SB/SE Burden Reduction Issue Committee Meeting Minutes

February 7, 2006
Teleconference

Welcome/Announcements
Kasturi welcomed the members. He explained that a Federal Register notice was not issued for this meeting since it was likely that it would not have posted timely. In any case, the meeting’s purpose will be to collect and provide information.

Ramirez indicated that the notes of our January meeting in Washington, D.C. will be available soon.

Kasturi announced the following addition to the agenda: roles and responsibilities of subcommittees. He would like to spend a few minutes giving an overview.

Roll Call

Panel Members Attending

• Shaun Barry — Franklin Square, NY
• Larry Behnkendorf — Waterford, MI
• Bill Bly — Wayne, PA
• Sandra Bland— Washington, DC
• Greg Gursey— Anchorage, AK
• Howard Guthman— St. Paul, MN
• Donna Hafer — Burlington, KY
• Sonny Kasturi — West Orange, NJ, Committee Chair
• Steve Landauer — Davenport, IA
• Marie O’Donnell— Riverwoods, IL
• Sheri Reading— Albuquerque, NM
• Steve Rue — Mechanicsville, VA, Committee Vice-chair

Panel Members Absent

• Daryll Cordeiro — Mobile, AL

TAP and IRS Attendees

• Helene Bayder, SBSE Program Owner
• Michael Chesman, SBSE, Director, Office of Taxpayer Burden Reduction
• Meglan Knights, SBSE Program Analyst
• Marisa Knispel, TAP Program Analyst
• Sandra Ramirez, TAP Program Manager, Committee Designated Federal Official

Program Owner Introduction
Chesman introduced himself and announced his departure from the IRS this Friday. He said that he has accepted a position as general counsel to a large insurance company. Beth Tucker, Director of Communications and Liaison, will act in the position until it is filled. Chesman expressed his appreciation for working with the IRS and with the TAP these past years. All members congratulated Chesman and wished him well.

Subcommittee Chair Roles and Responsibilities
Kasturi explained the roles and responsibilities of a subcommittee and its chair. The subcommittee, he indicated, researches the issue assigned to it and discusses the issue during their subcommittee meetings. The subcommittee chair is to conduct an orderly meeting and lead a thorough discussion. The chair or a designee from the subcommittee should take notes during the meeting and distribute them not only to the subcommittee members but also the committee Chair, Vice chair, and to staff to inform every one of their discussions. The subcommittee chair (or leader) acts as a spokesperson for the subcommittee and as a salesman of the recommendations put forth by the subcommittee. At the full committee meetings, the subcommittee chair presents progress made and is the spokesperson and advocate for the recommendation(s) and/or position of his or her subcommittee.

Subcommittees will find they need to coordinate their work with the other subcommittees and on occasion, even outside of their committees. Finally, the subcommittee chair is the focal person responsible for ensuring the subcommittee’s final recommendations are drafted/written.

Kasturi compared the subcommittee chair’s position to his position as the chair of the SBSE Burden Reduction Issue Committee. His role is that of the spokesperson for the Committee and he must defend the Committee’s position and recommendations to the IRS’ Issue Program Owner. This is why it is of utmost importance, he said, that the Committee chair is aware of and understands the discussions and decisions of the respective subcommittees.

Kasturi added that the role of the Committee vice chair is that of assisting the chair in his functions (reviewing minutes, recapping action items/assignments, closing meeting) and acting as chair in his absence. Likewise, a subcommittee chair would assign a replacement or appoint a vice chair when this situation applies.

Subcommittee EAST
Bly reported on the subcommittee’s deliberations and recommendations:

1. Two subcommittee meetings were held, the last being January 31st. He distributed notes from that meeting to staff and Kasturi. He indicated that the subcommittee reviewed the TIGTA audit reports back to 2002 that explained the S-election problems and the members agreed that the problems arise from processing the application to elect S-status rather than problems with the application form itself, Form 2553, or its instructions. He asked Knights what changes, if any, has IRS undertaken since these reports were published. Knights replied that the IRS has undergone several computer system changes to capture information not being captured in the past and improve the system, as recommended on these reports. She can get them for the committee.
   
2. The subcommittee recommends that; a) the IRS take a sampling of the first thousand immediately rejected/unprocessable Forms 2553 and analyze them to determine what the problems/trends are, b) that taxpayers be allowed to elect Subchapter S election at the time they file their first corporate tax return (Form 1120S) so that the status may become effective and would remain in effect until changed by the taxpayer in writing using appropriate IRS Forms. Bly asked Knights if the reason for the filing Form 2553 was regulatory or legislative.
   
   Chesman clarified the fact that making the election is statutory but as to the timing of when the application Form 2553, or, the election is made it can be made with the first filing of the Form 1120S. Knights indicated that the subcommittee’s recommendation that the Form or the election be made at the time of filing the tax return, Form 1120S, would have to be presented to IRS Counsel.
   
   Landauer asked how extensions for filing the tax return would be affected if the regulation were changed. Chessman replied that it would not affect extensions because the election is being made at the time of the filing or in this case, when the extension is due. It is also possible, Chesman added, that the IRS may request further supporting documentation. Chesman noted that suggesting the option of making the election applicable at time of first filing 1120S is not a short term solution – it would require approval from the Secretary of the Treasury and the Assistant Commissioner for Tax Policy, as well.
   
3. Another recommendation made by Subcommittee EAST is that the requirement that all shareholders sign the application for election (Form 2553) be eliminated, if the number of shareholders is large, to reduce burden.
   
4. A third recommendation is that Note 1 of the Form 2553, Election by a Small Business Corporation, be enlarged in bold type with an additional statement indicating that if an election to become subchapter S has not been approved, the tax return Form 1120 must be filed instead of Form 1120S.
   
5. The fourth and last recommendation is that the numerous references in the Form 2553 instructions to: revenue procedures, sections of the tax Code, etc, be placed in the footnotes. The main text would refer to the footnotes. This change would make the instructions easier to read. Overall, the subcommittee found that the instructions are not burdensome or hard to read.

Subcommittee WEST
Gursey indicated that the subcommittee posed some questions to Knights on the unpostability of 46,000 tax returns (Form 1120S) and the processing of Form 2553 which she replied to.

Guthmann recommended that to solve the problem of the 46,000 unpostable tax returns, the requirement of filing Form 2553 be eliminated. He believes that the problem is also one based on the processing of this Form and not the Form 2553 per se. He suggested that in its place, a check-a-box or the like be used on the tax form to allow selection of subchapter S. He indicated that in most cases tax professionals like CPAs and attorneys are those who complete the Form for the shareholders and these professionals are knowledgeable of the election requirements. Of the 46,000 unpostable 1120S ‘s he can’t believe that non filing of Form 2553 is the real problem and doesn’t understand why IRS can’t match the 1120s with the Form 2553.

Chesman indicated that these problems come from “mom and pop” type taxpayers. The problem of filing form 2553 or filing it correctly for this groups of taxpayers is the same as the problem with filing an application for an Employer Identification Number (EIN), Form SS-4 for this group of taxpayers. For instance, the name of the entity on the SS-4 (or Form 2553) does not match the name on the tax return or tax form. Another problem, he added, is that taxpayers apply for an EIN number multiple times and use the incorrect number when filing the tax return. This is not an IRS processing problem but one of incorrect submission, Chesman said.

Rue stated that from his experience attorneys/accountants contribute to the problem because they don’t get/aren’t involved with applying for the S election but assume that the election was made and has been granted, so they file the Form 1120S instead of Form 1120. Guthmann thinks that this situation could be resolved if the corporation received prompt notification of the error from the IRS. Knights replied that the IRS does contact the corporation within 30 days. Chesman added that the corporation also has two years after incorrectly filing Form 1120S to correct the error and submit Form 2553 for the election. The reason why the law was written this way, Chesman said, is to avoid corporations switching statuses (i.e. C-corporation status vs. S-corporation status) from year to year to benefit from the tax advantages that each status might offer that year.

O’Donnell compared this unpostable return problem to the same problem faced by Form 8832, Entity Election Classification, filers previously. That problem was addressed by allowing the form 8832 to be filed with the first year return and not requiring the form 8832 to be signed. She suggested the IRS review the revenue procedures or revenue rule (rather than wait for regulation changes) to see if the same could be applied to the Form 2553.

Kasturi suggested the subcommittees continue researching and discussing the S-election problem. Knights expressed interest in learning the individual experiences of the TAP members who are tax practitioners on this issue. What burden, if any, have they experienced. Kasturi suggested and encouraged the members to contact tax practitioner associations in their communities to learn the problems these professionals may experience with the issue.

Future Topics
Bayder listed three topics the committee will be discussing in the future:

1. office-in-home deduction
2. innocent spouse provision changes
3. mail-out strategy for bulk mailing

Chesman elaborated on these topics. The IRS is aiming to make the calculations for the deductions of an office in the home easier in order to avoid burden and complexity such as those found with the calculations for depreciation. He said that this issue arose from last year’s hearings as the number one issue of burden and complexity. IRS has talked with Counsel and they are receptive to some kind of alternatives. The Office of Taxpayer Burden Reduction would like to run some alternatives it’s considering by the committee. The second topic is related to the application to obtain innocent spouse relief. Many taxpayers confuse the definition of “innocent spouse” with that of “injured spouse” for which there is a different application process. Chesman explained the difference between both statuses and added that of approximately 50,000 applications for innocent spouse, only 20% of the applicants get relief. One of the main reasons is the incorrect completion of the application (Form 8857). Kasturi asked if background information could be made available on this topic to the committee so that they could ‘bone up’ on it. Bayder replied that when Lisa McLain, the person in charge of this initiative is more ready to present to the committee that may be an appropriate time to provide information.

Finally, Chesman explained that the issue of the mail-out strategy was presented to this Committee last year by Lisa McLain. The strategy aims to reduce the amount of paper (forms and instructions) that the IRS sends out to taxpayers. Some recommendations made by the TAP last year are currently being considered by the IRS for implementation.

Kasturi requested that the Program Owners give the members more background information on topics that are assigned so that they may read and prepare for future discussion. Chessman agreed that the committee get familiar with the topics. In anticipation of working these issues, Kasturi designated the issue of the ‘office-in-home deduction’ to the Subcommittee EAST and that of the ‘innocent spouse’ to the Subcommittee WEST.

Change of Date for Face-To-Face (FTF) Meeting
Kasturi explained that he would be unable to attend the FTF meeting on the scheduled date and asked that the committee consider rescheduling the meeting to the week prior or following the week already scheduled. Knispel will email all members to obtain their available or preferred dates (May 31-June 3rd or June 14th – June 17th).

Closing Assessment
In closing, Kasturi underscored the importance of assessing each committee meeting by completing the meeting survey provided to them before each meeting.

Action Items
Subcommittees will continue deliberating on the S-election issue.

1. Subcommittees were assigned their next topic and they should do preliminary research on their respective topic:
   Subcommittee EAST - office-in-home deduction
   Subcommittee WEST – innocent spouse
   
2. Knispel will request availability/preference for the FTF meeting in June from each member; ensure notes from January meeting are sent.

Next Full Committee Meeting
Tuesday, March 7, 2006 at 3:30 PM ET.