November 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

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OFFICERS & GOVERNORS 2002 - 2003

OFFICERS

BOARD OF GOVERNORS

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

Suzanne Baltz Donna Gowan Lonnie Taylor George Simpson Bradley Crain Ronny K. Woods

Pocahontas Searcy West Memphis Little Rock Prescott Nashville

FROM THE PRESIDENT’S PEN

Dear Members:

Have you been to ASPA's website recently?  If you haven't, then log on to www.arspa.org and check it out!  This great membership benefit provides the ASPA Monthly Newsletter for the most recent month plus links to the last two years of newsletters, information links to other websites that will be of use to you in your accounting practice, an event calendar listing our educational seminars for the next year, a registration form for the next educational seminar to be sponsored by ASPA, and many other items which will be of interest to you.  Another excellent website which will be of interest to you is the National Society of Accountant's website at www.nsacct.org.  

Members of the Boards of the Arkansas Society of Public Accountants, the Arkansas Society of Certified Public Accountants and the Arkansas State Board of Public Accountancy will meet in November for their annual meeting.  This meeting is important to all of us since it allows us to discuss issues which affect all our practices.  If you have anything which you would like your board members to address during this tri-board meeting, please let me know. Our member on the State Board is Robin

Clatworthy and I'm sure that he would appreciate your input throughout the year.  LaVerne Long, our Executive Secretary, also monitors our State Board meetings during the year which helps keep our board and our membership up to date on issues which can impact each of us and our accounting practices.  ASPA members who are former members of the State Board of Accountancy are Carl Dalrymple, Leonard Ricketts, Homer Holbrook and Ronny Woods.  These former state board members continue to serve ASPA by serving on various committees appointed by the state board.  These are important ways ASPA works to protect our right to practice - another important ASPA membership benefit.

If you are not actively involved in your Society, then I appeal to you to get involved.  Attend our seminars to stay current on the latest tax and accounting issues, network with other members to learn how they can help you in your practice and how you can help them, be aware of state board and legislative activities through your monthly newsletter and through contact with your local state representative and with your local state senator.

Each of us have much to be thankful for and as we approach the Thanksgiving Holiday, I wish for each of you  rest and relaxation.  You'll need it because the next tax filing season will soon be upon us.  We can even be thankful for that!

Sincerely,

Donny Woods, President

Arkansas Society of Public Accountants

Don't forget to pay your dues. Statements have been mailed.

Please pay promptly!

IRS REDUCES BUSINESS DRIVING DEDUCTION FOR 2003.  THE STANDARD MILEAGE RATE DEDUCTION FOR BUSINESS USE OF A CAR IN 2003 WILL BE 36 CENTS PER MILE.  DOWN FROM 36.5 FOR 2002. REVIEW IRS REVENUE PROCEDURE 2002-61 FOR MORE INFORMATION

THE FOLLOWING IS A LIST OF COMMITTEES FOR THE CURRENT YEAR.

• Legislative - Ronny Woods-Chairperson
• Robin Clatworthy
• Carl Dalrymple Jr.
• Homer A. Holbrook
• Constitution & By-Laws - Billy D. Cotton - Chair
• Michael R. Stafford
• Marvin O' Mary
• Membership - Shelly Russell - Chairperson
• Suzanne Baltz
• Donna Gowan
• Credentials - Charles Goslee - Chairperson
• Leonard Ricketts
• A.W. Bailey
• Ethics & Grievance - Lonnie Taylor - Chairperson
• Alma Strozyk
• Susie Anthony
• Review - Tom Simmons - Chairperson
• Bradley S. Crain
• Budget - Brian Thompson - Chairperson
• Debbie Hicks
• Jason Day
• Education & Seminars - Bryan Johnston - Chair
• LaVerne Long

GREETINGS FROM NSA

As your State Director I have some exciting opportunities for those of you who are not currently members of NSA.  I have been authorized to present 20 free ( until May 1, 2003) trial memberships, and I have a few of those left.  If you join under this program, you will receive all the membership benefits until May 1, 2003.  At that time you will be billed $159 for the next 12 months and have until July 31, 2003 to pay your dues or be dropped. These benefits include unlimited access to the NSA Tax Hotline for tax research assistance at no charge; subscriptions to "National Public Accountant", "NSA Software News", "Practitioner" newsletter, and "NSAlert" email news; NSA Tax Survival Guide; and discounts on publications, CPE courses,etc.

Another opportunity is available for members who join between September 1, 2002 and November 30, 2002 (and pay the $159 membership fee).  You will receive a free education voucher for the 2002 National Tax Institutes in Las Vegas (December 9-10) and Atlantic City, NJ (December 3-4).  The fee for these is $275 for members and $375 for non-members.

Firm Associate Memberships are offered for the first time to tax and accounting practitioners who work less than 751 hours per year.  Full time support staff of NSA active members are also eligible for the membership category, and the dues are only $69 per year.

Please contact me at 501-843-5561 or email me at sruss51670@aol.com if you are interested in any of these membership opportunities, and I will send you the necessary application forms.

For those of you who are already members, be a Go Getter.  You can get a $50 credit on you next dues renewal if you recruit a member now through December 31, 2002.  Beginning in January 3003, you will get a $10 scrip for each new member recruited.

NSA has a new web site (same address at http://www.nsacct.org).  The new site is easier to navigate and has been enhanced with more tools, resources, and information.  Be sure to visit it when you get time.

Shelly F. Russell

NSA State Director - Arkansas

IRS takes a narrow view of attorney-client privilege as it relates to tax practitioners.  

According to the  IRS, information that will be incorporated into a tax return, such as information appearing on Schedule K-1 issued by a partnership, is not privileged.  The IRS also takes the position that privilege does not protect facts, documents, and communications unrelated to the seeking of legal or tax advice.  Best bet:   If a question arises as to whether or not a particular conversation or a document is privileged, it is best to have a judge make the determination by contesting an IRS summons to court.

Electronic refund trap. The IRS won't replace an electronic refund that was stolen by fraud.  FACTS: An individual filed a tax return with the help of a volunteer return preparer at a clinic.  The individual asked for an electronic refund and provided the routing information for his bank account.  But the return preparer substituted information for another account and absconded with the refund after it arrived.  IRS position: The original refund was properly sent to the bank account listed on the return, so the IRS cannot send a replacement refund to the taxpayer.  IRS Legal Memorandum 200236025.

NEWS FROM INTERNAL REVENUE SERVICE

Treasury Secretary Paul O'Neill announced that Bob Wenzel, Deputy Commissioner, Internal Revenue Service, will serve as Acting Commissioner, upon Commissioner Rossotti's departure on November 6, 2002.

"I am pleased that Bob will serve as Acting IRS Commissioner," stated Treasury Secretary Paul O'Neill.  "We're fortunate to have such an experienced person on board.  Bob will provide continuity of leadership for this transition period, and keep IRS on the course Commissioner Rossotti charted.  It is important to not turn back the clock, but rather keep moving forward momentum going and progress on track."

Mr. Wenzel has served as Deputy Commissioner of Internal Revenue since 1998.  He is the highest ranking career official in the Internal Revenue Service, with responsibility for the day-to-day operation and strategic management of the United State tax administration system.  As the top career advisor to the Commissioner of Internal Revenue, he directs all major decisions regarding the operation of the agency and has ultimate responsibility for management and oversight of the nation's tax administration system.  In this capacity, he is responsible for IRS programs that annually respond to over 124 million customer service contacts, process over 227 million tax returns, issue 182  million tax refunds, account for $1.9 trillion in revenue receipts, examine 815 thousand returns, collect $32 billion in delinquent taxes, and investigate 4,000 tax fraud and related financial crimes.  MR. Wenzel first joined the IRS in 1963 as a Revenue Officer in Chicago.

IRS HELPS TAXPAYERS PRESERVE RETIREMENT SAVINGS BY ALLOWING A CHANGE TO PENSION DISTRIBUTION AMOUNTS.

WASHINGTON - The Treasury Department and the Internal Revenue Service have released Revenue Ruling 2002-62 that will help taxpayers preserve their retirement savings when there is an unexpected drop in the value of their retirement savings.  Some taxpayers began receiving fix payments from their IRS or retirement based on the value of their account at the time they started receiving payments.  Those taxpayers may now switch - without penalty   to a method of determining the amount of their payments based on the value of their account as it changes from year ro year.

"Taxpayers have worked hard to build their retirement savings.  They shouldn't be penalized when the market is down," stated Pam Olsen, Assistant Secretary for Tax Policy.  "This change will help many taxpayers to preserve their retirement savings by allowing those individuals to slow their distributions down in the event of unexpected market downturns."

Generally, taxpayers are subject to an extra 10% tax (in addition to regular income tax) on amounts withdrawn from the IRAs or employer-sponsored individual account plans prior to reaching 59 «. An exception to that tax is when a taxpayer takes a distribution as part of a series of substantially equal periodic payments over the taxpayer's life expectancy or the joint life expectancies of taxpayer and beneficiary.  The IRS issued guidance in 1989 (Q&A 12 of Notice 89-25) that provided three methods for satisfying the "substantially equal periodic payment" exception.

Two of the safe-harbor methods described in Notice 89-25 result in a fixed amount that is required to be distributed and could result in the premature depletion of the taxpayer's account in the event that the value of the assets in the account suffers a decline in the market value.  Revenue Ruling 2002-62 provides relief to taxpayers who selected one of these two methods by permitting them to change from a method for determining the payments under which the amount is fixed to the third method under the safe-harbor where the amount changes from year to year based on the value in the account from which the distributions are being made.

In addition to permitting a one-time switch in method, the revenue ruling:

• Clarifies how an individual can satisfy the permitted method that tracks the required minimum distribution rules of section 401(a)(9) in light of the recent finalization of regulations regarding those requirements;
• Provides guidance on what constitutes a reasonable rate of interest for determining payments to satisfy the substantially equal periodic payment rule;
• Provides a choice of mortality tables that can be used in satisfying the permitted methods.

ACCIDENT TAKES LIFE OF ASPA BOARD MEMBER

On the evening of September 10, 2002, George Simpson, age 58 was driving home and was involved in a one-vehicle accident that took his life.

George was very active in ASPA and served on the Board as Governor of District 4 for a number of years.

We extend our sympathy to his family.  We will miss him.

ASPA HAS RECEIVED A THANK YOU CARD FROM GEORGE'S WIDOW EXPRESSING HER THANKS AND APPRECIATION FOR THE FLORAL SPRAY AND ALSO FOR THOSE WHO ATTENDED THE VISITATION AND THE SERVICE THE FOLLOWING DAY.

INSTALLMENT SALES

Tax practitioners are familiar with installment sales and the resulting deferral of income taxes, so this article will not reiterate the basic computations.  However, there are certain issues to remember when confronted with an installment sale.

1. The emergence of the 25% capital gain rate for depreciation recapture complicates he calculation.  When this recapture is present, the 25% rate must be recognized first, and when totally used, the remainder is taxed at the 20% rate.
2. Recognition of gain on installment sales is based on the law in effect when the payment is received.  Therefore, installment sales originating prior to the 25% rate must have their gain recalculated based on the new rules.  The 25% rate portion would be applied to the earlier payments and any left would be applied to current payments.
3. The constructive receipt rules apply to payments on installment sales, and any payments constructively received are included when calculating the capital gain.
4. If there is recapture under Section 1245 or 1250, the entire amount of recapture will be treated as ordinary income in the year of disposition regardless of the amount of payments that year.
5. Non-recaptured Section 1231 losses for the preceding five years must be recognized as ordinary income to the extent of net Section 1231 long-term capital gain.  This recognition occurs as installment gain is recognized and is applied first against the 25% rate.
6. Net operating loss carryovers, credit carryovers and negative taxable income should be considered before determining that an installment sale is the best option.
7. Be sure to inquire concerning any liabilities and their disposition in the sale.  Assumption by the purchaser of liabilities, other than mortgage or other indebtedness encumbering the property, and subsequent payments in the year of sale are considered payments received by the seller for calculation of the installment sale gain for the year of sale.

Installment sales can be a valuable tool in tax planning, but be sure to consider all of the possible pitfalls for your clients.

IRS UPDATES:

Schedule B change reduces burden for more than 15 million taxpayers.

The Internal Revenue Service and Treasury Department have announced an increase in the threshold for filing a separate schedule for interest or dividend income.  The change means more than 15 million taxpayers will have one less schedule to file with their tax return.

For 2002 tax returns, most taxpayers will no longer have to file a separate schedule if they have interest or dividend income of $1,500 or less.  Form 1040 filers use Schedule B, Interest and Ordinary Dividends, to list the names of those who paid them along with the amount; Form 1040A filers use Schedule 1.  The new IRS standard replaces the existing reporting threshold of $400.  Without the shift, more than 40 million taxpayers would have to file Schedule B or Schedule 1 next year, according to IRS estimates.  The $400 figure has been in place since 1974.

This changes will also enable another 800,000 taxpayers to use the short form 1040EZ or use TeleFile to file their tax returns by telephone by increasing the maximum amount of interest income they report to $1,500.

As in past years, certain taxpayers with bank or other financial accounts in a foreign country (and certain taxpayers involved in foreign trust transactions) must  continue to file Schedule B regardless of the amount of interest or dividends they receive.  Taxpayers with ordinary dividends and taxable interest that each does not exceed the $1,500 threshold will report only these totals on their Form 1040.

OIC charges in the wind?  Rumors are circulating that IRS is getting set to announce a $150 charge for filing Offers in Compromise.

Reprint: EAMail - 10-18-02 from National Association of Enrolled Agents, webmaster@nea.org

Low Income Taxpayers Owed Refunds

The U.S. Department of the Treasury has been taken to task for failing to notify 600,000 low-income taxpayers that they were entitled to $200 million in refunds last year.  A bipartisan group of Members of Congress, including Senator Charles Grassley (R-IA) and Rep. Charles Rangel (D-NY), has chastised IRS for its failure to advise taxpayers that they were eligible for the $600 child tax credit.  In the next few weeks, IRS will send out information to low income taxpayers advising them of how they should proceed in claiming the tax credit.

IRS concedes.  1996 return may be filed now to claim $125,000 exclusion on home sale.  A couple has lived in their home for 50 years when the husband died.  His widow sold the home in 1996 and qualified to take the $125,OOO exclusion for gain on a home sale that then existed in the law.  However, she never filed a tax  return for the year.  IRS ruling: The deadline for claiming the exclusion was the same as for claiming a tax refund.  That is the later of three years after the return was filed or two years after the tax was paid, or if no return was filed, within two years after the tax was paid.  But the widow had never filed or paid any tax, the deadline never ran and she can file the return now claiming the exclusion.  Letter ruling 200124011.

GEAR UP 1040 SEMINAR WILL BE THE 18TH AND 19TH OF DECEMBER, 2002.  

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