Tax Season Is Just over the Horizon

Two very different issues dominated the tax world. The first, the Temporary Tax Reform Act of 2007, has come to a vote in the House of Representatives. It includes a series of extensions of popular tax benefits and temporary AMT relief for 2007. Faced with a projected increase in taxpayers subject to the AMT from four million to 25 million this year, the tax writers have been scurrying to get this done quickly. However, the process of providing a patch, though much needed, brings with it the legislative risk that it won’t be passed. The Senate Republicans seek a waiver of PAY-GO (that generally requires revenue offsets to revenue losses from tax benefits that are paid as you go). At issue are provisions that tax all partnership income allocated to certain partners providing investment services as ordinary income, regardless of the distributive share characterization of such income under the general partnership provisions. The President has threatened to veto the legislation on this account and the Senate has indicated the bill will not come before the Senate until December. The Service has indicated that it will not treat even the assurances of the senior committee members from both parties and both sides of the Capitol as a reason to make the necessary technical changes to its processing regime before the bill actually passes.

Last year may provide some counsel as to the likely results of such delay. Tax legislation that included some extenders meant that the 1040 was not structured and therefore its instructions did not address the necessary modifications and gyrations. Instructions that required preparers to use different letter designations next to certain “double-duty” line items were found on the IRS website. In addition, the tax software provided by commercial providers was delayed. The Service has already indicated that the reprogramming and testing of its computers will take ten weeks which will effectively postpone the opening day of Service processing. Expect delays in refunds and a crush at the end of tax season if e-filing.

What might be viewed on the brighter side is the November surprise FASB has given to accountants. The threshold condition that a tax position must meet for any part of the benefit of that position to be recognized in financial statements involved has been modified by FIN 48. FIN 48 requires the recognition of a tax benefit only if, based on the authorities applying for the position, it is more-likely-than-not that the position will be sustained upon examination by a tax authority that has full knowledge of all relevant information.

FASB has voted to delay the implementation of FIN 48 for nonpublic entities not already implementing FIN 48 until periods beginning after December 15, 2007, a one-year extension of the initial effective date of the interpretation. Those who have delayed FIN 48 are rewarded. Not all is lost for those firms that have already adopted FIN 48 processes into their development of tax positions for 2007. They will be more prepared in 2008 by reason of their 2007 adaptation than those that avoided FIN 48. In addition, the extent to which they have developed modalities to determine when a tax position has a more-likely-than-not probability of success will serve them well in the upcoming tax season, when they will be called on to make such determinations on the tax return.

These and other issues are examined in the following Surgent McCoy courses: