Noose Tightened Further on Patented Tax Strategies

The Treasury this week issued proposed regulations that would add patented transactions to the list of reportable transactions. As noted in our July 20, 2007 post, Congress is moving towards making tax planning techniques unpatentable. While classifying a transaction as a reportable transaction does not make it incorrect or illegal, the fact that a taxpayer must report a transaction has a chilling effect on taxpayers entering into such transactions. After all, who wants to face the resources of the government to prove they have properly reported a transaction, no mater how defensible their reporting might be?

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More New Hires will Qualify for Jobs Tax Credit

Recent changes to the Jobs Tax Credit may allow many more employers to claim a tax credit for new hires, particularly in the Texas Panhandle and Tri-State area. Before the changes, the law provided a tax credit to employers who hired disadvantaged workers. The tax credit can be as much as $2,400 for each person hired.

The credit has been expanded to include a new category of eligible workers: individuals who are at least 18 year old, but less than 40 on the date of hire, and who reside in a county that lost population through the 1990s. The IRS has just identified those counties, and they include:

  • Bailey, Briscoe, Castro, Collingsworth, Cottle, Deaf Smith, Floyd, Gray, Hall, Hemphill, Hockley, Hutchinson, Lamb, Oldham, Roberts, and Wheeler in Texas
  • Harding and Quay in New Mexico
  • Beaver, Cimmaron, Custer, Dewey, Ellis, Greer, Harper, Harmon, Kiowa, Roger Mills, and Woodward in Oklahoma.

A list of all counties meeting that definition can be found in the Instructions to IRS Form 8850. The new law becomes effective for hires made after May 25, 2007. 

The “catch” in the law is the requirement that employers must submit a certification request to their state workforce agency within 28 days of the date of hire using IRS Form 8850.

The employee does not actually have to be a “disadvantaged” person. They only have to reside in one of the listed counties at the time of hire and throughout the period they receive wages that qualify for the credit. In fact, highly paid or managerial employees who happen to reside in a listed county will qualify.

EGTRRA Effect on Federal Estate Tax Returns

An article in the summer 2007 issue of the Statistics of Income Bulletin shows how recent changes in the estate tax exemption level have significantly reduced filings of estate tax returns. Remember, the current estate tax scheme introduced by Congress under the Economic Growth and Tax Relief Reconciliation Act of 2001 ( EGTRRA) gradually increased the federal estate tax exemption ($1,500,000 for 2004-2005 and $2,000,000 for 2006-2008) and decreased the highest federal estate tax rate (48% in 2004, 47% in 2005, 46% in 2006, and 45% in 2007-2009).  This article highlights the changes from 2001 to 2005 in the number of federal estate tax returns filed, the total value of the assets reported on these returns, and the federal estate taxes paid on these returns.  Specifically:

  • the total number of estate tax returns filed fell by 58% to about 45,000 in 2005 from about 108,000 in 2001;
  • the total amount of assets represented by these returns fell by 14% to $185 billion in 2005 from $216 billion in 2001;
  • however, net estate taxes reported on these returns declined by only 8%.

It is interesting that the number of returns filed fell by 58% but the amount of tax paid only fell by 8%.  Because the article just examined the differences in the numbers from 2001 to 2005 and we have since entered into another higher level of federal estate tax exemption and a lower federal estate tax rate, I wonder what the numbers will reflect in the next report.  Stay tuned for more to come.

New Return Preparer Penalties Effectively Increase Return Disclosure Requirements

Buried in legislation enacted last May are major changes to the rules imposed on return preparers. The law was passed without much possibility for discussion or input from tax practitioners or even the IRS. It came as a such a surprise to the IRS that the IRS delayed the effective date of the new standards and sanctions under Section 6694(a).

Some of the effects of these new rules are likely to be:

  • conflicts arising from the fact that taxpayers need only meet a substantial-authority test on most tax positions, but preparers must meet a more-likely-than-not test that, if not met, requires a disclosure on the return.
  • an increase in the fees of return preparers to cover the increased work necessitated by and the increased exposure to higher penalties.
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