Tax Watch: House quizzes IRS on ID-matching for returns

Dan Burton, the Indiana Republican who heads the House Government Reform Committee, has written to Internal Revenue Service Commissioner Charles O. Rossotti asking about the agency’s policy for verifying Social Security names and numbers on joint returns.

According to an IRS news release (IR-2000-68), the agency issued notices from September to mid-November of last year to inform taxpayers whose returns had mismatched names and numbers. The notices instructed taxpayers to correct the error with the Social Security Administration before filing a 2000 tax return.

The IRS reported that it will remove the second spouse’s name from 2000 returns that have a mismatched name and Social Security number. The return will then be reclassified as single or head of household, resulting in the loss of an exemption.

Affected taxpayers will end up with an increased tax burden, and some will end up with a tax liability instead of a refund.

Mr. Burton’s letter to the IRS commissioner aims to guarantee that the verification policy is efficient and consistent.

“The committee wants to ensure that all taxpayers are treated fairly in the verification process and given the opportunity to remedy any errors. In order to do so, the committee needs to understand more fully the policy and process the IRS intends to follow in carrying out the verification process,” the letter states.

GAO issues warning

against tax cuts

* The General Accounting Office, Congress’ investigative arm, has warned lawmakers about passing big tax cuts – or for that matter big spending increases – based on Congressional Budget Office projections for a $5.6 trillion budget surplus over the next 10 years.

“These projections are based on a set of assumptions that may or may not happen,” David Walker, the GAO’s comptroller general, told the Senate Budget Committee. “No one should design tax or spending policy pegged to the price numbers of any 10-year forecast.”

Mr. Walker’s testimony came as Congress prepares to begin work on a $1.6 trillion tax cut package offered by President Bush. The president sent details of the plan to Congress early this month. That plan’s price tag could increase to more than $2 trillion over 10 years as lawmakers shepherd the legislation through Congress.

Mr. Walker did say that the surplus projections provide “room to address pent-up demands for some tax cuts and additional spending.”

He warned, however, that the outlook for the federal budget in the long term “looks worse because of Social Security and Medicare costs that are expected to mushroom as the baby boom generation nears retirement age.

“Without a change in entitlement programs, demographics will overwhelm the surplus and drive us back into escalating deficits and debt,” Mr. Walker said.

Withholding scam

reported by IRS

* The IRS has issued a consumer alert (IR-2001-18) about illegal schemes in which employers are instructed not to withhold federal income tax or employment taxes from wages paid to their employees.

The schemes are based on an incorrect interpretation of tax law and have been refuted in court, according to the IRS.

If an employer withheld employment taxes but failed to deposit them or failed to issue W-2s, the IRS instructs taxpayers to contact the employer to request the forms. If a taxpayer is unable to get a W-2 from the employer, the taxpayer should complete and attach Form 4852, “Substitute for W-2,” to the tax return using the best data available to calculate the wages and withholding.

Should an employer refuse to withhold employment taxes, and the IRS is unable to collect taxes from the employer, the IRS says, the employees are still responsible for paying income tax and their share of the Fica tax.

Form is revised

for taxpayer ID

* In December, the IRS issued a revised Form W-9, “Request for Taxpayer Identification Number and Certification.” The major change in the new version of the form is in Part III, “Certification,” where a payee must now certify that they are a U.S. “person” (including U.S. resident aliens).

Originally, Form W-9 asked the payee to certify only that their taxpayer identification number was correct and that they are not subject to backup withholding.

Because the certification of U.S. status affects only new accounts, financial institutions, brokers and other payers are not required to solicit existing clients to establish their U.S. status.

Nor are such payers required to use the new form for new accounts until July 1.

In general, Form W-9 certifications are required where broker proceeds, interest and dividends are paid and sales of real estate are reported.

In the announcement, the IRS reiterated that a foreign person may not use Form W-9 to furnish their taxpayer identification number to the payer after Dec. 31, 2000. Instead, foreign payees must use the appropriate form, W-8.

Cite: Announcement 2001-15

U.S. marshals seize

Indianapolis church

* In an unprecedented, although legally justified and warranted, move, U.S. marshals recently seized an Indianapolis church to satisfy more than $6 million in tax debt.

The U.S. Supreme Court had cleared the way earlier this year for the seizure of the Indianapolis Baptist Temple.

The Baptist Temple stopped withholding federal income and Social Security taxes from its employees’ paychecks in 1984, saying the church’s duty to obey God allowed no room for man-made laws and that withholding taxes would make it an agent of the government. In November, authorities had seized the church’s parsonage, a few miles away.

The federal government had never before seized a church for failing to pay taxes, says Richard Hammar, a lawyer for the Assemblies of God church in Springfield, Ill., and an expert on churches and tax law.

“To have the IRS come in and seize the church’s property, that is an extraordinary event unparalleled in American history.”

Regs are changed

on rent payments

* The IRS has adopted changes to the regulations under Section 467 (deferred rental payments) regarding the treatment of increasing or decreasing rents, or deferred or prepaid rent. The newly adopted regulations are substantially the same as those proposed and published May 18, 1999.

Under the revised regulations, a rental agreement may be a disqualified lease-back or long-term agreement – and consequently may be subject to constant rental accrual – even if it requires $2 million or less in rental payments and other considerations. The $2 million constant-rental-accrual exception previously contained in the Section 467 regulations has been eliminated for rental agreements effective after July 18, 1999.

In addition to the removal of the $2 million exception, the IRS has clarified the definition of “lease term,” when an amount is considered payable and whether a Section 467 rental agreement provides adequate interest.

Under the revised Section 467 regulations, lessee options are included in the lease term only if it is expected, as of the agreement date, that the options will be exercised. Also, when applying all of the Section 467 rules, an amount is considered payable on the last day for timely payment.

Cite: T.D. 8917