China Tycoon Accused of Tax Evasion
By AUDRA ANG
Associated Press Writer
BEIJING (AP) — Yang Bin, a cherubic, chain-smoking capitalist, piled up a $900 million fortune selling orchids before taking on the mission of Communist North Korea's experiment in free enterprise.
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Now China's second-wealthiest tycoon is facing another unusual chapter in what has been an unusual life: he is accused of failing to pay millions of dollars in taxes.
Born Chinese, naturalized Dutch and holder of a North Korean passport as of last week, Yang Bin has been dogged all year by financial problems. Before dawn Friday, a day after he promised to pay overdue taxes, he was summoned by Chinese police. He remained out of touch late Friday and it wasn't clear if he was in custody.
Just last week, North Korea named 39-year-old Yang chief executive of an experimental foreign-investment zone in a small city that abuts northeastern China. The Sinuiju Special Administrative Region, a groundbreaking undertaking, would immerse 50 square miles of the isolated North in capitalism, an apparent reflection of the government's willingness to embrace the world.
Given full administrative and financial powers, Yang has been typically expansive about his plans. Sinuiju, he says, will get no interference from Pyongyang. Korean, Chinese and English will be spoken. Chinese yuan or U.S. dollars will be spent.
A wall will separate the region from the rest of the country and a legislative council will be recruited from around the world — even the United States, whose president has dubbed North Korea part of an "axis of evil."
"Totally capitalist," Yang promised.
The clean-cut, rotund Yang has held court with reporters several times in recent days, answering questions and gesturing frequently to make a point. He has a warm and confident manner, smokes 555s — which Chinese consider one of the toniest brands — and almost always wears a white polo shirt and casual pants.
Pyongyang's choice of a Chinese-born Dutch citizen who doesn't speak Korean is seen by some as an odd one, even given his apparent close ties to North Korean leader Kim Jong Il.
While Yang "has a nice-looking childlike face and is very open-minded, ... it's a risk to employ someone who is not North Korean," said Park Joon Young, who teaches North Korean politics at Ewha Women's University in Seoul, South Korea.
"It indicates two things to me," he said. "Firstly, that North Korea seems ready to open its market and country. Secondly, that North Korea does not know what it's doing because they appointed a Chinese."
Yang, No. 2 on Forbes magazine's list of China's richest business people, was orphaned at age 5. He served in the Chinese army before moving to the Netherlands in 1987, according to a dossier by AccessAsia, a nonprofit clearinghouse for information on Asian policy.
He won political asylum after the 1989 pro-democracy protests in Tiananmen Square and ran a textile business for seven years before returning to China with $20 million to start a cut-flower business.
In a few years, Yang amassed a fortune as his Hong Kong-listed Euro- Asia Agricultural Holdings Co. invested in high-tech research to enhance production of orchids and other flowers.
"He has a huge vision and a huge ability to spot something. Who would have thought you could build a fortune on growing orchids?" said Tony Michell, of Euro-Asian Business Consultancy Ltd., a British-based company with offices in Pyongyang.
In North Korea, Michell said, Yang "impresses people by flying in on his private jet. There are very limited number of Chinese who can do that."
Yang's fleet of cars has run to a Mercedes-Benz, a Ferrari and a Rolls- Royce, and his offices in Shenyang are a replica of the Dutch royal palace.
The buildings are part of Yang's pet project — Holland Village, a combination housing development, theme park and greenhouse complex, complete with windmills, drawbridges and models of the International Court of Justice and the Amsterdam train station.
China has responded cautiously to news of the Sinuiju experiment, despite having encouraged North Korea for years to imitate Chinese economic reforms.
It was unclear whether Yang's summons was a poorly timed attempt by tax authorities to assert their powers or a sign of high-level displeasure with his appointment. On Friday, the Chinese Foreign Ministry said it had received news of the summons and was "trying to understand the situation."
Yang's financial problems have been brewing for a while. In July, Shanghai-based International Finance News reported that Yang went to North Korea and Japan to escape an investigation of tax evasion and misuse of land. Yang angrily denied the charge.
In recent weeks, the Hong Kong Stock Exchange has twice suspended trading in shares in his company. Yang has also sold Euro-Asia shares, reducing his stake to below 50 percent. And he has insisted the tax issue is "no problem."
But that was before Friday's summons.
"The Sinuiju experiment is not over, but Yang has to deal with the Chinese and listen to what they want to tell him," Michell said. "You can't escape the Chinese system just by crossing the river."
Copyright 2002 Associated Press. All rights reserved.
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OCTOBER 06, 15:34 ET
Maximizing Tax Benefits With Charity
By KATHY CHU
NEW YORK (AP) — When investors have less money, they look for more tax savings and this can affect the way they donate to charity.
"What we found in our research is that even with people who have significant wealth, as they see their investment income decline, the bulk of giving is going to be tax-related," said Scott Slater, director of the Spectrem Group in Chicago.
So, before writing a check to charity, consider these more tax- efficient strategies: charitable remainder trusts, family foundations and donor-advised funds. These vehicles, besides giving you a deduction for your gift, also can provide either tax-free growth of your money or income for life.
These benefits help to explain, at least partly, why investors are still giving at high levels. Last year, nationwide charitable giving reached a record $212 billion, an increase of 0.5 percent over the $210.89 billion the year before, according to the American Association of Fundraising Counsel Indianapolis. But after adjusting for inflation, total charitable gifts last year fell 2.3 percent compared with two years ago.
People who want to give but are worried that they'll outlive their money should consider charitable remainder trusts. These irrevocable trusts allow investors to put money in and get a monthly income from the trust until death. After the investor passes away, the charity gets the remainder of the balance.
"The payout schedules to the donor can be significantly higher than it is with a commercial annuity and there are tax deductions that you wouldn't get with a commercial annuity," said Ray Ferrara, a certified financial planner in Clearwater, Fla.
For instance, let's say that you want to put $100,000 worth of stock into a charitable remainder trust. You wouldn't have to pay capital gains tax because this is a gift to charity, meaning that at current rates, you would be able to get an average payout of $7,200, or 7.2 percent of the initial amount per year, according to Ferrara. But with a commercial annuity, you'd have to sell the stock first and pay a capital gains tax of 20 percent, leaving you with $80,000. This amount, when invested in a commercial annuity, would currently pay out at about 8.4 percent, a higher rate than with a charitable remainder trust, he said. Still, you'd only get $6,720 per year.
Furthermore, with the charitable remainder trust, you'll get an immediate tax deduction for the amount that's expected to go to charity. This is calculated by subtracting the monthly sum that will be paid out and taking into account the life expectancy of the investor. Expect to pay administrative fees for the management of the trust.
Family foundations are another tax-savvy charitable giving technique, but they only make sense if you are wealthy and plan to leave a substantial amount to charity when you die. They can be complicated to set up, expensive to maintain and the laws governing the foundation may vary from state to state.
If you want the benefits of a family foundation but don't want to pay the high setup and maintenance costs, consider a donor-advised fund, offered by companies such as Fidelity, Vanguard and Charles Schwab.
Like a family foundation, you get a tax deduction for the gift but the money doesn't have to pass to a charity immediately. When the donor dies, his or her children often take over the advisory role, recommending which charities should get the money.
Additionally, investors who've put money into these vehicles are more likely to give more money and to support more nonprofit organizations than they did before, because they've already made the financial commitment, said Cynthia Egan, the president of Fidelity's Charitable Gift Fund, a donor-advised fund.
"Donor-advised funds are built upon the concept of organized giving," Egan said. "They allow you to give efficiently and cost-effectively."
But there's a drawback to this charitable giving option: While you can make a recommendation about where your money should go, the company has the final say. Also, once you put money in, don't expect to take it out again. And there's usually a minimum investment in donor-advised funds of between $10,000 and $50,000.
Copyright 2002 Associated Press. All rights reserved.
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October 7, 2002
IRS, Labor Set Project On Employee Benefit Plan Reports
By John Connor
DOW JONES NEWSWIRES
WASHINGTON -- The Labor Department and Internal Revenue Service Monday announced a joint project designed to ensure that employee benefit plans have filed Form 5500 Returns/Reports annually as required by law, warning that failure to do so may result in significant monetary penalties.
ERISA, the Employee Retirement Income Security Act of 1974, requires most private-sector plans to file Form 5500 each year.
The IRS and Labor's Pension and Welfare Benefits Administration said they are "conducting research of various databases to identify potential non-filers," and that beginning this December they will mail letters to inquiry to those identified as potential non-filers.
The agencies said: "Plan administrators who fail or refuse to comply with ERISA's requirement may face civil penalties of up to $1,100 per day for each report. Likewise, the IRS may assess penalties of $25 per day (up to $15,000) for failure to timely file returns for certain pension and profit-sharing plans."
The agencies reminded delinquent filers of the availability of a program to assist plan administrators in filing delinquent reports, citing the "delinquent filer voluntary compliance program" created in 1995 to encourage plan administators to file overdue annual reports by paying reduced penalties.
This program has been updated to substantially reduce the penalty amounts for delinquent Form 5500 reports in order to make it easier to participate in the program, the agencies said. They noted the IRS has said it won't assess penalties on delinquent filers who satisfy the program's requirements.
An IRS spokesman said the agencies currently don't have an estimate of the number of plans that might be in noncompliance with the From 5500 reporting requirement.
"This hasn't been done in the past," the IRS spokesman said, explaining that part of the reason for the joint project is to get a handle on compliance.
More information about the project can be obtained from Labor's Pension and Welfare Benefits Administration at (202)-693-8360 (not a toll-free number) or through the IRS's customer service number at 1-877-829-5500. Questions about the Form 5500 should be directed to the Pension and Welfare Benefits Administration's toll-free number at 1-866-463-3278.
Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved
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October 8, 2002
US Tsy Appoints Nationwide Taxpayer Advocacy Panel
By Rebecca Christie
DOW JONES NEWSWIRES
WASHINGTON -- The U.S. Treasury named 102 members Tuesday to its new Taxpayer Advocacy Panel, an advisory board with members in all 50 states.
With the expanded panel, "we can ensure that taxpayers from every corner of the country will have their voices heard," said Treasury Secretary Paul O'Neill.
The volunteer panel members will work with Treasury's taxpayer liaison office and with the Internal Revenue Service. Pam Olson, Treasury's assistant secretary for tax policy, said the group would help the department in its quest to make the tax code simpler and more user- friendly.
"Although much simplification depends on Congressional action, there is much the IRS and Treasury can accomplish without such action," Olson said.
Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved
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October 8, 2002
Internal Revenue Service Press Release
By Pam Olson
Emphasis added by NRSTA.
TREASURY ASSISTANT SECRETARY FOR TAX POLICY PAM OLSON REMARKS TO THE NEW MEMBERS OF THE TAXPAYER ADVOCACY PANEL
Treasury Assistant Secretary for Tax Policy Pam Olson met with the new members of the Taxpayer Advocacy Panel yesterday. The new Taxpayer Advocacy Panel members are here in Washington for three days of orientation and meetings.
Good morning. I appreciate the opportunity to be with you today.
The IRS is the largest bureau within the Treasury Department. It touches more citizens on a regular basis than any other agency in the federal government. It is often the only point of contact citizens have with the federal government. No other agency has a greater capacity to affect the way our countrymen feel about their government. The IRS serves an important, but sometimes unpopular role in our country - it collects the funds necessary for our government to operate. Americans must rely on the IRS to administer our tax system in a fair and efficient manner, with as little intrusion into peoples’ lives as possible. Our goal, in which you join us, is to ensure that is the case.
Secretary O’Neill and Commissioner Rossotti have challenged the IRS to deliver world class customer service to America’s taxpayers. Under Commissioner Rossotti’s leadership, the IRS has taken important steps in that direction. Attitudes and practices have changed in ways that will improve tax administration for years to come. The agency is being reshaped to make it more friendly and accessible to taxpayers. Commissioner Rossotti is leaving a legacy of customer service at the IRS, and this program is part of that legacy. Nevertheless, much remains to be done, and that is where you come in.
The government often loses touch with the needs and concerns of the citizenry. The IRS is no exception. For example, taxpayers need to know up-front what their tax paying responsibilities are so they can comply with the law. But, the tax law is far too complex for that to be possible.
Individuals and businesses face significant challenges in understanding the tax laws, keeping required records, and filling out numerous complicated and detailed tax forms, which often require working through lengthy and difficult instructions, ending in cumbersome calculations. It is imperative that the government simplify the tax law and its administration to make compliance easier for taxpayers.
Although much simplification depends on congressional action, there is much the IRS and Treasury can accomplish without such action. Unfortunately, rather than simplifying things for taxpayers, the IRS often makes the problem worse by interpreting the law in a manner that is literally or theoretically correct, but that is divorced from reality and that offends common sense. Problems arise when the IRS spends too much time trying to get the perfect answer for every possible situation – the rules become unnecessarily complicated, with too many specialized rules, exceptions, and exceptions to the exceptions. The IRS gets bogged down with too many rules, too many procedures, and too much rigidity. And the taxpayers suffer.
When the IRS loses touch with taxpayer needs and concerns, the tax system cannot operate in an efficient and taxpayer friendly manner. Let me give you an example. I’m sure you’re familiar with the timely mailing is timely filing rule. You rush to the post office before midnight on April 15th and so long as the return is postmarked on April 15th, it’s considered timely. A few years ago, a taxpayer did the same thing with a tax court petition, which you’re allowed to do, but did the government a favor by shipping it Federal Express so it would be there the next day. That was a mistake! The IRS took the position that a petition is not timely filed if sent by Federal Express because it had not been "postmarked," as required by the Internal Revenue Code. From the taxpayers’ perspective, this made no sense – he had spent more money to get the petition filed faster and ensured its safe arrival. Eventually, Congress stepped in and clarified that the IRS could recognize documents timely "postmarked" by Federal Express as timely filed. In the meantime, however, rigid adherence to the rules caused an unnecessary problem. The IRS should help Americans comply with their taxpaying responsibilities, not make them more difficult.
To keep the faith of the taxpaying public, the IRS must use its resources more efficiently in its exam and collection functions by focusing on more egregious taxpayer conduct. The IRS might be compared to a village cop. The job of both is to protect and serve the citizenry. We wouldn’t think the village cop was doing his job correctly if he spent all his time giving speeding tickets to drivers traveling one mile per hour over the limit while robbers held up the bank. Too often, however, resources are spent pursuing taxpayers who are the equivalent of the village speeders, while ignoring taxpayers who are thumbing their noses at the tax system. This causes a loss of trust in the tax system.
Under Commissioner Rossotti’s leadership, the IRS has begun to use its resources in a more balanced manner, by focusing attention on egregious taxpayer behavior. Since President Bush took office, Commissioner Rossotti’s efforts to transform the IRS and use its resources effectively have accelerated. Rather than what was surely regarded by the taxpayers as nitpicking over methods of accounting, the IRS is reallocating resources to the pursuit of taxpayers hiding income in secret bank accounts. This reallocation of resources helps ensure that everyone pays the taxes Congress has imposed on them.
It will be a continual challenge, however, for the IRS both to deter the speeders and capture the bank robbers, a task made more difficult by the increasing sophistication of taxpayers and the sophistication of advisors who aid them in avoiding paying the taxes they owe. The IRS must continue to be sensible with its resources and focus them where they will have the biggest impact. With requests for additional funding must come a demonstration that existing resources are being used as effectively as possible.
We must be aware of the burdens the tax law imposes on taxpayers, to ensure the burdens don’t outweigh the benefits. At times, the IRS asks taxpayers to take on responsibilities that are impractical and don’t make sense from the taxpayer’s perspective. For example, to claim some family related credits, taxpayers must maintain all their grocery receipts for the year. This is an unrealistic requirement, and sets taxpayers up for problems with the IRS, even though their family situation makes them eligible for the credit. We must be more realistic about what we expect taxpayers to do.
The IRS is different from a business which has no lock on its customers. If a customer does not like the service or product a business provides, the customer can take his patronage elsewhere. Taxpayers can’t do that with the IRS. Consequently, it is essential to the integrity of the tax system that the IRS strive to treat taxpayers in the same manner that a business treats customers it wants to return. The IRS must strive to make its product user friendly – within the constraints laid out by Congress – by giving taxpayers simpler forms and simpler rules with which to comply. The IRS needs to provide guidance that corresponds with common sense. In addition, the IRS always must treat taxpayers in a courteous and responsive manner.
Although Commissioner Rossotti has put the IRS on a positive course, enormous challenges lie ahead. The only way the IRS can meet those challenges is if it stays in tune with taxpayers. This program is essential to ensuring that the voice of the customer is heard at the IRS, and factored in on a regular, consistent basis to help continuously improve service. Commissioner Rossotti has referred to these panels as "listening posts." I think that’s an apt description, so I urge you to comment, to advise. Your insights will help bridge the gap between the taxpayer’s expectations and IRS practices. You will help the IRS understand the taxpayer’s point of view. You will help keep the IRS grounded.
To meet the Secretary’s challenge to deliver world class customer service to America’s taxpayers, the IRS must continue to do everything it is doing now and find new ways to improve the delivery of its products and services to America’s taxpayers. You are a part of that effort, and we are counting on each of you to provide the kind of advice and guidance the IRS needs to stay on a positive course. With your help and your fresh perspective, we can make the IRS a better organization than it has ever been before.
The President has spoken of the value of volunteerism in America, and he has urged Americans to volunteer to help their neighbors, their communities, and their government. Never has this been more important. You have all volunteered to serve, to do this important work, to advise America’s tax agency, and to continue to help it improve and become more efficient and more responsive to America’s taxpayers.
On behalf of President Bush, Secretary O’Neill, and the Treasury Department, thank you for volunteering your time, your energy, your talent, your experience - not to mention your sense of humor - to this effort.
Thank you.
[source: http://www.treas.gov/press/releases/po3516.htm]
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OCTOBER 08, 17:54 ET
EU Fight Vs. Tax Evaders Hits Snag
By PAUL GEITNER
AP Business Writer
BRUSSELS, Belgium (AP) — A European Union initiative to crack down on tax dodgers was in jeopardy Tuesday following Britain's insistence that Switzerland crack open its cherished bank secrecy.
Britain's Chancellor of the Exchequer, Gordon Brown, said the Swiss refusal to report on people who may be guilty of tax evasion "potentially allows loopholes to develop in other issues," such as money laundering and terrorist financing.
"I believe there is a worldwide movement for exchange of information," Brown said on the sidelines of a meeting of EU finance ministers. "I do not believe Switzerland should continue to isolate itself."
Swiss President and Finance Minister Kaspar Villiger rejected the "cliche" that banking secrecy protects criminals or terrorists.
At issue is a long-debated EU plan to collect taxes on the income its citizens earn on savings and investments outside their home country.
Under Swiss law, tax evasion as such is not considered a crime, and so foreigners who don't tell their tax authorities about income earned from Swiss accounts are still protected.
Other EU countries that agreed only reluctantly to the initial plan said they would back out if no deal is reached.
"If we don't make progress with the Swiss, then Austria will not accept the EU legislation," said Austrian Finance Minister Karl-Heinz Grasser.
Luxembourg, Austria and Belgium insisted when the plan was adopted in 2000 that if they were going to loosen their bank secrecy laws, non-EU countries like Switzerland and the United States would have to agree on "equivalent measures" before it could take effect.
A deadline was set for the end of this year, when the 15 EU countries will have to unanimously decide whether their conditions have been met.
The plan requires each of the 15 EU countries, after a seven-year transition period, to have in place a system that would allow authorities in a depositor's home country to keep track of interest earned abroad — and levy taxes.
Switzerland has offered instead to withhold taxes on interest and dividend payments to EU residents and turn the money over to the appropriate country, but without identifying the depositors.
Villiger said even that would hurt the Swiss financial center — the Swiss Bankers Association said abolishing banking secrecy would put 20,000 jobs at risk — and have to be approved by a referendum.
Brown rejected that offer, saying the tax could be lower than what the depositor would be subject to at home. He has pushed the EU's top negotiator, Frits Bolkestein, to draw up a list of possible sanctions the EU could impose on Switzerland if a deal for automatic exchange of information is not reached.
Bolkestein insisted Switzerland was never expected to adopt the same measures as the EU. "Equivalent is not equal to equal," he said.
Negotiations with Washington have been less contentious but plagued by mixed signals, according to EU officials.
Brown said the United States had accepted the idea in principle, but Grasser said he was told the Bush administration preferred to work out a deal with each EU country, which would make meeting the December deadline impossible.
Copyright 2002 Associated Press. All rights reserved.
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October 9, 2002
TAX FACTS: Senate Democrats Looking For Economic Focus
By Jennifer Corbett Dooren
DOW JONES NEWSWIRES
WASHINGTON -- Even as lawmakers are focusing on debating war resolutions this week, Senate Democrats hope to put some focus on the economy less than a month before the Nov. 5 mid-term elections.
Senate Majority Leader Thomas Daschle, D-S.D., said he plans to hold an economic forum on Friday with Republican and Democratic economists to discuss the state of the U.S. economy. He also said he plans to continue his push to extend unemployment insurance benefits this week.
"Our purpose is to do what should have been done a long time ago - to put the focus on the economy," Daschle said, adding that lawmakers should "not only focus on our challenges in Iraq, but to recognize the extraordinary difficulty that we're facing within the economy."
Recent reports on employment, manufacturing and housing have suggested that the economic recovery from last year's recession has slowed.
Democrats have been frustrated that Iraq continues to dominate the Washington agenda and the headlines.
Daschle said he will seek what's known as an unanimous consent agreement that would extent unemployment benefits for another 13 weeks. Congress approved a similar extension earlier this year as part of a broader economic stimulus package. Republicans are expected to object to Daschle's request. But Daschle said he'll keep asking in hopes that he'll "get lucky" and prevail on the issue.
Lott Looking Toward GOP Senate Takeover
Daschle's Republican counterpart, Senate Minority Leader Trent Lott, R- Miss., is already planning next year's agenda in anticipation of the Republicans' return to power in the Senate, which the Democrats currently control by a one-vote margin.
Lott told reporters Tuesday that he hoped to enact another economic stimulus package next spring that could include a package of tax breaks aimed at small businesses and investors. Senate Finance Chairman Max Baucus, D-Mont., has crafted a $16 billion small business tax bill but it faces GOP opposition partly because it includes provisions aimed at stopping U.S. firms from moving their corporate headquarters overseas to lower their U.S. tax bills. Republicans are also afraid the measure could be used as a vehicle for the Democrats to attach a bill that would boost the federal minimum wage.
Lott predicted that no additional tax bills would be enacted this year even if Congress returns after the Nov. 5 elections for a lame-duck session to complete work on the federal budget.
"This session is basically over," he said, adding that lawmakers would likely only focus on an Iraq resolution, the budget and a defense department authorization bill for the rest of the congressional session.
Military Tax Bill Still In Works
However, a package of military tax breaks could still become law this year even though the House version has dropped provisions in the Senate bill designed to pay for the measure. The most controversial provision designed to help pay for the bill would immediately tax people who renounce their U.S. citizenship rather than over a period of time. The House is slated to take up the bill without that provision sometime this week.
The legislation would allow military personnel and members of the foreign service to more easily qualify for a capital gains tax break for the sale of a home and would increase to $6,000 the tax exclusion for death gratuity payments from the current level of $3,000.
Daschle said he was "concerned" the House bill doesn't include the offsets but suggested the differences could still be worked out this year.
IRS Reminds Taxpayers Of Oct. 15 Filing Deadline
The Internal Revenue Service said more than one million taxpayers face an Oct. 15 tax-filing deadline. The Oct. 15 deadline is the latest possible date that taxpayers who requested extensions can file their 2001 taxes without penalty. If the Oct. 15 deadline is missed, taxpayers are subject to a late filing penalty, which is 5% per month of any unpaid tax. Last year the IRS said it received 1.5 million returns between Oct. 12 and Oct. 26, and expects to receive the same amount this year.
Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved
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October 9, 2002
Tax Report
by Tom Herman
The Wall Street Journal
IRS Halts K-1 Matching Plan After Tax Advisers Find Flaws
This past summer, a California woman received a stern letter from the Internal Revenue Service.
"We are proposing changes to your 2000 income tax return because information you reported doesn't match what was reported to us by your employers, banks and/or other payers," the IRS letter said. "Our proposed amount you owe is $2,454.00. See our proposed changes on page 2 and the detailed information beginning on page 3."
But after the woman's tax adviser looked into the situation and responded to the IRS, the IRS acknowledged she didn't owe a penny. Instead, she was one of thousands of innocent bystanders who were caught up in a well-meaning IRS anti-cheating campaign that critics say veered badly off course and needs major repairs.
Launched earlier this year, the IRS campaign was designed to curb tax evasion among people with income from partnerships, trusts and S corporations. IRS officials thought the campaign would uncover huge amounts of cheating by matching information these taxpayers had reported on their tax returns against what had been reported separately to the IRS on "Schedule K-1." A K-1 is supposed to report a taxpayer's share of an enterprise's profits, losses, deductions or credits. The IRS processed more than 18 million of these K-1s for the 2000 tax year, recording $1.2 trillion in income to partners, stockholders and beneficiaries. Officials say the number of these forms and the dollar amounts have soared in recent years.
As of late June, the IRS had fired off about 65,000 letters to taxpayers, informing them of what the agency thought were mismatches. An IRS spokesman says he doesn't yet know the total number of those that resulted in no change in tax. But following complaints from tax specialists, the IRS stopped issuing K-1 mismatch notices as of August, and officials vow to make major changes.
Taxpayers who received these IRS notices were understandably chagrined, says Claudia Hill, president of a Cupertino, Calif., tax-services firm and a former member of a prestigious private-sector group that advises the IRS. Ms. Hill says two clients who received these notices "were upset because they thought either I did something wrong, or they owed money, and both things they weren't happy about." Moreover, the IRS explanation was confusing. "Talk about intimidating ... that's why most people don't get past the first two pages before wanting to give up," Ms. Hill says.
"I think there's a need for the document-matching program," Ms. Hill says, "but there's a need for much more technical expertise in the implementation of it."
IRS officials say notices issued prior to Aug. 1 "are legally valid and will be processed as usual." Thus, anyone getting one should be sure to respond. Don't do what many taxpayers may be tempted to do, which is to assume the IRS must be correct, or that it isn't worth the time to fight.
The matching program has "a number of problems," says Nancy Killefer, a director at McKinsey & Co. who recently became the head of the IRS Oversight Board, a nine-member group created by a 1998 law. "There are things to clean up. So they [IRS officials] decided to stop it, fix it and then roll it out next year," says Ms. Killefer, a former Treasury official. The document-matching program "needs to be done -- but we've got to get it right."
For years, the IRS has been warned by outside lawyers, accountants, former IRS officials and other experts about the difficulties of a K-1 matching program. These outsiders warned K-1s can be enormously thick and complex, making the document-matching process far more difficult than comparing other routine data, such as interest and dividends, against what taxpayers report. IRS officials replied they had taken special steps to avoid problems.
"There's a learning curve going on here," an IRS spokesman says. Since this is the first year of the program, "it is not a surprise" to have large numbers of no-change results. "In any kind of new program, we expect there will be a higher rate" of no-change notices than in established programs.
Officials expect by November of this year to have enough data to begin determining "possible enhancements" to the program, the IRS says. Meanwhile, matching of tax year 2001 returns "will continue as scheduled, with anticipated refinements to be incorporated into the process." That may eventually include tax-form changes.
THE PERSONAL EXEMPTION will rise again next year because of an annual inflation adjustment.
The personal exemption for 2003 is expected to be $3,050, up from $3,000 for this year, says James C. Young, an associate professor in the department of accountancy at Northern Illinois University in DeKalb, Ill. These and other 2003 projections by Prof. Young appear in the Sept. 30 issue of Tax Notes, a weekly publication of Tax Analysts, Arlington, Va.
Official IRS numbers won't be released until later this year.
THE COST MOUNTS of fixing the alternative minimum tax.
Pressure is growing to overhaul the tax. Unless major changes are made, the AMT, created decades ago to prevent the super-rich from entirely avoiding federal income taxes, will hit rapidly growing numbers of middle-income people, especially those with children, during the next decade.
The longer Congress delays, the greater the problem grows. "By 2008, the AMT will cost more to repeal than the regular income tax," according to Leonard E. Burman, William G. Gale and Jeffrey Rohaly in a report from the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.
Mr. Burman is a former deputy assistant Treasury secretary for tax analysis.
NEW YORK STATE's tax burden remains heavy despite cuts in recent years.
The state's tax structure "still represents a sizable competitive disadvantage in many respects," says a report this week by E.J. McMahon, senior fellow for tax and budgetary studies at the Center for Civic Innovation at the Manhattan Institute for Policy Research. "For all but low-income workers, New York's income-tax burden remains significantly heavier than the average for all states and for neighboring states."
The report urges the state to follow through on scheduled tax cuts enacted several years ago and "push the death tax back into its grave."
Mr. McMahon also urges the state to "stop bracket creep" by updating its income-tax brackets, exemptions and other items to keep pace with inflation.
BRIEFS: Final reminder for procrastinators: Oct. 15 is the deadline for the more than one million people who still haven't filed their federal income-tax return for 2001. These are people who got automatic four-month extensions before mid-April and then got a two- month extension beyond mid-August. ... IRS Commissioner Charles Rossotti's five-year term expires in about one month. President Bush hasn't nominated a successor.
Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved
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October 9, 2002
GETTING PERSONAL: More May Now Get Low-Income Tax Break
By Kaja Whitehouse
A Dow Jones Newswires Column
NEW YORK -- People who previously earned too much to get tax breaks reserved for low-income households may have a better chance this year.
You don't have to make less money. You simply have to contribute to your 401(k), cafeteria plan, or other pretax employee-benefit plan.
This is due to a little-known tax change that began this year under the Economic Growth & Tax Relief Reconciliation Act of 2001, or EGTRRA. It's important to people who make roughly $34,000 a year or less, which is the general income range for people who will be able to get a tax break for having low earnings in 2002.
The change should also be important to financial planners and accountants who do pro bono tax work, and to companies with employees in that wage group who may be now signing up for pretax employee- benefits plans, such as health care.
Thanks to EGTRRA, contributions to pretax benefits such as retirement and health care are now excluded when calculating income for a low-wage tax credit. So workers have more opportunity to become eligible for a low-income tax break, or for a bigger one, by simply adding money to payroll deduction plans.
Such a tax break may be relevant to more than low-wage earners this year. The beaten-down economy makes a tax credit potentially helpful to people who lost their jobs and to self-employed people who took a pay cut.
To understand how it works, one first has to understand the earned income tax credit, or EITC. The EITC was added to tax law in 1975 to give low-wage individuals and families a break from the burden of Social Security taxes.
How much one gets depends on such factors as number of children, salary and marriage status. The top credit for 2002, for example, is in the ballpark of $4,000 for a married filer earning below $15,000 with two or more children. The amount is less for people who earn more money, have fewer children or file as singles. The wage range changes every year.
Child Care Considerations
Before this year, when calculating income for the EITC, filers would include funds that had gone toward paying for taxable benefits such as health insurance or child care.
Now, all that's changed. With EGTRRA, people can now calculate earnings based on income excluding contributions to retirement savings plans like the 401(k), and to health flexible spending accounts or dependent care flexible spending accounts, which help pay for health-care or child-care costs with pretax dollars.
The provision should affect almost everyone who qualifies for the EITC because so many of America's workers now pay for benefits through payroll deductions, said Denise George, a research consultant at human resources consulting firm Hewitt Associates in Lincolnshire, Ill.
"The typical family of four, if they contribute to nothing else, they still would contribute to health-care insurance," she said.
The savings can be significant for this wage group. Single people making $30,000 with two children could qualify for a $670 tax credit in 2002, according to estimates by Ralph Pike, a senior manager at KPMG LLP's Washington National Tax Practice in Washington, D.C. But if the same people contributed about $5,000 to pretax plans, they could qualify for a credit of $1,722, or more than double, said Pike.
A single person who has one child and is making $30,000 wouldn't qualify for anything under EITC this year, he added. But once those earnings drop to $25,000, the filer qualifies for up to $671 in credits, he said.
And people who owe nothing to the IRS get the money back as a check.
It's a double tax benefit that shouldn't be ignored when you count in FICA taxes, which pay for Social Security and Medicare. That's because contributions to pretax benefits reduce FICA taxes, which eat away about 7.65% of earnings. A family contributing about $2,000 a year for health care through a pretax deduction program save an additional $153 in FICA taxes, and potentially increases their EITC, said Hewitt's George.
It's something that workers should be considering now if they are preparing to contribute to employee benefits through pretax dollars.
Autumn is traditionally the time when employees make selections for health-care and other company-sponsored benefits. For some, qualifying for the EITC might mean the difference between paying for child care through a company-sponsored pretax savings plan and paying for it after-tax and then applying for a child-care tax deduction, said George.
"For families with income of $15,000 or above, they may be better off with the employer flexible spending account than they are with the tax credit," she said.
The changes could make more people eligible for the EITC, but they seem to have slipped past the radar screens of many employers, said Don Bartolai, a senior vice president at Mellon HR Solutions in Chicago.
"I haven't seen any plan sponsors go out and make a big communication" to employees about these changes, he said.
Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved
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October 9, 2002
GETTING PERSONAL: New IRS Rule Helps Pension Withdrawals
By Jane J. Kim
A DOW JONES NEWSWIRES COLUMN
NEW YORK -- If you've made early withdrawals from your tax-deferred retirement accounts, you could stand to benefit from last week's ruling from the Internal Revenue Service.
The ruling is designed to help people whose accounts have fallen in value by giving them the chance to slow down their required withdrawals.
"It's especially relevant now because a lot of people saw their IRA balances decline pretty substantially, said Doug Brown, a certified financial planner in Ernst & Young's Personal Financial Counseling Group in Houston.
Normally, individuals must wait until they reach age 59 1/2 before they begin to tap their individual retirement accounts or other tax-deferred plans for income. Otherwise they're socked with a 10% penalty, in addition to any taxes. The reason for the penalty is that the IRS wants taxpayers to use the money for retirement and not other things, Brown said.
But taxpayers can avoid that penalty under a special provision if they promise to take a series of "substantially equal periodic payments" from their accounts for at least five years or until age 59 1/2, whichever is later.
The amount of those payments is calculated under one of three methods. Under two of the methods - annuitization and amortization - payments are based on the account value when distributions begin and result in fixed payments. Under the third method, called the minimum distribution method, the payment varies each year based on the account balance and the person's remaining life expectancy.
Since most people who take early distributions typically need more income, they usually lock into the amortization or annuitization methods - probably because those calculations provide the largest distributions, Brown said.
"A lot of people are getting laid off so they have to turn to their IRAs" for income, said William Massey, editor of Federal Taxes Weekly Alert, published by New York tax research firm RIA.
Plunging Account Balances
The IRS ruling addresses a dilemma that people who have selected one of the fixed-payment methods are facing: many of the accounts that have dropped in value can no longer cover the fixed payments.
In the past, once a withdrawal method was selected, it could not be changed. Last week's IRS ruling said that people taking early withdrawals from their pensions could change the method of payment calculations without facing any penalties.
The ruling "helps individuals who might otherwise prematurely exhaust their IRAs," said RIA's Massey. By switching to the required minimum distribution method, taxpayers will be able to reduce their payouts because the distributions are based on the value of the account as they change each year.
Taxpayers can further reduce payments since the ruling will also calculate those distributions on life expectancy tables "which have recently become more liberal," added Ernst & Young's Brown.
"This change will help many taxpayers to preserve their retirement savings by allowing those individuals to slow their distributions down in the event of unexpected market downturns," Pam Olson, assistant secretary for tax policy, said in the statement from the IRS.
Delay Taking Distributions
A better strategy: leave your retirement accounts to grow tax-deferred for as long as possible.
"The longer you wait the better off you are," said Brown. Look to other income sources before taking distributions from your retirement accounts.
However, if you need to take distributions from your IRA, then you might want to consider splitting up the assets into several accounts, said RIA's Massey. Consider how much you'll need and start off with the "lowest possible payments" that you'll need to live on.
If you need more income, you could start taking minimum distributions from a second IRA, he said.
Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved
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OCTOBER 09, 16:28 ET
GOP Tries to Make Taxes an Issue
By DAVID ESPO
AP Special Correspondent
MANCHESTER, N.H. (AP) — The way Republicans see it, a political season without a tax debate is like a New England fall without foliage.
Not going to happen, even in midterm elections carried out in the shadow of terrorism.
Not in New Hampshire, where both parties covet a highly competitive Senate seat, and where the GOP will spend $1 million on tax-related ads in hopes of keeping a House seat.
Not in Illinois, not in Alabama and not in other states where the GOP is working to inject the tax issue into races that will settle the battle for control of Congress.
"With this Democratic ticket it's just so obvious," says Rep. John Sununu, a three-term New Hampshire Republican running for the Senate. The Democratic candidate for governor advocates a statewide income tax, and Sununu charges that his own rival, three-term Gov. Jeanne Shaheen, has left the state "on the brink of an income tax."
Shaheen who has long opposed a statewide income tax, dismissively says Republicans "always want to make their campaigns about taxes."
She's aired a television commercial that shows a white, sandy beach and features pulsating Caribbean music — meant to depict Sununu as an ally of corporations that use offshore addresses to avoid payment of U.S. taxes.
Outside New England, the maneuvering takes different forms.
- In Maryland, embattled GOP Rep. Connie Morella is airing a commercial attacking her rival for voting in the state Legislature to raise taxes on snack foods, phone cards and auto registrations.
- The National Republican Congressional Committee criticized two Democrats, Rep. David Phelps of Illinois and Tim Holden of Pennsylvania, for voting against President Bush's 2001 tax cuts. Both men are running against incumbent Republican lawmakers who voted for Bush's plan.
- In Montana, Democratic Sen. Max Baucus campaigns as a "Senate chairman who worked with President Bush to pass new tax cuts."
- In Texas, Democratic senatorial candidate Ron Kirk recently began airing an ad that says, "I support the president's efforts to lower taxes" as well as to reform education and fight terrorism.
- The GOP senatorial committee has run nearly two dozen commercials this year on the subject of taxes, spread over states from Maine to Oregon.
Taxes have been a reliable Republican issue for more than two decades, and David Winston, a GOP pollster, said they are "always a significant issue, because people write out checks to the government."
But Geoff Garin, a Democratic pollster, countered that the issue has faded in importance as other concerns emerge. "Voters care much more about the economy, Social Security, education, health care and homeland security and taxes are pretty far down the list," he said.
New Hampshire has been a particularly tax-sensitive state, a place where Republican presidential candidates — and gubernatorial hopefuls of both parties — have been judged on their willingness to sign a pledge of opposition to a statewide income tax.
But now Democratic gubernatorial candidate Mark Fernald supports a 4 percent income tax, a proposal he says would help solve the state's long-running education funding woes and permit the repeal of a statewide property tax and other levies.
Fernald is the underdog to Republican Craig Benson in the gubernatorial race. And Democrats hope his presence on the ballot won't hurt Shaheen or Martha Fuller Clark in their efforts to capture Senate and House seats long in Republican hands.
Over and over, Sununu criticizes Shaheen for lobbying against permanent repeal of the estate tax and for supporting a state sales tax. She's leaving the governor's office at a time when the state "has a $40 million deficit and is on the brink of an income tax," he says.
Shaheen says Republicans are going to have a hard time making the tax case against her. "I have opposed an income tax," she says, and adds that despite his protests Sununu "continues to support leaving open the Bermuda tax loophole" for corporations.
If anything, taxes figure more prominently in the race for the House seat Sununu is vacating.
Fuller Clark and her Republican rival, Jeb Bradley, are both members of the state Legislature, and they cast numerous votes in recent years as the state debated its school funding needs.
"She voted to create New Hampshire's first ever income tax that would take money from our hard earned paychecks. Jeb Bradley, he never voted for an income tax," the NRCC said in a television commercial that began airing three weeks ago.
The Democrat wasn't caught off guard. Her campaign had prepared a rebuttal during the summer, and it began airing soon after the GOP launched its attack. "Despite what my opponents say, I voted against unfair taxes like the permanent statewide (property) taxes and all these taxes," she says as a list of taxes rolls across the screen.
Bradley, who voted to make the statewide property tax permanent, quickly countered with an ad of his own:
"In Congress he'll work to make President Bush's 2001 tax cut permanent, cut the capital gains tax further, permanently repeal the death tax and end the marriage penalty."
Copyright 2002 Associated Press. All rights reserved.
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OCTOBER 11, 10:41 ET
Anti-Tax Group Sues Calif. Governor
By JENNIFER COLEMAN
Associated Press Writer
SACRAMENTO, Calif. (AP) — An anti-tax group says California's energy crisis is over and sued Gov. Gray Davis to end the state of emergency he declared nearly two years ago.
The National Tax Limitation Committee filed a lawsuit Thursday in Superior Court saying the state of emergency is no longer necessary and gives the governor too much power.
In a letter, the group urged Davis to "rescind his energy declaration and frankly, the incredible and unilateral powers granted the governor under that emergency."
Davis' press secretary, Steve Maviglio, said the governor has not called off the energy emergency because the state is in a transition period as it prepares to exit the energy business.
"The governor has used the executive order judiciously," he said.
The emergency declaration gave Davis sweeping authority to waive regulations, reorganize executive offices and implement new programs.
He has used that authority to move the state away from deregulation, authorizing the state's Department of Water Resources to buy power.
Davis approved $43 billion in long-term power contracts over the next 10 years and created conservation programs. He also signed the law that created the state's Consumer Power and Conservation Financing Authority.
Maviglio said the state of emergency would probably end after the state's three utilities start buying their own energy after the end of the year.
Copyright 2002 Associated Press. All rights reserved.
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OCTOBER 11, 17:12 ET
At&T Sale of TV Unit to be Tax-Free
BEDMINISTER, N.J. (AP) — AT&T Corp. said Friday the Internal Revenue Service ruled that its plan to sell its cable-television business to Comcast Corp. will be tax-free to AT&T's U.S. shareholders.
The sale is expected to close by the end of the year, AT&T said.
This week, the companies said the cable TV unit, AT&T Broadband, would cut about 1,700 jobs from its headquarters in Englewood, Colo., after its merger with Philadelphia-based Comcast.
In December, New York-based AT&T agreed to sell its cable TV business to Comcast for about $45.7 billion in stock, plus the assumption of nearly $25 billion in debt and liabilities.
The deal would create a cable powerhouse serving more than 21 million households.
Shares of AT&T rose 65 cents, or 5.7 percent, to close Friday at $11.97 on the New York Stock Exchange.
Shares of Comcast climbed $1.53, or 8.3 percent, to close at $20.02 on the Big Board.
Copyright 2002 Associated Press. All rights reserved.
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October 11, 2002
GETTING PERSONAL: Tax Planning Tips For Small Businesses
By Jane J. Kim
A DOW JONES NEWSWIRES COLUMN
NEW YORK -- This year, Uncle Sam seems to be looking out for the little guys.
As a result of changes in the tax law, business owners can take advantage of new opportunities to lower their tax bill next April.
Not only has the Internal Revenue Service made it easier for small businesses to change to a more favorable accounting method for tax purposes, but many businesses will also now be able to take larger deductions to help reduce their taxable income.
General year-end tax-planning guidelines suggest that businesses defer income, where possible, and pull forward deductions to the current year. For business owners, this means implementing such counterintuitive strategies as delaying collecting money from customers and paying bills before they're due.
"So many people do (tax planning) in December," said Diane Kennedy, a certified public accountant in Phoenix and author of "Loopholes For The Rich." 'Now is the time to really start."
Bonus Depreciation
As a result of the Job Creation and Worker Assistance Act of 2002 that was signed into law in March, businesses can take an extra 30% depreciation deduction for any assets purchased between Sept. 10, 2001, and Sept. 11, 2004.
"There was concern after Sept. 11," said Bob Scharin, editor of Warren, Gorham & Lamont/RIA's "Practical Tax Strategies," a monthly journal for tax professionals. The government was trying to spur the economy by providing a type of fiscal stimulus, he said.
Take, for example, a person who bought a piece of equipment for $10,000. Typically, he would be able to deduct 20% of the cost, or $2,000, in the first year, assuming the asset is depreciated on a five- year schedule, Scharin said.
Under the new law, he would be able to deduct an additional 30% of the cost, or $3,000, in the first year. In addition, he could also deduct 20% of the adjusted cost of the asset, or $7,000 (the cost of the equipment minus the bonus depreciation amount), or $1,400. That brings the total amount that can be deducted to $4,400, Scharin said.
"If someone was a little short of cash, they may be holding off on buying," Scharin said. With the ability to take larger deductions, they might realize they can afford to make the purchase this year.
The new law was applied retroactively to any equipment purchased before March. So if taxpayers didn't take the extra deduction on their 2001 tax returns, they can still take it in 2002, Kennedy said. Especially since many of the tax-preparation software programs were written before March, taxpayers who used such programs to file their 2001 returns may have missed the opportunity to take the additional deduction, she said.
The "bonus" depreciation also applies to cars - if the vehicles are used more than 50% of the time for your business. So if you're planning a business trip at the end of the year, be sure to use the vehicle that you're figuring your depreciation on, said Scharin.
There's more good news for self-employed taxpayers next year. Starting in 2003, business owners will be able to claim 100% of their health insurance costs, an increase from 70% this year, Kennedy added.
Changing Accounting Methods
Earlier this year, the IRS came out with new rules making it easier for more businesses to adjust the timing of when they can report income and expenses for tax purposes. Businesses that qualify under the new rules - primarily service companies - can cut next year's tax bill.
The rules will allow businesses with gross receipts of $10 million or less to use the cash accounting method instead of the accrual method for tax purposes. Previously, businesses with gross receipts of $1 million or less were generally allowed to use the cash method.
Under the cash method, a business reports income and deducts expenses when they occur. Under the accrual method, a business owner must report income when it has the right to receive payment and deducts expenses when it has a liability.
The cash method gives businesses more leeway to time things such as holding off on writing checks or reporting income, Scharin said. In order to take advantage of the rule, businesses need to implement these strategies before the end of the year, he said. Eligible businesses must obtain approval from the IRS by filing Form 3115 to request a change in accounting method.
Many businesses that use the accrual accounting method can also comb through their customer accounts for potential bills that they don't believe will get paid and write off those amounts as bad debt this year, Scharin added. Other strategies: sell obsolete inventory and deduct the scrap value; and make repairs on your business and deduct those expenses this year, he noted.
Don't forget that if you're self-employed you can usually deduct most costs of setting up and running your business, said Dale Walters, a certified financial planner in Phoenix. If you have a family business, consider employing your children since you can pay their wages at the lower tax bracket, he said.
Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved
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October 11, 2002
IRS Reaffirms Ban on LILO Tax Shelter
By Rob Wells
DOW JONES NEWSWIRES
WASHINGTON -- The IRS, building on previous rulings, said Friday taxpayers cannot deduct rent or interest paid involving a tax shelter known as lease-in/lease-out.
The Internal Revenue Service revenue ruling reaffirmed a move in 1999 to outlaw the shelter, also known as LILO, which corporations have used to defer taxes.
The transaction often involved a U.S. bank or corporation leasing property overseas in countries such as Switzerland and Germany, such as a municipal building, and then subleasing the property back to the local government.
The company would derive a tax benefit when it borrowed money to pay for the lease and got a tax deduction from making an early payment of the lease. Numerous companies, including First Union Corp., used such a transaction.
"This ruling is part of our larger effort to respond to abusive transactions," IRS Commissioner Charles Rossotti said in a statement.
IRS Chief Counsel B. John Williams Jr. said the IRS refined its analysis of the lease-in/lease-out transaction after reviewing several of them. The IRS has "presented a legal position that gives clear guidance to the field and taxpayers alike explaining why we believe these transactions do not work," he said in a statement.
The IRS has been moving to shut down tax shelters, which are tax- avoidance strategies marketed by securities firms, accountants or lawyers. Some tax shelters are illegal while others stretch the boundaries of tax laws. Former Treasury Secretary Lawrence Summers estimated tax shelters cost taxpayers an estimated $10 billion annually.
Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved
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