Too Good To Be True?

However you feel about taxes and the Internal Revenue Service, odds are you’ve at least been tempted to find ways to pay less than the IRS seems to think you should.
But anyone who contemplates arguing on legal grounds against paying their fair share of taxes would be well-advised to first check out “The Truth about Frivolous Tax Arguments’, a 74-page document published by the IRS. The document, which discusses and rebuts many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws, has been updated for the 2007 filing season.
Not only will it “help taxpayers avoid wasting their time with frivolous arguments and incurring penalties’ – the IRS notes that in 2006 Congress increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.
“Too good to be true schemes are exactly that–too good to be true,” said IRS Chief Counsel Donald L. Korb. “Taxpayers should be careful in making frivolous arguments since courts have routinely rejected them.”
You’ve got another think coming if you:
  • Believe that filing a tax return or payment of tax is voluntary, that you can reduce your federal income tax liability by filing a “zero return’, or that the IRS must prepare federal tax returns for a person who fails to file.
  • Think that wages, tips, and other compensation received for personal services are not income, that only foreign-source income is taxable, or that Federal Reserve Notes are not income.
  • Try to argue that a taxpayer is not a “citizen’ of the United States, and thus not subject to the federal income tax laws, that the “United States’ consists only of the District of Columbia, federal territories, and federal enclaves, that a taxpayer is not a “person’ as defined by the Internal Revenue Code, thus is not subject to the federal income tax laws, or that the only “employees’ subject to federal income tax are employees of the federal government.
  • Contend that taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment, that federal income taxes constitute a “taking’ of property without due process of law, violating the Fifth Amendment, that you do not have to file returns or provide financial information because of the protection against self-incrimination found in the Fifth Amendment, that compelled compliance with the federal income tax laws is a form of servitude in violation of the Thirteenth Amendment, or that the Sixteenth Amendment to the United States Constitution was not properly ratified, thus the federal income tax laws are unconstitutional.
  • Are under the impression that the Internal Revenue Service is not an agency of the United States, that taxpayers are not required to file a federal income tax return, because the instructions and regulations associated with the Form 1040 do not display an OMB control number as required by the Paperwork Reduction Act, that African Americans can claim a special tax credit as reparations for slavery and other oppressive treatment, that taxpayers are entitled to a refund of the Social Security taxes paid over their lifetime, or that a “corporation sole’ can be established and used for the purpose of avoiding federal income taxes.
And yes – all of the above have (unsuccessfully) been argued previously.

The Truth about Frivolous Tax Arguments is available online at http://www.irs.gov/taxpros/article/0,,id=159853,00.html

IRS Applies PPA Changes to Cash Balance Regs

The Internal Revenue Service has updated its regulations on the tax treatment of cash balance plans to include changes made by the Pension Protection Act (PPA).

An IRS news release said the new rules are related to the PPA changes to tax code Sections 411(a)(13) and 411(b)(5) about certain hybrid defined benefit plans. The agency said a defined benefit pension plan generally must satisfy the minimum vesting standards of 411(a) and the accrual requirements of 411(b) to be qualified under 401(a).
While the new document includes transitional guidance released December 21, 2006 announcing the lifting of a moratorium and the start of processing for determination letter applications and examination cases for cash balance conversions, it includes new terminology, such as a” statutory hybrid benefit formula” and a “lump sum-based benefit formula,” to take into account situations where plans provide more than one benefit formula.
A lump sum-based benefit is defined as a benefit formula used to determine all or any part of a participant’s accumulated benefit under which the benefit is expressed as the balance of a hypothetical account maintained for the participant or as the current value of the accumulated percentage of the participant’s final average compensation. A statutory hybrid benefit formula is defined as a benefit formula that is either a lump sum-based benefit formula or a formula that has an effect similar to a lump sum-based benefit.
Under the latest IRS proposal, a plan is not treated as failing to meet the requirements for certain benefit formulas if a participant’s accumulated benefit expressed under one of those formulas would not be less than a similarly situated younger participant’s accumulated benefit expressed under the same formula, the tax agency said.
The new rule asserts that a defined benefit plan is not in violation with respect to a participant’s accrued benefit derived from employer contributions because the plan determines the present value of benefits under a lump sum-based benefit formula as the amount of the participant’s hypothetical account as the current value of the accumulated percentage of the participant’s final average compensation under that formula.
The proposed regulations address in detail special vesting rules, safe harbor age discrimination conversion protection, and market rate of return limitation. The PPA provided prospective safe harbor age discrimination protections in response to numerous lawsuits alleging historical age discrimination from cash balance conversions.
The IRS said that for a participant whose accrued benefit is determined under a statutory hybrid benefit formula, the plan is not treated as meeting the requirement unless the plan provides that the participant has a nonforfeitable right to 100% of the participant’s accrued benefit if the participant has three or more years of service. A plan that does not satisfy this test is required to satisfy the general nondiscrimination test, it added.

The safe harbor for satisfying the test only comes into play where a participant’s accumulated benefit under the terms of the plan is expressed as an annuity payable at normal retirement age (or current age, if later), the balance of a hypothetical account, or the current value of the accumulated percentage of the employee’s final average compensation.

Wear-Away Protections

To guard against any wear-away problems, under the proposed regulations, a participant whose benefits are affected by a conversion amendment which occurred after June 29, 2005, must generally be provided with a benefit after the conversion that is at least equal to the sum of the benefits accrued through the date of the conversion and benefits earned after the conversion, with no permitted interaction between these two portions.
The regulations would provide an alternative mechanism under which the plan provides for the establishment of an opening hypothetical account balance as part of the conversion and keeps separate track of the opening hypothetical account balance and interest credits attributable to the account, and the post-conversion hypothetical contributions and interest credits attributable to the account.
Written comments on the proposed rule are due by March 27, 2008, to CC:PA:LPD:PR (REG-104946-07), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. The IRS specifically requested comments on how the proposed regulations “may be made easier to understand.”

The IRS also asked for comments on conversion protection, market rate of return limitation, application of the three-year vesting requirement, whether a characteristic is indirectly on account of age, and the age discrimination safe harbor.

The proposed rule is online at http://www.plansponsor.com/uploadfiles/irscashbal.pdf

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