Penalty reduction overpaid AMT? Tax deposit rules 2001: inflation adjustments.

AICPA ACTIVITIES

Penalty Reduction

The AICPA's Individual Taxation Technical Resource Panel wants to remind practitioners of Sec. 6651 (h). Enacted by Section 3303(a) of the Internal Revenue Service Restructuring and Reform Act of 1998, Sec. 6651(h) reduces certain penalties if a Sec. 6159 installment agreement is in effect and the return was timely filed. Specifically, the reductions are as follows:

* The Sec. 6651 (a)(2) penalty for failure to pay the tax shown on the return is reduced from 0.5% per month to 0.25% per month.

* The Sec. 6651 (a) (3) penalty for failure to pay an assessed deficiency is reduced from 0.5% per month to 0.25% per month.

Sec. 6651 (h) is effective for determining additions to tax for months beginning after 1999.

FROM THE IRS 

Overpaid AMT?

According to a recent Treasury Inspector General for Tax Administration (TIGTA) report, More Small Corporate Taxpayers Can Benefit from the Alternative Minimum Tax Exemption Provision (Ref. No. 2001-30-019), over 2,000 small businesses may have overpaid $25 million in alternative minimum tax (AMT). These taxpayers may be unaware that they are not liable for the AMT they paid.

The IRS responded to a TIGTA audit inquiry that items not indicated on their returns may have caused some corporations not to qualify for the Sec. 448(c) small business AMT exemption. The TIGTA contacted a sample of the taxpayers included in the audit and found that 93% of the businesses contacted paid the AMT in error.

A TIGTA audit focused on four provisions enacted by the Taxpayer Relief Act of 1997 (TRA '97) that affected 1998 corporate returns. Among the provisions was the AMT exemption for small corporations. The report found that the new AMT provision proved problematic for taxpayers and their practitioners in preparing corporate returns. The returns did not provide enough information for the IRS to systematically identify errors made in the application of the AMT exemption for small businesses. The TIGTA report indicated that these two factors would most likely result in taxpayers continuing to make errors on subsequent years' returns.

The report also noted that the TRA '97 contained over 800 amendments to the Code and 300 new provisions that may have contributed to taxpayers' overlooking the small business AMT exemption. The TIGTA report recommended that the IRS make a public announcement and enhance taxpayer educational materials on the exemption. (To download the TIGTA report, click on "Audit Reports" at the TIGTA website, www.treas.gov/tigta. For a discussion of the exemption, see Karlinsky,"The Small Business AMT Exemption" 29 The Tax Adviser 480 (July 1998).)

Tax Deposit Rules

In a move that will affect approximately one million small businesses, the Service has ended its monthly tax deposit requirements. According to IR-2000-83, as of Jan. 1,2001, many small businesses were allowed to make employment tax payments on a quarterly basis, not monthly.

Under the new rules, a business can make payments every three months if it has less than $2,500 in quarterly employment taxes (up from $1,000). The businesses affected deposit $6.6 billion, about 13% of the $52.7 billion in total employment tax deposits.

The change creates a number of advantages:

* IRS notices to small businesses are expected to decrease about 70%, due to fewer deposits.

* Because this change will reduce the frequency of deposits, small businesses will encounter fewer mistakes and penalties.

* Quarterly--rather than monthly--payments will help small businesses' cashflow.

Previously, the threshold had been $500 and was raised to $1,000 in 1998. The new rules will be outlined in regulations.

Small businesses with employment taxes under $2,500 per quarter may pay them with Form 941, Employer's Quarterly Federal Tax Return. Only employers with employment taxes of $2,500 or more per quarter must deposit the tax with an authorized financial institution.

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