Noncontroversial and straightforward tweaks to a tax code that contains more than 3.5 million words are not easy to find, but the AICPA has several such proposals that, if enacted, could eliminate a few headaches for taxpayers and CPAs alike.
The AICPA’s second annual compendium of legislative proposals, distributed to key congressional tax committee leaders last week, seeks to correct technical problems related to a wide range of issues such as tax credits, due dates and penalties. Some of the proposals are narrow in scope (for example, allowing certain spousal transfers of suspended losses) while others touch on broadly used provisions that affect thousands or millions of taxpayers (school expense and attorney fee deductions, and nonbusiness mileage rates).
The most extensive proposal would streamline the growing number of incentives intended to help taxpayers meet or save for post-secondary educational expenses. Taxpayers currently face multiple sets of income phaseouts and qualifying expenses, depending on which credit or tuition plan they choose. (See pages 6–9 of the compendium for a chart.)
The Government Accountability Office (GAO) has estimated that almost 20% of eligible taxpayers are not taking advantage of these deductions and credits. And many of those who are using them are not doing so correctly. The Treasury Inspector General for Tax Administration (TIGTA) reported in 2009 that approximately $300 million of Hope scholarship credits were inappropriately claimed in tax year 2006.
The AICPA suggested several ways to simplify the current scheme, including the creation of one credit for all post-secondary expenses that is per student rather than per taxpayer. It also recommends creating a uniform definition of qualified higher education expenses, continuing the requirement for the student’s Social Security number on the return to help track compliance, and harmonizing the income phaseouts for all education incentives.
Other proposals in the compendium, and the AICPA’s reasons for urging the change, include:
1. Creating a separate rate for a child’s taxable income (eliminating the link to the parents’ income).
Rationale: Eliminates significant complexity for the “kiddie tax” calculation; also addresses potential alternative minimum tax (AMT) and tax equity issues for certain filers.
2. Standardizing the mileage rates—one for business expenses and another for nonbusiness (charitable, medical and moving expenses)—and set the nonbusiness rate to at least 50% of the business rate.
Rationale: Simplifies tax calculation. Also eliminates the huge disparity between rates (14 cents per mile for charitable, 51 cents per mile for business) and allows all rates to be adjusted in a timely manner.
3. Allowing attorney fees and court costs related to a litigation award or settlement as deductions for adjusted gross income.
Rationale: Corrects inequity in the law—costs for only certain types of litigation that generate gross income can be deducted for AGI; others are treated as miscellaneous itemized deductions.
4. Repealing full vesting on partial termination of qualified retirement plans.
Rationale: Eliminates significant burden due to uncertainty about when a “partial termination” occurs (the Code does not define partial termination).
5. Allowing a reasonable cause exception to the IRC § 6707A penalty for failure to include reportable transaction information with a return.
Rationale: Current law is not consistent with other penalty policies—the IRS has no discretion to waive, and the taxpayer has no opportunity to come into compliance.
6. Extending the due date for foreign bank and financial accounts (FBAR) reporting from June 30 to October 15.
Rationale: Information needed for reporting is often not available to tax practitioners by June 30.
7. Repealing the requirement of a 20% partial payment with a lump-sum offer-in-compromise.
Rationale: Current law discourages taxpayers from using the IRS offer-in-compromise program. Repeal provides an effective option for addressing tax liability.
8. Allowing transfer of partnership suspended losses to one another when spousal transfers under section 1041(a) take place.
Rationale: Suspended losses should be available to the spouse who actually owns the partnership interest. Similar transfers are currently allowed for S corporation shareholders.
9. Clarifying that husband and wife partnerships recognized under state law are eligible to elect qualified joint venture status.
Rationale: The current definition of qualified joint venture makes it unclear which partnerships are eligible to make the election.
10. Allowing offset to built-in gains tax for charitable contribution and foreign tax credit carryforwards from a C corporation year to an S corporation year.
Rationale: Foreign tax credit and charitable contributions relate to a liability integrally related to the former C corporation and should be allowed to be carried forward like other business credits and deductions.
11. Adding a new 120-day post-termination transition period starting on the date that a taxpayer files an amended Form 1120S, U.S. Income Tax Return for an S Corporation.
Rationale: Filing of an amended return should trigger the beginning of a new post-termination transition period, similar to what is allowed for an audit adjustment.
12. Allowing administrative relief for certain late qualified terminal interest property (QTIP) and qualified revocable trust (QRT) elections.
Rationale: Current law imposes hardship on taxpayers who lose a gift tax QTIP marital deduction or QRT benefit due to an error by their adviser. Similar relief is now provided for generation-skipping transfers.