpayments and underpayments overlap. Revenue procedure 99-19 (1999-13 IRB) explains when a taxpayer can use this rule.

Taxpayers affected should file Form 843, Claim for Refund and Request for Abatement, and write “Request for net interest rate of zero under revenue procedure 99-19” on top of the form.  

Small Fish Are Off the Hook

• Most small businesses will no longer have to worry about making their tax payments electronically. The IRS announced that starting on January 1, 2000, only companies paying $200,000 or more in employment and other depository taxes must use the new electronic federal tax payment systems (EFTPS). The IRS will waive penalties through the end of 1999 for smaller companies currently required to use EFTPS if they make timely deposits using paper tax deposit coupons. According to the service, only about 9% of business taxpayers will be required to use EFTPS under this new rule. (IR-1999-27 (3/22/99)).  

Court Says No to Writer’s Deductions

• In anticipation of retirement from full-time employment, a taxpayer began writing a book of fiction about legal brothels in Nevada. During his research, the taxpayer visited numerous brothels where he met with prostitutes. He eventually sold 10,000 copies of the book and received royalties from the sales.

The IRS, however, disallowed the taxpayer’s research-related expenses. It stated that he did not have a profit motive for the deductions and didn’t establish or substantiate that they were ordinary and necessary business expenses.

The Tax Court, however, held that the taxpayer did have a profit motive for his writing, but it denied most of the deductions the taxpayer claimed because of inadequate documentation. With respect to the taxpayer’s cash payments to prostitutes, the court held that the expenses were “so personal in nature as to preclude their deductibility.” ( Commissioner v. Ralph Louis Vitale, Jr., TC Memo 1999-131).

Service Is Willing to Compromise

• The IRS is changing its offers in compromise (OIC) program to make it more accessible to taxpayers. The changes make it easier for taxpayers to qualify for smaller compromise offers. The IRS will revise form 656, the OIC application, and implement new deferred payment procedures to give taxpayers who may have been excluded under the old guidelines more opportunities to submit compromise offers. (IR-1999-30).  

—Michael Lynch, CPA, Esq., professor of tax accounting at Bryant College, Smithfield, Rhode Island.