Saturday, February 16, 2019

Need to Contact the IRS: Be Prepared to Validate Your Identity

On February 14, 2019 the Internal Revenue Service reminded taxpayers and tax professionals that they will be asked to verify their identities if they call the IRS.

The days before and after Presidents Day mark the peak period for taxpayer phone calls to the IRS. To avoid the rush, callers should use IRS.gov to access resources like the IRS Service Guide, to answer their questions or be prepared to verify their identities if they need to call the agency.
Being prepared before a call or visit can save taxpayers multiple calls.

Confirming taxpayers’ identities during calls
IRS call center professionals take great care to make certain that they only discuss personal information with the taxpayer or someone the taxpayer authorizes to speak on their behalf. To ensure that taxpayers do not have to call back, the IRS reminds taxpayers to have the following information ready:
  • Social Security numbers (SSN) and birth dates for those who were named on the tax return
  • An Individual Taxpayer Identification Number (ITIN) letter if the taxpayer has one in lieu of a SSN
  • Filing status – single, head of household, married filing joint or married filing separate
  • The prior-year tax return. Telephone assistors may need to verify taxpayer identity with information from the return before answering certain questions
  • A copy of the tax return in question
  • Any IRS letters or notices received by the taxpayer
Confirming third-party authorizations during calls
By law, IRS telephone assistors will only speak with the taxpayer or to the taxpayer’s legally designated representative.
If taxpayers or tax professionals are calling about a third party’s account, they should be prepared to verify their identities and provide information about the third party they are representing. Before calling about a third-party, be sure to have the following information available:
  • Verbal or written authorization from the third-party to discuss the account
  • The ability to verify the taxpayer’s name, SSN/ITIN, tax period, and tax form(s) filed
  • Preparer Tax Identification Number (PTIN) or PIN if a third-party designee
  • A current, completed and signed Form 8821, Tax Information Authorization or
  • A completed and signed Form 2848, Power of Attorney and Declaration of Representative
Questions regarding a deceased taxpayer require different steps. Be prepared to fax:
  • The deceased taxpayer’s death certificate, and
  • Either copies of Letters Testamentary approved by the court, or IRS Form 56, Notice Concerning Fiduciary Relationship (for estate executors)
Alternatives for faster answers
The IRS offers a variety of online tools to help taxpayers answer common tax questions. For example, taxpayers can search the Interactive Tax Assistant, Tax Topics, Frequently Asked Questions, Tax Trails and the IRS Tax Map to get faster answers. Taxpayers wanting more information about the Tax Cuts and Jobs Act should review: Publication 5307, Tax Reform: Basics for Individuals and Families, or Publication 5318, Tax Reform What’s New for Your Business.

Some taxpayers also make in-person monthly or quarterly tax payments. Those payments can be made online by using IRS Direct Pay or through the Electronic Federal Tax Payment System. Taxpayers seeking free tax preparation assistance should explore the Volunteer Income Tax Assistance (VITA) Program for in-person help or IRS Free File if they want to prepare their return themselves. The IRS Services Guide links to many IRS online services.

The quickest way to check the status of a tax refund is to go to 'Where’s My Refund?" or call 800-829-1954 for automated phone service.

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IRS Makes it Easy for Taxpayers to Get Their Tax Transcript Online

On February 15, 2019 the IRS issued IR-2019-17 reminding taxpayers who need their prior-year tax records to either complete their 2018 tax return or to validate their income can use Get Transcript Online or Get Transcript by Mail.
 
Taxpayers often call or visit the IRS seeking their prior-year tax transcript, which is a record of their tax return. Taxpayers can avoid the rush by using online options that are faster and more convenient.

It’s always a good idea to keep copies of previously-filed tax returns. That recommendation is more important this year because, for some taxpayers, certain data from the 2017 tax return – the adjusted gross income -- will be required to validate their electronic signature on their 2018 tax return due April 15 for most filers. This is especially true for taxpayers who have switched tax software products this year.

Generally, for returning users, the commercial tax software product will carry over the prior-year information and make for an easy, seamless validation process. However, taxpayers using a new tax software product for the first time may be required to enter the information manually.
Here’s the way the electronic signature and signature validation work:
  • Taxpayers sign their returns electronically by creating a four-digit Personal Identification Number (PIN), also known as a Self-Select PIN. To validate that e-signature PIN, taxpayers must enter their birthdates and either their adjusted gross income from the prior-year return or the prior-year Self-Select PIN.
  • If taxpayers have kept a copy of their prior-year tax return, completing this task is easy. On the 2017 tax return, the Adjusted Gross Income (AGI) is on line 37 of Form 1040; line 21 on Form 1040-A; or line 4 on Form 1040-EZ.
  • If a copy of their 2017 tax return is not available, taxpayers may be able to obtain a copy from their previous year’s tax preparation software or previous tax preparer.
  • Taxpayers may also obtain a tax transcript online from the IRS.
    • Use Get Transcript Online to immediately view the AGI. Taxpayers must pass the Secure Access identity verification process. Select the “Tax Return Transcript” and use only the “Adjusted Gross Income” line entry.
    • Use Get Transcript by Mail or call 800-908-9946. Taxpayers who fail Secure Access and need to request a Tax Return Transcript can use the mail option.  Allow five to 10 days for delivery. Use only the “Adjusted Gross Income” line entry.
The electronic signature is the way the taxpayer acknowledges that information on the tax return is true and accurate. Validating the electronic signature by using prior-year adjusted gross income is one way the IRS, state tax agencies and the tax industry work to protect taxpayers from identity thieves.
Taxpayers who have been issued an Identity Protection (IP) PIN should enter it when prompted for an IP PIN by the software. The IP PIN will serve to verify the taxpayer’s identity. If the taxpayer has never filed a tax return before and is age 16, enter zero as the AGI.

The IRS has redesigned tax transcripts to partially mask all personally identifiable information for any person or entity on the 1040-series return. All financial entries remain fully visible. Taxpayers who need a tax transcript for income validation purposes can still use Get Transcript Online or by Mail. Review About the New Tax Transcript and the Customer File Number for more information.

As the IRS, state tax agencies and the tax industry have made progress against tax-related identity theft as part of the Security Summit effort, cybercriminals try to steal more personal information to file fraudulent tax returns. Masking personal data on tax transcripts is one way the IRS is helping to protect taxpayers from identity thieves. 

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Thursday, February 14, 2019

Top 5 International Tax Cases Of 2018

According to Law360, the past year saw a number of important international tax cases, including rulings about conflicting statutory and regulatory language involving U.S.-held foreign financial accounts and $608 million paid by Boston Scientific Corp. in a transfer pricing dispute.
Here, Law360 looks at the top five international tax cases of 2018.

U.S. v. Colliot

In the first of two separate but similar decisions favoring U.S. holders of foreign financial accounts, Judge Sam Sparks of the U.S. District Court for the Western District of Texas addressed the failure of Congress and the IRS to correct conflicting statutory and administrative language over penalty amounts.

Judge Sparks found in a May 15 ruling that a 1987 penalty cap of $100,000 for undisclosed offshore accounts — set by the Internal Revenue Service under Section 1010.820  of the Code of Federal Regulations — still applied even though federal lawmakers had raised the threshold through a 2004 statute.

Some practitioners have reacted to the Texas ruling and a subsequent decision in a Colorado federal court by saying the cases could affect other situations in which the U.S. Department of the Treasury had neglected to update regulations to reflect statutory changes in the tax code.

Judge Sparks sided with Texas resident Dominique Colliot, who was fighting an IRS attempt to collect more than $917,000 in civil penalties for his allegedly willful failure to disclose overseas accounts on federal Foreign Bank and Financial Accounts reporting forms, known as FBARs.

According to the judge’s order, the changes made in 2004 set a ceiling for penalties, not a floor. Instead, Congress ultimately gave discretion to Treasury when it came to assessing penalties, Judge Sparks found.

The case is U.S. v. Dominique G. Colliot, case number 1:16-cv-01281, in the U.S. District Court for the Western District of Texas.

U.S. v. Wahdan

In a separate FBAR case decided in July, two months after Colliot, Judge Marcia S. Krieger of the U.S. District Court for the District of Colorado issued an opinion with reasoning she called “congruous” to the Texas court’s ruling. Judge Krieger sided with a married couple, Denver-area restaurant owners Urayb and Said Wahdan, who had challenged an IRS attempt to collect over $2.3 million in penalties for purported failure to disclose Swiss bank accounts in 2008, 2009 and 2010.

The Wahdans had earlier told the district court they disputed all the penalties the IRS assessed but filed a motion specifically challenging those that exceeded $100,000. Like Colliot in Texas, the couple argued that the IRS’ 1987 regulation was still applicable, despite the existence of the 2004 law.

With the two federal district court rulings left intact, some practitioners say the 31-year-old cap on penalties could be adopted nationwide, while others consider that outcome unlikely and note that the precedential value of the decisions is limited to the courts’ respective jurisdictions.

Other experts have questioned the IRS’ view — encapsulated in its argument in Colliot — that the 1987 regulations were rendered invalid simply by virtue of Congress’ revision of the relevant statute. Whereas the pre-2004 regulation capped the penalty for “willful” violations of the FBAR statute at $100,000, the 2004 statutory amendment provided for a penalty of the greater of $100,000 or 50 percent of the undisclosed account balance.

“One can infer that the agency didn’t intend for [the penalty cap] to continue in force and that undoubtedly the thought process was that it was superseded by the amended legislation, but I really think the [two rulings] are correct” in establishing a split between the regulation and the revised statue, said Patrick J. Smith of Ivins Phillips & Barker Chtd. in Washington, D.C.

Others suggested the rulings in Colliot and Wahdan could materially hinder the government’s ability to exact penalties in FBAR cases beyond the district courts in Texas and Colorado.

“I’m wondering, frankly, whether the defense bar, the taxpayer bar, is going to seize on these cases and seek to make challenges elsewhere,” said Stuart D. Gibson, of counsel with Schiff Hardin LLP in Washington, D.C., and a former senior tax litigator with the U.S. Department of Justice.

John Warner of Buchanan Ingersoll & Rooney PC called the holdings in both Colliot and Wahdan “a bit extreme.” He said that while the IRS isn’t required to impose, even potentially, the maximum civil penalty prescribed by a statute, the regulation cited by both district courts “was promulgated when the relevant statutory limit was lower, so a fair interpretation of that regulation was that it was simply implementing the then-current statutory limit.”

“If I were the government, I might ditch the old regulations, but I would certainly appeal Colliot and Wahdan if I thought that the higher penalties sought are still appropriate under the post-2004 statute as applied to the taxpayers involved,” he added.

The IRS, which doesn’t comment on litigation involving individual taxpayers due to privacy considerations, has the right to appeal the district court rulings. Based on filings with the Texas court, the agency appears to have waived that right, and Judge Sparks issued an order on Nov. 18 for $570,314 that Colliot had paid the government to be returned to him. The remaining balance of the penalties he had paid in wage garnishments to the IRS is to be reimbursed later, the judge ordered.

In the Colorado case, the IRS and the Wahdans, according to a Dec. 7 filing, jointly requested that the district court grant more time for both parties to submit motions related to the government’s bid to reopen discovery.

The case is U.S. v. Urayb and Said Wahdan, case number 1:17-cv-01287, in the U.S. District Court for the District of Colorado.

Guidant et al. v. Commissioner

Medical device maker Boston Scientific Corp. disclosed in a May regulatory filing that it had been ordered to pay $608 million in taxes and interest in a final stipulated decision resolving transfer pricing issues with the IRS.

The company had entered a $275 million settlement in 2017 over tax years 2001 through 2007 that was contingent on applying the same transfer pricing basis to its 2008-2010 tax years, as well as a review by Congress’ Joint Committee on Taxation.

The case began when Guidant Corp., which produced devices such as pacemakers and was acquired by Boston Scientific in 2006, and its domestic and foreign subsidiaries sued the IRS in 2011 for a redetermination of hundreds of millions of dollars in deficiencies and so-called accuracy-related penalties.

In February 2016, Guidant lost its bid to challenge IRS adjustments that increased its income by about $3.5 billion when U.S. Tax Court Senior Judge David Laro ruled that the agency had acted well within its authority. The company had argued the IRS should have calculated the separate, taxable income of each controlled taxpayer and made specific adjustments to each transaction that involved the sale of manufactured products and services.

But Judge Laro denied Guidant’s motion for partial summary judgment at the time, saying the IRS had broad discretion to allocate income among controlled enterprises either to reflect income clearly or prevent tax evasion and was not statutorily required to determine the true separate taxable income of each controlled taxpayer in a consolidated group while making transfer pricing adjustments.

The case is Guidant LLC et al. v. Commissioner of Internal Revenue, docket numbers 5989-11, 5990-11, 10985-11, 26876-11, 5501-12 and 5502-12, in the U.S. Tax Court.

Starr International v. U.S.


In a dispute currently being appealed before the D.C. Circuit, Starr International Co. Inc. lost a suit seeking a refund in August 2017 when U.S. District Judge Christopher R. Cooper found that the IRS had reasonably concluded the insurer’s move to Switzerland from Ireland was improperly based on its seeking tax treaty benefits. Earlier this month, a three-judge panel of the circuit court ruled that the district court had wrongly concluded in February 2016 that the case involved a political question outside its reach.

Judge Cooper had concluded that ordering the IRS to grant Starr’s refund request, sought under a U.S.-Swiss tax treaty, would encroach on the diplomacy rights of the U.S. government’s executive branch.

The U.S.-Swiss treaty contains a limitation-on-benefits, or LOB, test outlining conditions for a company to receive treaty benefits. Starr had acknowledged that it didn’t satisfy the objective mechanical test under the LOB provision but asked the IRS for relief under the treaty’s discretionary article, which allows the agency to negate treaty benefits for transactions where it has determined that the “principal purpose” was to take advantage of the treaty.

After appealing Judge Cooper’s decision to side with the IRS, Starr said in May the principal purpose test, as outlined in a technical explanation of the U.S.-Swiss treaty, was meant to assess whether a taxpayer’s move to either the U.S. or Switzerland was really to funnel treaty benefits to a party in a third country.

The case is Starr International Co. Inc. v. U.S., case number 17-5238, in the U.S. Court of Appeals for the D.C. Circuit.

U.S. v. Facebook et al.

In November, the U.S. District Court for the Northern District of California declared Facebook Inc. and the IRS had resolved their disagreement over privileged documents in their transfer pricing dispute. In an unsigned joint status report, the court said attorneys for the government and Facebook had “resolved all remaining disputes” in their quarrel over whether three documents submitted by the social media giant were entitled to continued privilege.

Facebook’s dealings with its subsidiary in Ireland are at the center of a multiyear IRS audit that prompted the agency to issue a notice of deficiency relating to the company’s transfer pricing for the 2010 tax year. The overall dispute centers on licensing agreements transferred to Facebook Ireland that the U.S. company said are worth $6 billion. The IRS claimed they’re valued at $14 billion.

The case is U.S. v. Facebook Inc. and Subsidiaries, case number 3:16-cv-03777-LB, in the U.S. District Court for the Northern District of California.

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Private Debt Collection Agencies Collected 2% on Tax Debts

The private collection agencies that contract with the Internal Revenue Service to collect long overdue tax debts were able to garner only about 2 percent of the taxes owed on the more than 700,000 taxpayer accounts assigned to them since 2017, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, found that as of September 2018, the PCAs collected approximately $88.8 million of the balance owed on those taxpayer accounts. They also set up more than 21,000 payment arrangements with delinquent taxpayers, but the taxpayers later failed to make payments on more than half of them.

The disappointing results had been predicted by opponents of the private debt collection program. The IRS has twice before tried out private debt collection programs, but later canceled them after they collected far less tax revenue than anticipated, while prompting complaints from many taxpayers of harassment from debt collectors.

 
Despite warnings from the National Taxpayer Advocate and the National Treasury Employees Union, the IRS was forced to establish another private debt collection program after Congress passed the FAST Act, a highway funding bill that contained some tax-related provisions, in December 2015.

The IRS awarded contracts in April 2017 to four private debt collection agencies: the CBE Group of Waterloo, Iowa; ConServe of Fairport, New York; Performant of Pleasanton, California; and Pioneer of Horseheads, New York. The IRS set up some stringent requirements this time around to try to prevent the debt collection agencies from harassing taxpayers and to discourage them from contacting taxpayers by phone, out of fear that they might be confused with scammers pretending to be calling on behalf of the IRS.

Both the IRS and the private collection agencies monitor performance using various attributes such as procedural accuracy and professionalism. All of the PCAs performed well under these attributes, according to the TIGTA report, which is the third one to be issued since the program was restarted.

PCAs are helping the government sift through a mountain of debt they otherwise would not collect or even try to collect, so far resulting in the collection of $88 million in federal revenue previously thought to be uncollectible (through September 2018 – data through the end of 2018 will be released shortly).

The PDC program is successful because it works with taxpayers to determine manageable payment amounts that allow tax debts to be resolved over time. As the program moves forward, the revenue collected will grow exponentially as taxpayers continue making payments on their current installment plans and new installment plans begin.”

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States Seek To Tax Foreign Income!

According to Law360, recent bills in Montana and Oregon that would require multinationals to report their global profits present a legally sound option for recouping tax revenue from overseas, but the method has a history of foreign resistance that could remain a challenge.

Although the U.S. Supreme Court affirmed worldwide combined reporting in multiple rulings from the late 1970s through the mid-1990s, the same factors that kept the method from catching on back then could prevent its revival today: political pressure from multinationals, the federal government and foreign trading partners.

“The U.S. Supreme Court has said very clearly [that] worldwide combined reporting is fine, but politically at the federal level, from dealing with our trading partners in other countries overseas, there’s a clear objection to this concept,” said Steve Wlodychak, a principal at EY in Washington, D.C. “That’s the reason it hasn’t been implemented.”

Worldwide combined reporting, also known as complete reporting, has largely been dormant since the 1990s. However, advocates for the approach have contended that the federal tax overhaul in 2017 missed the opportunity to enact measures to substantially reduce the cash that multinationals have booked offshore. As a result, the issue is left to individual states to address.

This argument was made in a report published on January 17, 2019 by U.S. PIRG Education Fund and other groups. The report A Simple Fix for a $17 Billion Loophole, finds that states could raise as much as $17 billion in additional revenue in one year by developing legislation that would make it harder for companies to avoid taxes by shifting profits into domestic or offshore tax havens. The simple fix is mandating that corporations pay taxes based on their total worldwide profits and where they are doing business.
The report cited several estimates of lost revenue following the passage of the Tax Cuts and Jobs Act in December 2017, including the Congressional Budget Office’s forecast from April that said U.S. companies will continue to avoid taxes on roughly $300 billion in profits moved offshore each year.

Currently, 27 states and the District of Columbia have enacted combined reporting systems on the domestic level. The method requires multistate companies to add the profits of all subsidiaries and then report them to the state as if they were one entity, called a unitary business. The remaining states with a corporate income tax are “separate entity states.” In those, multistate corporations may report profits of each subsidiary one by one.

No state has worldwide reporting, except Alaska, which uses the method only for oil and gas companies, but that wasn’t always the case.

A number of states applied the unitary method to multinationals in the past, though California was by far the most economically significant of that group, according to a 2004 report from the state’s franchise tax board.

The report noted that the Supreme Court ruled on a number of issues related to the controversial approach from 1978 through 1983. In the latter year, the high court concluded that California could apply the unitary concept to the worldwide operations of a U.S.-based corporation. The case was called Container Corp. v. FTB .

“In the aftermath of Container, the multinationals and the foreign governments asserted pressure on the Ronald Reagan administration to undertake an active role in the resolution of the controversy,” according to the Franchise Tax Board. It noted that the end result was a report from a working group convened by then-U.S. Treasury Secretary Donald Regan.

“Almost immediately following the working group's report, a number of states enacted water's edge legislation,” according to the Franchise Tax Board, referring to a method that allows companies not to include foreign income in reports to states.

The water’s edge approach “was in response to demands from our trading partners overseas to correct the taxation at the state level that these companies in the U.K. and Canada, for example, objected to,” he said.

Evan Hoffman, the director of state government affairs at the Organization for International Investment, said the ever since the U.K. threatened retaliatory legislation in the 1980s, “states have gone to great lengths to prevent extraterritorial double taxation and ensure they remain economically competitive,” he said.

Although worldwide combined reporting is likely to face international pushback, proponents of the method have contended that it is viable from a legal and logistical level, and as a means for states to raise revenue that could appeal to constituents.

As for Montana and Oregon, worldwide combined reporting isn’t the only option the states are pursuing to recoup profits shifted offshore. Montana lawmakers in January also introduced a bill that would expand a list of countries the state considers to be tax havens, or jurisdictions with little or no taxation.

Montana is currently the only state that requires companies to include their U.S. profits held in offshore tax havens when calculating taxes. Oregon had a tax haven list, but repealed it in 2018 and instead decided to conform to provisions of the 2017 federal tax overhaul that allow for a one-time tax on repatriated income and for GILTI.

The paper published by the U.S. PIRG Education Fund and others last month noted that using the tax haven list approach allows Montana to collect more than $8 million per year in corporate taxes “that would have otherwise gone uncollected.”

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Tuesday, February 5, 2019

2017 TCJA's "Transition Tax" Continues To Impact 2018 Tax Returns

According to the Advocate Daily Americans living overseas are being warned that the 'transition tax' introduced by the Tax Cuts and Jobs Act 2017 will again have to be taken into account in their 2018 tax returns.

Those who own shares in foreign corporations whose have a fiscal year end other than 31 December must remit their transition tax with their 2018 tax return, and may have to look back as far as 2015 to determine the amount.

They also need to consider the new global intangible low-taxed income (GILTI) tax on controlled foreign corporations.

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