IRS NOT ALWAYS CORRECT
In Center vs. Commissioner, 1995 TCM 311, the Tax Court ruled that an IRS Notice of Deficiency is not entitled to a presumption of correctness, if the IRS does not produce any evidence in support of its determination. In Center, the taxpayer did not provide any proof of his income during the year at issue. He had not filed a tax return. The IRS took the earnings from a prior year and used the consumer price index to compute the alleged income for a subsequent year. The taxpayer denied he had made that much money. The taxpayer petitioned the Tax Court saying that the amount of income was wrong.
Generally, the IRS is given a presumption of correctness until a taxpayer shows it is arbitrary and erroneous. This exception can be overcome if the IRS can provide no evidence to show what they based their data upon. Once you can overcome the IRS has no evidence, the court held that the IRS also has no presumption of correctness.
The IRS has provided the following statistics based upon the incident of audit in the Chicago District:
Individual Audit Rate .78%
Corporate Audit Rate 1.04%
Partnership Audit Rate .35%
Please note that large corporations, those grossing two-hundred and fifty million dollars a year or more, have a national audit rate of 55%. The audit rate for estates of five million dollars and more has an audit rate of 48%. As income increases, the audit rate also tends to increase.
IRS ON THE INTERNET
The Internal Revenue Service and Department of Commerce are currently negotiating a transaction to allegedly allow an Internet Site managed by the National Technical Information Service, an agency of the Department of Commerce, receive income tax returns. A prior program, where individuals could file their returns using a commercial online service charged a fee to online file. The usage of the Internet would be a free service that the Internal Revenue Service would allow. The plan is scheduled to be announced in December of this year and could significantly increase the amount of electronic filers.
IRS Release 95-56 announced October 1st, 1995, increases the requirement from business receipts from $25.00 per expense up to $75.00. The new law deems taxpayers to have adequate records for proof of expense, such as travel, entertainment or gifts, without the necessity of having a receipt. The prior rule, relative to $25.00 for an expense, dated back to 1962.
TAX LEGISLATION SPEEDS THROUGH CONGRESS
The House Ways and Means Committee has approved via party-line vote, tax reconciliation legislation that would affect almost every area of the Income Tax Code. Tax legislation was sent to the House Budget Committee for inclusion in an omnibus budget reconciliation package. Various areas affected would include the targeted jobs tax credit, increasing its availability, extending the medical savings accounts, expanding corporate reversions of pension assets, and retaining the low income housing credit. Keep reading this column for more updates on other tax legislation.
Senate Small Business Committee met on September 19th and 10th to discuss various tax issues. For small businesses, estate tax relief was proposed by Majority Leader Robert Dole. Senator Dole’s proposal would exempt up to 1.5 million dollars of the value of family-owned businesses from the estate tax. Further discussions were had regarding the IRS and their reclassifications of independent contractors to employees reaching almost 2,000 reclassifications per week, according to Senator Don Nickles. Senator Nickles is in the process of drafting a bill that would offer a simplified definition of what an independent contractor is, as well as an employee. Proposed guidelines under these bills would require an independent contractor to make a significant investment in assets or training, incur significant unreimbursed expenses, enter into an agreement to complete a project in which the service provider is liable for potential damages, receive payment primarily on a commission basis, or purchase products for resale. These guidelines could be of great benefit to small businesses.
IRS REVENUE OFFICERS OUT OF BUSINESS?
The Internal Revenue Service budget for fiscal year 1996, includes “bounty” provisions which obligate the Internal Revenue Service to spend thirteen million dollars on a pilot project to have outside firms, non-IRS employees, collect delinquent taxes. It would allow for the first time in the history of the Tax Code, to have private citizens handle previously classified taxpayer information to collect taxes due. The Internal Revenue Service Commissioner, Margaret Richardson, has objected to three areas of outside collectors;
1) The perception of fairness of tax administration;
2) The protection of confidential tax information; and
3) The absence of Congressional collection powers granted to private contractors.
Despite the objections of the IRS, the provisions will be included in the final budget sent to President Clinton. This could have a major impact on the powers, responsibility and funding of IRS revenue officers. NOTE: The State of Illinois has been using outside collection agencies for various tax issues for at least two years.
INTEREST RATE SAFE HARBOR DOES NOT APPLY TO GIFT TAXES
The 10th Circuit Court of Appeals affirming a District Court case held that the safe harbor interest rates contained within IRC §483 and its regulations do not apply to the Gift Tax Code. In Charles Schusterman, et ux. vs. U.S., 94-5106 (10th Cir. 1995) the taxpayers transferred shares of stock in Tilco, Inc. into five irrevocable trusts. The trust executed promissory notes payable to the taxpayers, with a stated interest rate as contained within the Internal Revenue Code of 6% per annum. The IRS alleged that the safe harbor rate on interest did not apply to the Gift Tax Code. Therefore, the IRS applied a much higher interest rate, and alleged an additional Gift Tax Return was due. The 10th Circuit agreed with the IRS and held the Gift Tax was due.
The circuit that we live in, the 7th Circuit, has previously ruled that IRC §483 “applies to all provisions of the Tax Code, including income and gift tax provisions.” See Ballard vs. Commissioner, 854 F. 2d 185 (7th Cir. 1988). The 8th Circuit has reached a contrary opinion in this case in Krabbenhoft vs. Commissioner, 939 F. 2d 529 (8th Cir. 1991), cert. denied 112 S. Ct. 967 (1992).
Richard M. Colombik, JD, CPA, is an award-winning attorney and CPA with a doctorate in jurisprudence with distinction and was formerly on the tax staff of one of the world’s wealthiest families.
Mr. Colombik has also been a tax manager at a Big Four accounting firm, the State Bar’s liaison to the Internal Revenue Service (IRS), vice president of the American Association of Attorney-CPAs, and vice chairman of the American Bar Association’s Tax Section of the General Practice Council, as well as the past chair of the Illinois State Bar Association’s Federal Tax Committee. Mr. Colombik has also served on the liaison committee to the Washington, DC, National Office of the IRS. Mr. Colombik is also a member of the Asset Protection Committee, American Bar Association, and a member of its captive insurance subcommittee.
Mr. Colombik has appeared on numerous television shows, hosted a weekly radio show on tax and business planning, and authored more than 100 articles on income taxation, asset protection planning, IRS defense, and estate planning. He has also instructed more than 100 seminars to professional groups, business groups, bar associations, CPA societies, and insurance groups. This is in addition to authoring a published work on business entity structures offered by the Illinois Institute of Continuing Legal Education, as well as writing a chapter for The Estate Planning Short Course and Asset Protection Planning.