August 2001

The Arkansas Public Accountant is the monthly publication of the Arkansas Society of Public Accountants.  The society is a professional organization composed of Licensed Public Accountants, Enrolled agents and persons holding out to be accountants or tax preparers with their services available to the public.  This organization is dedicated to helping our members give the best possible service to their clients.  We are happy to accept articles and/or advertising that would be of interest to our members and ask that you submit any thing for publication by the 25th of the month to be included in the next month’s publication.  Please send to: LaVERNE LONG, Editor P.O. BOX 758 NEWPORT, AR 72112-0758 llonga@ipa.net

The Arkansas Public Accountant

OFFICERS & GOVERNORS
2000 - 2001

FROM THE PRESIDENT’S PEN

Dear Members:

The "Quickbooks Seminar" held on July 26 & 27 was a big success.  Phil Gomez is an excellent speaker and certainly knows a lot about this program.  I was amazed at how many different things the program will allow you to do, as well as how easy it appears to be to use.  More and more of our clients are using this program, and I'm sure more and more of us will be getting the program to help our clients and to enable us to give better service.  Several of you are already using the program as the main accounting software in your office.

The ASPA year is rapidly coming to a close (August 31), and your membership dues statements will be in the mail very soon.  Take time to consider all the benefits of being a member of ASPA and send your dues in as soon as possible.  WE NEED YOU!

Our next opportunity to get together as a group will be at the Annual Convention October 16-18.  Along with the convention we will be offering the Gear Up Business Entities Seminar which is usually very well attended.  However, the Convention business session and banquet always have sparse attendance.  Your Board has struggled with this for years, and we would welcome any input from you as to what would make our convention more enticing – Location?  Entertainment?  Program?  Please let us hear from you.

Sometimes we may think that the little details in our lives do not make a difference, but I read an article the other day that made me really stop and think.  If 99.9% is good enough, then 2,000,000 documents will be lost by the Internal Revenue Service this year; 403,260 tax returns will be returned incorrectly this year; 22,000 checks will be deducted from the wrong bank accounts in the next 60 minutes; 12 babies will be given to the wrong parents each day; 291 pacemaker operations will be botched this year; 107 incorrect medical procedures will be performed today; and 20,000 incorrect prescriptions will be written this year.  So the next time you undertake anything in your work or personal lives, remember the little details do make a difference!

Sincerely,

Shelly Russell
President - ASPA

Tax Information from IRS

Provided by SB/SE Taxpayer Education and Communication
Nashville, TN

"Day In Court" May Be Costly For Frivolous Tax Case Filers

WASHINGTON - Getting their "day in court" has been an expensive proposition for some people who have recently faced stiff penalties from the Tax Court, Appeals Courts and District Courts for pursuing frivolous tax cases. The Internal Revenue Service warns that the courts are sending a clear message to others who may be considering such positions - they do so at their own risk.

"Congress was concerned about taxpayers misusing the courts and obstructing the appeal rights of others when it enacted tougher sanctions in the 1980s," said IRS Commissioner Charles O. Rossotti. "The courts are for resolving unclear issues of law, not a forum for repeating arguments that the courts have already rejected. Taxpayers intending to use the court as a soapbox should consider the potential cost."

The law allows the courts to impose a penalty of up to $25,000 when they come to any of three conclusions:

• a taxpayer instituted a proceeding primarily for delay,                                                       
• a position is frivolous or groundless, or
• a taxpayer unreasonably failed to pursue administrative remedies.

The courts' determination to use their sanctions authority to discourage the filing of frivolous tax suits is evident in the case discussions that follow, which are taken from the public court records from the court proceedings: The Tax Court penalized two California residents in separate cases for trying to avoid taxes through the use of trusts. On June 21, the Court said that Charles and Francesca Sigerseth of El Macero met all three of the above criteria and fined them $15,000. The Court pointed out that the case was "a waste of limited judicial and administrative resources that could have been devoted to resolving bona fide claims of other taxpayers." (Sigerseth v. Commissioner)

On June 7, the Court found that Andy Hromiko of Roseville, Calif., not his trust, was the true earner of income. It noted that he had made "shopworn arguments characteristic of the tax-protester rhetoric that has been universally rejected by this and other courts," and fined him $12,500. (Matrixinfosys Trust v. Commissioner)

Last Dec. 4, the Tax Court imposed a $25,000 penalty against Hae-Rong and Lucy Ni, of San Jose, Calif. Contesting the IRS rejection of various deductions on their tax returns, the Nis were not responsive to orders for supporting records. Instead, they challenged the authority of the IRS to audit their returns and of the government to impose taxes. The Court concluded that the Nis had chosen "to pursue a strategy of noncooperation and delay, undertaken behind a smokescreen of frivolous tax-protester arguments." The Court also imposed sanctions of more than $10,600 against the Nis' attorney, Crystal Sluyter, for arguing frivolous positions in bad faith. (The Nis Family Trust v. Commissioner)

While at the Federal Prison Camp in Duluth, Minn., for tax evasion, Darlow Madge contended that he wasn't a taxpayer, that his income from selling hospital supplies wasn't taxable, and that only foreign income is taxable. On Dec. 7, the Tax Court imposed the maximum $25,000 fine after having warned Madge that continuing with his frivolous arguments would likely result in a penalty. (Madge v. Commissioner)    Regina Davis of Cincinnati, Ohio received a $4,000 penalty from the Tax Court on April 10 for frivolous and groundless arguments, including that the IRS is not an agency of the united States and that it is a function of the Puerto Rican Bureau of Alcohol, Tobacco and Firearms. Davis persisted in her contentions even after the Court warned her that she could be fined for doing so. (Davis v. Commissioner)

The Tax Court is not the only place for arguing tax cases. Other courts are also experiencing frivolous cases and imposing sanctions.

On Feb. 2, the Tenth Circuit Court of Appeals imposed an $8,000 penalty on Larry and Sandee Gass of Capulin, Col., for appealing district court decisions which rejected their contentions that taxes on income from real property are unconstitutional. The Appeals Court had earlier fined them $2,000 for using the same arguments in another case. (Gass v. U.S.)

Michele Brashier and Richard Hembree, of Tulsa, Okla., each drew $1,000 penalties on April 13 for arguing that requiring them to file sworn income tax returns violated their Fifth Amendment right against self-incrimination. The Tenth Circuit Court of Appeals noted that sanctions were warranted because the Tax Court had warned them that their argument -- rejected consistently for more than seventy years -- was frivolous. (Brashier v. Commissioner)

After losing the argument that his wages were not income and receiving a $500 penalty, Garnell McAfee, Jr., of Flowery Branch, GA, returned to U.S. District Court in Northern Georgia to try to stop the government from collecting the penalty by garnishing his wages. On April 4, the judge stated that "bringing this ill-considered, nonsensical litigation before this court for yet a second time is nothing but contumacious foolishness which wastes the time and energy of the court system." He then imposed a $1,000 penalty, added 10 percent to the original penalty, and ordered McAfee to pay the U.S. Marshal's costs of serving the writ of garnishment on his employer. (McAfee v. U.S.)

Did You Know . . . .

• Question:  Why are estimated tax installments not due at regular quarterly intervals?
• Answer:  Information letter INFO 2000-0091 provides the following explanation:

. . . estimated tax provisions were enacted in 1943. At that time, individual income tax returns were due on March 15. The four estimated tax installments were originally set at quarterly intervals beginning with the March 15 return due date: the installments were due on March 15, June 15, September 15, and December 15. In 1944, the Congress changed the due date for the fourth installment to January 15 of the following year. In 1954, the Congress changed the individual tax return due date to April 15 and the due date for the first installment of estimated tax to April 15. The second and third installments still retain their original due dates.

Information letters can be accessed on the IRS web site at http://www.irs.gov/prod/news/efoia/cc-docs.html

e-file for Business

Why Not You?     Why Not Now?

Okay, we all know that the IRS e-file program for individuals continues to be a very successful and proven program.  We can't imagine life without it.    But have you thought about e-file for Business?  The e-file for Business products offer the same valuable features and benefits as the individual e-file program - saves time & money, creates less paperwork; and is fast, and accurate.    The IRS has been working hard to build acceptance, create awareness, and increase usage of e-file for business programs throughout the marketplace.

Did you know that there are several business e-filing programs available to you right now?   For instance, you could be filing your own, or your clients' Employment Tax Returns (Forms 940 & 941) electronically or by using either the 941 On-Line or TeleFile filing options.  You can also file certain Information Returns electronically using the FIRE system.  Have you heard of FIRE (File Information Returns Electronically)?    Next time, try using FIRE, the "Hottest Way to File" Forms 1042-S, 1098, 1099, 5498, 8027, and W-2G).  Partnership Returns (Form 1065) can also be filed electronically.  This program allows you to electronically file the U.S. Partnership Return of Income electronically and there is less paperwork with paperless K-1s.  

You've most likely heard about the legislative mandate that requires some partnerships to file their Form 1065 electronically.  Specifically, Section 1224 of the Taxpayer Relief Act of 1997 required partnerships with more than 100 partners to file their return electronically for taxable years ending on or after December 31, 2000.   Keep in mind that you can also voluntarily choose to file electronically even though you or your clients are not required to do so by the mandate.  In fact, 83 percent of the partnership returns filed to date have come from partnerships that were not affected by the mandate.

 The IRS is in the process of building a Corporate Tax Return (Forms 1120/1120S) e-file program.  Full implementation is planned for January 2003.   Upon completion, this program will have file and pay capability, and will have the same error codes as e-file for individuals and other e-file for business products .And last, but not least, let's not forget about the Electronic Federal Tax Payment System, EFTPS, The Easiest Way to Pay Your Federal Taxes!  Now you can initiate your Federal Tax payments        electronically instead of using paper coupons.  EFTPS is available to all individual and business taxpayers.  EFTPS offers you the convenience of making your Federal tax payment directly by phone or personal computer (PC), or through your financial institution. You can initiate your tax payment 24 hours a day, seven days a week. As an added convenience, EFTPS-Direct allows you to "store" your tax payment and instruction up to 30 days in advance of a tax due date. Your payment will be made on the tax due date or the date you designate. No special equipment is required to use EFTPS, and if you wish to use a PC, free Windows-based software is available. You will find that EFTPS is easy to use, convenient, accurate, fast and economical.

Sounds interesting, but you still have questions?   For more information on e-file for Business products, visit the IRS Web site @  www.irs.gov and click on "Electronic Services"  - click once more on the e-file for Business logo, which will take you to specific e-file for Business Fact Sheets as well as helpful Frequently Asked Questions (FAQs).   Be sure to also visit the listing of Approved IRS e-file for Business Providers located @ http://www.irs.gov/elec_svs/abp.html.    You may also order forms and publications by calling 1-800-829-3676.

Mutual funds must report their performance on an after-tax basis under rules just adopted by the SEC.

A trap of mutual funds investing us that funds incur taxable gains on their trading, which are distributed to investors.  Funds with similar pretax returns may have very different returns after taxes.

The new rules require funds to repot after-tax returns over one, five, and 10 years on a standardized basis, so comparing funds will likely be easy.  This will make it much easier for investors to see which funds are the most tax efficient.

After tax returns must be included in all fund advertising no later than October 1.  The new SEC rules are at www.sec.gov/rules/final/33-791.htm.

TAX CUTS for individual taxpayers NOW and TOMORROW

The new tax law, The Economic Growth & Tax Relief Reconciliation Act of 2001, represents the largest tax cut in 20 years.  It brings long-term tax relief to individual taxpayers in all brackets.

Taxpayers who haven't filed returns by the time the checks are sent will get the benefit of the new 10% bracket when they file their return.

Rebate checks are being mailed in the order dictated by the last two digits of a taxpayer's Social Security number, the lowest numbers first.  All eligible taxpayers should be receiving their checks by the week of September 24, 2001.

OTHER RATE REDUCTIONS

Tax rates for the four top income tax brackets– 39.6%, 36%, 31% and 28%– are reduced by 0.5% effective July 1, 2001.

Additional rate reductions are introduced each year until 2006, when, for example, the top rate will have fallen from 39.6% to 35%.

Withholding: New wage withholding tables effective July 1, 2001, incorporate the reduced rates. Wage earners can look forward to higher take home pay.

To take advantage of rate reductions....

• Defer receipt of income to future years when it will be taxed at lower rates.  Ways to defer income...
• Enter into an agreement with employers to delay receipt of compensation, including bonuses.
• Replace investments that mature this year with ones that mature in early 2002.
• Postpone year-end billing if you own a cash basis business.  This will push  receipts to the following year.
• Accelerate  deductions into the current year, when they will be worth more.

Caution: High-income taxpayers may not see the full rate cut they expected.  That's because as the regular income tax drops, their alternative minimum tax (AMT) rises,

IMPACT ON INVESTING

The new law did not change the tax rates on capital gains but rates on ordinary income were cut.  This means the gap between the tax on ordinary income and the tax on capital gains has narrowed.

For example, under the old law, there was an 8% spread between the tax rate on ordinary income and the rate on long-term capital gains, for taxpayers in the 28% bracket.  The new law narrows this gap for this bracket to just 5% by 2006.

Holding investments long-term to obtain favorable tax rates becomes less important.  Selling for investment results rather than tax results becomes paramount.

Children older than age 13 with only modest investment income – say $6,000 – may wind up paying the same 10% tax rate on ordinary income and long-term capital gains.

MARRIAGE PENALTY RELIEF

For decades married working couples who filed joint returns have paid more income tax than they would have paid had they stayed single.  The new law reduces this well-known marriage penalty.

How?  By increasing the standard deduction and the size of the low 15% bracket for married couples to twice that of singles.

Problems?  Yes!

Relief doesn't start until 2005 and takes four years to become fully effective.  Married couples who itemize deductions rather than take the standard deduction will not benefit fully.  They can only profit from the expansion of the 15% bracket.

Delay the wedding: Singles contemplating marriage may want to consider putting off the wedding date to gain another year of tax savings. NOTE: There are some special circumstances in which marriage may result in a tax break even before the marriage penalty relief starts, such as when one spouse has income and the other has little or no income.

TAX CREDITS INCREASED

CHILD tax credit.  Starting this year, the credit for each eligible child rises to $600 from $500.  The credit continues to grow until it reaches $1.000 by 2010.  NOTE: The child credit phases out as income exceeds $75,000 for singles and $110,000 for married couples filing jointly.

Dependent care credit. Starting in 2002, taxpayers will be able to claim a larger dependent care credit.

The credit increases in two ways.  First, the amount of eligible expenses taken into account in figuring the credit rises to $3,000 for one dependent and $6,000 for two or more dependents ( up from $2,400 and $4,800).  Also, the maximum credit percentage increases to 35% (from 30%).  Result of these changes: The top credit for one dependent in $2002 is $1,050 (up from $720). The credit percentage point is reduced by one percentage point for each $2,000 or AGI or more than $15,000.  Thus, taxpayers with AGI of more than $43,000 are limited to a 20% credit.  But these taxpayers will still have a larger credit because of the increase in eligible expenses.

OUR ANNUAL CONVENTION WILL BE ON OCTOBER 16TH THIS YEAR AND BUSINESS ENTITIES WILL BE ON OCTOBER 17 AND 18.  SOON YOU WILL BE ABLE TO SEE THE REGISTRATION FORM ON OUR WEB PAGE.

I will still do a mailout, but if you are in a hurry to register for this you may do so by printing and mailing the form from the web.

If you have not ever looked at this site, you might consider doing so.  It has some good links and is something we call all be proud of.

I look forward to checking this site and seeing the counter go up and up as all of you begin to become familiar with the site and more important, use it on a regular basis.

That's all for now and, each and every one have a really nice day.

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