The IRS’s latest split dollar rulings is a cautionary tale that, despite its happy ending, illustrates the danger lurking at every corner of the split-dollar life insurance regulations.  The ruling shows that, despite otherwise meticulous adherence to the tax code and regulations, a split-dollar arrangement can fail for lack of filing a simple annual statement with the IRS.  In PLR 201041006, the IRS considered a charity’s request to grant the charity an extension to make a required filing under the split-dollar regulations.

The taxpayer in the case is a charity (Charity) that ran a split-dollar life insurance program for its high-level employees.  Not having any expertise with SDPs, Charity hired a company to revise its SDP.  On the consultant’s recommendation, Charity entered into a new SDP. The new SDP was entered into after the Treasury issued final regulations under §§1.61-22 and 1.7872-15, which can carry adverse tax consequences for both parties to a split-dollar arrangement. 

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of IRS split-dollar rulings in Advisor’s Journal, see Modification of Split-Dollar Arrangement Not a Material Change to Underlying Life Insurance Contract (CC 08-17) and Notice 2007-34 Explains Application of Section 409A to Split-dollar Life Insurance Arrangements (CC 07-18).

For in-depth analysis of split-dollar life insurance, see Advisor’s Main Library: Section 15.2  Split-Dollar.

We invite your questions and comments by posting them below or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Provides insight into the world of facts and circumstances in light of the economic substance doctrine.  Gives wealth mangers another view of the newly codified doctrine.

This blogticle is written to expound upon the recent AdvisorFX Journal article on economic substance written earlier this month.  AdvisorFX: The Economic Substance Doctrine Can Unwind Even the Best Laid Plans ) (CC 10-74).  Although its material is not required prerequisite knowledge to understand this presentation, wealth managers may find additional information presented therein to be useful.  This blog also sets-out to make a minor correction to the FX article, discussed below.

Many wealth managers are now aware of the codification of the Economic Substance Doctrine in Internal Revenue Code § 7710 (o).  This change was made as part of the Health Care and Education Affordability Reconciliation Act of 2010.

It states that taxpayers, when subject to the application of the economic substance in general, must show that, the transaction changes the taxpayers “economic position” in a meaningful way not including any tax benefits, and the taxpayer has a” substantial purpose” for entering the transaction not including any tax considerations.

The “economic substance doctrine” is a common law doctrine now codified, under which tax benefits with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose. [1]

The basis for the recent codification is based on the case law which “requires that the intended transactions have economic substance separate and distinct from economic benefit achieved solely by tax reduction.” [2] “The doctrine of economic substance becomes applicable…where a taxpayer seeks to claim tax benefits, unintended by Congress, by means of transactions that serve no economic purpose other than tax savings.” [3]

The determination of “whether a particular transaction meets the requirements for specific treatment under any of these provisions is a question of facts and circumstances.” [4] Therefore, wealth managers find it even more difficult to establish general rules regarding certain transactions as each case is unique and should be evaluated separately.  Furthermore, this means that two similar transactions under different fact patterns can yield entirely two different results.  Moreover, just because, “the fact that a transaction meets the requirements for specific treatment under any provision of the Code is not determinative of whether a transaction or series of transactions of which it is a part has economic substance.” [5]

This means in essence, the “Commissioner can apply to disallow a transaction” even if the formal characterization claimed by the taxpayer “technically satisfies the statutory conditions” by refusing to ”recognize tax benefits achieved by the form because the transaction lacks economic substance.” [6]

Our recent Advisor FX article (AdvisorFX: The Economic Substance Doctrine Can Unwind Even the Best Laid Plans ) (CC 10-74) mentioned in part, “The new law imposes a strict-liability 40 percent penalty on tax underpayments resulting from transactions that fail the economic substance doctrine.”  However, this author would like to note that, the 20% penalty ordinarily applied to “substantial understatements” is also applied to a “transaction lacking economic substance (within the meaning of section 7701(o)).” [7]

Only when, “any portion of an underpayment which is attributable to one or more nondisclosed noneconomic substance transactions,” will the penalty increase to “40 percent” from “20 percent”. [8] Nondisclosed noneconomic substance transaction means “any portion of a transaction” which is found to fail within the economic substance doctrine, and “relevant facts affecting the tax treatment are not adequately disclosed in the return nor in a statement attached to the return.” [9] Therefore, if relevant facts affecting the tax treatment of the transaction are adequately disclosed, then the smaller penalty should apply to the tax underpayment.

Next week’s blogs will revert back to the life insurance arena as we discuss products in detail.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] 26 U.S.C. § 7710 (o)(5)(A).

[2] Joint Committee on Taxation.  “Health Care and Education Reconciliation Act of 2010- Technical Explanation of the Revenue Provisions of the Reconciliaton act Of 2010,as Amended, in Combination with the Patient Protection and Affordable Care Act”.  E. Codification of Economic Substance Doctrine and Imposition of Penalties. JCX- 18-10 NO 7, 2010 WL 1047322 (I.R.S.).

[3] Joint Committee on Taxation. Citing, ACM Partnership v. Commissioner, 73 T.C.M. at 2215.

[4] Joint Committee on Taxation.

[5] Id.

[6] Jeff Rector.  A review of the Economic Substance Doctrine”.  10 Stan. J.L. Bus. & Fin. 173, 174 (.2004)

[7] 26 U.S.C. § 6662 (b)(6).

[8] 26 U.S.C. § 6622 (i)(1). [italics added].

[9] 26 U.S.C. § 6622 (i)(2).

FINRA has proposed new arbitration rules that would give investors the option of selecting all-public arbitration panels without an industry representative. Use of all-public panels excluding industry insiders is meant to bolster public confidence in the arbitration process. But the absence of financial professionals on the arbitration panels will undoubtedly disadvantage the financial institutions and professionals involved in many cases. 

Although an outright prohibition of mandatory arbitration clauses would hurt financial services firms and their employees by allowing some consumers to take the expensive litigation route, the proposed FINRA rules may counteract any migration away from arbitration by motivating some investors who are leery of arbitration panels that include an industry representative to utilize public-only arbitration, keeping those cases out of court.

AdvisorFX Advisor’s Journal will keep you updated on the development of both the FINRA arbitration proposal and SEC action on mandatory arbitration clauses.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of securities arbitration in Advisor’s Journal, see Mandatory Securities Arbitration Clauses on the Chopping Block (CC 10-48).

We invite your questions and comments by posting them below or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Discusses additional events and situations that may or may not trigger specific tax consequences related to common transactions.  Also provides distinctions common to these theories as well as methods to recognize particular fact patterns in relation to such.

The economic benefit doctrine is at issue when the taxpayer receives some benefit in connection with a business or contractual relationship with a current, real and measurable value. [1] One instance when an individual receives an economic or financial benefit or property is for compensation for services, whereby the value of the benefit or property is currently includible in the individual’s gross income. [2] This instance will be examined in further detail below.

Another common example is a promise to pay, which also provides a good illustration of how the doctrine applies.  A mere promise to pay, unsupported by notes or other evidences of indebtedness which by and large is unsecured, is not income to a cash method taxpayer. [3]

On the other hand, there is the cash equivalency doctrine, which states, where a promise to pay that is supported by notes or otherwise secured by a solvent obligor, which is unconditional and assignable, not subject to sett-offs, and issued at a reasonable discount, is therefore considered a cash equivalent.  Since, such notes are considered cash equivalents the notes are taxable in a like manner as cash, i.e., if cash instead of the note was received by the taxpayer the taxpayer would be taxed on the cash received.  “More simply, the cash equivalency doctrine provides that, if the right to receive a payment in the future is reduced to writing and is transferable, such as in the case of a note or a bond, the right is considered to be the equivalent of cash and the value of the right is includible in gross income.” [4]

Two additional examples of the economic benefit doctrine to further illustrate:

A football player entered into a two-year standard player’s contract with the Giants in 2009. In addition to salary, he received a signing bonus that was to be paid to an escrow agent designated by him. Under the agreement, the bonus plus interest were payable to the player over five years. The football player is taxed in full in 2009 when the payment was made to the escrow agent, because in that year, “the employer’s part in the transaction ended, and the amount of the compensation was fixed and irrevocably set aside for the player’s sole benefit” [5]

At the other end of the spectrum, consider ABC, a cash-basis taxpayer, who shares the top floor of an office building with the landlord. On December 31, 2009, a tenant from another floor mistakenly leaves cash rent in ABC’s office lobby, and ABC inadvertently deposits it. ABC discovers the error on January 5, 2010, and promptly issues a check to the landlord. The fact that ABC had dominion and control over the cash rent is irrelevant since it did not represent economic income to ABC. Therefore, ABC is not required to pay tax on the rent. [6]

Additionally, as briefly mentioned above, if an individual receives “any economic or financial benefit or property as compensation for services, the value of the benefit or property is currently includible in the individual’s gross income.” [7] Furthermore, an employee is required to include in his gross income, the value of assets that have been vested unconditionally and irrevocably, and transferred into a fund for the employee’s sole benefit, so long as the employee’s interest is not subject to financial forfeiture or transferable.  [8] A common example of this situation occurs when employee retirement programs are funded with employer stock options.

Tomorrow’s blogticle will discuss the ever popular economic substance doctrine.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] See generally, Advisor Fx: Two Tax Doctrines: Constructive Receipt and Economic Benefit.

[2] Internal Revenue Service—Department of the Treasury.  “Nonqualified Deferred Compensation Audit Techniques Guide”.  02-2005.  http://www.irs.gov/businesses/corporations/article/0,,id=134878,00.html. Page Last Reviewed or Updated: March 31, 2010.  Last Accessed 10/23/10.

[3] Tax Management Federal Income Portfolio. “Economic Benefit, Cash Equivalency, and Assignment of Income”.  No. 385 s V, (BNA), 20XX WL 4742238 (FEDERAL).  Compensation Planning Series– 385-4th: Deferred Compensation Arrangements.  Westlaw.  Citing Rev. Rul. 60-31

[4] Internal Revenue Service.  “Nonqualified Deferred Compensation Audit Techniques Guide”.

[5] Tax Management Federal Income Portfolio. “Economic Benefit, Cash Equivalency, and Assignment of Income”.  Citing Ex. 4 of Rev. Rul. 60-31, Rev. Rul. 55-727, [other citations omitted]; Rev. Rul. Rul. 60-31.

[6] CCH Federal Taxation Comprehensive Topics. Chapter 13, Exhibit 17b.  35 of 70.  blue.utb.edu/…/2006%20CCH%20Comp%20Topics%20Ch%2013.ppt.  Last accessed 10/23/10.

[7] Internal Revenue Service.  “Nonqualified Deferred Compensation Audit Techniques Guide”.

[8] 26 U.S.C § 83; Advisor Fx: Two Tax Doctrines: Constructive Receipt and Economic Benefit. ([09-36] 09/01/2009); Internal Revenue Service.  “Nonqualified Deferred Compensation Audit Techniques Guide”.

Brokers and mutual fund companies will soon be required to report to their customers and the IRS on the basis of securities sold from customers’ accounts and whether any gain on the sale is a short or long-term capital gain. IRS Commissioner Doug Shulman praised the new rules, saying that “[i]nvestors will now receive the information they need to more easily and accurately report their gains and losses.” Easy access to basis information will save many investors time and money when filling out their tax returns and ensure that the IRS is given accurate information by investors who make securities sales.

The new basis reporting requirements will be burdensome for brokers; the IRS has estimated that the average broker will spend eight hours annually to comply with the requirements. And this year, brokers have the challenge of implementing the systems necessary to comply with the basis reporting requirements by January 1, 2011. We will keep you posted if the IRS releases any additional guidance.

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

We invite your questions and comments by posting them below or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Many wealth managers are probably aware that when a client receives income, there is generally a tax effect which has implications on the determination of the income tax liability.  This blogticle presents situations that may or may not trigger specific tax consequences related to common transactions.

As a starting point, The Internal Revenue Code states that gross income, the top line calculation used in determining taxable income, includes income from whatever source derived unless otherwise excluded by law.  [1] One such exclusion occurs when death benefits are received by a beneficiary of a life insurance contract. [2]

To show the extent of the taxing power to include all income except excluded income, the Supreme Court examined a situation where taxpayers received money as settlement in punitive damages arising from anti-trust and fraud litigation.  The Court, in Commissioner v. Glenshaw Glass Co., adopted a broad definition of income as “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” [3] The Supreme Court’s ruling overturned both the District Court and Appeals Court decisions; it was therefore held the taxpayer’s receipt of money from settlement of a lawsuit was an increase in the taxpayer’s wealth, and furthermore, since not excluded under any section of the code, was consequently includable as gross income. [4]

However, where income is not “realized”, the taxpayer does not incur a tax liability.  In Eisner v. Macomber the taxpayer, a shareholder of a corporation, received additional shares representing undistributed earnings. [5] The Supreme Court “determined that a shareholder’s receipt of a stock distribution was not income to the shareholder and, therefore, Congress’s attempt to tax the stock dividend was not authorized by the Sixteenth Amendment.” [6]

The Court in Eisner also illustrated the now well known “fundamental relation of ‘capital’ to ‘income’ ”, as “the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time.” [7]

In another respect, when property or services are received by a taxpayer, a realization of income has occurred.  It is a long recognized principal that “if services are paid for other than in money, the fair market value of the property or services taken in payment must be included in income.” [8]

Barter transactions are afforded the general tax treatment as if the bartered property, goods, or services were sold, and the property, goods, or services received was purchased with the funds obtained from the that “sale.”  [9] Taxpayers are required to file Form 1099-B for barter transactions.

However, there are instances where even though the taxpayer may not receive anything today,    he has a right to receive something today, and is therefore taxed on it today.  This is the doctrine of constructive receipt.  “Income although not actually reduced to a taxpayer’s possession is constructively received by him” when he can draw upon it, or is otherwise made available to him. [10]

An example of constructive receipt occurs when interest from a savings account is taxed because the right to withdrawal interest from a savings account is present, and therefore the taxpayer has realized the income. [11] Another example is when a corporation “advises its employees that they will be receiving cash Christmas bonuses on December 20.”  One of the employees requests that “the payroll department not issue his bonus check until January 2.”   Since the employee “had an unrestricted right to receive the money on December 20, he is considered to have constructive receipt of the income as of that date.”

This last example as well of the contents of this article are discussed more thoroughly in

Advisor Fx: Two Tax Doctrines: Constructive Receipt and Economic Benefit. 09-36. (09/01/2009).  Please access AdvisorFX for the above article, or for more information on a free trial membership.

Tomorrow’s blogticle will discuss the similar but slightly different tax theory of economic benefit.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] 26 U.S.C. § 61(a); 26 U.S.C. § 63.

[2] 26 U.S.C. § 101.

[3] Commissioner of Internal Revenue v. Glenshaw Glass Co. 348 U.S. 426, 431. 1955.

[4] Glenshaw Glass Co. 348 U.S. at 432-433. Citing, Helvering v. Midland Mutual Life Ins. Co., 300 U.S. 216.

[5] Eisner v. Macomber. 252 U.S. 189, 201. 1920.

[6] Nathel v. C.I.R. 615 F.3d 83, 88. 2010.

[7] Eisner. 252 U.S. at 206.

[8] Rev. Rul. 79-24, 1979-1 CB 60. Citing 26 C.F.R. § 1.61-2(d)(1)

[9] U.S. v. General Shoe Corp. 282 F.2d 9, 12.  1960.  (Taxpayer realized exactly the same gain by transferring real estate as it would have had it sold the real estate for the fair market or appraised value and paid funds to a third party).

[10] 26 C.F.R. §1.451-2(a).

[11] 26 C.F.R. §1.451-2(a)(1).

Why is this Topic Important to Wealth Managers?  Provides general information regarding time limits in which transactions may be challenged by the Internal Revenue Service.  .

What is a statute of limitations and how does it apply to the tax code generally?

Generally a statute of limitations is “a law that bars [or prevents] claims after a specified period”. [1] As the name implies it is a “statute establishing a time limit” for bringing an action in court.  “The purpose of such a statute is to require diligent prosecution of known claims, thereby providing finality and predictability in legal affairs and ensuring that claims will be resolved while evidence is reasonably available and fresh”.  [2]

The Internal Revenue Service has a 3 year statute of limitation to asses a tax imposed by the Code from the date of filing of the return, whether or not such return was filed on a timely basis. [3]

A return is made on a timely basis when mailed within the prescribed period. [4] For individual taxpayers this means the postage containing the return must be postmarked by April 15.  Likewise, a Form 1040 that is filed electronically requires an “electronic postmark” in the period the tax is assessed.  The postmark is considered valid once the third-party service provider “first receives the electronic return on its host computer” in the time zone of the provider. [5]

In an almost time-warp fashion, the Service states “[t]he taxpayer adjusts the time to [service provider’s] time zone to determine timeliness.” [6] All things being equal if two taxpayers file with the same “e-file” service located in California, and the first taxpayer is located in New York, and the second in California, the former has an additional 3 hours to file his return each year.

Nevertheless, if a taxpayer files an amended return, it will not cause the statute of limitations to extend or start anew. [7]

In the case the taxpayer does not file a return at all, files a false return, or makes a willful attempt to evade tax, no statute of limitations is applied. [8] Also, if the taxpayer underreports more than 25% of gross, estate or gift income on a return, the statute of limitations is 6 years. [9]

Just because a taxpayer files an amended return does not negate the fraudulent exception that contains no statute of limitations. [10]

And if by the way you’re concerned, “[n]o person shall be prosecuted, tried, or punished for any of the various offenses arising under the internal revenue laws unless the indictment is found or the information instituted within 3 years next after the commission of the offense”. [11] But as always, there’re some minor exceptions, where charges may be brought within 6 years.  These include if a taxpayer, defrauds or attempting to defrauds the United States in connection with filing a return, willfully attempts to evade or defeat any tax, or fails to pay a tax or make a return. [12]

Additionally, the 6 year statue for prosecution applies if one, willfully aids or assists in, “or procuring, counseling, or advising, the preparation or presentation under, or in connection with,”  the internal revenue laws, files “a false or fraudulent return, affidavit, claim, or document (whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document)”.  [13]

Tomorrow’s blogticle will discuss two tax theories as related to estate planning.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Black’s Law Dictionary (9th ed. 2009), statute of limitations.

[2] Black’s, statute of limitations.

[3] 26 U.S.C. §  6501.

[4] 26 U.S.C. §  7502.

[5] IRS e-file Glossary. “Electronic Postmark”.  http://www.irs.gov/efile/article/0,,id=205574,00.html. Last Updated. 11/17/2009.  Last Accessed 10/18/2010.

[6] IRS e-file Glossary. “Electronic Postmark”.

[7] Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934).

[8] 26 U.S.C. §  6501(c).

[9] 26 U.S.C. §  6501(e).

[10] Badaracco v. Commissioner, 464 U.S. 386 (1984);

Gary D. Borek, Esq.  “Statute of Limitations for Federal Tax Matters”.  http://www.taxlawcenter.com/g0076000.htm. 1996. Last Accessed 10/18/2010.

[11] 26 U.S.C. § 6531.

[12] Id.

[13] Id.

A Medicaid compliant annuity may help older clients qualify for Medicaid when the value of their assets exceeds the Medicaid resource limit.  Purchase of a Medicaid compliant annuity can reduce the purchaser’s pool of assets that are countable for Medicaid purposes below the threshold for Medicaid eligibility, allowing the purchaser to qualify for Medicaid.

Extreme caution is necessary when using Medicaid compliant annuities. The states frequently challenge Medicaid compliant annuities, claiming—wrongly—that the annuities are countable assets and rejecting the purchaser’s Medicaid application on the grounds that the applicant’s assets are too substantial to qualify for Medicaid. Although states may still challenge the use of Medicaid compliant annuities, a  few recent cases have clarified the planning potential of the annuities, finding in favor of Medicaid applicants who use compliant annuities to reduce their countable assets.   Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of the topic of Roth IRAs, see Advisor’s Main Library Section 24 C—MEDICAID Planning

We invite your questions and comments by posting them in our blog AdvisorFYI, or by calling the Panel of Experts.

Variable universal life (VUL) insurance offers life insurance with mutual fund-like investment options. So why not forego the expense of VUL and cobble together your own VUL policy using mutual funds and a term life insurance policy?

Some investors may find that the mutual fund/term life combination suits their needs and goals, but many others will find that the tax benefits of VUL outweigh any savings on expenses. This article compares VUL and the mutual fund/term life strategy, focusing on the most important distinctions.

Although there are surface similarities between purchasing a variable universal life insurance policy and purchasing a term policy coupled with a mutual fund investment, the two financial planning devices can have radically different tax consequences. A client’s financial profile and investment goals will dictate whether one strategy is preferable to the other and may hinge on factors that are beyond the scope of this article, so thorough research is the key to making an appropriate, profitable choice.   Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For an in-depth description of variable universal life policies, see AUS Main Library: Section 25 B—Variable Universal Life (VUL).

For in-depth analysis comparing and contrasting investment in VUL and qualified retirement plans, see AUS Main Library: Section 25 C—UL And VUL—Tax Advantaged Asset Accumulation.

We invite your questions and comments by posting them below or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Provides an overview of the cost of compliance in regards to the federal income tax.  Discusses industry positions in relation to complexity and efficiencies.  Presents data and draws astonishing conclusions about total cost of tax compliance.  Read on to find out more.

“The federal tax system imposes a wide range of recordkeeping, computational, and filing requirements upon businesses and individuals.”  As many of us in the industry already know, “[c]omplying with these requirements costs taxpayers’ time and money.” [1] At the other end of the spectrum, the complexity of the tax code presents opportunity for those who understand it, and can explain it, to those who cannot.  “The Tax Code becomes more complex every year – especially this year with so many new tax credits and other rules as the federal government attempts to provide some taxpayers with relief during the economic downturn,” states National Society of Accountants president Robert L. Cross.  [2]

Has it always been this complex?  The short answer is no.  In 1913 the first year of enforcement of the present income tax code as we know it today, the actual law and regulations was comprised in total in a 400 page textbook.  It has been found that “the tax code really didn’t explode in complexity until World War II.” [3] In 1939 the tax code was a mere 504 pages, but by the end of the war it was up to 8,200 pages in 1945.  Since that time, “the number of pages in the U.S. federal tax code has grown at a near-steady exponential rate of 3.28% per year.” [4] Estimates project then that the total volume of the code, regulations and other administrative material this year is approximately 71,684 pages in length. [5]

Even government officials note the “tax code has grown so long that it’s challenging even to figure out its length.” [6] A study of the tax code conducted in 2008 by the National Taxpayer Advocate report “pegged the code at around 3.7 million words.” [7]

Like a sophisticated syntax that has developed over time, when the “tax laws become more complex, so necessarily does the language needed to describe them to the public.” The Tax Foundation gives an example, stating, there are at least 5 different definitions of who qualifies as [a] child for tax purposes, and all these definitions are required by the laws that Congress has passed over the years.” [8] As author reasonably concludes, “Congress cannot craft a 3.7 million word document and expect the results to be ‘clear and concise.’ ” [9]

So what effect does the enforcement of the taxes have on the taxpayers (not including taxes themselves)?

The average cost for the preparation of an itemized Form 1040 and state return is $229 nationally. [10] An “s-corp” is in the neighborhood of $665 whereas filing an Estates Form 706 could cost up to an average of $2,044. [11]

“There are between 900,000 and 1.2 million paid preparers nationwide” [12] Interestingly enough, only 25% of tax professionals are Certified Public Accountants. [13] However, the IRS plans to “create a public database of registered preparers for consumers.”  [14]

The most recent estimates available purport to contend that individuals, businesses and nonprofits “spend an estimated 6 billion hours complying with the federal income tax code.” [15]

The Government Accountability Office (GAO) estimates the total individual and corporate compliance cost (using the lowest available estimates) “yields a total roughly 1 percent of GDP per year.” [16]

The GAO also notes, the tax system “results in economic efficiency costs.”  “These costs occur when tax rules cause individuals to change their work, savings, consumption, and investment behavior in ways that ultimately leave them with a combination of consumption and leisure (now and in the future) that they value less than the combination they would have obtained under a tax system that did not alter their behavior.” [17]

The two most comprehensive studies used by the GAO in regards to efficiency “show costs on the order of magnitude of 2 to 5 percent of GDP each year (as of the mid- 1990s).” [18]

As of the most recent estimates (2008), the United States Gross Domestic Product was $14.591 trillion. [19] This data means that the “compliance” related costs are currently estimated at $145 billion.  The “efficiency” costs are approximately $291 Billion to $729 billion annually.  The high estimates then yield a total of tax cost to society (not including actual taxes paid) of approximately $1.165 trillion dollars 2010, relatively using 2008 GDP data.

Tomorrow’s blogticle will continue to discuss taxation.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] “Report to Congressional Requesters- Summary of Estimates of the Costs of the Federal Tax System”. At 3. United States Government Accountability Office.  GAO-05-878. August 2005.  http://www.gao.gov/new.items/d05878.pdf.  Last Accessed 10/17/2010.

[2] “Survey Finds Tax Prep Fees Average $229.” WebCPA. December 16, 2009.

http://www.webcpa.com/news/-52744-1.html.  Last Accessed 10/17/2010.

[3] “The Growing Complexity of the U.S. Federal Tax Code.”  Politicalcalculations.com.  March 11, 2010. http://politicalcalculations.blogspot.com/2010/03/growing-complexity-of-us-federal-tax.html.  Last Accessed 10/17/2010.  Citing CCH Standard Federal Tax Reporter.

[4] “The Growing Complexity of the U.S. Federal Tax Code”.

[5] Id.

[6] Mark Robyn.  “Who is Really to Blame for Bewildering Tax Rules?”  Tax Foundation.  Tax Policy Blog.  March 12, 2010.  http://www.taxfoundation.org/blog/show/25987.html.  Last Accessed 10/17/2010.  Citing, Nina Olson, the National Taxpayer Advocate at the IRS.

[7] Mark Robyn.  “Who is Really to Blame for Bewildering Tax Rules?”.

[8] Id.

[9] Id.

[10] “Survey Finds Tax Prep Fees Average $229.” WebCPA. December 16, 2009.

http://www.webcpa.com/news/-52744-1.html.  Last Accessed 10/17/2010.

[11] “Survey Finds Tax Prep Fees Average $229.” WebCPA.

[12] Ryan J. Donmoyer.  “H&R Block, Jackson Hewitt Must Register With U.S. IRS (Update3)”.  Bloomberg.  January 4, 2010.  http://www.bloomberg.com/apps/news?pid=newsarchive&sid=amNva7FXtukM.  Last Accessed 10/17/2010. Citing the Internal Revenue Service.

[13] “Survey Finds Tax Prep Fees Average $229.” WebCPA.

[14] Ryan J. Donmoyer.  “H&R Block, Jackson Hewitt Must Register With U.S. IRS (Update3)”.

[15] Mark Robyn.  “Who is Really to Blame for Bewildering Tax Rules?”

[16] “Report to Congressional Requesters- Summary of Estimates of the Costs of the Federal Tax System”.  United States Government Accountability Office.  GAO-05-878. At 3. August 2005.  http://www.gao.gov/new.items/d05878.pdf.  Last Accessed 10/17/2010.

[17] “Report to Congressional Requesters- Summary of Estimates of the Costs of the Federal Tax System”.  United States Government Accountability Office.  At 3.

[18] Id at 4.

[19] Gross Domestic Product.  U.S. Dollars.  Source World Bank, World Development Indicators. Last updated October 1, 2010. http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mktp_cd&idim=country:USA&dl=en&hl=en&q=us+gdp.  Last Accessed 10/17/2010.