INFLUENCE OF THE Internal Revenue Service62.The IRS as Protector of the Revenue. Examplesof the “loophole” closing procedure initiatedby theIRSinclude the following:a.Disallowance as a deduction certain excess investment interest expense [§ 163(d)].b.The imputed interest rules (§§ 483 and 7872).c.The alternative minimum tax (§§ 55-59).d.The hobby loss disallowance rules (§ 183).e.The possible disallowance of certain entertainment expenses (§ 274).f.The possible disallowance of certain expenses relating to an office in the home and the rentalof vacation homes (§ 280A).g.The virtual elimination of the deduction for prepaid interest by cash basis taxpayers (§461).h.At risk limitations (§ 465).i.Limitations on passive activity losses (§ 469).j.Taxation of unearned income of a minor child at the parents' rate [§ 1(g)].
k.For partnerships, S corporations, and personal service corporations, a requirement that theyutilize a calendar year for tax purposes [§§ 441(i), 706, and 1378] under certaincircumstances.l.Restriction on the use of the completed contract method for reporting gain on long-termcontracts (§ 460).m.Disallowance of the installment method for revolving charge accounts [§ 453(j)].n.Except for certain financial institutions, unavailability of the reserve method for deductingbad debts (§ 166).o.The right to make adjustments to a taxpayer’s method of accounting in order to clearlyreflect income [§ 446(b)].63.Administrative Feasibility. Many provisions in the tax law simplify the audit function of the IRS. a.Some of these include the following:(1)Increasesin the amount of the standard deduction.(2)Additional limitations imposed on itemized deductions include a 10 percent floor onmedical expenses [§ 213(a)], a 10% floor on casualty losses [§ 165(h)], and a 2percent floor on miscellaneous deductions (including most employee expenses) (§67).b.The effect of (1), and (2) above is to keep many taxpayers from itemizing deductions fromAGI. With fewer taxpayers itemizing and more claiming the standard deduction, the IRS hasa smaller number of Schedules A to audit.64.Penalties. In the past, a multitude of penalties either have been increased or instituted to improvetaxpayer compliance. Some of these include the following:a.Raising of the negligence penalty from 5% to 20%.b.The civil fraud penalty was increased from 50% to 75% [§ 6653(b)].c.Trusts and certain estates are required to make quarterly payments of estimated incometaxes. Failure to make such payments results in a penalty being imposed [§ 6654(1)].INFLUENCE OF THE COURTS65.Legislative versus Judicial Influence. Barring one exception(i.e., constitutional issues), Congresshas the last word on what the Federal tax law should be.