All the Tax That’s Fit to Know

All the Tax That’s Fit to Know
Conference Speaker Gives Crash Course in IRS Activity

The Internal Revenue Service doesn’t have an official motto, but if it did, the slogan might read: “Live Well and Be Rewarded.”
No, the Service is not moonlighting as a new age, self-help center, but it is issuing an increasing number of intriguing rulings that could finally make the difference for those clients of yours who have long vowed, albeit vainly, to take better care of themselves and their surroundings.

These rulings were just some of the items covered in a federal tax update presented by Stephen P. Valenti, who launched the Nov. 13 Foundation for Accounting Education’s Annual Tax/Plenary Conference. With the Jobs and Growth Tax Relief Reconciliation Act of 2003 as the primary backdrop, Valenti, who has his own practice and is a professor of accounting, finance and tax at New York University, shed light on a wide array of current IRS priorities and tax developments and cases that could be of interest to both the capacity crowd of CPAs in attendance and their clients.

To Your Health

As medical costs continue to rise, the Service has taken a number of steps to help defray related expenses, perhaps enabling more people to live healthier, longer lives.

Among those steps, Valenti pointed out that there is a new revenue ruling that allows a deduction for taxpayers who want to quit smoking. The deduction is applicable to the costs of two types of treatment (not otherwise reimbursed by insurance): a smoking-cessation program, and physician-prescribed drugs to alleviate the effects of nicotine withdrawal.

Similarly, the Service now permits tax breaks for the costs of certain types of weight-loss programs. As Valenti noted, in order to receive the deduction, taxpayers must be participating in the programs in response to a medical diagnosis such as obesity, and not purely for cosmetic reasons.

And speaking of cosmetic procedures, the costs of surgery that is necessary to “ameliorate a deformity relating to a congenital defect or personal injury from an accident, trauma or disease” are deductible, if the surgery also “promote(s) proper body function” or prevents disease. Consequently, the IRS has ruled, breast reconstruction performed after a mastectomy to treat cancer, and corrective eye surgery are deductible. Teeth-whitening, however, is not.

Further helping to promote a more conscientious society, the IRS has also given the green light to a one-time deduction on new hybrid automobiles—vehicles that through a combination of electric and gas-powered engines burn a cleaner fuel and emit fewer emissions than the more conventional gasoline-only-powered cars on the road.

According to IRS Release 2003-114, car owners who drive a 2004 Toyota Prius may take a deduction of up to $2,000 on Form 1040. The clean-burning fuel deduction, which previously applied to the 2001, 2002 and 2003 Prius, the 2000, 2001 and 2002 Honda Insight and the 2003 Honda Civic Hybrid, will be reduced incrementally until it expires beginning 2007. Under the law, the deduction must be taken in the year the vehicle was originally used.

In the Hopper

Of course, charitable contributions could also be said to be a big boon for the creation of any socially and environmentally responsible society, but the deductions that come with them are increasingly becoming the focus of attention by certain lawmakers, such as Sen. Charles Grassley of Iowa. As such, Valenti observed that there potentially could be “some actions on the part of the Service” to help curb abuse of charitable deductions.

Other actions that Valenti said may be taken by the Service include a renewed effort on the audit and collection side, which “means that we have a responsibility to educate our clients as to the deductibility of certain items,” and a current campaign targeting tax shelters, much like last year’s extensive crackdown on offshore accounts.

Valenti said the Service is also actively looking into providing more incentives for e-filing, noting that there has been a desire expressed that the IRS consider lowering its requirement of more than 100 individual returns for tax professionals who wish to participate in the e-filing program.

Also tied into Valenti’s sweeping discussion, on everything from home sale exclusion rules to pensions and split-dollar life insurance, was the controversial alternative minimum tax, in which he said that “you have a law that needs to be revised” as an increasing number of middle-class taxpayers are exposed it.

Valenti’s comments echoed those of a federal tax simplification task force composed of New York State Society of CPAs members who earlier this year reported to Congress that the AMT “no longer serves the purpose for which it was intended, functions inequitably in certain cases, and adds enormous compliance burdens.”