IRS to Recommend New Tax Preparer Standards
The IRS plans before the end of the year to recommend new standards for tax preparers, Commissioner Doug Shulman announced June 5.
In testimony before the House Ways and Means Oversight Subcommittee and in a news release, Shulman said he would propose to the White House and Treasury Department a comprehensive set of recommendations with the goals of ensuring high ethical standards of conduct for tax preparers and greater taxpayer compliance. The recommendations will focus on “a new model” of regulation for preparers focusing on training and enforcement of proper conduct.
It was not immediately clear how the IRS’ plans would comport with its current regulatory regime of Circular 230 and oversight by its Office of Professional Responsibility (OPR) over CPAs and other licensed preparers. Another set of ethical standards governing AICPA members is the Statements on Standards for Tax Services (SSTSs), which were recently updated and exposed for public comment.
The IRS plans to hold a “dialogue” that will feature public meetings, Shulman said. Enrolled preparers including CPAs will be consulted, along with software vendors, state and federal authorities, consumer groups and taxpayers. Also included will be a group currently outside the strictures of Circular 230 and OPR: unenrolled preparers. The lack of comparable education and training requirements for unenrolled preparers and the relative lack of administrative oversight over them has been raised repeatedly by legislators and others including National Taxpayer Advocate Nina Olson in her annual reports to Congress. Her 2008 report called on Congress to enact a “registration, examination, certification and enforcement program” for unenrolled preparers. California and Oregon already have a licensing or registration program for unenrolled preparers, and Maryland will begin one next year.
During the Ways and Means hearing at which Shulman spoke, subcommittee member Xavier Becerra, D-Calif., said he would reintroduce such legislation. The Taxpayer Bill of Rights Act of 2008, HR 5716, which Becerra sponsored in the 110th Congress last year, would have required currently unregulated preparers to pass an exam and fulfill continuing education requirements. It also would have fined unauthorized preparers $1,000 per return and would have funded low-income taxpayer clinics.
The Treasury Inspector General for Tax Administration (TIGTA) also has targeted unenrolled preparers. Posing as taxpayers in a spot check at a dozen offices of commercial tax preparation chains and those of 16 small, independent preparers last year, TIGTA found that those preparers had only slightly better than a one-third accuracy rate. In another study, the Government Accountability Office concluded last year that Oregon’s regulatory regime could be a suitable model for a federal program; it found that returns completed there by paid preparers were 72% more likely to be correct than in the nation as a whole (the study included enrolled preparers, although they are exempted from registration requirements). However, in California, the accuracy rate was 22% lower than nationally, the GAO said.
While federal proposals to heighten qualifications and oversight of paid preparers are not new, the director of OPR is. Karen Hawkins was appointed to the post March 3, replacing Michael Chesman, who left the post last fall. Hawkins will be among IRS officials taking a lead role in the initiative.
IRS Proposes Easing Cell Phone Rules
Employer-provided cell phones have gone from an exclusive perk to common equipment in the 20 years since Congress made them subject to strict substantiation requirements for business use. Recently, the IRS proposed simplifying those rules and requested comments.
Generally, employees must include in income the fair market value of fringe benefits provided by their employer, to the extent the value of the fringe benefit exceeds the amount the employee paid for the benefit plus the amount specifically excluded from income by the Code. Under IRC § 132(a)(3), employees may exclude the fair market value of cell phone use from income as a “working condition” fringe benefit, but only to the extent that, if the employee had paid for the cell phone use, the payment would be deductible under section 162 (trade or business expenses) or section 167 (depreciable property).
The Code defines cell phones as “listed property” (IRC § 280F(d)(4)). Under section 274(d)(4), employers are not allowed a deduction for listed property expenses unless the employer can adequately substantiate the amount, use and business purpose of the expense. The same substantiation requirements apply to excluding from the employee’s income the value of the phone as a working condition fringe benefit.
In Notice 2009-46 issued June 5, the Service requested comments on three new proposed methods that would simplify the substantiation requirements for employee use of employer-provided cell phones. All would require that employers maintain a written policy prohibiting more than minimal personal phone use. The methods are:
Minimal Personal Use Method. Two proposals under this method would allow an employer to deem as business use all employee use of a cell phone:
- The entire amount of an employee’s use of the employer-provided cell phone would be deemed to be for business purposes if the employee also had his or her own personal cell phone and could provide records showing the personal cell phone was used for personal calls during work hours; or
- An as-yet-unspecified minimal amount of personal use would be disregarded in determining the amount of personal use of an employer-provided phone.
Safe Harbor Method . The employer could treat a cell phone issued to an employee as used 75% for business and 25% for personal uses.
Statistical Sampling Method . The employer could use an approved statistical sampling method to determine the percentage of personal use.
The Service is open to other suggested methods and is requesting comments on the proposed methods, including the following particular issues:
- Provisions in an employer’s written policy governing use of employer-provided cell phones.
- The types of employee records sufficient to establish that the employee maintains and uses his or her own cell phone for the first proposal of the minimal personal use method.
- How to define the amount and type of personal use that should be disregarded under the second minimal personal use method.
- Any other appropriate ratio of business use to personal use for the safe harbor method.
- Methods currently used for determining fair market value of cell phone use.
Comments should be submitted in writing by mail, hand delivery, or e-mail to firstname.lastname@example.org and should refer to Notice 2009-46. The comment deadline is Sept. 4.
In a subsequent statement, IRS Commissioner Doug Shulman said the proposal had been incorrectly interpreted by some to mean the IRS was “cracking down” on employee use of employer-provided cell phones, and he called on Congress to “make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers.” Although some of the proposed substantiation methods could clarify the law’s administration, the law itself is obsolete, confusing and burdensome for both taxpayers and the IRS, he said.
Cell phones were added to listed property by the Omnibus Budget Reconciliation Act of 1989 (PL 101-239). Last year, the House passed a bill that would remove them again, but the bill, the Taxpayer Assistance and Simplification Act of 2008 (HR 5719), expired in the Senate Finance Committee. The legislation was reintroduced in the current Congress (HR 690 and S 144) but was still in committee in mid-June, when the IRS made its proposals.
QIs Welcome IRS Position Shift on Trademarks as § 1031 Property
Qualified intermediaries (QIs) and other facilitators of section 1031 exchanges expect to start seeing exchanges of trademarks and trade names now that the IRS has said they can be like-kind property eligible for the tax-free transaction.
“I think it’s going to open up a lot of opportunities,” said William L. Exeter, president and CEO of Exeter 1031 Exchange Services LLC in San Diego, in an interview. “We’ve done a lot of transactions selling smaller businesses, such as a fast food restaurant or convenience store, where they don’t own real estate and a huge part of the sale price was allocated to goodwill. It would be easy to allocate value to a trademark they’ve built up and developed.”
Under Treas. Reg. § 1.1031(a)-2(c)(2), a business’s goodwill or going-concern value is not eligible for a section 1031 exchange because it is unique to that business and therefore cannot be said to be like that of another business. Historically, the Service has extended the same treatment to intangibles that it considered closely related to goodwill, specifically to trademarks and trade names. It underscored this position in Technical Advice Memo 200602034 and Field Attorney Advice 29974401F.
But the Service said in Chief Counsel Advice Memo 200911006 released in March that an additional factor should be considered: whether an intangible can be described and valued apart from goodwill. That was the distinction made by the Supreme Court in Newark Morning Ledger Co. v. U.S. (507 U.S. 546 (1993)) by which a newspaper was allowed to depreciate its subscriber base. (The IRS also has generally considered goodwill and closely related assets to be nondepreciable).
In the 2007 FAA, the Service said the holding in Newark Morning Ledger did not apply to like-kind exchanges. But the more recent CCA memo reversed that position, saying not only that “intangibles such as trademarks, trade names, mastheads, and customer-based intangibles that can be separately described and valued apart from goodwill qualify as like-kind property under § 1031,” but that “except in rare and unusual situations” they can be so described and valued.
The change has been widely discussed within the QI community. Further guidance from the Service on describing and valuing such assets apart from goodwill would be welcomed by QIs, tax practitioners and business owners, Exeter said.
“Historically, that’s all been taxed, so this could make it easier to buy a business,” he said.
Phone Tax Appeal Denied; Deadline Looms for Refunds
The Court of Appeals for the Federal Circuit (no. 2008-5106) affirmed the Court of Federal Claims’ ruling that RadioShack Corp.’s refund claim for excise tax paid on long-distance telephone service was time-barred by the general three-year limitation period of section 6511(a). The electronics retailer had argued that because the Code provision applies to any tax “in respect of which tax the taxpayer is required to file a return,” the three-year limit didn’t apply, since RadioShack had not been required to file a return with respect to the phone tax. (For prior coverage, see “Tax Matters: Court Hangs Up on Phone Tax Refund,” JofA, Oct. 08, page 94.) RadioShack filed the claim in 2006 for taxes paid on phone service 10 years earlier.
The appellate court, like the trial court, said RadioShack’s overly literal reading of the statute ignored congressional intent and judicial holdings that indicate that for purposes of applying the three-year statute of limitations, it refers rather to any type of tax for which taxpayers generally must file a return. Therefore, taxpayers cannot claim a longer period in which to file a claim for refund by saying they had not been required to file that particular return for that tax year.
RadioShack’s lawsuit was one of several against the tax and was filed outside the administrative regime the IRS eventually set up for limited refunds. The IRS allowed a credit for the tax on services billed between Feb. 28, 2003, and Aug. 1, 2006, with the amount determined either by taxpayer records or estimation methods for individuals and businesses. The claim could be made only on taxpayers’ 2006 returns. Many taxpayers failed to do so. As of August 2007, only about half the $8 billion in tax collected had been refunded. Fewer than 6% of filers of corporate and partnership returns claimed the credit, most often because they deemed the trouble of calculating it outweighed the benefit, TIGTA reported from its survey of practitioners in September 2008. Among preparers who gave that reason, 27% were unaware of the estimation method. Generally, however, the IRS made “strong efforts” to enable taxpayers to claim the credit, TIGTA said.
Now the deadline on amended returns for 2006 is approaching. Generally, it is three years from the date a return was filed (or its due date, if filed earlier), or two years from when taxes were paid, whichever is later. For many calendar-year taxpayers, therefore, the deadline is April 17, 2010. (April 15, 2007, was a Sunday, and the next day was a legal holiday.)
Connecting With “Disconnected Youth”
With Notice 2009-28, 2009-24 IRB, issued May 28, the IRS further defined “disconnected youth,” and unemployed veterans under the American Recovery and Reinvestment Act of 2009 (ARRA), which added both groups to those for which employers may claim the section 51 work opportunity tax credit. The credit, part of the general business credit, is equal to 40% of the wages of such individuals during their first one-year period of employment, up to $6,000 per employee ($12,000 for certain veterans). The statute defines disconnected youth as individuals who are:
- Between ages 16 and 25,
- Who were not regularly employed or attending any secondary, technical or postsecondary school during the six months preceding the hiring date, and
- Who are not readily employable because they lack a sufficient number of basic skills.
The statute did not define an insufficient number of basic skills that prevents a young person from being readily employable. The notice states that individuals meet this qualification if they state in writing that they do not have a certificate of secondary school graduation or a GED or, if they do have one, they received it six months or longer ago and haven’t held a job in the meantime.
The notice also defined a secondary, technical or postsecondary school; what constitutes regular attendance at them; and a previous lack of regular employment. The latter provision is met by individuals who earned less than the equivalent of the federal minimum wage (or state minimum wage, if higher) at 30 hours a week throughout each of the previous two consecutive three-month periods. The federal minimum wage was scheduled to increase on July 24 from $6.55 to $7.25 per hour. Thus, a person who earned the federal minimum wage for 30 hours a week from May 1 to July 31, 2009, would have received $2,575.50 (12 weeks × 30 hours × $6.55) + (1 week × 30 hours × $7.25), and nearly the same amount in the previous three-month period. Individuals may meet the requirement of not having regularly attended a secondary, technical or postsecondary school in the previous six months by stating in writing that they did not attend such a school more than an average of 10 hours per week during the period, not including days when the school was closed for scheduled vacations.
The notice defined the other new targeted group under the ARRA, unemployed veterans, as individuals who either served on active duty in the U.S. military for more than 180 days or were discharged or released from active duty for a service-connected disability. In addition, they must have been discharged or released from active service within the five-year period ending on their hiring date and have received unemployment compensation for at least four weeks during the one-year period before hiring.
For members of either group, employers must obtain certification of eligibility by a designated local agency on or before the day the individual starts work or complete IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, and submit it to the agency within 28 days after the individual starts work. For individuals hired between Jan. 1, 2009, and July 16, 2009, the Service provided transition relief: The requirement will be considered met if the employer submits a completed Form 8850 to the agency by Aug. 17, 2009. The work opportunity tax credit is available for members of these two groups hired in 2009 or 2010.