March 2008 Tax Update

While the 2008 economic stimulus payments (also known as tax rebates, but not to be confused with refunds) have made most of the tax news headlines the past few weeks, there have been many other important federal tax developments so far this year. In fact, there have been so many that it's likely you have not been able to keep up with all of them. We'd like to highlight some of the more important developments for you. As always, if you have any questions about these developments, or any others, please give our office a call or drop us an email. We'll get you an answer right away.

Stimulus payments. The IRS has announced the distribution schedule for the 2008 economic stimulus payments. Payments will be made based on the last two digits of the recipients' Social Security number. Electronic deposits start May 2 and paper checks will be in the mail as of May 16.

While your income may be too high to receive a payment, keep in mind that you may know people who do qualify. For example, seniors on fixed incomes would likely qualify. However, to receive an economic stimulus payment, they must file a 2007 return. If they don't, they'll miss out on a payment. If you are married and usually file a joint return, you may want to consider filing separately this year. You could qualify for an economic stimulus payment; although your tax liability could be higher. We can "run the math" and calculate what filing status works best for you.CCH Federal Tax Weekly, No. 11, March 13, 2008; CCH Federal Tax Weekly, No. 12, March 20, 2008.

Audits. Everyone wants to know who the IRS is auditing but the agency rarely gives any details. However, it announced in January that one out of 11 millionaires faced an audit in 2007. More than 30,000 millionaires were audited in 2007 compared to 17,000 in 2006. Moreover, audits of all individuals across all income levels increased in 2007.

The IRS reported that the total number of individual returns audited in 2007 was 1.38 million compared to 1.29 million in 2006. The IRS also announced that audits of S corporations and partnerships rose in 2007 but audits of large corporations fell. CCH Federal Tax Weekly, No. 4, January 24, 2008.

Your return information. As tax professionals, we take very seriously the responsibility to safeguard your personal information. We place the highest premiums on protecting the confidentiality of client information. In January, the IRS issued final rules about the disclosure of return information. Tax professionals may not disclose a taxpayer's return information without obtaining prior consent, unless there is an authorized exception, the IRS reiterated. At the same time, the IRS announced that it would be taking a new look at refund anticipation loans (known as RALs). CCH Federal Tax Weekly, No. 2, January 10, 2008.

Preparer penalties. The IRS also issued in January interim guidance to help return preparers apply new rules about preparer penalties. Under the interim guidance, a return preparer may rely in good faith without verification upon information furnished by the taxpayer to determine if he or she has a reasonable belief that the position would more-likely-than-not be sustained on the merits. However, the preparer may not ignore the implications of information furnished to the preparer or actually known to the preparer and must make reasonable inquiries if the information appears incorrect or incomplete. CCH Federal Tax Weekly, No. 2, January 10, 2008.

Housing news. The housing slump is hitting many communities very hard and last year Congress gave homeowners in foreclosure some relief. A new law, the Mortgage Forgiveness Debt Relief Act of 2007, allows taxpayers to exclude from income the debt forgiven on their principal residence if the loan balance was less than $2 million. In February, the IRS issued a revised form to report mortgage debt forgiveness (Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness). CCH Federal Tax Weekly, No, 7. February 14, 2008.

The housing downturn also has many individuals wondering if they can sell their vacation properties. One alternative to selling is a like-kind exchange. Also in February, the IRS announced new rules for like-kind exchanges of vacation homes. The IRS will not challenge a vacation home as qualifying for purposes of Code Sec. 1031 as property held for productive use in a trade or business or for investment if the home is only occasionally used by the taxpayer for personal use and is predominately used to generate rental income. CCH Federal Tax Weekly, No. 8, February 21, 2008.

Executive compensation. Sometimes the IRS makes an announcement that is totally unexpected. That happened in January when the IRS determined that incentive awards paid to a corporate executive did not qualify as performance-based compensation under Code Sec. 162(m). The private letter ruling sent shock waves through many corporations, which use incentive awards to boost executive pay.

For a short time, it appeared that the IRS would pull back from the letter ruling. However, the IRS not only affirmed the letter ruling in February but also expanded it. The IRS is allowing some transition relief. CCH Federal Tax Weekly, No.9, February, 28, 2008.

Depreciation limits. In March, the IRS announced the depreciation limits for business automobiles, trucks and vans first placed in service in 2008. The 2008 amounts for passenger automobiles are $2,960 for the first tax year ($10,960 for passenger automobiles qualifying for 50 percent first-year bonus depreciation under the Economic Stimulus Act of 2008); $4,800 for the second tax year; $2,850 for the third tax year; and $1,775 for each tax year thereafter.

The 2008 amounts for trucks and vans are $3,160 for the first tax year ($11,160 for trucks and vans qualifying for 50 percent first-year depreciation); $5,100 for the second tax year; $3,050 for the third tax year; and $1,875 for each tax year thereafter. CCH Federal Tax Weekly, No. 11, March 13, 2008.

Capitalization. The IRS had good news for many taxpayers in March when it withdrew proposed regulations issued in 2006 about the capitalization of payments to acquire, produce or improve tangible property. The proposed regulations had been criticized for their complexity. The IRS rewrote the proposed regulations and made them much more taxpayer-friendly, getting rid of some of the complex analyses that could have resulted in different results for similar taxpayers. The reissued regulations describe, among other things, materials and supplies that can be deducted and actions that satisfy a safe harbor for routine maintenance. CCH Federal Tax Weekly, No. 11, March 13, 2008.

Frequent flier miles. Frequent flier miles are one of the most common perks available and everyone has accumulated some. Several years ago, the IRS determined that frequent flier miles are not included in an employee's gross income for tax purposes unless his or her employer reimburses the employee in cash for the fair market value of frequent flier miles accumulated on business trips.

In January, the IRS issued a private letter ruling that held that frequent flier miles purchased by a business to provide mileage awards would be subject to a federal excise tax. Because it is a private letter ruling, the IRS' determination is limited to the taxpayer that requested it. We'll watch for more developments about frequent flier miles from the IRS and keep you posted. CCH Federal Tax Weekly, No. 4, January 24, 2008.

Supreme Court. The Supreme Court decided three important cases for trusts and estates, pension plan participants and taxpayers in criminal tax actions in the first quarter of 2008.

In January, the Supreme Court placed limits on the deductions for investment advisory fees and other costs paid by trusts and estates. Shortly after the Supreme Court's ruling, the IRS announced interim guidance. Under the interim guidance, trusts and estates may temporarily disregard the unbundling requirement in the proposed regulations. Taxpayers will not be required to determine the portion of a bundled fee that is subject to the two percent floor under Code Sec. 67(e) for any tax year beginning before January 1, 2008. CCH Federal Tax Weekly, No. 4, January 24, 2008; CCH Federal Tax Weekly, No. 10, March 6, 2008.

In February, the Supreme Court ruled that participants in 401(k) and other defined contribution plans can sue for losses to their individual retirement savings accounts that arise from breaches of fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA). The unanimous decision is a significant change from prior law. Traditionally, a plan participant could only sue on behalf of the plan and had no right to recover for losses sustained to the individual's particular account. In a very technical opinion, the Supreme Court found that one provision of ERISA allows suits for fiduciary breaches arising under another provision that impair the value of plan assets in a participant's individual account. CCH Federal Tax Weekly, No, 9, February 28, 2008.

In March, the Supreme Court held that a taxpayer in a criminal tax case could treat a distribution as a return of capital without showing contemporaneous intent. The decision is a loss for the IRS, which had urged the Supreme Court to make an exception for diverted funds. The case has been sent back to the lower court for disposition. CCH Federal Tax Weekly, No. 11, March 13, 2008.

New IRS Commissioner. The IRS has a new leader, Douglas Shulman. Mr. Shulman succeeds Mark Everson who left the IRS in 2007. Mr. Shulman has promised to make customer service and enforcement of the tax laws his top priorities. CCH Federal Tax Weekly, No. 12, March 20, 2008.

These are just some of the many federal tax developments so far this year. Don't hesitate to contact our office If you have any questions about these or other developments.