March 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 Ronnie Woods

Pocahontas Searcy West Memphis Little Rock Prescott Nashville

SUBJ: 2002 Economic Stimulus Act

To: Clients and Friends of Dover Dixon Horne PLLC

From:  John Peace and Mike Parker

     The recent economic stimulus legislation makes a major change in the depreciation provisions of the tax law. The "Job Creation and Worker Assistance Act of 2002," which was signed into law on March 9, 2002, allows an additional first-year depreciation deduction—for both regular tax and alternative minimum tax purposes--equal to 30% of the adjusted basis of qualified property for the taxable year in which the property is placed in service.

     The basis of the property and the depreciation allowances in the year of purchase and later years must be adjusted to reflect the 30% bonus depreciation--the adjusted basis of the qualified property is reduced by the 30% deduction before computing the otherwise allowable depreciation for the first year and later years.

     A taxpayer may elect out of the 30% bonus depreciation for any class of property for any taxable year.

The following examples show how the provision works.

• Example 1. Assume that on March 1, 2002, a taxpayer buys and places in service office furniture that costs $100,000. Without the 30% first-year bonus depreciation, the maximum depreciation allowance generally would be 14.29% of $100,000, or $14,290. (Annual depreciation percentages are prescribed by the IRS based on rules spelled out in the tax code. Office furniture is seven-year class property subject to the 200% declining balance method, switching to the straight line method in the year that maximizes the depreciation allowance, and the half-year convention.)
  In contrast, under the first-year bonus depreciation rule, the taxpayer first takes 30% of $100,000, or $30,000. The $30,000 first-year bonus depreciation is then subtracted from the $100,000 original cost basis, leaving an adjusted basis of $70,000. The general first-year depreciation rate of 14.29% is then applied to the $70,000, yielding a further deduction of $10,003. The result is a total first-year depreciation deduction of $40,003 ($30,000 plus $10,003), or $25,713 more than under the general rule.
• Example 2. Assume the same facts as above, except that the taxpayer is also eligible for the first-year "expensing" allowance under tax code section 179, which for 2002 is $24,000. By using both the first-year expensing allowance and the 30% first-year bonus depreciation, the taxpayer can deduct even more. The amount is computed as follows. The first element is the first-year expensing allowance of $24,000. This $24,000 is subtracted from the original cost basis of $100,000, leaving an adjusted basis of $76,000, on which the 30% first-year depreciation bonus is calculated. This amount is $22,800 (30% of $76,000). The $76,000 adjusted basis is further reduced by the $22,800, leaving an adjusted basis of $53,200. The general first-year depreciation on $53,200 is 14.29%, or $7,602. The result is a total deduction of $54,402 ($24,000 plus $22,800 plus $7,602), or $40,112 more than under the general rule.

Property. In order for property to qualify for the additional first-year depreciation it must meet all of requirements 1 through 4 below:

The property must be property to which the general MACRS rules (not the alternative depreciation rules) apply and must be

1. property with a recovery period of 20 years or less,
1. computer software (other than computer software covered by §197),
2. water utility property, or
3. qualified leasehold improvement property.
4. Qualified leasehold improvement property is any improvement to a part of the interior of a nonresidential building if made under a lease either by the lessee (or sub-lessee) or the lessor of that part of the building, if that part of the building is to be occupied exclusively by the lessee (or any sub-lessee), and if the improvement is placed in service more than three years after the date the building was first placed in service. But qualified leasehold improvement property excludes enlarging a building, an elevator or escalator, a structural component benefiting a common area, or the internal structural framework of a building.
2. The original use of the property must begin with the taxpayer after September 10, 2001. (If the property is subject to a sale/leaseback, it will be treated as originally placed in service not earlier than the date the property is used under the leaseback.)
3. The taxpayer must acquire the property after September 10, 2001, and before September 11, 2004, or must acquire it under a binding written contract entered into after September 10, 2001, and before September 11, 2004. For property manufactured, constructed, or produced by the taxpayer for its own use, the taxpayer must begin manufacture, construction, or production after September 10, 2001, and before September 11, 2004.
4. The property must be placed in service before January 1, 2005. An extended placed-in-service date, January 1, 2006, applies for property that has a recovery period of ten years or longer or is tangible personal property used in the transportation business, but only if the property has a production period exceeding two years or an estimated production period exceeding one year and a cost exceeding $1 million. However, for the 2006 placed-in-service date property, only the portion of the basis attributable to the costs incurred before September 11, 2004, are eligible for the additional first-year depreciation.

     Automobiles. The limitation on the amount of depreciation deductions allowed with respect to certain passenger automobiles (under §280F of the Code) is increased in the first year by $4,600 for automobiles that qualify. This means that the previous limit of $3,060 in effect for 2001 and 2002 is now increased to $7,660.

     Please feel free to arrange an appointment to discuss this significant tax law change and its impact on your tax planning strategies.

NEWS FLASH!!

NSA District Governor's Column

SURVEY CONFIRMS IMPORTANCE OF MEMBERSHIP

The National Society of Accountants recently completed an electronic survey of members to determine what they need and want from their professional society.  Participating members were randomly selected except those in any position of leadership in NSA were excluded from the list as were officers of state affiliated organizations.

The results of the survey indicated the primary challenges facing NSA members were:

• Keeping up with tax law changes
• Business development and marketing (growing one's practice)
• Employee relations - finding, keeping and training staff
• Technology - wisely selecting software & hardware
• Competition from other accountants and software providers
• Customer relations - improving customer service and keeping clients honest

Some of the challenges ranking near the top of the compiled list were predictable, but others were surprising and provide further evidence that the profession to which members have devoted many years is changing and evolving.  The face of accounting and taxation as a livelihood is different from what it was 20 years ago.  The services provided by membership societies must also change and evolve to meet the new demand.

Those surveyed responded that the main reason they joined NSA was simply "access to information."  Second among reasons for joining and maintaining membership educational (CPE) opportunities.  Publications and credibility came in third.

NSA leadership was pleased to find that three out of four members responding to the survey thought that NSA met or strongly met their expectations.  When asked if they would definitely recommend NSA to peers and colleagues, 75% responded that they would.  Better yet, a whooping 88% of respondents thought that NSA dues were well worth the price they paid.

I sincerely hope you are a member of NSA and are as pleased with your membership as those who participated in the survey.  If you aren't, please let us know the reason so we can do something about it.  It appears we have a reputation to uphold!

Wanda Samek

District VIII Governor

GUIDELINE FOR NON-CASH DONATION VALUES

BASED ON GOODWILL PRICE GUIDE

TAX YEAR 2001

Tax Information From the IRS

Provided by Taxpayer Education and Communication SB/SE

Nashville, TN
EXAM RE-ENGINEERING PROJECT

The Small Business/Self-Employed (SB/SE) Operating Division of the Internal Revenue Service (IRS) is launching an initiative called the "SB/SE Exam Process Re-engineering Project" to redefine the way the IRS conducts audits.  Through this initiative, the IRS will increase compliance and customer satisfaction, and become a more effective and efficient agency.  The IRS will start implementing the recommended changes to the exam process starting in 2002.

IRS exam selection and collection processes have remained relatively the same for over 20 years.  The IRS has been reorganized, and the time has come to review major work processes and tailor them to reflect the new organization's goals and objectives, including increasing voluntary compliance, administering the tax laws more effectively, and increasing customer satisfaction.  The Exam Re-engineering Project is also exploring opportunities to apply commercial and government leading practices to achieve these goals.  Additionally, stakeholders are being interviewed to identify improvement opportunities and to learn what they want out of the Project.

• What is Exam Re-engineering, Exactly?
• The Exam Re-engineering Project will create a blueprint to improve the exam process using a step-by-step approach. First the scope and objectives of the Exam Re-engineering Project will be defined.  Next, discussions with stakeholders, including IRS employees, will build knowledge and understanding of the issues.  Finally, the first two steps will enable us to create a vision for the future or a"blueprint" for action. The key step in this approach involves designing and implementing solutions to bridge up the gap between where the IRS is today and where they want to be in the future.  Once these steps are completed, the IRS can develop an implementation plan that will build on current processes and structures, bringing them in line with the future vision.
• What are the goals of the Exam Re-engineering Project?
• Streamline examination processes, reduce taxpayer time and expense in dealing with the Service; Increase IRS effectiveness and timeliness in examining returns, collecting taxes, and resolving taxpayer issues, and ; Reduce and redirect expenditures within the IRS to improve operational results.
• Who is in charge of the Exam Re-engineering Project?
• SB/SE Commissioner Joseph Kehoe and Deputy Commissioner Dale Hart established the priorities for the examination work processes and the products and services to be reviewed and re-engineered.  IRS employees from around the country volunteered to serve on the Exam Re-engineering team headed by project Director Bill Conlon.  Together they are providing the institutional knowledge and field experience that is integral to the Project.
  SB/SE is also partnering with two key industry experts: Booz- Allen & Hamilton, a renowned consulting firm with expertise in analytical, strategic, objective change processes, and business process re-engineering, and DeLoitte and Touche, a big-5 accounting firm with a broad knowledge of tax administration, financial/audit best practices, and involvement in taxpayer facing associations.  The diversity of these IRS consultants teams is contributing to the overall success of this critical initiative.
• Why is the IRS undertaking this process now?
• It's imperative that the IRS make continual improvements while seeking efficient and effective new ways to achieve its mission of service to each taxpayer through a quality work environment.  These  goals can be met only by making specific changes to examination work processes and developing approaches that are specifically tailored for the agency's customer base and employee needs.  Moreover, the Exam Re-engineering Project isn't just about change; it's about making a long-lasting, positive impact on the entire organization.  Commissioner Kehoe said, " We're going to give our employees the means to work smarter and more efficiently, and when we're done, we will not only meet but exceed the expectations of our employees and our customers."

The IRS leadership believes that all stakeholders   including employees   have the opportunity to contribute to the Exam Re-engineering effort by providing input into process improvements as they evolve.  Commissioner Kehoe said, "Improving our business processes is a team effort, and by sharing your knowledge and experience, the Exam Re-engineering Project will be a success.  Incremental change isn't enough to bring us closer to our goal of providing the best service to our customers.  Together, we can rebuild the Exam Re-engineering process, and when we're done, we will all reap the benefits of working better and smarter for years to come."  

SLAVERY REPARATION SCAMS SURGE

IRS URGES TAXPAYERS NOT TO FILE FALSE CLAIMS

Washington - The Internal Revenue Service issued a nationwide warning for taxpayers not to be misled into filing slavery reparation claims.  The IRS has recently seen a significant surge in these false filings, and the agency urged taxpayers not to fall victim to this tax refund scam.

There is no provision in the tax law that allows African-Americans to get tax credits or refunds related to slavery reparations.  Unscrupulous promoters are deceiving people into paying money for advice on how to file these false claims, in which they generally seek $40,000 to $80,000.

Recently, the IRS has seen an increase in the number of people filing false claims for reparations.  In 2001, the agency received nearly 80,000 returns claiming more than $2.7 billion in reparation refunds.

"Promoters are shamelessly preying upon people," IRS Commissioner Charles O. Rossotti said.  "These snake-oil salesmen build false hopes and charge people good money for bad advice on reparation refunds.  In the end, the victims discover their refund claims are rejected, and their money and the promoters are long gone."

The IRS is taking action on several fronts to combat this recent upsurge of claims.  The slavery reparation scam has been most concentrated in Southern states, particularly in the Southeast, but the IRS is seeing claims in almost every section of the country.  About 45 percent of the claims have been from states served by the Atlanta Service Center (including Florida, Georgia, South Carolina and West Virginia), with about 25 percent from states served by the Memphis Service Center (including Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Nebraska, North Carolina and Tennessee).

The agency urged churches in the African-American community to be on the look-out for the scam.  The IRS has seen signs that some promoters are targeting church congregations for the reparation scams.  The agency plans to contact church organizations to help disseminate the message.

"Good people are getting caught up in this scam," Rossotti said.

The agency has been working for years to dispel myths about tax scams involving reparations.  But the agency is making a new and expanded effort to get the word out about slavery reparation scams following the new influx of claims.

The IRS has periodically seen slavery reparations claims in previous years, including 1994 and 1996.  The latest occurrence began in late 2000, and the false filings accelerated in 2001.

In addition, the IRS is seeing some early signs that promoters are trying to expand the reparation scam into new groups.  For example, about 200 claims have been submitted for Native American reparations.

The agency is particularly concerned about this recent activity targeting African- Americans and other for several reasons, including rapidly changing tactics being used by promoters in recent months.  Promoters have been submitting different types of scams in hopes of slipping false tax returns through the IRS system.  In response, the IRS is taking action on several fronts:

• The agency has developed special teams trained to watch for these suspicious returns being submitted.  These teams in the agency's 10 service centers have been alerted to watch for questionable tax claims on slavery reparations and other scams.
• The IRS will be contacting and distributing information to African-American leaders, church groups, organizations representing older Americans and other groups representing people targeted for these scams.
• The IRS continues to investigate new promoters for prosecution, and more legal action is expected in the weeks Ahead.  The IRS reminds taxpayers that promoters of reparations tax schemes have been convicted and imprisoned.

In addition, the IRS is seeing signs that promoters have told those seeking reparation claims not to back away from their claims to submit additional tax returns.  Some promoters charge additional money for filing these additional claims.  With these additional claims increasing, the agency will begin taking a new approach on this issue that, ultimately, will help taxpayers, hurt promoters and free up IRS resources.

Under a new policy effective April 15, 2002, the IRS will send a letter warning taxpayers about filing false reparations claims. If the taxpayer refuses to back away from an improper claim, they face a potential $500 penalty for filing a frivolous tax return.

The IRS will notify the filer that the claim has no basis in law, and the agency will offer an opportunity to submit a corrected return or rescind the frivolous claim with no penalty imposed.  But if the taxpayer does not agree, the penalty can be assessed.

This change means the category of slavery reparations claims will be treated the same as all other categories of frivolous tax claims, which are subject to the penalty if the taxpayers don't withdraw the claim after the first tax filing.  Under the old standard, a taxpayer had to submit two slavery reparation claims before the penalty could be imposed.

The IRS chose the April 15 implementation date to provide enough time to alert the taxpayers and organizations about the new policy.

The change still gives taxpayers an opportunity to back away from their claim without penalty.  But the approach also gives the agency a new tool to help discourage repeat filing and help counter promoters making a buck off these efforts.

The IRS is seeing promoters use several related schemes:

A person claims a credit for "black investment taxes," "reparations for African - Americans," "black inheritance tax refund," or racial discrimination.

A person attaches a tax form listing thousands of dollars in tax withholding that, in fact, never occurred.

Promoters can charge fees that can either a percentage of the refund claimed or a flat fee of $50, $100 or higher.

Promoters of these scams frequently warn their clients against contacting the IRS on the pretext that the IRS does not want the general public to know about the "credit."  This type of advice should be a red flag to taxpayers that there is a problem.

"If the tax benefits sound too good to be true, taxpayers should check them out with a trusted tax professional or the IRS before sharing personal and financial data with strangers," Rossotti said.

Taxpayers with questions about reparations scams can call the IRS's toll-free customer service line, 1-800-829-1040.  To report suspected tax fraud activity, taxpayers should call 1-800-829-0433.

Additional information on tax fraud is available on the IRS's Criminal Investigation web site at www.treas.gov/irs/ci/index.htm.

For more information about legal action taken against reparation refund scams, see IRS Fact Sheet 2002-08, "Reparation Scams Carry A Price."  Additional information is available in IRS News Release 2000-69 and News Release 2001-19.  All are available by visiting the News Release section on the news section of www.irs.gov.

Currently there is no law that allows the U.S. Government or the IRS to pay slavery reparations or refunds.  At one time, after the Civil War, Congress passed a bill to allow slavery reparations in the form of 40 acres and a mule, but that bill was vetoed by President Andrew Johnson and thus was never enacted into law.

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