Archive for June 30, 2013

Justify Your Favored Tax Breaks… If You Can

IncomeOn June 27, 2013, Senator Baucus, Chair of the Senate Finance Committee and Senator Hatch, Ranking Member of the committee issued a call to everyone asking them to submit justification for keeping any tax break they believe should be in the federal tax law. They refer to this as a “blank slate”approach. That is, assume that none of the 200+ special tax breaks (“tax expenditures”) are in the tax law. If you believe any should be there, send them the reasons why. House Ways and Means Committee Chairman Camp called this idea “welcome news” (6/27/13 press release).

The senators refer to the Joint Committee on Taxation tax expenditure report to define what a tax expenditure is. The Joint Committee on Taxation does not count rules tied to the basic design of a type of tax as tax expenditures. For example, the JCT states in its February 2013 report:

“Under the Joint Committee staff methodology, the normal structure of the individual income tax includes the following major components: one personal exemption for each taxpayer and one for each dependent, the standard deduction, the existing tax rate schedule, and deductions for investment and employee business expenses.” (page 3) The JCT also notes that the carryover of net operating losses is a normal part of an income tax. (page 8) Read More

Written by | Posted in United States

IRS Closing Agreement: Understanding Its Use in Tax Dispute Resolution and Offshore Voluntary Disclosure Program

Pen and Paper_HiResThe final conclusion of a taxpayer’s entry into one of the Offshore Voluntary Disclosure programs is memorialized in the Form 906, which is the Closing Agreement signed by the taxpayer and the Commissioner of the Internal Revenue Service (IRS). This signifies the completion of the voluntary disclosure. Significantly, the Form 906 has included language making clear that the Closing Agreement does not prevent the IRS from auditing a taxpayer for the relevant years and proposing adjustments that are unrelated to the offshore financial arrangements.  Clearly the Closing Agreement is a very important document when it is involved in any tax dispute, and it is especially critical in the Voluntary Disclosure process.

What is a Closing Agreement? When Will One Be Entered Into by the IRS?

A so-called “closing agreement” (authorized by the US Internal Revenue Code at Section 7121), can be a useful tool to resolve disagreements between the IRS and taxpayers.  The closing agreement is in many ways similar to a contract and general contract law principles apply in interpreting such agreements. It is, generally, a legally binding and final agreement between the IRS and a taxpayer on a specific issue or tax liability.

Both taxpayers and the IRS benefit from a properly executed closing agreement. The taxpayer not only obtains certainty that the issues are finally and permanently concluded, the taxpayer also obtains guidance on how to properly comply with the tax laws going forward.  For its part, the IRS resolves a tax compliance problem that would otherwise have involved significant time and resources to pursue to conclusion.  The IRS also obtains the taxpayer’s commitment to future compliance. Read More

Written by | Posted in United States

Texas Court of Appeals Finds Resale Exemption Applicable To Purchases Of Hotel Consumables

HotelOn April 11, 2013, the Texas Court of Appeals (“Court”) reversed the district court’s decision and held that items placed in hotel rooms for use by hotel guests such as soap, shampoo, conditioner, mouthwash, shower caps, pens, and notepads (“hotel consumables”) may be purchased exempt from sales tax under the resale exemption. DTWC Corp. v. Combs, No. 03-10-00801-CV (Tex. Ct. App. April 11, 2013).

The taxpayer, DTWC Corporation (“DTWC”), operates a hotel and charges guests a specific fee for overnight hotel accommodations. As part of the hotel accommodation, DTWC provides hotel consumables to its guests in their hotel rooms. Texas law exempts from sales and use tax the sale for resale of a taxable item. A “sale for resale” includes a sale of tangible personal property to a purchaser who acquires the property for the purpose of reselling it in the normal course of business in the form or condition in which it is acquired. Having paid sales tax on the purchase of hotel consumables, DTWC sought a refund arguing that these items were exempt as purchases for resale under Texas Tax Code §§ 151.302(a), 151.005(1), and 151.006(a)(1). The Texas Comptroller of Public Accounts (“Comptroller”) put forth multiple arguments as to why she believed DTWC was not entitled to the resale exemption for these items.

The Comptroller argued that the purpose of the resale exemption is to prevent an item from being twice subject to sales tax. Since the hotel consumables were subject to sales tax when they were purchased and the hotel occupancy tax later when a guest pays for a hotel room, the Comptroller argued that double taxation did not occur because sales tax was not charged twice. The Comptroller also argued that there was no actual resale of the hotel consumables to hotel guests. The Court disagreed. It determined that the plain language Read More

Written by | Posted in Sales/Use Tax • State And Local Tax (SALT)

Louisiana Changes Hiring Requirements For Enterprise Zone Program

iStock_Louisiana flagXSmallLouisiana Governor Bobby Jindal has signed into law a bill that disqualifies many retailers from participating in the state’s Enterprise Zone Program (“Program”) and makes other changes to the Program’s required employment criteria. House Bill 571 (“H.B. 571”) became effective immediately when Governor Jindal signed it on Friday, June 21, 2013. The bill makes several significant changes to the Program.

•  It increases the percentage of new jobs that a participant must hire from targeted groups to qualify for the Program from the current 35% to 50%. Under the bill, companies must hire 50% of their new jobs from at least one of the three targeted groups: enterprise zone residents, persons receiving some type of public assistance during the six-month period prior to employment, and persons who lack basic skills and are unemployable by traditional standards. Read More

Written by | Posted in Sales/Use Tax • Specialty Tax Incentives • State And Local Tax (SALT) • United States

Foreign Housing Exclusion –IRS Announces Housing Cost Limits for Tax Year 2013

House and moneyOverview

A foreign housing exclusion is available for certain overseas housing expenses that exceed a “base housing amount”.  Generally, the allowable housing expenses are the reasonable expenses (such as rent, utilities other than telephone charges, and real and personal property insurance) paid or incurred during the year by the taxpayer, or on his behalf, for foreign housing.  The housing costs include those of the spouse and dependents if they lived with the taxpayer.  Allowable housing expenses do not include the cost of home purchase or other capital items, wages of domestic servants, or deductible interest and taxes.   Some taxpayers mistakenly believe if they use only a portion of the employer-provided housing amount, they can still deduct the full amount permitted under the foreign housing exclusion rules.  This is not so.  To be eligible for exclusion, the taxpayer must actually incur these amounts in rental payments (for example, paid to the landlord on his behalf by the employer or paid by the taxpayer to the landlord from his employer-provided housing amount).

Calculation Rules

To be eligible for exclusion from tax, the allowable housing expenses must exceed a so-called “base housing amount”.  The base housing amount is 16 % of the maximum Foreign Earned Income Exclusion amount (FEIE). For 2013, this “base housing amount” is US$15,616 (computed as follows: 16% x US$97,600 – the 2013 FEIE amount). Reasonable foreign housing expenses in excess of the ”base housing amount” are eligible for the exclusion, but such Read More

Written by | Posted in Europe, Middle East • Expatriate • International • IRS • North America • Real Estate • State And Local Tax (SALT) • Tax Policy

The Sec. 501(c)(4) Story: Program Notes – Part 4 – Controversy #3

iStock_ExclusiveXSmallSocial welfare, inappropriateness, resignations, hearings, and complexity—the Sec. 501(c)(4) story has it all…

This blog post is written in five parts:

1.  The Sec. 501(c)(4) Story: Program Notes – Part 1
2.  The Sec. 501(c)(4) Story: Program Notes – Part 2-Plot and Controversy #1
3.  The Sec. 501(c)(4) Story: Program Notes – Part 3-Controversy #2
4.  The Sec. 501(c)(4) Story: Program Notes – Part 4-Controversy #3
5.  The Sec. 501(c)(4) Story: Program Notes – Part 5-Controversy #4 & Resolution

Controversy #3

What qualifies for Sec. 501(c)(4) status, and how do other rules interact with this provision?

As described earlier, there can easily be challenges in determining if social welfare is an organization’s primary purpose. Other issues also exist. It is still unresolved whether contributions to Sec. 501(c)(4) organizations should subject the donor to gift tax, even though in 2011 the IRS announced it was closing current examinations and suspending further action on that question, noting it was a “difficult area with significant legal, administrative, and policy implications” (IRS memo and website (7/7/11)). Read More

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“Quiet Disclosures” – Is the Jig Up?

iStock_tax evasionXSmallCertain findings and recommendations by the Government Accountability Office (GAO) about offshore tax evasion and the IRS efforts to combat it have many taxpayers worried. The GAO is an independent, nonpartisan agency that works for Congress and is often referred to as the “congressional watchdog.” It investigates how the federal government spends taxpayer dollars and makes recommendations as to how a governmental agency can be more efficient and effective.

Recently issued GAO report, Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion, provides key information about the IRS’ offshore voluntary disclosure initiatives. More importantly, however, GAO indicates its review of IRS data shows that the IRS is missing what appear to be rampant “quiet disclosure” and “new account” filings.

“Quiet Disclosures” / “New Account” Filings

With a “quiet disclosure”, taxpayers quietly amend past tax returns and FBARs reporting previously unreported income and accounts. With “new account” filings, taxpayers report the existence of any offshore accounts as well as income from the accounts on the current year tax return, without amending any prior years’ returns. They often also disclose the existence of the accounts by filing FBARs for the current calendar year making it appear as if the account was just newly opened.

GAO takes the IRS to task for not finding enough “quiet disclosures” and “new account” filings which lose billions of Read More

Written by | Posted in TaxConnections

The Sec. 501(c)(4) Story: Program Notes – Part 3 – Controversy #2

This blog post is written in five parts:

1.  The Sec. 501(c)(4) Story: Program Notes – Part 1
2.  The Sec. 501(c)(4) Story: Program Notes – Part 2-Plot and Controversy #1
3.  The Sec. 501(c)(4) Story: Program Notes – Part 3-Controversy #2
4.  The Sec. 501(c)(4) Story: Program Notes – Part 4-Controversy #3
5.  The Sec. 501(c)(4) Story: Program Notes – Part 5-Controversy #4 & Resolution

Controversy #2

Who knew what, and were congressional inquiries in recent years answered correctly?

The website for the May 22, 2013, hearing by the House Committee on Oversight and Government Reform includes Lois Lerner’s answers to TIGTA’s questions. The first question was whether anyone outside of the IRS influenced the selection criteria. Her answer: “To the best of my knowledge, no individual or organization outside the IRS influenced the creation of these criteria.”
 
The House Ways and Means Committee has posted a timeline of when groups and individuals took actions or knew something. The House Committee on Oversight sent a letter to Lerner on May 14, 2013, suggesting that she “provided false or misleading information on four separate occasions last year in response to the Committee’s oversight of IRS’s treatment of conservative groups applying for tax exempt status.” The letter also requests numerous documents for continued investigation. On May 20, 2013, the Senate Finance Committee sent a letter to Acting Commissioner Miller with 41 questions.
Written by | Posted in TaxConnections

United States Supreme Court DOMA Throw Down – Progress or Kabuki Theater?

iStock_Marriage CelebrationXSmallThe fact of the matter is that the Internal Revenue Service will continue to define marriage for United States Taxpayers everywhere in that only one man and one woman married to each other can file an income tax return with the filing status of married/joint. This filing status, looked upon by the Service as one taxpaying unit is entitled to substantial tax benefits over and above all other filing statuses be it Single, Head of Household, Married/separate, or Widow. So from an income tax perspective today’s supreme court decision is really in my opinion little more than kabuki theater.

If you check out the IRS’ Interactive Tax Assistant to determine your filing status you will find it to be incredibly disingenuous if not unilaterally misleading as the Instructions for the 2012 IRS Form 1040 Income Tax Return clearly state under under filing status the following.

“For federal tax purposes a marriage means only a legal union between a man and a woman as husband and wife, and the word “spouse” means a person of the opposite sex who is a husband or a wife.” 

In my own humble opinion until you can check the box Married/Joint on an income tax return (box #2 under filing status) you are unfortunately NOT married for federal income tax purposes regardless of the Supreme Court’s decision today and I find it impossible at this time or any time in the near future that the IRS will be compelled to change their definition of the Married Filing Joint (MFJ) filing status. Read More

Written by | Posted in Federal • Individual • North America

The Sec. 501(c)(4) Story: Program Notes – Part 2 – Plot and Controversy #1

iStock_Q and AXSmallThis blog post is written in five parts:

1.  The Sec. 501(c)(4) Story: Program Notes – Part 1
2.  The Sec. 501(c)(4) Story: Program Notes – Part 2-Plot and Controversy #1
3.  The Sec. 501(c)(4) Story: Program Notes – Part 3-Controversy #2
4.  The Sec. 501(c)(4) Story: Program Notes – Part 4-Controversy #3
5.  The Sec. 501(c)(4) Story: Program Notes – Part 5-Controversy #4 & Resolution

The Plot

The plot of the Sec. 501(c)(4) story revolves around four controversial areas in need of resolution. According to timelines prepared by the House Ways and Means Committee and TIGTA (see TIGTA Rep’t No. 2013-10-053, Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review, pages 30–42), the actions that generated the title for the May 2013 TIGTA report began in March 2010. The plot’s climax was a Q&A at an ABA Tax Section meeting involving Lois G. Lerner, IRS director, Exempt Organizations, that preceded the May 14 release of the TIGTA report. Within days, congressional hearings and additional investigations began, two IRS officials resigned Read More

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The Sec. 501(c)(4) Story: Program Notes – Part 1

Hands Raised HiResFor decades, a saga involving Sec. 501(c)(4) has been developing, and it likely reached its climax in the past month. These “program notes” serve to help those watching this drama unfold gain a better understanding of the story. The term “story” is not intended to make light of any of the events or players. A program notes approach is just one way to look at and describe a serious set of events involving a tax provision with inherent challenges for administration and compliance.

Theme

The key theme of the story is tax law complexity and the problems that complexity can generate for both the government agency trying to administer the system and the taxpayers trying to comply with it.

Setting

•  Offices in Cincinnati and Washington, within the IRS Tax Exempt and Government Entities Division.
•  Offices of the Treasury Inspector General for Tax Administration (TIGTA).
•  Various House and Senate committee hearing rooms.

Characters

•  IRS personnel in the Tax Exempt and Government Entities Division (see organizational chart at Exhibit 1), and the IRS deputy commissioner they report to.
•  J. Russell George, Treasury Inspector General for Tax Administration, and TIGTA auditors.
•  Organizations seeking Sec. 501(c)(4) status.
•  Sec. 501(c)(4)—while not a person, this Code provision plays a big role in the story. Read More

Written by | Posted in TaxConnections
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