LEVINE, KATZ, NANNIS + SOLOMON, P.C.

 December 2002

 

 

IRS Seeks Fee For Processing Offers-in-Compromise

 

The Internal Revenue Service has issued a proposed regulation that, if adopted, will affect the agency's offers-in-compromise (OIC) program. The regulation, NPRM REG-103777-02, would impose a $150 filing fee on OIC applicants. The fee would not change the net amount paid by a taxpayer who successfully negotiates an OIC plan.

 

The OIC program gives the IRS discretion to accept a reduced amount in payment for tax obligations where there is little or no expectation of receiving the full amount due. Certain situations where there is doubt as to whether the taxpayer owes the tax bill also qualify for the OIC program. The proposed regulation imposes a fee that reimburses the IRS for some of the cost of processing OIC claims.

 

The $150 fee is substantially less than the cost to provide offers-in-compromise services as calculated by the IRS. The average estimated cost to investigate doubt as to liability and effective tax administration is $471 per case and can go as high as $3,983 where detailed investigations are required.

 

Should the regulation be adopted, certain low-income taxpayers would be exempt from the $150 fee, and OICs based on doubt as to liability only would also be exempt, as would OICs accepted for the purpose of promoting effective tax administration. If it is determined that a taxpayer is able to pay the $150 fee, but that to pay that fee would create economic hardship for the taxpayer, then the fee would not be assessed.

 

The IRS is soliciting comments on the proposed regulation and to that end will hold a public hearing on February 13, 2003, at 10 a.m. at the IRS Building, Room 4718, 1111 Constitution Avenue, N.W., Washington D.C. Written comments are due by February 4, 2003. If you wish to comment online, you may do so at http://www.irs.gov/regs. Written comments should be mailed to:

 

Internal Revenue Service

CC:ITA:RU (REG-103888-02), Room 5226

P.O. Box 7604, Ben Franklin Station

Washington, D.C. 20044

 

Growing Demand For Pre-Deal Audits Slows

M&A Activity

 

In the aftermath of bad investments and troubled loans, both corporate buyers and their lenders are looking to accountants to do more upfront audits as part of pre-deal due diligence. This is slowing down the already low level of activity in mergers and acquisitions.

 

Commenting on the trend, Gregg Polle, global co-head of mergers and acquisitions at Salomon Smith Barney, told Reuters, "It used to be that often times you signed deals stipulating that audited financials needed to be prepared later. Now often times it's a requirement before they consider signing a deal at all."

 

Key reasons why pre-deal audits are in demand:

 

• Stricter corporate governance. "It's partly a result of boards of directors being much less likely to take risks that they might have taken before, and management not being willing to stick their necks out to endorse a deal they are not completely comfortable with," said Spencer Klein, the head of M&A at McDermott, Will & Emery. "People are trying to do a lot more up front to be comfortable and make sure nothing comes back to bite them."

 

• Corporate reform. Legal experts say the Sarbanes-Oxley Act is also indirectly influencing the demand for upfront audits. While the new law does not specifically require audits before a deal is signed, it does require audited statements shortly after a deal is closed. "You are trying to do more of it in advance because you really aren't going to have that much time before a deal closes," explains Ernest Lorimer, a partner with Finn Dixon & Herling.

 

• Tighter lending policies. Because they face growing portfolios of troubled loans, lenders are growing more cautious. "Banks that are providing the bridge commitments historically have not necessarily required audited finances," explained Mr. Polle. "Sometimes they wanted them, often times they could get comfortable without them. Now what we're seeing is they ... want to see an audit before they extend the bank credit."

 

The recent Qwest telephone book sale is cited as an example. After the bidders were narrowed down to two, both potential buyers insisted that Qwest run a full audit on the telephone book unit, delaying the sale by up to three weeks.

 

Andersen's Berardino Offers Guidance to Profession

 

Speaking at an American Institute of Certified Public Accountants conference in Phoenix Tuesday, former Andersen CEO Joseph Berardino offered his insights as to the crisis troubling both the accounting profession and corporate America and made suggestions as to how such a crisis can be overcome.

 

Mr. Berardino warned of a dangerous complacency on the part of the leaders of the remaining Big Four accounting firms, saying, "They think (what happened to Andersen) can't happen to them. Talk to me a year ago and I would have said the same thing."

 

He outlined five recent trends that he feels have helped shape today's business environment and which contributed to the crisis:

 

• Stock acquisition isn't just for the well-to-do anymore - more and more Americans are invested in the stock market through stock purchases, mutual fund investments, and 401(k) plan participation.
• Executive pay has become linked to performance and thus the bottom line determines how an executive will be rewarded.
• Media has contributed to an awareness of corporate performance as quarterly earnings reports are touted in the press and CEOs become more visible.
• Hedge funds have provided a new opportunity for companies to take risks.
• Potential conflicts of interest have become more visible.

 

Mr. Berardino recommends a change in audit opinions from a clean opinion vs. a qualified opinion to opinions issued on a graded scale. He also encourages a change from rules-based accounting to a principles-based model. And he added, "We must increase our ability to detect fraud."

 

 

States Vote to Proceed With Internet Sales Tax

Tax officials and legislators from 31 states and the District of Columbia met in Chicago on Tuesday to vote on a plan to simplify their respective tax laws in order to position themselves to collect sales tax on Internet sales.

 

The state officials voted unanimously to accept the plan, called the Streamlined Sales Tax Project. The next step in the controversial plan will be to ask Congress to mandate an online sales tax collection program. Should such legislation pass, the program would require mandatory participation among all states if as few as 10 states amend their laws to implement the program.

 

If the Streamlined Sales Tax Project is enacted, states would be required to simplify tax reporting requirements and would agree to charge a single statewide tax rate for various types of products. In addition the current sales taxing jurisdictions throughout the country, which number approximately 7,500, would be reduced to 200, thus significantly easing the reporting burden on retailers. States feel the program will be attractive to retailers who will be eligible to share in a portion of the sales tax proceeds.

 

Those who object to the program point to the additional paperwork burden for retailers, the ease with which retailers and customers could cheat the system, the cost of implementing a method of collection and tax payment, the fact that such a sales tax would encourage Internet shoppers to make purchases from non-U.S. vendors, and the unconstitutionality of such a program which violates the prohibition on state governments from taxing and regulating interstate commerce.

 

Treasury Announces New Tax on Offshore Companies

 

The Treasury Department has issued temporary regulations that require companies that move offshore to inform shareholders and the Internal Revenue Service of the move and to pay capital gains tax on the exchange of stock for stock in a foreign corporation. Typically this will result in a pass through of the capital gains tax to shareholders.

 

Treasury is hoping the tax requirement will deter some corporations from moving offshore, although the fact that the tax will probably be picked up by shareholders may not be a significant deterrent. "When you really look in depth, the reason we're losing people offshore is the inequity of our tax code as compared to our competitors overseas," said Speaker of the House Dennis Hastert (R-IL) last month in a discussion about the offshore relocations.

 

Frequently when a corporation relocates offshore, the company changes places with a foreign subsidiary, with the foreign subsidiary becoming the parent company and the original U.S. parent company becoming the subsidiary. This type of transaction is called a corporate inversion, and when the shareholders exchange their stock for stock in the foreign corporation, a taxable event occurs.

 

In addition, the Treasury Department issued proposed regulations that will require corporations to report to shareholders and to the IRS information regarding a change in control of a corporation or a recapitalization or any other substantial change in capital structure.

 

Taxpayers wishing to comment on the proposed regulations may do so by posting comments on the http://www.irs.gov/regs (IRS Web site), or by sending a letter to:

 

CC:ITA:RU (REG-143321-02)

Room 5226, Internal Revenue Service

POB 7604, Ben Franklin Station

Washington, DC 20044

 

The comment period deadline has not yet been posted, but can be expected to be displayed on the IRS Web site soon.

 

FASB Tightens Accounting Rules For Loan Guarantees

 

The Financial Accounting Standards Board issued Interpretation No. 45 to improve disclosure requirements for guarantees.

 

The interpretation is entitled, "Guarantor's Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Its key provisions:

 

§         The interpretation clarifies that companies must recognize liabilities for the obligations they assume under guarantees at the time they make the guarantees. Previously, liabilities were not recognized until it became likely the company would have to honor its guarantee.

§         It also adds disclosure requirements that may help investors avoid surprises like the one associated with the sudden revelations of executive loans at Adelphia Communications Corporation.

 

FASB Senior Project Manager Robert C. Wilkins explains, "The interpretation should significantly improve the reporting of guarantees that are issued in conjunction with other transactions."

 

An Overreaction?

 

Critics say the changes overcompensate for damage done in a few cases. "I'm all for better disclosure, but this rule is an overreaction," said Robert Willens, an accounting specialist with Lehman Brothers. "They're making companies record a liability even though they have merely guaranteed someone else's liability. That's pretty radical. Normally, you don't record a liability until you incur one." ("FASB Issues Rules To Improve Companies' Loan Disclosure," Wall Street Journal, November 25, 2002).

 

But the criticism is muted by the fact that the rule changes are applied judiciously, not across-the-board. For example, they don't apply to product warranties, guarantees accounted for as derivatives, or certain other types of guarantee contracts, such as those issued by insurance companies.

 

The interpretation may be obtained via FASB's Web site or by contacting the FASB's Order Department at 800-748-0659.

 

New IRS Telephone Numbers Take Effect December 2

 

As part of its continuing effort to provide better service, the IRS is making two new toll-free numbers available starting December 2, 2002.

 

1-800-829-4933:  Small businesses, corporations, partnerships and trusts who need information or help preparing business returns should now call this number. Customers calling this number can apply for a new Employer Identification Number (EIN) and receive help on employment taxes, partnership, corporation, estate, gift, trust and excise taxes or other small business issues.

 

1-800-829-1954:  People looking for their refunds should call this number. Individuals who filed a 1040 series return can check on the status of their current year tax refund with this toll-free number.