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The IRS announced in July that it had identified approximately 100,000 tax return preparers who did not comply with the new rules for preparer tax identification numbers (PTINs) and was sending them letters informing them of the problem (IR-2011-74).


All tax return preparers (including CPAs, attorneys and enrolled agents) were required to apply for and obtain a PTIN—even if they already had one—before preparing any federal tax returns for compensation in 2011. By this summer, approximately 712,000 preparers had obtained new PTINs under the registration program, which launched in September 2010.


The IRS said that it was sending letters to preparers who used outdated PTINs or their Social Security numbers as identifying numbers on returns they prepared this past tax season. The letters explained the PTIN registration requirement and told the preparers how to register for a new PTIN or renew an old PTIN.


The IRS also announced that it is working to detect what it calls “ghost preparers”—that is, preparers who attempt to avoid the new return preparer registration program by not signing returns they prepare. When the IRS identifies taxpayers who appear to have had assistance with their returns but whose returns lack tax return preparer signatures, it will send them a letter informing them how to file a complaint against preparers who fail to sign returns and explaining how to choose legitimate tax preparers.


The IRS is also working to identify tax return preparers who make repeated errors.




The U.S. Court of Appeals for the District of Columbia, sitting en banc, upheld its earlier panel decision, keeping alive an administrative challenge to the IRS’ method of refunding the former long-distance telephone excise tax ( Neiland Cohen v. U.S., docket no. 08- 5088 (D.C. Cir. 7/1/11)). The earlier decision had remanded and partially reversed a district court’s dismissal (599 F.3d 652 (3/11/10), rev’g in part, 539 F. Supp. 2d 281 (D.D.C. 3/25/08); see previous JofA Tax Matters coverage, Oct. 2009, page 73).


Five circuit courts held the 3% excise tax on toll phone charges under IRC §§ 4251 and 4252(b) inapplicable because, beginning in the 1990s, toll calls were no longer charged by distance. The Service then said in Notice 2006-50 it would stop collecting the tax (which phone companies had billed customers and remitted). Taxpayers could claim a one-time-only refund on their 2006 income tax returns for either actual taxes paid from 2003 to 2006 or a safe-harbor amount (for individual taxpayers, between $30 and $60, depending on their number of personal exemptions).


Several lawsuits challenged the refund regime, and three were consolidated from multiple districts into the instant case. It claims the IRS undercompensated taxpayers for an illegally collected tax and represented an abuse of discretion by the Service and was arbitrary and capricious. The District Court for the District of Columbia dismissed the case for failure to exhaust administrative remedies. A split D.C. Circuit panel held the plaintiffs could challenge the refund regime under the Administrative Procedure Act (APA, 5 USC § 500 et seq.), finding that the revenue procedure was a final agency action subject to the APA rather than an internal policy, as the IRS had argued. On rehearing en banc, the court considered only whether it had jurisdiction to hear the case and whether the plaintiffs had stated a claim for which relief could be granted. Deciding both questions in the affirmative, the court remanded the case for consideration of the APA claim.


Two other judges joined Judge Brett Kavanaugh in a dissent saying the plaintiffs should first be required to file administrative refund claims and then tax refund lawsuits before having standing to sue under the APA.




The IRS announced that it is discontinuing the high-low method for substantiating lodging, meal and incidental expenses incurred in traveling away from home (Announcement 2011-42). Last year, the IRS asked for comments on whether the high-low method was still needed, and it received no comments.


Under the high-low substantiation method, if an employer pays a per diem allowance in lieu of reimbursing actual lodging, meal and incidental expenses an employee incurs when traveling away from home, the amount of the expenses that is deemed substantiated (under IRC § 274(d)) for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the rate provided in an annual revenue procedure for the locality of travel for that day or partial day. This method was intended to be a simplified substantiation method to be used in place of the regular per diem substantiation method using the federal per diem rate.


The IRS has annually issued an updated per diem rate for travel to any specified “high-cost locality” or other locality within the continental United States. Under the high-low substantiation method, the high or low rate, as appropriate, applied as if it were the federal per diem rate for the locality of travel.


The IRS said it planned to publish a revenue procedure later this year that will provide general rules and procedures for substantiating travel expenses (omitting the high-low substantiation method). It will then no longer publish annual updates, but it will publish a new revenue procedure only when it modifies the rules and procedures. However, the IRS will continue publishing the special transportation industry per diem rate in an annual notice.


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