July 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

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 now that everyone has all of their extended tax returns filed and your desk is all cleared off..............?????

You mean you're not completely caught up, well I'm not either.

I was reviewing my IRS LOCAL NEWS NET email yesterday and was really excited to see that small corporations are going to get a break.  If they have less than $250,000 in gross receipts and less than $250,000 in assets, they no longer have to complete Schedules L, M-1 and M-2 of Form 1120 or 1120S.  I don't know about the rest of you, but I have very few corporations that will fall into both of these guidelines.

If you are reading this on our website, there is still time to register for the "Quickbooks for Accountants" seminar to be held at the Holiday Inn Select in Little Rock on July 25 and 26.                                                      

Some of you may be aware that the board voted at it's May meeting to discontinue the annual banquet and to have the installation of the new officers at the business meeting on the first day of the convention.  The cost for renting the room, paying for the meals and the cost of entertainment has really escalated the past few years.  The board felt that it was just too costly since a relatively small number of members elect to attend the banquet each year.  We will however still have the President's reception and you are all invited.  This is a great time to visit with other members and their spouses in relaxed atmosphere.

Some tax tips I thought you might find interesting.

• In 2002, the health insurance deduction for self employed individuals has increased to 70% and the deduction rises to 100% in 2003.
• Gift appreciated stock (if you still have any) to children who are 14 years of age or older and have them sell the stock.
• Nursing home care is now a deductible itemized medical expense and is subject to the 7.5% of the AGI limitation.

Hope to see you all in Little Rock at the Quickbooks seminar.

Sincerely,

James C. Hodge, President

Arkansas Society of Public Accountants

How to claim bonus first-year depreciation. This year's economic stimulus package allows 30% of the cost basis of property placed in service after September 11, 2001 to be deducted as additional first-year depreciation.  The IRS has now issued rules for claiming the extra depreciation by filing an amended tax return or Form 3115.  Application for Change of Accounting Method.  Firms that do not wish to take the extra first-year depreciation must make an election not to do so.  Details: Revenue Procedure 2002-33.

IRS creates Tax Scams Web page.  The IRS has redesigned and updated a Web page that you can visit to learn about common tax scams - and through which you can report suspected tax wrongdoing.  To get to the new page, click on "Tax Scams/Fraud Alerts" on the home page of the IRS Web site, www.irs.gov.

IRS concedes.  Company gets refund of funds stolen to pay another firm's taxes.   An employee of a company ser up a scam in which he wrote company checks to make estimated tax payments for another corporation that he owned.  Since his corp9ration didn't owe any taxes, he could then get the cash by filing for tax refunds later.  When the first company discovered the scam, it asked for a refund of the taxes paid by the second company. IRS: Because the tax payments had been paid fraudulently, the first company can obtain a refund of the second company's tax payments that remain in the IRS's possession, provided

the refund request is made within the normal three-year time limit for making one.  IRS Field Service Advice 200218005.

IRS loses.  Back employment taxes avoided on contractors ruled to be employees.  The IRS found that a company that provides medical rehabilitation services had treated doctors as contractors when they really were employees, and it imposed back employment taxes.  Court:

For the company.  It had followed a standard industry practice in treating the doctors in that manner...had followed advice of its accountants and lawyers in doing so ...and had properly filed all Form 1099s required for independent contractors.  Thus, it meets the requirements for "safe harbor" protection from the back employment tax bill.  Select Rehab Inc., DC MD Pa., No. 3: CV-01-1278.

Carrying net operating losses back five years....As part of the economic stimulus package recently enacted by Congress, the number of years that an operating loss can be carried back to obtain tax refunds for prior years has been increased to five from two.  The new rule applies to losses arising in 2002 and 2002.  If you filed a 2001 tax return without claiming the maximum carryback to get a tax refund, file an amended return to do so now.

Remember to include the increased cash-saving potential of a loss carryback in planning for 2002.

GREETINGS FROM NSA

Did you know NSA is the leading advocate for independent practitioners and has been a major force for protecting practitioners for more than 50 years?  NSA's many achievements  include:

• The EA Credential - NSA fought to allow accountants and tax preparers to sit for the exam.  If you're an EA, you can thank NSA!
• PTIN - NSA led the initiative to have preparers' social security numbers removed from tax returns, protecting you from identity theft and other misuses of preparer information.
• E-filing - NSA worked to eliminate the e-filing paperwork nightmare in advocating the use of electronic PINs.  I used this feature this taxseason, and it was great!
• IRS Mission - NSA persuaded Congress to change the IRS mission to one of taxpayer service.
• Offer-in-Compromise - NSA was able to persuade Congress to liberalize this program that helps taxpayers eliminate tax debt for pennies on the dollar.
• NSA's acclaimed Peer Review program helps members provide quality financial statements in accordance with standards of the profession.  Successful completion is a measure of excellence.

These are just a few of the reasons to join with NSA in making our profession better.

It's not too late to register for the NSA Convention in Honolulu August 20-23.  This event is being promoted as a family event.  Children are invited to the afternoon/evening Polynesian Cultural Event and will be able to eat breakfast in the hospitality suite, provided a parent has registered them for the convention.  Registration for children costs $10 each for the first two children and $100 for each additional child.

Please contact me at Sruss51670@aol.com if you need a membership application or a convention registration form.

Shelly F. Russell

NSA State Director

IRS gives taxpayers until October 31 to make a choice on new five-year carryback for net operating losses.  The Internal Revenue Service is allowing taxpayers until October 31, 2002, to choose whether or not they want to use the new five-year carryback period for net operating losses (NOLs) that was part of a tax law enacted in March.

The new law made the extended carryback period effective for tax years ending in 2001 or 2002, but some taxpayers who filed returns before the law was passed would not have been able to use this provision.

The Congressional tax-writing committees have advised the Treasury Department that this was not their intent and that they will pursue technical corrections legislation to let taxpayers take maximum advantage of the carryback period.  Today's procedures reflect that clarification.

Taxpayers that incurred an NOL but either elected  to forgo any carrryback period or used a two-year period whey they filed may switch to the five-year period and claim a quick refund until October 31, even though they would not usually have been able to do so.  Those who want their return to remain as they filed it need not do anything.

Taxpayers that neither elected to forgo the carryback period or used a two year period may choose to relinquish the five year period and apply a two-year period.

Revenue Procedure 2002-40 has details on what taxpayers should do in each situation.  It will be on the IRS Web site www.irs.gov soon and will be published in Internal Revenue Bulletin 2002-23, dated June 10, 2002.

The web site also has the new IRS Publication 3991, "Highlights of the Job Creation and Worker Assistance Act of 2002," with details on other tax law changes.  Among these are a deductions for educators' expenses, additional first-year depreciation for new business property placed in service after September 10, 2001, and tax incentives for the New York Liberty Zone.  Pub. 3991 is also available by calling 1-800-829-3676.

Rev. Proc. 2002-33, explaining how to claim the additional depreciation and certain Liberty Zone benefits if no originally claimed on returns filed before June 1, was in Internal Revenue Bulletin 2002-20, dated May20, and is also on the Web site.

IRS NEWS RELEASE: IR-2002-78

DATE POSTED: 6/17/2002

IRS CHANGES POLICY ON WORK PAPER REQUESTS TO FIGHT ABUSIVE TAX AVOIDANCE TRANSACTIONS

WASHINGTON - The Internal Revenue Service today announced a policy change to help the agency shut down abusive tax avoidance transactions.

Under the new policy, the IRS may request tax accrual work papers when it audits returns that claim a benefit from certain tax avoidance transactions that the IRS has identified as abusive.  In all other cases, the IRS will continue to apply its current policy of requesting tax accrual work papers only when unusual circumstances warrant such a request.  Tax accrual work papers normally are prepared by taxpayers and their independent auditors to evaluate the taxpayer's financial condition.

"This limited expansion of when the IRS will request tax accrual work papers is critical to our ongoing effort to curb abusive tax avoidance transactions and to ensure compliance with the tax laws," said IRS Commissioner Charles O. Rossotti.  " It is an important part of our mission of ensuring fairness to all taxpayers."  

The new policy primarily affects returns filed on or after July 1, 2002.  For those returns, whether the request for tax accrual work papers will be routine or merely discretionary, or will be limited to the abusive transaction rather than all the work papers, will depend on several factors, including whether the abusive transaction was disclosed.  For returns filed before July 1, 2002, the IRS may request tax accrual work papers if the taxpayer did not make the required disclosure of the abusive transactions.

Although the Supreme Court confirmed the IRS' right to summon tax accrual work papers in 1984, the agency has not made it a standard examination technique.  The IRS will continue its restraint in requesting tax accrual work papers, but will regularly do so to combat abusive tax avoidance transactions.

"This new policy encourages taxpayers to avoid overly aggressive transactions," IRS Chief Counsel B. John Williams said.  "It brings a new vitality to our self-assessment system and changes the risk calculus to make investing in overly aggressive transactions a very costly proposition.  It is another example of the IRS using existing tools for effective tax administration."

More information on the policy change is in Announcement 2002-63, which will be available soon on the IRS Web site at www.irs.gov.  It will also be published in Internal Revenue Bulletin 2002-27, dated July 8, 2002.

High Court Backs IRS on Income From Tips

The Supreme Court ruled yesterday ( I received this on June 28, 2002) that the IRS can use broad estimates of tip income for waiters and waitresses in calculating the payroll taxes owed by the restaurants that employ them.

The 6 to 3 decision was an important win for the IRS, which has been struggling with the issue of tip income for many years.  And while the case before he high court involved a restaurant, the principle would be applicable to other industries where tipping is common.

"The court's important decision upholds our ability to make sure all Americans pay a fair share of taxes," IRS Commissioner Charles O. Rossotti said in a statement.  "The IRS plans to continue working cooperatively with the restaurant industry and other industries where tips are common.  Our goal is to create a fair, accurate system for reporting tip income while minimizing burden on taxpayers and business."  In 1999, employees across the country reported $14.3 billion in tips, and although the IRS suspects that is low, it does not have an estimate of how much additional tax it might be able to collect as a result of yesterday's ruling.

But restaurant industry officials worry about the ruling's impact on businesses.

"Seven out of 10 restaurants are small businesses, many of which operate with slim margins.  Quite frankly, this decision could mean the difference between a restaurant staying in business or closing its doors," said Peter Kilgore, general counsel and senior vice president of operations for the National Restaurant Association in Washington.

He said there are about 200,000 restaurants nationwide with employees who receive tips.

But George Cowperthwaite, a tax partner at the accounting firm BDO Seidman, said the ruling is "probably not going to be a back breaker or a real significant item" for independent restaurants, though it "could have an impact"

on big chains.  In any case, he said, restaurants "are going to have to be very careful" when they file tip reports with the IRS.

Bob Larive, president of Fior d'Italia, the San Francisco restaurant involved in yesterday's ruling, said: "We are not pleased with the Supreme Court decision....We hoped a decision in our favor would force the IRS to do their job the right way and not resort to threats and guesses to coerce taxes out of restaurants and employees, but now we will probably have to go to Congress for clarification of their original intent and for relief from the IRS's draconian methods"

The case involved an extra $23,000 for unpaid Social Security, Medicare and unemployment taxes assessed against Fior d'Italia, a 116-year-old establishment.

The assessment arose when the IRS discovered that the restaurant's employees reported total tip income in 1991 and 1992 of just over $468,000, while credit card slips at the restaurant showed tips totaling just over $702,000.  Using the credit card slips, the IRS calculated that the average tip was about 14% and applied that to the restaurant's revenue to arrive at a total of about $300,000 in unreported tips   and the $23,000 additional payroll taxes owed.

Both workers and employers are liable for payroll taxes, but the workers' payments of their own share were not at issue in the case.

Fior d'Italia paid part of the added tax and then sued for a refund.  A federal district court and the 9th Circuit Court of Appeals sided with the restaurant.

Fior d'Italia argued, and the 9th circuit court agreed that using an aggregate approach to calculating tip income is unreasonable and thus contrary to law.  The restaurant argued that cash customers usually leave a smaller tips than credit card payers; that some "stiff" the waiter, leaving no tip at all; and that some leave a high tip but then ask for some cash back, leaving the waiter with a lower net.

Parsonage Exclusion: President signs bill clarifying clergy housing allowance exclusion.

President Bush May 20 signed into law legislation (H.R. 4156) clarifying that the clergy housing allowance tax exclusion is limited to the fair rental value of the property.

Bush signed the bill, approved by the Senate May 2 and by the House April 16 (86 DTR G-9, 5/3/02) during a private ceremony at the White House.

Proponents of the legislation said it was necessary to confirm established IRS policy that has lacked the force of law.  A taxpayer challenged IRS's position in federal court and the court ruled that it was not clear that Congress meant to impose the limit.

In Warren v. Commissioner, the Tax Court ruled that the amount of a minister's exclusion for parsonage allowance was limited to the amount used to provide a home, not the fair market rental value of the home (96 DTR K-25, 5/16/00.)  That decision then was appealed to the Ninth Circuit Court of Appeals, which March 5 directed parties to submit briefs on whether the court should address the constitutionally of the Internal Revenue code Section 107 parsonage exclusion (44 DTR K-23, 316102.)

Sen. Charles Grassley (R-Iowa), ranking member of the Senate Finance Committee and a co-sponsor of the companion bill (S. 2200), May 20 praised Bush's quick action in signing the measure into law.

"Without this bill, congregations nationwide would have suffered needlessly," said Grassley, who sponsored the bill along with Finance Committee Chairman Max Baucus (D. Mont.)  "Ministers, priests, and rabbis work hard for low pay.  They depend on their church or synagogue to help with their housing costs.  This is especially important in rural areas, where very small congregations have trouble attracting clergy members.  If Congress and the president had failed to clarify the parsonage housing tax allowance, churches and synagogues could have taken a huge tax hit.  It's reasonable for the tax code to offer modest tax breaks to non-profit organizations like churches and synagogues.

ASPA WILL BE HAVING A 4 HOUR SEMINAR FROM THE INTERNAL REVENUE ON THE FIRST DAY OF OUR ANNUAL CONVENTION IN SEPTEMBER.  THEY HAVE REQUESTED THAT IF WE HAVE ANY PARTICULAR SUBJECTS THAT WE WOULD LIKE DISCUSSED TO PLEASE MAKE THEM AWARE OF IT AND THEY WOULD TRY AND INCLUDE IT IN THEIR PROGRAM.  SO IT ANY OF YOU HAVE SUGGESTIONS OR REQUESTS, PLEASE CONTACT ME RIGHT AWAY SO THAT I CAN CONVEY THESE SUGGESTIONS OR REQUESTS TO THE IRS AS SOON AS POSSIBLE.   THANKS, LAVERNE.     

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