On May 21, 2018, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) announced the identification and selection of six new campaigns. These new campaigns follow the initial 13 campaigns announced on January 31, 2017, followed by 11 campaigns announced on November 3, 2017, and 5 campaigns announced on March 13, 2018. (more…)
On March 13, 2018, the Internal Revenue Service (IRS) announced that it will begin ramping down the current Offshore Voluntary Disclosure Program (OVDP) and urged taxpayers with undisclosed foreign assets to apply for the program prior to its close on September 28, 2018. We have previously reported on developments in the OVDP.
Tax reform is here to stay (at least for the foreseeable future). The Internal Revenue Service (IRS) may receive additional funds to implement the new tax law. With lowered tax rates, accelerated expensing and forced repatriation of foreign earnings comes an increased risk of an IRS audit. This brave new tax world has left so many questions that tax advisors’ phones have been ringing off the hooks! But as the end of the 2017 year and first quarter of 2018 dust settles, be mindful of the IRS audit to come. (more…)
As taxpayers are (or should be) aware, federal income tax returns must be timely filed to avoid potential penalties under Internal Revenue Code (Code) Section 6651. Historically, this meant mailing a tax return and, for returns filed close to the due date, ensuring that the “timely mailed, timely filed rule” applies (see here for our recent post on the “mailbox rule”). In recent years, there has been a push to electronically file tax returns with the Internal Revenue Service (IRS). However, for one reason or another, the potential exists that an e-filed return may be rejected. (more…)
The tax bar is abuzz with the talk of tax reform. Clients are in modeling purgatory, trying to calculate its effects and plan for the future. Public accounting firms are suggesting how to accelerate deductions in 2017 to take advantage of the massive tax rate decline in 2018. Now more than ever, there are substantial economic incentives to accelerate deductions in 2017 and defer income until 2018. Yes, it’s beginning to look a lot like Christmas and the end to what bodes to be a historic year for federal tax!
Not to be a Grinch, but consider the following as you prepare for year end. If you attempt to accelerate any deductions, make sure to have a complete, “audit-ready” file if the Internal Revenue Service (IRS) decides to test your position. Consider how you will protect against the assertion of any penalties; typically, your ticket to get of out penalty “prison” is to maintain proper substantiation and to establish a reasonable cause defense. An opinion of counsel is one method to meet your burden of establishing that defense. It is always better to be proactive and anticipate an IRS audit than to be reactive and try to compile the proper documentation after-the-fact.
Upcoming Tax Controversy Activities in September:
September 13, 2017: Tom Jones is presenting an update on Captive Tax in Charleston, South Carolina, at the South Carolina Captive Insurance Association Annual Conference.
September 14, 2017: Robin Greenhouse and Kristen Hazel will be speaking at McDermott Will & Emery’s Tax in the City®: A Women’s Tax Roundtable meeting in New York City about tax ethics.
September 18, 2017: Justin Jesse is speaking at the PLI Basics of International Taxation session in San Francisco about “Tax Concerns for US Persons Investing or Operating Outside of the US (Outbound Investments) – Active Business Operations.”
Wrapping up August:.
Our August 2017 blog posts are available on taxcontroversy360.com, or read each article by clicking on the titles below. To receive the latest on tax controversy news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.
August 3, 2017: Tax Court Addresses “Issue of First Impression” Defense to Penalties
August 7, 2017: President Trump Nominates Copeland and Urda to US Tax Court
August 8, 2017: Record Numbers Are Giving Up US Citizenship
August 9, 2017: TIGTA Pounces on IRS Federal Records Retention Policies; Recommends Changes
August 11, 2017: The IRS Is Struck Down Again in Privilege Dispute
August 14, 2017: McDermott Named “Law Firm of the Year” at 2017 US Captive Services Awards
August 16, 2017: Grecian Magnesite Mining v. Commissioner: Foreign Investor Not Subject to US Tax on Sale of Partnership Interest
August 17, 2017: Sovereign Immunity Principles Bar Taxpayers from Challenging John Doe Summonses
August 23, 2017: Court Rejects Taxpayer’s Claim for US-Swiss Treaty Coverage
August 24, 2017: Internal Revenue Service Updates Golden Parachute Payments Audit Technique Guide, Signaling Key Items IRS May Review on Audit
August 25, 2017: IRS Criminal Investigation Division Announces Two New Initiatives
The US government has reported that more than 1,750 people gave up US citizenship in the second quarter of 2017.
Tax practitioners speculate that the increase in expatriations is likely due to ever-increasing tax and financial reporting and compliance requirements. For example, the 2010 Foreign Account Tax Compliance Act requires overseas banks to disclose financial information to the Internal Revenue Service (IRS) about US citizen-owned accounts. US citizens who live overseas must comply with numerous reporting regimes regarding foreign financial assets and their sources of income. Failure to comply comes with steep penalties.
Practice Point: Expatriation from a tax perspective can be a very complicated endeavor. It is essential to consult with a tax professional that understands the rules and can assist in the efficient and effective renouncing of US citizenship.
We previously posted on what we called the “issue of first impression” defense to penalties and the recent application of this defense by the United States Tax Court (Tax Court) in Peterson v. Commissioner, a TC Opinion. We noted that taxpayers may want to consider raising this defense in cases where the substantive issue is one for which there is no clear guidance from the courts or the Internal Revenue Service. Yesterday’s Memorandum Opinion by the Tax Court in Curtis Investment Co., LLC v. Commissioner, addressed the issue of first impression defense in the context of the taxpayer’s argument that it acted with reasonable cause and good faith in its tax reporting position related to certain Custom Adjustable Rate Debt Structure (CARDS) transactions. For the difference between TC and Memorandum Opinions, see here.
The Tax Court (and some appellate courts) has addressed the tax consequences of CARDS transactions in several cases, each time siding with the Internal Revenue Service (IRS). In its opinions in those other cases, the Tax Court has found that the CARDS transaction lacks economic substance. The court in Curtis Investment concluded that the CARDS transactions before it was essentially the same as the CARDS transactions in the other cases with only immaterial differences. Applying an economic substance analysis, the Tax Court held the taxpayer issue lacked a genuine profit motive and did not have a business purpose for entering into the CARDS transactions. (more…)
Not only should companies worry about the Internal Revenue Service (IRS) auditing their returns, but they also have to be aware of a potential assault from within. Indeed, current and former employees have an incentive to air all of your tax issues with the hope of being rewarded for the information.
Section 7623(b) was added to the Internal Revenue Code (IRC) in 2005, and pays potentially large monetary rewards for so-called tax whistleblowers. To qualify for remuneration, a whistleblower must meet several conditions to qualify for the Section 7623(b) award program: (1) submit the confidential information under penalties of perjury to the IRS’s Whistleblower Office; (2) the information must relate to a tax issue for which the taxpayer (if the IRS found out) would be liable for tax, penalties and/or interest of more than $2 million; and (3) involve a taxpayer whose gross income exceeds $200,000 the tax year at issue. If the information substantially contributes to an administrative or judicial action that results in the collection, the IRS will pay an award of at least 15 percent, but not more than 30 percent of the collected proceeds resulting from the administrative or judicial action (including related actions).
Section 7623(b) has spawned a collection of law firms around the country dedicated to signing up scores of whistleblowers who are hoping to cash in big! Our clients routinely ask us how to best protect themselves. We typically tell our clients that the best defense is a good offense. Consider the following:
Practice Point: If you are under examination by the IRS, you may be able to discern a whistleblower issue based on the questions being asked by the IRS and whether those questions could only be formed based on information provided by a whistleblower. If this situation exists, it is important to determine whether you should raise the issue with the IRS, particularly if you believe that any confidential and/or privileged information has been provided to the IRS without your consent. To make sure you are protected and adequately prepared, consult with your tax controversy lawyer.
The Internal Revenue Code (Code) contains various provisions regarding the imposition of penalties and additions to tax. The accuracy-related penalty under section 6662(a), which imposes a penalty equal to 20 percent of the amount of any understatement of tax, is commonly asserted on the grounds that the taxpayer was negligent, disregarded rules or regulations, or had a substantial understatement of tax. Over the years, the Internal Revenue Service (IRS) has become increasingly aggressive in asserting penalties and generally requires that taxpayers affirmatively demonstrate why penalties should not apply, as opposed to the IRS first developing the necessary facts to support the imposition of penalties.
There are many different defenses available to taxpayers depending on the type and grounds upon which the penalty is asserted. These defenses include the reasonable basis and adequate disclosure defense, the substantial authority defense, and the reasonable cause defense.
Another defense available to taxpayers is what we will refer to as the “issue of first impression” defense. The Tax Court’s recent opinion in Peterson v. Commissioner, 148 T.C. No. 22, reconfirms the availability of this defense. In that case, the substantive issue was the application of section 267(a) to employers and employee stock ownership plan (ESOP) participants. The court, in a published T.C. opinion (see here for our prior discussion of the types of Tax Court opinions) held in the IRS’s favor on the substantive issue but rejected the IRS’s assertion of an accuracy-related penalty for a substantial understatement of tax on the ground that it had previously declined to impose a penalty in situations where the issue was one not previously considered by the Tax Court and the statutory language was not entirely clear.
The Tax Court’s opinion in Peterson is consistent with prior opinions by the court in situations involving the assertion of penalties in cases of first impression. In Williams v. Commissioner, 123 T.C. 144 (2004), for instance, the substantive issue was whether filing bankruptcy alters the normal Subchapter S rules for allocating and deducting certain losses. The Tax Court agreed with the IRS’s position, but it declined to impose the accuracy-related penalty because the case was an issue of first impression with no clear authority to guide the taxpayer. The court found that the taxpayer made a reasonable attempt to comply with the code and that the position was reasonably debatable.
Similarly, in Hitchens v. Commissioner, 103 T.C. 711 (1994), the court addressed, for the first time, an issue related to the computation of a taxpayer’s basis in an entity. Despite holding for the IRS, the court rejected the accuracy-related penalty. It stated “[w]e have specifically refused to impose additions to tax for negligence, etc., where it appeared that the issue was one not previously considered by the Court and the statutory language was not entirely clear.” Other cases are in accord. See Braddock v. Commissioner, 95 T.C. 639, 645 (1990) (“as we have previously noted, this issue has never before, as far as [...]
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