Charitably-inclined taxpayers stand to benefit from a hurricane-relief bill passed late this summer, but the federal government is in less of a giving mood these days when it comes to other types of tax relief than it has been the past few years. Also, its stepping up efforts to crack down on tax-law abusers.


The government is recognizing the tax gap, Chris Hesse, director of taxation for Spokane-based LeMaster & Daniels PLLC, says of the difference between the governments projected tax revenue and the amount of money it receives voluntarily and on time. There are more resources dedicated to the IRS in the enforcement area.


Steve Williams, tax manager at Williams & Webster PS, of Spokane, says provisions in the Katrina Emergency Tax Relief Act of 2005 give individuals and corporations more tax benefit from donations they make to charities. Those provisions suspend the limitation on deductions for donations made after Aug. 27, the day Katrina struck, and before the end of the year.


For individuals, write-offs for cash contributions to charities typically are limited to 50 percent of a taxpayers adjusted gross income, Williams says. Under the Katrina tax act, that cap is lifted so that taxpayers can write off cash donations to charities equal to their entire adjusted gross income, provided the donations were made during the allowed period.


The rule change doesnt apply to deductions for noncash contributions, which remain capped at 30 percent of adjusted gross income, Williams says.


For C-corporations, the cash-donation deduction limit is raised to 100 percent of adjusted gross income from a 10 percent maximum for donations made during the same period.


The new provisions related to donations by corporations, however, are somewhat more restrictive than those for individuals, Williams says. To be eligible to deduct cash donations above the typical 10 percent maximum, a corporation must give the money to organizations directly involved in Hurricane Katrina relief. Individuals can give to any public charity.


Other than the changes regarding charitable contributions, little has changed this year in tax law as it pertains to 2005 taxes, accountants here say, but taxpayers can take action to take advantage of laws that expire soon.


Kevin Sell, director of tax at the Spokane office of Seattle-based Moss Adams LLP, says that perhaps most significantly to people living in Washington state, the deduction for sales-tax payments is scheduled to expire after this year.


This year and last, federal taxpayers have had the choice of deducting either state income taxes or state sales taxes from their taxable income. Since Washington state doesnt have a state income tax, the provision meant an additional itemized deduction for residents here.


That deduction will go away next year, however, unless a new tax bill is passed that extends it.


Go out and buy that plasma TV yet this year, Sell quips, pointing out that taxpayers could be sure they could deduct the sales tax paid for the pricey item if it were bought in 2005.


Many of the other tax-relief measures included in the American Jobs Creation Act of 2004 and the 2003 Jobs and Growth Tax Relief Reconciliation Act eventually will expire, and tax law will revert back to the way it stood before those acts were passed. Hesse, of LeMaster & Daniels, says many of those provisions will expire at the end of 2008, and as those expiration dates get closer, accountants and their clients will want to look at ways to take advantage of those breaks.


Last year, Congress extended the length of time that some of the tax breaks will be in place, but Hesse says taxpayers cant count on additional extensions.


The way the current federal budget is looking, it doesnt look like they will be able to extend those provisions, he says. I certainly wont bet on an extension.


Compliance enforcement


In addition to holding the line on tax breaks for the most part, the federal government is becoming more aggressive in tax-law compliance enforcement on a couple of fronts.


Earlier this year, the IRS disclosed plans to hire more auditors and to perform more audits. Hesse and Sell say theyve heard that more audits are occurring on the national level, but havent seen evidence of stepped-up audit activity in the Inland Northwest.


This summer, the IRS announced that it had launched a study of S-corporation reporting compliance, through which it would examine 5,000 randomly selected S-corporation tax returns from 2003 and 2004.


S-corporations, which often are family-owned businesses, dont pay federal income taxes, but their shareholders pay taxes on distributions they receive from the businesses. IRS statistics show a dramatic increase in the number of S-corporations over a 17-year period, to 3.15 million in 2002 from 725,000 in 1985.


Sell says one aspect of S-corporations that the IRS likely will look at closely is owner compensation. In some cases, an owner doesnt receive a salary, but will take distribution, or dividend, payments from the company regularly. The owner would pay income taxes on those dividends, but the business wouldnt pay payroll taxes on the dividend payments as it would if the owner received a salary.


Thats an area theyre going to crack down on, Sell says.


The IRS said in its release that the results of the study of S-corporations will help the agency gauge the extent to which the income, deductions, and credits are properly reported by such companies. Ultimately, the IRS said, the research is expected to help it target companies with greater compliance risk.


The IRS study on S-corporations comes on the heels of a study of individual tax returns that showed the government has a gross tax gapthe difference between project tax revenue and money actually receivedof more than $300 billion each year, with IRS collection and compliance efforts reducing that gap by $50 billion annually.