March 2001

National

E-furnishing, IRS Next Generation Tax News

Trying to accommodate the public’s needs, the Internal Revenue Service in February issued temporary and proposed regulations that permit electronic furnishing of Form W-2, Form 1098-E, and Form 1098-T.

Though employers/payers can still provide information statements in written form, they now have the option of electronically delivering a copy of a Form W-2, “Wage and Tax Statement,” to an employee through a website. The same rules apply to individuals who must provide Form 1098-T, “Tuition Payments Statement” or Form 1098-E, “Education Loan Statement.”

The IRS says the new option will reduce the cost of processing, printing, and mailing paper statements and will benefit recipients who will receive the information faster without the worry of mailing delays or lost statements.

The temporary regulations do not change the rules for filing copy A of Forms W-2 with the Social Security Administration or the filing of Forms 1098-T or Forms 1098-E with the IRS.

For more information, visit www.irs.gov or refer to the Feb. 14, 2001, issue of the Federal Register.

Group of Wealthy Americans Unite Against Estate Tax Repeal

Over one hundred of America’s wealthiest taxpayers have come out against President Bush’s proposal to repeal the estate and gift taxes.

William H. Gates, Sr., the father of Microsoft’s founder and current chair, Bill Gates, started a petition against the repeal.

The petition states that “repealing the estate tax would enrich the heirs of America’s millionaires and billionaires while hurting families who struggle to make ends meet” and that the loss of such resources “will inevitably be made up either by increasing taxes on those less able to pay or by cutting Social Security, Medicare, environmental protection, and many other government programs so important to our nation’s continued well-being.”

Those who have signed the petition thus far include financier George Soros, philanthropist David Rockefeller, Jr., and Ben & Jerry’s founder Ben Cohen.

Although many of those who have signed the petition identify themselves as Democrats, Gates asserted that the petition was his own brainchild and that it has attracted nonpartisan support, according to The New York Times.

Under Bush’s $1.6 trillion tax plan, both the estate and gift taxes would be phased out by 2009.

IRS Warns Public on Illegal Tax Schemes

The IRS issued two consumer alerts regarding failure to withhold federal income tax and tax fraud last month.

Over the past several months, the IRS has been investigating a small number of cases where employers, who appear to wantonly misinterpret tax law and the “source” of income clause, are failing to withhold federal income and employment taxes from wages paid to their employees.

“We are pursuing these cases to uphold the law and make sure everyone pays their share,” said IRS Commissioner Charles O. Rossotti. “We don’t want to see taxpayers caught in a bind because employers fail to properly withhold taxes.”

The IRS also does not want to see taxpayers fall victim to tax scams. In a different alert, the IRS warned the public to be wary of “special” tax refunds and other promises that sound too good to be true.

The IRS encourages taxpayers to report suspected tax fraud at (800) 829-0433. For more information on these scams, visit www.irs.gov.

IRS Completes EIN Applications in Days If Faxed

Looking for an employee identification number from the Internal Revenue Service? CPAs who fax their requests to the agency are cutting the time to process their requests from weeks to days, thanks to the IRS’ Tele-tin unit.

While a completed Form SS-4 is still required, the IRS’ Tele-tin unit can process telephoned, faxed, and mailed-in requests for employer identification numbers requests within days or weeks, depending on how the request was made.

According to IRS Spokesperson Christine Hicks, faxed requests with no additional correspondence required are processed within four business days, compared to mailed-in requests which take four weeks to process. CPAs are encouraged to include their fax numbers in case the application is incomplete so tax examiners can fax back the application to resolve issues that need further clarification.

Requests can be faxed to the Tel-tin unit at (631) 447-4991. Third party requests, however, must include Form 2848 or 8821.

Tax Sites Experience Increase in Visitors

U.S. taxpayers across the country have been going online in an effort to meet the April 15 deadline for filing their 2000 returns.

According to statistics compiled by Nielsen/NetRatings, the number of visits to tax preparation websites increased greatly during the week of January 15, based on online destinations with the largest increases in traffic included the Internal Revenue Service’s official site and that of Intuit, a tax preparation software company.

Between January 15th and 21st Intuit.com had 608,000 visitors—twice as many as it did during the previous week, while IRS.gov experienced a 57 percent increase in traffic with 551,000 different visits, said the Nielsen report. The average visit lasted nearly 12 minutes, with most people concentrated on the pages enabling them to download tax forms.

Analysts believe that sometime in the future, taxpayers will complete the entire filing process on the Internet, according to a CNET news story.

Study Indicates IRS Audit Trends Are Changing

Based on IRS audit statistics for the past 10 years, a recent study found that there is a new “high risk” taxpayer category for audits.

Self-employed business Schedule C returns have replaced individuals with over $100,000 in total income (and not self employed) as the taxpayer category most likely to be hit with an audit, according to an examination of IRS audits by the Audit Protection Institute. In 1988, individuals with over $100,000 in total income had an 11.4 percent chance of being audited, but most recent data reveals that likelihood has dropped to 1.7 percent.

Schedule C audit rates vary from 2.4 percent for Schedule Cs with less than $25,000 in gross receipts to a high of 3.3 percent for Schedule Cs with greater than $100,000 in gross receipts, the study concluded.

“[I]t’s also surprising to find that if your income is greater, between $25,000 and $100,000, your risk of audit actually falls to only 6 percent, or 1 taxpayer in 167,” said Dan Walker, executive vice president of API. “One reason that taxpayers with income less than $25,000 are audited more than taxpayers with income between $25,000 and $100,000 is due to the EITC claimed on lower income returns.”

Because the Earned Income Tax Credit is complicated, it often is claimed in error, which explains the frequency of audits for those types of returns, Walker said.

State and Local

State Assembly Passes NYC Heating Oil Relief

The New York State Assembly moved quickly in February to approve legislation that provides quick relief on home-heating costs for New York City residents by allowing the city to eliminate its four percent sales tax on heating fuels.

The bill (A.3332-A) is in response to New York City Mayor Rudolph Giuliani’s request to roll back the sales tax on home heating oil for 60 days. Under the bill, the New York City Council has the option to repeal its four percent tax on sales of oil and natural gas used for home heating and other residential uses, either for a limited time or permanently.

“Over the past year, heating oil costs in New York City are up 36 percent and natural gas costs have risen 44 percent,” said New York State Assembly Speaker Sheldon Silver. “These high energy costs are creating a financial hardship for working families, seniors on fixed incomes, and many other New Yorkers.”

“Because we recognize that timely action on this matter is essential, we have acted quickly to authorize the city to lift the sales tax on home heating fuels,” said Assembly Ways and Means Committee Chairman Herman “Denny” Farrell, who is also primary sponsor of the current Assembly UAA bill. “Now we hope that the Senate and the governor will act immediately to ensure that fuel tax relief can be enacted into law as soon as possible.”

State Hands Out Refunds at Record Rates

The New York State Department of Taxation and Finance said that it is doling out a large number of state income tax refunds so far this tax season, setting new records for the total number and amount of refunds.

The Department paid out more than 21,000 refunds totaling nearly $12 million, compared to less than 1,600 amounting to $1.2 million during the same period last year. The number of returns filed by January 31 of this year totaled 309,783, compared to 181,141 in 2000.

The rate of refunds for this tax season are being credited to tax cuts over the past six years, an additional $500 million set aside in the current budget by Governor Pataki to accelerate refunds, and an increased use of electronic filing technology by the department during the last several years.

“E-filing your New York State tax return helps us to turn your return around much more quickly than using paper forms,” said New York State Commissioner of Taxation and Finance Arthur J. Roth. “In fact, by filing electronically, you can expect to receive your refund in about half the usual time.”