Tax News

CCH (cch.taxgroup.com) reports:

President Bush, in his State of the Union address on January 23, is expected to highlight domestic issues on which the White House and the new Congress could find common ground, including energy, immigration, health care and education. The House, meanwhile, approved the Clean Energy Bill of 2007 (HR 6) on January 18, although the legislation, which would strip tax breaks and increase royalty payments from big oil companies, is expected to face opposition in the Senate. Conversely, a bill approved by the Senate Finance Committee that would provide tax incentives for small business and will be offered as an amendment when the full Senate takes up minimum wage legislation (HR 2) during the week beginning January 22, faces opposition in the House.
White House
In his State of the Union address on January 23, President Bush will highlight domestic issues on which the White House and the new Congress could find common ground. Those issues include energy, immigration, health care and education. The White House plans to use a "carrot and stick approach" to address the growing concern over global warming, according to presidential spokesman Tony Snow. This approach is expected to include tax incentives to encourage the use of alternative fuels that do not cause greenhouse gas emissions but no mandatory controls. That approach rules out proposing a cap on greenhouse gas emissions or any form of carbon emissions tax.
Congress
House. House Democrats concluded their agenda for the first 100 hours of the 110th Congress on January 18, but gave few details about their legislative plans for the remainder of 2007.
House Majority Leader Steny H. Hoyer, D-Md., told reporters that the president's fiscal year 2008 budget would establish whether the administration is intent of fixing the alternative minimum tax (AMT). Hoyer said that he is waiting to see whether Bush will honestly project the cost of AMT relief in his budget.
Meanwhile, the House Ways and Means Committee adopted a plan to hold oversight hearings on the economy, federal budget, the Treasury Department and IRS administration of federal tax laws. Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., and ranking member Jim McCrery, R-La., pledged to work in a bipartisan manner to pass noncontroversial tax legislation that can win Senate and White House support.
Privately, both old and new members of the tax panel told CCH that the current spirit of bipartisanship in the committee will likely fray once lawmakers begin dealing with substantive tax policy on which the political parties disagree. Rep. Phil English, R-Pa., speculated that Democrats might accomplish limited AMT relief in 2007, but a total repeal would likely be part of a larger tax reform effort.
As expected, House lawmakers approved the Clean Energy Bill of 2007 (HR 6) by a vote of 264 to 163 (TAXDAY, 2007/01/19, C.1). The legislation, which faces a difficult time in the Senate, would strip tax breaks for and increase royalty payments from big oil companies. Democrats said that the bill's $14 billion in revenues would be invested in clean, renewable energy and energy efficiency.
Senate. The Senate Finance Committee on January 17 approved an $8.3 billion package of tax incentives for small business that will be offered as an amendment when the full Senate takes up minimum wage legislation (HR 2) during the week beginning January 22 (TAXDAY, 2007/01/18, C.1). The measure faces a potential uphill battle in the House, however, where Rangel has stated his opposition to adding tax incentives to the wage bill. The noncontroversial tax provisions, most of which only extend existing provisions for several months, were overshadowed, however, by an $806 million revenue- raiser that would cap at $1 million the amount of executive compensation that can be deferred annually. Highlights of the package include an extension of Code Sec. 179 expensing, accelerated depreciation for new restaurant construction, increased flexibility in the use of the cash-balance method of accounting, extension and expansion of the work opportunity tax credit (WOTC) and increased flexibility for small businesses to qualify for tax preferences as S corporations.
Testifying before the Senate Budget Committee on January 18, Federal Reserve Chairman Ben S. Bernanke said that tax rate hikes may be necessary if the federal government is to sustain its major entitlement programs, primarily Medicare and Social Security, at current levels (TAXDAY, 2007/01/19, C.2). Bernanke said that, because of demographic changes and rising medical costs, federal expenditures for entitlement programs are projected to rise sharply over the next few decades. He also warned that, if early and meaningful action is not taken, the U.S. economy could be seriously weakened.
Also on January 18, the IRS's private tax-collection initiative came under fire in Congress. Sens. Byron Dorgan, D-N.D, and Patty Murray, D-Wash., have introduced a bill to terminate the program. "I'm deeply concerned that the plan to outsource debt collection would neither adequately protect privacy nor guarantee any cost savings," Murray said in a statement.
The Dorgan-Murray bill would end phase one of the initiative, which is currently underway, and prohibit any future appropriated funds from being used for privatization. According to the National Taxpayer Advocate, the IRS intends to assign roughly 40,000 taxpayer accounts to private debt collectors in phase one (TAXDAY, 2007/01/10, I.2).
The Tax Fairness Coalition (TFC), which supports privatization, responded to Murray's concerns about cost-saving on January 19, reporting that the initiative is "exceeding expectations." Private debt agencies collected more than $8.4 million in the first 10 weeks of the initiative, according to the coalition.
On Monday, January 22, Sen. George V. Voinovich, R-Ohio, plans to introduce a compromise bill that raises the minimum wage to $7.25 an hour and includes targeted business tax relief and corresponding budget offsets. Primarily, the bill would expand the WOTC to apply to teenagers who work in restaurants where tipping is not customary and who earn at least the minimum wage, offer tax relief designed to assist small businesses, such as restaurants, for building improvements, and codify the current regulatory option for small businesses to use cash accounting.
IRS
Late in 2006, the IRS announced that it was lifting the moratorium on determination letter applications for conversions from traditional defined benefit plans to cash balance plans (IR-2006-193, Notice 2007-6, I.R.B. 2007-3, 272; TAXDAY, 2006/12/22, I.4). The IRS has received questions on whether the cash balance moratorium plans that are in Cycle A under Rev. Proc. 2005-66, I.R.B. 2005-37, 509, should be submitted for determination letters by January 1, 2007.
Sponsors of individually designed plans generally submit applications for determination letters once every five years, under a staggered system of five-year cycles. In most cases, the cycle that applies to a plan depends on the last digit of the sponsoring employer's identification number (EIN). The first five-year period for plans falling into Cycle A (EINs ending in 1 or 6) ends on January 31, 2007. The initial submission period also ends on that date.
On January 16, in a special edition of Employee Plans News, the IRS confirmed that cash balance moratorium plans that are in cycle A must be submitted for determination letters by January 31, 2007, in accordance with Rev. Proc. 2005-66. "The Cycle A determination letter application will be reviewed at the same time and by the same person that is assigned the cash balance moratorium plan," the IRS indicated. Plan sponsors should note in a cover letter that the plan has been subject to the moratorium on cash balance plans, the IRS indicated.
News about IRS agents being pressured to close large business audits quickly is still making waves (TAXDAY, 2007/01/17, C.2). Reps. Rahm Emanuel, D-Ill., and Richard Neal, D-Maine, told IRS Commissioner Mark W. Everson in a January 16 letter that the House Ways and Means Subcommittee on Select Revenue Measures will look into these reports. Emanuel and Neal expressed concern that IRS officials and large companies are "handcuffing auditors by prematurely declaring certain areas of inquiry off limits."
An IRS spokesperson told CCH that the Service will not comment on letters from members of the Congress before the Commissioner has replied and, normally, the Service leaves it up to the lawmaker to disclose the reply if he or she wishes.
By Jeff Carlson, Stephen K. Cooper, Paula Cruickshank and George L. Yaksick, Jr., CCH News Staff