Voluntary offshore disclosure program yields $5B

James W. Rahmlow, The Daily Record Newswire

Recent reports on the media indicate that the amount of U.S. monies offshore are in the trillions. The IRS happily announced on June 26 that its various offshore voluntary disclosure programs have yielded actual payments of back taxes, penalties and interest of over $5 billion. The first two programs yielded over 33,000 voluntary disclosures. The third program, started in January 2012, has added an additional 1,500 disclosures.

The purpose of the programs is to return taxpayers to the taxpaying system and insure the required compliance and disclosure. For those on the fence, take note-the typical IRS voluntary disclosure program starts with lower level penalties and compliance and then ratchets up the penalties as time progresses.

Long-term workers deemed employees

Rejecting a taxpayer’s assertion that its employees were transitory and temporary, the Tax Court determined that individuals who lived on the farm where they performed their duties were employees. The S Corporation taxpayer operated a horse farm which engaged the services of two workers who groomed horses and performed other duties in conjunction with the horse farm business. The individuals also lived on the farm where they worked.

The court found that the S Corporation exercised a sufficient level of control over the activities of the workers and were supervised by the owner of the S corporation. The individuals also used equipment provided by the S Corporation. It appears that the fact that the employees actually lived on the farm was of particular concern.

The IRS felt that the living arrangements, coupled with the extent of control over the activities of the individuals did not allow them to be classified as temporary or transitory. They were employees, and the S Corporation should have been filing form 943, Employer’s Annual Federal Tax Return for Agricultural Employees.

Gift tax returns audits

During a recently conducted Government Accountability Office’s review of the Internal Revenue Service’s oversight of income, estate and gift tax returns, the GAO concluded that gift tax returns that included appraisals were twice as likely to be audited as gift tax returns without appraisals. Appraisals are used to establish value on items that might not otherwise have a readily determinable fair market value and must meet certain criteria for IRS approval. Disputes in the amount of the appraisal directly affect the value of the gift being claimed.

While the IRS examinations of gift tax returns that had appraisals did not yield significant differences as compared to estate tax returns and income tax returns with and without appraisals, the increased probability is worthy of note. Nevertheless, the IRS maintains that neither do they target appraisals in select returns for exam by its audit staff, nor do they staff exam teams with experts on appraisal techniques.

Update: Preparer visitation project

As per a review report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS contacted more than 10,000 paid preparers by letter in fiscal 2010 and conducted visits of over 2,400 paid preparers. Similarly, in fiscal 2011, the IRS again sent letters to more than 10,000 paid preparers and visited almost 2,500 paid preparers.
The intent to communicate with preparers was well-disclosed by the IRS before the beginning of the filing seasons. The communications and visits were not intended to measure performance and the review report did focus on performance.

Prospectively, TIGTA recommended that the selection criteria of paid preparers should focus on tax return preparers who made errors. Additionally, the report suggested that the IRS should develop specific performance measurement standards and internal controls that can assess the impact of the communications and visits.

Obtaining individual taxpayer ID numbers becomes more strict

Acknowledging the need to not issue false numbers, the IRS has indicated that for the remainder of 2012, it will only issue individual taxpayer identification numbers(ITINs) where applications include original documentation, such as passports and birth certificates, or certified copies of these documents. Notarized documents are no longer acceptable.

For applications in process, the IRS has indicated that it reserves the right to request additional or clarifying documentation when they feel it is warranted.

Wrongful termination settlement for depression symptoms is not excludable from gross income

In a recent Tax Court ruling, an employee who received $100,000 in a wrongful termination settlement was not allowed to exclude the amount from her gross income as it was not considered compensation for physical injury or sickness. This is often a delicate area where wording is important, but in this case the court ruled that regardless of the wording, the payment was for emotional distress, which is not excludable.

The court examined the meaning of physical injury or sickness within the meaning of Code Sec. 104(a0(2) and concluded that while five of the eight physical symptoms experienced by the taxpayer could be signs of emotional distress, this did not automatically lead to physical injury or distress and thus was not excludable from gross income.

Ominous warning

One of IRS National Taxpayer Advocate Nina Olson’s qualifications is not listed as predictor of the future, but in recent remarks, she indicated that end of year tax legislation (undoubtedly after the presidential election), could delay filings of returns and requests for refunds for the 2013 filing season. Should there be such changes, the IRS would need additional time to update and reprogram its systems for the changes. If the delay happens, it will not be the first time; however, significant legislation could create additional pressure. Currently, there are many provisions of the Internal Revenue Code that are projected to sunset at the end of 2012, leaving 2012 at status quo.


James W. Rahmlow, a certified public accountant, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at jrahmlow@mmb-co.com.


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