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Interest suspension: plus: employment law and partnership agreements.

The FTB has announced it will follow the federal rule for interest suspension on amended returns.

The IRS released Rev. Rul. 2005-4 Jan. 7, 2005, which held that the interest suspension period of Sec. 6404(g) applies to deficiency notices and to self-assessed amounts shown on amended returns filed by the taxpayer.

The federal ruling holds that for taxpayers filing amended returns, the suspension period ends on the date the amended return is filed if the individual pays the tax due with the amended return, or within 21 days following the date on which the individual files the return, if they do not pay the additional tax due with the amended return.

FTB Notice 2005-4, issued Sept. 27, 2005, states that it will follow the federal Rev. Rul. 2005-4, and suspend interest on amounts reported on self-assessed amended returns in which the taxpayer:

* Is an individual;

* Files a timely original return for a taxable year ending after Oct. 10, 1999; and

* Filed an amended return for the taxable year, increasing the taxpayer's liability, more than 18 months after the filing of the original return.

If these requirements are met, interest will be suspended--not charged--from 18 months from the later of the date the original return was filed or the due date for the original return, without extension, until 15 days after the amended return is filed.

Interest suspension does not apply to an amended return filed by a taxpayer on or after Jan. 1, 2004, reporting additional tax as the result of the use of a potentially abusive tax shelter where:

* The taxpayer was contacted by the FTB about the use of a potentially abusive tax shelter; and

* The taxpayer has taxable income greater than $200,000.

The FTB will take action to refund interest on those accounts for taxable years ending after Oct. 10, 1999, for which the statute of limitations was open as of Jan. 7, 2005. Taxpayers do not need to write to the FTB about this interest abatement.

What forms should an employer file if a worker is an employee for California purposes, but an independent contractor for federal purposes?

Jim Counts, CalCPA's Employment Development Department liaison, recommends issuing only a 1099-Misc. Form to the worker. In the form's Memo section, indicate the amount of state and SDI withholding.

If the employer files a W-2 with the EDD, but not with the IRS, the IRS will use the W-2 filing as an argument against the business to say that the worker is an employee and not an independent contractor. In addition, the IRS will not allow the employer to use Sec. 530 or other rules to say that the worker is an independent contractor.

By the way, Sec. 530 is not in the Internal Revenue Code; it is in P.L. 95-600. IRC Sec. 530 pertains to Coverdell Education Accounts.

Sec. 530 of P.L. 95-600 says that a business owner's classification of a worker as an independent contractor will be considered reasonable if it was made in reasonable reliance on past IRS audit practice with respect to the business; published rulings or judicial precedent; recognized practice in the business' industry; or IRS technical advice or a letter ruling given to the business.

Limited partners in a partnership are upset because the general partner won't make a Sec. 754 election, and wish to seek judicial help in replacing the general partner. What are their chances?

This question calls for an attorney's advice. However, one TaxTalk participant with experience in this area said that these types of threats and lawsuits generally go nowhere because the courts are reluctant to replace general partners, no matter how egregious the limited partners think the general partner has been.

The lessons here are that hip-pocket partnership agreements often contain unanticipated pitfalls, and at minimum, most partnership agreements should have a Sec. 754 election provision

IRS Form 8886

California requires a separate filing of IRS Form 8886, "Reportable Transaction Disclosure Statement." The form is to be filed to report listed transactions, confidential transactions, transactions with contractual protection, certain loss transactions, transitions with significant book-tax differences and transactions with a brief asset holding period.

Unethical tax preparers

The FTB and Spidell have held public meetings with tax practitioners regarding the tax gap. In one such meeting, several tax practitioners were upset that they'd reported "refund mills" to the FTB and nothing ever happened. Apparently the FTB has taken action.

An Indio-based tax preparation service operator, and his employee/nephew, were arrested on felony charges involving filing false state income tax returns and negotiating fraudulent refund checks. They allegedly generated more than 200 returns claiming false or inflated child and dependent care credits, resulting in false state tax refunds of $93,680.


Thanks to Jim Counts, CPA; Roger Cruiser, CPA; John DiCarlo, CPA; and Don Yamagishi, JD, CPA.

By Leonard W. Williams, CPA

Leonard W. Williams, CPA is a Sunnyvale-based sole practitioner. A member of CalCPA's Committee on Taxation, the AICPA Tax Division and a former Peninsula Chapter president, you can reach him at
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Author:Williams, Leonard W.
Publication:California CPA
Geographic Code:1U9CA
Date:Jan 1, 2006
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