The Internal Revenue Service recently announced that taxpayers who need more time to complete their forms will find it easy to extend their filing deadline. They don't need an excuse or even a stamp, according to a recent IRS news release.
Automatic four-month extensions are now available by phone or by computer, as well as through the more traditional Form 4868.
Those getting extensions can also pay electronically any projected tax due, although payment is not required in order to obtain an extension. Taxpayers must make their requests by the normal filing deadline. The IRS expects 8 million extension requests this year.
Cite: IRS Release No. IR-2001-57
IRS wasn't ready for e-filing
IRS officials decided during the 2000 tax-filing season to launch the agency's e-file computers before completing all of the security requirements for formal certification and accreditation, according to the General Accounting Office.
In recent testimony before a House investigative committee, Robert F. Dacey, the GAO's director of information security issues, said e-filing was a major IRS initiative that the agency had aggressively marketed to meet the congressionally established goal of having 80% of all tax and information returns filed electronically by 2007.
Mr. Dacey told a House Government Reform subcommittee that except for taxpayers who file their returns by telephone, the IRS does not allow individual taxpayers to transmit electronic tax returns directly to the agency.
Instead, those taxpayers must use an IRS e-file partner, Mr. Dacey said. Such partners include electronic return originators, intermediate service providers and transmitters.
But Mr. Dacey said that during the 2000 filing season, the IRS did not implement adequate computer controls to ensure the security, privacy and reliability of the electronic filing systems and the tax return data within them.
Tax day may have impact on stocks
Analysts seeking seasonal patterns to the stock market have long looked for a tax-day effect, theorizing that stock prices would decline a day or two before tax payments are due as procrastinators liquidated holdings to meet their obligations.
Under that theory, stocks should rise immediately afterward as savvy buyers snap up stocks temporarily depressed by the forced selling.
Anthony J. Cataldo and Arline Savage documented the effect last year in their book, "The January Effect and Other Seasonal Anomalies: A Common Theoretical Framework."
Mr. Cataldo, a professor of accountancy at Western Michigan University in Kalamazoo, wrote that the effect could be detected as far back as 1918, when the marginal income tax rate more than quadrupled under the War Tax Act.
The tax-day impact is not seen every year, according to Mr. Cataldo, and it is a minor fluctuation compared with the far better known January effect attributed to year-end tax-loss selling.
In fact, April has usually been a good month for stocks in recent years as investors would take advantage of their last chance to cut the previous year's tax bill by investing in their individual retirement accounts.
Tax scam marketing gets Senate's eye
The Senate Finance Committee has announced hearings on increasingly sophisticated web-based tax scams and cons. In announcing the hearing, the committee said: "Hundreds of thousands of taxpayers are either participating in these schemes or are seriously considering participating in them by receiving literature and attending seminars."
The IRS says that it doesn't have any reliable up-to-date measures of tax cheating. IRS Commissioner Charles Rossotti, scheduled to testify before the committee, acknowledged that the lack of information is a big problem and said the agency is developing new ways to tackle it.
Officials at the IRS say its criminal investigation division has intensified enforcement activity, resulting in many significant convictions for "abusive" trusts and other tax crimes. Some have involved long jail sentences.
The IRS also recently embarked on the largest enforcement action in its history, executing more than three dozen search warrants in connection with a series of related investigations of foreign-based tax-evasion schemes.
1,467 topping 200G still paid no tax
According to a recently released IRS report, the number of tax returns showing adjusted incomes of more than $200,000 and no tax liability reached 1,467 in 1998, the highest number since the agency began keeping the statistic in 1977.
The previous high of 1,253 was reached in the 1991 tax year. Nevertheless, the percentage of well-to-do Americans paying no tax was basically flat as the number of wealthy individuals rose with the nation's prosperity.
The IRS study, for which the 1998 figures are the most complete, doesn't reach any conclusions about whether improper tax shelters were a factor in the latest numbers.
Wash sale unclear for fund holders
A reminder: Any investor who sells securities at a loss and who, within 30 days before or after that sale, purchases substantially identical stock or securities, cannot deduct the loss for tax purposes. Instead, the new shares acquired have a basis determined by the investor's basis in the shares sold.
Thus, the loss isn't permanently disallowed, merely postponed until a sale is made that isn't a wash sale. Unfortunately, the existence of a wash sale is not always clear.
When, for example, an investor sells 100 shares of XYZ Co. and purchases 100 shares within the 30-day period, it is an obvious wash sale. However, a wash sale can also occur when an investor sells shares in a mutual fund.
That can occur even if the investor didn't consciously purchase shares during the prohibited period.
An investor with a monthly investment plan or a plan where dividends and distributions are reinvested in the fund could run afoul of the wash sale rules.
For instance, ABC Tech Fund pays a $3-a-share dividend, which the fund uses to purchase additional shares.
Within 30 days, the investor sells shares of ABC Tech Fund. Any loss on the sale could be disallowed under the wash rules.
Taxpayers win on allowance claims
A federal court has ruled that a tax partnership "substantially" complied with election requirements to be allowed, at least for the purposes of claiming depletion allowances, to treat as separate properties multiple fractional working interests acquired by the partnership in parcels of land.
The taxpayers, through a general partnership, True Oil Co., owned fractional working mineral interests in parcels of land throughout the United States.
The taxpayers never filed a formal election statement. Instead, they attached schedules that identified the amount of depletion allowances claimed.
The court ruled that the taxpayers demonstrated substantial compliance with the election requirements.
Cite: True v. United States, No. 00-CV-1014-B
Court says computer has sound memory
The 2nd U.S. Circuit Court of Appeals has agreed with a U.S. district court that the statute of limitations on one individual's 1979 return had not run out because the individual consented to extend the limitations on assessments.
After all, the IRS' computers wouldn't lie, would they?
Stanley Malkin claimed a loss on his 1979 tax return for an investment. The IRS disallowed the loss.
The IRS determined that the investment entity generated fraudulent losses for its investors and in 1991 made an assessment against Mr. Malkin of taxes for 1979. A settlement was negotiated, which Mr. Malkin paid.
Mr. Malkin then brought a suit for refund on the grounds that the statute of limitations had run out before the assessment by the IRS of a deficiency.
The U.S. district court ruled that Mr. Malkin had failed to overcome the presumption that he signed a consent to indefinitely extend the limitations period
The court noted that the IRS had adequately proved the existence of the signed form and its entry by the agency into its computer system.
Cite: Stanley L. Malkin v. United States, 2nd Circuit
Tougher standards
on shelter opinions
As part of its effort to deter abusive tax shelters, the U.S. Treasury has proposed revisions to Circular 230, which provides the standards of practice for lawyers, accountants and enrolled practitioners.
The proposals would impose stricter standards for issuing tax-shelter opinions to prospective investors. The revisions would also prohibit certain contingent arrangements that base practitioners' fees on tax benefits obtained and require companies to adopt procedures to ensure compliance with Circular 230.
Historically, tax-shelter opinions have been used to assure investors that the purported tax benefits of a shelter are likely to be sustained if challenged by the IRS and to provide protection against the imposition of IRS penalties.
An opinion which concludes that the promoted tax treatment of a tax-shelter item is "more likely than not" the proper tax treatment can provide a taxpayer with a "reasonable belief" defense or a "reasonable cause" penalty defense.
