May 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:

This may seem a little late for yet another reminder about our up coming accounting seminar, but, if you are reading this on our web page, it's not too late to register for the Gear Up Accounting Seminar to be held at the Holiday Inn Select in Little Rock on May 29 and 30.

For those of you who still may not be aware of our web page, you are missing out on a great benefit sponsored by your organization.  Not only does it have a complete calendar of events for the current year, there are a great many useful links to other sites.  The officers and governors are also listed along with direct email links for each.  If you have questions or concerns, please feel free to contact the officers or the governor of your district in order that they might address these items.  The web site address is www.arspa.org.   Please take a moment to sign the guest book while your visiting the site.  I think LaVerne has mentioned this before , but it bears repeating.

In following up to my note in last months newsletter concerning Arkansas' treatment of the new federal law dealing with IRAs, Pension Plans, and Deferred Compensation Plans.  The Arkansas Department of Finance and Administration is implementing a plan to draft the 2002 state income tax forms and instructions to accommodate the retroactive adoption of the federal law.  They are also preparing a bill that can be pre-filed and ready for consideration early in the 2003 legislative session to adopt these federal changes affecting IRAs, Pension Plans and Deferred Compensation Plans.  If the general assemble does not adopt the federal law retroactively, DFA will abate interest and penalties assessed against taxpayers who followed the federal law when preparing their return.

You also need to be aware that Arkansas has not adopted the new federal depreciation guidelines concerning the new first year depreciation.  According to DFA's news release.  This one does not sound as promising as the proposal listed in the previous paragraph.

The above news releases can be found on the Arkansas Department of Finance and Administrations web site under income taxes.

I hope you are all getting some much deserved rest after tax season, but don't forget your continuing education requirements.

Sincerely,

James C. Hodge, President

Arkansas Society of Public Accountants

AMT relief.  

The rule allowing personal tax credits, such as the dependent care credit and education credits, to offset regular income tax and the alternative minimum tax has been extended to include 2002 and 2003.  This rule formerly applied to only 2001 returns.

After 2003, unless Congress takes further action, only the child tax credit and the adoption credit can be used to offset AMT liability.  Taxpayers faced with the AMT will lost the benefit of their other personal tax credits.

Good news.

We do not have to file amended returns merely to elect out of the 30% bonus depreciation. Per IRS, a taxpayer that has filed a federal return before June 1, 2002 that takes no action is treated as making a deemed election not to claim the 30% bonus depreciation. This treatment applies where the original return contained qualifying purchases but did not claim the 30% deduction nor contained an affirmative statement electing not to deduct the 30%, and where the taxpayer does not file an amended return within the one year period to claim the additional 30% deduction.

For returns filed after May 31, 2002, an election not to claim the additional 30% must be attached to the return, or the "allowed or allowable" rule is effective. In other words, absent an election out, the deduction would be lost.

So I do not have to amend all those returns after all, unless I want to claim the additional 30%.
IRS Rev. Proc 2002-33, issued April 30, 2002.

NSA District Governor's Column

THE SAGA OF ONE LONELY DEBIT

Once upon a time, not so long ago, a young man sat at his desk, stared at the ceiling, and pondered his professional existence.  The young mans name was Debit R. Credit.  He held a degree in accounting from a state university and had previously spent a few years employed by industry in a large accounting office.

The world of entrepreneurship-being his own boss, making his own decisions, writing his own paycheck-appealed to Debit.  He rented an office, hung out is shingle ("Credit Accounting and Tax Service"), and confidently and enthusiastically welcomed clients.  Debit was a knowledgeable, competent, and ethical practitioner; and the services he provided were appropriate to the needs of his small business clients and priced accordingly.

Like all wise individuals, Debit paused from time to time to take stock of his life, accomplishments, and direction.  This was such a day.  A new tax law had just been enacted and some of the provisions were not well explained and guidelines remained unwritten.  Debit wondered what other tax preparers were doing and how they were handling various unusual situations such as those he had run into during the recent filing season. For the first time since becoming a sole practitioner, he felt very alone and isolated.  

As luck would have it, a letter arrived that day from Kasha Flow inviting Debit to attend a meeting of the local chapter of a state accounting society.  Debit was pleased to learn that such a group existed, and when Kasha called the next day to reenforce the invitation, he decided to give it a try.  After all, the announcement said the topic of the evening would be "The New Tax Law-How it Affects You."

At first, Debit felt a little out of place at the meeting, but as he realized everyone in the room had backgrounds and practices similar to his and were sincerely glad he was there, he began to warm up.  He determined he would attend meetings regularly and as he did, he developed friendships and professional associations that made his life easier and he felt more secure in his practice decision-making because of the networking opportunities and encouragement he now enjoyed.

About the time Debit became a confident, contributing part of the chapter, he received a letter from the state board of accountancy.  Debit considered himself an accountant and the work he did accounting, so he was somewhat shocked to find out that he was prohibited by state law from using the word accounting in his report letters-even when it referred to the standard being used.

That lonely, isolated feeling overtook him again-that is until he talked the problem over with his friends at the chapter meeting.  He hadn't thought much about the state society until then, but he discovered that it did more than maintain chapters and promote networking.  It also had an active legislative program with a full-time lobbyist and practiced routine monitoring of legislative activity.  Debit felt much safer and confident in knowing he wasn't alone and that his state society was working to protect his practice rights.  He also found that the state society sponsored several excellent seminars and conferences to help him stay on top of his profession and market his practice more effectively.

As time passed and Debit contemplated all that had happened to him since entering the ranks of the self-employed, he began to wonder about a national accounting organization and the benefits it could provide-insurance programs, purchasing discounts, practice rights protection, educational and professional opportunities, newsletters and updates, and national recognition and public relations.  He found out , of course, about the National Society of Accountants and joined without hesitation.

Debit began immediately to partake of NSA's various offerings and was delighted to learn about the ACAT credentials in both tax and accounting because he recognized them as the path to recognition of his competence and capabilities.

Life was complete.  Debit was a happy man.

Wanda Samek, Governor

NSA District VIII

SOME IRS FORMS ARE VERY DANGEROUS TO FILE........EVER

How much does the IRS know about you?  Nothing, in most cases except what's reported to them on information returns, such as W-2s, K-1s, ir 1099s, and what you tell them yourself.

So a key rule of limiting your audit exposure is never tell the IRS anything you don't have to.  This means not filing IRS forms you don't have to file.  Five optional forms you should never file.....

Form 5213, Election to Postpone Determination As to Whether the Presumption Applies That an Activity is Engaged in for Profit.  Imagine that you've launched your own business, either full-time or as a sideline.  Most new businesses incur start-up losses, sometimes for years.

But business losses are deductible against other income.  If you own your business as a proprietorship or a pass-through entity (partnership, limited liability company, or s- corporation), you will be able to get a tax subsidy for such losses by deducting them against other income.

If you file Form 5213 when you start the business, the IRS will not examine your profit motive for five years in most cases.  Then you will be presumed to have a profit motive if the business was profitable for three of those five years.  Even if the business fails to meet that test, you can still save your loss deductions by documenting a profit motive with evidence such as a credible business plan, proof of the hours you worked, good business records, etc.

So filing form 5213 may sound like a good idea  you escape audits for five years, get that long to make your business profitable, and your loss deductions are safe in the meantime.

But filing the form puts the IRS on notice that you have started a new business and "asks" for an audit in five years.  It also allows IRS to audit for all five years, instead of the usual three years.

If you don't file the form, you probably won't be audited at all.  Even if you are audited, you will have to meet the very same tests to prove a profit motive that you would have if you had filed the form, except that IRS will be limited to three years.

Form 8275, Disclosure Statement.  The IRS says you should file this with your tax return to disclose any questionable or "gray area" deductions or positions on it, and to provide your justifications for taking them (such as an IRS ruling or a court case you are relying on).  

If you do file this form and your return is audited, and the item is subsequently disallowed, the IRS maintains it won't add a penalty to the taxes and interest you owe.

But why tell the IRS about the questionable items on your return?  The form just saves the IRS the trouble of finding them on its own.

It you don't file the form and are audited you will be in exactly the same legal position regarding the examined items that you would be in if you had filed the form, only you are more likely to be audited if you do file it.

The slight potential savings of an avoided penalty isn't worth the increased risk of incurring an audit and of having to pay back taxes and interest.

Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR).  If you receive income from a pass-through entity of trust or estate, you will receive a K-1 information return.  This form reports your share of its income and expenses that are to be reported on your return.

If you disagree with the way an amount has been reported on your K-1 you can't just change it on you r return.  Instead, the IRS says you should file Form 8082 to explain why you think the amount is being reported wrong.

You are raising a red flag to the IRS that there's a problem with your return - and that you disagree with the manager of the entity, and the other people involved with it, about how it should be handled.  You are asking for an audit for yourself - and possibly for everyone else involved with the entity.

Better strategy:   As soon as you get your K-1, examine it.  If there is a problem, ask the issuing entitys managers for a corrected K-1 before you file your return.

If there is no time to do that, file your return using the data on the errant K-1, then straighten out the problem, get a corrected K-1, and file an amended return.

Form 872-A, Special Consent to Extend Time to Assess Tax.  When the IRS conducts an audit, it often runs up against the three-year deadline within which it must assess tax.

At that point, the IRS auditor may ask you to agree to an extension of the assessment period.  If you object, the auditor may threaten to disallow every questionable item on your return and send a deficiency notice, forcing you to go to Tax Court to save your deductions.

This is a time to negotiate.  The auditor wants the case closed.  If it stays open and goes t o Tax Court, the IRS might lose, especially now that the low-cost Small Case Division of Tax Court is a viable option for taxpayers in most cases like this.

You should be able to negotiate a limited extension.  This will give the IRS extra time - one year, perhaps - to complete the audit, while limiting the areas on the return that will remain open to audit.

To agree to such a limited extension, sign IRS Form 872, Consent to Extend Time to Assess Tax.  Do not sign Form 872-A, Special Consent to Extend Time to Assess Tax.  The name is almost the same, but 872-A gives the IRS an extra 10 years to conduct its audit.

Use caution when signing this form.  Be sure it is the correct one and that the auditor doesn't mistakenly hand you the wrong form.  It happens.

And the last one - Form SS-8, Determination of Worker Status For Purposes of Federal Employment Taxes and Income Tax Withholding.  One of the hottest audit topics today is the tax status of workers hired as independent contractors and whether or not they are really employees.

The IRS says that both businesses and individuals can fill out and file a questionnaire, Form SS-8, to have it determine the workers status.

Filing this form can lead to huge problems for the company and its workers.  The IRS is likely to declare that workers treated as independent contractors are in fact employees and the results can be horrific.  Major tax bills for the company and employees can lose their self-employed retirement plans.  Let's just say do not file this form at all, get the booklet and study it and determine for yourself who is and who is not.

Credit card companies are helping the IRS catch tax evaders by providing information about customers who have offshore accounts.  MasterCard has turned over information on 230,000 accounts.  American Express has just agreed to provide similar information, and VISA is expected to reach an agreement soon.  This is part of an IRS program to identify persons who open foreign bank accounts to avoid paying tax on income earned in them.  

IRS Press Release, March 25, 2002.

IRS loses.  Can be sued for breaking installment agreement.  

A taxpayer signed an installment agreement after telling an IRS agent that his pension likely would be reduced in the future, and, he claimed, after the agent told him if that happened, his payments would be reduced proportionately.  But when it did happen and he reduced his payments, the IRS said he had breached the agreement and revoked it.  IRS defense: It's refusal to reduce the payments occurred five years previously, so the case was time-barred.  Court: The actual revocation of the agreement occurred less than two years earlier, within the stature of limitations, so the taxpayer can proceed with his case.

M. Robert Ullman, DC ED Penn., No. 01-0272.

The Case of the Missing Return

Rolly Sorrentino said that he mailed his tax return to the IRS six weeks before the deadline to claim a refund.  When the refunds didn't arrive, he called the IRS to ask about it.  The IRS told him it had never received the return, and that it was too late to file another to get the refund.

Mr. Sorrentino then filed in court to claim his refund.  He gave sworn testimony that he had filed his return on time, and presented a photocopy of it dated on the date he said he had filed it.  But the IRS answered under the Tax Code, only a certified or registered mail receipt was acceptable as proof of filing.*

Court: The Tax Code does not state that what it specifies as bein acceptable proof of filing is the only acceptable proof of filing.  And the IRS position that this is so has been accepted by only two US Courts of Appeal covering only seven states.**

Everywhere else a taxpayer may use credible evidence, including his/her own testimony, so show that a return was filed on time, even without having a receipt.

Here, the taxpayer's testimony, copy of the return, and act of asking about the refund all indicated he had filed on time, while the IRS presented no evidence to challenge the taxpayer's credibility.

So the return was deemed filed, and Sorrentino got his refund.

More: Because the IRS had ignored the law that was applicable in the state, it had to pay Sorrentino's ligation costs.

*Later expanded to include receipts from approved express delivery services.

**Connecticut, Kentucky, Michigan, New York, Ohio, Tennessee and Vermont.

Rolly J. Sorrentino, DC Colo.,2002-1 USTC p.50,227.

SEE YOU AT THE ACCOUNTING SEMINAR

MAY 29 AND 30, 2002.  

GOOD SPEAKERS, IN FACT THE BEST THAT GEAR UP HAS TO OFFER.

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