Recent IRS developments.In the past year, the Internal Revenue Service issued a "roadmap" of tax-related issues it is both looking at now and thinking about for the future. The list is lengthy; taxpayers and their CPAs have over 400 issues to consider Michael D. Felish, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , assistant vice-president of taxes, Comdisco, Inc, Rosemont, Illinois, explains how being aware of these issues in advance can help businesses avoid IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. audits or better handle audits if they do occur. In its business plan, 1994 Priorities for Tax Regulations and Other Administrative Guidance, the IRS listed 134 proposed projects, over 50% of which focused on employee benefits, international issues, tax accounting and tax administration (the 1993 list included 290 projects). The 199a list is expected to be issued by the end of January. Such lists are useful because they allow businesses to know in advance what IRS regulations and projects are forthcoming, giving their CPAs a chance to plan accordingly. IRS ROADMAP The IRS has a number of both new and ongoing programs. Market segment specialization program (MSSP (MultiService Switching Platform) A high-end Cisco router that supports high-speed optical connections in the core of the network. See MSPP and MSTP. ). In 1993, the IRS developed a program to provide guidance for IRS agents in highly specialized areas ranging from commercial fishing in Alaska Alaska's commercial fishermen work in one of the world's harshest environments. They endure isolated fishing grounds, high winds, seasonal darkness, very cold water, icing, and short fishing seasons, where very long work days are the norm. to scrap metal. The IRS's objective is to develop "cookbooks" for specific markets and industries. Under MSSP the manuals are to provide detailed discussions of the industries, suggestions for conducting audits of businesses in each industry and a list of industry issues. In February 1994, the IRS published a list of the guides it will publish (see exhibit 1, page 33). Approximately 90 markets are listed, some as broad as commercial banking or the entertainment industry, others as narrow as the Port of Houston The Port of Houston is the port of Houston, Texas, the fourth-largest city in the United States. The Port is a 25-mile-long complex of diversified public and private facilities located a few hours' sailing time from the Gulf of Mexico. . The list also centers on small business taxpayers--including barber shops, pizza parlors and taxicabs. EXHIBIT 1 Market segment specialization program manuals to be published Air charter Alaska commercial fishing Alaska placer gold mining Architectural services Art dealers Attorneys Auto body shops Auto repair shops Bail bondsmen Beauty and barber shops Bed and breakfasts Building maintenance services Cable television Carwashing and detailing Casino gaming Caterers Check cashing establishments Child care Citrus industry Commercial banking Community banks Computer, electronics components Construction, general building Construction industry contractor Cooperative housing cooperative housing n. an arrangement in which an association or corporation owns a group of housing units and the common areas for the use of all the residents. corporations Emergency care clinics Entertainment industry: Contracts--audit applications Foreign athletes and entertainers Motion pictures and TV Music Theatre--live performances Escort services Extended warranty companies Federal excise tax Excise Tax 1. An indirect tax charged on the sale of a particular good. 2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS. Notes: 1. , coal mining Financial institutions Form 1 042-S withholding agents Form W-8 unreported income Foreign airlines [excise tax) Foreign tourism Furniture manufacturing Garment industry Gasoline distributors Gas retailers Grain and milo growers Grocery stores Healthcare Insurance agencies Intermodal industry (transport containers) Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. section 936 corporations Jewelry dealers Landscaping--lawn care Laundromats Life insurance Liquor stores Low-income housing credits Mining activities (small scale) Ministers Mortuaries Motor fuel tax Nursing or rest homes Offshore casualty reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. companies Oil and gas operators Parking lots Passive activity losses Pawn shops Petroleum contamination cleanup Pizza parlors Plastic surgeons Port of Houston Printing Real estate agents-brokers Real estate developers Recycling Reforestation Reforestation The reestablishment of forest cover either naturally or artificially. Given enough time, natural regeneration will usually occur in areas where temperatures and rainfall are adequate and when grazing and wildfires are not too frequent. Rehabilitation tax credit Rent-to-own Resolution Trust Corproation project (forgiveness of debt) Restaurant Scrap metal Seafood purchases Selling door-to-door--mobile unit Taxicabs Timber sales Timeshare and homeowners associations Tobacco Tour bus industry Tourism Travel Trucking Used auto dealers Wine industry As of December 1994, the IRS had issued eight comprehensive market manuals, with the remaining manuals to be issued in 1996. The guides can be ordered by writing to the IRS, Freedom of Information Reading Room, P.O. Box 795, Ben Franklin Sation, Washington, D.C. 20044. Payment should be in the form of a check or money order payable to the IRS. Prices of specific MSSP guides can be obtained by calling (202) 622-5164. Coordinated issues. In the 1970s, the IRS developed a formal audit plan for large corporate taxpayers--the coordinated examination program (CEP CEP congenital erythropoietic porphyria. CEP abbr. congenital erythropoietic porphyria ). CEP in turn developed an industry specialization program in 1979, that includes IRS specialists throughout the country who are responsible for specific industries. As part of the program, coordinated issues (tax issues peculiar to an industry) were developed and approved by the IRS national office and the relevant industry specialists. All coordinated issues are documented in publicly available position papers. IRS agents always raise coordinated issues in the context of an audit. In March 1994, the IRS issued a revised list of coordinated issues that includes 26 industries and 70 issues. (Partnerships were added in October 1994.) Exhibit 2, page 34, lists the titles. Businesses and the CPAs who advise them should be familiar with industry-specific coordinated issues so they are aware of tax audit issues and potential exposures. EXHIBIT 2 Coordinated issues All industries * Employment contracts * Amortization of order backlog (inventory) * Covenants not to compete * Amortization of market-based intangibles * Customer-based intangibles * Amortization of assembled workforce Aerospace * Deductibility of illegal bribes and kick-backs * Cost overruns and underruns Commercial banking * Character of gain or loss realized on sales of property received by a bank in foreclosure or workout * Core deposit intangibles * Interest received in excess of maximum amount * Accrued interest Accrued Interest The interest that has accumulated on a bond since the last interest payment up to but not including the settlement date. There are two methods for calculating accrued interest: 1) 360-day year method, used for corporate and municipal bonds. on nonperforming loans * Foreign withholding taxes Construction--real estate * Advances for personal services--use of Internal Revenue Code section 482 * IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel. section 467 rental agreements the constant rental method; * IRC section 467 rental agreements the economic method Data processing * "Rotable" spare parts * Research and development credit for tech writers * Investment tax credit on equipment leased to government and nonprofit organizations * Capitalization of lease-related expenses Food * Package design costs * Investment credit on refrigerated structures * Contributions of food inventory to charities Forest products * Expenditures for replanting forest plantations that fail * Paper machine structures * Logging truck roods * Losses of timber following an epidemic of southern pine beetles * Depreciation-modified accelerated cost recovery system Accelerated cost recovery system (ACRS) Schedule of depreciation rates allowed for tax purposes. (MACRS See Modified Accelerated Cost Recovery System. MACRS See Modified Accelerated Cost Recovery System (MACRS). ) class lives * Computation of timber casualty losses * Capitalizing reforestation, costs Ground transportation * Railroad Retirement Tax Act tax on holding companies * Side track deposits * Structured settlements * Trackage track·age n. 1. Railway tracks. 2. a. The right of one railroad company to use the track system of another. b. The charge for this right. rights and other protective conditions Health * Accrual versus cash-hybrid accounting method Insurance, property and casualty * Captive insurance * Reserve strengthening Media-communications * Capitalization of cable franchise costs * Cable television franchise * Customer subscription lists * Federal Communications Commission Federal Communications Commission (FCC), independent executive agency of the U.S. government established in 1934 to regulate interstate and foreign communications in the public interest. station license * Network affiliation agreement Mergers and acquisitions and leveraged buyouts * Loan commitment fee in a stock redemption * Equity pool investment fees Mining * Strike costs Motor vehicles * Excess parts inventory * Dollar-value last-in, first-out (Lifo) definition for an item * Remanufacturers' inventory of cores Partnerships * No coordinated issues have been finalized; they are expected in early 1995 Petroleum * Advances to producers * Estimated dismantling and removal cost of oil and gas assets * Interstate fixed price gas contracts--percentage depletion * Line pack gas * Crude oil trading operations in tax haven Tax Haven A country that offers individuals and businesses little or no tax liability. Notes: There are several countries in the Caribbean that are considered tax havens. counties Retail * Inventory shrinkage reserve * Valuation of an acquired retailer's inventory * Heating, ventilating ventilating Natural or mechanically induced movement of fresh air into or through an enclosed space. The hazards of poor ventilation were not clearly understood until the early 20th century. Expired air may be laden with odors, heat, gases, or dust. and air conditioning (HVAC (Heating Ventilation Air Conditioning) In the home or small office with a handful of computers, HVAC is more for human comfort than the machines. In large datacenters, a humidity-free room with a steady, cool temperature is essential for the trouble-free ) systems investment tax credit (ITC ITC (Brit) n abbr (= Independent Television Commission) → Fernseh-Aufsichtsgremium ITC n abbr (BRIT) (= Independent Television Commission) → ) * ACRS ACRS See: Accelerated cost recovery system ACRS See Accelerated Cost Recovery System (ACRS). and ITC; suspended acoustical ceilings * Retail Lifo valuation of in-transit inventory Savings and loan savings and loan n. a banking and lending institution, chartered either by a state or the Federal government. Savings and loans only make loans secured by real property from deposits, upon which they pay interest slightly higher than that paid by most banks. * Core deposit intangibles * Deferred loan fees-loan liquidation * Accrued interest on nonperforming loans * Validity of regulations section 1.59-36A(b)(5)(vi) * Mortgage buydown * Interest income an the sale of foreclosed property * Deferred loan fees--composite method Securities and financial service firms * Reverse conversions * Taxable year Taxable year The 12-month period an individual uses to report income for income tax purposes. For most individuals, their tax year is the calendar year. of inclusion of stockbroker's commission income Shipping * Federal income tax withholding on wages paid to U.S. crew by a foreign transportation shipping entity Utilities * Line pack gas * Membership payments made to industry-created research organizations Industries with no coordinated issue papers * Air transportation; financial products; gaming; insurance-life; Mexican; pharmaceutical Source: Internal Revenue Service as of October 1994 Significant issues. As a follow-up to coordinated issues in the industry specialization program, the IRS developed another list: significant issues. In contrast to coordinated issues, significant issues are those currently being developed but not yet approved by the IRS national office or CEP industry specialists and not yet documented in publicly available position papers. Significant issues may become coordinated issues and ultimately be raised in audits by IRS agents. As of the latest IRS list (December 22, 1992), there are 111 significant issues. Exhibit 3, page 35, describes them by subject area. The list has not been updated publicly since it was issued. Significant issues are important because they help businesses anticipate concerns the IRS may raise in the future. EXHIBIT 3 Significant issues Aerospace * Internal Revenue Code section 41, Credit for Increasing Research Expenditures * Regulations section 1.45 1-3, Completed Contract Method of Accounting * IRC section 460, Special Rules for Long-Term Contracts Airline industry * Revenue procedure 71-21 * Accrual of expenses * Amortization of intangibles * Overhauls capital versus repairs * Investment tax credit (ITC)) Commercial banking * Financial Accounting Standards Board Financial Accounting Standards Board (FASB) Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). Statement no 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases * Mortgage service rights * Other real estate owned Real Estate Owned Property owned by a lender - usually a bank - after an unsuccessful sale at a foreclosure auction. This is common because most of the properties up for sale at these auctions are worth less than the total amount owed to the bank: the minimum bid in most (OREO) property * Hedging gains and losses * Brazilian foreign tax credit * Foreign tax credit * Interest expense (form 1120F) * Home office allocation (form 1120F) Construction * Aggregation of construction or manufacturing contracts * Severing of construction or manufacturing contracts * Warranty reserves * Rental agreements--economic accrual method * Rental agreements--constant rental method * Interest capitalization * Advance payments for personal services personal services n. in contract law, the talents of a person which are unusual, special or unique and cannot be performed exactly the same by another. These can include the talents of an artist, an actor, a writer, or professional services. * Use of IRC section 482 or subpart F Subpart F Special category of foreign-source "unearned" income that is currently taxed by the IRS whether or not it is remitted to the US for services to controlled foreign corporations Data processing * Research and experimental credit * Capitalization of user manual costs * Valuation of software acquired * Treatment of litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. costs and damages Food * Shelf space Forest products * Asbestos abatement expenditures * Toxic waste toxic waste is waste material, often in chemical form, that can cause death or injury to living creatures. It usually is the product of industry or commerce, but comes also from residential use, agriculture, the military, medical facilities, radioactive sources, and clean-up * Repairs versus capital expenditures * Timber stand establishment costs Health * Nonaccrual experience method of accounting * Incurred but not received (IBNR IBNR Incurred But Not Reported IBNR Interesting But Not Relevant ) deduction * Deferred premium reserve * Medical records (amortization or deduction) * Certificate of need (CON) (amortization) * Student nurse (definition of employment taxes) * Employees subject to Federal Unemployment Tax Act Life insurance * IRC section 807 adjustments * Recomputed reserve calculations * Negative deferential deferential /def·er·en·tial/ (-en´shal) pertaining to the ductus deferens. def·er·en·tial adj. Of or relating to the vas deferens. deferential pertaining to the ductus deferens. earnings rate (mutual life insurance companies--IRC section 809) * Voluntary reserves under IRC section 809 (mutual life insurance companies only) * New product development costs--capitalization under IRC section 263 * Reinsurance transactions--application of IRC section 845 Maquiladora ma·qui·la·do·ra n. An assembly plant in Mexico, especially one along the border between the United States and Mexico, to which foreign materials and parts are shipped and from which the finished product is returned to the original market. (export-oriented production companies in Mexico) * Rental income * Depreciation expense * Business expenses (not ordinary or necessary) * Debt-equity swap conversion gain * IRC section 1504(d) election * Allocation of adjustments to property having dutiable du·ti·a·ble adj. Subject to import tax. dutiable Adjective (of goods) requiring payment of duty Adj. 1. and nondutiable portions Media-communications * ITC transition property * Cable TV incentive payments * Charitable contribution's of newspaper morgue morgue (morg) a place where dead bodies may be kept for identification or until claimed for burial. morgue n. files * Charitable contributions of inventory * Uniform capitalization of prepublication pre·pub·li·ca·tion adj. Of or relating to the time just before a publication date, especially of a book: The marketing department was amazed by the number of prepublication orders. costs in the publishing industry * Magazines, paperbacks and records returned * Film amortization * Cable TV make-ready costs Mergers and acquisitions * Bridge loan commitment fees * Stock redemption costs * Acquisition costs * Debt versus equity * Interest on indebtedness to acquire stock of a corporation * Stock options * Net operating loss * Parachute payments * Debt restructuring * Intangibles Mining * Ash content reduction * Prepaid stripping * Reclamation expenses * Permit costs and environmental impact studies Motor vehicles * Captive reinsurance company income * Research expenses * Last-in, first-out-zero purchase items * Stocklifting costs * Extended service contracts * Lifo bargain purchase * Design and development costs * Components of cost * Software and low-value assets * Factory supplies * Capitalized cost reduction Property and casualty insurance * Unpaid losses * Unearned premium reserves * Punitive damages as unpaid losses * Retrospective rated insurance policies * Mortgage guaranty insurance * Financial reinsurance * Foreign tax credit limitation on life and nonlife consolidation * Uncollectible reinsurance * Health maintenance organizations * Extended service warranty contracts * Salvage and subrogation The substitution of one person in the place of another with reference to a lawful claim, demand, or right, so that he or she who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or Securities. recoverable Railroad * Form CT-1, Annual Railroad Retirement and Unemployment Repayment Tax Return * Fines and penalties * Membership dues * Overcharge claims Retail * Co-op advertising * Lifo election in bargain acquisitions Savings and loan * Federal Savings and Loan Insurance Corp secondary reserve deduction * Interest expense--IRC section 591 * Interest on Federal Home Loan Bank advances * IRC section 7507 claims * Mortgage servicing rights * Capitalization of loan origination costs * Capitalization of entrance and exit fees for insurance funds * Proper tax year * Credit card receivables Source: Internal Revenue Service as of December 22, 1992 Early referral program. As an audit progresses, issues may be raised that cannot be resolved at the audit level with an IRS agent. To help with the settlement process, the IRS developed an early referral program whereby unresolved issues are transferred to the IRS appeals division while the audit continues at the agent examination level. IRS announcement 93-144, issued December 5, 1993, and announcement 94-41, issued March 4, 1994, give details of the program. Early referral is optional, requested by the taxpayer and initially limited to CEP cases. However, it is expected to be expanded to non-CEP cases in the future. The announcements say appropriate issues for early referral consideration include those that, if resolved, could result in quicker resolution of an entire case. As early referral implies, issues should be raised early in an audit. From the perspective of a business's senior management, early referral is worthwhile because it can save considerable time and company resources. Field service advice. In the course of an audit, IRS agents contact IRS lawyers to ask their advice on whether an issue exists, based on certain facts and circumstances. Commonly referred to as field service advice (FSA FSA Financial Services Authority FSA Food Standards Agency (UK) FSA Farm Service Agency (USDA) FSA Financial Services Agency (Japan) ), contact can come in the form of a phone call or a letter. In 1993, 500 formal and 3,300 informal FSA requests were made. FSA recently came under scrutiny. The question is whether taxpayers' rights are protected since the facts of a case are presented solely by the IRS, without a taxpayer's input or knowledge. Are taxpayers' due process rights being violated? FSA procedures are likely to be adjusted to address these concerns. In the meantime Adv. 1. in the meantime - during the intervening time; "meanwhile I will not think about the problem"; "meantime he was attentive to his other interests"; "in the meantime the police were notified" meantime, meanwhile , companies being audited should ask the agent assigned to the audit if he or she has sought FSA. If the answer is yes, businesses should request a copy of the facts presented and the conclusions received. This exchange of information provides a level playing field See net neutrality. for everyone concerned in the audit. Mediation. According to the IRS national director of appeals, the IRS is considering whether to have selected cases at the appeals level decided by mediation. A nonbinding alternative dispute resolution Procedures for settling disputes by means other than litigation; e.g., by Arbitration, mediation, or minitrials. Such procedures, which are usually less costly and more expeditious than litigation, are increasingly being used in commercial and labor disputes, Divorce technique, mediation would be consistent with the IRS's goal of expediting the appeals process and resolving issues before they reach litigation. Specific details of the program are expected by the end of this month. PLAN FOR OR PLAN AROUND Planning may be the key to avoiding--or surviving--an IRS audit. By planning, businesses can anticipate issues the IRS may raise and make certain their handling of certain areas fits the letter of the law. Consistent with those laws, it also might be possible for taxpayers to plan around issues it knows the IRS finds contentious. |
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