Archive for July 31, 2013

Massachusetts Legislature Overrides Governor’s Veto; Passes Transportation Finance Bill

TaxConnections Picture - Gas ChartOn July 24, 2013, Massachusetts lawmakers voted to override Governor Deval Partick’s veto of the Commonwealth’s Transportation Finance Bill (“H.B. 3535”). As a result, the gas tax will increase by three cents per gallon; tax on cigarettes  by one dollar per pack; and computer system design services and the modification, integration, enhancement, installation, or configuration of standardized software will now be subject to sales and use tax. The revenue generated from H.B. 3535, as appropriately entitled, is designed to aid Massachusetts’ transportation systems and projects. The gas and cigarette tax increases, and sales and use tax on computer services are effective July 31, 2013 (seven days from the enactment of H.B. 3535).

“Computer system design services” are the planning, consulting, or designing of computer systems that integrate computer hardware, software or communication technologies and are provided by a vendor or a third party. “Modification, integration, enhancement, installation, or configuration of standardized software” are viewed as services that modify, enable, or adapt pre-written software to meet the business or technical requirements of a particular purchaser and to operate on the purchaser’s computer systems, regardless of how those services are described or billed to the customer. These services may also be described as customization services for pre-written software.

On July 25, 2013, the Massachusetts Department of Revenue released Technical Information Release 13-10 (“TIR – 13-10”), which provides guidance for the application of sales and use tax to these newly taxed computer services. This guidance includes transition rules for existing computer services contracts, sales and use tax filing requirements, and information on sourcing rules, including Multiple Points of Use. Read More

Written by | Posted in State And Local Tax (SALT) • Tax Policy

Trust Fund Recovery Penalty – #2 – Requirements For Liability

TaxConnections Picture - Dollar Sign and Money2. REQUIREMENTS FOR LIABILITY

§ 5:3 In general

There are two major tests to determine if someone is subject to the provisions of IRC § 6672. They are primarily questions of fact and may be stated as follows:

(1) Whether the party against whom the penalty is proposed had the duty to account for, collect, and pay over trust fund taxes; and

(2) Whether he or she willfully failed to perform this duty.

During the course of this text we will extensively discuss these two tests and the manner in which the courts have interpreted them. In general, the Internal Revenue Service has the right to pursue any person who meets the tests, even if he was not an officer or employee of the corporation which originally collected the taxes. In fact, on many occasions the Internal Revenue Service has asserted the penalty against accountants and attorneys who were not employees of the collecting corporation.

§ 5:4 Assessment against several persons

The penalty can be assessed against more than one person. It is not unusual for the Internal Revenue Service to assess the penalty against several responsible persons. In the event that the IRS; assesses several persons, it may collect the entire liability from any of those persons. Although the Service has a policy of not attempting to collect more than the total amount of the withheld taxes [IRM P-5-60, dated February 2, 1993], it consistently errs and collects more than the penalty from the various officers. This occurs because the Internal Revenue Service has never Read More

Written by | Posted in United States

Trust Fund Recovery Penalty – #1 – Introduction

TaxConnections Picture - Dollar Sign and Money1. INTRODUCTION

§ 5:1 In General

Congress enacted the Trust Fund Recovery Penalty Statute to encourage prompt payment of withheld and other collected taxes by allowing the IRS to assert a liability against responsible third parties. [IRC § 6672] The amount of the penalty imposed by the statute for failure to comply with its provisions is measured by the tax required to be collected or collected and not paid over. That is why the liability is referred to as a “100% Penalty.” The penalty is civil in nature, not criminal. The penalty is also sometimes called a Trust Fund Penalty because of the provisions of IRC §7501. IRC § 6672 reads as follows:

Any person required to collect, personally account for, and pay over any taxes owed by this title who willfully fails to collect such tax, or personally account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax on the penalty thereof,, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under § 6653 for any offense to which this section is applicable.

§ 5:2 Trust Fund

Congress clearly restricted the provisions of IRC §6672 to “Trust Fund” taxes as defined in IRC §7501. In other words, the penalty only applies to collected or withheld taxes that are imposed on persons other than the party who collects; accounts for, and pays over such taxes. The statute does not apply to direct taxes such as the employer’s portion of FICA, FUTA, noncollected income taxes, nor noncollected excise taxes. IRC § 7501 reads as follows: Read More

Written by | Posted in United States

How To Survive A Tax Investigation

TaxConnections Picture - Tax MagnificationWhen the brown envelope from HMRC lands on the doormat, most people don’t need to read the letter in great detail to know that there are difficult times ahead; guilty or innocent HMRC are going to give you a hard time. Here are some tips on how to deal with a tax investigation.

Whilst we talk about a Tax Investigation HMRC use soft words instead such as enquiry, review or check. Regardless of the language they all mean you are being investigated by HMRC.

So what are the key things to do (or not to do).

Don’t Panic

For many here will be an initial knee jerk reaction such as fear, denial and anger or a desire to have a chat with the Inspector to show you are a good person and willing to help or to assure HMRC there is nothing wrong.

This is a time for cool heads, planning and contemplation as to what could be the problems and taking stock of the situation. Do not do anything rash and:

Take Expert Advice

Your fist discussion may be with your accountant. Some are good at tax investigation work, many are not specialists. Engaging a specialist can make all the difference in time taken to deal with the issues and the eventual outcome. You must have an open and honest conversation about what may or may not have gone on and sometimes this is difficult with existing advisors. Read More

Written by | Posted in Audit • Europe, Middle East • Individual

Who Knew That Golf Was Such A Taxing Sport?

golf ball on lipOn Tuesday, March 19, 2013 we posted Professional Golfer Sergio Garcia “Whiffs” Tax Case regarding US Tax on “Image Rights” which discusses that the US Tax Court has ordered professional golfer Sergio Garcia to pay tax on endorsement income he had claimed was tax-free under the US-Switzerland tax treaty.

The court decided Garcia’s contract with his sponsor TaylorMade had attributed too much of the money to royalty payments for image rights, which the treaty exempts from US tax.

Mickelson capped a dominant fortnight in Scotland by shooting a final round 66 to come from behind and win The Open Championship. He also won the Scottish Open the previous week. For his two weeks of play, earned £1,445,000, or about $2,167,500.

The UK, which has authority to set Scotland’s tax rate until 2016, graduates to a 40% tax rate when income hits £32,010 then 45% when it reaches £150,000. Mickelson will pay £636,069 ($954,000, or 44.02%) on his Scottish earnings.

But that’s not all. The UK will tax a portion of his endorsement income for the two weeks he was in Scotland. It will also tax any bonuses he receives for winning these tournaments as well as a portion of the ranking bonuses he will receive at the end of the year, all at 45%. Read More

Written by | Posted in United States

IRS Releases 2010 Form 8805 – Foreign Partner’s Information Statistics

TaxConnections Picture - Tax DollarsUnder the Tax Reform Act of 1986, United States  partnerships are required to withhold income tax on “effectively connected taxable income” deemed allocable to foreign partners.The U.S. partnership must file a Form 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax, to show the amount of effectively connected taxable income and the total tax credit allocable to the foreign partner for the partnership’s tax year. Foreign partners must attach this form to their U.S. income tax returns to claim a withholding credit for their shares of the Section 1446 tax withheld by the partnership.

Written by | Posted in United States

Know a Bad Tax Preparer? File a Complaint!

Pen and Paper_HiResLate last summer I was approached by several members of the local law enforcement agencies with letters from the IRS.  It seems that in 2009 one member of the force had a friend of a friend that was getting him back refunds in the mid 5 figure range every year.  Of course, he wanted to share his largesse with his co-workers.

You know the rest of the story, I’m sure.  The tax preparer had been taking large, fraudulent deductions on Schedule C forms against the officers off duty 1099MISC income, giving them losses that exceeded their W2 income.  In many cases this made them eligible for EITC and other credits even though they married couples actually had income in excess of $100K.  And all the returns were done on at home software indicating the return had been self-prepared.

Of course they all got audited for 2009-2011 and once I was done they all owed in excess of $30K plus penalties and interest.  Well, I got mad!  Did I mention I’m a retired law enforcement officer from this same department?  I filed my first sets of complaints against another tax preparer and assisted the clients in doing the same.  The clients had the information on the preparer as several had written him checks.  A simple internet search gave me the rest of the details I needed.

So, we all filled out and mailed our IRS Form 14157 (for me) and 14157A (for the clients).  My clients all got on installment plans and we were able to get the penalties for 2009 abated in most cases under the First Time Abatement program.   Read More

Written by | Posted in Military • United States

“Leaver Lists” Will Expose More Swiss Banks To U.S. Dragnet!

Credit Suisse and Zurich Cantonal, have obtained government Credit Suisse[1]approval to send the US Department of Justice (USDoJ) lists of American clients who have moved assets out of their accounts to another bank.The so-called ‘leaver lists’ do not identify clients but do name the destination banks, which the USDoJ will then pursue with further disclosure notices.

The Swiss government announced a new approach allowing banks to hand over data to U.S. authorities in a bid to solve a dispute over undeclared assets and forestall further indictments by the Department of Justice.

The government is proposing banks apply for individual authorization to surrender records intended to yield information on Americans who cheated on their taxes, Finance Minister Eveline Widmer-Schlumpf said in the capital, Bern, Wednesday.

Written by | Posted in United States

F is for the Fish that Got Away

Books_Hour_GlassF is for the fish that got away.  I went fishing in Canada in early June and while the picture proves I didn’t really catch many impressive fish, I do have a story about the fish that got away.  In the evening I thought I hooked a fish, so I started reeling it in.  After a few seconds it just stopped moving and I changed my mind; it seemed I had caught a huge tree branch or something.  So I keep reeling in and at this point I am basically dragging the boat in the direction of my line which isn’t moving until the fish takes off to the right and the chase is on again.  The fish got up near the boat and we got a glimpse of what seemed like a very large fish only to lose it by the boat.  I like to think it would have been the biggest fish of the trip and we can only speculate how big it was (40 inches, 45 inches, 65 inches, who knows).  While it makes for a decent story and it was exciting at the time, we don’t need to repeat that experience with tax credits.  The story of the tax refund that got away is a depressing tale of poor time management and planning and you will be able to figure out exactly how much money you left on the table so let’s try and avoid this story.

The IRS imposes a statute of limitations on claims for refund and if you let that statute expire, you aren’t going to get any sympathy from the IRS.  If you discover an error on your tax return that results in a refund claim, it needs to be filed with the IRS within 3 years of the original filing date or within 2 years of paying the tax.  If you are even 1 day late you are out of luck.

Sometimes you amend returns to generate a loss, but there is no refund directly from that amended return.  If you amend your 2010 return to add business losses that generate an NOL, you can still carryback that NOL to the 2008 and 2009 years based on the 2010 statute of limitations.  The refunds are generated from the 2010 return so you would have 3 years from April 15th, 2011 to file the NOL carryback claims.

If you discover a reason to amend your return to correct something, report new information, claim an R&D credit, whatever it is, make sure you are paying attention to the statute of limitations so you don’t have a tale of the tax refund that got away.

Taxes A to Z – still randomly meandering through tax topics, but at least for 26 posts in an alphabetical order.

Written by | Posted in TaxConnections

For Hong Kong Chinese Residents That Have U.S. Citizenship; Maybe It’s Time To Re-Consider?

hong_kongScott Michel, a partner and President of Caplin & Drysdale, a DC-based law firm, advises that on July 10, 2013, the Hong Kong Legislative Council moved to enable Hong Kong to enter into stand-alone Tax Information Exchange Agreements and, more importantly for U.S. persons who have financial accounts there, to sign an “intergovernmental agreement” (IGA) with the U.S. for implementation of the Foreign Account Tax Compliance Act (FATCA).

It is expected that the U.S. and Hong Kong will agree on an IGA, and that financial institutions in Hong Kong will begin to comply with FATCA’s due diligence and automatic disclosure provisions next year.

The implications are profound for any U.S. citizen, green card holder or tax resident who has non-U.S. financial accounts or other financial assets, such as life insurance, retirement plans and the like. FATCA will require banks and other entities to ascertain which clients are subject to the U.S. tax system, to ask them to sign a W-9 form making their account transparent to the IRS and a waiver of domestic bank secrecy or confidentiality rules, and to begin in 2014 to share data with the IRS regarding their assets.

To the extent affected Americans have not complied with U.S. tax rules, they should consider their options in order to try to spare them from the most extreme enforcement measures available to the IRS.

Automatic Information Exchange Comes to Central The towering skyscraper financial firms in Central hold trillions of dollars in funds among millions of account holders and offer wealth and trust management services, insurance and annuity products, retirement plans, and the like.

Many clients of these entities have a U.S. passport or green card. Maybe it is time to reconsider their U.S. Citizenship and Expatriate?

Written by | Posted in United States
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