August 2002

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 725 NEWPORT, AR 72112-0725 llonga@ipa.net

The Arkansas Public Accountant

CLICK HERE TO VISIT THE OFFICIAL ASPA ONLINE SHOPPING MALL!

OFFICERS & GOVERNORS 2001 - 2002

OFFICERS

BOARD OF GOVERNORS

District I District II District III District IV District V District VI

Suzanne Baltz Donna Gowan Lonnie Taylor George Simpson Carl Dalrymple Jr Ronny K. Woods

Pocahontas Searcy West Memphis Little Rock Prescott Nashville

FROM THE PRESIDENT’S PEN

Dear Members:

Well I hope everyone has been able to get all their extensions out, or at least get the second request in the mail.

For those of you who did not attend the Quickbooks for Accountants seminar, you missed a good meeting.  Phil Gomez does a fantastic job of demonstrating how to use this program.  You can keep some relatively complex records with this program, and apparently more and more of our clients seem determined to use it.  We could all use a basic understanding of this program, even you Carl.  I hope Brad has filled you in by now.

Our next seminar will be at the convention on September 25, 26 and 27, 2002 at the Holiday Inn Select in Little Rock.  The first morning will a  short education session with the Internal Revenue Service.  The afternoon session will be ASPA's annual business meeting.  Please make every effort to attend this meeting since we will be installing the newly elected officers & governors at the close of this meeting instead of having a banquet this year.

The next two days will be taken up by the Gear Up Business Entities seminar.  We will still have the "President's Reception."  It will be on Thursday, the 26th of September, time and place to be announced later.  This will be a great opportunity to just visit with other members and guests, meet the newly installed officers who will be guiding our great organization in the coming year.

I hope to see you all in Little Rock at the annual convention.

Sincerely,

James C. Hodge, President

Arkansas Society of Public Accountants

Tax Information From The IRS

August 2002

Provided by SB/SE Taxpayer Education and Communication

Little Rock, AR

IRS OFFERS FASTER RESOLUTION OF TAX DISPUTES

Starting this month, small business and self-employed taxpayers can resolve tax disputes through fast-track mediation offered by the Internal Revenue Service. Disputes will be resolved through the new expedited process within 40 days compared to several months through the regular appeal process.

Either the taxpayer or the IRS Small Business/Self-Employed Division can propose mediation of disputed issues related to examinations or collection actions.  If both parties agree to mediation, a specially-trained IRS mediator from the Appeals Division helps resolve the dispute.  The mediator facilitates discussion, and may request additional information, but cannot impose a resolution.  The taxpayer and IRS must agree on any resolution.

"A primary focus in the IRS reorganization has been to develop systems and processes that improve service to the taxpayer. Fast-track mediation is geared to meet taxpayer needs by resolving controversy at the earliest resolution point within the IRS.  Fast-track mediation is what modernization is all about," said Joseph Kehoe, IRS Commissioner for the Small Business/Self-Employed Division.

In June 2000, IRS began testing fast-track mediation primarily in four areas of the country: Hartford, Jacksonville, Houston and Denver. The test has shown that the process can shorten the time it takes to resolve a tax dispute. Feedback provided by taxpayers and their representatives indicated an overall satisfaction rate of  4.2 on a scale of 5.0.

"We are pleased that the Fast-Track Mediation Program is being implemented nationwide. Our expectation is that this new service will meet the needs of our customers and promote quicker resolution of disputes," said David B. Robison, IRS Chief of Appeals.

The taxpayer does not give up any rights and can withdraw from mediation at any time.  Issues not resolved during the mediation process can follow the normal IRS appeal process. Certain issues, including Service Center appeals, or those issues with no legal precedent, cannot be addressed in fast-track mediation.

 For additional information on fast-track mediation, visit the IRS Web site at www.irs.gov and click on "Businesses" on the left side.  From the Businesses page, select "Small Business/Self-Employed" on the left. From the Small Business/Self-Employed page, scroll down and select  "Fast-Track Mediation."   

ENHANCED SCHEDULE K-1 COMPLIANCE EFFORT IN EFFECT

The Internal Revenue Service has launched an enhanced compliance effort to encourage taxpayers to properly report partnership, S corporation or trust income or losses on their individual tax returns. Some taxpayers may soon receive notices requesting an explanation for a discrepancy.

The IRS earlier this year began matching information reported on Schedule K-1 with income or losses reported on Form 1040 and other schedules.  The IRS will send notices to taxpayers when there is a mismatch in information provided on tax year 2000 returns. In many cases, the taxpayer or tax professional can resolve the issue with a letter or phone call.

"One of the most powerful tools that we use to ensure compliance is matching information received from employers, financial institutions and other businesses with information reported by taxpayers," said Charles O. Rossotti, IRS commissioner. "Third parties report approximately 80 percent of the personal income received by taxpayers. An important compliance strategy is to use this data as effectively as possible."

Partnerships, S corporations and trusts are not taxable entities. Taxes on their net profits or losses are levied, in general, directly on partners, shareholders or beneficiaries. These flow-through entities must file information returns with the IRS and also must provide to members or shareholders a Schedule K-1, which details an individual's share of profits, losses, deductions or credits.

The IRS processed more than 18 million Schedule K-1 forms for tax year 2000, recording $1.2 trillion in income to partners, stockholders and beneficiaries.  A computer program matches Schedule K-1 information. To date, some 65,000 notices have been issued in which the computer found a mismatch between the information return and the individual's tax return.

"The IRS is committed to refining the process. We will continue to work with the practitioner community to provide on-going status reports and to solicit feedback for program enhancements," said Joe Kehoe, commissioner of the Small Business and Self-Employed Division.

In an effort to perfect the matching program, IRS examiners are manually screening returns to ensure consideration of issues such as passive loss limitations and income or losses reported on Schedule E. A notice is generated when the examiners are unable to determine the cause of the discrepancy.

The Schedule K-1 forms are among the more than 1.4 billion information returns that the IRS processes. The Schedule K-1 matching program is more complex than the matching program for Form W-2 and Form 1099 documents because a K-1 lists multiple sources of income such as interest, dividends, capital gains and losses. The K-1 information is matched along with other information documents to ensure that all types of income are documented.

IRS FURTHER SIMPLIFIES DISTRIBUTION RULES FOR RETIREMENT PLANS

The Internal Revenue Service announced that simplified rules for required retirement plan distributions, incorporating many suggestions made after the IRS proposed these rules in January 2001, will take effect next year.

"These rules won praise last year for making it easier for retirees to take funds from their retirement plans," said IRS Commissioner Charles O. Rossotti.  "The comments we received helped us to simplify the rules even more.  This shows how people can benefit when stakeholders work with us to improve tax administration."

A section of the regulations dealing with annuity payments has been substantially changed and has been issued as a temporary regulation, giving taxpayers a chance to offer additional feedback.

The final regulations also include the new life expectancy tables called for in the Economic Growth and Tax Relief Reconciliation Act of 2001.  Taking current longevity into account, these tables provide for distributions to occur over a longer period than previous tables.

The latest guidance generally keeps last year's simplifications to the minimum distribution rules and adds some new elements, including:

• Advancing the deadline for determining a designated beneficiary from Dec. 31 to Sept. 30 of the year after a plan participant's year of death, making it easier to determine the initial distribution that must be made by the end of that year.
• Clarifying rules related to separate accounts with different beneficiaries.
• Simplifying the calculation of required minimum distributions (RMDs) by eliminating certain variables.
• Requiring IRA trustees to report the RMD amount to IRA owners, or to calculate it for the owners on request, but not report the RMD amount to the IRS.  The first report will be due January 31, 2003, alerting IRA owners to the distribution they must take for 2003.  Starting in 2004, trustees will identify to the IRS each IRA for which a lifetime minimum distribution is required for the year.  At this time, the IRS will not require these reports for beneficiaries' IRAs.

For 2002, taxpayers have the option of using the new rules, the 2001 proposal, or the original 1987 proposed regulations.

The final and temporary regulations on required distributions from retirement plans will be published in the Federal Register on April 17.  The temporary regulations related to annuity payments will also be available on the IRS Web site at ww.irs.gov, and taxpayers may submit comments on these regulations through that site.

 Notice 2002-27 contains the RMD reporting requirements for IRAs.  It will be available soon on the IRS Web site and will be published in Internal Revenue Bulletin 2002-18, dated May 6, 2002.

IRS Reduces Paperwork Burden on Small Businesses

Tax documentation constitutes the overwhelming majority of paperwork requirements for most small businesses.  Beginning with tax year 2002, companies with less than $250,000 in gross receipts and less than $250,000 in assets will no longer be required to complete Schedules L, M-1 and M-2 of Form 1120; Parts III and IV of From 1120-A; and Schedules L and M-1 of Form 1120S.

What are these forms?

• Schedule L (Part III of Form 1120-A) provides the beginning and end-of-year balance sheets based on the corporation's books.
• Schedule M-1 (Part IV of Form 1120-A) provides reconciliation of income or loss in accounting records with income or loss on the tax return.
• Schedule M-2 reflects unappropriated retained earnings.

For larger companies, these schedules are necessary tools in the examination of corporate returns.  For most small businesses, however, these schedules have a limited application, and would likely not be prepared if they were not required for tax reporting purposes.  The exemption for small businesses will allow them to use record keeping based on their checkbook or cash receipts and disbursements journal instead of additional accounting methods solely for tax reporting.

According to IRS Commissioner Charles O. Rossotti, "These changes could save 2.6 million small businesses an estimated 61 million staff hours.  This is staff time now spent preparing these forms.  These changes will mean a significant financial savings for small businesses.  This is part of an on-going effort by he IRS to ease the burden on America's taxpayers wherever possible."

For more information, visit the IRS web site at www.irs.gov.

IRS SELECTS ISSUES FOR INDUSTRY ISSUE RESOLUTION PROGRAM

The Internal Revenue Service and the Treasury Department today announced the selection of issues for the 2002 Industry Issue Resolution (IIR) Program.

The IIR program provides guidance on frequently disputed or burdensome tax issues.  Benefits of the program include reduced costs and burden, and eliminating uncertainty regarding proper tax treatment, for both taxpayers and IRS.  The program was successfully piloted in 2001 and made permanent this year.

"The response to the IIR program has been excellent.  We thank the business community for the issues they have identified and look forward to their increased participation in the program in the future," said IRS Commissioner Charles O. Rossotti.

The issues selected for the IIR program this year came from 38 issues submitted to IRS from businesses, tax practitioners and associations.  Issues were selected based on the criteria set forth in Notice 2002-20.  This year's selected issues are:

• depreciation of cable television systems under section 168
• tax treatment of pre-production costs of creative property
• inventory valuation method for cores in the auto remanufacturers business
• recovery period for depreciation of gasoline pump canopies
• substantiation of the amount of expenses for meals furnished by child care providers
• definition of highway tractors subject to the heavy truck tax under section 4051
• deduction and capitalization of costs incurred by utilities for assets used for power generation

Additionally, one issue submitted to IRS, the timing of HMO provider holdback payment recognition, is still being considered for the IIR program.

A resolution team of IRS, Chief Counsel and Treasury personnel will be assembled for each issue.  The teams will gather and analyze the relevant facts from industry groups and taxpayers for each issue and develop new guidance.  

Notice 2002-20 provides more information on the IIR program and is available on the IRS Web site at www.irs.gov.

The issues selected are included in the IRS 2002 Priority Guidance Plan, which will also be available on the IRS web site.

HOT!   HOT!   HOT!

HOME OWNERS WHO REFINANCE FOR THE SECOND TIME MAY GET A BONUS TAX DEDUCTION!

HOW? LOAN ORIGINATION FEES, OR "POINTS," PAID WHEN REFINANCING A HOME LOAN MUST BE DEDUCTED OVER THE LIFE OF THE LOAN.  HOWEVER, IF YOU HAVE UNDEDUCTED POINTS REMAINING FROM PRIOR REFINANCING, YOU CAN DEDUCT THEM WHEN YOU REFINANCE AGAIN TO RETIRE THAT LOAN.

Return of the "audits from hell."

We all can relate to that. Remember those TCMP audits.  Some of you young tax preparers may not, but take it from the older preparers, they were bad news.

We also remember when Rossotti was confirmed in 1997 as Clinton's second commissioner of the IRS and he promised a new agency that would emphasize service and uphold taxpayer rights. And on and on he went about tax reform and a new IRS.

Bill Stevenson, chairman of the NSA Federal Taxation Committee argues that it is unfair to subject taxpayers to audits without probable cause that their returns are inaccurate.  Futhermore, he worries about overzealous IRS auditors in the field who are desperate to find something on every taxpayer.

He also stated that taxpayers tagged by "research" audits likely will have to dip into their own pockets to hire professional help to face the IRS.

Stevenson is convinced the "research" audits will not give the IRS the data it wants about tax cheats.  He notes the IRS already has reduced the potential for cheating by matching tax returns through computers with W2s from employers, 1099s from customers of independent contractors and data from banks for the mortgage interest deduction.  Other deductions were reduced in the Tax Reform Act of 1986.

The self-employed will be the biggest targets, but they will do little to identify those who underreport cash income.  He says he thinks the data will be flawed because the "Participants" in the study will be intimidated by the IRS, and as with the TCMP the agency probably will not include the results of taxpayer appeals in its final results.

$500,000 of business deductions allowed without records.

Carroll Furnish operated a business that was picked for audit by the IRS.  During the audit, his accountant died - and the accountant's wife threw out all of the business's records.  The IRS then disallowed $500,000 of the deductions for lack of documentation.

TAX Court: Because the records were lost due to a cause beyond his control, Mr. Furnish could support his deductions with secondary evidence.  From this it was clear that he had operated a legitimate business, and the amount of expenses claimed was reasonable in light of its nature. Moreover, Mr. Furnish's testimony at trial appeared "honest, forthright, and credible."  So, 99% of his deductions were allowed.  Carroll W. Furnish, TC Memo 2002-286.

Double payments from customers aren't income.  A company often receives double payments from customers who pay the same amount twice when it appears both on an invoice and a monthly statement.  It gives such customers credit for future purchases, and if these aren't used, follows state law in disposing of the funds.  The company didn't include the double payments in its taxable income, but the IRS said it should.

TAX Court: The company had no "claim of rights" to the double payments and had done nothing to mislead customers into paying them.  So they are not includable in its income until customers use resulting credits to make purchases.  

Smarthealth, Inc., TC Memo 2001-145

Strategy for IRS Closing Agreements: Business and individual taxpayers may have occasion to enter into a "closing agreement" with the IRS.  Essentially, this is a contract that specifies how a particular tax issue will be resolved.  Trap: The IRS is generally reluctant to agree to close every possible tax consequence that may arise in the future.  Accordingly, resolving an issue through a closing agreement today may leave the taxpayer with a more serious tax issue tomorrow.  Strategy: Before accepting the IRS's version of the closing agreement, prepare a revised agreement.  Resolve issues you anticipate may be raised by IRS in the future - ones that might  spring from the issue being settled by the closing agreement.

COME TO OUR ANNUAL CONVENTION

MAKE YOUR PRESENCE COUNT

IT WILL MAKE A DIFFERENCE!

Newsletter | By Laws | Officers & Governors | Membership Types | Event Calendar | Information Links | Contact
Entire Contents Copyright © 2002 Arkansas Society of Public Accountants. All Rights Reserved.
Legal Notice

RETURN TO MAIN SITE